To amend the Internal Revenue Code of 1986 to provide for the establishment of disabled American financial security accounts for the care of family members with disabilities.

Summary: Disabled American Financial Security Act of 2006 - Amends the Internal Revenue Code to establish tax-exempt Disabled American Financial Security Accounts to pay certain expenses, including expenses for education, medical care, and employment training, of disabled individuals.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Disabled American Financial Security 
Act of 2006''.

SEC. 2. DISABLED AMERICAN FINANCIAL SECURITY ACCOUNTS.

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

          ``PART IX--SAVINGS FOR INDIVIDUALS WITH DISABILITIES

``Sec. 530A. Disabled American Financial Security Accounts.

``SEC. 530A. DISABLED AMERICAN FINANCIAL SECURITY ACCOUNTS.

    ``(a) General Rule.--A Disabled American Financial Security Account 
shall be exempt from taxation under this subtitle. Notwithstanding the 
preceding sentence, such account shall be subject to the taxes imposed 
by section 511 (relating to imposition of tax on unrelated business 
income of charitable organizations).
    ``(b) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Disabled american financial security account.--The 
        term `Disabled American Financial Security Account' means a 
        trust created or organized in the United States (and designated 
        as a Disabled American Financial Security Account at the time 
        created or organized) exclusively for the purpose of paying 
        qualified disability expenses of an individual who is disabled 
        and who is the designated beneficiary of the trust, but only if 
        the written governing instrument creating the trust meets the 
        following requirements:
                    ``(A) No contribution will be accepted--
                            ``(i) unless it is in cash, and
                            ``(ii) except in the case of rollover 
                        contributions described in subsection (c)(4), 
                        if such contribution would result in aggregate 
                        contributions for the taxable year and all 
                        preceding taxable years exceeding $500,000.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                that person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                in life insurance contracts.
                    ``(D) The assets of the trust shall not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
            ``(2) Qualified disability expenses.--The term `qualified 
        disability expenses' means, with respect to an individual with 
        a disability, amounts paid or incurred for--
                    ``(A) education, medical care, employment training, 
                moving, daily subsistence, and assistive technology, 
                and
                    ``(B) after the designated beneficiary has attained 
                the age of 18, housing and transportation.
            ``(3) Individual with a disability.--
                    ``(A) In general.--An individual is an individual 
                with a disability if such individual has been certified 
                by a physician as having a disability.
                    ``(B) Disability.--The term `disability' means 
                disabled (within the meaning of section 1614(a)(3) of 
                the Social Security Act (42 U.S.C. 1382c(a)(3)).
                    ``(C) Physician.--The term `physician' has the 
                meaning given to such term by section 1861(r)(1) of the 
                Social Security Act (42 U.S.C. 1395x(r)(1)).
    ``(c) Tax Treatment of Distributions.--
            ``(1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of a Disabled 
        American Financial Security Account shall be included in gross 
        income by the payee or distributee, as the case may be, for the 
        taxable year in which received in the manner as provided in 
        section 72.
            ``(2) Distributions for benefit of designated 
        beneficiary.--
                    ``(A) In general.--No amount shall be includible in 
                gross income under paragraph (1) if the qualified 
                disability expenses of the designated beneficiary 
                during the taxable year are not less than the aggregate 
                distributions during the taxable year.
                    ``(B) Distributions in excess of expenses.--If such 
                aggregate distributions exceed such expenses during the 
                taxable year, the amount otherwise includible in gross 
                income under paragraph (1) shall be reduced by the 
                amount which bears the same ratio to the amount which 
                would be includible in gross income under paragraph (1) 
                (without regard to this subparagraph) as the qualified 
                disability expenses bear to such aggregate 
                distributions.
                    ``(C) Disallowance of excluded amounts as 
                deduction, credit, or exclusion.--No deduction, credit, 
                or exclusion shall be allowed to the taxpayer under any 
                other section of this chapter for any qualified 
                disability expenses to the extent taken into account in 
                determining the amount of the exclusion under this 
                paragraph.
            ``(3) Additional tax for distributions not used for benefit 
        of designated beneficiary.--
                    ``(A) In general.--The tax imposed by this chapter 
                for any taxable year on any taxpayer who receives a 
                payment or distribution from a Disabled American 
                Financial Security Account shall be increased by 10 
                percent of the amount thereof which is includible in 
                gross income under paragraph (1).
                    ``(B) Exception.--Subparagraph (A) shall not apply 
                if the payment or distribution is made to a beneficiary 
                (or to the estate of the designated beneficiary) on or 
                after the death of the designated beneficiary.
                    ``(C) Contributions returned before certain date.--
                Subparagraph (A) shall not apply to the distribution of 
                any contribution made during a taxable year if--
                            ``(i) such distribution is made before the 
                        first day of the sixth month of the taxable 
                        year following the taxable year, and
                            ``(ii) such distribution is accompanied by 
                        the amount of net income attributable to such 
                        excess contribution.
                Any net income described in clause (ii) shall be 
                included in gross income for the taxable year in which 
                such excess contribution was made.
            ``(4) Rollovers.--Paragraph (1) shall not apply to any 
        amount paid or distributed from a Disabled American Financial 
        Security Account to the extent that the amount received is 
        paid, not later than the 60th day after the date of such 
        payment or distribution, into another Disabled American 
        Financial Security Account for the benefit of the same 
        beneficiary. The preceding sentence shall not apply to any 
        payment or distribution if it applied to any prior payment or 
        distribution during the 12-month period ending on the date of 
        the payment or distribution.
            ``(5) Change in beneficiary.--Any change in the beneficiary 
        of a Disabled American Financial Security Account shall not be 
        treated as a distribution for purposes of paragraph (1) if the 
        new beneficiary is disabled and is a member of the family (as 
        defined in section 529(e)(2)) of the old beneficiary.
    ``(d) Tax Treatment of Accounts.--Rules similar to the rules of 
paragraphs (2) and (4) of section 408(e) shall apply to any Disabled 
American Financial Security Account.
    ``(e) Community Property Laws.--This section shall be applied 
without regard to any community property laws.
    ``(f) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if--
            ``(1) the assets of such account are held by a bank (as 
        defined in section 408(n) or another person who demonstrates, 
        to the satisfaction of the Secretary, that the manner in which 
        he will administer the account will be consistent with the 
        requirements of this section, and
            ``(2) the custodial account would, except for the fact that 
        it is not a trust, constitute an account described in 
        subsection (c)(1).
For purposes of this title, in the case of a custodial account treated 
as a trust by reason of the preceding sentence, the custodian of such 
account shall be treated as the trustee thereof.
    ``(g) Reports.--The trustee of a Disabled American Financial 
Security Account shall make such reports regarding such account to the 
Secretary and to the beneficiary of the account 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.
    ``(h) Coordination With Means-Tested Programs.--Amounts held by, or 
paid or distributed from, a Disabled American Financial Security 
Account shall not be taken into account in determining eligibility for, 
or the amount or extent of, benefits provided by any program funded in 
whole or in part with Federal funds.''.
    (b) Conforming Amendments.--
            (1) Penalty for failure to meet minimum distribution 
        requirement.--Subsection (c) of section 4974 of such Code is 
        amended by striking ``or'' at the end of paragraph (4), by 
        striking the period at the end of paragraph (5) and inserting 
        ``, or'', and by inserting after paragraph (5) the following 
        new paragraph:
            ``(6) any Disabled American Financial Security Account (as 
        defined in section 530A(b)).''.
            (2) Tax on prohibited transactions.--Subsection (c) of 
        section 4975 of such Code (relating to tax on prohibited 
        transactions) is amended by adding at the end the following new 
        paragraph:
            ``(7) Special rule for disabled american financial security 
        accounts.--An individual for whose benefit a Disabled American 
        Financial Security Account is established and any contributor 
        to such account shall be exempt from the tax imposed by this 
        section with respect to any transaction concerning such account 
        (which would otherwise be taxable under this section) if 
        section 530A(d) applies with respect to such transaction.''.
            (3) Reports.--Paragraph (2) of section 6693(a) of such Code 
        is amended by redesignating subparagraphs (D) and (E) as 
        subparagraphs (E) and (F), respectively, and by inserting after 
        subparagraph (C) the following new subparagraph:
                    ``(D) section 530A(g) (relating to Disabled 
                American Financial SecurityAccounts).''.
    (c) Clerical Amendment.--The table of parts for subchapter F of 
chapter 1 of such Code is amended by inserting after the item relating 
to part VIII the following new item:

        ``Part IX. Savings for Individuals With Disabilities.''.

    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.