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?

a.            $30,000

b.            $25,000

c.             $40,000

d.            $0

e.            $20,000

2.            What is Fitness’ AE&P as of the end of 2016?

a.            $30,000

b.            $35,000

c.             $20,000

d.            $60,000

e.            $40,000

Please provide brief explanation for the answer