Title 26 — Internal Revenue CodeRelease 119-73
§995 Taxation of DISC income to shareholders
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter N— - Tax Based on Income From Sources Within or Without the United States › Part PART IV— - DOMESTIC INTERNATIONAL SALES CORPORATIONS › Subpart Subpart B— - Treatment of Distributions to Shareholders › § 995
Summary
Shareholders of a DISC must pay tax on certain DISC earnings as if those amounts were dividends. Each shareholder is treated as getting a pro rata share (but not more than the DISC’s earnings and profits for the year) of several specific items: interest from producer’s loans; certain gains when the DISC sells property that was earlier transferred to it without tax being recognized; 50 percent of the DISC’s taxable income tied to military property; the DISC’s taxable income from qualified export receipts that is over $10,000,000; some extra amounts for C corporations (including one‑seventeenth of a specified excess, 16/17 of that excess multiplied by an international boycott factor, and any illegal bribes or kickbacks); and the amount of foreign investment tied to producer’s loans. If a corporation stops being a DISC, its shareholders are treated as having received the DISC income that was accumulated while it was a DISC, paid in equal installments on the last day of each of the next 10 taxable years (but not over more than twice the number of years the corporation was a DISC). If a shareholder sells DISC stock or the DISC is merged away, any gain is treated as a dividend to the extent of the accumulated DISC income tied to the stock while the shareholder held it. Shareholders also must pay interest each year on deferred DISC tax equal to their deferred DISC tax liability times the base period T‑bill rate; that interest is treated and paid like other tax interest and the Treasury will issue rules about how to compute these amounts. Definitions (one line each): producer’s loans — loans by the DISC to producers; military property — arms and war implements on the U.S. munitions list; foreign investment attributable to producer’s loans — the smallest of three specific measures used to limit foreign investment; net increase in foreign assets — a calculated excess of foreign asset acquisitions over certain deductions; actual foreign investment — measured contributions, claims, and half of certain foreign earnings; uncommitted transitional funds — a special historical funds calculation; deferred DISC income — a shareholder’s excess pro rata share of accumulated DISC income (after 1984) over certain distributions; base period T‑bill rate — the annual rate based on the average 1‑year Treasury yields for the relevant prior year period.
Full Legal Text
Title 26, §995
Internal Revenue Code — Source: USLM XML via OLRC
(a)A shareholder of a DISC or former DISC shall be subject to taxation on the earnings and profits of a DISC as provided in this chapter, but subject to the modifications of this subpart.
(b)(1)A shareholder of a DISC shall be treated as having received a distribution taxable as a dividend with respect to his stock in an amount which is equal to his pro rata share of the sum (or, if smaller, the earnings and profits for the taxable year) of—
(A)the gross interest derived during the taxable year from producer’s loans,
(B)the gain recognized by the DISC during the taxable year on the sale or exchange of property, other than property which in the hands of the DISC is a qualified export asset, previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor’s gain on the previous transfer was not recognized,
(C)the gain (other than the gain described in subparagraph (B)) recognized by the DISC during the taxable year on the sale or exchange of property (other than property which in the hands of the DISC is stock in trade or other property described in section 1221(a)(1)) previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor’s gain on the previous transfer was not recognized and would have been treated as ordinary income if the property had been sold or exchanged rather than transferred to the DISC,
(D)50 percent of the taxable income of the DISC for the taxable year attributable to military property,
(E)the taxable income of the DISC attributable to qualified export receipts of the DISC for the taxable year which exceed $10,000,000,
(F)the sum of—
(i)in the case of a shareholder which is a C corporation, one-seventeenth of the excess of the taxable income of the DISC for the taxable year, before reduction for any distributions during the year, over the sum of the amounts deemed distributed for the taxable year under subparagraphs (A), (B), (C), (D), and (E),
(ii)an amount equal to 16⁄17 of the excess referred to in clause (i), multiplied by the international boycott factor determined under section 999, and
(iii)any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the DISC directly or indirectly to an official, employee, or agent in fact of a government, and
(G)the amount of foreign investment attributable to producer’s loans (as defined in subsection (d)) of a DISC for the taxable year.
(2)(A)A shareholder of a corporation which revoked its election to be treated as a DISC or failed to satisfy the conditions of section 992(a)(1) for a taxable year shall be deemed to have received (at the time specified in subparagraph (B)) a distribution taxable as a dividend equal to his pro rata share of the DISC income of such corporation accumulated during the immediately preceding consecutive taxable years for which the corporation was a DISC.
(B)Distributions described in subparagraph (A) shall be deemed to be received in equal installments on the last day of each of the 10 taxable years of the corporation following the year of the termination or disqualification described in subparagraph (A) (but in no case over more than twice the number of immediately preceding consecutive taxable years during which the corporation was a DISC).
(3)(A)For purposes of paragraph (1)(D), taxable income of a DISC for the taxable year attributable to military property shall be determined by only taking into account—
(i)the gross income of the DISC for the taxable year which is attributable to military property, and
(ii)the deductions which are properly apportioned or allocated to such income.
(B)For purposes of subparagraph (A), the term “military property” means any property which is an arm, ammunition, or implement of war designated in the munitions list published pursuant to section 38 of the Arms Export Control Act (22 U.S.C. 2778).
(4)(A)For purposes of applying paragraph (1)(E), all DISC’s which are members of the same controlled group shall be treated as a single corporation.
(B)The dollar amount under paragraph (1)(E) shall be allocated among the DISC’s which are members of the same controlled group in a manner provided in regulations prescribed by the Secretary.
(c)(1)If—
(A)a shareholder disposes of stock in a DISC or former DISC any gain recognized on such disposition shall be included in gross income as a dividend to the extent provided in paragraph (2), or
(B)stock of a DISC or former DISC is disposed of in a transaction in which the separate corporate existence of the DISC or former DISC is terminated other than by a mere change in place of organization, however effected, any gain realized on the disposition of such stock in the transaction shall be recognized notwithstanding any other provision of this title to the extent provided in paragraph (2) and to the extent so recognized shall be included in gross income as a dividend.
(2)The amounts described in paragraph (1) shall be included in gross income as a dividend to the extent of the accumulated DISC income of the DISC or former DISC which is attributable to the stock disposed of and which was accumulated in taxable years of such corporation during the period or periods the stock disposed of was held by the shareholder which disposed of such stock.
(d)For the purposes of this part—
(1)The amount of foreign investment attributable to producer’s loans of a DISC for a taxable year shall be the smallest of—
(A)the net increase in foreign assets by members of the controlled group (as defined in section 993(a)(3)) which includes the DISC,
(B)the actual foreign investment by domestic members of such group, or
(C)the amount of outstanding producer’s loans by such DISC to members of such controlled group.
(2)The term “net increase in foreign assets” of a controlled group means the excess of—
(A)the amount incurred by such group to acquire assets (described in section 1231(b)) located outside the United States over,
(B)the sum of—
(i)the depreciation with respect to assets of such group located outside the United States;
(ii)the outstanding amount of stock or debt obligations of such group issued after December 31, 1971, to persons other than the United States persons or any member of such group;
(iii)one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group;
(iv)one-half the royalties and fees paid by foreign members of such group to domestic members of such group; and
(v)the uncommitted transitional funds of the group as determined under paragraph (4).
(3)The term “actual foreign investment” by domestic members of a controlled group means the sum of—
(A)contributions to capital of foreign members of the group by domestic members of the group after December 31, 1971,
(B)the outstanding amount of stock or debt obligations of foreign members of such group (other than normal trade indebtedness) issued after December 31, 1971, to domestic members of such group,
(C)amounts transferred by domestic members of the group after December 31, 1971, to foreign branches of such members, and
(D)one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group for taxable years beginning after December 31, 1971.
(4)The uncommitted transitional funds of the group shall be an amount equal to the sum of—
(A)the excess of—
(i)the amount of stock or debt obligations of domestic members of such group outstanding on December 31, 1971, and issued on or after January 1, 1968, to persons other than United States persons or any members of such group, but only to the extent the taxpayer establishes that such amount constitutes a long-term borrowing for purposes of the foreign direct investment program, over
(ii)the net amount of actual foreign investment by domestic members of such group during the period that such stock or debt obligations have been outstanding; and
(B)the amount of liquid assets to the extent not included in subparagraph (A) held by foreign members of such group and foreign branches of domestic members of such group on October 31, 1971, in excess of their reasonable working capital needs on such date.
(5)Under regulations prescribed by the Secretary the determinations under this subsection shall be made on a cumulative basis with proper adjustments for amounts previously taken into account.
(e)If—
(1)a corporation owns, directly or indirectly, all of the stock of a subsidiary and a DISC,
(2)the subsidiary has been engaged in the active conduct of a trade or business (within the meaning of section 355(b)) throughout the 5–year period ending on the date of the transfer and continues to be so engaged thereafter, and
(3)during the taxable year of the subsidiary in which its stock is transferred and its preceding taxable year, such trade or business gives rise to qualified export receipts of the subsidiary and the DISC,
(f)(1)A shareholder of a DISC shall pay for each taxable year interest in an amount equal to the product of—
(A)the shareholder’s DISC-related deferred tax liability for such year, and
(B)the base period T-bill rate.
(2)For purposes of this subsection—
(A)The term “shareholder’s DISC-related deferred tax liability” means, with respect to any taxable year of a shareholder of a DISC, the excess of—
(i)the amount which would be the tax liability of the shareholder for the taxable year if the deferred DISC income of such shareholder for such taxable year were included in gross income as ordinary income, over
(ii)the actual amount of the tax liability of such shareholder for such taxable year.
(B)The Secretary shall prescribe regulations which provide such adjustments—
(i)to the accounts of the DISC, and
(ii)to the amount of any carryover or carryback of the shareholder,
(C)The term “tax liability” means the amount of the tax imposed by this chapter for the taxable year reduced by credits allowable against such tax (other than credits allowable under section 31, 32, and 34).
(3)For purposes of this subsection—
(A)The term “deferred DISC income” means, with respect to any taxable year of a shareholder, the excess of—
(i)the shareholder’s pro rata share of accumulated DISC income (for periods after 1984) of the DISC as of the close of the computation year, over
(ii)the amount of the distributions-in-excess-of-income for the taxable year of the DISC following the computation year.
(B)For purposes of applying subparagraph (A) with respect to any taxable year of a shareholder, the computation year is the taxable year of the DISC which ends with (or within) the taxable year of the shareholder which precedes the taxable year of the shareholder for which the amount of deferred DISC income is being determined.
(C)For purposes of subparagraph (A), the term “distributions-in-excess-of-income” means, with respect to any taxable year of a DISC, the excess (if any) of—
(i)the amount of actual distributions to the shareholder out of accumulated DISC income, over
(ii)the shareholder’s pro rata share of the DISC income for such taxable year.
(4)For purposes of this subsection, the term “base period T-bill rate” means the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder.
(5)The Secretary shall prescribe such regulations as may be necessary for the application of this subsection to short years of the DISC, the shareholder, or both.
(6)The interest accrued during any taxable year which a shareholder is required to pay under paragraph (1) shall be treated, for purposes of this title, as interest payable under section 6601 and shall be paid by the shareholder at the time the tax imposed by this chapter for such taxable year is required to be paid.
(7)For purposes of this subsection, the term “DISC” includes a former DISC.
(g)If any organization described in subsection (a)(2) or (b)(2) of section 511 (or any other person otherwise subject to tax under section 511) is a shareholder in a DISC—
(1)any amount deemed distributed to such shareholder under subsection (b),
(2)any actual distribution to such shareholder which under section 996 is treated as out of accumulated DISC income, and
(3)any gain which is treated as a dividend under subsection (c),
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2002—Subsec. (b)(3)(B). Pub. L. 107–147 substituted “Arms Export Control Act” for “International Security Assistance and Arms Export Control Act of 1976”. 2000—Subsec. (b)(3)(B). Pub. L. 106–554, § 1(a)(7) [title III, § 319(12)], substituted “section 38 of the International Security Assistance and Arms Export Control Act of 1976 (22 U.S.C. 2778)” for “the Military Security Act of 1954 (22 U.S.C. 1934)”. Subsec. (f)(4). Pub. L. 106–554, § 1(a)(7) [title III, § 307(c)], substituted “the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period” for “the average investment yield of United States Treasury bills with maturities of 52 weeks which were auctioned during the 1-year period”. 1999—Subsec. (b)(1)(C). Pub. L. 106–170 substituted “1221(a)(1)” for “1221(1)”. 1989—Subsec. (g). Pub. L. 101–239 substituted “section 511 (or any other person otherwise subject to tax under section 511)” for “section 511” in introductory provisions. 1988—Subsec. (c)(1). Pub. L. 100–647, § 1006(e)(15), struck out subpar. (C) and last sentence which read as follows: “(C) a shareholder distributes, sells, or exchanges stock in a DISC or former DISC in a transaction to which section 311, 336, or 337 applies, then an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the shareholder shall, notwithstanding any provision of this title, be included in gross income of the shareholder as a dividend to the extent provided in paragraph (2). Subparagraph (C) shall not apply if the person receiving the stock in the disposition has a holding period for the stock which includes the period for which the stock was held by the shareholder disposing of such stock.” Subsec. (g). Pub. L. 100–647, § 1012(bb)(6)(A), added subsec. (g). 1986—Subsec. (b)(1)(F)(i). Pub. L. 99–514, § 1876(b)(2)(A), inserted “in the case of a shareholder which is a C corporation,”. Subsec. (b)(1)(F)(ii). Pub. L. 99–514, § 1876(b)(2)(B), substituted “16⁄17 of the excess referred to in clause (i),” for “the amount determined under clause (i)”. Subsec. (f)(4) to (6). Pub. L. 99–514, § 1876(p)(1), redesignated as pars. (4), (5), and (6), respectively, former par. (3) relating to base period T-bill rate, (4) relating to short years, and (5) relating to payment and assessment and collection of interest. Subsec. (f)(7). Pub. L. 99–514, § 1876(g), added par. (7). 1984—Subsec. (b)(1)(E). Pub. L. 98–369, § 802(b)(1), substituted “of the DISC attributable to qualified export receipts of the DISC for the taxable year which exceed $10,000,000” for “for the taxable year attributable to base period export gross receipts (as defined in subsection (e))”. Subsec. (b)(1)(F)(i). Pub. L. 98–369, § 68(d), substituted “one-seventeenth” for “one/half”. Subsec. (b)(4). Pub. L. 98–369, § 802(b)(2), added par. (4). Subsec. (e). Pub. L. 98–369, § 802(a)(1), (2), redesignated subsec. (g) as (e). Former subsec. (e), which related to definitions and special rules relating to computation of taxable income attributable to base period export gross receipts, was struck out. Subsec. (f). Pub. L. 98–369, § 802(a)(1), (3), added subsec. (f). Former subsec. (f), which related to small DISCs, was struck out. Subsec. (g). Pub. L. 98–369, § 802(a)(2), redesignated subsec. (g) as (e). 1978—Subsec. (b)(1). Pub. L. 95–600, § 703(i)(1), (2), substituted in subpar. (G) “subsection (d)” for “subsection (D)”, and in provisions following subpar. (G) “income” for “gross income (taxable income in the case of subparagraph (D))” and “subparagraph (G)” for “subparagraph (E)”. Subsec. (c)(1). Pub. L. 95–600, § 701(u)(12)(B), inserted provision relating to application of subpar. (C). 1976—Subsec. (b)(1)(C). Pub. L. 94–455, § 1901(b)(3)(K), substituted “ordinary income” for “gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231” after “treated as”. Subsec. (b)(1)(D), (E). Pub. L. 94–455, § 1101(a)(1), added subpars. (D) and (E) and redesignated former subpars. (D) and (E) as (F) and (G), respectively. Subsec. (b)(1)(F). Pub. L. 94–455, §§ 1063(a), 1065(a)(2), 1101(a)(1), redesignated former subpar. (D) as (F), made existing provision cl. (i), added cls. (ii) and (iii), and substituted “(C), (D), and (E)” for “(C)” after “(B), and”. Subsec. (b)(1)(G). Pub. L. 94–455, § 1101(a)(1), redesignated former subpar. (E) as (G). Subsec. (b)(2)(B). Pub. L. 94–455, § 1101(a)(2), substituted “more than twice the number” for “more than the number” after “no case over”. Subsec. (b)(3). Pub. L. 94–455, § 1101(a)(3), added par. (3). Subsec. (c). Pub. L. 94–455, § 1101(d)(1), redesignated existing provisions as pars. (1) and (2) and, as redesignated, added subpar. (1)(C). Subsec. (d)(5). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”. Subsecs. (e) to (g). Pub. L. 94–455, § 1101(a)(4), added subsecs. (e) to (g).
Statutory Notes and Related Subsidiaries
Effective Date
of 1999 AmendmentAmendment by Pub. L. 106–170 applicable to any instrument held, acquired, or entered into, any transaction entered into, and supplies held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. L. 106–170, set out as a note under section 170 of this title.
Effective Date
of 1989 AmendmentAmendment by Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title.
Effective Date
of 1988 Amendment Pub. L. 100–647, title X, § 1012(bb)(6)(B), Nov. 10, 1988, 102 Stat. 3536, provided that: “The amendment made by subparagraph (A) [amending this section] shall apply to taxable years beginning after December 31, 1987.” Amendment by section 1006(e)(15) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.
Effective Date
of 1986 AmendmentAmendment by Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.
Effective Date
of 1984 AmendmentAmendment by section 68(d) of Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1984, see section 68(e)(1) of Pub. L. 98–369, set out as a note under section 291 of this title. Amendment by section 802(a), (b) of Pub. L. 98–369 applicable to transactions after Dec. 31, 1984, in taxable years ending after such date, see section 805(a)(1) of Pub. L. 98–369, as amended, set out as a note under section 245 of this title.
Effective Date
of 1978 Amendment Pub. L. 95–600, title VII, § 701(u)(12)(C), Nov. 6, 1978, 92 Stat. 2918, provided that: “The amendment made by subparagraph (B) [amending this section] shall apply to dispositions made after December 31, 1976, in taxable years ending after such date.” Amendment by section 703(i)(1), (2) of Pub. L. 95–600 effective on Oct. 4, 1976, see section 703(r) of Pub. L. 95–600, set out as a note under section 46 of this title.
Effective Date
of 1976 AmendmentAmendment by section 1063(a) of Pub. L. 94–455 applicable to participation in or cooperation with an international boycott more than 30 days after Oct. 4, 1976, with special provisions for existing contracts, see section 1066(a) of Pub. L. 94–455, set out as a note under section 908 of this title. Amendment by section 1065(a)(2) of Pub. L. 94–455 applicable to payments described in section 162(c) of this title made more than 30 days after Oct. 4, 1976, see section 1066(b) of Pub. L. 94–455, set out as a note under section 952 of this title. Pub. L. 94–455, title XI, § 1101(g)(1), Oct. 4, 1976, 90 Stat. 1659, provided that: “The
Amendments
made by subsections (a) and (e) [amending this section and section 996 of this title] shall apply to taxable years beginning after December 31, 1975.” Pub. L. 94–455, title XI, § 1101(g)(4), Oct. 4, 1976, 90 Stat. 1659, as amended by Pub. L. 95–600, title VII, § 701(u)(12)(A), Nov. 6, 1978, 92 Stat. 2918, provided that: “The
Amendments
made by subsection (d) [amending this section and section 751 of this title] shall apply to sales, exchanges, or other dispositions after December 31, 1976, in taxable years ending after such date.” Amendment by section 1901(b)(3)(K) of Pub. L. 94–455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. Plan
Amendments
Not Required Until January 1, 1989For 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 Pub. L. 99–514 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 Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. Proration of Base Period in Case of Fixed Contracts Pub. L. 94–455, title XI, § 1101(g)(5), Oct. 4, 1976, 90 Stat. 1659, as amended by Pub. L. 95–600, title VII, § 703(i)(4), Nov. 6, 1978, 92 Stat. 2940; Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “For purposes of determining adjusted base period export gross receipts (under section 995(e)(3) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], as amended by this section), if any DISC has export gross receipts from export property by reason of paragraph (2) of section 603(b) of the Tax Reduction Act of 1975, [set out as an
Effective Date
of 1975 Amendment note under section 993 of this title], then the export gross receipts of such DISC for the taxable years of the base period shall be increased by an amount equal to the amount of gross receipts which were excluded from export gross receipts during each taxable year of the base period by reason of the last sentence of section 995(e)(3) of such Code multiplied by a fraction, the numerator of which is the amount of the gross receipts in the taxable year which are export gross receipts by reason of paragraph (2) of section 603(b) of the Tax Reduction Act of 1975 and the denominator of which is the amount of total gross receipts which are excluded from export gross receipts in the taxable year by reason of subparagraph (C) or (D) of paragraph (2) of section 993(c) (determined without regard to paragraph (2) of section 603(b) of the Tax Reduction Act of 1975).”
Reference
Citations & Metadata
Citation
26 U.S.C. § 995
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73