Title 26 — Internal Revenue CodeRelease 119-73
§996 Rules for Allocation in the Case of Distributions and Losses
Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter N— Tax Based on Income From Sources Within or Without the United States › Part IV— DOMESTIC INTERNATIONAL SALES CORPORATIONS › Subpart B— Treatment of Distributions to Shareholders › § 996
Summary
When a DISC (a special export company) pays money to its shareholders, the payment is treated as coming from its earnings in a set order: first from income that was already taxed, then from accumulated DISC income, and last from other earnings. Money that comes out of already-taxed income is generally not taxed again, but it lowers your basis in the stock, and any amount above your basis is taxed as gain from selling the stock. Certain special distributions, like those made to keep the company qualified, follow the reverse order: accumulated DISC income comes out first. If the company has a loss for the year, the loss is charged against those same pools in reverse order, with already-taxed income hit last. Deemed distributions raise your stock basis. If a shareholder is a nonresident alien or foreign company, distributions out of accumulated DISC income are treated as U.S. business income, so the U.S. can tax them.
Full Legal Text
Title 26, §996
Internal Revenue Code — Source: USLM XML via OLRC
(a)(1)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)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.
(3)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)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)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)(1)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,
(2)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)(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.
(2)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)For purposes of this part:
(1)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)Earnings and profits deemed distributed under section 995(b) for a taxable year shall constitute previously taxed income for such year.
(3)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)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.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
1986—Subsec. (a)(2). Pub. L. 99–514 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.” 1984—Subsec. (g). Pub. L. 98–369 inserted “and which are derived from sources within the United States”. 1978—Subsec. (a)(2). Pub. L. 95–600 substituted “section (b)(1)(G)” for “section (b)(1)(E)”. 1976—Subsec. (a)(2). Pub. L. 94–455, § 1101(e), 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.” Subsec. (d). Pub. L. 94–455, § 1901(b)(3)(I), 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 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 Pub. L. 98–369 applicable to distributions on or after June 22, 1984, see section 805(a)(3) of Pub. L. 98–369, as amended, set out as a note under section 245 of this title.
Effective Date
of 1978 AmendmentAmendment by 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 1101(e) of Pub. L. 94–455 applicable to taxable years beginning after Dec. 31, 1975, see section 1101(g)(1) of Pub. L. 94–455, set out as a note under section 905 of this title. Amendment by section 1901(b)(3)(I) 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.
Reference
Citations & Metadata
Citation
26 U.S.C. § 996
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73