DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS.

SEC. 1005. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT INSTRUMENTS. (a) In General.—Section 163 (relating to deduction for interest), as amended by title V, is amended by redesignating subsection (1) as subsection (m) and by inserting after subsection (k) the following new subsection: “(l) Disallowance of Deduction on Certain Debt Instruments of Corporations.— “(1) In general.—No deduction shall be allowed under this chapter for any interest paid or accrued on a disqualified debt instrument. “(2) Disqualified debt instrument.—For purposes of this subsection, the term ‘disqualified debt instrument’ means any indebtedness of a corporation which is payable in equity of the issuer or a related party.111 STAT. 912 “(3) Special rules for amounts payable in equity.—For purposes of paragraph (2), indebtedness shall be treated as payable in equity of the issuer or a related party only if— “(A) a substantial amount of the principal or interest is required to be paid or converted, or at the option of the issuer or a related party is payable in, or convertible into, such equity, “(B) a substantial amount of the principal or interest is required to be determined, or at the option of the issuer or a related party is determined, by reference to the value of such equity, or “(C) the indebtedness is part of an arrangement which is reasonably expected to result in a transaction described in subparagraph (A) or (B). For purposes of this paragraph, principal or interest shall be treated as required to be so paid, converted, or determined if it may be required at the option of the holder or a related party and there is a substantial certainty the option will be exercised. “(4) Related party.—For purposes of this subsection, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b). “(5) Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through the use of an issuer other than a corporation.”. (b) Effective Date.— (1) In general.—The amendment made by this section shall apply to disqualified debt instruments issued after June 8, 1997. (2) Transition rule.—The amendment made by this section shall not apply to any instrument issued after June 8, 1997, if such instrument is— (A) issued pursuant to a written agreement which was binding on such date and at all times thereafter, (B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or (C) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required solely by reason of the issuance.