When a C corporation liquidates, the accumulated E&P as of the close of the date of distribution must be computed by taking into account the amount of earnings and profits properly applicable to the distributions to stockholders, regardless of whether such distributions occur before or after the close of the date of distribution. This means the corporation's accumulated E&P balance is reduced by the liquidating distributions.

Tax Treatment of Liquidating Distributions Distributions in complete liquidation are treated as follows:

Dividend treatment to the extent of E&P: Distributions are treated as dividends to the extent of the corporation's current year earnings and profits plus accumulated earnings and profits.

Return of capital: Any distribution in excess of total E&P reduces the shareholder's stock basis.

Capital gain: Amounts exceeding both E&P and stock basis are treated as capital gain.

Timing and Allocation If the corporation has both current year E&P and accumulated E&P, current year E&P is prorated to the date of each distribution during the year. The accumulated E&P balance is then reduced by each distribution treated as a dividend, creating a running balance throughout the liquidation period.

**Special Rules **If a foreign corporation adopts a plan of complete liquidation in a taxable year beginning after December 31, 1962, and section 337(a) would apply to prevent recognition of gain or loss if the corporation were domestic, the E&P accumulated for the taxable year are determined without regard to such gain or loss.

In short, accumulated E&P does not simply disappear — it flows through to shareholders as taxable dividends (to the extent of available E&P) as part of the liquidating distributions, with any excess treated as return of capital or capital gain.