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Contributions in Aid of Construction: IRS final regulations
Author(s) -
Kermode Danny P.
Publication year - 2002
Publication title -
journal ‐ american water works association
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.466
H-Index - 74
eISSN - 1551-8833
pISSN - 0003-150X
DOI - 10.1002/j.1551-8833.2002.tb09436.x
Subject(s) - liability , revenue , database transaction , business , service (business) , transaction cost , finance , risk analysis (engineering) , computer science , marketing , programming language
Early in 2001, the Internal Revenue Service released its new rules on contributions in aid of construction (CIAC). CIAC provides water utilities a method of tax‐free financing for plant improvements, but only if the transactions are structured to be consistent with the new rules. If a utility fails in some way to properly configure the transaction, it may be exposed to an unexpected tax liability. In some cases, the liability could be quite large. The CIAC rules affect all economically regulated water utilities operating in the corporate form. Even though the rules can be quite beneficial to water utilities, few articles have covered these financial management issues. This article attempts to fill that void by providing utility managers with information necessary to discuss and maximize the use of nontaxable CIAC financing without inadvertently triggering income tax complications. Because these rulings are new, issued in 2001, the management and advisors of regulated investor‐owned water companies must become acquainted with them to provide service at the lowest cost. Kermode provides a detailed overview of the requirements and accounting procedures for the new regulations. The article covers the sometimes complex characteristics of CIAC and also addresses in more depth the four types of transactions that result in a qualified transfer of CIAC.