Reg. § 1.279-2 Amount of disallowance of interest on corporate acquisition indebtedness.
(a) In general Under section , no deduction is 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 million, reduced by
(2) The amount of interest paid or incurred by such corporation during such year on any obligation issued after December 31, 1967, to provide consideration directly or indirectly for an acquisition described in section but which is not corporate acquisition indebtedness. Such an obligation is not corporate acquisition indebtedness if it:
(i) Was issued prior to October 10, 1969, or
(ii) Was issued after October 9, 1969, but does not meet any one or more of the tests of section (2), (3), or (4), or
(iii) Was originally deemed to be corporate acquisition indebtedness but is no longer so treated by virtue of the application of paragraphs (3) or (4) of section or
(iv) Is specifically excluded from treatment as corporate acquisition indebtedness by virtue of sections , (f), or (i).
The computation of the amount by which the $5 million limitation described in this paragraph is to be reduced with respect to any taxable year is to be made as of the last day of the taxable year in which an acquisition described in section occurs. In no case shall the $5 million limitation be reduced below zero.
(b) Certain terms defined When used in section and the regulations thereunder:
(1) The term issued includes the giving of a note or other evidence of indebtedness to a bank or other lender as well as an issuance of a bond or debenture. In the case of obligations which are registered with the Securities and Exchange Commission, the date of issue is the date on which the issue is first offered to the public. In the case of obligations which are not so registered, the date of issue is the date on which the obligation is sold to the first purchaser.
(2) The term interest includes both stated interest and unstated interest (such as original issue discount as defined in and amounts treated as interest under section ).
(3) The term money means cash and its equivalent.
(4) The term control shall have the meaning assigned to such term by section .
(5) The term affiliated group shall have the meaning assigned to such term by section , except that all corporations other than the acquired corporation shall be treated as includible corporations (without any exclusion under section ) and the acquired corporation shall not be treated as an includible corporation. This definition shall apply whether or not some or all of the members of the affiliated group file a consolidated return.
(c) Examples The provisions of of this section may be illustrated by the following examples:
Example 1. On March 4, 1973, X Corporation, a calendar year taxpayer, issues an obligation which satisfies the test of section but fails to satisfy either of the tests of section (2) or (3). Since at least one of the tests of section is not satisfied the obligation is not corporate acquisition indebtedness. However, since the test of section is satisfied, the interest on the obligation will reduce the $5 million limitation provided by section (a)(1).
Example 2. On January 1, 1969, X Corporation, a calendar year taxpayer, issues an obligation, which satisfies all the tests of section , requiring it to pay $3.5 million of interest each year. Since the obligation was issued before October 10, 1969, the obligation cannot be corporate acquisition indebtedness, and a deduction for the $3.5 million of interest attributable to such obligation is not subject to disallowance under section . However, since the obligation was issued after December 31, 1967, in an acquisition described in section , under section the $3.5 million of interest attributable to such obligation reduces the $5 million limitation provided by section to $1.5 million.
Example 3. Assume the same facts as in Example 2. Assume further that on January 1, 1970, X Corporation issues more obligations which are classified as corporate acquisition indebtedness and which require X Corporation to pay $4 million of interest each year. For 1970 the amount of interest paid or accrued on corporate acquisition indebtedness, which may be deducted is $1.5 million ($5 million maximum provided by section less $3.5 million, the reduction required under section ). Thus, $2.5 million of the $4 million interest incurred on a corporate acquisition indebtedness is subject to disallowance under section for the taxable year 1970.
Example 4. Assume the same facts as in Example 3. Assume further that on the last day of each of the taxable years 1971, 1972, and 1973 of X Corporation neither of the conditions described in section was present. Under these circumstances, such obligations for all taxable years after 1973 are not corporate acquisition indebtedness under section . Therefore, the $2.5 million of interest previously not deductible is not deductible for all taxable years after 1973. Although such obligations are no longer treated as corporate acquisition indebtedness, the interest attributable thereto must be applied in further reduction of the $5 million limitation. The $5 million limitation of section is therefore reduced to zero. While the limitation is at the zero level any interest paid or incurred on corporate acquisition indebtedness will be disallowed.
[T.D. 7262, 38 FR 5844, Mar. 5, 1973]