II

104TH CONGRESS

1ST SESSION S. 448

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.

IN THE SENATE OF THE UNITED STATES

FEBRUARY 16 (legislative day, JANUARY 30), 1995

Mr. GRASSLEY (for himself, Mr. PRYOR, and Mr. REID) introduced the

following bill; which was read twice and referred to the Committee on Finance

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.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. TREATMENT OF CONTRIBUTIONS IN AID OF

4 CONSTRUCTION.

5 (a) TREATMENT OF CONTRIBUTIONS IN AID OF CON6 STRUCTION.—
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S 448 IS

1 (1) IN GENERAL.—Section 118 of the Internal

2 Revenue Code of 1986 (relating to contributions to

3 the capital of a corporation) is amended—

4 (A) by redesignating subsection (c) as sub5 section (e), and

6 (B) by inserting after subsection (b) the

7 following new subsections:

8 ‘‘(c) SPECIAL RULES FOR WATER AND SEWAGE DIS9 POSAL UTILITIES.—

10 ‘‘(1) GENERAL RULE.—For purposes of this

11 section, the term ‘contribution to the capital of the

12 taxpayer’ includes any amount of money or other

13 property received by any person (whether or not a

14 shareholder) by a regulated public utility which pro15 vides water or sewerage disposal service if—

16 ‘‘(A) such amount is a contribution in aid

17 of construction,

18 ‘‘(B) in the case of contribution of prop19 erty other than water or sewerage disposal fa20 cilities, such amount meets the requirements of

21 the expenditure rule of paragraph (2), and

22 ‘‘(C) such amount (or any property ac23 quired or constructed with such amount) is not

24 included in the taxpayer’s rate base for rate25 making purposes.
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S 448 IS

1 ‘‘(2) EXPENDITURE RULE.—An amount meets

2 the requirements of this paragraph if—

3 ‘‘(A) an amount equal to such amount is

4 expended for the acquisition or construction of

5 tangible property described in section

6 1231(b)—

7 ‘‘(i) which is the property for which

8 the contribution was made or is of the

9 same type as such property, and

10 ‘‘(ii) which is used predominantly in

11 the trade or business of furnishing water

12 or sewerage disposal services,

13 ‘‘(B) the expenditure referred to in sub14 paragraph (A) occurs before the end of the sec15 ond taxable year in which such amount was re16 ceived, and

17 ‘‘(C) accurate records are kept of the

18 amounts contributed and expenditures made,

19 the expenditures to which contributions are al20 located, and the year in which the contributions

21 and expenditures are received and made.

22 ‘‘(3) DEFINITIONS.—For purpose of this sub23 section:

24 ‘‘(A) CONTRIBUTION IN AID OF CONSTRUC25 TION.—The term ‘contribution in aid of con-
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S 448 IS

1 struction’ shall be defined by regulations pre2 scribed by the Secretary, except that such term

3 shall not include amounts paid as service

4 charges for starting or stopping services.

5 ‘‘(B) PREDOMINANTLY.—The term ‘pre6 dominantly’ means 80 percent or more.

7 ‘‘(C) REGULATED PUBLIC UTILITY.—The

8 term ‘regulated public utility’ has the meaning

9 given such term by section 7701(a)(33), except

10 that such term shall not include any utility

11 which is not required to provide water or sewer12 age disposal services to members of the general

13 public in its service area.

14 ‘‘(4) DISALLOWANCE OF DEDUCTIONS AND IN15 VESTMENT CREDIT; ADJUSTED BASIS.—Notwith16 standing any other provision of this subtitle, no de17 duction or credit shall be allowed for, or by reason

18 of, any expenditure which constitutes a contribution

19 in aid of construction to which this subsection ap20 plies. The adjusted basis of any property acquired

21 with contributions in aid of construction to which

22 this subsection applies shall be zero.

23 ‘‘(d) STATUTE OF LIMITATIONS.—If the taxpayer for

24 any taxable year treats an amount as a contribution to
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1 the capital of the taxpayer described in subsection (c),

2 then—

3 ‘‘(1) the statutory period for the assessment of

4 any deficiency attributable to any part of such

5 amount shall not expire before the expiration of 3

6 years from the date the Secretary is notified by the

7 taxpayer (in such manner as the Secretary may pre8 scribe) of—

9 ‘‘(A) the amount of the expenditure re10 ferred to in subparagraph (A) of subsection

11 (c)(2),

12 ‘‘(B) the taxpayer’s intention not to make

13 the expenditure referred to in such subpara14 graph, or

15 ‘‘(C) a failure to make such expenditure

16 within the period described in subparagraph

17 (B) of subsection (c)(2); and

18 ‘‘(2) such deficiency may be assessed before the

19 expiration of such 3-year period notwithstanding the

20 provisions of any other law or rule of law which

21 would otherwise prevent such assessment.’’

22 (2) CONFORMING AMENDMENT.—Section

23 118(b) of such Code is amended by inserting ‘‘except

24 as provided in subsection (c),’’ before ‘‘the term’’.
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1 (3) EFFECTIVE DATE.—The amendments made

2 by this subsection shall apply to amounts received

3 after the date of the enactment of this Act.

4 (b) RECOVERY METHOD AND PERIOD FOR WATER

5 UTILITY PROPERTY.—

6 (1) REQUIREMENT TO USE STRAIGHT LINE

7 METHOD.—Section 168(b)(3) of the Internal Reve8 nue Code of 1986 is amended by adding at the end

9 the following new subparagraph:

10 ‘‘(F) Water utility property described in

11 subsection (e)(5).’’

12 (2) 25-YEAR RECOVERY PERIOD.—The table

13 contained in section 168(c)(1) of such Code is

14 amended by inserting the following item after the

15 item relating to 20-year property:

‘‘Water utility property ............................................................. 25 years’’.

16 (3) WATER UTILITY PROPERTY.—

17 (A) IN GENERAL.—Section 168(e) of such

18 Code is amended by adding at the end the fol19 lowing new paragraph:

20 ‘‘(5) WATER UTILITY PROPERTY.—The term

21 ‘water utility property’ means property—

22 ‘‘(A) which is an integral part of the gath23 ering, treatment, or commercial distribution of

24 water, and
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1 ‘‘(B) which, without regard to this para2 graph, would be 20-year property.’’

3 (B) CONFORMING AMENDMENT.—Subpara4 graph (F) of section 168(e)(3) of such Code is

5 amended by adding at the end the following

6 new sentence: ‘‘Such term does not include

7 water utility property.’’

8 (4) ALTERNATIVE SYSTEM.—Clause (iv) of sec9 tion 168(g)(2)(C) of such Code is amended by in10 serting ‘‘, water utility property,’’ and ‘‘grading’’.

11 (5) EFFECTIVE DATE.—The amendments made

12 by this subsection shall apply to property placed in

13 service after the date of the enactment of this Act,

14 other than property placed in service pursuant to a

15 binding contract in effect on such date and at all

16 times thereafter before the property is placed in

17 service.

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