Debt-equity distinction: another approach under new Treasury regulations
A capital structure consisting of both debt and equity investment can offer substantial tax advantages compared to capitalizing a corportion with equity only. Especially in the case of closely held oil and gas corporations, federal income-tax consequences may be the controlling influence in choosing between funding a corporation with debt obligations or stock. The new Treasury rules attempt to provide objective criteria for distinguishing debt from equity. However, a subjective evaluation of the many factors previously considered by the courts will still be necessary when determining the fair market value of an instrument, the reasonableness of the interest rate, the existence of excessive debt, and the appropriate discount rate for calculating the present value of fixed payments on a hybrid instrument. The Regulations do establish objective rules for determining whether an instrument will be treated as stock or indebtedness and isolate the situations which require factual determinations. This is an improvement over the subjective approach of the courts. Although the rules are complex, most corporations will now be able to issue debt instruments with a high degree of confidence that they will not be recharacterized as equity. 103 references.
- Research Organization:
- Sun Co., Dallas, TX
- OSTI ID:
- 6203702
- Journal Information:
- Oil Gas Tax Q.; (United States), Vol. 30:1
- Country of Publication:
- United States
- Language:
- English
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POLICY AND ECONOMY
02 PETROLEUM
03 NATURAL GAS
NATURAL GAS INDUSTRY
INVESTMENT
PETROLEUM INDUSTRY
TAXES
REGULATIONS
ECONOMIC POLICY
FINANCING
GOVERNMENT POLICIES
INDUSTRY
294002* - Energy Planning & Policy- Petroleum
294003 - Energy Planning & Policy- Natural Gas
020700 - Petroleum- Economics
Industrial
& Business Aspects
030600 - Natural Gas- Economic
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290200 - Energy Planning & Policy- Economics & Sociology