Abstract
It is only natural that innovative financial managers, desiring the advantages of equity financing without having to give up the tax advantages of debt, will try to design financing methods that are equivalent to taxdeductible equity. It is also natural that alert tax authorities and other regulators will try to thwart them. The continuing interplay of financial managers and regulators leads to an ever-changing array of financing innovations. This process of action and reaction represents a specific instance of what has been termed the regulatory dialectic, in which those being regulated seek new loopholes while the regulators endeavor to close the most heavily exploited ones.I In this paper, we first describe three recent attempts to gain the advantages of tax-deductible equity, which
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