Title 26 — Internal Revenue CodeRelease 119-73not60
§279 Interest on Indebtedness Incurred by Corporation to Acquire Stock or Assets of Another Corporation
Title 26 › Subtitle Subtitle A— Income Taxes › Chapter 1— NORMAL TAXES AND SURTAXES › Subchapter B— Computation of Taxable Income › Part IX— ITEMS NOT DEDUCTIBLE › § 279
Summary
Stops a corporation from deducting interest on debt used to buy another company when that interest is more than $5,000,000. The $5,000,000 cap is lowered by any interest the buyer paid on other debts issued to pay for the purchase if those other debts don’t qualify as “corporate acquisition indebtedness.” Debt counts as “corporate acquisition indebtedness” only if it was issued to buy stock or to buy assets (at least two‑thirds by value of the buyer’s business assets), is subordinated to other creditors, is convertible or sold with an option to get the buyer’s stock, and if either the buyer’s debt-to-equity ratio is over 2 to 1 or the buyer’s projected earnings are not more than 3 times the annual interest. Tests are made as of the last day of the tax year when the debt was issued. Banks and finance companies have special adjustments. Once debt is treated as acquisition debt, it generally stays that way unless facts change; if it fails the tests for 3 straight years it stops being treated that way. For stock buys the buyer must own at least 5 percent of voting stock before year-end. Debt used to buy a foreign company that earned almost all income outside the United States for the prior 3 years is excluded. Key terms (one line each): “Corporate acquisition indebtedness” — debt issued to pay for a covered stock or asset purchase; “ratio of debt to equity” — total debt divided by equity (assets minus debt); “projected earnings” — average annual earnings for the last 3 years, calculated without subtracting interest, depreciation/amortization, tax, or certain dividends; “annual interest to be paid or incurred” — interest based on total outstanding debt; “affiliated group” — treated as one issuer for these tests.
Full Legal Text
Title 26, §279
Internal Revenue Code — Source: USLM XML via OLRC
(a)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)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)For purposes of subsection (b)(4)—
(1)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)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)(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),
(4)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)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.
(d)In applying this section—
(1)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)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)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)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)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 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)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)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)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)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)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.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2014—Subsec. (a)(2). Pub. L. 113–295, § 221(a)(47)(A)(i), struck out “after
December 31, 1967,” after “(A) issued”. Subsec. (b). Pub. L. 113–295, § 221(a)(47)(A)(ii), struck out “after
October 9, 1969,” after “evidence of indebtedness issued” in introductory provisions. Subsec. (d)(5). Pub. L. 113–295, § 221(a)(47)(A)(iii), struck out “after
October 9, 1969, and” after “some time”. Subsecs. (i), (j). Pub. L. 113–295, § 221(a)(47)(A)(iv), redesignated subsec. (j) as (i) and struck out former subsec. (i). Prior to amendment, text of subsec. (i) read as follows: “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.” 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.
Statutory Notes and Related Subsidiaries
Effective Date
of 2014 Amendment Pub. L. 113–295, div. A, title II, § 221(a)(47)(B), Dec. 19, 2014, 128 Stat. 4045, provided that: “The
Amendments
made by this paragraph [amending this section] shall not— “(i) apply to obligations issued on or before October 9, 1969 (determined in the same manner as under section 279 of the Internal Revenue Code of 1986 as in effect before such
Amendments
), and “(ii) be construed to require interest on obligations issued on or before December 31, 1967, to be taken into account under section 279(a)(2) of such Code (as in effect after such
Amendments
).” Except as otherwise provided in section 221(a) of Pub. L. 113–295, amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a
Savings Provision
, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.
Effective Date
of 1976 Amendment Pub. L. 94–514, § 1(b), Oct. 15, 1976, 90 Stat. 2443, 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
Pub. L. 91–172, title IV, § 411(c), Dec. 30, 1969, 83 Stat. 608, 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.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 279
Title 26 — Internal Revenue Code
Last Updated
Apr 5, 2026
Release point: 119-73not60