I

104TH CONGRESS

2D SESSION H. R. 3842

To amend the Internal Revenue Code of 1986 to provide an exemption

from income taxation for qualified State tuition programs.

IN THE HOUSE OF REPRESENTATIVES

JULY 17, 1996

Mrs. THURMAN (for herself, Mr. BILIRAKIS, Ms. BROWN of Florida, Mr.

CANADY of Florida, Mr. DEUTSCH, Mr. DIAZ-BALART, Mr. GIBBONS, Mr.

FOLEY, Mr. HASTINGS of Florida, Mrs. MEEK of Florida, Mr. MILLER

of Florida, Mr. PETERSON of Florida, Mr. SCARBOROUGH, Mr. SHAW,

Mr. MICA, Mr. MCCOLLUM, Mr. STEARNS, Ms. ROS-LEHTINEN, Mr.

BACHUS, Mr. BEVILL, Mr. BONIOR, Mr. BORSKI, Mr. BROWDER, Mr.

CALLAHAN, Mr. CLEMENT, Miss COLLINS of Michigan, Mr. COMBEST,

Mr. CONYERS, Mr. CRAMER, Mr. DOOLEY of California, Mr. DOYLE, Mr.

ENGLISH of Pennsylvania, Mr. EVERETT, Mr. FAZIO of California, Mr.

FRANK of Massachusetts, Mr. FROST, Ms. HARMAN, Mr. HOLDEN, Ms.

JACKSON-LEE of Texas, Mr. JEFFERSON, Mr. JOHNSTON of Florida, Mr.

KANJORSKI, Ms. KAPTUR, Mr. KLINK, Mr. MASCARA, Mr. MEEHAN, Mr.

MOAKLEY, Mr. MORAN, Mr. MURTHA, Mr. NEAL of Massachusetts, Mr.

OLVER, Mr. PAYNE of Virginia, Ms. RIVERS, Mr. SMITH of Michigan, Mr.

STENHOLM, Mr. STUDDS, Mr. STUPAK, and Mr. TANNER) introduced the

following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

an exemption from income taxation for qualified State

tuition programs.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,
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1 SECTION 1. QUALIFIED STATE TUITION PROGRAMS.

2 (a) IN GENERAL.—Subchapter F of chapter 1 of the

3 Internal Revenue Code of 1986 (relating to exempt organi4 zations) is amended by adding at the end the following

5 new part:

6 ‘‘PART VIII—QUALIFIED STATE TUITION

7 PROGRAMS

‘‘Sec. 529. Qualified State tuition programs.

8 ‘‘SEC. 529. QUALIFIED STATE TUITION PROGRAMS.

9 ‘‘(a) GENERAL RULE.—A qualified State tuition pro10 gram shall be exempt from taxation under this subtitle.

11 Notwithstanding the preceding sentence, such program

12 shall be subject to the taxes imposed by section 511 (relat13 ing to imposition of tax on unrelated business income of

14 charitable organizations).

15 ‘‘(b) QUALIFIED STATE TUITION PROGRAM.—For

16 purposes of this section—

17 ‘‘(1) IN GENERAL.—The term ‘qualified State

18 tuition program’ means a program established and

19 maintained by a State or agency or instrumentality

20 thereof—

21 ‘‘(A) under which a person—

22 ‘‘(i) may purchase tuition credits or

23 certificates on behalf of a designated bene24 ficiary which entitle the beneficiary to the
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1 waiver or payment of qualified higher edu2 cation expenses of the beneficiary, or

3 ‘‘(ii) may make contributions to an

4 account which is established for the sole

5 purpose of meeting the qualified higher

6 education expenses of the designated bene7 ficiary of the account, and

8 ‘‘(B) which meets the other requirements

9 of this subsection.

10 ‘‘(2) CASH CONTRIBUTIONS.—A program shall

11 not be treated as a qualified State tuition program

12 unless it provides that purchases or contributions

13 may only be made in cash.

14 ‘‘(3) REFUNDS.—A program shall not be treat15 ed as a qualified State tuition program unless it im16 poses a more than de minimis penalty on any refund

17 of earnings from the account which are not—

18 ‘‘(A) used for qualified higher education

19 expenses of the designated beneficiary,

20 ‘‘(B) made on account of the death or dis21 ability of the designated beneficiary, or

22 ‘‘(C) made on account of a scholarship re23 ceived by the designated beneficiary to the ex24 tent the amount of the refund does not exceed
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1 the amount of the scholarship used for qualified

2 higher education expenses.

3 ‘‘(4) SEPARATE ACCOUNTING.—A program shall

4 not be treated as a qualified State tuition program

5 unless it provides separate accounting for each des6 ignated beneficiary.

7 ‘‘(5) NO INVESTMENT DIRECTION.—A program

8 shall not be treated as a qualified State tuition pro9 gram unless it provides that any contributor to, or

10 designated beneficiary under, such program may not

11 direct the investment of any contributions to the

12 program (or any earnings thereon).

13 ‘‘(6) NO PLEDGING OF INTEREST AS SECU14 RITY.—A program shall not be treated as a qualified

15 State tuition program if it allows any interest in the

16 program or any portion thereof to be used as secu17 rity for a loan.

18 ‘‘(c) TAX TREATMENT OF DESIGNATED BENE19 FICIARIES AND CONTRIBUTORS.—

20 ‘‘(1) IN GENERAL.—Except as otherwise pro21 vided in this subsection, no amount shall be includ22 ible in gross income of—

23 ‘‘(A) a designated beneficiary under a

24 qualified State tuition program, or
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1 ‘‘(B) a contributor to such program on be2 half of a designated beneficiary,

3 with respect to any distribution from, or earnings

4 under, such program.

5 ‘‘(2) DISTRIBUTIONS.—

6 ‘‘(A) IN GENERAL.—Any distribution

7 under a qualified State tuition program shall be

8 includible in the gross income of the distributee

9 in the same manner as provided under section

10 72 to the extent not excluded from gross in11 come under any other provision of this chapter.

12 ‘‘(B) IN-KIND DISTRIBUTIONS.—The fur13 nishing of education to a designated beneficiary

14 under a qualified State tuition program shall be

15 treated as a distribution to the beneficiary.

16 ‘‘(C) CHANGE IN BENEFICIARIES.—

17 ‘‘(i) ROLLOVERS.—Subparagraph (A)

18 shall not apply to that portion of any dis19 tribution which, within 60 days of such

20 distribution, is transferred to the credit of

21 another designated beneficiary under a

22 qualified State tuition program who is a

23 member of the same family as the des24 ignated beneficiary with respect to which

25 the distribution was made.
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1 ‘‘(ii) CHANGE IN DESIGNATED BENE2 FICIARIES.—Any change in the designated

3 beneficiary of an interest in a qualified

4 State tuition program shall not be treated

5 as a distribution for purposes of subpara6 graph (A) if the new beneficiary is a mem7 ber of the same family as the old bene8 ficiary.

9 ‘‘(D) OPERATING RULES.—For purposes of

10 applying section 72—

11 ‘‘(i) all qualified State tuition pro12 grams of which an individual is a des13 ignated beneficiary shall be treated as one

14 program,

15 ‘‘(ii) all distributions during a taxable

16 year shall be treated as one distribution,

17 and

18 ‘‘(iii) the value of the contract, income

19 on the contract, and investment in the con20 tract shall be computed as of the close of

21 the calendar year in which the taxable year

22 begins.

23 ‘‘(3) GIFT TAX TREATMENT.—Any contribution

24 on behalf of a designated beneficiary to a qualified
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1 State tuition program shall be treated as a qualified

2 transfer for purposes of section 2503(e).

3 ‘‘(d) REPORTING REQUIREMENTS.—

4 ‘‘(1) IN GENERAL.—If—

5 ‘‘(A) a designated beneficiary is furnished

6 education under a qualified State tuition pro7 gram during any calendar year, or

8 ‘‘(B) there is a distribution to any individ9 ual with respect to an interest in such program

10 during any calendar year,

11 each officer or employee having control of the quali12 fied State tuition program or their designee shall

13 make such reports as the Secretary may require re14 garding such education or distribution to the Sec15 retary and to the designated beneficiary or the indi16 vidual to whom the distribution was made. Any such

17 report shall include such information as the Sec18 retary may prescribe.

19 ‘‘(2) TIMING OF REPORTS.—Any report re20 quired by this subsection—

21 ‘‘(A) shall be filed at such time and in

22 such matter as the Secretary prescribes, and

23 ‘‘(B) shall be furnished to individuals not

24 later than January 31 of the calendar year fol-
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1 lowing the calendar year to which such report

2 relates.

3 ‘‘(e) OTHER DEFINITIONS AND SPECIAL RULES.—

4 For purposes of this section—

5 ‘‘(1) DESIGNATED BENEFICIARY.—The term

6 ‘designated beneficiary’ means—

7 ‘‘(A) the individual designated at the com8 mencement of participation in the qualified

9 State tuition program as the beneficiary of

10 amounts paid (or to be paid) to the program,

11 ‘‘(B) in the case of a change in bene12 ficiaries described in subsection (c)(2)(C)(ii),

13 the individual who is the new beneficiary, and

14 ‘‘(C) in the case of an interest in a quali15 fied State tuition program purchased by a State

16 or local government or an organization de17 scribed in section 501(c)(3) and exempt from

18 taxation under section 501(a) as part of a

19 scholarship program operated by such govern20 ment or organization, the individual receiving

21 such interest as a scholarship.

22 ‘‘(2) MEMBER OF FAMILY.—The term ‘member

23 of family’ has the same meaning given such term as

24 section 2032A(e)(2).
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1 ‘‘(3) QUALIFIED HIGHER EDUCATION EX2 PENSES.—The term ‘qualified higher education ex3 penses’ means tuition, fees, books, supplies, and

4 equipment required for the enrollment or attendance

5 of a designated beneficiary at an eligible education

6 institution (as defined in section 135(c)(3)).

7 ‘‘(4) APPLICATION OF SECTION 514.—An inter8 est in a qualified State tuition program shall not be

9 treated as debt for purposes of section 514.’’.

10 (b) EFFECTIVE DATES.—

11 (1) IN GENERAL.—The amendments made by

12 this section shall apply to taxable years ending after

13 the date of the enactment of this Act.

14 (2) TRANSITION RULE.—If—

15 (A) a State or agency or instrumentality

16 thereof maintains, on the date of the enactment

17 of this Act, a program under which persons

18 may purchase tuition credits or certificates on

19 behalf of, or make contributions for education

20 expenses of, a designated beneficiary, and

21 (B) such program meets the requirements

22 of a qualified State tuition program before the

23 later of—

24 (i) the date which is 1 year after such

25 date of enactment, or
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1 (ii) the first day of the first calendar

2 quarter after the close of the first regular

3 session of the State legislature that begins

4 after such date of enactment,

5 the amendments made by this section shall

6 apply to contributions (and earnings allocable

7 thereto) made before the later of such dates

8 without regard to whether any requirements of

9 such amendments are met with respect to such

10 contributions and earnings. For purposes of

11 subparagraph (B)(ii), if a State has a 2-year

12 legislative session, each year of such session

13 shall be deemed to be a separate regular session

14 of the State legislature.

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