Letter from R. M. Sutton (Omaha) to A. E. Stoddard, March 19, 1952

(COPYOF A COPY Omaha - March 19, 1952 704-36 Mr. A. E. Stoddard: (CC - Mr. W. H. Hulsizer Mr. W. R. Rouse) This refers to your letters of December 10, 1951 and January 15, 1952, file 199, about the suggested change in the corporate set-up of the water production and distribution facilities at Las Vegas, Nevada. During the extensive correspondence there have been various comments made, but it appears that it would merely complicate the situation for me to now comment on some of these different proposals which may not materialize. Therefore, I have hereinafter limited my comments to the effect, accounting- wise, of the latest proposal, e.g.: Mr. Hulsizer's letter January 7, 1952 to Mr. Stoddard: Sheets 2 and 3, items 1 and 2: If the water facilities were conveyed to Union Pacific at recorded book costs, I concur in the understanding that such conveyance would not involve any federal income taxes. Sheet 3, item 3 and the following three paragraphs: Using the figures shown in the letter, a comparison of the federal income tax results from donating the property in contrast to selling it is shown below: -2- 1/ Donation Basis: 1. Estimated present market value of the: (a) Entire water system $3,400,000 (b) Office, shop building, equipment and automotive equipment 102,300 (c) Total $3,502,300 2. Tax saving as a donation (52% x 1(c)) $1,821,196 1/ This is conditioned on a legal determination that the Las Vegas Water District has the right to exercise a part of the sovereign power of the State of Nevada and could qualify as a political subdivision thereof within the meaning of Section 29.22(b)(4)-1, page 181, of Regulation 111. If the Water District could not so qualify, the amount of donation that could be taken as a tax deduction would be limited to the book value less accrued depreciation, and the tax saving would in no wise be comparable with the advantage of the sale basis. Sale Basis J. Estimated sale price at the average of $2,000,000 and $2,500,000 $2,250,000 4. Less estimated book value 1.400.000 5. Gain for tax purposes (3 minus 4) $ 850,000 6. Capital gains tax (26% x 5) $ 221,000 7. Net profit (3 minus 6) $2,029,000 Result 8. Sale basis over donation basis (7 minus 2) $ 207,804 The foregoing tabulation indicates that even if the Water District is a legal political subdivision, the donation basis is not as favorable financially as the sale basis. The foregoing, which covers the latest suggestions at hand, will probably suffice for the present; if there are any further developments involving federal income taxes or accounting features, we will be glad to comment further. (Sgd) R. M. Sutton