**COMPARISON OF REVENUE PROVISIONS OF H.R. 2646**

**RELATING TO CERTAIN EDUCATION SAVINGS TAX INCENTIVES**

**AS PASSED BY THE HOUSE AND THE SENATE**

**Prepared by the Staff**

**of the**

**JOINT COMMITTEE ON TAXATION**

**May 11, 1998**

**JCX-33-98**

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**CONTENTS**
**INTRODUCTION**

**COMPARISON OF REVENUE PROVISIONS**

A. Modifications to Education Individual Retirement Accounts (IRAs) (sec. 2 of the House bill and sec. 101 of the Senate amendment)		

B. Exclusion from Gross Income of Education Distributions from Qualified State Tuition Programs (sec. 104 of the Senate amendment)		

C. Extension of Exclusion for Employer-Provided Educational Assistance	(sec. 105 of the Senate amendment)		

D. Arbitrage Rebate Exception for Governmental Bonds of Certain Small Governments	(sec. 106 of the Senate amendment)		

E. Exclusion of Certain Amounts Received under the National Health Corps Scholarship Program (sec. 107 of the Senate amendment)		

F. Tax-Exempt Bonds for Privately Owned Public Schools (sec. 108 of the Senate amendment)

G. Employer Deductions for Vacation and Severance Pay (sec. 3(a) of the House bill and sec. 201 of the Senate amendment)		

H. Modification to Foreign Tax Credit Carryback and Carryover Periods (sec. 202 of the Senate amendment)		

**INTRODUCTION
	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides a description of the revenue provisions of 

H.R. 2646, the "Education Savings Act for Public and Private Schools," as passed by the House, and the "Parent and Student SavingsAccount PLUS Act," as passed by the Senate.  The non-revenue provisions of H.R. 2646 as passed by the Senate are not described inthis document.

	H.R. 2646 was passed by the House on October 20, 1997.(2)  H.R. 2646 was passed by the Senate, as amended, on April 23, 1998.(3)

	This document contains a description of the revenue provisions in the House and Senate versions of the bill.  A separate documentprovides a comparison of the estimated budget effects of the House and Senate versions of the bill.
***Item******Present Law******House Bill******Senate Amendment*****A.  Modifications toEducation IRAs (sec. 2of the House bill and sec.101 of the Senateamendment)**In general.--Under Codesection 530,  taxpayers mayestablish "education IRAs"which are accounts createdexclusively for the purpose ofpaying qualified highereducation expenses of anamed beneficiary. Until adistribution is made from aneducation IRA, earnings oncontributions generally arenot subject to tax.  Inaddition, distributions froman education IRA areexcludable from gross incometo the extent that thedistribution does not exceedqualified higher educationexpenses incurred by thebeneficiary during the yearthe distribution is made(provided that a HOPE creditor Lifetime Learning credit isnot claimed with respect tothe beneficiary for the sameContribution limits.--Annualcontributions to educationIRAs may not exceed $500per designated beneficiary. Contributions to an educationIRA may not be made afterthe designated beneficiaryreaches age 18. Contribution limits.--For theperiod 1998 through 2002, theHouse bill increases thepresent-law annualcontribution limit to $2,500. For 2003 and later years, theannual contribution limit foreducation IRAs will be $500. Contributions may continueto be made after thedesignated beneficiaryreaches age 18 in the case of aspecial needs beneficiary (asdefined by TreasuryDepartment regulations).  Contribution limits.--Same asthe House bill, except that theSenate amendment increasesthe present-law annualcontribution limit to $2,000,and only for the period 1999through 2002.Eligible contributors.--Contributions to an educationIRA may not be made bycertain higher-incometaxpayers--i.e., thecontribution limit is phasedout for individuals withmodified adjusted grossincome between $95,000 and$110,000 ($150,000 and$160,000 for taxpayers filingjoint returns).  Nocontribution may be made toan education IRA during anyyear in which anycontributions are made byanyone to a qualified Statetuition program on behalf ofthe same beneficiary.Eligible contributors.--TheHouse bill clarifies thatcorporations and other entitiesare permitted to makecontributions to educationIRAs, regardless of theincome of the corporation orentity during the year of thecontribution.Eligible contributors.--Sameas the House bill.Distributions.--The legislativehistory of the 1997 Actprovides that any balanceremaining in an educationIRA will be deemed to bedistributed within 30 daysafter the date that the namedbeneficiary reaches age 30(or, if earlier, within 30 daysof the date that thebeneficiary dies).  (Atechnical correction to thiseffect is included inH.R.2676, the "InternalRevenue ServiceRestructuring and ReformAct," as passed by theHouse.)Distributions.--The House billprovides that, in the case of aspecial needs beneficiary, adeemed distribution of anybalance in an education IRAwill not be required when thebeneficiary reaches age 30.Distributions.--Same as theHouse bill.Qualified education expenses.--The term "qualified highereducation expenses" meanstuition, fees, books, supplies,and equipment required for theenrollment or attendance of adesignated beneficiary at an"eligible educational institution"(defined by reference to sec. 481of the Higher Education Act of1965).  Expenses incurred inconnection with elementary andsecondary education are notqualified education expenses. 
Certain room and boardexpenses also may be qualifiedhigher education expenses, butonly if the student is enrolled atan eligible educationalinstitution on at least a half-timebasis.Qualified education expenses.--The House bill provides that,with respect to contributionsmade during the period 1998through 2002 (and earningsattributable to suchcontributions), the definition ofqualified education expenses isexpanded to include "qualifiedelementary and secondaryeducation expenses," meaningtuition, fees, tutoring, specialneeds services, books, supplies,computer equipment (includingrelated software and services)and other equipment,transportation, andsupplementary expensesrequired for the enrollment orattendance of a designatedbeneficiary at a public, private,or religious elementary orsecondary school (throughgrade 12).  Qualifiedelementary and secondaryeducation expenses alsoinclude certain homeschoolingexpenses. For contributionsmade in 2003 or later years, thedefinition of qualifiededucation expenses will belimited to post-secondaryeducation expenses.Qualified education expenses.--The Senate  amendmentprovides that, with respect tocontributions made during theperiod 1999 through 2002 (andearnings attributable to suchcontributions), the definition ofqualified education expenses isexpanded to include "qualifiedelementary and secondaryeducation expenses," meaning(1) tuition, fees, academictutoring, special needs services,books, supplies, and equipment(including computers andrelated software and services)incurred in connection with theenrollment or attendance of thedesignated beneficiary as anelementary or secondary studentat a public, private, or religiousschool providing elementary orsecondary education (grades K-12), and (2) room and board,uniforms, transportation, andsupplementary items andservices (including extended-day programs) required orprovided by such a school forsuch enrollment or attendance ofthe designated beneficiary.   Forcontributions made in 2003 orlater years (and for earningsattributable to suchcontributions), the definition ofqualified education expenseswill be limited to post-secondary education expenses.
The Senate amendment alsoexpands the definition ofqualified education expenseswith respect to post-secondaryeducation to include (1) tuition,fees, academic tutoring, specialneeds services, books, supplies,and equipment (includingcomputers and related softwareand services) incurred inconnection with the enrollmentor attendance of the designatedbeneficiary at an eligible post-secondary educationalinstitution, and (2) certain roomand board expenses (as underpresent law).Technical corrections.--Noprovision. [Technicalcorrections provisions similarto those contained in the Senateamendment are included in theHouse-passed version of H.R.2676 (the "Internal RevenueService Restructuring andReform Act")]Technical corrections.--TheSenate amendment includesseveral technical amendments tothe education IRA provisionsenacted in 1997.	**Effective date**.--The House billprovisions are effective fortaxable years beginning afterDecember 31, 1997.**Effective date**.--The Senateamendment provisions areeffective for taxable yearsbeginning after December 31,1998.**B.  Exclusion from GrossIncome of EducationDistributions fromQualified State TuitionPrograms (sec. 104 of theSenate amendment)**In general.-Code section 529provides tax-exempt status to"qualified State tuitionprograms" that are establishedand maintained by a State underwhich persons may (1) purchasetuition credits or certificates onbehalf of a designatedbeneficiary that entitle thebeneficiary to a waiver orpayment of qualified highereducation expenses of thebeneficiary, or (2) makecontributions to an account thatis established for the purpose ofmeeting qualified highereducation expenses of thedesignated beneficiary of theaccount.Exclusion from gross income.--Contributions to qualified Statetuition programs are notincludible in gross income uponwithdrawal.  However, theearnings portion of distributionsfrom qualified State tuitionprograms are includible in thegross income of the distributee.
To the extent that a distributionfrom a qualified State tuitionprogram is used to pay qualifiedhigher education expenses, aHOPE credit or LifetimeLearning credit potentially maybe available with respect to suchexpenses.No provision.Exclusion from gross income.--Under the Senate amendment,both the contribution andearnings portions ofdistributions from qualifiedState tuition programs areexcludable from gross income tothe extent used to pay qualifiedhigher education expenses(defined below).
If a HOPE or Lifetime Learningcredit is claimed on behalf of astudent, then the earningsportion of a distribution made tothe student from a qualifiedState tuition program will beincludible in the gross incomeof the student.Qualified higher educationexpenses.--The term "qualifiedhigher education expenses"includes expenses for (1) tuition,fees, books, supplies, andequipment required for theenrollment or attendance at aneligible post-secondaryeducational institution, and (2)room and board expenses(meaning the minimum roomand board allowance applicableto the student as determined bythe institution in calculatingcosts of attendance for Federalfinancial aid programs undersec. 472 of the HigherEducation Act of 1965) for anyperiod during which the studentis at least a half-time student. No provision.Qualified higher educationexpenses.--Under the Senateamendment, "qualified highereducation expenses" are definedthe same as for purposes ofeducation IRAs (see above), meaning (1) tuition, fees,academic tutoring, special needsservices, books, supplies, andequipment (including computersand related software andservices) incurred in connectionwith the enrollment orattendance of a designatedbeneficiary at an eligible post-secondary educationalinstitution (i.e., colleges,universities, and certainvocational schools), and (2)certain room and boardexpenses (as under present law).**Effective date**.--The provisionsapply to distributions made intaxable years beginning afterDecember 31, 1998.**C.  Extension of Exclusionfor Employer-ProvidedEducational Assistance(sec. 105 of the Senateamendment)**Under present law Code section127, an employee's grossincome and wages do notinclude amounts paid orincurred by the employer foreducational assistance provided to the employee if suchamounts are paid or incurredunder an educational assistanceprogram that meets certainrequirements. This exclusion islimited to $5,250 of educationalassistance with respect to anindividual during a calendaryear.  The exclusion does notapply with respect to graduate-level courses.  The exclusion isscheduled to expire with respectto courses beginning after May31, 2000.No provision.The Senate amendmentreinstates the exclusion forgraduate-level education, andextends the exclusion (asapplied to both graduate andundergraduate courses) throughDecember 31, 2002.**Effective date**.--The extensionof the exclusion to graduate-level education is effective forexpenses with respect to coursesbeginning after December 31,1997.  The extension of theexclusion (with respect to bothgraduate and undergraduatecourses) expires with respect tocourses beginning afterDecember 31, 2002.**D.  Arbitrage RebateException forGovernmental Bonds ofCertain SmallGovernments (sec. 106 ofthe Senate amendment)**Arbitrage profits earned on tax-exempt bonds generally must berebated to the FederalGovernment.  An exception isprovided for profits earned ongovernmental bonds issued bycertain governmental units thatissue no more than $5 million ofsuch bonds in the year when thebonds benefitting from theexception are issued.  The $5million limit is increased to $10million if bonds equal to at leastthe excess over $5 million areused to finance public schools.No provision.Allows an additional $5 millionof public school bonds to beissued without loss of eligibilityfor the small-issuer arbitragerebate exception (for totalissuance of up to $15 millionper year if bonds equal to atleast the excess over $5 millionare used to finance publicschools).**Effective date**.--Bonds issuedafter December 31, 1998.**E.  Exclusion of CertainAmounts Received underthe National Health CorpsScholarship Program (sec.107 of the Senateamendment)**Code section 117 excludes fromgross income amounts receivedas a qualified scholarship by anindividual who is a degreecandidate and used for tuitionand fees required for theenrollment or attendance (or forfees, books, supplies, andequipment required for coursesof instruction) at a primary,secondary, or post-secondaryeducational institution.  The tax-free treatment provided bysection 117 does not extend toscholarship amounts coveringregular living expenses, such asroom and board.
Section 117(c) specificallyprovides that the exclusion forqualified scholarships does notapply to amounts received by astudent as payment for teaching,research, or other services by thestudent required as a conditionfor receiving the scholarship.No provision.Under the Senate amendment,amounts received by anindividual under the NationalHealth Corps ScholarshipProgram are eligible for tax-freetreatment as a qualifiedscholarship under section 117,without regard to the fact thatthe recipient of the scholarshipis obligated later to providemedical services in a geographicarea (or to an underservedpopulation group or designatedfacility) identified by the PublicHealth Service as having ashortage of health careprofessionals.  The tax-freetreatment does not apply toamounts received by students tocover regular living expenses,such as room and board.**Effective date**.--The provisionapplies to amounts received intaxable years beginning afterDecember 31, 1993.**F.  Tax-Exempt Bonds forPrivately Owned PublicSchools (sec. 108 of theSenate amendment)**Interest on State and localgovernment bonds generally istax-exempt if the bond proceedsare used to carry outgovernmental functions of theissuer and the debt is repaidwith governmental funds. Interest on bonds used tofinance private businessactivities is taxable unless theInternal Revenue Code includesan exception for the activityinvolved.  The Code does notinclude an exception for bondsto finance public schools ownedby for-profit private businesses.No provision.Allows States to issue up to $10per resident ($5 million, ifgreater) per year in tax-exemptbonds for public schools that areowned by for-profit, privatebusinesses, but that are operatedby States or local governmentsas part of the public schoolsystem.  Except for an amountnot exceeding $5 million peryear, each State could use thesebonds only for publicelementary and secondaryschools located in "high-growth" school districts.  High-growth school districts would bedefined as districts having anenrollment of at least 5,000students in the second precedingacademic year *and* havingexperienced student enrollmentincreases of 20 percent or moreduring the 5-year period endingwith that second year.**Effective date**.--Bonds issuedafter December 31, 1998.**G. Employer Deductionsfor Vacation andSeverance Pay (sec. 3(a) ofthe House bill and sec. 201of the Senate amendment)**In general, contributions under adeferred compensation plan(other than certain pension,profit-sharing and similar plans)are deductible in the taxableyear in which an amountattributable to the contribution isincludible in income of theemployee.  However, vacationpay which is treated as deferredcompensation is deductible forthe taxable year of the employerin which the vacation pay ispaid to the employee (sec.404(a)(5)). 
 A plan, method or arrangementis not considered to defer thereceipt of compensation orbenefits to the extent thatcompensation or benefits arereceived by the employee on orbefore the 15th day of the 3rdcalendar month after the end ofthe employer's taxable year inwhich the related services arerendered ("the applicable 2-1/2month period").

In Schmidt Baking Co., Inc.,107 T.C. 271 (1996), the TaxCourt held that severance payand vacation pay were paid toemployees within the applicable2-1/2 month period and were notdeferred compensation if thetaxpayer provided for itsaccrued vacation and severancepay liabilities by purchasing anirrevocable letter of credit afterthe end of the taxable year, butwithin the applicable 2-1/2month period. The vacation payand severance pay weredeductible by the taxpayer forthe taxable year pursuant to itsnormal accrual method ofaccounting.The House bill overrulesSchmidt Baking.  The Housebill provides that, for purposesof determining whether an itemof compensation is deferredcompensation, the compensationis not considered to be paid orreceived until actually receivedby the employee.  In addition,an item of deferredcompensation is not consideredpaid to an employee untilactually received by theemployee. 
 It is intended that similararrangements, such as trustarrangements, in addition to theletter of credit approach used inSchmidt Baking, do notconstitute actual receipt by theemployee, even if there is anincome inclusion on the part ofemployees.  Same as the House bill, exceptthat the provision does not applyto severance pay.**Effective date**.--The provisionis effective with respect totaxable years ending afterOctober 8, 1996.**Effective date**.--The provisionis effective with respect totaxable years ending after thedate of enactment.**H.  Modification toForeign Tax CreditCarryback and CarryoverPeriods (sec. 202 of theSenate amendment)**U.S. persons may credit foreigntaxes against U.S. tax onforeign-source income. Theamount of foreign tax creditsthat can be claimed in a year issubject to a limitation thatprevents taxpayers from usingforeign tax credits to offset U.S.tax on U.S.-source income. Theamount of creditable taxes paidor accrued (or deemed paid) inany taxable year which exceedsthe foreign tax credit limitationis permitted to be carried backtwo years and forward fiveyears. The amount carried overmay be used as a credit in acarryover year to the extent thetaxpayer otherwise has excessforeign tax credit limitation forsuch year.No provision.The carryback period for excessforeign tax credits is reducedfrom two years to one year.  Theexcess foreign tax creditcarryforward period is extendedfrom five years to seven years.**Effective date**.--The provisionapplies to foreign tax creditsarising in taxable yearsbeginning after December 31,2000.
1.   This document may be cited as follows: Joint Committee on Taxation, *Comparison of Revenue Provisions of H.R. 2646Relating to Certain Education Savings Tax Incentives* (JCX- 33-98), May 11, 1998.
2.   See, also, House Ways and Means Committee Report on H.R. 2646 (H. Rept. 105-332, October 21, 1997).
3.   See, also, Senate Committee on Finance Report on S. 1133 (S. Rept. 105-164, February 19, 1998).**