IRS written determination 201429029

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.

TREASURY

ERNAL REVENUE SE
SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

Release Number: 201429029

Release Date: 7/18/2014

Date: April 24, 2014
UIL Code: 511.00-00

Contact Person:

Identification Number:

Telephone Number:

Employer Identification Number:

Legend:

E

Dear

We have considered your ruling request dated February 28, 2013, and amended on April 4,
2014, concerning the tax consequences under section 511 of the Internal Revenue Code of
1986, as amended (hereafter "I.R.C."), related to merchandise sold at your museum gift shop.

Facts:

You are exempt from federal income tax under I.R.C. § 501(c)(3) and described in §
170(b)(1)(A)(vi). Your purposes include operating a museum and research center that provides
a location to receive and display materials pertaining to U, including but not limited to V, and to
educate the public about U and V, and outer space.

You maintain a museum gift shop on your premises. Museum gift shop business is also
conducted through internet-order catalog sales. You sell items in your museum gift shop as part
of your regular operations. The museum gift shop sells the following: items you describe as
"toys" that pertain to the solar system; books and documentary videos on the topic of U and V;
and, various items that contain a reproduction of the newspaper article reporting on V. You
represented that these items pertain to U and V and outer space, and which are all substantially
related to your exempt purpose. You provided copies of the descriptive literature/ educational
material that accompany each item and a statement as to how the sale of each item contributes
importantly to the achievement of your museum and research center's exempt educational
purposes. You also provided photographs and physical descriptions of the items on which you
are seeking a ruling, along with the descriptive literature/ educational material that accompanies
each item. You have represented that the descriptive literature/educational material
accompanying each item is based upon eye-witness accounts, referenced in various scholarly

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material (available in both written and video format in your museum library) and/or also depicted
in your museum's exhibits and displays. You represent that all these items help educate the
public about U and V, and outer space.

Ruling Requested:

The sale of merchandise in your museum gift shop, referenced herein, contributes importantly to
your exempt purpose and does not constitute unrelated business income under I.R.C. § 511.

Law:

I.R.C. § 501(c)(3) provides that a corporation organized and operated exclusively for charitable
or educational purposes is exempt from federal income tax.

I.R.C. § 511 imposes a normal tax and surtax on the unrelated business taxable income or
organizations exempt from taxation under § 501(c)(3).

I.R.C. § 512 defines "unrelated business taxable income" as income from any unrelated
business "regularly carried on" by an exempt organization.

I.R.C. § 513(a) defines "unrelated trade or business" to mean any trade or business the conduct
of which is not substantially related (aside from the need for income) to the exercise or
performance of the organization's exempt purpose or function that constitutes the basis for its
exemption under I.R.C. § 501.

I.R.C. § 513(c) provides that the term "trade or business" includes any activity which is carried
on for the production of income from the sale of goods or the performance of services. For
purposes of the preceding sentence, an activity does not lose identity as a trade or business
merely because it is carried on within a larger aggregate or similar activities, or within a larger
complex of other endeavors which may, or may not, be related to the exempt purposes of the
organization.

Treas. Reg. § 1.501(c)(3)-1(d)(3) defines "educational" to mean the instruction of the public on
subjects useful to the individual and beneficial to the community.

Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii) provides that, "museum, zoos, planetariums, and other
similar organizations" are examples of educational organizations.

Treas. Reg. § 1.513-1(b) provides that the primary objective of the adoption of the unrelated
business income tax was to eliminate a source of unfair competition by placing the unrelated
business activities of certain exempt organizations upon the same tax basis as the non-exempt
business endeavors with which they compete. On the other hand, where an activity does not
possess the characteristics of a trade or business within the meaning of I.R.C. § 162, such as
when an organization sends out low cost articles incidental to the solicitation of charitable
contributions, the unrelated business income tax does not apply since the organization is not in
competition with taxable organizations. However, in general, any activity of a I.R.C. § 501

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organization that is carried on for the production of income and that otherwise possesses the
characteristics required to constitute "trade or business" within the meaning of I.R.C. § 162-and
that, in addition, is not substantially related to the performance of exempt functions presents
sufficient likelihood of unfair competition to be within the policy of the tax. Accordingly, for
purposes of I.R.C. § 513, the term "trade or business" has the same meaning it has in I.R.C. §
162, and generally includes any activity carried on for the production of income from the sale of
goods or performance of services. Thus, the term "trade or business" in I.R.C. § 513 is not
limited to integrated aggregates of assets, activities, and good will which comprise business for
the purposes of certain other provisions of the Internal Revenue Code. Activities of producing
or distributing goods or performing services from which a particular amount of gross income is
derived do not lose identity as trade or business merely because they are 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. Thus, for example, the regular
sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose
identity as trade or business merely because the pharmacy also furnishes supplies to the
hospital and patients of the hospital in accordance with its exempt purposes or in compliance
with the terms of I.R.C. § 513(a)(2). Similarly, activities of soliciting, selling, and publishing
commercial advertising do not lose identity as a trade or business even though the advertising is
published in an exempt organization periodical that contains editorial matter related to the
exempt purposes of the organization. However, where an activity carried on for the production
of income constitutes unrelated trade or business, no part of that trade or business shall be
excluded from this classification merely because it does not result in profit.

Treas. Reg. § 1.513-1(c)(2)(ii) provides that, in general, exempt organization business activities
that are engaged in only discontinuously or periodically will not be considered regularly carried
on if they are conducted without the competition and promotional efforts typical of commercial
endeavors. However, where the non-qualifying sales are not merely casual but are
systematically and consistently carried on by the organization, they meet the requirement of
regularity under I.R.C. § 512.

Treas. Reg. § 1.513-1(d)(2) provides that a trade or business is "related" to exempt purposes
only where the conduct of the business activities has causal relationship to the achievement of
exempt purposes (other than through the production of income). Further, it is "substantially
related", for purposes of I.R.C. § 513 only if the causal relationship is a substantial one. For this
relationship to exist, 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. Whether activities productive of gross income contribute
importantly to the accomplishment of any purpose for which an organization is granted
exemption depends in each case upon the facts and circumstances involved.

Rev. Rul. 73-104, 1973-1 C.B. 263, holds that the sale of greeting card reproductions of art
works by an art museum exempt from tax under I.R.C. § 501(c)(3) does not constitute unrelated
trade or business. Each card is imprinted with the name of the artist, the title or subject matter of
the work, the date or period of its creation, if known, and the museum's name. The art museum
sold these cards through a shop in the museum and through a catalogue that solicited mail
orders. The rationale of Rev. Rul. 73-104 is that the card sales contribute importantly to the

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achievement of the museum's exempt educational purposes by stimulating and enhancing
public awareness, interest, and appreciation of art. Rev. Rul. 73-104 also states that the cards
are promoted and sold in a clearly commercial manner at a profit, and competition with
commercial greeting card publishers does not alter the fact of the activity's relatedness to the
museum's exempt purpose.

Rev. Rul. 73-105, 1973-1 C.B. 264, holds that the sale of scientific books and city souvenirs by
a museum of folk art exempt from tax under I.R.C. § 501(c)(3) constitutes unrelated trade or
business even though other items sold in the museum shop are related to its exempt function.
The revenue ruling describes an exempt museum of American folk art that offers for sale in its
shop four categories of items, i.e., (1) reproduction of artworks from the museum's collection
and from other art collections that take the form of prints suitable for framing, postcards,
greeting cards, and slides; (2) metal, wood, and ceramic copies of American folk art objects
from its collection and other collections; (3) instructional literature concerning the history and
development of art, particularly folk art; and (4) scientific books and various souvenir items
relating to the city in which the museum is located. All of its reproductions are imprinted with the
name of the artist, the title or subject matter of the reproduced work, and the museum's name. It
was concluded that categories (1), (2), and (3) contribute importantly to the achievement of the
folk art museum's exempt educational purposes by making works of art familiar to a broader
segment of the public, thereby enhancing the public's understanding and appreciation of art.
The sale of scientific books and souvenirs described in category (4) was deemed to constitute
unrelated trade or business, because the objects had no causal relationship to art or to artistic
endeavor and thus did not contribute importantly to the accomplishment of the folk art
museum's exempt purposes.

# Rationale:

The terms "unrelated business income" pertains to income generated from the sale of goods or
services as part of a regularly carried on trade or business that is not substantially related to the
exempt purpose of the organization. See §§ 511, 512, 513(a), and 513(c). Because you sell
items in your museum gift shop on a regular and routine basis, you are engaging in a regularly
carried on trade or business. See §§ 1.513-1(b), 1.513-1(c)(ii). The only issue remaining is
whether the sale of these items is substantially related to your exempt purposes. See § 1.513-
1(d)(2).

A nexus between the items sold in a museum gift shop and the accomplishment of the
museum's exempt purposes must be established before sales of the items can be considered
substantially related within the meaning of § 513(a) and thus exempt from unrelated business
income taxation. As such, the focus is on the primary purpose for the production and sale of
each item. For example, if the primary purpose of the article is utilitarian, ornamental, or as a
souvenir, it would not be considered substantially related within the meaning of § 513(a). The
nexus that is established should also establish that an item relates specifically to the particular
museum in which it is sold. Items that are of general educational value are not necessarily
substantially related. For example, in Rev. Rul. 73-105, supra, sales of scientific books by a
museum of folk art constituted an unrelated trade or business because of the lack of a causal
relationship of the scientific books to the folk art museum's exempt purpose, even though those

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scientific books were educational in and of themselves. Here, the various books and
documentary videos on the topic of U and V, relate directly to your exempt educational purpose
of educating the public about U and V, and outer space. As such, the sale of these items would
not generate unrelated business income.

Generally, museum gift shop sales will not generate unrelated business income when the
merchandise sold depicts items from the museum's collection and contains descriptive literature
to educate the purchaser as to the significance of the item and its nexus to the educational
purpose of the museum. See Rev. Ruls. 73-104 and 73-105, supra. Your museum gift shop
sells items that contain a reproduction of the newspaper article reporting on V, such as posters,
on coffee mugs, book markers, etc., along with various scholarly books and documentary videos
pertaining to U and V, and outer space. These items are intrinsically educational and create a
nexus with your exempt purpose. These items also contain accompanying descriptive literate,
which educates the public about U and V and create a nexus with your exempt purpose of
educating the public about U and V, and outer space. As such, the sale of these items would
not generate unrelated business income.

The museum gift shop sells items that can generally be described as educational and
interpretive teaching items for children that you broadly labeled as "toys." These items are
jigsaw puzzles, posters, cartoon books and t-shirts pertaining to the solar system and contain
educational material imprinted within and made part of the "toys." These items educate the
public about the solar system and create a substantial nexus to U and V and your exempt
purpose of educating the public about U and V, and outer space. As such, the sale of these
items would not generate unrelated business income.

Conclusion:

We have determined that the sale of the various "toys" pertaining to the solar system; various
books and documentary videos pertaining to U and V; and, items that contain a reproduction of
the newspaper article reporting on V, contribute importantly to your exempt purpose and do not
constitute unrelated business income under I.R.C. § 511.

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 resolve questions concerning your federal income tax status,
this ruling should be kept in your permanent records.

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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.

Sincerely,
Michael Seto
Manager, EO Technical

Enclosure
Notice 437