I

104TH CONGRESS

2D SESSION H. R. 4323

To amend the Internal Revenue Code of 1986 to make higher education

more affordable by providing tax benefits to individuals who save for,

or pay for, higher education.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 28, 1996

Mr. SCHUMER (for himself and Ms. SLAUGHTER) 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 make

higher education more affordable by providing tax benefits to individuals who save for, or pay for, higher education.

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 ‘‘Family Affordable Col5 lege Tuition Act of 1996’’.

6 SEC. 2. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

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

8 B of chapter 1 of the Internal Revenue Code of 1986 (re-
2

•HR 4323 IH

1 lating to additional itemized deductions for individuals) is

2 amended by redesignating section 221 as section 222 and

3 by inserting after section 220 the following new section:

4 ‘‘SEC. 221. HIGHER EDUCATION EXPENSES.

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

6 individual, there shall be allowed as a deduction an

7 amount equal to—

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

9 and

10 ‘‘(2) interest on qualified higher education

11 loans,

12 paid by the taxpayer during the taxable year.

13 ‘‘(b) LIMITATION BASED ON MODIFIED ADJUSTED

14 GROSS INCOME.—

15 ‘‘(1) IN GENERAL.—The amount which would

16 (but for this subsection) be taken into account under

17 subsection (a) shall be reduced (but not below zero)

18 by the amount determined under paragraph (2).

19 ‘‘(2) AMOUNT OF REDUCTION.—The amount

20 determined under this paragraph equals the amount

21 which bears the same ratio to the amount which

22 would be so taken into account as—

23 ‘‘(A) the excess of—

24 ‘‘(i) the taxpayer’s modified adjusted

25 gross income for such taxable year, over
3

•HR 4323 IH

1 ‘‘(ii) $140,000 ($200,000 in the case

2 of a joint return), bears to

3 ‘‘(B) $20,000.

4 ‘‘(3) MODIFIED ADJUSTED GROSS INCOME.—

5 For purposes of this subsection, the term ‘modified

6 adjusted gross income’ means the adjusted gross in7 come of the taxpayer for the taxable year deter8 mined—

9 ‘‘(A) without regard to this section and

10 sections 911, 931, and 933, and

11 ‘‘(B) after the application of sections 86,

12 135, 219, 220, and 469.

13 For purposes of the sections referred to in subpara14 graph (B), adjusted gross income shall be deter15 mined without regard to the deduction allowed under

16 this section.

17 ‘‘(4) INFLATION ADJUSTMENTS.—

18 ‘‘(A) IN GENERAL.—In the case of a tax19 able year beginning after 1999, the $140,000

20 and $200,000 amounts described in paragraph

21 (2) shall each be increased by an amount equal

22 to—

23 ‘‘(i) such dollar amounts, multiplied

24 by
4

•HR 4323 IH

1 ‘‘(ii) the cost-of-living adjustment de2 termined under section 1(f)(3) for the cal3 endar year in which the taxable year be4 gins, determined by substituting ‘calendar

5 year 1998’ for ‘calendar year 1992’ in sub6 paragraph (B) thereof.

7 ‘‘(B) ROUNDING.—If any amount as ad8 justed under subparagraph (A) is not a multiple

9 of $5,000, such amount shall be rounded to the

10 next lowest multiple of $5,000.

11 ‘‘(c) QUALIFIED HIGHER EDUCATION EXPENSES.—

12 For purposes of this section—

13 ‘‘(1) QUALIFIED HIGHER EDUCATION EX14 PENSES.—

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

16 higher education expenses’ means—

17 ‘‘(i) tuition and fees charged by an

18 educational institution and required for the

19 enrollment or attendance of—

20 ‘‘(I) the taxpayer,

21 ‘‘(II) the taxpayer’s spouse,

22 ‘‘(III) any dependent of the tax23 payer with respect to whom the tax24 payer is allowed a deduction under

25 section 151, or
5

•HR 4323 IH

1 ‘‘(IV) any grandchild of the tax2 payer,

3 as an eligible student at an institution of

4 higher education, and

5 ‘‘(ii) reasonable living expenses for

6 such an individual while away from home

7 and attending such institution.

8 ‘‘(B) ELIGIBLE COURSES.—Amounts paid

9 for qualified higher education expenses of any

10 individual shall be taken into account under

11 subsection (a) only to the extent such ex12 penses—

13 ‘‘(i) are attributable to courses of in14 struction for which credit is allowed toward

15 a baccalaureate degree by an institution of

16 higher education or toward a certificate of

17 required course work at a vocational

18 school, and

19 ‘‘(ii) are not attributable to any grad20 uate program of such individual.

21 ‘‘(C) EXCEPTION FOR NONACADEMIC

22 FEES.—Such term does not include any student

23 activity fees, athletic fees, insurance expenses,

24 or other expenses unrelated to a student’s aca25 demic course of instruction.
6

•HR 4323 IH

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

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

3 means a student who—

4 ‘‘(i) meets the requirements of section

5 484(a)(1) of the Higher Education Act of

6 1965 (20 U.S.C. 1091(a)(1)), as in effect

7 on the date of the enactment of this sec8 tion, and

9 ‘‘(ii) is carrying at least one-half the

10 normal full-time work load for the course

11 of study the student is pursuing, as deter12 mined by the institution of higher edu13 cation.

14 ‘‘(E) IDENTIFICATION REQUIREMENT.—No

15 deduction shall be allowed under subsection (a)

16 to a taxpayer with respect to an eligible student

17 unless the taxpayer includes the name, age, and

18 taxpayer identification number of such eligible

19 student on the return of tax for the taxable

20 year.

21 ‘‘(2) INSTITUTION OF HIGHER EDUCATION.—

22 The term ‘institution of higher education’ means an

23 institution which—

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

25 Higher Education Act of 1965 (20 U.S.C.
7

•HR 4323 IH

1 1088), as in effect on the date of the enactment

2 of this section, and

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

4 under title IV of such Act.

5 ‘‘(d) QUALIFIED HIGHER EDUCATION LOAN.—For

6 purposes of this section—

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

8 education loan’ means a loan which is—

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

10 Federal Government,

11 ‘‘(B) made by a State or a political sub12 division of a State,

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

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

15 ‘‘(D) made by an institution of higher edu16 cation (as defined in section 1201(a) of the

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

18 1141(a))).

19 ‘‘(2) LIMITATION.—The amount of interest on

20 a qualified higher education loan which is taken into

21 account under subsection (a)(2) shall not exceed the

22 amount which bears the same ratio to such amount

23 of interest as—

24 ‘‘(A) the proceeds from such loan used for

25 qualified higher education expenses, bears to
8

•HR 4323 IH

1 ‘‘(B) the total proceeds from such loan.

2 For purposes of the preceding sentence, the term

3 ‘qualified higher education expenses’ shall be deter4 mined without regard to subsection (c)(1)(A)(i)(IV).

5 ‘‘(e) SPECIAL RULES.—

6 ‘‘(1) NO DOUBLE BENEFIT.—

7 ‘‘(A) IN GENERAL.—No deduction shall be

8 allowed under subsection (a) for any expense

9 for which a deduction is allowable to the tax10 payer under any other provision of this chapter

11 unless the taxpayer irrevocably waives his right

12 to the deduction of such expense under such

13 other provision.

14 ‘‘(B) DEPENDENTS.—No deduction shall

15 be allowed under subsection (a) to any individ16 ual with respect to whom a deduction under

17 section 151 is allowable to another taxpayer for

18 a taxable year beginning in the calendar year in

19 which such individual’s taxable year begins.

20 ‘‘(C) SAVINGS BOND EXCLUSION.—A de21 duction shall be allowed under subsection (a)

22 for qualified higher education expenses only to

23 the extent the amount of such expenses exceeds

24 the amount excludable under section 135 for

25 the taxable year.
9

•HR 4323 IH

1 ‘‘(2) LIMITATION ON TAXABLE YEAR OF DE2 DUCTION.—

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

4 allowed under subsection (a) for qualified high5 er education expenses for any taxable year only

6 to the extent such expenses are in connection

7 with enrollment at an institution of higher edu8 cation during the taxable year.

9 ‘‘(B) CERTAIN PREPAYMENTS ALLOWED.—

10 Subparagraph (A) shall not apply to qualified

11 higher education expenses paid during a taxable

12 year if such expenses are in connection with an

13 academic term beginning during such taxable

14 year or during the first 3 months of the next

15 taxable year.

16 ‘‘(3) ADJUSTMENT FOR CERTAIN SCHOLAR17 SHIPS AND VETERANS BENEFITS.—The amount of

18 qualified higher education expenses otherwise taken

19 into account under subsection (a) or (d)(2) with re20 spect to the education of an individual shall be re21 duced (before the application of subsection (b)) by

22 the sum of the amounts received with respect to

23 such individual for the taxable year as—

24 ‘‘(A) a qualified scholarship which under

25 section 117 is not includable in gross income,
10

•HR 4323 IH

1 ‘‘(B) an educational assistance allowance

2 under chapter 30, 31, 32, 34, or 35 of title 38,

3 United States Code, or

4 ‘‘(C) a payment (other than a gift, be5 quest, devise, or inheritance within the meaning

6 of section 102(a)) for educational expenses, or

7 attributable to enrollment at an eligible edu8 cational institution, which is exempt from in9 come taxation by any law of the United States.

10 ‘‘(4) NO DEDUCTION FOR MARRIED INDIVID11 UALS FILING SEPARATE RETURNS.—If the taxpayer

12 is a married individual (within the meaning of sec13 tion 7703), this section shall apply only if the tax14 payer and the taxpayer’s spouse file a joint return

15 for the taxable year.

16 ‘‘(5) NONRESIDENT ALIENS.—If the taxpayer is

17 a nonresident alien individual for any portion of the

18 taxable year, this section shall apply only if such in19 dividual is treated as a resident alien of the United

20 States for purposes of this chapter by reason of an

21 election under subsection (g) or (h) of section 6013.

22 ‘‘(6) REGULATIONS.—The Secretary may pre23 scribe such regulations as may be necessary or ap24 propriate to carry out this section, including regula-
11

•HR 4323 IH

1 tions requiring recordkeeping and information re2 porting.’’

3 (b) DEDUCTION ALLOWED IN COMPUTING AD4 JUSTED GROSS INCOME.—Section 62(a) of such Code is

5 amended by inserting after paragraph (16) the following

6 new paragraph:

7 ‘‘(17) HIGHER EDUCATION EXPENSES.—The

8 deduction allowed by section 221.’’

9 (c) CONFORMING AMENDMENT.—The table of sec10 tions for part VII of subchapter B of chapter 1 of such

11 Code is amended by striking the item relating to section

12 221 and inserting:

‘‘Sec. 221. Higher education expenses.

‘‘Sec. 222. Cross reference.’’

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

14 this section shall apply to payments made after December

15 31, 1995.

16 SEC. 3. EDUCATION SAVINGS PLANS.

17 (a) IN GENERAL.—Part VII of subchapter B of chap18 ter 1 of the Internal Revenue Code of 1986 (relating to

19 additional itemized deductions for individuals) is amended

20 by redesignating section 222 as section 223 and by insert21 ing after section 221 the following new section:

22 ‘‘SEC. 222. EDUCATION SAVINGS PLANS.

23 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi24 vidual, there shall be allowed as a deduction the amount
12

•HR 4323 IH

1 paid in cash during the taxable year by such individual

2 to an education savings plan established for the purpose

3 of accumulating funds to pay the qualified higher edu4 cation expenses of individual who is an eligible individual

5 with respect to the taxpayer.

6 ‘‘(b) LIMITATIONS.—

7 ‘‘(1) IN GENERAL.—The amount allowable as a

8 deduction under subsection (a) to the taxpayer for

9 any taxable year with respect to amounts paid to the

10 education savings plan of each eligible individual

11 shall not exceed $4,000.

12 ‘‘(2) LIMITATION BASED ON MODIFIED AD13 JUSTED GROSS INCOME.—The $4,000 amount in

14 paragraph (1) shall be reduced (but not below zero)

15 by the amount which bears the same ratio to $4,000

16 as—

17 ‘‘(A) the excess of—

18 ‘‘(i) the taxpayer’s modified adjusted

19 gross income for such taxable year, over

20 ‘‘(ii) the dollar amount applicable to

21 the taxpayer for such taxable year under

22 section 221(b)(2)(A)(ii), bears to

23 ‘‘(B) $20,000.

24 ‘‘(3) MODIFIED ADJUSTED GROSS INCOME.—

25 For purposes of this subsection, the term ‘modified
13

•HR 4323 IH

1 adjusted gross income’ means the adjusted gross in2 come of the taxpayer for the taxable year deter3 mined—

4 ‘‘(A) without regard to this section and

5 sections 911, 931, and 933, and

6 ‘‘(B) after the application of sections 86,

7 135, 219, 220, 221, and 469.

8 For purposes of the sections referred to in subpara9 graph (B), adjusted gross income shall be deter10 mined without regard to the deduction allowed under

11 this section.

12 ‘‘(3) PLAN MAY NOT BE ESTABLISHED FOR

13 BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu14 cation savings plan may not be established for the

15 benefit of more than 1 individual.

16 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur17 poses of this section—

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

19 individual’ means an individual who is—

20 ‘‘(A) the taxpayer,

21 ‘‘(B) the taxpayer’s spouse,

22 ‘‘(C) any dependent of the taxpayer with

23 respect to whom the taxpayer is allowed a de24 duction under section 151, or

25 ‘‘(D) any grandchild of the taxpayer.
14

•HR 4323 IH

1 ‘‘(2) EDUCATION SAVINGS PLAN.—The term

2 ‘education savings plan’ means a trust created or or3 ganized in the United States exclusively for the pur4 pose of paying the qualified higher education ex5 penses of an eligible individual, but only if the writ6 ten governing instrument creating the trust meets

7 the following requirements:

8 ‘‘(A) No contribution will be accepted un9 less it is in cash, and contributions will not be

10 accepted for any taxable year in excess of

11 $4,000.

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

13 section 408(n)) or another person who dem14 onstrates to the satisfaction of the Secretary

15 that the manner in which that person will ad16 minister the trust will be consistent with the re17 quirements of this section.

18 ‘‘(C) No part of the trust assets will be in19 vested in life insurance contracts.

20 ‘‘(D) The assets of the trust shall not be

21 commingled with other property except in a

22 common trust fund or common investment

23 fund.

24 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

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

•HR 4323 IH

1 contribution on the last day of the preceding taxable

2 year if the contribution is made on account of such

3 taxable year and is made not later than the time

4 prescribed by law for filing the return for such tax5 able year (including extensions thereof).

6 ‘‘(4) QUALIFIED HIGHER EDUCATION EX7 PENSES.—The term ‘qualified higher education ex8 penses’ has the meaning given such term by section

9 221(c).

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

11 The term ‘institution of higher education’ has the

12 meaning given such term by section 221(c).

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

14 ‘‘(1) IN GENERAL.—Except as otherwise pro15 vided in this subsection, any amount paid or distrib16 uted out of an education savings plan shall be in17 cluded in gross income of the payee or distributee

18 for the taxable year in which the payment or dis19 tribution is received to the extent such amount is

20 not the return of a contribution for which no deduc21 tion was allowed under subsection (a).

22 ‘‘(2) DISTRIBUTION USED TO PAY QUALIFIED

23 HIGHER EDUCATION EXPENSES.—Paragraph (1)

24 shall not apply to any payment or distribution out

25 of an education savings plan to the extent such pay-
16

•HR 4323 IH

1 ment or distribution is used exclusively to pay the

2 qualified higher education expenses incurred by the

3 individual for whose benefit the plan is established

4 while such individual is an eligible student (as de5 fined in section 221).

6 ‘‘(3) DISTRIBUTIONS TO ANOTHER PLAN OR TO

7 INSTITUTION OF HIGHER EDUCATION.—Paragraph

8 (1) shall not apply to any distribution under sub9 section (c)(2)(E)(ii).

10 ‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE11 FORE DUE DATE OF RETURN.—Paragraph (1) does

12 not apply to the distribution of any contribution paid

13 during a taxable year to an education savings plan

14 to the extent that such contribution exceeds the

15 amount allowable as a deduction under subsection

16 (a) for contributions to such plan if—

17 ‘‘(A) such distribution is received on or be18 fore the day prescribed by law (including exten19 sions of time) for filing such individual’s return

20 for such taxable year,

21 ‘‘(B) no deduction is allowed under sub22 section (a) with respect to such excess contribu23 tion, and
17

•HR 4323 IH

1 ‘‘(C) such distribution is accompanied by

2 the amount of net income attributable to such

3 excess contribution.

4 Any net income described in subparagraph (C) shall

5 be included in the gross income of the individual for

6 the taxable year in which such excess contribution

7 was made.

8 ‘‘(e) TAX TREATMENT OF PLANS.—

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

10 savings plan is exempt from taxation under this sub11 title unless such plan has ceased to be an education

12 savings plan by reason of paragraph (3). Notwith13 standing the preceding sentence, any such plan is

14 subject to the taxes imposed by section 511 (relating

15 to imposition of tax on unrelated business income of

16 charitable, etc. organizations).

17 ‘‘(2) AMOUNT IN PLAN NOT TO AFFECT ELIGI18 BILITY FOR OTHER FEDERAL ASSISTANCE.—

19 Amounts held in any education savings plan shall

20 not be taken into account in determining the eligi21 bility for, or the amount of, any grant under any

22 Federal student assistance program.

23 ‘‘(3) LOSS OF EXEMPTION OF PLAN WHERE IN24 DIVIDUAL ENGAGES IN PROHIBITED TRANS25 ACTION.—
18

•HR 4323 IH

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

2 whose benefit an education savings plan is es3 tablished or any individual who contributes to

4 such plan engages in any transaction prohibited

5 by section 4975 with respect to the plan, the

6 plan shall cease to be an education savings plan

7 as of the first day of the taxable year (of the

8 individual so engaging in such transaction) dur9 ing which such transaction occurs.

10 ‘‘(B) PLAN TREATED AS DISTRIBUTING

11 ALL ITS ASSETS.—In any case in which any

12 plan ceases to be an education savings plan by

13 reason of subparagraph (A) as of the first day

14 of any taxable year, paragraph (1) of subsection

15 (d) shall apply as if there was a distribution on

16 such first day in an amount equal to the fair

17 market value (on such first day) of all assets in

18 the plan (on such first day).

19 ‘‘(4) EFFECT OF PLEDGING PLAN AS SECU20 RITY.—If, during any taxable year, the individual for

21 whose benefit an education savings plan is estab22 lished, or any individual who contributes to such

23 plan, uses the plan or any portion thereof as security

24 for a loan, the portion so used shall be treated as

25 distributed to the individual so using such portion.
19

•HR 4323 IH

1 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN2 CLUDED IN GROSS INCOME.—

3 ‘‘(1) DISTRIBUTION NOT USED FOR QUALIFIED

4 HIGHER EDUCATION EXPENSES.—In the case of any

5 payment or distribution to which subsection (d)(1)

6 applies, the tax liability of each payee or distributee

7 under this chapter for the taxable year in which the

8 payment or distribution is received shall be increased

9 by an amount equal to 10 percent of the amount of

10 the distribution which is includible in the gross in11 come of such payee or distributee for such taxable

12 year.

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

14 is includible in the gross income of an individual for

15 a taxable year because such amount is required to

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

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

18 under this chapter for such taxable year shall be in19 creased by an amount equal to 10 percent of such

20 amount required to be treated as a distribution and

21 included in his gross income.

22 ‘‘(3) DISABILITY OR DEATH CASES.—Para23 graphs (1) and (2) shall not apply if the payment

24 or distribution is made after the individual for whose
20

•HR 4323 IH

1 benefit the education savings plan becomes disabled

2 within the meaning of section 72(m)(7) or dies.

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

4 shall be applied without regard to any community property

5 laws.

6 ‘‘(h) CUSTODIAL PLANS.—For purposes of this sec7 tion, a custodial plan shall be treated as a trust if the

8 assets of such plan are held by a bank (as defined in sec9 tion 408(n)) or another person who demonstrates, to the

10 satisfaction of the Secretary, that the manner in which

11 he will administer the plan will be consistent with the re12 quirements of this section, and if the custodial plan would,

13 except for the fact that it is not a trust, constitute an

14 education savings plan described in subsection (c)(2). For

15 purposes of this title, in the case of a custodial plan treat16 ed as a trust by reason of the preceding sentence, the cus17 todian of such plan shall be treated as the trustee thereof.

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

19 plan shall make such reports regarding such plan to the

20 Secretary and to the individual for whose benefit the plan

21 is maintained with respect to contributions, distributions,

22 and such other matters as the Secretary may require

23 under regulations. The reports required by this subsection

24 shall be filed at such time and in such manner and fur-
21

•HR 4323 IH

1 nished to such individuals at such time and in such man2 ner as may be required by those regulations.’’

3 (b) DEDUCTION ALLOWED IN ARRIVING AT AD4 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)

5 of such Code (relating to retirement savings) is amend6 ed—

7 (1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE8 TIREMENT’’ in the heading of such paragraph, and

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

10 following: ‘‘and the deduction allowed by section 222

11 (relating to education savings plans)’’.

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

13 of such Code (relating to tax on excess contributions to

14 individual retirement plans, certain section 403(b) con15 tracts, and certain individual retirement annuities) is

16 amended—

17 (1) by inserting ‘‘EDUCATION SAVINGS PLANS,’’

18 after ‘‘MEDICAL SAVINGS ACCOUNTS,’’ in the heading

19 of such section,

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

21 (1) of subsection (a),

22 (3) by redesignating paragraph (3) of sub23 section (a) as paragraph (4) and by inserting after

24 paragraph (2) the following new paragraph:
22

•HR 4323 IH

1 ‘‘(3) an education savings plan (within the

2 meaning of section 222(c)(2)), or’’, and

3 (4) by adding at the end the following new sub4 section:

5 ‘‘(e) EXCESS CONTRIBUTIONS TO EDUCATION SAV6 INGS PLANS.—For purposes of this section, in the case

7 of an education savings plan, the term ‘excess contribu8 tions’ means the amount by which the amount contributed

9 for the taxable year to the plan exceeds the amount allow10 able as a deduction under section 222 for such taxable

11 year. For purposes of this subsection, any contribution

12 which is distributed out of the education savings plan in

13 a distribution to which section 222(d)(4) applies shall be

14 treated as an amount not contributed.’’

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

16 Section 2503 of such Code (relating to taxable gifts) is

17 amended by adding at the end the following new sub18 section:

19 ‘‘(h) EDUCATION SAVINGS PLANS.—Any contribution

20 made by an individual to an education savings plan de21 scribed in section 222(c)(2) which is allowable as a deduc22 tion under section 222 shall not be treated as a transfer

23 of property by gift for purposes of this chapter.’’

24 (e) TAX ON PROHIBITED TRANSACTIONS.—
23

•HR 4323 IH

1 (1) Section 4975 of such Code (relating to pro2 hibited transactions) is amended by adding at the

3 end of subsection (c) the following new paragraph:

4 ‘‘(5) SPECIAL RULE FOR EDUCATION SAVINGS

5 PLANS.—An individual for whose benefit an edu6 cation savings plan is established and any contribu7 tor to such plan shall be exempt from the tax im8 posed by this section with respect to any transaction

9 concerning such plan (which would otherwise be tax10 able under this section) if, with respect to such

11 transaction, the plan ceases to be an education sav12 ings plan by reason of the application of section

13 222(e)(2)(A) to such plan.’’

14 (2) Paragraph (1) of section 4975(e) is amend15 ed by striking ‘‘or’’ at the end of subparagraph (D),

16 by redesignating subparagraph (E) as subparagraph

17 (F), and by inserting after subparagraph (D) the

18 following new subparagraph:

19 ‘‘(E) an education savings plan described

20 in section 222(c)(2), or’’.

21 (f) FAILURE TO PROVIDE REPORTS ON EDUCATION

22 SAVINGS PLANS.—

23 (1) Paragraph (2) of section 6693(a) of such

24 Code (relating to failure to provide reports on indi25 vidual retirement plans or annuities) is amended by
24

•HR 4323 IH

1 striking ‘‘and’’ at the end of subparagraph (A), by

2 striking the period at the end of subparagraph (B)

3 and inserting ‘‘, and’’, and by adding at the end the

4 following new subparagraph:

5 ‘‘(C) section 220(i) (relating to education

6 savings plans).’’

7 (2) The section heading for section 6693 of

8 such Code is amended by inserting ‘‘or on education

9 savings plans’’ after ‘‘annuities’’.

10 (g) SPECIAL RULE FOR DETERMINING AMOUNTS OF

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

12 152 of such Code (relating to definition of dependent) is

13 amended by adding at the end the following new para14 graph:

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

16 plan described in section 222(c)(2) to the individual

17 for whose benefit such plan has been established

18 shall not be taken into plan in determining support

19 for purposes of this section to the extent such dis20 tribution is excluded from gross income of such indi21 vidual under section 222(d)(2).’’

22 (h) CLERICAL AMENDMENTS.—

23 (1) The table of sections for part VII of sub24 chapter B of chapter 1 of such Code is amended by
25

•HR 4323 IH

1 striking the item relating to section 222 and insert2 ing the following new items:

‘‘Sec. 222. Education savings plans.

‘‘Sec. 223. Cross references.’’

3 (2) The table of sections for chapter 43 of such

4 Code is amended by striking the item relating to sec5 tion 4973 and inserting the following new item:

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

accounts, medical savings accounts, education savings plans, certain 403(b) contracts, and certain individual retirement annuities.’’

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

7 chapter 68 of such Code is amended by striking the

8 item relating to section 6693 and inserting the fol9 lowing new item:

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

accounts or annuities or on education savings

plans.’’

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

11 this section shall apply to contributions made in taxable

12 years beginning after December 31, 1995.

Æ