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

question 101

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 these.

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