The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

General Utilities Co. v. Helvering, 296 U.S. 200 (1935)

The general rule was that a corporation recognized no gain or loss on the distribution of appreciated property to its shareholders.

Exceptions and limitations had crept in over time, e.g., recognition of corporate gain on appreciated property used to redeem stock.

The General Utilities doctrine was repealed by the Tax Reform Act of 1986.

Now corporations recognize gain on almost all distributions of appreciated property to shareholders.
A corporation distributing appreciated property to a shareholder is deemed to have sold that property to the shareholder at the property's fair market value, recognizing gain, and then to have distributed to the shareholder the cash deemed received in that sale.

If the shareholder is another corporation which is a member of the same consolidated return group as the distributing corporation, the gain on the deemed sale may not be taxed immediately but give rise to deferred intercompany gain which can be triggered when, among other circumstances, either the distributing or distributee corporation leaves the consolidated return group (e.g., is sold).

Even after the Tax Reform Act of 1986, liquidations of controlled subsidiaries can be effected tax free.

Repeal of the General Utilities doctrine has limited the tax planning opportunities available in corporate acquisitions. The only remaining mechanism for distribution by a corporation of appreciated property to its shareholders without recognition of gain is a tax-free "spin off" of a controlled subsidiary under I.R.C. § 355.

© 2007