Foreign Tax Credit Limitations and Preferred Stock Issuances.

This article presents information related to foreign tax credit limitations and preferred stock issuances. The authors suggest that the U.S. Tax Reform Act of 1986 inadvertently increased the use of preferred stock as a financing instrument among multinationals. The act changed how much interest could be allocated against foreign source income when determining foreign tax credits. The result is that firms restructured their financing activities to avoid domestic debt. Their response to tax changes was purely accounting-based rather than production.