PLR 1038013: Payments to relocate a utility line were treated as capital contributions

Plain-English summary

A utility received or expected to receive government payments to relocate an electrical transmission line so that a public highway could be widened. The IRS ruled that the payments were not contributions in aid of construction because the project primarily benefited the public and did not directly benefit particular utility customers. The payments were instead treated as contributions to the utility's capital under IRC § 118(a). The ruling applied the special facts and representations submitted by the requesting taxpayer.

Ruling snapshot

• Question: Were government payments to relocate an electrical transmission line contributions in aid of construction or contributions to capital?
• Outcome: Approved
• Key authorities: IRC §§ 61(a), 118(a), and 118(b); Treas. Reg. § 1.61-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201038013 Third Party Communication: None
Release Date: 9/24/2010 Date of Communication: Not Applicable
Index Number: 118.01-02, 118.02-00
Person To Contact:
----------------------- ----------------------------, ID No. --------------
---------------------------- -----------------
--------------------- Telephone Number:
-------------------------------- ---------------------
-------------------------------------------- Refer Reply To:
In Re: --------------------------------------------------- CC:PSI:B05
--------------------------------------------------------- PLR-155465-09
Date:
June 22, 2010

LEGEND:

Parent = -----------------------------------------------

Utility = --------------------------------------------------------------------------

County = -----------------------------------

Project = ---------------------------------------------

Dear ------------:

  This letter responds to a letter, dated December 14, 2009, and subsequent

correspondence, submitted on behalf of Parent by its authorized representative,
requesting rulings under section 118 of the Internal Revenue Code.

                                               FACTS

    Utility is a subsidiary of Parent and a member of Parent’s affiliated group that

files a consolidated return. Utility is in the business of generating, transmitting, and
distributing electric energy.

   County decided to proceed with Project. The purpose of Project is to widen a

public highway that is an important commuter connection.

  As part of Project, County or another governmental subdivision acting as the

agent of County will make payments to Utility for the purpose of relocating the existing
overhead electrical transmission line and related equipment (the “Transmission Line”).

PLR-155465-09 2

County’s purpose for relocating the Transmission Line is to accommodate the widening
of a public highway. The relocation of the Transmission Line does not directly benefit
particular customers or potential customers of Utility in their capacity as customers.

    Parent represents the following under penalties of perjury: The relocation of the

Transmission Line is not a prerequisite to the provision of any services. The relocated
Transmission Line will not provide any additional or upgraded electric service beyond
what it currently provides. The residents of any future development could become
electric customers of Utility, but they will not be served by the Transmission Line.

   Parent requests a ruling that the payments by County or another governmental

subdivision acting as the agent of County to Utility for Project for the purpose of
relocating the Transmission Line are not a contribution in aid of construction (CIAC)
under section 118(b) and are a contribution to the capital of Utility under section 118(a).

                                LAW AND ANAYSIS

   Section 61(a) and section 1.61-1 of the Income Tax Regulations provide that

gross income means all income from whatever source derived, unless excluded by law.
Section 118(a) provides that, in the case of a corporation, gross income does not
include any contribution to the capital of the taxpayer. Section 118(b) provides that for
section 118(a) purposes, the term “contribution to the capital of the taxpayer” does not
include any CIAC or any other contribution as a customer or potential customer.

    The House Ways and Means Committee Report for the Tax Reform Act of 1986

explains that property, including money, is a CIAC (rather than a capital contribution) if it
is transferred to provide or encourage the provision of services to or for the benefit of
the person transferring the property. H.R. Rep. No. 426, 99th Cong., 1st Sess. 644
(1985), 1986-3 (Vol. 2) C.B. 644 (the House Report). A utility has received property to
encourage the provision of services if the receipt of the property is a prerequisite to the
provision of the services; if the receipt of the property results in the provision of services
earlier than would have been the case had the property not been received; or if the
receipt of the property otherwise causes the transferor to be favored in any way.
However, a transfer of property is not a CIAC where it is clearly shown that the benefit
of the public as a whole was the primary motivating factor in the transfer.

      Notice 87-82, 1987-2 C.B. 389, provides that a payment received by a utility is

not a CIAC if it does not reasonably relate to the provision of services by the utility or for
the benefit of the person making the payment, but rather relates to the benefit of the
public at large. Notice 87-82 provides as an example of a payment benefiting the public
at large a relocation payment received by a utility under a government program to place
utility lines underground. In that situation, the relocation payment is not considered a
CIAC where the relocation is undertaken for purposes of community aesthetics and
public safety and does not directly benefit particular customers of the utility in their

PLR-155465-09 3

capacity as customers. Notice 87-82 provides that similar principles apply where the
utility is being reimbursed for the costs of relocating utility lines to accommodate the
construction or expansion of a highway and not for the provision of utility services.

   The payments by County to Utility for Project for the purpose of relocating the

Transmission Line will benefit the public at large by widening a public highway.
Therefore, we conclude that the payments by County to Utility for Project for the
purpose of relocating the Transmission Line fall within the public benefit exception
described in the House Report and in Notice 87-82 and are not a CIAC under section
118(b).

  Next, we must decide whether the payments qualify as a contribution to capital

under section 118(a).

   The legislative history of section 118 provides, in part, as follows:

   This [section 118] in effect places in the Code the court decisions on the
   subject. It deals with cases where a contribution is made to a corporation
   by a governmental unit, chamber of commerce, or other association of
   individuals having no proprietary interest in the corporation. In many such
   cases because the contributor expects to derive indirect benefits, the
   contribution cannot be called a gift; yet the anticipated future benefits may
   also be so intangible as to not warrant treating the contribution as a
   payment for future services.

S. Rep. No. 1622, 83rd Cong., 2d Sess. 18-19 (1954).

   In Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943), the Court held that

payments by prospective customers to an electric utility company to cover the cost of
extending the utility’s facilities to their homes were part of the price of service rather
than contributions to capital. The case concerned customers= payments to a utility
company for the estimated cost of constructing service facilities (primary power lines)
that the utility company otherwise was not obligated to provide. The customers
intended no contribution to the company’s capital.

   Later, in Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), the Court held

that money and property contributions by community groups to induce a shoe company
to locate or expand its factory operations in the contributing communities were
nonshareholder contributions to capital. The Court reasoned that when the motivation
of the contributors is to benefit the community at large and the contributors do not
anticipate any direct benefit from their contributions, the contributions are
nonshareholder contributions to capital. Id. at 591.

PLR-155465-09 4

   Finally, in United States v. Chicago, Burlington & Quincy Railroad Co., 412 U.S.

401, 413 (1973), the Court, in determining whether a taxpayer was entitled to depreciate
the cost of certain facilities that had been funded by the federal government, held that
the governmental subsidies were not contributions to the taxpayer’s capital. The Court
recognized that the holding in Detroit Edison Co. had been qualified by its decision in
Brown Shoe Co. The Court in Chicago, Burlington & Quincy Railroad Co. found that the
distinguishing characteristic between those two cases was the differing purpose
motivating the respective transfers. In Brown Shoe Co., the only expectation of the
contributors was that such contributions might prove advantageous to the community at
large. Thus, in Brown Shoe Co., since the transfers were made with the purpose not of
receiving direct services or recompense, but only of obtaining advantage for the general
community, the result was a contribution to capital.

   The Court in Chicago, Burlington & Quincy Railroad Co. also stated that there

were other characteristics of a nonshareholder contribution to capital implicit in Detroit
Edison Co. and Brown Shoe Co. From these two cases, the Court distilled some of the
characteristics of a nonshareholder contribution to capital under both the 1939 and 1954
Codes. First, the payment must become a permanent part of the transferee’s working
capital structure. Second, it may not be compensation, such as a direct payment for a
specific, quantifiable service provided for the transferor by the transferee. Third, it must
be bargained for. Fourth, the asset transferred foreseeably must benefit the transferee
in an amount commensurate with its value. Fifth, the asset ordinarily, if not always, will
be employed in or contribute to the production of additional income and its value
assured in that respect.

   The payments by County to Utility for Project for the purpose of relocating the

Transmission Line contain the characteristics of a nonshareholder contribution to capital
described in Chicago, Burlington & Quincy Railroad Co. Therefore, we conclude that
the payments by County to Utility for Project for the purpose of relocating the
Transmission Line are a contribution to the capital of Utility under section 118(a).

                                  CONCLUSION

   Accordingly, based on the foregoing analysis and the representations made, we

conclude that the payments made by County or another governmental subdivision
acting as the agent of County to Utility for Project for the purpose of relocating the
Transmission Line and related equipment are not a CIAC under section 118(b) and are
a contribution to the capital of Utility under section 118(a).

   Except as specifically set forth above, no opinion is expressed or implied

regarding the federal income tax consequences of the above described facts under any
other provision of the Code or regulations.

PLR-155465-09 5

  This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

    In accordance with the power of attorney on file with this ruling request, a copy of

this letter is being sent to Parent’s authorized representative.

                                              Sincerely,



                                              NICOLE R. CIMINO
                                              Senior Technician Reviewer, Branch 5
                                              Office of Associate Chief Counsel
                                              (Passthroughs and Special Industries)

Enclosures (2):
Copy of this letter
Copy for section 6110

cc: