Corporate Taxation Insider

Attacking Transactions to Evade General Utilities Repeal

Temporary regulations prevent corporations from avoiding tax through the use of partnerships.
By Stephen J. Ehrenberg, CPA

When establishing and operating a business, a taxpayer must evaluate which entity is right for the business. Issues such as liability protection, double taxation, the number of shareholders, and raising equity, to name a few, must be considered when deciding whether a corporation or a partnership is the right business model to pursue. As part of this analysis, taxpayers have sought to minimize, defer, or completely eliminate tax liabilities by carefully structuring their transactions.

One type of transaction has received increased scrutiny from the IRS since the repeal of the General Utilities doctrine nearly a half-century ago. Recent IRS action in the form of temporary regulations (T.D. 9722) has reduced a corporate taxpayer’s ability to use partnerships to avoid gain recognition on certain types of transactions.


A 1935 ruling by the U.S. Supreme Court in General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935) (commonly referred to as the General Utilities doctrine) allowed a corporation, for the most part, to distribute appreciated property to its shareholders without recognizing corporate-level gain. However, to undercut this treatment, from 1969 to 1984, Congress enacted the Code sections below, effectively ending nonrecognition of corporate-level gain on distributions of appreciated property and repealing what was left of the doctrine:

  • Sec. 311(b): Generally requires the recognition of corporate-level gain on nonliquidating distributions of appreciated property.
  • Sec. 336(a): Generally requires the recognition of corporate-level gain (or loss) on liquidating distributions.

While exceptions exist, such as for property distributions to a parent corporation (Sec. 337(a)), since the mid-’80s, corporate taxpayers entering into these types of transactions are generally required to recognize corporate-level gain on the distribution of appreciated property to their shareholders.

In the wake of the repeal of the General Utilities doctrine, corporate taxpayers still sought to structure transactions to reduce or eliminate the entity-level tax on distributions that partnerships typically avoid. To further combat this tax avoidance, Congress enacted Sec. 337(d) as part of the Tax Reform Act of 1986, P.L. 99-514. The new section provided broad authority to the Treasury Department to issue regulations to enforce the underlying gain recognition concepts that were at the center of the repeal of the General Utilities doctrine that may not have been anticipated when Secs. 311(b) and 336(a) were enacted.

IRS action

The IRS was keenly aware that corporate taxpayers were inserting partnerships into the corporate structure as a means to reduce, defer, or eliminate gain. One such transaction, as explained in T.D. 9722, was the following:

  1. Corporation enters into a partnership agreement.
  2. Corporation contributes appreciated property to the partnership in a tax-free transaction under Sec. 721.
  3. Partnership acquires stock of the corporate partner that contributed the appreciated property.
  4. Partnership makes a liquidating distribution of this stock to the corporate partner.

Under this scenario, the contributing corporation avoids the pitfalls of Sec. 311(b), which would have otherwise required the corporation to record an entity-level taxable gain upon the exchange of appreciated property for stock. Furthermore, the principles of Sec. 731(a) would apply, thus allowing the corporate partner to avoid gain on the distribution. (Had cash been distributed as part of this transaction, a gain may have been recognized.)

To halt the circumvention of gain recognition through the insertion of partnerships into the corporate structure, the IRS issued Notice 89-37, which was the precursor to the 1992 proposed regulations under Sec. 337(d) (REG-208989-90). Under the proposed regulations, the following two rules were adopted:

  1. Deemed redemption rule: Corporate taxpayers that are partners in a partnership recognize gain if there is an exchange of an interest in appreciated property for an interest in its stock (or the stock of any member of its affiliated group) that is owned, acquired, or distributed by the partnership.
  2. Deemed distribution rule: Corporate partners in the partnership that receive a distribution of the partner’s stock must treat this transaction as a redemption or exchange of the stock for a portion of the partnership interest.

These two rules addressed the underlying objectives of the repeal of General Utilities, effectively closing any remaining loopholes that corporate taxpayers were trying to parlay into gain avoidance through the introduction of partnership entities into the overall corporate structure.

T.D. 9722

The IRS recently withdrew the 1992 proposed regulations, replacing them with the temporary regulations contained in T.D. 9722, which apply to transactions entered into on or after June 12, 2015. These new rules largely put an end to a corporation’s ability to bypass entity-level gain recognition under Sec. 311(b) and/or Sec. 336(e) through the use of a partnership.

While the temporary regulations largely retain the concepts of the proposed regulations they replaced, certain key concepts were revised:

Stock of a corporate partner

The proposed regulations defined stock of a corporate partner as the stock or equity interests of the corporate partner and its affiliates. The temporary regulations augment this definition to include the stock or equity interests of any corporation that possesses control of the corporate partner. Whereas the proposed regulations applied the 80% vote and value test in the Sec. 1504 consolidated return rules, the temporary regulations use the Sec. 304(c) definition to determine control, replacing the 80% vote and value test with a 50% vote and value threshold.

Deemed redemption rule

The deemed redemption rule was retained, although there were changes in how the gain is calculated. Additionally, the deemed redemption rule now covers distributions, thus eliminating the deemed distribution rule in the proposed regulations.


In an effort to confine the scope to corporate tax avoidance, there are certain exceptions stipulated in the temporary regulations, including:

  • Related-party exception: Stock of a corporate partner excludes partnerships that are wholly owned by an affiliated group of corporations within the meaning of Sec. 1504(a) that includes the corporate partner.
  • De minimis exception: Transactions that meet the following thresholds are outside the scope of these rules:
    • Corporate partner and any affiliates own, in aggregate, less than 5% of the partnership;
    • Partnership holds stock of the corporate partner worth less than 2% of the value of the partnership’s gross assets; and
    • The partnership has never held more than $1 million in stock of the corporate partner or 2% of any class of the corporate partner’s stock.


The rules in this area are complex. Corporate taxpayers who have partnerships in their structure or are considering the insertion of partnerships into their structure as a means to defer, reduce, or eliminate gain should pay special attention to ensure that they are aware that there may be entity-level corporate gain in these types of transactions.

Stephen J. Ehrenberg, CPA, MBT, is a tax principal in the Los Angeles office of Holthouse Carlin & Van Trigt LLP

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