Corporation Z has an accumulate deficit of $100 in E&P as of December 31 of the

Question

Corporation Z has an accumulate 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 sufficient to eliminate the current year's deficit in E&P and cause there to be positive earnings and profit. Rather than sell the asset in the current year and distribute the proceeds to shareholders as a dividend, Z borrows against the asset and distributes 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 distribution will be a return of capital and potential gain to shareholders d. a and c e none of the above

Explanation / Answer

d. a and c

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