A distribution from a corporation to a shareholder will only be treated as a dividend for tax purposes if the distribution is paid out of current and/or accumulated earnings and profits.

Question

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According to the Internal Revenue Service (IRS), a distribution is considered a dividend for tax purposes only when it is paid out of current or accumulated earnings and profits. If the distribution is paid out of other sources, such as the corporation's capital or borrowed funds, it may be treated as a return of capital or a capital gain distribution instead.

A Distribution from a Corporation to a Shareholder Will Only