                          T.C. Memo. 1996-247



                        UNITED STATES TAX COURT



  BOB JONES UNIVERSITY MUSEUM AND GALLERY, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 717-95X.                          Filed May 29, 1996.



     John C. Stophel, Richard W. Bethea, Jr., and Stephen S.

Duggins, for petitioner.

     Charles B. Burnett and Monice Rosenbaum, for respondent.



                          MEMORANDUM OPINION


     FOLEY, Judge:   Petitioner seeks a declaratory judgment under

section 7428(a) that it is exempt from Federal income taxation

under section 501(a) as an organization meeting the requirements

of section 501(c)(3).    Pursuant to Rule 122, this case was
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submitted for decision based on the stipulated administrative

record as defined in Rule 210(b)(10).    Petitioner has exhausted

its administrative remedies within the Internal Revenue Service

as required by section 7428(b)(2) and Rule 210(c)(4), received a

final adverse ruling dated December 2, 1994, and invoked the

jurisdiction of this Court by a petition filed on January 12,

1995.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code of 1986, and all Rule references are to

the Tax Court Rules of Practice and Procedure.

                            Background

     Petitioner was incorporated as a nonprofit corporation under

the laws of South Carolina on June 2, 1992.   Petitioner is a

museum and art gallery located on the campus of Bob Jones

University (the University) in Greenville, South Carolina.

     The University first opened an art gallery in 1951, and

prior to petitioner's incorporation, the art gallery was a part

of the University.   The museum and art gallery have been housed

in their present location since 1965.    Petitioner represents that

the museum contains “one of the greatest collections of religious

paintings and works of art in the western hemisphere.”

     At one time, the University was a tax-exempt organization.

The University's exempt status was revoked, however, as a result

of a 1983 Supreme Court decision.   See Bob Jones Univ. v. United

States, 461 U.S. 574 (1983).   The University maintains a policy
                              - 3 -

that prohibits students from engaging in interracial dating and

marriage, and the Supreme Court found that policy to be contrary

to public policy.

     Petitioner's charter states that petitioner was organized

for the following reasons:

     To operate a museum and art gallery which will be open
     to the public with the hope that it will contribute
     substantially to the need of the Southeastern United
     States for cultural and artistic opportunities akin to
     that of other regions long recognized for their
     outstanding art galleries which enrich the lives of
     their people.

     To solicit, collect, receive, accumulate, administer
     and disburse funds and property in such a manner as
     will, in the sole discretion of the board of directors,
     most effectively operate to further religious,
     charitable, scientific, literary, or educational
     purposes, either directly or by contributions to any
     organization described in Section 501(c)(3) of the
     Internal Revenue Code, with the exception of
     organizations testing for public safety.

     In essence, petitioner is taking over all of the operations

of the museum previously managed by the University.   At the

outset, the museum operated by petitioner will display the same

artwork, retain the same employees, and be housed in the same

building (the Building) as the museum operated by the University.

Unlike the University, however, petitioner does not prohibit

interracial dating or marriage.

     Petitioner and the University entered into a 3-year lease

agreement beginning January 1, 1993, under which petitioner is
                                 - 4 -

renting the Building.1   Under the terms of the lease agreement,

petitioner is to pay the University a total of $105,600 per year.

The Building contains 35,200 square feet of floor space.    The

rent charged thus equals $3 per square foot, an amount

substantially below the Building’s fair market rental value of

$10-$12 per square foot.   The lease agreement states "that all

works of art, furniture, fixtures, and other items of personal

property located on or in the Leased Premises" are owned by the

University and are being lent to petitioner free of charge for

the 3-year term of the lease.    The artwork initially to be

displayed by petitioner consists exclusively of artwork on loan

from the University, but petitioner over time intends to acquire

additional artwork to display.

     In addition, the lease agreement states that the University

is responsible for the payment of taxes and repair and utility

costs as well as for the maintenance of personal injury and

property damage liability insurance relating to the Building.

Petitioner, however, must provide routine maintenance and care

for all artwork it borrows.   To the extent that petitioner’s

employees perform any restoration services on artwork owned by


     1
      The lease agreement provides that petitioner “shall have
the option to extend the term of this Lease for additional terms
of three (3) years each at a rental rate to be determined after
consideration of all of the facts and circumstances at the time
of renewal.” The original 3-year term ended on Dec. 31, 1995.
The administrative record does not indicate whether the lease
agreement has been extended.
                                - 5 -

the University, petitioner will insist on reasonable

remuneration.

     According to its bylaws, petitioner is governed by a board

of directors that must consist of at least three members and that

is self-perpetuating.   The board appoints officers for 1-year

terms.   Both the directors and the officers serve without

compensation from petitioner.

     Petitioner's board of directors currently consists of five

persons:   Bob Jones, chancellor of the University and the son of

the University’s founder; Bob Jones III, president and a member

of the board of the University and the son of Bob Jones; John

Brausch, an accountant; Terry E. Haskins, an attorney; and R.

Dana Sullivan, a businessman.

     Petitioner's officers are as follows:     Bob Jones III,

president; Bob Wood, vice president (Mr. Wood is also a vice

president of the University); Roger Syrja, treasurer; and Roy A.

Barton, Jr., secretary (Mr. Barton is also the executive director

of financial affairs for the University).

     In recent years, the number of visitors to the museum has

exceeded 20,000 annually.   Approximately 80 percent of the

visitors have no connection with the University.     The museum is

open to the public free of charge.      Petitioner anticipates that

substantially all of its revenue will come from contributions.

The balance of its revenue will come from sales of artwork

reproductions in a gift shop.
                               - 6 -

                            Discussion

I.   In General

      Section 501(a) exempts organizations described in section

501(c)(3) from Federal income tax.     Section 501(c)(3) includes:

      Corporations * * * organized and operated exclusively
      for religious, charitable, * * * or educational
      purposes, * * * no part of the net earnings of which
      inures to the benefit of any private shareholder or
      individual, no substantial part of the activities of
      which is carrying on propaganda, or otherwise
      attempting, to influence legislation * * * and which
      does not participate in, or intervene in, * * * any
      political campaign * * *.

The requirement that a corporation be organized exclusively for

permitted purposes is referred to as the “organizational” test.

The requirement that a corporation be operated exclusively for

permitted purposes is referred to as the “operational” test.

Only the operational test is at issue in this case.

      Section 1.501(c)(3)-1(c), Income Tax Regs., provides that an

organization will be regarded as “operated exclusively” for one

or more exempt purposes only if three requirements are satisfied:

(1) The organization engages primarily in activities that

accomplish exempt purposes, and no more than an insubstantial

part of its activities is in furtherance of a nonexempt purpose;

(2) the net earnings of the organization do not inure in whole or

in part to the benefit of private shareholders or individuals;

and (3) the organization is not an “action” organization that

attempts to influence legislation by propaganda or otherwise.
                               - 7 -

     Section 1.501(c)(3)-1(d)(3), Income Tax Regs., expressly

includes museums within the scope of section 501(c)(3).    Museums,

of course, must also satisfy all other requirements of section

501(c)(3) to qualify for exemption.    In her final adverse ruling,

respondent provided the following explanation for denying

petitioner’s application for exempt status:

     This ruling is made for the following reasons. You are
     not operated exclusively for exempt purposes. Your
     operation results in substantial private benefit to Bob
     Jones University, which is not exempt from income tax
     under § 501(c)(3) of the Code because of its racially
     discriminatory policies. Your earnings inure to
     private shareholders or individuals. Furthermore, you
     are operated for a substantial non-exempt purpose.

     This explanation appears to set forth four separate

justifications for denying petitioner’s application for

exemption.   In substance, however, it sets forth a single

justification.   Respondent contends that the University derives

an impermissible benefit from petitioner’s operation and that

petitioner, by providing such benefit, furthers a substantial

nonexempt purpose.   Respondent argues that the University

receives an impermissible benefit based on:   (1) Petitioner’s

payment of rent to the University; (2) petitioner’s payment of

salaries to employees formerly employed by the University;

(3) petitioner’s exhibition of artwork on loan from the

University; (4) the University’s influence on petitioner’s board;

(5) petitioner's location on the campus of the University; and

(6) the reputational benefit that the University will derive from
                               - 8 -

its association with petitioner.    Even if none of these factors

alone is found to be disqualifying, respondent maintains that

their cumulative effect precludes petitioner’s qualification for

exempt status.

     As a preliminary matter, we address respondent’s contention

that petitioner has conceded that it furthers a substantial

nonexempt purpose.   Respondent emphasizes that petitioner’s

application for tax-exempt status contained the following

statement:   “One of the purposes behind the establishment of the

organization is to allow for gifts to be made to the museum and

art gallery as charitable contributions, whereas no such

deduction would be allowed for such contributions if they were

given to the University.”   (Emphasis added.)    We do not agree

with respondent that this statement constitutes a disqualifying

admission of a nonexempt purpose.   The “purpose” of allowing

donors to deduct contributions, which presumably induces a larger

number and greater amount of contributions to an organization,

motivates virtually every organization’s decision to seek exempt

status.   If that objective precluded an organization from

qualifying for tax exemption, few if any organizations would ever

satisfy the section 501(c)(3) requirements.     More importantly,

the sentence in petitioner's application immediately following

the one quoted above states:   “Contributions to the organization

will be used solely for the operation of the museum and art

gallery and for acquisition of additional art as available funds
                                - 9 -

permit.”    Petitioner’s stated purposes thus are consistent with

those of any museum.

     Respondent contends that, notwithstanding petitioner’s

stated purposes, one of petitioner’s actual purposes is to funnel

tax-deductible contributions to the University.    For support,

respondent quotes Christian Manner Intl., Inc. v. Commissioner,

71 T.C. 661, 668 (1979), which states:   “It has been recognized

* * * that an organization engaged in a single activity may have

more than one purpose in conducting the activity.    So we must be

concerned with both the actual as well as the stated purposes for

the existence of the organization and the activities it engages

in to accomplish those purposes.”   We reject respondent’s

contention that petitioner's actual purpose is to funnel tax-

deductible contributions to the University.   We see nothing

improper about an educational organization's having as one of its

purposes the receipt of tax-deductible contributions and the use

of those contributions to pay ordinary and necessary business

expenses.      In addition, we find Christian Manner International

readily distinguishable from the present case.    In Christian

Manner International, the founder of a nonprofit corporation

wrote books that advanced a purportedly religious message and

received proceeds from the sale of the books.    The Court

concluded that the corporation’s activities resembled ordinary

commercial publishing practices and that the corporation’s

principal purpose was commercial in nature.   In the present case,
                                  - 10 -

there is no doubt that petitioner is a bona fide museum that

furthers educational purposes.

II.   Private Benefit Factors

      We now turn our attention to the specific factors cited by

respondent as the basis for her final adverse determination.

      A.    Petitioner’s Payment of Rent to the University

      Respondent contends that petitioner’s payment of rent to the

University confers on the University an impermissible private

benefit.     Respondent states:

           This [fundraising by the museum] will result in
      direct economic benefit to Bob Jones University because
      tax-deductible contributions made to Petitioner will be
      used to reimburse Bob Jones University for rental of
      the building on the University campus where the art
      collection is housed. This will relieve Bob Jones
      University of the cost of operating the museum itself,
      and will allow Bob Jones University to have the benefit
      of the museum on its campus financed by tax-deductible
      contributions.

      The principal inquiry in determining whether rental

arrangements create private benefit or inurement is whether the

rental payments are excessive.      See B.H.W. Anesthesia Found. v.

Commissioner, 72 T.C. 681, 686 (1979) (focusing on “whether

comparable services would cost as much if obtained from an

outside source in an arm’s-length transaction”).     In the present

case, petitioner is to pay the University $105,600 per year,

which is substantially less than the Building's fair market

value.     Respondent contends that payments for less than fair

market value can create private inurement.     For support,
                                - 11 -

respondent quotes Founding Church of Scientology v. United

States, 188 Ct. Cl. 490, 412 F.2d 1197 (1969), which states:

“That the benefit conveyed may be relatively small does not

change the basic fact of inurement.”     Id. at 497, 412 F.2d at

1200.     This quotation, however, is taken out of context.    The

same case concludes that an organization may “incur ordinary and

necessary expenditures in the course of its operations without

losing its tax-exempt status.”     Id. at 496, 412 F.2d at 1200.

We conclude that petitioner's payment of below-market rent

constitutes an “ordinary and necessary” expenditure and does not

confer an impermissible private benefit on the University.

     B.     Petitioner’s Payment of Employees’ Salaries

     Respondent states that petitioner has retained the same

museum employees that the University had employed.     Because the

burden of paying the employees’ salaries has shifted from the

University to petitioner, respondent maintains, the University is

receiving a private benefit.

     We reject respondent's argument.     Petitioner is an

independent organization that conducts its own operations.

Petitioner pays its employees to perform services for the museum.

Although petitioner's employees previously worked for the

University, they do not currently provide any services to the

University in exchange for their salaries.     Therefore, we

conclude that petitioner's payment of its employees' salaries

does not confer a private benefit on the University.
                                - 12 -

     C.   Petitioner’s Use of Artwork Lent by the University

     The lease agreement between petitioner and the University

restricts to the Building the use of all leased artwork,

furniture, and fixtures.    Respondent contends that this

restriction unduly limits petitioner’s operations.

     We disagree.   The terms of the lease agreement are somewhat

restricting, but the lease agreement expires after 3 years.

Moreover, respondent concedes that displaying artwork on loan is

a common practice of museums.    Respondent further concedes that

petitioner is not paying the University an excessive amount for

its use of the artwork.    In fact, petitioner is not paying the

University anything for its use of the artwork.    Based on these

facts, we conclude that the lease agreement does not confer an

impermissible private benefit on the University.

     D.   Excessive Control

     Respondent contends that persons on petitioner’s board of

directors who are affiliated with the University will manage

petitioner for the purpose of benefiting the University.    There

are no bright-line standards that address the effect on exempt

status, if any, of overlapping boards of directors.    In Rev. Rul.

66-358, 1966-2 C.B. 218, the Commissioner concluded that a

nonprofit organization spun off from a taxable corporation was

tax exempt even though the nonprofit organization’s directors

consisted of the taxable corporation’s officers.    Thus, the

Commissioner has recognized that overlapping boards of directors
                              - 13 -

do not automatically prevent an organization from qualifying for

exempt status.

     Two factors in the present case weigh in petitioner’s favor.

First, the University controls less than 50 percent of the votes

on petitioner’s board of directors.    Only two of petitioner’s

five directors, Bob Jones and Bob Jones III, are employed by the

University.   Second, we agree with petitioner that the issue of

control would be relevant only if petitioner and the University

were to engage in transactions in which petitioner paid the

University unreasonable amounts for goods or services.    See

Bubbling Well Church v. Commissioner, 74 T.C. 531, 537 (1980)

(“If members of the Harberts family [which made up the entire

board of directors] were actually engaged in performing

employment services, compensating them in reasonable amounts for

those services would not disqualify petitioners for exemption.”),

affd. 670 F.2d 104 (9th Cir. 1981).    Given that University

officials do not control a majority of petitioner’s board of

directors and that the record does not lead us to believe that

petitioner will make unreasonable payments to the University, we

conclude that the current composition of the board does not

preclude petitioner from satisfying the requirements of section

501(c)(3).

     E.   Location

     Respondent contends that petitioner’s location on the

University’s campus confers a private benefit on the University.
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In particular, respondent emphasizes that the University requires

all of its students to visit the museum as part of a required

freshman course and as part of several elective courses.

Petitioner contends that the University’s requirement that

students visit the museum is not problematic.   Petitioner

emphasizes that other schools may require students to visit

museums as part of their academic curricula and that whether

those museums are located on or off campus does not affect the

tax-exempt status of the schools imposing the requirement.

     We conclude that any benefit the University derives from

petitioner’s location is merely incidental.   See Kentucky Bar

Found., Inc. v. Commissioner, 78 T.C. 921, 926 (1982).

Respondent has not cited, nor have we found, any cases that

suggest that the location of an organization may affect its

eligibility for exempt status.   Moreover, approximately 80

percent of all visitors to the museum are not affiliated with the

University.   Evidently, the location does not deter public

visitors.

     F.   Enhancement to Reputation

     Respondent contends that petitioner’s name and location

serve to “enhance the University’s educational and spiritual

reputation” and thus confer a private benefit on the University.

While we agree that the University receives an intangible benefit

from petitioner’s name and location, we conclude that the benefit

is minimal and incidental.   See id.
                               - 15 -

     Respondent is especially concerned about preventing the

University from circumventing the Supreme Court’s 1983 decision

in Bob Jones Univ. v. United States, 461 U.S. 574 (1983).

Respondent contends that, if petitioner prevails, “Bob Jones

University will be able effectively to achieve the tax exempt

status which was denied to it by the Supreme Court.”    By spinning

off component parts, respondent states, the University “may

achieve an aura of tax-exempt status itself by being associated

with various tax-exempt spin-offs.”     Respondent further contends

that a decision for petitioner would create a “slippery slope”.

She believes that if the University is allowed to spin off its

museum, it may next attempt to spin off other component parts,

such as its library, cafeteria, and bookstore.

     Respondent’s concerns about spinoffs are misplaced for

several reasons.    First, as petitioner aptly points out,

respondent does not cite any cases to support her “aura”

argument, nor does she clearly define this exempt status-

defeating “aura”.    Second, libraries, cafeterias, and bookstores

are essential parts of a university, while most universities do

not maintain art museums.    Third, a cafeteria or bookstore spun

off from a taxable corporation might not independently qualify

for exempt status.    Finally, while additional concerns may arise

if a university were to attempt to spin off one of its essential

parts, those concerns are not implicated here.
                                  - 16 -

       We find problematic and reject the notion that enhancement

of another entity’s “educational and spiritual reputation” may

preclude exempt status.      Respondent has not cited, nor have we

found, any cases supporting her position.

       G.    Cumulative Effect of These Factors

       Ultimately, respondent concedes that “most of the individual

factors * * * may not appear to result in more than incidental

private benefit” but contends that the “cumulative effect” of

these factors creates a private benefit.      We disagree.   Based on

our review of the record, we conclude that petitioner satisfies

the requirements of section 501(c)(3) in substance as well as in

form.       Petitioner is a museum, open to the public free of charge,

that displays what petitioner claims is one of the greatest

collections of religious art in the Western Hemisphere.

Respondent has not challenged this claim.      With respect to all

financial dealings between petitioner and the University,

respondent has conceded that petitioner is paying the University

fair market value or less.      While there is no doubt that the

University receives certain benefits from petitioner's existence,

these benefits are merely incidental.

III.    Conclusion

       Respondent’s arguments ultimately lead to the conclusion

that a taxable corporation could never spin off a tax-exempt

organization and conduct subsequent financial dealings with it.

Because funds raised by a tax-exempt organization generally come
                              - 17 -

from tax-deductible donations, respondent’s position implies that

any transfer by an exempt organization to a taxable corporation

would create a private benefit or inurement problem.     We reject

this position.   Accordingly, we hold that petitioner’s operation

does not result in an impermissible private benefit to the

University and that petitioner’s net earnings do not inure to the

University.

     To reflect the foregoing,


                                            Decision will be entered

                                       for petitioner.
