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s There la non 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 gala of #1,141,185.54 would ensue# which at 26$ would result la a capital galas tax of #296,708.19. 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 1 mentioned that under the leasing arrangement, the LA&SLRR Co. facilities would have to be first conveyed to TJfRB Co. and that if the LVL&W Co. facilities were also convoyed to CFKR Co. and the latter sold the combined water plant for its own account to the Water District, perhaps OFRR Co. could locate capital losses to offset this capital gain and thus escape paying the capital gains tax. t 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 by. the people until February 1953, and with (3) no way of knowlngyadvance whether they will or will not be authorised. If the bond# would not be voted and the Water District eould 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. lew ever, 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, whleh 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*a 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), 1 recommend that Mr. Bennett’s proposal be held in abeyance until the bonds are voted on, and, if they are voted, until we knew whether the Water District can soil them. If the District can purchase the properties, I recommend (and assuming there would be no legal objections Involved due to LA&SLRR Co. owning 100$ of LVL&W Co. and CPRR Co. owning 50jfc of LA&SLRR Co.) that, at that time, both properties be sold to TJPRR Co. and the latter sell the combined plant to the District » and in this manner perhaps avoid payment of the capital gains tax.