Taxation of Distributions on a Corporation's Stock(1)

Taxation of Distributions on a Corporation's Stock(1) -...

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33:010:421 Income Tax Accounting Fall 2011 Gross Income (Chapter 6) Taxation of Distributions on a Corporation’s Stock Taxation of Dividends “Dividends” received by individuals are potentially taxed in the following favorable manner. Individuals who receive dividends from domestic corporations (those incorporated in one of the 50 States of the U.S) and from foreign corporations whose stock is readily traded on an established U.S. securities market are permitted to treat these so called “qualifying dividends” in a manner similar to a NCG. That is, these dividends are taxed at a maximum tax rate of 15% with a 0% rate applying to taxpayers in the 10% and 15% tax bracket. While “qualifying dividends” are added to any NCG they are not subject to the process by which capital gains and losses are netted. IRC § 316 defines a dividend as any distribution of property made by a corporation to its shareholders—  (1)  out of its earnings and profits accumulated after February 28, 1913,  [our class  should think of this as accumulated retained earnings] or (2)  out of its earnings and profits of the taxable year [our class should think of this as  current year’s earnings] (computed as of the close of the taxable year without  diminution by reason of any distributions made during the taxable year), without  regard to the amount of the earnings and profits at the time the distribution was  made.  Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to  the extent thereof, and from the most recently accumulated earnings and profits. [ This means that  ]. Although the Internal Revenue Code does not define the term earnings and profits (E&P) examples of the impact of specified transaction upon E&P are provided in IRC §312. For all practical purposes our class can think of current E&P as being a corporation’s current year financial statement income and accumulated E&P as being the balance in a corporation’s retained earnings on the last date of its prior year end. The term E&P is not necessarily equivalent to a corporation’s financial statement income or its taxable income. What is clear is that Congress intended when it used the term “earnings and 1
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Taxation of Distributions on a Corporation's Stock(1) -...

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