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If a corporation has profits, then they can pay dividends with those profits, and any amount not paid out as dividends is retained by the corporation.Any amounts retained by the corporation increases accumulated E&P, which is the earnings and profits that have been retained by the corporation from previous tax years.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.
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.
) 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.
However, dividends are subject to double taxation, in that the corporation must pay a tax on its profits and the shareholders must pay a tax on the dividends received.
A dividend is defined by IRC §316(a) as any distribution of cash or property by a corporation to its owners, but only to the extent that it was paid out of earnings and profit.