
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC385]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
          Subchapter C--Corporate Distributions and Adjustments
 
     PART VI--TREATMENT OF CERTAIN CORPORATE INTERESTS AS STOCK OR 
                              INDEBTEDNESS
 
Sec. 385. Treatment of certain interests in corporations as 
        stock or indebtedness
        

(a) Authority to prescribe regulations

    The Secretary is authorized to prescribe such regulations as may be 
necessary or appropriate to determine whether an interest in a 
corporation is to be treated for purposes of this title as stock or 
indebtedness (or as in part stock and in part indebtedness).

(b) Factors

    The regulations prescribed under this section shall set forth 
factors which are to be taken into account in determining with respect 
to a particular factual situation whether a debtor-creditor relationship 
exists or a corporation-shareholder relationship exists. The factors so 
set forth in the regulations may include among other factors:
        (1) whether there is a written unconditional promise to pay on 
    demand or on a specified date a sum certain in money in return for 
    an adequate consideration in money or money's worth, and to pay a 
    fixed rate of interest,
        (2) whether there is subordination to or preference over any 
    indebtedness of the corporation,
        (3) the ratio of debt to equity of the corporation,
        (4) whether there is convertibility into the stock of the 
    corporation, and
        (5) the relationship between holdings of stock in the 
    corporation and holdings of the interest in question.

(c) Effect of classification by issuer

                           (1) In general

        The characterization (as of the time of issuance) by the issuer 
    as to whether an interest in a corporation is stock or indebtedness 
    shall be binding on such issuer and on all holders of such interest 
    (but shall not be binding on the Secretary).

             (2) Notification of inconsistent treatment

        Except as provided in regulations, paragraph (1) shall not apply 
    to any holder of an interest if such holder on his return discloses 
    that he is treating such interest in a manner inconsistent with the 
    characterization referred to in paragraph (1).

                           (3) Regulations

        The Secretary is authorized to require such information as the 
    Secretary determines to be necessary to carry out the provisions of 
    this subsection.

(Added Pub. L. 91-172, title IV, Sec. 415(a), Dec. 30, 1969, 83 Stat. 
613; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 
1976, 90 Stat. 1834; Pub. L. 101-239, title VII, Sec. 7208(a)(1), Dec. 
19, 1989, 103 Stat. 2337; Pub. L. 102-486, title XIX, Sec. 1936(a), Oct. 
24, 1992, 106 Stat. 3032.)


                               Amendments

    1992--Subsec. (c). Pub. L. 102-486 added subsec. (c).
    1989--Subsec. (a). Pub. L. 101-239 inserted ``(or as in part stock 
and in part indebtedness)'' before period at end.
    1976--Subsec. (a). Pub. L. 94-455 struck out ``or his delegate'' 
after ``Secretary''.


                    Effective Date of 1992 Amendment

    Section 1936(b) of Pub. L. 102-486 provided that: ``The amendment 
made by subsection (a) [amending this section] shall apply to 
instruments issued after the date of the enactment of this Act [Oct. 24, 
1992].''


               Regulations Not To Be Applied Retroactively

    Section 7208(a)(2) of Pub. L. 101-239 provided that: ``Any 
regulations issued pursuant to the authority granted by the amendment 
made by paragraph (1) [amending this section] shall only apply with 
respect to instruments issued after the date on which the Secretary of 
the Treasury or his delegate provides public guidance as to the 
characterization of such instruments whether by regulation, ruling, or 
otherwise.''
