Dean Mead’s Tax Department handles tax planning issues for businesses and individuals. The attorneys in our department have extensive experience in a full range of…
If you want to get the attention of your elected officials in Florida, make sure there is an event that may adversely affect the tourism industry! The State of Florida receives (on average) between 50 – 60 inches of rain each year. Currently, our water management system is designed primarily as a drainage system with very little management options. This results in the discharge of tremendous amounts of fresh water to our coastal estuarine environments in unnatural slugs of water, rather than the more natural flow which impedes the fresh water’s trip to the coast, keeping our lakes, marshes, and wetlands hydrated longer and allowing for more absorption and evaporation before the remaining fresh water finds its way to the coastal estuarine environments. With the headlines across the state announcing like Paul Revere, the march of not the redcoats but of blue/green algae to lay devastation upon our waterways and cause not only an environmental but also an economic crisis affecting numerous locations around the state. There is now significantly more interest in addressing the much needed management options that could be developed to attenuate these freshwater discharges.
We also have become educated over the last few years on the water crisis affecting North Florida’s natural springs that bubble up through the Karst topography as the head waters of many of our streams and rivers. These natural bodies provide not only water supply, but also recreational opportunities that are engrained in the fabric of Florida living. The drainage noted above, along with increasing demand and concerns regarding water quality, have similar adverse effects upon the springs as the massive discharges of fresh water have to the coastal estuarine environment. So, with this double-barreled effect of the march of the blue/green algae and the demise of Florida’s natural springs, state and federal agencies have a heightened awareness that previously has not existed and appear to have a commitment to address the cause of these water crises across the state with new and innovative projects.
While there are large federal projects (much of which have yet to be funded and built) such as the Comprehensive Everglades Restoration Plan (“CERP”) and the Indian River Lagoon (“IRL”) Plan associated therewith, there is also a renewed focus upon steps that can be taken locally that cumulatively can have far-reaching effects upon these discharges. A common element that runs through these various projects, unlike the large institutional governmental projects contemplated by CERP and IRL, is the more targeted approach of identifying certain smaller projects on private land that are designed to provide relief such as dispersed water storage projects, best management practices, conservation easements to limit more intensive uses and surface water management systems improvements to existing structures. The cumulative impact of these projects should result in a positive impact on attenuating discharges, improving water quality and allowing for a more natural means of absorption, evaporation and drainage to the areas of the State that need fresh water.
So that brings us to the crux of this article, once a project and its funding are identified, the taxpayer (landowner) must assess the tax consequences upon receipt of payments for costs of engineering, permitting, structural improvements, and operational costs of implementation to determine if the taxpayer can afford to implement these solutions. Generally, such payments are included in gross income, whether received in cash or in kind, unless an exception applies. This is the first in a series of articles addressing potential exceptions to the general rule that may apply for these types of projects.
For corporations only, § 118(a) exempts certain “contributions to the capital” from gross income. This law, first enacted in 1954 to codify existing case law, provides that certain contributions to the capital of corporations were not taxable income “where a contribution is made to a corporation by a governmental unit, chamber of commerce, or other association of individuals having no proprietary interest in the corporation.” The Regulations distinguish between (1) contributions “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,” which are excludable, and (2) “consideration for goods or services rendered, or to subsidies paid for the purpose to induce a corporation to limit production,” which are not excludable. 
In United States v. Chicago, Burlington & Quincy R.R. v. Commissioner, the Supreme 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.
In Revenue Ruling 93-16, a privately owned public-use airport received a Federal Aviation Administration (FAA) grant under its Airport Improvement Program (AIP) to improve the airport. A recipient of an AIP grant must provide free landing rights to government aircraft under certain circumstances, which, in practice, were rarely requested. Thus, any benefit to the government is incidental in the context of the overall public purpose of the AIP. Accordingly, the motivation was for public benefit and the five characteristic test described above was met making the funds received nonshareholder contributions to capital under § 118(a).
Section 118(a) is one method a corporate recipient of funds for a water project may consider to exclude the payments received from recognition. The next in our series of articles will address exceptions from income recognition that may be applicable to all taxpayers, not just corporations.
About the Authors:
Dana M. Apfelbaum practices in the areas of federal income, estate, and gift tax law and family business succession planning. She counsels individuals in estate planning, with an emphasis on implementing the client’s objectives, asset protection and minimizing wealth transfer taxes. Ms. Apfelbaum also represents fiduciaries through all stages of probate, estate and trust administration. In addition, she represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, other general business matters, and succession planning. She may be reached at firstname.lastname@example.org.
Brad Gould practices in Dean Mead’s Fort Pierce office located in St. Lucie County, Florida. His practice covers the areas of federal income, estate, and gift tax law and business succession planning. He represents businesses and business owners in all types of business and tax matters, including choice of entity, mergers and acquisitions, reorganizations, and other general business matters. Mr. Gould represents individuals, businesses and fiduciaries before the IRS and also counsels clients on estate and wealth preservation planning matters. Additionally, he represents trustees, personal representatives and family members in controversies regarding wills, trusts and estates. Mr. Gould is a Certified Public Accountant. He may be reached at email@example.com.
Michael D. Minton is a shareholder and chair of Dean Mead’s Agribusiness Industry Team. He represents family businesses with an emphasis on generationally owned agricultural businesses. Mr. Minton assists with their organizational structure, federal income, estate and gift tax planning, and business succession planning. He is a member of the Solutions Committee of the Central Florida Water Initiative. He may be reached at (772) 464-7700 or by email at firstname.lastname@example.org.
 IRS §61(a); Rev. Rul. 60-32; Notice 99-3, 1999-1 CB 271; Notice 2006-108, 2006-2 CB 1118; All statutory references to the Internal Revenue Code of 1986 (IRC).
 S. Rep. No. 1622, 83d Cong., 2d Sess. 18-19 (1954).
 See Treas. Reg. § 1.118-1. Compare Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943), 1943 C.B. 1019 (holding payments by prospective customers to a power company to construct facilities were payments for services), and Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), 1950-1 C.B. 38 (holding 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).
 412 U.S. 401 (1973)
 Id. at 413.
 1993-1 C.B. 26.