$52$ a$.$ Bailey recognizes a dividend of $$100,000$ subject to the $15\%$ tax rate $($in $2010).$ Checker Corporation reduces its $E$&$P$ by $$100,000,$ the amount of the dividend.

b$.$ Bailey has a dividend of $$100,000,$ which is ordinary income. However, Bailey is entitled to an $65\%$ dividends$-$received deduction. Checker reduces its E&P by $$100,000,$ the amount of the dividend.

c$.$ Bailey recognizes a long$-$term capital gain of $$60,000($ $$100,000-$ $$40,000$ basis$).$ Checker reduces its E&P by $$70,000(25\%$ of the $$280,000$ balance$)$ because she surrendered $25\%$ of the outstanding stock in a redemption qualifying as a sale. The remaining $$30,000$ reduces Checker's Paid$-$In$-$Capital account.

d$.$ The results are the same as Part c$.$ Bailey recognizes a $$60,000$ long$-$term capital gain, and Checker reduces its E&P by $$70,000.$

e$.$ If Bailey is an individual, she would prefer long$-$term capital gain treatment. Although capital gains and dividends are both taxed at a maximum rate of $15\%($in $2010),$ she deducts her basis in her stock in calculating her $$60,000$ of capital gain, whereas dividend treatment does not allow the deduction of basis so she would have to report $$100,000$ of dividends. If Bailey is a corporation, it normally would prefer dividend treatment. A dividend would increase Bailey's taxable income by $$35,000($ $$100,000-$ $$65,000$ DRD$).$ A capital gain would increase taxable income by $$60,000,$ with no special rate on capital gains for corporations.