I
104TH CONGRESS
2D SESSION
H. R. 3842
To amend the Internal Revenue Code of 1986 to provide an exemption
from income taxation for qualified State tuition programs.
IN THE HOUSE OF REPRESENTATIVES
JULY 17, 1996
Mrs. THURMAN (for herself, Mr. BILIRAKIS, Ms. BROWN of Florida, Mr.
CANADY of Florida, Mr. DEUTSCH, Mr. DIAZ-BALART, Mr. GIBBONS, Mr.
FOLEY, Mr. HASTINGS of Florida, Mrs. MEEK of Florida, Mr. MILLER
of Florida, Mr. PETERSON of Florida, Mr. SCARBOROUGH, Mr. SHAW,
Mr. MICA, Mr. MCCOLLUM, Mr. STEARNS, Ms. ROS-LEHTINEN, Mr.
BACHUS, Mr. BEVILL, Mr. BONIOR, Mr. BORSKI, Mr. BROWDER, Mr.
CALLAHAN, Mr. CLEMENT, Miss COLLINS of Michigan, Mr. COMBEST,
Mr. CONYERS, Mr. CRAMER, Mr. DOOLEY of California, Mr. DOYLE, Mr.
ENGLISH of Pennsylvania, Mr. EVERETT, Mr. FAZIO of California, Mr.
FRANK of Massachusetts, Mr. FROST, Ms. HARMAN, Mr. HOLDEN, Ms.
JACKSON-LEE of Texas, Mr. JEFFERSON, Mr. JOHNSTON of Florida, Mr.
KANJORSKI, Ms. KAPTUR, Mr. KLINK, Mr. MASCARA, Mr. MEEHAN, Mr.
MOAKLEY, Mr. MORAN, Mr. MURTHA, Mr. NEAL of Massachusetts, Mr.
OLVER, Mr. PAYNE of Virginia, Ms. RIVERS, Mr. SMITH of Michigan, Mr.
STENHOLM, Mr. STUDDS, Mr. STUPAK, and Mr. TANNER) introduced the
following bill; which was referred to the Committee on Ways and Means
A BILL
To amend the Internal Revenue Code of 1986 to provide
an exemption from income taxation for qualified State
tuition programs.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. QUALIFIED STATE TUITION PROGRAMS.
(a) IN GENERAL.—Subchapter F of chapter 1 of the
Internal Revenue Code of 1986 (relating to exempt organi-
zations) is amended by adding at the end the following
new part:
‘‘PART VIII—QUALIFIED STATE TUITION
PROGRAMS
‘‘Sec. 529. Qualified State tuition programs.
‘‘SEC. 529. QUALIFIED STATE TUITION PROGRAMS.
‘‘(a) GENERAL RULE.—A qualified State tuition pro-
gram shall be exempt from taxation under this subtitle.
Notwithstanding the preceding sentence, such program
shall be subject to the taxes imposed by section 511 (relat-
ing to imposition of tax on unrelated business income of
charitable organizations).
‘‘(b) QUALIFIED STATE TUITION PROGRAM.—For
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified State
tuition program’ means a program established and
maintained by a State or agency or instrumentality
thereof—
‘‘(A) under which a person—
‘‘(i) may purchase tuition credits or
certificates on behalf of a designated bene-
ficiary which entitle the beneficiary to the
waiver or payment of qualified higher edu-
cation expenses of the beneficiary, or
‘‘(ii) may make contributions to an
account which is established for the sole
purpose of meeting the qualified higher
education expenses of the designated bene-
ficiary of the account, and
‘‘(B) which meets the other requirements
of this subsection.
‘‘(2) CASH CONTRIBUTIONS.—A program shall
not be treated as a qualified State tuition program
unless it provides that purchases or contributions
may only be made in cash.
‘‘(3) REFUNDS.—A program shall not be treat-
ed as a qualified State tuition program unless it im-
poses a more than de minimis penalty on any refund
of earnings from the account which are not—
‘‘(A) used for qualified higher education
expenses of the designated beneficiary,
‘‘(B) made on account of the death or dis-
ability of the designated beneficiary, or
‘‘(C) made on account of a scholarship re-
ceived by the designated beneficiary to the ex-
tent the amount of the refund does not exceed
the amount of the scholarship used for qualified
higher education expenses.
‘‘(4) SEPARATE ACCOUNTING.—A program shall
not be treated as a qualified State tuition program
unless it provides separate accounting for each des-
ignated beneficiary.
‘‘(5) NO INVESTMENT DIRECTION.—A program
shall not be treated as a qualified State tuition pro-
gram unless it provides that any contributor to, or
designated beneficiary under, such program may not
direct the investment of any contributions to the
program (or any earnings thereon).
‘‘(6) NO
PLEDGING
OF
INTEREST
AS
SECU-
RITY.—A program shall not be treated as a qualified
State tuition program if it allows any interest in the
program or any portion thereof to be used as secu-
rity for a loan.
‘‘(c) TAX
TREATMENT
OF
DESIGNATED
BENE-
FICIARIES AND CONTRIBUTORS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, no amount shall be includ-
ible in gross income of—
‘‘(A) a designated beneficiary under a
qualified State tuition program, or
‘‘(B) a contributor to such program on be-
half of a designated beneficiary,
with respect to any distribution from, or earnings
under, such program.
‘‘(2) DISTRIBUTIONS.—
‘‘(A) 
IN
GENERAL.—Any 
distribution
under a qualified State tuition program shall be
includible in the gross income of the distributee
in the same manner as provided under section
72 to the extent not excluded from gross in-
come under any other provision of this chapter.
‘‘(B) IN-KIND
DISTRIBUTIONS.—The fur-
nishing of education to a designated beneficiary
under a qualified State tuition program shall be
treated as a distribution to the beneficiary.
‘‘(C) CHANGE IN BENEFICIARIES.—
‘‘(i) ROLLOVERS.—Subparagraph (A)
shall not apply to that portion of any dis-
tribution which, within 60 days of such
distribution, is transferred to the credit of
another designated beneficiary under a
qualified State tuition program who is a
member of the same family as the des-
ignated beneficiary with respect to which
the distribution was made.
‘‘(ii) CHANGE IN DESIGNATED BENE-
FICIARIES.—Any change in the designated
beneficiary of an interest in a qualified
State tuition program shall not be treated
as a distribution for purposes of subpara-
graph (A) if the new beneficiary is a mem-
ber of the same family as the old bene-
ficiary.
‘‘(D) OPERATING RULES.—For purposes of
applying section 72—
‘‘(i) all qualified State tuition pro-
grams of which an individual is a des-
ignated beneficiary shall be treated as one
program,
‘‘(ii) all distributions during a taxable
year shall be treated as one distribution,
and
‘‘(iii) the value of the contract, income
on the contract, and investment in the con-
tract shall be computed as of the close of
the calendar year in which the taxable year
begins.
‘‘(3) GIFT TAX TREATMENT.—Any contribution
on behalf of a designated beneficiary to a qualified
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—The term ‘qualified higher education ex-
penses’ means tuition, fees, books, supplies, and
equipment required for the enrollment or attendance
of a designated beneficiary at an eligible education
institution (as defined in section 135(c)(3)).
‘‘(4) APPLICATION OF SECTION 514.—An inter-
est in a qualified State tuition program shall not be
treated as debt for purposes of section 514.’’.
(b) EFFECTIVE DATES.—
(1) IN GENERAL.—The amendments made by
this section shall apply to taxable years ending after
the date of the enactment of this Act.
(2) TRANSITION RULE.—If—
(A) a State or agency or instrumentality
thereof maintains, on the date of the enactment
of this Act, a program under which persons
may purchase tuition credits or certificates on
behalf of, or make contributions for education
expenses of, a designated beneficiary, and
(B) such program meets the requirements
of a qualified State tuition program before the
later of—
(i) the date which is 1 year after such
date of enactment, or
(ii) the first day of the first calendar
quarter after the close of the first regular
session of the State legislature that begins
after such date of enactment,
the amendments made by this section shall
apply to contributions (and earnings allocable
thereto) made before the later of such dates
without regard to whether any requirements of
such amendments are met with respect to such
contributions and earnings. For purposes of
subparagraph (B)(ii), if a State has a 2-year
legislative session, each year of such session
shall be deemed to be a separate regular session
of the State legislature.
Æ