Final answer:
The $70,000 distribution made by Gopher, Inc. on January 1, 2020, is treated as a dividend because it does not exceed the accumulated E&P.
Step-by-step explanation:
The character of the distribution made by Gopher, Inc. depends on the company's current and accumulated earnings and profits (E&P). At the end of 2020, Gopher, Inc. had current E&P of negative $40,000 and accumulated E&P of $100,000 at the beginning of the year.
Since the distribution of $70,000 took place on January 1, 2020, we look at the accumulated E&P at the beginning which was $100,000. This is sufficient to cover the $70,000 distribution, therefore the distribution is treated as a dividend to the extent of the accumulated E&P of $100,000.
Since the distribution does not exceed the beginning accumulated E&P, the distribution is fully treated as a dividend, even though the company ended the year with negative current E&P.