General Utilities Doctrine

General Utilities Doctrine

A former provision in U.S. tax law allowing a corporation to liquidate its assets at a profit and pass on the profit to its shareholders without paying a corporate tax. Shareholders, however, remained responsible for taxes on what amounted to a special dividend. The general utilities doctrine allowed shareholders to avoid double taxation in the liquidation of assets. It was abolished by the Tax Reform Act of 1986.

General Utilities Doctrine

An Internal Revenue Service provision that permits a firm to liquidate its assets at more than book value and to pass the proceeds of the liquidation through to stockholders without making the firm pay income taxes on the gains. Rather, stockholders receiving the distribution are required to report the gain (but not the entire liquidation) as income. The General Utilities Doctrine was repealed in 1986 tax reform. As a result of the repeal, any gain from liquidation is taxed twice: once to the liquidating firm and again to the stockholders.
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The IRS issued more regulations in June that take aim at transactions that attempt to avoid the repeal of the General Utilities doctrine.
Previously, the General Utilities doctrine had, with some exceptions, allowed a corporation to distribute appreciated property to its shareholders without recognizing gain.
The General Utilities doctrine reflects a tension that has existed throughout tax law history--that is, whether double taxation of corporate income is good policy.
In general, two taxes are due under sections 336 and 301 of the Internal Revenue Code upon dissolution of a C corporation because of the repeal of the so-called General Utilities doctrine by Tax Reform Act of 1986.
The LDR was adopted in 1991 in order to prevent the investment adjustment system of the consolidated return regulations from circumventing the repeal of the General Utilities doctrine.
The avoidance of capital gains tax was based upon the General Utilities doctrine.
The General Utilities doctrine grew out of General Utilities 6.
The Tax Reform Act of 1986 repealed the General Utilities doctrine by requiring corporate-level gain recognition on a corporation's sale or distribution of appreciated property, regardless of whether it occurs in a liquidating or non-liquidating context.
In 1986, Congress repealed the last element of the General Utilities doctrine.
It held that as a result of the repeal of the General Utilities doctrine, a tax liability upon liquidation or sale for built-in capital gains was not too speculative.
Under the 1986 act, the General Utilities doctrine was repealed, with a few exceptions: distributions in kind, sale of investment assets and the Section 1231 element as to assets used in a trade or business.
99-514, Congress repealed the General Utilities doctrine, which had allowed a C corporation to make a tax-free liquidating distribution to its shareholders prior to the sale of the company (General Utilities & Operating Co.

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