TAXATION OF DISC INCOME TO SHAREHOLDERS.

“SEC. 995. TAXATION OF DISC INCOME TO SHAREHOLDERS. “(a) General Rule—A shareholder of a DISC or former DISC shall be subject to taxation on the earnings and profits of a DISC as provided in this chapter, but subject to the modifications of this subpart. “(b) Deemed Distributions— “(1) Distributions in qualified years—A shareholder of a DISC shall be treated as having received a distribution taxable as a dividend with respect to his stock in an amount which is equal to his pro rata share of the sum (or, if smaller, the earnings and profits for the taxable year) of— “(A) the gross interest derived during the taxable year from producer’s loans, “(B) the gain recognized by the DISC during the taxable year on the sale or exchange of property, other than property which in the hands of the DISC is a qualified export asset, previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor’s gain on the previous transfer was not recognized, “(C) the gain (other than the gain described in subparagraph (B)) recognized by the DISC during the taxable year on the sale or exchange of property (other than property which in the hands of the DISC is stock in trade or other property described in section 1221(1)) previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor’s gain on the previous transfer was not recognized and would have been treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231 if the property had been sold or exchanged rather than transferred to the DISC, “(D) one-half of the excess of the taxable income of the DISC for the taxable year, before reduction for any distributions during the year, over the sum of the amounts deemed distributed for the taxable year under subparagraphs (A), (B).and (C), and “(E) the amount of foreign investment attributable to producer’s loans (as defined in subsection (d)) of a DISC for the taxable year. Distributions described in this paragraph shall be deemed to be received on the last day of the taxable year of the DISC in which the gross income (taxable income in the case of subparagraph (D)) was derived. In the case of a distribution described in subparagraph (E), earnings and profits for the tax-able year shall include accumulated earnings and profits. “(2) Distributions upon disqualification— “(A) A shareholder of a corporation which revoked its election to be treated as a DISC or failed to satisfy the conditions of section 992(a) (1) for a taxable year shall be deemed to have received (at the time specified in subparagraph (B)) a distribution taxable as a dividend equal to his pro rata share of the DISC income of such corporation accumulated during 85 Stat. 545 the immediately preceding consecutive taxable years for which the corporation was a DISC. “(B) Distributions described in subparagraph (A) shall be deemed to be received in equal installments on the last day of each of the 10 taxable years of the corporation following the year of the termination or disqualification described in subparagraph (A) (but in no case over more than the number of immediately preceding consecutive taxable years during which the corporation was a DISC). “(c) Gain on Disposition of Stock in a DISC.—If a shareholder disposes of stock in a DISC or former DISC, any gain recognized on such disposition shall be included in gross income as a dividend to the extent of the accumulated DISC income of such DISC or former DISC which is attributable to such stock and which was accumulated in taxable years of such corporation during the period or periods the stock disposed of was held by such shareholder. If stock of the DISC or former DISC is disposed of in a transaction in which the separate corporate existence of the DISC or former DISC is terminated other than by a mere change in place of organization, however effected, any gain realized on the disposition of such stock in the transaction shall be recognized notwithstanding any other provision of this title to the extent of the accumulated DISC income of such DISC or former DISC which is attributable to such stock and which was accumulated in taxable years of such corporation during the period or periods the stock disposed of was held by the stockholder which disposed of such stock, and such gain shall be included in gross income as a dividend. “(d) Foreign Investment Attributable to DISC Earnings—For the purposes of this part— “(1) In general—The amount of foreign investment attributable to producer’s loans of a DISC for a taxable year shall be the smallest of— “(A) the net increase in foreign assets by members of the controlled group (as defined in section 993(a)(3)) which includes the DISC, “(B) the actual foreign investment by domestic members of such group, or “(C) the amount of outstanding producer’s loans by such DISC to members of such controlled group. “(2) Net increase in foreign assets—The term ‘net increase in foreign assets’ of a controlled group means the excess of— “(A) the amount incurred by such group to acquire assets (described in section 1231(b)) located outside the United States over, “(B) the sum of— “(i) the depreciation with respect to assets of such group located outside the United States; “(ii) the outstanding amount of stock or debt obligations of such group issued after December 31, 1971, to persons other than the United States persons or any member of such group; “(iii) one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group; “(iv) one-half the royalties and fees paid by foreign members of such group to domestic members of such group; and “(v) the uncommitted transitional funds of the group as determined under paragraph (4). 85 Stat. 546 For purposes of this paragraph, assets which are qualified export assets of a DISC (or would be qualified export assets if owned by a DISC) shall not be taken into account. Amounts described in this paragraph (other than in subparagraphs (B)(ii) and (v)) shall be taken into account only to the extent they are attributable to taxable years beginning after December 31, 1971. “(3) Actual foreign investment—The term ‘actual foreign investment’ by domestic members of a controlled group means the sum of— “(A) contributions to capital of foreign members of the group by domestic members of the group after December 31, 1971, “(B) the outstanding amount of stock or debt obligations of foreign members of such group (other than normal trade indebtedness) issued after December 31, 1971, to domestic members of such group, “(C) amounts transferred by domestic members of the group after December 31, 1971, to foreign branches of such members, and “(D) one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group for taxable years beginning after December 31, 1971. As used in this subsection, the term ‘domestic member’ means a domestic corporation which is a member of a controlled group (as defined in section 993(a)(3)), and the term ‘foreign member’ means a foreign corporation which is a member of such a con-trolled group. “(4) Uncommitted transitional funds—The uncommitted transitional funds of the group shall be an amount equal to the sum of— (A) the excess of— (i) the amount of stock or debt obligations of domestic members of such group outstanding on December 31, 1971, and issued on or after January 1, 1968, to persons other than United States persons or any members of such group, but only to the extent the taxpayer establishes that such amount constitutes a long-term borrowing for purposes of the foreign direct investment program, over (ii) the net amount of actual foreign investment by domestic members of such group during the period that such stock or debt obligations have been outstanding; and “(B) the amount of liquid assets to the extent not included in subparagraph (A) held by foreign members of such group and foreign branches of domestic members of such group on October 31, 1971, in excess of their reasonable working capital needs on such date. For purposes of this paragraph, the term ‘liquid assets’ means money, bank deposits (not including time deposits), and indebtedness of 2 years or less to maturity on the date of acquisition; and the actual foreign investment shall be determined under paragraph (3) without regard to the date in subparagraph (A) of such paragraph and without regard to subparagraph (D) of such paragraph. “(5) Special rule—Under regulations prescribed by the Secretary or his delegate the determinations under this subsection shall be made on a cumulative basis with proper adjustments for amounts previously taken into account.