(a) Application of tax The tax imposed by section
1 (e) shall apply to the taxable income of estates or of any kind of property held in trust, including
(1) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
(2) income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;
(3) income received by estates of deceased persons during the period of administration or settlement of the estate; and
(4) income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
(c) 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).
(iv) Any interest expense paid or accrued on indebtedness incurred to acquire stock in an S corporation.
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,
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).
