CHAPTER 6: Problems pg. 303 (8^th edition) or pg. 308 (9^th edition)

1. Hill Corporation is organized with two classes of voting common stock, Class A and Class B. Shares in each class of stock have an equal right to Hill's assets and E&P. Frank owns 100 shares of Class A stock, and Fay and Joyce each own 50 shares of Class B stock.

Assuming that Hill Corporation has ample E&P, determine whether the following distributions are taxable under 301 or excludable under 305(a).

(a) Assume that Class B is a class of nonconvertible preferred stock, which pays regular cash dividends, and Hill distributes Class B stock to the Class A shareholder.

(b) Same as (d), except that Hill distributes a class of nonconvertible preferred stock which has rights to assets and E&P subordinate to those of the existing Class B stock, i.e., junior nonconvertible preferred stock, to the Class A shareholders.

(c) Assume that Hill has only one class of common stock outstanding and also has issued a series of 10% debentures convertible into common stock at the rate of one share of common stock for each $1,000 debenture. Hill makes an annual interest payment to the debenture holders and one month later distributes a common on common stock dividend to the common shareholders without adjusting the conversion ratio on the debentures.

(d) Same as (f), except that the debentures are convertible preferred stock. The corporation declares a one-for-one split on the preferred stock, i.e., each shareholder receives one new share of common stock for each old share, and the conversion ratio of the preferred is doubled.

(e) Assume again that Class A and Class B are both classes of voting common stock. Hill makes a pro rata distribution of Class A on Class A and a distribution of newly issued shares of nonconvertible preferred stock on Class B.

(f) Same as (h), except that the preferred stock which is distributed is convertible into Class B stock over 20 years at Class Bs market price on the day of the distribution.