26 U.S.C. § 385
Section 385 · Treatment of certain interests in corporations as stock or indebtedness
Amended 4 times on record
Applied in 27 court decisions — leading case Farmers Union Central Exchange, Inc. v. Federal Energy Regulatory Commission (1984)
Most recently applied in Bell v. Commissioner (July 2017)
How often courts cite this section
Court decisions citing this, by year.Markers show enactment, consequential amendments, and circuit splits over this section — watch for a citation surge after a change or a disagreement. The dip in the last several years is a data-coverage gap, not a real trend — our corpus holds fewer opinions from the most recent years, so recent citations are undercounted.
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).
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.
(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.
Editorial notes U.S. Code · Office of the Law Revision Counsel
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.”