I
105TH CONGRESS
1ST SESSION
H. R. 1597
To amend the Internal Revenue Code of 1986 to provide for the establishment
of, and the deduction of contributions to, education savings accounts.
IN THE HOUSE OF REPRESENTATIVES
MAY 14, 1997
Mr. GILLMOR (for himself, Mr. SOLOMON, Mr. LIVINGSTON, Mr. ENGLISH of
Pennsylvania, Mr. WATTS of Oklahoma, Mr. KING, Mr. CANADY of Flor-
ida, Mr. SHAYS, Mr. QUINN, Mr. MCHUGH, Mr. MANZULLO, Mr. DOO-
LITTLE, Mr. GREENWOOD, Mr. NORWOOD, Mrs. KELLY, Ms. GRANGER,
Mr. UNDERWOOD, Ms. NORTON, Mr. EHLERS, Mr. KNOLLENBERG, Mr.
FALEOMAVAEGA, Mr. BEREUTER, Mr. KLUG, Mr. SKEEN, Mr. SENSEN-
BRENNER, Mr. GRAHAM, Mr. BOB SCHAFFER of Colorado, and Mr. BILI-
RAKIS) 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
for the establishment of, and the deduction of contribu-
tions to, education savings accounts.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. EDUCATION SAVINGS ACCOUNTS.
(a) IN GENERAL.—Part VII of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
additional itemized deductions for individuals) is amended
by redesignating section 221 as section 222 and by insert-
ing after section 220 the following new section:
‘‘SEC. 221. EDUCATION SAVINGS ACCOUNTS.
‘‘(a) DEDUCTION ALLOWED.—In the case of an indi-
vidual, there shall be allowed as a deduction the sum of—
‘‘(1) amounts paid in cash, and
‘‘(2) the fair market value of stocks, bonds, or
other securities, which are readily tradable on an es-
tablished securities market, transferred,
during the calendar year which ends with or within the
taxable year by such individual to an education savings
account established for the purpose of accumulating funds
to pay the educational expenses of an eligible individual.
‘‘(b) LIMITATIONS.—
‘‘(1) ACCOUNT MAY NOT BE ESTABLISHED FOR
BENEFIT OF MORE THAN 1 INDIVIDUAL.—An edu-
cation savings account may not be established for
the benefit of more than 1 individual.
‘‘(2) ELIGIBLE INDIVIDUAL TREATED AS ELIGI-
BLE
INDIVIDUAL
ONLY
WITH
RESPECT
TO
AC-
COUNT.—If, at any time during a calendar year, 2
or more education savings accounts are maintained
for the benefit of an eligible individual, such individ-
ual shall be treated as an eligible individual for the
calendar year only with respect to the first of such
accounts.
‘‘(3) MAXIMUM
DEDUCTION
PER
ACCOUNT.—
The amount allowable as a deduction under sub-
section (a) to an individual for amounts paid or
transferred to an education savings account for any
calendar year shall not exceed $2,000.
‘‘(4) NO DEDUCTION AFTER BENEFICIARY AT-
TAINS AGE 19.—No deduction shall be allowed for
any contribution to an education savings account es-
tablished for the benefit of an eligible individual who
has attained age 19 before the close of the calendar
year in which such contribution is made.
‘‘(5) ADJUSTMENT OF DOLLAR AMOUNT LIMI-
TATIONS FOR INFLATION.—In the case of any cal-
endar year after 1997, the $2,000 contained in
paragraph (3) and subsection (c)(2)(A) shall be in-
creased by an amount equal to—
‘‘(A) $2,000, 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.
Any increase determined under the preceding sen-
tence shall be rounded to the nearest multiple of
$10.
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section—
‘‘(1) ELIGIBLE INDIVIDUAL.—The term ‘eligible
individual’ means an individual who is—
‘‘(A) a child (within the meaning of section
153(e)(3)) of the taxpayer or of a brother, sis-
ter, stepbrother, or stepsister of the taxpayer,
‘‘(B) an individual with respect to whom
the taxpayer has been appointed guardian by a
court of competent jurisdiction, or
‘‘(C) a descendant of a child of the tax-
payer.
‘‘(2) 
EDUCATION
SAVINGS
ACCOUNT.—The
term ‘education savings account’ means a trust cre-
ated or organized in the United States exclusively
for the purpose of paying the educational expenses
of an eligible individual, but only if the written gov-
erning instrument creating the trust meets the fol-
lowing requirements:
‘‘(A) No contribution will be accepted un-
less it is in cash, stocks, bonds, or other securi-
ties which are readily tradable on an established
securities market, and, except in the case of
contributions from another education savings
account or an individual retirement plan, con-
tributions will not be accepted for the taxable
year in excess of $2,000.
‘‘(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 (other than
contracts the beneficiary of which is the trust
and the face amount of which does not exceed
the amount by which the maximum amount
which can be contributed to the account exceeds
the sum of the amounts contributed to the ac-
count for all taxable years).
‘‘(D) The assets of the account may be in-
vested in accordance with the direction of the
individual contributing to the account, but, if
more than one individual has made contribu-
tions to the account, the consent of all such in-
dividuals shall be required for any such direc-
tion.
‘‘(E) The assets of the trust shall not be
commingled with other property except in a
common trust fund or common investment
fund.
‘‘(F) Any balance in the account on the
day after the date on which the individual for
whose benefit the trust is established attains
age 30 (or, if earlier, the date on which such
individual dies) shall be distributed within 30
days of such date—
‘‘(i) in accordance with paragraph (5)
to each of the individuals who have con-
tributed to the trust, or
‘‘(ii) as directed by such individuals,
to another education savings account es-
tablished for the benefit of an eligible indi-
vidual who has not attained age 30 or to
an eligible educational institution.
‘‘(3) TIME
WHEN
CONTRIBUTIONS
DEEMED
MADE.—A taxpayer shall be deemed to have made a
contribution on the last day of the preceding taxable
year if the contribution is made on account of such
taxable year and is made not later than the time
prescribed by law for filing the return for such tax-
able year (including extensions thereof).
‘‘(4) STOCK, ETC., TO
BE
VALUED
AS
OF
TRANSFER DATE.—The fair market value of stocks,
bonds, and other securities shall be determined as of
the date on which they are transferred to the ac-
count. If the date of transfer falls on a Saturday,
Sunday, or public legal holiday, then the fair market
value shall be determined by reference to the last
preceding day on which they could have been traded
on an established securities market.
‘‘(5) DISTRIBUTION OF BALANCE IN ACCOUNT
TO CONTRIBUTORS.—The Secretary shall prescribe
regulations describing the manner in which any bal-
ance in the educational savings account shall be dis-
tributed under paragraph (2)(F)(i) among the con-
tributors to the account. Any division of the balance
in the account shall reflect—
‘‘(A) the amount of net income of the ac-
count which is attributable to the contributions
of each such individual, and
‘‘(B) a proper allocation of any amounts
previously distributed from the account for edu-
cational expenses among the contributions
which were made before any such distribution
(including the net income of the account which
was attributable to such contributions and
earned before any such distribution).
‘‘(6) 
EDUCATIONAL
EXPENSES.—The 
term
‘educational expenses’ means—
‘‘(A) tuition and fees required for the en-
rollment or attendance of a student at an eligi-
ble educational institution,
‘‘(B) fees, books, supplies, and equipment
required for courses of instruction at an eligible
educational institution, and
‘‘(C) a reasonable allowance for meals and
lodging while attending an eligible educational
institution.
‘‘(7) ELIGIBLE EDUCATIONAL INSTITUTION.—
The term ‘eligible educational institution’ means—
‘‘(A) an institution of higher education, or
‘‘(B) a vocational school.
‘‘(8) INSTITUTION OF HIGHER EDUCATION.—
The term ‘institution of higher education’ means the
institutions described in section 1201(a) or 481(a)
of the Higher Education Act of 1965.
‘‘(9) VOCATIONAL
SCHOOL.—The term ‘voca-
tional school’ means an area vocational education
school as defined in subparagraph (C) or (D) of sec-
tion 521(4) of the Carl D. Perkins Vocational and
Applied Technology Education Act to the extent
such school is located within any State (as defined
in section 521(33) of such Act).
‘‘(d) TAX TREATMENT OF DISTRIBUTIONS.—
‘‘(1) IN GENERAL.—Except as otherwise pro-
vided in this subsection, any amount paid or distrib-
uted out of an education savings account shall be in-
cluded in gross income of the payee or distributee
for the taxable year in which the payment or dis-
tribution is received to the extent such amount is
not the return of a contribution for which no deduc-
tion was allowed under subsection (a).
‘‘(2) DISTRIBUTION
USED
TO
PAY
EDU-
CATIONAL
EXPENSES.—Paragraph (1) shall not
apply to any payment or distribution out of an edu-
cation savings account to the extent such payment
or distribution is used exclusively to pay the edu-
cational expenses incurred by the individual for
whose benefit the account is established.
‘‘(3) DISTRIBUTIONS TO ANOTHER ACCOUNT OR
TO
ELIGIBLE
EDUCATIONAL
INSTITUTION.—Para-
graph (1) shall not apply to any distribution under
subsection (c)(2)(F)(ii).
‘‘(4) EXCESS CONTRIBUTIONS RETURNED BE-
FORE DUE DATE OF RETURN.—Paragraph (1) does
not apply to the distribution of any contribution paid
during a taxable year to an education savings ac-
count to the extent that such contribution exceeds
the amount allowable as a deduction under sub-
section (a) if—
‘‘(A) such distribution is received on or be-
fore the day prescribed by law (including exten-
sions of time) for filing such individual’s return
for such taxable year,
‘‘(B) no deduction is allowed under sub-
section (a) with respect to such excess contribu-
tion, and
‘‘(C) such distribution is accompanied by
the amount of net income attributable to such
excess contribution.
Any net income described in subparagraph (C) shall
be included in the gross income of the individual for
the taxable year in which such excess contribution
was made.
‘‘(5) DISTRIBUTIONS TO INDIVIDUAL RETIRE-
MENT PLANS.—Paragraph (1) shall not apply to any
payment or distribution out of an education savings
account if—
‘‘(A) before the close of the 60th day after
the day on which the payment or distribution is
received, the payment or distribution is contrib-
uted into an individual retirement plan of an in-
dividual who contributed to the education sav-
ings account, and
‘‘(B) the amount of such payment or dis-
tribution (when added to all prior payments or
distributions excluded from the gross income of
such individual by reason of this paragraph)
does not exceed the aggregate amount contrib-
uted to the education savings account by the in-
dividual from amounts paid or distributed out
of an individual retirement plan in accordance
with section 408(d)(8).
‘‘(e) TAX TREATMENT OF ACCOUNTS.—
‘‘(1) EXEMPTION
FROM
TAX.—An education
savings account is exempt from taxation under this
subtitle unless such account has ceased to be an
education savings account by reason of paragraph
(2) or (3). Notwithstanding the preceding sentence,
any such account is subject to the taxes imposed by
section 511 (relating to imposition of tax on unre-
lated business income of charitable, etc. organiza-
tions).
‘‘(2) LOSS OF EXEMPTION OF ACCOUNT WHERE
INDIVIDUAL
ENGAGES
IN
PROHIBITED
TRANS-
ACTION.—
‘‘(A) IN GENERAL.—If the individual for
whose benefit an education savings account is
established or any individual who contributes to
such account engages in any transaction prohib-
ited by section 4975 with respect to the ac-
count, the account shall cease to be an edu-
cation savings account as of the first day of the
taxable year (of the individual so engaging in
such transaction) during which such transaction
occurs.
‘‘(B) ACCOUNT TREATED AS DISTRIBUTING
ALL ITS ASSETS.—In any case in which any ac-
count ceases to be an education savings account
by reason of subparagraph (A) as of the first
day of any taxable year, paragraph (1) of sub-
section (d) shall apply as if there was a dis-
tribution on such first day in an amount equal
to the fair market value (on such first day) of
all assets in the account (on such first day).
‘‘(3) EFFECT OF PLEDGING ACCOUNT AS SECU-
RITY.—If, during any taxable year, the individual for
whose benefit an education savings account is estab-
lished, or any individual who contributes to such ac-
count, uses the account or any portion thereof as se-
curity for a loan, the portion so used shall be treated
as distributed to the individual so using such por-
tion.
‘‘(f) ADDITIONAL TAX ON CERTAIN AMOUNTS IN-
CLUDED IN GROSS INCOME.—
‘‘(1) DISTRIBUTION
NOT
USED
FOR
EDU-
CATIONAL EXPENSES.—In the case of any payment
or distribution to which subsection (d)(1) applies,
the tax liability of each payee or distributee under
this chapter for the taxable year in which the pay-
ment or distribution is received shall be increased by
an amount equal to 10 percent of the amount of the
distribution which is includible in the gross income
of such payee or distributee for such taxable year.
‘‘(2) DISQUALIFICATION CASES.—If an amount
is includible in the gross income of an individual for
a taxable year because such amount is required to
be treated as a distribution under paragraph (2) or
(3) of subsection (e), such individual’s tax liability
under this chapter for such taxable year shall be in-
creased by an amount equal to 10 percent of such
amount required to be treated as a distribution and
included in his gross income.
‘‘(3) DISABILITY
OR
DEATH
CASES.—Para-
graphs (1) and (2) shall not apply if the payment
or distribution is made after the individual for whose
benefit the education savings account becomes dis-
abled within the meaning of section 72(m)(7) or
dies.
‘‘(g) COMMUNITY PROPERTY LAWS.—This section
shall be applied without regard to any community property
laws.
‘‘(h) 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 education savings account described in sub-
section (c)(2). 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 trustee thereof.
‘‘(i) REPORTS.—The trustee of an education savings
account shall make such reports regarding such account
to the Secretary and to the individual for whose benefit
the account is maintained with respect to contributions,
distributions, and such other matters 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) DEDUCTION ALLOWED
IN ARRIVING
AT AD-
JUSTED GROSS INCOME.—Paragraph (7) of section 62(a)
of such Code (relating to retirement savings) is
amended—
(1) by inserting ‘‘OR EDUCATION’’ after ‘‘RE-
TIREMENT’’ in the heading of such paragraph, and
(2) by inserting before the period at the end the
following: ‘‘and the deduction allowed by section 221
(relating to education savings accounts)’’.
(c) TAX ON EXCESS CONTRIBUTIONS.—
(1) Subsection (a) of section 4973 of such Code
(relating to tax on certain excess contributions) is
amended by striking ‘‘or’’ at the end of paragraph
(2), by inserting ‘‘or’’ at the end of paragraph (3),
and by inserting after paragraph (3) the following
new paragraph:
‘‘(4) an education savings account (within the
meaning of section 221(c)(2)),’’.
(2) Section 4973 of such Code is amended by
adding at the end the following new subsection:
‘‘(e) EXCESS CONTRIBUTIONS TO EDUCATION SAV-
INGS ACCOUNTS.—For purposes of this section, in the
case of an education savings account, the term ‘excess con-
tributions’ means the amount by which the amount con-
tributed for the taxable year to the account exceeds the
amount allowable as a deduction under section 221 for
such taxable year. For purposes of this subsection, any
contribution which is distributed out of the education sav-
ings account in a distribution to which section 221(d)(4)
applies shall be treated as an amount not contributed.’’
(3) The section heading for section 4973 of
such Code is amended to read as follows:
‘‘SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN TAX-FA-
VORED ACCOUNTS, ANNUITIES, ETC.’’
(4) The table of sections for chapter 43 of such
Code is amended by striking the item relating to sec-
tion 4973 and inserting the following new item:
‘‘Sec. 4973. Excess contributions to certain tax-favored accounts,
annuities. etc.’’
(d) CONTRIBUTION NOT SUBJECT TO GIFT TAX.—
Section 2503 of such Code (relating to taxable gifts) is
amended by adding at the end the following new sub-
section:
‘‘(h) EDUCATION SAVINGS ACCOUNTS.—Any con-
tribution made by an individual to an education savings
account described in section 221(c)(2) which is allowable
as a deduction under section 221 shall not be treated as
a transfer of property by gift for purposes of this
chapter.’’
(e) TAX ON PROHIBITED TRANSACTIONS.—
(1) Section 4975 of such Code (relating to pro-
hibited transactions) is amended by adding at the
end of subsection (c) the following new paragraph:
‘‘(5) SPECIAL RULE FOR EDUCATION SAVINGS
ACCOUNTS.—An individual for whose benefit an edu-
cation savings account is established and any con-
tributor 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, with re-
spect to such transaction, the account ceases to be
an education savings account by reason of the appli-
cation of section 221(e)(2)(A) to such account.’’
(2) Paragraph (1) of section 4975(e) of such
Code is amended by striking ‘‘or’’ at the end of sub-
paragraph (D), by redesignating subparagraph (E)
as subparagraph (F), and by inserting after sub-
paragraph (D) the following new subparagraph:
‘‘(E) an education savings account de-
scribed in section 221(c)(2), or’’.
(f) FAILURE TO PROVIDE REPORTS ON EDUCATION
SAVINGS ACCOUNTS.—
(1) Paragraph (2) of section 6693(a) of such
Code (relating to failure to provide reports on indi-
vidual retirement accounts or annuities) is amended
by striking ‘‘and’’ at the end of subparagraph (A),
by striking the period at the end of subparagraph
(B) and inserting ‘‘, and’’, and by adding at the end
the following new subparagraph:
‘‘(C) section 221(i) (relating to education
savings accounts).’’
(2) The section heading for section 6693 of
such Code is amended to read as follows:
‘‘SEC. 6693. FAILURE TO PROVIDE REPORTS ON CERTAIN
TAX-FAVORED ACCOUNTS, ETC.’’
(3) The table of sections for part I of sub-
chapter B of chapter 68 of such Code is amended
by striking the item relating to section 6693 and in-
serting the following new item:
‘‘Sec. 6693. Failure to provide reports on certain tax-favored ac-
counts, etc.’’
(g) SPECIAL RULE FOR DETERMINING AMOUNTS OF
SUPPORT FOR DEPENDENT.—Subsection (b) of section
152 of such Code (relating to definition of dependent) is
amended by adding at the end the following new para-
graph:
‘‘(6) A distribution from an education savings
account described in section 221(c)(2) to the individ-
ual for whose benefit such account has been estab-
lished shall not be taken into account in determining
support for purposes of this section to the extent
such distribution is excluded from gross income of
such individual under section 221(d)(2).’’
(h) CLERICAL AMENDMENT.—The table of sections
for part VII of subchapter B of chapter 1 of such Code
is amended by striking the item relating to section 221
and inserting the following new items:
‘‘Sec. 221. Education savings accounts.
‘‘Sec. 222. Cross reference.’’
SEC. 2. TRANSFERS BETWEEN INDIVIDUAL RETIREMENT
PLANS AND EDUCATION SAVINGS ACCOUNTS.
(a) EXEMPTION FROM ANNUAL CONTRIBUTION LIM-
ITATION FOR DISTRIBUTIONS FROM EDUCATION SAVINGS
ACCOUNTS INTO IRA’S.—Paragraph (1) of section 408(a)
of the Internal Revenue Code of 1986 (relating to defini-
tion of individual retirement account) is amended by in-
serting after ‘‘403(b)(8),’’ the following: ‘‘or in the case
of a contribution from an education savings account in ac-
cordance with section 221(d)(5),’’.
(b) EXCLUSION FROM GROSS INCOME
FOR DIS-
TRIBUTIONS FROM IRA’S INTO EDUCATION SAVINGS AC-
COUNTS.—Subsection (d) of section 408 of such Code (re-
lating to tax treatment of distributions from individual re-
tirement plans) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(8) DISTRIBUTIONS
USED
TO
MAKE
CON-
TRIBUTION
TO
EDUCATION
SAVINGS
ACCOUNT.—
Paragraph (1) shall not apply to any amount paid
or distributed out of an individual retirement plan if,
before the close of the 60th day after the day on
which the payment or distribution is received, the
payment or distribution is contributed into an edu-
cation savings account (as defined in section
221(c)(2)).
SEC. 3. EFFECTIVE DATE.
The amendments made by this Act shall apply to tax-
able years beginning after December 31, 1996.
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