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Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8936]
RIN 1545–AW17

Definition of Contribution in Aid of
Construction Under Section 118(c)
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations concerning an exclusion
from gross income for a contribution in
aid of construction under section 118(c)
that is treated as a contribution to
capital under section 118(a). The final
regulations affect a regulated public
utility that provides water or sewerage
services because a qualifying
contribution in aid of construction is
treated as a contribution to the capital
of the utility and excluded from gross
income. The final regulations provide
guidance on the definition of a
contribution in aid of construction, the
adjusted basis of any property acquired
with a contribution in aid of
construction, the information relating to
a contribution in aid of construction
required to be furnished by the utility,
and the time and manner for providing
that information to the IRS.
DATES: Effective Date: These regulations
are effective January 11, 2001.
Date of Applicability: For date of
applicability of § 1.118–2, see § 1.118–
2(f).

Paul
Handleman, (202) 622–3040 (not a tollfree number).
SUPPLEMENTARY INFORMATION:
FOR FURTHER INFORMATION CONTACT:

Paperwork Reduction Act
The collections of information
contained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545–1639.
Responses to these collections of
information are mandatory.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated annual burden per
respondent varies from .5 hour to 5
hours, depending on individual
circumstances, with an estimated
average of 1 hour.

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Comments concerning the accuracy of
these burden estimates and suggestions
for reducing these burdens should be
sent to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:FP:S:O, Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
On December 20, 1999, the IRS
published proposed regulations (REG–
106012–98) in the Federal Register (64
FR 71082) inviting comments under
section 118(c). A public hearing was
held April 27, 2000. Numerous
comments have been received. After
consideration of all the comments, the
proposed regulations are adopted as
revised by this Treasury decision.
Summary of Comments
Under section 118(a), gross income
does not include any contribution to the
capital of the taxpayer. Section 118(c)(1)
provides that a contribution to the
capital of a 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 the amount is a
contribution in aid of construction,
satisfies the expenditure rule, and is not
included in rate base for ratemaking
purposes. Pursuant to the authority
granted to the Secretary under section
118(c)(3)(A), the proposed regulations
define a contribution in aid of
construction as 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.
Customer Connection Fees
The proposed regulations define
nontaxable contributions in aid of
construction to exclude customer
connection fees. Customer connection
fees are defined in the proposed
regulations to include amounts paid for
the cost of installing a connection or
service line (including the cost of meters

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and piping) from the utility’s main lines
to the lines owned by the customer,
unless the connection or service line
serves, or is designed to serve, more
than one customer. Customer
connection fees also are defined in the
proposed regulations to include any
amounts paid as service charges for
starting or stopping services.
Several commentators contend that
connection and service lines should not
be treated as taxable customer
connection fees for a number of reasons.
For example, these commentators argue
that the omission from the current law
of the language included in former
section 118(b)(3)(A) that directed the
Secretary to define a contribution in aid
of construction to exclude amounts paid
to connect the customer’s line to a main
water or sewer line signals
congressional intent to include
connection and service lines in the
definition of a nontaxable contribution
in aid of construction. In addition, some
of these commentators believe that the
inclusion of connection and service
lines as taxable customer connection
fees is inconsistent with the judicial
interpretation of a contribution in aid of
construction, which arguably would
treat contributions for main lines and
connection and service lines as taxable
prerequisites for services under the
Supreme Court’s decision in United
States v. Chicago, Burlington & Quincy
R.R., 412 U.S. 401 (1973) (1973–2 C.B.
428). Some of these commentators also
contend that the exclusion of
connection and service lines from the
definition of a nontaxable contribution
in aid of construction is inconsistent
with regulatory accounting treatment,
which does not distinguish between
main lines and connection and service
lines for purposes of classifying
property or for purposes of ratemaking.
Finally, a few of these commentators
point out that the inclusion of
connection and service lines as taxable
customer connection fees will result in
customers being required to gross-up
their contributions of connection and
service lines for taxes, increasing the
cost of housing and development and
creating a competitive disadvantage for
investor-owned utilities.
The IRS and Treasury Department do
not agree with the commentators’
position with respect to connection and
service lines. As explained in the
preamble to the proposed regulations,
the inclusion of connection and service
lines in the definition of taxable
customer connection fees is consistent
with the legislative history explanation
that section 118(c) was intended to
restore the contribution in aid of
construction provision of former section

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Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
118(b) that was repealed by The Tax
Reform Act of 1986 for regulated public
utilities that provide water or sewerage
disposal services. H.R. Conf. Rep. No.
737, 104th Cong., 2d Sess. 316 (1996)
(1996–3 C.B. 741, 1056). While the
language regarding the definition of a
contribution in aid of construction did
change from the language in former
section 118(b), Congress did not
explicitly include connection and
service lines in the definition of a
contribution in aid of construction but
instead directed the Secretary to define
a contribution in aid of construction,
presumably aware of the IRS’ and
Treasury Department’s position that
connection and service lines are taxable
customer connection fees based on Rev.
Rul. 75–557 (1975–2 C.B. 33), and the
proposed regulations under former
section 118(b) (43 FR 22997 (May 30,
1978)). Moreover, the IRS and Treasury
Department continue to believe that the
exclusion of connection and service
lines from a nontaxable contribution in
aid of construction is more consistent
with the judicial and regulatory
interpretation of a contribution in aid of
construction and with the Supreme
Court’s directive that exclusions be
narrowly construed. See, for example,
Edwards v. Cuba R.R., 268 U.S. 628
(1925) (IV–2 C.B. 122); Detroit Edison
Co. v. Commissioner, 319 U.S. 98 (1943)
(1943 C.B. 1019); Chicago, Burlington &
Quincy R.R., 412 U.S. at 401; Florida
Progress Corp. v. United States, No. 93–
246–CIV–T–25A (M.D. Fla. July 2,
1998), appeal docketed, No. 99–15389–
FF (11th Cir. Dec. 29, 1999);
Commissioner v. Schleier, 515 U.S. 323,
328 (1995); and Rev. Rul. 75–557. As
explained by the court in Teco Energy,
Inc. v. United States, No. 98–430–Civ–
J–TJC (M.D. Fla. Oct. 21, 1999), ‘‘former
[section] 118(b) codifies the principles
of Edwards that payments made by a
government or other group to a utility to
encourage the extension of facilities into
new areas benefiting a large number of
people are given tax free status, while
also affirming the reasoning of Detroit
Edison Revenue Ruling 75–557, that
payments made by an individual or
business entity to a utility as a
prerequisite to receiving water or
sewage services would be treated as
taxable income to the utility.’’ Further,
the IRS and Treasury Department
believe that the definition of a
contribution in aid of construction used
for regulatory accounting purposes
should not control for tax purposes. See,
for example, Thor Power Tool Co. v.
Commissioner, 439 U.S. 522, 541–45
(1979) (1979–1 C.B. 167). Accordingly,
the final regulations retain the exclusion

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of connection and service lines from the
definition of a nontaxable contribution
in aid of construction.
Some commentators state that, before
the proposed regulations were
published, some utilities took the
position that payments for connection
and service lines were not taxable and
did not charge their contributors a
sufficient amount to cover their tax
liabilities. The IRS and Treasury
Department understand that there was
uncertainty before the proposed
regulations were published and that
some utilities may have reasonably
interpreted section 118(c)(3)(A) to mean
that connection and service lines should
not be treated as taxable. It is clear that
these final regulations apply to money
and other property received on or after
January 11, 2001 and do not apply to
transactions entered into prior to that
date. In addition, the IRS will take into
account all the facts and circumstances
in applying section 118(c) to such
transactions.
Commentators suggest that customer
connection fees relating to services
provided to public authorities, such as
schools, hospitals, public libraries, and
governmental entities, should be
included in the definition of nontaxable
contributions in aid of construction
because these services provide a broad
public benefit. In addition,
commentators recommend that
customer connection fees relating to fire
protection services should qualify as
nontaxable contributions in aid of
construction because a utility receives
no revenue for public fire protection
services and only a nominal standby fee
for private fire protection services. The
IRS and Treasury Department believe
that, regardless of whether the activities
of public authorities provide a public
benefit, connection and service lines
that serve these customers should be
treated in the same manner as
connection or service lines to any
paying customer—as a prerequisite for
services. Consequently, the final
regulations continue to treat amounts
paid for connection and service lines
with respect to public authorities as
customer connection fees. However, the
IRS and the Treasury Department agree
with commentators that amounts paid
with respect to fire protection services
should not be considered customer
connection fees.
Several commentators suggest that
connection and service lines that serve
more than one user, such as lines for
apartment houses, condominium
projects, shopping malls, and office
buildings, should be considered to serve
more than one customer and, thus, be
excluded from taxable customer

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2253

connection fees, regardless of whether
the utility treats the facility as one
customer or many. The final regulations
do not adopt this suggestion because
whether connection or service lines are
designed to serve more than one
customer does not depend on the
number of users but upon the number
of customers. Thus, for example, if a
water or sewerage disposal utility treats
an apartment or office building as one
utility customer, then the cost of
connecting the utility’s main lines to the
connection or service lines serving that
single customer is a taxable customer
connection fee.
Binding Agreement Rule
The proposed regulations provide that
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 nontaxable
contribution in aid of construction
unless, at the time the facility is placed
in service by the utility, there is an
agreement, binding under local law
between the prospective contributor and
the utility, that the utility is to receive
the amount as reimbursement for the
cost of acquiring or constructing the
facility.
Commentators suggest that the
binding agreement rule should be
expanded to include enforceable public
utility commission orders and tariffs.
The final regulations adopt this
suggestion by treating an order or a
tariff, issued or approved by the
applicable public utility commission,
that requires a current or prospective
customer to reimburse the utility for the
cost of acquiring or constructing the
facility as a binding agreement. Because
public utility commission orders or
tariffs may be issued or approved before
or after the facility is placed in service,
the final regulations also extend the
time for entering into a binding
agreement or the issuance or approval of
an order or a tariff to no later than 81⁄2
months after the close of the taxable
year (the usual due date with extensions
for a taxpayer’s return) in which the
facility is placed in service.
One commentator suggests adding an
example demonstrating that payments
made pursuant to a binding agreement
qualify as a contribution in aid of
construction under section 118(c). The
final regulations adopt this suggestion.
Basis Rules
The proposed regulations provide that
the basis of a water or sewerage facility
acquired or constructed with a
contribution under a binding agreement
must be reduced by the amount of the
contribution at the time the facility is

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Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations

placed in service. Several commentators
suggest that if the receipt of all of the
expected contributions under the
agreement occurs more than one or two
years after a facility is placed in service,
the utility should be permitted to claim
the full cost of the facility as basis for
depreciation purposes, subject to
adjustment as the contributions are
received. The final regulations do not
adopt this comment because section
118(c)(4) disallows any depreciation
deductions for a water or sewerage
disposal facility that is fully paid with
a nontaxable contribution in aid of
construction under section under
section 118(c). This result is consistent
with similar rules that either exclude
expected contributions from basis or
deny a deduction to the extent the
taxpayer has a right to, or reasonable
prospect of, reimbursement. See, for
example, § 1.110–1(b)(4)(ii)(B); § 1.165–
1(d)(2)(i); and Rev. Rul. 79–263 (1979–
2 C.B. 82).
The proposed regulations provide
that, if a contribution in aid of
construction treated as a contribution to
the capital of the taxpayer 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. A couple of
commentators suggest that the
repayment should be depreciated over
the remaining life of the property. The
final regulations adopt this suggestion.
Reporting Requirement
The proposed regulations provide that
a taxpayer treating a contribution in aid
of construction as a contribution to
capital must file a statement with its tax
returns to report the amount of the
contribution in aid of construction the
taxpayer: (1) Expended during the
taxable year for property described in
section 118(c)(2)(A) (qualified property);
(2) does not intend to expend for
qualified property; and (3) failed to
expend for qualified property. Several
commentators express concern that the
reporting requirement in the proposed
regulations exceeds the intent of the
statute because section 118(c)(2)(C) only
requires the maintenance of adequate
records. However, section 118(d)(1)
provides that if the taxpayer for any
taxable year treats an amount as a
contribution to the capital of the
taxpayer described in section 118(c),
then the statutory period for the
assessment of any deficiency
attributable to any part of the amount
does not expire before the expiration of
3 years from the date the Secretary is
notified by the taxpayer (in such

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manner as the Secretary may prescribe)
of the amount of the expenditure
referred to in section 118(c)(2)(A), of the
taxpayer’s intention not to make the
expenditures referred to in section
118(c)(2)(A), or of a failure to make the
expenditure within the period described
in section 118(c)(2)(B). Thus, the
regulations do not impose an additional
reporting requirement but merely
provide the time and manner in which
taxpayers must notify the Secretary
under section 118(d)(1) of amounts
treated as contributions in aid of
construction.
Collection of Information under
Paperwork Reduction Act
Two comments were sent to OMB on
the collection of information contained
in the proposed regulations, with copies
of the comments sent to the IRS Reports
Clearance Officer. The commentators
estimate that complying with the
recordkeeping requirements of section
118(c)(2)(C) involves more hours and
that the number of respondents is
greater than estimated. The collection of
information burden under the proposed
regulations is based only upon the time
for notifying the IRS of the required
information under section 118(d)(1) and
is not required to include the time for
maintaining accurate books and records.
Thus, the individual time to comply
with the collection of information
burden was not increased to reflect
these commentators concerns. However,
the estimated number of annual
respondents has been increased to 300
and the estimated total annual reporting
burden has been increased to 300 hours.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. It is hereby
certified that the collection of
information in these regulations will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that any burden on taxpayers is
minimal. Accordingly, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was
submitted to the Chief Counsel for
Advocacy of the Small Business

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Administration for comment on its
impact on small business.
Drafting Information
The principal author of these
regulations is Paul F. Handleman, Office
of the Associate Chief Counsel
(Passthroughs and Special Industries),
IRS. However, other personnel from the
IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
in numerical order to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.118–2 also issued under 26
U.S.C. 118(c)(3)(A); * * *

Par. 2. Section 1.118–2 is added to
read as follows:
§ 1.118–2 Contribution 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.

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(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

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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 81⁄2 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:
Example. M, a calendar year regulated
public utility that provides water services,
spent $1,000,000 for the construction of a
water facility that can serve 200 customers.
M placed the facility in service in 2000. In
June 2001, the public utility commission that
regulates M approves a tariff requiring new
customers to reimburse M for the cost of
constructing the facility by paying a service
availability charge of $5,000 per lot. Pursuant
to the tariff, M expects to receive
reimbursements for the cost of the facility of
$100,000 per year for the years 2001 through
2010. The reimbursements are contributions
in aid of construction under paragraph (b) of
this section because no later than 81⁄2 months
after the close of the taxable year in which
the facility was placed in service there was
a tariff, binding under local law, approved by
the public utility commission requiring new
customers to reimburse the utility for the cost
of constructing the facility. The basis of the
$1,000,000 facility is zero because the

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expected contributions equal the cost of the
facility.

(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:
Example. M, a calendar year regulated
public utility that provides water services,
received a $1,000,000 contribution in aid of
construction in 2000 for the purpose of
constructing a water facility. To the extent
that the $1,000,000 exceeded the actual cost
of the facility, the contribution was subject to
being returned. In 2001, M built the facility
at a cost of $700,000 and returned $200,000
to the contributor. As of the end of 2002, M
had not returned the remaining $100,000.
Assuming accurate records are kept, the
requirement under section 118(c)(2) is
satisfied for $700,000 of the contribution.

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Because $200,000 of the contribution was
returned within the time period during
which qualifying expenditures could be
made, this amount is not includible in M’s
income. However, the remaining $100,000 is
includible in M’s income for its 2000 taxable
year (the taxable year in which the amount
was received) because the amount was
neither spent nor repaid during the
prescribed time period. To the extent M
repays the remaining $100,000 after year
2002, M would be entitled to a deduction in
the year such repayment is paid or incurred.

(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:
Example. A, a calendar year regulated
public utility that provides water services,
received a $1,000,000 contribution in aid of
construction in 2000 as an advance from B,
a developer, for the purpose of constructing
a water facility. To the extent that the
$1,000,000 exceeds the actual cost of the
facility, the contribution is subject to being
returned. Under the terms of the advance, A
agrees to pay to B a percentage of the receipts
from the facility over a fixed period, but
limited to the cost of the facility. In 2001, A
builds the facility at a cost of $700,000 and
returns $300,000 to B. In 2002, A pays
$20,000 to B out of the receipts from the
facility. Assuming accurate records are kept,
the $700,000 advance is a contribution to the
capital of A under paragraph (a) of this

VerDate 112000

21:58 Jan 10, 2001

section and is excludable from A’s income.
The basis of the $700,000 facility constructed
with this contribution to capital is zero. The
$300,000 excess amount is not a contribution
to the capital of A under paragraph (a) of this
section because it does not meet the
expenditure rule described in paragraph
(c)(1) of this section. However, this excess
amount is not includible in A’s income
pursuant to paragraph (c)(2)(ii) of this section
since the amount is repaid to B within the
required time period. The repayment of the
$300,000 excess amount to B in 2001 is not
treated as a capital expenditure by A. The
$20,000 payment to B in 2002 is treated as
a capital expenditure by A in 2002 resulting
in an increase in the adjusted basis of the
water facility from zero to $20,000.

(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

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disposal services on or after January 11,
2001.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 4. In § 602.101, paragraph (b) is
amended by adding an entry to the table
in numerical order to read as follows:
§ 602.101

*

OMB Control numbers.

*
*
(b) * * *

*

*

CFR part or section identified
and described

Current OMB
control No.

*
*
*
1.118–2 .................................

*

*

*

*

*
1545–1639

*

*

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: December 20, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01–487 Filed 1–10–01; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 7
[TD 8937]
RIN 1545–AY53

Stock Transfer Rules: Transition Rules
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
SUMMARY: This document contains final
regulations addressing distributions
with respect to, or a disposition of,
certain stock that was subject to prior
temporary regulations under section
367(b). Section 367(b) addresses the
application of nonrecognition exchange
provisions in Subchapter C of the
Internal Revenue Code to transactions
that involve one or more foreign
corporations.
DATES: Effective Date. These regulations
are effective as of January 11, 2001.
Applicability Dates. These regulations
apply to distributions or dispositions
that occur on or after January 11, 2001.

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