“Earnings and profits” is a tax accounting term that is applicable in the context of distributions made by a corporation. Earnings and profits represent a form of economic income based upon taxable income with certain adjustments. Earnings and profits are increased through earnings and decreased through losses and dividends to shareholders. If the current year’s or accumulated earnings and profits are greater than all distributions made during the year, the distributions are taxable dividends. But, if the payout is greater than the company’s current and accumulated earnings and profits, the portion of the distribution in excess of the current and accumulated earnings and profits is a currently non-taxable return of capital that reduces a shareholder’s cost basis, unless, as noted above, the distribution exceeds the shareholder’s stock basis just prior to the distribution. If there is such an excess, that amount must be treated by the shareholder as capital gain.