Tar Heel Inc. pays $100,000 of dividends in 2012, with $25,000 going to your client, Mr. Big.

Tar Heel began 2012 with $120,000 in accumulated earnings and profits and had $10,000 of current earnings and profits in 2012. Mr. Big has a $40,000 basis in his Tar Heel stock.

a. How much dividend income will Mr. Big report from Tar Heel in 2012? What will Mr. Bigs basis in Tar Heel be after the dividend?

b. Assume instead that Tar Heel began 2012 with a $2,000 deficit balance in its earnings and profits account, but did have $10,000 of current earnings and profits for 2012. How much dividend income will Mr. Big report from Tar Heel in 2012?