[Code of Federal Regulations]
[Title 26, Volume 10]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.995-1]

[Page 702-704]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.995-1  Taxation of DISC income to shareholders.

    (a) In general. (1) Under Sec. 1.991-1(a), a corporation which is a 
DISC for a taxable year is not subject to any tax imposed by subtitle A 
of the Code (sections 1 through 1564) for the taxable year, except for 
the tax imposed by chapter 5 thereof (sections 1491 through 1494) on 
certain transfers to avoid tax.
    (2) Under section 995(a), the shareholders of a DISC, or a former 
DISC, are subject to taxation on the earnings and profits of the DISC in 
accordance with the provisions of chapter 1 of the Code generally 
applicable to shareholders, but subject to the modifications provided in 
sections 995, 996, and 997.
    (3) Under Sec. 1.996-3, three divisions of earnings and profits of 
a DISC, or former DISC, are defined: ``accumulated DISC income'', 
``previously taxed income'', and ``other earnings and profits''. Under 
Sec. 1.995-2, certain amounts of the DISC's earnings and profits are 
deemed to be distributed as dividends to shareholders of the DISC at the 
close of the DISC's taxable year in which such earnings were derived. 
Such deemed distributions do not cause a reduction in the DISC's 
earnings and profits, but are taken into account in Sec. 1.996-3(c) as 
an increase in previously taxed income. To the extent the DISC's 
earnings and profits are paid out in a subsequent distribution which is, 
under Sec. 1.996-1, treated as made out of such ``previously taxed 
income,'' they will not be taxable to the shareholders a second time.
    (4) In general, ``accumulated DISC income'' is the earnings and 
profits of the DISC which have not been deemed distributed and which may 
be deferred from taxation so long as they are not actually distributed 
with respect to its stock. However, deferral of taxation on 
``accumulated DISC income'' may be terminated, in whole or in part, in 
the event of: (i) Certain foreign investment attributable to producer's 
loans (see Sec. 1.995-2(a)(5) and Sec. 1.995-5); (ii) revocation of 
the election to be treated as a DISC or other disqualification (see 
Sec. 1.995-3); and (iii) certain dispositions of DISC stock in which 
gain is realized (see Sec. 1.995-4).

[[Page 703]]

    (5) Since a DISC is not taxed on its taxable income, section 246(d) 
and Sec. 1.246-4 provide that the deduction otherwise allowed under 
section 243 shall not be allowed with respect to a dividend from a DISC, 
or former DISC, paid or treated as paid out of accumulated DISC income 
or previously taxed income or with respect to a deemed distribution in a 
qualified year under Sec. 1.995-2(a).
    (b) Amounts and character of amounts includible in shareholder's 
gross income. Each shareholder of a corporation which is a DISC, or 
former DISC, shall include in his gross income--
    (1) Amounts actually distributed to him that are includible in his 
gross income in accordance with paragraph (c) of this section.
    (2) Amounts which, pursuant to Sec. 1.995-2, he is deemed to 
receive as a distribution taxable as a dividend on the last day of each 
of the corporation's taxable years for which it qualifies as a DISC,
    (3) Amounts which, pursuant to Sec. 1.995-3, he is deemed to 
receive as a distribution taxable as a dividend in the event the 
corporation revokes its election to be treated as a DISC or otherwise is 
disqualified as a DISC, and
    (4) Gain realized on certain dispositions of stock in the 
corporation which, under Sec. 1.995-4, is includible in his gross 
income as a dividend.
    (c) Treatment of actual distributions. (1) Except as provided in 
subparagraph (3) of this paragraph, amounts actually distributed to a 
shareholder of a DISC, or former DISC, with respect to his stock are 
includible in his gross income in accordance with section 301.
    (2) Since a deemed distribution does not reduce the earnings and 
profits of a DISC, it does not affect the determination as to whether a 
subsequent actual distribution is a ``dividend'' under section 316(a). 
Since, however, the amount of a deemed distribution increases 
``previously taxed income'', it does affect the determination as to 
whether a subsequent actual distribution is excluded (as described in 
subparagraph (3) of this paragraph) from gross income.
    (3) Under Sec. 1.996-1(c), the amount of any actual distribution 
(including a deficiency distribution made pursuant to Sec. 1.992-3), 
with respect to stock in a DISC, or former DISC, which is treated under 
Sec. 1.996-1 as made out of previously taxed income, is excluded by the 
distributee from gross income, but only to the extent that such amount 
does not exceed the adjusted basis of the distributee's stock. Under 
Sec. 1.996-5(b), that portion of any actual distribution which is 
treated as made out of previously taxed income shall be applied against 
and reduce the adjusted basis of the stock and, to the extent that it 
exceeds the adjusted basis of the stock, it shall be treated as gain 
from the sale or exchange of property.
    (4) A deficiency distribution pursuant to Sec. 1.992-3 may be made 
after the close of the DISC's taxable year with respect to which it is 
made. The determinations as to whether such deficiency distribution is a 
dividend under section 301 and as to which division of earnings and 
profits is the source thereof depend upon the status of the DISC's 
earnings and profits account and divisions thereof at the time the 
distribution is actually made. See Sec. 1.996-1(d) for the priority of 
such deficiency distribution over other actual distributions made during 
the same taxable year.
    (d) Personal holding company income. (1) Any amount includible in a 
shareholder's gross income as a dividend with respect to the stock of a 
DISC, or former DISC, pursuant to paragraph (b) of this section shall be 
treated as a dividend for all purposes of the Code, except that for 
purposes of determining whether such shareholder is a personal holding 
company within the meaning of section 542 any amount deemed distributed 
for qualified years under Sec. 1.995-2 or upon disqualification under 
Sec. 1.995-3, any amount of gain on certain dispositions of DISC stock 
to which Sec. 1.995-4 applies, and any amount treated under Sec. 
1.996-1 as distributed out of accumulated DISC income or previously 
taxed income shall not be treated as a dividend or any other kind of 
income described in section 543(a).
    (2) Notwithstanding subparagraph (1) of this paragraph, the 
shareholder may treat as an item of income described under section 543 
(for example, rents) any amount to which the exception in

[[Page 704]]

such subparagraph (1) applies, if it establishes to the satisfaction of 
the district director that such amount is attributable to earnings and 
profits derived from such item of income.

[T.D. 7324, 39 FR 35109, Sept. 30, 1974]