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IRS refines its position on museum UBIT sales of inventory.

Letter Ruling (TAM) 9550003 provides an excellent guide to the whole realm of "related" versus "unrelated" museum sales activities. Most significantly, the TAM provides that extensive off-site sales of museum-related items do not, per se, taint otherwise functionally related sales.

The museum in question charges independent manufacturers licensing fees to produce and merchandise reproductions and adaptations of objects in the museum's collection. Fees are based on production volume. The museum also conducts a lively area-wide gift shop and mail order business.

Citing Rev. Rul. 73-104, in which the sale of greeting cards containing accurate representations of museum holdings was deemed to be inherently "related" (despite off-site distribution), the IRS acknowledged that the use of an extensive off-site outlet sales network had an undeniably "commercial" (i.e., money-making) flavor. However, broad public exposure to the "related" line of merchandise enhances the public's understanding of the museum's theme exhibit and encourages purchasers to visit the museum. Thus, in this case, more is better.

Another important interpretation is the TAM's distinction between items that, regardless of utilitarian qualities, comprise faithful reproductions or adaptations of the museum's artifacts and those that merely display vague depictions or interpretations of museum motifs. Sales of the former are excepted from unrelated business income tax (UBIT) as functionally related activities; the latter lack the requisite educational impact. Hence, lamps, bookends, trivets, jewelry, placemats, etc., embracing superficial derivative designs (in contrast to reliable representations) fail the test because they do not foster a personal learning experience about the museum's collection. Merely affixing the museum's name to an object did not establish the requisite causal relationship with the museum's exempt purpose. It makes no difference that many of the articles containing the name or logo are inexpensive souvenirs or trinkets; they must, nonetheless, have more than a superficial resemblance to the museum's display items.

Engraving of certain gift articles performed at the museum in view of visitors was considered to be related in that it educated onlookers in the historic engraving techniques. Off-site engraving, on the other hand, had no educational value; thus, the separate fees in the latter case were deemed to be taxable. Gift wrapping fees were similarly taxable.

Income from the sale of "non-prepackaged food products" was classified as nontaxable, apparently because it was similar to food actually prepared and consumed during the featured historic period, while the packaged snacks lacked this quality.

The TAM provides a detailed roster of various museum sales items and their relative merits under UBIT analysis. There is a clear explanation of the "convenience exception" for on-site sales of items that enable visitors to devote more time to view the museum. The Service will presumably not target museums conducting energetic and extensive sales efforts so long as the product itself is substantially related to the museum collection.
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Title Annotation:unrelated business income tax
Author:Bloom, Jim
Publication:The Tax Adviser
Date:Apr 1, 1996
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