MODIFICATION TO LIMITATION ON DEDUCTION FOR CERTAIN INTEREST.

SEC. 13228. MODIFICATION TO LIMITATION ON DEDUCTION FOR CERTAIN INTEREST. (a) General Rule.— Paragraph (3) of section 163(j) (defining disqualified interest) is amended to read as follows: “(3) Disqualified interest.— For purposes of this subsection, the term ‘disqualified interest’ means— “(A) any interest paid or accrued by the taxpayer (directly or indirectly) to a related person if no tax is imposed by this subtitle with respect to such interest, and “(B) any interest paid or accrued by the taxpayer with respect to any indebtedness to a person who is not a related person if— “(i) there is a disqualified guarantee of such indebtedness, and “(ii) no gross basis tax is imposed by this subtitle with respect to such interest.” (b) Definitions.— Paragraph (6) of section 163(j) is amended by adding at the end thereof the following new subparagraphs: “(D) Disqualified guarantee.— “(i) In general.— Except as provided in clause (ii), the term ‘disqualified guarantee’ means any guarantee by a related person which is— “(I) an organization exempt from taxation under this subtitle, or “(II) a foreign person. “(ii) Exceptions.— The term ‘disqualified guarantee’ shall not include a guarantee— “(I) in any circumstances identified by the Secretary by regulation, where the interest on the indebtedness would have been subject to a net 107 STAT. 495basis tax if the interest had been paid to the guarantor, or “(II) if the taxpayer owns a controlling interest in the guarantor. For purposes of subclause (II), except as provided in regulations, the term ‘a controlling interest’ means direct or indirect ownership of at least 80 percent of the total voting power and value of all classes of stock of a corporation, or 80 percent of the profit and capital interests in any other entity. For purposes of the preceding sentence, the rules of paragraphs (1) and (5) of section 267(c) shall apply; except that such rules shall also apply to interest in entities other than corporations. “(iii) Guarantee.— Except as provided in regulations, the term ‘guarantee’ includes any arrangement under which a person (directly or indirectly through an entity or otherwise) assures, on a conditional or unconditional basis, the payment of another person’s obligation under any indebtedness. “(E) Gross basis and net basis taxation.— “(i) Gross basis tax.— The term ‘gross basis tax’ means any tax imposed by this subtitle which is determined by reference to the gross amount of any item of income without any reduction for any deduction allowed by this subtitle. “(ii) Net basis tax.— The term ‘net basis tax’ means any tax imposed by this subtitle which is not a gross basis tax.” (c) Conforming Amendments.— (1) Subparagraph (B) of section 163(j)(5) is amended by striking “to a related person”. (2) The subsection heading for subsection (j) of section 163 is amended to read as follows: “(j) Limitation on Deduction for Interest on Certain Indebtedness.—”. (d) Effective Date.— The amendments made by this section shall apply to interest paid or accrued in taxable years beginning after December 31, 1993.