                        T.C. Memo. 1995-499



                      UNITED STATES TAX COURT



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



     Docket No. 25248-93.             Filed October 17, 1995.



     Juan D. Keller, Paul P. Weil, and Philip B. Wright,

for petitioner.

     James A. Kutten, for respondent.


                  SUPPLEMENTAL MEMORANDUM OPINION

     GOLDBERG, Special Trial Judge:     This matter is before the

Court on petitioner's Motion for Reconsideration under Rule 161

and Motion to Vacate Decision under Rule 162.    The motions relate

to our Memorandum Findings of Facts and Opinion filed June 12,

1995 (T.C. Memo. 1995-249), and our decision entered on June 14,
                                - 2 -

1995.    The facts and holding of that opinion are incorporated

herein by this reference.1

     Brooks McArthy (McArthy) sought to develop a trailer park on

land he owned to be called Brookshire Village Mobile Home Park

(Brookshire).    McArthy utilized the resources of Eugene Fribis

(Fribis), an engineer consultant and owner of Epco, Inc.

(petitioner), the common parent of an affiliated group that

includes House Springs Sewer Co. (House Springs) and Imperial

Utility Corp. (Imperial). In particular, Fribis advised McArthy

regarding the sewer system Brookshire would require.    McArthy

later opted for an underground sewage pipe extension to County

Club Manor (Manor), a sewage treatment facility operated by

Imperial.    This method required the construction of pipes and

expansion of Manor to handle the additional sewage.    The cost of

this method totaled $540,000.    Each mobile home was required to

pay a $400 "contribution in aid of construction fee" and a

monthly service charge of $18 for sewage treatment.2

     Imperial contracted with McArthy to build a sewer system for

Brookshire.    Imperial agreed to build an underground wastewater

collection pipe extending from Manor to Brookshire.    McArthy

agreed to pay Imperial $200,000 in "tap-on fees" ("contributions

     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended. All Rule references are to
the Tax Court Rules of Practice and Procedure.
     2
        The term "tap-on fee" is commonly used interchangeably
with the term "contribution in aid of construction".
                                - 3 -

in aid of construction") and deposited this amount in an

interest-bearing checking account in the names of McArthy and

Imperial at Lemay Bank & Trust Co.      The account bore McArthy's

Social Security number as the taxpayer identification number, and

interest earned on the account was paid to McArthy.      Funds could

be withdrawn from the bank by checks signed by both Fribis, as

president of Imperial, and McArthy.

       Imperial contracted with McClanahan Contracting

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

install the sewer main-line extension and expand Manor.      The cost

of extending the main-line from Manor to Brookshire was $350,000.

Imperial paid approximately $150,000 of this cost and the

remainder consisted of the $200,000 from the escrow account.      The

expansion of Manor cost $190,000.

       The escrowed funds were credited toward the $400 per pad

"contribution in aid of construction fee".      As such, Imperial did

not charge McArthy a fee to connect each mobile home to the sewer

system.    From the escrow account, $164,375 was disbursed in 1988

and $35,625 was disbursed in 1989 to subcontractors and

contractors working on the construction of the sewer pipeline,

including Price Bros., Klueter Bros., McClanahan, and Fred Weber

Inc.    Imperial now owns the sewer line extension.

       On its 1988 Federal income tax return, petitioner included

in gross income the $164,375 disbursed from the escrow and

claimed depreciation in connection with those disbursements.
                                - 4 -

Petitioner did not report the $35,625 on its 1989 Federal income

tax return.   In her notice of deficiency, respondent determined

that the $35,625 was includable in petitioner's income for 1989

as "contributions in aid of construction" under section 118.

     At trial and in its briefs, petitioner argued that: (1) The

contribution by McArthy (escrowed funds) is not a "contribution

in aid of construction" within the meaning of section 118(b), but

a nontaxable contribution to the capital of Imperial; (2) if the

payment is a "contribution in aid of construction", including

such amount in the income of a corporation would violate the

Sixteenth Amendment; and (3) in the alternative, the fair market

value of McArthy's contribution should be based on the revenue

generated by the sewer line rather than the cost of construction.

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

we found that the funds disbursed from the escrow account were

"contributions in aid of construction" of the sewer pipeline,

and, therefore, we held that the amounts disbursed are includable

in petitioner's income.   Id.   We further held, based on the

legislative history of nonshareholder contributions, that

including in income "contributions in aid of construction" did

not violate the Sixteenth Amendment.    With respect to

petitioner's alternative argument, we stated:

          Finally, we reject petitioner's alternative argument
     that the amount of income includable should be the value of
     the main-line extension computed using the discounted cash-
     flow method based upon projected revenue. Imperial received
     cash. Imperial did not receive an operating sewer system,
                                - 5 -

     and, therefore, the projected income stream from the
     expansion of sewage capacity is irrelevant. The fact that
     Imperial used the cash to construct the main-line extension
     does not make the contribution equivalent to the asset
     constructed. We note that petitioner's reliance on the
     Staff of Joint Comm. on Taxation, General Explanation of the
     Tax Reform Act of 1986 (J. Comm. Print 1987), relating to
     section 118, is misplaced. [Id.].

     In its motions to vacate and for reconsideration, petitioner

argues that the findings with respect to its alternative argument

are factually incorrect in that petitioner did not receive cash,

but, rather, received a sewer line.     Petitioner also argues that

because its cost of the sewer line extension was greater than the

amount of contributions by McArthy, it realized no income on the

exchange.   We shall grant petitioner's Motion for Reconsideration

and reexamine this argument.

     Petitioner argues that the funds from the escrow account

were never paid to petitioner, but, instead, were disbursed under

the joint signatures of Fribis, as president of Imperial, and

McArthy.    Petitioner states that the escrow agreement prevented

it from receiving cash.   Based on a reexamination of the record,

we agree that petitioner did not receive "cash" from the escrow

account in the sense of a disbursement payable to petitioner.

However, in light of the fact that the disbursements were only

made under the signatures of Fribis and McArthy to pay entities

to which Imperial was contractually bound, and the fact that

Imperial is now the owner of the pipeline, we conclude that the

reasoning in Epco, Inc. & Subs. v. Commissioner, supra, is
                               - 6 -

correct.   While petitioner may not have been given cash directly

from the escrow account, petitioner received the benefit of the

funds disbursed in the same manner as if the funds had been

deposited directly into its own account.   To argue otherwise

would be an exercise in semantics, and it is well established

that the substance of the transaction, rather than its form, must

govern the tax consequences.   Garcia v. Commissioner, 80 T.C. 491

(1983) (citing Commissioner v. Court Holding Co., 324 U.S. 331

(1945); Gregory v. Helvering, 293 U.S. 465 (1935); Biggs v.

Commissioner, 69 T.C. 905 (1978), affd. 632 F.2d 1171 (5th Cir.

1980)).

     Petitioner contends that "an escrow not under the control of

the taxpayer is neither a vehicle for the realization of income

nor the receipt of the escrow proceeds themselves."   In support

thereof, petitioner cites the following cases: Swaim v. United

States, 651 F.2d 1066 (5th Cir. 1981); Sprague v. United States,

627 F.2d 1044 (10th Cir. 1980); Biggs v. Commissioner, supra;

Carlton v. United States, 385 F.2d 238 (5th Cir. 1967); Garcia v.

Commissioner, supra; Barker v. Commissioner, 74 T.C. 555 (1980);

Brauer v. Commissioner, 74 T.C. 1134 (1980); Fredericks v.

Commissioner, T.C. Memo. 1994-27; Grannemann v. United States,

649 F.Supp. 949 (E.D. Mo. 1986).

     Most of the cases cited by petitioner have a common thread;

namely, a discussion of or reference to the doctrine of

constructive receipt.   The doctrine generally provides that a
                                 - 7 -

taxpayer realizes income without actual receipt if such income is

available to the taxpayer and the availability thereof is not

subject to substantial limitations.      Sec. 1.451-2(a), Income Tax

Regs.    The doctrine of constructive receipt is not applicable in

this case because the escrowed funds were, in fact, disbursed,

and, as such, provided a direct benefit to petitioner.      The

remaining cases cited by petitioner involve the issue of

exchanges under section 1031.3    All of those cases are

inapposite.

     In addition, petitioner argues that we erred when we stated

that petitioner's reliance on the Staff of Joint Comm. on

Taxation, General Explanation of the Tax Reform Act of 1986 (J.

Comm. Print 1987), relating to section 118 (the General

Explanation), is misplaced.    Petitioner argues that because it

received a sewer line, not cash, the portion of the General

Explanation concerning valuation is relevant to the determination

of the fair market value of the sewer line, and, as a result, to

the determination of the amount of income petitioner must

recognize.    The funds in the escrow account were earmarked as

"tap-on fees" or "contributions in aid of construction".      These

funds went to those entities hired by petitioner to build a

pipeline that petitioner now owns.       Clearly, petitioner received

     3
          Carlton v. United States, 385 F.2d 238 (5th Cir. 1967);
Brauer v. Commissioner, 74 T.C. 1134 (1980); Biggs v.
Commissioner, 69 T.C. 905 (1978), affd. 632 F.2d 1171 (5th Cir.
1980).
                                 - 8 -

from McArthy not a sewer pipeline, but, rather, the direct

benefit of the cash disbursements.4       Thus, as we stated in our

opinion in Epco, Inc. & Subs. v. Commissioner, supra, the General

Explanation is irrelevant to the facts in this case.

     Having reconsidered petitioner's alternative argument and

addressed the merits thereof, we deny petitioner's Motion to

Vacate.

     To reflect the foregoing,

                                              An appropriate order will

                                         be issued.




     4
          One of the direct benefits received by petitioner as a
result of McArthy's contributions was that the funds went to pay
contractors and subcontractors to whom petitioner was directly
liable.
