Final regs. issued for transfers from taxable corporations to exempt entities.

• Author: Musi, Gennaro
• Position: IRS regulations

In recent years, there has been a surge in the number of conversions of entities, either from for-profit to not-for-profit status, or from not-for-profit to for-profit status. The IRS has issued final regulations on the repeal of the General Utilities doctrine, involving asset transfers from taxable corporations to exempt entities. The final regulations adopt, in most part, the rules in the proposed regulations. The final regulations apply to transfers of assets occurring after Jan. 28, 1999, unless the transfer is pursuant to a written agreement binding on or before that date. The purpose of the regulations is to prevent taxable corporations with appreciated assets from using exempt entities to escape taxation on the appreciation.

Background

Under the General Utilities doctrine, corporations were not required to recognize gain or loss when distributing appreciated or depreciated property to their shareholders. The General Utilities doctrine was an exception to the general rule that income earned by a corporation is taxed twice, once to the corporation when the income is earned and again to the corporation's shareholders when the earnings are distributed. The General Utilities doctrine generally permitted the permanent elimination of corporate-level tax on the disposition of appreciated assets, because the transferee received a fair market value (FMV) basis in the assets and the corporation generally did not recognize any gain. Beginning in 1969, the scope of the General Utilities doctrine was restricted, until ultimately it was repealed, with limited exceptions, in the Tax Reform Act of 1986 (TRA '86). The TRA '86 added Sec. 337(d), directing the Secretary to prescribe regulations necessary to carry out the purposes of the repeal of the General Utilities doctrine. The TRA '86 legislative history indicated that the General Utilities doctrine was repealed because it tended to undermine the corporate income tax, by allowing appreciated property to leave the corporation without imposition of a corporate-level tax. The Technical and Miscellaneous Revenue Act of 1988 amended Sec. 337(d) to specify that the section authorizes regulations to "ensure that such purposes may not be circumvented ... through the use of a ... tax-exempt entity."

On Jan. 15, 1997, the Service published proposed regulations under Sec. 337(d) to apply to a corporation that transferred all (or substantially all) of its assets to a tax-exempt entity or that converted from a...