[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.118-1]

[Page 496]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.118-1  Contributions to the capital of a corporation.

    In the case of a corporation, section 118 provides an exclusion from 
gross income with respect to any contribution of money or property to 
the capital of the taxpayer. Thus, if a corporation requires additional 
funds for conducting its business and obtains such funds through 
voluntary pro rata payments by its shareholders, the amounts so received 
being credited to its surplus account or to a special account, such 
amounts do not constitute income, although there is no increase in the 
outstanding shares of stock of the corporation. In such a case the 
payments are in the nature of assessments upon, and represent an 
additional price paid for, the shares of stock held by the individual 
shareholders, and will be treated as an addition to and as a part of the 
operating capital of the company. Section 118 also applies to 
contributions to capital made by persons other than shareholders. For 
example, the exclusion applies to the value of land or 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. However, the exclusion does not apply 
to any money or property transferred to the corporation in consideration 
for goods or services rendered, or to subsidies paid for the purpose of 
inducing the taxpayer to limit production. See section 362 for the basis 
of property acquired by a corporation through a contribution to its 
capital by its stockholders or by nonstockholders.