Developmental Disability Endowment Act

Summary: Sets forth the tax and estate tax treatment of designated beneficiaries and contributors.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Developmental Disability Endowment 
Act''.

SEC. 2. STATE DEVELOPMENTAL DISABILITIES ENDOWMENT PROGRAMS

    (a) In General.--Subchapter F of chapter 1 of the Internal Revenue 
Code of 1986 (relating to exempt organizations) is amended by adding at 
the end the following new part:

     ``PART IX--STATE DEVELOPMENTAL DISABILITIES ENDOWMENT PROGRAMS

                              ``Sec. 531. State developmental 
                                        disabilities endowment 
                                        programs.

``SEC. 531. STATE DEVELOPMENTAL DISABILITIES ENDOWMENT PROGRAMS.

    ``(a) General rule.--A qualified State developmental disabilities 
endowment program shall be exempt from taxation under this subtitle. 
Notwithstanding the preceding sentence, such program shall be subject 
to the taxes imposed by section 511 (relating to imposition of tax on 
unrelated business income of charitable organizations).
    ``(b) Qualified State Developmental Disabilities Endowment 
Program.--For purposes of this section--
            ``(1) In general.--The term `qualified State developmental 
        disabilities endowment program' means a program established and 
        maintained by a State or agency or instrumentality thereof--
                    ``(A) under which a person may make contributions 
                to an account which is established for the purpose of 
                providing qualified services to the designated 
                beneficiary of the account, and
                    ``(B) which meets the other requirements of this 
                subsection.
            ``(2) Cash contributions.--A program shall not be treated 
        as a qualified State developmental disabilities endowment 
        program unless it provides that contributions may only be made 
        in cash.
            ``(3) Refunds.--A program shall not be treated as a 
        qualified State developmental disabilities endowment program 
        unless it imposes a more than de minimis penalty on any refund 
        of earnings from the account which are not--
                    ``(A) used for qualified services with respect to 
                the designated beneficiary, or
                    ``(B) made on account of the death or disability of 
                the designated beneficiary.
            ``(4) Separate accounting.--A program shall not be treated 
        as a qualified State developmental disabilities endowment 
        program unless it provides separate accounting for each 
        designated beneficiary.
            ``(5) No investment direction.--A program shall not be 
        treated as a qualified State developmental disabilities 
        endowment program unless it provides that any contributor to, 
        or designated beneficiary under, such program may not directly 
        or indirectly direct the investment of any contributions to the 
        program (or any earnings thereon).
            ``(6) No pledging of interest as security.--A program shall 
        not be treated as a qualified State developmental disabilities 
        endowment program if it allows any interest in the program or 
        any portion thereof to be used as security for a loan.
            ``(7) Prohibition on excess contributions.--A program shall 
        not be treated as a qualified State developmental disabilities 
        endowment program unless it provides adequate safeguards to 
        prevent contributions on behalf of a designated beneficiary in 
        excess of those necessary to provide for the qualified services 
        with respect to the beneficiary.
    ``(c) Tax Treatment of Designated Beneficiaries and Contributors.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, no amount shall be includible in gross income of--
                    ``(A) a designated beneficiary under a qualified 
                State developmental disabilities endowment program, or
                    ``(B) a contributor to such program on behalf of a 
                designated beneficiary,
        with respect to any distribution or earnings under such 
        program.
            ``(2) Gift tax treatment of contributions.--For purposes of 
        chapters 12 and 13--
                    ``(A) In general.--Any contribution to a qualified 
                developmental disabilities endowment program on behalf 
                of any designated beneficiary--
                            ``(i) shall be treated as a completed gift 
                        to such beneficiary which is not a future 
                        interest in property, and
                            ``(ii) shall not be treated as a qualified 
                        transfer under section 2503(e).
                    ``(B) Treatment of excess contributions.--If the 
                aggregate amount of contributions described in 
                subparagraph (A) during the calendar year by a donor 
                exceeds the limitation for such year under section 
                2503(b), such aggregate amount shall, at the election 
                of the donor, be taken into account for purposes of 
                such section ratably over the 5-year period beginning 
                with such calendar year.
            ``(3) Distributions.--
                    ``(A) In general.--Any distribution under a 
                qualified State developmental disabilities endowment 
                program shall be includible in the gross income of the 
                distributee in the manner as provided under section 72 
                to the extent not excluded from gross income under any 
                other provision of this chapter.
                    ``(B) In-kind distributions.--Any benefit furnished 
                to a designated beneficiary under a qualified State 
                developmental disabilities endowment program shall be 
                treated as a distribution to the beneficiary.
                    ``(C) Change in beneficiaries.--
                            ``(i) Rollovers.--Subparagraph (A) shall 
                        not apply to that portion of any distribution 
                        which, within 60 days of such distribution, is 
                        transferred to the credit of another designated 
                        beneficiary under a qualified State 
                        developmental disabilities endowment program.
                            ``(ii) Change in designated 
                        beneficiaries.--Any change in the designated 
                        beneficiary of an interest in a qualified State 
                        developmental disabilities endowment program 
                        shall not be treated as a distribution for 
                        purposes of subparagraph (A).
                    ``(D) Operating rules.--For purposes of applying 
                section 72--
                            ``(i) to the extent provided by the 
                        Secretary, all qualified State developmental 
                        disabilities endowment programs of which an 
                        individual is a designated beneficiary shall be 
                        treated as one program,
                            ``(ii) all distributions during a taxable 
                        year shall be treated as one distribution, and
                            ``(iii) the value of the contract, income 
                        on the contract, and investment in the contract 
                        shall be computed as of the close of the 
                        calendar year in which the taxable year begins.
            ``(4) Estate tax treatment.--
                    ``(A) In general.--No amount shall be includible in 
                the gross estate of any individual for purposes of 
                chapter 11 by reason of an interest in a qualified 
                developmental disabilities endowment program.
                    ``(B) Amounts includible in estate of designated 
                beneficiary in certain cases.--Subparagraph (A) shall 
                not apply to amounts distributed on account of the 
                death of a beneficiary.
                    ``(C) Amounts includible in estate of donor making 
                excess contributions.--In the case of a donor who makes 
                the election described in paragraph (2)(B) and who dies 
                before the close of the 5-year period referred to in 
                such paragraph, notwithstanding subparagraph (A), the 
                gross estate of the donor shall include the portion of 
                such contributions properly allocable to periods after 
                the date of death of the donor.
            ``(5) Other gift tax rules.--For purposes of chapters 12 
        and 13, in no event shall a distribution from a qualified 
        developmental disabilities endowment program be treated as a 
        taxable gift.
    ``(d) Reports.--Each officer or employee having control of the 
qualified developmental disabilities endowment program or their 
designee shall make such reports regarding such program to the 
Secretary and to designated beneficiaries with respect to 
contributions, distributions, and such other matters as the Secretary 
may require. The reports required by this subsection shall be filed at 
such time and in such manner and furnished to such individuals at such 
time and in such manner as may be required by the Secretary.
    ``(e) Other Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Designated beneficiary.--The term `designated 
        beneficiary' means--
                    ``(A) the individual designated at the commencement 
                of participation in the qualified State developmental 
                disabilities endowment program as the beneficiary of 
                amounts paid (or to be paid) to the program,
                    ``(B) in the case of a change in beneficiaries 
                described in subsection (c)(3)(C), the individual who 
                is the new beneficiary, and
                    ``(C) any individual not described in subparagraph 
                (A) or (B) who is designated as a beneficiary under the 
                qualified developmental disabilities endowment program.
            ``(2) Qualified services.--The term `qualified services' 
        means the services designated under the qualified developmental 
        disabilities endowment program.''.
    (b) Clerical Amendment.--The table of parts for subchapter F of 
chapter 1 of such Code is amended by adding after the item relating to 
part VIII the following new item:

                              ``Part IX. State developmental 
                                        disabilities trust funds.''.

    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2000.