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Friday December 19, 2008 3:43 am

Werd: Bailout - Part Five

Posted by Patrick Snajder Categories: Editorials, Taxes, US Economy,


The history of the word “bailout” is spotty at best.  My handy not-quite-the-real-OED has no etymological definition.  Merriam-Webster, who chose “bailout” as the word of 2008, gives a lame definition with a general reference to the year 1951:

Date: 1951
: a rescue from financial distress

So I went to the vast Google books resources and noticed that bailout in 1951 referred to pilots, bailing out of their cockpits [see also, Popular Mechanics in 1947 and 1956].

But what does that have to do with finance?

Read More | 2008 Word of the Year

The earliest term related to business that I found was “preferred stock bailout,” a loophole that was closed by Section 306 of the IRS Tax Code in 1953

The case necessitating this IRS Law was Chamberlin v. Commissioner.[1] Chamberlin’s company devised a scheme where owners of preferred stock would call for a dividend sale and categorize the profits from that sale as capital gains, thereby bypassing tax liabilities for any profit the shareholders made in the sale.[2]  The court upheld the Chamberlin stock sale, further stating in the ruling:

The issue is whether it is taxable as income from a cash dividend or as income resulting from a long-term capital gain. . . . By Sec. 115(g), Internal Revenue Code, it has specifically excluded certain transactions with respect to stock dividends from the classification of a capital gain. The present transaction is not within the exclusion. If the profit from a transaction like the one here involved is to be taxed at the same rate as ordinary income, it should be done by appropriate legislation, not court decision.

And indeed, with Section 306 of the IRS Tax Code in 1953, legislation closed the loophole Chamberlin and his fellow plaintiffs exploited.

What should interest us here is the use of the word “bailout.”  Since the beginning of the proposed rescues of the financial and auto industries in 2008, the word “bailout,” in my mind, referred to the bailing out of water from a leaky boat.  We were, as Americans and taxpayers and generally interested parties in the safety of the American economic system, expected to pitch in with our tax dollars and help save the institutions that were taking on water.  Indeed, the way that Merriam-Webster defines the word renders that particular essence of the word: “a rescue from financial distress.”

But if we look at the bailout as it was defined by Section 306 and the Chamberlin case, the bailout is not a rescue, but an abandoning of ship (in Chamberlin’s case, for the sake of personal gain).  Instead of the all-hands-on-deck sense, the bailout of the 1947 court case and 1953 tax code was a usage referring to the sense of bailout that was popular in the 1940s and 1950s — an ejection from a crashing plane.  Chamberlin was not “bailed out” by stockholders or the public, he was bailing out, ejecting himself, from tax responsibility and bailing out from having the real value reflected in the stock his company sold.

Hell, if you want to use the term “bailout” to describe our current economic crisis, you might be better of utilizing the jail-associated usage of bailing out — where all of the corporations that built their wealth on bad decisions and poor management and other crimes of intellect are being released from the jail of financial responsibility by the bond posted by taxpayers.[3]

In fact, as it always is, the baggage behind the werd you use to describe our current crisis will inevitably reflect the way you see the actors.  So I ask you, dear readers: what sort of bailout is this, anyways?

Bailout - Part One
Bailout - Part Two
Bailout - Part Three
Bailout - Part Four
Bailout - Part Five

[1]  In 2008, as we discuss a potential bailout of Detroit automakers, should we be surprised that Chamberlin’s Corporation “engaged in the business of manufacturing metal mouldings and bright work trim used in the manufacture of automobiles”?
[2]  This is my best reading of the cited case.  If anyone can make greater sense of Chamberlin v. Commissioner, please feel free to enlighten me.  I did my best to translate the judgment into English, fully aware of my ignorance regarding all matters financial, so if you are an expert in either tax codes or legal reading, please translate it for us all in the comments below.
[3]A good set of the multiple definitions of “bail” are given here.



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