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Assume a calendar-year corporation has a deficit in current E&P of ($100) and positive accumulated E&P...

Assume a calendar-year corporation has a deficit in current E&P of ($100) and positive accumulated E&P of $100. Under this circumstance, a cash distribution of $100 to the corporation’s sole shareholder on June 30 will not be treated as a dividend because total E&P at December 31 is $0. True or false? Explain.

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Answer #1

False

Reason:-

Accumulated profit will be distributed on per day basis.

Distribution of allocated profit = 100 * days from 1 Jan to 30 June/days from 1 Jan to 31 Dec = 100*181/365 = $50.

Cash distribution would not have been treated dividend had there is negative current and past accumulated earnings.

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