Location Tax Incentive Not Federal Taxable Income
Elzweig, Brian, Chambers, Valrie, Journal of Accountancy
The IRS said in a coordinated issue paper that a location tax incentive paid or credited to a business by a unit of state or local government is not included in the business's gross income but rather reduces its tax expense. A location tax incentive is a tax reduction by abatement, credit, deduction, rate reduction or exemption given to a taxpayer as an incentive to locate in, remain in or expand its operations in a particular area. These incentives are not considered purchases from the taxpayer because they do not require the taxpayer to provide any services or property to the taxing jurisdiction. They benefit the taxpayer but are provided primarily for the economic benefit of the community at large. The taxpayer also does not realize an accession to wealth resulting in gross income.
Some corporate taxpayers have argued that such rebates should be treated as an exclusion from taxable income as a nonshareholder contribution to capital under IRC [section] 118, while they also include them in the full amount of tax expense deductible under section 164, the IRS said. These taxpayers would then reduce their basis of property under section 362(c) by the amount of the purported nonshareholder capital contribution. IRC [section] 118(a) does allow the money or value of property given to the corporation by the government or a civic group to be excluded from gross income (IRC [section] 61) as a nonshareholder contribution to capital. However, since a tax rebate is more like a discount on a liability than new incoming money or property, it is not a nonshareholder contribution to capital, the IRS said.
Even if such incentives were otherwise deemed to be gross income, they still generally would not be eligible for IRC [section] 118 treatment, which requires taxpayers to meet five factors, the IRS said, citing U.S. v. Chicago, Burlington & Quincy R.R. Co. (412 U.S. 401, 413 (1973)): (1) The contribution must become a permanent part of the transferee's working capital structure; (2) the contribution must not be compensation for specific, quantifiable services provided by the transferee to the transferor; (3) the contribution must be bargained for; (4) the asset transferred must result in a benefit to the transferee commensurate with its value; and (5) the asset transferred ordinarily, if not always, will be used to produce additional income. (For treatment of a state location incentive grant analyzed by these factors and deemed to qualify as a contribution to capital, see Private Letter Ruling 200901018 issued Jan. …