Securities Law Commons^™

Corporate Borrowing For Investment In Equity Securities: Tax Advantages Via The Interest Deduction And Dividends Received Deduction, Thomas D. Moore, Jr.

Vanderbilt Law Review

By borrowing money and purchasing preferred stocks with an average yield greater than 58% of the interest rate on the debt, a corporation at the maximum marginal tax rate can reduce its federal income tax liability. In evaluating the potential benefit of this practice, the corporation must consider transactions costs and its ability either to tie the debt to the equities or to have a sufficiently distant maturity on the debt to weather interest rate cycles that depress preferred stock prices. A small to medium-sized corporation probably is in a better position to obtain appropriate debt and to purchase enough …