March 15, 1990
Revenue Ruling Regarding the
Dutch Auction Rate Issued
WASHINGTON - The Internal Revenue Service today issued a
revenue ruling holding that "Dutch auction rate" preferred stock is
equity rather than debt to both issuer and holders for federal tax
purposes. The ruling further states that a corporation holding the
stock may qualify for the 70 percent dividends - received deduction.
Dutch auction rate preferred stock, while similar to other
types of preferred stock, is different because the dividend rate,
rather than being fixed or pegged to an index, is reset periodically
in an auction. The purpose of the auction is to allow the stock to
trade at par.
A key element of today's ruling is the fact that there can be
no agreement or other arrangement that effectively guarantees that a
holder of the stock can sell its shares. The existence of such an
agreement or arrangement, according to the IRS, would preclude the
dividends-received deduction. Through the examination process, the
IRS will continue to scrutinize both new and existing issues of
auction rate preferred stock to determine whether transactions have
legal and economic substance and whether an agreement or arrangement
of the type described above exists.
Revenue Ruling 90-27 is announced and will be published in the
Internal Revenue Bulletin No. 1990-14, dated April 2, 1990.
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