Choice "C" is correct. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits. Since Kee had a deficit, only current earnings and profits of $10,000 are available for dividends.
Choice "d" is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits; it is not based solely on the distributed property's fair market value (cash in this instance).
Choice "b" is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits; it is not calculated as the difference between current E&P and the cash distributed.
Choice "a" is incorrect. Taxable dividend income is paid out of the corporation's current or accumulated earnings and profits.