Unformatted text preview: end payments to a preferred
shareholder are considered dividend income to the preferred shareholder. Preferred shareholders are
paid in full before common shareholders receive dividends.
Common shareholders are residual owners of a corporation and share in the retained earnings ("earnings
and profits" is the tax term) of the corporation as well as the net assets. A "dividend" distribution to a
common shareholder may or may not be classified as a taxable dividend. A dividend is defined by the
Internal Revenue Code as a distribution of property by a corporation out of its earnings and profits (E &
P). Dividends come first from current E&P and then from accumulated E&P. Any distributions in excess
of current or accumulated E&P are first return of capital (up to the basis of the common stock) and then
capital gain distribution.
In this case, the facts tell us that the company has a deficit in accumulated E&P as of the beginning of the
year and that current E&P is $25,000. The facts do not tell us the amount of common shareholder capital
in the corporation,...
View Full Document
This note was uploaded on 06/14/2013 for the course ACCOUNTING Regulation taught by Professor Becker during the Fall '10 term at Keller Graduate School of Management.
- Fall '10
- The Land