Rev. Rul. 60-3

Advice has been requested as to the treatment, for Federal income tax purposes, of a payment made for installing water lines in a subdivision and of payments made for installing water meters in the houses in such subdivision.

The taxpayer, a general contractor, acquired a tract of land for the purpose of subdividing it into residential lots. The taxpayer constructed houses on some lots. Other lots were offered for sale to individual buyers. In order to provide water facilities for the subdivision, the taxpayer entered into a contract with the local water company to pay for the installation of water lines throughout the subdivision and to pay a stated sum for each water meter installed in the houses.

The contract further provides for the water company to reimburse these installation costs to the taxpayer, based upon a stated percentage of the gross annual receipts from the sale of water to the residents in the subdivision. The reimbursements are to be made for a specified period unless the full amount is repaid prior to the end of such period. Since some of the lots in the subdivision may not be sold and others may be purchased by individuals who may never construct houses thereon, the taxpayer might or might not receive reimbursement of the installation costs. The taxpayer does not hold title to the facilities.

Section 1011 of the Internal Revenue Code of 1954 provides as follows:

The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.

Section 1016(a) of the Code provides, in part, as follows:

Proper adjustment in respect of the property shall in all cases be made-

(1) for expenditures receipts, losses, or other items, properly chargeable to capital accounts * * *.

A payment of the types here concerned, made to a utility company for the installation of utility service by a taxpayer engaged in the development and sale of lots in a subdivision, constitutes an unconditional payment made to obtain utility service and is related directly to the improvement of the lots for the purpose of sale. Therefore, a pro rata portion of the payment is to be included in computing the cost of each lot in the subdivision, even though the taxpayer might be reimbursed for all or part of such payment. See The Colony, Inc. v. Commissioner , 26 T.C. 30, acquiescence, C.B. 1958-1, 4, and Albert Gersten et al. v. Commissioner , 28 T.C. 756, acquiescence, C.B. 1958-1, 4.

Accordingly, it is held that where a taxpayer is engaged in the development and sale of lots in a subdivision, the cost of each lot, for purposes of determining gain or loss, includes a pro rata portion of the payment made for installing water lines in the subdivision. It is further held that the cost of the houses in the subdivision includes the payments made for the cost of installing water meters in such houses.