Longhorn Company Reports Current E&P of $195,000 in 20X3 and a Deficit

Multiple Choice

Longhorn Company reports current E&P of $195,000 in 20X3 and a deficit of ($390,000) in accumulated E&P at the beginning of the year. Longhorn distributed $585,000 to its sole shareholder on January 1, 20X3. The shareholder's tax basis in his stock in Longhorn is $195,000. How is the distribution treated by the shareholder in 20X3?

A) $585,000 dividend
B) $195,000 dividend, $195,000 tax-free return of basis, and $195,000 capital gain
C) $195,000 dividend and $390,000 tax-free return of basis
D) $0 dividend, $195,000 tax-free return of basis, and $390,000 capital gain