Phone Company on the Hook for Incentives
The Eleventh Circuit Court of Appeals upheld a Georgia district court decision holding that federal and state incentive payments to a local telephone company were gross income.
The Eleventh Circuit Court of Appeals upheld a Georgia district court decision holding that federal and state incentive payments to a local telephone company were gross income. The appellate court accepted the lower court’s analysis that the payments were not excludable as non-shareholder capital contributions.
IRC § 118(a) excludes from income taxpayer contributions to capital. Treas. Reg. § 1.118-1 states that the exclusion also applies to non-shareholder contributions. It provides an example in which the value of land given by a government to a company to locate its business there is excluded from income, but money or property given in return for goods or services is included. The Supreme Court in U.S. v. Chicago, Burlington & Quincy Railroad Co. (32 AFTR2d 73-5042), stated in 1973 that the intent or motive of the non-shareholder transferring the property determines whether the amount is excluded from income. The high court also listed five characteristics of non-shareholder capital contributions: The payment must become part of the recipient’s permanent working capital, may not be made in return for an identifiable service, must be bargained for, must result in a benefit to the recipient in an amount roughly equal to the payment and will be used to produce additional income.
This article has been excerpted from the Journal of Accountancy. Read the full article here.