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Under the Internal Revenue Code of 1954, the corporation is a
separate taxable entity, so that corporate income is taxed to the
corporation and dividends paid by the corporation are taxable to the
shareholders. The framework for the taxation of corporate distributions
is provided by Sections 301 (a), 301 (c), and 316 of the Code.
By virtue of these provisions, a corporate distribution is a "dividend"
that must be included in gross income under § 301 (c) (1) and
§ 61 (a) (7) if, and to the extent that, it comes out of "earnings and
profits" of the corporation accumulated after February 28, 1913 or out
of earnings and profits of the taxable year. Most distributions of most
corporations fall well within this category of taxable "dividends" and
hence are taxed as ordinary income to the shareholder, subject to the
$50 exclusion of § 116 and the 4 percent dividends received credit of
§ 34 if the shareholder is an individual or to the 85 percent dividends
received deduction of § 243 if the shareholder is a corporation. To
the extent that a distribution by a corporation is not covered by current
or post-1913 earnings and profits, however, it is treated by
§ 301(c)(2) as a return of capital to the shareholder, to be applied
against and in reduction of the adjusted basis of his stock. If the
distribution exceeds the adjusted basis of the stock, the excess is
ordinarily taxed as capital gain, with an exception of minor importance
for distributions out of increase in the value of corporate property
accrued before March 1, 1913.

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