United States Court of Appeals,
Fifth Circuit.
No. 94-50034
Summary Calendar.
TEXAS FARM BUREAU, Plaintiff-Appellee Cross-Appellant,
v.
UNITED STATES of America, Defendant-Appellant Cross-Appellee.
June 1, 1995.
Appeals from the United States District Court for the Western
District of Texas.
Before WISDOM, WIENER and PARKER, Circuit Judges.
WISDOM, Circuit Judge:
This case involves the taxability of income generated by the
income-producing activities of a tax-exempt agricultural
association. The district court found that the income in question
was, in part, non-taxable royalties. We hold that the income in
question constituted unrelated business taxable income.
Accordingly, we reverse the judgment of the district court and
render a judgment in favor of the defendant/appellant, the United
States.
I
The plaintiff/appellee, the Texas Farm Bureau ("TFB"), a state
agricultural organization formed in the 1920's, is, like 49 other
state organizations, a member of the American Farm Bureau
Federation. Over the years, the name "Texas Farm Bureau" has
acquired a good reputation and is respected by those engaged in
agriculture. TFB aims to promote a profitable and desirable system
1
of agriculture in Texas, and TFB is exempt from federal income tax
under § 501(c)(5) of the Internal Revenue Code ("I.R.C.").1 TFB's
tax-exempt function is to better the conditions of those engaged in
agricultural pursuits, to improve the grade of their products, and
to develop a higher degree of efficiency in the respective
occupations of those engaged in agricultural pursuits.2
In 1947, TFB and several other agricultural associations in
the South formed two insurance companies: the Southern Farm Bureau
Life Insurance Company ("Life") and the Southern Farm Bureau
Casualty Insurance Company ("Casualty"). TFB owns a 10 percent
interest in Life, and a 20 percent interest in Casualty. In 1957,
Life and Casualty entered into agreements with TFB3 whereby Life
and Casualty paid TFB for certain administrative services and for
the exclusive right to use the Farm Bureau name and logo in Texas.
In a written agreement with Life, TFB agreed to "use its good
offices, influence, and prestige in promoting the general welfare"
of Life. TFB also agreed to furnish Life with clerical services,
office space, and equipment.
In the tax years 1984 through 1987, TFB received payments from
Life and Casualty in accordance with the agreements totaling
$2,180,958, $3,054,063, $2,360,390, and $2,318,407 respectively.
TFB originally included the full amount of those payments in its
1
26 U.S.C.A. § 501(c)(5) (1995).
2
26 C.F.R. § 1.501(c)(5)-1 (1994).
3
TFB's agreement with Life was in writing, and its agreement
with Casualty was oral. The parties agree that the two
agreements consist of primarily the same components.
2
"unrelated business taxable income" under I.R.C. § 511. Later, TFB
filed amended returns for years 1984 to 1987, contending that under
the agreements, Life and Casualty's payments were divisible into
two parts: (1) reimbursement to TFB for administrative and
clerical expenses, and (2) royalty for the use of TFB's name, and
for the goodwill and benefit Life and Casualty enjoyed from that
use. TFB asserted that royalties constituted 32 percent, 48
percent, 36 percent, and 56 percent of the payments Life and
Casualty made to TFB in years 1984 to 1987. In its amended
returns, TFB requested a refund, contending that the royalty
payments were exempt from taxation under § 512(b)(2).
The Commissioner denied TFB's request for a refund, and TFB
brought suit in federal district court. The United States moved
for summary judgment, arguing that the payments were not royalties
and were instead compensation for TFB's sponsorship and endorsement
of Life and Casualty, as well as for administrative and clerical
services TFB provided. The district court granted in part the
government's motion. The court concluded that TFB's dealings with
Life and Casualty were business activities unrelated to its exempt
function, but that there was a genuine issue of fact whether the
payments received from Land and Casualty were in part royalties.4
The case was tried before a jury, and the United States moved
for judgment as a matter of law after TFB rested and again at the
close of all the evidence. The district court denied the motions,
4
Texas Farm Bureau v. United States, 822 F.Supp. 371
(W.D.Tex.1993).
3
and the jury returned a verdict in favor of TFB, concluding that
the payments TFB received from Life and Casualty were in part
royalties. The district court denied the United States' motion for
judgment as a matter of law after the verdict and entered judgment
in favor of TFB. From the decision of the district court, the
United States appeals, and TFB has filed a cross-appeal,
challenging the district court's grant of summary judgment in favor
of the United States on the ground that TFB's agreements with Life
and Casualty were business activities unrelated to its tax exempt
purpose.
II
Under § 511 of the Internal Revenue Code, organizations that
have tax-exempt status under I.R.C. § 501 must still pay income tax
on "unrelated business taxable income", income received from the
conduct of a trade or business unrelated to its exempt purpose.
"Royalties", however, are excluded from unrelated business taxable
income under § 512(b)(2). The primary issue in this appeal is
whether the payments Life and Casualty made to TFB were in part
royalties exempt from the unrelated business income tax. The jury
concluded that they were, and we conclude that this case never
should have gone to the jury. We hold that the district court
erred in denying the United States' motion for judgment as a matter
of law. We reverse the judgment of the district court and render
a decision in favor of the United States.
A
The United States' first argument on appeal contends that the
4
district court erred in denying its motions for judgment as a
matter of law, because the evidence in this case was insufficient
to create a jury question that the payments Life and Casualty made
to TFB were in part royalty payments. The United States asserts
that there is but one reasonable conclusion permitted by the
evidence: that the payments made by Life and Casualty to TFB were
not royalties as a matter of law.
A motion for judgment as a matter of law in an action tried
by a jury is a challenge to the legal sufficiency of the evidence
supporting the jury's verdict. On review of the district court's
denial of such a motion, this Court uses the same standard to
review the verdict that the district court used in first
considering the motion.5 A motion for judgment as a matter of law
should be granted by the trial court if, after considering all the
evidence in the light and with all reasonable inferences most
favorable to the party opposed to the motion, the facts and
inferences point so strongly and overwhelmingly in favor of one
party that the court concludes that reasonable people could not
arrive at a contrary verdict.6
The determination of whether income is § 512(b)(2) royalty
income is to be "determined by all the facts and circumstances of
5
Spuler v. Pickar, 958 F.2d 103, 105 (5th Cir.1992) (citing
Ellison v. Conoco, Inc., 950 F.2d 1196, 1203 (5th Cir.1992),
cert. denied, --- U.S. ----, 113 S.Ct. 3003, 125 L.Ed.2d 695
(1993)); see also Bridges v. Groendyke Transport, Inc., 553 F.2d
877, 878 (5th Cir.1977).
6
Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir.1969).
5
each case".7 Neither the Internal Revenue Code nor the
regulations, however, define "royalty". The parties and the
district court use the definition of royalty found in Revenue
Ruling 81-178, which defines "royalty" as a payment that relates to
the use of a valuable right, such as a name, trademark, trade name,
or copyright.8 The Ruling further provides that payments for
personal services do not constitute royalties.9
The United States argues that under this definition, the
payments from Life and Casualty were not royalties as a matter of
law, and that the district court erred in sending this case to the
jury. The language in the contract between Life and TFB, the
United States argues, is unambiguous and is not susceptible to any
interpretation but that the arrangement was one for services, not
for royalties.
The agreement at issue in this case provides that TFB would
furnish Life and Casualty with its "good offices, influence, and
prestige in promoting the general welfare" of the insurance
companies. In addition, TFB agreed "[t]o promote among
policyholders of [Life] the value of maintaining in force life
insurance carried with [Life]". TFB also agreed "[t]o furnish all
facilities ... necessary to accommodate State and District Sales
Directors in carrying on the acquisition of new life insurance for
[Life], and servicing [Life's] policyholders within the territory
7
26 C.F.R. § 1.512(b)-1 (1994).
8
Rev.Rul. 81-178, 1981-2 C.B. 135.
9
Id.
6
of Farm Bureau". Further, the contract provided that TFB agreed to
furnish Life and Casualty with clerical, telephone, and
administrative services. The district court concluded that the
language in the agreement in this case was "uncertain when applied
to the subject matter of the agreement". We find no such
uncertainty.
In its agreements with Life and Casualty, TFB agrees to
provide Life and Casualty with substantial services. TFB agreed to
use its own offices, its influence and prestige to promote Life,
and to provide Life with stationary and postage, secretarial and
clerical help, office supplies, furniture, and equipment. Nowhere
in the agreements is a "royalty" mentioned. This is not a
situation in which Life and Casualty agreed to compensate TFB
solely for the benefit of association with the "Farm Bureau" name.
Instead, this is a situation in which the agreements plainly
require TFB to provide substantial services to the insurance
companies; the plain language of the agreements demonstrates that
the agreements were strictly for services and did not contemplate
a royalty payment. Had the parties wished to create a royalty
arrangement, they could have done so at the time of contracting.
Or, the parties could have amended the original agreement to
provide that TFB would be paid royalties for allowing the insurance
companies to use its name. TFB availed itself of neither of these
options; instead, as an afterthought, TFB filed amended tax
returns contending that the payments it received from Life and
Casualty were royalty payments and were therefore exempt from
7
taxation.
To create a jury question, there "must be a conflict in
substantial evidence".10 In this case, there was not a conflict in
substantial evidence. We conclude that the district court erred in
denying the United States's motion for judgment as a matter of law
and in sending this case to the jury.
B
The cross-appeal filed by TFB asks this Court to reverse the
district court order granting partial summary judgment to the
United States on the question of whether TFB's association with
Life and Casualty were "unrelated business activity".
We review de novo the district court's grant of summary
judgment.11 Summary judgment is appropriate when there is no
genuine issue as to any material fact and the moving party is
entitled to judgment as a matter of law.12
To constitute taxable, "unrelated business income" under §
511 to § 513, the activity that generates the income must satisfy
three elements: (1) the activity from which the income is derived
must be "a trade or business"; (2) that is "regularly carried on"
by the taxpayer,13 and (3) the conduct of the trade or business must
10
Boeing, 411 F.2d at 375.
11
Lockart v. Kobe Steel, Ltd. Constr. Mach. Div., 989 F.2d
864, 865 (5th Cir.1993).
12
Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S.
317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Thomas v.
Price, 975 F.2d 231, 235 (5th Cir.1992).
13
26 U.S.C.A. § 512(a)(1) (1995).
8
not be substantially related to the organization's exempt purpose.14
TFB concedes that its dealings with Life and Casualty were
regularly carried on, but contends that genuine issues of material
fact exist regarding whether the activity was a trade or business
and whether it was substantially related to its tax exempt purpose.
Section 513(c) of the Internal Revenue Code defines trade or
business as "any activity which is carried on for the production of
income from the sale of goods or the performance of services". To
determine whether a tax-exempt organization is carrying on a trade
or business, "the court must look to see whether that institution
is engaged in extensive activity over a substantial period of time
with the intent to earn a profit".15 Whether there is a profit
motive is our key inquiry.
We find that the United States satisfied its summary judgment
burden to demonstrate the absence of a material fact that TFB's
association with Life and Casualty constituted a trade or business.
Both Life and Casualty consistently generated a profit. Both
companies competed with other insurance companies in the state, and
Life and Casualty were among the more profitable operations in the
state. TFB received a substantial income from Life and Casualty.
Further, TFB actively worked to endorse Life and Casualty; indeed,
in the Farm Bureau newsletter, TFB ran no other insurance
14
26 U.S.C.A. § 513(a) (1995); see also Texas Apartment
Ass'n v. U.S., 869 F.2d 884, 886 (5th Cir.1989) (citing Louisiana
Credit Union League v. United States, 693 F.2d 525, 530-31 (5th
Cir.1982)).
15
Louisiana Credit Union League v. United States, 693 F.2d
525, 532 (5th Cir.1982).
9
provider's advertisements but those of Life and Casualty.
In response to the United States' summary judgment evidence,
TFB offered nothing but denials of its intent to generate a profit.
TFB argued that the motivation for its agreements with Life and
Casualty was to promote the sale of insurance to those who lived in
rural areas and were underserved by the insurance industry, and
that there was no evidence that TFB intended to make a profit
through its agreements with Life and Casualty. TFB contends that
it realized a huge profit through its dealings with Life and
Casualty without intending to do so. We agree with the district
court that the ends achieved can be a good indication of an
organization's motive for conducting an activity,16 and that there
was no genuine issue of material fact whether TFB engaged in a
trade or business.
TFB concedes that the second element of the inquiry is
satisfied, that its dealings with Life and Casualty were regularly
carried on. Having determined that TFB was regularly engaged in
trade or business, we turn now to the final inquiry, whether TFB's
association with Life and Casualty was substantially related to its
exempt function.
In determining whether an activity is substantially related
to the exempt purpose of an organization, we must examine "the
relationship between the business activities which generate the
particular income in question ... and the accomplishment of the
16
See Portland Golf Club v. Commissioner, 497 U.S. 154, 166-
67, 110 S.Ct. 2780, 2788-89, 111 L.Ed.2d 126 (1990).
10
organization's exempt purposes".17 For the conduct of a trade or
business to be substantially related to the tax exempt purpose, the
business activity must "contribute importantly" to the
accomplishment of the tax-exempt purpose.18 A trade or business is
"related" to an organization's tax-exempt purpose "only where the
conduct of the business activities has a causal relationship to the
achievement of the exempt purposes", and it is "substantially"
related "only if the causal relationship is a substantial one".19
To determine whether the business activity contributes importantly
to the accomplishment of the exempt purpose, "the size and extent
of the activities involved must be considered in relation to the
nature and extent of the exempt function which they purport to
serve".20 This is a fact-sensitive inquiry and must be made on a
case by case basis.21
TFB argues that its association with Life and Casualty is
related to TFB's exempt purpose as a § 501(c)(5) agricultural
association because Life and Casualty were formed to serve rural
areas as their primary market.22 TFB argues that Life and
17
26 C.F.R. § 1.513-1(d)(1) (1994).
18
26 C.F.R. § 1.513-1(d)(2) (1994).
19
Id.
20
26 C.F.R. § 1.5131(d)(3) (1994).
21
Hi-Plains Hosp. v. United States, 670 F.2d 528, 531 (5th
Cir.1982).
22
Life and Casualty stated two goals at the time of their
formation: to provide insurance to rural residents at reasonable
rates, and to provide member benefits for Farm Bureau members,
most of whom live in rural areas.
11
Casualty's presence in rural areas, their special attention to
customers in rural areas, and because Life and Casualty sell the
type of insurance farmers and ranchers need, Life and Casualty's
business is substantially related to TFB's tax-exempt purpose.
TFB's association with Life and Casualty does not contribute
importantly to the accomplishment of its exempt purposes. While it
may be true that the insurance services provided by TFB betters the
conditions of those engaged in agriculture, no substantial causal
relationship exists between the insurance sales and the improvement
of agricultural products or the development of a higher degree of
efficiency in agricultural occupations. Further, many of the
people who benefitted from these insurance policies are not
ranchers or farmers, and the sale of policies to such people cannot
contribute to TFB's exempt purpose. Any agricultural benefits
derived from Life and Casualty's insurance policies were incidental
benefits. There was no substantial causal relationship between the
insurance sales and the fulfillment of TFB's tax-exempt purpose.
Accordingly, we conclude that the district court properly found
that the income derived from Life and Casualty was unrelated
business income, and was taxable under I.R.C. § 511.
III
We REVERSE the decision of the district court denying the
United States' motion for judgment as a matter of law, affirm the
district court's grant of summary judgment in favor of the United
States, and render a decision that the income TFB received from
Life and Casualty was unrelated business income as a matter of law.
12
13