Problem: X Corp. has ample earnings and profits. Determine the tax consequences to M and N in the following situations:
X Corp. has two classes of stock outstanding. M owns 100 shares of class A common, and N owns 100 shares of class B common. The class A and B shares participate ratably in both current and liquidating distributions. X Corp. distributes:
1. Cash on the class A common owned by M and class B common on the class B common owned by N. How would your answer change if each class of stock were entitled to 50% of current and liquidating distributions?
2. Cash in redemption of one-quarter (25 shares) of the class B common owned by N.
3. Class A common on the class A common owned by M and preferred stock on the class B common owned by N.