26 U.S.C. § 996 — Rules for allocation in the case of distributions and losses
submitted 55 years ago by Pub. L. 92-178 to r/title-26-INTERNAL-REVENUE-CODE · 1,019 words · no verdicts yet
This section sets ordering rules for a DISC’s distributions, losses, and earnings categories, adjusts stock basis, defines those categories, and gives a rule for certain foreign shareholders.
(a)(1) A DISC* or former DISC’s actual distribution to a shareholder* out of earnings and profits, other than a paragraph (2) distribution or one covered by section 995(c), is treated as coming first from previously taxed income, up to that amount; second from accumulated DISC income, up to that amount; and finally from other earnings and profits. (2) A distribution under section 992(c), and a deemed distribution under section 995(b)(1)(G), is treated as coming first from accumulated DISC income, second from the earnings and profits in paragraph (1)(C), and finally from previously taxed income. For a section 992(c) distribution to a C corporation* needed to satisfy section 992(a)(1)(A), this order applies to 16/17 of the amount, and paragraph (1) applies to the remaining 1/17. (3) The recipient excludes amounts from previously taxed income from gross income, except gains described in subsection (e)(2), and those amounts reduce previously taxed income. (b) If a DISC or former DISC* has a deficit in earnings and profits for a tax year, charge it first to paragraph (a)(1)(C) earnings and profits, then accumulated DISC income, and finally previously taxed income. Do not charge it to accumulated DISC income already determined to be deemed distributed under section 995(b)(2)(A) because of revocation or disqualification. (c) An actual distribution during a tax year is treated as made after all deemed distributions during that year. A section 992(c) actual distribution is treated as made before other actual distributions that year. (d)(1) If gain on a DISC share is treated under section 995(c) as a dividend or ordinary income, and someone later receives an actual distribution of accumulated DISC income or a section 995(b)(2) deemed distribution on that share, that person treats the later distribution as previously taxed income to the extent the first gain exceeds other amounts on that share already treated that way. Gain on the DISC’s acquisition of the share, or on an earlier transaction, is not included in that first gain. (2) If section 995(c) applies to a stock* redemption, reduce accumulated DISC income by the section 995(c) gain treated as ordinary income, except for amounts already covered under paragraph (1). (e)(1) A section 995(b) deemed distribution increases the basis of the related stock. (2) The previously taxed-income part of an actual distribution reduces that stock’s basis. Any excess over adjusted basis is gain from selling or exchanging property. This paragraph does not apply to a distribution after a decedent’s death and before the alternate valuation date for stock included in the gross estate when a section 2032 alternate-valuation election is made. (f)(1) DISC income is a corporation’s earnings and profits for a year in which it is a DISC, before that year’s distributions, reduced by section 995(b)(1) deemed distributions. It includes amounts included in the DISC’s gross income under section 951(a). Accumulated DISC income is reduced by section 995(b)(2) deemed distributions. (2) Previously taxed income is earnings and profits deemed distributed under section 995(b) for the year. (3) Other earnings and profits are that year’s earnings and profits not described in paragraphs (1) or (2). (g) For a nonresident-alien individual or foreign corporation*, trust, or estate shareholder, section 995(c) gains and all accumulated-DISC-income distributions, including deemed distributions, are treated as gains and distributions effectively connected with a trade or business* through the shareholder’s permanent establishment in the United States* and derived from United States sources.
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—
first, out of previously taxed income, to the extent thereof,
second, out of accumulated DISC income, to the extent thereof, and
finally, out of other earnings and profits.
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—
first, out of accumulated DISC income, to the extent thereof,
second, out of the earnings and profits described in paragraph (1)(C), to the extent thereof, and
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.
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.
If for any taxable year* a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be chargeable—
first, to earnings and profits described in subsection (a)(1)(C), to the extent thereof,
second, to accumulated DISC income, to the extent thereof, and
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.
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.
If—
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
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).
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).
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.
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.
For purposes of this part:
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).
Earnings and profits deemed distributed under section 995(b) for a taxable year shall constitute previously taxed income for such year.
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.
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.
Source credit: (Added Pub. L. 92–178, title V, § 501 Dec. 10, 1971, 85 Stat. 547; amended Pub. L. 94–455, title XI, § 1101(e), title XIX, §§ 1901(b)(3)(I), Oct. 4, 1976, 90 Stat. 1659, 1793; Pub. L. 95–600, title VII, § 703(i)(3), Nov. 6, 1978, 92 Stat. 2940; Pub. L. 98–369, div. A, title VIII, § 801(d)(10), July 18, 1984, 98 Stat. 997; Pub. L. 99–514, title XVIII, § 1876(k), Oct. 22, 1986, 100 Stat. 2900.)
- 1971Enacted · Pub. L. 92-178 · 85 Stat. 547
- 1976Amended · Pub. L. 94-455 · 90 Stat. 1659, 1793
- 1978Amended · Pub. L. 95-600 · 92 Stat. 2940
- 1984Amended · Pub. L. 98-369 · 98 Stat. 997
- 1986Amended · Pub. L. 99-514 · 100 Stat. 2900
A history note hasn’t been published yet. The record shows enactment by Pub. L. 92-178 on 1971-12-10.
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