26 U.S.C. § 641 — Imposition of tax

(a) Application of tax. The tax imposed by section 1(e) applies to the taxable income of an estate or of any kind of property held in trust. This includes: (1) income saved in trust for unborn or not-yet-identified people, people whose interests depend on a future event, or future distribution under a will or trust; (2) income that the fiduciary^* must currently distribute to beneficiaries, and income a guardian collects for an infant and must hold or distribute as a court directs; (3) income an estate receives during administration or settlement after a person dies; and (4) income that the fiduciary may choose either to distribute to beneficiaries or to save.

(b) Computation and payment. Compute an estate's or trust's taxable income in the same way as an individual's taxable income, except where this part provides otherwise. Compute the tax on that taxable income, and the fiduciary must pay it. For this subsection, treat a foreign trust^* or foreign estate^* as a nonresident alien individual who is never present in the United States.

(c) Special rules for taxation of electing small business trusts.

(1) In general. For this chapter: (A) treat the part of an electing small business trust consisting of stock^* in one or more S corporations as a separate trust; and (B) determine the tax imposed on that separate trust using the changes in paragraph (2).

(2) Modifications. For paragraph (1), these changes apply: (A) Except as section 1(h) provides, determine the tax imposed by section 1(e) using the highest tax rate listed in section 1(e). (B) The exemption amount under section 55(d) is zero. (C) Count only these income, loss, deduction, or credit items: (i) items that section 1366 requires to be counted; (ii) gain or loss from disposing of S corporation^* stock; (iii) to the extent regulations allow, State or local income taxes or administrative expenses allocable to items in clauses (i) and (ii); and (iv) interest paid or accrued on debt incurred to acquire S corporation^* stock. Do not allow a deduction or credit for anything else. Do not allocate any item listed in this paragraph to a beneficiary^*. (D) Allow no amount under paragraph (1) or (2) of section 1211(b). (E)(i) Section 642(c) does not apply. (ii) For section 170(b)(1)(G), compute adjusted gross income as for an individual, except that deductions for costs paid or incurred to administer the trust, which would not have been incurred if the property were not held in the trust, are treated as allowed in computing adjusted gross income.

(3) Treatment of remainder of trust and distributions. To determine (A) the tax on the part of the electing small business trust that paragraph (1) does not treat as a separate trust, and (B) the distributable net income^* of the whole trust, exclude the items listed in paragraph (2)(C). Other than that rule, this subsection does not change how distributions from the trust are taxed.

(4) Treatment of unused deductions where termination of separate trust. If a part of an electing small business trust stops being treated as a separate trust under paragraph (1), the whole trust must take into account any carryover or excess deduction of that separate trust described in section 642(h).

(5) Electing small business trust. In this subsection, “electing small business trust” has the meaning given in section 1361(e)(1). This section does not define that term.