Final answer:
The $70,000 distribution made by Gopher, Inc. would be characterized as a dividend because it is less than their accumulated Earnings and Profits (E&P) of $100,000, even though their current E&P is negative.
Step-by-step explanation:
The student is inquiring about the character of the distribution made by Gopher, Inc., which relates to corporate taxation and the treatment of distributions to shareholders. Since Gopher, Inc. has a negative $40,000 current Earnings and Profits (E&P) and a positive $100,000 accumulated E&P, we need to understand how distributions affect the taxation of dividends.
To analyze the character of the $70,000 distribution, we use the current and accumulated E&P figures. First, the distribution would reduce accumulated E&P because the current E&P is negative. A distribution reduces accumulated E&P if the current E&P is not sufficient to cover it. The distribution to shareholders is taken from the accumulated E&P, to the extent it is available. For Gopher, Inc., the accumulated E&P more than covers the $70,000 distribution. Therefore, the distribution is characterized as a dividend to the extent of the accumulated E&P.
Any distribution in excess of the accumulated E&P would be a return of capital and could result in a capital gain for the shareholder, if it exceeds their stock basis. In this case, since the $70,000 distribution is less than the $100,000 accumulated E&P, the entire distribution is considered a dividend.