PRIA Logo™
Title 26, Internal Revenue CodeRelease 119-110

§996 Rules for Allocation in the Case of Distributions and Losses

Title 26 › 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

Last updated Sep 22, 2026|Official source

Summary

Sets the order for how a DISC’s money is treated when it pays shareholders or when it has losses. Actual distributions (other than special qualifying ones) must be treated first as coming from previously taxed income, then from accumulated DISC income, and last from other earnings. Special qualifying distributions (like those to meet qualification rules or certain deemed foreign-investment amounts) must be treated first as coming from accumulated DISC income, then from other earnings, and finally from previously taxed income. If a C corporation gets a qualifying distribution that must meet a specific condition, 16/17 of that amount follow the special order and 1/17 follow the regular order. Amounts paid out of previously taxed income are not counted as taxable income to the receiver (except for certain gains) and reduce the previously taxed income balance. If the DISC has a loss for the year, that deficit must be charged first against the “other earnings,” then against accumulated DISC income, and last against previously taxed income, but not against accumulated income already treated as deemed distributed because of election revocation or disqualification. Deemed distributions are treated as happening before any actual distributions in the same year, while qualifying actual distributions are treated as happening before other actual distributions. Deemed distributions increase stock basis. Actual distributions from previously taxed income reduce stock basis and, if they go past the basis, count as gain. Three short definitions used here are: DISC income (income while the company was a DISC), previously taxed income (amounts already treated as distributed), and other earnings and profits. For nonresident or foreign shareholders, the listed gains and distributions count as U.S.-source income that is connected to a U.S. business.

Full Legal Text

Title 26, §996

Internal Revenue Code, Source: USLM XML via OLRC

(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.

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

Sep 22, 2026

Release point: 119-110