T.C. Memo. 1995-499
UNITED STATES TAX COURT
EPCO, INC. AND SUBSIDIARIES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25248-93. Filed October 17, 1995.
Juan D. Keller, Paul P. Weil, and Philip B. Wright,
for petitioner.
James A. Kutten, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: This matter is before the
Court on petitioner's Motion for Reconsideration under Rule 161
and Motion to Vacate Decision under Rule 162. The motions relate
to our Memorandum Findings of Facts and Opinion filed June 12,
1995 (T.C. Memo. 1995-249), and our decision entered on June 14,
- 2 -
1995. The facts and holding of that opinion are incorporated
herein by this reference.1
Brooks McArthy (McArthy) sought to develop a trailer park on
land he owned to be called Brookshire Village Mobile Home Park
(Brookshire). McArthy utilized the resources of Eugene Fribis
(Fribis), an engineer consultant and owner of Epco, Inc.
(petitioner), the common parent of an affiliated group that
includes House Springs Sewer Co. (House Springs) and Imperial
Utility Corp. (Imperial). In particular, Fribis advised McArthy
regarding the sewer system Brookshire would require. McArthy
later opted for an underground sewage pipe extension to County
Club Manor (Manor), a sewage treatment facility operated by
Imperial. This method required the construction of pipes and
expansion of Manor to handle the additional sewage. The cost of
this method totaled $540,000. Each mobile home was required to
pay a $400 "contribution in aid of construction fee" and a
monthly service charge of $18 for sewage treatment.2
Imperial contracted with McArthy to build a sewer system for
Brookshire. Imperial agreed to build an underground wastewater
collection pipe extending from Manor to Brookshire. McArthy
agreed to pay Imperial $200,000 in "tap-on fees" ("contributions
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended. All Rule references are to
the Tax Court Rules of Practice and Procedure.
2
The term "tap-on fee" is commonly used interchangeably
with the term "contribution in aid of construction".
- 3 -
in aid of construction") and deposited this amount in an
interest-bearing checking account in the names of McArthy and
Imperial at Lemay Bank & Trust Co. The account bore McArthy's
Social Security number as the taxpayer identification number, and
interest earned on the account was paid to McArthy. Funds could
be withdrawn from the bank by checks signed by both Fribis, as
president of Imperial, and McArthy.
Imperial contracted with McClanahan Contracting
(McClanahan), a partnership of which Fribis was a partner, to
install the sewer main-line extension and expand Manor. The cost
of extending the main-line from Manor to Brookshire was $350,000.
Imperial paid approximately $150,000 of this cost and the
remainder consisted of the $200,000 from the escrow account. The
expansion of Manor cost $190,000.
The escrowed funds were credited toward the $400 per pad
"contribution in aid of construction fee". As such, Imperial did
not charge McArthy a fee to connect each mobile home to the sewer
system. From the escrow account, $164,375 was disbursed in 1988
and $35,625 was disbursed in 1989 to subcontractors and
contractors working on the construction of the sewer pipeline,
including Price Bros., Klueter Bros., McClanahan, and Fred Weber
Inc. Imperial now owns the sewer line extension.
On its 1988 Federal income tax return, petitioner included
in gross income the $164,375 disbursed from the escrow and
claimed depreciation in connection with those disbursements.
- 4 -
Petitioner did not report the $35,625 on its 1989 Federal income
tax return. In her notice of deficiency, respondent determined
that the $35,625 was includable in petitioner's income for 1989
as "contributions in aid of construction" under section 118.
At trial and in its briefs, petitioner argued that: (1) The
contribution by McArthy (escrowed funds) is not a "contribution
in aid of construction" within the meaning of section 118(b), but
a nontaxable contribution to the capital of Imperial; (2) if the
payment is a "contribution in aid of construction", including
such amount in the income of a corporation would violate the
Sixteenth Amendment; and (3) in the alternative, the fair market
value of McArthy's contribution should be based on the revenue
generated by the sewer line rather than the cost of construction.
In Epco, Inc. & Subs. v. Commissioner, T.C. Memo. 1995-249,
we found that the funds disbursed from the escrow account were
"contributions in aid of construction" of the sewer pipeline,
and, therefore, we held that the amounts disbursed are includable
in petitioner's income. Id. We further held, based on the
legislative history of nonshareholder contributions, that
including in income "contributions in aid of construction" did
not violate the Sixteenth Amendment. With respect to
petitioner's alternative argument, we stated:
Finally, we reject petitioner's alternative argument
that the amount of income includable should be the value of
the main-line extension computed using the discounted cash-
flow method based upon projected revenue. Imperial received
cash. Imperial did not receive an operating sewer system,
- 5 -
and, therefore, the projected income stream from the
expansion of sewage capacity is irrelevant. The fact that
Imperial used the cash to construct the main-line extension
does not make the contribution equivalent to the asset
constructed. We note that petitioner's reliance on the
Staff of Joint Comm. on Taxation, General Explanation of the
Tax Reform Act of 1986 (J. Comm. Print 1987), relating to
section 118, is misplaced. [Id.].
In its motions to vacate and for reconsideration, petitioner
argues that the findings with respect to its alternative argument
are factually incorrect in that petitioner did not receive cash,
but, rather, received a sewer line. Petitioner also argues that
because its cost of the sewer line extension was greater than the
amount of contributions by McArthy, it realized no income on the
exchange. We shall grant petitioner's Motion for Reconsideration
and reexamine this argument.
Petitioner argues that the funds from the escrow account
were never paid to petitioner, but, instead, were disbursed under
the joint signatures of Fribis, as president of Imperial, and
McArthy. Petitioner states that the escrow agreement prevented
it from receiving cash. Based on a reexamination of the record,
we agree that petitioner did not receive "cash" from the escrow
account in the sense of a disbursement payable to petitioner.
However, in light of the fact that the disbursements were only
made under the signatures of Fribis and McArthy to pay entities
to which Imperial was contractually bound, and the fact that
Imperial is now the owner of the pipeline, we conclude that the
reasoning in Epco, Inc. & Subs. v. Commissioner, supra, is
- 6 -
correct. While petitioner may not have been given cash directly
from the escrow account, petitioner received the benefit of the
funds disbursed in the same manner as if the funds had been
deposited directly into its own account. To argue otherwise
would be an exercise in semantics, and it is well established
that the substance of the transaction, rather than its form, must
govern the tax consequences. Garcia v. Commissioner, 80 T.C. 491
(1983) (citing Commissioner v. Court Holding Co., 324 U.S. 331
(1945); Gregory v. Helvering, 293 U.S. 465 (1935); Biggs v.
Commissioner, 69 T.C. 905 (1978), affd. 632 F.2d 1171 (5th Cir.
1980)).
Petitioner contends that "an escrow not under the control of
the taxpayer is neither a vehicle for the realization of income
nor the receipt of the escrow proceeds themselves." In support
thereof, petitioner cites the following cases: Swaim v. United
States, 651 F.2d 1066 (5th Cir. 1981); Sprague v. United States,
627 F.2d 1044 (10th Cir. 1980); Biggs v. Commissioner, supra;
Carlton v. United States, 385 F.2d 238 (5th Cir. 1967); Garcia v.
Commissioner, supra; Barker v. Commissioner, 74 T.C. 555 (1980);
Brauer v. Commissioner, 74 T.C. 1134 (1980); Fredericks v.
Commissioner, T.C. Memo. 1994-27; Grannemann v. United States,
649 F.Supp. 949 (E.D. Mo. 1986).
Most of the cases cited by petitioner have a common thread;
namely, a discussion of or reference to the doctrine of
constructive receipt. The doctrine generally provides that a
- 7 -
taxpayer realizes income without actual receipt if such income is
available to the taxpayer and the availability thereof is not
subject to substantial limitations. Sec. 1.451-2(a), Income Tax
Regs. The doctrine of constructive receipt is not applicable in
this case because the escrowed funds were, in fact, disbursed,
and, as such, provided a direct benefit to petitioner. The
remaining cases cited by petitioner involve the issue of
exchanges under section 1031.3 All of those cases are
inapposite.
In addition, petitioner argues that we erred when we stated
that petitioner's reliance on the Staff of Joint Comm. on
Taxation, General Explanation of the Tax Reform Act of 1986 (J.
Comm. Print 1987), relating to section 118 (the General
Explanation), is misplaced. Petitioner argues that because it
received a sewer line, not cash, the portion of the General
Explanation concerning valuation is relevant to the determination
of the fair market value of the sewer line, and, as a result, to
the determination of the amount of income petitioner must
recognize. The funds in the escrow account were earmarked as
"tap-on fees" or "contributions in aid of construction". These
funds went to those entities hired by petitioner to build a
pipeline that petitioner now owns. Clearly, petitioner received
3
Carlton v. United States, 385 F.2d 238 (5th Cir. 1967);
Brauer v. Commissioner, 74 T.C. 1134 (1980); Biggs v.
Commissioner, 69 T.C. 905 (1978), affd. 632 F.2d 1171 (5th Cir.
1980).
- 8 -
from McArthy not a sewer pipeline, but, rather, the direct
benefit of the cash disbursements.4 Thus, as we stated in our
opinion in Epco, Inc. & Subs. v. Commissioner, supra, the General
Explanation is irrelevant to the facts in this case.
Having reconsidered petitioner's alternative argument and
addressed the merits thereof, we deny petitioner's Motion to
Vacate.
To reflect the foregoing,
An appropriate order will
be issued.
4
One of the direct benefits received by petitioner as a
result of McArthy's contributions was that the funds went to pay
contractors and subcontractors to whom petitioner was directly
liable.