§ 108.1. Distributions by corporations.
(a) That portion of a distribution paid or credited out of earnings and profits by a corporation to a taxpayer in his capacity as a stockholder shall be taxed as a dividend. The remaining portion shall be applied against, and reduce, the adjusted basis of the taxpayer’s stock and, to the extent that it exceeds the adjusted basis of the stock, shall be taxed as a net gain from the disposition of intangible personal property.
(b) The amount of a distribution shall be the amount of money, and the fair market value of property determined as of the date of the distribution, received, reduced, but not below zero, by the amount of any liability of the corporation assumed by the stockholder in connection with the distribution and the amount of any liability to which the property received by the stockholder is subject immediately before, and immediately after, the distribution.
(c) The portion of a distribution that is paid or credited out of earnings and profits shall be determined in accordance with the following:
(1) Every distribution shall be deemed to be made out of earnings and profits to the extent thereof and from the most recently accumulated earnings and profits.
(2) If the current taxable year’s earnings and profits equal or exceed the amount of distributions made on stock during the year, each distribution is wholly a dividend paid out of current earnings and profits.
(3) If the amount of distributions made on stock during the current taxable year exceeds the year’s earnings and profits, the following apply:
(i) The year’s earnings and profits shall be allocated proportionately to each distribution.
(ii) The remaining portion of each distribution is a dividend only to the extent of accumulated earnings and profits at the time the distribution is made.
(4) Income or gain that is taxable under, as well as income or gain that is exempt from, or not taxable under, this article shall be included in computing earnings and profits.
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