Earnings and Profits refers to the economic capacity of a corporation to make a distribution to shareholders that is not considered a return of capital. If distributed, it constitutes a taxable dividend to the shareholder to the extent of current and accumulated earnings and profits.
The process by which a taxpayer receives a return of cost through distributions or payments with respect to a property. A recovery of basis is generally nontaxable if it follows a taxable distribution of earnings and profits from a corporate liquidation.
A return of capital refers to a distribution from a corporation to its shareholders that is not paid out of the corporation's earnings and profits. It represents a return of the shareholders' investment in the stock of the company.
