Distributions of Cash Relatively straightforward and follows the general rule: Dividend to the extent of E&P Then return of basis to the extent thereof Then proceeds from the sale or exchange of the stock The amount of the distribution is the FMV – Cash is Cash explain and example
When a corporation distributes cash to its shareholders, the tax treatment of that distribution depends on the corporation's earnings and profits (E&P), the shareholder's basis in the stock, and the fair market value (FMV) of the distribution. 1. Dividend to the extent of E&P: If the corporation has earnings and profits, the distribution is first considered a taxable dividend to the shareholder, up to the amount of the E&P. For example, if a corporation has $10,000 in E&P and distributes $8,000, the entire $8,000 is considered a dividend and is taxable to the shareholder. 2. Return of basis to the extent thereof: If the distribution exceeds the corporation's E&P, the excess is considered a return of the shareholder's basis in the stock, and is not taxable. For example, if the corporation in the previous example distributes an additional $3,000, bringing the total distribution to $11,000, the additional $3,000 is considered a return of basis, assuming the shareholder's basis in the stock is at least $3,000. 3. Proceeds from the sale or exchange of the stock: If the distribution exceeds both the corporation's E&P and the shareholder's basis in the stock, the excess is considered a capital gain from the sale or exchange of the stock, and is taxable. For example, if the shareholder's basis in the stock is only $2,000, then $1,000 of the
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