Lily is the sole shareholder of Crimson Corporation (a C corporation). At a time when Crimson has a deficit in accumulated E & P of $90,000 and current E & P of $65,000, it distributes a cash dividend of $85,000. If Lily's basis in her stock is $15,000, what are the tax consequences of the distribution to Lily and Crimson?

a. How is the $85,000 cash dividend taxed to Lily?

Dividend Income

Return of Capital

Capital Gain

b. What are the tax consequences of the distribution to Crimson Corporation?

After the distribution Crimson Corporation's current E & P is $_____ and its accumulated E & P is $______ deficit