Dairy Augmentation for Increased Retail in Yogurt products (DAIRY) Act

Summary: Dairy Augmentation for Increased Retail in Yogurt products (DAIRY) Act - Amends the Internal Revenue Code to: (1) establish tax-exempt dairy farm savings accounts to allow taxpayers engaged in the trade or business of dairy farming to use distributions from such accounts to pay business expenses; (2) allow a deduction from gross income for cash contributions to such accounts; and (3) set forth tax rules relating to, and penalties for, account distributions, excess contributions, and prohibited transactions. 

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Dairy Augmentation for Increased 
Retail in Yogurt products (DAIRY) Act''.

SEC. 2. ESTABLISHMENT OF DAIRY FARM SAVINGS ACCOUNTS.

    (a) In General.--Part VII of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 is amended by redesignating section 224 
as section 225 and by inserting after section 223 the following new 
section:

``SEC. 224. DAIRY FARM SAVINGS ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of a qualified dairy farmer, 
there shall be allowed as a deduction for the taxable year an amount 
equal to the aggregate amount paid in cash during such taxable year by 
or on behalf of such individual to a dairy farm savings account of such 
individual.
    ``(b) Account Balance Limitation.--A deduction shall not be allowed 
under subsection (a) with respect to any portion of a contribution to a 
dairy farm savings account of an individual if such contribution would 
result in the sum of the balances in all such accounts of such 
individual to exceed 150 percent of the individual's 3-year average of 
income derived from dairy farming.
    ``(c) Qualified Dairy Farmer.--For purposes of this section, the 
term `qualified dairy farmer' means, with respect to any taxable year, 
any individual who, during such year was engaged in the trade or 
business of dairy farming.
    ``(d) Dairy Farm Savings Account.--For purposes of this section--
            ``(1) In general.--The term `dairy farm savings account' 
        means a trust created or organized in the United States as a 
        dairy farm savings account exclusively for the purpose of 
        making qualified distributions, but only if the written 
        governing instrument creating the trust meets the following 
        requirements:
                    ``(A) Except in the case of a rollover contribution 
                described in subsection (f)(4), no contribution will be 
                accepted unless it is in cash.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)), an insurance company (as defined in section 
                816), or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such 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 anything other than--
                            ``(i) cash,
                            ``(ii) securities issued by the United 
                        States Treasury, or
                            ``(iii) or such other low-risk, interest-
                        bearing securities as are approved by the 
                        Secretary.
                    ``(D) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
                    ``(E) The interest of an individual in the balance 
                in his account is nonforfeitable.
            ``(2) Qualified distribution.--The term `qualified 
        distribution' means any amount paid from a dairy farm savings 
        account to the account beneficiary to the extent that such 
        amount when added to all other amounts paid from such accounts 
        to such beneficiary during the taxable year (other than 
        rollover contributions) does not exceed the excess (if any) 
        of--
                    ``(A) 100 percent of such beneficiary's 3-year 
                average of income derived from dairy farming, over
                    ``(B) such beneficiary's gross income derived from 
                dairy farming for the taxable year.
            ``(3) 3-year average of income derived from dairy 
        farming.--The term `3-year average of income derived from dairy 
        farming' means, with respect to any individual--
                    ``(A) the sum of the individual's gross income 
                derived from dairy farming for the taxable year and the 
                2 preceding taxable years, divided by
                    ``(B) the number of taxable years taken into 
                account under subparagraph (A) during which such 
                individual was engaged in the trade or business of 
                dairy farming.
            ``(4) Account beneficiary.--The term `account beneficiary' 
        means the individual on whose behalf the dairy farm savings 
        account was established.
            ``(5) Special rules; other rules.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 219(d)(2) (relating to no deduction 
                for rollovers).
                    ``(B) Section 219(f)(3) (relating to time when 
                contributions deemed made).
                    ``(C) Section 408(g) (relating to community 
                property laws).
                    ``(D) Section 408(h) (relating to custodial 
                accounts).
    ``(e) Tax Treatment of Accounts.--
            ``(1) In general.--A dairy farm savings account is exempt 
        from taxation under this subtitle unless such account has 
        ceased to be a dairy farm savings account. Notwithstanding the 
        preceding sentence, any such account is subject to the taxes 
        imposed by section 511 (relating to imposition of tax on 
        unrelated business income of charitable, etc. organizations).
            ``(2) Termination of accounts.--If the account beneficiary 
        ceases to engage in the trade or business of dairy farming--
                    ``(A) all dairy farm savings accounts of such 
                individual shall cease to be such accounts, and
                    ``(B) the balance of all such accounts shall be 
                treated as--
                            ``(i) distributed to such individual, and
                            ``(ii) not paid in a qualified 
                        distribution.
            ``(3) Prohibited transactions; pledging account as 
        security.--Rules similar to the rules of paragraphs (2) and (4) 
        of section 408(e) shall apply to dairy farm savings accounts, 
        and any amount treated as distributed under such rules shall be 
        treated as not used to pay qualified distributions.
    ``(f) Tax Treatment of Distributions.--
            ``(1) In general.--Any amount paid or distributed out of a 
        dairy farm savings account (other than a rollover contribution 
        described in paragraph (4)) shall be included in gross income 
        of the account beneficiary in the manner provided under section 
        72. Rules similar to the rules of paragraphs (2) and (3)(H) of 
        section 408(d) shall apply for purposes of this paragraph.
            ``(2) Additional tax on non-qualified distributions.--
                    ``(A) In general.--The tax imposed by this chapter 
                on the account beneficiary for any taxable year in 
                which there is a payment or distribution from a dairy 
                farm savings account of such beneficiary which is not a 
                qualified distribution shall be increased by 15 percent 
                of the amount of such payment or distribution which is 
                not a qualified distribution.
                    ``(B) Exception for disability or death.--
                Subparagraph (A) shall not apply if the payment or 
                distribution is made after the account beneficiary 
                becomes disabled within the meaning of section 72(m)(7) 
                or dies.
            ``(3) Excess contributions returned before due date of 
        return.--
                    ``(A) In general.--If any excess contribution is 
                contributed for a taxable year to a dairy farm savings 
                account of an individual, paragraph (2) shall not apply 
                to distributions from the dairy farm savings accounts 
                of such individual (to the extent such distributions do 
                not exceed the aggregate excess contributions to all 
                such accounts of such individual for such year) if--
                            ``(i) such distribution is received by the 
                        individual on or before the last day prescribed 
                        by law (including extensions of time) for 
                        filing such individual's return for such 
                        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 the gross income of the individual for the 
                taxable year in which it is received.
                    ``(B) Excess contribution.--For purposes of 
                subparagraph (A), the term `excess contribution' means 
                any contribution (other than a rollover contribution) 
                which is not deductible under this section.
            ``(4) Rollover contribution.--An amount is described in 
        this paragraph as a rollover contribution if it meets the 
        requirements of subparagraphs (A) and (B).
                    ``(A) In general.--For purposes of this section, 
                any amount paid or distributed from a dairy farm 
                savings account to the account beneficiary shall be 
                treated as a qualified distribution to the extent the 
                amount received is paid into a dairy farm savings 
                account for the benefit of such beneficiary not later 
                than the 60th day after the day on which the 
                beneficiary receives the payment or distribution.
                    ``(B) Limitation.--This paragraph shall not apply 
                to any amount described in subparagraph (A) received by 
                an individual from a dairy farm savings account if, at 
                any time during the 1-year period ending on the day of 
                such receipt, such individual received any other amount 
                described in subparagraph (A) from a dairy farm savings 
                account which was not included in the individual's 
                gross income because of the application of this 
                paragraph.
            ``(5) Transfer of account incident to divorce.--The 
        transfer of an individual's interest in a dairy farm savings 
        account 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 shall, after such transfer, be 
        treated as a dairy farm savings account with respect to which 
        such spouse is the account beneficiary.
            ``(6) Treatment after death of account beneficiary.--
                    ``(A) Treatment if designated beneficiary is 
                spouse.--If the account beneficiary's surviving spouse 
                acquires such beneficiary's interest in a dairy farm 
                savings account by reason of being the designated 
                beneficiary of such account at the death of the account 
                beneficiary, such dairy farm savings account shall be 
                treated as if the spouse were the account beneficiary.
                    ``(B) Other cases.--
                            ``(i) In general.--If, by reason of the 
                        death of the account beneficiary, any person 
                        acquires the account beneficiary's interest in 
                        a dairy farm savings account in a case to which 
                        subparagraph (A) does not apply--
                                    ``(I) such account shall cease to 
                                be a dairy farm savings account as of 
                                the date of death, and
                                    ``(II) an amount equal to the fair 
                                market value of the assets in such 
                                account on such date shall be included 
                                if such person is not the estate of 
                                such beneficiary, in such person's 
                                gross income for the taxable year which 
                                includes such date, or if such person 
                                is the estate of such beneficiary, in 
                                such beneficiary's gross income for the 
                                last taxable year of such beneficiary.
                            ``(ii) Deduction for estate taxes.--An 
                        appropriate deduction shall be allowed under 
                        section 691(c) to any person (other than the 
                        decedent or the decedent's spouse) with respect 
                        to amounts included in gross income under 
                        clause (i) by such person.
    ``(g) Reports.--The Secretary may require the trustee of a dairy 
farm savings account to make such reports regarding such account to the 
Secretary and to the account beneficiary with respect to contributions, 
distributions, and such other matters as the Secretary determines 
appropriate. 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.''.
    (b) Deduction Allowed Whether or Not Individual Itemizes Other 
Deductions.--Subsection (a) of section 62 of such Code is amended by 
inserting after paragraph (21) the following new paragraph:
            ``(22) Dairy farm savings accounts.--The deduction allowed 
        by section 224.''.
    (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 striking ``or'' at the end of subsection (a)(4), by 
        inserting ``or'' at the end of subsection (a)(5), and by 
        inserting after subsection (a)(5) the following new paragraph:
            ``(6) a dairy farm savings account (within the meaning of 
        section 224(d)),''; and
            (2) by adding at the end the following new subsection:
    ``(h) Excess Contributions to Dairy Farm Savings Accounts.--For 
purposes of this section, in the case of dairy farm savings accounts 
(within the meaning of section 224(d)), the term `excess contribution' 
means the sum of--
            ``(1) the aggregate amount contributed for the taxable year 
        to the accounts (other than rollover contributions described in 
        section 224(f)(4)) which is not allowable as a deduction under 
        section 224 for such year, and
            ``(2) the amount determined under this subsection for the 
        preceding taxable year, reduced by the sum of--
                    ``(A) the distributions out of the accounts with 
                respect to which additional tax was imposed under 
                section 224(f)(2), and
                    ``(B) the excess (if any) of--
                            ``(i) the maximum amount allowable as a 
                        deduction under section 224(b) for the taxable 
                        year, over
                            ``(ii) the amount contributed to the 
                        accounts for the taxable year.
                For purposes of this subsection, any contribution which 
                is distributed out of the dairy farm savings account in 
                a distribution to which section 224(f)(3) applies shall 
                be treated as an amount not contributed.''.
    (d) Tax on Prohibited Transactions.--
            (1) Section 4975(c) of such Code (relating to tax on 
        prohibited transactions) is amended by adding at the end the 
        following new paragraph:
            ``(7) Special rule for dairy farm savings accounts.--An 
        individual for whose benefit a dairy farm savings account 
        (within the meaning of section 224(d)) is established 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, with respect to such 
        transaction, the account ceases to be a dairy farm savings 
        account by reason of the application of section 224(e)(2) to 
        such account.''.
            (2) Section 4975(e)(1) of such Code is amended by 
        redesignating subparagraphs (F) and (G) as subparagraphs (G) 
        and (H), respectively, and by inserting after subparagraph (E) 
        the following new subparagraph:
                    ``(F) a dairy farm savings account described in 
                section 224(d),''.
    (e) Failure To Provide Reports on Dairy Farm Savings Accounts.--
Section 6693(a)(2) of such Code (relating to reports) 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 224(g) (relating to dairy farm 
                savings accounts),''.
    (f) Clerical Amendment.--The table of sections for part VII of 
subchapter B of chapter 1 of such Code is amended by redesignating the 
item relating to section 224 as relating to section 225 and by 
inserting after the item relating to section 223 the following:

``Sec. 224. Dairy farm savings accounts.''.
    (g) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after the date of the enactment of this 
Act.