I

104TH CONGRESS

1ST SESSION H. R. 769

To amend the Internal Revenue Code of 1986 to provide for the establishment

of, and the deduction of contributions to, education savings accounts.

IN THE HOUSE OF REPRESENTATIVES

FEBRUARY 1, 1995

Mr. GILLMOR (for himself, Mr. SOLOMON, Mr. CANADY of Florida, Mr.

ROHRABACHER, Mr. QUINN, Mr. BEREUTER, Mr. BILIRAKIS, Mr. LIVINGSTON, Mr. BACHUS, Ms. PRYCE, Mr. MCHUGH, Ms. DANNER, Mr.

MANZULLO, Mr. SCHAEFER, Mr. EMERSON, Mr. LIPINSKI, Mr.

HASTERT, Mr. CALVERT, Mr. DOOLITTLE, Mr. BLUTE, Mr. KING, Mr.

KNOLLENBERG, Mr. SENSENBRENNER, Mr. WALSH, Mr. DEUTSCH, Mr.

PACKARD, Mr. ZIMMER, Mrs. VUCANOVICH, and Mr. HANCOCK) 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

for the establishment of, and the deduction of contributions to, education savings accounts.

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

3 SECTION 1. EDUCATION SAVINGS ACCOUNTS.

4 (a) IN GENERAL.—Part VII of subchapter B of chap5 ter 1 of the Internal Revenue Code of 1986 (relating to

6 additional itemized deductions for individuals) is amended
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1 by redesignating section 220 as section 221 and by insert2 ing after section 219 the following new section:

3 ‘‘SEC. 220. EDUCATION SAVINGS ACCOUNTS.

4 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi5 vidual, there shall be allowed as a deduction the sum of—

6 ‘‘(1) amounts paid in cash, and

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

8 other securities, which are readily tradable on an es9 tablished securities market, transferred,

10 during the calendar year which ends with or within the

11 taxable year by such individual to an education savings

12 account established for the purpose of accumulating funds

13 to pay the educational expenses of an eligible individual.

14 ‘‘(b) LIMITATIONS.—

15 ‘‘(1) ACCOUNT MAY NOT BE ESTABLISHED FOR

16 BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu17 cation savings account may not be established for

18 the benefit of more than 1 individual.

19 ‘‘(2) ELIGIBLE INDIVIDUAL TREATED AS ELIGI20 BLE INDIVIDUAL ONLY WITH RESPECT TO 1 AC21 COUNT.—If, at any time during a calendar year, 2

22 or more education savings accounts are maintained

23 for the benefit of an eligible individual, such individ24 ual shall be treated as an eligible individual for the
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1 calendar year only with respect to the first of such

2 accounts.

3 ‘‘(3) MAXIMUM DEDUCTION PER ACCOUNT.—

4 The amount allowable as a deduction under sub5 section (a) to an individual for amounts paid or

6 transferred to an education savings account for any

7 calendar year shall not exceed $1,500.

8 ‘‘(4) NO DEDUCTION AFTER BENEFICIARY AT9 TAINS AGE 19.—No deduction shall be allowed for

10 any contribution to an education savings account es11 tablished for the benefit of an eligible individual who

12 has attained age 19 before the close of the calendar

13 year in which such contribution is made.

14 ‘‘(5) ADJUSTMENT OF DOLLAR AMOUNT LIMI15 TATIONS FOR INFLATION.—In the case of any cal16 endar year after 1995, the $1,500 contained in

17 paragraph (3) and subsection (c)(2)(A) shall be in18 creased by an amount equal to—

19 ‘‘(A) $1,500, multiplied by

20 ‘‘(B) the cost-of-living adjustment deter21 mined under section 1(f)(3) for such calendar

22 year by substituting ‘calendar year 1994’ for

23 ‘calendar year 1992’ in subparagraph (B)

24 thereof.
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1 Any increase determined under the preceding sen2 tence shall be rounded to the nearest multiple of

3 $10.

4 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur5 poses of this section—

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

7 individual’ means an individual who is—

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

9 153(e)(3)) of the taxpayer or of a brother, sis10 ter, stepbrother, or stepsister of the taxpayer,

11 ‘‘(B) an individual with respect to whom

12 the taxpayer has been appointed guardian by a

13 court of competent jurisdiction, or

14 ‘‘(C) a descendant of a child of the tax15 payer.

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

17 term ‘education savings account’ means a trust cre18 ated or organized in the United States exclusively

19 for the purpose of paying the educational expenses

20 of an eligible individual, but only if the written gov21 erning instrument creating the trust meets the fol22 lowing requirements:

23 ‘‘(A) No contribution will be accepted un24 less it is in cash, stocks, bonds, or other securi25 ties which are readily tradable on an established
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1 securities market, and, except in the case of

2 contributions from another education savings

3 account or an individual retirement plan, con4 tributions will not be accepted for the taxable

5 year in excess of $1,500.

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

7 section 408(n)) or another person who dem8 onstrates to the satisfaction of the Secretary

9 that the manner in which that person will ad10 minister the trust will be consistent with the re11 quirements of this section.

12 ‘‘(C) No part of the trust assets will be in13 vested in life insurance contracts (other than

14 contracts the beneficiary of which is the trust

15 and the face amount of which does not exceed

16 the amount by which the maximum amount

17 which can be contributed to the account exceeds

18 the sum of the amounts contributed to the ac19 count for all taxable years).

20 ‘‘(D) The assets of the account may be in21 vested in accordance with the direction of the

22 individual contributing to the account, but, if

23 more than one individual has made contribu24 tions to the account, the consent of all such in-
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1 dividuals shall be required for any such direc2 tion.

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

4 commingled with other property except in a

5 common trust fund or common investment

6 fund.

7 ‘‘(F) Any balance in the account on the

8 day after the date on which the individual for

9 whose benefit the trust is established attains

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

11 individual dies) shall be distributed within 30

12 days of such date—

13 ‘‘(i) in accordance with paragraph (5)

14 to each of the individuals who have con15 tributed to the trust, or

16 ‘‘(ii) as directed by such individuals,

17 to another education savings account es18 tablished for the benefit of an eligible indi19 vidual who has not attained age 30 or to

20 an eligible educational institution.

21 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

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

23 contribution on the last day of the preceding taxable

24 year if the contribution is made on account of such

25 taxable year and is made not later than the time
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1 prescribed by law for filing the return for such tax2 able year (including extensions thereof).

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

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

5 bonds, and other securities shall be determined as of

6 the date on which they are transferred to the ac7 count. If the date of transfer falls on a Saturday,

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

9 value shall be determined by reference to the last

10 preceding day on which they could have been traded

11 on an established securities market.

12 ‘‘(5) DISTRIBUTION OF BALANCE IN ACCOUNT

13 TO CONTRIBUTORS.—The Secretary shall prescribe

14 regulations describing the manner in which any bal15 ance in the educational savings account shall be dis16 tributed under paragraph (2)(F)(i) among the con17 tributors to the account. Any division of the balance

18 in the account shall reflect—

19 ‘‘(A) the amount of net income of the ac20 count which is attributable to the contributions

21 of each such individual, and

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

23 previously distributed from the account for edu24 cational expenses among the contributions

25 which were made before any such distribution
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1 (including the net income of the account which

2 was attributable to such contributions and

3 earned before any such distribution).

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

5 ‘educational expenses’ means—

6 ‘‘(A) tuition and fees required for the en7 rollment or attendance of a student at an eligi8 ble educational institution,

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

10 required for courses of instruction at an eligible

11 educational institution, and

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

13 lodging while attending an eligible educational

14 institution.

15 ‘‘(7) ELIGIBLE EDUCATIONAL INSTITUTION.—

16 The term ‘eligible educational institution’ means—

17 ‘‘(A) an institution of higher education, or

18 ‘‘(B) a vocational school.

19 ‘‘(8) INSTITUTION OF HIGHER EDUCATION.—

20 The term ‘institution of higher education’ means the

21 institutions described in section 1201(a) or 481(a)

22 of the Higher Education Act of 1965.

23 ‘‘(9) VOCATIONAL SCHOOL.—The term ‘voca24 tional school’ means an area vocational education

25 school as defined in subparagraph (C) or (D) of sec-
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1 tion 521(4) of the Carl D. Perkins Vocational and

2 Applied Technology Education Act to the extent

3 such school is located within any State (as defined

4 in section 521(33) of such Act).

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

6 ‘‘(1) IN GENERAL.—Except as otherwise pro7 vided in this subsection, any amount paid or distrib8 uted out of an education savings account shall be in9 cluded in gross income of the payee or distributee

10 for the taxable year in which the payment or dis11 tribution is received to the extent such amount is

12 not the return of a contribution for which no deduc13 tion was allowed under subsection (a).

14 ‘‘(2) DISTRIBUTION USED TO PAY EDU15 CATIONAL EXPENSES.—Paragraph (1) shall not

16 apply to any payment or distribution out of an edu17 cation savings account to the extent such payment

18 or distribution is used exclusively to pay the edu19 cational expenses incurred by the individual for

20 whose benefit the account is established.

21 ‘‘(3) DISTRIBUTIONS TO ANOTHER ACCOUNT OR

22 TO ELIGIBLE EDUCATIONAL INSTITUTION.—Para23 graph (1) shall not apply to any distribution under

24 subsection (c)(2)(F)(ii).
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1 ‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE2 FORE DUE DATE OF RETURN.—Paragraph (1) does

3 not apply to the distribution of any contribution paid

4 during a taxable year to an education savings ac5 count to the extent that such contribution exceeds

6 the amount allowable as a deduction under sub7 section (a) if—

8 ‘‘(A) such distribution is received on or be9 fore the day prescribed by law (including exten10 sions of time) for filing such individual’s return

11 for such taxable year,

12 ‘‘(B) no deduction is allowed under sub13 section (a) with respect to such excess contribu14 tion, and

15 ‘‘(C) such distribution is accompanied by

16 the amount of net income attributable to such

17 excess contribution.

18 Any net income described in subparagraph (C) shall

19 be included in the gross income of the individual for

20 the taxable year in which such excess contribution

21 was made.

22 ‘‘(5) DISTRIBUTIONS TO INDIVIDUAL RETIRE23 MENT PLANS.—Paragraph (1) shall not apply to any

24 payment or distribution out of an education savings

25 account if—
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1 ‘‘(A) before the close of the 60th day after

2 the day on which the payment or distribution is

3 received, the payment or distribution is contrib4 uted into an individual retirement plan of an in5 dividual who contributed to the education sav6 ings account, and

7 ‘‘(B) the amount of such payment or dis8 tribution (when added to all prior payments or

9 distributions excluded from the gross income of

10 such individual by reason of this paragraph)

11 does not exceed the aggregate amount contrib12 uted to the education savings account by the in13 dividual from amounts paid or distributed out

14 of an individual retirement plan in accordance

15 with section 408(d)(8).

16 ‘‘(e) TAX TREATMENT OF ACCOUNTS.—

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

18 savings account is exempt from taxation under this

19 subtitle unless such account has ceased to be an

20 education savings account by reason of paragraph

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

22 any such account is subject to the taxes imposed by

23 section 511 (relating to imposition of tax on unre24 lated business income of charitable, etc. organiza25 tions).
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1 ‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE

2 INDIVIDUAL ENGAGES IN PROHIBITED TRANS3 ACTION.—

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

5 whose benefit an education savings account is

6 established or any individual who contributes to

7 such account engages in any transaction prohib8 ited by section 4975 with respect to the ac9 count, the account shall cease to be an edu10 cation savings account as of the first day of the

11 taxable year (of the individual so engaging in

12 such transaction) during which such transaction

13 occurs.

14 ‘‘(B) ACCOUNT TREATED AS DISTRIBUTING

15 ALL ITS ASSETS.—In any case in which any ac16 count ceases to be an education savings account

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

18 day of any taxable year, paragraph (1) of sub19 section (d) shall apply as if there was a dis20 tribution on such first day in an amount equal

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

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

23 ‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU24 RITY.—If, during any taxable year, the individual for

25 whose benefit an education savings account is estab-
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1 lished, or any individual who contributes to such ac2 count, uses the account or any portion thereof as se3 curity for a loan, the portion so used shall be treated

4 as distributed to the individual so using such por5 tion.

6 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN7 CLUDED IN GROSS INCOME.—

8 ‘‘(1) DISTRIBUTION NOT USED FOR EDU9 CATIONAL EXPENSES.—In the case of any payment

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

11 the tax liability of each payee or distributee under

12 this chapter for the taxable year in which the pay13 ment or distribution is received shall be increased by

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

15 distribution which is includible in the gross income

16 of such payee or distributee for such taxable year.

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

18 is includible in the gross income of an individual for

19 a taxable year because such amount is required to

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

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

22 under this chapter for such taxable year shall be in23 creased by an amount equal to 10 percent of such

24 amount required to be treated as a distribution and

25 included in his gross income.
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1 ‘‘(3) DISABILITY OR DEATH CASES.—Para2 graphs (1) and (2) shall not apply if the payment

3 or distribution is made after the individual for whose

4 benefit the education savings account becomes dis5 abled within the meaning of section 72(m)(7) or

6 dies.

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

8 shall be applied without regard to any community property

9 laws.

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

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

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

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

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

15 which he will administer the account will be consistent

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

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

18 constitute an education savings account described in sub19 section (c)(2). For purposes of this title, in the case of

20 a custodial account treated as a trust by reason of the

21 preceding sentence, the custodian of such account shall be

22 treated as the trustee thereof.

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

24 account shall make such reports regarding such account

25 to the Secretary and to the individual for whose benefit
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1 the account is maintained with respect to contributions,

2 distributions, and such other matters as the Secretary

3 may require under regulations. The reports required by

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

5 manner and furnished to such individuals at such time and

6 in such manner as may be required by those regulations.’’

7 (b) DEDUCTION ALLOWED IN ARRIVING AT AD8 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)

9 of such Code (relating to retirement savings) is

10 amended—

11 (1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE12 TIREMENT’’ in the heading of such paragraph, and

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

14 following: ‘‘and the deduction allowed by section 220

15 (relating to education savings accounts)’’.

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

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

18 individual retirement accounts, certain section 403(b) con19 tracts, and certain individual retirement annuities) is

20 amended—

21 (1) by inserting ‘‘EDUCATION SAVINGS AC22 COUNTS,’’ after ‘‘ACCOUNTS,’’ in the heading of

23 such section,

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

25 (1) of subsection (a),
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1 (3) by redesignating paragraph (2) of sub2 section (a) as paragraph (3) and by inserting after

3 paragraph (1) the following new paragraph:

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

5 meaning of section 220(c)(2)), or’’, and

6 (4) by adding at the end the following new sub7 section:

8 ‘‘(d) EXCESS CONTRIBUTIONS TO EDUCATION SAV9 INGS ACCOUNTS.—For purposes of this section, in the

10 case of an education savings account, the term ‘excess con11 tributions’ means the amount by which the amount con12 tributed for the taxable year to the account exceeds the

13 amount allowable as a deduction under section 220 for

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

15 contribution which is distributed out of the education sav16 ings account in a distribution to which section 220(d)(4)

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

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

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

20 amended by adding at the end the following new sub21 section:

22 ‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con23 tribution made by an individual to an education savings

24 account described in section 220(c)(2) which is allowable

25 as a deduction under section 220 shall not be treated as
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1 a transfer of property by gift for purposes of this

2 chapter.’’

3 (e) TAX ON PROHIBITED TRANSACTIONS.—Section

4 4975 of such Code (relating to prohibited transactions)

5 is amended—

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

7 following new paragraph:

8 ‘‘(4) SPECIAL RULE FOR EDUCATION SAVINGS

9 ACCOUNTS.—An individual for whose benefit an edu10 cation savings account is established and any con11 tributor to such account shall be exempt from the

12 tax imposed by this section with respect to any

13 transaction concerning such account (which would

14 otherwise be taxable under this section) if, with re15 spect to such transaction, the account ceases to be

16 an education savings account by reason of the appli17 cation of section 220(e)(2)(A) to such account.’’,

18 and

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

20 described in section 220(c)(2),’’ in subsection (e)(1)

21 after ‘‘described in section 408(a)’’.

22 (f) FAILURE TO PROVIDE REPORTS ON EDUCATION

23 SAVINGS ACCOUNTS.—Section 6693 of such Code (relat24 ing to failure to provide reports on individual retirement

25 accounts or annuities) is amended—
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1 (1) by inserting ‘‘OR ON EDUCATION SAV2 INGS ACCOUNTS’’ after ‘‘ANNUITIES’’ in the

3 heading of such section, and

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

5 following new sentence: ‘‘The person required by sec6 tion 220(i) to file a report regarding an education

7 savings account at the time and in the manner re8 quired by such section shall pay a penalty of $50 for

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

10 due to reasonable cause.’’

11 (g) SPECIAL RULE FOR DETERMINING AMOUNTS OF

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

13 152 of such Code (relating to definition of dependent) is

14 amended by adding at the end the following new para15 graph:

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

17 account described in section 220(c)(2) to the individ18 ual for whose benefit such account has been estab19 lished shall not be taken into account in determining

20 support for purposes of this section to the extent

21 such distribution is excluded from gross income of

22 such individual under section 220(d)(2).’’

23 (h) CLERICAL AMENDMENTS.—

24 (1) The table of sections for part VII of sub25 chapter B of chapter 1 of such Code is amended by
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1 striking the item relating to section 220 and insert2 ing the following new items:

‘‘Sec. 220. Education savings accounts.

‘‘Sec. 221. Cross reference.’’

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, education savings accounts, 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 accounts.’’

10 SEC. 2. TRANSFERS BETWEEN INDIVIDUAL RETIREMENT

11 PLANS AND EDUCATION SAVINGS ACCOUNTS.

12 (a) EXEMPTION FROM ANNUAL CONTRIBUTION LIM13 ITATION FOR DISTRIBUTIONS FROM EDUCATION SAVINGS

14 ACCOUNTS INTO IRA’S.—Paragraph (1) of section 408(a)

15 of the Internal Revenue Code of 1986 (relating to defini16 tion of individual retirement account) is amended by in17 serting after ‘‘403(b)(8),’’ the following: ‘‘or in the case

18 of a contribution from an education savings account in ac19 cordance with section 220(d)(5),’’.
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1 (b) EXCLUSION FROM GROSS INCOME FOR DIS2 TRIBUTIONS FROM IRA’S INTO EDUCATION SAVINGS AC3 COUNTS.—Subsection (d) of section 408 of such Code (re4 lating to tax treatment of distributions from individual re5 tirement plans) is amended by adding at the end the fol6 lowing new paragraph:

7 ‘‘(8) DISTRIBUTIONS USED TO MAKE CON8 TRIBUTION TO EDUCATION SAVINGS ACCOUNT.—

9 Paragraph (1) shall not apply to any amount paid

10 or distributed out of an individual retirement plan if,

11 before the close of the 60th day after the day on

12 which the payment or distribution is received, the

13 payment or distribution is contributed into an edu14 cation savings account (as defined in section

15 220(c)(2)).

16 SEC. 3. EFFECTIVE DATE.

17 The amendments made by this Act shall apply to tax18 able years beginning after December 31, 1994.

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