C corporation liquidating dividend
If the shareholder elects to receive the stock dividend, then his proportionate ownership of the corporation increases at the expense of those who choose to take cash.
Therefore, the shareholders who received the stock dividend must recognize it as income equal to the FMV of the new shares, which is also equal to the tax basis in the shares.
While the payment of the nontaxable stock dividend does not change corporate E&P, taxable stock dividend distributions decrease E&P by the FMV of the stock.
Besides dividends, shareholders can receive compensation as employees of the corporation, or they may receive loans from the corporation in which they have to pay a reasonable interest rate.
) as a company's ability to pay out profits without returning paid-in capital.
Current E&P is approximately equal to the corporate taxable income minus the federal income tax assessed on it, which is then subjected to the statutory adjustments listed in IRC §312.
A corporation can pay a dividend either out of current E&P or accumulated E&P.
If the amount of the dividend paid out exceeds the sum of both current E&P and accumulated E&P, then the percentage of the payment that will be considered a dividend will be the amount paid multiplied by the total E&P divided by the total dividend paid out.
If a return of capital is greater than the stockholders basis in the stock, then the excess must be treated as a capital gain.
There are several reasons why the Board of Directors may declare a stock dividend: However, if a corporation allows the shareholders to choose between the stock dividend or cash, then the distribution is taxable.
If the stockholder elects to receive cash, then obviously that distribution is taxable to the shareholder.
If the amount paid out as dividends exceeds both E&P and accumulated E&P, then the excess is treated as a return of capital, which is not taxable to the shareholders.
Any return of capital does not affect accumulated E&P.
Based on the above table, you, as a shareholder who owns 10% of the company, will receive 10% of the $800,000 total distribution.