Broadway Theatre League of Lynchburg v. United States

According to its articles of incorporation, the Broadway Theatre League of Lynchburg, Virginia (the league) (plaintiff) was organized to promote and cultivate local interest in “good theatrical performances of all kinds” and to build and maintain a permanent audience for such productions. The league contracted with United Performing Arts, Inc. (United), a booking agent, for a one-year term with an option for renewal by the league. The contract barred the sale of single-admission tickets, providing exclusively for seasonal memberships. This approach was intended to ensure the success of the league’s first theatrical season. Under the terms of the contract, United would receive 15 percent of aggregate membership dues. The Internal Revenue Service (IRS) (defendant) denied the league’s application for exemption from income taxation under § 501(c)(3) of the Internal Revenue Code. The league paid taxes and penalties the IRS claimed were due and then sued the IRS for a refund. The IRS argued the league failed to satisfy both the organizational and operational tests. For instance, the IRS argued that the articles’ reference to “good theatrical performances of all kinds” did not sufficiently limit the league’s activities to exempt purposes. The IRS also argued that the league served the benefit of United and the league’s season-ticket purchasers, rather than the public, in violation of the private-inurement rule.