Academic journal article Journal of Accountancy

IRS Rules on Auction-Rate Preferred Stock

Academic journal article Journal of Accountancy

IRS Rules on Auction-Rate Preferred Stock

Article excerpt

Corporate

IRS RULES ON AUCTION-RATE PREFERRED STOCK

Internal Revenue Service revenue ruling 90-27 resolves the questions of whether auction-rate preferred stock is debt or equity and whether a corporate holder of the stock is entitled to a dividends-received deduction.

The ruling concludes equity treatment is proper--even though investors view aution-rate preferred stock as an alternative to commercial paper or other short-term debt. Equity was found because a holder's rights are similar to those with traditional preferred stock. A holder has no right to receive a certain sum on demand or on a specified date; a holder's rights on liquidation or in bankruptcy are subordinate to claims of creditors; and receipt of dividends depends on their being declared and paid out of legally available funds.

The availability of the dividends-received deduction depends on achieving at least a 46-day holding period for the underlying stock. …

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