Problem: Scarlet Corporation has a deficit in accumulated E & P of $500,000. It has current E & P of $350,000. On July 1, Scarlet distributes $400,000 to its sole shareholder, Lupita. Lupita has a basis of $95,000 in her stock in Scarlet Corporation. As a result of the distribution, Lupita has:
a. Dividend income of $400,000.
b. Dividend income of $95,000 and reduces her stock basis to zero.
c. Dividend income of $350,000 and reduces her stock basis to $45,000.
d. No dividend income, reduces her stock basis to zero, and has a capital gain of $400,000.
e. None of the above.