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

---

Definitions:

Tofranil

A brand name for imipramine, a tricyclic antidepressant used to treat depression and certain anxiety disorders.

Edema

An accumulation of fluid in the tissues, causing swelling, often as a result of inflammation or injury.

Pyelonephritis

A type of urinary tract infection that affects one or both kidneys.

Glomerulonephritis

An inflammation of the tiny filters in the kidneys (glomeruli), which can affect kidney function.