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^ There is now attached a similar statement which is based on actual figures as of August 31, 1952, which shows that if the combined water system is sold for $2,500,000 a capi­tal gain of $1,141,185*34 would ensue, which at 26$ would result in a capital gains tax of f296,?0$.19* These figures are also subject to adjustment for reasons shown in the footnote on the statement• * 4 * On page 2 of my letter of October 15, 1952 I mentioned that under the leasing arrangement, the LA&SLRR Co* facilities would have to be first conveyed to UPRR Co* and that if the LVL&W Co* facilities were also conveyed to UPRR Co* and the lat­ter sold the combined water plant for its own account to the Water District, perhaps UPRR Co. could locate capital losses to offset this capital gain and thus escape paying the capital gains tax. I also stated that if the combined water plant is sold by LVL&W Co*, it is very doubtful that it could locate capital losses to offset such a large capital gain. At this time, this entire matter appears rather nebu­lous in that the purchase offer is subject to (1) the ability of the Water District to sell the bonds, which (2) will not be voted on bXi& he people until February 1953, and with (3) no way of knowing/aavance whether they will or will not be authorised. If the bonds would not be voted and the Water District could not acquire the combined properties, there would be no ob­jection from an accounting standpoint to selling the LA&SLRR Co. facilities to LVL&W Co., with the latter to own and operate only the combined water plant after divesting itself of all other fa­cilities to other companies. However, if the LA&SLRR Co. facilities are sold at this time to LVL&W Co. and the bonds were subsequently voted and sold, and the $2,500,000 offer accepted, the latter would then sell the combined water plant, which would probably result in the payment of a capital gains tax of some $300,000. Accordingly, due to ad­verse tax reasons, it appears that Mr. Bennett’s suggestion should not be placed in effect at this time. As an alternate suggestion (and assuming it is the in­tention to sell the combined water plant for the amount offered if the bonds are voted and sold), X recommend that Mr. Bennett’s proposal be held in abeyance until tBS'T&onds-are~voted on, ahd'i “ if they are voted, until we know whether the Water District can sell them. If the District can purchase the properties, X recom­mend (and assuming there would be no legal objections involved due to LA&SLRR Co. owning 100$ of LVL&W Co* and UPRR Co. owning 50$ of LA&SLRR Co.) that, at that time, both properties be sold to UPRR Co. and the latter sell the combined plant to the Dis­trict , and in this manner perhaps avoid payment of the capital gains tax.