26 U.S.C. § 385

Treatment of certain interests in corporations as stock or indebtedness

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

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”.

Statutory Notes and Related SubsidiariesEffective Date of 1992 Amendment

Pub. L. 102–486, title XIX, § 1936(b), Oct. 24, 1992, 106 Stat. 3032, 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

Pub. L. 101–239, title VII, § 7208(a)(2), Dec. 19, 1989, 103 Stat. 2337, 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.”

Notes of Decisions

Cited in 15 cases (1 in the last 5 years), 1972–2025 · leading case: Rudolph A. Hardman, Frances N. Hardman & Hardman, Inc. v. United States, 827 F.2d 1409 (9th Cir. 1987).

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Rudolph A. Hardman, Frances N. Hardman & Hardman, Inc. v. United States, 827 F.2d 1409 (9th Cir. 1987). · cites it 3× “1987); see also 26 U.S.C. § 385 . However, there is “no general requirement that transactions be entered into in a conventional way for them to be recognized as having the usual tax result.”

Philip E. & Joan Bauer, Fed. Meat Co. & Phillip & Ruth Himmelfarb v. Comm'r of Internal Revenue, 748 F.2d 1365 (9th Cir. 1985). · cites it 2× “Here we must still be guided by the case law and by the five factors that Congress suggested, as part of the 1969 statute, might be included in the regulations.”

Riley v. Tencara, LLC (In Re Wolverine, Proctor & Schwartz, LLC), 447 B.R. 1 (Bankr. D. Mass. 2011). · cites it 2× “reflected sufficient available capital, including available financing, after the 2005 Transaction with which to conduct its business and that Tencara was justified in relying on those forecasts and that the U.”

In the Matter of Uneco, Inc., Bankrupt. United States of Am. v. Uneco, Inc., 532 F.2d 1204 (8th Cir. 1976). “Section 385 of the Internal Revenue Code, 26 U.S.C. § 385 , supports our conclusion that objective factors should be given consideration in the decision on this issue.”

Edward M. Selfe & Jane B. Selfe v. United States, 778 F.2d 769 (11th Cir. 1985). “26 U.S.C. § 385 provides in relevant part: SEC.”

Alexander W. Jones & Margaret M. Jones v. United States of Am., Howard E. Campbell & Betty Campbell v. United States, 659 F.2d 618 (5th Cir. 1981). “We are gratified that the Internal Revenue Service has at last responded to the Congressional mandate of 26 U.S.C. § 385 (1976), enacted in 1969, which, in the words of distinguished commentators “authorizes the Treasury to blanket the [debt-equity classification] area with…”

Bell v. Comm'r, 700 F. App'x 654 (9th Cir. 2017). · cites it 2× “” Title 26 U.S.C. § 385 defines the “[treatment of certain interests in corporations as stock or indebtedness.”

Est. of Leavitt v. Comm'r, 875 F.2d 420 (4th Cir. 1989). “See also 26 U.S.C. § 385 . The appellants correctly state that the First, Fifth and Ninth Circuits have all applied traditional debt-equity principles in determining whether a shareholder’s guarantee of a corporate debt was in substance a capital contribution.”

Midland Distributors, Inc. v. United States, 481 F.2d 730 (5th Cir. 1973). “See also 26 U.S.C. § 385 , passed as part of the Tax Reform Act of 1969; Comment, Toward New Modes of Tax Decision-making'— The Debt-Equity Imbroglio and Dislocations in Tax Lawmaking Responsibility, 83 Harv.”

Amory Cotton Oil Co., Plaintiff-Appellee-Cross-Appellant v. United States of Am., Defendant-Appellant-Cross-Appellee, 468 F.2d 1046 (5th Cir. 1972). “In addition, 26 U.S.C. § 385 (a) provides : The Secretary .”

Becker v. Internal Revenue Serv., 286 B.R. 250 (S.D.N.Y. 2002). “In doing so, it relied, among other things, on the five factors articulated in 26 U.S.C. § 385 (b), as well as others set forth in cases including Gilbert v.”

Farmers Union Cent. Exch., Inc. v. Fed. Energy Regulatory Comm'n, 734 F.2d 1486 (D.C. Cir. 1984). “Also, under 26 U.S.C. § 385 , the Secretary of the IRS is authorized to prescribe rules "to determine whether an interest in a corporation is to be treated for [tax] purposes .”

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