A corporation seeking DISC status that fails either the receipts test or the assets test, or both, may nevertheless qualify by distributing the tainted income or the ineligible assets to its shareholders.1 This technique is called a deficiency distribution or a distribution to meet qualification requirements.
Deficiency distributions can be used to meet the receipts test or the assets test, but not other qualification requirements. Thus, if the capital is below $2,500, the incorporation is defective, the election is late, or there is a second class of stock, the deficiency distribution procedure is not available.2
The amount of the deficiency
distribution does not depend on the extent by which a 95 percent
test is violated. Once the test is :i violated, the full amount
of tainted income or ineligible assets must be distributed.3 Thus,
the assets test and the receipts test are based on 100 percent
rather than on 95 percent.
Basic Requirements
Five basic requirements must be satisfied for a distribution to
constitute a deficiency distribution:
1.§992(c)(1);Reg.§1.992-3.
2. Reg.§1.992-3. Feinschreiber, Deficiency Distribution
to meet qualification Requirements, 1 DISCUSSION 3-4 (Sept.1972).
.I
3. Reg. § 1.992-3 (a) (2)
