I.R.C. § 118(a) General Rule —
In the case of a corporation, gross income does not
include any contribution to the capital of the taxpayer.
I.R.C. § 118(b) Exceptions —
For purposes
of subsection (a), except as provided in subsection (c), the term “contribution
to the capital of the taxpayer” does not include—
I.R.C. § 118(b)(1) —
any contribution in aid of construction
or any other contribution as a customer or potential customer, and
I.R.C. § 118(b)(2) —
any contribution by any governmental
entity or civic group (other than a contribution made by a shareholder
as such).
I.R.C. § 118(c) Special Rules For Water And Sewerage Disposal Utilities
I.R.C. § 118(c)(1) General Rule —
For purposes of this section, the term “contribution
to the capital of the taxpayer” includes any amount of money
or other property received from any person (whether or not a shareholder)
by a regulated public utility which provides water or sewerage disposal
services if—
I.R.C. § 118(c)(1)(A) —
such amount is—
I.R.C. § 118(c)(1)(A)(i) —
a contribution in aid of construction,
or
I.R.C. § 118(c)(1)(A)(ii) —
contribution to the capital of such
utility by a governmental entity providing for the protection, preservation,
or enhancement of drinking water or sewerage disposal services,
I.R.C. § 118(c)(1)(B) —
in the case of a contribution in aid
of construction which is property other than water or sewerage disposal
facilities, such amount meets the requirements of the expenditure
rule of paragraph (2), and
I.R.C. § 118(c)(1)(C) —
such amount (or any property acquired
or constructed with such amount) is not included in the taxpayer's
rate base for ratemaking purposes.
I.R.C. § 118(c)(2) Expenditure Rule —
An amount meets the requirements of this paragraph if—
I.R.C. § 118(c)(2)(A) —
an amount equal to such amount is expended
for the acquisition or construction of tangible property described
in section 1231(b)—
I.R.C. § 118(c)(2)(A)(i) —
which is the property for which the
contribution was made or is of the same type as such property, and
I.R.C. § 118(c)(2)(A)(ii) —
which is used predominantly in the
trade or business of furnishing water or sewerage disposal services,
I.R.C. § 118(c)(2)(B) —
the expenditure referred to in subparagraph
(A) occurs before the end of the second taxable year after the year
in which such amount was received, and
I.R.C. § 118(c)(2)(C) —
accurate records are kept of the amounts
contributed and expenditures made, the expenditures to which contributions
are allocated, and the year in which the contributions and expenditures
are received and made.
I.R.C. § 118(c)(3) Definitions —
For purposes of this subsection—
I.R.C. § 118(c)(3)(A) Contribution In Aid Of Construction —
The term “contribution in aid of construction”
shall be defined by regulations prescribed by the Secretary, except
that such term shall not include amounts paid as service charges for
starting or stopping services.
I.R.C. § 118(c)(3)(C) Regulated Public Utility —
The term “regulated public utility” has
the meaning given such term by section 7701(a)(33), except that such
term shall not include any utility which is not required to provide
water or sewerage disposal services to members of the general public
in its service area.
I.R.C. § 118(c)(4) Disallowance Of Deductions And Credits; Adjusted Basis —
Notwithstanding any other provision of this subtitle,
no deduction or credit shall be allowed for, or by reason of, any
expenditure which constitutes a contribution in aid of construction
to which this subsection applies. The adjusted basis of any property
acquired with contributions in aid of construction to which this subsection
applies shall be zero.
I.R.C. § 118(d) Statute Of Limitations —
If the taxpayer for any taxable year treats an amount
as a contribution to the capital of the taxpayer described in subsection
(c)(1)(A)(i), then—
I.R.C. § 118(d)(1) —
the statutory period for the assessment
of any deficiency attributable to any part of such amount shall not
expire before the expiration of 3 years from the date the Secretary
is notified by the taxpayer (in such manner as the Secretary may prescribe)
of—
I.R.C. § 118(d)(1)(A) —
the amount of the expenditure referred
to in subparagraph (A) of subsection (c)(2),
I.R.C. § 118(d)(1)(B) —
the taxpayer's intention not to
make the expenditures referred to in such subparagraph, or
I.R.C. § 118(d)(1)(C) —
a failure to make such expenditure within
the period described in subparagraph (B) of subsection (c)(2), and
I.R.C. § 118(d)(2) —
such deficiency may be assessed before
the expiration of such 3-year period notwithstanding the provisions
of any other law or rule of law which would otherwise prevent such
assessment.
I.R.C. § 118(e) Cross References
I.R.C. § 118(e)(1) —
For basis of property acquired by a
corporation through a contribution to its capital, see section 362.
I.R.C. § 118(e)(2) —
For special rules in the case of contributions
of indebtedness, see section 108(e)(6).
(Aug. 16, 1954, ch. 736, 68A Stat. 39; Oct. 4, 1976,
Pub. L. 94-455, title
XXI, 2120(a), 90 Stat. 1912; Nov. 6, 1978, Pub. L. 95-600, title III, 364(a),
92 Stat. 2854; Dec. 24, 1980, Pub.
L. 96-589, 2(e)(2), 94 Stat. 3396; July 18, 1984, Pub. L. 98-369, div. A, title I,
163(a), 98 Stat. 697; Oct. 22, 1986, Pub.
L. 99-514, title VIII, 824(a), 100 Stat. 2374; Aug.
20, 1996, Pub. L. 104-188,
title I, Sec. 1613(a), 110 Stat. 1755; Pub. L. 115-97, title I, Sec. 13312(a),
Dec. 22, 2017, 131 Stat. 2054; Pub. L. 117-58,
Div. H, title VI, Sec. 80601(a), Nov. 15, 2021, 135 Stat. 429.)
BACKGROUND NOTES
AMENDMENTS
2021—Subsec. (b). Pub.
L. Pub. L. 117-58, Sec. 80601(a)(1),
amended subsec. (b) by inserting “except as provided in subsection
(c)” after “For purposes of subsection (a)”.
Subsecs. (c)-(e). Pub.
L. 117-58, Sec. 80601(a)(2)-(3), struck subsec. (c), redesignated
subsec. (d) as subsec. (e), and added new subsecs. (c) and (d). Before
being struck, subsec. (c) read as follows:
“(c) Regulations—The Secretary shall
issue such regulations or other guidance as may be necessary or appropriate
to carry out this section, including regulations or other guidance
for determining whether any contribution constitutes a contribution
in aid of construction.”
2017—Subsec.
(b). Pub. L. 115-97, Sec. 13312(a),
struck subsec. (b) and added a new subsec. (b). Before being struck,
it read as follows:
“(b) Contributions In Aid Of Construction,
Etc.—For purposes of subsection (a), except as provided in subsection
(c), the term “contribution to the capital of the taxpayer”
does not include any contribution in aid of construction or any other
contribution as a customer or potential customer.”
Subsec. (c). Pub.
L. 115-97, Sec. 13312(a), struck subsec. (c) and added a
new subsec. (c). Before being struck, it read as follows:
“(c) Special Rules For Water And Sewerage
Disposal Utilities
“(1) General Rule.—For purposes of
this section, the term “contribution to the capital of the taxpayer”
includes any amount of money or other property received from any person
(whether or not a shareholder) by a regulated public utility which
provides water or sewerage disposal services if—
“(A) such amount is a contribution in aid
of construction,
“(B) in the case of contribution of property
other than water or sewerage disposal facilities, such amount meets
the requirements of the expenditure rule of paragraph (2), and
“(C) such amount (or any property acquired
or constructed with such amount) is not included in the taxpayer's
rate base for ratemaking purposes.
“(2) Expenditure Rule.—An amount meets
the requirements of this paragraph if—
“(A) an amount equal to such amount
is expended for the acquisition or construction of tangible property
described in section 1231(b)—
“(i) which is the property for which the
contribution was made or is of the same type as such property, and
“(ii) which is used predominantly in the
trade or business of furnishing water or sewerage disposal services,
“(B) the expenditure referred to in subparagraph
(A) occurs before the end of the second taxable year after the year
in which such amount was received, and
“(C) accurate records are kept of the amounts
contributed and expenditures made, the expenditures to which contributions
are allocated, and the year in which the contributions and expenditures
are received and made.
“(3) Definitions.—For purposes of this
subsection—
“(A) Contribution In Aid Of Construction.—The
term “contribution in aid of construction” shall be defined
by regulations prescribed by the Secretary, except that such term
shall not include amounts paid as service charges for starting or
stopping services.
“(B) Predominantly.—The term “predominantly”
means 80 percent or more.
“(C) Regulated Public Utility.—The
term “regulated public utility” has the meaning given
such term by section 7701(a)(33), except that such term shall not
include any utility which is not required to provide water or sewerage
disposal services to members of the general public in its service
area.
“(4) Disallowance Of Deductions And Credits;
Adjusted Basis.—Notwithstanding any other provision of this
subtitle, no deduction or credit shall be allowed for, or by reason
of, any expenditure which constitutes a contribution in aid of construction
to which this subsection applies. The adjusted basis of any property
acquired with contributions in aid of construction to which this subsection
applies shall be zero.”
Subsec. (d)-(e). Pub.
L. 115-97, Sec. 13312(a), struck subsec. (d) and redesignated
subsec. (e) as subsec. (d). Before being struck, subsec. (d) read
as follows:
“(d) Statute Of Limitations.—If the
taxpayer for any taxable year treats an amount as a contribution to
the capital of the taxpayer described in subsection (c), then—
“(1) the statutory period for the assessment
of any deficiency attributable to any part of such amount shall not
expire before the expiration of 3 years from the date the Secretary
is notified by the taxpayer (in such manner as the Secretary may prescribe)
of—
“(A) the amount of the expenditure referred
to in subparagraph (A) of subsection (c)(2),
“(B) the taxpayer's intention not to make
the expenditures referred to in such subparagraph, or
“(C) a failure to make such expenditure
within the period described in subparagraph (B) of subsection (c)(2),
and
“(2) such deficiency may be assessed before
the expiration of such 3-year period notwithstanding the provisions
of any other law or rule of law which would otherwise prevent such
assessment.”
1996--Subsec. (b). Pub. L. 104-188, 1613(a)(2), inserted
“except as provided in subsection (c),” before “the term”.
Subsec. (c), (d), (e). Pub. L. 104-188, 1613(a)(1), redesignated
subsec. (c) as subsec. (e), and added new subsections (c) and (d).
1986--Subsec. (b). Pub. L. 99-514, 824(a), added subsec.
(b) and struck out former subsec. (b) relating to contributions in
aid of construction, containing par. (1) general rule, par. (2) expenditure
rule, par. (3) definitions, and par. (4) disallowance of deductions
and investment credit; adjusted basis.
Subsecs. (c), (d). Pub.
L. 99-514, 824(a), redesignated former subsec. (d)
as (c) and struck out former subsec. (c), statute of limitations,
which read as follows: “If the taxpayer for any taxable year treats
an amount as a contribution to the capital of the taxpayer described
in subsection (b), then--
“(1) the statutory period for
the assessment of any deficiency attributable to any part of such
amount shall not expire before the expiration of 3 years from the
date the Secretary is notified by the taxpayer (in such manner as
the Secretary may prescribe) of--
“(A) the amount of the expenditure
referred to in subparagraph (A) of subsection (b)(2),
“(B) the taxpayer's intention
not to make the expenditures referred to in such subparagraph, or
“(C) a failure to make such
expenditure within the period described in subparagraph (B) of subsection
(b)(2); and
“(2) such deficiency may be
assessed before the expiration of such 3-year period notwithstanding
the provisions of any other law or rule of law which would otherwise
prevent such assessment.”
1984--Subsecs. (c), (d). Pub. L. 98-369 added subsec. (c)
and redesignated former subsec. (c) as (d).
1980--Subsec. (c). Pub. L. 96-589 designated existing
provisions as par. (1) and added par. (2).
1978--Subsec. (b)(1). Pub. L. 95-600, 364(a)(1), (2), substituted
in provisions preceding subpar. (A) “electric energy, gas (through
a local distribution system or transportation by pipeline), water,"
for “water” and in subpar. (B) “electric energy, gas, steam, water,"
for “water”.
Subsec. (b)(2)(A)(ii). Pub.
L. 95-600, 364(a)(3), substituted “electric energy,
gas, steam, water,” for “water”.
Subsec. (b)(3)(A). Pub.
L. 95-600, 364(a)(4), substituted “line to an electric
line, a gas main, a steam line, or a main water or sewer line” for
“property to a main water or sewer line”.
Subsec. (b)(3)(C). Pub.
L. 95-600, 364(a)(5), substituted “electric energy,
gas, water,” for “water” and inserted “(including in the case of a
gas transmission utility, the provision of gas services by sale for
resale to the general public)” after “members of the general public”.
1976--Subsecs. (b), (c). Pub. L. 94-455, 2120(a), added subsec.
(b) and redesignated former subsec. (b) as (c).
EFFECTIVE DATE OF 2021 AMENDMENTS
Amendments by Pub. L.
117-58, Sec. 80601(a), effective for contributions made
after December 31, 2020.
EFFECTIVE DATE OF 2017
AMENDMENT
Amendments by Pub. L. 115-97, Sec. 13312(a),
effective for contributions made after the date of enactment of this
Act [Enacted: Dec. 22, 2017]. Pub.
L. 115-97, Sec. 13312(b)(2), provided the following exception:
“(2) EXCEPTION.—The amendments made
by this section shall not apply to any contribution, made after the
date of enactment of this Act [Enacted: Dec. 22, 2017] by a governmental
entity, which is made pursuant to a master development plan that has
been approved prior to such date by a governmental entity.”
EFFECTIVE DATE OF 1996 AMENDMENT
Section 1613(a)(3) of Pub.
L. 104-188 provided that: “The amendments made by
this subsection shall apply to amounts received after June 12, 1996.”
EFFECTIVE DATE OF 1986 AMENDMENT
Section 824(c) of Pub.
L. 99-514, as amended by Pub. L. 100-647, title I, 1008(j)(2),
Nov. 10, 1988, 102 Stat. 3445, provided that:
“(1) In general.--Except as otherwise provided
in this subsection, the amendments made by this section [amending
sections 118 and 362 of this title] shall apply to amounts received
after December 31, 1986, in taxable years ending after such date.
“(2) Treatment of certain water supply projects.--The
amendments made by this section shall not apply to amounts which are
paid by the New Jersey Department of Environmental Protection for
construction of alternative water supply projects in zones of drinking
water contamination and which are designated by such department as
being taken into account under this paragraph. Not more than $4,631,000
of such amounts may be designated under the preceding sentence.
“(3) Treatment of certain contributions by transportation
authority.--The amendments made by this section shall not apply to
contributions in aid of construction by a qualified transportation
authority which were clearly identified in a master plan in existence
on September 13, 1984, and which are designated by such authority
as being taken into account under this paragraph. Not more than $68,000,000
of such contributions may be designated under the preceding sentence.
For purposes of this paragraph, a qualified transportation authority
is an entity which was created on February 20, 1967, and which was
established by an interstate compact and consented to by Congress
in Public Law 89-774,
80 Stat. 1324 (1966).
“(4) Treatment of certain partnerships.--In the
case of a partnership with a taxable year beginning May 1, 1986, if
such partnership realized net capital gain during the period beginning
on the 1st day of such taxable year and ending on May 29, 1986, pursuant
to an underwriting agreement dated May 6, 1986, then such partnership
may elect to treat each asset to which such net capital gain relates
as having been distributed to the partners of such partnership in
proportion to their distributive share of the capital gain or loss
realized by the partnership with respect to such asset and to treat
each such asset as having been sold by each partner on the date of
the sale of the asset by the partnership. If such an election is made,
the consideration received by the partnership in connection with the
sale of such assets shall be treated as having been received by the
partners in connection with the deemed sale of such assets. In the
case of a tiered partnership, for purposes of this paragraph each
partnership shall be treated as having realized net capital gain equal
to its proportionate share of the net capital gain of each partnership
in which it is a partner, and the election provided by this paragraph
shall apply to each tier.”
EFFECTIVE DATE OF 1984 AMENDMENT
Section 163(c) of Pub.
L. 98-369, as amended by Pub.
L. 99-514, 2, Oct. 22, 1986, 100 Stat. 2095, provided
that: “The amendments made by this section [amending sections 118,
6501, and 6511 of this title] shall apply to expenditures with respect
to which the second taxable year described in section 118(b)(2)(B) of the Internal Revenue
Code of 1986 [formerly I.R.C.
1954] ends after December 31, 1984.”
EFFECTIVE DATE OF 1980 AMENDMENT
Amendment by Pub.
L. 96-589 applicable to transactions which occur
after Dec. 31, 1980, other than transactions which occur in a proceeding
in a bankruptcy case or similar judicial proceeding or in a proceeding
under Title 11 commencing on or after Dec. 31, 1980, with an exception
permitting the debtor to make the amendment applicable to transactions
occurring after Sept. 30, 1979, in a specified manner, see section
7(a)(1), (f) of Pub. L. 96-589,
set out as a note under section 108 of this title.
EFFECTIVE DATE OF 1978 AMENDMENT
Section 364(b) of Pub.
L. 95-600 provided that: “The amendments made by
this section [amending this section] shall apply to contributions
made after January 31, 1976.”
EFFECTIVE DATE OF 1976 AMENDMENT
Section 2120(c) of Pub.
L. 94-455 provided that: “The amendments made by
this section [amending this section and section 362 of this title]
apply to contributions made after January 31, 1976.”
