REG C Corporations · Updated November 2026
Is a Corporate Distribution Automatically a Dividend?
Distribution character flows through earnings and profits first, then basis, then potential gain.
Dividend portion
A corporate distribution is generally treated as a dividend to the extent of applicable current and accumulated E&P under the distribution-ordering rules.
Return of capital
Once applicable E&P is exhausted, the distribution can reduce the shareholder's stock basis.
Capital gain
If the distribution exceeds both applicable E&P and remaining stock basis, the excess can create capital gain under the applicable rules.
Retained earnings trap
Tax E&P is not simply the corporation's book retained earnings balance.
The takeaway
E&P first, basis second, gain third.
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FAQ
Does every cash distribution create dividend income?
No.
Can a distribution reduce stock basis?
Yes.
Is E&P the same as retained earnings?
No.