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TITLE 26-INTERNAL REVENUE CODE (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 de- scribed 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 con- trol (as defined in section 368(c)), or has acquired substantially all of the proper- ties, of the acquired corporation. (B) The average annual earnings referred to in subparagraph (A) is, for any corpora- tion, the amount of its earnings and profits for any 3-year period ending with the last day of a taxable year of the issuing corpora- tion 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 distri- butions from the acquired to the issuing corporation), and reduced to an annual average for such 3-year period pursuant to regulations pre- scribed by the Secretary. Such regulations shall include rules for cases where any cor- poration was not in existence for all of such 3-year period or such period includes only a portion of a taxable year of any corpora- tion. (4) Annual interest to be paid or incurred The term "annual interest to be paid or in- curred" 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 out- standing, or (B) if projected earnings are determined under clause (1i) of paragraph (3)(A), the annual interest to be paid or incurred by both the issuing corporation and the ac- quired corporation, determined by reference to their combined total indebtedness out- standing. (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 primar- ily engaged in a lending or finance business- (A) in determining under paragraph (2) the ratio of debt to equity of such corpora- tion (or of the affiliated group of which such corporation is a member), the total in- debtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebted- ness owed to such corporation which arises out of the banking business of such corpo- ration, or out of the lending or finance busi- ness 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 para- graph (4)(B) or by the affiliated group of which such corporation is a member) the amount of such interest (determined with- out regard to this paragraph) shall be re- duced 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 busi- ness of making loans or purchasing or dis- counting accounts receivable, notes, or install- ment 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 corpo- rate acquisition indebtedness as of the close of a taxable year of the issuing corporation in which clause (i) of subsection (c)(3)(A) ap- plied, 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 corpo- rate acquisition indebtedness for such later taxable year and all taxable years thereafter. §279 Page 224