II

104TH CONGRESS

2D SESSION S. 2035

To invest in the future American workforce and to ensure that all Americans

have access to higher education by providing tax relief for investment

in a college education and by encouraging savings for college costs,

and for other purposes.

IN THE SENATE OF THE UNITED STATES

AUGUST 2, 1996

Mr. BIDEN introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To invest in the future American workforce and to ensure

that all Americans have access to higher education by

providing tax relief for investment in a college education

and by encouraging savings for college costs, and for

other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Growing the Economy

5 for Tomorrow: Assuring Higher Education is Affordable

6 and Dependable Act’’.
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1 SEC. 2. FINDINGS.

2 The Congress finds that—

3 (1) since 1980 the cost of public college tuition

4 and fees has increased nearly three times faster than

5 the median household income;

6 (2) in 1994, 8.3 percent of the median house7 hold income was required to pay for the average cost

8 of public college tuition and fees whereas 4.5 percent

9 of such income was required to pay for such cost in

10 1980;

11 (3) in 1994, 35.7 percent of the median house12 hold income was required to pay for the average cost

13 of private college tuition and fees whereas 20.4 per14 cent of such income was required to pay for such

15 cost in 1980;

16 (4) educating America’s future workforce is one

17 of the best investments we as a society can make

18 and one of the best measurements of future eco19 nomic well-being; and

20 (5) the Federal Government should renew and

21 strengthen its longstanding commitment to seeing

22 that young people desiring to go to college are not

23 turned away because of the cost.
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1 TITLE I—TAX INCENTIVES FOR

2 HIGHER EDUCATION

3 SEC. 100. AMENDMENT OF 1986 CODE.

4 Except as otherwise expressly provided, whenever in

5 this title an amendment or repeal is expressed in terms

6 of an amendment to, or repeal of, a section or other provi7 sion, the reference shall be considered to be made to a

8 section or other provision of the Internal Revenue Code

9 of 1986.

10 Subtitle A—Tax Relief for Higher

11 Education Costs

12 SEC. 101. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

13 (a) DEDUCTION ALLOWED.—Part VII of subchapter

14 B of chapter 1 is amended by redesignating section 220

15 as section 221 and by inserting after section 219 the fol16 lowing new section:

17 ‘‘SEC. 220. HIGHER EDUCATION TUITION AND FEES; INTER18 EST ON STUDENT LOANS.

19 ‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an

20 individual, there shall be allowed as a deduction an

21 amount equal to the sum of—

22 ‘‘(1) the qualified higher education expenses,

23 plus

24 ‘‘(2) interest on qualified higher education

25 loans,
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1 paid by the taxpayer during the taxable year.

2 ‘‘(b) QUALIFIED HIGHER EDUCATION EXPENSES.—

3 For purposes of this section—

4 ‘‘(1) QUALIFIED HIGHER EDUCATION EX5 PENSES.—

6 ‘‘(A) IN GENERAL.—The term ‘qualified

7 higher education expenses’ means tuition and

8 fees required for the enrollment or attendance

9 of—

10 ‘‘(i) the taxpayer,

11 ‘‘(ii) the taxpayer’s spouse, or

12 ‘‘(iii) any dependent of the taxpayer

13 with respect to whom the taxpayer is al14 lowed a deduction under section 151,

15 as an eligible student at an institution of higher

16 education.

17 ‘‘(B) EXCEPTION FOR EDUCATION INVOLV18 ING SPORTS, ETC.—Such term does not include

19 expenses with respect to any course or other

20 education involving sports, games, or hobbies

21 unless such expenses—

22 ‘‘(i) are part of a degree program, or

23 ‘‘(ii) are deductible under this chapter

24 without regard to this section.
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1 ‘‘(C) EXCEPTION FOR NONACADEMIC

2 FEES.—Such term does not include any student

3 activity fees, athletic fees, insurance expenses,

4 or other expenses unrelated to a student’s aca5 demic course of instruction.

6 ‘‘(D) ELIGIBLE STUDENT.—For purposes

7 of subparagraph (A), the term ‘eligible student’

8 means a student who meets the requirements of

9 section 484(a)(1) of the Higher Education Act

10 of 1965 (20 U.S.C. 1091(a)(1)).

11 ‘‘(2) DOLLAR LIMITATION.—

12 ‘‘(A) IN GENERAL.—The amount taken

13 into account under paragraph (1) for any tax14 able year shall not exceed $10,000.

15 ‘‘(B) PHASE-IN.—In the case of taxable

16 years beginning in 1996, 1997, and 1998, sub17 paragraph (A) shall be applied by substituting

18 ‘$5,000’ for ‘$10,000’.

19 ‘‘(3) LIMITATION BASED ON MODIFIED AD20 JUSTED GROSS INCOME.—

21 ‘‘(A) IN GENERAL.—If the modified ad22 justed gross income of the taxpayer for the tax23 able year exceeds $70,000 ($100,000 in the

24 case of a joint return), the amount which would

25 (but for this paragraph) be taken into account
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1 under paragraph (1) shall be reduced (but not

2 below zero) by the amount which bears the

3 same ratio to the amount which would be taken

4 into account as such excess bears to $20,000.

5 ‘‘(B) INFLATION ADJUSTMENT.—In the

6 case of any taxable year beginning in a calendar

7 year after 1996, the $70,000 and $100,000

8 amounts contained in subparagraph (A) shall

9 be increased by an amount equal to—

10 ‘‘(i) such dollar amount, multiplied by

11 ‘‘(ii) the cost-of-living adjustment

12 under section 1(f)(3) for the calendar year

13 in which the taxable year begins, except

14 that section 1(f)(3)(B) shall be applied by

15 substituting ‘1995’ for ‘1992’.

16 ‘‘(C) ROUNDING.—If any amount as ad17 justed under subparagraph (B) is not a mul18 tiple of $50, such amount shall be rounded to

19 the nearest multiple of $50 (or if such amount

20 is a multiple of $25, such amount shall be

21 rounded to the next highest multiple of $50).

22 ‘‘(D) MODIFIED ADJUSTED GROSS IN23 COME.—The term ‘modified adjusted gross in24 come’ means the adjusted gross income of the

25 taxpayer for the taxable year determined—
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1 ‘‘(i) without regard to this section and

2 sections 911, 931, and 933, and

3 ‘‘(ii) after the application of sections

4 86, 135, 219, 221, and 469.

5 ‘‘(4) INSTITUTION OF HIGHER EDUCATION.—

6 The term ‘institution of higher education’ means an

7 institution which—

8 ‘‘(A) is described in section 481 of the

9 Higher Education Act of 1965 (20 U.S.C.

10 1088), and

11 ‘‘(B) is eligible to participate in programs

12 under title IV of such Act.

13 ‘‘(c) QUALIFIED HIGHER EDUCATION LOAN.—For

14 purposes of this section—

15 ‘‘(1) IN GENERAL.—The term ‘qualified higher

16 education loan’ means a loan to a student which is—

17 ‘‘(A) made, insured, or guaranteed by the

18 Federal Government,

19 ‘‘(B) made by a State or a political sub20 division of a State,

21 ‘‘(C) made from the proceeds of a qualified

22 student loan bond under section 144(b), or

23 ‘‘(D) made by an institution of higher edu24 cation (as defined in section 1201(a) of the
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1 Higher Education Act of 1965 (20 U.S.C.

2 1141(a))).

3 ‘‘(2) LIMITATION.—

4 ‘‘(A) IN GENERAL.—The amount of inter5 est on a qualified higher education loan which

6 is taken into account under subsection (a)(2)

7 shall be reduced by the amount which bears the

8 same ratio to such amount of interest as—

9 ‘‘(i) the proceeds from such loan not

10 used for qualified higher education ex11 penses, bears to

12 ‘‘(ii) the total proceeds from such

13 loan.

14 ‘‘(B) QUALIFIED HIGHER EDUCATION EX15 PENSES.—For purposes of subparagraph (A),

16 the term ‘qualified higher education expenses’

17 has the meaning given such term by subsection

18 (b), except that—

19 ‘‘(i) such term shall include reason20 able living expenses while away from home,

21 and

22 ‘‘(ii) the limitations of paragraphs (2)

23 and (3) of subsection (b) shall not apply.

24 ‘‘(d) COORDINATION WITH OTHER PROVISIONS.—

25 ‘‘(1) NO DOUBLE BENEFIT.—
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1 ‘‘(A) IN GENERAL.—No deduction shall be

2 allowed under subsection (a) for qualified high3 er education expenses or interest on qualified

4 higher education loans with respect to which a

5 deduction is allowed under any other provision

6 of this chapter.

7 ‘‘(B) PAYMENTS FROM EXCLUDABLE

8 AMOUNTS.—A deduction shall be allowed under

9 subsection (a)(1) for qualified higher education

10 expenses only to the extent the amount of such

11 expenses exceeds the sum of—

12 ‘‘(i) amounts excludable under section

13 135 for the taxable year, plus

14 ‘‘(ii) the excess of—

15 ‘‘(I) amounts excludable under

16 sections 117 and 221(d)(2) for the

17 taxable year, reduced (but not below

18 zero) by—

19 ‘‘(II) reasonable expenses paid or

20 incurred during the taxable year for

21 meals and lodging of the taxpayer,

22 spouse, or dependent while an eligible

23 student at an institution of higher

24 education, plus
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1 ‘‘(iii) educational assistance allow2 ances under chapter 30, 31, 32, 34, or 35

3 of title 38, United States Code, plus

4 ‘‘(iv) payments (other than a gift, be5 quest, devise, or inheritance within the

6 meaning of section 102(a)) for educational

7 expenses, or attributable to attendance at

8 an eligible educational institution, which

9 are exempt from income taxation by any

10 law of the United States.

11 ‘‘(2) QUALIFIED RESIDENCE INTEREST.—If a

12 deduction is allowed under subsection (a)(2) for in13 terest which is also qualified residence interest under

14 section 163(h), such interest shall not be taken into

15 account under section 163(h).

16 ‘‘(e) SPECIAL RULES.—

17 ‘‘(1) ELECTION.—If a deduction is allowable

18 under more than one provision of this chapter with

19 respect to qualified higher education expenses, the

20 taxpayer may elect the provision under which the de21 duction is allowed.

22 ‘‘(2) LIMITATION ON TAXABLE YEAR OF DE23 DUCTION.—

24 ‘‘(A) IN GENERAL.—A deduction shall be

25 allowed under subsection (a)(1) for any taxable
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1 year only to the extent the qualified higher edu2 cation expenses are in connection with attend3 ance at an institution of higher education dur4 ing the taxable year.

5 ‘‘(B) CERTAIN PREPAYMENTS ALLOWED.—

6 Subparagraph (A) shall not apply to qualified

7 higher education expenses paid during a taxable

8 year which are in connection with attendance at

9 an institution of higher education which begins

10 during the first 2 months of the following tax11 able year.

12 ‘‘(3) NO DEDUCTION FOR MARRIED INDIVID13 UALS FILING SEPARATE RETURNS.—If the taxpayer

14 is a married individual (within the meaning of sec15 tion 7703), this section shall apply only if the tax16 payer and his spouse file a joint return for the tax17 able year.

18 ‘‘(4) REGULATIONS.—The Secretary may pre19 scribe such regulations as may be necessary or ap20 propriate to carry out this section, including regula21 tions requiring recordkeeping and information re22 porting.’’

23 (b) DEDUCTION ALLOWED IN COMPUTING AD24 JUSTED GROSS INCOME.—Section 62(a) is amended by in25 serting after paragraph (15) the following new paragraph:
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1 ‘‘(16) HIGHER EDUCATION TUITION AND

2 FEES.—The deduction allowed by section 220.’’

3 (c) CONFORMING AMENDMENT.—The table of sec4 tions for part VII of subchapter B of chapter 1 is amended

5 by striking the item relating to section 220 and inserting:

‘‘Sec. 220. Higher education tuition and fees; interest on student

loans.

‘‘Sec. 221. Cross reference.’’

6 (d) EFFECTIVE DATES.—The amendments made by

7 this section shall apply to taxable years beginning after

8 December 31, 1995.

9 SEC. 102. EXCLUSION FOR SCHOLARSHIPS AND FELLOW10 SHIPS.

11 (a) IN GENERAL.—Subsections (a) and (b) of section

12 117 (defining qualified scholarships) are amended to read

13 as follows:

14 ‘‘(a) GENERAL RULE.—Gross income does not in15 clude any amount received as a qualified scholarship or

16 fellowship by an individual who is a candidate for a degree

17 at an educational organization described in section

18 170(b)(1)(A)(ii).

19 ‘‘(b) QUALIFIED SCHOLARSHIP OR FELLOWSHIP.—

20 For purposes of this section—

21 ‘‘(1) IN GENERAL.—The term ‘qualified schol22 arship or fellowship’ means any amount received—
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1 ‘‘(A) as a scholarship at an educational or2 ganization described in section 170(b)(1)(A)(ii),

3 or

4 ‘‘(B) as a fellowship grant.

5 Such term includes the value of any contributed

6 services and accommodations included in such schol7 arship or grant.

8 ‘‘(2) ADDITIONAL EXPENSES.—The term ‘quali9 fied scholarship or fellowship’ includes any amount

10 received to cover expenses for travel, research, cleri11 cal help, or equipment which are incident to a schol12 arship or fellowship grant described in paragraph

13 (1), but only to the extent that the amount is so ex14 pended by the recipient.’’

15 (b) EXTENSION TO CERTAIN INDIVIDUALS WHO ARE

16 NOT DEGREE CANDIDATES.—

17 (1) IN GENERAL.—Section 117 is amended by

18 adding at the end the following new subsection:

19 ‘‘(e) INDIVIDUALS WHO ARE NOT DEGREE CAN20 DIDATES.—

21 ‘‘(1) IN GENERAL.—Subsection (a) shall apply

22 to an individual who is not a candidate for a degree

23 at an educational organization described in section

24 170(b)(1)(A)(ii) if the grantor of the scholarship

25 is—
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1 ‘‘(A) an organization described in section

2 501(c)(3) which is exempt from tax under sec3 tion 501(a),

4 ‘‘(B) a foreign government,

5 ‘‘(C) an international organization, or a bi6 national or multinational educational and cul7 tural foundation or commission created or con8 tinued pursuant to the Mutual Educational and

9 Cultural Exchange Act of 1961, or

10 ‘‘(D) the United States or an instrumen11 tality or agency thereof or a State or possession

12 of the United States or any political subdivision

13 thereof.

14 ‘‘(2) LIMITATION.—The amounts described in

15 subsection (b)(1) which may be excluded under sub16 section (a) in the case of an individual described in

17 paragraph (1) shall not exceed the product of—

18 ‘‘(A) $300, and

19 ‘‘(B) the number of months for which the

20 recipient received amounts under the scholar21 ship or fellowship grant during the taxable year,

22 except that not more than 36 months (whether

23 or not consecutive) may be taken into account

24 under this subsection with respect to any indi25 vidual for all taxable years.’’
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1 (2) CONFORMING AMENDMENT.—The second

2 sentence of section 1441(b) is amended to read as

3 follows: ‘‘The items of income referred to in sub4 section (a) from which tax shall be deducted and

5 withheld at the rate of 14 percent are amounts

6 which are received by a nonresident alien individual

7 who is temporarily present in the United States as

8 a nonimmigrant under subparagraph (F), (J), (M),

9 or (Q) of section 101(a)(15) of the Immigration and

10 Nationality Act and which are incident to a qualified

11 scholarship or fellowship to which section 117(a) ap12 plies, but only to the extent such amounts are in13 cludible in gross income.’’

14 (c) REQUIREMENT OF FUTURE SERVICE AS A FED15 ERAL EMPLOYEE.—Section 117(c) is amended—

16 (1) by striking ‘‘Subsections’’ and inserting:

17 ‘‘(1) IN GENERAL.—Subsections’’, and

18 (2) by adding at the end the following new

19 paragraph:

20 ‘‘(2) FEDERAL GRANTS FOR TUITION AND RE21 LATED EXPENSES NOT INCLUDABLE MERELY BE22 CAUSE THERE IS REQUIREMENT OF FUTURE SERV23 ICE AS FEDERAL EMPLOYEE.—

24 ‘‘(A) IN GENERAL.—If—
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1 ‘‘(i) an amount received by an individ2 ual under a Federal program would be ex3 cludable under subsection (a) as a scholar4 ship or fellowship grant but for the fact

5 that the individual is required to perform

6 future service as a Federal employee, and

7 ‘‘(ii) the individual establishes that, in

8 accordance with the terms of the grant,

9 such amount was used for qualified tuition

10 and related expenses,

11 gross income shall not include such amount.

12 ‘‘(B) QUALIFIED TUITION AND RELATED

13 EXPENSES DEFINED.—For purposes of this

14 paragraph—

15 ‘‘(i) IN GENERAL.—The term ‘quali16 fied tuition and related expenses’ means—

17 ‘‘(I) tuition and fees required for

18 the enrollment or attendance of a stu19 dent at an institution of higher edu20 cation, and

21 ‘‘(II) fees, books, supplies, and

22 equipment required for courses of in23 struction at an institution of higher

24 education.
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1 ‘‘(ii) INSTITUTION OF HIGHER EDU2 CATION.—The term ‘institution of higher

3 education’ means an educational institu4 tion in any State which—

5 ‘‘(I) admits as regular students

6 only individuals having a certificate of

7 graduation from a high school, or the

8 recognized equivalent of such a certifi9 cate,

10 ‘‘(II) is legally authorized within

11 such State to provide a program of

12 education beyond high school,

13 ‘‘(III) provides an educational

14 program for which it awards a bach15 elor’s or higher degree, provides a

16 program which is acceptable for full

17 credit toward such a degree, or offers

18 a program of training to prepare stu19 dents for gainful employment in a rec20 ognized health profession, and

21 ‘‘(IV) is a public or other non22 profit institution.

23 ‘‘(C) SERVICE AS FEDERAL EMPLOYEE.—

24 For purposes of this paragraph, service in a
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1 health manpower shortage area shall be treated

2 as service as a Federal employee.’’

3 (d) CONFORMING AMENDMENTS.—

4 (1)(A) The heading for section 117 is amended

5 by adding ‘‘OR FELLOWSHIPS’’ after ‘‘SCHOLAR6 SHIPS’’.

7 (B) The item relating to section 117 in the

8 table of sections for part III of subchapter B of

9 chapter 1 is amended by inserting ‘‘or fellowships’’

10 after ‘‘scholarships’’.

11 (2) Sections 74(a) and 135(d)(1)(A) are each

12 amended by inserting ‘‘or fellowships’’ after ‘‘schol13 arships’’.

14 (3) Sections 4941(d)(2)(G)(ii) and 4945(g)(1)

15 are each amended by striking ‘‘which would be sub16 ject to the provisions of section 117(a) (as in effect

17 on the day before the date of the enactment of the

18 Tax Reform Act of 1986)’’ and inserting ‘‘which are

19 subject to the provisions of section 117(a)’’.

20 (e) EFFECTIVE DATE.—The amendments made by

21 this section shall apply to taxable years beginning after

22 December 31, 1995.
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1 SEC. 103. PERMANENT EXCLUSION FOR EDUCATIONAL AS2 SISTANCE.

3 (a) IN GENERAL.—Section 127 (relating to exclusion

4 for educational assistance programs) is amended by strik5 ing subsection (d) and by redesignating subsection (e) as

6 subsection (d).

7 (b) EFFECTIVE DATE.—The amendments made by

8 this section shall apply to taxable years beginning after

9 December 31, 1994.

10 Subtitle B—Encouraging Savings

11 for Higher Education Costs

12 SEC. 111. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE

13 USED WITHOUT PENALTY TO PAY HIGHER

14 EDUCATION EXPENSES.

15 (a) IN GENERAL.—Paragraph (2) of section 72(t)

16 (relating to exceptions to 10-percent additional tax on

17 early distributions from qualified retirement plans) is

18 amended by adding at the end the following new subpara19 graph:

20 ‘‘(D) DISTRIBUTIONS FROM CERTAIN PLANS

21 FOR EDUCATIONAL EXPENSES.—Distributions to an

22 individual from an individual retirement plan, or

23 from amounts attributable to employer contributions

24 made pursuant to elective deferrals described in sub25 paragraph (A) or (C) of section 402(g)(3) or section

26 501(c)(18)(D)(iii), to the extent such distributions
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1 do not exceed the qualified higher education ex2 penses (as defined in paragraph (6)) of the taxpayer

3 for the taxable year.’’

4 (b) DEFINITION.—Section 72(t) is amended by add5 ing at the end the following new paragraph:

6 ‘‘(6) QUALIFIED HIGHER EDUCATION EX7 PENSES.—For purposes of paragraph (2)(D)—

8 ‘‘(A) IN GENERAL.—The term ‘qualified

9 higher education expenses’ means tuition, fees,

10 books, supplies, and equipment required for the

11 enrollment or attendance of—

12 ‘‘(i) the taxpayer,

13 ‘‘(ii) the taxpayer’s spouse, or

14 ‘‘(iii) any child (as defined in section

15 151(c)(3)), grandchild, or ancestor of the

16 taxpayer or the taxpayer’s spouse,

17 at an eligible educational institution (as defined

18 in section 135(c)(3)).

19 ‘‘(B) COORDINATION WITH OTHER EXCLU20 SIONS.—The amount of qualified higher edu21 cation expenses for any taxable year shall be re22 duced by the sum of—

23 ‘‘(i) any amount excludable from gross

24 income under section 135, plus

25 ‘‘(ii) the excess of—
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1 ‘‘(I) amounts excludable under

2 section 221(d)(2) for the taxable year,

3 reduced (but not below zero) by—

4 ‘‘(II) reasonable expenses paid or

5 incurred during the taxable year for

6 meals and lodging of the taxpayer,

7 spouse, or dependent while an eligible

8 student at an institution of higher

9 education.

10 For purposes of this subparagraph, the terms

11 ‘eligible student’ and ‘institution of higher edu12 cation’ have the meanings given such terms by

13 section 220.’’

14 (c) CONFORMING AMENDMENTS.—

15 (1) Section 401(k)(2)(B)(i) is amended by

16 striking ‘‘or’’ at the end of subclause (III), by strik17 ing ‘‘and’’ at the end of subclause (IV) and inserting

18 ‘‘or’’, and by inserting after subclause (IV) the fol19 lowing new subclause:

20 ‘‘(V) the date on which distribu21 tions for qualified higher education

22 expenses (as defined in section

23 72(t)(6)) are made, and’’.

24 (2) Section 403(b)(11) is amended by striking

25 ‘‘or’’ at the end of subparagraph (A), by striking the
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1 period at the end of subparagraph (B) and inserting

2 ‘‘, or’’, and by inserting after subparagraph (B) the

3 following new subparagraph:

4 ‘‘(C) for the payment of qualified higher

5 education expenses (as defined in section

6 72(t)(6)).’’

7 (d) EFFECTIVE DATE.—The amendments made by

8 this section shall apply to payments and distributions after

9 the date of the enactment of this Act.

10 SEC. 112. EDUCATION SAVINGS ACCOUNTS.

11 (a) IN GENERAL.—Part VII of subchapter B of chap12 ter 1 (relating to additional itemized deductions for indi13 viduals), as amended by section 101, is amended by redes14 ignating section 221 as section 222 and by inserting after

15 section 220 the following new section:

16 ‘‘SEC. 221. EDUCATION SAVINGS ACCOUNTS.

17 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi18 vidual, there shall be allowed as a deduction the sum of—

19 ‘‘(1) amounts paid in cash, and

20 ‘‘(2) the fair market value of stocks, bonds, or

21 other securities which are readily tradeable on an es22 tablished securities market and which are trans23 ferred,

24 during the calendar year which ends with or within the

25 taxable year by such individual to an education savings
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1 account established for the purpose of accumulating funds

2 to pay the educational expenses of an eligible individual.

3 ‘‘(b) LIMITATIONS.—

4 ‘‘(1) MAXIMUM DEDUCTION PER ACCOUNT.—

5 The amount allowable as a deduction under sub6 section (a) to an individual for amounts paid or

7 transferred to an education savings account for any

8 calendar year shall not exceed $2,000.

9 ‘‘(2) LIMITATION BASED ON MODIFIED AD10 JUSTED GROSS INCOME.—

11 ‘‘(A) IN GENERAL.—If the modified ad12 justed gross income of the taxpayer for the tax13 able year exceeds $70,000 ($100,000 in the

14 case of a joint return), the amount which would

15 (but for this paragraph) be taken into account

16 under subsection (a) shall be reduced (but not

17 below zero) by the amount which bears the

18 same ratio to the amount which would be taken

19 into account as such excess bears to $20,000.

20 ‘‘(B) MODIFIED ADJUSTED GROSS IN21 COME.—The term ‘modified adjusted gross in22 come’ means the adjusted gross income of the

23 taxpayer for the taxable year determined—

24 ‘‘(i) without regard to this section and

25 sections 220, 911, 931, and 933, and
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1 ‘‘(ii) after the application of sections

2 86, 135, 219, and 469.

3 ‘‘(C) NONDEDUCTIBLE CONTRIBUTIONS.—

‘‘For nondeductible contributions to education

savings accounts, see subsection (k).

4 ‘‘(3) LIMITATIONS ON ACCOUNTS.—

5 ‘‘(A) ACCOUNT MAY NOT BE ESTABLISHED

6 FOR BENEFIT OF MORE THAN 1 INDIVIDUAL.—

7 An education savings account may not be estab8 lished for the benefit of more than 1 individual.

9 ‘‘(B) ELIGIBLE INDIVIDUAL TREATED AS

10 ELIGIBLE INDIVIDUAL ONLY WITH RESPECT TO

11 1 ACCOUNT.—If, at any time during a calendar

12 year, 2 or more education savings accounts are

13 maintained for the benefit of an eligible individ14 ual, such individual shall be treated as an eligi15 ble individual for the calendar year only with

16 respect to the first of such accounts.

17 ‘‘(4) NO DEDUCTION AFTER BENEFICIARY AT18 TAINS AGE 19.—No deduction shall be allowed for

19 any contribution to an education savings account es20 tablished for the benefit of an eligible individual who

21 has attained age 19 before the close of the calendar

22 year in which such contribution is made.

23 ‘‘(5) ADJUSTMENT OF DOLLAR AMOUNT LIMI24 TATIONS FOR INFLATION.—
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1 ‘‘(A) IN GENERAL.—In the case of any cal2 endar year after 1996, the $70,000 and

3 $100,000 amounts under paragraph (2), shall

4 each be increased by an amount equal to—

5 ‘‘(i) such dollar amount, multiplied by

6 ‘‘(ii) the cost-of-living adjustment de7 termined under section 1(f)(3) for such

8 calendar year by substituting ‘calendar

9 year 1995’ for ‘calendar year 1992’ in sub10 paragraph (B) thereof.

11 ‘‘(B) ROUNDING.—The rounding rules of

12 section 220(b)(3)(C) shall apply to any increase

13 under subparagraph (A).

14 ‘‘(6) ROLLOVER CONTRIBUTIONS.—Paragraph

15 (1) shall not apply to any rollover contribution de16 scribed in subsection (c)(2)(F)(i)(II) or (d)(3)(B).

17 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur18 poses of this section—

19 ‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible

20 individual’ means an individual who is—

21 ‘‘(A) a child (within the meaning of section

22 153(e)(3)) of the taxpayer or of a brother, sis23 ter, stepbrother, or stepsister of the taxpayer,
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1 ‘‘(B) an individual with respect to whom

2 the taxpayer has been appointed guardian by a

3 court of competent jurisdiction, or

4 ‘‘(C) a descendant of a child of the tax5 payer.

6 ‘‘(2) EDUCATION SAVINGS ACCOUNT.—The

7 term ‘education savings account’ means a trust cre8 ated or organized in the United States exclusively

9 for the purpose of paying the educational expenses

10 of an eligible individual, but only if the written gov11 erning instrument creating the trust meets the fol12 lowing requirements:

13 ‘‘(A) No contribution will be accepted un14 less it is in cash, stocks, bonds, or other securi15 ties which are readily tradeable on an estab16 lished securities market, and, except in the case

17 of contributions from another education savings

18 account, contributions will not be accepted for

19 the taxable year in excess of $2,000.

20 ‘‘(B) The trustee is a bank (as defined in

21 section 408(n)) or another person who dem22 onstrates to the satisfaction of the Secretary

23 that the manner in which the person will ad24 minister the trust will be consistent with the re25 quirements of this section.
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•S 2035 IS

1 ‘‘(C) No part of the trust assets will be in2 vested in life insurance contracts (other than

3 contracts the beneficiary of which is the trust

4 and the face amount of which does not exceed

5 the amount by which the maximum amount

6 which can be contributed to the account exceeds

7 the sum of the amounts contributed to the ac8 count for all taxable years).

9 ‘‘(D) The assets of the account may be in10 vested in accordance with the direction of the

11 individual contributing to the account, but, if

12 more than one individual has made contribu13 tions to the account, the consent of all such in14 dividuals shall be required for any such direc15 tion.

16 ‘‘(E) The assets of the trust shall not be

17 commingled with other property except in a

18 common trust fund or common investment

19 fund.

20 ‘‘(F)(i) Any balance in the account on the

21 day after the date on which the individual for

22 whose benefit the trust is established attains

23 age 30 (or, if earlier, the date on which such

24 individual dies) shall be distributed within 30

25 days of such date—
28

•S 2035 IS

1 ‘‘(I) in accordance with paragraph (5)

2 to each of the individuals who have con3 tributed to the trust, or

4 ‘‘(II) as directed by such individuals,

5 to another education savings account es6 tablished for the benefit of an eligible indi7 vidual who has not attained age 30 or to

8 an eligible educational institution.

9 ‘‘(ii) If an individual is at least a half-time

10 student at an eligible educational institution at

11 the time the individual attains age 30, clause (i)

12 shall not apply until the individual ceases to be

13 such a student.

14 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

15 MADE.—A taxpayer shall be deemed to have made a

16 contribution on the last day of the preceding taxable

17 year if the contribution is made on account of such

18 taxable year and is made not later than the time

19 prescribed by law for filing the return for such tax20 able year (including extensions thereof).

21 ‘‘(4) STOCK, ETC., TO BE VALUED AS OF

22 TRANSFER DATE.—The fair market value of stocks,

23 bonds, and other securities shall be determined as of

24 the date on which they are transferred to the ac25 count. If the date of transfer falls on a Saturday,
29

•S 2035 IS

1 Sunday, or public legal holiday, then the fair market

2 value shall be determined by reference to the last

3 preceding day on which they could have been traded

4 on an established securities market.

5 ‘‘(5) DISTRIBUTION OF BALANCE IN ACCOUNT

6 TO CONTRIBUTORS.—The Secretary shall prescribe

7 regulations describing the manner in which any bal8 ance in the education savings account shall be dis9 tributed under paragraph (2)(F)(i)(I) among the

10 contributors to the account. Any division of the bal11 ance in the account shall reflect—

12 ‘‘(A) the amount of net income of the ac13 count which is attributable to the contributions

14 of each such individual, and

15 ‘‘(B) a proper allocation of any amounts

16 previously distributed from the account for edu17 cational expenses among the contributions

18 which were made before any such distribution

19 (including the net income of the account which

20 was attributable to such contributions and

21 earned before any such distribution).

22 ‘‘(6) EDUCATIONAL EXPENSES.—The term

23 ‘educational expenses’ means—
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•S 2035 IS

1 ‘‘(A) tuition and fees required for the en2 rollment or attendance of a student at an eligi3 ble educational institution,

4 ‘‘(B) fees, books, supplies, and equipment

5 required for courses of instruction at an eligible

6 educational institution, and

7 ‘‘(C) a reasonable allowance for meals and

8 lodging while attending an eligible educational

9 institution.

10 ‘‘(7) ELIGIBLE EDUCATIONAL INSTITUTION.—

11 The term ‘eligible educational institution’ means an

12 institution of higher education described in section

13 481(a) of the Higher Education Act of 1965.

14 ‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—

15 ‘‘(1) IN GENERAL.—Except as otherwise pro16 vided in this subsection, any amount paid or distrib17 uted out of an education savings account shall be in18 cluded in gross income of the payee or distributee

19 for the taxable year in which the payment or dis20 tribution is received to the extent such amount is

21 not the return of a contribution for which no deduc22 tion was allowed under subsection (a) (as deter23 mined in the same manner as provided under section

24 72).
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•S 2035 IS

1 ‘‘(2) DISTRIBUTION USED TO PAY EDU2 CATIONAL EXPENSES.—Paragraph (1) shall not

3 apply to any payment or distribution out of an edu4 cation savings account to the extent such payment

5 or distribution is used exclusively to pay the edu6 cational expenses incurred by the individual for

7 whose benefit the account is established.

8 ‘‘(3) DISTRIBUTIONS TO ANOTHER ACCOUNT OR

9 TO ELIGIBLE EDUCATIONAL INSTITUTION.—

10 ‘‘(A) IN GENERAL.—Paragraph (1) shall

11 not apply to any distribution under subsection

12 (c)(2)(F)(i)(II).

13 ‘‘(B) ROLLOVER CONTRIBUTIONS.—Para14 graph (1) shall not apply to any distribution—

15 ‘‘(i) from an education savings ac16 count of the individual for whose benefit

17 the account is established which, within 60

18 days of such distribution, is paid to an19 other such account of such individual, or

20 ‘‘(ii) which is not described in sub21 paragraph (A) and which, as directed by

22 individuals who have contributed to the ac23 count, is paid to another education savings

24 account established for the benefit of an el25 igible individual who is a member of the
32

•S 2035 IS

1 family (within the meaning of section

2 2032A(e)(2)) of the account holder.

3 ‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE4 FORE DUE DATE OF RETURN.—Paragraph (1) does

5 not apply to the distribution of any contribution paid

6 during a taxable year to an education savings ac7 count to the extent that such contribution exceeds

8 the amount allowable as a deduction under sub9 section (a) if—

10 ‘‘(A) such distribution is received on or be11 fore the day prescribed by law (including exten12 sions of time) for filing such individual’s return

13 for such taxable year,

14 ‘‘(B) no deduction is allowed under sub15 section (a) with respect to such excess contribu16 tion, and

17 ‘‘(C) such distribution is accompanied by

18 the amount of net income attributable to such

19 excess contribution.

20 Any net income described in subparagraph (C) shall

21 be included in the gross income of the individual for

22 the taxable year in which such excess contribution

23 was made.

24 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—
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•S 2035 IS

1 ‘‘(1) EXEMPTION FROM TAX.—An education

2 savings account is exempt from taxation under this

3 subtitle unless such account has ceased to be an

4 education savings account by reason of paragraph

5 (2) or (3). Notwithstanding the preceding sentence,

6 any such account is subject to the taxes imposed by

7 section 511 (relating to imposition of tax on unre8 lated business income of charitable, etc. organiza9 tions).

10 ‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE

11 INDIVIDUAL ENGAGES IN PROHIBITED TRANS12 ACTION.—

13 ‘‘(A) IN GENERAL.—If the individual for

14 whose benefit an education savings account is

15 established or any individual who contributes to

16 such account engages in any transaction prohib17 ited by section 4975 with respect to the ac18 count, the account shall cease to be an edu19 cation savings account as of the first day of the

20 taxable year (of the individual so engaging in

21 such transaction) during which such transaction

22 occurs.

23 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

24 ALL ITS ASSETS.—In any case in which any ac25 count ceases to be an education savings account
34

•S 2035 IS

1 by reason of subparagraph (A) as of the first

2 day of any taxable year, paragraph (1) of sub3 section (d) shall apply as if there was a dis4 tribution on such first day in an amount equal

5 to the fair market value (on such first day) of

6 all assets in the account (on such first day).

7 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU8 RITY.—If, during any taxable year, the individual for

9 whose benefit an education savings account is estab10 lished, or any individual who contributes to such ac11 count, uses the account or any portion thereof as se12 curity for a loan, the portion so used shall be treated

13 as distributed to the individual so using such por14 tion.

15 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN16 CLUDED IN GROSS INCOME.—

17 ‘‘(1) DISTRIBUTION NOT USED FOR EDU18 CATIONAL EXPENSES.—In the case of any payment

19 or distribution to which subsection (d)(1) applies,

20 the tax liability of each payee or distributee under

21 this chapter for the taxable year in which the pay22 ment or distribution is received shall be increased by

23 an amount equal to 10 percent of the amount of the

24 distribution which is includible in the gross income

25 of such payee or distributee for such taxable year.
35

•S 2035 IS

1 ‘‘(2) DISQUALIFICATION CASES.—If an amount

2 is includible in the gross income of an individual for

3 a taxable year because such amount is required to

4 be treated as a distribution under paragraph (2) or

5 (3) of subsection (e), such individual’s tax liability

6 under this chapter for such taxable year shall be in7 creased by an amount equal to 10 percent of such

8 amount required to be treated as a distribution and

9 included in the individual’s gross income.

10 ‘‘(3) DISABILITY OR DEATH CASES AND UNEM11 PLOYMENT.—Paragraphs (1) and (2) shall not apply

12 if the payment or distribution—

13 ‘‘(A) is made after the individual for whose

14 benefit the education savings account becomes

15 disabled within the meaning of section 72(m)(7)

16 or dies, or

17 ‘‘(B) is made to an individual who is a

18 contributor after separation from employment

19 if—

20 ‘‘(i) such individual has received un21 employment compensation for 12 consecu22 tive weeks under any Federal or State un23 employment compensation law by reason of

24 such separation, and
36

•S 2035 IS

1 ‘‘(ii) such distributions are made dur2 ing any taxable year during which such un3 employment compensation is paid or the

4 succeeding taxable year.

5 To the extent provided in regulations, a self-em6 ployed individual shall be treated as meeting the re7 quirements of subparagraph (B)(i) if, under Federal

8 or State law, the individual would have received un9 employment compensation but for the fact the indi10 vidual was self-employed.

11 ‘‘(g) COMMUNITY PROPERTY LAWS.—This section

12 shall be applied without regard to any community property

13 laws.

14 ‘‘(h) CUSTODIAL ACCOUNTS.—For purposes of this

15 section, a custodial account shall be treated as a trust if

16 the assets of such account are held by a bank (as defined

17 in section 408(n)) or another person who demonstrates,

18 to the satisfaction of the Secretary, that the manner in

19 which he will administer the account will be consistent

20 with the requirements of this section, and if the custodial

21 account would, except for the fact that it is not a trust,

22 constitute an education savings account described in sub23 section (c)(2). For purposes of this title, in the case of

24 a custodial account treated as a trust by reason of the
37

•S 2035 IS

1 preceding sentence, the custodian of such account shall be

2 treated as the trustee thereof.

3 ‘‘(i) REPORTS.—The trustee of an education savings

4 account shall make such reports regarding such account

5 to the Secretary and to the individual for whose benefit

6 the account is maintained with respect to contributions,

7 distributions, and such other matters as the Secretary

8 may require under regulations. The reports required by

9 this subsection shall be filed at such time and in such

10 manner and furnished to such individuals at such time and

11 in such manner as may be required by those regulations.

12 ‘‘(j) COORDINATION WITH FEDERAL MEANS-TESTED

13 PROGRAMS.—For purposes of any Federal means-tested

14 program, the balance in any education savings account

15 (and any income from such account) shall not be treated

16 as an asset (or income) of the individual for whom the

17 account is established or any parent of such individual.

18 ‘‘(k) DEFINITIONS AND RULES RELATING TO NON19 DEDUCTIBLE CONTRIBUTIONS TO EDUCATION SAVINGS

20 ACCOUNTS.—

21 ‘‘(1) IN GENERAL.—Subject to the provisions of

22 this subsection, designated nondeductible contribu23 tions may be made on behalf of an individual to an

24 education savings account.
38

•S 2035 IS

1 ‘‘(2) LIMITS ON AMOUNTS WHICH MAY BE CON2 TRIBUTED.—

3 ‘‘(A) IN GENERAL.—The amount of the

4 designated nondeductible contributions made on

5 behalf of any individual for any taxable year

6 shall not exceed the nondeductible limit for

7 such taxable year.

8 ‘‘(B) NONDEDUCTIBLE LIMIT.—For pur9 poses of this paragraph—

10 ‘‘(i) IN GENERAL.—The term ‘non11 deductible limit’ means the excess of—

12 ‘‘(I) the amount allowable as a

13 deduction under this section (deter14 mined without regard to subsection

15 (b)(2)), over

16 ‘‘(II) the amount allowable as a

17 deduction under this section (deter18 mined with regard to subsection

19 (b)(2)).

20 ‘‘(ii) TAXPAYER MAY ELECT TO TREAT

21 DEDUCTIBLE CONTRIBUTIONS AS NON22 DEDUCTIBLE.—If a taxpayer elects not to

23 deduct an amount which (without regard

24 to this clause) is allowable as a deduction

25 under this section for any taxable year, the
39

•S 2035 IS

1 nondeductible limit for such taxable year

2 shall be increased by such amount.

3 ‘‘(C) DESIGNATED NONDEDUCTIBLE CON4 TRIBUTIONS.—

5 ‘‘(i) IN GENERAL.—For purposes of

6 this paragraph, the term ‘designated non7 deductible contribution’ means any con8 tribution to an education savings account

9 for the taxable year which is designated (in

10 such manner as the Secretary may pre11 scribe) as a contribution for which a de12 duction is not allowable under this section.

13 ‘‘(ii) DESIGNATION.—Any designation

14 under clause (i) shall be made on the re15 turn of tax imposed by chapter 1 for the

16 taxable year.

17 ‘‘(3) TIME WHEN CONTRIBUTIONS MADE.—In

18 determining for which taxable year a designated

19 nondeductible contribution is made, the rule of sub20 section (c)(3) shall apply.

21 ‘‘(4) INDIVIDUAL REQUIRED TO REPORT

22 AMOUNT OF DESIGNATED NONDEDUCTIBLE CON23 TRIBUTIONS.—

24 ‘‘(A) IN GENERAL.—Any individual who—
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•S 2035 IS

1 ‘‘(i) makes a designated nondeductible

2 contribution to any education savings ac3 count for any taxable year, or

4 ‘‘(ii) receives any amount from any

5 education savings account for any taxable

6 year,

7 shall include on his return of the tax imposed

8 by chapter 1 for such taxable year and any suc9 ceeding taxable year (or on such other form as

10 the Secretary may prescribe for any such tax11 able year) information described in subpara12 graph (B).

13 ‘‘(B) INFORMATION REQUIRED TO BE SUP14 PLIED.—The following information is described

15 in this subparagraph:

16 ‘‘(i) The amount of designated non17 deductible contributions for the taxable

18 year.

19 ‘‘(ii) The amount of distributions from

20 education savings accounts for the taxable

21 year.

22 ‘‘(iii) The excess (if any) of—

23 ‘‘(I) the aggregate amount of

24 designated nondeductible contribu-
41

•S 2035 IS

1 tions for all preceding taxable years,

2 over

3 ‘‘(II) the aggregate amount of

4 distributions from education savings

5 accounts which was excludable from

6 gross income for such taxable years.

7 ‘‘(iv) The aggregate balance of the

8 education savings account of the individual

9 as of the close of the calendar year in

10 which the taxable year begins.

11 ‘‘(v) Such other information as the

12 Secretary may prescribe.’’

13 (b) DEDUCTION ALLOWED IN ARRIVING AT AD14 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)

15 (relating to retirement savings) is amended—

16 (1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE17 TIREMENT’’ in the heading of such paragraph, and

18 (2) by inserting before the period at the end the

19 following: ‘‘and the deduction allowed by section 221

20 (relating to education savings accounts)’’.

21 (c) TAX ON EXCESS CONTRIBUTIONS.—Section 4973

22 (relating to tax on excess contributions to individual re23 tirement accounts, certain section 403(b) contracts, and

24 certain individual retirement annuities) is amended—
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•S 2035 IS

1 (1) by inserting ‘‘EDUCATION SAVINGS AC2 COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of

3 such section,

4 (2) by striking ‘‘or’’ at the end of paragraph

5 (1) of subsection (a),

6 (3) by redesignating paragraph (2) of sub7 section (a) as paragraph (3) and by inserting after

8 paragraph (1) the following new paragraph:

9 ‘‘(2) an education savings account (within the

10 meaning of section 221(c)(2)), or’’, and

11 (4) by adding at the end the following new sub12 section:

13 ‘‘(d) EXCESS CONTRIBUTIONS TO EDUCATION SAV14 INGS ACCOUNTS.—For purposes of this section, in the

15 case of an education savings account, the term ‘excess con16 tributions’ means the amount by which the amount con17 tributed for the taxable year to the account exceeds the

18 amount allowable as a deduction under section 221 for

19 such taxable year. For purposes of this subsection, any

20 contribution which is distributed out of the education sav21 ings account in a distribution to which section 221(d)(4)

22 applies shall be treated as an amount not contributed.’’

23 (d) CONTRIBUTION NOT SUBJECT TO GIFT TAX.—

24 Section 2503 (relating to taxable gifts) is amended by

25 adding at the end the following new subsection:
43

•S 2035 IS

1 ‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con2 tribution (including any rollover contribution) made by an

3 individual to an education savings account described in

4 section 221(c)(2) which is allowable as a deduction under

5 section 221 shall not be treated as a transfer of property

6 by gift for purposes of this chapter.’’

7 (e) TAX ON PROHIBITED TRANSACTIONS.—Section

8 4975 (relating to prohibited transactions) is amended—

9 (1) by adding at the end of subsection (c) the

10 following new paragraph:

11 ‘‘(4) SPECIAL RULE FOR EDUCATION SAVINGS

12 ACCOUNTS.—An individual for whose benefit an edu13 cation savings account is established and any con14 tributor to such account shall be exempt from the

15 tax imposed by this section with respect to any

16 transaction concerning such account (which would

17 otherwise be taxable under this section) if, with re18 spect to such transaction, the account ceases to be

19 an education savings account by reason of the appli20 cation of section 221(e)(2)(A) to such account.’’,

21 and

22 (2) by inserting ‘‘, an education savings account

23 described in section 221(c)(2),’’ in subsection (e)(1)

24 after ‘‘described in section 408(a)’’.
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•S 2035 IS

1 (f) FAILURE TO PROVIDE REPORTS ON EDUCATION

2 SAVINGS ACCOUNTS.—Section 6693 (relating to failure to

3 provide reports on individual retirement accounts or annu4 ities) is amended—

5 (1) by inserting ‘‘OR ON EDUCATION SAV6 INGS ACCOUNTS’’ after ‘‘ANNUITIES’’ in the

7 heading of such section, and

8 (2) by adding at the end of subsection (a) the

9 following new sentence: ‘‘The person required by sec10 tion 221(i) to file a report regarding an education

11 savings account at the time and in the manner re12 quired by such section shall pay a penalty of $50 for

13 each failure, unless it is shown that such failure is

14 due to reasonable cause.’’

15 (g) SPECIAL RULE FOR DETERMINING AMOUNTS OF

16 SUPPORT FOR DEPENDENT.—Subsection (b) of section

17 152 (relating to definition of dependent) is amended by

18 adding at the end the following new paragraph:

19 ‘‘(6) A distribution from an education savings

20 account described in section 221(c)(2) to the individ21 ual for whose benefit such account has been estab22 lished shall not be taken into account in determining

23 support for purposes of this section to the extent

24 such distribution is excluded from gross income of

25 such individual under section 221(d)(2).’’
45

•S 2035 IS

1 (h) CLERICAL AMENDMENTS.—

2 (1) The table of sections for part VII of sub3 chapter B of chapter 1 is amended by striking the

4 item relating to section 221 and inserting the follow5 ing new items:

‘‘Sec. 221. Education savings accounts.

‘‘Sec. 222. Cross reference.’’

6 (2) The table of sections for chapter 43 is

7 amended by striking the item relating to section

8 4973 and inserting the following new item:

‘‘Sec. 4973. Tax on excess contributions to individual retirement

accounts, education savings accounts, certain

403(b) contracts, and certain individual retirement

annuities.’’

9 (3) The table of sections for subchapter B of

10 chapter 68 is amended by striking the item relating

11 to section 6693 and inserting the following new

12 item:

‘‘Sec. 6693. Failure to provide reports on individual retirement

accounts or annuities or on education savings accounts.’’

13 (i) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to taxable years beginning after

15 December 31, 1995.

16 SEC. 113. INCREASE IN INCOME LIMITS FOR SAVINGS BOND

17 EXCLUSION.

18 (a) IN GENERAL.—Paragraph (2) of section 135(b)

19 is amended to read as follows:
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•S 2035 IS

1 ‘‘(2) LIMITATION BASED ON MODIFIED AD2 JUSTED GROSS INCOME.—

3 ‘‘(A) IN GENERAL.—If the modified ad4 justed gross income of the taxpayer for the tax5 able year exceeds $70,000 ($100,000 in the

6 case of a joint return), the amount which would

7 (but for this paragraph) be excludable from

8 gross income under subsection (a) shall be re9 duced (but not below zero) by the amount

10 which bears the same ratio to the amount which

11 would be so excludable as such excess bears to

12 $20,000.

13 ‘‘(B) INFLATION ADJUSTMENT.—In the

14 case of any taxable year beginning in a calendar

15 year after 1996, the $70,000 and $100,000

16 amounts contained in subparagraph (A) shall

17 be increased by an amount equal to—

18 ‘‘(i) such dollar amount, multiplied by

19 ‘‘(ii) the cost-of-living adjustment

20 under section 1(f)(3) for the calendar year

21 in which the taxable year begins, deter22 mined by substituting ‘1995’ for ‘1992’ in

23 subparagraph (B) thereof.

24 ‘‘(C) ROUNDING.—If any amount as ad25 justed under subparagraph (B) is not a mul-
47

•S 2035 IS

1 tiple of $50, such amount shall be rounded to

2 the nearest multiple of $50 (or if such amount

3 is a multiple of $25, such amount shall be

4 rounded to the next highest multiple of $50).’’

5 (b) EFFECTIVE DATE.—The amendments made by

6 this section shall apply to taxable years beginning after

7 December 31, 1995.

8 SEC. 114. TAX TREATMENT OF STATE PREPAID TUITION

9 PLANS.

10 (a) IN GENERAL.—Subchapter F of chapter 1 (relat11 ing to exempt organizations) is amended by adding at the

12 end the following new part:

13 ‘‘PART VIII—STATE PREPAID TUITION PLANS

‘‘Sec. 529. State prepaid tuition plans.

14 ‘‘SEC. 529. STATE PREPAID TUITION PLANS.

15 ‘‘(a) GENERAL RULE.—A qualified State prepaid tui16 tion plan is exempt from tax under this subtitle. Notwith17 standing the preceding sentence, such plan is subject to

18 the taxes imposed by section 511 (relating to imposition

19 of tax on unrelated business income of charitable, etc. or20 ganizations).

21 ‘‘(b) DEFERRAL OF TAX ON PURCHASERS AND

22 BENEFICIARIES.—No amount shall be included in gross

23 income of a purchaser or beneficiary of any interest in
48

•S 2035 IS

1 a qualified State prepaid tuition plan until such amount

2 is received from the plan (whether in cash or otherwise).

3 ‘‘(c) QUALIFIED STATE PREPAID TUITION PLAN.—

4 For purposes of this section, the term ‘qualified State pre5 paid tuition plan’ means a corporation or trust established

6 by a State or instrumentality thereof pursuant to a pro7 gram established by State law which—

8 ‘‘(1) allows an individual to make advance pay9 ments to the corporation or trust on behalf of a des10 ignated beneficiary, and

11 ‘‘(2) provides that such payments—

12 ‘‘(A) may be converted into a percentage

13 (determined at the time of payment) of the

14 qualified higher education expenses of the des15 ignated beneficiary at a participating eligible

16 educational institution, or

17 ‘‘(B) will be refunded in the case of the

18 death or disability of the beneficiary or if the

19 beneficiary does not enroll at such an institu20 tion.’’

21 (b) CONFORMING AMENDMENT.—The table of parts

22 for subchapter F of chapter 1 is amended by adding at

23 the end the following new item:

‘‘Part VIII. State prepaid tuition plans.’’
49

•S 2035 IS

1 TITLE II—SCHOLARSHIPS FOR

2 ACADEMIC ACHIEVEMENT

3 SEC. 201. ACADEMIC ACHIEVEMENT SCHOLARSHIPS.

4 (a) SCHOLARSHIPS.—The Secretary of Education is

5 authorized to award scholarships for academic year 1997–

6 1998 and succeeding academic years to each student in

7 a State who graduated in the top 5 percent of such stu8 dent’s graduating class from secondary school in academic

9 year 1996–1997 or a succeeding academic year.

10 (b) AMOUNT.—Each scholarship awarded under this

11 section shall be in the amount of $1,000.

12 (c) NUMBER AND USE.—Each student described in

13 subsection (a) may receive a maximum of 2 scholarships

14 under this section for use at any institution of higher edu15 cation during any 4 academic years.

16 (d) CONTINUING ELIGIBILITY.—In order to be eligi17 ble to receive a second scholarship under this section, a

18 student shall maintain a 3.0 grade point average on a 4.0

19 grade point scale during such student’s first year of study

20 at an institution of higher education.

21 (e) LIMITATION BASED ON MODIFIED ADJUSTED

22 GROSS INCOME.—

23 (1) IN GENERAL.—The Secretary of Education

24 shall not award a scholarship to a student under this

25 section if the modified adjusted gross income of the
50

•S 2035 IS

1 parents of such student in the case of a dependent

2 student, or the student in the case of an independ3 ent student, for the most recent taxable year ending

4 before the academic year for which the scholarship

5 is awarded exceeds $70,000 ($100,000 in the case of

6 a joint return).

7 (2) MODIFIED ADJUSTED GROSS INCOME.—The

8 term ‘‘modified adjusted gross income’’ means the

9 adjusted gross income of the taxpayer for the tax10 able year determined without regard to sections 911,

11 931, and 933 of the Internal Revenue Code of 1986.

12 (3) ADJUSTMENT OF DOLLAR AMOUNT LIMITA13 TIONS FOR INFLATION.—

14 (A) IN GENERAL.—In the case of any cal15 endar year after 1996, the $70,000 and

16 $100,000 amounts under paragraph (1), shall

17 each be increased by an amount equal to—

18 (i) such dollar amount, multiplied by

19 (ii) the cost-of-living adjustment de20 termined under section 1(f)(3) of the In21 ternal Revenue Code of 1986 for such cal22 endar year by substituting ‘‘calendar year

23 1995’’ for ‘‘calendar year 1992’’ in sub24 paragraph (B) of such section.
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•S 2035 IS

1 (B) ROUNDING.—The rounding rules of

2 section 220(b)(3)(C) of the Internal Revenue

3 Code of 1986 shall apply to any increase under

4 subparagraph (A).

5 (f) REGULATIONS.—The Secretary of Education shall

6 promulgate regulations regarding the notification concern7 ing, payment of, and continuing eligibility for, scholarships

8 under this section.

9 SEC. 202. DEFINITIONS.

10 For the purpose of this title—

11 (1) the term ‘‘institution of higher education’’

12 has the meaning given such term in section 1201 of

13 the Higher Education Act of 1965 (20 U.S.C.

14 1141);

15 (2) the term ‘‘secondary school’’ has the mean16 ing given such term in section 14101 of the Elemen17 tary and Secondary Education Act of 1965 (20

18 U.S.C. 8801); and

19 (3) the term ‘‘State’’ means each of the several

20 States of the United States and the District of Co21 lumbia.

22 SEC. 203. AUTHORIZATION OF APPROPRIATIONS.

23 There are authorized to be appropriated

24 $130,000,000 for fiscal year 1997 and $260,000,000 for

25 each of the 4 succeeding fiscal years.
52

•S 2035 IS

1 TITLE III—DEFICIT NEUTRALITY

2 SEC. 301. SENSE OF THE SENATE.

3 It is the sense of the Senate that—

4 (1) this Act will not increase the budget deficit

5 of the United States; and

6 (2) the costs of carrying out this Act should be

7 paid by closing corporate tax loopholes.

Æ