ADDITIONAL SYSTEM INFORMATION :
OpenJDK 17.0.4.1+1, 19+36, 20-ea+17

A DESCRIPTION OF THE PROBLEM :
The compiler complains about an invocation of a method that has a parameter whose type is a local class C declared in a lambda by passing it an instance of C returned by a method because "C cannot be converted to C". The lambda also has to be passed to a method: if it is assigned to a variable, the code compiles.

STEPS TO FOLLOW TO REPRODUCE THE PROBLEM :
javac -Xdiags:verbose Bug.java
Code is below.

EXPECTED VERSUS ACTUAL BEHAVIOR :
EXPECTED -
No error.
ACTUAL -
Bug.java:11: error: method takeC in class C cannot be applied to given types;
                        C.takeC(C.giveC());
                         ^
  required: C
  found: C
  reason: argument mismatch; C cannot be converted to C

---------- BEGIN SOURCE ----------
class Bug {
static void run(Runnable r) {}

static void main() {
run(() -> {
class C {
static void takeC(C c) {}
static C giveC() {return new C();}
}

C.takeC(C.giveC());
});
}
}
---------- END SOURCE ----------

CUSTOMER SUBMITTED WORKAROUND :
I was able to work around this bug by declaring the local class outside the lambda.
class Workaround1 {
static void run(Runnable r) {}

static void main() {
class C {
static void takeC(C c) {}
static C giveC() {return new C();}
}

run(() -> {
C.takeC(C.giveC());
});
}
}

Additionally, storing the argument in a variable and passing the variable's value to the method allows the code to compile.
class Workaround2 {
static void run(Runnable r) {}

static void main() {
run(() -> {
class C {
static void takeC(C c) {}
static C giveC() {return new C();}
}

var c = C.giveC();
C.takeC(c);
});
}
}

FREQUENCY : always