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failed to treat the direct mail campaign’s expenses that exceeded
the direct mail campaign’s gross revenue as being its expenses.
In his letter dated December 20, 1985, to petitioner’s
executive director, Watson advised that petitioner’s accounting
treatment of the direct mail campaign’s 1984 expenses was
incorrect. Watson’s December 20, 1985, letter stated, in
pertinent part, as follows:
The proper way to account for all your funds and
expenses is to account for all of the income generated
from UCC mailings as UCC income and all of the expenses
related to all of the mailings must be recorded as UCC
expenses. If * * * [W&H], through its direct mail
assistance, raises $1,000,000 for UCC and spends
$900,000 doing it, then the financial statements must
reflect a gross income of $1,000,000 and $900,000 in
expenses. * * * If your accountants are overly
concerned about the * * * [Contract], I would recommend
that they list the contract as a contractual obligation
in the footnotes to the financial statement. And, they
may want to even indicate that * * * [W&H] is
potentially liable for any losses incurred in the
fundraising efforts. But most importantly, and I have
said this over and over again, * * * [W&H] is not the
keeper of UCC funds. * * * [W&H] does not dole out net
proceeds of fundraising campaigns to UCC.
On its 1985 through 1989 financial statements and Forms 990,
petitioner treated all of the direct mail campaign’s revenue and
expenses as its revenue and expenses.
On its partnership returns, W&H included in “cost of goods
sold” the postage advances it made and included in income the
subsequent reimbursements it received for these advances.
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