Business and Personal Finance Dictionary

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• MONTHLY INCOME PREFERRED SHARES
  
  Monthly Income Preferred Shares (or Stock) - which most people call MIPS or Mips, for short - are Preferred Shares (q.v.) that pay monthly dividends. MIPS are callable after some period of call protection, and convertible into common shares. Some observers see MIPS as tax-deductible equity, in effect. Some in the Treasury department see this as abusive, and want a crackdown. Goldman, Sachs & Co. pioneered them circa October 1993. Cf. Step-Down Preferred Stock. The parent corporation (Parent) creates a subsidiary (Sub) or limited partnership to issue the MIPS. Sub sells MIPS for cash and lends the cash to Parent or buys Parent's notes. Parent pays interest to Sub, which pays monthly preferred dividends to its security holders. In at least one case Parent had the option to defer interest for up to five years. That would mean that MIPS holders might receive no dividends for five years. One variation on the MIPS structure involves an offshore Sub, which pays dividends to investors without withholding tax. Part of the motivation for MIPS seems to be reduction of taxes paid by the issuer and its direct or indirect security holders. Parent issues debt and pays interest, so Parent may deduct interest expense. Subsidiary issues preferred shares and pays dividends, so corporations that buy MIPS get a dividend exclusion. This shifts the tax burden to parties besides security holders of Parent and Sub. Texaco, Inc., USX Corp., ConAgra Inc., and others issued more than $2.5 billion in the first year MIPS existed. Merrill Lynch and Smith Barney have issued similar securities. The masochistic or meticulous among you may like to view legal documents from Edgar, pertaining to a proposed offering of MIPS, by Capital Holding Corp., with help from Goldman, Sachs. See also U.K. Mips.
  
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