ELECTING SMALL BUSINESS TRUSTS.

SEC. 1302. ELECTING SMALL BUSINESS TRUSTS. (a) General Rule.— Subparagraph (A) of section 1361(c)(2) (relating to certain trusts permitted as shareholders) is amended by inserting after clause (iv) the following new clause: “(v) An electing small business trust.”. (b) Current Beneficiaries Treated As Shareholders.— Subparagraph (B) of section 1361(c)(2) is amended by adding at the end the following new clause: “(v) In the case of a trust described in clause (v) of subparagraph (A), each potential current beneficiary of such trust shall be treated as a shareholder; except that, if for any period there is no potential current beneficiary of such trust, such trust shall be treated as the shareholder during such period.”. (c) Electing Small Business Trust Defined.— Section 1361 (defining S corporation) is amended by adding at the end the following new subsection: “(e) Electing Small Business Trust Defined.— “(1) Electing small business trust.— For purposes of this section— “(A) In general.— Except as provided in subparagraph (B), the term ‘electing small business trust’ means any trust if— “(i) such trust does not have as a beneficiary any person other than (I) an individual, (II) an estate, or (III) an organization described in paragraph (2), (3), (4), or (5) of section 170(c) which holds a contingent interest and is not a potential current beneficiary, “(ii) no interest in such trust was acquired by purchase, and “(iii) an election under this subsection applies to such trust. “(B) Certain trusts not eligible.— The term ‘electing small business trust’ shall not include— “(i) any qualified subchapter S trust (as defined in subsection (d)(3)) if an election under subsection (d)(2) applies to any corporation the stock of which is held by such trust, and “(ii) any trust exempt from tax under this subtitle. “(C) Purchase.— For purposes of subparagraph (A), the term ‘purchase’ means any acquisition if the basis of the property acquired is determined under section 1012. “(2) Potential current beneficiary.— For purposes of this section, the term ‘potential current beneficiary’ means,110 STAT. 1778 with respect to any period, any person who at any time during such period is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust. If a trust disposes of all of the stock which it holds in an S corporation, then, with respect to such corporation, the term ‘potential current beneficiary’ does not include any person who first met the requirements of the preceding sentence during the 60-day period ending on the date of such disposition. “(3) Election.— An election under this subsection shall be made by the trustee. Any such election shall apply to the taxable year of the trust for which made and all subsequent taxable years of such trust unless revoked with the consent of the Secretary. “(4) Cross reference.— “For special treatment of electing small business trusts, see section 641(d).”. (d) Taxation Of Electing Small Business Trusts.— Section 641 (relating to imposition of tax on trusts) is amended by adding at the end the following new subsection: “(d) Special Rules for Taxation of Electing Small Business Trusts.— “(1) In general.— For purposes of this chapter— “(A) the portion of any electing small business trust which consists of stock in 1 or more S corporations shall be treated as a separate trust, and “(B) the amount of the tax imposed by this chapter on such separate trust shall be determined with the modifications of paragraph (2). “(2) Modifications.— For purposes of paragraph (1), the modifications of this paragraph are the following: “(A) Except as provided in section 1(h), the amount of the tax imposed by section 1(e) shall be determined by using the highest rate of tax set forth in section 1(e). “(B) The exemption amount under section 55(d) shall be zero. “(C) The only items of income, loss, deduction, or credit to be taken into account are the following: “(i) The items required to be taken into account under section 1366. “(ii) Any gain or loss from the disposition of stock in an S corporation. “(iii) To the extent provided in regulations, State or local income taxes or administrative expenses to the extent allocable to items described in clauses (i) and (ii). No deduction or credit shall be allowed for any amount not described in this paragraph, and no item described in this paragraph shall be apportioned to any beneficiary. “(D) No amount shall be allowed under paragraph (1) or (2) of section 1211(b). “(3) Treatment of remainder of trust and distributions.— For purposes of determining— “(A) the amount of the tax imposed by this chapter on the portion of any electing small business trust not treated as a separate trust under paragraph (1), and “(B) the distributable net income of the entire trust,110 STAT. 1779 the items referred to in paragraph (2)(C) shall be excluded. Except as provided in the preceding sentence, this subsection shall not affect the taxation of any distribution from the trust. “(4) Treatment of unused deductions where termination of separate trust.— If a portion of an electing small business trust ceases to be treated as a separate trust under paragraph (1), any carryover or excess deduction of the separate trust which is referred to in section 642(h) shall be taken into account by the entire trust. “(5) Electing small business trust.— For purposes of this subsection, the term ‘electing small business trust’ has the meaning given such term by section 1361(e)(1).”. (e) Technical Amendment.— Paragraph (1) of section 1366(a) is amended by inserting “, or of a trust or estate which terminates,” after “who dies”.