Qualified State Tuition Programs

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