Frequently Asked Questions
Who is eligible for the Exclusion of Previously Taxed DISC Income?
Shareholders of a DISC receiving actual distributions after having already paid tax on deemed distributions.
How does the Exclusion of Previously Taxed DISC Income work?
Actual distributions made out of 'previously taxed income' (amounts already deemed distributed under Section 995) are excluded from the shareholder's gross income.
What law authorizes the Exclusion of Previously Taxed DISC Income?
The Exclusion of Previously Taxed DISC Income is authorized under IRC §996 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §996
Source: Internal Revenue Code, Title 26, United States Code
§ 996. Rules for allocation in the case of distributions and losses(a) Rules for actual distributions and certain deemed distributions(1) In generalAny actual distribution (other than a distribution 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 distributionsAny 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—(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 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.
(3) Exclusion from gross incomeAmounts distributed out of previously taxed income shall be excluded by the distributee from gross income except for gains described in subsection (e)(2), and shall reduce the amount of the previously taxed income.
(b) Ordering rules for lossesIf 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 disqualification.
(c) Priority of distributionsAny 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 adjustmentIf—(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
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