Relocating power lines can lead to tax complications for utilities.

The person asking the utility to move its lines often reimburses the utility for the cost. The utility then wonders whether it must report the cost reimbursement as taxable income. The Internal Revenue Service has been taking a hard line in such cases in the last year.

An electric utility moved a transmission line at the request of a state university that was expanding its campus. The transmission line cut across the new area the university planned to use as a campus. The utility moved it to the perimeter, and the university reimbursed the utility for the cost.

The utility took the position that it did not have to report the cost reimbursement as income on grounds that the amount was a “nonshareholder” capital contribution. The IRS has often allowed such treatment in the past, but this time it insisted on audit that the utility had to report the reimbursement as income. The case went to the IRS national office, which confirmed in a “technical advice memorandum” — or ruling to settle a dispute between a taxpayer and an IRS agent — that the utility could not avoid reporting the payment by claiming it is a capital contribution. The agency said the problem in this case is the university received a direct benefit from the payment. The case is TAM 200450035. The IRS released the text in mid-December.

The utility should have claimed it had no income under a different theory. Companies that incur moving costs can ordinarily deduct them. However, that is not true in cases where a company is assured of reimbursement by a third party. In that case, the moving costs cannot be deducted, but the reimbursement does not have to be reported as income, either. The courts were describing this principle as “well settled” as early as the 1930’s.

Keith Martin