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Bayeaux, Inc. is currently a C corporation with two subsidiaries and three classes of stock authorized and issued. X proposes to take steps to make

Bayeaux, Inc. is currently a C corporation with two subsidiaries and three classes of stock authorized and issued. X proposes to take steps to make it eligible to elect S corporation status. It intends to liquidate its subsidiaries, repurchase stock from many shareholders in order to meet the 100 shareholder rule, recapitalize so that there is only one class of common with both voting and nonvoting shares, and implement a Stock Equivalency Plan (Plan) to compensate key employees whose shares are to be repurchased. Bayeaux, Inc. wishes to create the Plan to reward and help retain key executives. The Executive Committee (Committee) of Bayeaux, Inc.'s Board of Directors will periodically award grants of units in the Plan to key employees, who are designated by the Committee. The participant may not be required to purchase the units. The amount owed to each participant will be represented in Bayeaux, Inc.'s balance sheet as a liability to be paid as future compensation to the participant under the terms of the Plan. Each unit of participation will be assigned a portion of Bayeaux, Inc.'s book income annually, and that amount will become a liability of Bayeaux, Inc. to the participant who has been awarded the unit. A participant in the Plan will not be entitled to any benefits under the Plan until he or she dies, becomes totally disabled, or, if certain conditions are met, ceases to work for Bayeaux, Inc.. In addition, the Committee, with the Board's approval, may declare a distribution at any time. Once the conditions for distribution are met, cash amounts in respect of the units will be distributed to the participant, or to his or her beneficiary. The units are not transferable, and convey neither voting rights nor any right to participate in any corporate dividend.

Your objective is to determine whether the plan will constitute outstanding stock and thus a second class of stock for S corporation purposes.

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