PUBLIC LAW 104-188—AUG. 20, 1996 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 tsixation of any distribution from the trust. "(4) TREATMENT OF UNUSED DEDUCTIONS WHERE TERMI- NATION 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". SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN TRUSTS. Subparagraph (A) of section 1361(c)(2) (relating to certain trusts permitted as shareholders) is amended— (1) by striking "60-day period" each place it appears in clauses (ii) and (iii) and inserting "2-year period", and (2) by striking the last sentence in clause (ii). SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE HARBOR DEBT. Clause (iii) of section 1361(c)(5)(B) (defining straight debt) is amended by striking "or a trust described in paragraph (2)" and inserting "a trust described in paragraph (2), or a person which is actively and regularly engaged in the business of lending money". SEC. 1305. RULES RELATING TO INADVERTENT TERMINATIONS AND INVALID ELECTIONS. (a) GENERAL RULE. —Subsection (f) of section 1362 (relating to inadvertent terminations) is amended to read as follows: " (f) INADVERTENT INVALID ELECTIONS OR TERMINATIONS. — If—- "(1) an election under subsection (a) by any corporation— "(A) was not effective for the taxable year for which made (determined without regard to subsection (b)(2)) by reason of a failure to meet the requirements of section 1361(b) or to obtain shareholder consents, or "(B) was terminated under paragraph (2) or (3) of subsection (d), "(2) the Secretary determines that the circumstances resulting in such ineffectiveness or termination were inadvertent, "(3) no later than a reasonable period of time after discovery of the circumstances resulting in such ineffectiveness or termination, steps were taken— "(A) so that the corporation is a small business corpora- - tion, or "(B) to acquire the required shareholder consents, and "(4) the corporation, and each person who was a shareholder in the corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of the corporation as an S corporation) as may be required by the Secretary with respect to such period.
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