§ 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 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 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
(2)
Ratio of debt to equity
(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
(2)
General rule for succeeding years
(3)
Redetermination where control, etc., is acquired
(e)
Certain nontaxable transactions
(f)
Exemption for certain acquisitions of foreign corporations
(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)
Effect on other provisions
(Added [Pub. L. 91–172, title IV, § 411(a)], Dec. 30, 1969, [83 Stat. 604]; amended [Pub. L. 94–455, title XIX, § 1906(b)(13)(A)], Oct. 4, 1976, [90 Stat. 1834]; [Pub. L. 94–514, § 1(a)], Oct. 15, 1976, [90 Stat. 2443]; [Pub. L. 113–295, div. A, title II, § 221(a)(47)(A)], Dec. 19, 2014, [128 Stat. 4045].)