Treatment of Water and Sewerage Disposal Utilities. –

# (a)

Such amount is:

# (1)

A contribution in aid of construction; or

# (2)

A contribution to the capital of such utility by a governmental entity providing for the protection, preservation, or enhancement of drinking water or sewerage disposal services;

# (b)

In the case of a contribution in aid of construction which is property other than water or sewerage disposal facilities, such amount meets the requirements of the expenditure rule of paragraph II; and

# (c)

Such amount, or any property acquired or constructed with such amount, is not included in the taxpayer's rate base for ratemaking purposes.
II. An amount meets the requirements of subparagraph I(b) if:

(a) An amount equal to such amount is expended for the acquisition or construction of tangible property described in United States Internal Revenue Code section 1231(b):

(1) Which is the property for which the contribution was made or is of the same type as such property; and

(2) Which is used predominantly in the trade or business of furnishing water or sewerage disposal services;

(b) The expenditure referred to in subparagraph (a) occurs before the end of the second taxable year after the year in which such amount was received; and

(c) Accurate records are kept of the amounts contributed and expenditures made, the expenditures to which contributions are allocated, and the year in which the contributions and expenditures are received and made.
III. For purposes of this section:

(a) "Contribution in aid of construction" shall mean as the term is defined by the United States Department of the Treasury's Treasury Regulations 1.118-2 (2001), except that such term shall not include amounts paid as service charges for starting or stopping services.

(b) "Predominantly" means 80 percent or more.

(c) "Regulated public utility" has the meaning given such term by Internal Revenue Code section 7701(a)(33), except that such term shall not include any utility which is not required to provide water or sewerage disposal services to members of the general public in its service area.
IV. Notwithstanding any other provisions of law, no deduction or credit shall be allowed for, or by reason of, any expenditure which constitutes a contribution in aid of construction to which this section applies. The adjusted basis of any property acquired with contributions in aid of construction to which this section applies shall be zero.