Orange Corporation Has a Deficit in Accumulated E & P

Multiple Choice

Orange Corporation has a deficit in accumulated E & P of $600,000 and has current E & P of $450,000.On July 1, Orange distributes $500,000 to its sole shareholder, Morris, who has a basis in his stock of $105,000.As a result of the distribution, Morris has:

A) Dividend income of $450,000 and reduces his stock basis to $55,000.
B) Dividend income of $105,000 and reduces his stock basis to zero.
C) Dividend income of $450,000 and no adjustment to stock basis.
D) No dividend income, reduces his stock basis to zero, and has a capital gain of $500,000.
E) None of the above.