Page 629

TITLE 26-INTERNAL REVENUE CODE receipts which were excluded from export gross re- ceipts during each taxable year of the base period by reason of the last sentence of section 993(e)(3) of such Code (section 993(e)(3) of this title] multiplied by a fraction, the numerator of which is the amount of the gross receipts in the taxable year which are export gross receipts by reason of paragraph (2) of section 603(b) of the Tax Reduction Act of 1975 and the de- nominator of whi.,h is the amount of total gross re- ceipts which are excluded from export gross receipts in the taxable year by reason of subparagraph (C) or (D) of paragraph (2) of section 993(c) [section 993(c)(2)(C), D, of this title] (determined without regard to paragraph (2) of section 603(b) of the Tax Reduction Act of 1975)." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 246, 751, 861, 996, 999 of this title. § 996. Rules for allocation in the case of distributions and losses (a) Rules for actual distributions and certain deemed distributions (1) In general Any actual distribution (other than a distri- bution 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)(E) (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 dis- tribution 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. (3) Exclusion from gross income Amounts distributed out of previously taxed income shall be excluded by the distri- butee from gross income except for gains de- scribed 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 disqualifi- cation. (c) Priority of distributions Any actual distribution made during a tax- able year shall be treated as being made subse- quent to any deemed distribution made during such year. Any actual distribution made pursu- ant 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 disposiion of DISC stock (1) Shareholder previously taxed income adjust- ment 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 accumulat- ed DISC income, or a deemed distributidlh made pursuant to section 995(b)(2), with re- spect to such share, such person shall treat such distribution in the same manner as a distribution from previ- ously taxed income to the extent that (i) the gain referred to in subparagraph (A), exceeds (it) any other amounts with respect to such share which were treated under this para- graph 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 transac- tion prior to such acquisition shall not be con- sidered 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 accumu- lated 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 para- graph (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 proper- 71-999 0 - 78 - 42 (vol. 1) Page 629 § 996