IRS Provides Safe Harbor For Treating Certain DOE Awards As Capital Contributions

Rev Proc 2011-30, 2011-21 IRB

In a Revenue Procedure, IRS has provided a safe harbor under Code Sec. 118(a) for the treatment of certain awards for clean coal technology to corporations from the National Energy Technology Laboratory (NETL) of the Department of Energy (DOE), effective Apr. 14, 2011. This initiative was funded by the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5, 2/17/2009).

Background. Under Code Sec. 118(a), a corporation's gross income doesn't include a contribution to its capital. Reg. §1.118-1 provides that Code Sec. 118 applies to contributions to a corporation's capital made by a person other than a shareholder. When a corporation receives money from a nonshareholder as a contribution to its capital, Code Sec. 362(c)(2) requires a basis reduction in a corporation's property.

42 U.S.C. 15962 directs DOE to provide assistance for projects that advance efficiency, environmental performance, and cost competitiveness well beyond the level of technologies that are in commercial service or have been demonstrated on a scale that DOE determines is sufficient to demonstrate that commercial service is viable as of Aug. 8, 2005. Accordingly, NETL issued a Financial Assistance Funding Opportunity Announcement for Clean Coal Power Initiative - Round 3 (CCPI - Round 3).

42 U.S.C. 17251 directs DOE to carry out a program to demonstrate technologies for the large-scale capture of carbon dioxide from industrial sources. Accordingly, NETL issued a Financial Assistance Funding Opportunity Announcement for Carbon Capture and Sequestration from Industrial Sources and Innovative Concepts for Beneficial CO2 Use (ICCS).

On Sept. 27, 2010, NETL awarded assistance for a commercial-scale, oxy-combustion power plant and carbon dioxide sequestration facility (FutureGen 2.0).

ARRA appropriated $3.4 billion for fossil energy research and development, of which DOE allocated approximately $796 million to CCPI - Round 3, approximately $703 million to ICCS, and approximately $995 million to FutureGen 2.0.

Safe harbor. In Rev Proc 2011-30, IRS said that it would not challenge a corporation's treatment of an award from DOE under CCPI - Round 3, ICCS, or FutureGen 2.0 as a nonshareholder contribution to the capital of the corporation under Code Sec. 118(a), if the corporate taxpayer properly reduces the basis of its property under Code Sec. 362(c)(2) and the regs.

References: For nonshareholder contributions of property to a corporation, see FTC 2d/FIN ¶F-1903.1; United States Tax Reporter ¶1184.01; TaxDesk ¶232,308; TG ¶11437.