Question

Explain the role that earnings and profits play in determining the tax treatment of distributions. Describe the tax treatment of dividends for individual shareholders. Find an example of a corporation (AT&T) that has a dividend program and share their approach of (AT&T).

Answer 1

The earnings and profits play an important role in determining the tax treatment of distributions as it helps us to know whether a distribution represents a taxable dividend,a non taxable return of shareholder capital or capital gain to the recipient shareholder. Any distribution of property made by a corporation out of current and accumulated earnings and profits is treated as dividend , any distribution constituting a dividend must be included in the gross income of shareholder, while amount distributed in excess of those considered a dividend is first treated as non taxable return of capital to the extent of the shareholders stock basis and any remaining distribution treated as a gain from the sale of stock resulting in capital gain

A cash distribution to a individual shareholder is a taxable dividend to the extent of corporation's current or accumulated earnings and profits,if the current E&P equals or exceeds the amount of distribution it is a fully taxable dividend to the shareholder Even if the corporation has negative accumulated E&P and when property is distributed the amount of the dividend equals the fair market value of the property on the date of distribution reduced by liabilities which the property is subject to.