§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) Exceptions

For purposes of subsection (a), except as provided in subsection (c), the term "contribution to the capital of the taxpayer" does not include-

(1) any contribution in aid of construction or any other contribution as a customer or potential customer, and

(2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such).

(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-

(i) a contribution in aid of construction, or

(ii) 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,

(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

(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)(1)(A)(i), 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).

(Aug. 16, 1954, ch. 736, 68A Stat. 39 ; Pub. L. 94–455, title XXI, §2120(a), Oct. 4, 1976, 90 Stat. 1912 ; Pub. L. 95–600, title III, §364(a), Nov. 6, 1978, 92 Stat. 2854 ; Pub. L. 96–589, §2(e)(2), Dec. 24, 1980, 94 Stat. 3396 ; Pub. L. 98–369, div. A, title I, §163(a), July 18, 1984, 98 Stat. 697 ; Pub. L. 99–514, title VIII, §824(a), Oct. 22, 1986, 100 Stat. 2374 ; Pub. L. 104–188, title I, §1613(a)(1), (2), Aug. 20, 1996, 110 Stat. 1848–1850 ; Pub. L. 115–97, title I, §13312(a), Dec. 22, 2017, 131 Stat. 2132 ; Pub. L. 117–58, div. H, title VI, §80601(a), Nov. 15, 2021, 135 Stat. 1337 .)

Editorial Notes

Amendments

2021-Subsec. (b). Pub. L. 117–58, §80601(a)(1), inserted "except as provided in subsection (c)," after "For purposes of subsection (a)," in introductory provisions.

Subsecs. (c) to (e). Pub. L. 117–58, §80601(a)(2), (3), added subsecs. (c) and (d), redesignated former subsec. (d) as (e), and struck out former subsec. (c) which related to regulations.

2017-Subsecs. (b) to (e). Pub. L. 115–97 added subsecs. (b) and (c), redesignated subsec. (e) as (d), and struck out former subsecs. (b) to (d) which related to contributions in aid of construction, special rules for water and sewerage disposal utilities, and statute of limitations for assessment of deficiencies, respectively.

1996-Subsec. (b). Pub. L. 104–188, §1613(a)(2), inserted "except as provided in subsection (c)," before "the term".

Subsecs. (c) to (e). Pub. L. 104–188, §1613(a)(1), added subsecs. (c) and (d) and redesignated former subsec. (c) as (e).

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).

Statutory Notes and Related Subsidiaries

Effective Date of 2021 Amendment

Pub. L. 117–58, div. H, title VI, §80601(b), Nov. 15, 2021, 135 Stat. 1338 , provided that: "The amendments made by this section [amending this section] shall apply to contributions made after December 31, 2020."

Effective Date of 2017 Amendment

Pub. L. 115–97, title I, §13312(b), Dec. 22, 2017, 131 Stat. 2132 , provided that:

"(1) In general.-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].

"(2) Exception.-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."

Effective Date of 1996 Amendment

Pub. L. 104–188, title I, §1613(a)(3), Aug. 20, 1996, 110 Stat. 1850 , 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

Pub. L. 99–514, title VIII, §824(c), Oct. 22, 1986, 100 Stat. 2374 , 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 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

Pub. L. 98–369, div. A, title I, §163(c), July 18, 1984, 98 Stat. 698 , as amended by Pub. L. 99–514, §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 [former] 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

Pub. L. 95–600, title III, §364(b), Nov. 6, 1978, 92 Stat. 2854 , 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

Pub. L. 94–455, title XXI, §2120(c), Oct. 4, 1976, 90 Stat. 1913 , 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."