[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: 26CFR1.996-7]

[Page 733-734]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.996-7  Carryover of DISC tax attributes.

    (a) In general. Carryover of a DISC's divisions of earnings and 
profits to acquiring corporations in nontaxable transactions shall be 
subject to rules generally applicable to other corporate tax attributes. 
For example, a DISC which acquires the assets of another DISC in a 
transaction to which section 381(a) applies shall succeed to, and take 
into account, the divisions of the earnings and profits of the 
transferor DISC in accordance with section 381(c)(2).
    (b) Allocation of divisions of earnings and profits in corporate 
separations. (1) If one DISC transfers part of its assets to a 
controlled DISC in a transaction to which section 368(a)(1)(D) applies 
and immediately thereafter the stock of the controlled DISC is 
distributed in a distribution or exchange to which section 355 (or so 
much of section 356 as relates to section 355) applies, then--
    (i) The earnings and profits of the distributing DISC immediately 
before the transaction shall be allocated between the distributing DISC 
and the controlled DISC in accordance with the provisions of Sec. 
1.312-10.
    (ii) Each of the divisions of such earnings and profits, namely 
previously taxed income, accumulated DISC income, and other earnings and 
profits, shall be allocated between the distributing DISC and the 
controlled DISC on the same basis as the earnings and profits are 
allocated.
    (iii) Any assets of the distributing DISC whose status as qualified 
export assets is limited by its accumulated DISC income (e.g., 
producer's loans described in Sec. 1.993-4, Export-Import Bank and 
other obligations described in Sec. 1.993-2(h), and financing 
obligations described in Sec. 1.993-2(i)) shall be treated as having 
been allocated, for the purpose of determining the classification of 
such assets in the hands of the distributing DISC or the controlled 
DISC, on the same basis as the earnings and profits are allocated 
regardless of how such assets are actually allocated.
    (2) Example. The provisions of this paragraph may be illustrated by 
the following example:

    Example. On January 1, 1974, P Corporation transfers part of its 
assets to S Corporation, a newly organized subsidiary of P, in a 
transaction described in section 368(a)(1)(D) and distributes all the S 
stock in a transaction which qualifies under section 355. Immediately 
before such transfer, P had earnings and profits of $120,000 of which 
$100,000 constitutes accumulated DISC income. The unpaid balance of P's 
producer's loans is $80,000 all of which is retained by P. Pursuant to 
Sec. 1.312-10, 25 percent of P's accumulated DISC income is allocated 
to S (i.e., $25,000). P's producer's loans will be treated as allocated 
to S in the same proportion. Accordingly, for purposes of determining, 
under Sec. 1.993-4(a)(3), the amount of producer's loans which S is 
entitled to make, S is treated as having an unpaid balance of producer's 
loans of $20,000 (i.e., 25% x $80,000) and P is treated as having an 
unpaid balance of $60,000 (i.e., 75% x $80,000).


[[Page 734]]


    (c) Accumulated DISC income accounts of separate DISC's maintained 
after corporate combination. If two or more DISC's combine to form a new 
DISC, or if the assets of one DISC are acquired by another DISC, in a 
transaction described in section 381(a), accumulated DISC income of the 
acquired DISC or DISC's shall carry over and be taken into account by 
the acquiring or new DISC, except that a separate account shall be 
maintained for the accumulated DISC income of any DISC scheduled to be 
received as a deemed distribution by its shareholders under Sec. 1.995-
3 (relating to deemed distributions upon disqualification). If, as a 
part of such transaction, the stock of the DISC which has accumulated 
DISC income scheduled to be deemed distributed is exchanged for stock of 
the acquiring or new DISC to which such accumulated DISC income is 
carried over and which maintains a separate account, then such 
accumulated DISC income shall be deemed distributed pro rata to 
shareholders of the acquiring or new DISC on the basis of stock 
ownership immediately after the exchange.

[T.D. 7324, 39 FR 35125, Sept. 30, 1974]