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U H Y LLP C e r t i f i e d P u b l i c A c c o u n t a n t s
January 2010
Vol. 3 • No. 1

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Upcoming Changes Understanding

Charitable Donations
Treatment of Mergers and of Inventory and
Acquisitions for Not-for-Profits Other Property
By Matt Duvall By Kerry Duvall

In light of the
hardships many
organizations are
the furtherance of their mission ben-
efiting the public rather than maxi-
mizing the profit of shareholders.
f your organiza-
tion is a 501(c)(3),
don’t forget that
facing due to the there are special
recent economic cri- SFAS No. 164 distinguishes between rules applicable to
sis, there has been a a merger and an acquisition as fol- in-kind donations
trend toward con- lows: A merger is a combination in from “C” corpora-
solidation. In the which the governing boards of two tion donors. Typi-
Matt Duvall
not-for-profit com- or more not-for-profit organizations Kerry Duvall cally, when a com-
munity specifically, these financial cede control of those organizations pany contributes inventory to a chari-
pressures have led to an increase in to create a new not-for-profit organ- table organization, the tax deduction
ization. An acquisition, however, is is limited to the company’s basis in
merger and acquisition activity.
a combination in which one not-for- the property (generally, the amount
It is timely that the FASB has intro- profit organization obtains control you paid for it). However, when the
duced SFAS No. 164 specifically to of one or more not-for-profit activi- donor is a “C” corporation and the
address mergers and acquisitions ties or businesses. contributed property is inventory,
involving not-for-profit organiza- there is an increased deduction that
tions. The objective of SFAS No. 164 The distinction between a merger you are allowed if you meet specific
is to improve the quality and rele- and an acquisition is an important requirements.
vance of information disclosed first step since SFAS No. 164 calls
for different accounting treatments Requirements
about combinations in not-for-profit
financial reports. for each. If the combination is In order to qualify for the increased
classified as a merger, the newly cre- deduction, the donation must be
Prior to the introduction of SFAS ated organization must apply the made to a 501(c)(3) organization and
No. 164, not-for-profit organizations carryover method. Applying the car- must meet four requirements:
accounted for mergers and acquisi- ryover method is done by combin- continued on page 2
tions by applying accounting stan- ing the assets and liabilities recog-
dards that were geared toward for- nized in the financial statements of PREFER TO GET YOUR
profit businesses. The FASB con- each merging organization as of the
cluded that these standards were
merger date; there are no additional
not sufficient for not-for-profit enti- assets or liabilities recognized and Sign up to receive our newsletter
ties because of the fundamental dif- no fair value adjustment is made. through email. Just email Kathy
ference that combinations by not- SFAS No. 164 notes that a merging at, and
for-profit entities tend to focus on she’ll take care of the rest.
continued on page 2

UHY LLP brings specialists in nonprofit solutions in accounting and tax.

January 2010
Vol. 3 • No. 1

Understanding charitable Act, such property must fully satis- contribution, the fair market value of
donations of inventory fy the requirements of The Act for the inventory was $5,000. If the prop-
180 days prior to the contribution erty were sold in the corporation’s
and other property date. (Also, any donation of food normal course of business, the corpo-
continued from page 1 inventory must meet the definition ration would pay income tax on a
1. The use of the property is related of apparently wholesome food.) gain of $4,000. However, assume that
to the organization’s exempt pur- instead of selling the property, the
pose and must be used for the Calculation of deduction corporation donated it to Charity Y.
care of the ill, needy or infants. Based on these facts, the corporation
Instead of deducting the corpora- would be entitled to a deduction of
2. The property is not transferred to tion’s basis in the inventory, the cor- $2,000 (the lower of either $3,000,
the organization in exchange for poration may deduct the lower of basis plus half of the ordinary
money, other property or services. 1) the basis in the property plus half income, or $2,000, twice the basis).
of the ordinary income that would
3. The taxpayer receives from the have been recognized if the proper- It’s important to note here that the
organization a written statement ty were sold at fair market value on deduction is still limited to 10 per-
representing that its use and dis- the contribution date, or 2) twice the cent of corporate taxable income.
position of the property will be in basis of the property.
accordance with #1 and #2 above.
To illustrate this point, let’s assume If you have any questions regarding
4. If the property is subject to the Corporation X purchased inventory this deduction, please contact Kerry
Federal Food, Drug, and Cosmetic for $1,000 and, as of the date of the at (410) 720-5220.

Treatment of mergers The acquisition method requires the tions that operate on support from
and acquisitions for identification of the acquirer and for fees for service, the recognition of
the acquirer to recognize the identi- goodwill is similar to that required
not-for-profits fiable assets acquired, the liabilities under FASB Accounting Standards
continued from page 1 assumed and any non-controlling Codification (ASC) 805.
entity that does not follow GAAP interest in the acquiree at the fair
(Generally Accepted Accounting value as of the acquisition date. Significant financial statement dis-
Principles) must first prepare finan- closures intended to enable users of
cial statements in accordance with This is the point where SFAS No. 164 financial statements to evaluate the
GAAP before the newly created departs from the requirements under nature and financial effect of the
organization recognizes the assets FASB Accounting Standards Codifica- combination are required for both
and liabilities. tion (ASC) 805. The FASB recognized mergers and acquisitions.
that some not-for-profit organiza-
The carryover method applied to tions are solely operated by contribu- SFAS No. 164 becomes effective for
mergers is fairly straightforward tions and returns on investments. mergers for which the merger date is
when compared to the acquisition These organizations may not recog- on or after the beginning of an initial
method called for when the combina- nize a component of goodwill as a reporting period beginning on or after
tion is determined to be an acquisi- result of the combination. Rather, the December 15, 2009, and for acquisi-
tion. The acquisition method pre- acquirer is to recognize an amount tions for which the acquisition date is
scribed by SFAS No. 164 is similar to shown as “Excess of Liabilities over on or after the beginning of the first
the acquisition method found in FASB Assets” in its statement of activities annual reporting period beginning on
Accounting Standards Codification equal to the amount that would have or after December 15, 2009. At that
(ASC) 805, formerly known as SFAS otherwise been recognized as good- time, the pronouncement will be for-
No. 141(R), with the main exception will in the statement of financial mally incorporated into the FASB
being the treatment of goodwill. position. For not-for-profit organiza- Accounting Standards Codification.

The statements contained herein are provided for informational purposes only, are not intended to constitute tax advice which may be relied upon to avoid penalties under any federal,
state, local or other tax statutes or regulations, and do not resolve any tax issues in your favor. Furthermore, such statements are not presented or intended as, and should not be taken
or assumed to constitute legal advice of any nature, for which advice it is recommended that you consult your own legal counselors or professionals.
UHY Advisors, Inc., provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of “UHY Advisors.” UHY Advisors, Inc.,
and its subsidiary entities offer services from offices across the United States. UHY Advisors, Inc., and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent
CPA firm that performs attest services. UHY Advisors, Inc., and UHY LLP are independent U.S. members of Urbach Hacker Young International Limited.