26 U.S.C. § 126 — Certain cost-sharing payments

(a) General rule. Gross income does not include the "excludable portion" (defined in (b)) of payments received under: (1) the rural clean water program authorized by section 208(j) of the Federal Water Pollution Control Act (33 U.S.C. § 1288(j)); (2) the rural abandoned mine program authorized by section 406 of the Surface Mining Control and Reclamation Act of 1977 (30 U.S.C. § 1236); (3) the water bank program authorized by the Water Bank Act (16 U.S.C. § 1301 et seq.); (4) the emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978; (5) the agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act (16 U.S.C. § 590a); (6) the resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act (7 U.S.C. § 1010; 16 U.S.C. § 590a et seq.); (7) any small watershed program the Secretary of Agriculture administers that the Secretary of the Treasury (or a delegate) decides is substantially similar to the programs listed above; and (8) any program of a state, U.S. possession, a political subdivision of either, or the District of Columbia, that pays individuals mainly to conserve soil, protect or restore the environment, improve forests, or provide wildlife habitat. (b) Excludable portion. (1) The "excludable portion" of a payment made under any program in (a) is the part (or all) of it that (A) the Secretary of Agriculture decides is made mainly to conserve soil and water resources, protect or restore the environment, improve forests, or provide wildlife habitat, and (B) the Secretary of the Treasury (or a delegate) decides does not substantially increase the yearly income the property produces. (2) The excludable portion does not include any part of a payment that is properly tied to an amount deductible for the tax year the amount is paid or incurred. (c) Election for section not to apply. (1) A taxpayer may elect not to have this section (and section 1255) apply to some or all of an excludable portion. (2) This election must be made in the manner Treasury regulations prescribe, no later than the due date (including extensions) for filing the tax return for the year the payment was received or accrued. (d) Denial of double benefits. No deduction or credit is allowed for spending that is properly tied to an amount excluded from gross income under (a). (e) Basis of property not increased by reason of excludable payments. Even though section 1016 would otherwise say so, the tax basis of property bought or improved using an excluded payment is not adjusted for any amount excluded from gross income under (a).