The Open 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.

Wayne Davis, 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. The museum’s address is 250 Oak Avenue, Peoria, IL 61625.

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. As the museum treasurer, write a letter to Wayne explaining the reason for the tax consequences. Mr. Davis’s address is 45 Pine Avenue, Peoria, IL 61625.