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TITLE 26-INTERNAL REVENUE CODE the amount of such income (determined without regard to this sentence) multiplied by a fraction the numerator of which is the excess of the investment interest for the taxable year over the investment interest to which such prior provision applies, and the denominator of which is the investment in- terest for the taxable year. (B) Investment income The term "investment income" means- (1) the gross income from interest, divi- dends, rents, and royalties, (ii) the net short-term capital gain at- tributable to the disposition of property held for investment, and (iii) any amount treated under sections 1245, 1250, and 1254 as ordinary income, but only to the extent such income, gain, and amounts are not derived from the con- duct of a trade or business. (C) Investment expenses The term "investment expenses" means the deductions allowable under sections 162, 164(a)(1) or (2), 166, 167, 171, 212, or 611 di- rectly connected with the production of in- vestment income. For purposes of this sub- paragraph, the deduction allowable under section 167 with respect to any property may be treated as the amount which would have been allowable had the taxpayer de- preciated the property under the straight line method for each taxable year of its useful life for which the taxpayer has held the property, and the deduction allowable under section 611 with respect to any prop- erty may be treated as the amount which would have been allowable had the taxpay- er determined the deduction under section 611 without regard to section 613 for each taxable year for which the taxpayer has held the property. (D) Investment interest The term "investment interest" means in- terest paid or accrued on indebtedness in- curred or continued to purchase or carry property held for investment. (E) Disallowed investment interest The term "disallowed investment inter- est" means with respect to any taxable year, the amount not allowable as a deduc- tion solely by reason of the limitation in paragraph (1). (4) Special rules (A) Property subject to net lease For purposes of this subsection, property subject to a lease shall be treated as proper- ty held for investment, and not as property used in a trade or business, for a taxable year, if- (I) for such taxable year the sum of the deductions of the lessor with respect to such property which are allowable solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) is less than 15 percent of the rental income produced by such prop- erty, or (ii) the lessor is either guaranteed a specified return or is guaranteed in whole or in part against loss of income. (B) Partnerships In the case of a partnership, each partner shall, under regulations prescribed by the Secretary, take into account separately his distributive share of the partnership's in- vestment interest and the other items of income and expense taken into account under this subsection. (C) Shareholders of electing small business cor. porations In the case of an electing small business corporation (as defined in section 1371(b)), the investment interest paid or accrued by such corporation and the other items of income and expense which would be taken into account If this subsection applied to such corporation shall, under regulations prescribed by the Secretary, be treated as investment interest paid or accrued by the shareholders of such corporation and as items of such shareholders, and shall be ap- portioned pro rata among such sharehold- ers in a manner consistent with section 1374(c)(1). (D) Construction interest For purposes of this subsection, interest paid or accrued on indebtedness incurred or continued in the construction of property to be used in a trade or business shall not be treated as investment interest. (5) Exceptions This subsection shall not apply with respect to investment interest, investment income, and investment expenses attributable to a specific item of property, if the indebtedness with respect to such property- (A) is for a specified term, and (B) was incurred before December 17, 1969, or is incurred after December 16, 1969, pursuant to a written contract or commit- ment which, on such date and at all times thereafter prior to the incurring of such in- debtedness, is binding on the taxpayer. For taxable years beginning after December 31, 1975, this paragraph shall be applied on an allocation basis rather than a specific item basis. (6) Real property leases For purposes of paragraph (4)(A)- (A) if a parcel of real property of the tax- payer is leased under two or more leases, paragraph (4)(A)(i) shall, at the election of the taxpayer, be applied by treating all leased portions of such property as subject to a single lease; and (B) at the election of the taxpayer, para- graph (4)(A)(i) shall not apply with respect to real property of the taxpayer which has been in use for more than 5 years. An election under subparagraph (A) or (B) shall be made at such time and in such manner as the Secretary prescribes by regula- tions. Page 143 § 163