
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document affected by Public Law 106-554 Section 1(a)(7)[319(5)]]
[Document affected by Public Law 107-16 Section 402(a)(1)-(3)]
[Document affected by Public Law 107-16 Section 402(a)(4)(A)]
[Document affected by Public Law 107-16 Section 402(a)(4)(C)]
[Document affected by Public Law 107-16 Section 402(a)(4)(D)]
[Document affected by Public Law 107-16 Section 402(b)(1)]
[Document affected by Public Law 107-16 Section 402(c)-(g)]
[Document affected by Public Law 107-22 Section 1(b)(3)(C)]
[Document affected by Public Law 107-16 Section 402(a)(4)(E)]
[Document affected by Public Law 107-22 Section 1(a)(6)]
[CITE: 26USC529]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                   Subchapter F--Exempt Organizations
 
              PART VIII--HIGHER EDUCATION SAVINGS ENTITIES
 
Sec. 529. Qualified State tuition programs


(a) General rule

    A qualified State tuition program shall be exempt from taxation 
under this subtitle. Notwithstanding the preceding sentence, such 
program shall be subject to the taxes imposed by section 511 (relating 
to imposition of tax on unrelated business income of charitable 
organizations).

(b) Qualified State tuition program

    For purposes of this section--

                           (1) In general

        The term ``qualified State tuition program'' means a program 
    established and maintained by a State or agency or instrumentality 
    thereof--
            (A) under which a person--
                (i) may purchase tuition credits or certificates on 
            behalf of a designated beneficiary which entitle the 
            beneficiary to the waiver or payment of qualified higher 
            education expenses of the beneficiary, or
                (ii) may make contributions to an account which is 
            established for the purpose of meeting the qualified higher 
            education expenses of the designated beneficiary of the 
            account, and

            (B) which meets the other requirements of this subsection.

                       (2) Cash contributions

        A program shall not be treated as a qualified State tuition 
    program unless it provides that purchases or contributions may only 
    be made in cash.

                             (3) Refunds

        A program shall not be treated as a qualified State tuition 
    program unless it imposes a more than de minimis penalty on any 
    refund of earnings from the account which are not--
            (A) used for qualified higher education expenses of the 
        designated beneficiary,
            (B) made on account of the death or disability of the 
        designated beneficiary, or
            (C) made on account of a scholarship (or allowance or 
        payment described in section 135(d)(1)(B) or (C)) received by 
        the designated beneficiary to the extent the amount of the 
        refund does not exceed the amount of the scholarship, allowance, 
        or payment.

                       (4) Separate accounting

        A program shall not be treated as a qualified State tuition 
    program unless it provides separate accounting for each designated 
    beneficiary.

                     (5) No investment direction

        A program shall not be treated as a qualified State tuition 
    program unless it provides that any contributor to, or designated 
    beneficiary under, such program may not directly or indirectly 
    direct the investment of any contributions to the program (or any 
    earnings thereon).

               (6) No pledging of interest as security

        A program shall not be treated as a qualified State tuition 
    program if it allows any interest in the program or any portion 
    thereof to be used as security for a loan.

               (7) Prohibition on excess contributions

        A program shall not be treated as a qualified State tuition 
    program unless it provides adequate safeguards to prevent 
    contributions on behalf of a designated beneficiary in excess of 
    those necessary to provide for the qualified higher education 
    expenses of the beneficiary.

(c) Tax treatment of designated beneficiaries and contributors

                           (1) In general

        Except as otherwise provided in this subsection, no amount shall 
    be includible in gross income of--
            (A) a designated beneficiary under a qualified State tuition 
        program, or
            (B) a contributor to such program on behalf of a designated 
        beneficiary,

    with respect to any distribution or earnings under such program.

               (2) Gift tax treatment of contributions

        For purposes of chapters 12 and 13--

        (A) In general

            Any contribution to a qualified tuition program on behalf of 
        any designated beneficiary--
                (i) shall be treated as a completed gift to such 
            beneficiary which is not a future interest in property, and
                (ii) shall not be treated as a qualified transfer under 
            section 2503(e).

        (B) Treatment of excess contributions

            If the aggregate amount of contributions described in 
        subparagraph (A) during the calendar year by a donor exceeds the 
        limitation for such year under section 2503(b), such aggregate 
        amount shall, at the election of the donor, be taken into 
        account for purposes of such section ratably over the 5-year 
        period beginning with such calendar year.

                          (3) Distributions

        (A) In general

            Any distribution under a qualified State tuition program 
        shall be 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 of this 
        chapter.

        (B) In-kind distributions

            Any benefit furnished to a designated beneficiary under a 
        qualified State tuition program shall be treated as a 
        distribution to the beneficiary.

        (C) Change in beneficiaries

            (i) Rollovers

                Subparagraph (A) shall not apply to that portion of any 
            distribution which, within 60 days of such distribution, is 
            transferred to the credit of another designated beneficiary 
            under a qualified State tuition program who is a member of 
            the family of the designated beneficiary with respect to 
            which the distribution was made.
            (ii) Change in designated beneficiaries

                Any change in the designated beneficiary of an interest 
            in a qualified State tuition program shall not be treated as 
            a distribution for purposes of subparagraph (A) if the new 
            beneficiary is a member of the family of the old 
            beneficiary.

        (D) Operating rules

            For purposes of applying section 72--
                (i) to the extent provided by the Secretary, all 
            qualified State tuition programs of which an individual is a 
            designated beneficiary shall be treated as one program,
                (ii) all distributions during a taxable year shall be 
            treated as one distribution, and
                (iii) the value of the contract, income on the contract, 
            and investment in the contract shall be computed as of the 
            close of the calendar year in which the taxable year begins.

                      (4) Estate tax treatment

        (A) In general

            No amount shall be includible in the gross estate of any 
        individual for purposes of chapter 11 by reason of an interest 
        in a qualified tuition program.

        (B) Amounts includible in estate of designated beneficiary in 
                certain cases

            Subparagraph (A) shall not apply to amounts distributed on 
        account of the death of a beneficiary.

        (C) Amounts includible in estate of donor making excess 
                contributions

            In the case of a donor who makes the election described in 
        paragraph (2)(B) and who dies before the close of the 5-year 
        period referred to in such paragraph, notwithstanding 
        subparagraph (A), the gross estate of the donor shall include 
        the portion of such contributions properly allocable to periods 
        after the date of death of the donor.

                      (5) Other gift tax rules

        For purposes of chapters 12 and 13--

        (A) Treatment of distributions

            Except as provided in subparagraph (B), in no event shall a 
        distribution from a qualified tuition program be treated as a 
        taxable gift.

        (B) Treatment of designation of new beneficiary

            The taxes imposed by chapters 12 and 13 shall apply to a 
        transfer by reason of a change in the designated beneficiary 
        under the program (or a rollover to the account of a new 
        beneficiary) only if the new beneficiary is a generation below 
        the generation of the old beneficiary (determined in accordance 
        with section 2651).

(d) Reports

    Each officer or employee having control of the qualified State 
tuition program or their designee shall make such reports regarding such 
program to the Secretary and to designated beneficiaries with respect to 
contributions, distributions, and such other matters as the Secretary 
may require. The reports required by this subsection shall be filed at 
such time and in such manner and furnished to such individuals at such 
time and in such manner as may be required by the Secretary.

(e) Other definitions and special rules

    For purposes of this section--

                     (1) Designated beneficiary

        The term ``designated beneficiary'' means--
            (A) the individual designated at the commencement of 
        participation in the qualified State tuition program as the 
        beneficiary of amounts paid (or to be paid) to the program,
            (B) in the case of a change in beneficiaries described in 
        subsection (c)(3)(C), the individual who is the new beneficiary, 
        and
            (C) in the case of an interest in a qualified State tuition 
        program purchased by a State or local government (or agency or 
        instrumentality thereof) or an organization described in section 
        501(c)(3) and exempt from taxation under section 501(a) as part 
        of a scholarship program operated by such government or 
        organization, the individual receiving such interest as a 
        scholarship.

                        (2) Member of family

        The term ``member of the family'' means, with respect to any 
    designated beneficiary--
            (A) the spouse of such beneficiary;
            (B) an individual who bears a relationship to such 
        beneficiary which is described in paragraphs (1) through (8) of 
        section 152(a); and
            (C) the spouse of any individual described in subparagraph 
        (B).

               (3) Qualified higher education expenses

        (A) In general

            The term ``qualified higher education expenses'' means 
        tuition, fees, books, supplies, and equipment required for the 
        enrollment or attendance of a designated beneficiary at an 
        eligible educational institution.

        (B) Room and board included for students who are at least half-
                time

            (i) In general

                In the case of an individual who is an eligible student 
            (as defined in section 25A(b)(3)) for any academic period, 
            such term shall also include reasonable costs for such 
            period (as determined under the qualified State tuition 
            program) incurred by the designated beneficiary for room and 
            board while attending such institution. For purposes of 
            subsection (b)(7), a designated beneficiary shall be treated 
            as meeting the requirements of this clause.
            (ii) Limitation

                The amount treated as qualified higher education 
            expenses by reason of the preceding sentence shall not 
            exceed the minimum amount (applicable to the student) 
            included for room and board for such period in the cost of 
            attendance (as defined in section 472 of the Higher 
            Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the 
            date of the enactment of this paragraph) for the eligible 
            educational institution for such period.

                   (4) Application of section 514

        An interest in a qualified State tuition program shall not be 
    treated as debt for purposes of section 514.

                (5) Eligible educational institution

        The term ``eligible educational institution'' means an 
    institution--
            (A) which is described in section 481 of the Higher 
        Education Act of 1965 (20 U.S.C. 1088), as in effect on the date 
        of the enactment of this paragraph, and
            (B) which is eligible to participate in a program under 
        title IV of such Act.

(Added Pub. L. 104-188, title I, Sec. 1806(a), Aug. 20, 1996, 110 Stat. 
1895; amended Pub. L. 105-34, title II, Sec. 211(a), (b), (d), 
(e)(2)(A), title XVI, Sec. 1601(h)(1)(A), (B), Aug. 5, 1997, 111 Stat. 
810, 812, 1092; Pub. L. 105-206, title VI, Sec. 6004(c)(2), (3), July 
22, 1998, 112 Stat. 793; Pub. L. 106-554, Sec. 1(a)(7) [title III, 
Sec. 319(5)], Dec. 21, 2000, 114 Stat. 2763, 2763A-646.)

                       References in Text

    The date of the enactment of this paragraph, referred to in subsec. 
(e)(3)(B)(ii), (5), probably means the date of enactment of Pub. L. 105-
34, which amended subsec. (e)(3) generally and enacted subsec. (e)(5) 
and which was approved Aug. 5, 1997.
    The Higher Education Act of 1965, referred to in subsec. (e)(5), is 
Pub. L. 89-329, Nov. 8, 1965, 79 Stat. 1219, as amended. Title IV of the 
Act is classified generally to subchapter IV (Sec. 1070 et seq.) of 
chapter 28 of Title 20, Education, and part C (Sec. 2751 et seq.) of 
subchapter I of chapter 34 of Title 42, The Public Health and Welfare. 
For complete classification of this Act to the Code, see Short Title 
note set out under section 1001 of Title 20 and Tables.


                               Amendments

    2000--Subsec. (e)(3)(B). Pub. L. 106-554 struck out ``under 
guaranteed plans'' after ``students'' in heading.
    1998--Subsec. (c)(3)(A). Pub. L. 105-206, Sec. 6004(c)(2), 
substituted ``section 72'' for ``section 72(b)''.
    Subsec. (e)(2). Pub. L. 105-206, Sec. 6004(c)(3), reenacted heading 
without change and amended text of par. (2) generally. Prior to 
amendment, text read as follows: ``The term `member of the family' 
means--
        ``(A) an individual who bears a relationship to another 
    individual which is a relationship described in paragraphs (1) 
    through (8) of section 152(a), and
        ``(B) the spouse of any individual described in subparagraph 
    (A).''
    1997--Subsec. (b)(5). Pub. L. 105-34, Sec. 211(b)(4), inserted 
``directly or indirectly'' after ``may not''.
    Subsec. (c)(2). Pub. L. 105-34, Sec. 211(b)(3)(A)(i), amended 
heading and text of par. (2) generally. Prior to amendment, text read as 
follows: ``In no event shall a contribution to a qualified State tuition 
program on behalf of a designated beneficiary be treated as a taxable 
gift for purposes of chapter 12.''
    Subsec. (c)(3)(A). Pub. L. 105-34, Sec. 211(d), substituted 
``section 72(b)'' for ``section 72''.
    Subsec. (c)(4). Pub. L. 105-34, Sec. 211(b)(3)(B), amended heading 
and text of par. (4) generally. Prior to amendment, text read as 
follows: ``The value of any interest in any qualified State tuition 
program which is attributable to contributions made by an individual to 
such program on behalf of any designated beneficiary shall be includible 
in the gross estate of the contributor for purposes of chapter 11.''
    Subsec. (c)(5). Pub. L. 105-34, Sec. 211(b)(3)(A)(ii), amended 
heading and text of par. (5) generally. Prior to amendment, text read as 
follows: ``For purposes of section 2503(e), the waiver (or payment to an 
educational institution) of qualified higher education expenses of a 
designated beneficiary under a qualified State tuition program shall be 
treated as a qualified transfer.''
    Subsec. (d). Pub. L. 105-34, Sec. 211(e)(2)(A), amended subsec. (d) 
generally. Prior to amendment, subsec. (d) read as follows:
    ``(d) Reporting Requirements.--
        ``(1) In general.--If there is a distribution to any individual 
    with respect to an interest in a qualified State tuition program 
    during any calendar year, each officer or employee having control of 
    the qualified State tuition program or their designee shall make 
    such reports as the Secretary may require regarding such 
    distribution to the Secretary and to the designated beneficiary or 
    the individual to whom the distribution was made. Any such report 
    shall include such information as the Secretary may prescribe.
        ``(2) Timing of reports.--Any report required by this 
    subsection--
            ``(A) shall be filed at such time and in such matter as the 
        Secretary prescribes, and
            ``(B) shall be furnished to individuals not later than 
        January 31 of the calendar year following the calendar year to 
        which such report relates.''
    Subsec. (e)(1)(B). Pub. L. 105-34, Sec. 1601(h)(1)(A), substituted 
``subsection (c)(3)(C)'' for ``subsection (c)(2)(C)''.
    Subsec. (e)(1)(C). Pub. L. 105-34, Sec. 1601(h)(1)(B), inserted 
``(or agency or instrumentality thereof)'' after ``local government''.
    Subsec. (e)(2). Pub. L. 105-34, Sec. 211(b)(1), amended heading and 
text of par. (2) generally. Prior to amendment, text read as follows: 
``The term `member of the family' has the same meaning given such term 
as section 2032A(e)(2).''
    Subsec. (e)(3). Pub. L. 105-34, Sec. 211(a), amended heading and 
text of par. (3) generally. Prior to amendment, text read as follows: 
``The term `qualified higher education expenses' means tuition, fees, 
books, supplies, and equipment required for the enrollment or attendance 
of a designated beneficiary at an eligible educational institution (as 
defined in section 135(c)(3)).''
    Subsec. (e)(5). Pub. L. 105-34, Sec. 211(b)(2), added par. (5).


                    Effective Date of 1998 Amendment

    Amendment by Pub. L. 105-206 effective, except as otherwise 
provided, as if included in the provisions of the Taxpayer Relief Act of 
1997, Pub. L. 105-34, to which such amendment relates, see section 6024 
of Pub. L. 105-206, set out as a note under section 1 of this title.


                    Effective Date of 1997 Amendment

    Section 211(f) of Pub. L. 105-34 provided that:
    ``(1) In general.--Except as otherwise provided in this subsection, 
the amendments made by this section [amending this section and sections 
135 and 6693 of this title] shall take effect on January 1, 1998.
    ``(2) Expenses to include room and board.--The amendment made by 
subsection (a) shall take effect as if included in the amendments made 
by section 1806 of the Small Business Job Protection Act of 1996 [Pub. 
L. 104-188].
    ``(3) Eligible educational institution.--The amendment made by 
subsection (b)(2) [amending this section] shall apply to distributions 
after December 31, 1997, with respect to expenses paid after such date 
(in taxable years ending after such date), for education furnished in 
academic periods beginning after such date.
    ``(4) Coordination with education savings bonds.--The amendment made 
by subsection (c) [amending section 135 of this title] shall apply to 
taxable years beginning after December 31, 1997.
    ``(5) Estate and gift tax changes.--
        ``(A) Gift tax changes.--Paragraphs (2) and (5) of section 
    529(c) of the Internal Revenue Code of 1986, as amended by this 
    section, shall apply to transfers (including designations of new 
    beneficiaries) made after the date of the enactment of this Act 
    [Aug. 5, 1997].
        ``(B) Estate tax changes.--Paragraph (4) of such section 529(c) 
    shall apply to estates of decedents dying after June 8, 1997.
    ``(6) Transition rule for pre-august 20, 1996 contracts.--In the 
case of any contract issued prior to August 20, 1996, section 
529(c)(3)(C) of the Internal Revenue Code of 1986 shall be applied for 
taxable years ending after August 20, 1996, without regard to the 
requirement that a distribution be transferred to a member of the family 
or the requirement that a change in beneficiaries may be made only to a 
member of the family.''
    Amendment by section 1601(h)(1)(A), (B) of Pub. L. 105-34 effective 
as if included in the provisions of the Small Business Job Protection 
Act of 1996, Pub. L. 104-188, to which it relates, see section 1601(j) 
of Pub. L. 105-34, set out as a note under section 23 of this title.


                             Effective Date

    Section 1806(c) of Pub. L. 104-188, as amended by Pub. L. 105-34, 
title XVI, Sec. 1601(h)(1)(C), Aug. 5, 1997, 111 Stat. 1092, provided 
that:
    ``(1) In general.--The amendments made by this section [enacting 
this section and amending section 135 of this title] shall apply to 
taxable years ending after the date of the enactment of this Act [Aug. 
20, 1996].
    ``(2) Transition rule.--If--
        ``(A) a State or agency or instrumentality thereof maintains, on 
    the date of the enactment of this Act, a program under which persons 
    may purchase tuition credits or certificates on behalf of, or make 
    contributions for education expenses of, a designated beneficiary, 
    and
        ``(B) such program meets the requirements of a qualified State 
    tuition program before the later of--
            ``(i) the date which is 1 year after such date of enactment, 
        or
            ``(ii) the first day of the first calendar quarter after the 
        close of the first regular session of the State legislature that 
        begins after such date of enactment,
    then such program (as in effect on August 20, 1996) shall be treated 
    as a qualified State tuition program with respect to contributions 
    (and earnings allocable thereto) pursuant to contracts entered into 
    under such program before the first date on which such program meets 
    such requirements (determined without regard to this paragraph) and 
    the provisions of such program (as so in effect) shall apply in lieu 
    of section 529(b) of the Internal Revenue Code of 1986 with respect 
    to such contributions and earnings.
For purposes of subparagraph (B)(ii), if a State has a 2-year 
legislative session, each year of such session shall be deemed to be a 
separate regular session of the State legislature.''

                  Section Referred to in Other Sections

    This section is referred to in sections 72, 135, 530, 6693 of this 
title.
