[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.279-1]

[Page 643-644]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.279-1  General rule; purpose.

    An obligation issued to provide a consideration directly or 
indirectly for a corporate acquisition, although constituting a debt 
under section 385, may have characteristics which make it more 
appropriate that the participation in the corporation which the 
obligation represents be treated for purposes of the deduction of 
interest as if it were a stockholder interest rather than a creditors 
interest. To deal with such cases, section 279 imposes certain

[[Page 644]]

limitations on the deductibility of interest paid or incurred on 
obligations which have certain equity characteristics and are classified 
as corporate acquisition indebtedness. Generally, section 279 provides 
that no deduction will 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 such interest exceeds $5 million. 
However, the $5 million limitation is reduced by the amount of interest 
paid or incurred on obligations issued under the circumstances described 
in section 279(a)(2) but which are not corporate acquisition 
indebtedness. Section 279(b) provides that an obligation will be 
corporate acquisition indebtedness if it was issued under certain 
circumstances and meets the four tests enumerated therein. Although an 
obligation may satisfy the conditions referred to in the preceding 
sentence, it may still escape classification as corporate acquisition 
indebtedness if the conditions as described in sections 279(d) (3), (4), 
and (5), 279(f), or 279(i) are present. However, no inference should be 
drawn from the rules of section 279 as to whether a particular 
instrument labeled a bond, debenture, note, or other evidence of 
indebtedness is in fact a debt. Before the determination as to whether 
the deduction for payments pursuant to an obligation as described in 
this section is to be disallowed, the obligation must first qualify as 
debt in accordance with section 385. If the obligation is not debt under 
section 385, it will be unnecessary to apply section 279 to any payments 
pursuant to such obligation.

[T.D. 7262, 38 FR 5844, Mar. 5, 1973]