Tracy and Lance, Equal Shareholders in Macaw Corporation, Receive $600,000

question 85

Multiple Choice

Tracy and Lance, equal shareholders in Macaw Corporation, receive $600,000 each in distributions on December 31 of the current year. Macaw's current year taxable income is $1 million and it has no accumulated E & P. Last year, Macaw sold an appreciated asset for $1,200,000 (basis of $400,000) . Payment for one-half of the sale of the asset was made this year. How much of Tracy's distribution will be taxed as a dividend?

• A) $0
• B) $300,000
• C) $500,000
• D) $600,000
• E) None of the above

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Definitions:

Marginal Rate

Often refers to the incremental increase in cost or benefit associated with a one-unit change in an economic activity.

Substitution

The economic principle where consumers replace more expensive items with less costly alternatives, or when firms swap higher-priced inputs with cheaper resources.

Income Effect

The change in consumption resulting from a change in real income.

Total Utility

The overall satisfaction or benefit a consumer receives from consuming a certain quantity of a good or service.