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Rather, the corporation allocated its profit to its owners, and then the owners got taxed.
To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).Tweet This website grew out of a graduate tax class I taught at Golden Gate University's tax program several years ago.The site provides you with all sorts of background on S corporations, including do-it-yourself downloadable kits.This subchapter, which was based on a proposal from President Eisenhower, gave corporations with just a handful of individual shareholders the option to be taxed like partnerships.This meant among other things that the corporation wasn't taxed on its profits.