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Title 26 — Internal Revenue CodeRelease 119-73

§385 Treatment of certain interests in corporations as stock or indebtedness

Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter C— - Corporate Distributions and Adjustments › Part PART VI— - TREATMENT OF CERTAIN CORPORATE INTERESTS AS STOCK OR INDEBTEDNESS › § 385

Last updated Apr 6, 2026|Official source

Summary

The Secretary can write rules to decide whether an interest in a corporation is treated for tax purposes as stock, as debt, or partly both. The rules must list the things to look at when deciding if the relationship is more like a creditor-debtor or a shareholder one. Those things can include a written promise to repay with interest, whether the claim is behind or ahead of other debts, the company’s debt-to-equity mix, whether the interest can convert into stock, and how stock holdings relate to the interest. When issued, the company’s label generally binds the company and holders, but not the Secretary. Holders may report a different treatment on their tax return if they disclose it. The Secretary can require information to apply these rules.

Full Legal Text

Title 26, §385

Internal Revenue Code — Source: USLM XML via OLRC

(a)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)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)(1)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)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)The Secretary is authorized to require such information as the Secretary determines to be necessary to carry out the provisions of this subsection.

Legislative History

Notes & Related Subsidiaries

Editorial Notes

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”.

Statutory Notes and Related Subsidiaries

Effective 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.”

Reference

Citations & Metadata

Citation

26 U.S.C. § 385

Title 26 — Internal Revenue Code

Last Updated

Apr 6, 2026

Release point: 119-73