At the beginning of the current year, Penguin Corporation (a calendar year taxpayer) has accumulated E & P of $55,000. During the year, Penguin incurs a $36,000 loss from operations that accrues ratably. On October 1, Penguin distributes $40,000 in cash to Holly, its sole shareholder.

How is Holly taxed on the distribution?

Of the $40,000 distribution, ...........................$ is taxed as a dividend and $ ....................represents a return of capital.