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TITLE 26-INTERNAL REVENUE CODE (6) Expenses and depreciation applicable to proper- ty of the taxpayer The aggregate of the deductions allowed under section 162 (relating to trade or busi- ness expenses) and section 167 (relating to de- preciation), which are allocable to the oper- ation and maintenance of property owned or operated by the corporation, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is estab- lished (under regulations prescribed by the Secretary) to the satisfaction of the Secre. tary- (A) that the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtain- able; (B) that the property was held in the course of a business carried on bona fide for profit; and (C) either that there was reasonable ex- pectation that the operation of the proper- ty would result in a profit, or that the prop- erty was necessary to the conduct of the business. (c) Special adjustment to taxable income (1) In general Except as otherwise provided in this subsec- tion, for purposes of subsection (a) there shall be allowed as a deduction amounts used, or amounts irrevocably set aside (to the extent reasonable with reference to the size and terms of the indebtedness), to pay or retire qualified indebtedness. (2) Corporations to which applicable This subsection shall apply only with re- spect to a corporation- (A) which for at least one of the two most recent taxable years ending before Febru- ary 26, 1964 was not a personal holding company under section 542, but would have been a personal holding company under sec- tion 542 for such taxable year if the law ap- plicable for the first taxable year beginning after December 31, 1963, had been applica- ble to such taxable year, or (B) to the extent that it succeeds to the deduction referred to in paragraph (1) by reason of section 381(c)(15). (3) Qualified indebtedness (A) In general Except as otherwise provided in this para- graph, for purposes of this subsection the term "qualified indebtedness" means- (I) the outstanding indebtedness in- curred by the taxpayer after December 31, 1933, and before January 1, 1964, and (ii) the outstanding indebtedness in- carred after December 31, 1963, for the purpose of making a payment or set-aside referred to in paragraph (1) in the same taxable year, but, in the case of such a payment or set-aside which is made on or after the first day of the first taxable year beginning after December 31, 1963, only to the extent the deduction other- wise allowed in paragraph (1) with respect to such payment or set-aside is treated as nondeductible by reason of the election provided in paragraph (4). (B) Exception For purposes of subparagraph (A), quali- fied indebtedness does not include any amounts which were, at any time after De- cember 31, 1963, and before the payment or set-aside, owed to a person who at such time owned (or was considered as owning within the meaning of section 318(a)) more than 10 percent in value of the taxpayer's outstand- Ing stock. (C) Reduction for amounts irrevocably set aside For purposes of subparagraph (A), the qualified indebtedness with respect to a contract shall be reduced by amounts irre- vocably set aside before the taxable year to pay or retire such indebtedness; and no de- duction shall be allowed under paragraph (1) for payments out of amounts so set aside. (4) Election not to deduct A taxpayer may elect, under regulations prescribed by the Secretary, to treat as non- deductible an amount otherwise deductible under paragraph (1); but only if the taxpayer files such election on or before the 15th day of the third month following the close of the taxable year with respect to which such elec- tion applies, designating therein the amounts which are to be treated as nondeductible and specifying the indebtedness (referred to in paragraph (3)(A)(ii)) incurred for the purpose of making the payment or set-aside. (5) Limitations The deduction otherwise allowed by this subsection for the taxable year shall be re- duced by the sum of- (A) the amount, if any, by which- (I) the deductions allowed for the tax- able year and all preceding taxable years beginning after December 31, 1963, for ex- haustion, wear and tear, obsolescence, am- ortization, or depletion (other than such deductions which are disallowed in com- puting undistributed personal holding company income under subsection (b)(6)), exceed (ii) any reduction, by reason of this sub- paragraph, of the deductions otherwise al- lowed by this subsection for such preced- ing taxable years, and (B) the amount, if any, by which- (1) the deductions allowed under subsec- tion (b)(5) in computing undistributed personal holding company income for the taxable year and all preceding taxable years beginning after December 31, 1963, exceed (i) any reduction, by reason of this sub- paragraph, of the deductions otherwise al- lowed by this subsection for such preced- ing taxable years. (6) Pro-rata reduction in certain cases For purposes of paragraph (3)(A), if proper- ty (of a character which is subject to an allowance for exhaustion, wear and tear, ob- solescence, amortization, or depletion) is dis- posed of after December 31, 1963, tha total Page 417/ § 545