Bob Jones University Museum and Gallery v. Commissioner

Bob Jones University Museum and Gallery (museum) (plaintiff) was formed to operate a museum and art gallery on the campus of Bob Jones University (the university) in South Carolina. Before being separately incorporated, the museum was part of the university. The new entity was created to display the same artwork and planned to retain the same employees as when it was operated by the university. The museum would be housed in the same facilities pursuant to the terms of a written lease with the university. The rent to be paid by the museum to the university was $105,600 annually, which was less than the fair market value of the facilities. In 1983, the United States Supreme Court revoked the university’s tax-exempt status due to the university’s racially discriminatory policies. The newly incorporated museum did not, however, maintain such policies. The museum was open to the public and free of charge, and 80 percent of the museum’s visitors had no affiliation with the university. Most of the museum’s revenue was expected to come from contributions, with a small portion being derived from gift-shop sales. The commissioner of internal revenue (commissioner) (defendant) denied the museum’s application for tax-exempt status under § 501(c)(3) of the Internal Revenue Code on the ground that the operation of the museum resulted in substantial private benefit to the nonexempt university and, therefore, the museum’s earnings inured to private shareholders or individuals. The museum sought a declaratory judgment to the effect that it was entitled to the exemption.