Legal Definitions - bailout stock

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.