Aaron and Michele, Equal Shareholders in Cavalier Corporation, Receive $25,000

question 68

Multiple Choice

Aaron and Michele, equal shareholders in Cavalier Corporation, receive $25,000 each in distributions on December 31 of the current year. During the current year, Cavalier sold an appreciated asset for $60,000 (basis of $15,000) . Payment for the sale of the asset will be made as follows: 50% next year and 50% in the following year, with interest payable at a rate of 6 percent. Before considering the effect of the asset sale, Cavalier's current year E & P is $40,000 and it has no accumulated E & P. How much of Aaron's distribution will be taxed as a dividend?

• A) $0
• B) $20,000
• C) $25,000
• D) $42,500
• E) None of the above

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Definitions:

Nucleolus

Somewhat rounded, dense, well-defined nuclear body with no surrounding membrane; contains ribosomal RNA and protein. Plural: Nucleoli.

Endoplasmic Reticulum

An organelle in eukaryotic cells that plays a key role in protein and lipid synthesis and transport.

Nuclear Envelope

Double membrane structure surrounding and enclosing the nucleus.

Chromosomes

Structures made of DNA and protein that contain the genes and are found in the nucleus of eukaryotic cells.