§385 — Treatment of certain interests in corporations as stock or indebtedness
16 cases·2 distinguished·14 cited
Statute Text — 26 U.S.C. §385
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:
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,
whether there is subordination to or preference over any indebtedness of the corporation,
the ratio of debt to equity of the corporation,
whether there is convertibility into the stock of the corporation, and
the relationship between holdings of stock in the corporation and holdings of the interest in question.
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).
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).
The Secretary is authorized to require such information as the Secretary determines to be necessary to carry out the provisions of this subsection.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.385-1 General provisions
- Treas. Reg. §Treas. Reg. §1.385-1(a) Overview of section 385 regulations.
- Treas. Reg. §Treas. Reg. §1.385-1(b) General rule.
- Treas. Reg. §Treas. Reg. §1.385-1(c) Definitions.
- Treas. Reg. §Treas. Reg. §1.385-1(d) Treatment of deemed exchanges—(1) Debt instrument deemed to be exchanged for stock—(i) In general.
- Treas. Reg. §Treas. Reg. §1.385-1(e) Indebtedness in part.
- Treas. Reg. §Treas. Reg. §1.385-1(f) Applicability date.
- Treas. Reg. §Treas. Reg. §1.385-1(i) §1.385-1(i)
- Treas. Reg. §Treas. Reg. §1.385-1(v) Brother-sister groups with non-corporate owners.
- Treas. Reg. §Treas. Reg. §1.385-3 Certain distributions of debt instruments and similar transactions
- Treas. Reg. §Treas. Reg. §1.385-3(a) Scope.
- Treas. Reg. §Treas. Reg. §1.385-3(b) Covered debt instrument treated as stock—(1) Effect of characterization as stock.
- Treas. Reg. §Treas. Reg. §1.385-3(c) Exceptions—(1) In general.
- Treas. Reg. §Treas. Reg. §1.385-3(d) Operating rules—(1) Timing.
- Treas. Reg. §Treas. Reg. §1.385-3(e) No affirmative use.
- Treas. Reg. §Treas. Reg. §1.385-3(f) Treatment of controlled partnerships—(1) In general.
- Treas. Reg. §Treas. Reg. §1.385-3(g) Definitions.
- Treas. Reg. §Treas. Reg. §1.385-3(h) Examples—(1) Assumed facts.
- Treas. Reg. §Treas. Reg. §1.385-3(i) §1.385-3(i)
- Treas. Reg. §Treas. Reg. §1.385-3(j) Applicability date and transition rules—(1) In general.
- Treas. Reg. §Treas. Reg. §1.385-3(k) Additional transition rules.
- Treas. Reg. §Treas. Reg. §1.385-3(v) Option to apply proposed regulations.
- Treas. Reg. §Treas. Reg. §1.385-3(x) Example 10.
- Treas. Reg. §Treas. Reg. §1.385-4 Treatment of consolidated groups
- Treas. Reg. §Treas. Reg. §1.385-4(a) Scope.
16 Citing Cases
ides that “[t]he 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).” 12 [*12] Respondent argues that section 385(c) should be applied to bind the Frys to their characterization at the time of filing the return for the 2013 tax year and that section 385(c) prohibits the recharacterization of the interest as e
21, 2016) (Treasury Decision concerning regulations under section 385 spanned 127 pages of the Federal Register, including a preamble of more than 90 pages, of which more than 80 pages responded to comments).
21, 2016) (Treasury Decision concerning regulations under section 385 spanned 127 pages ofthe Federal Register, including a preamble ofmore than 90 pages, ofwhich more than 80 pages responded to comments).
Petitioner, taking the position ordinarily advanced by respondent, argues that there is no deductible interest based on statutory (section 385) and case law concerning the debt versus equity issue.
Petitioner, taking the position ordinarily advanced by respondent, argues that there is no deductible interest based on statutory (section 385) and case law concerning the debt versus equity issue.