QUALIFIED STATE TUITION PROGRAMS.

SEC. 1806. QUALIFIED STATE TUITION PROGRAMS. (a) In General.— Subchapter F of chapter 1 (relating to exempt organizations) is amended by adding at the end the following new part: “PART VIII— QUALIFIED STATE TUITION PROGRAMS “Sec. 629. Qualified State tuition programs. “SEC. 529. QUALIFIED STATE TUITION PROGRAMS. “(a) General Rule.— A qualified State tuition program shall be exempt from taxation under this subtitle. Notwithstanding the preceding sentence, such program shall be subject to the taxes imposed by section 511 (relating 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 beneficiary which entitle the beneficiary to the waiver or payment of qualified higher education expenses of the beneficiary, or 110 STAT. 1896 “(ii) may make contributions to an account which is established for the purpose of meeting the qualified higher education expenses of the designated beneficiary 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 treated as a qualified State tuition program unless it imposes 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 disability of the designated beneficiary, or “(C) made on account of a scholarship (or allowance or payment described in section 135(d)(1)(B) or (C)) received by the designated beneficiary to the extent the amount of the refund does not exceed the amount of the scholarship, allowance, or payment. “(4) Separate accounting.— A program shall not be treated as a qualified State tuition program unless it provides separate accounting for each designated beneficiary. “(5) No investment direction.— A program shall not be treated as a qualified State tuition program 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 security.— 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 security for a loan. “(7) Prohibition on excess contributions.— A program shall not be treated as a qualified State tuition program unless it provides adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of those necessary to provide for the qualified higher education expenses of the beneficiary. “(c) Tax Treatment of Designated Beneficiaries and Contributors.— “(1) In general.— Except as otherwise provided in this subsection, no amount shall be includible in gross income of— “(A) a designated beneficiary under a qualified State tuition program, or “(B) a contributor to such program on behalf of a designated beneficiary, with respect to any distribution or earnings under such program. “(2) Contributions.— In no event shall a contribution to a qualified State tuition program on behalf of a designated beneficiary be treated as a taxable gift for purposes of chapter 12. “(3) Distributions.— “(A) In general.— Any distribution under a qualified State tuition program shall be includible in the gross110 STAT. 1897 income of the distributee in the manner as provided under section 72 to the extent not excluded from gross income under any other provision of this chapter. “(B) In-kind distributions.— Any benefit furnished 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 distribution 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 family of the designated beneficiary with respect to which the distribution was made. “(ii) Change in designated beneficiaries.— 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 subparagraph (A) if the new beneficiary is a member of the family of the old beneficiary. “(D) Operating rules.— For purposes of applying section 72— “(i) to the extent provided by the Secretary, all qualified State tuition programs of which an individual is a designated 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 contract shall be computed as of the close of the calendar year in which the taxable year begins. “(4) Estate tax inclusion.— The value of any interest in any qualified State tuition program which is attributable to contributions made by an individual to such program on behalf of any designated beneficiary shall be includible in the gross estate of the contributor for purposes of chapter 11. “(5) Special rule for applying section 2503(e).— For purposes of section 2503(e), the waiver (or payment to an educational institution) of qualified higher education expenses of a designated beneficiary under a qualified State tuition program shall be treated as a qualified transfer. (d) Reporting requirements.— “(1) In general.— If there is a distribution to any individual with respect to an interest in a qualified State tuition program during any calendar year, each officer or employee having control of the qualified State tuition program or their designee shall make such reports as the Secretary may require regarding such distribution to the Secretary and to the designated beneficiary or the individual to whom the distribution was made. Any such report shall include such information as the Secretary may prescribe. “(2) Timing of reports.— Any report required by this subsection— “(A) shall be filed at such time and in such matter as the Secretary prescribes, and 110 STAT. 1898 “(B) shall be furnished to individuals not later than January 31 of the calendar year following the calendar year to which such report relates. “(e) Other Definitions and Special Rules.— For purposes of this section— “(1) Designated beneficiary.— The term ‘designated beneficiary’ means— “(A) the individual designated at the commencement of participation in the qualified State tuition program as the beneficiary of amounts paid (or to be paid) to the program, “(B) in the case of a change in beneficiaries described in subsection (c)(2)(C), the individual who is the new beneficiary, and “(C) in the case of an interest in a qualified State tuition program purchased by a State or local government or an organization described in section 501(c)(3) and exempt from taxation under section 501(a) as part of a scholarship program operated by such government or organization, the individual receiving such interest as a scholarship. “(2) Member of family.— The term ‘member of the family’ has the same meaning given such term as section 2032A(e)(2). “(3) Qualified higher education expenses.— The term ‘qualified higher education expenses’ means tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution (as defined in section 135(c)(3)). “(4) Application of section 514.— An interest in a qualified State tuition program shall not be treated as debt for purposes of section 514.”. (b) Conforming Amendments.— (1) Section 135(d)(1) is amended by striking “or” at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting “, or”, and by adding at the end the following new subparagraph: “(D) a payment, waiver, or reimbursement of qualified higher education expenses under a qualified State tuition program (within the meaning of section 529(b)).”. (2) The table of parts for subchapter F of chapter 1 is amended by adding at the end the following new item: “Part VIII. Qualified State tuition programs.” (c) 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 110 STAT. 1899 (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 date such program meets the requirements of such amendments 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.