Establishment of dairy farm savings accounts

(a)

In general

Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by redesignating section 224 as section 225 and by inserting after section 223 the following new section:

224.

Dairy farm savings accounts

(a)

Deduction allowed

In the case of a qualified dairy farmer, there shall be allowed as a deduction for the taxable year an amount equal to the aggregate amount paid in cash during such taxable year by or on behalf of such individual to a dairy farm savings account of such individual. (b)

Account balance limitation

A deduction shall not be allowed under subsection (a) with respect to any portion of a contribution to a dairy farm savings account of an individual if such contribution would result in the sum of the balances in all such accounts of such individual to exceed 150 percent of the individual's 3-year average of income derived from dairy farming. (c)

Qualified dairy farmer

For purposes of this section, the term qualified dairy farmer means, with respect to any taxable year, any individual who, during such year was engaged in the trade or business of dairy farming. (d)

Dairy farm savings account

For purposes of this section— (1)

In general

The term dairy farm savings account means a trust created or organized in the United States as a dairy farm savings account exclusively for the purpose of making qualified distributions, but only if the written governing instrument creating the trust meets the following requirements: (A)Except in the case of a rollover contribution described in subsection (f)(4), no contribution will be accepted unless it is in cash. (B)The trustee is a bank (as defined in section 408(n)), an insurance company (as defined in section 816), or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section. (C)No part of the trust assets will be invested in anything other than— (i)cash, (ii)securities issued by the United States Treasury, or (iii)or such other low-risk, interest-bearing securities as are approved by the Secretary. (D)The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. (E)The interest of an individual in the balance in his account is nonforfeitable. (2)

Qualified distribution

The term qualified distribution means any amount paid from a dairy farm savings account to the account beneficiary to the extent that such amount when added to all other amounts paid from such accounts to such beneficiary during the taxable year (other than rollover contributions) does not exceed the excess (if any) of— (A)100 percent of such beneficiary's 3-year average of income derived from dairy farming, over (B)such beneficiary's gross income derived from dairy farming for the taxable year. (3)

3-Year average of income derived from dairy farming

The term 3-year average of income derived from dairy farming means, with respect to any individual— (A)the sum of the individual's gross income derived from dairy farming for the taxable year and the 2 preceding taxable years, divided by (B)the number of taxable years taken into account under subparagraph (A) during which such individual was engaged in the trade or business of dairy farming. (4)

Account beneficiary

The term account beneficiary means the individual on whose behalf the dairy farm savings account was established. (5)

Special rules; other rules

Rules similar to the following rules shall apply for purposes of this section: (A)Section 219(d)(2) (relating to no deduction for rollovers). (B)Section 219(f)(3) (relating to time when contributions deemed made). (C)Section 408(g) (relating to community property laws). (D)Section 408(h) (relating to custodial accounts). (e)

Tax treatment of accounts

(1)

In general

A dairy farm savings account is exempt from taxation under this subtitle unless such account has ceased to be a dairy farm savings account. Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). (2)

Termination of accounts

If the account beneficiary ceases to engage in the trade or business of dairy farming— (A)all dairy farm savings accounts of such individual shall cease to be such accounts, and (B)the balance of all such accounts shall be treated as— (i)distributed to such individual, and (ii)not paid in a qualified distribution. (3)

Prohibited transactions; pledging account as security

Rules similar to the rules of paragraphs (2) and (4) of section 408(e) shall apply to dairy farm savings accounts, and any amount treated as distributed under such rules shall be treated as not used to pay qualified distributions. (f)

Tax treatment of distributions

(1)

In general

Any amount paid or distributed out of a dairy farm savings account (other than a rollover contribution described in paragraph (4)) shall be included in gross income of the account beneficiary in the manner provided under section 72. Rules similar to the rules of paragraphs (2) and (3)(H) of section 408(d) shall apply for purposes of this paragraph. (2)

Additional tax on non-qualified distributions

(A)

In general

The tax imposed by this chapter on the account beneficiary for any taxable year in which there is a payment or distribution from a dairy farm savings account of such beneficiary which is not a qualified distribution shall be increased by 15 percent of the amount of such payment or distribution which is not a qualified distribution. (B)

Exception for disability or death

Subparagraph (A) shall not apply if the payment or distribution is made after the account beneficiary becomes disabled within the meaning of section 72(m)(7) or dies. (3)

Excess contributions returned before due date of return

(A)

In general

If any excess contribution is contributed for a taxable year to a dairy farm savings account of an individual, paragraph (2) shall not apply to distributions from the dairy farm savings accounts of such individual (to the extent such distributions do not exceed the aggregate excess contributions to all such accounts of such individual for such year) if— (i)such distribution is received by the individual on or before the last day prescribed by law (including extensions of time) for filing such individual's return for such taxable year, and (ii)such distribution is accompanied by the amount of net income attributable to such excess contribution.

Any net income described in clause (ii) shall be included in the gross income of the individual for the taxable year in which it is received.

(B)

Excess contribution

For purposes of subparagraph (A), the term excess contribution means any contribution (other than a rollover contribution) which is not deductible under this section. (4)

Rollover contribution

An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). (A)

In general

For purposes of this section, any amount paid or distributed from a dairy farm savings account to the account beneficiary shall be treated as a qualified distribution to the extent the amount received is paid into a dairy farm savings account for the benefit of such beneficiary not later than the 60th day after the day on which the beneficiary receives the payment or distribution. (B)

Limitation

This paragraph shall not apply to any amount described in subparagraph (A) received by an individual from a dairy farm savings account if, at any time during the 1-year period ending on the day of such receipt, such individual received any other amount described in subparagraph (A) from a dairy farm savings account which was not included in the individual's gross income because of the application of this paragraph. (5)

Transfer of account incident to divorce

The transfer of an individual's interest in a dairy farm savings account to an individual's spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section 71(b)(2) shall not be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest shall, after such transfer, be treated as a dairy farm savings account with respect to which such spouse is the account beneficiary. (6)

Treatment after death of account beneficiary

(A)

Treatment if designated beneficiary is spouse

If the account beneficiary's surviving spouse acquires such beneficiary's interest in a dairy farm savings account by reason of being the designated beneficiary of such account at the death of the account beneficiary, such dairy farm savings account shall be treated as if the spouse were the account beneficiary. (B)

Other cases

(i)

In general

If, by reason of the death of the account beneficiary, any person acquires the account beneficiary's interest in a dairy farm savings account in a case to which subparagraph (A) does not apply— (I)such account shall cease to be a dairy farm savings account as of the date of death, and (II)an amount equal to the fair market value of the assets in such account on such date shall be included if such person is not the estate of such beneficiary, in such person's gross income for the taxable year which includes such date, or if such person is the estate of such beneficiary, in such beneficiary's gross income for the last taxable year of such beneficiary. (ii)

Deduction for estate taxes

An appropriate deduction shall be allowed under section 691(c) to any person (other than the decedent or the decedent's spouse) with respect to amounts included in gross income under clause (i) by such person. (g)

Reports

The Secretary may require the trustee of a dairy farm savings account to make such reports regarding such account to the Secretary and to the account beneficiary with respect to contributions, distributions, and such other matters as the Secretary determines appropriate. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by the Secretary.

(b)

Deduction allowed whether or not individual itemizes other deductions

Subsection (a) of section 62 of such Code is amended by inserting after paragraph (21) the following new paragraph:

(22)

Dairy farm savings accounts

The deduction allowed by section 224.

(c)

Tax on excess contributions

Section 4973 of such Code (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended— (1)by striking or at the end of subsection (a)(4), by inserting or at the end of subsection (a)(5), and by inserting after subsection (a)(5) the following new paragraph:

(6)a dairy farm savings account (within the meaning of section 224(d)),

; and

(2)by adding at the end the following new subsection:

(h)

Excess contributions to dairy farm savings accounts

For purposes of this section, in the case of dairy farm savings accounts (within the meaning of section 224(d)), the term excess contribution means the sum of— (1)the aggregate amount contributed for the taxable year to the accounts (other than rollover contributions described in section 224(f)(4)) which is not allowable as a deduction under section 224 for such year, and (2)the amount determined under this subsection for the preceding taxable year, reduced by the sum of— (A)the distributions out of the accounts with respect to which additional tax was imposed under section 224(f)(2), and (B)the excess (if any) of— (i)the maximum amount allowable as a deduction under section 224(b) for the taxable year, over (ii)the amount contributed to the accounts for the taxable year.

For purposes of this subsection, any contribution which is distributed out of the dairy farm savings account in a distribution to which section 224(f)(3) applies shall be treated as an amount not contributed.

(d)

Tax on prohibited transactions

(1)Section 4975(c) of such Code (relating to tax on prohibited transactions) is amended by adding at the end the following new paragraph:

(7)

Special rule for dairy farm savings accounts

An individual for whose benefit a dairy farm savings account (within the meaning of section 224(d)) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be a dairy farm savings account by reason of the application of section 224(e)(2) to such account.

(2)Section 4975(e)(1) of such Code is amended by redesignating subparagraphs (F) and (G) as subparagraphs (G) and (H), respectively, and by inserting after subparagraph (E) the following new subparagraph:

(F)a dairy farm savings account described in section 224(d),

(e)

Failure To provide reports on dairy farm savings accounts

Section 6693(a)(2) of such Code (relating to reports) is amended by redesignating subparagraphs (D) and (E) as subparagraphs (E) and (F), respectively, and by inserting after subparagraph (C) the following new subparagraph:

(D)section 224(g) (relating to dairy farm savings accounts),

(f)

Clerical amendment

The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by redesignating the item relating to section 224 as relating to section 225 and by inserting after the item relating to section 223 the following:

Sec. 224. Dairy farm savings accounts.

(g)

Effective date

The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.