If the IRS reclassifies debt as equity under § 385,the repayment of the debt by the corporation to the shareholder is treated as a dividend,assuming adequate E & P.

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If the IRS reclassifies debt as equity under § 385, the repayment of the debt by the corporation to the shareholder is treated as a dividend, assuming adequate E & P. This is because payments to equity holders are typically treated as distributions of earnings, while payments to debt holders are considered interest payments.

If the IRS Reclassifies Debt as Equity Under § 385,the