For purposes of this paragraph, the term qualified convertible debt instrument means any bond or other evidence of indebtedness— (i) which is originally issued by the corporation to the taxpayer, (ii) the issuer of which— (I) from issuance until conversion, is a qualified small business, and (II) during substantially all of the taxpayer’s holding period of such bond or evidence of indebtedness, the corporation meets the active business requirements of subsection (e), and (iii) which is convertible into stock in the corporation. . (b) Effective date The amendments made by this section shall apply to debt instruments originally issued after the date of the enactment of this Act. 4. Gain exclusion allowed with respect to qualified small business stock in corporation (a) In general Section 1202(c) of the Internal Revenue Code of 1986 is amended— (1) by striking C corporation in paragraphs (1) and inserting corporation , and (2) by striking and such corporation is a C corporation in paragraph (2)(A). (b) Qualified small business definition Section 1202(d)(1) of such Code is amended by striking which is a C corporation . (c) Clarification of aggregation rules applicable to S corporations Section 1202(d)(3) of such Code is amended by adding at the end the following new subparagraph: (C) Clarification with respect to S corporations Any determination of the members of a controlled group of corporations under this paragraph shall include taking into account any stock ownership in an S corporation. . (d) Treatment of passive losses Section 469(g)(1) of such Code is amended by adding at the end the following new subparagraph: (D) Certain dispositions of small business stock In the case a disposition any gain from which is excluded from gross income under section 1202, subparagraph (A) shall not apply. . (e) Special rules relating to S corporations Section 1202(e) of such Code is amended by adding at the end the following new paragraph: (9) Applied at S corporation level In the case of an S corporation, the requirements of