PUBLIC LAW 101-239—DEC. 19, 1989 103 STAT. 2331 any applicable high yield discount obligation is the lesser of— "(I) the amount of such original issue discount, or "(II) the portion of the total return on such obligation which bears the same ratio to such total ^ return as the disqualified jdeld on such obligation bears to the jdeld to maturity on such obligation, " (ii) DEFINITIONS, —For purposes of clause (i), the term 'disqualified yield' means the excess of the yield to maturity on the obligation over the sum referred to subsection (i)(l)(B) plus 1 percentage point, and the term 'total return' is the amount which would have ^_ been the original issue discount on the obligation if interest described in the parenthetical in section 1273(a)(2) were included in the stated redemption price at maturity. "(D) EXCEPTION FOR S CORPORATIONS.— T his paragraph shall not apply to any obligation issued by any corporation for any period for which such corporation is an S corpora- tion. "(E) EFFECT ON EARNINGS AND PROFITS. —T his paragraph shall not apply for purposes of determining earnings and ^ profits; except that, for purposes of determining the divi- dend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation, no reduction shall be made for any amount attributable to the disqualified portion of any original issue discount on such obligation. " (F) CROSS REFERENCE. — "For definition of applicable high yield discount obligation, see subsec- tion (i)." (b) APPLICABLE HIGH YIELD DISCOUNT OBLIGATION. — Section 163 is amended by redesignating subsection (i) as subsection 0') and by inserting after subsection (h) the following new subsection: "(i) APPLICABLE HIGH YIELD DISCOUNT OBLIGATION.— "(1) IN GENERAL.—For purposes of this section, the term ' applicable high yield discount obligation' means any debt in- strument if— "(A) the maturity date of such instrument is more than 5 years from the date of issue, "(B) the)deld to maturity on such instrument equals or exceeds the sum of— "(i) the applicable Federal rate in effect under sec- tion 1274(d) for the calendar month in which the obliga- tion is issued, plus "(ii) 5 percentage points, and "(C) such instrument has significant original issue dis- count. For purposes of subparagraph (B)(i), the Secretary may by regulation permit a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such higher rate is based on the same principles as the ap- plicable Federal rate and is appropriate for the term of the instrument.
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