Tax Facts

7514 / How is a shareholder taxed if the corporation makes a distribution in excess of its earnings and profits? How is a “return of capital” taxed?

To the extent that a distribution paid with respect to its stock exceeds the corporation’s accumulated and current earnings and profits, the shareholders will be deemed to have received a “return of capital.”1



When a shareholder receives a “return of capital” distribution, the shareholder’s tax basis in the stock is reduced (but not below zero) by the amount of the distribution. The shareholder is not taxed to the extent that basis is reduced. Any excess of “return of capital” over the shareholder’s tax basis in the stock is generally treated as capital gain.2






1.   IRC § 301(c).

2.   IRC §§ 301(c), 316.

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