As of January 1,2014,Owl Corporation (a calendar year C corporation)has a deficit in accumulated earnings and profits (E & P)of $150,000.In 2014,it has current E & P of $200,000 and distributes a $220,000 dividend to its shareholders.A result of these transactions is:

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The shareholders must recognize dividend income of $200,000 which is the amount of current E & P (choices c.and d. ).The additional $20,000 the shareholders receive [$220,000 (amount of distributions)- $200,000 (dividend income)] is a return of capital.As a corporation's deficit cannot be increased by a dividend distribution,Owl Corporation's E & P does not change and remains at a deficit of $150,000 (choice a. ).

As of January 1,2014,Owl Corporation (A Calendar Year C Corporation)has