§996 Rules for allocation in the case of distributions and losses

Summary

Sets the order for what kinds of income are used when a DISC (or former DISC) makes payments and how losses are charged for tax. For a normal payment, the money is treated as coming first from previously taxed income, then from accumulated DISC income, and lastly from other earnings and profits. Payments required under section 992(c) or deemed under section 995(b)(1)(G) are treated differently: they come first from accumulated DISC income, then from other earnings and profits, and last from previously taxed income. If the DISC has a loss in a year, that loss is charged first against other earnings and profits, then against accumulated DISC income, and finally against previously taxed income, except that losses do not reduce accumulated DISC income already treated as deemed distributed under section 995(b)(2)(A). Any actual payment in a year is treated as after any deemed distribution that year, except actual payments under section 992(c) are treated before other actual payments. Deemed distributions under section 995(b) raise the stock basis. Actual payments that come from previously taxed income cut the stock basis, and any amount over the basis is taxed as a gain (with a special rule if the stock is in a decedent’s estate and an election under section 2032 is made). If section 995(c) makes a gain on a share treated as a dividend or ordinary income, later distributions or redemptions reduce accumulated DISC income as described. Defined terms: DISC income (income earned while a corporation is a DISC), accumulated DISC income (income saved up from past years), previously taxed income (amounts already taxed to shareholders), and other earnings and profits (all other corporate earnings). For nonresident aliens and foreign entities, those gains and distributions from accumulated DISC income are treated as U.S.-effectively connected income and as U.S.-source.