Utility relocation payments had to be reported as taxable income.

The IRS is making it harder for utilities to avoid taxable income when developers merely reimburse for the cost of moving gas mains and power lines out of the way of new construction.  It addressed two fact patterns in private letter rulings that were released in late October.

In one ruling, the county government made a developer pay to expand a highway next to a site he was developing. The developer had to reimburse the local utility to move its power lines and poles.  The lines and poles will be used to supply electricity to the developer’s site.  The IRS said in Private Letter Ruling 200541036 that the cost reimbursements had to be reported as income.  In the other case, a developer had to pay the local utility to bury power lines along the perimeter of his site as a condition for a building permit.  These lines were not used to supply electricity to his site.  The IRS said in Private Letter Ruling 200541001 that the utility still had to report the cost reimbursements as income.

The rulings make for higher costs for developers, since the utilities will insist on “tax grossups” in addition to being reimbursed for their relocation costs.

The parties in such situations should explore whether it is possible the utility lines and poles were “involuntarily converted” into cash, as that would avoid tax.  They may have been if the local government would have taken them had the utility failed to move them.

Keith Martin