Jul 9, 2010 By Steve Ferris 3 min read

DILLINER – U.S. Rep. Mark S. Critz, D-Johnstown, on Thursday agreed to help the East Dunkard Water Association convert to an authority so it could avoid paying taxes on a $6.1 million loan and grant from the state and borrowing money to guarantee the loan. Association solicitor Dennis Makel said the association works like an authority because it makes no profit in providing water to 1,600 customers, or almost 6,000 residents in Dunkard Township.

“We’re an association that acts like an authority,” Makel said, adding that revenue is used to fund operations.

He said the $6.1 million in financing the association received from the Pennsylvania Infrastructure Investment Authority (PENNVEST) in March includes a $3.9 million loan at 1 percent interest and a $2.2 million grant.

In addition, PENNVEST would require the association to obtain a bank loan to guarantee its loan, Makel said.

Because the association is for-profit, the Internal Revenue Service would consider the loan and grant as income and possibly taxable, Makel said.

The Dunkard Township supervisors support converting the association to an authority and are willing to make the move at no cost to the association, he said.

Association manager Barry Bennett said the bank loan would cost the association about $1 million over 20 years and that cost would be passed along to customers.

The improvement project for which the PENNVEST financing was obtained will result in a “minimal” fee increase to cover those financing costs, Bennett said.

The association charges residents $8.50 a month for 1,000 gallons and the average customer bill is $25 a month, Bennett said.

He said the association wants to close on the PENNVEST financing in September and then start the work, which includes expanding water storage capacity, renovating the filter system, upgrading main lines and installing new meters for all customers.

The association, which was founded in 1969, considered selling its assets to an authority, but that transaction would result in a tax on the association, Bennett said, adding that PENNVEST did not object to the association converting to an authority.

Critz said a “zero-sum transfer” could be what is needed to transfer the association’s assets to an authority.

He said he would have his staff tax expert contact the association’s accountant to learn more details and then contact an IRS tax advocate to find out how to complete the conversion.

“This can’t be the first time this happened,” Critz said.

Makel estimated that it would take two months to establish an authority.

Critz said have the association donate its assets to an authority might work, but he said his tax expert and the tax advocate would determine the best way to proceed.

He said he the authority, not the association, should be the recipient of the PENNVEST financing.

“We’ll do what we can. We’ll get the conversations started,” Critz said.

Makel said he was told that an attorney from West Virginia set up the association as an association and not an authority because of practices in that state recognize associations.