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TITLE 26-INTERNAL REVENUE CODE SUBPART B-TREATMENT OF DISTRIBUTIONS TO SHAREHOLDERS Sec. 995. Taxation of DISC income to shareholders. 996. Rules for allocation in the case of distributions and losses. 997. Special subchapter C rules. § 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- (A) the gross interest derived during the taxable year from producer's loans, (B) the gain recognized by the DISC during the taxable year on the sale or ex- change of property, other than property which in the hands of the DISC is a quali- fied 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 de- scribed 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(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 for the taxable year attributable to base period export gross receipts (as defined in subsection (e)), (F) the sum of- (i) one-half 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 tax- able year under subparagraphs (A), (B), (C), (D), and (E), (1i) an amount equal to the amount de- termined under clause (I) multiplied by the international boycott factor deter- mined under section 999, and (iii) any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the DISC directly or indirectly to an official, em- ployee, or agent in fact of a government, and (0) the amount of foreign investment at. tributable 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 gross income (taxable income in the case of subparagraph (D)) was derived. In the case of a distribution described in subparagraph (E), earnings and profits for the taxable year shall include accumulated earnings and prof. its. (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 accumu- lated during the immediately preceding con- secutive taxable years for which the corpo- ration was a DISC. (B) Distributions described in subpara- graph (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 dis- qualification 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 prop- erty (A) In general For purposes of paragraph (1)(D), taxable income of a DISC for the taxable year at- tributable to military property shall be de- termined by only taking into account- (I) the gross income of the DISC for the taxable year which is attributable to mili- tary property, and ii) the deductions which are properly apportioned or allocated to such income. (B) Military property For purposes of subparagraph (A), the term "military property" means any proper- ty which is an arm, ammunition, or imple- ment of war designated in the munitions list published pursuant to the Military Se- curity Act of 1954 (22 U.S.C. 1934). (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), (B) stock of a DISC or former DISC is dis- posed of in a transaction in which the sepa- rate corporate existence of the DISC or former DISC is terminated other than by a mere change in place of organization, how- ever effected, any gain realized on the dis- position of such stock in the transaction shall be recognized notwithstanding any Page 625 § 995