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Corporation Z has an accumulated deficit of $100 in E&P as of December 31 of...

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Accounting

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 years 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.

***Explain how you got that answer?

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