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DIVIDENDS Dividends to shareholders are taxable only to the extent the payments are made from either Net Income (current earnings and profits) or Retained Earnings (accumulated earnings and profits). * Return on Investment: EARNINGS AND PROFITS * Return of Investment: CAPITAL cannot be chosen by a taxpayer * Capital Gain: LIABILITIES When a corporation issues a simple stock dividend, the shareholder does not realize income. However, if the shareholder has the option of receiving cash instead, he/she must realize the value of the stock received, rather than the cash rejected. TAX BENEFIT RULE If a taxpayer obtains a deduction for an item in one year and in a later year recovers all or the portion of the prior deduction, the recovery is included in gross income in the year received. Example: In 1999 Mimi deducted as a loss a $1,000 receivable from the customer when it appeared the amount would never be collected. The following...

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