Caring Shop is a gift shop located in The Natural History Museum. Caring shop has annual sales revenue of $850,000. Additionally, the Natural History museum has investment income of $550,000 from its endowment, and an annual operating budget of $3 million.

Both the income from the gift shop and the endowment income are used to support the exempt purpose of the museum. The balance of funding required for annual operations is provided through admission fees.

Dan Nolan, 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.

1. Calculate the amount of unrelated business income.
2. 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.
3. As the museum treasurer, write a letter to Dan Nolan explaining the reason for the tax consequences.