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Mr. Wm. Reinhardt 8 December 4, 1951 f o r b is comments w ith r e s p e c t t o th e c a p i t a l s t r u c tu r e w h ich he would c o n s id e r advan tageou s f o r th e d i s t r i b u ­t i o n company to have from a r a t e s ta n d p o in t. I a tta c h f o r y ou r in fo r m a tio n copy o f M r. ife h e ’ s l e t t e r o f No­vem ber 23, 1951* X have some comments in a d d it io n to th o s e made by M r. ffehe w it h r e s p e c t t o some o f th e prob­lems in v o lv e d . One o f th e im p o rta n t problem s I s w h eth er t h e r e w i l l be an income t a x d is a d v a n ta g e in m akin g th e t r a n s f e r . I a g r e e w it h M r. w©he t h a t th e w a te r p r o d u c tio n f a c i l i t i e s o f th e R a ilr o a d Company should be t r a n s fe r r e d t o th e Wa­t e r Company a t t h e i r d e p r e c ia t e d book c o s t so th a t p r e ­sumably t h e r e would be no c a p i t a l g a in in v o lv e d in th e t r a n s f e r . I f i t w ere d e c id e d to t r a n s f e r th e p ro d u c tio n f a c i l i t i e s a t t h e i r s o - c a l l e d o r i g i n a l c o s t as d e te rm in e d in th e Wehe r e p o r t , t h e r e p r o b e b ly w ould be some c a p i t a l g a in in v o lv e d . H ow ever i t I s my u n d ersta n d in g t h a t under S e c t io n 1 1 2 (b )(5 ) o f th e I n t e r n a l Revenue Code no g a in o r lo s s i s r e c o g n is e d i f p r o p e r t y i s t r a n s fe r r e d to a co rp o ­r a t io n w h ich i s c o n t r o lle d by th e t r a n s f e r r o r im m e d ia te ly a f t e r th e t r a n s f e r . I a ls o b e l i e v e t h a t a t r a n s f e r o f th e a s s e ts o f Las V ega s Land and W a te r Company, o t h e r than wa­t e r p ro d u c tio n and d i s t r i b u t i o n f a c i l i t i e s , t o a n o th e r sub­s i d i a r y c o r p o r a t io n co u ld be accom p lish ed w ith o u t income ta x consequ en ces under - e c t io n 1 1 2 (g ) o f th e I n t e r n a l Rev­enue C ode. M r. Wehe' p o in ts o u t th a t i f th e w a te r u t i l i t y o p e r a t io n s w ere condu cted by a s e p a r a te c o r p o r a t io n , i t would lo s e th e b e n e f i t o f o f f s e t t i n g i t s lo s s e s in p o o r y e a r s a g a in s t income from th e o t h e r o p e r a t io n s fo r m e r ly condu cted by Las Vegas Land and W ater Company. T h is i s p r o b a b ly t r u e e x c e p t in y e a rs when th e R a ilr o a d system as a w h ole would d e c id e t o f i l e c o n s o lid a t e d r e t u r n s . The income t a x prob lem sh ou ld be g iv e n c a r e f u l c o n s id e r a t io n by o th e r s more f a m i l i a r w ith t a x m a tte r s than I am b e fo r e a d e f i n i t e c o n c lu s io n I s re a c h e d . I t would be ad van tageou s from a r a t e s ta n d p o in t f o r th e r e o r g a n iz e d w a te r company t o have a c a p i t a l s t r u c t u r e w h ich would e n a b le i t t o d em on strate in th e u su a l manner th e r a t e o f r e tu r n to w hich th a t company I s e n t i t l e d . One o f th e t e s t s i s th e c o s t o f money t e s t , w hich i s d e t e r ­mined by th e c o s t o f i n t e r e s t on borrow ed c a p i t a l and a