Viewing page 30 of 100

This transcription has been completed. Contact us with corrections.

-23-

Executive Committee of the Regents on September 21, 1977, that before addressing this major issue, the scope of possible tax liability in actual dollars should be more clearly defined.  Pending the outcome of this issue, a reserve of $2,400,000 against a possible tax liability has been accumulated through the end of fiscal year 1979, with additional amounts budgeted in subsequent years.

Finally this March, the IRS issued the requested ruling interpreting current regulations as applied to the Smithsonian's overall income and expense in such a way that there would appear to be, at present, no net taxable income from advertising.  The ruling is general in nature, and this result will have to be verified by application of the ruling to the actual sums involved in the 1976 audit and to the figures for subsequent years.  This ruling may be relied on until the regulations are changed, a process which takes a number of months to complete but which could begin at any time.

In the twenty-eight months that the ruling request has been before IRS, other potential unrelated business income tax issues were raised during an audit of the Institution's 1976 figures, centering around the product development licensing program, foreign and domestic study tours, and museum shops, and periodic reports on these matters have been made to the Regents.  Regarding these other areas of potential tax liability: (1) product development income has been determined by the auditing revenue agent to be "royalty" income which is not taxable; (2) Counsel has been told [[underlined]] informally [[/underlined]] that Smithsonian tours have met the "relatedness" standard, and that no tax liability exists; and, (3) the issue of whether any products sold in the Museum Shops are "unrelated" is still undetermined.  This latter issue, on 

6