Business and Personal Finance Dictionary

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 

• STEP-DOWN PREFERRED STOCK
  
  Corporate Preferred Stock that a REIT issues, as part of a tax avoidance plan that the IRS declared abusive in 2/97. The parent corporation would set up a REIT that issued preferred shares and lent the proceeds to the parent. The parent then paid tax-deductible interest on the loan to the REIT, which paid tax-deductible preferred dividends (unique to REITs) to its shareholders, who were ordinarily tax exempt. The tax treatment is similar to that of interest on debt that a taxable corporation pays a tax exempt investor. The preferred dividend was typically large, initially and for up to about ten years, then much smaller. Cf. MIPS. The arrangement exploded in popularity during February 1997, with Freddie Mac the most prolific issuer. Morgan Stanley and Bear, Stearns were major underwriters of such issues. The IRS responded to this growth by shutting down this type of security, claiming that it abused the federal tax system.
  
  Back