Melissa owns 100% of the stock in Fitness Corporation (Fitness), a calendar year corporation. Melissa has an adjusted basis of $25,000 in her stock at the beginning of the current year (2016). Fitness has $60,000 of CE&P for the current year and zero AE&P as of the beginning of the year. With respect to the CE&P of $60,000, $30,000 was earned during the first six months of the year and $30,000 was earned during the last six months of the year. Fitness makes a nonliquidating distribution to Melissa of $40,000 on July 1, 2016.

1. How much of the distribution to Melissa is treated as a dividend?
   1. $30,000
   2. $25,000
   3. $40,000
   4. $0
   5. $20,000
2. What is Fitness AE&P as of the end of 2016?
   1. $30,000
   2. $35,000
   3. $20,000
   4. $60,000
   5. $40,000

Please provide brief explanation for the answer