Posted by: Jonathan D. Moll, CPA | April 22, 2015

FASB Proposes Improvements to Not-For-Profit Financial Statements

Posted by Jonathan D. Moll, CPA

FASB Nonprofit StandardsToday (04/22/15) FASB issued a proposed Accounting Standards Update intended to improve existing standards for financial statement presentation for Nonprofit Organizations. A summary of the changes is provided, as well as, the full proposed ASU at fasb.org. The new standards will significantly change financial statement presentation for most nonprofit organizations.

The more significant changes include the following:

  • Net Asset Classification will include 2 classes, with donor restrictions and without donor restriction.  This replaces the current 3 class presentation.
  • Requires disclosure of both quantitative and qualitative information about liquidity
  • Reporting in the statement of activities on an intermediary measure of operations that is mission based
  • Requires the direct method for preparation of the statement of cash flows, with additional presentation of the indirect method for operating activities permitted but no longer required
  • Present information for all nonprofit organizations about expenses by function, nature, or both with enhanced disclosure requirements in notes if both are not on the face of the statement.

Additional information such as effective date will be determined by the Board after considering stakeholder’s feedback during this comment period on the proposed update.  Stay tuned.

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Posted by: Christina Bell, CPA | April 7, 2015

The TE/GE FY 15 Program Letter

Posted by Christina Bell, CPA

TE/GE Program Letter - Delaware CPA FirmIn December of 2014 the Commissioner of the Tax Exempt & Government Entities Division of the IRS (TE/GE), Sunita Lough, issued the TE/GE Program Letter for FY 2015. The letter is meant to serve as a document that discusses the TE/GE’s priorities and key areas of focus for the coming year. It is also meant to aid in the TE/GE’s mission of providing their customers (you) top quality service by helping them understand and comply with applicable tax laws and protecting the public interest by applying the tax law with integrity and fairness to all. A few of the priorities and key areas of focus described in the letter are summarized below.

1)      Accountability and Transparency – In accordance with the IRS Strategic Plan FY 2014-2017, TE/GE is entering FY 2015 focused on accountability and transparency.

2)      Continuous Improvement – The TE/GE is committed to improving processes, reducing taxpayer burden and capturing opportunities to eliminate waste. Last year, the TE/GE implemented the Form 1023-EZ that provided a simpler application process for qualifying exempt organizations. In FY 2015, the TE/GE wants to continue to review and improve the application process for all exempt organizations.

3)      Knowledge Management – The TE/GE will continue developing a knowledge management strategy during FY 2015 to foster consistency in the positions the TE/GE take issues on.

4)      Data-Driven Decision Making – The TE/GE is working towards equipping their workforce with the tools and data necessary to foster a culture of data-driven decision making to aid in identifying trends and future business issues and demands, finding opportunities to improve processes, quality and efficiency, and targeting existing and emerging high-risk areas.

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Posted by: Christina Bell, CPA | March 23, 2015

2015 Brings Single Audit Changes

Posted by Christina Bell, CPA

A-133 Audit - Delaware CPA FirmOn December 26, 2013, the Office of Management and Budget (OMB) published in the Federal Register Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards; Final Rule. The guidance in this document supersedes the requirements found in OMB Circular A-133 Audits of States, Local Governments and Non-Profit Organizations as well as several other OMB Circulars.

Currently, all nonprofit organizations that expend $500,000 or more in federal funding in a given fiscal year are required to conduct a single audit, also known as an “A-133 Audit.” For fiscal years beginning on or after January 1, 2015 the single audit threshold increases to $750,000. Those organizations that expend less than $750,000 in federal funding will be required to make their records available for review or audit, if requested, to appropriate officials of the federal agency, pass-through entities, or the U. S. Government Accountability Office.  Federal funding includes funds received directly from federal agencies, as well as those received from pass-through entities, such as a state government.

The single audit threshold increase is not the only OMB Circular A-133 change nonprofit organizations should be familiar with. Other significant changes effective for fiscal years beginning on or after January 1, 2015 include the following:

  • Reportable Audit Findings – The reporting threshold for known questioned costs increases from $10,000 to $25,000.
  • Major Program Determination – The most notable changes in determining if a program is major includes the following:
    • The minimum threshold for a major program (Type A) will increase from $300,000 to $750,000 for organizations that expend between $750,000 and $25 million in federal funds.
    • Auditors previously had to ensure that 25 percent of federal expenditures were audited for a low-risk auditee, and 50 percent for an auditee not assessed as low-risk.  For fiscal years beginning on or after January 1, 2015 those coverage requirements have been lowered to 20 percent (low-risk auditee) and 40 percent (not a low-risk auditee).
    • A significant deficiency in internal control alone will not exclude a Type A program from being considered low risk.
  • Criteria for Low-Risk Auditee – Criteria to be considered a low risk auditee have been expanded to include the following:
    • The organization must have an unmodified opinion on their schedule of expenditures of federal awards (in relation to the basic financial statements as a whole).
    • The organization must not have a going concern opinion.
  • Findings – The new guidance places an increased emphasis on repeat findings. The required elements of a finding now include a statement about whether or not a finding is a repeat finding. In addition, if an audit finding from a previous year is not fully corrected by the subsequent year, the reason for the finding’s recurrence must be included in the schedule of prior audit findings.
  • Audit Reports Publicly Available – Audit reports will now be publicly available on the Internet through the Federal Audit Clearinghouse.

Nonprofit organizations should review, with the assistance of their auditors, their obligations under programs in which federal funds are received to ensure all requirements are fulfilled and determine whether the changes to OMB Circular A-133 affect future audit requirements.

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Posted by: Christina Bell, CPA | March 10, 2015

What Should Your Church Know about Social Security?

Posted by Christina Bell, CPA

Social Security ChruchesSocial Security and Medicare taxes are collected under the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act (SECA). Many people refer to contributions to Social Security and Medicare as either FICA or SE taxes. Employers and employees equally split the current 15.3% cost of Social Security and Medicare so that each party pays 7.65%. This is referred to as the payment of FICA. Self-employed taxpayers pay the full 15.3% themselves and often refer to this is as the payment of SE, or self-employment taxes.

Churches and qualified church-controlled organizations must pay FICA for employees (with the exception of ministers who are always considered self-employed for Social Security purposes and must pay SE taxes on their ministerial earnings) unless the organization has elected to exempt itself. The term “qualified church-controlled organization” means any church-controlled Section 501(c)(3) tax-exempt organization, other than an organization that:

1) Offers goods, services, or facilities for sale, other than on an incidental basis, to the general public at other than a nominal charge that is substantially less than the cost of providing such goods, services, or facilities, and

2) Normally receives more than 25 percent of its support from the sum of governmental sources and receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in activities that are not unrelated trades or businesses.

In order for churches and qualified church-controlled organizations to become exempt from paying the employer share of FICA, the organization must file Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption from Employer Social Security and Medicare Taxes with the Internal Revenue Service (IRS). It is important to note that very specific timing rules apply to filing Form 8274. Form 8274 must be filed before the first date on which a quarterly employment tax return (Form 941) would otherwise be due from the organization. The organization may make the election only if it is opposed for religious reasons to the payment of FICA taxes.

The election can be revoked by the IRS if the organization fails to file Form W-2, Wage and Tax Statement, for two years.

Once the election is made, the organization will no longer be subject to the employer share of FICA on wages disbursed to its employees as they have shifted the burden of FICA to their employees. The organization’s employees now must pay self-employment tax on the wages received. As such, employees of the organization must attach Schedule SE (Form 1040), Self-Employment Tax, to their income tax return.

Organizations who have received exemption from FICA may give their employees a Social Security “allowance” to help them pay their self-employment taxes; however, this allowance is considered extra income and, therefore, employees must report this allowance as income for federal income tax purposes and also for self-employment tax purposes.  This is also the case for ministers, who are always treated as self-employed individuals, even if the organization is exempt from FICA. In rare cases ministers can exempt themselves from paying their self-employment tax by meeting strict IRS guidelines.

If your organization is not sure it’s handling FICA and SE issues correctly, we’d be more than happy to answer your questions. Additionally, Publication 15-A from the IRS is a great resource.

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Posted by: Lou Volpe, CPA | February 18, 2015

Substantiation Rules Are Not Meant to be Broken

Posted by Lou Volpe, CPA

Substantiation RulesThe holiday season has passed and it is now tax-filing season. During this time, charitable organizations need to make sure that they are doing everything in their power to assist their donors in following the IRS donation “substantiation rules.” Winter is already a cold and dark time of the year, so if charitable organizations doe not assist donors in following these substantiation rules, they could be leaving them out in the pitch black with frostbite. By following these substantiation rules, charitable organizations will not only provide the proof that their donors need to deduct financial gifts, but having proper documentation will also help their donors avoid any further problems with the IRS.

There are various substantiation rules and recordkeeping requirements that need to be met from both the donor and the charitable organization in order for a donor’s charitable contribution to be eligible for deduction on his income tax return.  A donor cannot claim a deduction for any monetary gift or for any unreimbursed out-of-pocket expenses related to giving services to a qualified organization unless the donor maintains adequate records of the contribution/out-of-pocket expenses in the form of either a bank record (i.e., cancelled check or credit card receipt) or a contemporaneous dated written acknowledgement from the charitable organization (i.e. receipt or letter).  For the dated written acknowledgement to be considered contemporaneous with the contribution, a donor must receive it from the charitable organization by the earlier of:  the date on which the donor actually files their income tax return for the year of the contribution; or the due date (including extensions) of the return.  One thing is for certain.  If these rules and requirements are not met, no deduction will be allowed.

When a donor makes a charitable contribution under $250, a cancelled check or credit card receipt is usually sufficient substantiation. When a donor makes cash or noncash contributions of $250 or more, the donor is required to obtain a contemporaneous dated written acknowledgement of the contribution from the recipient charitable organization.  Although the responsibility to obtain this dated written acknowledgment falls at the feet of the donor, the charitable organization can assist a donor by providing a timely written statement containing the following information:  1) name of the charitable organization, 2) amount of the cash contribution and description (but not the value) of a noncash contribution (separately itemized if one receipt is used to acknowledge two or more contributions), 3) date of the contribution, and 4) either a statement that no goods or services were provided by the organization in return for the contribution, or a description and good faith estimate of the value of goods or services that the organization provided in return for the contribution. If a religious organization provides only intangible religious benefits to a donor, the dated written acknowledgement does not need to describe or value those benefits.  It only needs to state that the religious organization provided the benefits.

If a donor receives goods or services in exchange for a single donation in excess of $75, the charitable organization must provide a contemporaneous dated written disclosure statement to the donor.  The required dated written disclosure statement must inform the donor that the amount of their contribution that is deductible for federal tax purposes is limited to the excess of money contributed over the value of goods and services provided by the organization.  The dated written disclosure must also provide the donor with a description and good faith estimate of the fair market value of the goods or services.

In addition, insubstantial goods or services a charitable organization provides in exchange for contributions do not have to be described in the dated written acknowledgement.  Goods and services are considered to be insubstantial if the payment occurs in the context of a fundraising campaign in which a charitable organization informs the donor of the amount of the contribution that is deductible and: the fair market value of the benefits received does not exceed the lesser of 2 percent of the payment of $104 (for 2014), or the payment is at least $52 (for 2014); the only items provided bear the charitable organization’s name or logo (i.e., calendars, mugs, or posters); and the cost of these items is within the limit for “low-cost articles,” which is $10.40 (for 2014).

When a donor makes a noncash contribution the donor is required to attach a completed Form 8283 to their tax return. Section A of Form 8283 should be completed by the donor to report donations of property in which the donor is claiming a deduction of $5,000 or less per item or group of similar items. Section A should also be completed by the donor to report donations of publicly traded securities. Section B of Form 8283 should be completed by the donor to report donations of property in which the donor is claiming a deduction of more than $5,000 per item or group of similar items. A written appraisal from a qualified appraiser is normally necessary before completing Section B of Form 8283; however, exceptions do apply. Those exceptions can be found in the IRS’s Instructions for Form 8283 along with other important information concerning appraisal requirements and when the appraisal must be attached to the return.

In determining whether the deduction for a group of similar items is more than $5,000, the donor should consider all items in the group, even if items in the group were donated to more than one charitable organization. However, a donor must file a separate Form 8283, Section B, for each charitable organization. Similar items of property are items of the same generic category or type, such as coin collections, paintings, books, clothing, jewelry, nonpublicly traded stock, land, or buildings.

Charitable organizations can assist their donors in meeting these substantiation rules by implementing certain best practices. These practices include providing dated written acknowledgement letters to all donors who contribute to the organization regardless of the amount contributed and verifying that the donor has obtained an appraisal, if necessary, before accepting a significant noncash contribution.

By working together to follow these substantiation rules, both donors and charitable organizations will be able to enjoy the many benefits that can be obtained.  Donors will be able to claim a charitable contribution on their income tax returns without having to worry about any future issues with the IRS during this already stressful time of the year.  And charitable organizations will be able to maintain a strong foundation with their donors and may even attract new donors to their cause due to their diligence in making sure that their donors’ charitable contributions are acknowledged and properly documented.

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Posted by: Christina Bell, CPA | January 20, 2015

Small Nonprofit? Get the Credit You Deserve!

Posted by Christina Bell, CPA

Nonprofit Healthcare - Belfint Lyons Shuman - Delaware CPA FirmIn March 2010, the Affordable Care Act was enacted to encourage small businesses and tax-exempt organizations to offer health insurance to their employees for the first time or continue the health care coverage they already provided.

The Act gave eligible nonprofits the opportunity to receive a Small Employer Health Care Tax Credit for premiums paid to provide health insurance to their employees. For tax years 2010 through 2013, the maximum allowable credit for nonprofits was 25% of premiums paid. For tax year 2014, the maximum allowable credit increased to 35% of premiums paid. The good news for eligible nonprofits is that the credit is refundable, meaning that even if the organization has no taxable income, they still may be eligible to receive the credit as a refund.

Eligibility is limited to those nonprofits that meet the following criteria:

  • Pay at least 50% of employee-only health care insurance costs for their employees.
  • Employ fewer than 25 full-time equivalent (FTE) employees. Generally, all employees who perform services are considered employees; however, special rules apply to leased employees, seasonal employees who work fewer than 120 days, and ministers.
  • Average employee wages are less than $50,000. Wages, for this purpose, are defined as wages subject to Social Security and Medicare tax withholding without considering any wage base limit.
  • Purchased health care insurance through the SHOP Marketplace, unless an exception was granted (applicable for tax years after 2013).

Eligible nonprofits can claim a credit for the years 2010 through 2013 and for any two years after that. The amount of the credit is determined by completing IRS Form 8941. Once the amount is calculated it is claimed on line 44f of IRS Form 990-T, even if the organization has no unrelated trade or business income.

The credit phases out gradually for organizations with average wages between $25,000 and $50,000, and for organizations with the equivalent of between 10 and 25 full-time employees.

A common question is “What if my nonprofit is eligible for the credit but failed to claim it in prior years?” To change a previously filed return, write “Amended Return” at the top of the Form 990-T. Also, include a statement that indicates the line numbers on the original return that were changed and provide the reason for each change. In this case, Form 8941 should also be included. Generally, the amended return must be filed within 3 years after the date the original return was due or 3 years after the date the organization filed it, whichever is later.

For more information about the Small Business Health Care Tax Credit, including detailed guidance, instructions for Form 8941, and answers to frequently asked questions, visit the IRS website.

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Posted by: Casey Hagy, CPA | November 3, 2014

Back to School with Charity Navigator

Posted by Casey Hagy, CPA

Charity NavigatorSchool is in full swing across the country, and it looks like students won’t be the only ones who will be graded out of 100 points this year. Charity Navigator, a nonprofit organization that evaluates charities in the United States and compares them to charities with similar causes, recently changed their rating system from a 70-point scale to a 100-point scale. The mission of Charity Navigator is to guide intelligent giving. By guiding intelligent giving, they hope to advance a more efficient and responsive philanthropic marketplace. Their current rating system has two dimensions:

  1. Financial Health
  2. Accountability & Transparency

Charity Navigator analyzes 24 different metrics associated with these two dimensions and assigns an overall score and overall rating. Click here to learn more about the 24 metrics analyzed during the rating process. Because our educational system is based on the 100-point system, the organization thought the change from a 70-point scoring system to a 100-point scoring system would make their rating process simpler and easier to understand. The 70-point system was used from the founding of the organization in 2002 when there was only one dimension (Financial Health) and seven metrics used to judge nonprofits. In 2011, Charity Navigator expanded their rating analysis to include the second dimension (Accountability & Transparency) which added 17 metrics. They are currently working on adding a third dimension, Results Reporting, which will evaluate the outcomes of an organization’s work and whether these outcomes are providing a social value. Charity Navigator feels the third dimension will be the most important dimension in the rating process as charities exist to promote positive change in communities and people’s lives. They hope to have the new dimension implemented by the end of 2016.

Below is the formula Charity Navigator uses to calculate an organization’s overall score, as well as a description for each rating.

Charity Navigator Formula

 

 

Casey blog

 

 

 

 

 

 

 

 

 

So, if you notice that your score is higher than 70 points, you haven’t received extra credit, but you are that much closer to the coveted four-star rating!

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Posted by: Jonathan D. Moll, CPA | September 30, 2014

Identity Crisis – When There is a Need to Change Your Nonprofit’s Name

Posted by Jonathan Moll, CPA

Nonprofit Name ChangeThe need for a nonprofit organization to change its name happens quite frequently.  The reasons vary: mergers with other organizations, additions of or changes to major programs, to distinguish from prior affiliated organizations or groups, or to improve marketability and fundraising. At times, organizations may delay this decision due to being unfamiliar with the required process. Fortunately for those looking to make the change, the process is simple and usually requires 3 steps:

Step 1 – legally change your organization’s name

This step usually begins with a board resolution to change the name. The organization must then amend its organizational documents (articles of incorporation and bylaws) and file the amended documents with the state of incorporation.

Step 2 – notify the IRS

This is normally as simple as notifying the IRS of the change when filing its next annual return (Form 990 or Form 990-EZ).

However, if an organization does not have an annual return filing requirement, qualifies to file for 990-N (e-Postcard), or is required to e-file its return, the name change should be reported by letter or fax to the IRS’ Customer Account Services. Generally, a copy of the amended articles of incorporation and proof of filing are required. The letter or fax must include:

  • Full name (both prior and new)
  • Employer Identification Number
  • Authorized signature of officer or trustee

Step 3 – notify your vendors, customers and donors

This step is often overlooked as the assumption is it will occur naturally through continued operations. However, as funding contracts or vendor contracts are renewed, the simplest process is often the most successful process. Being proactive to eliminate potential inconsistencies is usually a wise investment of time.

Despite the process being relatively straightforward and simple, I always encourage consulting your CPA when the IRS is involved.

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Posted by: Casey Hagy, CPA | September 16, 2014

What to Consider When Changing Your Mission Statement

Posted by Casey Foulk, CPA

446538765_bfa89f9875_nA wise person once said, “The only thing that is constant in life is change.” This principle lends itself well to the world of nonprofit organizations. A variety of factors cause nonprofit organizations to change. From regulatory changes to changes in demand for services to changes in leadership and administration, adaptation is a skill necessary for survival. At times, the evolution of an organization requires a nonprofit to change its mission. A mission statement describes a nonprofit’s purpose, what they intend to do, and whom they intend to serve. Most importantly, a nonprofit’s approved exempt activities must be embodied in its mission.

Below are two common reasons nonprofits may need to change their mission statement, as well as factors that need to be considered in doing so.

1. To better articulate the goal of the existing programs. The programs of the organization have not changed, but the mission statement could be rewritten to better reflect your current operations.

a. Upon approval of the new mission statement by the organization’s board, the bylaws and articles of incorporation should be evaluated to determine if they need to be updated. In addition to the possibility of amending corporate documents, the organization should update its website, marketing materials, etc.

b. Changes to the mission statement must be reported to the IRS on the organization’s Form 990 annual information return. Update Part 1 Line 1 and Part III Line 1 which ask for a description of the organization’s mission. If corporate documents including bylaws were updated, the organization should also mark “yes” to Part VI Line 4 which asks if any significant changes to governing documents have been made since the prior Form 990 was filed (an explanation should be reported on Schedule O).

2. Changes to a program or development of a new program. In addition to the steps listed above, if the mission statement needs to be updated because the operations of the organization are changing in some way, they have two options to communicate the changes to the IRS.

a. Tell the IRS. If the organization is confident that the changes to their programs or addition of a new program is in line with their approved tax-exempt purpose as specified in Section 501(c)(3) of the Internal Revenue Code, they can inform the IRS by answering “yes” to Part III Line 2 of the Form 990, which asks if the organization undertook any significant program services during the year which were not listed on the prior Form 990 (an explanation should be reported on Schedule O).

b. Ask for approval. If the changes to an organization’s program or addition of a new program are not within the scope of their original tax-exempt purpose as described on the original Form 1023 application, they should ask for approval from the IRS by requesting a private letter ruling in accordance with Revenue Procedure 2014-4. A sample format for a letter ruling request can be found here. The IRS charges an applicable user fee for the processing of a private letter ruling in accordance with Revenue Procedure 2014-8.

As always, it is best to consult your CPA for guidance on tax compliance matters.

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Posted by: Christina Bell, CPA | September 4, 2014

Rental Income – Taxable to my Nonprofit or Not?

Posted by Christina Bell, CPA

Rental Income - nonprofitsThe IRS defines unrelated business income (UBI) as income from a trade or business regularly carried on by a nonprofit organization that is not substantially related to the performance by the organization of its exempt function. One source of UBI is rental income; however, not all rental income is subject to unrelated business income tax (UBIT). So how is a nonprofit to know if the rental income they receive is subject to UBIT? A few general rules are listed below. In addition, IRS publication 598 details all rules and regulations governing UBI, including income from rental property.

  1. Rental income from real property is excluded from UBI if there is no acquisition indebtedness on the property.  Acquisition debt is defined as the unpaid debt incurred by an organization (1) when acquiring or improving property, (2) before acquiring or improving property if the debt would not have been incurred except for the acquisition or improvement, or (3) after acquiring or improving the property if the debt would not have been incurred except for the acquisition or improvement. Acquisition debt also includes liens similar to a mortgage. A lien is similar to a mortgage if titled to property encumbered by a lien for the creditor’s behalf such as a security interest under the Uniform Commercial Code.
  2. Rental income from real property that is subject to acquisition indebtedness is excluded from UBI if 85% or more of the use of the property is substantially related to the organization’s exempt purpose. The percent of usage can be determined by dividing the time the property is used for exempt purposes by the total time the property is used (hours) or by dividing the part of the property that is used for exempt purposes by the part used for all purposes (square footage).
  3. Rental income from real property that is subject to acquisition indebtedness is excluded from UBI if the lessee is a related organization. For this purpose an exempt organization is related to another exempt organization only if:
    • One organization is an exempt holding company and the other receives profits derived by the exempt holding company.
    • One organization controls the other
    • More than 50% of the members of one organization are members of the other
    • Each organization is a local organization directly affiliated with a common state, national, or international organization that is also exempt.
  4. Rental income from personal property is included as UBI and subject to UBIT.
  5. Mixed leases, meaning leases that include both real and personal property, are subject to a 10% rule.  The rule states that if rents attributable to personal property are not more than 10% of all rents received under the lease, all rents are excluded from UBI. If rents attributable to personal property are greater than 50% of all rents received under the lease all rents are included in UBI. If rents attributable to personal property are greater than 10% but less than 50% of all rents received under the lease, only the rents received attributable to the real property are excluded from UBI.

Nonprofit organizations should seek appropriate counsel or expertise when engaging in business activities, including the rental of real and personal property, to understand their consequences on UBI and ensure the entity can optimally engage in such activities without triggering any income taxes.

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