Cardinal Corporation an accrual basis taxpayer, has struggled to
survive since its formation, six years ago.  As a result, it has a
deficit in accumulated Earnings and Profits (E & P) at the beginning
of the year of $300,000.  This year however, the tide was turned and
Cardinal earned a significant profit; taxable income was $200,000.  To
celebrate, Cardinal made two cash distributions to Max, its sole
shareholder.  The first distribution, $125,000, was made on July 1. 
The second distribution, $175,000, was paid on December 31. 
Cardinal's accountant has provided you with the following information
that she thinks might be relevant to determining the tax treatment of
the distributions.
      This year's taxable income included a net operating loss
carryover of $55,000.
      The Corporation's Federal income liability was $61,250 for the
year.
      Cardinal paid nondeductible fines and kickbacks of $5,000.  The
company also paid nondeductible life insurance of $22,000.