
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC118]

 
                     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
 
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).

(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.)


                               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.''

                  Section Referred to in Other Sections

    This section is referred to in section 108 of this title.
