Accounting for government grants.

• Author: Conjura, Carol

The IRS has released Letter Ruling 201003005, which concludes that (1) nonreimbursable payments from the government to a corporate taxpayer to construct a plant are nonshareholder contributions to the capital of the taxpayer under Sec. 118(a) and are excluded from the taxpayer's gross income under Sec. 61, and (2) the basis of the plant's capital assets acquired by the taxpayer with the money contributed by the government is reduced according to Sec. 362(c).

Although the letter ruling is based on a specific fact pattern and is not to be cited as precedent, it may help federal and state stimulus program grant recipients determine whether those payments potentially qualify as excludible nonshareholder contributions to capital. This item summarizes the letter ruling and other relevant legal authorities and IRS guidance that may be helpful in making that decision.

Taxpayer Facts and Request

The taxpayer is a wholly owned corporate subsidiary that entered into an agreement with the government in which the government will make payments to assist the taxpayer in construction of a plant under a government program. The taxpayer will receive the program awards during the design, permitting, equipment procurement, construction, and start-up phases of the plant as well as the project demonstration period.

The taxpayer requested the following rulings:

* The payments from the government to the taxpayer under the program for the plant are a nonshareholder contribution to the taxpayer's capital under Sec. 118(a) and are thus excluded from the taxpayer's gross income under Sec. 61; and

* The basis of the plant's capital assets acquired by the taxpayer with the money from the program contributed by the government shall be reduced in accordance with the provisions of Sec. 362(c) and the regulations thereunder.

Relevant Legal Authorities

Sec. 61(a) provides that except as otherwise provided in Subtitle A (Income Taxes), "gross income" means all income from whatever source derived. Regs. Sec. 1.61-l(a) defines gross income as all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether money, property, or services.

Sec. 118(a) excludes any contribution to the capital of a corporation from gross income. Regs. Sec. 1.118-1 applies the Sec. 118 exclusion to contributions to capital made by persons other than shareholders. For example, the exclusion applies to the value of land or other property...