When a state, county, city, and industrial development authorities give a company a free plant site, cash reimbursements, grants, and other incentives to locate a factory in Alabama, is the value of those inducements taxable as corporate income — or excludible as a gift?

Plain-English summary

Company A was choosing where in the U.S. to build a large production facility. To win the project, a package of Alabama public bodies — the State, a County, a City, an Industrial Development Authority (IDA), and a County Industrial Development Authority (CIDA) — signed a series of agreements offering Company A substantial inducements:

• a free plant site plus financed site improvements (conveyed at no cost);
• "tax increment" reimbursement funds from the State to reimburse construction costs (potentially funded by IDA "tax increment" bonds, with Company A making annual payments to the IDA equal to its state corporate income tax);
• a CIDA economic-development grant (a lump sum to defray construction costs); and
• other incentives — reimbursement of training-facility costs, training-equipment costs, and rail-line construction costs.

Company A asked whether the value of the site, the funds, the grant, and the other incentives must be included in its income for Alabama corporate income tax, or whether they are excludible.

The Department ruled they are all excludible — as gifts. The chain of law: § 40-18-34 says a corporation's "gross income" means gross income as defined in § 40-18-14, and § 40-18-14(2)-c excludes "the value of property acquired by gift" (see also Reg. 810-3-14-.02(3)(a)). Under the Alabama Supreme Court's test, a valid gift has three elements — the donor intends to surrender title and dominion, there is delivery, and the donee accepts (Dial v. Dial; Samford v. First Alabama Bank; First Alabama Bank of Montgomery v. Adams). The Department found all three present: the public bodies clearly intended to relinquish title/dominion, and Company A would accept upon executing the agreements.

Crucially, the Department held that a negotiated inducement can still be a gift: the fact that the agreements are bargained-for, or come with conditions or qualifications, does not defeat gift treatment unless a condition is inconsistent with the vesting of title (38 C.J.S. Gifts § 36). Nothing in these agreements hindered title from vesting in Company A, so the inducements are valid gifts.

Holding (all four items excludible under § 40-18-14(2)-c): (1) the fair market value of the site and improvements; (2) the Section 4.1 reimbursement funds; (3) the CIDA grant funds; and (4) the other incentives are all excludible from the Taxpayer's gross income for Alabama corporate income tax.

What this means for you

Alabama treated location incentives as tax-free gifts

Under this ruling, a package of state and local inducements to locate a plant in Alabama — a free site, cash reimbursements, grants, and cost reimbursements — was excluded from corporate income as the "value of property acquired by gift" (§ 40-18-14(2)-c). That is an Alabama income-tax conclusion grounded in the state gift exclusion.

"Negotiated" and "conditional" don't automatically defeat gift treatment

The Department expressly rejected the idea that a bargained-for, conditioned inducement can't be a gift. The test is whether a condition is inconsistent with title vesting in the recipient. Structure the agreements so title genuinely vests, without strings that claw it back.

This is state law and time-specific — check federal and current rules separately

This ruling addresses Alabama income tax under the 1993 gift exclusion; it does not decide the federal income-tax treatment of government economic-development incentives, which is governed by separate (and since-changed) federal rules. Analyze federal consequences — and any later Alabama changes — independently.

Not precedent

Under § 40-2A-5 the ruling is not precedent and binds the Department only as to Company A's specific agreements. A differently structured incentive package needs its own analysis.

Common questions

Q: Are state and local incentives to locate a plant in Alabama taxable income?
A: In this ruling, no — the free site, reimbursement funds, grant, and other inducements were excluded from Alabama corporate income as gifts under § 40-18-14(2)-c.

Q: How can a negotiated incentive be a "gift"?
A: Alabama looks for donative intent, delivery, and acceptance (Dial v. Dial). A gift can be negotiated and conditioned; conditions defeat it only if they are inconsistent with title vesting in the recipient. Here nothing hindered vesting.

Q: Does this decide my federal income tax on the incentives?
A: No. This is an Alabama income-tax ruling under the state gift exclusion. Federal treatment of government incentives is separate and has changed over time — get separate advice.

Q: Can I rely on this ruling?
A: No. Ala. Code § 40-2A-5 makes revenue rulings non-precedential; this one is limited to Company A's facts and agreements.

Citations and references

Statutes and regulation:

• Ala. Code 1975 § 40-18-34 — corporate "gross income" means gross income as defined in § 40-18-14
• Ala. Code 1975 § 40-18-14(2)-c — excludes the "value of property acquired by gift" from gross income
• Alabama Corporate Income Tax Regulation 810-3-14-.02(3)(a) — gift exclusion
• Ala. Code 1975 § 40-2A-5 — revenue rulings are not to be used or cited as precedent

Cases cited:

• Dial v. Dial, 603 So. 2d 1020 (Ala. 1992) — the three elements of a valid gift
• Samford v. First Alabama Bank, 431 So. 2d 146 (Ala. 1983)
• First Alabama Bank of Montgomery v. Adams, 382 So. 2d 1104 (Ala. 1980)
• 38 C.J.S. Gifts § 36 (1993) — conditional gifts remain valid unless the condition is inconsistent with vesting of title

Source

• Landing page: Alabama Department of Revenue -- Revenue Rulings
• Original PDF: https://www.revenue.alabama.gov/wp-content/uploads/2022/06/2017_05_RR-93-010.pdf

Original ruling text

State of Alabama
Department of Revenue

Montgomery, Alabama 36132 GEORGE E. MINGLEDORFF Ill
Assistant Commissioner
GEORGE E. MINGLEDORFF ill LEWIS A. EASTERLY
Commissioner (Acting! Secretary

ALABAMA DEPARTMENT OF REVENUE
REVENUE RULING 93-010

This document may not be used or cited as precedent. Code of
Alabama 1975, §40-2A-5(a).

TO:

FROM: Commissioner of Revenue
Alabama Department of Revenue

DATE: September 24, 1993

SUBJECT: Imposition of Alabama Corporate Income Tax on Funds
and Value of Property Received in Exchange for
Corporation's Agreement to Locate Plant Site in
Alabama

FACTS

Company A is a corporation organized for the purpose of
locating an appropriate site within the United States of America
on which to construct a production facility. The facility is
estimated initially to employ approximately X amount of people
and require an aggregate investment of X amount of dollars.
Among a number of sites under consideration for the facility is
a certain tract of real property located in Alabama.

In an effort to induce Company A to locate its production
facility in Alabama, the "State", the "County™, the "City”, the
Industrial Development Authority (the “IDA™), and the County
Industrial Development Authority (the "CIDA") have executed a
series of agreements with Company A. These agreements are as
follows: .

C1) An agreement between the State and Company A setting
forth the terms under which Company A will locate its production
facility in X County (the "State Agreement™);3

(2) An agreement among the County, the CIDA and Company A
supplementing the terms under which Company A will locate its
production facility in X County (the "County Agreement");

(3) An agreement among the City, the CIDA and Company A
supplementing the terms under which Company A will locate its
production facility in X County (the "City Agreement"); and

(4) A grant agreement between the CIDA and Company A
setting forth the terms governing the CIDA's grant of X amount
of dollars to Company A in connection with Company A's location
of its production facility in xX County (the "CIDA Grant
Agreement™).

CIDA Site Grant

Sections II and III of the State Agreement obligate the
CIDA, in conjunction with the State, the City and the County
Ccollectively, the ™Parties™) to: (1) convey the site on which
the production facility will be constructed to Company A at no
cost; and (2) finance a number of different improvements to the
site (the site, together with the related improvements, is
hereinafter referred to simply as the "™site™). The site is
being offered to Company A to induce Company A to locate its
production facility in X County. A more complete explanation of
the Parties' obligations to Company A concerning the site is
provided in the relevant portions of the State Agreement. Such
portions of the State Agreement are specifically incorporated by
reference into the ruling request on this issue.

Tax Increment Funds

Section 4.1 of the State Agreement obligates the State to
deliver X amount of dollars to Company A as a reimbursement to
Company A of costs incurred in the course of constructing its
production facility in X County. The money is being made
available to Company A to induce Company A to locate its
production facility in X County and will be provided to Company
A only in return for Company A's locating the facility in xX
County. All or ae portion of the funds may be provided to
Company A through the issuance of so-called "tax increment"
bonds by the IDA pursuant to the provisions of Act No. X. Under
this arrangement, Company A would be obligated to make annual
payments to IDA in an amount equal to its state corporate income
tax liability. IDA would use the monies to make the principal
and interest payments on the bonds. In the event that Company
A's projected payments to the IDA are insufficient to fund a
bond issue large enough to meet the State's obligation, the
State must provide the difference to Company A through some
other means. A more complete explanation of the State's
obligation to Company A concerning delivery of the funds is
provided in Section 4.1 of the State Agreement. The provisions
of Section 4.1 of the State Agreement are specifically
incorporated by reference into the ruling request on this
issue.

CIDA Grant Agreesent Funds

Section 4.3 of the State Agreement obligates the State to
coordinate and cooperate with Company A in negotiations with the

CIDA to implement the terms of an economic development grant.
These negotiations have resulted in the execution of the CIDA
Grant Agreement. Under the terms of the CIDA Grant Agreement,
the CIDA has agreed to provide Company A with a grant of X
amount of dollars. The grant from the CIDA will be provided to
Company A to defray costs incurred by Company A in the course of
constructing its production facility in X County. The grant
will be provided to Company A by the CIDA only if Company A
agrees to locate the production plant in X County. If Company A
agrees to locate the production plant in X County, a lump sum
payment of X amount of dollars must be paid to Company A by the
CIDA on or before March 31, 1994. A more complete explanation
of the CIDA's obligation to Company A concerning the grant from
the CIDA is provided in the. CIDA Grant Agreement. The
provisions of the CIDA Grant Agreement are specifically
incorporated by reference into the ruling request on this
issue.

Other Incentives

Other provisions of the State Agreement obligate the
Parties to provide Company A with a number of other incentives
in connection with Company A's decision to locate its production
facility in xX County. Examples of these other incentives
include, without limitation, reimbursement/payment of: C1)
training facility costs; (2) training equipment costs; and (3)
rail line construction costs. These other incentives are being
offered to Company A to induce Company A to locate its
production facility in X County and will be provided to Company
A only in return for Company A's commitment to locate the
production facility in X County. A more complete explanation of
the Parties' obligation to Company A concerning these other
incentives is provided in the relevant portions of the State
Agreement. Such portions of the State Agreement. are
specifically incorporated by reference into the ruling request
on this issue.

Successors and Assigns

Section 7.10 of the State Agreement authorizes Company A to
assign its rights under the terms of the State, County, City and
CIDA Grant Agreements to an affiliate. For the purposes of this
ruling, Company A, its successors and assigns, are hereinafter
collectively referred to as the "Taxpayer".

ISSUES

€1) Whether the fair market value of the site and the
related site improvements provided pursuant to _ the
terms of the State, County and City Agreements will be
excludible from the recipient Taxpayer's gross income
under Alabama Code §40-18-14(2)-c3

(2) Whether the funds provided pursuant to Section 4.1 of
the State Agreement will be excludible from the
recipient's gross income under Alabama Code
§40-18-14(2)-c3

(3) Whether the funds provided by the CIDA pursuant to the
terms of the CIDA Grant Agreement will be excludible
from the recipient Taxpayer's gross income under
Alabama Code §40-18-14(2)-c}3 and

(4) Whether the other incentives provided pursuant to the
terms of the State Agreement will be excludible from
the recipient Taxpayer's gross income under Alabama
Code §40-18-14(2)-c.

LAW AND ANALYSIS

In determining a corporation's gross income for Alabama
corporate income tax purposes, Code of Alabama 1975, §40-18-34
provides, in part, that the term "gross income™ means gross
income as defined in Section 40-18-14. Section 40-18-14(2)-c
exempts from Alabama income tax the "value of property acquired
by gift.* See also, Alabama Corporate Income Tax Regulation
810-3-14-.02(3) (a).

According to the Alabama Supreme Court, there are three
elements in making a valid gift. First, the donor must intend

to surrender title and dominion over the property. Second,
there must be actual delivery of the property to the donee.
Third, there must be acceptance by the donee. Dial v. Dial,

603 So.2d 1020 (CAla. 1992). See also, Samford v. First Alabama
Bank, 431 So.2d 146 (Ala. 1983); First Alabama Bank of
Montgomery v. Adams, 382 So.2d 1104 (Ala. 1980).

It is clear that the State, County, and City Agreements
which are the subject of this transaction constitute gifts of
funds and property to Company A. All of the donors clearly
intend to relinquish title and dominion over the funds and
property and Company A plans to accept the funds and property
pursuant to and upon execution of the agreements.

The fact that the agreements are negotiated documents does
not prevent the inducements from being classified as gifts, as
long as no conditions exist to hinder vesting of title to the
property. The fact that the gifts are accompanied by conditions
or qualifications does not necessarily render the inducements
invalid gifts, unless the conditions or qualifications are
inconsistent with the vesting of title. 38 C.J.S. Gifts 836
C1993). Nothing in the agreements hinder the vesting of title
of the funds and property in Company A pursuant to and upon
execution of the agreements. Accordingly, the transactions are
valid gifts.

RULINGS

The State, County, and City Agreements contemplate gifts of
funds and property to Company A. As gifts, the funds and
property are exempt from Alabama corporate income tax pursuant
to section 40-18-14(2)-c. Based on this analysis, the
Department issues the following rulings:

(1) The fair market value of the site and the
related site improvements provided
pursuant to the terms of the State,
County and City Agreements will be
excludible from the recipient Taxpayer's
gross income under Code of Alabama
1975, §460-18-14(2)-c;

(2) The funds provided pursuant to Section
4.1 of the State Agreement will be
excludible from the recipient Taxpayer's
gross income under Code of Alabama
1975, §40-18-14(C2)-c}3

(3) The funds provided by the CIDA pursuant
to the terms of the CIDA Grant Agreement
will be excludible from the recipient
Taxpayer's gross income under Code _ of
Alabama 1975, §40-18-14(2)-c; and

(G4) The other incentives provided pursuant to
the terms of the State Agreement will be
excludible from the recipient Taxpayer's
gross income under Code of Alabama
1975, §40-18-14(2)-c.

George E. Mingledorff III

GEM: MDG: eb330