Who’s Afraid of the Big Bad Tax-Free Liquidating Distribution? Ideological Debates on Taxation and the Repeal of General Utilities

The General Utilities doctrine, named for the 1935 Supreme Court decision allowing a corporation to distribute appreciated assets to shareholders without reporting a taxable gain, was once known as one of seven fundamental principles of American corporate taxation. The doctrine’s popularity reached its peak in 1954, when Congress formally incorporated it into the Internal Revenue Code. Despite this esteemed position among tax-law doctrines, General Utilities was routinely criticized because, among other things, it allowed a situational (and arbitrary) reprieve from “double taxation” of corporate income. Corporate income is functionally taxed twice in the sense that the corporation owes tax on the profits earned by its operations and the shareholders owe individual income taxes on the leftover, after-tax profits the corporation distributes to shareholders. 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