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 The General Utilities Doctrine was repealed in 1986 tax reform.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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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 grew out of General Utilities 6.
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 avoidance of capital gains tax was based upon the General Utilities doctrine.
In addition, with the repeal of the General Utilities doctrine, the consistency rules of sections 338(e) and (f) no longer served their original purpose of targeting transactions designed to selectively step up the basis of certain assets while preserving the tax attributes of other corporations.
First, section 355, which provides an exception to the repeal of the General Utilities doctrine, was intended to permit tax-free restructurings of several businesses among existing shareholders.
Under the General Utilities doctrine, a corporation could distribute appreciated property to its shareholders without recognizing gain.
Shareholders who needed to withdraw earnings from a corporation found tax reform and the repeal of the General Utilities doctrine had eliminated techniques by which corporate shareholders had previously been able to avoid double tax on the withdrawal of corporate earnings.
Simply stated, the General Utilities doctrine allowed a C corporation to make a tax-free liquidating distribution to its shareholders prior to a sale of the company.
The repeal of the General Utilities doctrine in 1986 rendered IRC [sections] 341 redundant.
Although this seems onerous, the 1986 repeal of the General Utilities doctrine reduces the circumstances under which a corporation can dispose of assets tax-free.
Before the repeal of the General Utilities doctrine, partial liquidation treatment was highly prized.

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