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

1. Employer deductions for vacation pay

2. Foreign tax credit carryover rules

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

1 of 11 2/10/2017 8:35 AM
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,

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

2 of 11 2/10/2017 8:35 AM
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.

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

3 of 11 2/10/2017 8:35 AM
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.

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

4 of 11 2/10/2017 8:35 AM
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.

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

5 of 11 2/10/2017 8:35 AM
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

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

6 of 11 2/10/2017 8:35 AM
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

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

7 of 11 2/10/2017 8:35 AM
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.

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

8 of 11 2/10/2017 8:35 AM
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

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

9 of 11 2/10/2017 8:35 AM
(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

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

10 of 11 2/10/2017 8:35 AM
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.

JCX-5-98 SFC MARKUP https://permanent.access.gpo.gov/lps61424/x-5-98.htm

11 of 11 2/10/2017 8:35 AM