Corpoartion Z has an acculate deficit of $100 in E&P as of December 31 of the pr
ID: 2372533 • Letter: C
Question
Corpoartion Z has an acculate deficit of $100 in E&P as of December 31 of the preceding year. In addition, corporation Z is operating at a loss for the current year. Z has a valuable asset which if sold will generate a gain sufficeint to eliminate the current year's deficit in E&P and cause there to be positive earnings and profits. Rather than sell the asset in the current year and distribute the proceeds to shareholders as a dividend, Z borrows against the asset and distrubutes the loan funds to the shareholders. In the following year, Z sells the asset and pays off the loan.
a. There is no dividend in the current year
b. There is a dividend in the current year because the borrowing and the delaying of the sale is a sham.
c. The distrubution will be a return of capital and potential gain shareholders
d. A and C
e. none of the above
Explanation / Answer
a. There is no dividend in the current year