upr000204 297

Mr. Wm. Reinhardt 8 December 4, 1951 for his comments with respect to the capital structure which he would consider advantageous for the distribu­tion company to have from a rate standpoint. I attach for your information copy of Mr. W e h e ^ letter of No­vember 2 3 , 1951. I have some comments in addition to those made by Mr. Wehe with respect to some of the prob­lems involved. One of the important problems is whether there will be an income tax disadvantage in making the transfer. I agree with Mr. Wehe that the water production facilities of the Railroad Company should be transferred to the Wa­ter Company at their depreciated book cost so that pre­sumably there would be no capital gain involved in the transfer. If it were decided to transfer the production facilities at their so-called original cost as determined in the Wehe report, there probably would be some capital gain involved. However it is my understanding that under Section 112(b)(5) of the Internal Revenue Code no gain or loss is recognized if property is transferred to a corpo­ration which is controlled by the transferror immediately after the transfer. I also believe that a transfer of the assets of Las Yegas Land and Water Company, other than wa­ter production and distribution facilities, to another sub­sidiary corporation could be accomplished without income tax consequences under Section 112(g) of the Internal Rev­enue Code. Mr. Wehe points out that if the water utility operations were conducted by a separate corporation, it would lose the benefit of offsetting its losses in poor years against income from the other operations formerly conducted by Las Yegas Land and Water Company. This is probably true except in years when the Railroad system as a whole would decide to file consolidated returns. The income tax problem should be given careful consideration by others more familiar with tax matters than I am before a definite conclusion is reached. It would be advantageous from a rate standpoint for the reorganized water company to have a capital structure which would enable it to demonstrate in the usual manner the rate of return to which that company is entitled. One of the tests is the cost of money test, which is deter­mined by the cost of interest on borrowed capital and a