Final answer:
The $60,000 distribution from Gopher Inc. would be considered a dividend to the extent of its current E&P of $40,000, and the remaining $20,000 is treated as a return of capital and possibly a capital gain if it exceeds the shareholder's basis.
Step-by-step explanation:
To determine the character of the distribution from Gopher Inc., first, we need to consider the company's current and accumulated Earnings and Profits (E&P). Gopher Inc. has a current E&P of $40,000 and an accumulated E&P of negative $100,000. When making a distribution, the current E&P is applied first, followed by the accumulated E&P.
In this case, the $60,000 distribution would first reduce the current E&P to zero. This portion of the distribution would be considered a dividend and is generally taxable to the recipient. Then, because the current E&P is now exhausted, the remaining $20,000 would reduce the accumulated E&P deficit. Because the accumulated E&P is negative, this portion of the distribution is generally treated as a non-taxable return of capital until it reduces the shareholder's basis in the stock to zero. Any distribution in excess of the shareholder's basis would then be treated as capital gain.
Therefore, the $60,000 distribution from Gopher Inc. would initially be characterized as a dividend to the extent of its current E&P of $40,000, and the remaining $20,000 is treated as a return of capital (and possibly a capital gain if it exceeds the shareholder's basis).