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Corporation Z has an accumulated 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 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 distributes the loan funds to the shareholders. In the following year, Z sells the asset and pays off the loan.

a. There is a dividend in the current year because the borrowing and the delaying of the sale is a sham.

b. The distribution will be a return of capital and potential gain to shareholders.

c. a and b.

d. None of the above.

Corporation Z distributes $200 total in cash to shareholder C and $200 total in cash to shareholder D during the current year at quarterly intervals, $50 in cash per quarter per shareholder. At the end of the preceding taxable year Z's accumulated E&P was $0. In the current taxable year, Z's taxable income and current E&P is $200.

a. The first two quarterly installments of $50 to each shareholder are dividends.

b. $25 of each quarterly distribution is a dividend to each shareholder.

c. There are no dividends to either shareholder.

d. None of the above.

Top Answer

c. a and b. a. The first two... View the full answer

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