1 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 system1 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 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

I n 1947, TFB and several other agricultural associati ons in

the South formed two insurance companies: the Southern Farm Bureau

Life Insurance Company ("Life") and the Southern Farm Bureau

Casualty Insurance Co mpany ("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 TFB 3 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 agreeme nt 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 Casu alty 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 its4 Texas Farm Bureau v. United States, 822 F.Supp. 371

(W.D.Tex.1993).

3 "unrelated business taxable income" under I.R.C. § 511. Later, TFB

filed amended returns for years 1984 to 1987, contending that under

t he 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 denie d 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 genuin e 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

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

i ncome under § 512(b)(2). The primary issue in this appeal is

wh ether 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 the5 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 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 sa me 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 ligh t 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

pa rty 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 of7 26 C.F.R. § 1.512(b)-1 (1994).

8 Rev.Rul. 81-178, 1981-2 C.B. 135.

9 Id.

6 each case". 7 Neither the Internal Revenue Code nor the

regulations, however, define "royalty". The parties and the

district court use the definition of roy alty 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 Casu alty 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

facilitie s ... 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 territory7

of Farm Bureau". Further, the contract provided that TFB agreed to

furnish Life and C asualty 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,

a nd 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

sit uation 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 substantia l 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 payme nt. 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 agree ment 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 from10 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 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 const itute 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 must14 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 not be substantially related to the organization's exempt purpose. 14

TFB concedes that its dealings with L ife 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 g enerated 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 insurance16 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 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 wa s 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 go od indication of an

organization's motive for conducting an activity, 16 and that there

was no genuine issue of material fa ct 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

... a nd the accomplishment of the17 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 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 "substan tially"

related "only if the causal relat ionship is a substantial one". 1 9

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 serv e rural

areas as thei r primary market. 2 2 TFB argues that Life and12

Casualty's pr esence in rural areas, their special attention to

customers in rural areas, and because Life and Casualty sell the

t ype 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 p urpose.

Ac cordingly, 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.13