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current year’s E&P. As long as the corporation has current E&P, a distribution may be treated as having come from current 24. E&P, even if the corporation has a deficit balance in its accumulated E&P. Any distribution that is not from either current or accumulated E&P is considered a tax-free return of the 25. shareholder’s investment in the corporation. When stock is sold during the year, it is important to allocate each distribution between current and 26. accumulated E&P to determine what portion of each distribution represents a taxable dividend versus what portion is a return of capital to each shareholder receiving a distribution during the year. A constructive distribution is treated like all other distributions in that it is considered a dividend 27. distribution to the extent that it comes from the corporation’s current and/or accumulated E&P. Not treating stock dividends as taxable events stems from the premise that the shareholders have not 28. received anything of real value in the distribution because no assets were transferred to the shareholders and no change in ownership interests resulted. If a corporation’s distribution of its stock results in some shareholders receiving money or other property 29. and other shareholders increasing their proportionate interests in the assets or E&P of the corporation, the distribution will be treated as a dividend to the extent it is made from the corporation’s current or accumulated E&P. Shareholders that receive a nontaxable stock dividend must allocate their basis in their stock prior to the 30. distribution between their old stock and their new stock in proportion to the FMVs of each on the date the stock is distributed. Penalties, fines, and other expenditures that violate public policy reduce the amount of profits available 31. to be distributed to shareholders and therefore reduce a corporation’s E&P, even through they are not deductible for tax purposes. Losses resulting from a sale between related parties are disallowed for tax purposes, but nonetheless affect 32. a corporation’s ability to pay dividends, and accordingly reduce the corporation’s E&P.