Also, it must be “bargained for.” Moreover, the asset transferred must benefit the transferee “in an amount commensurate with its value,” and it must be shown that the asset so transferred will be employed in, or contribute to, the production of additional income. (See United States v. Chicago, Burlington & Quincy Railroad Co., 412 US 401 (1973).)
In the case described in the 2008 IRS letter, the payment by the city to Alpha met this exceedingly rigorous set of requirements in the following way:
• The underground lines will become a permanent part of Alpha’s working capital;
• The payments do not constitute compensation for services. After the payments are made, Alpha will not be required to provide any services it is not currently providing;
• The burying of the overhead lines is not necessary other than as part of the city’s program to improve community aesthetics and public safety;
• The payments are a bargained-for exchange;
• The payments will result in a benefit to Alpha that is commensurate with their value;
• The buried electric lines and related equipment will be used by Alpha in its trade or business to produce income.
Accordingly, the IRS concluded that the payments made by the city to Alpha for the purpose of undergrounding the overhead electrical lines and related equipment constituted a nontaxable contribution to the capital of Alpha Corp.4
Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
1 Section 61 of the Internal Revenue Code.
2 See Notice 87-82, 1987-2 C.B. 389.
3 Compare Detroit Edison Co. v. Commissioner, 319 US 98 (1943).
4 However, if, as here, money is received by a corporation as a contribution to capital, and it is not contributed by a shareholder as such, then the basis of any property acquired with such money during the 12-month period beginning on the day of the contribution to capital shall be reduced by the amount of such contribution. (If property other than money is acquired by a corporation as a contribution to capital, and the property is not contributed by a shareholder as such, then the basis of such property shall be zero.) See Section 362(c) of the IRS code.