§996 — Rules for allocation in the case of distributions and losses

Statute Text — 26 U.S.C. §996

Treasury Regulations

• Treas. Reg. §1.996-1Rules for actual distributions and certain deemed distributions Show full text ▾ Collapse ▴

  (a) General rule. Under section 996(a)(1), any actual distribution (other than a distribution described in paragraph (b) of this section or to which § 1.995-4 applies) to a shareholder by a DISC, or former DISC, which is made out of earnings and profits shall be treated as made—

  (1) First, out of “previously taxed income” (as defined in § 1.996-3(c)) to the extent thereof,

  (2) Second, out of “accumulated DISC income” (as defined in § 1.996-3(b)) to the extent thereof, and

  (3) Third, out of “other earnings and profits” (as defined in § 1.996-3(d)) to the extent thereof.

  (b) Rules for qualifying distributions and deemed distributions under section 995(b)(1)(G)—(1) In general. Except as provided in subparagraph (2), any actual distribution to meet qualification requirements made pursuant to § 1.992-3 and any deemed distribution pursuant to § 1.995-2(a)(5) (relating to foreign investment attributable to producer's loans) which is made out of earnings and profits shall be treated as made—

  (i) First, out of “accumulated DISC income” (as defined in § 1.996-3(b)) to the extent thereof.

  (ii) Second, out of “other earnings and profits” (as defined in § 1.996-3(d)) to the extent thereof, and

  (iii) Third, out of “previously taxed income” (as defined in § 1.996-3(c)) to the extent thereof.

  (2) Special rule. For taxable years beginning after December 31, 1975, paragraph (b)(1) of this section shall apply to one-half of the amount of an actual distribution made pursuant to § 1.992-3 to satisfy the condition of § 1.992-1(b) (the gross receipts test) and paragraph (a) of this section shall apply to the remaining one-half of such amount.

  (c) Exclusion from gross income. Under section 996(a)(3), amounts distributed out of previously taxed income shall be excluded by the distributee from gross income. However, see § 1.996-5(b) for treatment as gain from the sale or exchange of property of the portion of an actual distribution out of previously taxed income to the extent it exceeds the adjusted basis of the stock with respect to which the distribution is made.

  (d) Priority of distributions. Under section 996(c), for purposes of determining their treatment under paragraphs (a), (b), and (c) of this section, distributions made during a taxable year shall be treated as being made in the following order—

  (1) Deemed distributions under §§ 1.995-2 and 1.995-3.

  (2) Actual distributions to meet qualification requirements made pursuant to § 1.992-3 in the order in which they are made, and

  (3) Other actual distributions in the order in which they are made.

  Thus, the treatment of any distribution shall be determined after the divisions of earnings and profits have been properly adjusted by taking into account distributions of higher priority which are made or deemed made during the same taxable year.

  (e) Examples. The provisions of this section may be illustrated by the following examples:

• Treas. Reg. §1.996-1(a)General rule. Show full text ▾ Collapse ▴

  General rule. Under section 996(a)(1), any actual distribution (other than a distribution described in paragraph (b) of this section or to which § 1.995-4 applies) to a shareholder by a DISC, or former DISC, which is made out of earnings and profits shall be treated as made—

  (1) First, out of “previously taxed income” (as defined in § 1.996-3(c)) to the extent thereof,

  (2) Second, out of “accumulated DISC income” (as defined in § 1.996-3(b)) to the extent thereof, and

  (3) Third, out of “other earnings and profits” (as defined in § 1.996-3(d)) to the extent thereof.

• Treas. Reg. §1.996-1(b)Rules for qualifying distributions and deemed distributions under section 995(b)(1)(G)—(1) In general. Show full text ▾ Collapse ▴

  Rules for qualifying distributions and deemed distributions under section 995(b)(1)(G)—(1) In general. Except as provided in subparagraph (2), any actual distribution to meet qualification requirements made pursuant to § 1.992-3 and any deemed distribution pursuant to § 1.995-2(a)(5) (relating to foreign investment attributable to producer's loans) which is made out of earnings and profits shall be treated as made—

• Treas. Reg. §1.996-1(c)Exclusion from gross income. Show full text ▾ Collapse ▴

  Exclusion from gross income. Under section 996(a)(3), amounts distributed out of previously taxed income shall be excluded by the distributee from gross income. However, see § 1.996-5(b) for treatment as gain from the sale or exchange of property of the portion of an actual distribution out of previously taxed income to the extent it exceeds the adjusted basis of the stock with respect to which the distribution is made.

• Treas. Reg. §1.996-1(d)Priority of distributions. Show full text ▾ Collapse ▴

  Priority of distributions. Under section 996(c), for purposes of determining their treatment under paragraphs (a), (b), and (c) of this section, distributions made during a taxable year shall be treated as being made in the following order—

  (1) Deemed distributions under §§ 1.995-2 and 1.995-3.

  (2) Actual distributions to meet qualification requirements made pursuant to § 1.992-3 in the order in which they are made, and

  (3) Other actual distributions in the order in which they are made.

  Thus, the treatment of any distribution shall be determined after the divisions of earnings and profits have been properly adjusted by taking into account distributions of higher priority which are made or deemed made during the same taxable year.

• Treas. Reg. §1.996-1(e)Examples. Show full text ▾ Collapse ▴

  Examples. The provisions of this section may be illustrated by the following examples:

• Treas. Reg. §1.996-1(i)First, out of “accumulated DISC income” (as defined in § 1. Show full text ▾ Collapse ▴

  First, out of “accumulated DISC income” (as defined in § 1.996-3(b)) to the extent thereof.

  (ii) Second, out of “other earnings and profits” (as defined in § 1.996-3(d)) to the extent thereof, and

  (iii) Third, out of “previously taxed income” (as defined in § 1.996-3(c)) to the extent thereof.

  (2) Special rule. For taxable years beginning after December 31, 1975, paragraph (b)(1) of this section shall apply to one-half of the amount of an actual distribution made pursuant to § 1.992-3 to satisfy the condition of § 1.992-1(b) (the gross receipts test) and paragraph (a) of this section shall apply to the remaining one-half of such amount.

• Treas. Reg. §1.996-2Ordering rules for losses Show full text ▾ Collapse ▴

  (a) In general. Under section 996(b), if for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be charged—

  (1) First, to other earnings and profits (as defined in § 1.996-3(d)) to the extent thereof,

  (2) Second, to accumulated DISC income (as defined in § 1.996-3(b)) to the extent thereof, subject to the special rule in paragraph (b) of this section,

  (3) Third, to previously taxed income (as defined in § 1.996-3(c)) to the extent thereof, and

  (4) To the extent that the amount of such deficit exceeds the sum of the amounts charged in accordance with subparagraphs (1), (2), and (3) of this paragraph, to other earnings and profits (as defined in § 1.996-3(d)).

  Thus, the excess deficit charged to other earnings and profits under subparagraph (4) of this paragraph will create a deficit therein in the amount of such excess. To determine the amount of any division of earnings and profits for the purpose of determining under § 1.996-1 the treatment of any actual and certain deemed distributions, the portion of a deficit in earnings and profits chargeable under this paragraph to such division prior to such distribution shall be determined in a manner consistent with the rules in § 1.316-2(b) for determining the amount of earnings and profits available on the date of any distribution.

  (b) Deficits subsequent to a disqualification. A deficit in earnings and profits of a DISC, or former DISC, shall not be charged to accumulated DISC income which has been determined is to be deemed distributed to the shareholders pursuant to § 1.995-3 as a result of a revocation of election or other disqualification. Thus, in accordance with paragraph (a) of this section as modified by this paragraph, a deficit incurred by a former DISC following such a revocation or disqualification shall be charged first to other earnings and profits and then to previously taxed income with any balance being charged to other earnings and profits and creating a deficit therein. The preceding sentence shall also apply in the case of a deficit incurred by a DISC which has no accumulated DISC income accumulated during its current taxable year and all immediately preceding consecutive taxable years for which it was a DISC. If as a result of the application of this paragraph the amount of a deficit in other earnings and profits exceeds the amount of a deficit in accumulated earnings and profits, then upon any subsequent actual distribution the deficit in other earnings and profits shall be reduced by the lower of (1) the amount of such actual distribution chargeable to accumulated DISC income or previously taxed income or (2) the amount of such excess.

  (c) Examples. The provisions of this section may be illustrated by the following examples:

• Treas. Reg. §1.996-2(a)In general. Show full text ▾ Collapse ▴

  In general. Under section 996(b), if for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be charged—

  (1) First, to other earnings and profits (as defined in § 1.996-3(d)) to the extent thereof,

  (2) Second, to accumulated DISC income (as defined in § 1.996-3(b)) to the extent thereof, subject to the special rule in paragraph (b) of this section,

  (3) Third, to previously taxed income (as defined in § 1.996-3(c)) to the extent thereof, and

  (4) To the extent that the amount of such deficit exceeds the sum of the amounts charged in accordance with subparagraphs (1), (2), and (3) of this paragraph, to other earnings and profits (as defined in § 1.996-3(d)).

  Thus, the excess deficit charged to other earnings and profits under subparagraph (4) of this paragraph will create a deficit therein in the amount of such excess. To determine the amount of any division of earnings and profits for the purpose of determining under § 1.996-1 the treatment of any actual and certain deemed distributions, the portion of a deficit in earnings and profits chargeable under this paragraph to such division prior to such distribution shall be determined in a manner consistent with the rules in § 1.316-2(b) for determining the amount of earnings and profits available on the date of any distribution.

• Treas. Reg. §1.996-2(b)Deficits subsequent to a disqualification. Show full text ▾ Collapse ▴

  Deficits subsequent to a disqualification. A deficit in earnings and profits of a DISC, or former DISC, shall not be charged to accumulated DISC income which has been determined is to be deemed distributed to the shareholders pursuant to § 1.995-3 as a result of a revocation of election or other disqualification. Thus, in accordance with paragraph (a) of this section as modified by this paragraph, a deficit incurred by a former DISC following such a revocation or disqualification shall be charged first to other earnings and profits and then to previously taxed income with any balance being charged to other earnings and profits and creating a deficit therein. The preceding sentence shall also apply in the case of a deficit incurred by a DISC which has no accumulated DISC income accumulated during its current taxable year and all immediately preceding consecutive taxable years for which it was a DISC. If as a result of the application of this paragraph the amount of a deficit in other earnings and profits exceeds the amount of a deficit in accumulated earnings and profits, then upon any subsequent actual distribution the deficit in other earnings and profits shall be reduced by the lower of (1) the amount of such actual distribution chargeable to accumulated DISC income or previously taxed income or (2) the amount of such excess.

• Treas. Reg. §1.996-2(c)Examples. Show full text ▾ Collapse ▴

  Examples. The provisions of this section may be illustrated by the following examples:

• Treas. Reg. §1.996-3Divisions of earnings and profits Show full text ▾ Collapse ▴

  (a) In general. For purposes of sections 991 through 997, the earnings and profits of a DISC, or former DISC, shall be treated as composed of the following three divisions:

  (1) Accumulated DISC income (as defined in paragraph (b) of this section),

  (2) Previously taxed income (as defined in paragraph (c) of this section), and

  (3) Other earnings and profits (as defined in paragraph (d) of this section),

  (b) Accumulated DISC income defined. (1) Accumulated DISC income is that portion of a corporation's earnings and profits which were derived during taxable years for which it qualified as a DISC and which were deferred from taxation. Accumulated DISC income as of the close of each taxable year of the corporation is—

  (i) The amount of accumulated DISC income as of the close of the immediately preceding taxable year increased by,

  (ii) The amount of DISC income for the year (as determined in subparagraph (2) of this paragraph) and reduced (but not below zero) by,

  (iii) The items enumerated in subparagraph (3) of this paragraph.

  (2) Under section 996(f)(1), DISC income is (i) the earnings and profits derived by the corporation during a taxable year for which such corporation is a DISC minus (ii) amounts deemed distributed under § 1.995-2 other than the amount of foreign investment attributable to producer's loans described in § 1.995-2(a)(5). For example, the earnings and profits of a DISC for a taxable year include any amounts includible in such DISC's gross income pursuant to section 951(a) (relating to controlled foreign corporations). Deemed distributions under § 1.995-2(a)(5) are taken into account under subparagraph (3) of this paragraph as a reduction in computing accumulated DISC income.

  (3) The accumulated DISC income (as increased by DISC income for the year determined under subparagraph (2) of this paragraph) is reduced by each of the following items in the following order:

  (i) Any amount deemed distributed for such year under § 1.995-3 (relating to deemed distributions upon disqualification),

  (ii) Any amount of foreign investment attributable to producer's loans deemed distributed for such year under § 1.995-2(a)(5) to the extent it is charged to accumulated DISC income under § 1.996-1(b)(1)(i),

  (iii) The amount of any adjustment to accumulated DISC income for such year under § 1.966-4(b)(1), and

  (iv) To the extent they are treated, under § 1.996-1 (a) or (b) (relating to ordering rules for distributions), as made out of accumulated DISC income, the amounts of any actual qualifying distributions pursuant to § 1.992-3 in the order in which they are made, and thereafter by the amounts of any other actual distributions in the order in which they are made, except that, prior to each actual distribution, accumulated DISC income shall be reduced by the portion of any deficit in earnings and profits for the taxable year chargeable at that time under § 1.996-2(a)(2) to accumulated DISC income.

  (4) Every distribution or other reduction in accumulated DISC income pursuant to subparagraph (3) of this paragraph shall be charged to the most recently accumulated DISC income.

  (c) Previously taxed income. Under section 996(f)(2), previously taxed income as of the close of each taxable year of the corporation is an amount equal to—

  (1) The sum of—

  (i) The amount of previously taxed income as of the close of the immediately preceding taxable year,

  (ii) Amounts deemed distributed for the current year under § 1.995-2 (relating to deemed distributions in qualified years),

  (iii) Amounts deemed distributed for the current year under § 1.995-3 (relating to deemed distributions upon disqualification),

  (iv) With respect to a distribution in redemption to which § 1.996-4(b)(1) applies, an amount equal to the excess (if any) of (a) the amount of the reduction under § 1.996-4(b)(1) in accumulated DISC income over (b) the reduction in the corporation's earnings and profits (see section 312(e)), and

  (v) Any amount by which accumulated DISC income is reduced under paragraph (b)(3)(ii) of this section by reason of a deemed distribution as a dividend, under § 1.995-2(a)(5), of an amount of foreign investment attributable to producer's loans,

  (2) Decreased (but not below zero), to the extent they are treated, under § 1.996-1 (a) or (b) (relating to ordering rules for distributions), as made out of previously taxed income, by the amounts of any actual qualifying distributions pursuant to § 1.992-3 in the order in which they are made, and thereafter by the amounts of any other actual distributions in the order in which they are made, except that, prior to any actual distribution, previously taxed income shall be reduced by the portion of any deficit in earnings and profits for the taxable year chargeable at that time under § 1.996-2(a)(3) to previously taxed income.

  (d) Other earnings and profits. Under section 996(f)(3), other earnings and profits consist of earnings and profits other than accumulated DISC income and previously taxed income described respectively in paragraphs (b) and (c) of this section. Other earnings and profits as of the close of each taxable year of the corporation is (subject to paragraph (e) of this section) an amount equal to the amount of other earnings and profits as of the close of the immediately preceding taxable year decreased (if necessary, below zero) in the following order by—

  (1) To the extent they are treated, under § 1.996-1 (a) or (b) (relating to ordering rules for distributions), as made out of other earnings and profits, the amounts of any actual qualifying distributions pursuant to § 1.992-3 in the order in which they are made, and thereafter the amounts of any other actual distributions in the order in which they are made, except that, prior to any actual distribution, other earnings and profits shall be reduced by the portion of any deficit in earnings and profits for the taxable year chargeable at that time under § 1.996-2(a)(1) to other earnings and profits, and

  (2) With respect to a distribution in redemption to which § 1.996-4(b)(1) applies, an amount equal to the excess (if any) of (a) the reduction in the corporation's earnings and profits (see section 312(e)) over (b) the amount of the reduction under § 1.996-4(b)(1) in accumulated DISC income.

  (e) Distributions in kind. (1) For purposes of determining, under paragraphs (b), (c), and (d) of this section, the amount by which any division of earnings and profits is reduced by reason of a distribution of property (other than money or the DISC's, or former DISC's, own obligations), the amount of such distribution is the fair market value of such property at the time of the distribution.

  (2) For any taxable year in which the DISC makes a distribution of such property, the amount of other earnings and profits determined under paragraph (d) of this section (without regard to this subparagraph) shall be—

  (i) Increased by the excess (if any) of the amount of such distribution treated as a dividend under section 316(a) over the adjusted basis of such property, and

  (ii) Decreased by the excess (if any) of the adjusted basis of such property over the amount of such distribution treated as a dividend under section 316 (a).

  Each item of property shall be considered separately for purposes of making the adjustment under this subparagraph.

  (f) Examples. The provisions of §§ 1.996-1, 1.996-2, and this section may be illustrated by the following examples:

  (g) DISCs having corporate and noncorporate shareholders. In the case of a DISC having one or more corporate shareholders but less than all of its shareholders subject to the special rules of section 291(a)(4), relating to certain deferred DISC income as a corporate preference item, accumulated DISC income and previously taxed income of the DISC are divided between the corporate shareholders, as a class, and the other shareholders, as a class, in proportion to amounts of DISC income not deemed distributed and amounts deemed distributed to each class. Subsequent taxation of actual and qualifying distributions shall be based upon this division. Thus, if a DISC is owned 50 percent by corporate shareholders and 50 percent by individual shareholders and has undistributed taxable income of $2,000 for its year, the division is made as follows:

• Treas. Reg. §1.996-3(a)In general. Show full text ▾ Collapse ▴

  In general. For purposes of sections 991 through 997, the earnings and profits of a DISC, or former DISC, shall be treated as composed of the following three divisions:

  (1) Accumulated DISC income (as defined in paragraph (b) of this section),

  (2) Previously taxed income (as defined in paragraph (c) of this section), and

  (3) Other earnings and profits (as defined in paragraph (d) of this section),

• Treas. Reg. §1.996-3(b)Accumulated DISC income defined. Show full text ▾ Collapse ▴

  Accumulated DISC income defined. (1) Accumulated DISC income is that portion of a corporation's earnings and profits which were derived during taxable years for which it qualified as a DISC and which were deferred from taxation. Accumulated DISC income as of the close of each taxable year of the corporation is—

• Treas. Reg. §1.996-3(c)Previously taxed income. Show full text ▾ Collapse ▴

  Previously taxed income. Under section 996(f)(2), previously taxed income as of the close of each taxable year of the corporation is an amount equal to—

  (1) The sum of—

• Treas. Reg. §1.996-3(d)Other earnings and profits. Show full text ▾ Collapse ▴

  Other earnings and profits. Under section 996(f)(3), other earnings and profits consist of earnings and profits other than accumulated DISC income and previously taxed income described respectively in paragraphs (b) and (c) of this section. Other earnings and profits as of the close of each taxable year of the corporation is (subject to paragraph (e) of this section) an amount equal to the amount of other earnings and profits as of the close of the immediately preceding taxable year decreased (if necessary, below zero) in the following order by—

  (1) To the extent they are treated, under § 1.996-1 (a) or (b) (relating to ordering rules for distributions), as made out of other earnings and profits, the amounts of any actual qualifying distributions pursuant to § 1.992-3 in the order in which they are made, and thereafter the amounts of any other actual distributions in the order in which they are made, except that, prior to any actual distribution, other earnings and profits shall be reduced by the portion of any deficit in earnings and profits for the taxable year chargeable at that time under § 1.996-2(a)(1) to other earnings and profits, and

  (2) With respect to a distribution in redemption to which § 1.996-4(b)(1) applies, an amount equal to the excess (if any) of (a) the reduction in the corporation's earnings and profits (see section 312(e)) over (b) the amount of the reduction under § 1.996-4(b)(1) in accumulated DISC income.

• Treas. Reg. §1.996-3(e)Distributions in kind. Show full text ▾ Collapse ▴

  Distributions in kind. (1) For purposes of determining, under paragraphs (b), (c), and (d) of this section, the amount by which any division of earnings and profits is reduced by reason of a distribution of property (other than money or the DISC's, or former DISC's, own obligations), the amount of such distribution is the fair market value of such property at the time of the distribution.

  (2) For any taxable year in which the DISC makes a distribution of such property, the amount of other earnings and profits determined under paragraph (d) of this section (without regard to this subparagraph) shall be—

• Treas. Reg. §1.996-3(f)Examples. Show full text ▾ Collapse ▴

  Examples. The provisions of §§ 1.996-1, 1.996-2, and this section may be illustrated by the following examples:

• Treas. Reg. §1.996-3(g)DISCs having corporate and noncorporate shareholders. Show full text ▾ Collapse ▴

  DISCs having corporate and noncorporate shareholders. In the case of a DISC having one or more corporate shareholders but less than all of its shareholders subject to the special rules of section 291(a)(4), relating to certain deferred DISC income as a corporate preference item, accumulated DISC income and previously taxed income of the DISC are divided between the corporate shareholders, as a class, and the other shareholders, as a class, in proportion to amounts of DISC income not deemed distributed and amounts deemed distributed to each class. Subsequent taxation of actual and qualifying distributions shall be based upon this division. Thus, if a DISC is owned 50 percent by corporate shareholders and 50 percent by individual shareholders and has undistributed taxable income of $2,000 for its year, the division is made as follows:

• Treas. Reg. §1.996-3(i)§1.996-3(i) Show full text ▾ Collapse ▴

  Increased by the excess (if any) of the amount of such distribution treated as a dividend under section 316(a) over the adjusted basis of such property, and

  (ii) Decreased by the excess (if any) of the adjusted basis of such property over the amount of such distribution treated as a dividend under section 316 (a).

  Each item of property shall be considered separately for purposes of making the adjustment under this subparagraph.

• Treas. Reg. §1.996-3(v)Any amount by which accumulated DISC income is reduced under paragraph (b)(3)(ii) of this section by reason of a deemed distribution as a dividend, under § 1. Show full text ▾ Collapse ▴

  Any amount by which accumulated DISC income is reduced under paragraph (b)(3)(ii) of this section by reason of a deemed distribution as a dividend, under § 1.995-2(a)(5), of an amount of foreign investment attributable to producer's loans,

  (2) Decreased (but not below zero), to the extent they are treated, under § 1.996-1 (a) or (b) (relating to ordering rules for distributions), as made out of previously taxed income, by the amounts of any actual qualifying distributions pursuant to § 1.992-3 in the order in which they are made, and thereafter by the amounts of any other actual distributions in the order in which they are made, except that, prior to any actual distribution, previously taxed income shall be reduced by the portion of any deficit in earnings and profits for the taxable year chargeable at that time under § 1.996-2(a)(3) to previously taxed income.

• Treas. Reg. §1.996-4Subsequent effect of previous disposition of DISC stock Show full text ▾ Collapse ▴

  (a) Shareholder adjustment for previously taxed income. (1) Under section 996(d)(1), except as provided in subparagraph (2) of this paragraph, if—

  (i) Gain with respect to a share of stock of a DISC, or former DISC, is treated under § 1.995-4 as a dividend, and

  (ii) With respect to such share, any person subsequently receives an actual distribution made out of accumulated DISC income, or a deemed distribution made, pursuant to § 1.995-3, by reason of disqualification, out of accumulated DISC income,

  then such person shall treat such distribution in the same manner as a distribution from previously taxed income (and thus excludable from gross income under § 1.996-1(c)) to the extent that the gain referred to in subdivision (i) of this subparagraph exceeds the aggregate amount of any other distributions with respect to such share which were treated under this subparagraph as made from previously taxed income.

  (2) In applying subparagraph (1) of this paragraph with respect to a share of stock in a DISC, or former DISC, the gain referred to in subparagraph (1)(i) of this paragraph does not include any gain to a shareholder on a redemption of such share which qualifies as an exchange under section 302(a) or any gain on a disposition of such share prior to such redemption. Distributions described in subparagraph (1)(ii) of this paragraph do not include a distribution in a redemption which qualifies as an exchange under section 302(a). For adjustments to accumulated DISC income by reason of dividend treatment under § 1.995-4 with respect to gain upon a redemption of DISC stock to which section 302(a) applies and upon a prior disposition of such stock, see paragraph (b) of this section.

  (3) Example. The provisions of this paragraph may be illustrated by the following example:

  (b) Corporate adjustment upon redemption. (1) Under section 996(d)(2), if by reason of § 1.995-4 gain on a redemption of stock in a DISC, or former DISC, is included in the shareholder's gross income as a dividend, then the accumulated DISC income shall be reduced by an amount equal to the sum of—

  (i) The amount of gain on such redemption which, under § 1.995-4, is treated as a dividend, and

  (ii) The amount of any gain with respect to such redeemed stock which, under § 1.995-4, was treated as a dividend on a disposition prior to such redemption minus the amount of distributions with respect to such stock which have been treated as made out of previously taxed income by reason of the application of paragraph (a)(1) of this section.

  (2) The provisions of this paragraph may be illustrated by the following examples:

• Treas. Reg. §1.996-4(a)Shareholder adjustment for previously taxed income. Show full text ▾ Collapse ▴

  Shareholder adjustment for previously taxed income. (1) Under section 996(d)(1), except as provided in subparagraph (2) of this paragraph, if—

• Treas. Reg. §1.996-4(b)Corporate adjustment upon redemption. Show full text ▾ Collapse ▴

  Corporate adjustment upon redemption. (1) Under section 996(d)(2), if by reason of § 1.995-4 gain on a redemption of stock in a DISC, or former DISC, is included in the shareholder's gross income as a dividend, then the accumulated DISC income shall be reduced by an amount equal to the sum of—

• Treas. Reg. §1.996-4(i)The amount of gain on such redemption which, under § 1. Show full text ▾ Collapse ▴

  The amount of gain on such redemption which, under § 1.995-4, is treated as a dividend, and

  (ii) The amount of any gain with respect to such redeemed stock which, under § 1.995-4, was treated as a dividend on a disposition prior to such redemption minus the amount of distributions with respect to such stock which have been treated as made out of previously taxed income by reason of the application of paragraph (a)(1) of this section.

  (2) The provisions of this paragraph may be illustrated by the following examples: