I

105TH CONGRESS

1ST SESSION H. R. 82

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

JANUARY 7, 1997

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 1997’’.
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1 SEC. 2. DEDUCTION FOR HIGHER EDUCATION EXPENSES.

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

3 B of chapter 1 of the Internal Revenue Code of 1986 (re4 lating to additional itemized deductions for individuals) is

5 amended by redesignating section 221 as section 222 and

6 by inserting after section 220 the following new section:

7 ‘‘SEC. 221. HIGHER EDUCATION EXPENSES.

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

9 individual, there shall be allowed as a deduction an

10 amount equal to—

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

12 and

13 ‘‘(2) interest on qualified higher education

14 loans,

15 paid by the taxpayer during the taxable year.

16 ‘‘(b) LIMITATION BASED ON MODIFIED ADJUSTED

17 GROSS INCOME.—

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

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

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

21 by the amount determined under paragraph (2).

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

23 determined under this paragraph equals the amount

24 which bears the same ratio to the amount which

25 would be so taken into account as—

26 ‘‘(A) the excess of—
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1 ‘‘(i) the taxpayer’s modified adjusted

2 gross income for such taxable year, over

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

4 of a joint return), bears to

5 ‘‘(B) $20,000.

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

7 For purposes of this subsection, the term ‘modified

8 adjusted gross income’ means the adjusted gross in9 come of the taxpayer for the taxable year deter10 mined—

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

12 sections 911, 931, and 933, and

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

14 135, 219, 220, and 469.

15 For purposes of the sections referred to in subpara16 graph (B), adjusted gross income shall be deter17 mined without regard to the deduction allowed under

18 this section.

19 ‘‘(4) INFLATION ADJUSTMENTS.—

20 ‘‘(A) IN GENERAL.—In the case of a tax21 able year beginning after 1999, the $140,000

22 and $200,000 amounts described in paragraph

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

24 to—
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1 ‘‘(i) such dollar amounts, multiplied

2 by

3 ‘‘(ii) the cost-of-living adjustment de4 termined under section 1(f)(3) for the cal5 endar year in which the taxable year be6 gins, determined by substituting ‘calendar

7 year 1998’ for ‘calendar year 1992’ in sub8 paragraph (B) thereof.

9 ‘‘(B) ROUNDING.—If any amount as ad10 justed under subparagraph (A) is not a multiple

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

12 next lowest multiple of $5,000.

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

14 For purposes of this section—

15 ‘‘(1) QUALIFIED HIGHER EDUCATION EX16 PENSES.—

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

18 higher education expenses’ means—

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

20 educational institution and required for the

21 enrollment or attendance of—

22 ‘‘(I) the taxpayer,

23 ‘‘(II) the taxpayer’s spouse,
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1 ‘‘(III) any dependent of the tax2 payer with respect to whom the tax3 payer is allowed a deduction under

4 section 151, or

5 ‘‘(IV) any grandchild of the tax6 payer,

7 as an eligible student at an institution of

8 higher education, and

9 ‘‘(ii) reasonable living expenses for

10 such an individual while away from home

11 and attending such institution.

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

13 for qualified higher education expenses of any

14 individual shall be taken into account under

15 subsection (a) only to the extent such ex16 penses—

17 ‘‘(i) are attributable to courses of in18 struction for which credit is allowed toward

19 a baccalaureate degree by an institution of

20 higher education or toward a certificate of

21 required course work at a vocational

22 school, and

23 ‘‘(ii) are not attributable to any grad24 uate program of such individual.
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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—

9 ‘‘(i) meets the requirements of section

10 484(a)(1) of the Higher Education Act of

11 1965 (20 U.S.C. 1091(a)(1)), as in effect

12 on the date of the enactment of this sec13 tion, and

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

15 normal full-time work load for the course

16 of study the student is pursuing, as deter17 mined by the institution of higher edu18 cation.

19 ‘‘(E) IDENTIFICATION REQUIREMENT.—No

20 deduction shall be allowed under subsection (a)

21 to a taxpayer with respect to an eligible student

22 unless the taxpayer includes the name, age, and

23 taxpayer identification number of such eligible

24 student on the return of tax for the taxable

25 year.
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1 ‘‘(2) INSTITUTION OF HIGHER EDUCATION.—

2 The term ‘institution of higher education’ means an

3 institution which—

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

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

6 1088), as in effect on the date of the enactment

7 of this section, and

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

9 under title IV of such Act.

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

11 purposes of this section—

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

13 education loan’ means a loan which is—

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

15 Federal Government,

16 ‘‘(B) made by a State or a political sub17 division of a State,

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

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

20 ‘‘(D) made by an institution of higher edu21 cation (as defined in section 1201(a) of the

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

23 1141(a))).

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

25 a qualified higher education loan which is taken into
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1 account under subsection (a)(2) shall not exceed the

2 amount which bears the same ratio to such amount

3 of interest as—

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

5 qualified higher education expenses, bears to

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

7 For purposes of the preceding sentence, the term

8 ‘qualified higher education expenses’ shall be deter9 mined without regard to subsection (c)(1)(A)(i)(IV).

10 ‘‘(e) SPECIAL RULES.—

11 ‘‘(1) NO DOUBLE BENEFIT.—

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

13 allowed under subsection (a) for any expense

14 for which a deduction is allowable to the tax15 payer under any other provision of this chapter

16 unless the taxpayer irrevocably waives his right

17 to the deduction of such expense under such

18 other provision.

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

20 be allowed under subsection (a) to any individ21 ual with respect to whom a deduction under

22 section 151 is allowable to another taxpayer for

23 a taxable year beginning in the calendar year in

24 which such individual’s taxable year begins.
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1 ‘‘(C) SAVINGS BOND EXCLUSION.—A de2 duction shall be allowed under subsection (a)

3 for qualified higher education expenses only to

4 the extent the amount of such expenses exceeds

5 the amount excludable under section 135 for

6 the taxable year.

7 ‘‘(2) LIMITATION ON TAXABLE YEAR OF DE8 DUCTION.—

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

10 allowed under subsection (a) for qualified high11 er education expenses for any taxable year only

12 to the extent such expenses are in connection

13 with enrollment at an institution of higher edu14 cation during the taxable year.

15 ‘‘(B) CERTAIN PREPAYMENTS ALLOWED.—

16 Subparagraph (A) shall not apply to qualified

17 higher education expenses paid during a taxable

18 year if such expenses are in connection with an

19 academic term beginning during such taxable

20 year or during the first 3 months of the next

21 taxable year.

22 ‘‘(3) ADJUSTMENT FOR CERTAIN SCHOLAR23 SHIPS AND VETERANS BENEFITS.—The amount of

24 qualified higher education expenses otherwise taken
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1 into account under subsection (a) or (d)(2) with re2 spect to the education of an individual shall be re3 duced (before the application of subsection (b)) by

4 the sum of the amounts received with respect to

5 such individual for the taxable year as—

6 ‘‘(A) a qualified scholarship which under

7 section 117 is not includable in gross income,

8 ‘‘(B) an educational assistance allowance

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

10 United States Code, or

11 ‘‘(C) a payment (other than a gift, be12 quest, devise, or inheritance within the meaning

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

14 attributable to enrollment at an eligible edu15 cational institution, which is exempt from in16 come taxation by any law of the United States.

17 ‘‘(4) NO DEDUCTION FOR MARRIED INDIVID18 UALS FILING SEPARATE RETURNS.—If the taxpayer

19 is a married individual (within the meaning of sec20 tion 7703), this section shall apply only if the tax21 payer and the taxpayer’s spouse file a joint return

22 for the taxable year.

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

24 a nonresident alien individual for any portion of the
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1 taxable year, this section shall apply only if such in2 dividual is treated as a resident alien of the United

3 States for purposes of this chapter by reason of an

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

5 ‘‘(6) REGULATIONS.—The Secretary may pre6 scribe such regulations as may be necessary or ap7 propriate to carry out this section, including regula8 tions requiring recordkeeping and information re9 porting.’’

10 (b) DEDUCTION ALLOWED IN COMPUTING AD11 JUSTED GROSS INCOME.—Section 62(a) of such Code is

12 amended by inserting after paragraph (16) the following

13 new paragraph:

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

15 deduction allowed by section 221.’’

16 (c) CONFORMING AMENDMENT.—The table of sec17 tions for part VII of subchapter B of chapter 1 of such

18 Code is amended by striking the item relating to section

19 221 and inserting:

‘‘Sec. 221. Higher education expenses.

‘‘Sec. 222. Cross reference.’’

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

21 this section shall apply to payments made after December

22 31, 1996.
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1 SEC. 3. EDUCATION SAVINGS PLANS.

2 (a) IN GENERAL.—Part VII of subchapter B of chap3 ter 1 of the Internal Revenue Code of 1986 (relating to

4 additional itemized deductions for individuals) is amended

5 by redesignating section 222 as section 223 and by insert6 ing after section 221 the following new section:

7 ‘‘SEC. 222. EDUCATION SAVINGS PLANS.

8 ‘‘(a) DEDUCTION ALLOWED.—In the case of an indi9 vidual, there shall be allowed as a deduction the amount

10 paid in cash during the taxable year by such individual

11 to an education savings plan established for the purpose

12 of accumulating funds to pay the qualified higher edu13 cation expenses of individual who is an eligible individual

14 with respect to the taxpayer.

15 ‘‘(b) LIMITATIONS.—

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

17 deduction under subsection (a) to the taxpayer for

18 any taxable year with respect to amounts paid to the

19 education savings plan of each eligible individual

20 shall not exceed $4,000.

21 ‘‘(2) LIMITATION BASED ON MODIFIED AD22 JUSTED GROSS INCOME.—The $4,000 amount in

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

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

25 as—

26 ‘‘(A) the excess of—
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1 ‘‘(i) the taxpayer’s modified adjusted

2 gross income for such taxable year, over

3 ‘‘(ii) the dollar amount applicable to

4 the taxpayer for such taxable year under

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

6 ‘‘(B) $20,000.

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

8 For purposes of this subsection, the term ‘modified

9 adjusted gross income’ means the adjusted gross in10 come of the taxpayer for the taxable year deter11 mined—

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

13 sections 911, 931, and 933, and

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

15 135, 219, 220, 221, and 469.

16 For purposes of the sections referred to in subpara17 graph (B), adjusted gross income shall be deter18 mined without regard to the deduction allowed under

19 this section.

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

21 BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu22 cation savings plan may not be established for the

23 benefit of more than 1 individual.

24 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur25 poses of this section—
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1 ‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible

2 individual’ means an individual who is—

3 ‘‘(A) the taxpayer,

4 ‘‘(B) the taxpayer’s spouse,

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

6 respect to whom the taxpayer is allowed a de7 duction under section 151, or

8 ‘‘(D) any grandchild of the taxpayer.

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

10 ‘education savings plan’ means a trust created or or11 ganized in the United States exclusively for the pur12 pose of paying the qualified higher education ex13 penses of an eligible individual, but only if the writ14 ten governing instrument creating the trust meets

15 the following requirements:

16 ‘‘(A) No contribution will be accepted un17 less it is in cash, and contributions will not be

18 accepted for any taxable year in excess of

19 $4,000.

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 that person will ad24 minister the trust will be consistent with the re25 quirements of this section.
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1 ‘‘(C) No part of the trust assets will be in2 vested in life insurance contracts.

3 ‘‘(D) 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 ‘‘(3) TIME WHEN CONTRIBUTIONS DEEMED

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

9 contribution on the last day of the preceding taxable

10 year if the contribution is made on account of such

11 taxable year and is made not later than the time

12 prescribed by law for filing the return for such tax13 able year (including extensions thereof).

14 ‘‘(4) QUALIFIED HIGHER EDUCATION EX15 PENSES.—The term ‘qualified higher education ex16 penses’ has the meaning given such term by section

17 221(c).

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

19 The term ‘institution of higher education’ has the

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

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

22 ‘‘(1) IN GENERAL.—Except as otherwise pro23 vided in this subsection, any amount paid or distrib24 uted out of an education savings plan shall be in25 cluded in gross income of the payee or distributee
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1 for the taxable year in which the payment or dis2 tribution is received to the extent such amount is

3 not the return of a contribution for which no deduc4 tion was allowed under subsection (a).

5 ‘‘(2) DISTRIBUTION USED TO PAY QUALIFIED

6 HIGHER EDUCATION EXPENSES.—Paragraph (1)

7 shall not apply to any payment or distribution out

8 of an education savings plan to the extent such pay9 ment or distribution is used exclusively to pay the

10 qualified higher education expenses incurred by the

11 individual for whose benefit the plan is established

12 while such individual is an eligible student (as de13 fined in section 221).

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

15 INSTITUTION OF HIGHER EDUCATION.—Paragraph

16 (1) shall not apply to any distribution under sub17 section (c)(2)(E)(ii).

18 ‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE19 FORE DUE DATE OF RETURN.—Paragraph (1) does

20 not apply to the distribution of any contribution paid

21 during a taxable year to an education savings plan

22 to the extent that such contribution exceeds the

23 amount allowable as a deduction under subsection

24 (a) for contributions to such plan if—
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1 ‘‘(A) such distribution is received on or be2 fore the day prescribed by law (including exten3 sions of time) for filing such individual’s return

4 for such taxable year,

5 ‘‘(B) no deduction is allowed under sub6 section (a) with respect to such excess contribu7 tion, and

8 ‘‘(C) such distribution is accompanied by

9 the amount of net income attributable to such

10 excess contribution.

11 Any net income described in subparagraph (C) shall

12 be included in the gross income of the individual for

13 the taxable year in which such excess contribution

14 was made.

15 ‘‘(e) TAX TREATMENT OF PLANS.—

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

17 savings plan is exempt from taxation under this sub18 title unless such plan has ceased to be an education

19 savings plan by reason of paragraph (3). Notwith20 standing the preceding sentence, any such plan is

21 subject to the taxes imposed by section 511 (relating

22 to imposition of tax on unrelated business income of

23 charitable, etc. organizations).

24 ‘‘(2) AMOUNT IN PLAN NOT TO AFFECT ELIGI25 BILITY FOR OTHER FEDERAL ASSISTANCE.—
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1 Amounts held in any education savings plan shall

2 not be taken into account in determining the eligi3 bility for, or the amount of, any grant under any

4 Federal student assistance program.

5 ‘‘(3) LOSS OF EXEMPTION OF PLAN WHERE IN6 DIVIDUAL ENGAGES IN PROHIBITED TRANS7 ACTION.—

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

9 whose benefit an education savings plan is es10 tablished or any individual who contributes to

11 such plan engages in any transaction prohibited

12 by section 4975 with respect to the plan, the

13 plan shall cease to be an education savings plan

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

15 individual so engaging in such transaction) dur16 ing which such transaction occurs.

17 ‘‘(B) PLAN TREATED AS DISTRIBUTING

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

19 plan ceases to be an education savings plan by

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

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

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

23 such first day in an amount equal to the fair

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

25 the plan (on such first day).
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1 ‘‘(4) EFFECT OF PLEDGING PLAN AS SECU2 RITY.—If, during any taxable year, the individual for

3 whose benefit an education savings plan is estab4 lished, or any individual who contributes to such

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

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

7 distributed to the individual so using such portion.

8 ‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN9 CLUDED IN GROSS INCOME.—

10 ‘‘(1) DISTRIBUTION NOT USED FOR QUALIFIED

11 HIGHER EDUCATION EXPENSES.—In the case of any

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

13 applies, the tax liability of each payee or distributee

14 under this chapter for the taxable year in which the

15 payment or distribution is received shall be increased

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

17 the distribution which is includible in the gross in18 come of such payee or distributee for such taxable

19 year.

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

21 is includible in the gross income of an individual for

22 a taxable year because such amount is required to

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

24 (3) of subsection (e), such individual’s tax liability
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1 under this chapter for such taxable year shall be in2 creased by an amount equal to 10 percent of such

3 amount required to be treated as a distribution and

4 included in his gross income.

5 ‘‘(3) DISABILITY OR DEATH CASES.—Para6 graphs (1) and (2) shall not apply if the payment

7 or distribution is made after the individual for whose

8 benefit the education savings plan becomes disabled

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

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

11 shall be applied without regard to any community property

12 laws.

13 ‘‘(h) CUSTODIAL PLANS.—For purposes of this sec14 tion, a custodial plan shall be treated as a trust if the

15 assets of such plan are held by a bank (as defined in sec16 tion 408(n)) or another person who demonstrates, to the

17 satisfaction of the Secretary, that the manner in which

18 he will administer the plan will be consistent with the re19 quirements of this section, and if the custodial plan would,

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

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

22 purposes of this title, in the case of a custodial plan treat23 ed as a trust by reason of the preceding sentence, the cus24 todian of such plan shall be treated as the trustee thereof.
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1 ‘‘(i) REPORTS.—The trustee of an education savings

2 plan shall make such reports regarding such plan to the

3 Secretary and to the individual for whose benefit the plan

4 is maintained with respect to contributions, distributions,

5 and such other matters as the Secretary may require

6 under regulations. The reports required by this subsection

7 shall be filed at such time and in such manner and fur8 nished to such individuals at such time and in such man9 ner as may be required by those regulations.’’

10 (b) DEDUCTION ALLOWED IN ARRIVING AT AD11 JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)

12 of such Code (relating to retirement savings) is amend13 ed—

14 (1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE15 TIREMENT’’ in the heading of such paragraph, and

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

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

18 (relating to education savings plans)’’.

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

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

21 individual retirement plans, certain section 403(b) con22 tracts, and certain individual retirement annuities) is

23 amended—
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1 (1) by inserting ‘‘EDUCATION SAVINGS PLANS,’’

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

3 of such section,

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

5 (2) of subsection (a),

6 (3) by redesignating paragraph (3) of sub7 section (a) as paragraph (4) and by inserting after

8 paragraph (2) the following new paragraph:

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

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

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

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

15 of an education savings plan, the term ‘excess contribu16 tions’ means the amount by which the amount contributed

17 for the taxable year to the plan exceeds the amount allow18 able as a deduction under section 222 for such taxable

19 year. For purposes of this subsection, any contribution

20 which is distributed out of the education savings plan in

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

22 treated as an amount not contributed.’’

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

24 Section 2503 of such Code (relating to taxable gifts) is
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1 amended by adding at the end the following new sub2 section:

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

4 made by an individual to an education savings plan de5 scribed in section 222(c)(2) which is allowable as a deduc6 tion under section 222 shall not be treated as a transfer

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

8 (e) TAX ON PROHIBITED TRANSACTIONS.—

9 (1) Section 4975 of such Code (relating to pro10 hibited transactions) is amended by adding at the

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

12 ‘‘(5) SPECIAL RULE FOR EDUCATION SAVINGS

13 PLANS.—An individual for whose benefit an edu14 cation savings plan is established and any contribu15 tor to such plan shall be exempt from the tax im16 posed by this section with respect to any transaction

17 concerning such plan (which would otherwise be tax18 able under this section) if, with respect to such

19 transaction, the plan ceases to be an education sav20 ings plan by reason of the application of section

21 222(e)(2)(A) to such plan.’’

22 (2) Paragraph (1) of section 4975(e) is amend23 ed by striking ‘‘or’’ at the end of subparagraph (D),

24 by redesignating subparagraph (E) as subparagraph
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1 (F), and by inserting after subparagraph (D) the

2 following new subparagraph:

3 ‘‘(E) an education savings plan described

4 in section 222(c)(2), or’’.

5 (f) FAILURE TO PROVIDE REPORTS ON EDUCATION

6 SAVINGS PLANS.—

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

8 Code (relating to failure to provide reports on indi9 vidual retirement plans or annuities) is amended by

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

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

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

13 following new subparagraph:

14 ‘‘(C) section 222(i) (relating to education

15 savings plans).’’

16 (2) The section heading for section 6693 of

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

18 savings plans’’ after ‘‘annuities’’.

19 (g) SPECIAL RULE FOR DETERMINING AMOUNTS OF

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

21 152 of such Code (relating to definition of dependent) is

22 amended by adding at the end the following new para23 graph:

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

25 plan described in section 222(c)(2) to the individual
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1 for whose benefit such plan has been established

2 shall not be taken into plan in determining support

3 for purposes of this section to the extent such dis4 tribution is excluded from gross income of such indi5 vidual under section 222(d)(2).’’

6 (h) CLERICAL AMENDMENTS.—

7 (1) The table of sections for part VII of sub8 chapter B of chapter 1 of such Code is amended by

9 striking the item relating to section 222 and insert10 ing the following new items:

‘‘Sec. 222. Education savings plans.

‘‘Sec. 223. Cross references.’’

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

12 Code is amended by striking the item relating to sec13 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.’’

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

15 chapter 68 of such Code is amended by striking the

16 item relating to section 6693 and inserting the fol17 lowing new item:

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

accounts or annuities or on education savings

plans.’’
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1 (i) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to contributions made in taxable

3 years beginning after December 31, 1996.

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