§ 996. Rules for allocation in the case of distributions and losses
(a)
Rules for actual distributions and certain deemed distributions
(1)
In general
(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—
(B)
second, out of the earnings and profits described in paragraph (1)(C), to the extent thereof, and
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.
(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—
(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
(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).
(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.