SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Taxpayer Relief Act of 1997’’.
(b) AMENDMENT OF 1986 CODE.—Except as other-
wise expressly provided, whenever in this Act an amend-
ment or repeal is expressed in terms of an amendment
to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provi-
sion of the Internal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—The table of contents for
this Act is as follows:
Sec. 1. Short title; amendment of 1986 Code.
TITLE I—CHILD TAX CREDIT; TAX INCENTIVES FOR DEPENDENT
CARE AND HEALTH CARE FOR CHILDREN
Sec. 101. Child tax credit.
Sec. 102. Inflation adjustment of limits and other modifications of dependent
care credit.
TITLE II—EDUCATION INCENTIVES
Subtitle A—Tax Benefits Relating to Education Expenses
Sec. 201. Hope credit for higher education tuition and related expenses.
Sec. 202. Deduction for qualified higher education expenses.
Sec. 203. Penalty-free withdrawals from individual retirement plans for higher
education expenses.
Sec. 204. Expenses for education which supplements elementary and secondary
education.
Subtitle B—Expanded Education Investment Savings Opportunities
Sec. 211. Eligible educational institutions permitted to maintain qualified tui-
tion programs; other modifications of qualified State tuition
programs.
Sec. 212. Education investment accounts.
Subtitle C—Other Education Initiatives
Sec. 221. Extension of exclusion for employer-provided educational assistance.
Sec. 222. Increase in limitation on qualified 501(c)(3) bonds other than hos-
pital bonds.
Sec. 223. Contributions of computer technology and equipment for elementary
or secondary school purposes.
Sec. 224. Treatment of cancellation of certain student loans.
TITLE III—SAVINGS AND INVESTMENT INCENTIVES
Subtitle A—Retirement Savings
Sec. 301. Establishment of American Dream IRA.
Subtitle B—Capital Gains
PART I—INDIVIDUAL CAPITAL GAINS
Sec. 311. 20 percent maximum capital gains rate for individuals.
Sec. 312. Indexing of certain assets acquired after December 31, 2000, for pur-
poses of determining gain.
Sec. 313. Exemption from tax for gain on sale of principal residence.
PART II—CORPORATE CAPITAL GAINS
Sec. 321. Reduction of alternative capital gain tax for corporations.
TITLE IV—ALTERNATIVE MINIMUM TAX REFORM
Sec. 401. Adjustment of exemption amounts for taxpayers other than corpora-
tions.
Sec. 402. Exemption from alternative minimum tax for small corporations.
Sec. 403. Repeal of adjustment for depreciation.
Sec. 404. Minimum tax not to apply to farmers’ installment sales.
TITLE V—ESTATE, GIFT, AND GENERATION-SKIPPING TAX
PROVISIONS
Subtitle A—Estate and Gift Tax Provisions
Sec. 501. Cost-of-living adjustments relating to estate and gift tax provisions.
Sec. 502. 20-year installment payment where estate consists largely of interest
in closely held business.
Sec. 503. No interest on certain portion of estate tax extended under section
6166, reduced interest on remaining portion, and no deduction
for such reduced interest.
Sec. 504. Extension of treatment of certain rents under section 2032A to lineal
descendants.
Sec. 505. Clarification of judicial review of eligibility for extension of time for
payment of estate tax.
Sec. 506. Gifts may not be revalued for estate tax purposes after expiration of
statute of limitations.
Sec. 507. Termination of throwback rules for domestic trusts.
Sec. 508. Unified credit of decedent increased by unified credit of spouse used
on split gift included in decedent’s gross estate.
Sec. 509. Reformation of defective bequests, etc., to spouse of decedent.
Subtitle B—Generation-Skipping Tax Provisions
Sec. 511. Severing of trusts holding property having an inclusion ratio of great-
er than zero.
Sec. 512. Expansion of exception from generation-skipping transfer tax for
transfers to individuals with deceased parents.
TITLE VI—EXTENSION AND MODIFICATION OF CERTAIN
EXPIRING PROVISIONS
Sec. 601. Research tax credit.
Sec. 602. Contributions of stock to private foundations.
Sec. 603. Work opportunity tax credit.
Sec. 604. Orphan drug tax credit.
Sec. 605. Budgetary treatment of expiring preferential excise tax rates which
are dedicated to trust funds.
TITLE VII—INCENTIVES FOR REVITALIZATION OF THE DISTRICT
OF COLUMBIA
Sec. 701. Tax incentives for revitalization of the District of Columbia.
Sec. 702. Incentives conditioned on other DC reform.
TITLE VIII—WELFARE-TO-WORK INCENTIVES
Sec. 801. Incentives for employing long-term family assistance recipients.
TITLE IX—MISCELLANEOUS PROVISIONS
Subtitle A—Provisions Relating to Excise Taxes
Sec. 901. Repeal of tax on diesel fuel used in recreational boats.
Sec. 902. Continued application of tax on imported recycled Halon-1211.
Sec. 903. Uniform rate of tax on vaccines.
Sec. 904. Operators of multiple gasoline retail outlets treated as wholesale dis-
tributor for refund purposes.
Sec. 905. Exemption of electric and other clean-fuel motor vehicles from luxury
automobile classification.
Subtitle B—Provisions Relating to Pensions and Fringe Benefits
Sec. 911. Section 401(k) plans for certain irrigation and drainage entities.
Sec. 912. Extension of moratorium on application of certain nondiscrimination
rules to State and local governments.
Sec. 913. Treatment of certain disability benefits received by former police offi-
cers or firefighters.
Sec. 914. Portability of permissive service credit under governmental pension
plans.
Sec. 915. Gratuitous transfers for the benefit of employees.
Sec. 916. Treatment of certain transportation on non-commercially operated
aircraft as a fringe benefit excludable from gross income.
Sec. 917. Minimum pension accrued benefit distributable without consent in-
creased to $5,000.
Sec. 918. Clarification of certain rules relating to employee stock ownership
plans of S corporations.
Subtitle C—Revisions Relating to Disasters
Sec. 921. Authority to postpone certain tax-related deadlines by reason of presi-
dentially declared disaster.
Sec. 922. Use of certain appraisals to establish amount of disaster loss.
Sec. 923. Treatment of livestock sold on account of weather-related conditions.
Sec. 924. Mortgage financing for residences located in disaster areas.
Subtitle D—Provisions Relating to Employment Taxes
Sec. 931. Clarification of employment tax status of individuals distributing bak-
ery products.
Sec. 932. Clarification of standard to be used in determining employment tax
status of retail securities brokers.
Sec. 933. Clarification of exemption from self-employment tax for certain termi-
nation payments received by former insurance salesmen.
Sec. 934. Standards for determining whether individuals are not employees.
Subtitle E—Provisions Relating to Small Businesses
Sec. 941. Waiver of penalty through 1998 on small businesses failing to make
electronic fund transfers of taxes.
Sec. 942. Clarification of treatment of home office use for administrative and
management activities.
Subtitle F—Other Provisions
Sec. 951. Use of estimates of shrinkage for inventory accounting.
Sec. 952. Assignment of workmen’s compensation liability eligible for exclusion
relating to personal injury liability assignments.
Sec. 953. Tax-exempt status for certain State worker’s compensation act com-
panies.
Sec. 954. Election to continue exception from treatment of publicly traded part-
nerships as corporations.
Sec. 955. Exclusion from unrelated business taxable income for certain sponsor-
ship payments.
Sec. 956. Associations of holders of timeshare interests to be taxed like other
homeowners associations.
Sec. 957. Additional advance refunding of certain Virgin Island bonds.
Sec. 958. Nonrecognition of gain on sale of stock to certain farmers’ coopera-
tives.
Sec. 959. Exception from reporting of real estate transactions for sales and ex-
changes of certain principal residences.
Sec. 960. Increased deductibility of business meal expenses for individuals sub-
ject to Federal hours of service.
Sec. 961. Qualified lessee construction allowances for short-term leases.
Sec. 962. Tax treatment of consolidations of life insurance departments of mu-
tual savings banks.
Sec. 963. Offset of past-due, legally enforceable State tax obligations against
overpayments.
Sec. 964. Exemption of the incremental cost of a clean fuel vehicle from the
limits on depreciation for vehicles.
Sec. 965. Tax benefits for law enforcement officers killed in the line of duty.
Sec. 966. Temporary suspension of taxable income limit on percentage deple-
tion for marginal production.
Subtitle G—Extension of Duty-Free Treatment Under Generalized System of
Preferences; Tariff Treatment of Certain Equipment and Repair of Vessels
Sec. 971. Generalized system of preferences.
Sec. 972. Equipment and repair of vessels.
Subtitle H—United States-Caribbean Basin Trade Partnership Act
Sec. 981. Short title.
Sec. 982. Findings and policy.
Sec. 983. Definitions.
Sec. 984. Temporary provisions to provide NAFTA parity to partnership coun-
tries.
Sec. 985. Effect of NAFTA on sugar imports from beneficiary countries.
Sec. 986. Duty-free treatment for certain beverages made with Caribbean rum.
Sec. 987. Meetings of trade ministers and USTR.
Sec. 988. Report on economic development and market oriented reforms in the
Caribbean.
TITLE X—REVENUES
Subtitle A—Financial Products
Sec. 1001. Constructive sales treatment for appreciated financial positions.
Sec. 1002. Limitation on exception for investment companies under section
351.
Sec. 1003. Modification of rules for allocating interest expense to tax-exempt
interest.
Sec. 1004. Gains and losses from certain terminations with respect to property.
Sec. 1005. Determination of original issue discount where pooled debt obliga-
tions subject to acceleration.
Sec. 1006. Denial of interest deductions on certain debt instruments.
Subtitle B—Corporate Organizations and Reorganizations
Sec. 1011. Tax treatment of certain extraordinary dividends.
Sec. 1012. Application of section 355 to distributions followed by acquisitions
and to intragroup transactions.
Sec. 1013. Tax treatment of redemptions involving related corporations.
Sec. 1014. Modification of holding period applicable to dividends received de-
duction.
Subtitle C—Other Corporate Provisions
Sec. 1021. Registration and other provisions relating to confidential corporate
tax shelters.
Sec. 1022. Certain preferred stock treated as boot.
Subtitle D—Administrative Provisions
Sec. 1031. Reporting of certain payments made to attorneys.
Sec. 1032. Decrease of threshold for reporting payments to corporations per-
forming services for Federal agencies.
Sec. 1033. Disclosure of return information for administration of certain veter-
ans programs.
Sec. 1034. Continuous levy on certain payments.
Sec. 1035. Modification of levy exemption.
Sec. 1036. Confidentiality and disclosure of returns and return information.
Sec. 1037. Returns of beneficiaries of estates and trusts required to file returns
consistent with estate or trust return or to notify secretary of
inconsistency.
Subtitle E—Excise Tax Provisions
Sec. 1041. Extension and modification of Airport and Airway Trust Fund
taxes.
Sec. 1042. Kerosene taxed as diesel fuel.
Sec. 1043. Restoration of Leaking Underground Storage Tank Trust Fund
taxes.
Sec. 1044. Application of communications tax to long-distance prepaid tele-
phone cards.
Subtitle F—Provisions Relating to Tax-Exempt Entities
Sec. 1051. Expansion of look-thru rule for interest, annuities, royalties, and
rents derived by subsidiaries of tax-exempt organizations.
Sec. 1052. Limitation on increase in basis of property resulting from sale by
tax-exempt entity to a related person.
Sec. 1053. Modifications to exception from reporting, etc. of lobbying activities.
Sec. 1054. Termination of certain exceptions from rules relating to exempt or-
ganizations which provide commercial-type insurance.
Subtitle G—Other Revenue Provisions
Sec. 1061. Termination of suspense accounts for family corporations required
to use accrual method of accounting.
Sec. 1062. Modification of taxable years to which net operating losses may be
carried.
Sec. 1063. Expansion of denial of deduction for certain amounts paid in con-
nection with insurance.
Sec. 1064. Allocation of basis among properties distributed by partnership.
Sec. 1065. Repeal of requirement that inventory be substantially appreciated.
Sec. 1066. Extension of time for taxing precontribution gain.
Sec. 1067. Restrictions on availability of earned income credit for taxpayers
who improperly claimed credit in prior year.
Sec. 1068. Limitation on property for which income forecast method may be
used.
Sec. 1069. Repeal of special rule for rental use of vacation homes, etc., for less
than 15 days.
Sec. 1070. Expansion of requirement that involuntarily converted property be
replaced with property acquired from an unrelated person.
Sec. 1071. Treatment of exception from installment sales rules for sales of
property by a manufacturer to a dealer.
TITLE XI—SIMPLIFICATION AND OTHER FOREIGN-RELATED
PROVISIONS
Subtitle A—General Provisions
Sec. 1101. Treatment of computer software as FSC export property.
Sec. 1102. Adjustment of dollar limitation on section 911 exclusion.
Sec. 1103. Certain individuals exempt from foreign tax credit limitation.
Sec. 1104. Exchange rate used in translating foreign taxes.
Sec. 1105. Election to use simplified section 904 limitation for alternative mini-
mum tax.
Sec. 1106. Treatment of personal transactions by individuals under foreign cur-
rency rules.
Sec. 1107. All noncontrolled section 902 corporations which are not passive for-
eign investment companies in one foreign tax limitation basket.
Subtitle B—Treatment of Controlled Foreign Corporations
Sec. 1111. Gain on certain stock sales by controlled foreign corporations treat-
ed as dividends.
Sec. 1112. Miscellaneous modifications to subpart F.
Sec. 1113. Indirect foreign tax credit allowed for certain lower tier companies.
Subtitle C—Treatment of Passive Foreign Investment Companies
Sec. 1121. United States shareholders of controlled foreign corporations not
subject to PFIC inclusion.
Sec. 1122. Election of mark to market for marketable stock in passive foreign
investment company.
Sec. 1123. Effective date.
Subtitle D—Repeal of Excise Tax on Transfers to Foreign Entities
Sec. 1131. Repeal of excise tax on transfers to foreign entities; recognition of
gain on certain transfers to foreign trusts and estates.
Subtitle E—Information Reporting
Sec. 1141. Clarification of application of return requirement to foreign partner-
ships.
Sec. 1142. Controlled foreign partnerships subject to information reporting
comparable to information reporting for controlled foreign cor-
porations.
Sec. 1143. Modifications relating to returns required to be filed by reason of
changes in ownership interests in foreign partnership.
Sec. 1144. Transfers of property to foreign partnerships subject to information
reporting comparable to information reporting for such trans-
fers to foreign corporations.
Sec. 1145. Extension of statute of limitation for foreign transfers.
Sec. 1146. Increase in filing thresholds for returns as to organization of foreign
corporations and acquisitions of stock in such corporations.
Subtitle F—Determination of Foreign or Domestic Status of Partnerships
Sec. 1151. Determination of foreign or domestic status of partnerships.
Subtitle G—Other Simplification Provisions
Sec. 1161. Transition rule for certain trusts.
Sec. 1162. Repeal of stock and securities safe harbor requirement that principal
office be outside the United States.
Subtitle H—Other Provisions
Sec. 1171. Definition of foreign personal holding company income.
Sec. 1172. Personal property used predominantly in the United States treated
as not property of a like kind with respect to property used
predominantly outside the United States.
Sec. 1173. Holding period requirement for certain foreign taxes.
Sec. 1174. Penalties for failure to disclose position that certain international
transportation income is not includible in gross income.
Sec. 1175. Denial of treaty benefits for certain payments through hybrid enti-
ties.
Sec. 1176. Interest on underpayments not reduced by foreign tax credit
carrybacks.
Sec. 1177. Clarification of period of limitations on claim for credit or refund
attributable to foreign tax credit carryforward.
Sec. 1178. Miscellaneous clarifications.
TITLE XII—SIMPLIFICATION PROVISIONS RELATING TO
INDIVIDUALS AND BUSINESSES
Subtitle A—Provisions Relating to Individuals
Sec. 1201. Basic standard deduction and minimum tax exemption amount for
certain dependents.
Sec. 1202. Increase in amount of tax exempt from estimated tax requirements.
Sec. 1203. Optional methods for computing SECA tax combined.
Sec. 1204. Treatment of certain reimbursed expenses of rural mail carriers.
Sec. 1205. Treatment of traveling expenses of certain Federal employees en-
gaged in criminal investigations.
Sec. 1206. Payment of tax by commercially acceptable means.
Subtitle B—Provisions Relating to Businesses Generally
Sec. 1211. Modifications to look-back method for long-term contracts.
Sec. 1212. Minimum tax treatment of certain property and casualty insurance
companies.
Subtitle C—Simplification Relating to Electing Large Partnerships
PART I—GENERAL PROVISIONS
Sec. 1221. Simplified flow-through for electing large partnerships.
Sec. 1222. Simplified audit procedures for electing large partnerships.
Sec. 1223. Due date for furnishing information to partners of electing large
partnerships.
Sec. 1224. Returns may be required on magnetic media.
Sec. 1225. Treatment of partnership items of individual retirement accounts.
Sec. 1226. Effective date.
PART II—PROVISIONS RELATED TO TEFRA PARTNERSHIP PROCEEDINGS
Sec. 1231. Treatment of partnership items in deficiency proceedings.
Sec. 1232. Partnership return to be determinative of audit procedures to be fol-
lowed.
Sec. 1233. Provisions relating to statute of limitations.
Sec. 1234. Expansion of small partnership exception.
Sec. 1235. Exclusion of partial settlements from 1-year limitation on assess-
ment.
Sec. 1236. Extension of time for filing a request for administrative adjustment.
Sec. 1237. Availability of innocent spouse relief in context of partnership pro-
ceedings.
Sec. 1238. Determination of penalties at partnership level.
Sec. 1239. Provisions relating to court jurisdiction, etc.
Sec. 1240. Treatment of premature petitions filed by notice partners or 5-per-
cent groups.
Sec. 1241. Bonds in case of appeals from certain proceeding.
Sec. 1242. Suspension of interest where delay in computational adjustment re-
sulting from certain settlements.
Sec. 1243. Special rules for administrative adjustment requests with respect to
bad debts or worthless securities.
PART III—PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE
YEAR WITH RESPECT TO DECEASED PARTNER, ETC.
Sec. 1246. Closing of partnership taxable year with respect to deceased partner,
etc.
Subtitle D—Provisions Relating to Real Estate Investment Trusts
Sec. 1251. Clarification of limitation on maximum number of shareholders.
Sec. 1252. De minimis rule for tenant services income.
Sec. 1253. Attribution rules applicable to tenant ownership.
Sec. 1254. Credit for tax paid by REIT on retained capital gains.
Sec. 1255. Repeal of 30-percent gross income requirement.
Sec. 1256. Modification of earnings and profits rules for determining whether
REIT has earnings and profits from non-REIT year.
Sec. 1257. Treatment of foreclosure property.
Sec. 1258. Payments under hedging instruments.
Sec. 1259. Excess noncash income.
Sec. 1260. Prohibited transaction safe harbor.
Sec. 1261. Shared appreciation mortgages.
Sec. 1262. Wholly owned subsidiaries.
Sec. 1263. Effective date.
Subtitle E—Provisions Relating to Regulated Investment Companies
Sec. 1271. Repeal of 30-percent gross income limitation.
Subtitle F—Taxpayer Protections
Sec. 1281. Reasonable cause exception for certain penalties.
Sec. 1282. Clarification of period for filing claims for refunds.
Sec. 1283. Repeal of authority to disclose whether prospective juror has been
audited.
Sec. 1284. Clarification of statute of limitations.
Sec. 1285. Awarding of administrative costs.
Sec. 1286. Penalty for unauthorized inspection of tax returns or tax return in-
formation.
Sec. 1287. Civil damages for unauthorized inspection of returns and return in-
formation; notification of unlawful inspection or disclosure.
TITLE XIII—SIMPLIFICATION PROVISIONS RELATING TO ESTATE
AND GIFT TAXES
Sec. 1301. Gifts to charities exempt from gift tax filing requirements.
Sec. 1302. Clarification of waiver of certain rights of recovery.
Sec. 1303. Transitional rule under section 2056A.
Sec. 1304. Clarifications relating to disclaimers.
Sec. 1305. Increase of amount of lapse of general power of appointment not
treated as release for purposes of estate and gift tax (5 or 5
power).
Sec. 1306. Treatment for estate tax purposes of short-term obligations held by
nonresident aliens.
Sec. 1307. Certain revocable trusts treated as part of estate.
Sec. 1308. Distributions during first 65 days of taxable year of estate.
Sec. 1309. Separate share rules available to estates.
Sec. 1310. Executor of estate and beneficiaries treated as related persons for
disallowance of losses, etc.
Sec. 1311. Limitation on taxable year of estates.
Sec. 1312. Treatment of funeral trusts.
Sec. 1313. Adjustments for gifts within 3 years of decedent’s death.
Sec. 1314. Clarification of treatment of survivor annuities under qualified ter-
minable interest rules.
Sec. 1315. Treatment under qualified domestic trust rules of forms of owner-
ship which are not trusts.
Sec. 1316. Opportunity to correct certain failures under section 2032A.
Sec. 1317. Authority to waive requirement of United States trustee for quali-
fied domestic trusts.
TITLE XIV—SIMPLIFICATION PROVISIONS RELATING TO EXCISE
TAXES, TAX-EXEMPT BONDS, AND OTHER MATTERS
Subtitle A—Excise Tax Simplification
PART I—EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS
Sec. 1401. Increase in de minimis limit for after-market alterations for heavy
trucks and luxury cars.
Sec. 1402. Credit for tire tax in lieu of exclusion of value of tires in computing
price.
PART II—PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER
Sec. 1411. Credit or refund for imported bottled distilled spirits returned to
distilled spirits plant.
Sec. 1412. Authority to cancel or credit export bonds without submission of
records.
Sec. 1413. Repeal of required maintenance of records on premises of distilled
spirits plant.
Sec. 1414. Fermented material from any brewery may be received at a distilled
spirits plant.
Sec. 1415. Repeal of requirement for wholesale dealers in liquors to post sign.
Sec. 1416. Refund of tax to wine returned to bond not limited to
unmerchantable wine.
Sec. 1417. Use of additional ameliorating material in certain wines.
Sec. 1418. Domestically produced beer may be withdrawn free of tax for use
of foreign embassies, legations, etc.
Sec. 1419. Beer may be withdrawn free of tax for destruction.
Sec. 1420. Authority to allow drawback on exported beer without submission of
records.
Sec. 1421. Transfer to brewery of beer imported in bulk without payment of
tax.
Sec. 1422. Transfer to bonded wine cellars of wine imported in bulk without
payment of tax.
PART III—OTHER EXCISE TAX PROVISIONS
Sec. 1431. Authority to grant exemptions from registration requirements.
Sec. 1432. Repeal of expired provisions.
Subtitle B—Tax-Exempt Bond Provisions
Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under 1-year ex-
ception from rebate.
Sec. 1442. Exception from rebate for earnings on bona fide debt service fund
under construction bond rules.
Sec. 1443. Repeal of debt service-based limitation on investment in certain non-
purpose investments.
Sec. 1444. Repeal of expired provisions.
Sec. 1445. Effective date.
Subtitle C—Tax Court Procedures
Sec. 1451. Overpayment determinations of Tax Court.
Sec. 1452. Redetermination of interest pursuant to motion.
Sec. 1453. Application of net worth requirement for awards of litigation costs.
Sec. 1454. Proceedings for determination of employment status.
Subtitle D—Other Provisions
Sec. 1461. Extension of due date of first quarter estimated tax payment by pri-
vate foundations.
Sec. 1462. Clarification of authority to withhold Puerto Rico income taxes from
salaries of Federal employees.
Sec. 1463. Certain notices disregarded under provision increasing interest rate
on large corporate underpayments.
TITLE XV—TECHNICAL AMENDMENTS RELATED TO SMALL BUSI-
NESS JOB PROTECTION ACT OF 1996 AND OTHER LEGISLATION
Sec. 1501. Amendments related to Small Business Job Protection Act of 1996.
Sec. 1502. Amendments related to Health Insurance Portability and Account-
ability Act of 1996.
Sec. 1503. Amendments related to Taxpayer Bill of Rights 2.
Sec. 1504. Miscellaneous provisions.
TITLE 
I—CHILD 
TAX 
CREDIT;
MODIFICATION OF DEPEND-
ENT CARE CREDIT
SEC. 101. CHILD TAX CREDIT.
(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 23 the fol-
lowing new section:
‘‘SEC. 24. CHILD TAX CREDIT.
‘‘(a) ALLOWANCE OF CREDIT.—There shall be al-
lowed as a credit against the tax imposed by this chapter
for the taxable year an amount equal to $500 multiplied
by the number of qualifying children of the taxpayer.
‘‘(b) LIMITATIONS.—
‘‘(1) LIMITATION BASED ON ADJUSTED GROSS
INCOME.—For limitation based on adjusted gross in-
come, see section 26(c).
‘‘(2) REDUCTION FOR DEPENDENT CARE CRED-
IT.—In the case of taxable years beginning after De-
cember 31, 1999—
‘‘(A) IN GENERAL.—The credit allowed by
subsection (a) for the taxable year (determined
after paragraph (1) but before paragraph (3))
shall be reduced by the amount equal to 50 per-
cent of the credit allowed under section 21 for
such taxable year (determined after section
26(c)).
‘‘(B) EXCEPTION
BASED
ON
ADJUSTED
GROSS INCOME.—
‘‘(i) IN GENERAL.—Subparagraph (A)
shall not apply to a taxpayer whose modi-
fied adjusted gross income for the taxable
year does not exceed the threshold amount.
‘‘(ii) PHASEIN OF REDUCTION.—If the
modified adjusted gross income of the tax-
payer for the taxable year exceeds the
threshold amount by less than $5,000, the
amount of the reduction under subpara-
graph (A) shall be an amount which bears
the same ratio to the amount of such re-
duction (determined without regard to this
clause) as the excess of the taxpayer’s
modified adjusted gross income over the
threshold amount bears to $5,000. In the
case of a joint return, the preceding sen-
tence shall be applied by substituting
‘$10,000’ for ‘$5,000’ each place it ap-
pears.
‘‘(iii) 
THRESHOLD
AMOUNT.—For
purposes of this subparagraph, the term
‘threshold amount’ means—
‘‘(I) $60,000 in the case of a
joint return,
‘‘(II) $33,000 in the case of an
individual who is not married, and
‘‘(III) $25,000 in the case of a
married individual filing a separate
return.
For purposes of this clause, marital status
shall be determined under section 7703.
‘‘(iv) MODIFIED ADJUSTED GROSS IN-
COME.—For purposes of this subpara-
graph, the term ‘modified adjusted gross
income’ has the meaning given such term
by section 26(c).’’.
‘‘(C) NO
REDUCTION
FOR
DEPENDENT
CARE
OF
INDIVIDUALS
INCAPABLE
OF
SELF-
CARE.—Subparagraph (A) shall not apply to so
much of the credit which would have been al-
lowed under section 21 (determined without re-
gard to section 26(c)) if only qualifying individ-
uals described in subparagraph (B) or (C) of
section 21(b)(1) were taken into account.
‘‘(3) LIMITATION
BASED
ON
AMOUNT
OF
TAX.—The credit allowed by subsection (a) (deter-
mined after paragraphs (1) and (2)) shall not exceed
the excess (if any) of—
‘‘(A) the taxpayer’s regular tax liability for
the taxable year reduced by the credits allow-
able against such tax under this subpart (other
than this section), over
‘‘(B) the sum of—
‘‘(i) the taxpayer’s tentative minimum
tax for such taxable year (determined with-
out regard to the alternative minimum tax
foreign tax credit), plus
‘‘(ii) the credit allowed for the taxable
year under section 32.
‘‘(c) QUALIFYING CHILD.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The term ‘qualifying child’
means any individual if—
‘‘(A) the taxpayer is allowed a deduction
under section 151 with respect to such individ-
ual for the taxable year,
‘‘(B) such individual has not attained the
age of 17 as of the close of the calendar year
in which the taxable year of the taxpayer be-
gins, and
‘‘(C) such individual bears a relationship to
the taxpayer described in section 32(c)(3)(B).
‘‘(2) EXCEPTION FOR CERTAIN NONCITIZENS.—
The term ‘qualifying child’ shall not include any in-
dividual who would not be a dependent if the first
sentence of section 152(b)(3) were applied without
regard to all that follows ‘resident of the United
States’.
‘‘(d) TAXABLE YEAR MUST BE FULL TAXABLE
YEAR.—Except in the case of a taxable year closed by rea-
son of the death of the taxpayer, no credit shall be allow-
able under this section in the case of a taxable year cover-
ing a period of less than 12 months.
‘‘(e) PHASEIN OF CREDIT.—In the case of taxable
years beginning in 1998, subsection (a) shall be applied
by substituting ‘$400’ for ‘$500’.’’.
(b) HIGH RISK POOLS PERMITTED TO COVER DE-
PENDENTS
OF HIGH RISK INDIVIDUALS.—Paragraph
(26) of section 501(c) is amended by adding at the end
the following flush sentence:
‘‘A qualifying child (as defined in section 24(c)) of
an individual described in subparagraph (B) (with-
out regard to this sentence) shall be treated as de-
scribed in subparagraph (B).’’.
(c) CONFORMING AMENDMENTS.—
(1) Subsection (a) of section 26 is amended by
inserting ‘‘(other than the credit allowed by section
24)’’ after ‘‘credits allowed by this subpart’’.
(2) The table of sections for subpart A of part
IV of subchapter A of chapter 1 is amended by in-
serting after the item relating to section 23 the fol-
lowing new item:
‘‘Sec. 24. Child tax credit.’’.
(d) EFFECTIVE DATE.—The amendments made by
this section shall apply to taxable years beginning after
December 31, 1997.
(e) NOTICE
OF CREDIT.—The Secretary of the
Treasury or his delegate shall include in any booklet of
instructions for Form 1040, 1040A, or 1040EZ prepared
by such Secretary for filing individual income tax returns
for taxable years beginning in 1998 a notice which states
only the following: ‘‘The Taxpayer Relief Act of 1997
which was recently passed by the Congress has fulfilled
its promise to provide tax relief to American families. The
Act’s child tax credit allows American families to reduce
their taxes by $400 per child for 1998 and $500 per child
after 1998. You may wish to check with your employer
about changing your tax withholding.’’.
(f) ADJUSTMENTS TO WITHHOLDING.—
(1) IN GENERAL.—The Secretary of the Treas-
ury or his delegate shall modify the tables and pro-
cedures under section 3402 of the Internal Revenue
Code of 1986 such that every employer making pay-
ment of wages during calendar year 1998 to any
specified employee—
(A) shall reduce the amount deducted and
withheld as tax under chapter 24 of such Code
for any payroll or other period during such year
to reflect such period’s proportionate share of
the child care credit amount, and
(B) shall, before implementing such reduc-
tion, provide reasonable notice to such employ-
ees that such a reduction will apply to each
specified employee who does not provide the
employer with the notice referred to in para-
graph (5).
(2) SPECIFIED
EMPLOYEE.—For purposes of
this subsection, the term ‘‘specified employee’’
means any employee—
(A) whose wages from the employer on an
annualized basis are reasonably expected to be
at least $30,000 but not more than $100,000,
and
(B) who claims more than the base num-
ber of withholding exemptions on the withhold-
ing exemption certificate furnished to the em-
ployer.
For purposes of the preceding sentence, the term
‘‘base number’’ means 1 withholding exemption if
the certificate reflects withholding for an unmarried
individual and 2 withholding exemptions if the cer-
tificate reflects withholding for a married individual.
(3) CHILD CARE CREDIT AMOUNT.—For pur-
poses of this subsection, the term ‘‘child care credit
amount’’ means the lesser of $800 or the amount
equal to the product of—
(A) $400, and
(B) the number of withholding exemptions
claimed by the employee on the withholding ex-
emption certificate furnished to the employer to
the extent such number exceeds the base num-
ber (as defined in paragraph (2)) of such ex-
emptions.
(4) PROPORTIONATE SHARE.—For purposes of
this subsection, except as provided by the Secretary
of the Treasury or his delegate, a period’s propor-
tionate share of the child care credit amount is the
amount which bears the same ratio to the child care
credit amount as the number of days in such period
bears to 365.
(5) NOTICE TO HAVE SUBSECTION NOT APPLY
TO EMPLOYEE.—This subsection shall not apply to
any employee who provides written notice (in such
form as the Secretary shall prescribe) to the em-
ployer of such employee’s decision not to have this
subsection apply to such employee.
(6) DEFINITIONS.—Terms used in this sub-
section which are also used in chapter 24 of the In-
ternal Revenue Code of 1986 shall have the respec-
tive meanings given such terms by such chapter.
SEC. 102. INFLATION ADJUSTMENT OF LIMITS AND OTHER
MODIFICATIONS OF DEPENDENT CARE CRED-
IT.
(a) INFLATION ADJUSTMENT.—
(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
‘‘(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
(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.
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.
‘‘(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)
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.
‘‘(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
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
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.—
‘‘(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-
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
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
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
(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-
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—
‘‘(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-
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:
‘‘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.
‘‘(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—
‘‘(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—
‘‘(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-
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
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.
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)—
‘‘(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.
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)
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-
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:
‘‘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
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-
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.
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).
‘‘(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
‘‘(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
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.’’.
(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
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-
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),’’.
(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—
‘‘(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.
‘‘(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-
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-