Entity Choice: The C Corporate Taxpayer Chapter 11 Entity Choice: The C Corporate Taxpayer

What Constitutes a Dividend? Dividend is a distribution to shareholders of a portion of corporate profits. Distributions to shareholders are deemed to be dividends if the corporation has either current or accumulated earnings and profits (E&P). E&P similar to retained earnings Distributions in excess of earnings and profits are first a return of capital (reduce basis in stock) and then a capital gain to the shareholder.

Stock Repurchase vs. Dividend Purchase by corporation of its own shares from existing shareholders is called a stock redemption. Redemptions are taxable as sales rather than as dividends. Example—Corporation redeems 1,000 shares of stock from shareholder for $25,000. Shareholder’s cost basis in stock is $15,000. Result—shareholder recognizes capital gain = $10,000. If distribution had been dividend, s/h would have income of $25,000.