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Simple English definitions for legal terms
bailout stock
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A quick definition of bailout stock:
Bailout stock is a type of preferred stock that a company gives to its shareholders as a dividend. It used to be a way for companies to distribute earnings at a lower tax rate, but this is now prohibited. The stock is called "bailout" because it was often given to shareholders during times of financial crisis when the company needed a bailout.A more thorough explanation:
Bailout stock is a type of preferred stock that is issued to stockholders as a dividend. It was used to gain favorable tax rates by distributing corporate earnings at capital gains rates rather than by distributing dividends at ordinary income rates. However, this practice is now prohibited by the Internal Revenue Code.
Example: Company A issues bailout stock to its stockholders as a dividend. The stockholders receive the stock without having to pay taxes on it. This allows the company to distribute its earnings at a lower tax rate.
This example illustrates how bailout stock was used to gain favorable tax rates by distributing corporate earnings at capital gains rates rather than by distributing dividends at ordinary income rates.