SECTION 2. BACKGROUND

Section 118(a) of the Code provides that in the case of a corporation, gross income does not include a contribution to the capital of the taxpayer.

Section 1.118–1 of the Income Tax Regulations provides that section 118 applies to contributions to capital made by a person other than a shareholder, for example, property contributed to a corporation by a governmental unit for the purpose of enabling the corporation to expand its operating facilities.

Section 362(c)(2) of the Code requires a basis reduction in a corporation’s property when the corporation receives money from a nonshareholder as a contribution to its capital.

The Congestion Grant program under 49 U.S.C. 24105(a) provides that the Secretary of Transportation (the Secretary) may make grants for financing the capital costs of facilities, infrastructure, and equipment for high priority rail corridor projects necessary to reduce congestion or facilitate ridership growth in intercity rail passenger transportation.

The Intercity Passenger Rail Service Corridor Capital Assistance program under 49 U.S.C. 24402(a)(1) provides that the Secretary may make grants to assist in financing the capital costs of facilities,

2010–49 I.R.B. 814 December 6, 2010

24105, 24401 et seq., or 26106 as a nonshareholder contribution to the capital of the corporation under section 118(a) of the Code if the corporation properly reduces the basis of its property under section 362(c)(2) and the regulations thereunder.

Also, the Service will not challenge a corporate taxpayer’s treatment of grant amounts received by the corporation under TIGER Discretionary Grants for capital investments in surface transportation infrastructure or under TIGER II Discretionary Grants for capital investments in surface transportation infrastructure as a nonshareholder contribution to the capital of the corporation under section 118(a) of the Code if the corporation properly reduces the basis of its property under section 362(c)(2) and the regulations thereunder.