West Virginia Law Review

Document Type



The labyrinthine provisions of the Internal Revenue Code make a decision on whether or not to incorporate a closely-held business astoundingly complex. To decide properly, one must understand the terms "C corporations," "S corporations," a partner's "distributive share," and a host of other cryptic concepts.' Even those initiated into the inner sanctums of Subchapters C2, K3 and S4 must advise their clients that their counsel.is based on the enterprise's projected revenues and expenses, estimates that may prove to be far off the mark. Moreover, changes in the Internal Revenue Code have been so constant that no one can feel confident in assuming that the tax laws in X number of years will be the same as they are now. Despite these nettlesome problems affecting this most common of business decisions, one might not feel too exercised, if, after incorporation, he could be rid of the layers of abstruse tax law, free to fomulate plans for business reasons. Unfortunately, this is not the case. Whether one likes it or not, tax considerations continue to be vital elements in strategic business planning even after the decision to incorporate has been made. The purpose of this paper is to examine the impact of the tax laws on a key aspect of post-incorporation planning - formulation of the capital structure of the closely-held corporation. The paper tries to identify and explain the various components in such a capital structure effected by the tax laws. It examines several of the amorphous tax issues affecting capital structures, e.g., the debt-equity distinction. And, where appropriate, it seeks to evaluate the policy implications of the impact of the tax laws on capital structures.



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