Distribution is a dividend and is taxed to the shareholders as
an ordinary income to the extent the corporation has accumulated
E&P.
Distributions in excess of accumulated E&P are distributed
as a form of nontaxable return of capital to the extent of the
shareholder’s basis in stock.
Distributions in excess of the E&P are considered as a sale
of the shareholder’s stock, and are taxaas a long-term capital
gain, depending on the holding period.
The distribution made is decreased by the liabilities held by
the shareholder (e.g., a mortgage on a distributed piece of real
estate).