**DESCRIPTION OF CHAIRMAN'S MARK**

**OF AN AMENDMENT TO S. 1133**

**("PARENT AND STUDENT SAVINGS ACCOUNT PLUS ACT")**

Scheduled for Markup

By the

SENATE COMMITTEE ON FINANCE

on February 10, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

February 6, 1998

JCX-5-98

----

**CONTENTS**

INTRODUCTION	

	I.	EDUCATION SAVINGS AND EMPLOYER-PROVIDED	EDUCATIONAL ASSISTANCE	

	II.	REVENUE OFFSETS		

- Employer deductions for vacation pay	 Foreign tax credit carryover rules
**INTRODUCTION**

	The Senate Committee on Finance has scheduled a markup on February 10, 1998, on aproposed Chairman's amendment ("Chairman's mark") to S. 1133 ("Parent and Student SavingsAccount Plus Act").

	S. 1133, which was introduced by Senator Coverdell on July 31, 1997, and was referredto the Senate Committee on Finance, would expand and modify the education IRAs enacted in theTaxpayer Relief Act of 1997 by increasing the annual contribution limit and by including asqualified expenses certain elementary and secondary education expenses.

	The Chairman's mark would be an amendment to S. 1133 in the nature of a substitute. This document,(1) prepared by the staff of the Joint Committee on Taxation, provides a descriptionof the Chairman's mark.  Part I is a description of the provisions relating to education savings andemployer-provided educational assistance, and Part II is a description of the revenue offsetsrelating to the treatment of the employer deductions for vacation pay and the foreign tax creditcarryover rules.  

**I.  EDUCATION SAVINGS AND EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE**

**Present Law**

**Education IRAs**

In general.--Section 530 provides tax-exempt status to "education IRAs," meaning certaintrusts (or custodial accounts) which are created or organized in the United States exclusively forthe purpose of paying the qualified higher education expenses of a named beneficiary.(2) Contributions to education IRAs may be made only in cash.  Annual contributions to educationIRAs may not exceed $500 per designated beneficiary (except in cases involving certain tax-freerollovers, as described below), and may not be made after the designated beneficiary reaches age18.(3)  Moreover, section 4973 imposes a penalty excise tax if a contribution is made by any personto an education IRA established on behalf of a beneficiary during any taxable year in which anycontributions are made by anyone to a qualified State tuition program (defined under sec. 529) onbehalf of the same beneficiary.  These provisions were enacted as part of the Taxpayer Relief Actof 1997 ("1997 Act").

Phase-out of contribution limit.--The $500 annual contribution limit for education IRAs isphased out ratably for contributors with modified AGI between $95,000 and $110,000 ($150,000and $160,000 for joint returns).  Individuals with modified AGI above the phase-out range are notallowed to make contributions to an education IRA established on behalf of any other individual.

Treatment of distributions.--Amounts distributed from education IRAs are excludablefrom gross income to the extent that the amounts distributed do not exceed qualified highereducation expenses of the designated beneficiary incurred during the year the distribution is made(provided that a HOPE credit or Lifetime Learning credit is not claimed under sec. 25A withrespect to the beneficiary for the same taxable year).(4)  If a HOPE credit or Lifetime Learningcredit is claimed with respect to a student for a taxable year, then a distribution from an educationIRA may (at the option of the taxpayer) be made during that taxable year on behalf of thatstudent, but an exclusion is not available under the Act for the earnings portion of suchdistribution.(5)

	Distributions from an education IRA generally are deemed to consist of distributions ofprincipal (which, under all circumstances, are excludable from gross income) and earnings (whichmay be excludable from gross income) by applying the ratio that the aggregate amount ofcontributions to the account for the beneficiary bears to the total balance of the account.(6)  If thequalified higher education expenses of the student for the year are at least equal to the totalamount of the distribution (i.e., principal and earnings combined) from an education IRA, then theearnings in their entirety will be excludable from gross income.  If, on the other hand, the qualifiedhigher education expenses of the student for the year are less than the total amount of thedistribution (i.e., principal and earnings combined) from an education IRA, then the qualifiedhigher education expenses will be deemed to be paid from a pro-rata share of both the principaland earnings components of the distribution.  Thus, in such a case, only a portion of the earningswill be excludable under section 530 (i.e., a portion of the earnings based on the ratio that thequalified higher education expenses bear to the total amount of the distribution) and the remainingportion of the earnings will be includible in the distributee's gross income.(7)  To the extent that adistribution exceeds qualified higher education expenses of the designated beneficiary, anadditional 10-percent tax is imposed on the earnings portion of such excess distribution undersection 530(d)(4), unless such distribution is made on account of the death or disability of, orscholarship received by, the designated beneficiary.(8)

	Section 530(d) allows tax-free (and penalty-free) transfers or rollovers of account balancesfrom one education IRA benefiting one beneficiary to another education IRA benefiting anotherbeneficiary (as well as redesignations of the named beneficiary), provided that the new beneficiaryis a member of the family of the old beneficiary.(9)

	The legislative history to the 1997 Act indicates that any balance remaining in aneducation IRA will be deemed to be distributed within 30 days after the date that the namedbeneficiary reaches age 30 (or, if earlier, within 30 days of the date that the beneficiary dies).(10)

Qualified higher education expenses.--The term "qualified higher education expenses"includes tuition, fees, books, supplies, and equipment required for the enrollment or attendance ofthe designated beneficiary at an eligible education institution, regardless of whether the beneficiaryis enrolled at an eligible educational institution on a full-time, half-time, or less than half-timebasis.  Moreover, the term "qualified higher education expenses include room and board expenses(meaning the minimum room and board allowance applicable to the student as determined by theinstitution in calculating costs of attendance for Federal financial aid programs under sec. 472 ofthe Higher Education Act of 1965) for any period during which the beneficiary is at least a half-time student.  Qualified higher education expenses include expenses with respect to undergraduateor graduate-level courses.  In addition, section 530(b)(2)(B) specifically provides that qualifiedhigher education expenses include amounts paid or incurred to purchase tuition credits (or tomake contributions to an account) under a qualified State tuition program, as defined in section529, for the benefit of the beneficiary of the education IRA.

	Qualified higher education expenses generally include only out-of-pocket expenses.  Suchqualified higher education expenses do not include expenses covered by educational assistance forthe benefit of the beneficiary that is excludable from gross income.  Thus, total qualified highereducation expenses are reduced by scholarship or fellowship grants excludable from gross incomeunder present-law section 117, as well as any other tax-free educational benefits, such asemployer-provided educational assistance that is excludable from the employee's gross incomeunder section 127.  In addition, qualified higher education expenses do not include expenses paidwith amounts that are excludible under section 135.  No reduction of qualified higher educationexpenses is required, however, for a gift, bequest, devise, or inheritance within the meaning ofsection 102(a).  Qualified higher education expenses do not include any education expense forwhich a deduction is claimed under section 162 or any other section of the Code.

	Eligible educational institution.--Eligible educational institutions are defined by referenceto section 481 of the Higher Education Act of 1965.  Such institutions generally are accreditedpost-secondary educational institutions offering credit toward a bachelor's degree, an associate'sdegree, a graduate-level or professional degree, or another recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also are eligibleinstitutions.  The institution must be eligible to participate in Department of Education student aidprograms.

**Qualified State tuition programs**

	Section 529 provides tax-exempt status to "qualified State tuition programs," meaningcertain programs established and maintained by a State (or agency or instrumentality thereof)under which persons may (1) purchase tuition credits or certificates on behalf of a designatedbeneficiary that entitle the beneficiary to a waiver or payment of qualified higher educationexpenses of the beneficiary, or (2) make contributions to an account that is established for thepurpose of meeting qualified higher education expenses of the designated beneficiary of theaccount.  The term "qualified higher education expenses" has the same meaning as does the termfor purposes of education IRAs (as described above) and, thus, includes expenses for tuition, fees,books, supplies, and equipment required for the enrollment or attendance at an eligibleeducational institution(11), as well as room and board expenses (meaning the minimum room andboard allowance applicable to the student as determined by the institution in calculating costs ofattendance for Federal financial aid programs under sec. 472 of the Higher Education Act of1965) for any period during which the student is at least a half-time student. 

	Section 529 also provides that no amount shall be included in the gross income of acontributor to, or beneficiary of, a qualified State tuition program with respect to any distributionfrom, or earnings under, such program, except that (1) amounts distributed or educational benefitsprovided to a beneficiary (e.g., when the beneficiary attends college) will be included in thebeneficiary's gross income (unless excludable under another Code section) to the extent suchamounts or the value of the educational benefits exceed contributions made on behalf of thebeneficiary, and (2) amounts distributed to a contributor or another distributee (e.g., when aparent receives a refund) will be included in the contributor's/distributee's gross income to theextent such amounts exceed contributions made on behalf of the beneficiary.(12)

	A qualified State tuition program is required to provide that purchases or contributionsonly be made in cash.(13)  Contributors and beneficiaries are not allowed to directly or indirectlydirect any investments made on their behalf by the program.  The program is required to maintaina separate accounting for each designated beneficiary.  A specified individual must be designatedas the beneficiary at the commencement of participation in a qualified State tuition program (i.e.,when contributions are first made to purchase an interest in such a program), unless interests insuch a program are purchased by a State or local government or a tax-exempt charity described insection 501(c)(3) as part of a scholarship program operated by such government or charity underwhich beneficiaries to be named in the future will receive such interests as scholarships.  Atransfer of credits (or other amounts) from one account benefiting one designated beneficiary toanother account benefiting a different beneficiary will be considered a distribution (as will achange in the designated beneficiary of an interest in a qualified State tuition program), unless thebeneficiaries are members of the same family.(14)  Earnings on an account may be refunded to acontributor or beneficiary, but the State or instrumentality must impose a more than de minimismonetary penalty unless the refund is (1) used for qualified higher education expenses of thebeneficiary, (2) made on account of the death or disability of the beneficiary, or (3) made onaccount of a scholarship received by the designated beneficiary to the extent the amount refundeddoes not exceed the amount of the scholarship used for higher education expenses.

	No amount is includible in the gross income of a contributor to, or beneficiary of, aqualified State tuition program with respect to any contribution to or earnings on such a programuntil a distribution is made from the program, at which time the earnings portion of thedistribution (whether made in cash or in-kind) will be includible in the gross income of thedistributee.  However, to the extent that a distribution from a qualified State tuition program isused to pay for qualified tuition and related expenses (as defined in sec. 25A(f))(1)), thedistributee (or another taxpayer claiming the distributee as a dependent) will be able to claim theHOPE credit or Lifetime Learning credit under section 25A with respect to such tuition andrelated expenses (assuming that the other requirements for claiming the HOPE credit or LifetimeLearning credit are satisfied and the modified AGI phaseout for those credits does not apply).

**Employer-provided educational assistance**

	Under present-law section 127, an employee's gross income and wages do not includeamounts paid or incurred by the employer for educational assistance provided to the employee ifsuch amounts are paid or incurred pursuant to an educational assistance program that meetscertain requirements.  This exclusion is limited to $5,250 of educational assistance with respect toan individual during a calendar year.  The exclusion does not apply with respect to graduate levelcourses.  The exclusion is scheduled to expire with respect to courses beginning after May 31,2000.

	In the absence of the exclusion provided for by section 127, educational assistance isexcludable from income only if the education is related to the employee's current job, meaningthat the education (1) maintains or improves a skill required in a trade or business currentlyengaged in by the taxpayer, or (2) meets the express requirements of the taxpayer's employer, orrequirements of applicable law or regulations, imposed as a condition of continued employment(but not if the education relates to certain minimum educational requirements or enables ataxpayer to begin working in a new trade or business).

**Description of Chairman's Mark**

**Education IRAs**

Annual contribution limit.--For the period 1999 through 2002, the proposal wouldincrease to $2,000 the annual contribution limit that currently applies to education IRAs undersection 530(b)(1)(A)(iii).  Thus, under the proposal, aggregate contributions that could be madeby all contributors to one (or more) education IRAs established on behalf of any particularbeneficiary would be limited to $2,000 for each year during the period 1999 through 2002.  For2003 and later years, the annual contribution limit for education IRAs will be $500.

Qualified expenses.--With respect to contributions made during the period 1999 through2002 (and earnings attributable to such contributions), the proposal would expand the definitionof qualified education expenses that may be paid with tax-free distributions from an educationIRA.  Specifically, the definition of qualified education expenses would be expanded to include"qualified elementary and secondary education expenses" meaning (1) tuition, fees, tutoring,books, supplies, equipment (including computers and related software and services), and specialneeds services in connection with the enrollment or attendance of the designated beneficiary of thetrust at a public, private, or religious school providing elementary or secondary education(through grade 12), and (2) transportation and supplementary expenses (such as the cost ofuniforms) required or provided by such a school for the enrollment or attendance of thedesignated beneficiary.  "Qualified elementary and secondary education expenses" also includehomeschooling education expenses if the requirements of any applicable State or local law are metwith respect to such homeschooling.  For contributions made in 2003 or later years (and forearnings attributable to such contributions), the definition of qualified education expenses will belimited to post-secondary education expenses.

	With respect to post-secondary education, qualified education expenses would include (1)tuition, fees, tutoring, books, supplies, equipment and special needs services in connection withthe enrollment or attendance of the designated beneficiary at an eligible post-secondaryeducational institution, and (2) room and board expenses (meaning the minimum room and boardallowance applicable to the student as determined by the institution calculating costs of attendancefor Federal financial aid programs) for any period during which the student is at least a half-timestudent.

Special needs beneficiaries.--The proposal also would provide that, although contributionsto an education IRA generally may not be made after the designated beneficiary reaches age 18,contributions may continue to be made to an education IRA in the case of a special needsbeneficiary (as defined by Treasury Department regulations).  In addition, under the proposal, inthe case of a special needs beneficiary, a deemed distribution of any balance in an education IRAwill not be required when the beneficiary reaches age 30.

Contributions by persons other than individuals.--The proposal would clarify thatcorporations and other entities (e.g., tax-exempt entities) are permitted to make contributions toeducation IRAs, regardless of the income of the corporation or entity during the year of thecontribution.  As under present law, the eligibility of high-income individuals to makecontributions to education IRAs is phased out ratably for individuals with modified AGI between$95,000 and $110,000 ($150,000 and $160,000 for joint returns).

Technical corrections.--The proposal would provide for several technical corrections tosection 530 (as enacted as part of the Taxpayer Relief Act of 1997), including: (1) adding aprovision that any balance remaining in an education IRA would be deemed to be distributedwithin 30 days after the date that the named beneficiary reaches age 30; (2) clarifying that, underrules contained in present-law section 72, distributions from education IRAs are treated asrepresenting a pro-rata share of the principal and accumulated earnings in the account; and 

(3) clarifying that, under section 530(d)(4), the 10-percent additional tax should not be imposed incases where a distribution (although used to pay for qualified higher education expenses) isincludible in gross income because the taxpayer elects the HOPE or Lifetime Learning credit onbehalf of the student for the same taxable year.

**Qualified State tuition programs**

	Under the proposal, an exclusion from gross income would be provided for distributionsfrom qualified State tuition programs (as defined in sec. 529) to the extent that the distribution isused to pay for (1) tuition, fees, tutoring, books, supplies, equipment (including computers andrelated software and services), and special needs services in connection with the enrollment orattendance of a designated beneficiary at an eligible post-secondary educational institution (i.e.,colleges, universities, and certain vocational schools), and (2) room and board expenses (meaningthe minimum room and board allowance applicable to the student as determined by the institutioncalculating costs of attendance for Federal financial aid programs) for any period during which thestudent is at least a half-time student.  As under present law, there would be no specific dollarlimitation imposed under the Internal Revenue Code on contributions made to qualified Statetuition programs, although section 529(b)(7) would continue to require that the programsthemselves provide adequate safeguards to prevent contributions on behalf of a beneficiary inexcess of those necessary to provide for qualified higher education expenses of the beneficiary.

	As with the present-law exclusion from gross income for distributions from educationIRAs, the tax-free treatment for a distribution from a qualified State tuition program would beallowed only if, for the taxable year during which the distribution is made, a HOPE or LifetimeLearning credit (under sec. 25A) is not claimed on behalf of the student.  As under present law, ifa student is claimed as a dependent by his or her parent, then the parent (if eligible) must decidewhether to elect to claim a HOPE or Lifetime Learning credit with respect to that student for thattaxable year; and, if the parent elects to claim a HOPE or Lifetime Learning credit, then theearnings portion of a distribution made to a student from a qualified State tuition program wouldbe includible in the gross income of the student. 

**Employer-provided educational assistance**

	The proposal would expand the exclusion provided by section 127 for employer-providededucational benefits so that the exclusion is available for graduate-level courses.  The exclusionprovided for by section 127 would be scheduled to expire such that the exclusion would not beavailable for courses beginning after December 31, 2002.

**Effective date**

	The proposals modifying education IRAs under section 530 generally would be effectivefor taxable years beginning after December 31, 1998.  However, the proposed increase in theannual contribution limit for education IRAs would apply during the period January 1, 1999,through December 31, 2002, and the proposed expansion of qualified education expenses toinclude qualified elementary and secondary education expenses would apply for contributions (andearnings thereon) made during the period January 1, 1999, through December 31, 2002.  Theexpansion of qualified State tuition programs would be effective for distributions made in taxableyears beginning after December 31, 1998.  The expansion of section 127 to graduate-level courseswould be effective for expenses paid with respect to courses beginning during the period January1, 1998, through December 31, 2002.  The exclusion provided under section 127 forundergraduate courses would be extended for courses beginning on or before December 31,2002.

**II.  REVENUE OFFSETS**
**1.  Employer deductions for vacation pay**

**Present Law**

	 For deduction purposes, any method or arrangement that has the effect of a plan deferringthe receipt of compensation or other benefits for employees is treated as a deferred compensationplan (sec. 404(b)).  In general, contributions under a deferred compensation plan (other thancertain pension, profit-sharing and similar plans) are deductible in the taxable year in which anamount attributable to the contribution is includible in income.  However, vacation pay which istreated as deferred compensation is deductible for the taxable year of the employer in which thevacation pay is paid to the employee (sec. 404(a)(5)).  

	Temporary Treasury regulations provide that a plan, method, or arrangement defers thereceipt of compensation or benefits to the extent it is one under which an employee receivescompensation or benefits more than a brief period of time after the end of the employer's taxableyear in which the services creating the right to such compensation or benefits are performed.  Aplan, method or arrangement is presumed to defer the receipt of compensation for more than abrief period of time after the end of an employer's taxable year to the extent that compensation isreceived after the 15th day of the 3rd calendar month after the end of the employer's taxable yearin which the related services are rendered (the "2-1/2 month" period).  A plan, method orarrangement is not considered to defer the receipt of compensation or benefits for more than abrief period of time after the end of the employer's taxable year to the extent that compensationor benefits are received by the employee on or before the end of the applicable 2-1/2 monthperiod.  (Temp. Treas. Reg. sec. 1.404(b)-1T A-2).

	The Tax Court recently addressed the issue of when vacation pay and severance pay areconsidered deferred compensation in Schmidt Baking Co., Inc., 107 T.C. 271 (1996).  In SchmidtBaking, the taxpayer was an accrual basis taxpayer with a fiscal year that ended December 28,1991.  The taxpayer funded its accrued vacation and severance pay liabilities for 1991 bypurchasing an irrevocable letter of credit on March 13, 1992.  The parties stipulated that the letterof credit represented a transfer of substantially vested interest in property to employees forpurposes of section 83, and that the fair market value of such interest was includible in theemployees' gross incomes for 1992 as a result of the transfer.(15)  The Tax Court held that thepurchase of the letter of credit, and the resulting income inclusion, constituted payment of thevacation and severance pay within the 2-1/2 month period.  Thus, the vacation and severance paywere treated as received by the employees within the 2-1/2-month period and were not treated asdeferred compensation.  The vacation pay and severance pay were deductible by the taxpayer forits 1991 fiscal year pursuant to its normal accrual method of accounting.

**Description of Chairman's Mark**

	The proposal specifically overrules the result in Schmidt Baking and provides that, exceptwith respect to severance pay,(16) the Internal Revenue Code will be applied without regard to theresult reached in that case.  Thus, under the proposal, the fact that an item is includible in incomeis not taken into account in determining whether or not payment has been made.   For example,with respect to the determination of wether an item of compensation is deferred compensation,the fact that the item is includible in the income of employees within the applicable 2-1/2 monthperiod is not taken into account in determining whether there has been payment or receipt by theemployees.  Rather, the item must have been actually paid or received within the 2-1/2 period inorder for the compensation not to be treated as deferred compensation.

	While Schmidt Baking involved only vacation and severance pay, there is concern that thistype of arrangement could be used  to circumvent other provisions of the Code where payment isrequired in order for a deduction to occur. Thus, the proposal is intended to apply to vacation payand other forms of compensation, except for severance pay.  The proposal is not limited to thedetermination of whether compensation is deferred compensation.

	 It is intended that similar arrangements, in addition to the letter of credit approach used inSchmidt Baking, will not constitute payment, even if there is an income inclusion.  Thus, forexample, payment does not include the furnishing of a note or letter or other evidence ofindebtedness of the taxpayer, whether or not the evidence is guaranteed by any other instrumentor by any third party.  As a further example, payment does not include a promise of the taxpayerto provide service or property in the future (whether or not the promise is evidenced by a contractor other written agreement).  In addition, payment does not include an amount transferred as aloan, refundable deposit, or contingent payment.  

	The proposal does not affect the determination of whether an item is includible in income. Thus, for example, using the mechanism in Schmidt Baking for vacation or severance pay stillresults in income inclusion to the employees, but the employer is not entitled to a deduction forthe vacation until actually paid to and received by the employees.

	Similarly, the proposal does not affect situations in which payment is not required in orderfor a deduction to occur.  Thus, the proposal does not change the general rule that deferredcompensation (other than deferred compensation provided through certain types of plans), otherthan vacation pay, is deductible in the taxable year in which it is includible in the gross income ofemployees participating in the plan. 

	The proposal is effective for taxable years ending after the date of enactment.  Any changein method of accounting required by the provision is treated as initiated by the taxpayer with theconsent of the Secretary of the Treasury.  Any adjustment required by section 481 as a result ofthe change is taken into account in the year of the change.

**2.  Modify foreign tax credit carryover rules**

**Present Law**

	U.S. persons may credit foreign taxes against U.S. tax on foreign source income. Theamount of foreign tax credits that can be claimed in a year is subject to a limitation that preventstaxpayers from using foreign tax credits to offset U.S. tax on U.S. source income. Separateforeign tax credit limitations are applied to specific categories of income.

	The amount of creditable taxes paid or accrued (or deemed paid) in any taxable yearwhich exceeds the foreign tax credit limitation is permitted to be carried back two years andforward five years.  The amount carried over may be used as a credit in a carryover year to theextent the taxpayer otherwise has excess foreign tax credit limitation for such year. The separateforeign tax credit limitations apply for purposes of the carryover rules.

**Description of Chairman's Mark**

	The proposal would reduce the carryback period for excess foreign tax credits from twoyears to one year. The proposal also would extend the excess foreign tax credit carryforwardperiod from five years to seven years.

1.   This document may be cited as follows: Joint Committee on Taxation, *Description ofChairman's Mark of an Amendment to S. 1133 ("Parent and Student Savings Account Plus Act")*(JCX-5-98), February 6, 1998.
2.   Education IRAs generally are not subject to Federal income tax, but are subject to theunrelated business income tax ("UBIT") imposed by section 511.
3.   An excise tax penalty may be imposed under present-law section 4973 to the extent thatexcess contributions above the $500 annual limit are made to an education IRA.  However, TitleVI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by the House onNovember 5, 1997, clarifies that neither the excise tax penalty under section 4973 nor theadditional 10-percent tax under section 530(d)(4) (described infra) may be imposed in caseswhere contributions (and any earnings thereon) are distributed from the education IRA before thedate that a return is required to be filed (including extensions of time) by the beneficiary for theyear in which the contribution was made (or, if the beneficiary is not required to file such a return,April 15th of the year following the taxable year during which the contribution was made).
4.   The exclusion will not be a preference item for alternative minimum tax (AMT)purposes.
5.   If a HOPE credit or Lifetime Learning credit was claimed with respect to a student foran earlier taxable year, the exclusion provided for by section 530 may be claimed with respect tothe same student for a subsequent taxable year with respect to a distribution from an educationIRA made in that subsequent taxable in order to cover qualified higher education expensesincurred during that year.  Conversely, if an exclusion is claimed for a distribution from aneducation IRA with respect to a particular student, then a HOPE credit or Lifetime Learningcredit will be available in a subsequent taxable year with respect to that same student (providedthat no exclusion is claimed in such other taxable years for distributions from an education IRA onbehalf of that student and provided that the requirements of the HOPE credit or Lifetime Learningcredit are satisfied in the subsequent taxable year).
6.   Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by theHouse on November 5, 1997, clarifies that, under rules contained in present-law section 72,distributions from education IRAs are treated as representing a pro-rata share of the principal(i.e., contributions) and accumulated earnings in the account, and also makes certain conformingchanges to section 72.  In particular, the Tax Technical Corrections Act of 1997 provides that,under section 72(e)(8)(B), the determination of the ratio that the aggregate amount ofcontributions to an education IRA bears to the account balance is to be made at the time of thedistribution or at such other time as the Secretary of the Treasury may prescribe.
7.   For example, if an education IRA has a total balance of $10,000, of which $4,000represents principal (i.e., contributions) and $6,000 represents earnings, and if a distribution of$2,000 is made from such an account, then $800 of that distribution will be treated as a return ofprincipal (which under no event is includible in the gross income of the distributee) and $1,200 ofthe distribution will be treated as accumulated earnings.  In such a case, if qualified highereducation expenses of the beneficiary during the year of the distribution are at least equal to the$2,000 total amount of the distribution (i.e., principal plus earnings), then the entire earningsportion of the distribution will be excludible under section 530, provided that a Hope credit orLifetime Learning credit is not claimed for that same taxable year on behalf of the beneficiary.  If,however, the qualified higher education expenses of the beneficiary for the taxable year are lessthan the total amount of the distribution, then only a portion of the earnings will be excludablefrom gross income under section 530.  Thus, in the example discussed above, if the beneficiaryincurs only $1,500 of qualified higher education expenses in the year that a $2,000 distribution ismade, then only $900 of the earnings will be excludable from gross income under section 530(i.e., an exclusion will be provided for the pro-rata portion of the earnings, based on the ratio thatthe $1,500 of qualified higher education expenses bears to the $2,000 distribution) and theremaining $300 of the earnings portion of the distribution will be includible in the distributee'sgross income.
8.   A technical correction is needed to section 530(d)(4) to clarify that the 10-percentadditional tax should not be imposed in cases where a distribution (although used to pay forqualified higher education expenses) is includible in gross income because the taxpayer elects theHOPE or Lifetime Learning credit on behalf of the student for the same taxable year.
9.   For this purpose, a "member of the family" means persons described in paragraphs (1)through (8) of section 152(a)--e.g., sons, daughters, brothers, sisters, nephews and nieces, certainin-laws, etc.--and any spouse of such persons.
10.   A technical correction providing that any balance remaining in an education IRA will bedeemed distributed within 30 days after the date that the designated beneficiary reaches age 30 isincluded in Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by theHouse on November 5, 1997.
11.   "Eligible educational institutions" are defined the same for purposes of education IRAs(described above) and qualified State tuition programs.
12.   Title VI of H.R. 2676, the Tax Technical Corrections Act of 1997, as passed by theHouse on November 5, 1997, clarifies that, under rules contained in present-law section 72,distributions from qualified State tuition programs are treated as representing a pro-rata share ofthe principal (i.e., contributions) and accumulated earnings in the account, and also makes certainconforming changes to section 72.  In particular, the Tax Technical Corrections Act of 1997provides that, under section 72(e)(8)(B), the determination of the ratio that the aggregate amountof contributions to a qualified State tuition program on behalf of a beneficiary bears to the totalbalance (or value) of the account for the beneficiary is to be made at the time of the distribution orat such other time as the Secretary of the Treasury may prescribe.
13.  Sections 529(c)(2), (c)(4), and (c)(5), and section 530(d)(3) provide special estate andgift tax rules for contributions made to, and distributions made from, qualified State tuitionprograms and education IRAs.
14.   For this purpose, the term "member of the family" means persons described inparagraphs (1) through (8) of section 152(a)--e.g., sons, daughters, brothers, sisters, nephews andnieces, certain in-laws, etc--and any spouse of such persons.
15.   While the rules of section 83 may govern the income inclusion, section 404 governs thededuction if the amount involved is deferred compensation.
16.  A provision that overrules *Schmidt Baking* with respect to severance pay is included inH.R. 2644, the "United States - Caribbean Trade Partnership Act," as reported by the Committeeon Ways and Means on October 9, 1997.