IRS refines its position on museum UBIT sales of inventory.

• Author: Bloom, Jim
• Position: Unrelated business income tax

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...