Corporate distributions can take the form of cash, stock, or property. Under IRC §301, the tax character of a distribution depends entirely on the corporation’s Earnings & Profits (E&P).
How distributions are taxed
- Dividend
A distribution is a dividend to the extent of:
- current E&P
- accumulated E&P
Dividends are taxable to shareholders regardless of whether the underlying income was taxable or tax‑exempt to the corporation.
- Nondividend distribution
If E&P is exhausted, the distribution becomes a return of capital. This reduces the shareholder’s stock basis.
- Gain
Once basis reaches zero, any remaining distribution becomes capital gain.
Property distributions
Most distributions are cash, but corporations may distribute property. The amount of the distribution equals:
- Money paid plus
- FMV of property minus
- Liabilities assumed by the shareholder
The shareholder’s basis in the property is its FMV.
Corporate gain recognition
Under IRC §311(b), a corporation must recognize gain (but never loss) when distributing appreciated property. If the property is depreciable, recapture rules may apply.
Stock and stock rights
Stock dividends and stock rights are generally tax‑free under IRC §305, unless:
- Shareholders can choose cash
- The distribution changes proportionate ownership
- Preferred stock is issued in a way that shifts value
- Preferred stock is distributed on preferred stock
- Common stock is given to some shareholders and preferred to others
If any of these apply, the distribution is taxed like property.
The shareholder’s holding period begins the day after the distribution.
Deemed distributions
Certain transactions are treated as constructive distributions under IRC §301:
- Below‑market loans
- Debt cancellation
- Property transfers below FMV
- Excessive rent
- Unreasonable compensation
These amounts are treated as dividends to the extent of E&P.
Form 1099‑DIV reporting
Corporations must issue Form 1099‑DIV for each shareholder who receives:
- $10 or more in dividends or other distributions
- Dividends subject to foreign tax withholding
- Dividends subject to backup withholding
- $600 or more as part of a liquidation
Forms must be furnished to shareholders by January 31 and filed with the IRS by February 28 (March 31 if e‑filed).
Summary
Corporate distributions follow a strict ordering:
- Dividend to the extent of E&P
- Return of capital until basis is zero
- Capital gain thereafter
Property distributions trigger corporate gain, stock dividends are usually tax‑free, and several transactions are treated as deemed distributions. Reporting is handled through Form 1099‑DIV.
These rules come directly from IRC §301–§316, §305, and IRS corporate distribution guidance.