On September 23rd, the Internal Revenue Service issued Revenue Procedure 2010-34, which provides a safe harbor for corporations receiving certain grants to expand broadband capabilities from the Rural Utilities Service (RUS) of the Department of Agriculture under the Broadband Initiatives Program (BIP) and from the National Telecommunications and Information Administration (NTIA) of the Department of Commerce under the Broadband Technology Opportunities Program (BTOP). BIP provides grants for six purposes: (1) Last Mile Remote Projects (LMRP); (2) Last Mile Projects (LMP); (3) Middle Mile Projects (MMP); (4) Satellite Projects (SP); (5) Technical Assistance (TA); and (6) Rural Library Broadband (RLB). BTOP provides grants for four purposes: (1) Broadband Infrastructure (BI); (2) Comprehensive Community Infrastructure (CCI); (3) Public Computer Centers (PCC); and (4) Sustainable Broadband Adoption (SBA).
Prior to this revenue procedure, the tax treatment of these grants was not entirely clear. However, it was generally believed that a grant received by a corporation would be treated as a tax-free contribution to capital by a nonshareholder. Further, it was believed that the corporate recipient would have to reduce the basis in an asset constructed with the grant proceeds by the amount of grant proceeds expended on the asset (i.e., the corporation would only receive basis for the amount of nongrant proceeds expended).
The Service confirmed this treatment for certain grants in Revenue Procedure 2010-34. The IRS will not challenge a corporation’s treatment of grants to a corporation from RUS under BIP for LMRP, LMP, MMP, or RLB or from NTIA under BTOP for BI or CCI as a nontaxable contribution to capital of the corporation if the corporation properly reduces the basis of its property under Code Section 362(c)(2) and the regulations thereunder. This revenue procedure is effective September 23, 2010.
Notably the safe harbor does not apply to noncorporate taxpayers (such as partnerships or limited liability companies taxable as partnerships). It is likely that noncorporate taxpayers will have to report any grant proceeds as taxable income, regardless of their purpose. As a result, the noncorporate taxpayer will receive a full cost basis in the assets constructed.
The safe harbor also does not apply to: (1) grants from RUS under BIP for SP or TA; (2) the portion of any grant paid to reimburse pre-application expenses; (3) loans from RUS under BIP; (4) grants from NTIA under BTOP for PCC or SBA; or (5) the National Broadband Plan or the Universal Service Fund of the Federal Communications Commission. Taxpayers receiving grants for these purposes should consult their tax advisors.