A capital contribution is a transfer of property by a person,
which may or may not be a current shareholder,
to a corporation for which no stock or property is received in return.
Code section 118(a) provides that a corporation does not include in gross income
any contributions of money or property from
shareholders to the capital of the corporation.
In other words, the corporation receiving
a capital contribution from a shareholder does not recognize
any income or gain on the transfer of property because
the transaction is not a sale of services, inventory, or property.
This tax-free treatment applies despite the fact
there is no change in the outstanding shares of stock.
Contributions of capital by non-shareholders however,
received special treatment depending on whether
the contribution occurred in a tax year beginning before or after
the enactment of the Tax Cuts and Jobs Act of
2017 and particular for tax years beginning after 2017,
capital contributions of property by
non-shareholder are included in a corporation's gross income.
Why? Can you think of a situation where a non-shareholder will
voluntarily transfer property to a corporation for nothing in return?
I mean, are you willing to transfer your home or car to Google for nothing? Probably not.
The scenario commonly arises when a governmental entity such as a municipality,
transfers real estate to a corporation to induce
the corporation to locate its operations within its border.
As such, the code now subjects this transaction to taxation.
Before 2018 however, such contributions were excluded from gross income.
So, be sure to pay attention to tax your timing in this situation.
If cash or other properties contributed by an existing shareholder,
the corporation receives a carryover exchange basis in the property.
This is the same basis treatment as in
most other non-recognition transactions such as Section 1032.
This treatment applies both before and after the Tax Cuts and Jobs Act.
However, if non-cash property is contributed by a non-shareholder after 2017,
the corporation receives a basis equal to
the property's fair market value as it is a taxable transaction.
Before 2018, the corporation generally receives a basis of zero in the property.
A common exception however,
occurs if non-shareholder contributes cash
which has a tax basis and cannot be zero by definition.
In such cases the corporation reduces its basis and
other property it already owns by the amount of cash received.
For contributing shareholders, a capital contribution is not
a taxable event because nothing is received in return,
instead shareholders increase their basis and
any existing stock by the basis of the property contributed.
For non shareholder transfers like the local government mentioned in the example earlier,
special rules beyond the scope of this course generally apply.