Internal Revenue Code:Sec. 118. Contributions to the capital of a corporation
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Location in Internal Revenue Code
TITLE 26 - INTERNAL REVENUE CODE
Subtitle A - Income Taxes
CHAPTER 1 - NORMAL TAXES AND SURTAXES
Subchapter B - Computation of Taxable Income
PART III - ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
Statute
Sec. 118. Contributions to the capital of a corporation
(a) General rule
In the case of a corporation, gross income does not include any
contribution to the capital of the taxpayer.
(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.
(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.
(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.
(e) Cross references
(1) For basis of property acquired by a corporation through a
contribution to its capital, see section 362.
(2) For special rules in the case of contributions of
indebtedness, see section 108(e)(6).
Sources
(Aug. 16, 1954, ch. 736, 68A Stat. 39; Pub. L. 94-455, title XXI,
Sec. 2120(a), Oct. 4, 1976, 90 Stat. 1912; Pub. L. 95-600, title
III, Sec. 364(a), Nov. 6, 1978, 92 Stat. 2854; Pub. L. 96-589, Sec.
2(e)(2), Dec. 24, 1980, 94 Stat. 3396; Pub. L. 98-369, div. A,
title I, Sec. 163(a), July 18, 1984, 98 Stat. 697; Pub. L. 99-514,
title VIII, Sec. 824(a), Oct. 22, 1986, 100 Stat. 2374; Pub. L.
104-188, title I, Sec. 1613(a)(1), (2), Aug. 20, 1996, 110 Stat.
1848-1850.)
Miscellaneous
AMENDMENTS
1996 - Subsec. (b). Pub. L. 104-188, Sec. 1613(a)(2), inserted
''except as provided in subsection (c),'' before ''the term''.
Subsecs. (c) to (e). Pub. L. 104-188, Sec. 1613(a)(1), added
subsecs. (c) and (d) and redesignated former subsec. (c) as (e).
1986 - Subsec. (b). Pub. L. 99-514, Sec. 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, Sec. 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, Sec. 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, Sec. 364(a)(3),
substituted ''electric energy, gas, steam, water,'' for ''water''.
Subsec. (b)(3)(A). Pub. L. 95-600, Sec. 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, Sec. 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, Sec. 2120(a), added
subsec. (b) and redesignated former subsec. (b) as (c).
EFFECTIVE DATE OF 1996 AMENDMENT
Section 1613(a)(3) of Pub. L. 104-188 provided that: ''The
amendments made by this subsection (amending this section) 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, Sec. 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 this
section and section 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,
Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ''The
amendments made by this section (amending this section and sections
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.''
References
SECTION REFERRED TO IN OTHER SECTIONS
This section is referred to in section 108 of this title.
