Master Corporation plans a recapitalization. Explain the tax consequences of each of the following unrelated transactions:
a. Holders of Class A nonvoting preferred stock exchange their stock for newly issued common stock. Master paid $300,000 of cash dividends on the preferred stock in the current year and each prior year.
b. Holders of Master bonds in the amount of $3 million exchange their bonds for the same dollar amount of preferred stock. In addition, $180,000 of unpaid interest will be paid by issuing additional Master preferred stock to the former bondholders.
c. Because of a decline in the prevailing rate of interest, Master 9% bonds in the amount of $3 million are called and exchanged by their holders before their maturity date for the same dollar amount of Master 6% bonds. In addition, Master will pay with cash $180,000 of unpaid interest.