The Taxation of Nonshareholder Contributions to Capital: An Economic Analysis

Every year, billions of dollars are contributed to corporations by persons who are neither owners nor shareholders of those corporations. These contributions, categorized under the income tax laws as "non- shareholder contributions to capital," play an important economic role in subsidizing the construction of new factories and other improvements to the nation's infrastructure. This Article concerns the federal income tax treatment of the two principal categories of nonshareholder contributions to capital, which together encompass the great majority of these transactions. The first category consists of contributions made for the purpose of obtaining economic development.

Typically, this occurs when governments and business groups contribute property to corporations in order to persuade those corporations to construct factories and other facilities in their local areas. These contributions are made to the firms so that the local area will benefit from the jobs and economic stimulation provided, as positive externalities,' by the operation of the factories in the vicinity. Under present law, corporations are not taxed on contributions they receive for economic development. When, for example, a corporation receives "free" land from a state government as an inducement to construct a factory, the law generally allows the corporation to exclude the value of the land from its taxable income.' Present law thus implicitly assumes that the corporation does not have income, defined as an accretion to wealth, from the receipt of the land.