Choice "A" is correct. Dividend income is distributions to shareholders first out of current earnings and profits, then out of accumulated earnings and profits. After earnings and profits have been depleted, the distribution is a liquidating return of capital. Since there is a total of $140,000 in earnings and profits ($80,000 + $60,000), $140,000 is dividend income. The remaining $40,000 is a liquidating return of capital.Choice "d" is incorrect. Distributions are considered dividends to the shareholders to the extent a corporation has current or accumulated earnings and profits. Therefore, the dividend treatment is limited to $140,000 of the distribution.
Choice "b" is incorrect. The corporation had accumulated earnings and profits of $60,000 that must also be considered.
Choice "c" is incorrect. Distributions from a corporation to its shareholders are considered dividend income to the extent the corporation has current and accumulated earnings and profits. Any additional amounts are a return of capital and any excess beyond capital are considered capital gain.