Question: Explain the relationship between dividends and earnings and profits. A. Distributions are taxable to shareholders as dividends only to the extent they are made from

Explain the relationship between dividends and earnings and profits.

Distributions are taxable to shareholders as dividends only to the extent they are made from current earnings and profits. Distributions in excess of earnings and profits are treated as a taxable recovery of capital. Such distributions increase the shareholder's basis in the stock. Distributions in excess of the basis of the stock are treated as ordinary income.

Distributions are taxable to shareholders as dividends only to the extent they are made from either current or accumulated earnings and profits. Distributions in excess of earnings and profits are treated as a nontaxable recovery of capital. Distributions in excess of the basis of the stock are treated as capital gain.

Distributions are taxable to shareholders as dividends only to the extent they are made from either current or accumulated earnings and profits. Distributions in excess of earnings and profits are treated as a taxable addition to capital. Such distributions reduce the shareholder's basis in the stock. Distributions in excess of the basis of the stock are treated as ordinary income.

Distributions are always nontaxable to shareholders. Distributions in excess of earnings and profits are treated as a nontaxable addition to capital. Distributions in excess of the basis of the stock are treated as capital gain.

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