Pay In Kind Toggle Notes

The debt floated in private equity leveraged buyouts is increasingly innovative on a very old theme. How does one make equity look enough like debt for the IRS?? The newest old trick is Pay In Kind Toggle Notes: When cash is short, in essence, the debt may postpone cash interest payments but the interest rate is bumped up. This is very close to preferred stock. I am sure there are numerous lawyer opinion letters on the fact that PIK Toggles are debt for the IRS. I hope the IRS agrees. The legal divide between debt and equity for tax purposes is less and less sustainable and ought to be reconsidered. At minimum we would not have so many lawyers and accountants charging fees for creating instruments that sit on the boundary.