REVENUE RULE 93-16

1993-1 C.B. 26, 1993-8 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

AIRPORT IMPROVEMENT GRANTS; INCOME; BASIS

Published: February 22, 1993

§ 118.--Contributions to the Capital of a Corporation, 26 CFR 1.118-1: Contributions to the capital of a corporation.

(See Also § 362; 1.362-2.)

Airport improvement grants; income; basis. The Service has ruled that a project grant made by the FAA to a corporate owner of a public-use airport under the Airport Improvement Program is a nonshareholder contribution to the capital of the corporation under § 118(a) of the Code and the basis in the corporation's property is reduced under the rules provided by § 362(c)(2).

ISSUE

Is a project grant made by the Federal Aviation Administration (FAA) to a corporate owner of a public-use airport under the Airport Improvement Program (AIP) a nonshareholder contribution to capital under § 118(a) of the Internal Revenue Code and is the basis in the corporation's property reduced under § 362(c)(2) because of receipt of the grant?

FACTS

The AIP was established by the Airport and Airway Improvement Act of 1982 (AAIA), 49 U.S.C. 2201, and is administered by the FAA. To improve public safety and efficiency at public-use airports, § 505(a) of the AAIA authorizes the Secretary of Transportation to make project grants under the AIP for airport planning and airport development. Airport development includes construction, hazard removal, acquisition or installation of air navigation aids and safety or security equipment, and land acquisition. AIP grants are also available to prepare and implement noise compatibility programs under § 508 of the AAIA.

AIP funds are primarily used to improve public airports, that is, airports under the control of a public agency, used for public purposes, and publicly owned. The definition of a "public-use airport" under § 503(a)(18)(B) and (C) of the AAIA includes, in addition to a public airport, any privately owned reliever airport and any privately owned airport that enplanes annually 2,500 or more passengers and receives scheduled aircraft passenger service, that is used or will be used for public purposes. AIP project grants are made from the Airport and Airway Trust Fund, which is funded by revenues from several aviation-user taxes on airline fares, air freight, and aviation fuel.

Under § 511(a)(6) of the AAIA, the recipient of an AIP project grant must provide free landing rights to government aircraft under certain defined circumstances. The FAA rarely requests landing rights at a privately owned public-use airport, however, so that any benefit to the government is incidental in the context of the overall public purpose of the grant program. Under § 511(a)(7) of the AAIA, the recipient of an AIP project grant must, upon request, provide a portion of its land or water area for government use in constructing, at federal expense, facilities for air traffic control or navigation activities. FAA experience to date is that no request for land or water use has ever been made to a privately owned public-use airport. If the government ever does request land or water use from a privately owned public- use airport for air traffic control or navigation, the benefit will be to the general flying public and not the government.

LAW AND ANALYSIS

§ 118(a) of the Code provides that in the case of a corporation, gross income does not include any contribution to the capital of the taxpayer. The committee reports accompanying the enactment of what is now § 118(a) indicate that the provision was intended to codify the existing law that had developed through administrative and court decisions on the subject. H.R.Rep. No. 1337, 83d Cong., 2d Sess. 17 (1954); S.Rep. No. 1622, 83d Cong., 2d Sess. 18 (1954).

§ 1.118-1 of the Income Tax Regulations includes within the meaning of a contribution to capital, a contribution by a nonshareholder and cites as examples of nonshareholder contributions to capital: the value of land and other property contributed to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community, or for the purpose of enabling the corporation to expand its operating facilities.

§ 362(c)(2) of the Code provides for a basis reduction of a corporation's property when the corporation receives money from a nonshareholder as a contribution to its capital.

In Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943), 1943 C.B. 1019, the Supreme Court held that payments by prospective customers to an electric power company that were used by the company to construct the facilities necessary to deliver electricity to the customers were not nonshareholder contributions to capital. The Court found that the motivation for the prospective customers' contributions was to obtain electric services from the power company and, therefore, the contributions were payment for services. 319 U.S. at 102, 1943 C.B. at 1021.

In contrast, Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), 1950-1 C.B. 38, held that money and property contributions by community groups to induce a shoe company to locate or expand its factory operations in the contributing communities were nonshareholder contributions to capital. The Court reasoned that when the motivation of the contributors is to benefit the community at large and the contributors do not anticipate any direct benefit from their contributions, the contributions are nonshareholder contributions to capital. 339 U.S. at 591, 1950-1 C.B. at 41.

The Court again considered this issue in United States v. Chicago, Burlington & Quincy R.R., 412 U.S. 401 (1973), 1973-2 C.B. 428. In that case, the Court set forth the following five characteristics of a nonshareholder contribution to capital: (1) the contribution must become a permanent part of working capital; (2) the contribution must not be compensation for specific quantifiable services; (3) the contribution must be bargained for; (4) the contribution must foreseeably benefit the corporation in an amount commensurate with its value; and (5) the contribution must ordinarily be employed to generate additional income. 412 U.S. at 413, 1973-2 C.B. at 432.

§ 505(a) of the AAIA demonstrates that the FAA's intent in making the AIP project grants is to benefit the public at large pursuant to a government program to foster the development, safety, and efficiency of public-use airports. The FAA's motivation in making the AIP project grants is similar to the public-benefit motivation of the contributors in Brown Shoe and is distinguishable from the motivation of the prospective customers in Detroit Edison, which was to obtain services.

In addition, the AIP project grants satisfy the five characteristics of a nonshareholder contribution to capital set forth in Chicago, Burlington & Quincy R.R., because the AIP grants: (1) become a part of the public-use airport's working capital used for development, planning, and the purchase of navigation and other equipment; (2) are not made for specific, quantifiable services received by the government since the purpose of the grants is to benefit public aviation and any services to the government under § 511(a)(6) and (7) of the AAIA are incidental to this purpose; (3) are bargained for because the grants are highly sought after with certain meaningful conditions for the grants being negotiated between the airports and the FAA; (4) benefit the airport commensurate with their value by helping avoid functional obsolescence of facilities and improve safety and operations, a definite economic value to the airport; and (5) generate additional income for the airport through increased public use of facilities and services.

HOLDING

A project grant made by the FAA to a corporate owner of a public-use airport under the AIP is a nonshareholder contribution to the capital of the corporation under § 118(a) of the Code and the basis in the corporation's property is reduced under the rules provided by § 362(c)(2).

DRAFTING INFORMATION

The principal author of this revenue ruling is Paul F. Handleman of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Jeffrey A. Erickson on (202) 622-3040 (not a toll-free call).

Rev. Rul. 93-16, 1993-1 C.B. 26, 1993-8 I.R.B. 5.