[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1597 Introduced in House (IH)]







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 Florida, 
  Mr. Shays, Mr. Quinn, Mr. McHugh, Mr. Manzullo, Mr. Doolittle, 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. Sensenbrenner, Mr. Graham, Mr. Bob Schaffer of 
 Colorado, and Mr. Bilirakis) 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 contributions to, education 
                           savings accounts.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. EDUCATION SAVINGS ACCOUNTS.

    (a) In General.--Part VII of subchapter B of chapter 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 inserting after section 220 the following new 
section:

``SEC. 221. EDUCATION SAVINGS ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual, 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 established 
        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 education savings account may not be 
        established for the benefit of more than 1 individual.
            ``(2) Eligible individual treated as eligible individual 
        only with respect to 1 account.--If, at any time during a 
        calendar year, 2 or more education savings accounts are 
        maintained for the benefit of an eligible individual, such 
        individual 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 subsection (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 attains age 19.--No 
        deduction shall be allowed for any contribution to an education 
        savings account established 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 limitations for 
        inflation.--In the case of any calendar year after 1997, the 
        $2,000 contained in paragraph (3) and subsection (c)(2)(A) 
        shall be increased by an amount equal to--
                    ``(A) $2,000, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                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 sentence shall be 
        rounded to the nearest multiple of $10.
    ``(c) Definitions and Special Rules.--For purposes 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, sister, 
                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 taxpayer.
            ``(2) Education savings account.--The term `education 
        savings account' means a trust created or organized in the 
        United States exclusively for the purpose of paying the 
        educational expenses of an eligible individual, but only if the 
        written governing instrument creating the trust meets the 
        following requirements:
                    ``(A) No contribution will be accepted unless it is 
                in cash, stocks, bonds, or other securities 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, contributions 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 demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                that person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) No part of the trust assets will be invested 
                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 
                account for all taxable years).
                    ``(D) The assets of the account may be invested in 
                accordance with the direction of the individual 
                contributing to the account, but, if more than one 
                individual has made contributions to the account, the 
                consent of all such individuals shall be required for 
                any such direction.
                    ``(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 contributed to 
                        the trust, or
                            ``(ii) as directed by such individuals, to 
                        another education savings account established 
                        for the benefit of an eligible individual 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 taxable 
        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 account. 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 balance in the educational savings account shall 
        be distributed under paragraph (2)(F)(i) among the contributors 
        to the account. Any division of the balance in the account 
        shall reflect--
                    ``(A) the amount of net income of the account which 
                is attributable to the contributions of each such 
                individual, and
                    ``(B) a proper allocation of any amounts previously 
                distributed from the account for educational 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 enrollment 
                or attendance of a student at an eligible 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 `vocational school' 
        means an area vocational education school as defined in 
        subparagraph (C) or (D) of section 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 provided in this 
        subsection, any amount paid or distributed out of an education 
        savings account shall be included in gross income of the payee 
        or distributee for the taxable year in which the payment or 
        distribution is received to the extent such amount is not the 
        return of a contribution for which no deduction was allowed 
        under subsection (a).
            ``(2) Distribution used to pay educational expenses.--
        Paragraph (1) shall not apply to any payment or distribution 
        out of an education savings account to the extent such payment 
        or distribution is used exclusively to pay the educational 
        expenses incurred by the individual for whose benefit the 
        account is established.
            ``(3) Distributions to another account or to eligible 
        educational institution.--Paragraph (1) shall not apply to any 
        distribution under subsection (c)(2)(F)(ii).
            ``(4) Excess contributions returned before due date of 
        return.--Paragraph (1) does not apply to the distribution of 
        any contribution paid during a taxable year to an education 
        savings account to the extent that such contribution exceeds 
        the amount allowable as a deduction under subsection (a) if--
                    ``(A) such distribution is received on or before 
                the day prescribed by law (including extensions of 
                time) for filing such individual's return for such 
                taxable year,
                    ``(B) no deduction is allowed under subsection (a) 
                with respect to such excess contribution, 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 retirement 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 contributed into an 
                individual retirement plan of an individual who 
                contributed to the education savings account, and
                    ``(B) the amount of such payment or distribution 
                (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 contributed to the education savings account by 
                the individual 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 unrelated business income of 
        charitable, etc. organizations).
            ``(2) Loss of exemption of account where individual engages 
        in prohibited transaction.--
                    ``(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 prohibited by section 4975 with 
                respect to the account, the account shall cease to be 
                an education 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 account ceases to be 
                an education savings account by reason of subparagraph 
                (A) as of the first day of any taxable year, paragraph 
                (1) of subsection (d) shall apply as if there was a 
                distribution 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 security.--If, during 
        any taxable year, the individual for whose benefit an education 
        savings account is established, or any individual who 
        contributes to such account, uses the account or any portion 
        thereof as security for a loan, the portion so used shall be 
        treated as distributed to the individual so using such portion.
    ``(f) Additional Tax on Certain Amounts Included in Gross Income.--
            ``(1) Distribution not used for educational 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 payment 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 
        increased 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.--Paragraphs (1) and (2) 
        shall not apply if the payment or distribution is made after 
        the individual for whose benefit the education savings account 
        becomes disabled 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 subsection (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 Adjusted Gross Income.--
Paragraph (7) of section 62(a) of such Code (relating to retirement 
savings) is amended--
            (1) by inserting ``or education'' after ``retirement'' 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 Savings Accounts.--For 
purposes of this section, in the case of an education savings account, 
the term `excess contributions' means the amount by which the amount 
contributed 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 savings 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-FAVORED ACCOUNTS, 
              ANNUITIES, ETC.''

            (4) The table of sections for chapter 43 of such Code is 
        amended by striking the item relating to section 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 subsection:
    ``(h) Education Savings Accounts.--Any contribution 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 prohibited 
        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 education savings 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, with respect to such 
        transaction, the account ceases to be an education savings 
        account by reason of the application 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 subparagraph (D), by 
        redesignating subparagraph (E) as subparagraph (F), and by 
        inserting after subparagraph (D) the following new 
        subparagraph:
                    ``(E) an education savings account described 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 individual 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 subchapter B of 
        chapter 68 of such Code is amended by striking the item 
        relating to section 6693 and inserting the following new item:

                              ``Sec. 6693. Failure to provide reports 
                                        on certain tax-favored 
                                        accounts, 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 paragraph:
            ``(6) A distribution from an education savings account 
        described in section 221(c)(2) to the individual for whose 
        benefit such account has been established 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 Limitation for Distributions 
From Education Savings Accounts Into IRA's.--Paragraph (1) of section 
408(a) of the Internal Revenue Code of 1986 (relating to definition of 
individual retirement account) is amended by inserting after 
``403(b)(8),'' the following: ``or in the case of a contribution from 
an education savings account in accordance with section 221(d)(5),''.
    (b) Exclusion From Gross Income for Distributions From IRA's Into 
Education Savings Accounts.--Subsection (d) of section 408 of such Code 
(relating to tax treatment of distributions from individual retirement 
plans) is amended by adding at the end the following new paragraph:
            ``(8) Distributions used to make contribution 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 education savings account 
        (as defined in section 221(c)(2)).

SEC. 3. EFFECTIVE DATE.

    The amendments made by this Act shall apply to taxable years 
beginning after December 31, 1996.

                                 <all>