The Modern Art Museum is an exempt organization that operates a gift shop. The museums 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 museums 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 entitys 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.