To amend the Internal Revenue Code of 1986 to provide for the establishment of, and the deduction of contributions to, homeownership plans.

Summary: Restore American Dream Act of 2007 - Amends the Internal Revenue Code to establish tax-exempt homeownership plans. Allows a tax deduction from gross income for cash contributions to such plans.

Defines "homeownership plan" as a trust established for the exclusive purpose of paying the costs (e.g., downpayment, interest, mortgage insurance, closing costs, etc.) of acquiring a principal residence by an individual who has never owned a principal residence.

Excludes from gross income distributions from a homeownership plan used to pay the costs of acquiring a principal residence. Sets forth rules governing: (1) transfers of an interest in a plan due to death or divorce; (2) penalties for making distributions from a plan for purposes other than to acquire a principal residence; and (3) employer homeownership plans established for the benefit of their employees.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Restore American Dream Act of 
2007''.

SEC. 2. HOMEOWNERSHIP PLANS.

    (a) In General.--Part VII of subchapter B of chapter I of the 
Internal Revenue Code of 1986 (relating to additional itemized 
deductions for individuals) is amended by redesignating section 224 as 
section 225, and by inserting after section 223 the following new 
section:

``SEC. 224. HOMEOWNERSHIP PLANS.

    ``(a) Allowance of Deduction.--In the case of an individual, there 
shall be allowed as a deduction the amounts paid in cash for the 
taxable year by or on behalf of such individual to a homeownership plan 
established for the benefit of the individual.
    ``(b) Limitations.--
            ``(1) Maximum deduction.--The deduction allowed by 
        subsection (a) for the taxable year shall not exceed the 
        limitation of section 415(c) (relating to limitation for 
        defined contribution plans).
            ``(2) Deduction not to exceed compensation.--The deduction 
        allowed under subsection (a) for the taxable year shall not 
        exceed an amount equal to the compensation includible in the 
        individual's gross income for such taxable year.
            ``(3) Period for deductions.--No deduction shall be allowed 
        under subsection (a) for any contribution made to a 
        homeownership plan after the contribution period.
            ``(4) Number of plans.--If an individual is the beneficiary 
        of more than 1 homeownership plan during any taxable year, no 
        deduction shall be allowed under subsection (a) for any amount 
        paid for such taxable year to any homeownership plan 
        established for the benefit of such individual.
            ``(5) Married individuals.--For purposes of this section--
                    ``(A) Treatment.--Married individuals filing either 
                a joint return or separate returns shall be considered 
                to be 1 individual.
                    ``(B) Establishment of plan.--A homeownership plan 
                established for the benefit of any married individual 
                shall be deemed to be established for the exclusive 
                benefit of the individual and such individual's spouse.
                    ``(C) Merger of plans.--In the event that 2 
                individuals for each of whose benefit a homeownership 
                plan has been established should marry, the 2 plans 
                shall be deemed to be merged into 1 plan. Thereafter, 
                subject to paragraph (1), each individual may make 
                contributions during the remainder of the contribution 
                period applicable to that individual.
    ``(c) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Homeownership plan.--The term `homeownership plan' 
        means a trust created or organized in the United States 
        exclusively for the purpose of paying qualified principal 
        residence acquisition expenses of the account holder, but only 
        if such account holder meets the ownership limitations 
        specified in paragraph (3) and only if the written governing 
        instrument creating the trust meets the following requirements:
                    ``(A) No contribution will be accepted unless it is 
                in cash.
                    ``(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 
                the 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 be invested in 
                accordance with the direction of the account holder.
                    ``(E) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(F) The interest of an individual in the balance 
                in his account is nonforfeitable.
                    ``(G) The entire interest of an individual for 
                whose benefit the trust is maintained will be 
                distributed to such individual at the end of the 
                contribution period.
            ``(2) Qualified principal residence acquisition expenses.--
        The term `qualified principal residence acquisition expense' 
        means an expense incurred by the taxpayer with respect to 
        acquiring a principal residence, including expenses for a 
        downpayment, interest, points, homeowners and mortgage 
        insurance, other closing costs, and other related items.
            ``(3) Ownership limitations.--The account holder shall be 
        an individual who, after attaining the age of 19 (or in the 
        case of a student has not attained the age of 24), has never 
        had a present ownership interest in a principal residence.
            ``(4) Principal residence.--The term `principal residence' 
        has the same meaning as when used in section 121.
            ``(5) Contribution period.--
                    ``(A) In general.--The term `contribution period' 
                means the 9-year period beginning on the date on which 
                the homeownership plan is established.
                    ``(B) After death or divorce.--In the case of plan 
                treated as a homeownership plan under paragraph (4) or 
                (5) of subsection (d), the contribution period shall be 
                the remaining portion of the 9-year period described in 
                subparagraph (A), determined by taking into account 
                only the employment and enrollment of the account 
                holder. In no event may the contribution period exceed 
                14 years.
            ``(6) Time when contributions deemed made.--A taxpayer 
        shall be deemed to have made a contribution to a homeownership 
        plan on the last day of the preceding taxable year if the 
        contribution is made on account of such taxable year and is 
        made not later than the time prescribed by law for filing the 
        return for such taxable year (not including extensions 
        thereof).
            ``(7) Financial hardship.--The term `financial hardship' 
        means an individual can withdraw from the homeownership plan 
        if--
                    ``(A) the withdrawal is due to an immediate and 
                heavy financial need,
                    ``(B) the withdrawal is necessary to satisfy the 
                heavy financial need, and
                    ``(C) the withdrawal does not exceed the amount 
                that is needed to relieve the heavy financial need.
    ``(d) Tax Treatment of Distributions.--
            ``(1) Amounts used for qualified principal residence 
        acquisition expenses.--Any amount paid or distributed out of a 
        homeownership plan which is used exclusively to pay qualified 
        principal residence acquisition expenses of the account holder 
        shall not be includible in gross income.
            ``(2) Inclusion of amounts not used for qualified principal 
        residence acquisition expenses.--Any amount paid or distributed 
        out of a homeownership plan which is not used exclusively to 
        pay the qualified principal residence acquisition expenses of 
        the account holder shall be included in the gross income of 
        such holder.
            ``(3) Excess contributions returned before due date of 
        return.--Paragraph (2) shall not apply to the distribution of 
        any contribution made during a taxable year to a homeownership 
        plan to the extent that such contribution exceeds the amount 
        allowable as a deduction under subsection (a) if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year,
                    ``(B) such distribution is accompanied by the 
                amount of net income attributable to such excess 
                contribution.
        Any net income described in subparagraph (B) shall be included 
        in the gross income of the individual for the taxable year in 
        which such excess contribution was made.
            ``(4) Transfer of plan incident to divorce.--The transfer 
        to an individual's spouse or former spouse under a divorce or 
        separation instrument described in subparagraph (A) of section 
        71(b)(2) shall not be considered a taxable transfer made by 
        such individual notwithstanding any other provision of this 
        subtitle, and such interest at the time of the transfer shall 
        be treated as a homeownership plan of such spouse with respect 
        to which such spouse is the account holder. For purposes of 
        subsection (c)(1)(G), the spouse shall take into account the 
        period such plan was held by the individual transferring the 
        interest.
            ``(5) Transfer of plan incident to death.--The transfer of 
        a decedent's interest in a homeownership plan to such 
        decedent's spouse shall not be considered a taxable transfer 
        made by such decedent notwithstanding any other provision of 
        this subtitle, and such interest at the time of the transfer 
        shall be treated as a homeownership plan of the surviving 
        spouse with respect to which such spouse is the account holder. 
        For purposes of subsection (c)(1)(G), the surviving spouse 
        shall take into account the period such plan was held by the 
        decedent transferring the interest.
    ``(e) Tax Treatment of Plans.--
            ``(1) Exemption from tax.--A homeownership plan shall be 
        exempt from taxation under this subtitle unless such plan has 
        ceased to be a homeownership plan. Notwithstanding the 
        preceding sentence, any such plan shall be subject to the taxes 
        imposed by section 511 (relating to imposition of tax on 
        unrelated business income of charitable, etc. organizations).
            ``(2) Loss of exemption of plan where individual engages in 
        prohibited transactions.--
                    ``(A) In general.--If, during any taxable year of 
                the individual for whose benefit the homeownership plan 
                is established, the individual engages in any 
                transaction prohibited by section 4975 with respect to 
                the plan, the plan shall cease to be a homeownership 
                plan as of the first day of such taxable year.
                    ``(B) Financial hardship exception.--Subparagraph 
                (A) shall not apply if such individual experiences 
                financial hardship and engaged in such transaction--
                            ``(i) to pay medical expenses; or
                            ``(ii) to cover funeral expenses for a 
                        family member.
                For purposes of this subparagraph, the individual for 
                whose benefit any plan was established is treated as 
                the creator of the plan.
                    ``(C) Plan treated as distributing all its 
                assets.--In any case in which any plan ceases to be a 
                homeownership plan by reason of subparagraph (A), on 
                the first day of any taxable year, subsection (d)(1) 
                shall be applied as if there were a distribution on 
                such first day in an amount equal to the fair market 
                value (on such first day) of all assets in the plan (on 
                such first day).
            ``(3) Effect of pledging plan as security.--If, during any 
        taxable year, an individual for whose benefit a homeownership 
        plan is established uses the plan or any portion thereof as 
        security for a loan, the portion so used shall be treated as 
        distributed to such individual.
            ``(4) Effect of acquisition of principal residence.--
                    ``(A) In general.--In the event that the individual 
                for whose benefit a homeownership plan is established 
                acquires a principal residence in any taxable year, 
                such plan shall cease to be a homeownership plan and 
                all assets in the plan shall be treated as distributed 
                to such individual on the first day of such taxable 
                year.
                    ``(B) Special rules upon marriage.--For purposes of 
                subparagraph (A), an individual for whose benefit a 
                homeownership plan is established shall not be treated 
                as having acquired a principal residence if, after the 
                establishment of such plan, such individual--
                            ``(i) marries an individual who owns a 
                        principal residence, but
                            ``(ii) does not obtain an ownership 
                        interest in such residence.
    ``(f) Additional Tax on Certain Amounts Included in Gross Income.--
            ``(1) Distribution not used for purchase of principal 
        residence.--The tax imposed by this chapter on the account 
        holder for any taxable year in which there is a payment or 
        distribution from a homeownership plan of such holder which is 
        includible in gross income under subsection (d)(2) shall be 
        increased by 10 percent of the amount which is so includible.
            ``(2) Disability or death cases.--Paragraph (1) shall not 
        apply if the distribution is made after the individual for 
        whose benefit the homeownership plan is established becomes 
        disabled within the meaning of section 72(m)(7) or dies.
    ``(g) Custodial Accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if 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 if the custodial account would, 
except for the fact that it is not a trust, constitute a homeownership 
plan described in subsection (c). 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.
    ``(h) Reports.--The trustee of a homeownership plan shall make such 
reports regarding such plan to the Secretary and to the individual for 
whose benefit the plan is maintained with respect to contributions, 
distributions, and such other matters as the Secretary may require 
under regulations. 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 those 
regulations.
    ``(i) Plans Established by Employers.--A trust created or organized 
in the United States by an employer for the exclusive benefit of the 
employees of the employer shall be treated as a homeownership plan, but 
only if the written governing instrument creating the plan meets the 
following requirements:
            ``(1) General requirements for homeownership plans.--The 
        plan satisfies the requirements of subparagraphs (A) through 
        (G) of subsection (c)(1).
            ``(2) Separate accounting.--There is a separate accounting 
        for the interest of each employee. The assets of the trust may 
        be held in a common fund for the account of all employees who 
        have an interest in the trust.
            ``(3) Additional requirements.--The plan satisfies 
        requirements, established in regulations issued by the 
        Secretary, similar to the requirements set forth in paragraphs 
        (2) through (8) of section 408(k) (other than paragraph 
        (2)(B)).''
    (b) Allowance of Deduction in Arriving at Adjusted Gross Income.--
Paragraph (7) of section 62(a) of such Code (relating to retirement 
savings) is amended--
            (1) by inserting ``or housing'' after ``retirement'' in the 
        heading of such paragraph; and
            (2) by inserting before the period at the end the 
        following: ``and the deduction allowed by section 224 (relating 
        to deduction of certain payments to homeownership plans)''.
    (c) Tax on Excess Contributions.--Section 4973 of such Code 
(relating to tax on excess contributions to certain tax-favored 
accounts and annuities) is amended--
            (1) by inserting after paragraph (5) the following:
            ``(6) a homeownership plan (within the meaning of section 
        224(c)),''; and
            (2) by adding at the end the following new subsection:
    ``(h) Excess Contributions to Homeownership Plans.--For purposes of 
this section, in the case of a homeownership plan (within the meaning 
of section 224(c)(1)), the term `excess contributions' means the amount 
by which the amount contributed for the taxable year to the plan 
exceeds the amount allowable as a deduction under section 224 for such 
taxable year.''.
    (d) Tax on Prohibited Transactions.--Section 4975 of such Code 
(relating to tax on prohibited transactions) is amended--
            (1) by adding at the end of subsection (c) the following 
        new paragraph:
            ``(7) Special rule for homeownership plans.--An individual 
        for whose benefit a homeownership plan is established shall be 
        exempt from the tax imposed by this section with respect to any 
        transaction concerning such plan (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the plan ceases to be a homeownership plan by 
        reason of the application of section 222(e)(2)(A) or if section 
        222(e)(3) applies to such plan.''; and
            (2) in subsection (e)(1) by striking ``or'' at the end of 
        subparagraph (F), by redesignating subparagraph (G) as 
        subparagraph (H) and inserting after subparagraph (F) the 
        following new subparagraph:
                    ``(G) a homeownership plan described in section 
                224(c), or''.
    (e) Failure To Provide Reports on Homeownership Plans.--Paragraph 
(2) of section 6693(a) of such Code (relating to failure to provide 
reports on certain tax-favored accounts or annuities; penalties 
relating to designated nondeductible contributions) is amended by 
striking ``and'' at the end of subparagraph (D), by striking the period 
at the end of subparagraph (E) and inserting ``, and'', and by 
inserting after subparagraph (E) to following new subparagraph:
                    ``(F) section 224(i) (relating to homeownership 
                plans).''.
    (f) Clerical Amendments.--The table of sections for part VII of 
subchapter B of chapter 1 of such Code is amended by striking the item 
relating to section 224 and inserting the following:

``Sec. 224. Homeownership plans.
``Sec. 225. Cross reference.''.
    (g) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2007.