your client supplies water to a housing development the company requires new custome 699069

Your client supplies water to a housing development. The company requires new customers to pay for the extension of the water lines to the customer’s home. The water lines are the company’s property. The company has consistently treated the amounts received from its customers as a nontaxable contribution to capital and used the amounts received as a reduction in the cost of the water lines for tax purposes. In recent decisions, the courts have consistently ruled that the payments received from the utility customers in similar circumstances should be treated as income from services, rather than as a contribution to capital. Your client has concluded that it is only a matter of time before the IRS will apply the recent court decisions to the company. The client would like you to explain the tax consequences of the IRS’s likely adjustments based on these decisions.