Texas Farm Bureau v. U.S., 94-50034
| Decision Date | 01 June 1995 |
| Docket Number | No. 94-50034,94-50034 |
| Parties | -2323, 95-1 USTC P 50,297 TEXAS FARM BUREAU, Plaintiff-Appellee Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant Cross-Appellee. Summary Calendar. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Steven W. Parks and Kenneth L. Green, Gary R. Allen, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, DC, for appellant.
Andy McSwain, Fulbright, Winniford, Bice & Marable, Waco, TX, Sidney Powell, Dallas, TX, for appellee.
Appeals from the United States District Court for the Western District of Texas.
Before WISDOM, WIENER and PARKER, Circuit Judges.
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.
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 of agriculture in Texas, and TFB is exempt from federal income tax under Sec. 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 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 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 "unrelated business taxable income" under I.R.C. Sec. 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 Sec. 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, 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.
Under Sec. 511 of the Internal Revenue Code, organizations that have tax-exempt status under I.R.C. Sec. 501 still must 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 Sec. 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.
The United States' first argument on appeal contends that the 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 Sec. 512(b)(2) royalty income is to be "determined by all the facts and circumstances of 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 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;...
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