The term monthly income preferred stock refers to a security that possesses the features of both preferred stock and bonds. Monthly income preferred stock is considered a hybrid security that dominated the market at one time due to a tax shelter loophole that has since been closed.
Monthly income preferred stock (MIPS) is a security issued to the public by a special purpose entity (SPE) created by a parent corporation. These securities typically have a par value of $25.00, and provide the holder with cumulative monthly distributions.
The proceeds received from issuing this preferred stock are lent to the parent company. The interest expense payments the parent makes to the special purpose entity are tax deductible. The proceeds from the interest expense payments received by the SPE are then used to pay the preferred dividend owed to holders of the MIPS.
In the late 1990s, MIPS were extremely popular securities. However, after a long battle with the Internal Revenue Service, the use of MIPS as a tax shelter was no longer acceptable.