110 STAT. 1778 PUBLIC LAW 104-188—AUG. 20, 1996 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) 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) SPECLVL RULES FOR TAXATION OF ELECTING SMALL BUSI- NESS 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 DISTRIBU- TIONS.— 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.