IRS written determination 201438033

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201438033
Release Date: 9/19/2014
Date: June 24, 2014
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
UIL: 507.01-00, 511.00-00, 512.00-00, 513.00-00,
4943.00-00
Employer Identification Number:
Legend:
Grantor
=
Museum
=
Transferor
=
X
=
y
=
Dear
This letter supersedes our letter ruling to you dated June
6, 2014 in response to your ruling
request regarding the proper treatment
of a transfer of part of the assets of another private
foundation to you under §§
507 and 4943, and whether certain activities are subject to unrelated
business income tax
under§§ 511, 512, and 513 of the Internal Revenue Code (I.R.C.).
Facts:
You are a nonprofit corporation described
in § 501 (c)(3) and classified as a private operating
foundation
under§ 509(a) that you represent is described in § 49420)(3). Your purposes are
charitable and educational. Your mission
is to promote the appreciation of, and education about,
Grantor's art medium specifically and public art generally, primarily through the creation,
maintenance, and public placement
of artwork created by Grantor ("Artwork").
Museum
is a§ 501 (c)(3) organization and classified as a public charity under§ 509(a)(2) that
operates a museum and park with permanent and seasonal exhibits, concerts, dance and drama
performances, film screenings, fairs and celebrations, community gatherings, arboretum, and
shopping and dining. Works by well-known and emerging American and international artists
(including Grantor) are accessibly exhibited and interpreted through publications, lecture,
workshops, and other educational programs.
Transferor
is a private operating foundation that will make two transfers of assets. It will first
transfer about
y%, which is more than 25%, of its assets to you and then the remainder to
Museum. Transferor will then provide notice of termination to the Secretary at least one day after
the transfer to Museum is completed and then terminate its private foundation status under
§ 507(a)(1 ). You represent that Transferor will exercise expenditure responsibility over its grants to

----------------------
you until such time as it disposes of all of its assets, and it will satisfy the§ 4945(h) reporting
requirements for the taxable
year
in which the final transfers are made. You and Transferor have
nearly identical governance structures with control
of both currently vested in Grantor, Grantor's
son, and Grantor's nephew.
After the transfers, you will own all
of Grantor's incomplete Artworks, future Artworks, as well as the
preparatory works, the copyrights to
all
of Grantor's Artworks, and a significant amount of Grantor's
completed Artworks.
You
will curate and sponsor traveling exhibitions
of Artwork and conduct related on-site educational
programming without charge to the public
in most cases, and on occasion subject to a nominal fee.
Exhibit sites
will include blighted urban centers and rural areas with little or no arts budgets or
programming. You will loan art pieces to museums, cultural institutions, other nonprofit
organizations, and
municipalities, and work with private individuals or organizations to display the
art
in public venues. You will charge exhibition fees to organizations hosting the art but will reduce
or eliminate fees for organizations unable to pay the full amounts. You represent that when
charged fees
will be
in amounts comparable to fees charged by other organizations for similar
loans
of art.
Your workshop and studio activity will provide creation, conservation, and maintenance services
("Production and Maintenance Services") for Artworks. You will provide these services to Museum
and other tax-exempt organizations that publicly display art, and to non-exempt organizations that
commit contractually to publicly display their art and/or use the art for educational purposes for a
significant period
of time. You state that fees for services will be fair market value or less but not in
excess of your costs.
You represent that no more
than~% of your Production and Maintenance Services will be for
artwork created by individual artists and/or works owned and displayed privately by organizations
and private collectors. Your interns will perform the work as part
of the education. You will charge
either fair market value
or the amount necessary to cover your costs. Any excess fees will not
greatly exceed the educational needs
of the interns you train.
You represent that your educational activity will educate the public about the process of creating
art, demonstrate the many ways art can be protected and finished for public display, train
individuals
in the techniques for making art, and educate the public about Artwork. You will
conduct public demonstrations and lectures and invite Museum members and other groups to visit
the studios and workshops. You are committed to providing such public demonstrations, lectures,
and tours without regard to ability to pay. You state that admission to these educational events is
generally free but
in some instances, you will charge modest admission fees. In describing how
you determine the admission fees, you state that the fees charged for public demonstrations and
lectures are
comparable
to, or less than, the fees charged by other organizations and are intended
to cover or defray your costs
in providing these events. Similarly, the fees charged for visits and/or
tours to your studios and workshops are intended to cover or defray the costs
of any consumables
provided to attendees and any other costs
in connection with the visit or tour. School groups,
which comprise tens
of thousands of students annually, are charged no fees at all for these
services. In addition, if an individual or group is unable to pay the full amount
of any applicable fee,
you will reduce or eliminate the fee.

You will catalogue and maintain the definitive list of Grantor created art, and make catalogues
available to the public for research, educational, and authentication purposes. You will offer
internships to post-secondary and post-graduate students
in the Grantor's medium. Interns will
study and practice methods and techniques
of Grantor's medium, and can participate in archival,
publication,
and exhibition projects.
As part
of your effort to enhance the public understanding and appreciation of the Grantor's
medium, you will produce limited edition Artwork for sale at significant discount to museums,
municipalities, and other tax-exempt entities for public display or educational purposes. You will
sell
to non-exempt entities who commit contractually to publicly display the art or use the art for
educational purposes for a significant amount
of time at fair market value, and sell a limited number
of art pieces to private parties who ultimately commit to loaning or gifting the purchased art to
exempt organizations
or municipalities for public displays, and such sales will be at fair market
value.
You may also from time to time sell original Artworks that were
part
of your permanent collection for
fundraising purposes. Sales will be on the same terms with respect to public or private
organizations, or individuals as described above for Artworks created as inventory for sale.
Finally, you will also license the sale
of reproductions, using fee structures comparable to fees
charged by other organizations for
similar licensing activity not to exceed fair market value. You
will not provide any services
in connection with licensing agreements other than quality control.
Rulings Requested:
You have requested the
following rulings:
1. You shall not be treated as a newly created organization following Transferor's transfer of
assets to you pursuant to a reorganization as described in§ 507(b)(2).
2. You will succeed to Transferor's aggregate tax benefit in proportion to the amount of the fair
market value
of the assets you receive from it.
3. Your applicable holding period in the transferred assets for purposes of§ 4943(c)(4), (5)
and (6) includes both the period during which Transferor held such assets and the period
during which you hold such assets.
4. Transferor will not be transferring all of its net assets to a private foundation that is
effectively controlled, directly or indirectly, by the same person or persons that effectively
controlled
the transferor private foundation. Therefore, you should not be treated as if you
were Transferor for purposes
of Chapter 42 and §§ 507 through 509.
5. Any person who is a substantial contributor within the meaning of§ 507(d)(2) with respect
to Transferor
will be treated as a substantial contributor with respect to you, regardless
of
whether such person meets the $5,000/two percent test with respect to you at any time.

6. You will receive the transferred assets subject to Transferor's prior excise tax liabilities
under Chapter 42 (and any penalty resulting therefrom), if any, to the extent Transferor did
not previously satisfy those liabilities.
7. Your Grantor medium Production Services and Maintenance Services for Museum, and for
other tax-exempt organizations that publicly display art and/or use
it for educational
purposes, and non-exempt organizations that commit contractually to publicly display their
art and/or use their art for educational purposes for a significant period
of time, are
substantially related to your exempt purposes, as defined
in Treas. Reg. § 1.513-1 (d)(2),
and revenue from such services does not
result
in unrelated business taxable income
(UBTI) as defined
in§ 512(a)(1).
8. Your Grantor medium Production Services and Maintenance Services for art created by
individual artists, or owned by organizations and private collectors and displayed privately
are substantially related to your exempt purposes, as defined
in Treas. Reg. § 1.513-
1 (d)(2), and revenue from such Services does not
result
in unrelated business taxable
income as defined
in§ 512(a)(1).
9. Sales of original Artwork held as inventory to tax-exempt and public entities for public
display or other educational purposes, and to non-exempt entities that commit contractually
to publicly display their Artwork and/or use their Artwork for educational purposes for a
significant period
of time, are substantially related to your exempt purposes, as defined in
Treas. Reg. § 1.513-1 (d)(2), and revenue from such sales does not result in unrelated
business taxable income as defined
in § 512(a)(1 ).
1 0. Licensing of Artwork images is substantially related to your exempt purposes, as defined in
Treas. Reg. § 1.513-1(d)(2), falls under the modification for royalty income provided in
§ 512(b)(2), and does not result in unrelated business taxable income as defined in
§ 512(a)(1).
I.R.C. § 501(c)(3) provides an exemption from federal tax for organizations that are organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, no part
of the net earnings of which inures to the benefit of any private
shareholder
or individual.
I.R.C.
§ 507(a)(1) states that a private foundation may voluntarily terminate its private foundation
status by submitting to the
Internal Revenue Service a statement
of its intention to voluntarily
terminate its private foundation status pursuant
to§ 507(a)(1) and by paying any termination tax
under§ 507(c).
I.R.C. § 507(b)(2) states that, in the case
of a transfer of assets of any private foundation to
another private foundation pursuant to any
liquidation, merger, redemption, recapitalization, or
other adjustment, organization,
or reorganization, the transferee private foundation shall not be
treated as a
newly created organization.

I.R.C. §50?( c) imposes an excise tax equal to the lower of: (1) the aggregate tax benefits that have
resulted from the private foundation's exempt status
under§ 501 (c)(3}, or (2) the value of the net
assets
of the private foundation on an organization that voluntarily terminates its private foundation
status.
I.R.C. § 511(a)(1) imposes a tax on the unrelated business taxable income (as defined
in§ 512) of
certain organizations including those described in § 501 (c}(3}.
I.R.C. § 512(a)(1) defines the term "unrelated business taxable income" to mean the gross
income derived by any organization from any unrelated trade
or business (as defined in § 513)
regularly carried on by it, less certain deductions, and computational modifications.
I.R.C. § 513(a) provides that the term "unrelated trade or business" means any trade or business
the conduct
of which is not substantially related (aside from the organization's need for income or
funds or the use it makes
of the profits derived) to the exercise or performance of an organization's
purpose or function constituting the basis for its exemption under §
501.
I.R.C.
§ 513(c) provides that an activity does not lose identity as a trade or business merely
because
it is carried on within a larger aggregate of similar activities or within a larger complex of
other endeavors which may, or may not, be related to the exempt purposes of the organization.
I.R.C. § 4943 imposes an excise tax on the excess business holdings
of a private foundation in a
business enterprise during any taxable year that ends
in the taxable period. Excess business
holdings are generally the amount
of interests in the business enterprise greater than the permitted
holdings. Where disqualified persons also have business holdings
in the same business enterprise
then the private foundation's otherwise permitted
holdings are reduced by those amounts. A
private foundation is
allowed a five year period to dispose
of certain large gifts and bequests
without incurring the excise tax.
Treas.
Reg.§ 1.507-3(a)(1) states that in the case of a significant disposition of assets to one or
more private foundations, within the meaning
of paragraph (c) of this section which describes a
§ 507(b)(2) transfer, the transferee organization
shall not be treated as a newly created
organization, but
shall succeed to those attributes and characteristics
of the transferor organization
described
in Treas. Reg.§ 1.507-3(a)(2), (3}, and (4), which include its aggregate tax benefit,
substantial contributors, and chapter 42 tax and penalty liabilities.
Treas. Reg. § 1.507 -3(a)(2) states,
in part, that a transferee organization to which this paragraph
applies shall succeed to the aggregate tax benefit
of the transferor organization.
Treas. Reg. § 1.507-3(a)(3) states that, for purposes
of§ 507(d)(2), in the event of a transfer of
assets described in§ 507(b)(2}, any person who is a "substantial contributor'' (within the meaning
of§ 507(d)(2)) with respect to the transferor foundation will be treated as a "substantial contributor''
with respect to the transferee foundation, regardless
of whether such person meets the $5,000-two
percent test with respect to the transferee organization at any time.

Treas. Reg. § 1.507-3(a)(4) states that if a private foundation incurs a liability for one or more of the
taxes imposed under chapter 42 (or any
penalty resulting therefrom) prior to, or as a result
of,
making a transfer of assets described in§ 507(b)(2) to one or more private foundations, in any
case where transferee liability applies, each transferee foundation shall be treated as receiving the
transferred assets subject to such liability to the extent that the transferor foundation does not
satisfy such liability.
Treas. Reg. § 1.507-3(a)(6) provides that when a private foundation makes
a§ 507(b)(2) transfer
of all or part of its net assets to another private foundation, the applicable period of time described
in§ 4943(c)(4), (5), or (6) shall include both the period during which the transferor foundation held
such assets and the period during which the transferee foundation holds such assets.
Treas.
Reg.§ 1.507-3(a)(8)(ii) sets forth certain rules that apply to the transferee foundation with
respect to the assets transferred
in a§ 507(b)(2) transfer to the same extent and in the same
manner that they
would have applied to the transferor foundation had
the§ 507(b)(2) transfer not
been effected, mostly
in the nature of transitional rules of limited scope for the Tax Reform Act of
1969.
Treas. Reg. § 1.507 -3(a)(9)(i) provides that if a private foundation transfers all
of its net assets to
one or more private foundations which are effectively controlled (within the meaning of
Treas. Reg. § 1.482 1 (a)(3)),
directly or indirectly, by the same person or persons which effectively
controlled the transferor private foundation, for purposes
of chapter 42 (§ 4940 et seq.) and part II
of subchapter F of chapter 1 of the Code (§§ 507 through 509) such a transferee private foundation
shall be treated as if it were the transferor.
Treas.
Reg.§ 1.507-3(c)(1) states that a transfer of assets is described in§ 507(b)(2) if it is made
by a private foundation to another private foundation pursuant to any liquidation, merger,
redemption, recapitalization, or other adjustment, organization, or reorganization.
Treas. Reg. § 1.507-3(c)(2) defines the term "significant disposition
of assets to one or more
private foundations" as any disposition or series
of dispositions where the cumulative total of
dispositions is 25 percent or more of the fair market value of the net assets of the foundation at the
beginning
of the taxable year.
Treas. Reg. § 1.507-4(b) states that private foundations which make transfers described in
§ 507(b)(2) are not subject to the tax imposed under§ 507(c) with respect to such transfers unless
the provisions
of§ 507(a) become applicable.
Treas. Reg. § 1.513-1 (d)(2) provides that a trade or business is "related" to exempt purposes,
in
the relevant sense, only where the conduct of the business activities has a causal relationship to
the achievement
of exempt purposes (other than through the production of income); and that it is
"substantially related", for purposes
of § 513, only if the causal relationship is a substantial one.
Thus, for the conduct
of a trade or business from which a particular amount of gross income is
derived to be substantially related to purposes for which exemption is granted, the production or
distribution
of the goods or the performance of the services from which the gross income is derived
must contribute importantly to the accomplishment
of those purposes.

Treas. Reg. § 1.513-1 (d)(3) directs that in determining whether activities contribute importantly to
the accomplishment
of an exempt purpose, the size and extent of the activities involved must be
considered in
relation to the nature and extent
of the exempt function which they purport to serve.
Thus, where income is
realized by an exempt organization from activities which are
in part related
to the performance
of its exempt functions, but which are conducted on a larger scale than is
reasonably necessary for performance
of such functions, the gross income attributable to that
portion
of the activities in excess of the needs of exempt functions constitutes gross income from
the conduct
of unrelated trade or business. Such income is not derived from the production or
distribution
of goods or the performance of services which contribute importantly to the
accomplishment
of any exempt purpose of the organization.
In Example 1
of Treas. Reg. § 1.513-1 (d), an organization described in § 501 (c)(3) operates a
school for training children
in the performing arts, such as acting, singing, and dancing. It presents
performances by its students and derives gross income from admission charges for the
performances. The students' participation
in performances before audiences is an essential part of
their training. Since the income realized from the performances derives from activities which
contribute importantly to the accomplishment
of M's exempt purposes, it does not constitute gross
income from unrelated trade or business.
Treas. Reg. § 53.4946-1 (a)(8) states that, for purposes
of§ 4941 only, the term "disqualified
person" shall not include any organization which is described
in§ 501 (c)(3) (other than an
organization described
in§ 509(a)(4)).
In Rev. Rul. 69-269, 1969-1 C.B. 160, a hospital was concerned with providing sufficient parking
space for visitors because visitation is considered to be supportive therapy and part
of patient
treatment. Because
of a serious lack of adequate parking space, the hospital constructed adjacent
to its main building a parking lot for patients and visitors only. The lot is not for general public
utilization. A fee is charged for the use
of these facilities and all profits are placed in the hospital's
general operating fund. The ruling holds that providing such facilities contributes importantly to the
accomplishment
of the hospital's exempt purpose. Accordingly, this activity is substantially related
to the purpose constituting the basis for the hospital's exemption and does not constitute unrelated
trade or business within the meaning
of§ 513.
In Rev. Rul. 73-104, 1973-1 C.B. 263, the museum is exempt as an educational organization on
the basis
of its ownership, maintenance, and exhibition for public viewing of works of art. The sale
of greeting cards displaying printed reproductions of art works in the museum's collection
contributes importantly to the achievement
of the museum's exempt educational purposes by
stimulating and enhancing public awareness, interest, and appreciation
of art. Moreover, a broader
segment
of the public may be encouraged to visit the museum itself to share in its educational
functions and programs as a result
of seeing the cards. The fact that the cards are promoted and
sold
in a clearly commercial manner at a profit and in competition with commercial greeting card
publishers does not alter the fact
of the activity's relatedness to the museum's exempt purpose.
In Rev. Rul. 80-295, 1980-2
C. B. 194, the broadcasting of the organization's sponsored,
supervised, and regulated athletic events promotes the various amateur sports, fosters widespread
public interest
in the benefits of its nationwide amateur athletic program, and encourages public

--------------------
participation. Therefore, the organization's sale of broadcasting rights and the resultant
broadcasting
of its athletic events contributes importantly to the accomplishment of its exempt
purposes.
In Rev. Rul. 81-178, 1981-2
C. B. 135, payments an exempt labor organization receives from
various business enterprises for the use of the organization's trademark and similar properties are
royalties within the meaning
of§ 512(b)(2) and are not taken into account in determining unrelated
taxable
income. However, payments the organization receives for personal appearances and
interviews by its members are not royalties but are compensation for personal services and must
be taken into account
in computing the organization's unrelated business taxable income.
Analysis:
Rulings
1:
Section 507(b)(2) provides that in the case of a transfer from one private foundation to another
private foundation according to any liquidation, merger, redemption, recapitalization, or other
adjustment, organization or reorganization, the transferee organization shall not be treated as a
newly created organization. Section 1.507-3(c)(1) describes the terms "other adjustment,
organization, or reorganization" as including any partial liquidation or any other significant
distribution
of assets to one or more private foundations, other than transfers for full and adequate
consideration or distributions out
of current income. The term "significant disposition of assets to
one or more private foundations" is defined by§ 1.507-3(c)(2) as any disposition or series of
dispositions where the aggregate value transferred is 25 percent or more of the fair market value of
the net assets of the foundation at the beginning of the taxable year. Because the Transferor is
transferring to you more than 25%
of its assets, the proposed transfer is described in§ 507(b)(2).
Ruling
2:
In the case of a significant disposition of assets to one or more private foundations within the
meaning
of§ 507(b)(2), the transferee organization shall be treated as possessing those attributes
and characteristics
of the transferor organization which are described in subparagraphs (2), (3),
and (4) of Treas. Reg.§ 1.507-3(a). Accordingly, you will be treated as possessing the
Transferor's attributes and characteristics as described in Treas. Reg. §§ 1.507-3(a)(2), (3), and (4)
including that a transferee organization shall succeed to the aggregate tax benefit
of the transferor
organization in proportion to the amount
of the fair market value of the assets the transferee
receives from the transferor.
Ruling
3:
Section 4943 imposes an excise tax on the excess business holdings of a private foundation during
any
taxable year that ends in the taxable period. Excess business holdings are generally the
amount
of interests in the business enterprise greater than the permitted holdings. Where
disqualified persons also have business holdings in the same business enterprise then the private
foundation's otherwise permitted holdings are reduced by those amounts. A private foundation is
allowed a five year period to dispose
of certain large gifts and bequests without incurring the excise
tax. Treas. Reg. § 1.507-3(a)(6) provides that whenever a private foundation makes
a§ 507(b)(2)

transfer of all or part of its net assets to another private foundation, the applicable period of time
described
in § 4943(c)(4), (5) or (6) shall include both the period during which the transferor
foundation held such assets and the period during which the transferee foundation holds such
assets. As described above, Transferor intends to transfer a significant portion of its assets, but
not all of its assets, to you which will constitute a transfer of assets pursuant to a reorganization
plan as described
in§ 507(b)(2). Therefore, your applicable period of time in the transferred assets
described
in§ 4943(c)(4), (5) and (6) will include both the period during which Transferor held such
assets and the period during which you holds such assets.
Ruling
4:
Under Treas. Reg. § 1.507-3(a)(9)(i}, if a private foundation transfers all of its net assets to
another private foundation which is
effectively controlled by the same person
or persons which
effectively controlled the transferor private foundation, the transferee private foundation is
treated as if it were the transferor. Here, Transferor is transferring less than all of its net assets
to a private foundation, so you are not treated as Transferor for
all private foundation purposes.
Instead, you will be treated as possessing its attributes and characteristics which are described
in Treas.
Reg.§§ 1.507-3(a)(2), (3), (4), and, to the extent applicable, (6) and (8)(ii).
Ruling
5:
Treas. Reg. § 1.507-3(a)(3) provides that for purposes of§ 507(d)(2}, in the event of a transfer of
assets described in§ 507(b)(2}, any person who is a substantial contributor (within the meaning of
§ 507(d)(2)) with respect to the transferor foundation shall be treated as a substantial contributor
with respect to the transferee foundation, regardless of whether such person meets the $5,00Q-two
percent test with respect to the transferee organization at any time. If a private foundation makes a
transfer described
in§ 507(b)(2) to two or more transferee private foundations, any person who is
a substantial contributor with respect to the transferor foundation prior to such transfer shall be
considered a substantial contributor with respect to each transferee private foundation.
As discussed above, Transferor's transfers to you are § 507(b)(2) transfers. Grantor
is a
substantial contributor to Transferor.
In addition, Grantor and any other persons who are
substantial contributors to Transferor are also
substantial
contributors to you without regard to
whether each person meets the $5,000-two percent test with respect to you.
Ruling
6:
Transferor intends to transfer a significant portion of its assets, but not all of its assets, to you
pursuant to a reorganization plan
under§ 507(b)(2). Treas. Reg. 1.507-3(a)(1) provides that, in a
§ 507(b)(2) transfer, a transferee organization will not be treated as a newly created organization.
The transferee organization is treated as possessing those attributes and characteristics of the
transferor organization which are described in Treas. Reg. §1.507-3(a)(2), (3) and (4). Treas. Reg.
§ 1.507-3(a)(4) provides that if a private foundation incurs liability for one or more of the taxes
imposed under Chapter 42 (or any
penalty resulting therefrom) prior to, or as a result of, making a
transfer of assets described
in§ 507(b)(2) to one or more private foundations, in any case where
transferee liability applies, each transferee foundation shall be treated as receiving the transferred
assets subject to such liability to the extent that the transferor foundation does not satisfy such

liability. Therefore, you will receive the transferred assets subject to Transferor's prior excise tax
liabilities under Chapter 42 (and any penalty resulting therefrom), if any, to the extent Transferor
did not previously satisfy those liabilities.
Ruling
7:
Sections 511 imposes a tax on the unrelated business taxable income of§ 501 (c)(3) organizations.
Unrelated business taxable income is generally gross income derived by any organization from any
unrelated trade or business (as defined
in§ 513) regularly carried on by it. See I.R.C. § 512(a)(1).
Section 513 defines
unrelated trade
or business as "any trade or business the conduct of which is
not substantially related (aside from the need
of such organization for income or funds or the use it
makes of the profits derived) to the exercise or performance by such organization of its charitable,
educational, or other purpose or function constituting the basis for its exemption under section
501."
To determine that an activity is substantially related to an exempt purpose, Treas. Reg.
§ 1.513-1 (d) requires the activity have a causal relationship to the exempt purpose that is
substantial and that the size and scope
of the activity not be on a larger scale than reasonably
necessary for performance
of such exempt functions.
The portion
of your Production and Maintenance services you provide to Museum and other tax-
exempt organizations that publicly display Artwork and/or use it for educational purpose, and non-
exempt organizations that commit
contractually to publicly display their Artwork and/or use their
Artwork for educational purposes for a significant period
of time is substantially related to the
achievement of your exempt purposes (other than through the production
of income) within the
meaning
of Treas. Reg. § 1.513-1 (d){2) because (i) publicly accessible displays are necessary to
educate the
public, (ii) you do not own or control any exhibition space and therefore must work with
governments or other organizations to
publicly display the art, and (iii) creation and maintenance
of
displayed Artwork pieces requires highly specialized skill and knowledge most cooperating
organizations lack. Necessity makes the causal relationship between the production, public
display, and maintenance
of Artworks and achieving your exempt purposes a substantial one.
Necessity also means your Production and Maintenance services to such organizations contribute
importantly to the accomplishment
of your exempt purposes. See Rev. Ruls. 69-269 and 80-295,
supra. Accordingly, the relationship test in Treas. Reg. § 1.513-1 (d)(2) is met.
The fact that you charge the displaying organizations fees comparable to similar transactions does
not diminish the important contribution Production and Maintenance
of publicly exhibited pieces of
Artwork makes to achieving your exempt purposes. Your Production and Maintenance services
are
less commercial because you reduce or eliminate fees for organizations unable to pay the full
amounts. Moreover, you represent that you limit substantially all
of these services to Artwork
pieces. Accordingly, your Production and Maintenance services to exempt organizations
displaying Artworks is substantially related to your exempt purposes, as defined
in Treas. Reg.
§ 1.513-1 (d)(2), and revenue from such services does not result
in "unrelated business taxable
income" as defined
in § 512(a)(1 ).
Ruling 8:
Based on your representations, you also provide an insubstantial amount of Production and
Maintenance services for art created by
individual artists, or owned by organizations and private

collectors and displayed privately. Section 1.513-1(d)(1) and (2) require that there be a causal
relationship
between the activity and an exempt purpose, and that the causal relationship be a
substantial one. Section 1.513-1 ( d)(3) requires that where income is realized by an exempt
organization from activities which are
in part related to the performance of its exempt functions, but
which are conducted on a larger scale than is reasonably necessary for performance
of such
functions, the gross income attributable to that portion
of the activities in excess of the needs of
exempt functions constitutes gross income from the conduct of unrelated trade or business. In
Example 1 ofTreas.
Reg.§ 1.513-1(d), an organization described in§ 501(c)(3), operates a
school for training children
in the performing arts, such as acting, singing, and dancing. It presents
performances by its students and derives gross income from admission charges for the
performances. The students' participation
in performances before audiences is an essential part of
their training. Since the income realized from the performances derives from activities which
contribute
importantly to the accomplishment
of M's exempt purposes, it does not constitute gross
income from unrelated trade or business.
Because the work will be performed by interns as part
of their education, the services have a
causal relationship to your exempt purposes
of educating about the medium, that is substantial
within Treas.
Reg.§ 1.513-1(d)(2). Moreover, the fees charged are commensurate with the
interns'
educational needs thus showing the size and scope
of the services are not on a larger
scale than is reasonably necessary for the performance
of your educational function, as required
by Treas.
Reg.§ 1.513-1(d)(3). Accordingly, such services are like the organization in example 1
of Treas. Reg. § 1.513-1 (d) and are substantially related to the achievement of your exempt
purposes (other than through the production
of income) within the meaning of Treas. Reg. § 1.513-
1 (d)(2). The revenue from such services does not result
in "unrelated business taxable income" as
defined
in§ 512(a)(1).
Ruling
9:
The sale of goods held for inventory is a trade or business subject to unrelated business income
tax unless the conduct
of which is substantially related (aside from the organization's need for
income or funds or the use it makes
of the profits derived) to the exercise or performance of an
organization's purpose or function constituting the basis for its exemption. See I.R.C. § 513(a).
Treas. Reg. § 1.513-1 (d)(2) provides that a trade or business is "substantially related" to purposes
for which exemption
is granted only if the production or distribution of the goods from which the
gross income is derived 'contributes
importantly' to the accomplishment
of those purposes.
One
of your exempt purposes is stimulating and enhancing public awareness, interest, and
appreciation
of art. You sell original Artwork held as inventory to tax-exempt and public entities for
public display or other educational purposes, and to non-exempt entities that commit contractually
to publicly display Artwork and/or use their Artwork for educational purposes for a significant period
of time.
Like the museum
in Rev. Rul. 73-104, supra, part of your basis for exemption is the ownership,
maintenance, and exhibition for public viewing
of works of art. In the ruling, the museum's mass
sale
of print reproductions of art held in the museum's collection contributes importantly to the
achievement of its exempt educational purposes because although the sold reproductions were not
publicly displayed they reaches a broader segment
of the public who thereby may be encouraged

to visit the museum itself to share in its educational functions and programs as a result of seeing
the cards.
In your case, you too are selling goods held for inventory. Unlike a museum that sells
reproductions for private use, you are selling original Artwork subject to an obligation for the
purchaser to
publicly display the artwork and use
it to educate the public for a significant amount of
time. Your conditional sales of original art similar to a museum's mass sale of reproductions,
encourage the public sharing
in your educational functions and programs, because of your
purchasers' obligations to publicly exhibit the original art and use it to educate the public for a
significant period
of time similarly reaches a broader segment of public. Such sales contribute
importantly to the achievement
of your exempt purposes by stimulating and enhancing public
awareness, interest, and appreciation
of art and is substantially related to your exempt purposes
under Treas. Reg. § 1.513-1 (d), and therefore is not subject to unrelated business income tax.
Ruling 10:
You plan to license images
of Artwork to unrelated persons that do not require identifying the artist,
the title
or subject matter of the work, the date or period of its creation, if known, or information as
to where viewers can see the original Artwork. You may require licensed images bear your
copyright. The
licenses use a fee structure that is comparable to fees charged by other
organizations for similar licensing activity, and
in no case will such fees exceed fair market value.
You own the copyrights to all licensed images. You state that you will not provide any services
in
connection with the licensing agreements other than quality control. You also state that all
licensees
are unrelated organizations.
Licensing images
of Artwork in your collection without more is not substantially related to your
exempt purposes and constitutes a trade or business as defined
in§ 513(a). Computation of
unrelated taxable business income under§ 512(a)(1) is modified to generally exclude royalty
income and directly related deductions. See I.R.C. § 512(b)(2). A royalty
is a payment that relates
to the use
of a valuable right. Payments for the use of trademarks, trade names, service marks, or
copyrights, whether or not payment is based on the use made
of such property, are ordinarily
classified as royalties for federal tax purposes. Similarly, payments for the use
of a professional
athlete's
name, photograph, likeness, or facsimile signature are ordinarily
characterized as
royalties. Royalties do not include payments for personal services. See Rev. Rul. 81-178, 1981-2
C.B. 135. You own the copyrights to all images licensed. The only services you will provide are
quality control. Requiring licensed images bear your copyright is more a prudent step to protect
your intellectual property than a personal service. Accordingly, although your licensing
of Artwork
images is not substantially related to your exempt purposes as defined
in Treas. Reg. § 1.513-
1 (d)(2},
it falls under the modification for royalty income provided in § 512(b)(2), and does not result
in unrelated business taxable income as defined in§ 512(a)(1).

Conclusion:
Based on the foregoing, we rule as follows:
1. You shall not be treated as a newly created organization following Transferor's transfer of
assets to you pursuant to a reorganization as described in§ 507(b)(2).
2. You will succeed to Transferor's aggregate tax benefit in proportion to the amount of the fair
market value
of the assets you receive from it.
3. Your applicable holding period in the transferred assets for purposes of§ 4943(c)(4), (5) and
(6) includes both the period during which Transferor held such assets and the period during
which you
hold such assets.
4. Transferor
will not be transferring all
of its net assets to a private foundation that is effectively
controlled, directly or indirectly, by the same person or persons that effectively controlled the
transferor private foundation. Therefore, you will not be treated as if you were Transferor for
purposes
of Chapter 42 and §§ 507 through 509.
5. Any person who is a substantial contributor within the meaning of§ 507(d)(2) with respect to
Transferor will be treated as a substantial contributor with respect to you, regardless
of whether
such person meets the $5,000/two percent test with respect to you at any time.
6. You will receive the transferred assets subject to Transferor's prior excise tax liabilities under
Chapter 42 (and any penalty resulting therefrom}, if any, to the extent Transferor did not
previously satisfy those liabilities.
7. Your Grantor medium Production Services and Maintenance Services for Museum, and for
other tax-exempt organizations that
publicly display art and/or use it for educational purposes,
and non-exempt organizations that commit
contractually to publicly display their art and/or use
their art for educational purposes for a significant period
of time, are substantially related to
your exempt purposes, as defined
in Treas. Reg.§ 1.513-1(d)(2), and revenue from such
Services does not result
in UBTI as defined in§ 512(a)(1).
8. Your Grantor medium Production Services and Maintenance Services for art created by
individual artists, or owned by organizations and private collectors and displayed privately are
substantially related to your exempt purposes, as defined
in Treas. Reg. § 1.513-1 (d)(2}, and
revenue from such Services does not result
in UBTI as defined in§ 512(a)(1).
9. Sales of original Artwork held as inventory to tax-exempt and public entities for public display or
other educational purposes, and to non-exempt entities that commit contractually to publicly
display their Artwork and/or use their Artwork for educational purposes for a significant period
of time, are substantially related to your exempt purposes, as defined in Treas. Reg. §1.513-
1(d)(2}, and revenue from such sales does not result
in UBTI as defined in§ 512(a)(1).

10. Licensing of Artwork images is not substantially related to your exempt purposes, as defined
in Treas. Reg. § 1.513-1 (d)(2), but falls under the modification for royalty income provided in
§ 512(b)(2) and does not result in UBTI as defined in§ 512(a)(1).
This ruling will be made available for public inspection
under§ 6110 after certain deletions of
identifying information are made. For details, see enclosed Notice 437, Notice
of Intention to
Disclose. A copy of this ruling with deletions that we intend to make available for public
inspection is attached to Notice 437. If you disagree with our proposed deletions, you should
follow the instructions
in Notice 437.
This
ruling
is directed only to the organization that requested it. Section 6110(k)(3) provides
that it may not be used or cited by others
as precedent.
This
ruling is based on the facts
as they were presented and on the understanding that there will
be no material changes
in these facts. This ruling does not address the applicability of any
section of the Code or
regulations to the facts submitted other than with respect to the sections
described. Because it could help resolved questions concerning your federal income tax status,
this ruling should be kept in your permanent records.
If you have any questions about this ruling, please contact the person whose name and
telephone number are shown
in the heading of this letter.
In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.
Enclosure
Notice 437
Sincerely,
Michael
C. Seto
Manager, Exempt Organizations
Technical