Question

The Modern Art Museum is an exempt organization that operates a gift shop. The museum’s annual operations budget is $3.2 million.

Gift shop sales generate a profit of $900,000. Another $600,000 of investment income is generated by the museum’s endowment fund. Both the income from the gift shop and the endowment income are used to support the exempt purpose of the museum.

The balance of $1.7 million required for annual operations is provided through admission fees.

Clay Marshall, a new board member, does not understand why the museum is subject to tax at all, particularly because all of the entity’s profits are used in carrying out the mission of the museum.

a) Calculate the amount of unrelated business income.

b) Assume, instead, that the endowment income is reinvested in the endowment fund, rather than being used to support annual operations. Calculate the amount of unrelated business income.

c) Explain the reason for the tax consequences.

Answer 1

a) unrelated business income = $9000/0

the net unrelated business income of the modern art Museum includes the gift shop profit of $900,000;

so the gross unrelated business income would consist of the sales revenue from the gift shop and would offset the related deductions.

B) unrelated business income will remain same i.e. $900000.

the reinvestment in endowment fund would be irrelevant in calculating the unrelated business income.

C) as the income will be $900000 through the gift shop and therby they will be liable for corporate tax rate. The income of $900000 creates an annual tax liability for the museum of $189000(i.e. 900000×21%), although all the profit are going toward operating and maintaning the museum.

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