Subchapter S and Its Effect on the Capitalization of Corporations

Our federal tax laws encourage the creation of complex capital structures. Thinning capitalizations by issuing corporate indebtedness offers well known tax advantages to both shareholder and corporation.\u27 Also, since 1954, issuing preferred stock on incorporation is a standard procedure for side-stepping the bail-out prohibitions of code section 306. A good capitalization from a tax viewpoint, therefore, will often involve a small base of common stock, a heavier layer of preferred stock and as much debt as the tax adviser believes will be given tax recognition