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Mr. W, R. Roust 2 . Noverabsr 11, 1952 time. However X do not think this difficulty should control the ultimate decision. Item 4 : My suggestion that the interest on the railroad advances be charged is based upon the fact that this practice would be beneficial in rate cases. If tax disadvantages outweigh this advantage, the practice should not be adopted. Item 5: No comment is necessary. The other comments in Mr, Sutton’s letter are not 1- temiaed, and I shall be unable to refer to them by item numbers. Mr. Sutton’s suggestion that the rooming-house and e-quipment be transferred to the UPRRCo. is undoubtedly intended to suggest a transfer to the L&&SL so that the property would automatically fall under the lease and be operated by the UPRRCo. I see no objection to this even though other facilities are transferred to a subsidiary. If all of the properties of the LVL&W Company other than its water department are transferred to the LA&SLRRCo., Mr. Sutton’s suggestion would be automatically carried out. I also see no objection to his suggestion that the water system at Yermo, California, be transferred to the LA&SL and operated by the UPRRCo. under Its lease. It appears from Mr. Sutton’s letter that there would be a capital gain in the sale of the combined water plant to the District whether the sale is made by the Railroad or by the LVL&W Company. The disadvantage in making the sale by the LVL&W Company appears to be that it is doubtful that it could locate a capital loss to offset the capital gain, whereas apparently such a capital loss could be readily located by the UPRRCo. This is a very important consideration, As you will note, my suggestion for transfer of, the water production facilities to the LVL&W Co. was made on the assumption that the sale of the combined plant by the LVL&W to the District would nob result in substantial tax disadvantages. If there are substantial tax disadvantages the management may not desire to carry out the plan suggested by me. However It appears to me that ths