Sixteen years after Congress passed the Tax Reform Act of 1969, the Internal Revenue Service is struggling to define part of it.

Section 385 of the law deals with the thorny issue of whether a person who owns an interest in a corporation is a stockholder or a creditor.

The distinction is important because payments involving equity, usually in the form of stock dividends, are taxed twice: once as corporate earnings and again as a payment to the taxpayer/stockholder.

Payments in satisfaction of a debt, on the other hand, are taxed once, on the creditor's return, and only on the interest he receives. In addition, a corporation is allowed to deduct interest it incurs repaying a debt.

The 1969 law instructed the Internal Revenue Service "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."

Despite a voluminous amount of confusing case law on the issue, the regulations haven't been completed.

The IRS first issued proposed regulations for Section 385 on March 24, 1980.

Asked why it took the agency 11 years to propose the rules, spokesman Larry Batdorf said, "It's a very difficult area of the Internal Revenue Code."

After a July 1980 hearing, where small businesses voiced opposition to the proposed regulation, the IRS published final regulations in December 1980.

But those regulations were anything but final.

On May 1, 1981, in response to more criticism, the agency postponed their effective date until Dec. 31.

On Jan. 5, 1982, the IRS published revised regulations that lasted until Nov. 3, when the regulations were withdrawn, leaving Section 385 in its present, unregulated state.

So far, the IRS has not set a target date for producing the regulation.