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    Internal Revenue Service
 Revenue Ruling

Rev. Rul. 73-105

1973-1 C.B. 264

Sec. 513

IRS Headnote

The sale of scientific books and city souvenirs by a museum of folk art
exempt from tax under section 501(c)(3) of the Code constitutes unrelated
trade or business even though other items sold in the museum shop are
related to its exempt function. 

Full Text

Rev. Rul. 73-105 

Advice has been requested whether, under the circumstances described below,
the sales activities of an art museum exempt from Federal income tax as an
educational organization under section 501(c)(3) of the Internal Revenue
Code of 1954 constitute unrelated trade or business within the meaning of
section 513 of the Code. 

The organization maintains and operates an art museum devoted to the
exhibition of American folk art. It operates a shop in the museum that
offers for sale to the general public: (1) reproductions of works in the
museum's own collection and reproductions of artistic works from the
collections of other art museums (these reproductions 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 own
collection and similar copies of art objects from other collections of art
works; and (3) instructional literature concerning the history and
development of art and, in particular, of American folk art. The shop also
rents originals or reproductions of paintings contained in its collection.
All of its reproductions are imprinted with the name of the artist, the
title or subject matter of the work from which it is reproduced, and the
museum's name. 

Also sold in the shop are scientific books and various souvenir items
relating to the city in which the museum is located. 

Section 511(a) of the Code imposes a tax upon the unrelated business
taxable income (as defined in section 512) of organizations exempt from
Federal income tax under section 501(c)(3). Section 512(a) of the Code
defines "unrelated business taxable income" as the gross income from any
"unrelated trade or business" regularly carried on by the organization as
computed in the manner provided in section 512. 

The term "unrelated trade or business" is defined in section 513 of the
Code 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 exempt functions. 

Section 1.513-1(d)(2) of the Income Tax Regulations provides that 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. 

Section 513(c) of the Code and section 1.513-1(b) of the regulations
provide that trade or business includes any activity which is carried on
for the production of income from the sale of goods. An activity does not
lose its identity as 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 not be related to the exempt purposes of the
organization. 

Thus, sales of a particular line of merchandise may be considered
separately to determine their relatedness to the exempt purpose. Section
1.513-1(d)(2) of the regulations emphasizes that it is the particular facts
and circumstances involved in each case which determines whether the
activities in question contribute importantly to the accomplishment of any
purpose for which the organization is exempt. 

An art museum is exempt as an educational organization on the basis of its
ownership, maintenance, and exhibition for public viewing of an art
collection. The sale and rental of reproductions of works from the museum's
own collection and reproductions of artistic works not owned by the museum
contribute importantly to the achievement of the museum's exempt
educational purpose by making works of art familiar to a broader segment of
the public, thereby enhancing the public's understanding and appreciation
of art. The same is true with respect to literature relating to art. 

Accordingly, it is held that these sales activities do not constitute
unrelated trade or business under section 513 of the Code. 

On the other hand, scientific books and souvenir items relating to the city
where the museum is located have no causal relationship to art or to
artistic endeavor and, therefore, the sale of these items does not
contribute importantly to the accomplishments of the subject organization's
exempt educational purpose which, as an art museum, is to enhance the
public's understanding and appreciation of art. The fact that some of these
items could, in a different context, be held related to the exempt
educational purpose of some other exempt educational organization does not
change the conclusion that in this context they do not contribute to the
accomplishment of this organization's exempt educational purpose. 

Additionally, under the provisions of section 513(c) of the Code, the
activity with respect to sales of such items does not lose identity as
trade or business merely because the museum also sells articles which do
contribute importantly to the accomplishment of its exempt function. 

Accordingly, it is held that the sale of those articles having no
relationship to American folk art or to art generally, constitutes
unrelated trade or business under section 513 of the Code.