NPRM_106177-97_Qualified State Tuition

55918

Corrections

Federal R e s t e r
Val. 63. No. 201
Monday. Oct~ber19, 1 998

Friday, October 9,1998. the docket
5. On the same page, in the same
contains edilorial mectlons ofP ~ ~ ~ ~ U S I number
Y
was o m i t ~ e dand the hcading is colrunn,in the same section, in rhe 13th
published Presidenllal, Rub, Pmpased Ruk,
corrected to read as set forth above.
enuy from the bottom. "3/1/06"should
and Notice documents. These Eorrwims are
cow ,-a
read "3/1/96".
prepared by the mce of tb Federal
6.On page 44549. In the third
Reaster. Aaencv pre~aredcorrections are
issied as &ned bc&ents
and appear in
column.'ininthe
same section, in the 15th
DEPARTMENT OF T R A N S ~ O R T A ~ O N
the approprhte documem cafegorks
entry frnm the bottom. "2/27/96"
elsewhere in ihe issue.
should read "2/7/96".
Federal Aviatbn Admlnistratlon
T ~ I fieclion
S
ofthe FEDERAL REGISTER

14 CFR Part 39

DEPARTMENT OF ENERGY

10713; AW8-17-111

DEPARTMENT OF THE TREASURY

RIM rn ZO-AAM

internal Revenue Sewice

Afnnorlhiness OLmctfves; Textron
Lyc0mbg and Tewyne Conti~ental

26 CFR Part 1

Crassroads Pipeline Company; Notice

of Compflance Filing

Motors Reciprocating Englnes

[REG-loel 7i'-97]

Coz-ection

Comection
In rule docurnerat 98-22240 beginning RIN 1545-AV18
on page 44545 in the issue of Thursday, Qualified State Tuition Programs
August 20, 1998, make the following

Federal Energy Regulatory

Commission
[Dofket No. RW8.432-00DJ

In notice document 98-27 129,
appearing on page 54463 in the lssue of
PI iddy. Octobcr 0 , 1998.the d o c k ~ t
number is corrected to read as set forth
-4

N k e ! No. 98-AHE-27-AD; Amendment 3 4

B U W B CODE 1505DlQ

above.
BILLING COVE 15U5-Dl-0

corrections:

Cunection

539.79 { C m W e q
1. On page 44547, in the second

In proposed rule document 98-22465
kglrnllng on p g c 4501 9 in the iss~iknf
Monday. August 24, 1998, make the

coiumn. in 5 39.13, in t h e airworthiness
DEPARTMENT OF EHERQY

Federa! Ehergy Regulatory

Commlsslbn
[Docket b.C P S & 8 D m ]

Tennessee Gas Pipdine Company;
Notice of Request Undw Blanket
Authorixation
Correction

directive, In the 7th line, "0-360.41A"
should read "0-360-A !A".
2. On page 44548, in the fourth
coIurnn of table 1. in the same section.
in the 6th entry. "L-160015-15''should

read "L- 16005-15".
3.On the sarne page, in the third
column of table 1 . in the same section.
in the 35th entry, "5/13/95" shwld read

"5/3/95".
4. On the same page, in the same
column. in the same section, in the 38th

Irr lot ice docurncnt 98-27126
beginning on page 54470, in the issue of entry. " 1/8/95" should read " 11W96".

following correction:
On page 45026. in the second column,
in 5 1.529-1 (c),in definition patagraph
(2)(i)+in the eighth lim, "20 U.S.C.
1 0 8 7 1 1" should read "20 U.S.C.
108711".
BURG

m o E 1-I-D

45019
-1111 Constitution Avenue. NW.

Federal Register N o ! . 63, No. 163 /Monday, August 24, 1998 /Proposed Rules
a

-

-

circumstances in its moving papers. The where facsimile equipment is availahl~,
motions; information pertaining to
motion s M I be filed within 10 days
prehearing disclosure, conferences,
after service of the General Counsel's
flnd decision. A motion fnr
orders,or hearing dates, times, and
locations: information pertaining to
reconsideration shall state with
subpoenas; and other similar matters;
particularity the extraordinary
circumstances claimed and shall be
except for supporting evidence and
d o ~ u n e n t ssubmitted pursuant to
supported by appropriate c ltatioris.
55 2423.4 and 2423.6 of this subchapter,
5 2423.12 Settlement d unfsrlr labor
may be filed by facsimile transmission.
practltl~echarges aiter a Regionat Diream
detennlnatm to kssue a cmpiaint but prior provided that the entire individual
filing by the party does not exceed 10
to Issuance of a complaint
pages in total length. with normal
(a) Bilateral irlformal settlement
a g m m e n r Prior to issuing a complaint, margins and font sizes.
*
*
*
+
*

the Regional Director may afford the
Charging Party and the Charged Party a

reasomble period of time to enter into
an informal selderne~ilagreement to bc
approved by t h e Regional Director.
When a Charged Party complies with
the rcrms nf an informal settlement
agreement approved by the Regional
Director. no further action is taken in
the case. lf the Charged Party fails to
perform ~ t obllgatiorl~
s
under the
approved informal settlement
agreemerit. the Regional Director may
institute ii ~rtherproceedings.
(b) Unilarml informal settlement
agreement. If the Charging Party erects
not to become a party to an informal
sertlement agleerrsnt which the
Regional Director concludes effectuates
the poIicies of the Federal Service
Iahor-Management Relations Statute.
h e agreement may be between the
Charged Party d the Regional
Director. The Regional Director issues a
letter stadng Lhe gruunds for approving
t h e settlement agreement and declining
to issue a complaint. The Charging farcy
may W i n review of &heRegional
D i m r ' s action by filing an appeal
with the General Counsel in accordance
with 5 2423.1 1 (c) and (dl. The General
Counsel takesaction bn the appeal as
set forth in 3 2423.1 I (f) and @.

a2423.13-2423.1

9 [Resewed]

PART 2429-MISCELlANEOUS
GENERAL REQUIREMENTS

AND

5 . The authority citatlnn for part 2429
continues to read as follows:
A u M t y : 5 U.S.C.7134.
6. Section 2429.24 is amended by
revising paragraph {e) to read as fallows:
92429.24

Place and method of fillng;

acknowledgment.

*

*

*

*

=

(e) All documents filed pursuant to
this section shall be flied in person, by
commercial delivery, by first-clas mail.
or by cerGfied mail; except for unfair
labor practice charges filed in

ac~ol-dance
with 5 2423.6 of this
subchapter. Provided. however, that

Dared: August 19. 1998.
JasephSwerdzmki,
Gcncral Counsel. F~rlera?
J.ahRda&ns
Author*.
Doc. 98-22645 Filed 8-21-98; 8:45 am]

Service.

Washington DC . Alternatively,
taxpayers may submit comments
electronically via the Internet by
selectir~gLhe "Tar Regs" option on the

IRS Home Page, or by submitting
comments directly to the IRS Internet
site at hctp://www.irs.weas.govlprodl
tax regs/comments.html. The public
hearing will be held h room 2615,
Internal Revenue Buildmg, 1 111
C~nstttutloriAvenue NW., Washington.
DC.
FOR FURMER

wornnm

ACT:

Concerning the p m p . w d remlations,
Monice Rosenbaum. (202:) 622-6070;
concerning the proposed estate and gift
tax regulations, Susan Hurwitz (202)
622-3090:concerning subm~ssiorlsand
the hearing, Michael Slaughter. (202)
622-7 190 (not toll-free numbers).
S U ~ N T A R Ymmm-

DEPARTMENT OF THE TREASURY

hfems! Revenue Servke
26 CFR Part 1

Paperwork Reduction Act

The collection of infonnatlon
contained in this notice o f proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with t h ~
Paperwork Reduction Act of 1995 (44

Qualified Stale Tuttkn Programs
A

m

:

Internal Rwenue Service (IRS).

Treasury.
m : Notjce of proposed rulemakfng
and notice of public hearing,
A

T h f document contains
proposed regularions relating to
qualified State t dtion programs
{QSTPs). These pmpowd regulations
SUMMARY:

reflect changes to the law made by the
Small Business Job Pmtectlon Act of
1996 and the Taxpayer Relief Act of
1997. The proposed regulations affect
QSTPs established and maintdned by a
State w agency or instrurnentallry of a
State, and individuak receiving
distributions from QSTE's. This
document also provides notice of a
publlc hearing on these proposed

regulations.
DATES: Written

comments must be

received by November 23, 1998.

Outlines of topscs to be discussed at the
public hcaring scheduled for
Wednesday. January 6,1999. at 10 a.m.
must be received by k e m b e r 16, 1998.
m S S E S : Send submissions to
CC:DOM:CORP:R WG106177-97).
rmm 5226,lnremal Rwenue Service.
POB 7601,Ben Franklin Station.
Washbgtun DC 20044. Submissions
m y be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R F E G 106177-97).
Courier's Desk, Internal Revenue

U.S.C. 3507ld)). Comments on the
collectjon of information should be sent
'
to the Omce of Management and
Budget. A m : Desk Officer for the
Department of the Treasury, Ofice of
Information and ReguIatory Affairs.
Washington DC 20503. with copies to
the lnternal Revenue Service. Atin: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224. Commenrs on
the collection of informalion shoutd be

received by October 23, 1998.
Comments are specifically rprlumed
concerning:
Whether the proposed collection of
h f o m t i o n is fiec-ry
for the proper
performance of the functions of tile
internal Revenue Service, including
whether the Informatlor, will: have
practical utility:
The accuracy ofrhe estimated buden
associated with the proposed collection
of Information;
How t h e quality, u~llliy.a n d clarity of
the inforrnatlon to be collected may be

enhanced:
Hnw

Lhc burden of compiying with

the proposed collection of idormation
may be minimized, including through
the application of automated collection
technjques or ocher ffoi- us of information

technology;and
ktimates of capital or s w - u p costs
and costs of operation, maintenance.
and purchase or services to provide
informationThe collection of i n f m a t t o n in this
proposed wgulatiun is in 55 1.529 -

45020
--

Federal RegkferlVol. 63, No. 163/Monday, August 24,

2(e)(4). 1.529-Z{O and (i),1.529-4, and
1.529-5(b)(Z). This information is
required by the IRS to verify compliance
with sections 529@) (3,
(4).(7)and (d).
This information will be used by the IRS
and individuals receiving distributiom
from QSTPs to derermine that the
taxable amount of the dtstribution has
been computed correctly. The collection
of information is required to obtain ihe
benefit of b i n g a QSTP described in
section 529. The likely respondents
andlor recordkeepers are state
governments and distributees who
receive distributions under the
programs. The burden for reporting
distrlbutlom is reflected in the burden
for Form 1099-G,Certain Government
Payments. The burden for electing to
take certain contributions to a QSTP

or ~ e ~ c a ton
e sbehaliof a designated
beneficiary entitling the beneficiary to a
waiver or payment of qualified higher
edutration expenses, or (2)contribute to
an account established exclusiveiy for
the purpose of meeting qua1ified 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 eligjble educational
instltution, 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 postsecondary educational institution
offeringcredit toward a bachelor's
degree, an associate's degree, a graduatelevel or professional degree, or another
recognized post-set-ondary credential.
The institution must be eligible to
partlcipate in Department of Education
student aid programs.
QSTFs established and maintained by
a State (or agency or hsmmentalitl'
thereof) must require all contributions
to the program be made only in cash.
Neither contributors nor dsignat ed
beneflciar ies may direct the investment
of any conMbutions or any earning on
conelbutions. 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 p e d t y 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

Any distribtlLion, or portion ~ia
distribution, that is transfemd within
60 days under a QSTP to the credit: of
a new designated beneficiary who is a
member of the family ofthe old
designated beneficiary shall not be
treated as a disnibution. A change in the
designated bneficiary of an interest in
a QSTP shall not be treated as a
dlsh-ibution if the new beneficiary js a
member of the family of the old
beneficiary. A member of t h e family
means the spouse of the designated
benefictary or an individual who is
related to the designated beneficiary z
described in section 152(a)(l) 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 urovisions
into account ratably over a five year
addreking the &ate. gift, &d
period in detminlflg the amount of
generation-skipping transfer tax. The
gifts made during fie calendar year is
provisions w k e si$lficantly rwised,
reflected jn the burden for Form 709,
effective prospectively, by the Taxpayer
Federal Gift Tax Return.
Relief Act of 1997 (I 997 Act).
Estimated total annual reparlit@
A conMbution on behalf of a
recordkeeping burden: 705,000hours.
designated beneficiary to a QSTP which
Estimated average annual burden per
is made after August 20, I 996,and
r~pondenviecordkeeper:
35 hours. 10
before August 6. 1997, i s not treated as
minutes.
a taxable gift. Rather. the subsequent
Estimated oum&r of respondents/
waiver (or payment) of qualified higher
recordkeepers: 20:051 .
education expenses of a desjgnared .
Estimated annua 1 Frequency of
beneficiary by (or to) an educatianal
responses: On occasion.
An agency may not conduct or
institution under the QSTP is treated as
sponsor. and a person is not required to
a qualified transfer under section
respond to,a collection ofinformation
2503(e) and is not treated as a transfer
d e s s It displays a valid control
of property by gift for purposes of
section 2501. As such. the contribution
number assigned by the Office of
is not subject to the generation-skkpplng
Management and Budget.
Books w records relating to a
transferI- lmposed by section 2601.
In contrast, under section 529 as
coIlection of information must be
rehined as long as h i r contents may
account of a scholarship or certain other amended by the 1997 Act, a
contribution on behalf of a designated
become material in the admhistrarion
educational allowances. A program
beneficiary to a QSTP after August 5,
of any Internal revenue law. Generally.
must provide adequate safeguards to
tax returns and tax return information
prevent contributians in excess 01 those 1997. I s a completed gift of a present
interest in property under section
are confidential, as required by 26
necessary k~provide for the q d i f l e d
2503(b) from the conkibutor to the
U.S.C. 6103.
higher education expenses of the
beneficiary. A specified individual must designated beneficiary and is not a
Background
qualified transfer within themeaning of
be designated as the beneflciary at the
This document contains proposed
section 2503(eI.The portion of a
commencement of participation in a
amendments to the Income Tax
contribution excludible fmm taxable
QSTP, unless the interests in the
Regulations 126 CFR Part 1) relating to
gifts under section 2503(b)also satisfies
program are purchased by a State or
qualified State tuition programs
the requirements of section 2642(c) (2)
local government or a taxqxempt
and, therefore, i s also excludible b r
described in section 529. Seaiml529
organization described in section
purposes of the generation-skipping
was added to the Internal Revenue Code 501 (c)(3) as part of a scholarship
t~ansfectax imposed under section
by section 1806 of the Small Business
pmgram operated by such government
2601.For purposes of the annual
Job Protection Act of 1996.Public Law
or organization under which
exclusion, a conmibutor may elect to
1 04-188, 1 10 Stat. 1895. Section 529
beneficiaries to be named in the fume
cake certain contributions to a QSTP
was modifled by sections 21 1 and
will receive the Interes~as
into account ratably over a five-year
1601(h)of the Taxpayer Relief Act of
scholarships.
Distributions under a QSTF are
period in determining the amount of
1997, Public Law 105-34, 11 1 Stat. 810
Includible in the gross income of the
gifts made during the calendar year.
and 1092.
Section 529 provides tax-exempt
Under section 529 as amended by the
distributee in h e manner as provided
status t o qualified Stare tuition
under section 72 to the extent not
1997 Act, a transfer which occurs by
excluded from g m s Income under any
programs (QSTPs) esmblished and
reason of a change in the designated
other provision. Distrjbutions include
maintained by a State (or agency or
beneficiary of a QSTP, or a rollover from
instrurnentaIity thereof) under which
jn-kind benefits fumished to a
the account of one beneficiary to the
persons may (1) pt~rchasetuition credits designated beneficjary under a QS'TP.
account of another beneficiary in a

Federal &gister/Vol. 63. No. 163/Munday, August 24, 19981Propsczd Rr~les

One commenter was endorsed by
several others for suggestingwo
specific safe harbors to satisfy the
defined in section 529(e)(2), of the old
requirement that a program impose
beneficiary, and i s assjgrled to the same
more than a de minimis penalv on
generation, as defined in section 2651,
refunds. The first safe harbor was a 5
as the old beneficiary. If the new
beneficiary is assigned t~ a lower
]une 8. 1997. does 11ut ulclude the value percent of earnings ~wnaltyon refunds
generation than the old beneficiary, the of any interest jn a QSTP attributable ro of earnings prior to the designated
transfer is a taxable gift from the old
beneficiary rna@jculeting, reduced to at
contributions from the contributor
beneficjary to t h e new beneficiary
(except amounts attributable to calendar least a 1 percent penalty on refunds of
regardiess of whether h e new
years after dcnth where the five-year
earnings only after the age of
ben&ciary is a member ofthe family of averaging rule has been elected). Also,
matriculation. The second safe harbor
h e old beneficiary. In addition, the
was a fuced-rate safe harbor equal to h e
Secause a contribution after August 5 ,
transfer will be subject to the
lesser o f $50 or 1 percent o f the assets
1997, is a completed gift from the
ges~eration-skippingtransfer tax if the
dktributed. Another cornenter
conuiburnr to the designated
new beneficiary is assigned to a
suggested an addl tional safe ha bor
b e n e f i c t q ,any subsequent transfer
generationwhich is two or mare levek
based on the return of Series 'EEsavings
which occurs by reason of a change in
lower t h a n the generaion asignment of the designated beneficiary or a rollover
bonds. That commenter also suggested
the old b ~ n e fcinry.
i
T ~ five-year
P
that safe harbors are n o t necessarily the
from the account or the original
averaging election for purposa of the
designated beneficiay to the account of minimum acceptable penalties and that
gift tax annual exclusion may be applied another hneficiary is treated. to the
all facts and circumstances should be
to the transfer.
taken into account In determining the
extent it is subject to the gift and/or
Regding
application the esfate generation-skipping transfer tax, as a
adequacy of penalties that are less than
tax, the vaiue of any lnterest in any
thc mfc harbor penalties
transfer irom the original desigrlated
QSTP which is attributable to
benefjciary to the new beneficiary. This
Commenters urged that regulations
contributions made *y a decedent who
i s the result even though the change in
limit or avoid rules requiring prngmms
died after
20,
and before
beneficiary or the rollover is made at the to enforce penalties or reguire
June 9, 1997. is ir~cludlblein thc
dlrectlur~of the contributor under the
substantiation to ensure that
decedent's grass estate. In contrast,
terms of the contract.
disbursements are used to pay for
pursuant to the 1997 Act amendments
qualilied hjgher education expenses,
Commentr From Notice 96-58
to section 529, the value of such an
Recognizing however that there may be
intcrest is not incltrdihl~in the gross
In Notlce 96-58, 1998-2 C.B. 226, the some misuse in this atea,commenters
estate of a decedent who dies after June
recommended that checks from Q S W s
Revenue Service invited
8'
the decedent had 'lected comments on section 529 Including rhe be marked with a special endorsement
for purposes rquirements for reporting distributions or be payable to both the educational
the five-yearaverag'ng
of the gift tax annual exclusion and died hy QsTPs,the requirements for
institution and the designated
before the 'lose ofthe
period. qualificauon and operation of programs. beneficiary.
ln that mse, the p r d n n of the
and the treatment of distributions made
Cornenters suggested that the
conmibution altocable to calendar years
by programs for federal tax purposes.
prohibition on investment direction not
the decedent'sdate of
E$$teen comments were received. The
include a choice between a prepaid
death is includjble in his gross estate.
comments addressed a broad range OT
tuluor~pugram and n swings program
Also, pursuant to the 1997 Act
issues, including but not limited to,
(established and maintained in one
amendments to section 529, the value of
those outlined by Notice 96-58. the
State). a choice among options in a
any interst In a QSTP held for a
desigrwtcd bnefidary
who
afiF?r
concept of account owneiship and gift
prepaid tuition progmm. a choice
tax rules. e n f u ~ c e r ~ ~ of
e npenalti-,
t
among options fnr tht? initial
31me 8. 1997, Is includible h the
designatd benefidary's grass ate.
and recordkeepin&and
contribution to the program, or an
transition relief for programs in
apportuniq to change investment
The Federa1 estate and gift tax
existence on August 20. 1996.T%e
strategies. One cornmerater suggested
treatment ofQSTP interests has no
summary below 1s not intended to be a
that @ pmhibition on investment
effect on the acmal rights and
direction not apply to prevent
obligations of the parties purs-t
to the compiete dhcussion of the comments.
participation in the program by program
terms of the contra,-& under state law, However, all matters presented in the
comments were considered in the
board and staff members.
In addition, the estate and gift lax
dmfung of this notice of proposed
Commenters sugested several
upamen<~ T t - u r ~ u i b u t l u ntos a QSTP
rulemaking.
approaches for satisfying die prohibirion
and interests in a QSTP Is generally
on Excess contributions. Two safe
One commenter discussed in detail
different from the treament that would
harbors were proposed: one was based
the requirements that a Q S V be
otherwise apply under generally
applirrable estate and gift tax principle%. "established and maintained by a State upon eight times the average annual
urhderpduotc tuition and rquimd fees
or agency or instrumentality of a State.
For example, under most contracts. the
at private four-year universities; the
The commenter recommended a list d
contributor may retain the right to
change the designated beneficiary ofan factors to be considered In determining other was based upon five years of
supplies, and
whether a State maintarns the program. tuiuon, fes. &k:,
account. to designate any person other
equipment at the highest cost institution
?his commenrer a i d od1er.s IL-ged that
than the designated beneficiav to
allowed by the State's program. Other
the use of outside contractors or the
whom funds may be paid from the
proposed allowing the
account, or to receive distributions from holding of program deposits at a private approa*
provision OF adequate safeguards to
fl nancia1 institution selected by the
the account If no such other person is
prevent excess c~ntributionsto be left to
State not bc determinative of whether
designated. Such rights would
the discretion of rhe progmm or
the program was maintained by the
ordlnari ly cause the transfer to the
allowing the contributor to certify that
State.
account to fail to be a completed gift
QSTP, is not a taxable g i f t if the new

bcndSciq is a member ofthe family. as

-r(

45021

and mandate inclusion of the value of
the undistributed interest in the QSTP
in the gross estate of the contributor
under sectlons 2036 and/or 2038.
However, under section 529, the gross
estate of a contrjbutor who dies after

'

45022

Federal Register / VoZ. 63, No. 163 /Monday, August 24, 1998 1Proposed Rules

no attempt would be made to overfund
the account.
Comrnenters made suggestions and
raised concerns regarding: separate
accounting rules including. but not
limited to,the valuation and rracking of
tuition units; thc operating rules eeating
all prDgrams in which an individuai is
a d-ignated h e f i d a r y as one program,
and treating all distributions during a
taxable year as one distribution; the
application ofsection 72 to calculate
disulburlom: and, income tax

Established and Maintain&
The proposed reguIarians provide that
a program i s established by a Statf: or
agency or instrumentlllity of the State if
the program is initiated by State statute
or regulation. or by an act of a State
ofijcid or agency with the authority to
act on behalf of the Stme. A program is
maintained by a State or agency or
instrumentality of a State if all t h e terms
and conditions Of the Program are set by
the State or agency or InstnrmentaIit~
and the State or agency or
instmentality fs actively hvolved on
an ongoing basis in the administration
of the Program,
s"~eniising
all decisions relating to the inveshnent
of sets contributed to the program.
The proposed regulatjons set forth

consequences relating to account
ownenhip, penalties, and withholding.
The modifications made to section
529
'he
Act
lgg7
issues
have addressed' inlarge part'
raised by comrnenters concerning
transition relief for pmg~;unsin
factorsthat
are
in determjnbg
whether
a State, agency or
existence on August 20,1996. estate and
Instrumentality
is actively involved in
gift tax consequences for mntrlbutors
the administration of the program,
and designated beneficiaries, and
Included in the factors is the manner
definitions pertaining to family
and extent to which i t is permissible for
members and eligible educatlonai
the program to contract out for
institutions.
professional and fmancial services.
Explanation ofProvisions
Penalties and Substantiation-Safe
Qualificatjon as Qualified Stale Tuition Harbors
Progmm (QSTP): Unrelated Business
As
by
529(b)(3),
a
Income Tax and Filing Requirements
more than de minimis penalty must be

The proposed regulations provide
guidance nn the requ'rcmenb a p r o p r n
must satisfy in order to be a QSTP
descrhd in section 529. A P r o w that
generally is
meets these
from
taxation*
a QSTP is subject the
section
relathgto impositionof
tax On
business jncome. For
purposes of section 529 and these
regulations, an interest In a QSTP shall
not be treated as debt forpurposes
51 4;
investment
income earned on contributions to the

program by purchasers will not
constitutedebt-fhanced income subject

imp0sed
On the
portion
ofisany
distribution
from h e program
that
not
used for the qualified higher education
experws of the designated beneficiary.
mad,
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) (E3) and (C)that are
received by the designated beneficiary
to t h e extent the amount of the refund
doesnot exceed the amount of the
scholarship. allowance, or payment. The
penalty shall afso not apply to rollover

,

dtstdbutions

jn section

529Ic)(3)(C)which are discussed in the
St?C tlon titled Incnn-feTax T ~ a r m e nof
t
to the unrelated business income tax.
Dis&ibutees, &low. The proposed
However, investment income of the
regulations provide h a t a penalty is
QSTP shall be subject to the unrelated
more than de minimis if it rs consistent
business income tax to the extent the
with a program intended to assist
program incurs indebtedness when
Individuals in saving exclusively for
acquiring or improving incomequalifledhighcreducationexpenses.
producing property. Earnings fbrfeited
Whether any penalty is more than de
on educational contracts or savings.
minimis will depend upon the facts and
amounts collected as penalties an
circumstance of the particular program.
refunds or excess contributions. and
including the extent to which the
certain administrative and other fees are penalty offsets the federal income tax
not unrelated business income to the
benefit from having deferred income tax
QSTP. A QSTP is not required to file
liability on the earnings portion ofany
Form 990,Return of Organization
distribution. The proposed regulations
Exempt From Income Tax, however, this provide a s f e harbor penalty that a
does not affect t h e obligation of a QSTP
program may adopt lot satisfying this
to fiIe Form 990-T, Exempt
requirement. For purposes of the safe
harbor. a penalty imposed on the
Organization Business Income Tax
earnings portion of a distribution is
Return.

more than de minimis if it is equal to
geater
than l o percent ofthe

Or

emLngs-

To be treated as imposing a more than
de minimis penalty as required by
5291b)(
3) a program must
implement practices and procedures for

identifying whether a disPibution is

subject to a
and collecting any
penalty that is due. T h e proposed
of a safeharbor,
regulations, inhe
set forth pm,-tic-s and pmcedures that
b, implementd by a program, T~~
safe harbor provides that distributions
are treated as p a ~ e n t of
s qualified
higher education
if the
distdbutjon is made dkectjy to

e,idbIeeducational insdlution; the
distribution i s made in t h e form of a
check payable to bath the designated
beneficiary and the eligible educational

institution;the distribution is made
after the delgnated beneficiary submits

substantiation showing that the
qualified highereducation expenses
pid and the program reviews be
substantiation;or h e designated
beneficiary certifies prim to disulbution
the amount to be used for qualified
higher education expenses and the
program quires substantiation of
payment within 30 days of making
reviews hp
distribution, he
substantiation,and the program retains
,,,,,T
to collect the
penalty owed on the distribution if valid
isnor pmduced.
The safe harbor procedure provides
h a t a penalty be collectpd on d l other
distrfhtions except where
to

,,

,,,,,,,

disrfibution the

receives

written third p q conf-arion
that h e
designated hnefjciary has died or
become disabled or has received a
scholarshfp or allowance or payment
described -Uon
135(4(l) (B)or (C).
Alternatively, dfsmbutions may be

made upon rhe ~ e r t ~ c a t i oofnthe
account owner that the designated
knefidary has died or become disabled
or has received a scholarship or
allowance or payment described above,
if h e program withholds a portion of
the distribution as a penalty. The
penalty may be refunded after receipt o f
thirdpartyconfirnationofthe
certificatio~lmade by the account
owner.

The safe harbor procedure provides
program may document amounts
refunded from ellgible educational
institutions that were not used for
qualified higher education expenses by
rquiring a signed wrinen staternat
from the distrfb~teeidentifying the
amount of any wfund received from an
eligible educationat institution at the
end of each year in which disrrlbutions
for qualiLed higher education expenses
that a

45023
contributions made into an account

Federal Register / Vo 1. 63, No. 163/Monday. August 24. 1998/Propsed Rules
board members or employees or a
conh-actor it hires to perform
adminf strative services to purchase
tuition credits or certificates or make
conmi butions.
Section 529{b) (6)provides that a
program may not allow any interest in
or colleciing the penalty on a State
the program, or any portion of an
Income tax return.
interest in the program. to be used as
Othm Requiremena for QSTP
security for a loan. The proposed
Qualfication
regulations clarify that this restrlcti ~n
As described h section 5 29Ib)f 1) (A).
i n c l u d ~but
~ , is not limited to, a
prohibition on the use of m y interest in
the proposed regulations provide that
contributions to the program w be
the program as security for a loan used
placed into either a prepaid educational to purchase the interest In the program.
Section 529(b)(7) requires a program
arrangement O r contract. or an
to estabibh adequate safeguards to
educational savings account, or both.
but a n n o t be placed into any other type prevent contributions for the benefit of
a designated beneficiary in excess of
of account.Contributions may be made
those necessary to provide for the
only in cash and not in properq as
provided in section 529b) (2). however. qualified higher edumtion expenses of
the designated beneficiary. The
the proposed regulations provide that a
program may accept payment In cash, or proposed regulations prov I de a safe
harbor that permits a program to satisfy
by check. money order, credit card, or
this requirement if h e program will bar
similar methods.
Section 529@) (44) requires that a
any additional contrihutions to an
program provide separate accounting for amount as sbon as the account reaches
each designated beneficiary. Separate
a specified limit applicable to all
accounting requires that contrlburlons
accounts of designated beneficfades
for the benefit of a designated
with the same expected year of
beneficiary and earning attributable to
enrollment.The total contributions may
those contributions are allocated to the
not exceed the amount determined by
actuarial estimates that i
s n e c e s s q to
appropriate account. The proposed
regulations provide that if a program
pay tuition, required fees, and room and
does not ordinarily provide each
board expenses o f the dsignated
account owner an annual account
benefiddry for five years of
statement showing the transactions
undergraduate enrollmenr at the highest
related to the account, the program must cast institution allowed by the program.
give this information to the account
T h c safe harbor in the proposed
owner or designated beneficiary upon
regulations applies only to the program.
Despite the fact that a program has met
r uest.
%ection 529(b)(5)states that a program the safe harbor, a prtjcular account
shall not be treated as a QSTP unless i t
established under the program may have
provides thar any contributor to. or
a balance that exceeds the amomt
designated beneficiary under. such
actually needed to mver the particular
program may not directly or indirectly
designated beneficiary's qualified hlgher
direct the investment of any
education expenses. INstributlons made
contributions to the program or any
hat are not used for qualified higher
earnings thereon. A program will not
education expenses of the designated
violate the requirement of this
ben&ciary are subject to the penalty
paragraph if it permits a person who
provisions of section 529(b) (3).
establishes an account to select between
income Tax Treatment ofDistributees
a prepaid educational services account
In accordance with section 529(cf(3),
and an educational savings account, or
the propmd regulations provide that
to select among different investment
dktdbutlons made by a QSTP,
strategies designed exclusively by the
program, at the time that an educational including any benefit furnished in-kind,
must be included in the gross income of
savings account is established.
the distributee to the extent that the
However, the propa-ed regulations
distribution consists of earnings. The
clarify that a program will violate this
requrrement if, after an account with the proposed regulations clarify that term
"disuibutee" refers to the designated
program initially is established, the
beneficiary or rhe account owner who
account owner. a contributor, or the
receives or is ueated as receiving a
designated beneficiary subsequently is
distribution from a QSTP.As required
permitted to select among different
by section 529(c)(3)(A). distributions
invesbnent options or strategies. A
under a QSTP must be included in
program will not violate this
income in the manner as provided
requirement merely because it permits
its board members. its employees, or the under section 72. Therefore, deposits or

were made and of the next year. A
program must also have procedures to
collect the penalty either by retaining a
s m c i e n t balance in the account to pay
the penalty, withholding an amount
equal to the penalty from a distribution,

"

'

under a QSTP are recovered ratably over
the period of t i m e distributions are
made. T h e amount of taxable earnings
shall be determined by applying an
earnings rat to, 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 ofeducation (e.g.,
credit, hour, semester, or other unit of
education) that is dis~ibutedrather than
the recovery of the cost of any particular

unlt o f education.
In accordance with section
529(c)(3) [C), the proposed regulations
permit nontaxable rollover
dbtrlbutions. A rollover consists of a
distribution or transfer from an account
of a designated beneficiary that i s
transferred to or d~pasitedwithin 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 dfstributbn unless there is a
change in beneficiary.The new
designated beneficiary's account may be
in a QSTP established or maintained by
the same Stace or by another State. A
transFer from the designated beneflclary
to himself or herself, regardless of
whether the transfer is to an account
within the same QSPor another QSTP
in the same or another State, is not a
roilover distribution and is taxable
under the general rule. The Internal
Revenue Service is concerned about the
use of multiple rollnvers to circumvent
the restriction on investment direction.

In particular, h e Internal Revenue
Service requests comments on this
Wue, including whether Limits should
be placed on the number of rollovers
permitted within a certain Lime 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, requkements related
to section 529(b)(4) above. A QSfP must
report taxable earnings on Form 1099G,Certain Government Payments. to
distributees. Any reporring

45024

Federal Register /Vo11. 63,

-

requirements promulgated under
section 529(d) apply in lieu of any other
reporring 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 proposd regulations provide
guidance on the gift and generationskipping transfer tax consequences of
contributiom to a QSTP,a change in the
designated benefidary 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 gros estate of a
contributor to a QSTP or the gmss estate
of a designated beneficiq of a QSTP.
Because of the arnendmenrs to section
529 made b y the Taxpayer Relief Acr of
1997, different gift tax rules apply to
contributions made after August 20,
I 996,and before August 6. 1997, than
apply ru contributjons made after
August 5, 1997. Also. estate o f
decedents dying after August 20, 1996.
and before June9, 1997,are ireated
differently from estates ofdecedents
dying after June 8.1 997.Comments are
requested specifically on whether there
is a need for more detalled guidance
with respect to the elate, gift, and
generation-skipping transfer tax
provisions.

NO.163/Monday,

August 24. ,9981Proposed Rules

.
-

pledging of a QSTP interest as security
for a loan. However, regardjessofthe
terms of any agreement executed before
August 20. 1996, distributions made by
the QSTP are subject to tax according to
the rules of 5 1.529-3and subject to the
reporting requirements of 5 1.529-4.
Proposed Effctive Date
lhese regulatlons are proposed to be
effective on the date they are published
In the Federal Register as ilnal
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 determlnw! 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 entitles, 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 Advmacy of the Small
Business Admtnistration for comment
on its impact on small business.
Comments and Public Hearing
Transition Rules
Before these proposed regulations are
lo accordance with section 1806(c) of
the Small Business JobProtection Act of adopted as final regulations,
consideration will be given to any
1996 and secdan 1601(h) of the
written comments (a signed original and
Taxpayer Relief Act of 1997. special
eight (8) copies) thar are submitted
transition rules apply to programs In
timely to the UiS. All comments will be
existence on August 20. 1996. The
avatlable far public inspection and
proposed regulations provide that no
copying.
income tax Hability will be asserted
A public hearing has h e n scheduled
against a QSTP for any period before the
for
Wednesday, January 6. 1999.
program meets the requirements of
beginning at 10 a.m. In room 261 5 of the
section 529 and these regulatlons if the
lntemal Revenue Building. I1 11
program qualifies for the transition
Constitution Avenue, NW..Washington,
relief. A program shall be treated as
meeting the transition rule if it conforms DC. Because of access restrictions,
visitors will not be admitted beyond the
to the requirements of section 529 and
hternal Revenue Bullding lobby more
hese regulations by the date of final
than 15 mhutes before the heafing
regulations.
starts.
The proposed regulations provide
The rules of 26 CFR 601.601(a)@)
transition rules that grandfather certain
apply to the hearing.
provbions in conuacts issued and
Persons who wish to present oral
accounts opened before August 20,
comments at the hearing must submit
1996. These contracts may be honored
written comments and an outline of the
without regard to the dennitions of
topics to be discussed and h e time to
"member of the famlly" and "eltable
educadonal institution" used in section be devoted to each topjc (signed original
529Ie) (2) and (31, and without regard to and eight (8) copies) by Decembw 16,
1998.
section 529(b) (6)whtch prohibits the

A perlod of 10 minutes will be
allotted to each person for making
comments.
An agenda showing the scheduling of

the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.

Drafing Information
The principal authors ofthese
proposed regulations are Monice
Rosenbaum. M i c e OF Associate Chief
Counsel (Employee Benefits and Exempt
Organitations) and Susan Hunvjtz.
Office of the Associate Chief Counsel
(Passthroughs and Special lndusiries).
However. other persomd from the mS
and Treasury Department participated
in their development.
Ltst of Subjects In 26 CFR Part I
Income taxes, Reporting and
recordkeeping requirements.

Proposed Amendments to the
Regulalions
Accordingly, 26 CFR part 1 is
proposed to be amended s follows:
PART 1--INCOME TAXES

Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
Aurhority: 26 U.S C. 7805 * * *
Par. 2. An undesignated
centerheading and 55 1.529-0 through
1.529-6 are added to read as foIlows:
Qualified State Tuition Programs

5 1.5294

TaMe ofcontents.

This section lists the following
captions contained in 55 1.529-1
through 1.52%6:
5 1.52% 1 Qualified State tuition prngmm.
undated business Income tax and
deLhitlons.
(a) In general.
(b)Unrelated businw Income tax rules.
( I ) Application of section 51 4.
(2) Pem1tle.s and forfeitures.
(3)Adrnlnkirative mid other Fes.
(c) DeBnitions.

5 I.529-2

Qudis7ed State tuitim program
described.
(a) In general.
(b) Established and maintain4 by a Stale o r
agency or imlrurnentality ofa State.
{ I ) Established.
(2) Mahtdned.
(3) Anively involved.
(c) Permissible uses ofcontributions.
(4Cash rrmtributions.
(e) Penalties on refunds.
(I) General rule.
(2) More than de minimis penalty
(i) In generd.
(ii) Safe h a r b r .

-

Federal Register/Vol. 63, No. 163/Monday. August 24, 1998/Proposed Rules

-

(c) Estate t a Zrreatnlent for estates of
decedents dying after August 20, 1996,

45025

--

maintain prepaid educational
arrangements or contracts and
and before June 9.1997.
educational savings accounts, as
(d) Estate r i u ; beatmerit for estates of
administrative or maintenance fees, and
decedents dying a f e r June 8,1997.
other similar fees including late fees.
( I ) In general.
service
charges, and finance charges, are
(2) fhcess contributions.
not unrelated business income to the
(3) h i p a t e d beneficiary decedents.
QSTF.
51.52%6 Transition rules.
(c) h h i t i o n s . For purposes of
date.
section 529. this section and 5s 1.529(b) b ~ m nuinlamed
s
on August 20. 1996. 2 through 1.529-6:
(c) Retroactive effect.
Account means the formal record of
expenses(4Contracts entered into and accounts
transactions relating to a particular
m Procedures
to collect penalty.
opened before August 20. 1996.
(f) Separate accounthg.
designared beneficiary when it is used
(1) In general.
(g) No investment direction.
alone without further modification in
(2) Interest in program pledged as security for
(h)No pledging of interest x security.
these regulations. The term includes
a loan.
(i) Prohibttlon on excess cantributions.
prepaid educational arrangements or
(3) Member of the family
( I ) In pmral.
contracts described in section
(4) Eligible educational Institution.
(2) Safe b r b o r .
529(b)(I)(A)(I)and educational savings
5 J -529-1 QuaWied State tuition prqgram,
accounts desmibed in
5 1.529-3 h m m e tax treatment o f
unrelated business income tax and
dlstributm.
definitions.
529@)(1)IA)(iil.
Account owner means the person
(a) Taxation of distributions.
(a)
gcnerai.
A
quaiifled
tuitfon
who,
under heterms of h e QSTP or
( I ) h general.
pro(QSpl
desHibed
in
any ,,met setting forth the terms
(2) Rollover distributlom.
from income tax,
(b) Computing taxable earnings.
529 Is
under which con&ibutiommay
made
f
o
r
the
tax
imposed
under
section
51
1
( 1 ) Amount of taxable earnings in a
of a
to an account for the
on the QSTP's unrelated business
distribution.
designated beneficiary, is entitled to
(j) Educational savings account.
taxable income. A QSTP is not required select change the designated
fo file Form 990, Return of Organization beneficiary ofan account, to
(ii) F'repaid educationai services account.
( 2 ) Adjustm~ntfor progmns that treated
Exempt From Income T u , F*nn 1041,
any person oher than the designated
distrjbutions and earnings in a different
U.S. Income Tax Return for Estates and
beneficiary
to whom funds may be paid
manner for years beginning before
Trusts.urFom1120,U.S.Corporatron
fromtheaurount,ortoreccive
January 1, 1 999.
lncome
Tax Return. A QSTp maybe
distributions front the account if no,
(3) Examples.
required
to file Form 990-T.Exempt
such
is dBignated,
(c) C hanp in designated beneficiaries.
Organization
Business
Income
Tax
Conaiburion meam any payment
( 1 ) General rule.
Return- See 5s 1-602-Z
and 1 -6012- d [realY
a] located to an account for the
(2) S c h o h ~ h i pprogram.
(5)for requirements ro~.
filing Form
(d) Aggregation of accounts.
benefit of a dmipated beneficiary or
990-T.
used to pay late fees or administrative
5 1.529-4 Time. form. and manner of
Ib)Unrelatedbusiness
jncorne tax
fees associated with the account. In the
reponiqg diskfbutiom from QSTPs and
des.
For I ' q B ofsection 529*this case of a tax-free rollover, within the
backup withhidding.
section and §S 1.529-2 through 1.529-6: meaning of hisparaFaph (c). into a
(a) Taxable distribu~fom
.
ofsection 514. An
(1)
QSTJ'account, only the portion of the
(b) Requirement to file return.
interest in a QSTP shall not be treated
rdlover
amount hat
constituted
(1) Form of return.
as debt for purposes of section 5 14.
investment in the account, within the
(2) Payor.
Consequenrly, a QSTP's investment
meaning of this paragraph (c) . Is treated
(3) lnfurmation included on return.
income will not constitute debtas a contribution to the account as
(4) Time and place lor fding return.
financed income subject to the
(5) Returns required on magnetic media.
by 5 1.529-3(a)(2).
unrelated business income tax merely
(6) Externion of time to file return.
ated beneficiary meansbemuse the program acceph
(c) Requirement to furnhh shtement to the
Individual designated as the
dhtributee.
contributions and is obligated to pay out beneficiary of the account at the time an
(1) In general.
Or refund such contributionsand certain account is established with
QSp;
12) Information included on statement.
earnings attributable theret~to
(2) The individual who is designated
(3)Time for Furnishing statement.
designated beneficiaries or to account
as the new benekiary when
to furnish sratement.
owners. lbwever, ir~vestmentlocome of beneficiaries are changed: and
(d) Bitckup wiihh01ding.
(3)The individual receiving the
a QSTP shall be subject to the unrelated
(R) Effective date.
benefits accumulated in the account as
business income tau as debt-financed
5 1 52%5 EsMte. gfft,and generationincome to the extent the program incurs a scholarship in rhe case of a QSTP
skipping transfer tax r u b Mating to
account established by a State or local
indebtedness when acquiring or
qudif~edState tuition programs
government or an organization
improving income-producingproperty.
(a) Gift and generation-skippingtransfer tax
(2)Penalties and furfeitum. Earnings described in section 501 (c)(3) and
treatment of contributions after Augmt
exernpr from taxation under section
forfeited on prepaid educatfonaI
20. 1996, and before August 6, 1997.
501(a) as part of a scholarship program
arrangements or contracts and
(b) Gifi and generation-skippfng
transfer t*
savings accounts and
operated by such governmfnt or
treatment of contributions after Augut 5 , retained by a
or arnounts
o anization.
1997.
%istribufee means the designated
collected
by
a QSTP as penalties on
( I ) In general.
beneficiary or the account owner who
refunds or excess contributions are not
(2) Conaibulinns that e x d the annual
unrelated business income to the QSTP. receives or js treated as recelv h g a
exclusion amount.
(3)Administrative and other f e e .
distribution from a QSTP. Fbr example,
(3) Change OF designated beneficiary or
Amounts paid, in order to open or
if a QSTP makes a distribution directly
rollover.
(3) Separate distributions.
(4) P r o ~ ~ for
d uverifying
~
use of
dlstributiom and impsing and
collecting penalti-.
(i) In general
(ii) Safe harbr.
(A) Distributiom treated as payments of
qudified higher education expenses.
IB) Treatment of all other dktributiorrs.
(C1 Refunds of pendries.
(n) Documentation of amounb refunded and
rmt used for qualified h i e r education

4

-

45026

Federal Register / Vol. 63, No. 163 /Monday. August 24. 1998 / Prupsed Rules

to an eligible educational institution to
pay tuition and fees for a designated
beneficiary o r a QSTP makes a
distribution in the form of a check
payable to both a designated bnefiriary

and a n eligible edutsational institution,
the distribution shall be treated as
having been made in full to the
designated ber~encixy.
Distribution means any disbursement,
whether ln ash or in-klnd, from a
QSTP.Distributions include, but are not
limited to, tujtion credits or certificates.
payment vouchen, tuition waivers or
other similar items. Distributions also

hvestment in &the- account means the
sum of all conMbutions nladr LO t h e

account on or before a particular date
less the aggregate amount of
c~ntributibnsincluded in d1st'ibutions,
if any. made from the account on or
before that date.
Member of the fmify means an
individual who is r~latedto the
designated beneficiary as described In
paragraphs (I) through (9) af this
definition. For PuVoses ofdetermining
who 1s a memkl- of h e family. a legally

adopted child of an individual shall be
@eated as the child of such individual
include, but w e not limited to. a mf~lnrl by blood. The terms brother and sister
include a brother or sister by the
to the account ouner, the designated
halfblood. Member of the family
beneficfary or the designated
beneficiary's estate.
means(1) A snn or dallehter. or a descendant
Earnings attrl butable to an account
of either;
are the total account balance on a
(2) A Stepson Or stepdau%hter:
panicuIac date minus the investment in
(3) A brother, sistw. stepbrother, Or
the account a s of that date.
"I"Sls'er;
Earnings raLio means t h e amount of
Or an
4, The fatherOr
earnings allocable to the account on the
a"ceStor
of
either:
last day of the calendar year divided by
(5) A stepfather or stepmother:
the lotal account balmcc on the Iast day
(6) A son or daug1lier. of a brother or
of that calendar year. T h e earnings ratio
sister:
is applied to any distribution made
(7)A br&et or sister of befather or
during the calendar year. For purposes
mother;
of computing the earnings ratio, t h e
(8) A son-in-law. daughter-in-law.
earnln~
the account On the father-in-law, mother-in-law. brothu-inLast day of the calendar year and the
law, or sister-in-law:or
total arcount balance on the last day of
(9)~h~
of
designated
the calendar year include all
beneficiary or the spouse of any
distributions made duringthe calendar
individual described in paragraphs(1)
ye= and any amounts that have been
&rough (8) of this dennition.

P

forfeited from the account during the

calendar year.
Eligible educational insrituibn means
an institution which is described in
section 481 of the Higher Edumtion Act
of 1965 (20U.S.C 1088) in effect
August 5,1997,and which is eligible to
particiraf~jn a program under title TV
of such Act. Such institutions generally
are accredited post-secondary
educational institutions offerlng crrdit
~ o w a -a
d bachelor's dcgrcc, an
-oclate's degree. a graduate level or
professional degree, or mother
recognized post-secondary credential.
Certain proprietary instirutions and
post-secondaryvocational institutions
also are eligible institutions.T h e
institution must be eligible to
participate in Departmerlt of Education
student aid programs.
Finai disiribuiion means rbe
distributio~lfrom a QSW account that

reduces the total account balance to
zero.

Forfeit means that earnings and
contrjbutions allocable to a QS'I'F
account are withdrawn b j the QSTP
from the account or deducted by the
QSTP from a distribution tn pay a
penalty as required by 5 2.529-2(e).

Person has thc s y n c meaning as

under section 7701 (a) (I).
Quali[ied higher education expenses
means(1) -l'uition,fees, and file cosb of

b o o k , supplies.and equipment

required fw Ihe molfment M
aaendance o t a designated beneficiary at
an eligible educational institution;and
(2) The costs of room and board (as
limited by paragraph (2)(1) of this
definition) ofa desi~natcdbeneficiary

(who meets requirements of pamgraph
(2) (it) of this dennition) incurred while
attending an eligible educational
instltuliv~>:
(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 c ~ s t of
s attendance for
Federa1 f-anclal aid programs under
section 472 nf the Higher Education Act
of 1965 (20 U.S.C. 10871 1) as in effect
on August 5,1997. For purposes of
these regulations,room and board costs
sh~lnotex~d$1.500perncadcmic
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 beneficiariest h e amount
shall not exceed $2,500 per acadernic
year. For this purpose the term
academic year has the same meming 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 ~ e a t e d
as qualified higher eduauon expenses
for a designated beneficiary if they are

i n c m ~ dduring any amdemic period
during which he daignated beneficiary
is enrolled or accepted Ior enrollment m
a degree, certificate. or other program
(inchding a program of study abroad
approved for credit by the eligible
ed~lmtionaIinstitution) fiat leads a
recognf zed educatl onal credential
awacded by an eligible educational
designated
Instltutjon, In addj tion,
k~leficiarymust bc cntollcd at least
half-the. A student will be considered
ta be enrolled a t least half-time if the
student i s enrolled for at least half the
full-tlme academic workload for h e
the student isPursuing
as determined under the standards of
the institlitlon where the student is
enrolled. The institution's standard for
a full-time workload must equal or :
exceed the stmdard established by the
Department of Education under the
Higher E d u a t i ~ nAct and set forth in 34

CFR 674.2@).
Rollover disVjbution means a
dismbutjon or m s f e r from an account
of a designated beneficiary that is
transferred to or deposited within 60
daysof the distribution Into an xcount
of another kdividual who is a member
of the family ofthe dslgnated
beneficiary. A distribution i s not a
rollover dlstributiorl unless there Is n
change in benefjciary. The new
designated beneficiary's account may be
in a QSTP in either the same State or a
QSTP tn another Stace.
Total account balance means the total
amount or the total falr market value of
tuition credits or certificates Or simitar
benefits allocable to the account on a

date. For p q 5 e s of
computing the eamingsratio, the total
a,-cmnt balance ISadjusted as desmibed

in &is paragtaph (c).
§1.52%2
Clew-.

amlifld Stateturnonmmm

(a) In general. To be a QSTP, a
program m u s ~satisfy the requjrements

desuibedinparapraphs(a)thmugh(i)
of this section. A QSTP is a program
esrablfshed and maintained by a State or
an agency or instrumentality of a State
under which a persun-

Federal Register / Vol. 63.

--

(1) May purchase tuition credits or
certlflcates on behalf of a designated
beneficiary tl~aientitle the beneficiary to
the waiver or payment of qualified
higher education expznses of thp
beneficjaq-: or
(2) May make contributions to an
account that is established for the
purpose of meeting the qualIfled higher
c d u o t i ~ lexpenses
l
0f rhe designated
beneficia of the account.
( b ) ~ s ~ ~ ~ j S ~ ~ ~

State ur agency or insutrn~entalityofa

State-(1) Established. A program is
established by a State Or an agency or
irwu,wlt-iltality oFa State if the program
is initiated by State statute or regulation,
or by an act of a State official Or agenq
with the auhori9' t o act on behaU of the
State.
(2)Maintained. A program is
maintained by a State or an agency or
ktnrmentality of a State 1f(i) T h e State or agency or
instrumenmlit~sets all of t h e telTls and

conditiom of fie P r % m , includbg but
the
program. who may be a designated
beneficial-yof the p - o g r a m , what
benefits the program may provide. when
penalties
refundsw d what
those penalties will be; and
(ii) T h e State or a ~ n c y
or
insmentality is a a i v e l ~
On
an ongoing basis in the ad mink trati on
not limited to who may contribute

-

pr'%rm,

supervising

decisions
to the investment
of assets contributed to the program.
(3) Actjvely invohed. Factors that are
'=levant indetermining whether a State+
'gency Or
adjvely
lr'cludeb

*

are not limited to:

whether the State provide services or
benefits (such as tax, student aid or
other financial benefits) to account
owners or designated beneficiaries that
are not providedto Persons who are not
account owners or designated
ber~eficiarles;whether the State or
agency Or h m m e n m l i ~establishes
detailed operating rules for
administering the program; whether
officials of the State or agency or
instrumentality play a substantial role
in the operati on 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 pravjde
services under the program to the same
standards and requirements that apply
when private contractors handle funds
hat belong to the Srate or provide
services to the State: whether the State
p r v i d e ? funding for the program: and.
whether the State or agency or
instrumentality acts as trustee or holds

No. 163 /Monday,

August 24, 1998 /Proposed Rules

45027

program s e t s directly or for the benefit the penalty offsets the federal income
tax benefit from hming deferred income
of the account owneis or designated
beneficiaries. If the State nr an agency
tax liability on the earnings portion of
any dismibution.
or instrumentality thereof exercises the
(Ii) Safe h a f b r . A penalty imposed on
same authority over the funds invested
the earnings portion of a distribution is
in the program as it does aver the
more than de minimis if it is equal to
investments in or pool offunds of a
or greater h a n 10 percent of the
State employees' ddmed beneff t
earnin s.
pension plan, then the State or agency
(3) ¶" dirtrlhctom. For
or h-entaliw
will be c ~ m i d e ~ d
~
any
actively involved on an ongoing basis in PurlOSesof ~ P P I Ythe~ penalty,
~ ~ ~a d~m a
j n~
f l ~~t ifo ni r~; f d* ebp ~Yg m
a . single distribution d*cribcrl in
paragraph (e) (1) of his section will be
(c) Permissible uses of contributions.
treated as a separate distribution and
Conuibutions a QSTP can be placed
not part of a slogie aggregated annual
int~
either a prepaid educational
distribution by the program,
arrangement or conrnct described in
notwithstanding the mIes under
section 529(b)(l)(A)(i)or an
5 1.529-3 and 5 1.529-4.
ac,-Dunt described in s t i o n
(4) Procedures for verifying use of
529(6)(1) (A)(li) , or both, but cannot be
placedintoaTlyoth~rtypeofaaccount.
dist"'butionsandmposingand
(1) A prepaid educational services
couecting penatie* (11 g ~ l e r 3 1To
.
be
treated
as
imposing
a
more
than
de
c,t,,,
is an account
mi nimis penalty as required in
through which tuition credits or
paragraph (e)(l) of tfik section, a
certfflcates or other rights are acquired
of program must implement practices and
that ,mnUfle ole des*pat&
the account to fie waiver or payment of procedures to identify whether a
distrlbulion i s S~bjEctto a penalty and
qualified higher eduation expenses,
(2) A n educational swings account is collect any penalty that is due.
harbor. A program that fa&
an account that Is established
(ii)
within the safe harbor described in
,dUsively for the purpose of meeting
hequalified higher ,=ducation expenses paragraphs (e)(4)(1i) (A) through
of
this section wilL be treated as
of a designated beneficiary.
Implementing practices and p r m e d p e
{d) Cash contributions. A prngrarn
to identify whether a more than de
shall not be seated as a QSTp unless It
minimis penalty must be imposed a~
provides that contributions may be
made only in cash and not property.
required in paragraph (e)(l) of this
A QSTP may accept payment, however, Section.
(A) Djsu.iburior rs treated as payments
in sash, or by check, m ~ n c yorder.
of
qualfied higher educatim expen-S.
credit card, or similar methods.
P e n a I t j ~on r&nds-(l) Gene:ral The program treats distributions as
being used to pay for qualified higher
rule. A program shall not be treated a
education expenses only ifa (2Sl.p unlef~
it imposes a lrlu-efllall
(1) The distribution is made djrectly
d, minimis penalty on the
to ar, digfble educational institution;
portion of any distribution from the
(Z) The distribution is made in the
pro ram that Is notform
of a check payable to both the
U,d
exclusively
for
qualified
t4
designated beneficby and the eligible
higher education expenses efthe

,,

,

educational institution;
(3) 'medistribution is made after the
designated beneficfary submits
(lij)Madeonacc~untoftherecetptof substantlatlo~~tushowthatthc
distribution is a reimbursement for
a scholarshjp (or ajlowance or payment
described in section 135(d)(l) (B) or (C)) qualified higher education expenses that
the designated beneficiary has already
by the designated benefidary to the
paid and the psogram ha^ a prncress for
extent the amount of the distclbutiu~l
reviewing the validity of the
does not exceed the amount of the
suhstantiatlon prior io the distribution:
scholssfiip, aIlowance, or payment; or
{iv) A rollover distribution.
or
(4 The designated beneficiaq
(2) More than de rninimis pcnalty-(l)
certifies prior to the distribution that the
In general. A penalty is more than de
distribution will be expended for his or
minimis if it is consistent with a
her qualaed higher education expenses
program intended to assist individuals
within a reasonable time after h e
in .saving exclusively for qualified
distribution: the program requi1t.s d=
higher education exFllses. Except. as
designated beneficiary to provide
provided in paragraph (e)(2)(li) of this
section,whether any particular penalty suhstantjation of payment of qualified
is more than de rninimis depends on the higher education expenses w i t h i n 30
facts and circumstances of h e particular days after ~ r ~ a b i tr lg~ edistribution and
has a process for reviewing the
program, including the exten: to which
desl nated beneficiary:
(15 Made on account of the death or
disability ofthe desimated b.pneficjary;

45028

Federal Register /Val. 63. No. 163 /Monday, August 24,

substantiation;and the program retains
an account balance that is large enough
to collect any penalty owed on the
distribution 1T valid substnntiatjon is not
produced.
(B) Treatment of all other
disnibutions. The program collects a
penalty on all djsuibutions not treated
as made to pay qualified higher
education expenses except where-(I) Prior to the distribution the
program receives written third party
confumation that Ehe designated
beneficiary has died or become disabled
or has received a scholarship (or
allowance or payment described In
sectlon 135(d){1) (B)or (C)) in an
amount equal to the distribution; or
(Z) Prior to the distribution the
program receives a certification from the
account owner that the distribution is
being made because d ~ designated
e
beneficiary has died or become disabled
or has received a scholarship (or
allowance or payment described in
section 135Id)(1) (B)or (C))received by
the designated beneZiclary (and the
distribution is equal to the amount of
the scholarship. allowance. or pWment)
and the program withholds and reserves
a pbrtion of the distrjbution as a
penalty. Any penalty withheld by the
program may be refunded after the

accounting requires that contributions
for the benefit of a designated
beneficiary and any earnings
atmibutable thereto must be allocated fo
the appropriate account. If a program
does not ordinarily provlde 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)(l){A)(i) the total account
balance may be shown as credits or
units of benefits instead of fair market

value.

@ g)oitlve~tmentdirection. A
progcam shall not be treated as a QSTp
unless it provides that any account
owner in, or conhibutor to. or
designated benehciary under, such
program may not directly or indirectly
dkect the investmen1 or any
contribution to the program or direclly
or indirecuy direct t h e invesment of
any earnings attributable t~
contributions. A program doe2 not
violate this requirement if a person who
establishes an account with the progmm
is permitted to select among different
program receives third party
investment strategies designed
confirmation that the designated
exclusively by the program, only at the
beneficiary has died or kcome disabled time the initial contribution Is made
or has received a scholarship or
establishing the account. A program will
allowance (or payment described In
not violate the requirement of this
section 135(d)(1) @) or (C)).
paragraph (gl if it permits a person who
(C) Refimds ofpenalties.The program establishes an account tn seiect between
will refund a penalty collected on a
a prepaid educational services account
distribution only after the desipated
and an educational savings account. A
beneficiary substantiates that he or she
program also will not violate the
had qualified higher education expenses requirement 05 this paragraph (el merely
greater than or equal to the distribution. because It permits its board members,
and the program has reviewed the
Its employees. or the board members w
suhsmtiati on.
employees of a contractor it hires to
(D) Docun~entationof amounts
perform administrative services to
refunded and not used for qualified
purchase tuition credits or certficates or
highw education expenses. The program make contributions as described In
requires the distributee, deflrled in
paragraph (c)of this section.
5 1.529-1 (c), to provide a signed
(h) No pledging of interest as security.
sratement identifying the amount of any A program shall not be treated as a
QSTP unless the terms of the program
refunds received from eligible
or a state statute or regulation that
educational institutions at the end of
governs the program prohibit any
each year in which dktributions for
interest in the program or any portion
qualified higher education expenses
thereof from bejng used as security For
were made and of the next yar.
(E) Procedures to collect penalty. The a loan. This rsmiction includes, but is
not iimited to, a pmhibi~ionon the use
program collects required penalties by
retaining a sufficienr balance in the
of any Interest in the program as
account to pay the amount of penalty.
security for a loan used to purchase
such interst in tile program.
withholding an amount equal to the
(I) Prohibition on excess
penalty from a dktribution, or collecting
the penalty on a S b t ~
income tax return. contributions-41)In general. A program
shall not be treated as a QSTF unless it
(0 Separate accounting. A pmgmm
shall not be treated as a QSTP unless it
provides adequate safeguards to prevent
provides separate accounting lor each
contributions Tor the benefit of a
designated beneficiary. Separate
designated beneficiary in excess of those

necessary to provide for the qualified

higher education expenses of the
designated benef ciary.
(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
specifled account balance Hmit
applicable to all accounts ofdesignated
beneficiaries with the same expected
year of enrollment. 'me total
contributions may not exceed the
amount determined by actuarial
est irnates that i s necessary to pay
tuitlan, required fees, and room and
board expenses of the designated
beneficiary for five years of
undergmduate enrollment at the highest
cost Anstftutlon allowed by the p r o g m .

9 1-529-3

lneome tax treatmerrt of
distributees.
(a) Taxation of dis&ibutions--(1) h
general. Any distribution, other than a
rollover distribution, from a QSTP

account must be included in the gross
income of the dlstributee to the extent
of the earnings portion of the
distribution and to Che extent not
excluded from gross income under any
other provjston of chapter I of the
Internal Revenue Code. If any amount of
a dfstribution i s forfeited under a QSTP
as required by 5 1.529-2(e), this amourit
Is neither included in the gross income
of the dktributee 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 djstributlon, that portion of the
rollover amount that constituted
investment in the account, defined in
5 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 o f the rollover amount that
constituted earnings of the acmtmt that
made the dlsuibution is added to the
earnings of the account that received the
dktribution.
(b) Computing faxable earning+{ 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 8 I .529- 1{I).
The return of investment portion of the
distrIhtion is equal to the amount of
the distribution minus the earnings

portion of the distrlbutirsn.
(ii) Prepaid educationa1 services
account. In the case of a prepaid
educat tonal services account,the
earnings portion of a distribution is
equal to the value of the credits. hours,

Federal Register/lToJ.63, No. I63/Monday. August 24, 1998/Proposed Rules

45029

--w other units of education disulbuied at
the time of distribution minus t h e return
of investment portion of the
dbtr ibution. T h e value of the credits,
hours. or other units of education may
be based o n the tuition waived or the
cash disabuted. The return of
investment portion of the djsujbutinn is
determined by dividing the investment
in the account at the end of the year in
which the dlsuiburic~nis made by the
number of credlts. hours, or other units
of ducation in the acmunr at the end
of the calendar p a r (including all
credits, hours. Dr other units of
education disolbuted during the
calendar year), and mu1tiplying that
amount by the number of credtw, hours.
or other units of education distributed
during the current calendar year.
(2)A d J u s m i t for p g m s that
treated distributions and earnings in a
diflerenl rnamxr fur years beginning
he fore January 1, 1999.For calendar
years beginning after December 3 1,
1998. a QSTP must treat taxpayers as
recovering investment in the account
and e m i n g s ratably wlrh each
distribution.Prior to January 1 , 1999. a

4

piogram may have mated distributions
In a different manner and reported them
to taxpayers accordiwly. In order to
adjust to the method described in this
section, if dismibutionswere treated as
coming first from the investment in the
account, the QSTP must adjust the
investment tn-ha account by
subtracting the amount of t h e
Fnveshnent in the account pnviously
treated as distrih~std.If distributions
were treated as coming fmt from
earnings, the QSTP must adjust the
earnings portion of the account by
subimctjng the amount of earnings
previously mated as distributed. After
the adjustment is made, the investment
~ I Id ~ e
account Is rccovcrcd ratably in
accordance with t h i s section. If n o
prer.jDUS distribut ton was made but
earnings were treated a~,taxable to h e
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) Example. The application of his
puagraph (b) is illustrated hy rh~!
following examples. The rounding

conventinn used (roundingto three
decimal places) in tbese 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 1938, an fndlvidual, A,
opens a prepaid educational services account
with a QSTP on behdf of a designated
bcndciary. Through t h e arcmlnt A
pur&
u n l b o&educationequlvdent to
eight semesters of tuition lor full-time
attendance at a public fow-yearuniversity
covered by the QSTP.A cwntrisutes $16,(100
that includes payment ofprocesring fees to
the QSV. In 201 1 the designated knehciary
enrolls at a public four year unlveslty Ihp:

QSTP makes dhtrlbutlom on khalf ofIhe
desigmted kneficiary to the university In
August for the fall semester and hn D e c e m h
for the spring semester. Tuition for full-time
anendance at the university is $7,500 per
amdemic year in 201 1 and 2012, $7,875 for
t i w acaderrlic year In 2013, and $8,200 for the
academic year in 2014. The only expenx
cwered try the QSTP distribution is tuition
forfour a d e r n l c yeyears. The calculations are
as follows:

..................................................................................
Investment in the account as OF 12/311201 1 ................................. .....
Units in account .............................................................................................................................................................

Per unit investment ..........................................................................................................................................
Unifi distributed in 201 1 ..........................................................................................................................................................
Investment portion of distribution in 201 1 ($Z,OM1per unit x Z units) ..........................................................................
Ci~rmt
of hvo unrts distributed in 201 I ............................................
......................................................................
Earnings portion of distribution in 201 1 [$1,500-$4,000) .................................... .......................................................

.
.

=

=

-

Sl$,WO
8

-

sZ,MX)
2

=
=

$4.MW
37,500

=

53.500

=
=

s12.000
6

-

f 2.000

=

mtz
Investment i n ihe account as of IU3112012 ($16,-$4,00C]I
......................................................................................
......
Units in account ........................................................................................................................................................
Per unit hvestment ................................................................................................
..................................................................

.......

...................................
Units distributed in 201.2 ......................................................................................................
hvestrnent p r t i o n nT distribution in 201 2 ($2,000per unit x 2 units) ...............................................................................
Current value of two units distributed In 2012 .......................................................................................................................
Earnings portion of distribution in 2012 ($7.5QO-$4.000) ...................................................................................................

-

=
=

2

-

$4.000
97.500
J3,5W

InvestmentintheaccomtasofIu31/20U(S12.~$4000j.............................................................................................
Uniis In account .............................. ........
.....
....
Per unit investment .....................................................................................................................................................................

=

-

58.000
4

P

............................................................................................................................................
Invesrment pwtlon of dlstribuuan In 2013 (SZ,MK) per unlt x 2 units) ................................................................................
Current value of two units distributed in 201 3 ..................................................................................................................
Earnings portion of distribt~tion:n201 3 ($7,875-54.000)
...................... ...........................................................................

12.000

Urnits distributed in 2013

=

=

2013
-

-

2

%$,Om

=

$7.875

=

$3,875

Investment in the account as of 12/31/2014 ($8.000-$4000) ..............................................................................................
Unlb in account .....................................................................................................................................................................

=

$4.000

=
=

Units distributed In 2014 ....................................................................................................................................................
Investment pmtion of diitrlbution in 2014 (54,000 per unit x 2 units: .................................................................................
Current value of two units distributed in 201 4 .....................................................................................................................
Earnings pTti311of distrtbution in 2014 (58.20&$4.000) ................................................................................................
12kIlh14 (after distributiom)

-

2
$Z.OOD

Yerunlth~munerlt.........................................................................................................................................................

(ii)In each year the designated beneficiary
i n c l d a in hb or her gross income the
earnin~sportion of the distribution for
tuition.

&le Z (i)
In 1 998. an individual. B ,
opens a college avings account with a QSTP
on behalf of a designated beneficiaq. 13
conrrlbutm 518,000 to the account t h r

=

=
=

2

$4,000

S8,m
f 4.2M)

includes payment ofpr~~-&urgC t e s to the

QSTP.On Decerntxr 3 1,2011, the mtal
balance in the account for the benefit of the
designat4 beneficiary is $30.000 ( i n d u d h ~

45030
--

Federal RegLster /Val. 63, No. 263 /Monday, August 24, 1998 /Proposed Rules
-

dtstributions madeduring Ihe year 2011). In
201 1 the designated beneficiary enrok at a
four-year university. The QSTP makes
distributions on behalf of the designated
beneficiary to the university in August forthe
faU semester and in December for the spring

semester. Tuition for lul-time attendance at
the university is $7.500 per academic year in
201 1 and 201 2. 57,875 for the academic year
in 20 13, and $8.200 for the academic year in
2014. The onty expense covered by the QSTP
dtstributions i s tuition for four academic

years. On the last day of the calendar year the
account is allocated earnings DT 5% on the
total account balance on that day. Under the
terms of ihe QSTP, a pdty of 15% is

applied io the earnings rmt used to pay
tuition. The calculationsare as follows:

aDll

...............................................................................................................................................
Total account balance as of 12/31 JZ011 ..............................................................................................................................
Earnings as oC 12131/20 1 1 ........................................................................................................................
. ......................
D i s t r i b u t l ~in 201 1 ................................................................................................................................................................
Earningsratiofw2011(S12.OWk$30,OD0)...............................................................................................................................
Earnings portion or dtstrlbutions in 201 1 (S 7 , 5 0 0 ~ 4 )..............................................................................................................
Return of inveslment portion or dlstributlo~rsin 201 1 ($7,500- S 3 . W ) ...........................................................................
Investment in the acmunt

=
=

-=

--

7

$18.000

s 30.000

SIZ,DW
f 7.503
4%

$3.000
$4,500

201P

Investment in the account a s of 12/31/2012 ($18.MX) - $4.5001

................................

.......................................................

,
.

T~1alaccountbalanceasof12131/12l(S30,000-S7.50DJx105%]............................ ...........................................................
Earnings as of I 2/31120 12 ......................................................................................................................................................
Distributlom In 2012 .................................................................................................................................................................
Earnings ratlo for 2012 ($14 125+$23,625) .............................................................................................................................
Eaminp portion of distributions in 2012 [S7.5M1x.429) ...........................................................
..............................................
Return of investmen1 portion of distributions In 2012 ($7,500- $3,217.50) .......................................................................

=
=

=
x

=
=

$13,500
$23.625
SIO.L25

17.500
42.9%

S3,217.50
$4,282.50

2013

Investment jn the account iis of 1213 112013 (113,500-S 4,282.50) ......................................................................................
Total account balance as of 12131113 t(SZ3.625- f 7.500)x105%J ..........................................................................................
Earning as of 12/31/2013 .......................................................................................................
..,........................................

...........................................................................................................................................................
Earnhgsra~oFor2013($7.713.7SS16.931.25)
.......................................................................................................................
Fa~nlngsportion of distributions in 2013 ($7,875~456).........................................................................................................
Return of Invatment prtion of distributions Fn 2013 ($7,875- $3,591) ...............................................................................
Distributions In 2013

=
=

=

-

=
=
=

$9.217.50
$16.93 I .25
$7,713.75
$7,875
45.6%
53,591

$4.284

2014
-9

Investment in t h e account as of 12t31/2014 ($9,2I7.50- $4,284) ....................... .
.
.
......................................................
Total account Mance as of 12/3 1/14 [($16.931.25
- S7,875)x105%1 .............................................................................
Earnings as of 12/3 It2014 .............................................................................................................................................
Distributlom in 2014 for qualified bier education expenses [QHEE) ....................................
............................................
Distributions ln 201 4 not for quaiin& higher educalion expenses won-QHEE) ...................................................................
lotaidistributiom .......................
..........................................................................................................................................
Earnings ponion of QHEE distribution In 203 4 [($8.2@$9.5[)9.06)~$4,575.56] ................................................................
Return oi investment portion of QHEEdistribution in 2014 ...............................................................................................
Earnings portion of Non-QHEE distribution subject to p c ~ l t y[($I ,309.06tS9,509.06)xS4.575.56)] ...................................
Return of investment portion of mn-QHEE distribution in 20 14 .............................. .
.
......................................................
T

..

(ii) In years 201 1 through 20 13 the
designated beneficiary includes in gross
Income the earnings portion of the
disu'but'ons for tu'''on' In year
Ihe
designated beneflctary includes in gross
tncome the earning prtlon of the
distribution lor tuition, $3.945.68, plus the
earnings portion of the distrlbutlon that was
not used for tuition after reduction for the
penalty. i.e. $535.4 1 (3629.89minus a 15%
penalty of $94.48).

(2) Scholarship program.
No t-withstandi n paragraph (c) (I) of this
section, the requiremen! that the new
beneficiarybe a member of the famjly of
the tmnsferor beneficiary shall not
apply to a change in designated
beneficiary of an intemt f n a QSTP
account purchased by a State or local
government or an o r w b t i o n
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 contriblitiorls
and earnings as allocable to a singIe
account for purposes of calculating the
earnings portion of any distribution
from that QSTP. For purposes of
determining h e effect of f i e
distribution on each account, the
earnhgs portinn and return of
provided the account owner has the
investment in the account portion of the
authority to change the designated
beneficiary.For rules related to a change distribution shall be allocated pro rata
among the accounts based on total
in the designated beneficiary pursuant
account value as of the close of the
to a roliover distribution see 55 f .529current calendar year.
1 (c) and 1.529-3(a)(2).
(c) Change in designated
beneficiaries-(1) General rule. A
change in the designated beneficiary of
a QSTF account Is not created as a
distribution I f the new designated
beneficiary is a member of the family of
the transferor designated ber~eficiary.
However, any change of designated
beneficiary not desalbed in the
preceding sentence is aeated as a
distribution LO the account owner.

=
=
=
=
=
=

--

=
=

-

-

$4.933.50
S 9,509.06
S 4,575.56

f 8,203
$1.309.06
f 9,509.06
53,945.68
$4,254.32
$629.89
$679.17

9 1.52Time, form and manner d
' t p d n 0 d ~ ~ ~ i fnrm
o nQ sm s and
bCku~withMding.
(a) Taxable dtstributians.The part ion
of any distribution made during the
calendar year by a QSTP that represents

earnings shall be reported by the payor
as described In this smtion.
(b) Requirement to file r e m ( 1 )
Form of return.A payor must file a
return required by this section on Form
109SG. A payor may use forms
containing provisions similar to Form
109SG if it complies with applicable
revenue procedures relating to
substitute Forms 1099. A payor must
file a separate return for each dktributee
who receives a taxabIe distribution.
(2) Payor. For purposes of t h i s section,
rfie term "payor" means the officer or
employee having control of the program,
or their design=.
(3) Lnformation included on return. A
payor must include on F o m 1099-G-(i) The niune, address, and taxpayer
identifying number (TIN}(as defined in
section 7701 (a) (4 1))oi the payor:

Federal Re&ter / Va11. 63, No. 1631Monday. August 24, 1998/ Proposed Rules
-

-

45031

-

(ii) The name. address. and TIN of the
disajbutee;
(jii) The amount of earnings
dlstrlbuted to the distritiutee in the

calendar year: and
(iv)Any other idomration 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 y e a following the calendar
year In which the distribution is made.
A payor musr file the return with the
IRS ofice designated in the instructions
for Form 1095G.
(5)Remrns 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)f i ~ e n s ~ oofntime to Me return.For

(4) Extension of m e tc. 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 ot time must be sublr~illedin

(2) Conujburluns that exceed the

a m u d acIusion amount. (i) Under
secrlon 529(c)(2)(3)a donor may elect to
take certain contributions to a QSTP
into account ratably over a five year

period in deterrninhg the amount of
gifts made during t h ~ l c n d a year.
r
The
provfsion is applfcable only with
the manner prescribed by t h t h p
respect to contributions not in excess of
C~mm
lssioner.
Id) Backup withholdjtlp. Dlstribulimu five times the section 2503Ib) exclusion
amount available in the calendar year of
from a QSTP are not subject to backup
the contribution. Any excess may n b be
withholding.
taken into account mtably and is treated
(e) Effeaivedate. 'The reporttng
a taxable gift in the calendar year of
requirements set forth in this ~ e c t i ~ as
the contribuijon.
apply to distributions made after
(ii) The election under secrion
Uecem ber 3 1, 1998.
529(c)(2) 113) may be made by a dorlv~
and his or her spouse with respect to a
8 1.524-5 Estate,g M ,and generationgift considered to be made one-half by
skipping mnste?t a x rules relating to
each spouse under section 2513.
qualtfied Sate tuMon programs.
(ilf) The election is made on Form
(a) Gift and gemtion-skipping
709.Federal Gift Tax Return. for the
fi-ansfcr t s treaunent
~ ~
nf contributions
caierldar year in which the mnttiblttinn
after A ugust 20,1996. and before
is made.
August
6,
f
997.
4
contrjbutian
on
good muse, the Commissioner may
(iv)If in any year after the first year
bchBlf of a designated beneficiary to a
granl an extension d rirrw In w t ~ l c h
to
ofthc five year period d~srribedin
QSTP
(or
to
a
program
that
meets
the
file Form 1099-G for reporting taxable
section 529(c)(Z)@). the amount
transitional rule repulrements under
earnings under section 529. The
excludible under section 2503fi) is
5 1.529-6h)) after August 20, 1996, and increased as provided in section
appl~cationfor exte~lsiunof time must
before August 6,1997, i s not treated as
be submitted in the manner prescribed
2503(b)(2), the donor may make an
a taxable gift. The subsequent waiver of additional contribution In any m e w
by Lhe Comrni~stoner.
qrla1jfied higher edumtion expenses of a rnorr?of the four remaining years up Lo
(c) Requlre~lte~~t
to furnish stotcmant
designated beneficiary by an
to rhe distributee--I 1) In general. A
the difference between the exclusion
educational institution (or the
payor that must file a retutn under
amount as increased and the original
subsequent payment ~f hisher education exdusion amount for the year or years
paragraph (b) of this xction must
expenses of a designated beneficiary to
furnish a statement to the dktributee.
in which the original contribution was
The requrrernent to furnish a statement an educational Institutj~n)under a
made.
QSTP is treated a a qualif ed mnsfer
to rhc distributee will be saatisfi~dif the
(v) Example. T h e application of this
under section 2503(e) and is not treated paragraph (b)(Z) is illus~raredby d>e
payor provides the distributee with a
as a umsfer of property by gi I t for
copy of the Fonn 1099-G (wa
following example:
purposes of swtion 2501. As such, the
substitute statement that complies with
Example. In Year I. when ihe annual
contributi~nis not subject to the
applicable revenue procedures)
exclusion under section 2503(b) is S I U , W .
conralning all the information fiied with generation-skipping transfer tax
P makes a contribution of 160,000 to a QSTP
the Internal R P V P ~ ~ Service
IF!
and all the imposed by sectlon 2601.
for ihe bendt of P's child. C.P elecb under
legends required by paragraph (c)(2) of
sect1011529(c) (2) (D) to account for the gift
(b) C& and ger~ration-skipping
ratably w e r a five year period beginning with
his section by the time required by
transfertau treatment of contributions
the calendar year oiccntrfbutlon. P Is treated
paragraph lc) (3) of this section.
after A ugusr 5, 1997-(1) In general. A
as making an excludible gift of S 10,000 in
(2) lnformarton Ir~dudedon
contrlbutlon on behalf of a deslgrmted
each of Years 1 through 5 and a taxable
statement. A payor must include on the
beneficiary to a QSTP (or to a program
of$IO,MX)inYear 1. InYear3, whenthe
statemnt that it must furnish to the
that meets the transitional rule
annual exclusion i s increased to $1 2,000,P
distributeerequirements urlcler 5 1.529-6b))
aftm
makes nn additional conb-lhhltlonfor the
beneb d C in the amount of 5B.000. P is
(i)
The information required under
August 5, 1997,is a completed gift of a
treated as making an excludl ble gifr of 52,000
paragraph (b)(3) of this sectlon:
present interest in property under
under spclion 2503(b):the remaining f 6 . W
(ii) The telephone number of a person sectio122503(b) from thc p r s o n making
Is a taxable gift in Year 3.
to contact about questions pertaining to
the contribution to the designated
(3) Change of designated benefidary
the statement; and
beneficiary. As such, the contribution IS
eIigible for the annual gift tax exchrsion or rollover. (i) A transfer which occurs
Iiii)A legend as q u i r e d on che
by reason of a change in the designated
provided under section 2503{b). The
official Internal Revenue Service Form
beneficiary, or a rollover of credits or
portion of a conttibution excludibIe
1099-G.
From taxable gifts under sectinn 2503(b)
account balances from the account of
13) ]'he for furnishing sraternent. A
also satisfies the requirements of section one beneficiary to the account of
payor must furnish the statement
another beneficlay. is not a taxable gift
2642(c)(2) and, therefore. is also
required by paragraph (c)(l) of this
and is not subject to the generationcxcludible Tor ptIrpose-s nf the
section to the distrlbutee 011or b e r e
skipping transfer tax if Ehe new
generation-skippingtransfer tax
January 31 of theyear following the
beneficiary is a member of the family of
calendar year in which the distribution imposed under section 2601. A
contribution to a Q S p after August 5,
the oId beneficiary. as defined in
was made. The stail!wneniwill be
5 1,529-1jc] and is asslped to h e samc
1997. is not treated as a qualified
considered furnished to the dlsrributee
generation as the old b e n e f l c i q ,as
transfer within Lhe meaning of section
if it is mailed to the distribute's last
defined In section 265 1.
2503(~,i.
k n o w address.

.

45032

Federal Register /Vul. 63, No. 163 /Monday, August 24, 1998 / Prnpsed Rules

(ii) A umsfer which occurs by reason
of a change in the rl%ignatcd
beneficiary.or a rollover of credits or
account balances from the account of
one beneficiary to the account of
another kwneFiciary. wiII be treated as a
taxable gift by the old beneficiary to the
new beneficiary If the new beneficiary
is assigned to a Aower generation than
the aid beneficiary,as defined in section
265 I , regardless ofwhether the new
beneficiary is a member of the family of
the old beneficiary. The transfer will be
subject to t h generation-skipping
~
ffansfer tax If the new benefic*
is
assigned to a generationwhich is two or
more levels lower than the generation
assipmenr of the old beneficiary. The
five year averaging rule described in
paragraph Ib)(Z) of his section may be
apf =lied
. to the transfer.
111) Example. The a ~ ~ l i c a t i oof
n
paragraph (b)(3) is illustrated
the
follow lng example:
Example. In Year 1. P make 2 contribution

,

August 20. 1996,and appIies to all
conwazts entered into or accounts
opened on August 20,1996, or later.
(b) Programs maintairled on August
20.1996. Transition relief is available to
a program mainrained by a State under

(2) Interest in program pledged as
for a loan. An interest in the
program, or a portIon of an interest in
t h e program, may be used as securjty for
a loan if the contract giving rise to the
interest was entered into or account was

which persons could purchase tuition
credits, cenificalion or similar rights on
behalf of, or make contributions for
educational expenses of,a d e s j ~ a t e d
beneficiary if the program was in
existence on August 20, 1996. Such
program must meet the requirements of
a QSTP befoe the later of August 20,
1997,or the f rst day of tbe first
calendar quarter after the close of the
first regular session of the State
legislature that begins after August 20,
1996. Jf a State has a two-year legislative
sessiorr, each year of such session shall
be deemed to be a separate regular

erl~ertdInto h h r c August 20, 1996, the
rules regarding a change in beneficiluy,
hcluding the rollover rule in 5 1.5293(a) and the gift tax taxrule in 5 1.5295(b) (31,shall bc applicd by treating any
transferee benefidary permitted under
the terms of the account or contract as
a member of the family of the transferw

session of the State legislature.The
program, as in effect on August 20,
1996, shall be treated as a QSTP with
respect to contFTbutiom (and earnings
to a QSI'Pon h h a l f nf P's rhild. C. In Year
aIIocabIe theret~)pursuant to contracts
4, P dlrects that a distribution from the
entered into under the program. T h i s
afcount fwthe benefil of C be made to an
relief is available for contributiom (and
Pccoun~
benetit OFP'sgmndrhfld.
G. earnings allorsable thereto) made before,
The rollover distribution k treated as a
tawable
by to C;,
under
and h e conwabs entered into before,
program
265 1, G is assipned to a generation below the the first date On which
becomes a QSTF. The pmvlsions of the
generation assignment of C.
program, as In effect on August 20.
(1' Estate tax lreatment estates
1996.shall apply in lieu of section
decedents dying after August 20, 1996, 529fi)
to such
and beforeJune 9. 1997.The gross estate ,,,~ibutions and e a m i n ~A+ program
of a decedent dying after August 20+
shall be treated as meeting &hetlansitlon
1996,and before June 9. 1997, Includes de
if i t conforms to herequlrernenb
the value ofm y interest In any PSIP
of
529,55 ,529-1
which is atrributable to contributions
.52gT5 and
section
the date this
the decedent to such program
docwent is published as final
on behalf of a designated beneficiary.
regulations in he ~
~ Rq,ster
d
~
Estate
peamentfur estaresof
(c) R e ~ m c t erect.
~ e h~ol ncome tax
deedens dybg slier lune 1997-'1'
liability will be asserted against a QSTP
In general. Except as provided in
for
any per-od before the program meets
paragraph (dl(2) ofthis section. the
the requirements ofsection 529,
gross &late
a
dytng a'er
sg 1.529-1 through 1,52%5 and this
June8, 1997,does not include the value
section
if the program qualifies for the
of any interest in a QSTP whjch is
rransltton
relief describwl in pangraph
attributabl~to contributionsmade by
the decedent ro such pmgrar~01) h I d T
Ib) this
(d)Conwads entered into and
of any designated beneficiary.
(2) E x c a contributions. In the case of aCMUnCS opened
2Q,
a decedent who made the election under 199k(1) In general. A QSTP may
continue to maintain agreements in
section 529(c)(Z) (D)and paragraph
13)(I)
whodis before connection with contracts entered into
a"d amou"tS opened before August
h e close of tfie five year period, that
portion of the contribution allocable to
lgg6.
jeopardizing Its tax
e x m p t statuseven if maintaining the
~-de.ndmyears begi~hning
after the
of death of t h e decedent is includible in ageemen&
conmaryto
529@)
provided that the QSTP operates in
the decedent's gross estate.
(3) Designated beneficiarydecedents, accordance with the mtric ions
contained ln this paragraph (d).
' h e gross estate of a designated
However, distributions made by the
beneficiary of a QSTP includes the
QSTP, regardless of the terms of any
value of any interest in the QSTP.
agreement executed before August 20,
11.52H Transition rules.
1996,are subject to tax according lo h
(a) ElFFective date. Section 529 is
rules of 5 1.529-3 and subject to the
effective for taxable years ending after
reporting requirements of § 1.529-4.
9
'

security

opened prior tu August 20,1996 and tbc
agreement permitted such a pledge.
(3) hiember of the family. h the case
of an account opened or a conwact

beneficiary.

(4) Eligible educational institution. Ln
the case of an account opened or
contract entered Into before August 20.
1996,a n eligible erl~~cational
institution
is an educational institution in which

the beneficiary may enroll under the
terms of the accaunt or contract.
Michacl P.Dolen,
Deputy Commisslmer ~flnternalRevenue.
[FRDoc. 98-22465Filed S-21-98: 8:45 am1

ENVIRONMENTAL PROTECTlON '
AGENCY
40 CFR Parts 51,5876, and 96
Availability of Documents for the
Rulsmaking for Certain States in the
Ozone ~ r a n s ~Assessment
rt
Group
Regkn
d
AGENCY:
Environmental Protection
Agency (EPA).
A
:Notice ofavailability.
This document announces the
avalkability of various documents that
relate to the notice of pmposed
ruIernaking and suppiemenml notice of
SUMMY:

proposed rulemaking for the ozone
transport rulc. These documenk h a w
been, or shortly will be, placed in the
docket for this rule, or have been made
available on the EPA website.
DATES: Documents wcrc placed in the
docket on or about August 10, 1998.
AWRESSES: Some of the documents
have been ptaced in the docket for the
ozone transport rule, Docket No.A- 9656, at Che Alr and Radiation Docket and

Information Center (61021, US
Environmental Protection Agency, 401
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