preferred stock bailout

A procedure whereby the issuance, sale, and later redemption or a preferred stock dividend was used by a shareholder to obtain long-term capital gains without any loss of voting control over the corporation. In effect, therefore, the shareholder was able to bail-out corporate profits without suffering the consequence's of dividend income treatment. This procedure led to the enactment by Congress of I.R.C. No. 306 which, if applicable, converts the prior long-term capital gam on the sale of the stock to ordinary income. Under these circumstances, the amount of ordinary income is limited to the shareholder's portion of the corporation's earnings and profits existing when the preferred stock was issued as a stock dividend. However, the enactment of the Tax Reform Act of 1986 has changed the impact of I.R.C. No. 306 substantially due to the repeal of the favorable tax treatment previously given to long term capital gains