26 U.S.C. § 996 | Rules for allocation in the case of distributions and losses

(a)

Rules for actual distributions and certain deemed distributions

(1)

In general

Any actual distribution (other than a distribution described in paragraph (2) or to which section 995(c) applies) to a shareholder by a DISC (or former DISC) which is made out of earnings and profits shall be treated as made—

(A)

first, out of previously taxed income, to the extent thereof,

(B)

second, out of accumulated DISC income, to the extent thereof, and

(C)

finally, out of other earnings and profits.

(2)

Qualifying distributions

Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements), and any deemed distribution pursuant to section 995(b)(1)(G) (relating to foreign investment attributable to producer’s loans), shall be treated as made—

(A)

first, out of accumulated DISC income, to the extent thereof,

(B)

second, out of the earnings and profits described in paragraph (1)(C), to the extent thereof, and

(C)

finally, out of previously taxed income.

In the case of any amount of any actual distribution to a C corporation made pursuant to section 992(c) which is required to satisfy the condition of section 992(a)(1)(A), the preceding sentence shall apply to 16/17ths of such amount and paragraph (1) shall apply to the remaining 1/17th of such amount.

(3)

Exclusion from gross income

Amounts distributed out of previously taxed income shall be excluded by the distributee from gross income except for gains described in subsection (e)(2), and shall reduce the amount of the previously taxed income.

(b)

Ordering rules for losses

If for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be chargeable—

(1)

first, to earnings and profits described in subsection (a)(1)(C), to the extent thereof,

(2)

second, to accumulated DISC income, to the extent thereof, and

(3)

finally, to previously taxed income, except that a deficit in earnings and profits shall not be applied against accumulated DISC income which has been determined is to be deemed distributed to the shareholders (pursuant to section 995(b)(2)(A)) as a result of a revocation of election or other disqualification.

(c)

Priority of distributions

Any actual distribution made during a taxable year shall be treated as being made subsequent to any deemed distribution made during such year. Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements) shall be treated as being made before any other actual distributions during the taxable year.

(d)

Subsequent effect of previous disposition of DISC stock

(1)

Shareholder previously taxed income adjustment

If—

(A)

gain with respect to a share of stock of a DISC or former DISC is treated under section 995(c) as a dividend or as ordinary income, and

(B)

any person subsequently receives an actual distribution made out of accumulated DISC income, or a deemed distribution made pursuant to section 995(b)(2), with respect to such share,

such person shall treat such distribution in the same manner as a distribution from previously taxed income to the extent that (i) the gain referred to in subparagraph (A), exceeds (ii) any other amounts with respect to such share which were treated under this paragraph as made from previously taxed income. In applying this paragraph with respect to a share of stock in a DISC or former DISC, gain on the acquisition of such share by the DISC or former DISC or gain on a transaction prior to such acquisition shall not be considered gain referred to in subparagraph (A).

(2)

Corporate adjustment upon redemption

If section 995(c) applies to a redemption of stock in a DISC or former DISC, the accumulated DISC income shall be reduced by an amount equal to the gain described in section 995(c) with respect to such stock which is (or has been) treated as ordinary income, except to the extent distributions with respect to such stock have been treated under paragraph (1).

(e)

Adjustment to basis

(1)

Additions to basis

Amounts representing deemed distributions as provided in section 995(b) shall increase the basis of the stock with respect to which the distribution is made.

(2)

Reductions of basis

The portion of an actual distribution made out of previously taxed income shall reduce the basis of the stock with respect to which it is made, and to the extent that it exceeds the adjusted basis of such stock, shall be treated as gain from the sale or exchange of property. In the case of stock includible in the gross estate of a decedent for which an election is made under section 2032 (relating to alternate valuation), this paragraph shall not apply to any distribution made after the date of the decedent’s death and before the alternate valuation date provided by section 2032.

(f)

Definition of divisions of earnings and profits

For purposes of this part:

(1)

DISC income

The earnings and profits derived by a corporation during a taxable year in which such corporation is a DISC, before reduction for any distributions during the year, but reduced by amounts deemed distributed under section 995(b)(1), shall constitute the DISC income for such year. The earnings and profits of a DISC for a taxable year include any amounts includible in such DISC’s gross income pursuant to section 951(a) for such year. Accumulated DISC income shall be reduced by deemed distributions under section 995(b)(2).

(2)

Previously taxed income

Earnings and profits deemed distributed under section 995(b) for a taxable year shall constitute previously taxed income for such year.

(3)

Other earnings and profits

The earnings and profits for a taxable year which are described in neither paragraph (1) nor (2) shall constitute the other earnings and profits for such year.

(g)

Effectively connected income

In the case of a shareholder who is a nonresident alien individual or a foreign corporation, trust, or estate, gains referred to in section 995(c) and all distributions out of accumulated DISC income including deemed distributions shall be treated as gains and distributions which are effectively connected with the conduct of a trade or business conducted through a permanent establishment of such shareholder within the United States and which are derived from sources within the United States.

Pub. L. 92–178, title V, § 501Dec. 10, 197185 Stat. 547 Pub. L. 94–455, title XI, § 1101(e)Oct. 4, 197690 Stat. 1659 Pub. L. 95–600, title VII, § 703(i)(3)Nov. 6, 197892 Stat. 2940 Pub. L. 98–369, div. A, title VIII, § 801(d)(10)July 18, 198498 Stat. 997 Pub. L. 99–514, title XVIII, § 1876(k)Oct. 22, 1986100 Stat. 2900(Added , ; amended , title XIX, §§ 1901(b)(3)(I), , , 1793; , , ; , , ; , , .)

Editorial Notes

Amendments

Pub. L. 99–5141986—Subsec. (a)(2). inserted last sentence and struck out former last sentence which read as follows: “In the case of any amount of any actual distribution made pursuant to section 992(c) which is required to satisfy the condition of section 992(a)(1)(A), the preceding sentence shall apply to one-half of such amount, and paragraph (1) shall apply to the remaining one-half of such amount.”

Pub. L. 98–3691984—Subsec. (g). inserted “and which are derived from sources within the United States”.

Pub. L. 95–6001978—Subsec. (a)(2). substituted “section (b)(1)(G)” for “section (b)(1)(E)”.

Pub. L. 94–455, § 1101(e)1976—Subsec. (a)(2). , inserted at end “In the case of any amount of any actual distribution made pursuant to section 992(c) which is required to satisfy the condition of section 992(a)(1)(A), the preceding sentence shall apply to one-half of such amount, and paragraph (1) shall apply to the remaining one-half of such amount.”

Pub. L. 94–455, § 1901(b)(3)(I)Subsec. (d). , substituted “ordinary income” for “gain from the sale or exchange of property which is not a capital asset” in par. (1)(A) after “dividend or as” and, in par. (2), after “treated as”.

Statutory Notes and Related Subsidiaries

Effective Date of 1986 Amendment

Pub. L. 99–514 Pub. L. 98–369, div. A section 1881 of Pub. L. 99–514 section 48 of this titleAmendment by effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, , to which such amendment relates, see , set out as a note under .

Effective Date of 1984 Amendment

Pub. L. 98–369June 22, 1984section 805(a)(3) of Pub. L. 98–369 section 245 of this titleAmendment by applicable to distributions on or after , see , as amended, set out as a note under .

Effective Date of 1978 Amendment

Pub. L. 95–600Oct. 4, 1976section 703(r) of Pub. L. 95–600 section 46 of this titleAmendment by effective on , see , set out as a note under .

Effective Date of 1976 Amendment

section 1101(e) of Pub. L. 94–455Dec. 31, 1975section 1101(g)(1) of Pub. L. 94–455 section 905 of this titleAmendment by applicable to taxable years beginning after , see , set out as a note under .

section 1901(b)(3)(I) of Pub. L. 94–455Dec. 31, 1976section 1901(d) of Pub. L. 94–455 section 2 of this titleAmendment by applicable with respect to taxable years beginning after , see , set out as a note under .

Plan Amendments Not Required Until January 1, 1989

Pub. L. 99–514Jan. 1, 1989section 1140 of Pub. L. 99–514 section 401 of this titleFor provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after , see , as amended, set out as a note under .