Final answer:
The $60,000 cash distribution from Gopher, Inc. to shareholder Carl will be treated as a dividend up to the amount of the company's current and accumulated E&P. Any distribution beyond the shareholder's stock basis of $10,000 would constitute a capital gain.
Step-by-step explanation:
When Gopher, Inc. distributes $60,000 in cash to its sole shareholder, Carl, it will be treated as both a dividend and potentially a capital gain or return of capital, depending on several factors.
Firstly, the distribution would be considered a dividend to the extent of the corporation's current earnings and profits (E&P) and accumulated E&P. Given that Gopher, Inc. has $40,000 of current E&P and $50,000 of accumulated E&P, the initial $40,000 of the distribution would be a dividend out of the current E&P.
The remaining $20,000 would then reduce the accumulated E&P and be considered a dividend out of those earnings. However, once the E&P is fully distributed, any further distribution is a return of capital and reduces the shareholder's basis in the stock. If the distribution exceeds the shareholder's stock basis, the excess would be treated as a capital gain.
In Carl's case, he has a basis of $10,000 in his stock, so after the $40,000 current E&P and the $20,000 accumulated E&P are distributed, the remaining $10,000 of his distribution would reduce his basis to zero, and any further distribution would be a capital gain.
Therefore, the $60,000 cash distribution will initially be treated as a dividend (to the extent of current and accumulated E&P), and since Carl's basis is $10,000, any distribution in excess of $90,000 (current E&P + accumulated E&P + Carl's basis) would be considered a capital gain.