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Debt Versus Equity in the U.S.

Tax Journal

In this article, Jim Gadwood describes the Internal Revenue Service's (IRS's) increased scrutiny of inbound financing leading to attempts to recharacterize related-party debt as equity. As neither the Internal Revenue Code nor the Treasury Regulations define "debt" or "equity," U.S. courts have defined the distinguishing characteristics. The IRS has argued in the U.S. Tax Court for equity treatment in some cases and debt treatment in others. "By arguing both sides of the issue, the IRS could end up facing its own arguments in future cases," Gadwood said.