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.