Definition of Contribution in Aid of Construction Under Section 118(c), 11306-11308 [06-55510]
Download as PDF
<![CDATA[
11306
Federal Register / Vol. 71, No. 44 / Tuesday, March 7, 2006 / Rules and Regulations
and recordkeeping requirements, Trade
agreements.
Amendments to the Regulations
Accordingly, chapter I of title 19,
Code of Federal Regulations (19 CFR
chapter I), is amended as set forth
below.
I
PART 10—ARTICLES CONDITIONALLY
FREE, SUBJECT TO A REDUCED
RATE, ETC.
1. The general authority citation for
part 10 continues, and the specific
authority for new Subpart J is added, to
read as follows:
I
Authority: 19 U.S.C. 66, 1202 (General
Note 3(i), Harmonized Tariff Schedule of the
United States), 1321, 1481, 1484, 1498, 1508,
1623, 1624, 3314;
*
*
*
*
*
Section 10.699 also issued under Pub. L.
109–53, 119 Stat. 462.
2. Part 10, CBP regulations, is
amended by adding a new Subpart J to
read as follows:
I
Subpart J—Dominican Republic—
Central America—United States Free
Trade Agreement
Retroactive Preferential Tariff
Treatment for Textile and Apparel
Goods
rmajette on PROD1PC67 with RULES1
§ 10.699
Duties
Refunds of Excess Customs
(a) Applicability. The Dominican
Republic-Central America-United States
Free Trade Agreement (CAFTA–DR or
Agreement) was entered into by the
governments of Costa Rica, the
Dominican Republic, El Salvador,
Guatemala, Honduras, Nicaragua, and
the United States on August 5, 2004.
The Congress approved the CAFTA–DR
in the Dominican Republic—Central
America—United States Free Trade
Agreement Implementation Act (the
Act), Public Law 109–53, 119 Stat. 462
(19 U.S.C. 4001 et seq.). Section 205 of
the Act provides for the retroactive
application of the Agreement and
payment of refunds for any excess
duties paid with respect to entries of
textile and apparel goods of eligible
CAFTA–DR countries that meet certain
conditions and requirements. Those
conditions and requirements are set
forth in paragraphs (b) and (c) of this
section.
(b) General. Notwithstanding 19
U.S.C. 1514 or any other provision of
law, and subject to paragraph (c) of this
section, a textile or apparel good of an
eligible CAFTA–DR country that was
entered or withdrawn from warehouse
for consumption on or after January 1,
VerDate Aug<31>2005
15:02 Mar 06, 2006
Jkt 208001
2004, and before the date of the entry
into force of the Agreement with respect
to that country will be liquidated or
reliquidated at the applicable rate of
duty for that good set out in the
Schedule of the United States to Annex
3.3 of the Agreement, and CBP will
refund any excess customs duties paid
with respect to such entry, with interest
accrued from the date of entry,
provided:
(1) The good would have qualified as
an originating good under § 203 of the
Act if the good had been entered after
the date of entry into force of the
Agreement for that country; and
(2) Customs duties in excess of the
applicable rate of duty for that good set
out in the Schedule of the United States
to Annex 3.3 of the Agreement were
paid.
(c) Request for liquidation or
reliquidation. Liquidation or
reliquidation may be made under
paragraph (b) of this section with
respect to an entry of a textile or apparel
good of an eligible CAFTA–DR country
only if a request for liquidation or
reliquidation is filed with the CBP port
where the entry was originally filed by
the later of December 31, 2006, or the
date that is 90 days after the date of the
entry into force of the Agreement for
that country, and the request contains
sufficient information to enable CBP:
(1) To locate the entry or to
reconstruct the entry if it cannot be
located; and
(2) To determine that the good
satisfies the conditions set forth in
paragraph (b) of this section.
(d) Definitions. For purposes of this
section:
(1) ‘‘Eligible CAFTA–DR country’’
means a country that the United States
Trade Representative has determined,
by notice published in the Federal
Register, to be an eligible country for
purposes of section 205 of the Act; and
(2) ‘‘Textile or apparel good’’ means a
good listed in the Annex to the
Agreement on Textiles and Clothing
referred to in section 101(d)(4) of the
Uruguay Round Agreements Act (19
U.S.C. 3511(d)(4)), other than a good
listed in Annex 3.29 of the Agreement.
Deborah J. Spero,
Acting Commissioner of Customs and Border
Protection.
Approved: February 28, 2006.
Timothy E. Skud,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 06–2070 Filed 3–6–06; 8:45 am]
BILLING CODE 9111–14–P
PO 00000
Frm 00020
Fmt 4700
Sfmt 4700
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Definition of Contribution in Aid of
Construction Under Section 118(c)
CFR Correction
In Title 26 of the Code of Federal
Regulations, part 1 (§§ 1.61 to 1.169),
revised as of April 1, 2005, on page 495,
reinstate § 1.118–2 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.
(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
E:\FR\FM\07MRR1.SGM
07MRR1
rmajette on PROD1PC67 with RULES1
Federal Register / Vol. 71, No. 44 / Tuesday, March 7, 2006 / Rules and Regulations
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
VerDate Aug<31>2005
15:02 Mar 06, 2006
Jkt 208001
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
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).
PO 00000
Frm 00021
Fmt 4700
Sfmt 4700
11307
(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.
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
E:\FR\FM\07MRR1.SGM
07MRR1
11308
Federal Register / Vol. 71, No. 44 / Tuesday, March 7, 2006 / Rules and Regulations
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:
rmajette on PROD1PC67 with RULES1
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
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
VerDate Aug<31>2005
15:02 Mar 06, 2006
Jkt 208001
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.
[T.D. 8936, 66 FR 2254, Jan. 11, 2001]
[FR Doc. 06–55510 Filed 3–6–06; 8:45 am]
BILLING CODE 1505–01–D
Privacy Act of 1974; Implementation
Department of Justice.
Final rule.
AGENCY:
The Department of Justice,
Tax Division, is amending 28 CFR part
16 to exempt a newly revised Privacy
Act system of records entitled ‘‘Files of
Applicants For Attorney and NonSUMMARY:
Fmt 4700
On
November 16, 2005 (70 FR 69486), a
proposed rule was published in the
Federal Register with an invitation to
comment. Based on suggestions
received, the Department is eliminating
the reference to 5 U.S.C. 552a(k)(2) as a
basis for exemption, and is removing the
exemption from 5 U.S.C. 552a(e)(1).
This rule relates to individuals rather
than small business entities.
Nevertheless, pursuant to the
requirements of the Regulatory
Flexibility Act, 5 U.S.C. 601–612, this
rule will not have a significant
economic impact on a substantial
number of small entities.
SUPPLEMENTARY INFORMATION:
Sfmt 4700
Pursuant to the authority vested in the
Attorney General by 5 U.S.C. 552a and
delegated to me by Attorney General
Order No. 793–78, 28 CFR part 16 is
amended as follows:
I
[AAG/A Order No. 003–2006]
Frm 00022
FOR FURTHER INFORMATION CONTACT:
Mary Cahill, (202) 307–1823.
Administrative Practices and
Procedures, Courts, Freedom of
Information, Sunshine Act and Privacy.
28 CFR Part 16
PO 00000
Effective Date: This final rule is
effective March 7, 2006.
DATES:
List of Subjects in 28 CFR Part 16
DEPARTMENT OF JUSTICE
ACTION:
Attorney Positions with the Tax
Division, Justice/TAX–003,’’ as
described in today’s notice section of
the Federal Register, from 5 U.S.C.
552a(c)(3) and (d)(1). The exemptions
will be applied only to the extent that
information in a record is subject to
exemption pursuant to 5 U.S.C.
552a(k)(5). The exemptions are
necessary to protect the confidentiality
of employment records. The Department
also is deleting as obsolete provisions
exempting two former Tax Division
systems of records: ‘‘Freedom of
Information/Privacy Act Request Files,
Justice/TAX–004;’’ and ‘‘Tax Division
Special Project Files, Justice/TAX–005.’’
The records in TAX–004 are now
covered by a Departmentwide system
notice, ‘‘Freedom of Information Act,
Privacy Act, and Mandatory
Declassification Review Requests and
Administrative Appeals, DOJ–004’’. The
relevant records in TAX–005 are now
part of the revised system entitled
‘‘Criminal Tax Case Files, Special
Project Files, Docket Cards, and
Associated Records, Justice/TAX–001.’’
PART 16—PRODUCTION OR
DISCLOSURE OF MATERIAL OR
INFORMATION
1. The authority for part 16 continues
to read as follows:
I
E:\FR\FM\07MRR1.SGM
07MRR1
]]>Agencies
[Federal Register Volume 71, Number 44 (Tuesday, March 7, 2006)]
[Rules and Regulations]
[Pages 11306-11308]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-55510]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Definition of Contribution in Aid of Construction Under Section
118(c)
CFR Correction
In Title 26 of the Code of Federal Regulations, part 1 (Sec. Sec.
1.61 to 1.169), revised as of April 1, 2005, on page 495, reinstate
Sec. 1.118-2 to read as follows:
Sec. 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.
(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
[[Page 11307]]
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:
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 8\1/2\ 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 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. 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
[[Page 11308]]
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 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 disposal services on or after January 11, 2001.
[T.D. 8936, 66 FR 2254, Jan. 11, 2001]
[FR Doc. 06-55510 Filed 3-6-06; 8:45 am]
BILLING CODE 1505-01-D
