An S corporation with renovations already underway receives $40,000 in state/local government grant money paid in three equal installments to help with part of the renovations.
PLR 1003005 suggests that these payments should be considered non-shareholder contributions of capital under 362(c)(2). 362(c)(2) provides that "the basis of any property acquired with such money during the 12-month period beginning on the day the contribution is received shall be reduced by the amount of such contribution".
There are two complications to this issue.
Complication 1: The government authority has issued a 1099-MISC to the corporation with $40,000 listed as "other income" in box 3. The instructions to Form 1099-MISC indicate that it need not be issued to a corporation, so the fact it was issued implies that the authority may not have known about their corporate status. Does the 1099-MISC tell the IRS that the $40,000 was income and not a reduction in basis, as I assume it would be to an individual, or does it merely indicate that cash was transferred? Should the 1099-MISC be considered to contain an error? Is it worth bothering over?
Complication 2: The net cash payments are over $40,000 but they aren't lined up nicely with the grant monies the way that 362(c)(2) seems to want them to be. The transactions proceed as indicated below. All of the contractor payments listed below except for the final three payments are for related improvements to the property. Can these improvements be considered "acquired" on 6/8 when the final payment is made, and therefore fully covered by the grant money? Or can the grant money be applied to the improvements through some other logic even though a plain reading of the statute would suggest otherwise?
3/01 Contractor .....................(7,000.00)
3/08 Grant............................ 13,334.00
3/08 Contractor ....................(13,334.00)
3/15 Landlord reimbursement.. 50,052.44
3/15 Contractor.....................(50,052.44)
5/07 Contractor ....................(13,333.00)
5/10 Grant............................ 13,333.00
6/05 Grant............................ 13,333.00
6/08 Contractor.....................(11,260.00)
7/15 Contractor......................( 1,300.00)
7/15 Contractor.........................( 750.00)
8/05 Contractor.........................( 122.00)
Also, Freedom Newspapers, Inc. v. Commissioner is possibly relevant here so I figured I'd link to it.