Qualified State Tuition Programs

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-106177-97] RIN 1545-AV18

TITLE: Qualified State Tuition Programs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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
§§1.529-2(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 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 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 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 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 §1.529-3 and
subject to the reporting requirements of §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..26 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 center heading and §§1.529-0 through 1.529-6
are added to read as follows:

QUALIFIED STATE TUITION PROGRAMS

§1.529-0 Table of contents.

This section lists the following captions contained in §§1.529-1
through 1.529-6:

§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.

§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.

(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. §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.

§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.

§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.

§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.

§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 §§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 §§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
§§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 §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 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
§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. 1087ll) 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).

§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--

(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.39 529(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 §1.529-3 and §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 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 §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.

§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 §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
§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 §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, 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.49
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 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
§§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.

§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;

(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.

§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
§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.56 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 §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.58 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 §1.529-1(c), and is assigned to the same
generation as the old beneficiary, as defined in section 2651.

(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.

§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, §§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.61 asserted
against a QSTP for any period before the program meets the
requirements of section 529, §§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 §1.529-3 and
subject to the reporting requirements of §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 §1.529-3(a)
and the gift tax rule in §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

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