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(1) IN GENERAL.—Subsection (c) of section 21
(relating to expenses for household and dependent
care services necessary for gainful employment) is
amended to read as follows:
‘‘(c) DOLLAR LIMIT ON AMOUNT CREDITABLE.—
‘‘(1) IN GENERAL.—The amount of the employ-
ment-related expenses incurred during any taxable
year which may be taken into account under sub-
section (a) shall not exceed—
‘‘(A) $2,400 if there is 1 qualifying indi-
vidual with respect to the taxpayer for such tax-
able year, or
‘‘(B) $4,800 if there are 2 or more qualify-
ing individuals with respect to the taxpayer for
such taxable year.
The amount determined under subparagraph (A) or
(B) (whichever is applicable) shall be reduced by the
aggregate amount excludable from gross income
under section 129 for the taxable year.
‘‘(2) INFLATION ADJUSTMENT.—In the case of
taxable years beginning in a calendar year after
1997, each of the dollar amounts contained in para-
graph (1) shall be increased by an amount equal
to—
‘‘(A) such dollar amount, multiplied by
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‘‘(B) the cost-of-living adjustment deter-
mined under section 1(f)(3) for such calendar
year by substituting ‘calendar year 1996’ for
‘calendar year 1992’ in subparagraph (B)
thereof.
If any amount as adjusted under the preceding sen-
tence is not a multiple of $50, such amount shall be
rounded to the next lowest multiple of $50.’’.
(2) CONFORMING AMENDMENT.—Paragraph (2)
of section 21(d) is amended by striking ‘‘(c)(1)’’ and
inserting ‘‘(c)(1)(A)’’ and by striking ‘‘(c)(2)’’ and
inserting ‘‘(c)(1)(B)’’.
(b) REDUCTION OF BENEFIT BASED ON ADJUSTED
GROSS INCOME.—
(1) IN GENERAL.—Section 26 is amended by
redesignating subsection (c) as subsection (d) and by
inserting after subsection (b) the following new sub-
section:
‘‘(c) REDUCTION OF DEPENDENT CARE CREDIT AND
CHILD CREDIT BASED ON ADJUSTED GROSS INCOME.—
‘‘(1) IN
GENERAL.—The aggregate amount
which would (but for subsection (a), this subsection,
and paragraphs (2) and (3) of section 24(b)) be al-
lowed under sections 21 and 24 shall be reduced
(but not below zero) by $25 for each $1,000 (or
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fraction thereof) by which the taxpayer’s modified
adjusted gross income exceeds the threshold amount.
For purposes of the preceding sentence, the term
‘modified adjusted gross income’ means adjusted
gross income increased by any amount excluded
from gross income under section 911, 931, or 933.
‘‘(2) THRESHOLD AMOUNT.—For purposes of
paragraph (1), the term ‘threshold amount’ means—
‘‘(A) $110,000 in the case of a joint re-
turn,
‘‘(B) $75,000 in the case of an individual
who is not married, and
‘‘(C) $55,000 in the case of a married in-
dividual filing a separate return.
For purposes of this paragraph, marital status shall
be determined under section 7703.
‘‘(3) REMAINING CREDIT TREATED AS ATTRIB-
UTABLE TO DEPENDENT CARE TAX CREDIT.—The
aggregate amount allowable under sections 21 and
24 after the application of paragraph (1) shall be
treated as allowable solely under section 21 to the
extent such amount does not exceed the amount al-
lowable under section 21 (determined without regard
to section 21(a)(3)).’’.
(2) CONFORMING AMENDMENTS.—
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(A) Subsection (a) of section 21 is amend-
ed by adding at the end the following new para-
graph:
‘‘(3) LIMITATION BASED ON ADJUSTED GROSS
INCOME.—
‘‘For limitation based on adjusted gross income,
see section 26(c).’’.
(B) The section heading for section 26 is
amended by inserting before the period ‘‘;
PHASEOUT
OF
CERTAIN
CREDITS
BASED
ON INCOME’’.
(C) The item relating to section 26 in the
table of sections for subpart A of part IV of
subchapter A of chapter 1 is amended by in-
serting before the period ‘‘; phaseout of certain
credits based on income’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
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TITLE II—EDUCATION
INCENTIVES
Subtitle A—Tax Benefits Relating
to Education Expenses
SEC. 201. HOPE CREDIT FOR HIGHER EDUCATION TUITION
AND RELATED EXPENSES.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal
credits) is amended by inserting after section 25 the fol-
lowing new section:
‘‘SEC. 25A. HIGHER EDUCATION TUITION AND RELATED EX-
PENSES.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed as a credit against the tax
imposed by this chapter for the taxable year the amount
equal to 50 percent of qualified tuition and related ex-
penses paid by the taxpayer during such taxable year for
education furnished during any academic period beginning
in such year.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount al-
lowed as a credit under subsection (a) for any tax-
able year with respect to the qualified tuition and re-
lated expenses of any 1 individual shall not exceed
$1,500.
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‘‘(2) CREDIT ALLOWED ONLY FOR 2 TAXABLE
YEARS.—No credit shall be allowed under subsection
(a) for a taxable year with respect to the qualified
tuition and related expenses of an individual unless
the taxpayer elects to have this section apply with
respect to such individual for such year. An election
under this paragraph shall not take effect with re-
spect to an individual for any taxable year if an elec-
tion under this paragraph (by the taxpayer or any
other individual) is in effect with respect to such in-
dividual for any 2 prior taxable years.
‘‘(3) CREDIT ALLOWED FOR YEAR ONLY IF IN-
DIVIDUAL IS AT LEAST 1⁄2 TIME STUDENT FOR POR-
TION OF YEAR.—No credit shall be allowed under
subsection (a) for a taxable year with respect to the
qualified tuition and related expenses of an individ-
ual unless such individual is an eligible student for
at least one academic period which begins during
such year.
‘‘(4) CREDIT ALLOWED ONLY FOR FIRST TWO
YEARS OF POSTSECONDARY EDUCATION.—No credit
shall be allowed under subsection (a) for a taxable
year with respect to the qualified tuition and related
expenses of an individual if the individual has com-
pleted (before the beginning of such taxable year)
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the first 2 years of postsecondary education at an el-
igible educational institution.
‘‘(c) LIMITATION BASED ON MODIFIED ADJUSTED
GROSS INCOME.—
‘‘(1) IN GENERAL.—The amount which would
(but for this subsection) be taken into account under
subsection (a) for the taxable year shall be reduced
(but not below zero) by the amount determined
under paragraph (2).
‘‘(2) AMOUNT
OF
REDUCTION.—The amount
determined under this paragraph is the amount
which bears the same ratio to the amount which
would be so taken into account as—
‘‘(A) the excess of—
‘‘(i) the taxpayer’s modified adjusted
gross income for such taxable year, over
‘‘(ii) $40,000 ($80,000 in the case of
a joint return), bears to
‘‘(B) $10,000 ($20,000 in the case of a
joint return).
‘‘(3) MODIFIED
ADJUSTED
GROSS
INCOME.—
The term ‘modified adjusted gross income’ means
the adjusted gross income of the taxpayer for the
taxable year increased by any amount excluded from
gross income under section 911, 931, or 933.
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‘‘(d) DEFINITIONS.—For purposes of this section—
‘‘(1) QUALIFIED
TUITION
AND
RELATED
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
tuition and related expenses’ means tuition and
fees required for the enrollment or attendance
of—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any dependent of the taxpayer
with respect to whom the taxpayer is al-
lowed a deduction under section 151,
at an eligible educational institution and books
required for courses of instruction of such indi-
vidual at such institution.
‘‘(B) EXCEPTION FOR EDUCATION INVOLV-
ING SPORTS, ETC.—Such term does not include
expenses with respect to any course or other
education involving sports, games, or hobbies,
unless such course or other education is part of
the individual’s degree program.
‘‘(C) 
EXCEPTION
FOR
NONACADEMIC
FEES.—Such term does not include student ac-
tivity fees, athletic fees, insurance expenses, or
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other expenses unrelated to an individual’s aca-
demic course of instruction.
‘‘(2) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ means an
institution—
‘‘(A) which is described in section 481 of
the Higher Education Act of 1965 (20 U.S.C.
1088), as in effect on the date of the enactment
of this section, and
‘‘(B) which is eligible to participate in a
program under title IV of such Act.
‘‘(3) ELIGIBLE STUDENT.—The term ‘eligible
student’ means, with respect to any academic period,
a student who—
‘‘(A) meets the requirements of section
484(a)(1) of the Higher Education Act of 1965
(20 U.S.C. 1091(a)(1)), as in effect on the date
of the enactment of this section, and
‘‘(B) is carrying at least 1⁄2 the normal
full-time work load for the course of study the
student is pursuing.
‘‘(4) OTHER TERMS RELATING TO THE HIGHER
EDUCATION ACT.—The following terms shall have
the meanings prescribed in regulations under section
481(g) of the Higher Education Act of 1965 (20
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U.S.C. 1088(g)), as added by the Student Financial
Aid Improvements Act of 1997:
‘‘(A) Academic period.
‘‘(B) Normal full-time workload.
‘‘(C) First two years of postsecondary edu-
cation.
‘‘(e) TREATMENT OF EXPENSES PAID BY DEPEND-
ENT.—If a deduction under section 151 with respect to
an individual is allowed to another taxpayer for a taxable
year beginning in the calendar year in which such individ-
ual’s taxable year begins—
‘‘(1) no credit shall be allowed under subsection
(a) to such individual for such individual’s taxable
year, and
‘‘(2) qualified tuition and related expenses paid
by such individual during such individual’s taxable
year shall be treated for purposes of this section as
paid by such other taxpayer.
‘‘(f) TREATMENT OF CERTAIN PREPAYMENTS.—If
qualified tuition and related expenses are paid by the tax-
payer during a taxable year for an academic period which
begins during the first 3 months following such taxable
year, such academic period shall be treated for purposes
of this section as beginning during such taxable year.
‘‘(g) SPECIAL RULES.—
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‘‘(1) 
IDENTIFICATION
REQUIREMENT.—No
credit shall be allowed under subsection (a) to a tax-
payer with respect to the qualified tuition and relat-
ed expenses of an individual unless the taxpayer in-
cludes the name and taxpayer identification number
of such individual on the return of tax for the tax-
able year.
‘‘(2) ADJUSTMENT
FOR
CERTAIN
SCHOLAR-
SHIPS, ETC.—The amount of qualified tuition and
related expenses otherwise taken into account under
subsection (a) with respect to an individual for an
academic period shall be reduced (before the applica-
tion of subsections (b) and (c)) by the sum of any
amounts paid for the benefit of such individual
which are allocable to such period as—
‘‘(A) a qualified scholarship which is ex-
cludable from gross income under section 117,
‘‘(B) an educational assistance allowance
under chapter 30, 31, 32, 34, or 35 of title 38,
United States Code, or under chapter 1606 of
title 10, United States Code, and
‘‘(C) a payment (other than a gift, be-
quest, devise, or inheritance within the meaning
of section 102(a)) for such individual’s edu-
cational expenses, or attributable to such indi-
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vidual’s enrollment at an eligible educational in-
stitution, which is excludable from gross income
under any law of the United States.
‘‘(3) DENIAL
OF
CREDIT
IF
STUDENT
CON-
VICTED OF A FELONY DRUG OFFENSE.—No credit
shall be allowed under subsection (a) for qualified
tuition and related expenses for the enrollment or
attendance of a student for any academic period if
such student has been convicted of a Federal or
State felony offense consisting of the possession or
distribution of a controlled substance before the end
of the taxable year with or within which such period
ends.
‘‘(4) DENIAL OF DOUBLE BENEFIT.—No credit
shall be allowed under this section for any expense
for which a deduction is allowed under any other
provision of this chapter.
‘‘(5) NO
CREDIT
FOR
MARRIED
INDIVIDUALS
FILING SEPARATE RETURNS.—If the taxpayer is a
married individual (within the meaning of section
7703), this section shall apply only if the taxpayer
and the taxpayer’s spouse file a joint return for the
taxable year.
‘‘(6) NONRESIDENT ALIENS.—If the taxpayer is
a nonresident alien individual for any portion of the
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taxable year, this section shall apply only if such in-
dividual is treated as a resident alien of the United
States for purposes of this chapter by reason of an
election under subsection (g) or (h) of section 6013.
‘‘(h) INFLATION ADJUSTMENTS.—
‘‘(1) DOLLAR
LIMITATION
ON
AMOUNT
OF
CREDIT.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning after 1998, the $1,500
amount in subsection (b)(1) shall be increased
by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $50, such amount shall be rounded to the
next lowest multiple of $50.
‘‘(2) INCOME LIMITS.—
‘‘(A) IN GENERAL.—In the case of a tax-
able year beginning after 2000, the $40,000
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and $80,000 amounts in subsection (c)(2) shall
each be increased by an amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for the cal-
endar year in which the taxable year be-
gins, determined by substituting ‘calendar
year 1999’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
‘‘(B) ROUNDING.—If any amount as ad-
justed under subparagraph (A) is not a multiple
of $5,000, such amount shall be rounded to the
next lowest multiple of $5,000.
‘‘(i) REGULATIONS.—The Secretary may prescribe
such regulations as may be necessary or appropriate to
carry out this section, including regulations providing for
a recapture of credit allowed under this section in cases
where there is a refund in a subsequent taxable year of
any amount which was taken into account in determining
the amount of such credit.’’.
(b) EXTENSION OF PROCEDURES APPLICABLE TO
MATHEMATICAL OR CLERICAL ERRORS.—Paragraph (2)
of section 6213(g) (relating to the definition of mathe-
matical or clerical errors) is amended by striking ‘‘and’’
at the end of subparagraph (G), by striking the period
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at the end of subparagraph (H) and inserting ‘‘, and’’,
and by inserting after subparagraph (H) the following new
subparagraph:
‘‘(I) an omission of a correct TIN required
under section 25A(g)(1) (relating to higher edu-
cation tuition and related expenses) to be in-
cluded on a return.’’.
(c) RETURNS RELATING TO TUITION AND RELATED
EXPENSES.—
(1) IN GENERAL.—Subpart B of part III of
subchapter A of chapter 61 (relating to information
concerning transactions with other persons) is
amended by inserting after section 6050R the fol-
lowing new section:
‘‘SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION
TUITION AND RELATED EXPENSES.
‘‘(a) IN GENERAL.—Any person—
‘‘(1) which is an eligible educational institution
which receives payments for qualified tuition and re-
lated expenses with respect to any individual for any
calendar year, or
‘‘(2) which is engaged in a trade or business
and which, in the course of such trade or business,
makes payments during any calendar year to any in-
dividual which constitute reimbursements or refunds
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(or similar amounts) of qualified tuition and related
expenses of such individual,
shall make the return described in subsection (b) with re-
spect to the individual at such time as the Secretary may
by regulations prescribe.
‘‘(b) FORM AND MANNER OF RETURNS.—A return
is described in this subsection if such return—
‘‘(1) is in such form as the Secretary may pre-
scribe,
‘‘(2) contains—
‘‘(A) the name, address, and TIN of the
individual with respect to whom payments de-
scribed in subsection (a) were received from (or
were paid to),
‘‘(B) the name, address, and TIN of any
individual certified by the individual described
in subparagraph (A) as the taxpayer who will
claim the individual as a dependent for pur-
poses of the deduction allowable under section
151 for any taxable year ending with or within
the calendar year, and
‘‘(C) the—
‘‘(i) aggregate amount of payments
for qualified tuition and related expenses
received with respect to the individual de-
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scribed in subparagraph (A) during the
calendar year, and
‘‘(ii) aggregate amount of reimburse-
ments or refunds (or similar amounts)
paid to such individual during the calendar
year, and
‘‘(D) such other information as the Sec-
retary may prescribe.
‘‘(c) APPLICATION TO GOVERNMENTAL UNITS.—For
purposes of this section—
‘‘(1) a governmental unit or any agency or in-
strumentality thereof shall be treated as a person,
and
‘‘(2) any return required under subsection (a)
by such governmental entity shall be made by the of-
ficer or employee appropriately designated for the
purpose of making such return.
‘‘(d) STATEMENTS TO BE FURNISHED TO INDIVID-
UALS WITH RESPECT TO WHOM INFORMATION IS RE-
QUIRED.—Every person required to make a return under
subsection (a) shall furnish to each individual whose name
is required to be set forth in such return under subpara-
graph (A) or (B) of subsection (b)(2) a written statement
showing—
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‘‘(1) the name, address, and phone number of
the information contact of the person required to
make such return, and
‘‘(2) the aggregate amounts described in sub-
section (b)(2)(C).
The written statement required under the preceding sen-
tence shall be furnished on or before January 31 of the
year following the calendar year for which the return
under subsection (a) was required to be made.
‘‘(e) DEFINITIONS.—For purposes of this section, the
terms ‘eligible educational institution’ and ‘qualified tui-
tion and related expenses’ have the meanings given such
terms by section 25A.
‘‘(f) RETURNS WHICH WOULD BE REQUIRED TO BE
MADE BY 2 OR MORE PERSONS.—Except to the extent
provided in regulations prescribed by the Secretary, in the
case of any amount received by any person on behalf of
another person, only the person first receiving such
amount shall be required to make the return under sub-
section (a).
‘‘(g) REGULATIONS.—The Secretary shall prescribe
such regulations as may be necessary to carry out the pro-
visions of this section. No penalties shall be imposed under
section 6724 with respect to any return or statement re-
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quired under this section until such time as such regula-
tions are issued.’’.
(2) ASSESSABLE PENALTIES.—
(A) 
Subparagraph 
(B) 
of 
section
6724(d)(1) (relating to definitions) is amended
by redesignating clauses (ix) through (xiv) as
clauses (x) through (xv), respectively, and by
inserting after clause (viii) the following new
clause:
‘‘(ix) section 6050S (relating to re-
turns relating to payments for qualified
tuition and related expenses),’’.
(B) Paragraph (2) of section 6724(d) is
amended by striking ‘‘or’’ at the end of the next
to last subparagraph, by striking the period at
the end of the last subparagraph and inserting
‘‘, or’’, and by adding at the end the following
new subparagraph:
‘‘(Z) section 6050S(d) (relating to returns
relating to qualified tuition and related ex-
penses).’’.
(3) CLERICAL AMENDMENT.—The table of sec-
tions for subpart B of part III of subchapter A of
chapter 61 is amended by inserting after the item
relating to section 6050R the following new item:
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‘‘Sec. 6050S. Returns relating to higher education tuition and re-
lated expenses.’’.
(d) COORDINATION WITH SECTION 135.—Subsection
(d) of section 135 is amended by redesignating paragraphs
(2) and (3) as paragraphs (3) and (4), respectively, and
by inserting after paragraph (1) the following new para-
graph:
‘‘(2) COORDINATION WITH HIGHER EDUCATION
CREDIT.—The amount of the qualified higher edu-
cation expenses otherwise taken into account under
subsection (a) with respect to the education of an in-
dividual shall be reduced (before the application of
subsection (b)) by the amount of such expenses
which are taken into account in determining the
credit allowable to the taxpayer or any other person
under section 25A with respect to such expenses.’’.
(e) CLERICAL AMENDMENT.—The table of sections
for subpart A of part IV of subchapter A of chapter 1
is amended by inserting after the item relating to section
25 the following new item:
‘‘Sec. 25A. Higher education tuition and related expenses.’’.
(f) EFFECTIVE DATE.—The amendments made by
this section shall apply to expenses paid after December
31, 1997 (in taxable years ending after such date), for
education furnished in academic periods beginning after
such date.
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SEC. 202. DEDUCTION FOR QUALIFIED HIGHER EDUCATION
EXPENSES.
(a) DEDUCTION ALLOWED.— Part VII of subchapter
B of chapter 1 (relating to additional itemized deductions
for individuals) is amended by redesignating section 221
as section 222 and by inserting after section 220 the fol-
lowing new section:
‘‘SEC. 221. QUALIFIED HIGHER EDUCATION EXPENSES.
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of an
individual, there shall be allowed as a deduction the
amount of qualified higher education expenses paid by the
taxpayer during the taxable year for education furnished
during any academic period (within the meaning of section
25A) beginning in such year.
‘‘(b) LIMITATIONS.—
‘‘(1) ANNUAL LIMIT.—The amount allowed as a
deduction under subsection (a) for any taxable year
with respect to expenses paid for education fur-
nished to any 1 individual shall not exceed the lesser
of—
‘‘(A) $10,000, or
‘‘(B) the amount includible in the tax-
payer’s gross income for such taxable year by
reason of a distribution from a qualified tuition
program (as defined in section 529), or an edu-
cation investment account (as defined in section
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530), the beneficiary of which is such individ-
ual.
‘‘(2) AGGREGATE LIMIT.—The amount allowed
as a deduction under subsection (a) to the taxpayer
or any other individual with respect to expenses paid
for education furnished to any 1 individual shall not
exceed $40,000 for all taxable years.
‘‘(3) DEDUCTION ALLOWED FOR YEAR ONLY IF
INDIVIDUAL IS AT LEAST
1⁄2 TIME STUDENT FOR
PORTION OF YEAR.—No deduction shall be allowed
under subsection (a) for a taxable year with respect
to the qualified higher education expenses of an indi-
vidual unless such individual is an eligible student
(as defined in section 25A(d)(3)) for at least one
academic period which begins during such year.
‘‘(4) DEDUCTION ALLOWED ONLY FOR FIRST 4
YEARS OF POSTSECONDARY EDUCATION.—No deduc-
tion shall be allowed under subsection (a) for a tax-
able year with respect to the qualified higher edu-
cation expenses of an individual if the individual has
completed (before the beginning of such taxable
year) the equivalent of the first 4 years of post-
secondary education at an eligible educational insti-
tution (determined under the rules of section 25A).
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‘‘(5) COORDINATION WITH CREDIT FOR HIGHER
EDUCATION EXPENSES.—No deduction shall be al-
lowed under this section for a taxable year with re-
spect to the qualified higher education expenses of
an individual if an election is in effect under section
25A with respect to such individual for such taxable
year.
‘‘(c) QUALIFIED HIGHER EDUCATION EXPENSES.—
The term ‘qualified higher education expenses’ means
qualified higher education expenses (as defined in section
529) for the education of—
‘‘(1) the taxpayer,
‘‘(2) the taxpayer’s spouse, or
‘‘(3) any dependent of the taxpayer with respect
to whom the taxpayer is allowed a deduction under
section 151,
at an eligible educational institution (as defined in section
529(e)(5)).
‘‘(d) TREATMENT OF EXPENSES PAID BY DEPEND-
ENT.—If a deduction under section 151 with respect to
an individual is allowed to another taxpayer for a taxable
year beginning in the calendar year in which such individ-
ual’s taxable year begins—
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‘‘(1) no deduction shall be allowed under sub-
section (a) to such individual for such individual’s
taxable year, and
‘‘(2) qualified higher education expenses paid
by such individual during such individual’s taxable
year shall be treated for purposes of this section as
paid by such other taxpayer.
‘‘(e) COORDINATION WITH AMOUNTS INCLUDIBLE IN
GROSS INCOME UNDER SECTION 529 OR 530.—If any de-
duction is allowed under subsection (a) with respect to the
qualified higher education expenses of an individual with
respect to whom the taxpayer is allowed a deduction under
section 151(c), any amount which would (but for this sub-
section) be includible in such individual’s gross income by
reason of section 529 or section 530 shall be includible
in the gross income of the taxpayer and not such individ-
ual.
‘‘(f) ADJUSTMENT
FOR CERTAIN SCHOLARSHIPS,
ETC.—The amount of qualified higher education expenses
otherwise taken into account under subsection (a) with re-
spect to an individual for an academic period shall be re-
duced (before the application of subsection (b)) by the sum
of—
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‘‘(1) the aggregate amount of the reductions
under section 25A(g)(2) for the benefit of such indi-
vidual for such period, and
‘‘(2) the amount excludable from gross income
under section 135 by reason of such expenses with
respect to such individual which are allocable to such
period.
‘‘(g) DENIAL
OF DEDUCTION
IF STUDENT CON-
VICTED OF A FELONY DRUG OFFENSE.—No deduction
shall be allowed under subsection (a) for qualified higher
education expenses for the enrollment or attendance of a
student for any academic period if such student has been
convicted of a Federal or State felony offense consisting
of the possession or distribution of a controlled substance
before the end of the taxable year with or within which
such period ends.
‘‘(h) DENIAL OF DOUBLE BENEFIT.—No deduction
shall be allowed under subsection (a) for any expense for
which a deduction is allowed to the taxpayer under any
other provision of this chapter.’’.
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ITEMIZES OTHER DEDUCTIONS.—
(1) IN GENERAL.—Subsection (b) of section 63
is amended by striking ‘‘and’’ at the end of para-
graph (1), by striking the period at the end of para-
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graph (2) and inserting ‘‘, and’’, and by adding at
the end the following new paragraph:
‘‘(3) the deduction allowed by section 221 (re-
lating to deduction for qualified higher education ex-
penses).’’.
(2) CONFORMING AMENDMENT.—Subsection (d)
of section 63 is amended by striking ‘‘and’’ at the
end of paragraph (1), by striking the period at the
end of paragraph (2) and inserting ‘‘, and’’, and by
adding at the end the following new paragraph:
‘‘(3) the deduction allowed by section 221 (re-
lating to deduction for qualified higher education ex-
penses).’’.
(c) PHASEOUT OF EXCLUSION FOR QUALIFIED TUI-
TION REDUCTIONS.—Subsection (d) of section 117 is
amended by redesignating the last paragraph as para-
graph (4) and by adding at the end the following new
paragraph:
‘‘(5) PHASEOUT OF EXCLUSION.—
‘‘(A) TERMINATION.—Paragraph (1) shall
not apply to any qualified tuition reduction for
any course of instruction beginning after De-
cember 31, 2001.
‘‘(B) PHASEOUT.—The amount excludable
from gross income under paragraph (1) for any
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course of instruction beginning in a calendar
year after 1997 and before 2002 shall not ex-
ceed the applicable percentage (determined in
accordance with the following table) for such
calendar year of the amount which would be so
excludable but for this subparagraph:
In the case of
The applicable
calendar year:
percentage is:
1998 .......................................................................
1999 .......................................................................
2000 .......................................................................
2001 .......................................................................
20.’’.
(d) TECHNICAL AMENDMENTS.—
(1) Subparagraph (A) of section 529(e)(3) is
amended by inserting ‘‘(except as provided in section
221(e))’’ after ‘‘distributee’’.
(2) The table of sections for part VII of sub-
chapter B of chapter 1 is amended by striking the
item relating to section 221 and inserting:
‘‘Sec. 221. Qualified higher education expenses.
‘‘Sec. 222. Cross reference.’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to expenses paid after December
31, 1997 (in taxable years ending after such date), for
education furnished in academic periods beginning after
such date.
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SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVIDUAL
RETIREMENT 
PLANS 
FOR 
HIGHER 
EDU-
CATION EXPENSES.
(a) IN GENERAL.—Paragraph (2) of section 72(t)
(relating to exceptions to 10-percent additional tax on
early distributions from qualified retirement plans) is
amended by adding at the end the following new subpara-
graph:
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL
RETIREMENT PLANS FOR HIGHER EDUCATION
EXPENSES.—Distributions 
to 
an 
individual
from an individual retirement plan to the extent
such distributions do not exceed the qualified
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year.
Distributions shall not be taken into account
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or
(D) or to the extent paragraph (1) does not
apply to such distributions by reason of sub-
paragraph (B).’’.
(b) DEFINITION.—Section 72(t) is amended by add-
ing at the end the following new paragraph:
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)—
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‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means qualified
higher education expenses (as defined in section
529(e)(3) without regard to subparagraph (C)
thereof) for education furnished to—
‘‘(i) the taxpayer,
‘‘(ii) the taxpayer’s spouse, or
‘‘(iii) any child (as defined in section
151(c)(3)) or grandchild of the taxpayer or
the taxpayer’s spouse,
at an eligible educational institution (as defined
in section 529(e)(5)).
‘‘(B) COORDINATION WITH OTHER BENE-
FITS.—The amount of qualified higher edu-
cation expenses for any taxable year shall be re-
duced as provided in section 25A(g)(2).’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to distributions after December 31,
1997, with respect to expenses paid after such date (in
taxable years ending after such date), for education fur-
nished in academic periods beginning after such date.
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SEC. 204. EXPENSES FOR EDUCATION WHICH SUPPLE-
MENTS ELEMENTARY AND SECONDARY EDU-
CATION.
(a) IN GENERAL.—Subpart A of part IV of sub-
chapter A of chapter 1 (relating to nonrefundable personal
credits) is amended by inserting after section 25A, as
added by this title, the following new section:
‘‘SEC. 25B. EXPENSES FOR EDUCATION WHICH SUPPLE-
MENTS ELEMENTARY AND SECONDARY EDU-
CATION.
‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in-
dividual, there shall be allowed a credit against the tax
imposed by this chapter for the taxable year an amount
equal to 50 percent of the qualifying educational assist-
ance expenses paid by the taxpayer during the taxable
year.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount al-
lowed as a credit under subsection (a) for any tax-
able year with respect to the qualified educational
assistance expenses of any 1 individual shall not ex-
ceed $150.
‘‘(2) REDUCTION
OF
CREDIT
BASED
ON
AD-
JUSTED GROSS INCOME.—
‘‘(A) 
IN
GENERAL.—The 
aggregate
amount which would (but for this paragraph)
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be allowed by this section shall be reduced (but
not below zero) by $25 for each $1,000 (or
fraction thereof) by which the taxpayer’s modi-
fied adjusted gross income exceeds the thresh-
old amount. For purposes of the preceding sen-
tence, the term ‘modified adjusted gross in-
come’ means adjusted gross income increased
by any amount excluded from gross income
under section 911, 931, or 933.
‘‘(B) THRESHOLD AMOUNT.—For purposes
of subparagraph (A), the term ‘threshold
amount’ means—
‘‘(i) $80,000 in the case of a joint re-
turn,
‘‘(ii) $50,000 in the case of an indi-
vidual who is not married, and
‘‘(iii) $40,000 in the case of a married
individual filing a separate return.
For purposes of this subparagraph, marital sta-
tus shall be determined under section 7703.
‘‘(c) QUALIFIED EDUCATIONAL ASSISTANCE EX-
PENSES.—For purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified edu-
cational assistance expenses’ means amounts paid to
a qualified entity to provide supplementary edu-
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cation to any dependent (within the meaning of sec-
tion 152) of the taxpayer—
‘‘(A) who is less than 18 years of age as
of the close of the taxable year, and
‘‘(B) who is enrolled as a full-time student
in an elementary or secondary school.
‘‘(2) SUPPLEMENTARY EDUCATION.—For pur-
poses of paragraph (1), supplementary education is
education provided with respect to reading, mathe-
matics, or any subject that the dependent student is
studying at the time in elementary or secondary
school classes. Eligible courses of study shall not in-
clude courses providing assistance with respect to
preparation for college entrance examinations.
‘‘(3) QUALIFIED ENTITY.—The term ‘qualified
entity’ means a person that is accredited as a sup-
plementary education service provider by an accredi-
tation organization that is recognized by the Sec-
retary of Education or by any other agency, associa-
tion, or group that is certified by the Secretary for
purposes of this section.’’.
(b) CLERICAL AMENDMENT.—The table of sections
for subpart A of part IV of subchapter A of chapter 1
is amended by inserting after the item relating to section
25A the following new item:
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‘‘Sec. 25B. Expenses for education which supplements elementary
and secondary education.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle B—Expanded Education
Investment Savings Opportunities
SEC. 211. ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION
PROGRAMS; 
OTHER 
MODIFICATIONS 
OF
QUALIFIED STATE TUITION PROGRAMS.
(a) ELIGIBLE EDUCATIONAL INSTITUTIONS PER-
MITTED TO MAINTAIN QUALIFIED TUITION PROGRAMS.—
Paragraph (1) of section 529(b) (defining qualified State
tuition program) is amended by inserting ‘‘or by one or
more eligible educational institutions’’ after ‘‘maintained
by a State or agency or instrumentality thereof’’.
(b) QUALIFIED HIGHER EDUCATION EXPENSES TO
INCLUDE ROOM AND BOARD.—Paragraph (3) of section
529(e) (defining qualified higher education expenses) is
amended to read as follows:
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ means tuition, fees,
books, supplies, and equipment required for the
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enrollment or attendance of a designated bene-
ficiary at an eligible education institution.
‘‘(B) ROOM
AND
BOARD
INCLUDED
FOR
STUDENTS WHO ARE AT LEAST HALF-TIME.—In
the case of an individual who is an eligible stu-
dent (as defined in section 25A(d)(3)) for any
academic period, such term shall also include
reasonable costs for such period (as determined
under the qualified tuition program) incurred
by the designated beneficiary for room and
board while attending such institution. The
amount treated as qualified higher education
expenses by reason of the preceding sentence
shall not exceed the minimum amount (applica-
ble to the student) included for room and board
for such period in the cost of attendance (as de-
fined in section 472 of the Higher Education
Act of 1965, 20 U.S.C. 1087ll, as in effect on
the date of the enactment of this paragraph)
for the eligible educational institution for such
period.
‘‘(C) EXCLUSION
FOR
GRADUATE
LEVEL
COURSES.—Such term shall not include ex-
penses for any graduate level course of a kind
normally taken by an individual pursuing a pro-
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gram leading to a law, business, medical, or
other advanced academic or professional degree.
Such courses shall not be taken into account in
determining whether an individual is described
in subsection (f)(3)(A).’’.
(c) ADDITIONAL MODIFICATIONS.—
(1) MEMBER
OF
FAMILY.—Paragraph (2) of
section 529(e) (relating to other definitions and spe-
cial rules) is amended to read as follows:
‘‘(2) MEMBER OF FAMILY.—The term ‘member
of the family’ means—
‘‘(A) an individual who bears a relationship
to another individual which is a relationship de-
scribed in paragraphs (1) through (8) of section
152(a), and
‘‘(B) the spouse of any individual described
in subparagraph (A).’’.
(2) ELIGIBLE
EDUCATIONAL
INSTITUTION.—
Section 529(e) is amended by adding at the end the
following:
‘‘(5) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ means an
institution—
‘‘(A) which is described in section 481 of
the Higher Education Act of 1965 (20 U.S.C.
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1088), as in effect on the date of the enactment
of this paragraph, and
‘‘(B) which is eligible to participate in a
program under title IV of such Act.’’.
(3) NO
CONTRIBUTIONS
AFTER
BENEFICIARY
ATTAINS AGE 18; DISTRIBUTIONS REQUIRED IN CER-
TAIN
CASES.—Subsection (b) of section 529 (as
amended by subsection (f) of this section) is amend-
ed by adding at the end the following new para-
graph:
‘‘(7) RESTRICTIONS RELATING TO AGE OF BEN-
EFICIARY; COMPLETION OF EDUCATION.—
‘‘(A) IN GENERAL.—A program shall be
treated as a qualified tuition program only if—
‘‘(i) no contribution is accepted on be-
half of a designated beneficiary after the
date on which such beneficiary attains age
18, and
‘‘(ii) any balance to the credit of a
designated beneficiary (if any) on the ac-
count termination date shall be distributed
within 30 days after such date to such
beneficiary (or in the case of death, the es-
tate of the beneficiary).
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‘‘(B) ACCOUNT TERMINATION DATE.—For
purposes of subparagraph (A), the term ‘ac-
count termination date’ means whichever of the
following dates is the earliest:
‘‘(i) The date on which the designated
beneficiary completes the equivalent of 4
years of post-secondary education (whether
or not at the same eligible educational in-
stitution).
‘‘(ii) The date on which the des-
ignated beneficiary attains age 30.
‘‘(iii) The date on which the des-
ignated beneficiary dies.’’.
(4) ESTATE AND GIFT TAX TREATMENT.—
(A) GIFT TAX TREATMENT.—
(i) Paragraph (2) of section 529(c) is
amended to read as follows:
‘‘(2) GIFT
TAX
TREATMENT
OF
CONTRIBU-
TIONS.—For purposes of chapters 12 and 13, any
contribution to a qualified tuition program on behalf
of any designated beneficiary—
‘‘(A) shall be treated as a completed gift to
such beneficiary which is not a future interest
in property, and
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‘‘(B) shall not be treated as a qualified
transfer under section 2503(e).’’.
(ii) Paragraph (5) of section 529(c) is
amended to read as follows:
‘‘(5) OTHER GIFT TAX RULES.—For purposes
of chapters 12 and 13—
‘‘(A) TREATMENT OF DISTRIBUTIONS.—In
no event shall a distribution from a qualified
tuition program be treated as a taxable gift.
‘‘(B) TREATMENT
OF
DESIGNATION
OF
NEW
BENEFICIARY.—The taxes imposed by
chapters 12 and 13 shall apply to a transfer by
reason of a change in the designated beneficiary
under the program (or a rollover to the account
of a new beneficiary) only if the new beneficiary
is a generation below the generation of the old
beneficiary (determined in accordance with sec-
tion 2651).’’.
(B) ESTATE
TAX
TREATMENT.—Para-
graph (4) of section 529(c) is amended to read
as follows:
‘‘(4) ESTATE TAX TREATMENT.—
‘‘(A) IN GENERAL.—No amount shall be
includible in the gross estate of any individual
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for purposes of chapter 11 by reason of an in-
terest in a qualified tuition program.
‘‘(B) AMOUNTS INCLUDIBLE IN ESTATE OF
DESIGNATED
BENEFICIARY
IN
CERTAIN
CASES.—Subparagraph (A) shall not apply to
amounts distributed on account of the death of
a beneficiary.’’.
(5) LIMITATION ON CONTRIBUTIONS TO QUALI-
FIED TUITION PROGRAMS NOT MAINTAINED BY A
STATE.—Subsection (b) of section 529 is amended
by adding at the end the following new paragraph:
‘‘(9) 
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
an amount equal to the lesser of—
‘‘(A) $5,000, or
‘‘(B) the excess of—
‘‘(i) $50,000, over
‘‘(ii) the aggregate amount contrib-
uted to such program on behalf of such
beneficiary for all prior taxable years.’’.
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(d) ADDITIONAL TAX ON AMOUNTS NOT USED FOR
HIGHER EDUCATION EXPENSES.—Section 529 is amend-
ed by adding at the end the following new subsection:
‘‘(f) IMPOSITION OF ADDITIONAL TAX.—
‘‘(1) IN GENERAL.—The tax imposed by this
chapter for any taxable year on any taxpayer who
receives a payment or distribution from a qualified
tuition program which is includible in gross income
shall be increased by 10 percent of the amount
which is so includible.
‘‘(2) EXCEPTIONS.—Paragraph (1) shall not
apply if the payment or distribution is—
‘‘(A) used for qualified higher education
expenses of the designated beneficiary,
‘‘(B) made to a beneficiary (or to the es-
tate of the designated beneficiary) on or after
the death of the designated beneficiary,
‘‘(C) attributable to the designated bene-
ficiary’s being disabled (within the meaning of
section 72(m)(7)), or
‘‘(D) made on account of a scholarship, al-
lowance, or payment described in subparagraph
(A), (B), or (C) of section 135(d)(1) received by
the account holder to the extent the amount of
the payment or distribution does not exceed the
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amount of the scholarship, allowance, or pay-
ment.
‘‘(3) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—In the case of a
qualified tuition program not maintained by a State
or any agency or instrumentality thereof, paragraph
(1) shall not apply to the distribution to a contribu-
tor of any contribution made during a taxable year
on behalf of a designated beneficiary to the extent
that such contribution exceeds the limitation in sec-
tion 4973(e) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such contributor’s re-
turn for such taxable year, and
‘‘(B) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (B) shall
be included in the gross income of the contributor
for the taxable year in which such excess contribu-
tion was made.’’.
(e) COORDINATION
WITH
EDUCATION
SAVINGS
BOND.—Section 135(c)(2) (defining qualified higher edu-
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cation expenses) is amended by adding at the end the fol-
lowing:
‘‘(C) CONTRIBUTIONS TO QUALIFIED TUI-
TION PROGRAM.—Such term shall include any
contribution to a qualified tuition program (as
defined in section 529) on behalf of a des-
ignated beneficiary (as defined in such section)
who is an individual described in subparagraph
(A); but there shall be no increase in the invest-
ment in the contract for purposes of applying
section 72 by reason of the portion of such con-
tribution which is not includible in gross income
by reason of this subparagraph.’’.
(f) TAX ON EXCESS CONTRIBUTIONS.—
(1) IN
GENERAL.—Subsection (a) of section
4973 is amended by striking ‘‘or’’ at the end of
paragraph (2) and by inserting after paragraph (3)
the following new paragraphs:
‘‘(4) a qualified tuition program (as defined in
section 529) not maintained by a State or any agen-
cy or instrumentality thereof, or
‘‘(5) an education investment account (as de-
fined in section 530),’’.
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(2) EXCESS
CONTRIBUTIONS
DEFINED.—Sec-
tion 4973 is amended by adding at the end the fol-
lowing new subsection:
‘‘(e) 
EXCESS
CONTRIBUTIONS
TO
PRIVATE
QUALFIED TUITION PROGRAM AND EDUCATION INVEST-
MENT 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 the lesser of—
‘‘(A) the excess of—
‘‘(i) $5,000, over
‘‘(ii) the aggregate amount contrib-
uted to all qualified tuition programs (as
defined in section 529) maintained by a
State or any agency or instrumentality
thereof on behalf of such beneficiary for
such taxable year, or
‘‘(B) the excess of—
‘‘(i) $50,000, over
‘‘(ii) the sum of—
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‘‘(I) the aggregate amount con-
tributed to such accounts for all prior
taxable years, and
‘‘(II) the aggregate amount con-
tributed to all qualified tuition pro-
grams (as defined in section 529)
maintained by a State or any agency
or instrumentality thereof on behalf of
such beneficiary for such taxable year
and all prior taxable years.
‘‘(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 investment 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 investment account in a
distribution to which section 530(c)(3)(B) ap-
plies.
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‘‘(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.’’.
(g) TECHNICAL AMENDMENTS.—
(1) Paragraph (2) of section 26(b) is amended
by redesignating subparagraphs (E) through (P) as
subparagraphs (F) through (Q), respectively, and by
inserting after subparagraph (D) the following new
subparagraph:
‘‘(E) section 529(f) (relating to additional
tax on certain distributions from qualified tui-
tion programs),’’.
(2) The text of section 529 is amended by strik-
ing ‘‘qualified State tuition program’’ each place it
appears and inserting ‘‘qualified tuition program’’.
(3) Subsection (b) of section 529 is amended by
striking paragraph (3) and by redesignating para-
graphs (4) through (7) as paragraphs (3) through
(6), respectively.
(4)(A) The section heading of section 529 is
amended to read as follows:
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‘‘SEC. 529. QUALIFIED TUITION PROGRAMS.’’.
(B) The item relating to section 529 in the
table of sections for part VIII of subchapter F of
chapter 1 is amended by striking ‘‘State’’.
(5)(A) The heading for part VIII of subchapter
F of chapter 1 is amended to read as follows:
‘‘PART VIII—HIGHER EDUCATION SAVINGS
ENTITIES’’.
(B) The table of parts for subchapter F of
chapter 1 is amended by striking the item relating
to part VIII and inserting:
‘‘Part VIII. Higher education savings entities.’’.
(h) EFFECTIVE DATES.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall take effect on January 1, 1998.
(2) EXPENSES TO INCLUDE ROOM AND BOARD,
ETC.—The amendments made by subsection (b) and
(c)(2) shall apply to distributions after December
31, 1997, with respect to expenses paid after such
date (in taxable years ending after such date), for
education furnished in academic periods beginning
after such date.
(3) PENALTY FOR NONEDUCATION WITHDRAW-
ALS.—The amendment made by subsection (d) shall
apply to distributions after December 31, 1997.
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(4) COORDINATION WITH EDUCATION SAVINGS
BONDS.—The amendment made by subsection (e)
shall apply to taxable years beginning after Decem-
ber 31, 1997.
(5) ESTATE AND GIFT TAX CHANGES.—
(A) GIFT TAX CHANGES.—Paragraphs (2)
and (5) of section 529(c) of the Internal Reve-
nue Code of 1986, as amended by this section,
shall apply to transfers (including designations
of new beneficiaries) made after the date of the
enactment of this Act.
(B) ESTATE
TAX
CHANGES.—Paragraph
(4) of such section 529(c) shall apply to estates
of decedents dying after June 8, 1997.
SEC. 212. EDUCATION INVESTMENT ACCOUNTS.
(a) IN GENERAL.—Part VIII of subchapter F of
chapter 1 (relating to qualified State tuition programs)
is amended by adding at the end the following new section:
‘‘SEC. 530. EDUCATION INVESTMENT ACCOUNTS.
‘‘(a) GENERAL RULE.—An education investment ac-
count shall be exempt from taxation under this subtitle.
Notwithstanding the preceding sentence, the education in-
vestment account shall be subject to the taxes imposed by
section 511 (relating to imposition of tax on unrelated
business income of charitable organizations).
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‘‘(b) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) EDUCATION INVESTMENT ACCOUNT.—The
term ‘education investment account’ means a trust
created or organized in the United States exclusively
for the purpose of paying the qualified higher edu-
cation expenses of the account holder, but only if the
written governing instrument creating the trust
meets the following requirements:
‘‘(A) No contribution will be accepted—
‘‘(i) unless it is in cash,
‘‘(ii) after the date on which the ac-
count holder attains age 18, or
‘‘(iii) in excess of $5,000 for the tax-
able year.
‘‘(B) The trustee is a bank (as defined in
section 408(n)) or another person who dem-
onstrates to the satisfaction of the Secretary
that the manner in which that person will ad-
minister the trust will be consistent with the re-
quirements of this section.
‘‘(C) No part of the trust assets will be in-
vested in life insurance contracts.
‘‘(D) The assets of the trust shall not be
commingled with other property except in a
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common trust fund or common investment
fund.
‘‘(E) Any balance in the account will be
distributed 
as 
required 
under 
section
529(b)(8)(B) (as if such account were a quali-
fied tuition program).
For $50,000 limit on aggregate contributions to ac-
counts, see section 4973(e).
‘‘(2) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—
‘‘(A) IN
GENERAL.—The term ‘qualified
higher education expenses’ has the same mean-
ing given such term by section 529(e)(3).
‘‘(B) QUALIFIED
TUITION
PROGRAMS.—
Such term shall include amounts paid or in-
curred to purchase tuition credits or certifi-
cates, or to make contributions to an account,
under a qualified tuition program (as defined in
section 529(b)) for the benefit of the account
holder.
‘‘(3) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ has the
meaning given such term by section 529(e)(5).
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‘‘(4) ACCOUNT
HOLDER.—The term ‘account
holder’ means the individual for whose benefit the
education investment account is established.
‘‘(c) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Any amount paid or dis-
tributed shall be includible in gross income as re-
quired by section 529(c)(3) (determined as if such
account were a qualified tuition program).
‘‘(2) SPECIAL
RULES
FOR
APPLYING
ESTATE
AND GIFT TAXES WITH RESPECT TO ACCOUNT.—
Rules similar to the rules of paragraphs (2), (4),
and (5) of section 529(c) shall apply for purposes of
this section.
‘‘(3) ADDITIONAL TAX FOR DISTRIBUTIONS NOT
USED FOR EDUCATIONAL EXPENSES.—
‘‘(A) IN GENERAL.—The tax imposed by
section 529(f) shall apply to payments and dis-
tributions from an education investment ac-
count in the same manner as such tax applies
to qualified tuition programs (as defined in sec-
tion 529).
‘‘(B) EXCESS CONTRIBUTIONS RETURNED
BEFORE
DUE
DATE
OF
RETURN.—Subpara-
graph (A) shall not apply to the distribution to
a contributor of any contribution paid during a
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taxable year to an education investment account
to the extent that such contribution exceeds the
limitation in section 4973(e) if such distribution
(and the net income with respect to such excess
contribution) meet requirements comparable to
the requirements of section 529(f)(3).
‘‘(4) ROLLOVER
CONTRIBUTIONS—Paragraph
(1) shall not apply to any amount paid or distrib-
uted from an education investment account to the
extent that the amount received is paid into another
education investment account for the benefit of the
account holder or a member of the family (within
the meaning of section 529(e)(2)) of the account
holder not later than the 60th day after the date of
such payment or distribution. The preceding sen-
tence shall not apply to any payment or distribution
if it applied to any prior payment or distribution
during the 12-month period ending on the date of
the payment or distribution.
‘‘(5) CHANGE
IN
ACCOUNT
HOLDER.—Any
change in the account holder of an education invest-
ment account shall not be treated as a distribution
for purposes of paragraph (1) if the new account
holder is a member of the family (as so defined) of
the old account holder.
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‘‘(6) SPECIAL
RULES
FOR
DEATH
AND
DI-
VORCE.—Rules similar to the rules of paragraphs
(7) and (8) of section 220(f) shall apply.
‘‘(d) TAX TREATMENT OF ACCOUNTS.—Rules similar
to the rules of paragraphs (2) and (4) of section 408(e)
shall apply to any education investment account.
‘‘(e) COMMUNITY PROPERTY LAWS.—This section
shall be applied without regard to any community property
laws.
‘‘(f) CUSTODIAL ACCOUNTS.—For purposes of this
section, a custodial account shall be treated as a trust if
the assets of such account are held by a bank (as defined
in section 408(n)) or another person who demonstrates,
to the satisfaction of the Secretary, that the manner in
which he will administer the account will be consistent
with the requirements of this section, and if the custodial
account would, except for the fact that it is not a trust,
constitute an account described in subsection (b)(1). For
purposes of this title, in the case of a custodial account
treated as a trust by reason of the preceding sentence,
the custodian of such account shall be treated as the trust-
ee thereof.
‘‘(g) REPORTS.—The trustee of an education invest-
ment account shall make such reports regarding such ac-
count to the Secretary and to the account holder with re-
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spect to contributions, distributions, and such other mat-
ters as the Secretary may require under regulations. The
reports required by this subsection shall be filed at such
time and in such manner and furnished to such individuals
at such time and in such manner as may be required by
those regulations.’’.
(b) TAX ON PROHIBITED TRANSACTIONS.—
(1) IN
GENERAL.—Paragraph (1) of section
4975(e) (relating to prohibited transactions) is
amended by striking ‘‘or’’ at the end of subpara-
graph (D), by redesignating subparagraph (E) as
subparagraph (F), and by inserting after subpara-
graph (D) the following new subparagraph:
‘‘(E) an education investment account de-
scribed in section 530, or’’.
(2) SPECIAL RULE.—Subsection (c) of section
4975 is amended by adding at the end of subsection
(c) the following new paragraph:
‘‘(5) SPECIAL RULE FOR EDUCATION INVEST-
MENT ACCOUNTS.—An individual for whose benefit
an education investment account is established and
any contributor to such account shall be exempt
from the tax imposed by this section with respect to
any transaction concerning such account (which
would otherwise be taxable under this section) if sec-
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tion 530(d) applies with respect to such trans-
action.’’.
(c) FAILURE TO PROVIDE REPORTS ON EDUCATION
INVESTMENT ACCOUNTS.—
(1) IN
GENERAL.—Paragraph (2) of section
6693(a) (relating to failure to provide reports on in-
dividual retirement accounts or annuities) is amend-
ed by striking ‘‘and’’ at the end of subparagraph
(A), by striking the period at the end of subpara-
graph (B) and inserting ‘‘, and’’, and by adding at
the end the following new subparagraph:
‘‘(C) section 530(g) (relating to education
investment accounts).’’.
(2) CLERICAL AMENDMENT.—The section head-
ing for section 6693 is amended by striking ‘‘INDI-
VIDUAL RETIREMENT’’ and inserting ‘‘CERTAIN
TAX-FAVORED’’.
(d) TECHNICAL AMENDMENTS.—
(1) Subparagraph (F) of section 26(b)(2), as
added by the preceding section, is amended by in-
serting before the comma ‘‘and section 530(c)(3)
(relating to additional tax on certain distributions
from education investment accounts)’’.
(2) Subparagraph (C) of section 135(c)(2), as
added by the preceding section, is amended by in-
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serting ‘‘, or to an education investment account (as
defined in section 530) on behalf of an account hold-
er (as defined in such section),’’ after ‘‘(as defined
in such section)’’.
(3) The table of sections for part VIII of sub-
chapter F of chapter 1 is amended by adding at the
end the following new item:
‘‘Sec. 530. Education investment accounts.’’.
(4) The item relating to section 6693 in the
table of sections for part I of subchapter B of chap-
ter 68 is amended by striking ‘‘individual retire-
ment’’ and inserting ‘‘certain tax-favored’’.
(e) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
Subtitle C—Other Education
Initiatives
SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PRO-
VIDED EDUCATIONAL ASSISTANCE.
(a) IN GENERAL.—Subsection (d) of section 127 (re-
lating to educational assistance programs) is amended to
read as follows:
‘‘(d) TERMINATION.—This section shall not apply to
expenses paid with respect to courses of instruction begin-
ning after December 31, 1997.’’.
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(b) EFFECTIVE DATE.—The amendment made by
subsection (a) shall apply to taxable years beginning after
December 31, 1996.
SEC. 222. INCREASE IN LIMITATION ON QUALIFIED 501(C)(3)
BONDS OTHER THAN HOSPITAL BONDS.
(a) IN GENERAL.—The text of paragraph (1) of sec-
tion 145(b) is amended by striking ‘‘$150,000,000.’’ and
inserting ‘‘the limitation determined in accordance with
the following table:
In the case of
calendar year:
The limitation is:
1998 ..................................................................................
$160,000,000
1999 ..................................................................................
170,000,000
2000 ..................................................................................
180,000,000
2001 ..................................................................................
190,000,000
2002 or thereafter .............................................................
200,000,000.’’.
(b) CONFORMING AMENDMENT.—The heading for
subsection (b) of section 145 is amended by striking
‘‘$150,000,000’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall take effect on January 1, 1998.
SEC. 223. CONTRIBUTIONS OF COMPUTER TECHNOLOGY
AND EQUIPMENT FOR ELEMENTARY OR SEC-
ONDARY SCHOOL PURPOSES.
(a) CONTRIBUTIONS
OF COMPUTER TECHNOLOGY
AND EQUIPMENT
FOR ELEMENTARY
OR SECONDARY
SCHOOL PURPOSES.—Subsection (e) of section 170 is
amended by adding at the end the following new para-
graph:
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‘‘(6) SPECIAL RULE FOR CONTRIBUTIONS OF
COMPUTER TECHNOLOGY AND EQUIPMENT FOR ELE-
MENTARY OR SECONDARY SCHOOL PURPOSES.—
‘‘(A) LIMIT ON REDUCTION.—In the case
of a qualified elementary or secondary edu-
cational contribution, the reduction under para-
graph (1)(A) shall be no greater than the
amount determined under paragraph (3)(B).
‘‘(B) QUALIFIED
ELEMENTARY
OR
SEC-
ONDARY
EDUCATIONAL
CONTRIBUTION.—For
purposes of this paragraph, the term ‘qualified
elementary or secondary educational contribu-
tion’ means a charitable contribution by a cor-
poration of any computer technology or equip-
ment, but only if—
‘‘(i) the contribution is to—
‘‘(I) an educational organization
described in subsection (b)(1)(A)(ii),
or
‘‘(II) an entity described in sec-
tion 501(c)(3) and exempt from tax
under section 501(a) (other than an
entity described in subclause (I)) that
is organized primarily for purposes of
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supporting elementary and secondary
education,
‘‘(ii) the contribution is made not
later than 2 years after the date the tax-
payer acquired the property (or in the case
of property constructed by the taxpayer,
the date the construction of the property is
substantially completed),
‘‘(iii) substantially all of the use of the
property by the donee is for use within the
United States for educational purposes in
any of the grades K–12 that are related to
the purpose or function of the organization
or entity,
‘‘(iv) the property is not transferred
by the donee in exchange for money, other
property, or services, except for shipping,
installation and transfer costs,
‘‘(v) the property will fit productively
into the entity’s education plan, and
‘‘(vi) the entity’s use and disposition
of the property will be in accordance with
the provisions of clauses (iii) and (iv).
‘‘(C) CONTRIBUTION TO PRIVATE FOUNDA-
TION.—A contribution by a corporation of any
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computer technology or equipment to a private
foundation (as defined in section 509) shall be
treated as a qualified elementary or secondary
educational contribution for purposes of this
paragraph if—
‘‘(i) the contribution to the private
foundation satisfies the requirements of
clauses (ii) and (iv) of subparagraph (B),
and
‘‘(ii) within 30 days after such con-
tribution, the private foundation—
‘‘(I) contributes the property to
an entity described in clause (i) of
subparagraph (B) that satisfies the
requirements of clauses (iii) through
(vi) of subparagraph (B), and
‘‘(II) notifies the donor of such
contribution.
‘‘(D) SPECIAL RULE RELATING TO CON-
STRUCTION OF PROPERTY.—For the purposes
of this paragraph, the rules of paragraph (4)(C)
shall apply.
‘‘(E) DEFINITIONS.—For the purposes of
this paragraph—
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‘‘(i) 
COMPUTER
TECHNOLOGY
OR
EQUIPMENT.—The term ‘computer tech-
nology or equipment’ means computer soft-
ware (as defined by section 197(e)(3)(B)),
computer or peripheral equipment (as de-
fined by section 168(i)(2)(B)), and fiber
optic cable related to computer use.
‘‘(ii) CORPORATION.—The term ‘cor-
poration’ has the meaning given to such
term by paragraph (4)(D).’’.
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to taxable years beginning after
the calendar year in which this Act is enacted.
SEC. 224. TREATMENT OF CANCELLATION OF CERTAIN STU-
DENT LOANS.
(a) CERTAIN DIRECT STUDENT LOANS THE REPAY-
MENT OF WHICH IS INCOME CONTINGENT.—Paragraph
(1) of section 108(f) is amended by striking ‘‘any student
loan if’’ and all that follows and inserting ‘‘any student
loan if—
‘‘(A) such discharge was pursuant to a
provision of such loan under which all or part
of the indebtedness of the individual would be
discharged if the individual worked for a certain
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period of time in certain professions for any of
a broad class of employers, or
‘‘(B) in the case of a loan made under part
D of title IV of the Higher Education Act of
1965 which has a repayment schedule estab-
lished under section 455(e)(4) of such Act (re-
lating to income contingent repayments), such
discharge is after the maximum repayment pe-
riod under such loan (as prescribed under such
part).’’.
(b) CERTAIN LOANS BY EXEMPT ORGANIZATIONS.—
(1) IN
GENERAL.—Paragraph (2) of section
108(f) (defining student loan) is amended by strik-
ing ‘‘or’’ at the end of subparagraph (B) and by
striking subparagraph (D) and inserting the follow-
ing:
‘‘(D) any educational organization de-
scribed in section 170(b)(1)(A)(ii) if such loan
is made—
‘‘(i) pursuant to an agreement with
any entity described in subparagraph (A),
(B), or (C) under which the funds from
which the loan was made were provided to
such educational organization, or
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‘‘(ii) pursuant to a program of such
educational organization which is designed
to encourage its students to serve in occu-
pations with unmet needs or in areas with
unmet needs and under which the services
provided by the students (or former stu-
dents) are for or under the direction of a
governmental unit or an organization de-
scribed in section 501(c)(3) and exempt
from tax under section 501(a).
The term ‘student loan’ includes any loan made by
an educational organization so described or by an or-
ganization exempt from tax under section 501(a) to
refinance a loan meeting the requirements of the
preceding sentence.’’.
(2) EXCEPTION FOR DISCHARGES ON ACCOUNT
OF
SERVICES
PERFORMED
FOR
CERTAIN
LEND-
ERS.—Subsection (f) of section 108 is amended by
adding at the end the following new paragraph:
‘‘(3) EXCEPTION
FOR
DISCHARGES
ON
AC-
COUNT
OF
SERVICES
PERFORMED
FOR
CERTAIN
LENDERS.—Paragraph (1) shall not apply to the
discharge of a loan made by an organization de-
scribed in paragraph (2)(D) (or by an organization
described in paragraph (2)(E) from funds provided
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by an organization described in paragraph (2)(D)) if
the discharge is on account of services performed for
either such organization.’’.
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to discharges of indebtedness after
the date of the enactment of this Act.
TITLE III—SAVINGS AND
INVESTMENT INCENTIVES
Subtitle A—Retirement Savings
SEC. 301. ESTABLISHMENT OF AMERICAN DREAM IRA.
(a) IN GENERAL.—Subpart A of part I of subchapter
D of chapter 1 (relating to pension, profit-sharing, stock
bonus plans, etc.) is amended by inserting after section
408 the following new section:
‘‘SEC. 408A. AMERICAN DREAM IRA.
‘‘(a) GENERAL RULE.—Except as provided in this
section, an American Dream IRA shall be treated for pur-
poses of this title in the same manner as an individual
retirement plan.
‘‘(b) AMERICAN DREAM IRA.—For purposes of this
title, the term ‘American Dream IRA’ or ‘AD IRA’ means
an individual retirement plan (as defined in section
7701(a)(37)) which is designated at the time of the estab-
lishment of the plan as an American Dream IRA. Such
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designation shall be made in such manner as the Secretary
may prescribe.
‘‘(c) TREATMENT OF CONTRIBUTIONS.—
‘‘(1) NO DEDUCTION ALLOWED.—No deduction
shall be allowed under section 219 for a contribution
to an AD IRA.
‘‘(2) CONTRIBUTION LIMIT.—
‘‘(A) 
IN
GENERAL.—The 
aggregate
amount of contributions for any taxable year to
all AD IRAs maintained for the benefit of an
individual shall not exceed $2,000.
‘‘(B) INFLATION
ADJUSTMENT.—In the
case of taxable years beginning in a calendar
year after 1998, the $2,000 amount contained
in subparagraph (A) shall be increased by an
amount equal to—
‘‘(i) such dollar amount, multiplied by
‘‘(ii) the cost-of-living adjustment de-
termined under section 1(f)(3) for such
calendar year by substituting ‘calendar
year 1997’ for ‘calendar year 1992’ in sub-
paragraph (B) thereof.
If the amount as adjusted under the preceding
sentence is not a multiple of $50, such amount
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shall be rounded to the next lowest multiple of
$50.
‘‘(3) CONTRIBUTIONS PERMITTED AFTER AGE
701⁄2.—Contributions to an AD IRA may be made
even after the individual for whom the account is
maintained has attained age 701⁄2.
‘‘(4) MANDATORY
DISTRIBUTION
RULES
NOT
TO APPLY, ETC.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), subsections (a)(6) and (b)(3)
of section 408 (relating to required distribu-
tions) and section 4974 (relating to excise tax
on certain accumulations in qualified retirement
plans) shall not apply to any AD IRA.
‘‘(B) POST-DEATH DISTRIBUTIONS.—Rules
similar to the rules of section 401(a)(9) (other
than subparagraph (A) thereof) shall apply for
purposes of this section.
‘‘(5) RULES
RELATING
TO
ROLLOVER
CON-
TRIBUTIONS.—
‘‘(A) IN GENERAL.—No rollover contribu-
tion may be made to an AD IRA unless it is
a qualified rollover contribution.
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‘‘(B) 
COORDINATION
WITH
LIMIT.—A
qualified rollover contribution shall not be taken
into account for purposes of paragraph (2).
‘‘(6) TIME WHEN CONTRIBUTIONS MADE.—For
purposes of this section, the rule of section 219(f)(3)
shall apply.
‘‘(d) DISTRIBUTION RULES.—For purposes of this
title—
‘‘(1) GENERAL RULES.—
‘‘(A) EXCLUSIONS FROM GROSS INCOME.—
Any qualified distribution from an AD IRA
shall not be includible in gross income.
‘‘(B) NONQUALIFIED DISTRIBUTIONS.—In
applying section 72 to any distribution from an
AD IRA which is not a qualified distribution,
such distribution shall be treated as made from
contributions to the AD IRA to the extent that
such distribution, when added to all previous
distributions from the AD IRA, does not exceed
the aggregate amount of contributions to the
AD IRA. For purposes of the preceding sen-
tence, all AD IRAs maintained for the benefit
of an individual shall be treated as 1 account.
‘‘(C) EXCEPTION FROM PENALTY TAX.—
Section 72(t) shall not apply to—
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‘‘(i) any qualified distribution from an
AD IRA, and
‘‘(ii) any qualified first-time home-
buyer distribution (whether or not a quali-
fied distribution) from an AD IRA.
‘‘(2) QUALIFIED DISTRIBUTION.—For purposes
of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
distribution’ means any payment or distribu-
tion—
‘‘(i) made on or after the date on
which the individual attains age 591⁄2,
‘‘(ii) made to a beneficiary (or to the
estate of the individual) on or after the
death of the individual,
‘‘(iii) attributable to the individual’s
being disabled (within the meaning of sec-
tion 72(m)(7)), or
‘‘(iv) which is a qualified first-time
homebuyer distribution.
‘‘(B) DISTRIBUTIONS WITHIN 5 YEARS.—
No payment or distribution shall be treated as
a qualified distribution if—
‘‘(i) it is made within the 5-taxable
year period beginning with the 1st taxable
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year for which the individual made a con-
tribution to an AD IRA (or such individ-
ual’s spouse made a contribution to an AD
IRA) established for such individual, or
‘‘(ii) in the case of a payment or dis-
tribution properly allocable (as determined
in the manner prescribed by the Secretary)
to a qualified rollover contribution (or in-
come allocable thereto), it is made within
the 5-taxable year period beginning with
the taxable year in which the rollover con-
tribution was made.
Clause (ii) shall not apply to a qualified rollover
contribution from an AD IRA.
‘‘(3) ROLLOVERS.—
‘‘(A) IN
GENERAL.—Paragraph (1) shall
not apply to any distribution which is trans-
ferred in a qualified rollover contribution to an
AD IRA.
‘‘(B) INCOME INCLUSION FOR ROLLOVERS
FROM NON-AD IRAS.—
‘‘(i) IN GENERAL.—In the case of any
distribution to which this subparagraph
applies—
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‘‘(I) sections 72(t) and 408(d)(3)
shall not apply (but section 4980A
shall apply), and
‘‘(II) any amount required to be
included in gross income by reason of
this paragraph shall be so included
ratably over the 4-taxable year period
beginning with the taxable year in
which the distribution is made.
‘‘(ii) DISTRIBUTIONS TO WHICH SUB-
PARAGRAPH APPLIES.—This subparagraph
shall apply to a distribution before Janu-
ary 1, 1999, from an individual retirement
plan (other than an AD IRA) maintained
for the benefit of an individual to an AD
IRA maintained for the benefit of such in-
dividual if such distribution would be a
qualified rollover contribution were such
individual retirement plan an AD IRA.
‘‘(iii) CONVERSIONS.—The conversion
of an individual retirement plan (other
than an AD IRA) to an AD IRA shall be
treated for purposes of this subparagraph
as a distribution from such plan to such
AD IRA.
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this subsection, for purposes of determining the
amount of any loss on a sale or exchange of an in-
terest in a partnership, S corporation, or common
trust fund, the adjustment made under subsection
(a) shall not be taken into account in determining
the adjusted basis of such interest.
‘‘(g) DISPOSITIONS BETWEEN RELATED PERSONS.—
‘‘(1) IN GENERAL.—This section shall not apply
to any sale or other disposition of property between
related persons except to the extent that the basis
of such property in the hands of the transferee is a
substituted basis.
‘‘(2) RELATED PERSONS DEFINED.—For pur-
poses of this section, the term ‘related persons’
means—
‘‘(A) persons bearing a relationship set
forth in section 267(b), and
‘‘(B) persons treated as single employer
under subsection (b) or (c) of section 414.
‘‘(h) TRANSFERS TO INCREASE INDEXING ADJUST-
MENT.—If any person transfers cash, debt, or any other
property to another person and the principal purpose of
such transfer is to secure or increase an adjustment under
subsection (a), the Secretary may disallow part or all of
such adjustment or increase.
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‘‘(i) SPECIAL RULES.—For purposes of this section—
‘‘(1) TREATMENT OF IMPROVEMENTS, ETC.—If
there is an addition to the adjusted basis of any tan-
gible property or of any stock in a corporation dur-
ing the taxable year by reason of an improvement to
such property or a contribution to capital of such
corporation—
‘‘(A) such addition shall never be taken
into account under subsection (c)(1)(A) if the
aggregate amount thereof during the taxable
year with respect to such property or stock is
less than $1,000, and
‘‘(B) such addition shall be treated as a
separate asset acquired at the close of such tax-
able year if the aggregate amount thereof dur-
ing the taxable year with respect to such prop-
erty or stock is $1,000 or more.
A rule similar to the rule of the preceding sentence
shall apply to any other portion of an asset to the
extent that separate treatment of such portion is ap-
propriate to carry out the purposes of this section.
‘‘(2) ASSETS WHICH ARE NOT INDEXED ASSETS
THROUGHOUT HOLDING PERIOD.—The applicable in-
flation adjustment shall be appropriately reduced for
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est in such residence, but this section shall
apply only to one such interest in such resi-
dence which is sold or exchanged separately.
‘‘(B) EXCEPTION FOR SALES TO RELATED
PARTIES.—Subparagraph (A) shall not apply to
any sale to, or exchange with, any person who
bears a relationship to the taxpayer which is de-
scribed in section 267(b) or 707(b).
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by
an individual if the treatment provided by section
877(a)(1) applies to such individual.
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—
This section shall not apply to any sale or exchange with
respect to which the taxpayer elects not to have this sec-
tion apply.
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER
SECTION 1034.—For purposes of this section, in the case
of property the acquisition of which by the taxpayer re-
sulted under section 1034 (as in effect on the day before
the date of the enactment of this sentence) in the non-
recognition of any part of the gain realized on the sale
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such
property as the taxpayer’s principal residence, there shall