section 521 (relating to farmers’ cooperative associa-
tions).
‘‘(c) INTEREST.—For purposes of this section, the
term ‘interest’ means—
‘‘(1) interest on deposits with a bank (as de-
fined in section 581),
‘‘(2) amounts (whether or not designated as in-
terest) paid in respect of deposits, investment certifi-
cates, or withdrawable or repurchasable shares, by—
‘‘(A) a mutual savings bank, cooperative
bank, domestic building and loan association,
industrial loan association or bank, or credit
union, or
‘‘(B) any other savings or thrift institution
which is chartered and supervised under Fed-
eral or State law,
the deposits or accounts in which are insured under
Federal or State law or which are protected and
guaranteed under State law,
‘‘(3) interest on—
‘‘(A) evidences of indebtedness (including
bonds, debentures, notes, and certificates)
issued by a domestic corporation in registered
form, and
‘‘(B) to the extent provided in regulations
prescribed by the Secretary, other evidences of
indebtedness issued by a domestic corporation
of a type offered by corporations to the public,
‘‘(4) interest on obligations of the United
States, a State, or a political subdivision of a State
(not excluded from gross income of the taxpayer
under any other provision of law), and
‘‘(5) interest attributable to participation shares
in a trust established and maintained by a corpora-
tion established pursuant to Federal law.
‘‘(d) SPECIAL RULES.—For purposes of this sec-
tion—
‘‘(1) DISTRIBUTIONS
FROM
REGULATED
IN-
VESTMENT COMPANIES AND REAL ESTATE INVEST-
MENT TRUSTS.—Subsection (a) shall apply with re-
spect to distributions by—
‘‘(A) regulated investment companies to
the extent provided in section 854(c), and
‘‘(B) real estate investment trusts to the
extent provided in section 857(c).
‘‘(2) DISTRIBUTIONS BY A TRUST.—For pur-
poses of subsection (a), the amount of dividends and
interest properly allocable to a beneficiary under sec-
tion 652 or 662 shall be deemed to have been re-
ceived by the beneficiary ratably on the same date
that the dividends and interest were received by the
estate or trust.
‘‘(3) CERTAIN
NONRESIDENT
ALIENS
INELI-
GIBLE
FOR
EXCLUSION.—In the case of a non-
resident alien individual, subsection (a) shall apply
only—
‘‘(A) in determining the tax imposed for
the taxable year pursuant to section 871(b)(1)
and only in respect of dividends and interest
which are effectively connected with the conduct
of a trade or business within the United States,
or
‘‘(B) in determining the tax imposed for
the taxable year pursuant to section 877(b).’’.
(b) CONFORMING AMENDMENTS.—
(1) The table of sections for part III of sub-
chapter B of chapter 1 of such Code is amended by
inserting after the item relating to section 115 the
following new item:
‘‘Sec. 116. Partial exclusion of dividends and interest received by
individuals.’’.
(2) Paragraph (2) of section 265(a) of such
Code is amended by inserting before the period at
the end the following: ‘‘, or to purchase or carry ob-
ligations or shares, or to make deposits, to the ex-
tent the interest thereon is excludable from gross in-
come under section 116’’.
(3) Subsection (c) of section 584 of such Code
is amended by adding at the end the following new
flush sentence:
‘‘The proportionate share of each participant in the
amount of dividends or interest received by the common
trust fund and to which section 116 applies shall be con-
sidered for purposes of such section as having been re-
ceived by such participant.’’.
(4) Subsection (a) of section 643 of such Code
is amended by redesignating paragraph (7) as para-
graph (8) and by inserting after paragraph (6) the
following new paragraph:
‘‘(7) DIVIDENDS OR INTEREST.—There shall be
included the amount of any dividends or interest ex-
cluded from gross income pursuant to section 116.’’.
(5) Section 854 of such Code is amended by
adding at the end the following new subsection:
‘‘(c) TREATMENT UNDER SECTION 116.—
‘‘(1) IN
GENERAL.—For purposes of section
116, in the case of any dividend (other than a divi-
dend described in subsection (a)) received from a
regulated investment company which meets the re-
quirements of section 852 for the taxable year in
which it paid the dividend—
‘‘(A) the entire amount of such dividend
shall be treated as a dividend if the sum of the
aggregate dividends and the aggregate interest
received by such company during the taxable
year equals or exceeds 75 percent of its gross
income, or
‘‘(B) if subparagraph (A) does not apply,
there shall be taken into account under section
116 only the portion of such dividend which
bears the same ratio to the amount of such div-
idend as the sum of the aggregate dividends re-
ceived and aggregate interest received bears to
gross income.
For purposes of the preceding sentence, gross in-
come and aggregate interest received shall each be
reduced by so much of the deduction allowable by
section 163 for the taxable year as does not exceed
aggregate interest received for the taxable year.
‘‘(2) NOTICE TO SHAREHOLDERS.—The amount
of any distribution by a regulated investment com-
pany which may be taken into account as a dividend
for purposes of the exclusion under section 116 shall
not exceed the amount so designated by the com-
pany in a written notice to its shareholders mailed
not later than 60 days after the close of its taxable
year.
‘‘(3) DEFINITIONS.—For purposes of this sub-
section—
‘‘(A) The term ‘gross income’ does not in-
clude gain from the sale or other disposition of
stock or securities.
‘‘(B) The term ‘aggregate dividends’ in-
cludes only dividends received from domestic
corporations other than dividends described in
section 116(b)(2). In determining the amount
of any dividend for purposes of this subpara-
graph, the rules provided in section 116(d)(1)
(relating to certain distributions) shall apply.
‘‘(C) The term ‘interest’ has the meaning
given such term by section 116(c).’’.
(6) Subsection (c) of section 857 of such Code
is amended to read as follows:
‘‘(c) LIMITATIONS APPLICABLE TO DIVIDENDS RE-
CEIVED FROM REAL ESTATE INVESTMENT TRUSTS.—
‘‘(1) IN
GENERAL.—For purposes of section
116 (relating to an exclusion for dividends and inter-
est received by individuals) and section 243 (relating
to deductions for dividends received by corpora-
tions), a dividend received from a real estate invest-
ment trust which meets the requirements of this
part shall not be considered as a dividend.
‘‘(2) TREATMENT AS INTEREST.—For purposes
of section 116, in the case of a dividend (other than
a capital gain dividend, as defined in subsection
(b)(3)(C)) received from a real estate investment
trust which meets the requirements of this part for
the taxable year in which it paid the dividend—
‘‘(A) such dividend shall be treated as in-
terest if the aggregate interest received by the
real estate investment trust for the taxable year
equals or exceeds 75 percent of its gross in-
come, or
‘‘(B) if subparagraph (A) does not apply,
the portion of such dividend which bears the
same ratio to the amount of such dividend as
the aggregate interest received bears to gross
income shall be treated as interest.
‘‘(3) ADJUSTMENTS TO GROSS INCOME AND AG-
GREGATE
INTEREST
RECEIVED.—For purposes of
paragraph (2)—
‘‘(A) gross income does not include the net
capital gain,
‘‘(B) gross income and aggregate interest
received shall each be reduced by so much of
the deduction allowable by section 163 for the
taxable year (other than for interest on mort-
gages on real property owned by the real estate
investment trust) as does not exceed aggregate
interest received by the taxable year, and
‘‘(C) gross income shall be reduced by the
sum of the taxes imposed by paragraphs (4),
(5), and (6) of section 857(b).
‘‘(4) INTEREST.—The term ‘interest’ has the
meaning given such term by section 116(c).
‘‘(5) NOTICE TO SHAREHOLDERS.—The amount
of any distribution by a real estate investment trust
which may be taken into account as interest for pur-
poses of the exclusion under section 116 shall not
exceed the amount so designated by the trust in a
written notice to its shareholders mailed not later
than 60 days after the close of its taxable year.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
SEC. 4. DEDUCTION FOR 100 PERCENT OF THE HEALTH IN-
SURANCE COSTS OF SELF-EMPLOYED INDI-
VIDUALS.
(a) IN GENERAL.—Paragraph (1) of section 162(l)
of the Internal Revenue Code of 1986 (relating to special
rules for health insurance costs of self-employed individ-
uals) is amended to read as follows:
‘‘(1) ALLOWANCE OF DEDUCTION.—In the case
of an individual who is an employee within the
meaning of section 401(c)(1), there shall be allowed
as a deduction under this section an amount equal
to the amount paid during the taxable year for in-
surance which constitutes medical care for the tax-
payer, his spouse, and dependents.’’.
(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1997.
SEC. 5. EXCLUSION FROM GROSS INCOME OF EDUCATION
DISTRIBUTIONS FROM QUALIFIED TUITION
PROGRAMS; COVERAGE OF PRIVATE PRO-
GRAMS.
(a) EXCLUSION.—
(1) IN GENERAL.—Subparagraph (B) of section
529(c)(3) of the Internal Revenue Code of 1986 (re-
lating to distributions) is amended to read as fol-
lows:
‘‘(B) 
DISTRIBUTIONS
FOR
QUALIFIED
HIGHER EDUCATION EXPENSES.—If a distribu-
tee elects the application of this subparagraph
for any taxable year—
‘‘(i) no amount shall be includible in
gross income by reason of a distribution
which consists of providing a benefit to the
distributee which, if paid for by the dis-
tributee, would constitute payment of a
qualified higher education expense, and
‘‘(ii) the amount which (but for the
election) would be includible in gross in-
come by reason of any other distribution
shall not be so includible in an amount
which bears the same ratio to the amount
which would be so includible as the amount
of the qualified higher education expenses
of the distributee bears to the amount of
the distribution.’’.
(2) ADDITIONAL TAX ON AMOUNTS NOT USED
FOR HIGHER EDUCATION EXPENSES.—Section 529
of such Code is amended by adding at the end the
following new subsection:
‘‘(f) ADDITIONAL TAX
FOR DISTRIBUTIONS NOT
USED FOR EDUCATIONAL EXPENSES.—
‘‘(1) IN GENERAL.—The tax imposed by section
530(d)(4) shall apply to payments and distributions
from qualified tuition programs in the same manner
as such tax applies to education individual retire-
ment accounts.
‘‘(2) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) shall
not apply to the distribution to a contributor of any
contribution paid during a taxable year to a quali-
fied tuition program to the extent that such con-
tribution exceeds the limitation in section 4973(e) if
such distribution (and the net income with respect
to such excess contribution) meets requirements
comparable to the requirements of clauses (i) and
(ii) of section 530(d)(4)(C).’’.
(3) COORDINATION
WITH
EDUCATION
CRED-
ITS.—Section 25A(e)(2) of such Code is amended by
inserting ‘‘529(c)(3)(B) or’’ before ‘‘530(d)(2)’’.
(4) EFFECTIVE DATE.—The amendments made
by this subsection shall apply to distributions after
December 31, 1997, for education furnished in aca-
demic periods beginning after such date.
(b) ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—
(1) IN
GENERAL.—Paragraph (1) of section
529(b) of such Code (defining qualified State tuition
program) is amended by inserting ‘‘or by 1 or more
eligible educational institutions’’ after ‘‘maintained
by a State or agency or instrumentality thereof’’.
(2) LIMITATION ON CONTRIBUTIONS TO QUALI-
FIED TUITION PROGRAMS NOT MAINTAINED BY A
STATE.—Subsection (b) of section 529 of such Code
is amended by adding at the end the following new
paragraph:
‘‘(8) 
LIMITATION
ON
CONTRIBUTIONS
TO
QUALIFIED TUITION PROGRAMS NOT MAINTAINED BY
A STATE.—In the case of a program not maintained
by a State or agency or instrumentality thereof, such
program shall not be treated as a qualified tuition
program unless it limits the annual contribution to
the program on behalf of a designated beneficiary to
$5,000.’’.
(3) TAX ON EXCESS CONTRIBUTIONS.—
(A) IN GENERAL.—Subsection (a) of sec-
tion 4973 of such Code is amended by striking
‘‘or’’ at the end of paragraph (3), by redesig-
nating paragraph (4) as paragraph (5), and by
inserting after paragraph (3) the following new
paragraph:
‘‘(4) a qualified tuition program (as defined in
section 529) not maintained by a State or any agen-
cy or instrumentality thereof, or’’.
(B) EXCESS CONTRIBUTIONS DEFINED.—
Section 4973(e) of such Code is amended to
read as follows:
‘‘(e) EXCESS CONTRIBUTIONS TO PRIVATE QUALI-
FIED TUITION PROGRAM AND EDUCATION INDIVIDUAL
RETIREMENT ACCOUNTS.—For purposes of this section—
‘‘(1) IN GENERAL.—In the case of private edu-
cation investment accounts maintained for the bene-
fit of any 1 beneficiary, the term ‘excess contribu-
tions’ means the amount by which the amount con-
tributed for the taxable year to such accounts ex-
ceeds $5,000.
‘‘(2) PRIVATE
EDUCATION
INVESTMENT
AC-
COUNT.—For purposes of paragraph (1), the term
‘private education investment account’ means—
‘‘(A) a qualified tuition program (as de-
fined in section 529) not maintained by a State
or any agency or instrumentality thereof, and
‘‘(B) an education individual retirement
account (as defined in section 530).
‘‘(3) SPECIAL RULES.—For purposes of para-
graph (1), the following contributions shall not be
taken into account:
‘‘(A) Any contribution which is distributed
out of the education individual retirement ac-
count in a distribution to which section
530(d)(4)(C) applies.
‘‘(B) Any contribution to a qualified tui-
tion program (as so defined) described in sec-
tion 530(b)(2)(B) from any such account.
‘‘(C) Any rollover contribution.’’.
(4) CONFORMING AMENDMENTS.—
(A) Paragraph (2) of section 26(b) of such
Code is amended by redesignating subpara-
graphs (E) through (Q) as subparagraphs (F)
through (R), respectively, and by inserting after
subparagraph (D) the following new subpara-
graph:
‘‘(E) section 529(f) (relating to additional
tax on certain distributions from qualified tui-
tion programs),’’.
(B) The text and headings of sections 529
and 530 of such Code are amended by striking
‘‘qualified State tuition program’’ each place it
appears and inserting ‘‘qualified tuition pro-
gram’’.
(C)(i) The section heading of section 529
of such Code is amended to read as follows:
‘‘SEC. 529. QUALIFIED TUITION PROGRAMS.’’.
(ii) The item relating to section 529 of
such Code in the table of sections for part VIII
of subchapter F of chapter 1 is amended by
striking ‘‘State’’.
(5) EFFECTIVE DATE.—The amendments made
by this subsection shall take effect on January 1,
1998.
(c) CHANGE OF QUALIFIED TUITION PROGRAM OR
OF DESIGNATED BENEFICIARY.—
(1) 
IN
GENERAL.—Clause 
(i) 
of 
section
529(c)(3)(C) of such Code is amended by inserting
‘‘to another qualified tuition program for the benefit
of the designated beneficiary or’’ after ‘‘trans-
ferred’’.
(2) INCLUSION OF SIBLINGS AS MEMBER OF
FAMILY.—Paragraph (2) of section 529(e) of such
Code is amended by inserting before the period at
the end the following: ‘‘, except that such term shall
include any sibling (whether by the whole or half
blood) of the designated beneficiary’’.