Because the income of S corporations is taxed to the owners when the income is earned, a mechanism is needed to ensure that the shareholder is not taxed again when the earnings are distributed.This is done through a system of rules that track and adjust the shareholder’s stock basis.
Rather, in § 312, it has provided adjustments that must be made to a corporation’s taxable income to arrive at E & P.
The shareholder will also have tax consequences from the liquidation.
First, if the corporation distributes appreciated or depreciated assets as art of the liquidation, the S corporation’s gain or loss from the deemed sale of assets is passed through to the shareholder, The shareholder will also be taxed on the liquidation itself.
EARNINGS AND PROFITS (E & P) earnings and profits (E & P) The notion of is similar in many respects to the accounting con- cept of retained earnings.
Both are measures of the firm’s accumulated capital (E & P includes both the accumulated E & P of the corporation since the latter of its incorporation date or February 28, 1913, and the current year’s E & P).