To amend the Internal Revenue Code of 1986 to provide an exemption from income taxation for qualified State tuition programs.

SECTION 1. QUALIFIED STATE TUITION 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 VIII--QUALIFIED STATE TUITION PROGRAMS

                              ``Sec. 529. Qualified State tuition 
                                        programs.

``SEC. 529. QUALIFIED STATE TUITION PROGRAMS.

    ``(a) General Rule.--A qualified State tuition 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 Tuition Program.--For purposes of this 
section--
            ``(1) In general.--The term `qualified State tuition 
        program' means a program established and maintained by a State 
        or agency or instrumentality thereof--
                    ``(A) under which a person--
                            ``(i) may purchase tuition credits or 
                        certificates on behalf of a designated 
                        beneficiary which entitle the beneficiary to 
                        the waiver or payment of qualified higher 
                        education expenses of the beneficiary, or
                            ``(ii) may make contributions to an account 
                        which is established for the sole purpose of 
                        meeting the qualified higher education expenses 
                        of 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 tuition program unless it provides that 
        purchases or contributions may only be made in cash.
            ``(3) Refunds.--A program shall not be treated as a 
        qualified State tuition 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 higher education expenses 
                of the designated beneficiary,
                    ``(B) made on account of the death or disability of 
                the designated beneficiary, or
                    ``(C) made on account of a scholarship received by 
                the designated beneficiary to the extent the amount of 
                the refund does not exceed the amount of the 
                scholarship used for qualified higher education 
                expenses.
            ``(4) Separate accounting.--A program shall not be treated 
        as a qualified State tuition program unless it provides 
        separate accounting for each designated beneficiary.
            ``(5) No investment direction.--A program shall not be 
        treated as a qualified State tuition program unless it provides 
        that any contributor to, or designated beneficiary under, such 
        program may not 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 tuition program if it 
        allows any interest in the program or any portion thereof to be 
        used as security for a loan.
    ``(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 tuition program, or
                    ``(B) a contributor to such program on behalf of a 
                designated beneficiary,
        with respect to any distribution from, or earnings under, such 
        program.
            ``(2) Distributions.--
                    ``(A) In general.--Any distribution under a 
                qualified State tuition program shall be includible in 
                the gross income of the distributee in the same 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.--The furnishing of 
                education to a designated beneficiary under a qualified 
                State tuition 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 tuition 
                        program who is a member of the same family as 
                        the designated beneficiary with respect to 
                        which the distribution was made.
                            ``(ii) Change in designated 
                        beneficiaries.--Any change in the designated 
                        beneficiary of an interest in a qualified State 
                        tuition program shall not be treated as a 
                        distribution for purposes of subparagraph (A) 
                        if the new beneficiary is a member of the same 
                        family as the old beneficiary.
                    ``(D) Operating rules.--For purposes of applying 
                section 72--
                            ``(i) all qualified State tuition 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.
            ``(3) Gift tax treatment.--Any contribution on behalf of a 
        designated beneficiary to a qualified State tuition program 
        shall be treated as a qualified transfer for purposes of 
        section 2503(e).
    ``(d) Reporting Requirements.--
            ``(1) In general.--If--
                    ``(A) a designated beneficiary is furnished 
                education under a qualified State tuition program 
                during any calendar year, or
                    ``(B) there is a distribution to any individual 
                with respect to an interest in such program during any 
                calendar year,
        each officer or employee having control of the qualified State 
        tuition program or their designee shall make such reports as 
        the Secretary may require regarding such education or 
        distribution to the Secretary and to the designated beneficiary 
        or the individual to whom the distribution was made. Any such 
        report shall include such information as the Secretary may 
        prescribe.
            ``(2) Timing of reports.--Any report required by this 
        subsection--
                    ``(A) shall be filed at such time and in such 
                matter as the Secretary prescribes, and
                    ``(B) shall be furnished to individuals not later 
                than January 31 of the calendar year following the 
                calendar year to which such report relates.
    ``(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 tuition 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)(2)(C)(ii), the individual 
                who is the new beneficiary, and
                    ``(C) in the case of an interest in a qualified 
                State tuition program purchased by a State or local 
                government or an organization described in section 
                501(c)(3) and exempt from taxation under section 501(a) 
                as part of a scholarship program operated by such 
                government or organization, the individual receiving 
                such interest as a scholarship.
            ``(2) Member of family.--The term `member of family' has 
        the same meaning given such term as section 2032A(e)(2).
            ``(3) Qualified higher education expenses.--The term 
        `qualified higher education expenses' means tuition, fees, 
        books, supplies, and equipment required for the enrollment or 
        attendance of a designated beneficiary at an eligible education 
        institution (as defined in section 135(c)(3)).
            ``(4) Application of section 514.--An interest in a 
        qualified State tuition program shall not be treated as debt 
        for purposes of section 514.''.
    (b) Effective Dates.--
            (1) In general.--The amendments made by this section shall 
        apply to taxable years ending after the date of the enactment 
        of this Act.
            (2) Transition rule.--If--
                    (A) a State or agency or instrumentality thereof 
                maintains, on the date of the enactment of this Act, a 
                program under which persons may purchase tuition 
                credits or certificates on behalf of, or make 
                contributions for education expenses of, a designated 
                beneficiary, and
                    (B) such program meets the requirements of a 
                qualified State tuition program before the later of--
                            (i) the date which is 1 year after such 
                        date of enactment, or
                            (ii) the first day of the first calendar 
                        quarter after the close of the first regular 
                        session of the State legislature that begins 
                        after such date of enactment,
                the amendments made by this section shall apply to 
                contributions (and earnings allocable thereto) made 
                before the later of such dates without regard to 
                whether any requirements of such amendments are met 
                with respect to such contributions and earnings. For 
                purposes of subparagraph (B)(ii), if a State has a 2-
                year legislative session, each year of such session 
                shall be deemed to be a separate regular session of the 
                State legislature.

Summary: Amends the Internal Revenue Code to exempt from taxation a qualified State tuition program. Defines such a program.