3- Blue Corporation has a deficit in accumulated E & P of $300,000 and has current E & P of $225,000. On July 1, Blue distributes $250,000 to its sole shareholder, Sam, who has a basis in his stock of $52,500. As a result of the distribution, Sam has:

a.Dividend income of $225,000 and no adjustment to stock basis.

b.Dividend income of $52,500 and reduces his stock basis to zero.

c.Dividend income of $225,000 and reduces his stock basis to $27,500.

d.No dividend income, reduces his stock basis to zero, and has a capital gain of $250,000.

4- Which of the following is not a consequence of the double tax on dividends?

a.Corporations have an incentive to invest in noncorporate rather than corporate businesses.

b.The cost of capital for corporate investments is decreased.

c.Corporations have an incentive to finance operations with debt rather than equity.

d.Corporations have an incentive to retain earnings and structure distributions to avoid dividend treatment.