Viewpoints

Tax-Exempt Update

Mario Urso

Originally Published In:
BIZ ACTIONS E-NEWSLETTER
December 2007
Author: Mario P. Urso, CPA

Is a Merger or Acquisition in Your Future?

The Financial Accounting Standards Board (FASB) has finally issued some much-needed guidance for mergers and acquisitions in the nonprofit sector. The FASB first began working on establishing such standards more than seven years ago. Why would a nonprofit participate in a merger or acquisition? After all, the organization was established with a specific mission in mind. History has shown that mergers and acquisitions usually take place in the nonprofit world for one of these two reasons:

Reason 1: Two or more nonprofits may merge operations to meet complementary missions or to expand a mission. The prevailing economies can make this a viable option.  Also, this may allow a financially struggling organization to solidify it's financial situation and continue its mission.

Reason 2: One of the organizations may be tainted by events that result in a public backlash. With a merger or acquisition, a "white knight" can ride in to rescue the organization's reputation. Typically, a nonprofit with a clean record will take over one that has been professionally damaged by a highly publicized scandal.

What is the difference between a merger and an acquisition?

This is best answered by using the following formula:  In its simplest form, a merger occurs when one nonprofit joins with another to create a separate and distinct nonprofit (Nonprofit A + Nonprofit B = Nonprofit C). 

An acquisition is usually more complex. A nonprofit may absorb another nonprofit (Nonprofit A + Nonprofit B = either Nonprofit A or Nonprofit B). Alternatively it may acquire a nonprofit activity (Nonprofit A + Activity B = Nonprofit A) or a for-profit activity (Nonprofit A + For-profit B = Nonprofit A).

When can you consolidate?

Under FASB guidelines, two nonprofits may consolidate when one owns more than 50% of the other entity's outstanding voting stock or it controls a majority of the voting interests of the other's governing board and has an economic interest in the entity.

How do you consolidate?

The organization removes from its balance sheet account balances, transactions and losses on assets remaining in the consolidated entity.

Also, interorganization investments and net assets of the subsidiary are not counted. If the nonprofit does not completely own the other entity, it must report the minority interests.

Under FASB proposed guidelines for mergers and acquisitions for nonprofits, the following occur:

• Elimination of the use of the pooling-of-interest methods of accounting.
  
• Recognition of the identifiable assets acquired and liabilities assumed that are included in the merger or acquisition.
  
• Measurement of assets and liabilities at their fair-market value on the acquisition date.
  
• Recognition of goodwill or gifts based on the value of acquired assets, liabilities assumed and any other consideration received.
  
• Full disclosure of information that will enable professionals to evaluate the nature and financial effects of mergers and acquisitions.

Six Steps to Branding Your Nonprofit

A successful product usually has a successful brand. Think Kellogg's cereal, Tide detergent or Rolex watches. The names alone conjure up certain feelings and associations.  Granted, your nonprofit is not a box of cereal or detergent or even an expensive wristwatch. But it is still important to stamp a brand on the organization that will leave a lasting impression.

Branding is not just about marketing, although this is certainly a key function in the process. It is all about creating an image for your nonprofit. Here are six practical suggestions for creating a brand name.

1. Analyze the critical aspects of your organization. In this context, you should focus on your strengths, weaknesses, opportunities and external threats. Obtain feedback from all levels of your organization-from the highest-ranking officers to operational staff members-to arrive at a balanced picture.

Consider answering the following questions for this purpose:

• What does your organization do best? How do you  want to be viewed? What distinguishes you from similar nonprofits?
  
• How have you failed to portray your mission? What have you lacked in branding the organization? How effective will your board be in promoting the brand?
  
• Can you identify expanding markets for products and services? What is the current economic climate for your nonprofit?
  
• Who are your main competitors in the nonprofit sector? How much do you know about them? Are  there outside factors that will hinder promoting of your brand?

2. Review your findings. What have you learned about who you are, what you do and how you do it? Try to qualify and quantify the results.

3. Determine which messages appeal to your targeted audience ... and which don't. Caution: Sometimes this process will yield results that you don't want to hear or findings that you strongly disagree with. Keep an open mind. 

4. Conduct a focus group. If you cannot accommodate this internally, use an independent resource. Include questions to validate the results of your findings.

5. Create a branding package. Typically, this type of package might include your mission statement, a tagline, a positioning statement, supporting documentation and a logo. This encapsulates the core messages you want your brand to convey. It can help you "stay the course" when communicating information about your nonprofit.

6. Finally, test out the messages to avoid any late glitches or hitches. Return to your focus group. Obtain "real" reactions from people outside your organization. This final step is critical to ensure that the messages you select have the desired effect.

How to Improve Volunteer Recruiting

If you are like most nonprofit managers, you probably want to bring more volunteers into the fold. In fact, it may have become a cause for concern if you've noticed a downward trend. But you don't have to panic quite yet.  By doing some preliminary work, you can increase the chances of more volunteers joining your organization.
As with many management aspects, preparation is critical.

Following are some practical suggestions to help get you started.

1. Review your nonprofit's work environment. Each organization has a distinct "personality" that may reflect the manner in which you carry on the nonprofit's activities or some of your personal traits. If that's the case, try to cultivate a positive outlook.  For instance, is your office open, friendly and conducive to creativity? Is it chaotic and free flowing, or is it value-driven and more rigid? Are employees open and friendly, or do they present a cold demeanor? Are employees relaxed about job security, or do they appear to be tense and worried? These factors can have an impact, one way or the other, on whether individuals choose to volunteer.

2. Match the nonprofit's culture to potential volunteers. The culture will determine the type of volunteer you should recruit. For instance, a highly structured organization needs to recruit followers, not leaders. Conversely, an office that is more loosely organized might look for self-starters who don't need much guidance.  Make an honest appraisal of your nonprofit before you start recruiting volunteers. You are more likely to find good matches this way.

3. Prepare for an influx of volunteers. Encourage management to support volunteer work and show appreciation for the services these individuals can provide. Instruct staff members to be prepared and willing to help with interviewing, orientation and supervision. Create job descriptions to help volunteers meet expectations.  Take the time needed to prepare recruiting materials such as brochures, flyers and a volunteer handbook. Set aside a place for volunteers to work with supplies and equipment. Finally, establish procedures and recordkeeping systems for volunteers.

4. Resolve potential legal obstacles. Review with your attorneys any legal and liability issues relating to volunteer activities. Install a system for evaluating the performance of volunteers and the outcome of recruiting initiatives. Obtain approval from counsel relating to your recruitment activities.

5. Make sure your staff is prepared to respond to volunteer inquiries. They must be able to speak knowingly about the organization and its objectives. Note: Even if you are not specifically recruiting, people who want to do volunteer work may contact you. Pay prompt attention to these call-ins. They should not have to call you back; show interest by reaching out to them.

6. Educate your staff on recruiting volunteers. Undoubtedly, your employees have contact with potential volunteers every day. Do they know about the opportunities available? How do they refer interested individuals? Your organization could be missing out on key recruits if your employees are not properly trained.

New Form 990 Makes Its Debut

At long last, the IRS has released its draft version of the new Form 990. This form is used by tax-exempt organizations to report activities, assets and expenses.  The new draft, which reflects major revisions, includes a one-page summary, a nine-page core form for all organizations and 15 schedules for organizations that conduct particular activities. The Form 990 is intended to promote compliance by requiring a broader range of information than in the past.

The director of the IRS's Exempt Organizations office estimates that about 25% of existing tax-exempt organizations will need to fill out three or more schedules, while fewer than 10% will be saddled with eight or more schedules. Filing Form 990 will be more burdensome for organizations with complex compensation arrangements, related entity structures and activities that could raise compliance issues.

IRS Views Real Estate Donations

The IRS has expressed concern over gifts of real property it considers to be suspicious in nature. It has announced that it will be examining real estate investors and charitable organizations engaged in such transactions.

The problem: An investor acquires property subject to a long-term lease. Then he or she donates it to charity and makes an overly aggressive valuation. This results in a sizeable tax deduction on the investor's return.  To compound the abuse, some investors have arranged to buy back properties at reduced prices. So the donor winds up with both a huge tax deduction and the original property.

The IRS is watching property donations carefully, so make sure that you are in full compliance with the tax rules.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.