Toga Corporation ("Toga") is a calendar year corporation with CE&P of $100,000 in 2016. Toga has a deficit in AE&P at the beginning of the year of ($200,000) (i.e., negative $200,000). Toga makes a nonliquidating distribution of $300,000 to its sole shareholder (Bluto) on January 1, 2016. Bluto's tax basis in his stock in Toga was $40,000 immediately prior to the distribution. The stock is a capital asset in Bluto's hands, and Bluto has a long-term holding period in the stock.

1. What is the tax treatment of the distribution to Bluto?

a. $300,000 dividend

b. $100,000 dividend, $40,000 tax-free return of capital, and $160,000 long-term capital gain

c. $0 dividend, $40,000 tax-free return of capital, and $260,000 ordinary income

d. $0 dividend, $40,000 tax-free return of capital, and $260,000 long-term capital gain

e. $100,000 dividend, $40,000 tax-free return of capital, and $160,000 ordinary income

2. What is Toga's AE&P as of the end of 2016?

a. ($200,000)

b. ($400,000)

c. $0

d. ($240,000) dividend

e. ($300,000)