Court Opinion

ID: 4330505
Source: CourtListenerOpinion
Date Created: 2018-11-13 23:40:45.155988+00
Date Added: 2024-06-11T14:47:15.647434
License: Public Domain

106 T.C. No. 11

                UNITED STATES TAX COURT

   OHIO FARM BUREAU FEDERATION, INC., Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18614-93.                     Filed April 11, 1996.

     P, a tax-exempt agricultural organization, engaged
in activities to promote the use of agricultural
cooperatives among farmers. In 1934, P formed L, a
statewide cooperative. In 1949, P and L entered into a
written contract, whereby P agreed to perform
educational and promotional activities on behalf of L
in exchange for a fee. Pursuant to the contract, P
performed activities to promote cooperatives in general
and L specifically.

     In 1985, L merged into another cooperative. In
connection with the merger, P and L formally terminated
their contractual relationship pursuant to a written
termination agreement. The termination agreement
contained a nonsponsorship and noncompetition clause,
whereby P agreed not to sponsor or promote a competing
cooperative on an exclusive basis. In consideration
for the nonsponsorship and noncompetition agreement, P
received $2,064,500.
                                 - 2 -

          Held: The fees received by P pursuant to its
     service contract with L were substantially related to
     its tax-exempt purpose and, therefore, did not
     constitute unrelated business taxable income.

          Held, further: P’s fulfillment of the
     nonsponsorship and noncompetition clause did not
     constitute a trade or business as defined by sec. 513,
     I.R.C.; therefore, the payment did not constitute
     unrelated business taxable income taxable to P under
     sec. 511(a), I.R.C.

     James R. King, Michael Dubetz, Jr., and Todd S. Swatsler,

for petitioner.

     Robert D. Kaiser, for respondent.

     RUWE, Judge:   Respondent determined deficiencies in

petitioner’s Federal income tax in the amounts of $1,107,505 and

$40,192 for the taxable periods ending August 31, 1985, and

August 31, 1986, respectively.

     After concessions, the issues for decision are: (1) Whether

the $292,617 received by petitioner pursuant to its service

contract with Landmark, Inc., during the taxable year ending

August 31, 1985, constituted unrelated business taxable income;

(2) whether a lump-sum payment made by Landmark, Inc., to

petitioner pursuant to the terms of a nonsponsorship and

noncompetition clause contained in their 1985 termination

agreement constituted unrelated business taxable income; and (3)

whether interest should be computed under the provisions of
                                 - 3 -

section 6621(c),1 dealing with large corporate underpayments, for

the taxable period ending August 31, 1985.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and attached exhibits are incorporated

herein by this reference.    At the time the petition was filed,

petitioner’s principal place of business was in Columbus, Ohio.

     Petitioner is the Ohio Farm Bureau Federation, Inc., a

nonprofit agricultural organization exempt from Federal income

tax under section 501(c)(5).    Petitioner was formed in 1919 as an

unincorporated association and subsequently incorporated under

Ohio law on November 27, 1931.    Petitioner is a statewide

federation of local county farm bureaus (county bureaus).

Individual farmers are not members of petitioner.    Instead,

farmers (or other persons fulfilling certain eligibility

requirements) are members of the county bureaus, which, in turn,

are members of petitioner.

     Petitioner’s stated purpose was generally to aid and assist

in the betterment of the conditions and welfare of those engaged

in agriculture.   More specifically, petitioner engaged in

activities to educate Ohio farmers and to promote agricultural

     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable period in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 4 -

cooperatives and cooperative activity among Ohio farmers.      An

agricultural cooperative is a business organization in which the

members, who are generally individual farmers, are both owners of

the organization and its customers.     The farmer-owners sell

products to, and purchase products and supplies from, the

cooperative.   A farmer’s ownership interest in the cooperative is

determined by the amount of business he or she does with the

cooperative.   Petitioner has historically encouraged farmers to

join cooperatives, pointing out the benefits of ownership, the

availability of products or services that may not otherwise be

available to farmers, and the focus on keeping farmers’ needs and

interests primary.    In fact, petitioner was the founder or

sponsor of most of the agricultural cooperatives in Ohio.

     In 1934, petitioner formed an Ohio agricultural cooperative

by the name of the Ohio Farm Bureau Cooperative Association, Inc.

The name was later changed to Landmark, Inc. (Landmark).

Landmark was a regional cooperative organization.     As such, it

did not generally sell products to or purchase products from

individual farmers.    Instead, local Landmark cooperatives or

affiliated organizations (local Landmarks) purchased from or sold

to individual farmers.

     From the time of Landmark’s formation until December 5,

1981, petitioner held a controlling interest in Landmark’s voting
                               - 5 -

common stock and also held some preferred shares.2   Petitioner

and Landmark shared common management until 1955.    During the

taxable year in issue, petitioner and Landmark shared office

space pursuant to a contract dated December 5, 1981, between

petitioner and Landmark.

     During the year in issue, local Landmarks were located

throughout the State of Ohio, making Landmark the only regional

cooperative in Ohio that had local affiliates located throughout

the State.   Landmark, as the regional organization, dealt

principally with petitioner, rather than with the county bureaus.

The local Landmarks worked with the county bureaus throughout the

State in a similar mutual and cooperative manner.    Most of the

farmers who were members of the county bureaus were also members

of the local Landmarks.

     On November 15, 1949, petitioner and Landmark (then known as

the Farm Bureau Cooperative Association, Inc.) entered into a

written service contract, whereby petitioner agreed to "perform

services on behalf of * * * [Landmark] in the fields of

education, promotion, organization, publicity and public

relations for the purpose of aiding in the purchasing and

marketing activities of * * * [Landmark]."   Specifically,

petitioner agreed to (1) disseminate information to Ohio farmers

     2
      Petitioner continued to hold Landmark preferred shares
until such shares were exchanged for Countrymark stock pursuant
to a merger in 1985. See infra p. 9.
                               - 6 -

with respect to economic and social conditions, results of

agricultural research, methods of producing, marketing, and

selling agricultural products, and methods for financing

agricultural operations; (2) provide education, including

education for the purpose of promoting the marketing and sale of

agricultural products handled by Landmark; (3) make available to

Landmark its mailing list; (4) maintain a publicity department to

encourage the handling of Landmark merchandise; (5) publish

advertisements of Landmark (at standard advertising rates) and

news items about Landmark (as offered and agreed upon) in its

news publication; (6) maintain a public relations program

relating to farm cooperatives; and (7) promote research in

agricultural fields and cooperatives generally.   In consideration

of the performance of these services by petitioner, Landmark

agreed to pay the sum of 1/4 of 1 percent of its purchasing

volume and 1/16 of 1 percent of its marketing volume.

     The November 15, 1949, contract represented the first

written agreement between the parties; however, the working

relationship memorialized in the agreement actually predated the

writing.   The written service contract was amended on January 1,

1980, and again on December 5, 1981.   The only material change

made by these amendments was in the calculation of the fee to be

paid to petitioner.   The 1980 amendment changed the amount of the

fee to a percentage of Landmark’s gross margin, and the 1981

amendment changed the amount to correspond to a fixed payment
                                 - 7 -

schedule.   The 1981 amendment was in effect during the taxable

year in issue.

     Pursuant to the service contract, petitioner engaged in

various types of educational programs, which directly or

indirectly promoted cooperatives.    For example, petitioner

conducted youth camps, where cooperatives and cooperative issues

were explained, and children were given the opportunity to

operate a small-scale cooperative.       Petitioner also conducted

conferences for young couples dedicated to farming.       These

conferences were jointly sponsored with Landmark and included

discussion about cooperatives.    In addition, petitioner sponsored

advisory council meetings, in which small, voluntary groups of

farmers gathered to discuss farm topics.       Petitioner would

suggest topics for discussion at these meetings, including

cooperative issues in general and assessment of the performance

of the local cooperative organizations.

     Petitioner also engaged in various public relations

activities to promote cooperatives pursuant to the service

contract.   For example, C. William Swank, petitioner’s executive

vice president and chief executive officer, and other staff

members of petitioner frequently spoke about cooperative issues

to farmer groups, university groups and classes, and service

clubs.   Moreover, petitioner’s primary publication, the Buckeye

Farm News, included frequent editorial discussions about

cooperative ideas in general and about Landmark in particular.
                               - 8 -

Petitioner made editorial space available to Landmark, so that it

could include its own discourse on cooperatives as well as

discussions of its general business.    Petitioner also invited

representatives from Landmark and other cooperative organizations

to speak about cooperative issues at its farm bureau meetings.

     In addition, pursuant to the service contract, petitioner

undertook various legislative efforts in cooperation with

Landmark.   On several occasions, they were successful in securing

passage of legislation beneficial to Ohio farmers.

     In conducting its activities pursuant to the service

contract, petitioner continuously emphasized the cooperative form

of doing business.   In this connection, petitioner would often

mention Landmark specifically and permit Landmark representatives

to communicate with petitioner’s members through editorials in

the Buckeye Farm News and through appearances at youth camps and

other meetings.   Petitioner would also refer its members to

Landmark.   The nature of petitioner’s activities under the

service contract did not materially change from the time the

contract was executed in 1949 until the time it was terminated in

1985.

     Petitioner had a similar service agreement with another,

much smaller agricultural cooperative, known as the Ohio

Agricultural Marketing Association.    This agreement served

significantly fewer people and generated much smaller fees than

did petitioner’s service contract with Landmark.
                               - 9 -

     In 1985, Landmark merged into another agricultural

cooperative, the Ohio Farmers Grain and Supply Association, Inc.

(Ohio Farmers).   The name of the surviving entity was changed to

Countrymark.   Prior to the merger, Landmark had cooperative

facilities throughout the State of Ohio, whereas Ohio Farmers’

activities were limited to northwest Ohio.   The two cooperative

organizations were competitive to the extent that Landmark

operated facilities in northwest Ohio; however, Ohio Farmers

coexisted with Landmark in only about 15 percent of the counties

in Ohio.   The merger eliminated most of the cooperative

competition in Ohio.

     In connection with the merger, petitioner’s relationship

with Landmark was formally terminated pursuant to a written

termination agreement, dated February 20, 1985.   The preamble to

the agreement contained the following recital:

     [Petitioner] and Landmark have had a close working
     relationship since 1934. Until 1955, they shared
     common management. Thereafter, the close relationship
     continued under a service/sponsorship agreement
     providing for [petitioner] to perform a wide variety of
     services in the promotion and advancement of Landmark,
     its products and services. During the duration of the
     relationship [petitioner] has been privy to many of
     Landmark’s business plans and programs, its trade
     secrets, customer lists of its members, price lists and
     other confidential trade practices and has promoted,
     exclusively, the Landmark system and its products and
     services.

Under the termination agreement, petitioner and Landmark agreed,

among other things, to terminate their service contract.   The
                             - 10 -

termination agreement also contained a nonsponsorship and

noncompetition provision, which provided in pertinent part:

           Section 5. Non-Sponsorship/Non-Competition.
     [Petitioner], for and upon receipt of the consideration
     specified in Section 6.2 below, agrees that for a
     period of three (3) years from the Effective Date that
     (except for the benefit of Landmark or its successors)
     it will not participate in the ownership, management,
     operation, control, or sponsorship of any agri-business
     enterprise engaged in grain marketing, feed
     manufacturing, fertilizer manufacturing or
     distribution, or farm chemical or petroleum
     distribution at the "regional cooperative level" * * *
     nor will it, at the regional or local level * * *
     during such three year period, within the State of
     Ohio, sponsor or promote, on an exclusive basis, a
     specific competing enterprise or products or services
     of the type and character described above. Nothing
     herein shall be construed to prohibit or prevent
     [petitioner’s] support for and promotion of
     cooperatives and their products and services on a non-
     exclusive basis within the agri-business community;
     promotion of and education of the public about
     agriculture, its needs and concerns; the conduct of any
     programs or activities which [petitioner] now conducts
     * * *

In consideration for the covenants contained in this provision,

petitioner received $2,064,500.3

     Since entering the termination agreement on February 20,

1985, petitioner has continued to conduct educational,

promotional, and other activities with respect to agricultural

     3
      Petitioner received an additional $633,600 under the
termination agreement in consideration for certain rights to
additional preferred stock of Landmark and for petitioner’s
assignment of all its voting rights in Landmark to a voting trust
provided for in the termination agreement. This payment is not
in issue.
                               - 11 -

and other cooperatives.    Petitioner has also afforded some

visibility to Countrymark, the merged entity, by mentioning it in

the Buckeye Farm News and permitting Countrymark representatives

to appear at petitioner’s youth camps and annual meetings.

                               OPINION

     The parties agree that petitioner is a "Labor, agricultural,

or horticultural" organization exempt from tax pursuant to

section 501(c)(5).    Such organizations are described in the

regulations as those that (1) have no net earnings inuring to the

benefit of any member and (2) have as their objects the

betterment of the conditions of those engaged in agricultural

pursuits, the improvement of the grade of their products, and the

development of a higher degree of efficiency in their

occupations.   Sec. 1.501(c)(5)-1, Income Tax Regs.

     Notwithstanding this general exemption from taxation,

section 511(a) imposes a tax on the "unrelated business taxable

income" (UBTI) of section 501(c)(5) organizations.    UBTI is

defined in section 512(a)(1) as "the gross income derived by any

organization from any unrelated trade or business (as defined in

section 513) regularly carried on by it, less the deductions

* * * which are directly connected with the carrying on of such

trade or business".    Section 513(a), in turn, defines "unrelated

trade or business" as "any trade or business the conduct of which

is not substantially related * * * to the exercise or performance
                              - 12 -

by such organization of its charitable, educational, or other

purpose or function constituting the basis for its exemption".

     The regulations and the case law have delineated the three

elements necessary for income from an activity to be UBTI:     (1)

The activity from which the income is derived is a trade or

business, (2) the trade or business is regularly carried on by

the organization, and (3) the conduct of the trade or business is

not substantially related to the organization’s tax-exempt

purpose, other than through the need for or use of the funds it

produces.   United States v. American Bar Endowment, 477 U.S. 105,

110 (1986); National Water Well Association v. Commissioner, 92
T.C. 75, 83 (1989); sec. 1.513-1(a), Income Tax Regs.   UBTI

exists only if all three elements are found.   Veterans of Foreign

Wars, Mich. v. Commissioner, 89 T.C. 7, 19-20 (1987).   Petitioner

bears the burden of proving that one or more of the elements

above is lacking.   Rule 142(a).

Payments Under the Service Agreement

     The first issue we must decide is whether the $292,617

received by petitioner during 1985 pursuant to its service

agreement with Landmark constituted UBTI.   There appears to be no

dispute that the services performed by petitioner pursuant to the

service agreement constituted a trade or business and were

regularly carried on.   Thus, the focus of our discussion is

limited to whether or not petitioner’s performance of those
                              - 13 -

services was substantially related to its tax-exempt purpose as

an agricultural organization under section 501(c)(5).

     For a substantial relationship to exist, the activity that

produces the income “must contribute importantly to the

accomplishment of * * * [the organization’s exempt] purposes.”

Sec. 1.513-1(d)(2), Income Tax Regs.   The regulations describe

the type of relationship that qualifies as substantial:

     Trade or business is “related” to exempt purposes, in
     the relevant sense, only where the conduct of the
     business activities has causal relationship to the
     achievement of exempt purposes (other than through the
     production of income); and it is “substantially
     related,” for purposes of section 513, only if the
     causal relationship is a substantial one. * * * [Sec.
     1.513-1(d)(2), Income Tax Regs.]

The substantial relationship requirement focuses upon the manner

in which the tax-exempt organization conducts its activities.

United States v. American College of Physicians, 475 U.S. 834,

848-849 (1986).

     In cases involving business leagues, courts have identified

two factual elements that are important to the substantial

relationship determination:   (1) Whether the activities in

question are “unique” to the organization’s tax-exempt function,

and (2) whether the activities benefit the common business

interest of an organization’s membership or the industry as a

whole and not just members in their individual capacities.

Professional Ins. Agents of Mich. v. Commissioner, 726 F.2d 1097,
                              - 14 -

1103 (6th Cir. 1984), affg. 78 T.C. 246 (1982); Louisiana Credit

Union League v. United States, 693 F.2d 525, 535 (5th Cir.

1982).4

     With respect to the uniqueness test, it has been stated
that:

     Such services as educational and training programs,
     legislative lobbying, and institutional advertising
     clearly satisfy this uniqueness test, because they
     advance the purposes of the * * * [organization] as an
     entity in itself. It is the institutional ends that
     must be served if the activity is to be deemed
     substantially related. Educational, legislative, and
     advertising services are peculiarly suitable activities
     for a business league because they further the common
     business interest that unites the association’s
     members. * * * [Louisiana Credit Union League v.
     United States, supra at 535; see also Professional Ins.
     Agents of Mich. v. Commissioner, supra at 1103.]

     Petitioner’s stated purpose was generally to aid and assist

in the betterment of the conditions and welfare of those engaged

in agriculture.   The affidavit upon which petitioner’s tax

exemption was based defined petitioner’s purposes to include “the

sponsorship of * * * Purchasing and Marketing cooperatives”.   The

primary thrust of petitioner’s activities under the service

contract was to educate Ohio farmers about agricultural

cooperatives in general, and Landmark specifically, and to

     4
      While the cases cited deal with business leagues under sec.
501(c)(6), which are associations of persons having common
business interests, we have stated that this substantial
relationship analysis is relevant for purposes of sec. 501(c)(5)
agricultural organizations as well. California Thoroughbred
Breeders Association v. Commissioner, T.C. Memo. 1989-342.
                              - 15 -

promote cooperative activity among the farmers.   Petitioner

believed that the use of cooperatives was beneficial to farmers,

as evidenced by its historical involvement in the cooperative

movement in Ohio.   We think that petitioner is in a unique

position to perform the activities under the service contract

given its distinctive relationship with Ohio farmers, and we find

the activities to be unique to petitioner’s tax-exempt function.

     In evaluating the relationship between the activities and

the purposes of an agricultural organization, the capacity in

which benefits are received by the organization’s members is as

important as the unique character of the organization’s

activities.   For a substantial relationship to exist, the

benefits flowing from the organization’s activities must inure to

the members as a group, rather than as individuals.   Professional

Ins. Agents of Mich. v. Commissioner, supra at 1103-1104;

Louisiana Credit Union League v. United States, supra at 535-536.

Several factors are relevant in determining whether an activity

operates primarily to benefit individual members:   (1) Whether

fees charged are directly proportionate to benefits received; (2)

whether participation is limited to members and, thus, is of no

benefit to nonmembers in the industry; and (3) whether the

service provided is one commonly provided by for-profit entities.

Illinois Association of Professional Ins. Agents v. Commissioner,

801 F.2d 987, 993 (7th Cir. 1986), affg. T.C. Memo. 1985-105;

Carolinas Farm & Power Equip. Dealers v. United States, 699 F.2d
                                - 16 -

167, 171 (4th Cir. 1983).

     In the present case, the only fees paid to petitioner by its

members were membership dues.    The benefits that petitioner’s

members might receive from petitioner’s educational, promotional,

and lobbying activities performed pursuant to the service

contract could turn out to be negligible, or they could far

outweigh the amount of their dues.       The benefits were not

directly proportional to the amount of the fees paid.       Moreover,

petitioner’s activities in lobbying for and promoting cooperative

activity would benefit the entire agricultural industry, not just

its members, and it is a service not commonly provided by for-

profit entities.

     Respondent argues that, pursuant to the service contract,

petitioner agreed to promote exclusively Landmark and its

products and services, and that the manner in which petitioner

conducted its activities was primarily for the commercial benefit

of Landmark, rather than for the purposes underlying petitioner’s

exemption.   Respondent cites Illinois Association of Professional

Ins. Agents v. Commissioner, supra and National Water Well

Association v. Commissioner, 92 T.C. at 97-98, to support her

argument.

     In Illinois Association of Professional Ins. Agents v.

Commissioner, supra, the Court of Appeals for the Seventh Circuit

held that the manner in which the taxpayer, a business league

exempt under section 501(c)(6), conducted its errors and
                              - 17 -

omissions insurance activities indicated that the activities were

not substantially related to the taxpayer’s exempt purpose.        The

court based its determination on the fact that the taxpayer

endorsed a particular errors and omissions program in a manner

that provided convenient marketing, advertising, and

administrative services to the insurance company and that

generated income for the taxpayer rather than educating the

taxpayer’s members, serving the public interest, or merely

advising of the need for such coverage.      Illinois Association of

Professional Ins. Agents v. Commissioner, supra at 995.      The

court further noted that the program benefited the individual

members in direct proportion to the fees they paid, rather than

benefiting the members as a group.     Id.

     Similarly, in National Water Well Association v.

Commissioner, supra, this Court held that the taxpayer’s

endorsement and sponsorship of a particular industry casualty

insurance program was not substantially related to its exempt

purpose.   In so holding, we noted that had the taxpayer intended

to educate and advise its members of the need for casualty

industry insurance, it would have advised its members of various

types of insurance from which its members could select.      National

Water Well Association v. Commissioner, supra at 98.      Moreover,

only those individuals who paid premiums received insurance under

the industry casualty insurance program; therefore, the members

were not benefited as a group.   Id. at 98-99.
                              - 18 -

     We find these cases to be distinguishable from the instant

case, because petitioner did educate its members and promote the

use of cooperatives in general.   Unlike the promotion of a

particular commercial insurance program, petitioner’s promotion

of Landmark was uniquely related to its exempt purpose.   Most

Ohio farmers who were members of county bureaus were also members

of local Landmark cooperatives.   Landmark was the only statewide

regional agricultural cooperative in Ohio and was regularly held

up by petitioner as the exemplar of the successful cooperative.

Indeed, the only other regional agricultural cooperative, Ohio

Farmers, coexisted with Landmark in only about 15 percent of the

counties in Ohio.   Petitioner’s promotion of Landmark was thus

done in conjunction with its promotion of cooperatives in

general.   Indeed, petitioner continued to promote cooperatives

after it terminated its relationship with Landmark, and

petitioner often singled out Countrymark, the newly merged

statewide cooperative.   Moreover, unlike the cases above, the

benefits received by petitioner’s members were not directly

proportional to the amount of the fees paid, and the members

benefited as a group from petitioner’s activities.

Payments under the Nonsponsorship Clause

     In determining whether the payment made by Landmark to

petitioner pursuant to the terms of the nonsponsorship and

noncompetition clause contained in their 1985 termination
                              - 19 -

agreement constituted UBTI, we must first decide whether the

income was derived from a trade or business.

     Section 513(c) defines the term “trade or business” as any

activity that is carried on for the production of income from the

sale of goods or the performance of services.   The regulations

provide that, as a general rule, an activity that qualifies as a

trade or business under section 162 also qualifies as a trade or

business under section 513.   Sec. 1.513-1(b), Income Tax Regs.

In setting out the test for a trade or business under section

162, the Supreme Court has stated:

          Of course, not every income-producing and profit-
     making endeavor constitutes a trade or business. The
     income tax law, almost from the beginning, has
     distinguished between a business or trade, on the one
     hand, and “transactions entered into for profit but not
     connected with . . . business or trade,” on the other.
     See Revenue Act of 1916, § 5(a), Fifth, 39 Stat. 759.
     Congress “distinguished the broad range of income or
     profit producing activities from those satisfying the
     narrow category of trade or business.” Whipple v.
     Commissioner, 373 U.S., at 197. We accept the fact
     that to be engaged in a trade or business, the taxpayer
     must be involved in the activity with continuity and
     regularity and that the taxpayer’s primary purpose for
     engaging in the activity must be for income or profit.
     A sporadic activity, a hobby, or an amusement diversion
     does not qualify. [Commissioner v. Groetzinger, 480
U.S. 23, 35 (1987); emphasis added.]

Because the purpose of the unrelated business income tax was to

prevent tax-exempt organizations from unfairly competing with

businesses whose earnings were taxed, United States v. American

Bar Endowment, 477 U.S. at 114, we have considered the potential
                                - 20 -

for unfair competition as a factor in determining whether a trade

or business exists.    National Water Well Association v.

Commissioner, 92 T.C. at 86.

     The question of whether noncompetition under a covenant not

to compete constitutes a trade or business appears to be an issue

of first impression.    Respondent argues that the determinative

factor is whether the activity was engaged in with an intent to

earn a profit, and the allocation of $2,064,500 to the

nonsponsorship and noncompetition clause clearly shows

petitioner’s profit motive.

     While profit motive is an important factor in the trade or

business analysis, the Supreme Court made it clear that the level

of activity remains an important component of the trade or

business standard.     Commissioner v. Groetzinger, supra at 35; see

also Professional Ins. Agents of Mich. v. Commissioner, 726 F.2d

at 1102; National Water Well Association v. Commissioner, supra

at 84.   We simply do not think that a one-time agreement not to

engage in certain activities constitutes the kind of continuous

and regular activity characteristic of a trade or business.    Nor

does noncompetition involve a “sale of goods” or “performance of

services” as set out in the definition of trade or business in

section 513(c).   Moreover, we simply do not see how an agreement

not to compete creates a potential for unfair competition with a

taxable entity.

     We are aware that a negative covenant to refrain from
                               - 21 -

performing services has been held to be the equivalent of

affirmative personal services.    Patterson v. Commissioner, 810
F.2d 562, 569 (6th Cir. 1987), affg. T.C. Memo. 1985-53; Salvage

v. Commissioner, 76 F.2d 112, 113-114 (2d Cir. 1935), affd. 297
U.S. 106 (1936); Cox v. Helvering, 71 F.2d 987, 988 (D.C. Cir.

1934); Ullman v. Commissioner, 29 T.C. 129, 139 (1957), affd. 264
F.2d 305 (2d Cir. 1959).    However, this rule has been applied

only for purposes of determining that a payment received for such

a covenant constitutes income to the recipient.5   Such

application is appropriate given the exceedingly broad definition

of income.   The definition of trade or business, on the other

hand, is more narrow as noted by the Supreme Court in

Commissioner v. Groetzinger, supra at 35.    We, therefore, decline

to treat the absence of activity resulting from a covenant not to

compete as equivalent to the affirmative performance of such

activity for purposes of applying the definition of a trade or

business in this context.    Accordingly, we find that the payment

made by Landmark to petitioner pursuant to the terms of the

nonsponsorship and noncompetition clause contained in their 1985

     5
      Similarly, in Schaefer v. Commissioner, 105 T.C. 227
(1995), we sustained a Treasury regulation under which income
from a covenant not to compete is not considered “passive” income
for purposes of sec. 469. In Schaefer, we dealt only with the
validity of a regulation that specifically classified income from
a covenant not to compete as nonpassive income. We did not deal
with the more narrow question of whether the income from such a
covenant is derived from a trade or business regularly carried on
within the meaning of the unrelated business income tax, which
confronts us in the present case.
                              - 22 -

termination agreement was not derived from a trade or business

and, therefore, does not constitute UBTI.

     For similar reasons, we do not think that the nonsponsorship

and noncompetition clause met the second requirement for UBTI--

that the trade or business be “regularly carried on” by the

organization.   The regulations provide guidance in deciding

whether an activity is regularly carried on within the meaning of

section 512:

     regard must be had to the frequency and continuity with
     which the activities productive of the income are
     conducted and the manner in which they are pursued.
     This requirement must be applied in light of the
     purpose of the unrelated business income tax to place
     exempt organization business activities upon the same
     tax basis as the nonexempt business endeavors with
     which they compete. * * *

                          * * * * * * *

     Certain intermittent income producing activities occur
     so infrequently that neither their recurrence nor the
     manner of their conduct will cause them to be regarded
     as trade or business regularly carried on. For
     example, income producing or fund raising activities
     lasting only a short period of time will not ordinarily
     be treated as regularly carried on if they recur only
     occasionally or sporadically. * * * [Sec. 1.513-
     1(c)(1), (2)(iii), Income Tax Regs.; emphasis added.]
                              - 23 -

     The nonsponsorship and noncompetition clause was part of a

termination agreement entered into between petitioner and

Landmark.   Such a one-time agreement is clearly not the sort of

frequent and continuous activity contemplated by the regulations.

Rather, it is a single, isolated event that occurred as a result

of the unique relationship between petitioner and Landmark.

     Our conclusion is consistent with analogous cases involving

self-employment taxes.   In Newberry v. Commissioner, 76 T.C. 441,

444 (1981), the issue was whether the proceeds from business

interruption insurance that the taxpayer received after his store

was destroyed by fire constituted “gross income derived by an

individual from any trade or business carried on by such

individual” pursuant to section 1402(a).   We held that the quoted

language of section 1402(a) required a causal nexus between the

income and actual business activity and that such a requirement

had not been met.6   The statutory language in section 1402(a) is

quite similar to the definition of unrelated business income in

section 512(a),7 and we believe that the rationale in Newberry v.

Commissioner, supra, is equally applicable to the instant case.8

     6
      See also Milligan v. Commissioner, 38 F.3d 1094 (9th Cir.
1994), revg. T.C. Memo. 1992-655.
     7
      Sec. 512(a) defines “unrelated business income” as “gross
income derived by any organization from any unrelated trade or
business * * * regularly carried on by it”.
     8
      See also Barrett v. Commissioner, 58 T.C. 284, 289 (1972),
wherein this Court noted: “Both parties agree that
                                                   (continued...)
                             - 24 -

     Accordingly, we hold that petitioner did not have UBTI

during the taxable year in issue.9

                                     Decision will be entered

                              under Rule 155.

     8
      (...continued)
noncompetition does not constitute the carrying on of a trade or
business.”
     9
      Because we have found that there was no underpayment of
petitioner’s income tax, we need not address whether interest
should be computed under the provisions of sec. 6621(c), dealing
with large corporate underpayments.