## Facts

- A South Carolina nonprofit corporation operated a museum and art gallery located on a university campus.
- The museum was separately incorporated in 1992 and applied for recognition of exemption under I.R.C. §§ 501(a) and 501(c)(3).
- The museum was open to the public without charge, attracted about 20,000 visitors annually, and most visitors were not affiliated with the university.
- The museum leased space from the university at below-market rent and displayed art owned by the university that was loaned without charge.
- The museum’s revenue consisted of donations and gift-shop sales, used for museum operations and acquisition of additional art.
- The governing board included individuals associated with the university (including members of the founder’s family) and several outside directors.
- The university had lost its own tax-exempt status due to discriminatory policies; the museum itself did not maintain a policy prohibiting interracial dating or marriage.
- The IRS issued a final adverse ruling in 1994, asserting substantial private benefit and inurement to the nonexempt university.
- The museum sought declaratory judgment in the Tax Court under I.R.C. § 7428 based on a stipulated administrative record.

## Issues

1. Whether the museum was organized and operated exclusively for exempt purposes within I.R.C. § 501(c)(3).
2. Whether the museum’s arrangements with, and relationship to, the nonexempt university resulted in prohibited inurement of net earnings to a private shareholder or individual.
3. Whether the museum’s activities conferred a substantial private benefit on the nonexempt university inconsistent with § 501(c)(3).

## Decision

- The Tax Court held the museum qualified as an organization described in § 501(c)(3) and was exempt from federal income tax under § 501(a).
- The court found the museum was a bona fide museum furthering educational purposes through public access and cultural programming.
- The court rejected the IRS’s inurement theory, finding museum revenues were used for museum operations and acquisitions rather than being distributed or transferred to the university.
- The court concluded any benefit to the university from the museum’s presence, shared history, or supportive lease/loan arrangements was incidental to the museum’s public educational function.
- The court ruled the university’s loss of exemption and discriminatory policies did not automatically disqualify the separately incorporated museum, which had its own purposes and operations.

## Legal Principles

- An organization qualifies under § 501(c)(3) only if it is organized and operated exclusively for exempt purposes and serves a public, not private, interest.
- Prohibited inurement requires that net earnings flow to the benefit of a private shareholder or individual; affiliation or overlap in personnel alone is insufficient without evidence of earnings being diverted.
- Private benefit analysis distinguishes permissible incidental benefits to private parties from substantial benefits that indicate the organization is not operated exclusively for exempt purposes.
- A separately incorporated affiliate may qualify for § 501(c)(3) despite close ties to a nonexempt entity when the affiliate’s primary activities benefit the public and financial operations do not divert earnings to the related entity.

## Conclusion

The Tax Court recognized the museum as a § 501(c)(3) organization because it primarily served the public through free educational museum operations, and the record did not show diversion of net earnings or substantial private benefit to the nonexempt university despite close operational ties.


Bob Jones Univ. Museum & Gallery, Inc. v. Comm'r, 71 T.C.M. (CCH) 3120 (T.C. 1996)