C153521 Contract

• Contract/PO #: C153521
• Contractor Name: Grand Valley Water Users' Association
• Contract Type: Loan
• Water District: 0
• County: Mesa
• Bill Number: SB 000
• Loan Projects - Doc Type: Contract Documents

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J. William McDonald, Director
June 24, 1988
Page Three

we will not incur any income tax liability. Chadwick, Steinkirchner,
Davis and Co., C.P.A.s share this opinion but we are in the process
of obtaining an opinion from tax counsel in Denver. The reason
we escape income tax liability (if we are correct) is that we do
not own any of the project. The structures are owned by the united
States and the water rights are adjudicated in the name of the
United States. In the 70s, the Internal Revenue Service attempted
to cancel our tax exemption because more than fifteen percent of
our gross annual income was realized from a source other than assessment
against shareholders. After two conferences in Washington, we
were able to convince them that because the United States owns
the facilities upon which we are making payments, it must be regarded
as a right of use or lease fee. If that theory is not accepted,
then we think that we would not be liable for any income tax because
we must be considered insolvent if we owe all of the money under
the contracts but own none of the facilities.

We would like to have the money borrowed from the Board evidenced
by a note or agreement providing for the semi-annual payments as
referred to above but with the privilege to make prepayment. If
we were to determine that we are not going to have a tax problem
and that no other situation presents itself which would require
expenditure of available funds for unusual maintenance or repair,
we would then like to have the chance to make a prepayment. We
would be willing to agree that any prepayment would be credited
against the last payments to come due under the note/agreement.

Because the facilities are owned by the united States, we
really don't have much to offer as security. I think we have a
few motor vehicles and maybe some equipment that we could consider
as owned by the Association but the value is de minimis. However,
the Association has been making payments to the United States for
approximately seventy years and so far as anyone knows there has
never been a default. Perhaps there was some deferral of payment
during the Depression. We are not sure about that, but we can
honestly say that we have never noticed anything in the old records
of the Association indicating that there was a default in any payment
and we know there has not been any default in the memory of anyone
presently living and connected with the Association.

I feel I should perhaps mention something else with respect
to the power plant. Our temporary contract now provides that the
net profits from operation of the power plant are paid to the United
States to be applied on our contracts which we are repurchasing.
Note that it is the power contract that makes that provision and
not the contracts themselves. It further provides that when the
contracts are paid in full, the net profit can be used to pay operation,
maintenance, and replacement charges of the project and except
as so needed the payments will go into the Treasury of the United
States. Currently the contract for permanent operation of the