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Petitioner did not report the $35,625 on its 1989 Federal income
tax return. In her notice of deficiency, respondent determined
that the $35,625 was includable in petitioner's income for 1989
as "contributions in aid of construction" under section 118.
At trial and in its briefs, petitioner argued that: (1) The
contribution by McArthy (escrowed funds) is not a "contribution
in aid of construction" within the meaning of section 118(b), but
a nontaxable contribution to the capital of Imperial; (2) if the
payment is a "contribution in aid of construction", including
such amount in the income of a corporation would violate the
Sixteenth Amendment; and (3) in the alternative, the fair market
value of McArthy's contribution should be based on the revenue
generated by the sewer line rather than the cost of construction.
In Epco, Inc. & Subs. v. Commissioner, T.C. Memo. 1995-249,
we found that the funds disbursed from the escrow account were
"contributions in aid of construction" of the sewer pipeline,
and, therefore, we held that the amounts disbursed are includable
in petitioner's income. Id. We further held, based on the
legislative history of nonshareholder contributions, that
including in income "contributions in aid of construction" did
not violate the Sixteenth Amendment. With respect to
petitioner's alternative argument, we stated:
Finally, we reject petitioner's alternative argument
that the amount of income includable should be the value of
the main-line extension computed using the discounted cash-
flow method based upon projected revenue. Imperial received
cash. Imperial did not receive an operating sewer system,
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