_____________ No. 95-2791WM

_____________ American Academy of Family * Physicians, a not-for-profit * corporation, * * Appellee, * Appeal from the United States * District Court for the Western v. * District of Missouri. * United States of America, * * Appellant. *

_____________ Submitted: April 8, 1996 Filed: August 6, 1996

_____________ Before FAGG, WOLLMAN, and MURPHY, Circuit Judges.

_____________ FAGG, Circuit Judge.
The Internal Revenue Service (IRS) appeals the district court's grant of a tax refund to the American Academy of Family Physicians (Academy)

. The IRS contends the Academy, a tax-exempt organization, is required to pa y federal income tax on certain payments it receiv ed through its sponsorship of group insurance plans. We conclude the payments are not taxable, and affirm.

The Acade my is a national association of family physicians that was organized to represent the interests of family physicians and to promote quality health care. The Academy is exempt from federal income tax as a business league under 26 U.S.C. § 501(a), (c)(6) . The Academy created the American Academy of F amily Physicians Foundation (Foundation) to serve as the Academy's charitable arm. The Foundation is exempt from federal incom e tax as a scientific and educational foundation. See id. § 501(a),

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(c)(3).

The Academy owns and sponsors group disability, medical, and lif e insurance plans that are available to Academy me mbers and their employees. The Principal Mutual Life Insurance Company (Principal) underwrites th e policies. The polici es were initially administered by an individual, and when he died, he bequ eathed the business of administering the policies to the Foundation. The Foundation then created AAF P Insurance Services, Inc. (ISI), a separate corporation, and turned over the administration of the insurance plans to ISI. ISI is a for-profit cor poration that pays federal inco me tax on its profits from administering the insurance plans an d distributes dividends to the Foundation, which owns all ISI's stock. The Academy provides its membership lists to ISI for fair market value. ISI reports twice a year to an Academy committee, and must obtain th e committee's approval before making any changes to the policies.

The Acade my members who elect coverage under the group policies pay premiums to Principal . Principal sets aside part of the premium payments as reserves to pay future claims, and Principal controls the investment of the reser ves. The group policies require Principal to turn over to th e Academy any reserve funds remaining after the policies have been terminate d and all t he claims have been paid, whenever that might occur. In th e meantime, whether the insurance plans are profit able for Principal or not, the policies require Principal to make annual payments to the Academy for Principal 's use of the reserves, based on a fixed percentage of th e insurance reserves. Principal paid the Academy over $600,000 a year durin g the Academy's 1984 to 1987 fiscal years. The issue on appeal is whether these annual payments are taxable.

The IR S contends the payments are taxable under 26 U.S.C. § 511 , which provides that an organization entitled to a tax

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exemption under § 501(a), like the Academy, still must pay income tax on its "u nrelated business taxable income." See id. § 511(a)(1)-(2)(A)

. Unrela ted business taxable income is income the organization earns b y regularly carrying on a trade or business that is not substantially relate d to the purposes or functions entitling the organization to its § 501(a) ta x exemption. Id. §§ 512(a)(1), 513(a). Here, the IRS concluded Principal's payments to the Academy were compensation for th e Academy's sponsorship of the group insurance plans, and the payments qualified as unrelated busines s taxable income. The IRS determined the Academy had improperly failed to pay tax on the paymen ts received from 1984 to 1987. The Academy paid the back taxes and interest assessed by the IRS and then brought this refund action, contending th e Academy's participation in the insurance plans did not co nstitute a trade or business under § 513 and the payments fro m Princi pal were interest, a type of income specifically excluded fro m
unre lated business taxable income, id. § 512 (b)(1). Relying on th e parties' extensive factual stipulations, the district court decided th e Academy's insurance activities were not a trade or business, granted the Academy summary judgment, and ordered a tax refund. The district court di d not reach the interest issue.

In review ing the district court's decision, we first must determine the mea ning of the phrase "trade or business" in § 513. Section 513(c ) defines a trade or business as "any activity which is carried on for the producti on of income from the sale of goods or the performance o f service s." Treasury Regulation § 1.513-1(b) clarifies this statutor y definition by providing that "trade or business" has the same meaning in § 51 3 as it does in 26 U.S.C. § 162, the Internal Revenue Code sectio n permit ting business expense deductions. United States v. American Ba r Endowment , 477 U.S. 105, 110 (1986). The standard test for whether a n activity is a trade o r business under § 162 is whether the activity "`was entered into with the dominant hope and intent of realizing a profit.' " Id. at 110 n.1 (quoting Brannen v. Commissioner , 722 F.2d 695, 704 (11th

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Cir. 1984)). In other words, "the taxpayer's pr imary purpose for engaging in the activity must be for income or profit." Commissioner v

. Groetzinger , 480 U.S. 23, 35 (1987). In keeping with these interpretation s of § 162, several courts of appeals have adopted a profit motive test to determine whether an activity is a trade or business for purposes of the unrelated business income tax. American Bar Endowment , 477 U.S. at 110 n. 1 (citing Professional Ins. Agents v. Commissione r , 726 F.2d 1097 (6th Cir. 1984); Carolinas Far m & Power Equip. Dealers Ass'n v. United States , 699 F.2d 167 (4th Cir. 1983); Louisiana Credit Unio n League v. United States , 693 F.2d 525 (5th Cir. 1982)). "`[T]he existence of a genuine profi t motive is the most important criterion for . . . a trade or business.' " Profe ssional Ins. Agents , 726 F.2d at 1102 (quoted case omitted); se e Louisiana Credit Union League , 693 F.2d at 532.

In addition to the profit motive requirement, the income-producin g activity of a tax-exempt organization must have the general characteristic s of a t rade or business. American Bar Endowment , 477 U.S. at 110-11

. Specif ically, some courts of appeals have recognized that an exemp t organi zation must carry out extensive business activities over a substan tial period of time to be engaged in a trade or business, and w e agree wit h the reasoning of these cases. See Zell v. Commissioner , 76 3 F.2d 1139, 1142 n.2 ( 10th Cir. 1985) (interpreting "trade or business" in § 162); Professional Ins. Agents , 726 F.2d at 1102 (interpreting §§ 162 and 513); McDowell v. Ribicoff , 292 F.2d 174, 178 (3rd Cir.) (interpretin g § 162), cert. denied , 368 U.S. 919 (1961). Contrary to the IRS's position , requiring extensive c ommercial activities is consistent with American Bar End owment , in which the Supreme Court held the American Bar Endowment' s (ABE's) group insuran ce program was a trade or business for purposes of § 513(c) and triggered the unrelated business income tax, see 477 U.S. a t 119. The ABE's insurance activities were clearly extensive. The AB E assembled a group of better-than-average insuran ce risks and negotiated on

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their behalf with insurance companies, id. at 111, compiled lists of ABE members and solicited them, collected premiums f or the insurer, maintained files on each policyholder, answered members' questions about the policies , and screened claims for benefits, id. at 107.

Mo reover, the ABE's significant business activity was important t o the Supr eme Court's analysis. The Supreme Court decided the ABE' s insurance activities met the definition of a trade or business because the y invo lved both the sale of goods and the performance of services, an d "possesse[d] the gene ral characteristics of a trade or business." Id. at 110-11

. Indeed, the ABE was engaging in the same kind of commercia l activities that taxable organizations perform to earn a profit. Id. a t 111. Recognizing that "[t]he undisputed purpose of the unrelated business income tax was to prevent tax-exempt organizatio ns from competing unfairly with businesses whose earnings were taxed," the Supreme Court described th e ABE's ins urance program as a classic example of "the sort of unfai r comp etition that Congress intended to prevent." Id. at 114. Havin g examined Supreme Court and court of appeals precedents, we conclude we mus t consider both the Academy's motive for participating in the insurance plan s and the nature and extent of the Academy's participation during th e relevant tax years.
In our view, the Academy did not hav e the profit motive required for

a t rade or business. Id. at 110 n.1. The IRS contends the Academy wa s earning a profit because the payments from Principal to the Academy were essentially "a brokerage fee for [the Academy's] delivering its members to the insurance company as premium-paying customers." Appellant's Br. at 24

. This contention is unsupported by the record and goes against the grain of the parties' stipulations.
The stipulations show the payments were not compensation for

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services rendered and were not profit in a commercial sense. As we have already explained, th e parties stipulated the group policies entitled the Academ y to receive the excess reserves after the policies' termination

. Thus, the Academy had a recognizable interest in the reserves Principal wa s holding. The parties also stipulated Principal was required to make the annual payments to the Academy as "interest on [the] insurance reserves fo r Principal's use of th e reserves." Appellant's App. at 148. These annual payments were based on a specified, annual, fixed percentage of th e insura nce reserves, and were generated by Principal's investment of th e
reserves. Further, the parties stipulated the interest on the insurance
reserve s was payable without regard to the profitability of the grou p ins urance plans. Based on these stipulations, the annual payments wer e neither brokerage fees nor other compensation fo r commercial services, but
were the way the parties decided to acknowledge the Academy's eventua l claimto the excess reserves while Principal was still holding and using the reserves. We need not decide whether the payments were interest withi n the meaning of § 512( b)(1) as the Academy asserts, because the stipulated record persuades us the payments were not compensation for commercia l services performed by the Academy and were not profit for purposes of the unrelated business income tax.

Besides finding no profit motive, we also conclude the Academy' s involvement in the insurance plans was not extensive and did not "possess[ ] the gene ral characteristics of a trade or business." American Ba r Endowment , 477 U.S. at 110-11. At most, the Academy purchased the group policies offering coverage to its members, sold its membership lists to IS I for fair m arket value, allowed Principal and ISI to use the Academy' s endorsement, and kept track of the policy provisions to make certain the insu rance products the Academy sponsored would meet the needs of it s members. The IRS stipulated that ISI handled the promotion, marketing, an d administration, and Principal processed the insurance applications and mad e decisions about coverage. The Academy had no

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administrative or underwriting responsibilities, unlike the ABE and th e taxpayers in all the other cases the IRS cites o n appeal. See id. at 107, 111; T exas Farm Bureau v. United States , 53 F.3d 120, 124-25 (5th Cir

. 1995); Illinois Ass'n of Professional Ins. Agents v. Commissioner , 801 F.2 d 987, 989-90 (7th Cir. 1986); Professional Ins. Agents , 726 F.2d at 1099, 1100, 1102; Carolinas Farm & Power Equip. Deale rs Ass'n , 699 F.2d at 168; Louisiana Credit Union League , 693 F.2d at 533. The parties' stipulations mak e clear the Academy was not engaged in the kind of activities tha t concerned the Supreme Court in American Bar Endowment . While the AB E negotiated with an insurance company and perform ed numerous administrative tasks, 477 U.S. at 107, 111, the Academy neither carried on a tax-fre e business nor sought a competitive edge for the group insurance progra m based on the Academy's tax-exempt status. Instead, it was ISI tha t operated the group insurance program for a profi t and passed its after-tax profits on to the Foundation (in the form of dividends) to support th e Foundation's charitable work. ISI paid income tax like all other competin g commercial entities. Although the Academy made group coverage available by assembling its members into a group and purchasing the policies, th e Academ y consistently acted like an insurance customer, not an insuranc e compa ny, and ISI took the active, profit-making role. We conclude th e Academy's involvement in the group policies was not significant enough to constitute a trade or business and expose the Academy to income tax.

Contrary to the IRS's view, "not every income-producing and profitmaking endeavor constitutes a trade or business." Groetzinger , 480 U.S. at 35. The Academy's sponsorship of a group insurance program administere d in its entirety by an unrelated, non-exempt corporation with no competitiv e advantage over other taxable organizations does not translate into taxable business activity for the Academy. Even if Prin cipal made the payments to the Academy for the Academy's sponsorship -- and the parties' stipulations show otherwise -- the payments would not be taxable.

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For purpo ses of this case, it does not matter whether the payments wer e brokerage fees, gratuities to promote goodwill, or interest, because the Academy was not engaged in business activity for a profit and the unrelate d business income tax does not apply. We affirm the judgment of the distric t court.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.