(a) No deduction shall be allowed for any interest paid or incurred by a taxpayer during the taxable year with respect to its corporate acquisition indebtedness to the extent that such interest exceedsâ (1) Five million dollars ($5,000,000), reduced by (2) The amount of interest paid or incurred by such corporation during such year on obligations (A) issued after December 31, 1967, to provide consideration for an acquisition described in paragraph (1) of subdivision (b), but (B) which are not corporate acquisition indebtedness. (b) For purposes of this section, the term âcorporate acquisition indebtednessâ means any obligation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued after October 9, 1969, by a corporation (hereinafter in this section referred to as âissuing corporationâ) ifâ (1) Such obligation is issued to provide consideration for the acquisition ofâ (A) Stock in another corporation (hereinafter in this section referred to as âacquired corporationâ), or (B) Assets of another corporation (hereinafter in this section referred to as âacquired corporationâ) 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 eitherâ (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 eitherâ (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 paragraph (1) of subdivision (c) eitherâ (A) The ratio of debt to equity (as defined in paragraph (2) of subdivision (c)) of the issuing corporation exceeds 2 to 1, or (B) The projected earnings (as defined in paragraph (3) of subdivision (c)), do not exceed three times the annual interest to be paid or incurred (determined under paragraph (4) of subdivision (c)). (c) For purposes of paragraph (4) of subdivision (b)â (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 paragraph (1) of subdivision (b) of stock in, or assets of, the acquired corporation. (2) The term âratio of debt to equityâ 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 âprojected earningsâ means the âaverage annual earningsâ (as defined in subparagraph (B)) ofâ (i) The issuing corporation only, if cause (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 24564), 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 three-year period ending with the last day of a taxable year of the issuing corporation described in paragraph (1), computed without reduction forâ (i) Interest paid or incurred, (ii) Depreciation or amortization allowed under this part, (iii) Liability for tax under this part, and (iv) Distributions to which Section 301(c)(1) of the Internal Revenue Code, relating to property distributions, applies (other than such distributions from the acquir
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