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 § 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 § 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% * $80,000) and P is treated as having an unpaid balance of $60,000 (i.e., 75% * $80,000).
26 C.F.R. §1.996-7