It is important to determine whether an interest in a corporation is treated as debt or equity. In the absence of black letter law, the courts and the IRS have set forth various evidentiary factors to be considered when classifying debt versus equity.

A) In one paragraph, Discuss the various objective factors to be considered and further discuss the various tax consequences to the holder of debt, the holder of stock and the issuing corporation.

i) For example, dividends versus interest payments, taxation upon sale of debt instrument and sale of stock, worthless securities and applicable bad debt deduction treatments.