Ohio Farm Bureau Fed'n, Inc. v. Comm'r of Internal Revenue

• Decision Date: 11 April 1996
• Docket Number: No. 18614-93.,18614-93.
• Citation: 106 T.C. 222,106 T.C. No. 11
• Parties: OHIO FARM BUREAU FEDERATION, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

106 T.C. 222

106 T.C. No. 11

OHIO FARM BUREAU FEDERATION, INC., Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 18614-93.

United States Tax Court.

April 11, 1996.

James R. King, Michael Dubetz, Jr., and Todd S. Swatsler, Columbus, OH, for petitioner.

Robert D. Kaiser, Hamilton, OH, 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 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 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 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 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 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. 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.

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.

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