
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC279]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
                      PART IX--ITEMS NOT DEDUCTIBLE
 
Sec. 279. Interest on indebtedness incurred by corporation to 
        acquire stock or assets of another corporation
        

(a) General rule

    No deduction shall be allowed for any interest paid or incurred by a 
corporation during the taxable year with respect to its corporate 
acquisition indebtedness to the extent that such interest exceeds--
        (1) $5,000,000, reduced by
        (2) the amount of interest paid or incurred by such corporation 
    during such year on obligations (A) issued after December 31, 1967, 
    to provide consideration for an acquisition described in paragraph 
    (1) of subsection (b), but (B) which are not corporate acquisition 
    indebtedness.

(b) Corporate acquisition indebtedness

    For purposes of this section, the term ``corporate acquisition 
indebtedness'' means any obligation evidenced by a bond, debenture, 
note, or certificate or other evidence of indebtedness issued after 
October 9, 1969, by a corporation (hereinafter in this section referred 
to as ``issuing corporation'') if--
        (1) such obligation is issued to provide consideration for the 
    acquisition of--
            (A) stock in another corporation (hereinafter in this 
        section referred to as ``acquired corporation''), or
            (B) assets of another corporation (hereinafter in this 
        section referred to as ``acquired corporation'') pursuant to a 
        plan under which at least two-thirds (in value) of all the 
        assets (excluding money) used in trades and businesses carried 
        on by such corporation are acquired,

        (2) such obligation is either--
            (A) subordinated to the claims of trade creditors of the 
        issuing corporation generally, or
            (B) expressly subordinated in right of payment to the 
        payment of any substantial amount of unsecured indebtedness, 
        whether outstanding or subsequently issued, of the issuing 
        corporation,

        (3) the bond or other evidence of indebtedness is either--
            (A) convertible directly or indirectly into stock of the 
        issuing corporation, or
            (B) part of an investment unit or other arrangement which 
        includes, in addition to such bond or other evidence of 
        indebtedness, an option to acquire, directly or indirectly, 
        stock in the issuing corporation, and

        (4) as of a day determined under subsection (c)(1), either--
            (A) the ratio of debt to equity (as defined in subsection 
        (c)(2)) of the issuing corporation exceeds 2 to 1, or
            (B) the projected earnings (as defined in subsection (c)(3)) 
        do not exceed 3 times the annual interest to be paid or incurred 
        (determined under subsection (c)(4)).

(c) Rules for application of subsection (b)(4)

    For purposes of subsection (b)(4)--

                      (1) Time of determination

        Determinations are to be made as of the last day of any taxable 
    year of the issuing corporation in which it issues any obligation to 
    provide consideration for an acquisition described in subsection 
    (b)(1) of stock in, or assets of, the acquired corporation.

                     (2) Ratio of debt to equity

        The term ``ratio of debt to equity'' means the ratio which the 
    total indebtedness of the issuing corporation bears to the sum of 
    its money and all its other assets (in an amount equal to their 
    adjusted basis for determining gain) less such total indebtedness.

                       (3) Projected earnings

            (A) The term ``projected earnings'' means the ``average 
        annual earnings'' (as defined in subparagraph (B)) of--
                (i) the issuing corporation only, if clause (ii) does 
            not apply, or
                (ii) both the issuing corporation and the acquired 
            corporation, in any case where the issuing corporation has 
            acquired control (as defined in section 368(c)), or has 
            acquired substantially all of the properties, of the 
            acquired corporation.

            (B) The average annual earnings referred to in subparagraph 
        (A) is, for any corporation, the amount of its earnings and 
        profits for any 3-year period ending with the last day of a 
        taxable year of the issuing corporation described in paragraph 
        (1), computed without reduction for--
                (i) interest paid or incurred,
                (ii) depreciation or amortization allowed under this 
            chapter,
                (iii) liability for tax under this chapter, and
                (iv) distributions to which section 301(c)(1) applies 
            (other than such distributions from the acquired to the 
            issuing corporation),

        and reduced to an annual average for such 3-year period pursuant 
        to regulations prescribed by the Secretary. Such regulations 
        shall include rules for cases where any corporation was not in 
        existence for all of such 3-year period or such period includes 
        only a portion of a taxable year of any corporation.

             (4) Annual interest to be paid or incurred

        The term ``annual interest to be paid or incurred'' means--
            (A) if subparagraph (B) does not apply, the annual interest 
        to be paid or incurred by the issuing corporation only, 
        determined by reference to its total indebtedness outstanding, 
        or
            (B) if projected earnings are determined under clause (ii) 
        of paragraph (3)(A), the annual interest to be paid or incurred 
        by both the issuing corporation and the acquired corporation, 
        determined by reference to their combined total indebtedness 
        outstanding.

    (5) Special rules for banks and lending or finance companies

        With respect to any corporation which is a bank (as defined in 
    section 581) or is primarily engaged in a lending or finance 
    business--
            (A) in determining under paragraph (2) the ratio of debt to 
        equity of such corporation (or of the affiliated group of which 
        such corporation is a member), the total indebtedness of such 
        corporation (and the assets of such corporation) shall be 
        reduced by an amount equal to the total indebtedness owed to 
        such corporation which arises out of the banking business of 
        such corporation, or out of the lending or finance business of 
        such corporation, as the case may be;
            (B) in determining under paragraph (4) the annual interest 
        to be paid or incurred by such corporation (or by the issuing 
        and acquired corporations referred to in paragraph (4)(B) or by 
        the affiliated group of which such corporation is a member) the 
        amount of such interest (determined without regard to this 
        paragraph) shall be reduced by an amount which bears the same 
        ratio to the amount of such interest as the amount of the 
        reduction for the taxable year under subparagraph (A) bears to 
        the total indebtedness of such corporation; and
            (C) in determining under paragraph (3)(B) the average annual 
        earnings, the amount of the earnings and profits for the 3-year 
        period shall be reduced by the sum of the reductions under 
        subparagraph (B) for such period.

    For purposes of this paragraph, the term ``lending or finance 
    business'' means a business of making loans or purchasing or 
    discounting accounts receivable, notes, or installment obligations.

(d) Taxable years to which applicable

    In applying this section--

                   (1) First year of disallowance

        The deduction of interest on any obligation shall not be 
    disallowed under subsection (a) before the first taxable year of the 
    issuing corporation as of the last day of which the application of 
    either subparagraph (A) or subparagraph (B) of subsection (b)(4) 
    results in such obligation being corporate acquisition indebtedness.

                (2) General rule for succeeding years

        Except as provided in paragraphs (3), (4), and (5), if an 
    obligation is determined to be corporate acquisition indebtedness as 
    of the last day of any taxable year of the issuing corporation, it 
    shall be corporate acquisition indebtedness for such taxable year 
    and all subsequent taxable years.

        (3) Redetermination where control, etc., is acquired

        If an obligation is determined to be corporate acquisition 
    indebtedness as of the close of a taxable year of the issuing 
    corporation in which clause (i) of subsection (c)(3)(A) applied, but 
    would not be corporate acquisition indebtedness if the determination 
    were made as of the close of the first taxable year of such 
    corporation thereafter in which clause (ii) of subsection (c)(3)(A) 
    could apply, such obligation shall be considered not to be corporate 
    acquisition indebtedness for such later taxable year and all taxable 
    years thereafter.

                       (4) Special 3-year rule

        If an obligation which has been determined to be corporate 
    acquisition indebtedness for any taxable year would not be such 
    indebtedness for each of any 3 consecutive taxable years thereafter 
    if subsection (b)(4) were applied as of the close of each of such 3 
    years, then such obligation shall not be corporate acquisition 
    indebtedness for all taxable years after such 3 consecutive taxable 
    years.

                      (5) 5 percent stock rule

        In the case of obligations issued to provide consideration for 
    the acquisition of stock in another corporation, such obligations 
    shall be corporate acquisition indebtedness for a taxable year only 
    if at some time after October 9, 1969, and before the close of such 
    year the issuing corporation owns 5 percent or more of the total 
    combined voting power of all classes of stock entitled to vote of 
    such other corporation.

(e) Certain nontaxable transactions

    An acquisition of stock of a corporation of which the issuing 
corporation is in control (as defined in section 368(c)) in a 
transaction in which gain or loss is not recognized shall be deemed an 
acquisition described in paragraph (1) of subsection (b) only if 
immediately before such transaction (1) the acquired corporation was in 
existence, and (2) the issuing corporation was not in control (as 
defined in section 368(c)) of such corporation.

(f) Exemption for certain acquisitions of foreign corporations

    For purposes of this section, the term ``corporate acquisition 
indebtedness'' does not include any indebtedness issued to any person to 
provide consideration for the acquisition of stock in, or assets of, any 
foreign corporation substantially all of the income of which, for the 3-
year period ending with the date of such acquisition or for such part of 
such period as the foreign corporation was in existence, is from sources 
without the United States.

(g) Affiliated groups

    In any case in which the issuing corporation is a member of an 
affiliated group, the application of this section shall be determined, 
pursuant to regulations prescribed by the Secretary, by treating all of 
the members of the affiliated group in the aggregate as the issuing 
corporation, except that the ratio of debt to equity of, projected 
earnings of, and annual interest to be paid or incurred by any 
corporation (other than the issuing corporation determined without 
regard to this subsection) shall be included in the determinations 
required under subparagraphs (A) and (B) of subsection (b)(4) as of any 
day only if such corporation is a member of the affiliated group on such 
day, and, in determining projected earnings of such corporation under 
subsection (c)(3), there shall be taken into account only the earnings 
and profits of such corporation for the period during which it was a 
member of the affiliated group. For purposes of the preceding sentence, 
the term ``affiliated group'' has the meaning assigned to such term by 
section 1504(a), except that all corporations other than the acquired 
corporation shall be treated as includible corporations (without any 
exclusion under section 1504(b)) and the acquired corporation shall not 
be treated as an includible corporation.

(h) Changes in obligation

    For purposes of this section--
        (1) Any extension, renewal, or refinancing of an obligation 
    evidencing a preexisting indebtedness shall not be deemed to be the 
    issuance of a new obligation.
        (2) Any obligation which is corporate acquisition indebtedness 
    of the issuing corporation is also corporate acquisition 
    indebtedness of any corporation which becomes liable for such 
    obligation as guarantor, endorser, or indemnitor or which assumes 
    liability for such obligation in any transaction.

(i) Certain obligations issued after October 9, 1969

    For purposes of this section, an obligation shall not be corporate 
acquisition indebtedness if issued after October 9, 1969, to provide 
consideration for the acquisition of--
        (1) stock or assets pursuant to a binding written contract which 
    was in effect on October 9, 1969, and at all times thereafter before 
    such acquisition, or
        (2) stock in any corporation where the issuing corporation, on 
    October 9, 1969, and at all times thereafter before such 
    acquisition, owned at least 50 percent of the total combined voting 
    power of all classes of stock entitled to vote of the acquired 
    corporation.

(j) Effect on other provisions

    No inference shall be drawn from any provision in this section that 
any instrument designated as a bond, debenture, note, or certificate or 
other evidence of indebtedness by its issuer represents an obligation or 
indebtedness of such issuer in applying any other provision of this 
title.

(Added Pub. L. 91-172, title IV, Sec. 411(a), Dec. 30, 1969, 83 Stat. 
604; amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 
1976, 90 Stat. 1834; Pub. L. 94-514, Sec. 1(a), Oct. 15, 1976, 90 Stat. 
2443.)


                               Amendments

    1976--Subsecs. (c)(3)(B), (g). Pub. L. 94-455 struck out ``or his 
delegate'' after ``Secretary''.
    Subsec. (i). Pub. L. 94-514 struck out provisions that par. (2) 
would cease to apply when (at any time on or after October 9, 1969) the 
issuing corporation has acquired control (as defined in section 368(c)) 
of the acquired corporation.


                    Effective Date of 1976 Amendment

    Section 1(b) of Pub. L. 94-514 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply to taxable years 
ending after October 9, 1969. If refund or credit of any overpayment of 
income tax resulting from the amendment made by subsection (a) [amending 
this section] is prevented on the date of the enactment of this Act 
[Oct. 15, 1976], or at any time within one year after such date, by the 
operation of any law or rule of law, refund or credit of such 
overpayment may, nevertheless, be made or allowed if claim therefor is 
filed within one year from such date.''


                             Effective Date

    Section 411(c) of Pub. L. 91-172 provided that: ``The amendments 
made by this section [enacting this section] shall apply to the 
determination of the allowability of the deduction of interest paid or 
incurred with respect to indebtedness incurred after October 9, 1969.''
