UTILITY RELOCATION PAYMENTS continue to cause trouble at the IRS. A city worked with a private developer to build a mix of single-family homes, town houses, condominiums and rental units on a parcel of land.Two high-pressure gas pipelines ran across the land and had to be moved to make way for the construction.The city reimbursed the pipeline company for the cost of moving them. The IRS ruled privately that the utility had to report the reimbursements as income. The utility had insisted that the city pay a “tax gross up”in addition to reimbursing it for the cost of the move. The city argued that the reimbursement was similar to government grants that are treated as nonshareholder “contributions to capital.” Such grants are not taxable income. The IRS disagreed. It said a payment must have as its primary motivation “the benefit of the public as a whole” in order to fall in this category. It said this one did not because the motivation was to help a private developer. The case is addressed in Private Letter Ruling 200647002.The IRS made the ruling public in late November. The parties asked the wrong question of the IRS. A utility can normally deduct its costs to move equipment.However, under a line of cases that the courts were describing as “well established” by the 1930’s, moving costs cannot be deducted when the company will be reimbursed for them, but the reimbursement does not have to be reported as income,either. In addition, if the city could have used its power of eminent domain to force the utility to move the gas pipelines, then it is possible that the pipelines were “involuntarily converted.” Compensation paid in such an involuntary conversion does not have to be reported as income, provided it is reinvested in similar property. Spending on the move would have been considered such a reinvestment.