text: SECTION 1. QUALIFIED STATE TUITION PROGRAMS.
  
      (a) In General.--Subchapter F of chapter 1 of the Internal Revenue 
  Code of 1986 (relating to exempt organizations) 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 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
                              ``(ii) may make contributions to an account 
                          which is established for the sole 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 received by 
                  the designated beneficiary to the extent 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 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.
      ``(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 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 income under any other provision of this 
                  chapter.
                      ``(B) In-kind distributions.--The furnishing 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 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 same family as 
                          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 same 
                          family as the old beneficiary.
                      ``(D) Operating rules.--For purposes of applying 
                  section 72--
                              ``(i) 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.
              ``(3) Gift tax treatment.--Any contribution on behalf of a 
          designated beneficiary to a qualified State tuition program 
          shall be treated as a qualified transfer for purposes of 
          section 2503(e).
      ``(d) Reporting Requirements.--
              ``(1) In general.--If--
                      ``(A) a designated beneficiary is furnished 
                  education under a qualified State tuition program 
                  during any calendar year, or
                      ``(B) there is a distribution to any individual 
                  with respect to an interest in such 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 education or 
          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
                      ``(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)(ii), 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 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 education 
          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) 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.
target: Amends the Internal Revenue Code to exempt from taxation a qualified State tuition program.  Defines such a program.
feat_title: To amend the Internal Revenue Code of 1986 to provide an exemption from income taxation for qualified State tuition programs.