26 U.S.C. § 118: Contributions to the capital of a corporation

In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer. any contribution in aid of construction or any other contribution as a customer or potential customer, and any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). a contribution in aid of construction, or a 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, 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 such amount (or any property acquired or constructed with such amount) is not included in the taxpayer’s rate base for ratemaking purposes. which is the property for which the contribution was made or is of the same type as such property, and which is used predominantly in the trade or business of furnishing water or sewerage disposal services, 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 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. 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. The term “predominantly” means 80 percent or more. 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. 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. the amount of the expenditure referred to in subparagraph (A) of subsection (c)(2), the taxpayer’s intention not to make the expenditures referred to in such subparagraph, or a failure to make such expenditure within the period described in subparagraph (B) of subsection (c)(2), and 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. For basis of property acquired by a corporation through a contribution to its capital, see section 362. For special rules in the case of contributions of indebtedness, see section 108(e)(6). Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to contributions made after the date of enactment of this Act [ Dec. 22, 2017 ]. The amendments made by this section shall not apply to any contribution, made after the date of enactment of this Act 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.” 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. 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. 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). 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.”