Sec. 3-9.7. Rules for treatment of earnings and profits

(a) For purposes of article 9-A, the earnings and profits of a DISC or of a former DISC are deemed to be divided into the following three categories:

(1) accumulated DISC income which includes its earnings and profits which have been deferred from taxation, as defined in paragraph (b) of section 1.996-3 of the Federal income tax regulations (27 CFR 1.996-3[b]);

(2) previously taxed income which includes earnings and profits which have been previously taxed by reason of having been deemed distributed, as defined in paragraph (c) of section 1.996-3 of the Federal income tax regulations (26 CFR 1.996-3[c]); and

(3) other earnings and profits which includes earnings and profits which were derived by the corporation in taxable years when it was not qualified as a DISC, as defined in paragraph (d) of section 1.996-3 of the Federal income tax regulations (26 CFR 1.996-3[d]).

(b) Any actual distribution to a stockholder which is made out of the earnings and profits of a DISC or a former DISC shall be treated as made in the following order:

(1) first, out of previously taxed income;

(2) second, out of accumulated DISC income; and

(3) third, out of other earnings and profits.

(c) If for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be charged in the following order:

(1) first, to other earnings and profits;

(2) second, to accumulated DISC income; and

(3) third, to previously taxed income.