In the 1981 case California et al. v. Grace Brethren Church et al., the U.S Supreme Court ruled that religious schools were exempt from paying unemployment taxes under federal law, specifically the Federal Unemployment Tax Act (FUTA). The state of California had sought to require three church-operated schools to pay such taxes, arguing that they did not qualify for exemption because their employees were not engaged in "religious activities." However, the court disagreed and held that these institutions fell within FUTA's broad definition of a "church," which includes organizations operated primarily for religious purposes. Therefore, as long as an organization is controlled by a church or association of churches and its primary purpose is religious education, it qualifies for tax exemption even if its employees are involved in secular activities like teaching math or science.

In the dissenting opinion for California et al. v. Grace Brethren Church et al., Justice William J. Brennan Jr., joined by Justices Thurgood Marshall and Harry A. Blackmun, argued that the majority's decision to bar federal courts from issuing declaratory judgments on state tax matters was a misinterpretation of the Tax Injunction Act (TIA). They contended that TIA should not be extended to cover cases where no injunction is sought or issued, as it contradicts Congress' intent when enacting this law - which was primarily aimed at preventing taxpayers from using federal courts to stop collection of their taxes before paying them first at state level and then seeking refund if they believe those were unjustly collected. The dissenters also expressed concern about potential negative impacts on religious freedom due to forcing churches into costly litigation in order to challenge discriminatory taxation practices.