[Federal Register Volume 63, Number 163 (Monday, August 24, 1998)]
[Proposed Rules]
[Pages 45019-45032]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22465]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106177-97]
RIN 1545-AV18
Qualified State Tuition Programs
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to
qualified State tuition programs (QSTPs). These proposed regulations
reflect changes to the law made by the Small Business Job Protection
Act of 1996 and the Taxpayer Relief Act of 1997. The proposed
regulations affect QSTPs established and maintained by a State or
agency or instrumentality of a State, and individuals receiving
distributions from QSTPs. This document also provides notice of a
public hearing on these proposed regulations.
DATES: Written comments must be received by November 23, 1998. Outlines
of topics to be discussed at the public hearing scheduled for
Wednesday, January 6, 1999, at 10 a.m. must be received by December 16,
1998.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-106177-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-106177-97), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW,
Washington DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in room 2615, Internal
Revenue Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Monice Rosenbaum, (202) 622-6070; concerning the proposed estate and
gift tax regulations, Susan Hurwitz (202) 622-3090; concerning
submissions and the hearing, Michael Slaughter, (202) 622-7190 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of information should be received by
October 23, 1998. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase or services to provide information.
The collection of information in this proposed regulation is in
Secs. 1.529-
[[Page 45020]]
2(e)(4), 1.529-2(f) and (i), 1.529-4, and 1.529-5(b)(2). This
information is required by the IRS to verify compliance with sections
529(b)(3), (4), (7) and (d). This information will be used by the IRS
and individuals receiving distributions from QSTPs to determine that
the taxable amount of the distribution has been computed correctly. The
collection of information is required to obtain the benefit of being a
QSTP described in section 529. The likely respondents and/or
recordkeepers are state governments and distributees who receive
distributions under the programs. The burden for reporting
distributions is reflected in the burden for Form 1099-G, Certain
Government Payments. The burden for electing to take certain
contributions to a QSTP into account ratably over a five year period in
determining the amount of gifts made during the calendar year is
reflected in the burden for Form 709, Federal Gift Tax Return.
Estimated total annual reporting/recordkeeping burden: 705,000
hours.
Estimated average annual burden per respondent/recordkeeper: 35
hours, 10 minutes.
Estimated number of respondents/recordkeepers: 20,051.
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) relating to qualified State tuition
programs described in section 529. Section 529 was added to the
Internal Revenue Code by section 1806 of the Small Business Job
Protection Act of 1996, Public Law 104-188, 110 Stat. 1895. Section 529
was modified by sections 211 and 1601(h) of the Taxpayer Relief Act of
1997, Public Law 105-34, 111 Stat. 810 and 1092.
Section 529 provides tax-exempt status to qualified State tuition
programs (QSTPs) established and maintained by a State (or agency or
instrumentality thereof) under which persons may (1) purchase tuition
credits or certificates on behalf of a designated beneficiary entitling
the beneficiary to a waiver or payment of qualified higher education
expenses, or (2) contribute to an account established exclusively for
the purpose of meeting qualified higher education expenses of the
designated beneficiary. Qualified higher education expenses, for
purposes of section 529, are tuition, fees, books, supplies, and
equipment required for enrollment or attendance at an eligible
educational institution, as well as certain room and board expenses for
students who attend an eligible educational institution at least half-
time. An eligible educational institution is an accredited post-
secondary educational institution offering credit toward a bachelor's
degree, an associate's degree, a graduate-level or professional degree,
or another recognized post-secondary credential. The institution must
be eligible to participate in Department of Education student aid
programs.
QSTPs established and maintained by a State (or agency or
instrumentality thereof) must require all contributions to the program
be made only in cash. Neither contributors nor designated beneficiaries
may direct the investment of any contributions or any earnings on
contributions. No interest in the program may be pledged as security
for a loan. A separate accounting must be provided to each designated
beneficiary in the program. A program must impose a more than de
minimis penalty on refunds that are not used for qualified higher
education expenses, not made on account of death or disability of the
designated beneficiary, or not made on account of a scholarship or
certain other educational allowances. A program must provide adequate
safeguards to prevent contributions in excess of those necessary to
provide for the qualified higher education expenses of the beneficiary.
A specified individual must be designated as the beneficiary at the
commencement of participation in a QSTP, unless the interests in the
program are purchased by a State or local government or a tax-exempt
organization described in section 501(c)(3) as part of a scholarship
program operated by such government or organization under which
beneficiaries to be named in the future will receive the interests as
scholarships.
Distributions under a QSTP are includible in the gross income of
the distributee in the manner as provided under section 72 to the
extent not excluded from gross income under any other provision.
Distributions include in-kind benefits furnished to a designated
beneficiary under a QSTP. Any distribution, or portion of a
distribution, that is transferred within 60 days under a QSTP to the
credit of a new designated beneficiary who is a member of the family of
the old designated beneficiary shall not be treated as a distribution.
A change in the designated beneficiary of an interest in a QSTP shall
not be treated as a distribution if the new beneficiary is a member of
the family of the old beneficiary. A member of the family means the
spouse of the designated beneficiary or an individual who is related to
the designated beneficiary as described in section 152(a)(1) through
(8) or is the spouse of any of these individuals.
Section 529, as added to the Code by the Small Business Job
Protection Act of 1996 (1996 Act), contained provisions addressing the
estate, gift, and generation-skipping transfer tax. The provisions were
significantly revised, effective prospectively, by the Taxpayer Relief
Act of 1997 (1997 Act).
A contribution on behalf of a designated beneficiary to a QSTP
which is made after August 20, 1996, and before August 6, 1997, is not
treated as a taxable gift. Rather, the subsequent waiver (or payment)
of qualified higher education expenses of a designated beneficiary by
(or to) an educational institution under the QSTP is treated as a
qualified transfer under section 2503(e) and is not treated as a
transfer of property by gift for purposes of section 2501. As such, the
contribution is not subject to the generation-skipping transfer tax
imposed by section 2601.
In contrast, under section 529 as amended by the 1997 Act, a
contribution on behalf of a designated beneficiary to a QSTP after
August 5, 1997, is a completed gift of a present interest in property
under section 2503(b) from the contributor to the designated
beneficiary and is not a qualified transfer within themeaning of
section 2503(e). The portion of a contribution excludible from taxable
gifts under section 2503(b) also satisfies the requirements of section
2642(c)(2) and, therefore, is also excludible for purposes of the
generation-skipping transfer tax imposed under section 2601. For
purposes of the annual exclusion, a contributor may elect to take
certain contributions to a QSTP into account ratably over a five-year
period in determining the amount of gifts made during the calendar
year. Under section 529 as amended by the 1997 Act, a transfer which
occurs by reason of a change in the designated beneficiary of a QSTP,
or a rollover from the account of one beneficiary to the account of
another beneficiary in a
[[Page 45021]]
QSTP, is not a taxable gift if the new beneficiary is a member of the
family, as defined in section 529(e)(2), of the old beneficiary, and is
assigned to the same generation, as defined in section 2651, as the old
beneficiary. If the new beneficiary is assigned to a lower generation
than the old beneficiary, the transfer is a taxable gift from the old
beneficiary to the new beneficiary regardless of whether the new
beneficiary is a member of the family of the old beneficiary. In
addition, the transfer will be subject to the generation-skipping
transfer tax if the new beneficiary is assigned to a generation which
is two or more levels lower than the generation assignment of the old
beneficiary. The five-year averaging election for purposes of the gift
tax annual exclusion may be applied to the transfer.
Regarding the application of the estate tax, the value of any
interest in any QSTP which is attributable to contributions made by a
decedent who died after August 20, 1996, and before June 9, 1997, is
includible in the decedent's gross estate. In contrast, pursuant to the
1997 Act amendments to section 529, the value of such an interest is
not includible in the gross estate of a decedent who dies after June 8,
1997, unless the decedent had elected the five-year averaging rule for
purposes of the gift tax annual exclusion and died before the close of
the five-year period. In that case, the portion of the contribution
allocable to calendar years beginning after the decedent's date of
death is includible in his gross estate.
Also, pursuant to the 1997 Act amendments to section 529, the value
of any interest in a QSTP held for a designated beneficiary who dies
after June 8, 1997, is includible in the designated beneficiary's gross
estate.
The Federal estate and gift tax treatment of QSTP interests has no
effect on the actual rights and obligations of the parties pursuant to
the terms of the contracts under State law. In addition, the estate and
gift tax treatment of contributions to a QSTP and interests in a QSTP
is generally different from the treatment that would otherwise apply
under generally applicable estate and gift tax principles. For example,
under most contracts, the contributor may retain the right to change
the designated beneficiary of an account, to designate any person other
than the designated beneficiary to whom funds may be paid from the
account, or to receive distributions from the account if no such other
person is designated. Such rights would ordinarily cause the transfer
to the account to fail to be a completed gift and mandate inclusion of
the value of the undistributed interest in the QSTP in the gross estate
of the contributor under sections 2036 and/or 2038. However, under
section 529, the gross estate of a contributor who dies after June 8,
1997, does not include the value of any interest in a QSTP attributable
to contributions from the contributor (except amounts attributable to
calendar years after death where the five-year averaging rule has been
elected). Also, because a contribution after August 5, 1997, is a
completed gift from the contributor to the designated beneficiary, any
subsequent transfer which occurs by reason of a change in the
designated beneficiary or a rollover from the account of the original
designated beneficiary to the account of another beneficiary is
treated, to the extent it is subject to the gift and/or generation-
skipping transfer tax, as a transfer from the original designated
beneficiary to the new beneficiary. This is the result even though the
change in beneficiary or the rollover is made at the direction of the
contributor under the terms of the contract.
Comments From Notice 96-58
In Notice 96-58, 1996-2 C.B. 226, the Internal Revenue Service
invited comments on section 529 including the requirements for
reporting distributions by QSTPs, the requirements for qualification
and operation of programs, and the treatment of distributions made by
programs for federal tax purposes. Eighteen comments were received. The
comments addressed a broad range of issues, including but not limited
to, those outlined by Notice 96-58, the concept of account ownership
and gift tax rules, enforcement of penalties, accounting and
recordkeeping, and transition relief for programs in existence on
August 20, 1996. The summary below is not intended to be a complete
discussion of the comments. However, all matters presented in the
comments were considered in the drafting of this notice of proposed
rulemaking.
One commenter discussed in detail the requirements that a QSTP be
``established and maintained'' by a State or agency or instrumentality
of a State. The commenter recommended a list of factors to be
considered in determining whether a State maintains the program. This
commenter and others urged that the use of outside contractors or the
holding of program deposits at a private financial institution selected
by the State not be determinative of whether the program was maintained
by the State.
One commenter was endorsed by several others for suggesting two
specific safe harbors to satisfy the requirement that a program impose
more than a de minimis penalty on refunds. The first safe harbor was a
5 percent of earnings penalty on refunds of earnings prior to the
designated beneficiary matriculating, reduced to at least a 1 percent
penalty on refunds of earnings only after the age of matriculation. The
second safe harbor was a fixed-rate safe harbor equal to the lesser of
$50 or 1 percent of the assets distributed. Another commenter suggested
an additional safe harbor based on the return of Series EE savings
bonds. That commenter also suggested that safe harbors are not
necessarily the minimum acceptable penalties and that all facts and
circumstances should be taken into account in determining the adequacy
of penalties that are less than the safe harbor penalties.
Commenters urged that regulations limit or avoid rules requiring
programs to enforce penalties or require substantiation to ensure that
disbursements are used to pay for qualified higher education expenses.
Recognizing however that there may be some misuse in this area,
commenters recommended that checks from QSTPs be marked with a special
endorsement or be payable to both the educational institution and the
designated beneficiary.
Commenters suggested that the prohibition on investment direction
not include a choice between a prepaid tuition program and a savings
program (established and maintained in one State), a choice among
options in a prepaid tuition program, a choice among options for the
initial contribution to the program, or an opportunity to change
investment strategies. One commenter suggested that the prohibition on
investment direction not apply to prevent participation in the program
by program board and staff members.
Commenters suggested several approaches for satisfying the
prohibition on excess contributions. Two safe harbors were proposed;
one was based upon eight times the average annual undergraduate tuition
and required fees at private four-year universities; the other was
based upon five years of tuition, fees, books, supplies, and equipment
at the highest cost institution allowed by the State's program. Other
approaches proposed allowing the provision of adequate safeguards to
prevent excess contributions to be left to the discretion of the
program or allowing the contributor to certify that
[[Page 45022]]
no attempt would be made to overfund the account.
Commenters made suggestions and raised concerns regarding: separate
accounting rules including, but not limited to, the valuation and
tracking of tuition units; the operating rules treating all programs in
which an individual is a designated beneficiary as one program, and
treating all distributions during a taxable year as one distribution;
the application of section 72 to calculate distributions; and, income
tax consequences relating to account ownership, penalties, and
withholding.
The modifications made to section 529 by the Taxpayer Relief Act of
1997 have addressed, in large part, the issues raised by commenters
concerning transition relief for programs in existence on August 20,
1996, estate and gift tax consequences for contributors and designated
beneficiaries, and definitions pertaining to family members and
eligible educational institutions.
Explanation of Provisions
Qualification as Qualified State Tuition Program (QSTP): Unrelated
Business Income Tax and Filing Requirements
The proposed regulations provide guidance on the requirements a
program must satisfy in order to be a QSTP described in section 529. A
program that meets these requirements generally is exempt from income
taxation. However, a QSTP is subject to the taxes imposed by section
511 relating to imposition of tax on unrelated business income. For
purposes of section 529 and these regulations, an interest in a QSTP
shall not be treated as debt for purposes of section 514; consequently,
investment income earned on contributions to the program by purchasers
will not constitute debt-financed income subject to the unrelated
business income tax. However, investment income of the QSTP shall be
subject to the unrelated business income tax to the extent the program
incurs indebtedness when acquiring or improving income-producing
property. Earnings forfeited on educational contracts or savings,
amounts collected as penalties on refunds or excess contributions, and
certain administrative and other fees are not unrelated business income
to the QSTP. A QSTP is not required to file Form 990, Return of
Organization Exempt From Income Tax, however, this does not affect the
obligation of a QSTP to file Form 990-T, Exempt Organization Business
Income Tax Return.
Established and Maintained
The proposed regulations provide that a program is established by a
State or agency or instrumentality of the State if the program is
initiated by State statute or regulation, or by an act of a State
official or agency with the authority to act on behalf of the State. A
program is maintained by a State or agency or instrumentality of a
State if all the terms and conditions of the program are set by the
State or agency or instrumentality and the State or agency or
instrumentality is actively involved on an ongoing basis in the
administration of the program, including supervising all decisions
relating to the investment of assets contributed to the program. The
proposed regulations set forth factors that are relevant in determining
whether a State, agency or instrumentality is actively involved in the
administration of the program. Included in the factors is the manner
and extent to which it is permissible for the program to contract out
for professional and financial services.
Penalties and Substantiation--Safe Harbors
As required by section 529(b)(3), a more than de minimis penalty
must be imposed on the earnings portion of any distribution from the
program that is not used for the qualified higher education expenses of
the designated beneficiary, not made on account of the death or
disability of the designated beneficiary, or not made on account of a
scholarship or certain other payments described in sections
135(d)(1)(B) and (C) that are received by the designated beneficiary to
the extent the amount of the refund does not exceed the amount of the
scholarship, allowance, or payment. The penalty shall also not apply to
rollover distributions described in section 529(c)(3)(C) which are
discussed in the section titled Income Tax Treatment of Distributees,
below. The proposed regulations provide that a penalty is more than de
minimis if it is consistent with a program intended to assist
individuals in saving exclusively for qualified higher education
expenses. Whether any penalty is more than de minimis will depend upon
the facts and circumstance of the particular program, including the
extent to which the penalty offsets the federal income tax benefit from
having deferred income tax liability on the earnings portion of any
distribution. The proposed regulations provide a safe harbor penalty
that a program may adopt for satisfying this requirement. For purposes
of the safe harbor, a penalty imposed on the earnings portion of a
distribution is more than de minimis if it is equal to or greater than
10 percent of the earnings.
To be treated as imposing a more than de minimis penalty as
required by section 529(b)(3) a program must implement practices and
procedures for identifying whether a distribution is subject to a
penalty and collecting any penalty that is due. The proposed
regulations, in the form of a safe harbor, set forth practices and
procedures that may be implemented by a program. The safe harbor
provides that distributions are treated as payments of qualified higher
education expenses if the distribution is made directly to an eligible
educational institution; the distribution is made in the form of a
check payable to both the designated beneficiary and the eligible
educational institution; the distribution is made after the designated
beneficiary submits substantiation showing that the qualified higher
education expenses were paid and the program reviews the
substantiation; or the designated beneficiary certifies prior to
distribution the amount to be used for qualified higher education
expenses and the program requires substantiation of payment within 30
days of making the distribution, the program reviews the
substantiation, and the program retains an amount necessary to collect
the penalty owed on the distribution if valid substantiation is not
produced.
The safe harbor procedure provides that a penalty be collected on
all other distributions except where prior to distribution the program
receives written third party confirmation that the designated
beneficiary has died or become disabled or has received a scholarship
or allowance or payment described in section 135(d)(1) (B) or (C).
Alternatively, distributions may be made upon the certification of the
account owner that the designated beneficiary has died or become
disabled or has received a scholarship or allowance or payment
described above, if the program withholds a portion of the distribution
as a penalty. The penalty may be refunded after receipt of third party
confirmation of the certification made by the account owner.
The safe harbor procedure provides that a program may document
amounts refunded from eligible educational institutions that were not
used for qualified higher education expenses by requiring a signed
written statement from the distributee identifying the amount of any
refund received from an eligible educational institution at the end of
each year in which distributions for qualified higher education
expenses
[[Page 45023]]
were made and of the next year. A program must also have procedures to
collect the penalty either by retaining a sufficient balance in the
account to pay the penalty, withholding an amount equal to the penalty
from a distribution, or collecting the penalty on a State income tax
return.
Other Requirements for QSTP Qualification
As described in section 529(b)(1)(A), the proposed regulations
provide that contributions to the program can be placed into either a
prepaid educational arrangement or contract, or an educational savings
account, or both, but cannot be placed into any other type of account.
Contributions may be made only in cash and not in property as provided
in section 529(b)(2), however, the proposed regulations provide that a
program may accept payment in cash, or by check, money order, credit
card, or similar methods.
Section 529(b)(4) requires that a program provide separate
accounting for each designated beneficiary. Separate accounting
requires that contributions for the benefit of a designated beneficiary
and earning attributable to those contributions are allocated to the
appropriate account. The proposed regulations provide that if a program
does not ordinarily provide each account owner an annual account
statement showing the transactions related to the account, the program
must give this information to the account owner or designated
beneficiary upon request.
Section 529(b)(5) states that a program shall not be treated as a
QSTP unless it provides that any contributor to, or designated
beneficiary under, such program may not directly or indirectly direct
the investment of any contributions to the program or any earnings
thereon. A program will not violate the requirement of this paragraph
if it permits a person who establishes an account to select between a
prepaid educational services account and an educational savings
account, or to select among different investment strategies designed
exclusively by the program, at the time that an educational savings
account is established. However, the proposed regulations clarify that
a program will violate this requirement if, after an account with the
program initially is established, the account owner, a contributor, or
the designated beneficiary subsequently is permitted to select among
different investment options or strategies. A program will not violate
this requirement merely because it permits its board members, its
employees, or the board members or employees of a contractor it hires
to perform administrative services to purchase tuition credits or
certificates or make contributions.
Section 529(b)(6) provides that a program may not allow any
interest in the program, or any portion of an interest in the program,
to be used as security for a loan. The proposed regulations clarify
that this restriction includes, but is not limited to, a prohibition on
the use of any interest in the program as security for a loan used to
purchase the interest in the program.
Section 529(b)(7) requires a program to establish adequate
safeguards to prevent contributions for the benefit of a designated
beneficiary in excess of those necessary to provide for the qualified
higher education expenses of the designated beneficiary. The proposed
regulations provide a safe harbor that permits a program to satisfy
this requirement if the program will bar any additional contributions
to an account as soon as the account reaches a specified limit
applicable to all accounts of designated beneficiaries with the same
expected year of enrollment. The total contributions may not exceed the
amount determined by actuarial estimates that is necessary to pay
tuition, required fees, and room and board expenses of the designated
beneficiary for five years of undergraduate enrollment at the highest
cost institution allowed by the program. The safe harbor in the
proposed regulations applies only to the program. Despite the fact that
a program has met the safe harbor, a particular account established
under the program may have a balance that exceeds the amount actually
needed to cover the particular designated beneficiary's qualified
higher education expenses. Distributions made that are not used for
qualified higher education expenses of the designated beneficiary are
subject to the penalty provisions of section 529(b)(3).
Income Tax Treatment of Distributees
In accordance with section 529(c)(3), the proposed regulations
provide that distributions made by a QSTP, including any benefit
furnished in-kind, must be included in the gross income of the
distributee to the extent that the distribution consists of earnings.
The proposed regulations clarify that term ``distributee'' refers to
the designated beneficiary or the account owner who receives or is
treated as receiving a distribution from a QSTP. As required by section
529(c)(3)(A), distributions under a QSTP must be included in income in
the manner as provided under section 72. Therefore, deposits or
contributions made into an account under a QSTP are recovered ratably
over the period of time distributions are made. The amount of taxable
earnings shall be determined by applying an earnings ratio, generally
the earnings allocable to the account as of the close of the calendar
year divided by the total account balance as of the close of the
calendar year, to the distribution. In the case of a prepaid
educational services account, this method of calculating taxable
earnings utilizes an average value for each unit of education (e.g.,
credit, hour, semester, or other unit of education) that is distributed
rather than the recovery of the cost of any particular unit of
education.
In accordance with section 529(c)(3)(C), the proposed regulations
permit nontaxable rollover distributions. A rollover consists of a
distribution or transfer from an account of a designated beneficiary
that is transferred to or deposited within 60 days of the distribution
into an account of another individual who is a member of the family of
the designated beneficiary. A distribution is not a rollover
distribution unless there is a change in beneficiary. The new
designated beneficiary's account may be in a QSTP established or
maintained by the same State or by another State. A transfer from the
designated beneficiary to himself or herself, regardless of whether the
transfer is to an account within the same QSTP or another QSTP in the
same or another State, is not a rollover distribution and is taxable
under the general rule. The Internal Revenue Service is concerned about
the use of multiple rollovers to circumvent the restriction on
investment direction. In particular, the Internal Revenue Service
requests comments on this issue, including whether limits should be
placed on the number of rollovers permitted within a certain time
period or rollovers back to the original designated beneficiary. No
taxable distribution will result from a change in designated
beneficiary of an interest in a QSTP purchased by a State or local
government or an organization described in section 501(c)(3) as part of
a scholarship program.
Reporting Requirements
The proposed regulations set forth recordkeeping and reporting
requirements. A QSTP must maintain records that enable the program to
produce an annual account balance for each account. See, requirements
related to section 529(b)(4) above. A QSTP must report taxable earnings
on Form 1099-G, Certain Government Payments, to distributees. Any
reporting
[[Page 45024]]
requirements promulgated under section 529(d) apply in lieu of any
other reporting requirement for a program that may apply with respect
to information returns or payee statements or distributions. The
proposed regulations contain more detail on how the information must be
reported.
Estate and Gift Tax
The proposed regulations provide guidance on the gift and
generation-skipping transfer tax consequences of contributions to a
QSTP, a change in the designated beneficiary of a QSTP, and a rollover
from the account of one beneficiary to the account of another
beneficiary under a QSTP. The proposed regulations also provide
guidance on whether and to what extent the value of an interest in a
QSTP is includible in the gross estate of a contributor to a QSTP or
the gross estate of a designated beneficiary of a QSTP. Because of the
amendments to section 529 made by the Taxpayer Relief Act of 1997,
different gift tax rules apply to contributions made after August 20,
1996, and before August 6, 1997, than apply to contributions made after
August 5, 1997. Also, estates of decedents dying after August 20, 1996,
and before June 9, 1997, are treated differently from estates of
decedents dying after June 8, 1997. Comments are requested specifically
on whether there is a need for more detailed guidance with respect to
the estate, gift, and generation-skipping transfer tax provisions.
Transition Rules
In accordance with section 1806(c) of the Small Business Job
Protection Act of 1996 and section 1601(h) of the Taxpayer Relief Act
of 1997, special transition rules apply to programs in existence on
August 20, 1996. The proposed regulations provide that no income tax
liability will be asserted against a QSTP for any period before the
program meets the requirements of section 529 and these regulations if
the program qualifies for the transition relief. A program shall be
treated as meeting the transition rule if it conforms to the
requirements of section 529 and these regulations by the date of final
regulations.
The proposed regulations provide transition rules that grandfather
certain provisions in contracts issued and accounts opened before
August 20, 1996. These contracts may be honored without regard to the
definitions of ``member of the family'' and ``eligible educational
institution'' used in section 529(e) (2) and (3), and without regard to
section 529(b)(6) which prohibits the pledging of a QSTP interest as
security for a loan. However, regardless of the terms of any agreement
executed before August 20, 1996, distributions made by the QSTP are
subject to tax according to the rules of Sec. 1.529-3 and subject to
the reporting requirements of Sec. 1.529-4.
Proposed Effective Date
These regulations are proposed to be effective on the date they are
published in the Federal Register as final regulations. Taxpayers may,
however, rely on the proposed regulations for taxable years ending
after August 20, 1996. Programs that were in existence on August 20,
1996, may also rely upon the transition rules provided.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and, because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for Wednesday, January 6, 1999,
beginning at 10 a.m. in room 2615 of the Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. Because of access
restrictions, visitors will not be admitted beyond the Internal Revenue
Building lobby more than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and eight (8)
copies) by December 16, 1998.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these proposed regulations are Monice
Rosenbaum, Office of Associate Chief Counsel (Employee Benefits and
Exempt Organizations) and Susan Hurwitz, Office of the Associate Chief
Counsel (Passthroughs and Special Industries). However, other personnel
from the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. An undesignated centerheading and Secs. 1.529-0 through
1.529-6 are added to read as follows:
Qualified State Tuition Programs
Sec. 1.529-0 Table of contents.
This section lists the following captions contained in Secs. 1.529-
1 through 1.529-6:
Sec. 1.529-1 Qualified State tuition program, unrelated business
income tax and definitions.
(a) In general.
(b) Unrelated business income tax rules.
(1) Application of section 514.
(2) Penalties and forfeitures.
(3) Administrative and other fees.
(c) Definitions.
Sec. 1.529-2 Qualified State tuition program described.
(a) In general.
(b) Established and maintained by a State or agency or
instrumentality of a State.
(1) Established.
(2) Maintained.
(3) Actively involved.
(c) Permissible uses of contributions.
(d) Cash contributions.
(e) Penalties on refunds.
(1) General rule.
(2) More than de minimis penalty.
(i) In general.
(ii) Safe harbor.
[[Page 45025]]
(3) Separate distributions.
(4) Procedures for verifying use of distributions and imposing and
collecting penalties.
(i) In general.
(ii) Safe harbor.
(A) Distributions treated as payments of qualified higher education
expenses.
(B) Treatment of all other distributions.
(C) Refunds of penalties.
(D) Documentation of amounts refunded and not used for qualified
higher education expenses.
(E) Procedures to collect penalty.
(f) Separate accounting.
(g) No investment direction.
(h) No pledging of interest as security.
(i) Prohibition on excess contributions.
(1) In general.
(2) Safe harbor.
Sec. 1.529-3 Income tax treatment of distributees.
(a) Taxation of distributions.
(1) In general.
(2) Rollover distributions.
(b) Computing taxable earnings.
(1) Amount of taxable earnings in a distribution.
(i) Educational savings account.
(ii) Prepaid educational services account.
(2) Adjustment for programs that treated distributions and earnings
in a different manner for years beginning before January 1, 1999.
(3) Examples.
(c) Change in designated beneficiaries.
(1) General rule.
(2) Scholarship program.
(d) Aggregation of accounts.
Sec. 1.529-4 Time, form, and manner of reporting distributions
from QSTPs and backup withholding.
(a) Taxable distributions.
(b) Requirement to file return.
(1) Form of return.
(2) Payor.
(3) Information included on return.
(4) Time and place for filing return.
(5) Returns required on magnetic media.
(6) Extension of time to file return.
(c) Requirement to furnish statement to the distributee.
(1) In general.
(2) Information included on statement.
(3) Time for furnishing statement.
(4) Extension of time to furnish statement.
(d) Backup withholding.
(e) Effective date.
Sec. 1.529-5 Estate, gift, and generation-skipping transfer tax
rules relating to qualified State tuition programs.
(a) Gift and generation-skipping transfer tax treatment of
contributions after August 20, 1996, and before August 6, 1997.
(b) Gift and generation-skipping transfer tax treatment of
contributions after August 5, 1997.
(1) In general.
(2) Contributions that exceed the annual exclusion amount.
(3) Change of designated beneficiary or rollover.
(c) Estate tax treatment for estates of decedents dying after August
20, 1996, and before June 9, 1997.
(d) Estate tax treatment for estates of decedents dying after June
8, 1997.
(1) In general.
(2) Excess contributions.
(3) Designated beneficiary decedents.
Sec. 1.529-6 Transition rules.
(a) Effective date.
(b) Programs maintained on August 20, 1996.
(c) Retroactive effect.
(d) Contracts entered into and accounts opened before August 20,
1996.
(1) In general.
(2) Interest in program pledged as security for a loan.
(3) Member of the family.
(4) Eligible educational institution.
Sec. 1.529-1 Qualified State tuition program, unrelated business
income tax and definitions.
(a) In general. A qualified State tuition program (QSTP) described
in section 529 is exempt from income tax, except for the tax imposed
under section 511 on the QSTP's unrelated business taxable income. A
QSTP is not required to file Form 990, Return of Organization Exempt
From Income Tax, Form 1041, U.S. Income Tax Return for Estates and
Trusts, or Form 1120, U.S. Corporation Income Tax Return. A QSTP may be
required to file Form 990-T, Exempt Organization Business Income Tax
Return. See Secs. 1.6012-2(e) and 1.6012-3(a)(5) for requirements for
filing Form 990-T.
(b) Unrelated business income tax rules. For purposes of section
529, this section and Secs. 1.529-2 through 1.529-6:
(1) Application of section 514. An interest in a QSTP shall not be
treated as debt for purposes of section 514. Consequently, a QSTP's
investment income will not constitute debt-financed income subject to
the unrelated business income tax merely because the program accepts
contributions and is obligated to pay out or refund such contributions
and certain earnings attributable thereto to designated beneficiaries
or to account owners. However, investment income of a QSTP shall be
subject to the unrelated business income tax as debt-financed income to
the extent the program incurs indebtedness when acquiring or improving
income-producing property.
(2) Penalties and forfeitures. Earnings forfeited on prepaid
educational arrangements or contracts and educational savings accounts
and retained by a QSTP, or amounts collected by a QSTP as penalties on
refunds or excess contributions are not unrelated business income to
the QSTP.
(3) Administrative and other fees. Amounts paid, in order to open
or maintain prepaid educational arrangements or contracts and
educational savings accounts, as administrative or maintenance fees,
and other similar fees including late fees, service charges, and
finance charges, are not unrelated business income to the QSTP.
(c) Definitions. For purposes of section 529, this section and
Secs. 1.529-2 through 1.529-6:
Account means the formal record of transactions relating to a
particular designated beneficiary when it is used alone without further
modification in these regulations. The term includes prepaid
educational arrangements or contracts described in section
529(b)(1)(A)(i) and educational savings accounts described in section
529(b)(1)(A)(ii).
Account owner means the person who, under the terms of the QSTP or
any contract setting forth the terms under which contributions may be
made to an account for the benefit of a designated beneficiary, is
entitled to select or change the designated beneficiary of an account,
to designate any person other than the designated beneficiary to whom
funds may be paid from the account, or to receive distributions from
the account if no such other person is designated.
Contribution means any payment directly allocated to an account for
the benefit of a designated beneficiary or used to pay late fees or
administrative fees associated with the account. In the case of a tax-
free rollover, within the meaning of this paragraph (c), into a QSTP
account, only the portion of the rollover amount that constituted
investment in the account, within the meaning of this paragraph (c), is
treated as a contribution to the account as required by Sec. 1.529-
3(a)(2).
Designated beneficiary means--
(1) The individual designated as the beneficiary of the account at
the time an account is established with the QSTP;
(2) The individual who is designated as the new beneficiary when
beneficiaries are changed; and
(3) The individual receiving the benefits accumulated in the
account as a scholarship in the case of a QSTP account established 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.
Distributee means the designated beneficiary or the account owner
who receives or is treated as receiving a distribution from a QSTP. For
example, if a QSTP makes a distribution directly
[[Page 45026]]
to an eligible educational institution to pay tuition and fees for a
designated beneficiary or a QSTP makes a distribution in the form of a
check payable to both a designated beneficiary and an eligible
educational institution, the distribution shall be treated as having
been made in full to the designated beneficiary.
Distribution means any disbursement, whether in cash or in-kind,
from a QSTP. Distributions include, but are not limited to, tuition
credits or certificates, payment vouchers, tuition waivers or other
similar items. Distributions also include, but are not limited to, a
refund to the account owner, the designated beneficiary or the
designated beneficiary's estate.
Earnings attributable to an account are the total account balance
on a particular date minus the investment in the account as of that
date.
Earnings ratio means the amount of earnings allocable to the
account on the last day of the calendar year divided by the total
account balance on the last day of that calendar year. The earnings
ratio is applied to any distribution made during the calendar year. For
purposes of computing the earnings ratio, the earnings allocable to the
account on the last day of the calendar year and the total account
balance on the last day of the calendar year include all distributions
made during the calendar year and any amounts that have been forfeited
from the account during the calendar year.
Eligible educational institution means an institution which is
described in section 481 of the Higher Education Act of 1965 (20 U.S.C
1088) as in effect on August 5, 1997, and which is eligible to
participate in a program under title IV of such Act. Such institutions
generally are accredited post-secondary educational institutions
offering credit toward a bachelor's degree, an associate's degree, a
graduate level or professional degree, or another recognized post-
secondary credential. Certain proprietary institutions and post-
secondary vocational institutions also are eligible institutions. The
institution must be eligible to participate in Department of Education
student aid programs.
Final distribution means the distribution from a QSTP account that
reduces the total account balance to zero.
Forfeit means that earnings and contributions allocable to a QSTP
account are withdrawn by the QSTP from the account or deducted by the
QSTP from a distribution to pay a penalty as required by Sec. 1.529-
2(e).
Investment in the account means the sum of all contributions made
to the account on or before a particular date less the aggregate amount
of contributions included in distributions, if any, made from the
account on or before that date.
Member of the family means an individual who is related to the
designated beneficiary as described in paragraphs (1) through (9) of
this definition. For purposes of determining who is a member of the
family, a legally adopted child of an individual shall be treated as
the child of such individual by blood. The terms brother and sister
include a brother or sister by the halfblood. Member of the family
means--
(1) A son or daughter, or a descendant of either;
(2) A stepson or stepdaughter;
(3) A brother, sister, stepbrother, or stepsister;
(4) The father or mother, or an ancestor of either;
(5) A stepfather or stepmother;
(6) A son or daughter of a brother or sister;
(7) A brother or sister of the father or mother;
(8) A son-in-law, daughter-in-law, father-in-law, mother-in-law,
brother-in-law, or sister-in-law; or
(9) The spouse of the designated beneficiary or the spouse of any
individual described in paragraphs (1) through (8) of this definition.
Person has the same meaning as under section 7701(a)(1).
Qualified higher education expenses means--
(1) Tuition, fees, and the costs of books, supplies, and equipment
required for the enrollment or attendance of a designated beneficiary
at an eligible educational institution; and
(2) The costs of room and board (as limited by paragraph (2)(i) of
this definition) of a designated beneficiary (who meets requirements of
paragraph (2)(ii) of this definition) incurred while attending an
eligible educational institution:
(i) The amount of room and board treated as qualified higher
education expenses shall not exceed the minimum room and board
allowance determined in calculating costs of attendance for Federal
financial aid programs under section 472 of the Higher Education Act of
1965 (20 U.S.C. 108711) as in effect on August 5, 1997. For purposes of
these regulations, room and board costs shall not exceed $1,500 per
academic year for a designated beneficiary residing at home with
parents or guardians. For a designated beneficiary residing in
institutionally owned or operated housing, room and board costs shall
not exceed the amount normally assessed most residents for room and
board at the institution. For all other designated beneficiaries the
amount shall not exceed $2,500 per academic year. For this purpose the
term academic year has the same meaning as that term is given in 20
U.S.C. 1088(d) as in effect on August 5, 1997.
(ii) Room and board shall be treated as qualified higher education
expenses for a designated beneficiary if they are incurred during any
academic period during which the designated beneficiary is enrolled or
accepted for enrollment in a degree, certificate, or other program
(including a program of study abroad approved for credit by the
eligible educational institution) that leads to a recognized
educational credential awarded by an eligible educational institution.
In addition, the designated beneficiary must be enrolled at least half-
time. A student will be considered to be enrolled at least half-time if
the student is enrolled for at least half the full-time academic
workload for the course of study the student is pursuing as determined
under the standards of the institution where the student is enrolled.
The institution's standard for a full-time workload must equal or
exceed the standard established by the Department of Education under
the Higher Education Act and set forth in 34 CFR 674.2(b).
Rollover distribution means a distribution or transfer from an
account of a designated beneficiary that is transferred to or deposited
within 60 days of the distribution into an account of another
individual who is a member of the family of the designated beneficiary.
A distribution is not a rollover distribution unless there is a change
in beneficiary. The new designated beneficiary's account may be in a
QSTP in either the same State or a QSTP in another State.
Total account balance means the total amount or the total fair
market value of tuition credits or certificates or similar benefits
allocable to the account on a particular date. For purposes of
computing the earnings ratio, the total account balance is adjusted as
described in this paragraph (c).
Sec. 1.529-2 Qualified State tuition program described.
(a) In general. To be a QSTP, a program must satisfy the
requirements described in paragraphs (a) through (i) of this section. A
QSTP is a program established and maintained by a State or an agency or
instrumentality of a State under which a person--
[[Page 45027]]
(1) May purchase tuition credits or certificates on behalf of a
designated beneficiary that entitle the beneficiary to the waiver or
payment of qualified higher education expenses of the beneficiary; or
(2) May make contributions to an account that is established for
the purpose of meeting the qualified higher education expenses of the
designated beneficiary of the account.
(b) Established and maintained by a State or agency or
instrumentality of a State--(1) Established. A program is established
by a State or an agency or instrumentality of a State if the program is
initiated by State statute or regulation, or by an act of a State
official or agency with the authority to act on behalf of the State.
(2) Maintained. A program is maintained by a State or an agency or
instrumentality of a State if--
(i) The State or agency or instrumentality sets all of the terms
and conditions of the program, including but not limited to who may
contribute to the program, who may be a designated beneficiary of the
program, what benefits the program may provide, when penalties will
apply to refunds and what those penalties will be; and
(ii) The State or agency or instrumentality is actively involved on
an ongoing basis in the administration of the program, including
supervising all decisions relating to the investment of assets
contributed to the program.
(3) Actively involved. Factors that are relevant in determining
whether a State, agency or instrumentality is actively involved
include, but are not limited to: whether the State provides services or
benefits (such as tax, student aid or other financial benefits) to
account owners or designated beneficiaries that are not provided to
persons who are not account owners or designated beneficiaries; whether
the State or agency or instrumentality establishes detailed operating
rules for administering the program; whether officials of the State or
agency or instrumentality play a substantial role in the operation of
the program, including selecting, supervising, monitoring, auditing,
and terminating any private contractors that provide services under the
program; whether the State or agency or instrumentality holds the
private contractors that provide services under the program to the same
standards and requirements that apply when private contractors handle
funds that belong to the State or provide services to the State;
whether the State provides funding for the program; and, whether the
State or agency or instrumentality acts as trustee or holds program
assets directly or for the benefit of the account owners or designated
beneficiaries. If the State or an agency or instrumentality thereof
exercises the same authority over the funds invested in the program as
it does over the investments in or pool of funds of a State employees'
defined benefit pension plan, then the State or agency or
instrumentality will be considered actively involved on an ongoing
basis in the administration of the program.
(c) Permissible uses of contributions. Contributions to a QSTP can
be placed into either a prepaid educational arrangement or contract
described in section 529(b)(1)(A)(i) or an educational savings account
described in section 529(b)(1)(A)(ii), or both, but cannot be placed
into any other type of account.
(1) A prepaid educational services arrangement or contract is an
account through which tuition credits or certificates or other rights
are acquired that entitle the designated beneficiary of the account to
the waiver or payment of qualified higher education expenses.
(2) An educational savings account is an account that is
established exclusively for the purpose of meeting the qualified higher
education expenses of a designated beneficiary.
(d) Cash contributions. A program shall not be treated as a QSTP
unless it provides that contributions may be made only in cash and not
in property. A QSTP may accept payment, however, in cash, or by check,
money order, credit card, or similar methods.
(e) Penalties on refunds--(1) General rule. A program shall not be
treated as a QSTP unless it imposes a more than de minimis penalty on
the earnings portion of any distribution from the program that is not--
(i) Used exclusively for qualified higher education expenses of the
designated beneficiary;
(ii) Made on account of the death or disability of the designated
beneficiary;
(iii) Made on account of the receipt of a scholarship (or allowance
or payment described in section 135(d)(1) (B) or (C)) by the designated
beneficiary to the extent the amount of the distribution does not
exceed the amount of the scholarship, allowance, or payment; or
(iv) A rollover distribution.
(2) More than de minimis penalty--(i) In general. A penalty is more
than de minimis if it is consistent with a program intended to assist
individuals in saving exclusively for qualified higher education
expenses. Except as provided in paragraph (e)(2)(ii) of this section,
whether any particular penalty is more than de minimis depends on the
facts and circumstances of the particular program, including the extent
to which the penalty offsets the federal income tax benefit from having
deferred income tax liability on the earnings portion of any
distribution.
(ii) Safe harbor. A penalty imposed on the earnings portion of a
distribution is more than de minimis if it is equal to or greater than
10 percent of the earnings.
(3) Separate distributions. For purposes of applying the penalty,
any single distribution described in paragraph (e)(1) of this section
will be treated as a separate distribution and not part of a single
aggregated annual distribution by the program, notwithstanding the
rules under Sec. 1.529-3 and Sec. 1.529-4.
(4) Procedures for verifying use of distributions and imposing and
collecting penalties--(i) In general. To be treated as imposing a more
than de minimis penalty as required in paragraph (e)(1) of this
section, a program must implement practices and procedures to identify
whether a distribution is subject to a penalty and collect any penalty
that is due.
(ii) Safe harbor. A program that falls within the safe harbor
described in paragraphs (e)(4)(ii) (A) through (E) of this section will
be treated as implementing practices and procedures to identify whether
a more than de minimis penalty must be imposed as required in paragraph
(e)(1) of this section.
(A) Distributions treated as payments of qualified higher education
expenses. The program treats distributions as being used to pay for
qualified higher education expenses only if--
(1) The distribution is made directly to an eligible educational
institution;
(2) The distribution is made in the form of a check payable to both
the designated beneficiary and the eligible educational institution;
(3) The distribution is made after the designated beneficiary
submits substantiation to show that the distribution is a reimbursement
for qualified higher education expenses that the designated beneficiary
has already paid and the program has a process for reviewing the
validity of the substantiation prior to the distribution; or
(4) The designated beneficiary certifies prior to the distribution
that the distribution will be expended for his or her qualified higher
education expenses within a reasonable time after the distribution; the
program requires the designated beneficiary to provide substantiation
of payment of qualified higher education expenses within 30 days after
making the distribution and has a process for reviewing the
[[Page 45028]]
substantiation; and the program retains an account balance that is
large enough to collect any penalty owed on the distribution if valid
substantiation is not produced.
(B) Treatment of all other distributions. The program collects a
penalty on all distributions not treated as made to pay qualified
higher education expenses except where--
(1) Prior to the distribution the program receives written third
party confirmation that the designated beneficiary has died or become
disabled or has received a scholarship (or allowance or payment
described in section 135(d)(1) (B) or (C)) in an amount equal to the
distribution; or
(2) Prior to the distribution the program receives a certification
from the account owner that the distribution is being made because the
designated beneficiary has died or become disabled or has received a
scholarship (or allowance or payment described in section 135(d)(1) (B)
or (C)) received by the designated beneficiary (and the distribution is
equal to the amount of the scholarship, allowance, or payment) and the
program withholds and reserves a portion of the distribution as a
penalty. Any penalty withheld by the program may be refunded after the
program receives third party confirmation that the designated
beneficiary has died or become disabled or has received a scholarship
or allowance (or payment described in section 135(d)(1) (B) or (C)).
(C) Refunds of penalties. The program will refund a penalty
collected on a distribution only after the designated beneficiary
substantiates that he or she had qualified higher education expenses
greater than or equal to the distribution, and the program has reviewed
the substantiation.
(D) Documentation of amounts refunded and not used for qualified
higher education expenses. The program requires the distributee,
defined in Sec. 1.529-1(c), to provide a signed statement identifying
the amount of any refunds received from eligible educational
institutions at the end of each year in which distributions for
qualified higher education expenses were made and of the next year.
(E) Procedures to collect penalty. The program collects required
penalties by retaining a sufficient balance in the account to pay the
amount of penalty, withholding an amount equal to the penalty from a
distribution, or collecting the penalty on a State income tax return.
(f) Separate accounting. A program shall not be treated as a QSTP
unless it provides separate accounting for each designated beneficiary.
Separate accounting requires that contributions for the benefit of a
designated beneficiary and any earnings attributable thereto must be
allocated to the appropriate account. If a program does not ordinarily
provide each account owner an annual account statement showing the
total account balance, the investment in the account, earnings, and
distributions from the account, the program must give this information
to the account owner or designated beneficiary upon request. In the
case of a prepaid educational arrangement or contract described in
section 529(b)(1)(A)(i) the total account balance may be shown as
credits or units of benefits instead of fair market value.
(g) No investment direction. A program shall not be treated as a
QSTP unless it provides that any account owner in, or contributor to,
or designated beneficiary under, such program may not directly or
indirectly direct the investment of any contribution to the program or
directly or indirectly direct the investment of any earnings
attributable to contributions. A program does not violate this
requirement if a person who establishes an account with the program is
permitted to select among different investment strategies designed
exclusively by the program, only at the time the initial contribution
is made establishing the account. A program will not violate the
requirement of this paragraph (g) if it permits a person who
establishes an account to select between a prepaid educational services
account and an educational savings account. A program also will not
violate the requirement of this paragraph (g) merely because it permits
its board members, its employees, or the board members or employees of
a contractor it hires to perform administrative services to purchase
tuition credits or certificates or make contributions as described in
paragraph (c) of this section.
(h) No pledging of interest as security. A program shall not be
treated as a QSTP unless the terms of the program or a state statute or
regulation that governs the program prohibit any interest in the
program or any portion thereof from being used as security for a loan.
This restriction includes, but is not limited to, a prohibition on the
use of any interest in the program as security for a loan used to
purchase such interest in the program.
(i) Prohibition on excess contributions--(1) In general. A program
shall not be treated as a QSTP unless it provides adequate safeguards
to prevent contributions for the benefit of a designated beneficiary in
excess of those necessary to provide for the qualified higher education
expenses of the designated beneficiary.
(2) Safe harbor. A program satisfies this requirement if it will
bar any additional contributions to an account as soon as the account
reaches a specified account balance limit applicable to all accounts of
designated beneficiaries with the same expected year of enrollment. The
total contributions may not exceed the amount determined by actuarial
estimates that is necessary to pay tuition, required fees, and room and
board expenses of the designated beneficiary for five years of
undergraduate enrollment at the highest cost institution allowed by the
program.
Sec. 1.529-3 Income tax treatment of distributees.
(a) Taxation of distributions--(1) In general. Any distribution,
other than a rollover distribution, from a QSTP account must be
included in the gross income of the distributee to the extent of the
earnings portion of the distribution and to the extent not excluded
from gross income under any other provision of chapter 1 of the
Internal Revenue Code. If any amount of a distribution is forfeited
under a QSTP as required by Sec. 1.529-2(e), this amount is neither
included in the gross income of the distributee nor deductible by the
distributee.
(2) Rollover distributions. No part of a rollover distribution is
included in the income of the distributee. Following the rollover
distribution, that portion of the rollover amount that constituted
investment in the account, defined in Sec. 1.529-1(c), of the account
from which the distribution was made is added to the investment in the
account of the account that received the distribution. That portion of
the rollover amount that constituted earnings of the account that made
the distribution is added to the earnings of the account that received
the distribution.
(b) Computing taxable earnings--(1) Amount of taxable earnings in a
distribution--(i) Educational savings account. In the case of an
educational savings account, the earnings portion of a distribution is
equal to the product of the amount of the distribution and the earnings
ratio, defined in Sec. 1.529-1(c). The return of investment portion of
the distribution is equal to the amount of the distribution minus the
earnings portion of the distribution.
(ii) Prepaid educational services account. In the case of a prepaid
educational services account, the earnings portion of a distribution is
equal to the value of the credits, hours,
[[Page 45029]]
or other units of education distributed at the time of distribution
minus the return of investment portion of the distribution. The value
of the credits, hours, or other units of education may be based on the
tuition waived or the cash distributed. The return of investment
portion of the distribution is determined by dividing the investment in
the account at the end of the year in which the distribution is made by
the number of credits, hours, or other units of education in the
account at the end of the calendar year (including all credits, hours,
or other units of education distributed during the calendar year), and
multiplying that amount by the number of credits, hours, or other units
of education distributed during the current calendar year.
(2) Adjustment for programs that treated distributions and earnings
in a different manner for years beginning before January 1, 1999. For
calendar years beginning after December 31, 1998, a QSTP must treat
taxpayers as recovering investment in the account and earnings ratably
with each distribution. Prior to January 1, 1999, a program may have
treated distributions in a different manner and reported them to
taxpayers accordingly. In order to adjust to the method described in
this section, if distributions were treated as coming first from the
investment in the account, the QSTP must adjust the investment in the
account by subtracting the amount of the investment in the account
previously treated as distributed. If distributions were treated as
coming first from earnings, the QSTP must adjust the earnings portion
of the account by subtracting the amount of earnings previously treated
as distributed. After the adjustment is made, the investment in the
account is recovered ratably in accordance with this section. If no
previous distribution was made but earnings were treated as taxable to
the taxpayer in the year they were allocated to the account, the
earnings treated as already taxable are treated as additional
contributions and added to the investment in the account.
(3) Examples. The application of this paragraph (b) is illustrated
by the following examples. The rounding convention used (rounding to
three decimal places) in these examples is for purposes of illustration
only. A QSTP may use another rounding convention as long as it
consistently applies the convention. The examples are as follows:
Example 1. (i) In 1998, an individual, A, opens a prepaid
educational services account with a QSTP on behalf of a designated
beneficiary. Through the account A purchases units of education
equivalent to eight semesters of tuition for full-time attendance at
a public four-year university covered by the QSTP. A contributes
$16,000 that includes payment of processing fees to the QSTP. In
2011 the designated beneficiary enrolls at a public four-year
university. The QSTP makes distributions on behalf of the designated
beneficiary to the university in August for the fall semester and in
December for the spring semester. Tuition for full-time attendance
at the university is $7,500 per academic year in 2011 and 2012,
$7,875 for the academic year in 2013, and $8,200 for the academic
year in 2014. The only expense covered by the QSTP distribution is
tuition for four academic years. The calculations are as follows:
2011
Investment in the account as of 12/31/2011.......... = $16,000
Units in account.................................... = 8
Per unit investment................................. = $2,000
Units distributed in 2011........................... = 2
Investment portion of distribution in 2011 ($2,000
per unit x 2 units).............................. = $4,000
Current value of two units distributed in 2011...... = $7,500
Earnings portion of distribution in 2011 ($7,500-
$4,000)............................................ = $3,500
2012
Investment in the account as of 12/31/2012 ($16,000-
$4,000)............................................ = $12,000
Units in account.................................... = 6
Per unit investment................................. = $2,000
Units distributed in 2012........................... = 2
Investment portion of distribution in 2012 ($2,000
per unit x 2 units).............................. = $4,000
Current value of two units distributed in 2012...... = $7,500
Earnings portion of distribution in 2012 ($7,500-
$4,000)............................................ = $3,500
2013
Investment in the account as of 12/31/2013 ($12,000-
$4000)............................................. = $8,000
Units in account.................................... = 4
Per unit investment................................. = $2,000
Units distributed in 2013........................... = 2
Investment portion of distribution in 2013 ($2,000
per unit x 2 units).............................. = $4,000
Current value of two units distributed in 2013...... = $7,875
Earnings portion of distribution in 2013 ($7,875-
$4,000)............................................ = $3,875
2014
Investment in the account as of 12/31/2014 ($8,000-
$4000)............................................. = $4,000
Units in account.................................... = 2
Per unit investment................................. = $2,000
Units distributed in 2014........................... = 2
Investment portion of distribution in 2014 ($4,000
per unit x 2 units).............................. = $4,000
Current value of two units distributed in 2014...... = $8,200
Earnings portion of distribution in 2014 ($8,200-
$4,000)............................................ = $4,200
12/31/2014 (after distributions)
Investment in the account as of 12/31/2014 ($4,000-
$4000)............................................. = 0
(ii) In each year the designated beneficiary includes in his or
her gross income the earnings portion of the distribution for
tuition.
Example 2. (i) In 1998, an individual, B, opens a college
savings account with a QSTP on behalf of a designated beneficiary. B
contributes $18,000 to the account that includes payment of
processing fees to the QSTP. On December 31, 2011, the total balance
in the account for the benefit of the designated beneficiary is
$30,000 (including
[[Page 45030]]
distributions made during the year 2011). In 2011 the designated
beneficiary enrolls at a four-year university. The QSTP makes
distributions on behalf of the designated beneficiary to the
university in August for the fall semester and in December for the
spring semester. Tuition for full-time attendance at the university
is $7,500 per academic year in 2011 and 2012, $7,875 for the
academic year in 2013, and $8,200 for the academic year in 2014. The
only expense covered by the QSTP distributions is tuition for four
academic years. On the last day of the calendar year the account is
allocated earnings of 5% on the total account balance on that day.
Under the terms of the QSTP, a penalty of 15% is applied to the
earnings not used to pay tuition. The calculations are as follows:
2011
Investment in the account........................... = $18,000
Total account balance as of 12/31/2011.............. = $30,000
Earnings as of 12/31/2011........................... = $12,000
Distributions in 2011............................... = $7,500
Earnings ratio for 2011 ($12,000$30,000).... = 40%
Earnings portion of distributions in 2011 ($7,500 x
.4)................................................ = $3,000
Return of investment portion of distributions in
2011 ($7,500-$3,000)............................... = $4,500
2012
Investment in the account as of 12/31/2012 ($18,000-
$4,500)............................................ = $13,500
Total account balance as of 12/31/12 [($30,000-
$7,500) x 105%].................................... = $23,625
Earnings as of 12/31/2012........................... = $10,125
Distributions in 2012............................... = $7,500
Earnings ratio for 2012 ($10,125$23,625).... = 42.9%
Earnings portion of distributions in 2012 ($7,500 x
.429).............................................. = $3,217.50
Return of investment portion of distributions in
2012 ($7,500-$3,217.50)............................ = $4,282.50
2013
Investment in the account as of 12/31/2013 ($13,500-
$4,282.50)......................................... = $9,217.50
Total account balance as of 12/31/13 [($23,625-
$7,500) x 105%].................................... = $16,931.25
Earnings as of 12/31/2013........................... = $7,713.75
Distributions in 2013............................... = $7,875
Earnings ratio for 2013
($7,713.75$16,931.25)...................... = 45.6%
Earnings portion of distributions in 2013 ($7,875 x
.456).............................................. = $3,591
Return of investment portion of distributions in
2013 ($7,875-$3,591)............................... = $4,284
2014
Investment in the account as of 12/31/2014
($9,217.50-$4,284)................................. = $4,933.50
Total account balance as of 12/31/14 [($16,931.25-
$7,875) x 105%].................................... = $9,509.06
Earnings as of 12/31/2014........................... = $4,575.56
Distributions in 2014 for qualified higher education
expenses (QHEE).................................... = $8,200
Distributions in 2014 not for qualified higher
education expenses (Non-QHEE)...................... = $1,309.06
Total distributions................................. = $9,509.06
Earnings portion of QHEE distribution in 2014
[($8,200$9,509.06) x $4,575.56]............ = $3,945.68
Return of investment portion of QHEE distribution in
2014............................................... = $4,254.32
Earnings portion of Non-QHEE distribution subject to
penalty [($1,309.06$9,509.06) x $4,575.56)] = $629.89
Return of investment portion of non-QHEE
distribution in 2014............................... = $679.17
(ii) In years 2011 through 2013 the designated beneficiary
includes in gross income the earnings portion of the distributions
for tuition. In year 2014 the designated beneficiary includes in
gross income the earnings portion of the distribution for tuition,
$3,945.68, plus the earnings portion of the distribution that was
not used for tuition after reduction for the penalty, i.e. $535.41
($629.89 minus a 15% penalty of $94.48).
(c) Change in designated beneficiaries--(1) General rule. A change
in the designated beneficiary of a QSTP account is not treated as a
distribution if the new designated beneficiary is a member of the
family of the transferor designated beneficiary. However, any change of
designated beneficiary not described in the preceding sentence is
treated as a distribution to the account owner, provided the account
owner has the authority to change the designated beneficiary. For rules
related to a change in the designated beneficiary pursuant to a
rollover distribution see Secs. 1.529-1(c) and 1.529-3(a)(2).
(2) Scholarship program. Notwithstanding paragraph (c)(1) of this
section, the requirement that the new beneficiary be a member of the
family of the transferor beneficiary shall not apply to a change in
designated beneficiary of an interest in a QSTP account purchased by a
State or local government or an organization described in section
501(c)(3) as part of a scholarship program.
(d) Aggregation of accounts. If an individual is a designated
beneficiary of more than one account under a QSTP, the QSTP shall treat
all contributions and earnings as allocable to a single account for
purposes of calculating the earnings portion of any distribution from
that QSTP. For purposes of determining the effect of the distribution
on each account, the earnings portion and return of investment in the
account portion of the distribution shall be allocated pro rata among
the accounts based on total account value as of the close of the
current calendar year.
Sec. 1.529-4 Time, form, and manner of reporting distributions from
QSTPs and backup withholding.
(a) Taxable distributions. The portion of any distribution made
during the calendar year by a QSTP that represents earnings shall be
reported by the payor as described in this section.
(b) Requirement to file return--(1) Form of return. A payor must
file a return required by this section on Form 1099-G. A payor may use
forms containing provisions similar to Form 1099-G if it complies with
applicable revenue procedures relating to substitute Forms 1099. A
payor must file a separate return for each distributee who receives a
taxable distribution.
(2) Payor. For purposes of this section, the term ``payor'' means
the officer or employee having control of the program, or their
designee.
(3) Information included on return. A payor must include on Form
1099-G--
(i) The name, address, and taxpayer identifying number (TIN) (as
defined in section 7701(a)(41)) of the payor;
[[Page 45031]]
(ii) The name, address, and TIN of the distributee;
(iii) The amount of earnings distributed to the distributee in the
calendar year; and
(iv) Any other information required by Form 1099-G or its
instructions.
(4) Time and place for filing return. A payor must file any return
required by this paragraph (b) on or before February 28 of the year
following the calendar year in which the distribution is made. A payor
must file the return with the IRS office designated in the instructions
for Form 1099-G.
(5) Returns required on magnetic media. If a payor is required to
file at least 250 returns during the calendar year, the returns must be
filed on magnetic media. If a payor is required to file fewer than 250
returns, the prescribed paper form may be used.
(6) Extension of time to file return. For good cause, the
Commissioner may grant an extension of time in which to file Form 1099-
G for reporting taxable earnings under section 529. The application for
extension of time must be submitted in the manner prescribed by the
Commissioner.
(c) Requirement to furnish statement to the distributee--(1) In
general. A payor that must file a return under paragraph (b) of this
section must furnish a statement to the distributee. The requirement to
furnish a statement to the distributee will be satisfied if the payor
provides the distributee with a copy of the Form 1099-G (or a
substitute statement that complies with applicable revenue procedures)
containing all the information filed with the Internal Revenue Service
and all the legends required by paragraph (c)(2) of this section by the
time required by paragraph (c)(3) of this section.
(2) Information included on statement. A payor must include on the
statement that it must furnish to the distributee--
(i) The information required under paragraph (b)(3) of this
section;
(ii) The telephone number of a person to contact about questions
pertaining to the statement; and
(iii) A legend as required on the official Internal Revenue Service
Form 1099-G.
(3) Time for furnishing statement. A payor must furnish the
statement required by paragraph (c)(1) of this section to the
distributee on or before January 31 of the year following the calendar
year in which the distribution was made. The statement will be
considered furnished to the distributee if it is mailed to the
distributee's last known address.
(4) Extension of time to furnish statement. For good cause, the
Commissioner may grant an extension of time to furnish statements to
distributees of taxable earnings under section 529. The application for
extension of time must be submitted in the manner prescribed by the
Commissioner.
(d) Backup withholding. Distributions from a QSTP are not subject
to backup withholding.
(e) Effective date. The reporting requirements set forth in this
section apply to distributions made after December 31, 1998.
Sec. 1.529-5 Estate, gift, and generation-skipping transfer tax rules
relating to qualified State tuition programs.
(a) Gift and generation-skipping transfer tax treatment of
contributions after August 20, 1996, and before August 6, 1997. A
contribution on behalf of a designated beneficiary to a QSTP (or to a
program that meets the transitional rule requirements under Sec. 1.529-
6(b)) after August 20, 1996, and before August 6, 1997, is not treated
as a taxable gift. The subsequent waiver of qualified higher education
expenses of a designated beneficiary by an educational institution (or
the subsequent payment of higher education expenses of a designated
beneficiary to an educational institution) under a QSTP is treated as a
qualified transfer under section 2503(e) and is not treated as a
transfer of property by gift for purposes of section 2501. As such, the
contribution is not subject to the generation-skipping transfer tax
imposed by section 2601.
(b) Gift and generation-skipping transfer tax treatment of
contributions after August 5, 1997--(1) In general. A contribution on
behalf of a designated beneficiary to a QSTP (or to a program that
meets the transitional rule requirements under Sec. 1.529-6(b)) after
August 5, 1997, is a completed gift of a present interest in property
under section 2503(b) from the person making the contribution to the
designated beneficiary. As such, the contribution is eligible for the
annual gift tax exclusion provided under section 2503(b). The portion
of a contribution excludible from taxable gifts under section 2503(b)
also satisfies the requirements of section 2642(c)(2) and, therefore,
is also excludible for purposes of the generation-skipping transfer tax
imposed under section 2601. A contribution to a QSTP after August 5,
1997, is not treated as a qualified transfer within the meaning of
section 2503(e).
(2) Contributions that exceed the annual exclusion amount. (i)
Under section 529(c)(2)(B) a donor may elect to take certain
contributions to a QSTP into account ratably over a five year period in
determining the amount of gifts made during the calendar year. The
provision is applicable only with respect to contributions not in
excess of five times the section 2503(b) exclusion amount available in
the calendar year of the contribution. Any excess may not be taken into
account ratably and is treated as a taxable gift in the calendar year
of the contribution.
(ii) The election under section 529(c)(2)(B) may be made by a donor
and his or her spouse with respect to a gift considered to be made one-
half by each spouse under section 2513.
(iii) The election is made on Form 709, Federal Gift Tax Return,
for the calendar year in which the contribution is made.
(iv) If in any year after the first year of the five year period
described in section 529(c)(2)(B), the amount excludible under section
2503(b) is increased as provided in section 2503(b)(2), the donor may
make an additional contribution in any one or more of the four
remaining years up to the difference between the exclusion amount as
increased and the original exclusion amount for the year or years in
which the original contribution was made.
(v) Example. The application of this paragraph (b)(2) is
illustrated by the following example:
Example. In Year 1, when the annual exclusion under section
2503(b) is $10,000, P makes a contribution of $60,000 to a QSTP for
the benefit of P's child, C. P elects under section 529(c)(2)(B) to
account for the gift ratably over a five year period beginning with
the calendar year of contribution. P is treated as making an
excludible gift of $10,000 in each of Years 1 through 5 and a
taxable gift of $10,000 in Year 1. In Year 3, when the annual
exclusion is increased to $12,000, P makes an additional
contribution for the benefit of C in the amount of $8,000. P is
treated as making an excludible gift of $2,000 under section
2503(b); the remaining $6,000 is a taxable gift in Year 3.
(3) Change of designated beneficiary or rollover. (i) A transfer
which occurs by reason of a change in the designated beneficiary, or a
rollover of credits or account balances from the account of one
beneficiary to the account of another beneficiary, is not a taxable
gift and is not subject to the generation-skipping transfer tax if the
new beneficiary is a member of the family of the old beneficiary, as
defined in Sec. 1.529-1(c), and is assigned to the same generation as
the old beneficiary, as defined in section 2651.
[[Page 45032]]
(ii) A transfer which occurs by reason of a change in the
designated beneficiary, or a rollover of credits or account balances
from the account of one beneficiary to the account of another
beneficiary, will be treated as a taxable gift by the old beneficiary
to the new beneficiary if the new beneficiary is assigned to a lower
generation than the old beneficiary, as defined in section 2651,
regardless of whether the new beneficiary is a member of the family of
the old beneficiary. The transfer will be subject to the generation-
skipping transfer tax if the new beneficiary is assigned to a
generation which is two or more levels lower than the generation
assignment of the old beneficiary. The five year averaging rule
described in paragraph (b)(2) of this section may be applied to the
transfer.
(iii) Example. The application of this paragraph (b)(3) is
illustrated by the following example:
Example. In Year 1, P makes a contribution to a QSTP on behalf
of P's child, C. In Year 4, P directs that a distribution from the
account for the benefit of C be made to an account for the benefit
of P's grandchild, G. The rollover distribution is treated as a
taxable gift by C to G, because, under section 2651, G is assigned
to a generation below the generation assignment of C.
(c) Estate tax treatment for estates of decedents dying after
August 20, 1996, and before June 9, 1997. The gross estate of a
decedent dying after August 20, 1996, and before June 9, 1997, includes
the value of any interest in any QSTP which is attributable to
contributions made by the decedent to such program on behalf of a
designated beneficiary.
(d) Estate tax treatment for estates of decedents dying after June
8, 1997--(1) In general. Except as provided in paragraph (d)(2) of this
section, the gross estate of a decedent dying after June 8, 1997, does
not include the value of any interest in a QSTP which is attributable
to contributions made by the decedent to such program on behalf of any
designated beneficiary.
(2) Excess contributions. In the case of a decedent who made the
election under section 529(c)(2)(B) and paragraph (b)(3)(i) of this
section who dies before the close of the five year period, that portion
of the contribution allocable to calendar years beginning after the
date of death of the decedent is includible in the decedent's gross
estate.
(3) Designated beneficiary decedents. The gross estate of a
designated beneficiary of a QSTP includes the value of any interest in
the QSTP.
Sec. 1.529-6 Transition rules.
(a) Effective date. Section 529 is effective for taxable years
ending after August 20, 1996, and applies to all contracts entered into
or accounts opened on August 20, 1996, or later.
(b) Programs maintained on August 20, 1996. Transition relief is
available to a program maintained by a State under which persons could
purchase tuition credits, certification or similar rights on behalf of,
or make contributions for educational expenses of, a designated
beneficiary if the program was in existence on August 20, 1996. Such
program must meet the requirements of a QSTP before the later of August
20, 1997, or the first day of the first calendar quarter after the
close of the first regular session of the State legislature that begins
after August 20, 1996. If a State has a two-year legislative session,
each year of such session shall be deemed to be a separate regular
session of the State legislature. The program, as in effect on August
20, 1996, shall be treated as a QSTP with respect to contributions (and
earnings allocable thereto) pursuant to contracts entered into under
the program. This relief is available for contributions (and earnings
allocable thereto) made before, and the contracts entered into before,
the first date on which the program becomes a QSTP. The provisions of
the program, as in effect on August 20, 1996, shall apply in lieu of
section 529(b) with respect to such contributions and earnings. A
program shall be treated as meeting the transition rule if it conforms
to the requirements of section 529, Secs. 1.529-1 through 1.529-5 and
this section by the date this document is published as final
regulations in the Federal Register.
(c) Retroactive effect. No income tax liability will be asserted
against a QSTP for any period before the program meets the requirements
of section 529, Secs. 1.529-1 through 1.529-5 and this section if the
program qualifies for the transition relief described in paragraph (b)
of this section.
(d) Contracts entered into and accounts opened before August 20,
1996--(1) In general. A QSTP may continue to maintain agreements in
connection with contracts entered into and accounts opened before
August 20, 1996, without jeopardizing its tax exempt status even if
maintaining the agreements is contrary to section 529(b) provided that
the QSTP operates in accordance with the restrictions contained in this
paragraph (d). However, distributions made by the QSTP, regardless of
the terms of any agreement executed before August 20, 1996, are subject
to tax according to the rules of Sec. 1.529-3 and subject to the
reporting requirements of Sec. 1.529-4.
(2) Interest in program pledged as security for a loan. An interest
in the program, or a portion of an interest in the program, may be used
as security for a loan if the contract giving rise to the interest was
entered into or account was opened prior to August 20, 1996 and the
agreement permitted such a pledge.
(3) Member of the family. In the case of an account opened or a
contract entered into before August 20, 1996, the rules regarding a
change in beneficiary, including the rollover rule in Sec. 1.529-3(a)
and the gift tax rule in Sec. 1.529-5(b)(3), shall be applied by
treating any transferee beneficiary permitted under the terms of the
account or contract as a member of the family of the transferor
beneficiary.
(4) Eligible educational institution. In the case of an account
opened or contract entered into before August 20, 1996, an eligible
educational institution is an educational institution in which the
beneficiary may enroll under the terms of the account or contract.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-22465 Filed 8-21-98; 8:45 am]
BILLING CODE 4830-01-U
