Each item of property shall be considered separately for purposes of making the adjustment under this subparagraph.
Accumulated earnings and profits | Accumulated DISC income | Previously taxed income | Other earnings and profits | |
(1) Balance January 1, 1975 | $450 | $100 | $250 | $100 |
(2) Adjustments (see paragraphs (b)(3)(ii) and (c)(1)(v) of this section) | 0 | (100) | 100 | 0 |
(3) Balance January 1, 1976 | 450 | 0 | 350 | 100 |
Capital | Accumulated earnings and profits | Accumulated DISC income | Previously taxed income | Other earnings and profits | |
(1) Balance January 1, 1973 | $2,000 | $400 | $300 | $100 | 0 |
(2) Adjustments (see § 1.996-4(b) and paragraph (c)(1)(iv) of this section) | (240) | (60) | (200) | 140 | 0 |
(3) Balance January 1, 1974 | 1,760 | 340 | 100 | 240 | 0 |
Accumulated earnings and profits | Accumulated DISC income | Previously taxed income | Other earnings and profits | |
(1) Balance January 1, 1974 | $200 | $80 | $120 | 0 |
(2) Adjustment under paragraphs (c)(2) and (e)(1) this section | (40) | 0 | (100) | 0 |
(3) Adjustment under paragraph (e)(2)(i) of this section | 0 | 0 | 0 | $60 |
(4) Balance January 1, 1975 | 160 | 80 | 20 | 60 |
Accumulated earnings and profits | Accumulated DISC income | Previously taxed income | Other earnings and profits | |
(1) Balance January 1, 1975 | $1,200 | $800 | $320 | $80 |
(2) Portion of 1975 deficit of $365 chargeable as of June 30, 1975, pursuant to § 1.996-2(a) | (181) | (101) | 0 | (80) |
(3) Balance July 1, 1975 | 1,019 | 699 | 320 | 0 |
(4) $650 distributed to C on July 1, 1975 | (650) | (330) | (320) | 0 |
(5) Portion of 1975 deficit of $365 chargeable as of December 30, 1975, pursuant to § 1.996-2(a) | (183) | (183) | 0 | 0 |
(6) Balance December 31, 1975 | $186 | $186 | 0 | 0 |
(7) $650 distributed to D on December 31, 19751 | (186) | (186) | 0 | 0 |
(8) Balance January 1, 1976 | 0 | 0 | 0 | 0 |
1 $60 treated as return of capital pursuant to section 301(c)(2).
Earnings and profits for year | Accumulated earnings and profits | Accumulated DISC income | Previously taxed income | Other earnings and profits | |
(1) Balance January 1, 1974 | ($60.00) | ($60.00) | |||
(2) Earnings and profits for year before reduction for distributions | $80.00 | ||||
(3) Deemed distribution of $35 to X on December 31, 1974, under § 1.995-2(a) | $35.00 | ||||
(4) DISC income for 1974 of $45 as defined in paragraph (b)(2) of this section (line 2 ($80) minus line 3 ($35)) | $45.00 | ||||
(5) Balance before actual distributions | 80.00 | (60.00) | 45.00 | 35.00 | (60.00) |
(6) Qualifying distribution of $30 to X on August 15, 1974, pursuant to § 1.992-3 | (26.67) | (26.67) | |||
(7) Actual distribution to P of $60 on June 15, 1974 | (53.33) | (18.33) | (35.00) | ||
(8) Balance January 1, 1975 | 0 | (60.00) | 0 | (60.00) |
Assume the facts are the same as in example 5, except that at the beginning of 1974 R's accumulated earnings and profits amount to $60 consisting of accumulated DISC income of $20, previously taxed income of $10, and other earnings and profits of $30. In addition, on August 1, 1974, X transfers all R's stock to Y Corporation in a reorganization described in section 368(a)(1)(B) in which under section 354 X recognizes no gain or loss. Under these facts, X includes in its gross income for 1974 a dividend of $15 which is attributable to the actual distribution of $60 paid out of earnings and profits on June 15, 1974. X excludes from gross income the balance of the $60 distribution ($45) paid out of earnings and profits because, under § 1.996-1(a) , it is treated as paid out of previously taxed income. Y includes in its gross income for 1974 a dividend of $65 of which $35 is attributable to the deemed distribution of a dividend to Y on December 31, 1974, under § 1.995-2(a) and $30 is attributable to the qualifying distribution paid out of earnings and profits to Y on August 15, 1974. The adjustments to R's earnings and profits are summarized in the following table:
Earnings and profits for year | Accumulated earnings and profits | Accumulated DISC income | Previously taxed income | Other earnings and profits | |
(1) Balance January 1, 1974 | $60 | $20 | $10 | $30 | |
(2) Earnings and profits for year before reduction for distributions | $80 | ||||
(3) Deemed distribution of $35 to Y on December 31, 1974, under § 1.995-2(a) | 35 | ||||
(4) DISC income for 1974 of $45 as defined in paragraph (b)(2) of this section (line 2 ($80) minus line 3 ($35)) | 45 | ||||
(5) Balance before actual distributions | 80 | 60 | 65 | 45 | 30 |
(6) Qualifying distribution of $30 to Y on August 15, 1974, pursuant to § 1.992-3 | (26.67) | (3.33) | (30) | ||
(7) Actual distribution to X of $60 on June 15, 1974 | (53.33) | (6.67) | (15) | (45) | |
(8) Balance January 1, 1975 | 50 | 20 | 0 | 30 |
Corporate shareholders: | |
Previously taxed income (57.5% of $2,000 ÷ 2) | $575 |
Accumulated DISC income (42.5% of $2,000 ÷ 2) | 425 |
Individual shareholders: | |
Previously taxed income (50% of $2,000 ÷ 2) | 500 |
Accumulated DISC income (50% of $2,000 ÷ 2) | 500 |
26 C.F.R. §1.996-3
Secs. 995(e)(7), (8) and (10), 995(g) and 7805 of the Internal Revenue Code of 1954 (90 Stat. 1655, 26 U.S.C. 995 (e)(7), (8) and (10) ; 90 Stat. 1659, 26 U.S.C. 995(g) ; and 68A Stat. 917, 26 U.S.C. 7805 )