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‘‘(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 sub-
paragraph (A) occurs before the end of the sec-
ond taxable year after the 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 al-
located, and the year in which the contributions
and expenditures are received and made.
‘‘(3) DEFINITIONS.—For purpose of this sub-
section—
‘‘(A) CONTRIBUTION IN AID OF CONSTRUC-
TION.—The term ‘contribution in aid of con-
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struction’ shall be defined by regulations pre-
scribed by the Secretary, except that such term
shall not include amounts paid as service
charges for starting or stopping services.
‘‘(B) PREDOMINANTLY.—The term ‘pre-
dominantly’ 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 sewer-
age disposal services to members of the general
public in its service area.
‘‘(4) DISALLOWANCE OF DEDUCTIONS AND IN-
VESTMENT
CREDIT; 
ADJUSTED
BASIS.—Notwith-
standing any other provision of this subtitle, no de-
duction or credit shall be allowed for, or by reason
of, any expenditure which constitutes a contribution
in aid of construction to which this subsection ap-
plies. 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
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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 pre-
scribe) of—
‘‘(A) the amount of the expenditure re-
ferred to in subparagraph (A) of subsection
(c)(2),
‘‘(B) the taxpayer’s intention not to make
the expenditures referred to in such subpara-
graph, 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’’.
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(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 Reve-
nue 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 fol-
lowing new paragraph:
‘‘(5) WATER
UTILITY
PROPERTY.—The term
‘water utility property’ means property—
‘‘(A) which is an integral part of the gath-
ering, treatment, or commercial distribution of
water, and
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‘‘(B) which, without regard to this para-
graph, would be 20-year property.’’
(B) CONFORMING AMENDMENT.—Subpara-
graph (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 sec-
tion 168(g)(2)(C) of such Code is amended by in-
serting ‘‘, 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.
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