A transfer of cash or other property to a corporation or partnership (or to a limited liability company (LLC) classified as a partnership) by one or more persons, in exchange for an ownership interest in the entity (stock or a partnership interest), is generally not includible in the income of the entity for income tax purposes. IRC §§721(a) (partnership), 1032(a) (corporation). Sometimes, however, a “non-owner,” such as a governmental entity or civic group, will make a contribution to the capital of an entity, without receiving an equity interest in the entity or any other consideration, in order, for example, to facilitate the development of property by the entity in a manner expected to result in a public benefit. The appropriate tax treatment of such transactions, particularly in the case of partnerships, has been uncertain. This article notes two recent developments, one a statutory change, the other a judicial decision, relevant to corporations and partnerships receiving such contributions.

Legislation

Since 1954, and until enactment of P.L. 115-97 (commonly referred to as the Tax Cuts and Jobs Act, or TCJA) in December 2017, IRC §118(a) provided that, in general, a corporation’s gross income did not include any contribution to the capital of the corporation. Under §118(b), however, this general exclusion rule did not apply to a “contribution in aid of construction” or (subject to a limited exception relating to public utilities) to any other contribution by a customer.