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PurposeThe purpose of this paper is to provide empirical support for micro‐economic theory respecting debt capacity and develop a practically useful model for assessing debt capacity for firms seeking to minimize credit risk and the cost of debt (interest rate).Design/methodology/approachTheoretically important factors explaining the variation in debt capacity are identified and tested, namely: the proportion of property, plant and equipment over total assets, industry group (highlighting asset specificity), sales variability, and the depreciation method. Data were collected from the SEC Disclosure Database. Using the SPSS software, this paper's theoretically based constructs were tested by developing a linear regression model.FindingsThe regression results indicate that the theoretical model explains a statistically significant portion of the variation across firms in the proportion of debt to total assets a firm is willing (and is allowed by the financial market) to carry. However, a major portion of the variation in debt capacity is not explained. Future research can identify and test other factors to develop a better explanatory model.Research limitations/implicationsSubject to the above limitation, the model developed provides a basis for firms to assess their debt capacity. Firm's whose actual debt to asset ratio is less than their debt capacity can borrow more if needed and if additional leverage is justified. Creditors can also use the estimated debt capacity when deciding the terms (including the interest rate) of extending credit. Investors can shy away from companies with very little or no unused debt capacity to reduce their portfolio risk.Originality/valueThis paper's academic and practical contributions, respectively, are to empirically test debt capacity's theoretical constructs and provide a practically useful and theoretically based model for assessing debt capacity by creditors, investors, and the companies.

One of the most litigated and adjusted areas in taxation has been the determination of the minority interest discount in estate and gift taxation. Valuation disputes arise because the valuation processes for estate and gift taxation are “inherently imprecise,” and the goals of the taxpayer and Internal Revenue Service (IRS) are diametrically opposed. The IRS's vigorous defense of the estate and gift tax base and the taxpayersa' attempts to pay no more tax than is their legal duty have resulted in a history of situations where the taxpayer and the IRS turn to the courts for adjudication. This paper addresses the basis for a minority interest discount, the determination whether ownership interests are in fact minority interests, and the importance of facts and law in the determination of the minority interest discount. A comprehensive analysis of estate and gift tax cases that determined minority interest discounts is used as a basis for planning ideas to maximize these discounts.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), creates a financial incentive for the owner/executives of small to medium size closely held corporations to deviate from the Pre-JGTRRA 2002 historical allocations of average taxable corporate income before owner/executive compensation to taxable salary and qualifying dividends.  For purposes of comparison, this paper summarizes the 2002 tax year average taxable corporate incomes before owner/executive compensation for small to medium size closely held corporations, the 2002 average allocations to taxable salary and bonuses or qualifying dividend income and the tax consequences of those allocations.  The 2002 tax year average allocations and tax consequences calculated using the JGTRRA’s tax bases and rate parameters are compared with the results of an iterative numerical search procedure that incorporates the JGTRRA’s tax base and tax rate parameters to mathematically estimate tax-minimizing allocations to owner/executive salary and bonuses versus dividends.  Comparisons of the estimated tax-minimizing allocations’ 2004 (JGTTRA) tax consequences with the 2002 (using JGTTRA) tax year’s average historical allocations’ tax consequences indicate that the JGTRRA has created a financial incentive to deviate from the historical allocations to salary and bonuses versus dividends of the taxable corporate income before owner/executive compensation.  One caveat or constraint to adjusting historical allocations to tax-minimizing allocations would be that the Internal Revenue Service might challenge adjusted allocations as unreasonably low salary compensation that would deprive the treasury of Social Security and Medicare taxes.  Another constraint is that the iterative computations are ceteris paribus for those factors not included in the computational formula.  Specifically this paper does not model for tax deferred contributions to retirement plans and does not model for the impact of the American Jobs Creation Act of 2004 and the deduction for qualified U.S. production activities.

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