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SEC. 1611. TREATMENT OF CONTRIBUTIONS IN AID OF CON-
STRUCTION.
(a) TREATMENT OF CONTRIBUTIONS IN AID OF CON-
STRUCTION.—
(1) IN GENERAL.—Section 118 (relating to con-
tributions to the capital of a corporation) is amend-
ed—
(A) by redesignating subsection (c) as sub-
section (e), and
(B) by inserting after subsection (b) the fol-
lowing new subsections:
‘‘(c) SPECIAL RULES FOR WATER AND SEWERAGE
DISPOSAL UTILITIES.—
‘‘(1) GENERAL RULE.—For purposes of this sec-
tion, the term ‘contribution to the capital of the tax-
payer’ includes any amount of money or other prop-
erty received from any person (whether or not a
shareholder) by a regulated public utility which pro-
vides water or sewerage disposal services 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 ex-
penditure rule of paragraph (2), and
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‘‘(C) such amount (or any property ac-
quired or constructed with such amount) is not
included in the taxpayer’s rate base for rate-
making 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 subpara-
graph (A) occurs before the end of the second tax-
able 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 allo-
cated, and the year in which the contributions
and expenditures are received and made.
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‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) CONTRIBUTION IN AID OF CONSTRUC-
TION.—The term ‘contribution in aid of con-
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 CRED-
ITS; 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
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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 pre-
scribe) 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 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.’’.
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(2) CONFORMING AMENDMENT.—Section 118(b)
is amended by inserting ‘‘except as provided in sub-
section (c),’’ before ‘‘the term’’.
(3) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to amounts received
after June 12, 1996.
(b) RECOVERY METHOD
AND PERIOD
FOR WATER
UTILITY PROPERTY.—
(1) REQUIREMENT
TO
USE
STRAIGHT
LINE
METHOD.—Section 168(b)(3) 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 con-
tained in section 168(c)(1) 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) is amend-
ed by adding at the end the following new para-
graph:
‘‘(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