§ 995. Taxation of DISC income to shareholders
(a)
General rule
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)
Deemed distributions
(1)
Distributions in qualified years
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—
(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 has 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
(G)
the amount of foreign investment attributable to producer’s loans (as defined in subsection (d)) of a DISC for the taxable year.
Distributions described in this paragraph shall be deemed to be received on the last day of the taxable year of the DISC in which the income was derived. In the case of a distribution described in subparagraph (G), earnings and profits for the taxable year shall include accumulated earnings and profits.
(2)
Distributions upon disqualification
(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 immediately preceding consecutive taxable years during which the corporation was a DISC).
(3)
Taxable income attributable to military property
(c)
Gain on disposition of stock in a DISC
(1)
In general
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)
Amount included
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)
Foreign investment attributable to DISC earnings
For the purposes of this part—
(1)
In general
The amount of foreign investment attributable to producer’s loans of a DISC for a taxable year shall be the smallest of—
(2)
Net increase in foreign assets
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—
(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
For purposes of this paragraph, assets which are qualified export assets of a DISC (or would be qualified export assets if owned by a DISC) shall not be taken into account. Amounts described in this paragraph (other than in subparagraphs (B)(ii) and (v)) shall be taken into account only to the extent they are attributable to taxable years beginning after December 31, 1971.
(3)
Actual foreign investment
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 the December 31, 1971, to foreign branches of such members, and
(4)
Uncommitted transitional funds
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
(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.
For purposes of this paragraph, the term “liquid assets” means money, bank deposits (not including time deposits), and indebtedness of 2 years or less to maturity on the date of acquisition; and the actual foreign investment shall be determined under paragraph (3) without regard to the date in subparagraph (A) of such paragraph and without regard to subparagraph (D) of such paragraph.
(e)
Certain transfers of DISC assets
If—
(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,
then, under such terms and conditions as the Secretary by regulations shall prescribe, transfers of assets, stock, or both, will be deemed to be a reorganization within the meaning of section
368, a transaction to which section
355 applies, an exchange of stock to which section
351 applies, or a combination thereof. The preceding sentence shall apply only to the extent that the transfer or transfers involved are for the purpose of preventing the separation of the ownership of the stock in the DISC from the ownership of the trade or business which (during the base period) produced the export gross receipts of the DISC.
(f)
Interest on DISC-related deferred tax liability
(1)
In general
A shareholder of a DISC shall pay for each taxable year interest in an amount equal to the product of—
(2)
Shareholder’s DISC-related deferred tax liability
For purposes of this subsection—
(A)
In general
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
Determinations under the preceding sentence shall be made without regard to carrybacks to such taxable year.
(3)
Deferred DISC income
For purposes of this subsection—
(A)
In general
The term “deferred DISC income” means, with respect to any taxable year of a shareholder, the excess of—
(B)
Computation year
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.
(4)
Base period T-bill rate
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)
Short years
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)
Payment and assessment and collection of interest
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.
(g)
Treatment of tax-exempt shareholders
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—
(2)
any actual distribution to such shareholder which under section
996 is treated as out of accumulated DISC income, and
shall be treated as derived from the conduct of an unrelated trade or business (and the modifications of section
512
(b) shall not apply). The rules of the preceding sentence shall apply also for purposes of determining any such shareholder’s DISC-related deferred tax liability under subsection (f).