A bill to amend section 118 of the Internal Revenue Code of 1986 to provide for certain exceptions from rules for determining contributions in aid of construction, and for other purposes.

Summary: Amends the Internal Revenue Code with respect to the corporate income tax exclusion of contributions to the capital of the taxpayer. Includes as a qualifying contribution any amount of money or property received by a regulated public utility which provides water or sewage disposal services that:  (1) is a contribution in aid of construction; (2) meets certain expenditure requirements; and (3) is not included in the taxpayer's rate base.  Excludes amounts paid as service charges for starting or stopping services. 
Determines the depreciation deduction for such property by using the straight line method and provides for a 25-year recovery period.

SECTION 1. TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUCTION.

    (a) Treatment of Contributions in Aid of Construction.--
            (1) In general.--Section 118 of the Internal Revenue Code 
        of 1986 (relating to contributions to the capital of a 
        corporation) is amended--
                    (A) by redesignating subsection (c) as subsection 
                (e), and
                    (B) by inserting after subsection (b) the following 
                new subsections:
    ``(c) Special Rules for Water and Sewage Disposal Utilities.--
            ``(1) General rule.--For purposes of this section, the term 
        `contribution to the capital of the taxpayer' includes any 
        amount of money or other property received by any person 
        (whether or not a shareholder) by a regulated public utility 
        which provides water or sewerage disposal service if--
                    ``(A) such amount is a contribution in aid of 
                construction,
                    ``(B) in the case of contribution of property other 
                than water or sewerage disposal facilities, such amount 
                meets the requirements of the expenditure rule of 
                paragraph (2), and
                    ``(C) such amount (or any property acquired or 
                constructed with such amount) is not included in the 
                taxpayer's rate base for ratemaking purposes.
            ``(2) Expenditure rule.--An amount meets the requirements 
        of this paragraph if--
                    ``(A) an amount equal to such amount is expended 
                for the acquisition or construction of tangible 
                property described in section 1231(b)--
                            ``(i) which is the property for which the 
                        contribution was made or is of the same type as 
                        such property, and
                            ``(ii) which is used predominantly in the 
                        trade or business of furnishing water or 
                        sewerage disposal services,
                    ``(B) the expenditure referred to in subparagraph 
                (A) occurs before the end of the second taxable year in 
                which such amount was received, and
                    ``(C) accurate records are kept of the amounts 
                contributed and expenditures made, the expenditures to 
                which contributions are allocated, and the year in 
                which the contributions and expenditures are received 
                and made.
            ``(3) Definitions.--For purpose of this subsection:
                    ``(A) Contribution in aid of construction.--The 
                term `contribution in aid of construction' shall be 
                defined by regulations prescribed by the Secretary, 
                except that such term shall not include amounts paid as 
                service charges for starting or stopping services.
                    ``(B) Predominantly.--The term `predominantly' 
                means 80 percent or more.
                    ``(C) Regulated public utility.--The term 
                `regulated public utility' has the meaning given such 
                term by section 7701(a)(33), except that such term 
                shall not include any utility which is not required to 
                provide water or sewerage disposal services to members 
                of the general public in its service area.
            ``(4) Disallowance of deductions and investment credit; 
        adjusted basis.--Notwithstanding any other provision of this 
        subtitle, no deduction or credit shall be allowed for, or by 
        reason of, any expenditure which constitutes a contribution in 
        aid of construction to which this subsection applies. The 
        adjusted basis of any property acquired with contributions in 
        aid of construction to which this subsection applies shall be 
        zero.
    ``(d) Statute of Limitations.--If the taxpayer for any taxable year 
treats an amount as a contribution to the capital of the taxpayer 
described in subsection (c), then--
            ``(1) the statutory period for the assessment of any 
        deficiency attributable to any part of such amount shall not 
        expire before the expiration of 3 years from the date the 
        Secretary is notified by the taxpayer (in such manner as the 
        Secretary may prescribe) of--
                    ``(A) the amount of the expenditure referred to in 
                subparagraph (A) of subsection (c)(2),
                    ``(B) the taxpayer's intention not to make the 
                expenditure referred to in such subparagraph, or
                    ``(C) a failure to make such expenditure within the 
                period described in subparagraph (B) of subsection 
                (c)(2); and
            ``(2) such deficiency may be assessed before the expiration 
        of such 3-year period notwithstanding the provisions of any 
        other law or rule of law which would otherwise prevent such 
        assessment.''
            (2) Conforming amendment.--Section 118(b) of such Code is 
        amended by inserting ``except as provided in subsection (c),'' 
        before ``the term''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts received after the date of the enactment 
        of this Act.
    (b) Recovery Method and Period for Water Utility Property.--
            (1) Requirement to use straight line method.--Section 
        168(b)(3) of the Internal Revenue Code of 1986 is amended by 
        adding at the end the following new subparagraph:
                    ``(F) Water utility property described in 
                subsection (e)(5).''
            (2) 25-Year recovery period.--The table contained in 
        section 168(c)(1) of such Code is amended by inserting the 
        following item after the item relating to 20-year property:

``Water utility property.............................       25 years''.
            (3) Water utility property.--
                    (A) In general.--Section 168(e) of such Code is 
                amended by adding at the end the following new 
                paragraph:
            ``(5) Water utility property.--The term `water utility 
        property' means property--
                    ``(A) which is an integral part of the gathering, 
                treatment, or commercial distribution of water, and
                    ``(B) which, without regard to this paragraph, 
                would be 20-year property.''
                    (B) Conforming amendment.--Subparagraph (F) of 
                section 168(e)(3) of such Code is amended by adding at 
                the end the following new sentence: ``Such term does 
                not include water utility property.''
            (4) Alternative system.--Clause (iv) of section 
        168(g)(2)(C) of such Code is amended by inserting ``, water 
        utility property,'' and ``grading''.
            (5) Effective date.--The amendments made by this subsection 
        shall apply to property placed in service after the date of the 
        enactment of this Act, other than property placed in service 
        pursuant to a binding contract in effect on such date and at 
        all times thereafter before the property is placed in service.