In the case of Allen, Collector of Internal Revenue v. Regents of the University System of Georgia (1937), the U.S. Supreme Court ruled in favor of The Regents, stating that income generated from a university's endowment fund was exempt from federal taxation under Section 103(a) and (b)of the Revenue Act 1928. This decision was based on two main factors: first, that universities serve public purposes similar to those served by government entities; secondly, because these funds were used for educational purposes rather than private gain or profit. Therefore, taxing them would be contrary to established principles regarding tax exemptions for governmental bodies and charitable organizations dedicated to education.

In the dissenting opinion for Allen v. Regents of the University System of Georgia, Justice Cardozo argued that tax exemption should not be extended to income from activities unrelated to an institution's educational purpose. He contended that while a university's core functions - teaching and research - are undoubtedly charitable and thus deserving of tax-exempt status, this does not mean all its operations should automatically enjoy such privilege. Specifically, he disagreed with the majority view that profits derived from oil extraction on university-owned land were exempt from federal taxation. In his view, these commercial activities fell outside the scope of what could reasonably be considered as contributing directly to education or charity work; hence they ought not benefit from tax exemptions intended for non-profit institutions serving public interest through their primary mission-related activities.