§118 — Contributions to the capital of a corporation
65 citing cases
Statute Text — 26 U.S.C. §118
In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.
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, and
any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such).
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—
such amount is—
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.
An amount meets the requirements of this paragraph if—
an amount equal to such amount is expended for the acquisition or construction of tangible property described in section 1231(b)—
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.
For purposes of this subsection—
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.
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—
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—
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).
Treasury Regulations
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Treas. Reg. §1.118-1Contributions to the capital of a corporation
In the case of a corporation, section 118 provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer. Thus, if a corporation requires additional funds for conducting its business and obtains such funds through voluntary pro rata payments by its shareholders, the amounts so received being credited to its surplus account or to a special account, such amounts do not constitute income, although there is no increase in the outstanding shares of stock of the corporation. In such a case the payments are in the nature of assessments upon, and represent an additional price paid for, the shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company. Section 118 also applies to contributions to capital made by persons other than shareholders. For example, the exclusion applies to the value of land or other property contributed to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community, or for the purpose of enabling the corporation to expand its operating facilities. However, the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered, or to subsidies paid for the purpose of inducing the taxpayer to limit production. See section 362 for the basis of property acquired by a corporation through a contribution to its capital by its stockholders or by nonstockholders.
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Treas. Reg. §1.118-2Contribution in aid of construction
(a) Special rule for water and sewerage disposal utilities—(1) In general. For purposes of section 118, 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 that provides water or sewerage disposal services if—
(i) The amount is a contribution in aid of construction under paragraph (b) of this section;
(ii) In the case of a contribution of property other than water or sewerage disposal facilities, the amount satisfies the expenditure rule under paragraph (c) of this section; and
(iii) The amount (or any property acquired or constructed with the amount) is not included in the taxpayer's rate base for ratemaking purposes.
(2) Definitions—(i) Regulated public utility has the meaning given such term by section 7701(a)(33), except that such term does 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.
(ii) Water or sewerage disposal facility is defined as tangible property described in section 1231(b) that is used predominately (80% or more) in the trade or business of furnishing water or sewerage disposal services.
(b) Contribution in aid of construction—(1) In general. For purposes of section 118(c) and this section, the term contribution in aid of construction means any amount of money or other property contributed to a regulated public utility that provides water or sewerage disposal services to the extent that the purpose of the contribution is to provide for the expansion, improvement, or replacement of the utility's water or sewerage disposal facilities.
(2) Advances. A contribution in aid of construction may include an amount of money or other property contributed to a regulated public utility for a water or sewerage disposal facility subject to a contingent obligation to repay the amount, in whole or in part, to the contributor (commonly referred to as an advance). For example, an amount received by a utility from a developer to construct a water facility pursuant to an agreement under which the utility will pay the developer a percentage of the receipts from the facility over a fixed period may constitute a contribution in aid of construction. Whether an advance is a contribution or a loan is determined under general principles of federal tax law based on all the facts and circumstances. For the treatment of any amount of a contribution in aid of construction that is repaid by the utility to the contributor, see paragraphs (c)(2)(ii) and (d)(2) of this section.
(3) Customer connection fee—(i) In general. Except as provided in paragraph (b)(3)(ii) of this section, a customer connection fee is not a contribution in aid of construction under this paragraph (b) and generally is includible in income. The term customer connection fee includes any amount of money or other property transferred to the utility representing the cost of installing a connection or service line (including the cost of meters and piping) from the utility's main water or sewer lines to the line owned by the customer or potential customer. A customer connection fee also includes any amount paid as a service charge for starting or stopping service.
(ii) Exceptions—(A) Multiple customers. Money or other property contributed for a connection or service line from the utility's main line to the customer's or the potential customer's line is not a customer connection fee if the connection or service line serves, or is designed to serve, more than one customer. For example, a contribution for a split service line that is designed to serve two customers is not a customer connection fee. On the other hand, if a water or sewerage disposal utility treats an apartment or office building as one utility customer, then the cost of installing a connection or service line from the utility's main water or sewer lines serving that single customer is a customer connection fee.
(B) Fire protection services. Money or other property contributed for public and private fire protection services is not a customer connection fee.
(4) Reimbursement for a facility previously placed in service—(i) In general. If a water or sewerage disposal facility is placed in service by the utility before an amount is contributed to the utility, the contribution is not a contribution in aid of construction under this paragraph (b) with respect to the cost of the facility unless, no later than 8
1/2 months after the close of the taxable year in which the facility was placed in service, there is an agreement, binding under local law, that the utility is to receive the amount as reimbursement for the cost of acquiring or constructing the facility. An order or tariff, binding under local law, that is issued or approved by the applicable public utility commission requiring current or prospective utility customers to reimburse the utility for the cost of acquiring or constructing the facility, is a binding agreement for purposes of the preceding sentence. If an agreement exists, the basis of the facility must be reduced by the amount of the expected contributions. Appropriate adjustments must be made if actual contributions differ from expected contributions.
(ii) Example. The application of paragraph (b)(4)(i) of this section is illustrated by the following example:
(5) Classification by ratemaking authority. The fact that the applicable ratemaking authority classifies any money or other property received by a utility as a contribution in aid of construction is not conclusive as to its treatment under this paragraph (b).
(c) Expenditure rule—(1) In general. An amount satisfies the expenditure rule of section 118(c)(2) if the amount is expended for the acquisition or construction of property described in section 118(c)(2)(A), the amount is paid or incurred before the end of the second taxable year after the taxable year in which the amount was received as required by section 118(c)(2)(B), and accurate records are kept of contributions and expenditures as provided in section 118(c)(2)(C).
(2) Excess amount—(i) Includible in the utility's income. An amount received by a utility as a contribution in aid of construction that is not expended for the acquisition or construction of water or sewerage disposal facilities as required by paragraph (c)(1) of this section (the excess amount) is not a contribution to the capital of the taxpayer under paragraph (a) of this section. Except as provided in paragraph (c)(2)(ii) of this section, such excess amount is includible in the utility's income in the taxable year in which the amount was received.
(ii) Repayment of excess amount. If the excess amount described in paragraph (c)(2)(i) of this section is repaid, in whole or in part, either—
(A) Before the end of the time period described in paragraph (c)(1) of this section, the repayment amount is not includible in the utility's income; or
(B) After the end of the time period described in paragraph (c)(1) of this section, the repayment amount may be deducted by the utility in the taxable year in which it is paid or incurred to the extent such amount was included in income.
(3) Example. The application of this paragraph (c) is illustrated by the following example:
(d) Adjusted basis—(1) Exclusion from basis. Except for a repayment described in paragraph (d)(2) of this section, to the extent that a water or sewerage disposal facility is acquired or constructed with an amount received as a contribution to the capital of the taxpayer under paragraph (a) of this section, the basis of the facility is reduced by the amount of the contribution. To the extent the water or sewerage disposal facility is acquired as a contribution to the capital of the taxpayer under paragraph (a) of this section, the basis of the contributed facility is zero.
(2) Repayment of contribution. If a contribution to the capital of the taxpayer under paragraph (a) of this section is repaid to the contributor, either in whole or in part, then the repayment amount is a capital expenditure in the taxable year in which it is paid or incurred, resulting in an increase in the property's adjusted basis in such year. Capital expenditures allocated to depreciable property under paragraph (d)(3) of this section may be depreciated over the remaining recovery period for that property.
(3) Allocation of contributions. An amount treated as a capital expenditure under this paragraph (d) is to be allocated proportionately to the adjusted basis of each property acquired or constructed with the contribution based on the relative cost of such property.
(4) Example. The application of this paragraph (d) is illustrated by the following example:
(e) Statute of limitations—(1) Extension of statute of limitations. Under section 118(d)(1), the statutory period for assessment of any deficiency attributable to a contribution to capital under paragraph (a) of this section does not expire before the expiration of 3 years after the date the taxpayer notifies the Secretary in the time and manner prescribed in paragraph (e)(2) of this section.
(2) Time and manner of notification. Notification is made by attaching a statement to the taxpayer's federal income tax return for the taxable year in which any of the reportable items in paragraphs (e)(2)(i) through (iii) of this section occur. The statement must contain the taxpayer's name, address, employer identification number, taxable year, and the following information with respect to contributions of property other than water or sewerage disposal facilities that are subject to the expenditure rule described in paragraph (c) of this section—
(i) The amount of contributions in aid of construction expended during the taxable year for property described in section 118(c)(2)(A) (qualified property) as required under paragraph (c)(1) of this section, identified by taxable year in which the contributions were received;
(ii) The amount of contributions in aid of construction that the taxpayer does not intend to expend for qualified property as required under paragraph (c)(1) of this section, identified by taxable year in which the contributions were received; and
(iii) The amount of contributions in aid of construction that the taxpayer failed to expend for qualified property as required under paragraph (c)(1) of this section, identified by taxable year in which the contributions were received.
(f) Effective date. This section is applicable for any money or other property received by a regulated public utility that provides water or sewerage disposal services on or after January 11, 2001.
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Treas. Reg. §1.118-2(a)Special rule for water and sewerage disposal utilities—(1) In general.
Special rule for water and sewerage disposal utilities—(1) In general. For purposes of section 118, 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 that provides water or sewerage disposal services if—
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Treas. Reg. §1.118-2(b)Contribution in aid of construction—(1) In general.
Contribution in aid of construction—(1) In general. For purposes of section 118(c) and this section, the term contribution in aid of construction means any amount of money or other property contributed to a regulated public utility that provides water or sewerage disposal services to the extent that the purpose of the contribution is to provide for the expansion, improvement, or replacement of the utility's water or sewerage disposal facilities.
(2) Advances. A contribution in aid of construction may include an amount of money or other property contributed to a regulated public utility for a water or sewerage disposal facility subject to a contingent obligation to repay the amount, in whole or in part, to the contributor (commonly referred to as an advance). For example, an amount received by a utility from a developer to construct a water facility pursuant to an agreement under which the utility will pay the developer a percentage of the receipts from the facility over a fixed period may constitute a contribution in aid of construction. Whether an advance is a contribution or a loan is determined under general principles of federal tax law based on all the facts and circumstances. For the treatment of any amount of a contribution in aid of construction that is repaid by the utility to the contributor, see paragraphs (c)(2)(ii) and (d)(2) of this section.
(3) Customer connection fee—(i) In general. Except as provided in paragraph (b)(3)(ii) of this section, a customer connection fee is not a contribution in aid of construction under this paragraph (b) and generally is includible in income. The term customer connection fee includes any amount of money or other property transferred to the utility representing the cost of installing a connection or service line (including the cost of meters and piping) from the utility's main water or sewer lines to the line owned by the customer or potential customer. A customer connection fee also includes any amount paid as a service charge for starting or stopping service.
(ii) Exceptions—(A) Multiple customers. Money or other property contributed for a connection or service line from the utility's main line to the customer's or the potential customer's line is not a customer connection fee if the connection or service line serves, or is designed to serve, more than one customer. For example, a contribution for a split service line that is designed to serve two customers is not a customer connection fee. On the other hand, if a water or sewerage disposal utility treats an apartment or office building as one utility customer, then the cost of installing a connection or service line from the utility's main water or sewer lines serving that single customer is a customer connection fee.
(B) Fire protection services. Money or other property contributed for public and private fire protection services is not a customer connection fee.
(4) Reimbursement for a facility previously placed in service—(i) In general. If a water or sewerage disposal facility is placed in service by the utility before an amount is contributed to the utility, the contribution is not a contribution in aid of construction under this paragraph (b) with respect to the cost of the facility unless, no later than 8
1/2 months after the close of the taxable year in which the facility was placed in service, there is an agreement, binding under local law, that the utility is to receive the amount as reimbursement for the cost of acquiring or constructing the facility. An order or tariff, binding under local law, that is issued or approved by the applicable public utility commission requiring current or prospective utility customers to reimburse the utility for the cost of acquiring or constructing the facility, is a binding agreement for purposes of the preceding sentence. If an agreement exists, the basis of the facility must be reduced by the amount of the expected contributions. Appropriate adjustments must be made if actual contributions differ from expected contributions.
(ii) Example. The application of paragraph (b)(4)(i) of this section is illustrated by the following example:
(5) Classification by ratemaking authority. The fact that the applicable ratemaking authority classifies any money or other property received by a utility as a contribution in aid of construction is not conclusive as to its treatment under this paragraph (b).
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Treas. Reg. §1.118-2(c)Expenditure rule—(1) In general.
Expenditure rule—(1) In general. An amount satisfies the expenditure rule of section 118(c)(2) if the amount is expended for the acquisition or construction of property described in section 118(c)(2)(A), the amount is paid or incurred before the end of the second taxable year after the taxable year in which the amount was received as required by section 118(c)(2)(B), and accurate records are kept of contributions and expenditures as provided in section 118(c)(2)(C).
(2) Excess amount—(i) Includible in the utility's income. An amount received by a utility as a contribution in aid of construction that is not expended for the acquisition or construction of water or sewerage disposal facilities as required by paragraph (c)(1) of this section (the excess amount) is not a contribution to the capital of the taxpayer under paragraph (a) of this section. Except as provided in paragraph (c)(2)(ii) of this section, such excess amount is includible in the utility's income in the taxable year in which the amount was received.
(ii) Repayment of excess amount. If the excess amount described in paragraph (c)(2)(i) of this section is repaid, in whole or in part, either—
(A) Before the end of the time period described in paragraph (c)(1) of this section, the repayment amount is not includible in the utility's income; or
(B) After the end of the time period described in paragraph (c)(1) of this section, the repayment amount may be deducted by the utility in the taxable year in which it is paid or incurred to the extent such amount was included in income.
(3) Example. The application of this paragraph (c) is illustrated by the following example:
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Treas. Reg. §1.118-2(d)Adjusted basis—(1) Exclusion from basis.
Adjusted basis—(1) Exclusion from basis. Except for a repayment described in paragraph (d)(2) of this section, to the extent that a water or sewerage disposal facility is acquired or constructed with an amount received as a contribution to the capital of the taxpayer under paragraph (a) of this section, the basis of the facility is reduced by the amount of the contribution. To the extent the water or sewerage disposal facility is acquired as a contribution to the capital of the taxpayer under paragraph (a) of this section, the basis of the contributed facility is zero.
(2) Repayment of contribution. If a contribution to the capital of the taxpayer under paragraph (a) of this section is repaid to the contributor, either in whole or in part, then the repayment amount is a capital expenditure in the taxable year in which it is paid or incurred, resulting in an increase in the property's adjusted basis in such year. Capital expenditures allocated to depreciable property under paragraph (d)(3) of this section may be depreciated over the remaining recovery period for that property.
(3) Allocation of contributions. An amount treated as a capital expenditure under this paragraph (d) is to be allocated proportionately to the adjusted basis of each property acquired or constructed with the contribution based on the relative cost of such property.
(4) Example. The application of this paragraph (d) is illustrated by the following example:
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Treas. Reg. §1.118-2(e)Statute of limitations—(1) Extension of statute of limitations.
Statute of limitations—(1) Extension of statute of limitations. Under section 118(d)(1), the statutory period for assessment of any deficiency attributable to a contribution to capital under paragraph (a) of this section does not expire before the expiration of 3 years after the date the taxpayer notifies the Secretary in the time and manner prescribed in paragraph (e)(2) of this section.
(2) Time and manner of notification. Notification is made by attaching a statement to the taxpayer's federal income tax return for the taxable year in which any of the reportable items in paragraphs (e)(2)(i) through (iii) of this section occur. The statement must contain the taxpayer's name, address, employer identification number, taxable year, and the following information with respect to contributions of property other than water or sewerage disposal facilities that are subject to the expenditure rule described in paragraph (c) of this section—
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Treas. Reg. §1.118-2(f)Effective date.
Effective date. This section is applicable for any money or other property received by a regulated public utility that provides water or sewerage disposal services on or after January 11, 2001.
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Treas. Reg. §1.118-2(i)§1.118-2(i)
The amount of contributions in aid of construction expended during the taxable year for property described in section 118(c)(2)(A) (qualified property) as required under paragraph (c)(1) of this section, identified by taxable year in which the contributions were received;
(ii) The amount of contributions in aid of construction that the taxpayer does not intend to expend for qualified property as required under paragraph (c)(1) of this section, identified by taxable year in which the contributions were received; and
(iii) The amount of contributions in aid of construction that the taxpayer failed to expend for qualified property as required under paragraph (c)(1) of this section, identified by taxable year in which the contributions were received.
65 Citing Cases
Section 118 Thermal argues that the $4.3 million paid by NVT is excludable from income under section 118(a), which provides that “[i]n the case of a corporation, gross income does not include any contribution to the capital of the taxpayer.” The Commissioner argues that the exceptions to section 118(a) found in section 118(b) preclude a capital con
Nonshareholder Contributions to Capital Section 118(a) generally excludes from gross income any contribution to the capital of a corporation. This includes contributions made by nonshareholders. Treas. Reg. § 1.118-1. The exclusion does not apply, however, to any money or other property transferred in consideration for goods or services rendered.5 Id.
Petitioner argues that section 118, which 18 Respondent determined penalties for tax year ending November 30, 2015, as a computational adjustment related to the deficiencies from tax years ending November 30, 2010 through 2012.
In Saline Sewer we held that “the failure to report customer connection fees as income, and instead treat them as contributions to capital pursuant to section 118, is clearly not a timing issue.” See id at *9.
Accordingly, we hold that petitioners did not strictly comply with the requirement under section 170 and the regulations thereunder that the taxpayer obtain a CWA.
- 22 - [*22] Petitioner argues that it falls under one such exclusion: section 118(a),¹² which provides that, in general, "[i]n the case ofa corporation, gross income does not include any contribution to the capital ofthe taxpayer." As relevant in this matter, section 1.118-1, Income Tax Regs., provides: In the case ofa corporation, section 118 provides an exclusion from gross income with respect to any contribution ofmoney or property to the capital ofthe taxpayer. * * * Section 118 also applie
138 (2002). Gross income derived from an individual's trade or business may be subject to self-employmenttax even when it is attributable in whole or in part to services rendered in a prior taxable year. Sec. 1.1402(a)-1(c), Income Tax Regs. Section 1402(k) exempts the termination - 7 - [*7] payments ofinsurance salesmen from self-emplo
Section 170(f)(8)(B) provides that a contemporaneous written acknowledgment must include: (i) The amount ofcash and a description (but not value) ofany property other than cash contributed.
Section 170(f)(8)(B) provides that a contemporaneous written acknowledgment must include: (i) The amount ofcash and a description (but not value) ofany property other than cash contributed.
Section 170(f)(8)(B) provides that a contemporaneous written acknowledgment must include: (i) The amount ofcash and a description (but not value) ofany property other than cash contributed.
The taxpayers in Nathel argued that "because section 118 excludes capital contributions from the gross income ofan S - 25 - [*25] corporation in all circumstances, capital contributions to an S corporation are 'permanently excludible' from the gross income ofthe S corporation and are thus tax-exempt income' under section 1.1366-1(a)(2)(viii), Income Tax Regs.".
The taxpayers in Nathel argued that "because section 118 excludes capital contributions from the gross income ofan S - 25 - [*25] corporation in all circumstances, capital contributions to an S corporation are 'permanently excludible' from the gross income ofthe S corporation and are thus tax-exempt income' under section 1.1366-1(a)(2)(viii), Income Tax Regs.".
The taxpayers in Nathel argued that "because section 118 excludes capital contributions from the gross income ofan S - 25 - [*25] corporation in all circumstances, capital contributions to an S corporation are 'permanently excludible' from the gross income ofthe S corporation and are thus tax-exempt income' under section 1.1366-1(a)(2)(viii), Income Tax Regs.".
The taxpayers in Nathel argued that "because section 118 excludes capital contributions from the gross income ofan S - 25 - [*25] corporation in all circumstances, capital contributions to an S corporation are 'permanently excludible' from the gross income ofthe S corporation and are thus tax-exempt income' under section 1.1366-1(a)(2)(viii), Income Tax Regs.".
The taxpayers in Nathel argued that "because section 118 excludes capital contributions from the gross income ofan S - 25 - [*25] corporation in all circumstances, capital contributions to an S corporation are 'permanently excludible' from the gross income ofthe S corporation and are thus tax-exempt income' under section 1.1366-1(a)(2)(viii), Income Tax Regs.".
W&N CAL of the $1,622 , 050 loan payments, petitioners ' August 30 , 2001, capital contributions to G&D and to W&N CAL were treated by petitioners as constituting income under section 1366 (a)(1) to G&D and W&N CAL (albeit as excludable income under section 118) and therefore as restoring or increasing under section 1367 (b)(2)(B) petitioners' respective tax bases in the outstanding loans each petitioner made to G&D and W&N CAL as follows : Each Petitioner's Tax Bases in Loans To G&D and W&N CAL
W&N CAL of the $1,622 , 050 loan payments, petitioners ' August 30 , 2001, capital contributions to G&D and to W&N CAL were treated by petitioners as constituting income under section 1366 (a)(1) to G&D and W&N CAL (albeit as excludable income under section 118) and therefore as restoring or increasing under section 1367 (b)(2)(B) petitioners' respective tax bases in the outstanding loans each petitioner made to G&D and W&N CAL as follows : Each Petitioner's Tax Bases in Loans To G&D and W&N CAL
- 3 - under section 118, as a nontaxable capital contribution by the Mexican Government to petitioner or to Procesos.
Contributions to the capital of a corporation.-- In the case of a corporation, section 118 provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer.
ealized no gain on the transaction; (2) that the transaction should not be viewed as a taxable exchange because petitioner could not legally own an interest in the U.S.-dollar-denominated debt of the Mexican Government; and (3) that if gain was realized over petitioner’s cost of participating in the transaction, such gain should be regarded, under section 118, as a nontaxable capital contribution by the Mexican Government to petitioner or to Procesos.
Petitioner characterizes the transfer fees as contributions to capital and principally relies on section 118 for the proposition that contributions to capital are not included in the gross income of a corporation.
s. - 4 - Petitioner did not report the $35,625 on its 1989 Federal income tax return. In her notice of deficiency, respondent determined that the $35,625 was includable in petitioner's income for 1989 as "contributions in aid of construction" under section 118. At trial and in its briefs, petitioner argued that: (1) The contribution by McArthy (escrowed funds) is not a "contribution in aid of construction" within the meaning of section 118(b), but a nontaxable contribution to the capital of Impe
Alternatively, if gain was realized on the exchange of the Mexican debt for the Mexican pesos, petitioner argues that the gain should be regarded as having been realized not by petitioner but by Procesos and that the gain should be treated, under section 118, as a nontaxable contribution of capital by the Mexican Government to Procesos.