                       T.C. Memo. 1999-103



                     UNITED STATES TAX COURT



           EPCO, INC. AND SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*




     Docket No. 25248-93.                Filed March 31, 1999.


     Juan D. Keller and Philip B. Wright, for petitioner.

     James A. Kutten, for respondent.



   SECOND SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION


     GOLDBERG, Special Trial Judge:     This case is before the

Court on remand from the Court of Appeals for the Eighth Circuit.

EPCO, Inc. & Subs. v. Commissioner, 104 F.3d 170 (8th Cir. 1997),




     *    This opinion supplements our opinion in EPCO, Inc. &
Subs. v. Commissioner, T.C. Memo. 1995-249.
                               - 2 -


affg. in part, vacating in part, and remanding T.C. Memo. 1995-

249 and T.C. Memo. 1995-499.

     The issue for decision is the proper amount of contribution

in aid of construction income includable in petitioner's 1989

gross income.   In order to decide this issue, we are required to

determine the fair market value of a sewer line petitioner

constructed using amounts contributed to petitioner as a

contribution in aid of construction.

     Petitioner, using the capitalization of income method of

valuation, contends that the sewer line has a fair market value

of $80,000 and that petitioner recognized no contribution in aid

of construction income in 1989.   Respondent, using the cost

method of valuation, contends that the sewer line has a fair

market value of $540,000 and that petitioner recognized $200,000

in contribution in aid of construction income in 1989.

     In EPCO, Inc. & Subs. v. Commissioner, T.C. Memo. 1995-249

(EPCO I), this Court held that escrow amounts disbursed in the

construction of a sewer line constituted a contribution in aid of

construction under section 118(b), and, as such, were includable

in petitioner's income.1   We further held that petitioner




     1
           Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 - 3 -


received cash in the transaction and did not receive a sewer

line.

     In a supplemental memorandum opinion, we considered both

petitioner's Motion for Reconsideration under Rule 161 and Motion

to Vacate Decision under Rule 162 and held that, while petitioner

did not receive "cash" per se from the escrow account, petitioner

received the benefit of the escrow funds in the same manner as if

the funds had been deposited directly into petitioner's own

account and were used to pay contractors to whom petitioner was

directly liable.   See EPCO, Inc. & Subs. v. Commissioner, T.C.

Memo. 1995-499 (EPCO II).

     In EPCO, Inc. & Subs. v. Commissioner, 104 F.3d 170 (8th

Cir. 1997), the U.S. Court of Appeals for the Eighth Circuit

affirmed in part, vacated in part, and remanded our decision in

EPCO I.   The Court of Appeals affirmed our finding that

petitioner received a contribution in aid of construction under

section 118(b), which was includable in petitioner's gross income

for 1989.   However, the Court of Appeals held that whatever

contribution in aid of construction income petitioner received in

1989 was based on the value of a completed sewer line and not on

the disbursal of escrow funds.    The case was remanded to the Tax

Court to determine the fair market value of the completed sewer

line.
                               - 4 -


     At the direction of the Court of Appeals, we now undertake

to determine the fair market value of that sewer line in order to

determine the amount of income, if any, which should be

recognized by petitioner as a contribution in aid of construction

for the 1989 tax year.

                         FINDINGS OF FACT

     The findings of fact are set forth in EPCO I and are

incorporated herein by this reference.   The stipulations and

exhibits are also incorporated herein by this reference.    For

convenience, we shall only set forth the facts necessary to

clarify the ensuing discussion.

     Petitioner is an affiliated group of corporations which

filed a consolidated Federal corporate income tax return for

1989.   For the year at issue, EPCO, Inc. (EPCO), a Missouri

corporation, was the common parent of an affiliated group which

included Imperial Utility Corp. (Imperial), a Missouri

corporation 100 percent owned by EPCO.   During the year at issue,

Eugene Fribis (Mr. Fribis) and his wife owned all of the stock of

EPCO, and Mr. Fribis served as the president of both EPCO and

Imperial.   Imperial engages in the business of sewage collection

and treatment and is regulated by the Missouri Public Service

Commission (PSC).

     Sometime in 1986 or 1987, Brooks McArthy (Mr. McArthy), a

real estate developer, planned to develop a trailer park
                               - 5 -


consisting of 266 trailer pads.   The trailer park, named

Brookshire Village Mobile Home Park (Brookshire), was to be

developed in three stages.

     Before commencing development of Brookshire, Mr. McArthy

consulted Mr. Fribis in order to arrange sewer service.     The

method of providing sewer service had to be approved by the

Missouri Department of Natural Resources (DNR), an agency of the

State of Missouri responsible for water quality.   Mr. Fribis told

Mr. McArthy that the sewage from Brookshire could be treated by

using either an onsite lagoon, an onsite sewage treatment plant,

or an underground sewer line connecting Brookshire to a

centralized treatment plant.

     Mr. McArthy ultimately chose the third sewage treatment

option which involved the construction of a sewer line connecting

Brookshire to Imperial's Country Club Manor sewage treatment

facility (treatment facility), 2-1/2 miles north of Brookshire.

Since the northern boundary of Brookshire abutted a tract of

undeveloped land owned by Interstate Development Corp.

(Interstate), the completed sewer line would also bisect

Interstate's land, thereby providing sewer service to any future

development.

     In order to determine the economic feasibility of the

project, Mr. Fribis determined the costs of construction,

operation, and maintenance of both the sewer line and treatment
                                 - 6 -


facility upgrade and compared these expenses to the projected

revenue of the sewer line by using a formula he called a "life

cycle cost analysis".

     Imperial is a regulated utility and its revenue from sewage

collection and treatment is regulated by the PSC.    At the time

petitioner decided to construct the sewer line, the PSC tariff

provided for a $400 "contribution in aid of construction fee" and

a monthly service charge of $18 for each mobile home.    The $400

fee was a one-time fee charged to occupied mobile home pads,

regardless of the existence of a sewer line.    Imperial was

permitted to charge customers for the cost of a sewer line

connecting the customers' property to petitioner's treatment

facility and the cost of upgrading that treatment facility to

meet any increased waste flow.

     On March 11, 1988, Imperial entered into a contract entitled

"Agreement for Sewer Service New Construction" (McArthy-Imperial

agreement) with Mr. McArthy and Interstate.    Pursuant to the

McArthy-Imperial agreement, Imperial agreed to build a 2-1/2-mile

sewer line extending from Brookshire through Interstate's

property to the treatment facility, thereby allowing service to

both properties.   Imperial also agreed to upgrade its treatment

facility to handle the anticipated increase in waste.    The

McArthy-Imperial agreement also provided for Mr. McArthy to pay

Imperial $200,000 in "tap-on fees in accordance with the Sewer
                               - 7 -


Company's tariff on file with the Missouri Public Service

Commission".2

     Additionally, the McArthy-Imperial agreement provided that

the escrow deposit would be credited toward the $400 per pad

"contribution in aid of construction fee" permitted by the Sewer

Service Rules.   As a result, Imperial waived fees, which are

usually borne by the customer, to connect individual mobile homes

in Brookshire to the sewer system in exchange for the $200,000

escrow contribution.

     According to the McArthy-Imperial agreement, Mr. McArthy

deposited the $200,000 into an escrow account.   In addition, Mr.

McArthy and Interstate agreed that $100,000 of Mr. McArthy's

deposit was for the development contemplated by Interstate, with

the understanding that Interstate would later reimburse Mr.

McArthy.   Pursuant to the agreement, Interstate executed a deed

of trust in the amount of $100,000 in favor of Mr. McArthy.

Interstate subsequently paid Mr. McArthy the $100,000.

     Imperial contracted with McClanahan Contracting

(McClanahan), a partnership of which Mr. Fribis was a partner, to

construct the sewer line and upgrade the treatment facility at a



     2
          Mr. Fribis drafted the contract and often used the
terms "tap-on fee" and "contribution in aid of construction"
interchangeably. By reference to the Sewer Service Rules, Mr.
Fribis intended that the term "tap-on fee" used in the contract
would correspond to the term "contribution in aid of
construction" used in the Sewer Service Rules.
                                - 8 -


total cost of $540,000.    The cost of the sewer line connecting

Brookshire to the treatment facility was $350,000, with $150,000

of those construction costs paid by Imperial and the remaining

$200,000 paid from the escrow fund.     Imperial paid the total

$190,000 cost of the treatment facility upgrade.     Construction of

the sewer line and the upgrade of the treatment facility was

completed in April 1989.

     At the time that McClanahan was constructing the sewer line

in 1988 and 1989, Fribis-Wiley, a civil engineering firm of which

Mr. Fribis is president, was preparing plats for the development

of the Interstate property.    Interstate called its proposed

development Pine View Acres (Pine View) and initially planned to

develop 326 lots for single family residences.     Fribis-Wiley

prepared the plans for Pine View's first phase of development,

which ultimately included 37 DNR-approved lots.

     The sewer lines within Brookshire were constructed at Mr.

McArthy's expense, and Mr. McArthy retained title to them and

responsibility for their maintenance.     Imperial owns the sewer

line connecting Brookshire to the treatment facility.     The sewer

line now serves additional customers other than those in

Brookshire and Imperial continues to receive fees from these

additional customers.

     Of the $200,000 in escrow funds, $164,375 was disbursed in

1988 and $35,625 was disbursed in 1989.     Petitioner included in
                                - 9 -


income the $164,375 of disbursements made from the escrow account

during 1988 on its 1988 Federal corporate income tax return.

Petitioner did not include in income the 1989 disbursements from

the escrow account totaling $35,625 on its 1989 Federal corporate

income tax return.

     Petitioner included the $164,375 paid to "Price/McClanahan"

in its cost basis of the sewer line (referred to by petitioner as

the "Brookshire Trunk Sewer Line") on the depreciation worksheet

attached to its corporate income tax return and, with regard to

this amount only, claimed depreciation in the amount of $6,164.05

for 1988 and $11,866.27 for the 1989 tax year.   Petitioner

claimed a total cost basis in the Brookshire Trunk Sewer Line in

the amount of $373,514.44 on its 1989 consolidated Federal

corporate income tax return3 and claimed total depreciation on

the sewer line in the amounts of $15,279.92 and $30,757.31 for

the 1988 and 1989 tax years, respectively.

                               OPINION

General Discussion

     Gross income generally means all income from whatever source

derived.   See sec. 61(a).   Section 118(a) provides an exception

to the general rule and states:   "In the case of a corporation,


     3
          There is no explanation in the record as to the
difference between the cost basis of the sewer line as reported
on petitioner's corporate income tax return and the stipulated
cost of $350,000.
                                - 10 -


gross income does not include any contribution to the capital of

the taxpayer."    Section 118(b), however, excludes a "contribution

in aid of construction" from the definition of a "contribution to

the capital of the taxpayer".

     A taxpayer must include in gross income the value of

property received.   See sec. 1.61-1(a), Income Tax Regs.   The

determination of fair market value is a question of fact to be

resolved from a consideration of all relevant evidence in the

record and the appropriate inferences to be drawn therefrom.      See

Estate of Jung v. Commissioner, 101 T.C. 412, 423-424 (1993).

"Fair market value" has been defined by this Court to mean the

price at which property would change hands between a willing

buyer and a willing seller, neither being under any compulsion to

buy or sell and both having a reasonable knowledge of the

relevant facts.    See Estate of Newhouse v. Commissioner, 94 T.C.

193, 217 (1990).



Methods of Valuation

     There are generally three kinds of valuation methods used to

determine fair market value: (1) The comparable sales method, (2)

the capitalization of income method, and (3) the cost method.

See Marine v. Commissioner, 92 T.C. 958, 983 (1989), affd.

without published opinion 921 F.2d 280 (9th Cir. 1991).
                                - 11 -


     Both parties agree that the comparable sales method of

valuation is not applicable to the valuation of the sewer line in

question because there are no sales of sewer lines to which we

can compare it.    Two generally accepted methods of valuation

remain:    (1) The capitalization of income method; and (2) the

cost method.

Respondent’s Position

     Respondent contends that the sewer line should be valued by

using the cost method of valuation.      The total cost of the sewer

line and treatment facility upgrade was $540,000.     Included in

this amount was the $350,000 cost of the sewer line itself,

$200,000 of which was financed by the deposit in escrow.

Imperial paid the total $190,000 cost of upgrading the treatment

facility.     Therefore, if we accept respondent’s cost valuation

approach, since the fair market value of the sewer line and

treatment facility upgrade is the cost, in this case, $540,000,

and Imperial contributed only $340,000 towards its construction

and upgrade, all of the $200,000 expended from escrow would be

includable in petitioner’s income.

Petitioner’s Position

     Petitioner contends that the capitalization of income method

of valuation is the only fair and accurate method for determining

the fair market value of income-producing property like a sewer

line.     The capitalization of income method determines fair market
                                - 12 -


value by determining an applicable discount rate and discounting

to present value a property's anticipated income and any salvage

value which may remain at the end of the property's economic

life.     See United States v. Dresser Indus., Inc., 324 F.2d 56

(5th Cir. 1963); Concord Control, Inc. v. Commissioner, 78 T.C.

742 (1982), affd. in part and remanded 615 F.2d 1153 (6th Cir.

1980).

        Using the capitalization of income method of valuation,

petitioner values the sewer line at $80,000.     As we understand

petitioner’s argument, since petitioner contends the fair market

value of the sewer line is $80,000 and petitioner contributed

$150,000 of its own funds to construct the sewer line, none of

the $200,000 expended from escrow would be includable in income

for 1989.

Expert Testimony

        In support of the use of the capitalization of income method

of valuation, petitioner used Daniel Lee Jones (Mr. Jones) as an

expert witness.     Petitioner contends that Mr. Jones is an expert

in the valuation of the subject sewer line based on his knowledge

and expertise.     Respondent disagrees and objects to the receipt

of Mr. Jones' report into evidence.      The report was received into

evidence subject to respondent's objections noted in the record.

        Mr. Jones is a certified public accountant (C.P.A.) with the

certified public accounting firm of Daniel Jones & Associates,
                               - 13 -


which provides accounting services to EPCO.      In the course of his

firm's work for EPCO, Mr. Jones reviews individual financial

statements and corporate tax returns of EPCO and its

subsidiaries.    Mr. Jones' involvement with petitioner began in

1992.

     In order to become familiar with petitioner's operations in

1988 and 1989, Mr. Jones reviewed EPCO's financial data from

those years.    The data consisted of historical financial

statements and Federal income tax returns.

     At trial, petitioner orally moved that the Court recognize

Mr. Jones as an expert, for the purposes of the valuation of the

sewer line.    Respondent objected to Mr. Jones’ being qualified as

an expert and we took respondent's objection under advisement.

We find that Mr. Jones does not have specific expertise in

valuing sewer lines.

     Mr. Jones has neither lectured nor published articles on the

subject of valuation.    Mr. Jones has not attended courses or

seminars conducted by an appraisal organization, nor has he been

certified by an appraisal society.      Additionally, Mr. Jones

testified that he was not familiar with the Uniform Standards of

Professional Appraisal Practice.    Mr. Jones has no prior

experience valuing sewer lines or, as a matter of fact, any type

of public utility.    Mr. Jones’ prior valuation experience

primarily consists of valuing underlying collateral for loan
                                - 14 -


applications to insure that the collateral provided adequate

security.

     Though we find that Mr. Jones has no expertise in the

specific area of valuing sewer lines, we do find that Mr. Jones

has professional knowledge acquired from prior valuations using

acceptable methods of valuation; i.e., income capitalization.

     We consider his testimony in that light and accept his

testimony under those circumstances.     We must now decide whether

Mr. Jones' general valuation experience is helpful to this Court

in arriving at the fair market value of the sewer line in

question.

     Though expert opinion is admissible and relevant to a

valuation question and is intended to help the Court understand

areas requiring specialized training, it does not always aid the

Court in determining the value of property.    See Laureys v.

Commissioner, 92 T.C. 101, 129 (1989).

     This Court will evaluate expert testimony in light of the

demonstrated qualifications of the expert and on the basis of all

other credible evidence in the record.    See Estate of Newhouse v.

Commissioner, 94 T.C. at 217.    This Court is the trier of fact

and is not bound by expert opinion when that opinion contravenes

our judgment.   See Estate of Newhouse v. Commissioner, supra.

Moreover, because valuation is necessarily an approximation, it

is not required that the value we determine be one as to which
                              - 15 -


there is specific testimony, provided that it is within the range

of figures that properly may be deduced from the evidence.     See

Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir. 1957),

affg. in part and remanding in part T.C. Memo. 1956-178.     We may

also be selective in the use of any portion of an expert opinion.

See Parker v. Commissioner, 86 T.C. 547, 562 (1986).

     According to Mr. Jones' testimony and his report received

into evidence, the fair market value of the sewer line using the

capitalization of income method of valuation is $80,000.

     Mr. Jones testified that the sewer line generated annual

revenue in the amount of $60,912 and that the sewer line's annual

operating expenses totaled $43,303.     Based on these figures, Mr.

Jones calculated that the sewer line generated annual net

earnings in the amount of $17,609.     Mr. Jones then applied a

discount rate of 22 percent because, in Mr. Jones' opinion, a

willing buyer would expect a 22-percent return on this investment

because of the type of risk involved.     Mr. Jones did not include

the $200,000 deposited in escrow or potential tap-on fees from

future Pine View customers in his calculations of the proceeds

from the sewer line.

     We have the following reservations concerning Mr. Jones'

report:   (1) Mr. Jones contends that the escrow funds, if they

have any bearing at all on the valuation of the sewer line,

should be discounted as though they were tap-on fees received
                              - 16 -


over time; (2) Mr. Jones applied a discount rate that is

unrelated to the original transaction, circumstances, or original

parties; and (3) Mr. Jones characterized the construction of the

sewer line as a "bad investment" and contended that cost overruns

made the cost method approach to valuation inappropriate to this

sewer line.

     Mr. Jones argues that the application of respondent's method

of valuation is inaccurate in this case because it values the

funds in escrow as of 1989, the date the funds became totally

available to petitioner.   Mr. Jones contends that if the escrow

amounts were to enter into the valuation at all, the funds should

be discounted as though the funds represented actual customer

tap-on fees to be paid to petitioner over a course of years.

     We do not agree.   The escrow funds were available and used

for construction of the sewer line in 1988 and 1989 without

waiting for Brookshire customers to be "on-line".   The sewer line

was fully completed and operational as of April 1989.

     Mr. Jones also applied a 22-percent discount rate to the

sewer line income as the rate a willing buyer or investor would

expect because of the risk of this type of investment.   Mr.

Jones' application of a 22-percent discount rate follows from

several assumptions that have no foundation in the record, and we

remain unconvinced that the application of a 22-percent discount
                              - 17 -


rate adequately reflects the rate of return an investor could

expect from a PSC-regulated sewer line.

     Mr. Jones has also characterized the sewer line as a bad

investment and contends that valuing the sewer line at cost would

be unfair to petitioner.   We do not believe that petitioner

considered the sewer line a bad investment when it was

constructed.   Mr. Fribis prepared a life cycle cost analysis to

determine the cost effectiveness of constructing the sewer line.

The analysis included construction costs and operating expenses

petitioner expected to incur during the life of both the sewer

line and the treatment facility.

     We infer that had the life cycle cost analysis supported

petitioner's valuation position it would have been produced at

trial.   Since the analysis was not produced at trial, we surmise

that the analysis did not support petitioner's litigating

position.   This Court can infer that testimony which was not

produced at trial would not have been favorable to a taxpayer.

See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158,

1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947).

     Whether petitioner now believes that the sewer line was a

bad investment or not, the appropriate time of valuing the sewer

line is on its date of completion.     As a general rule, the

valuation of property is based on facts known at the date of

valuation, without regard to hindsight.     See Estate of Gilford v.
                              - 18 -


Commissioner, 88 T.C. 38, 52 (1987).     Any capitalization of

income valuation analysis must take into account the events which

the parties expected at the time of valuation and not whether

those events were, or were not, ultimately realized several years

later.

     Mr. Fribis was the president of Imperial, EPCO, and Fribis-

Wiley.   Mr. Fribis knew that petitioner had built the sewer line

to bisect Pine View and that Pine View was planning further

developments in addition to those already approved by the DNR.

That knowledge not only affected the decision of whether or not

to construct the sewer line, but also affected petitioner's

profit expectations at the time the sewer line was constructed.

     Because we are concerned with the valuation of the sewer

line when it was completed around April 1989, we cannot assign a

fair market value to the sewer line based on a method of

valuation having so little relation to the facts as they existed.

The capitalization of income method of valuation is practical

only when income attributable to the property can be adequately

estimated on the date of construction.

     Mr. Jones' report values the sewer line without regard to

the knowledge held by Mr. Fribis, and by extension petitioner,

and without regard to the profit expectations such knowledge

surely created on the date of valuation.    It is clear that

petitioner, as a willing seller not being under any compulsion to
                               - 19 -


sell and having a reasonable knowledge of the relevant facts at

the time, would not have sold the sewer line on which Imperial

and others had just spent $350,000 to a buyer for only $80,000 at

the time of completion in April 1989.

     Furthermore, the portions of Mr. Jones' testimony concerning

cost overruns in the construction of the sewer line are vague and

unsupported by the record.

     Finally, petitioner contends that Mr. Jones' testimony makes

a prima facie case for petitioner's valuation which then must be

rebutted by respondent.    We reject this contention.   It is well

established that this Court is not required to accept the

testimony of alleged expert witnesses as "gospel" and that we are

entitled to evaluate testimony by our own judgment and in light

of the entire record.   See Cupler v. Commissioner, 64 T.C. 946,

956 (1975).   Mr. Jones' report and testimony is therefore of

little use to this Court in such valuation.

Cost Method of Valuation

     Respondent contends that the sewer line should be valued by

use of the cost method.4   Respondent contends that the best

     4
          It is unclear from the record, but respondent seems to
have, at times, equated "replacement cost" with historical cost.
The replacement cost method of valuation uses the projected cost
of replacement to value property. The replacement method bears
some resemblance to the historical cost method in that the
replacement cost method typically uses actual cost figures as a
primary information source. We believe, however, that in this
case, actual cost, and not replacement cost, is the better
                                                   (continued...)
                                - 20 -


direct evidence of the value of the sewer line is its cost and

that the actual cost of an asset is direct evidence of its fair

market value on the date of construction.    Cost is cogent

evidence of value.     See Guggenheim v. Rasquin, 312 U.S. 254, 258

(1941).    This Court has held that cost may be considered in

valuing property.    See Cupler v. Commissioner, supra at 955.

     In an attempt to discredit the use of the cost method of

valuation, Mr. Jones calculated the cost per foot incurred by

petitioner to construct the sewer line in question and projected

that cost to all of Imperial's sewer lines contending that

respondent's use of the cost method of valuation would result in

an unreasonable, overall valuation of Imperial at about $10

million.    Mr. Jones' extrapolation is irrelevant. It is our task

to value a single sewer line and not Imperial as a whole.     We do

not believe that Imperial's older sewer lines, or any lines

constructed more recently than the sewer line in question, would

have any direct relationship to our valuation of the subject

sewer line.    Individual sewer lines would certainly have

different operating costs and different construction costs, and,

therefore, would be of different value to Imperial.    If the sewer

line in question cost more to construct than Imperial's other




     4
      (...continued)
valuation method.
                                - 21 -


sewer lines, we must then consider the reasons why petitioner

would construct such a sewer line.

     As discussed above, Mr. Fribis testified that he completed a

life cycle cost analysis before constructing the sewer line.    A

businessman such as Mr. Fribis, with access to information about

the development plans of both Brookshire and Pine View, would

certainly not decide to construct a sewer line if it seemed to be

a bad investment on the information available to him at that

time.   It is inconceivable to us that EPCO would spend $150,000

of its own money, plus $200,000 contributed by other business

people, to construct an asset worth only $80,000 when completed.

     At trial, Mr. Fribis sought to minimize his prior knowledge

of the Pine View development.    Mr. Fribis testified that he

believed that the property would not be fully developed as long

as Interstate owned the property and that he was skeptical that

the full development of Pine View could have proceeded as

planned.   Though later events certainly justified this view,

there were no clear indications at the time of the sewer line

construction of Interstate's later financial difficulties.

Testimony has shown that developers generally construct housing

developments in stages.   That future development did not go

according to either Fribis-Wiley's or Interstate's plan does not

affect the valuation of the sewer line at the time of

construction.
                              - 22 -


     According to the terms of the McArthy-Imperial agreement,

Imperial agreed to waive "tap-on" fees up to $200,000.    Clearly,

Imperial expected something of value in exchange for its waiver

of fees.   Mr. Fribis testified that Imperial has waived tap-on

fees for other customers in the past in exchange for easements

over property Imperial needed to construct a sewer line.     In this

case, Imperial received $200,000 in lieu of future tap-on fees.

     This Court has noted that the determination of the fair

market value of property on a given date is a question to be

resolved on the basis of the entire record.   See McShain v.

Commissioner, 71 T.C. 998, 1004 (1979).   In this case, we find

that the record clearly supports the use of the cost method of

valuation.

     We have considered the cost method of valuation in light of

all relevant evidence:   (1) The cost of construction; (2)

petitioner's expectations at the time of valuation; and (3) the

positioning of the sewer line through Pine View.   The knowledge,

actions, and expectations of petitioner illustrate that the cost

of construction is in these circumstances indicative of the fair

market value of the sewer line.   Therefore, we find that the

price at which the sewer line would change hands between a

willing buyer and a willing seller, neither being under any

compulsion to buy or sell, is the cost of construction.
                              - 23 -


     Though the sewer line may be considered an income-producing

property in itself, the capitalization of income approach is of

no use to this Court unless the income can be adequately

estimated at the time of valuation, the time when the completed

sewer line was placed in service.5     We find that the income from

the sewer line could not be adequately estimated by using Mr.

Jones' approach.   We find that the cost method of valuation is

appropriate in this case.

     The cost of construction of the sewer line has been fully

stipulated.   The cost of the sewer line connecting the treatment

facility to Brookshire was $350,000.     Imperial paid approximately

$150,000 of its own funds, and the remainder consisted of the

$200,000 disbursed from the escrow account.

     We find that the cost of the sewer line is its fair market

value and hold that the cost of the sewer line, less the amount

petitioner paid, is includable in petitioner's gross income as a

contribution in aid of construction.




     5
          It should be noted that in Exhibit 9, received in
evidence in EPCO I, petitioner estimated that the Brookshire
sewer line would have produced $360,157 of income discounted over
50 years, based on an individual $18-monthly rate for 266 trailer
pads. The undated exhibit was prepared subsequent to the
construction of the sewer line and does not take into account
either the $200,000 of contribution in aid of construction funds
disbursed from escrow, the possibility of potential customers
from Pine View, or a possible increase in the monthly sewer rate.
                              - 24 -


Respondent's Amended Answer

     On November 12, 1997, respondent filed an Amended Answer

requesting that this Court redetermine petitioner's deficiency in

Federal corporate income tax for the 1989 tax year to be $4,537,

plus an increased deficiency pursuant to section 6214(a) in the

amount of $56,839.   Respondent apparently based the increased

deficiency contained in the Amended Answer on the Court of

Appeals’ decision that the income petitioner received is measured

by the value of the sewer line which was completed in 1989.

     We do not agree with respondent on this issue.    Though the

sewer line was completed in 1989, we do not read the Court of

Appeals' decision as mandating that petitioner include in income

for 1989 all of any contribution in aid of construction income

received in connection with the sewer line.    Petitioner included

in its income for 1988 the $164,375 disbursed from escrow in 1988

and used in that year for construction of the sewer line.    We are

not persuaded that the accession to value realized during 1989

would be greater than $36,625, a sum commensurate with the amount

disbursed from escrow in 1989 to complete construction of the

sewer line.   Therefore the inclusion in petitioner's income for

1989 should be limited to $36,625.

     To reflect the foregoing,

                                      Decision will be entered

                                 under Rule 155.
