[21] Cardinal Corporation, an accrual basis taxpayer, has struggled to survive since its formation, six year ago. As a result, it has a deficit in accumulated E&P at the beginning of the year of $300,000. This year, however, the tide was turned and Cardinal earned a significant profit; taxable income was $200,000. To celebrate, Cardinal made two cash distributions to Max, its sole shareholder. The first distribution, $125,000, was made on July 1. The second distribution, $175,000, was paid on December 31. Cardinals accountant has provided you with the following information that she thinks might be relevant to determining the tax treatment of the distributions.

- The corporations Federal income tax liability was $61,250 for the year.

- Cardinal paid nondeductible fines and kickbacks of $5,000. The company also paid nondeductible life insurance premiums of $22,000.

- Tax Exempt interest income is $16,000.

- MACRS depreciation exceeds E&P depreciation by $9,000. In addition, an election under Section 179 was made this year for $18,000 of assets.

a. Compute Cardinals E&P for the year using the above information. Compute E&P at each distribution date and at the end of the year.

b. What are the tax consequences of the two distributions made during the year to Max and the corporation? Assume Maxs stock basis is $75,000.