Rev. Rul. 85-86

1985-1 C.B. 291, 1985-25 I.R.B. 7.

DISTRIBUTION UNDER SECTION 805(B) OF THE TAX REFORM ACT OF 1984 TO A S

CORPORATION SHAREHOLDER

Published: June 24, 1985

Section 1368.-Distributions

(Also Section 1367.)

  Distribution under section 805(b) of the Tax Reform Act of 1984 to a § corporation shareholder. A distribution made pursuant to section 805(b) of the Tax Reform Act of 1984 by a former Domestic International Sales Corporation to its § corporation parent increases the accumulated adjustments account of the parent under section 1368(e) of the Internal Revenue Code and thereby under section 1367(a) of the Code increases the basis of the shareholders' stock in the § corporation.

ISSUE

  Whether a distribution made pursuant to section 805(b) of the Tax Reform Act of 1984 ('Act'), 1984-3 (Vol. 1) C.B. 508, by a former Domestic International Sales Corporation (DISC) to its § corporation parent increases the accumulated adjustments account of the parent under section 1368(e) of the Internal Revenue Code and thereby under section 1367(a) of the Code increases the basis of the shareholders' stock in the § corporation.

FACTS

  On December 31, 1984, X was an electing small business corporation and owned 100 percent of the stock of Y, a DISC within the meaning of section 992(a) of the Code. Under the provisions of section 805(b) of the Act, Y's tax year closed on December 31, 1984. On January 3, 1985, Y distributed to X, 10x dollars of accumulated DISC income, within the meaning of section 996(f)(1).

LAW AND ANALYSIS

  Section 805(b)(1)(A) of the Act, with an exception not pertinent here, provides that the tax year of each DISC which begins before January 1, 1985, and which (but for section 805(b)(1) of the Act) would have included January 1, 1985, closed on December 31, 1984.

  Section 805(b)(2)(A) of the Act provides that with respect to actual distributions made after December 31, 1984, by a DISC or former DISC which was a DISC on December 31, 1984, any accumulated DISC income of a DISC or former DISC (within the meaning of section 996(f)(1)) that is derived before January 1, 1985, will be treated as previously taxed income (within the meaning of section 996(f)(2)) with respect to which there had previously been a deemed distribution to which section 996(e)(1) applied.

  Section 1367(a) of the Code provides that the basis of each shareholder's stock in an § corporation will be increased for any period by the sum of the following items determined with respect to that shareholder for such period: (A) the items of income described in section 1366(a)(1)(A), (B) any nonseparately computed income determined under section 1366(a)(1)(B), and (C) the excess of the deductions for depletion over the basis of the property subject to depletion.

  Section 1368(e)(1)(A) of the Code provides that except as provided in section 1368(e)(1)(B), the term 'accumulated adjustments account' means an account of the § corporation that is adjusted for the § period in a manner similar to the adjustments under section 1367 (except that no adjustment will be made for income (and related expenses) that is exempt from tax under this title and the phrase '(but not below zero)' shall be disregarded in section 1367(b)(2)(A)).

  Section 805(b)(2) of the Act provides that, with respect to actual distributions made after December 31, 1984, accumulated DISC income as of December 31, 1984, will be treated as previously taxed income with respect to which there had previously been a deemed distribution. In order to reflect the adjustments that would have been made if there had in fact been a deemed distribution subject to current law, it is necessary for the § corporation to increase its 'accumulated adjustments account' by the amount of such income actually distributed to the § corporation in the year of such distribution and for the § shareholders to be accorded a corresponding increase in their stock bases by the amount of such actual distribution in such taxable year.

HOLDING

  The 10x dollars of accumulated DISC income distributed to X by Y will increase X's accumulated adjustments account under section 1368(e) of the Code and the basis of the stock held by X's shareholders under section 1367(a).

Rev. Rul. 85-86, 1985-1 C.B. 291, 1985-25 I.R.B. 7.