II 110th CONGRESS 1st Session S. 1593 IN THE SENATE OF THE UNITED STATES June 12, 2007 Mr. Baucus (for himself, Mr. Grassley, Mr. Rockefeller, Mr. Conrad, Mr. Bingaman, Ms. Snowe, Mr. Kerry, Mrs. Lincoln, Mr. Smith, Mr. Schumer, Ms. Stabenow, Ms. Cantwell, Mr. Roberts, and Mr. Salazar) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to provide tax relief and protections to military personnel, and for other purposes.

1.

Short title

(a)

Short title

This Act may be cited as the Defenders of Freedom Tax Relief Act of 2007. (b)

Amendment of 1986 Code

Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986. (c)

Table of contents

The table of contents for this Act is as follows: Sec. 1. Short title. Sec. 2. Extension of statute of limitations to file claims for refunds relating to disability determinations by Department of Veterans Affairs. Sec. 3. Permanent extension of election to treat combat pay as earned income for purposes of earned income credit. Sec. 4. Treatment of differential military pay as wages. Sec. 5. Permanent extension of penalty-free withdrawals from retirement plans by individual called to active duty. Sec. 6. State payments to service members treated as qualified military benefits. Sec. 7. Permanent extension of disclosure authority to Department of Veterans Affairs. Sec. 8. Three-year extension of qualified mortgage bond program rules for veterans. Sec. 9. Permanent exclusion of gain from sale of a principal residence by certain employees of the intelligence community. Sec. 10. Contributions of military death gratuities to Roth IRAs. Sec. 11. Credit for employer differential wage payments to employees who are active duty members of the uniformed services. Sec. 12. Revision of tax rules on expatriation of individuals.

2.

Extension of statute of limitations to file claims for refunds relating to disability determinations by Department of Veterans Affairs

(a)

In general

Subsection (d) of section 6511 (relating to special rules applicable to income taxes) is amended by adding at the end the following new paragraph: (8)

Special rules when uniformed services retired pay is reduced as a result of award of disability compensation

(A)

Period of limitation on filing claim

If the claim for credit or refund relates to an overpayment of tax imposed by subtitle A on account of— (i)the reduction of uniformed services retired pay computed under section 1406 or 1407 of title 10, United States Code, or (ii)the waiver of such pay under section 5305 of title 38 of such Code, as a result of an award of compensation under title 38 of such Code pursuant to a determination by the Secretary of Veterans Affairs, the 3-year period of limitation prescribed in subsection (a) shall be extended, for purposes of permitting a credit or refund based upon the amount of such reduction or waiver, until the end of the 1-year period beginning on the date of such determination.(B)

Limitation to 5 taxable years

Subparagraph (A) shall not apply with respect to any taxable year which began more than 5 years before the date of such determination. . (b)

Effective date

The amendment made by subsection (a) shall apply to claims for credit or refund filed after the date of the enactment of this Act. (c)

Transition rules

In the case of a determination described in paragraph (8) of section 6511(d) of the Internal Revenue Code of 1986 (as added by this section) which is made by the Secretary of Veterans Affairs after December 31, 2000, and on or before the date of the enactment of this Act, such paragraph— (1)shall not apply with respect to any taxable year which began before January 1, 2001, and (2)shall be applied by substituting the date of the enactment of the Defenders of Freedom Tax Relief Act of 2007 for the date of such determination in subparagraph (A) thereof.

3.

Permanent extension of election to treat combat pay as earned income for purposes of earned income credit

(a)

In general

Clause (vi) of section 32(c)(2)(B) (defining earned income) is amended to read as follows: (vi)a taxpayer may elect to treat amounts excluded from gross income by reason of section 112 as earned income. . (b)

Effective date

The amendment made by this section shall apply to taxable years ending after December 31, 2007.

4.

Treatment of differential military pay as wages

(a)

Income tax withholding on differential wage payments

(1)

In general

Section 3401 (relating to definitions) is amended by adding at the end the following new subsection: (h)

Differential wage payments to active duty members of the uniformed services

(1)

In general

For purposes of subsection (a), any differential wage payment shall be treated as a payment of wages by the employer to the employee. (2)

Differential wage payment

For purposes of paragraph (1), the term differential wage payment means any payment which— (A)is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days, and (B)represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer. . (2)

Effective date

The amendment made by this subsection shall apply to remuneration paid after December 31, 2007. (b)

Treatment of differential wage payments for retirement plan purposes

(1)

Pension plans

(A)

In general

Section 414(u) (relating to special rules relating to veterans’ reemployment rights under USERRA) is amended by adding at the end the following new paragraph: (11)

Treatment of differential wage payments

(A)

In general

Except as provided in this paragraph, for purposes of applying this title to a retirement plan to which this subsection applies— (i)an individual receiving a differential wage payment shall be treated as an employee of the employer making the payment, (ii)the differential wage payment shall be treated as compensation, and (iii)the plan shall not be treated as failing to meet the requirements of any provision described in paragraph (1)(C) by reason of any contribution or benefit which is based on the differential wage payment. (B)

Special rule for distributions

(i)

In general

Notwithstanding subparagraph (A)(i), for purposes of section 401(k)(2)(B)(i)(I), 403(b)(7)(A)(ii), 403(b)(11)(A), or 457(d)(1)(A)(ii), an individual shall be treated as having been severed from employment during any period the individual is performing service in the uniformed services described in section 3401(h)(2)(A). (ii)

Limitation

If an individual elects to receive a distribution by reason of clause (i), the plan shall provide that the individual may not make an elective deferral or employee contribution during the 6-month period beginning on the date of the distribution. (C)

Nondiscrimination requirement

Subparagraph (A)(iii) shall apply only if all employees of an employer (as determined under subsections (b), (c), (m), and (o)) performing service in the uniformed services described in section 3401(h)(2)(A) are entitled to receive differential wage payments on reasonably equivalent terms and, if eligible to participate in a retirement plan maintained by the employer, to make contributions based on the payments on reasonably equivalent terms. For purposes of applying this subparagraph, the provisions of paragraphs (3), (4), and (5) of section 410(b) shall apply. (D)

Differential wage payment

For purposes of this paragraph, the term differential wage payment has the meaning given such term by section 3401(h)(2). . (B)

Conforming amendment

The heading for section 414(u) is amended by inserting and to Differential Wage Payments to Members on Active Duty after USERRA. (2)

Differential wage payments treated as compensation for individual retirement plans

Section 219(f)(1) (defining compensation) is amended by adding at the end the following new sentence: The term compensation includes any differential wage payment (as defined in section 3401(h)(2)).. (3)

Effective date

The amendments made by this subsection shall apply to years beginning after December 31, 2007. (c)

Provisions relating to plan amendments

(1)

In general

If this subsection applies to any plan or annuity contract amendment— (A)such plan or contract shall be treated as being operated in accordance with the terms of the plan or contract during the period described in paragraph (2)(B)(i), and (B)except as provided by the Secretary of the Treasury, such plan shall not fail to meet the requirements of the Internal Revenue Code of 1986 or the Employee Retirement Income Security Act of 1974 by reason of such amendment. (2)

Amendments to which section applies

(A)

In general

This subsection shall apply to any amendment to any plan or annuity contract which is made— (i)pursuant to any amendment made by this section, and (ii)on or before the last day of the first plan year beginning on or after January 1, 2009. (B)

Conditions

This subsection shall not apply to any plan or annuity contract amendment unless— (i)during the period beginning on the date the amendment described in subparagraph (A)(i) takes effect and ending on the date described in subparagraph (A)(ii) (or, if earlier, the date the plan or contract amendment is adopted), the plan or contract is operated as if such plan or contract amendment were in effect, and (ii)such plan or contract amendment applies retroactively for such period.

5.

Permanent extension of penalty-free withdrawals from retirement plans by individual called to active duty

Clause (iv) of section 72(t)(2)(G) (relating to distributions from retirement plans to individuals called to active duty) is amended by striking all after September 11, 2001 and inserting a period.

6.

State payments to service members treated as qualified military benefits

(a)

In general

Section 134(b) (defining qualified military benefit) is amended by adding at the end the following new paragraph: (6)

Certain state payments

The term qualified military benefit includes any bonus payment by a State or political subdivision thereof to any member or former member of the uniformed services of the United States or any dependent of such member only by reason of such member's service in an combat zone (as defined in section 112(c)(2), determined without regard to the parenthetical). . (b)

Effective date

The amendment made by this section shall apply to payments made before, on, or after the date of the enactment of this Act.

7.

Permanent extension of disclosure authority to Department of Veterans Affairs

Section 6103(l)(7)(D) (relating to program to which rule applies) is amended by striking the last sentence.

8.

Three-year extension of qualified mortgage bond program rules for veterans

Section 143(d)(2)(D) (relating to exception) is amended by striking January 1, 2008 and inserting January 1, 2011.

9.

Permanent exclusion of gain from sale of a principal residence by certain employees of the intelligence community

(a)

In general

Section 417(e) of division A of the Tax Relief and Health Care Act of 2006 is amended by striking and before January 1, 2011. (b)

Duty station may be outside United States

(1)

In general

Section 121(d)(9)(C) (defining qualified official extended duty) is amended by striking clause (vi). (2)

Effective date

The amendment made by this subsection shall apply to sales or exchanges after the date of the enactment of this Act.

10.

Contributions of military death gratuities to Roth IRAs

(a)

Provision in effect before pension protection act

Subsection (e) of section 408A (relating to qualified rollover contribution), as in effect before the amendments made by section 824 of the Pension Protection Act of 2006, is amended to read as follows: (e)

Qualified rollover contribution

For purposes of this section— (1)

In general

The term qualified rollover contribution means a rollover contribution to a Roth IRA from another such account, or from an individual retirement plan, but only if such rollover contribution meets the requirements of section 408(d)(3). Such term includes a rollover contribution described in section 402A(c)(3)(A). For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA. (2)

Military death gratuity

(A)

In general

The term qualified rollover contribution includes a contribution to a Roth IRA maintained for the benefit of an individual to the extent that such contribution does not exceed the amount received by such individual under section 1477 of title 10, United States Code, or under section 1967 of title 38 of such Code, if such contribution is made not later than 1 year after the day on which such individual receives such amount. (B)

Annual limit on number of rollovers not to apply

Section 408(d)(3)(B) shall not apply with respect to amounts treated as a rollover by the subparagraph (A). (C)

Application of section 72

For purposes of applying section 72 in the case of a distribution which is not a qualified distribution, the amount treated as a rollover by reason of subparagraph (A) shall be treated as investment in the contract. . (b)

Provision in effect after pension protection act

Subsection (e) of section 408A, as in effect after the amendments made by section 824 of the Pension Protection Act of 2006, is amended to read as follows: (e)

Qualified Rollover Contribution

For purposes of this section— (1)

In general

The term qualified rollover contribution means a rollover contribution— (A)to a Roth IRA from another such account, (B)from an eligible retirement plan, but only if— (i)in the case of an individual retirement plan, such rollover contribution meets the requirements of section 408(d)(3), and (ii)in the case of any eligible retirement plan (as defined in section 402(c)(8)(B) other than clauses (i) and (ii) thereof), such rollover contribution meets the requirements of section 402(c), 403(b)(8), or 457(e)(16), as applicable. For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.(2)

Military death gratuity

(A)

In general

The term qualified rollover contribution includes a contribution to a Roth IRA maintained for the benefit of an individual to the extent that such contribution does not exceed the amount received by such individual under section 1477 of title 10, United States Code, or under section 1967 of title 38 of such Code, if such contribution is made not later than 1 year after the day on which such individual receives such amount. (B)

Annual limit on number of rollovers not to apply

Section 408(d)(3)(B) shall not apply with respect to amounts treated as a rollover by the subparagraph (A). (C)

Application of section 72

For purposes of applying section 72 in the case of a distribution which is not a qualified distribution, the amount treated as a rollover by reason of subparagraph (A) shall be treated as investment in the contract. . (c)

Effective dates

(1)

In general

Except as provided by paragraphs (2) and (3), the amendments made by this section shall apply with respect to deaths from injuries occurring on or after the date of the enactment of this Act. (2)

Application of amendments to deaths from injuries occurring on or after October 7, 2001, and before enactment

The amendments made by this section shall apply to any contribution made pursuant to section 408A(e)(2) of the Internal Revenue Code of 1986, as amended by this Act, with respect to amounts received under section 1477 of title 10, United States Code, or under section 1967 of title 38 of such Code, for deaths from injuries occurring on or after October 7, 2001, and before the date of the enactment of this Act if such contribution is made not later than 1 year after the date of the enactment of this Act. (3)

Pension Protection Act changes

Section 408A(e)(1) of the Internal Revenue Code of 1986 (as in effect after the amendments made by subsection (b)) shall apply to taxable years beginning after December 31, 2007.

11.

Credit for employer differential wage payments to employees who are active duty members of the uniformed services

(a)

In general

Subpart D of part IV of subchapter A of chapter 1 (relating to business credits) is amended by adding at the end the following new section:

45O.

Employer wage credit for employees who are active duty members of the uniformed services

(a)

General rule

For purposes of section 38, in the case of an eligible small business employer, the differential wage payment credit for any taxable year is an amount equal to 20 percent of the sum of the eligible differential wage payments for each of the qualified employees of the taxpayer during such taxable year. (b)

Definitions

For purposes of this section— (1)

Eligible differential wage payments

The term eligible differential wage payments means, with respect to each qualified employee, so much of the differential wage payments (as defined in section 3401(h)(2)) paid to such employee for the taxable year as does not exceed $20,000. (2)

Qualified employee

The term qualified employee means a person who has been an employee of the taxpayer for the 91-day period immediately preceding the period for which any differential wage payment is made. (3)

Eligible small business employer

(A)

In general

The term eligible small business employer means, with respect to any taxable year, any employer which— (i)employed an average of less that 50 employees on business days during such taxable year, and (ii)under a written plan of the employer, provides eligible differential wage payments to every qualified employee of the employer. (B)

Controlled groups

For purposes of subparagraph (A), all persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as a single employer. (c)

Coordination with other credits

The amount of credit otherwise allowable under this chapter with respect to compensation paid to any employee shall be reduced by the credit determined under this section with respect to such employee. (d)

Disallowance for failure To comply with employment or reemployment rights of members of the reserve components of the Armed Forces of the United States

No credit shall be allowed under subsection (a) to a taxpayer for— (1)any taxable year, beginning after the date of the enactment of this section, in which the taxpayer is under a final order, judgment, or other process issued or required by a district court of the United States under section 4323 of title 38 of the United States Code with respect to a violation of chapter 43 of such title, and (2)the 2 succeeding taxable years. (e)

Certain rules to apply

For purposes of this section, rules similar to the rules of subsections (c), (d), and (e) of section 52 shall apply. (f)

Termination

This section shall not apply to any payments made after December 31, 2009.

. (b)

Credit treated as part of general business credit

Section 38(b) (relating to general business credit) is amended by striking plus at the end of paragraph (30), by striking the period at the end of paragraph (31) and inserting , plus, and by adding at the end of following new paragraph: (32)the differential wage payment credit determined under section 45O(a). . (c)

No deduction for compensation taken into account for credit

Section 280C(a) (relating to rule for employment credits) is amended by inserting 45O(a), after 45A(a),. (d)

Clerical amendment

The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item: Sec. 45O. Employer wage credit for employees who are active duty members of the uniformed services. . (e)

Effective date

The amendments made by this section shall apply to amounts paid after the date of the enactment of this Act.

12.

Revision of tax rules on expatriation of individuals

(a)

In General

Subpart A of part II of subchapter N of chapter 1 is amended by inserting after section 877 the following new section:

877A.

Tax responsibilities of expatriation

(a)

General Rules

For purposes of this subtitle— (1)

Mark to market

Except as provided in subsections (d) and (f), all property of a covered expatriate to whom this section applies shall be treated as sold on the day before the expatriation date for its fair market value. (2)

Recognition of gain or loss

In the case of any sale under paragraph (1)— (A)notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and (B)any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence.(3)

Exclusion for certain gain

(A)

In general

The amount which, but for this paragraph, would be includible in the gross income of any individual by reason of this section shall be reduced (but not below zero) by $600,000. For purposes of this paragraph, allocable expatriation gain taken into account under subsection (f)(2) shall be treated in the same manner as an amount required to be includible in gross income. (B)

Cost-of-living adjustment

(i)

In general

In the case of an expatriation date occurring in any calendar year after 2007, the $600,000 amount under subparagraph (A) shall be increased by an amount equal to— (I)such dollar amount, multiplied by (II)the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, determined by substituting calendar year 2006 for calendar year 1992 in subparagraph (B) thereof. (ii)

Rounding rules

If any amount after adjustment under clause (i) is not a multiple of $1,000, such amount shall be rounded to the next lower multiple of $1,000. (4)

Election to continue to be taxed as united states citizen

(A)

In general

If a covered expatriate elects the application of this paragraph— (i)this section (other than this paragraph and subsection (i)) shall not apply to the expatriate, but (ii)in the case of property to which this section would apply but for such election, the expatriate shall be subject to tax under this title in the same manner as if the individual were a United States citizen. (B)

Requirements

Subparagraph (A) shall not apply to an individual unless the individual— (i)provides security for payment of tax in such form and manner, and in such amount, as the Secretary may require, (ii)consents to the waiver of any right of the individual under any treaty of the United States which would preclude assessment or collection of any tax which may be imposed by reason of this paragraph, and (iii)complies with such other requirements as the Secretary may prescribe. (C)

Election

An election under subparagraph (A) shall apply to all property to which this section would apply but for the election and, once made, shall be irrevocable. Such election shall also apply to property the basis of which is determined in whole or in part by reference to the property with respect to which the election was made. (b)

Election To Defer Tax

(1)

In general

If the taxpayer elects the application of this subsection with respect to any property treated as sold by reason of subsection (a), the payment of the additional tax attributable to such property shall be postponed until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as the Secretary may prescribe). (2)

Determination of tax with respect to property

For purposes of paragraph (1), the additional tax attributable to any property is an amount which bears the same ratio to the additional tax imposed by this chapter for the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain taken into account under subsection (a) with respect to all property to which subsection (a) applies. (3)

Termination of postponement

No tax may be postponed under this subsection later than the due date for the return of tax imposed by this chapter for the taxable year which includes the date of death of the expatriate (or, if earlier, the time that the security provided with respect to the property fails to meet the requirements of paragraph (4), unless the taxpayer corrects such failure within the time specified by the Secretary). (4)

Security

(A)

In general

No election may be made under paragraph (1) with respect to any property unless adequate security is provided to the Secretary with respect to such property. (B)

Adequate security

For purposes of subparagraph (A), security with respect to any property shall be treated as adequate security if— (i)it is a bond in an amount equal to the deferred tax amount under paragraph (2) for the property, or (ii)the taxpayer otherwise establishes to the satisfaction of the Secretary that the security is adequate. (5)

Waiver of certain rights

No election may be made under paragraph (1) unless the taxpayer consents to the waiver of any right under any treaty of the United States which would preclude assessment or collection of any tax imposed by reason of this section. (6)

Elections

An election under paragraph (1) shall only apply to property described in the election and, once made, is irrevocable. An election may be made under paragraph (1) with respect to an interest in a trust with respect to which gain is required to be recognized under subsection (f)(1). (7)

Interest

For purposes of section 6601— (A)the last date for the payment of tax shall be determined without regard to the election under this subsection, and (B)section 6621(a)(2) shall be applied by substituting 5 percentage points for 3 percentage points in subparagraph (B) thereof. (c)

Covered Expatriate

For purposes of this section— (1)

In general

Except as provided in paragraph (2), the term covered expatriate means an expatriate. (2)

Exceptions

An individual shall not be treated as a covered expatriate if— (A)the individual— (i)became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and (ii)has not been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) during the 5 taxable years ending with the taxable year during which the expatriation date occurs, or (B)(i)the individual’s relinquishment of United States citizenship occurs before such individual attains age 181/2, and (ii)the individual has been a resident of the United States (as so defined) for not more than 5 taxable years before the date of relinquishment. (d)

Exempt Property; Special Rules for Pension Plans

(1)

Exempt property

This section shall not apply to the following: (A)

United states real property interests

Any United States real property interest (as defined in section 897(c)(1)), other than stock of a United States real property holding corporation which does not, on the day before the expatriation date, meet the requirements of section 897(c)(2). (B)

Specified property

Any property or interest in property not described in subparagraph (A) which the Secretary specifies in regulations. (2)

Special rules for certain retirement plans

(A)

In general

If a covered expatriate holds on the day before the expatriation date any interest in a retirement plan to which this paragraph applies— (i)such interest shall not be treated as sold for purposes of subsection (a)(1), but (ii)an amount equal to the present value of the expatriate’s nonforfeitable accrued benefit shall be treated as having been received by such individual on such date as a distribution under the plan. (B)

Treatment of subsequent distributions

In the case of any distribution on or after the expatriation date to or on behalf of the covered expatriate from a plan from which the expatriate was treated as receiving a distribution under subparagraph (A), the amount otherwise includible in gross income by reason of the subsequent distribution shall be reduced by the excess of the amount includible in gross income under subparagraph (A) over any portion of such amount to which this subparagraph previously applied. (C)

Treatment of subsequent distributions by plan

For purposes of this title, a retirement plan to which this paragraph applies, and any person acting on the plan’s behalf, shall treat any subsequent distribution described in subparagraph (B) in the same manner as such distribution would be treated without regard to this paragraph. (D)

Applicable plans

This paragraph shall apply to— (i)any qualified retirement plan (as defined in section 4974(c)), (ii)an eligible deferred compensation plan (as defined in section 457(b)) of an eligible employer described in section 457(e)(1)(A), and (iii)to the extent provided in regulations, any foreign pension plan or similar retirement arrangements or programs. (e)

Definitions

For purposes of this section— (1)

Expatriate

The term expatriate means— (A)any United States citizen who relinquishes citizenship, and (B)any long-term resident of the United States who— (i)ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)), or (ii)commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country and who does not waive the benefits of such treaty applicable to residents of the foreign country. (2)

Expatriation date

The term expatriation date means— (A)the date an individual relinquishes United States citizenship, or (B)in the case of a long-term resident of the United States, the date of the event described in clause (i) or (ii) of paragraph (1)(B). (3)

Relinquishment of citizenship

A citizen shall be treated as relinquishing United States citizenship on the earliest of— (A)the date the individual renounces such individual’s United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), (B)the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)–(4)), (C)the date the United States Department of State issues to the individual a certificate of loss of nationality, or (D)the date a court of the United States cancels a naturalized citizen’s certificate of naturalization. Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.(4)

Long-term resident

The term long-term resident has the meaning given to such term by section 877(e)(2). (f)

Special Rules Applicable to Beneficiaries’ Interests in Trust

(1)

In general

Except as provided in paragraph (2), if an individual is determined under paragraph (3) to hold an interest in a trust on the day before the expatriation date— (A)the individual shall not be treated as having sold such interest, (B)such interest shall be treated as a separate share in the trust, and (C)(i)such separate share shall be treated as a separate trust consisting of the assets allocable to such share, (ii)the separate trust shall be treated as having sold its assets on the day before the expatriation date for their fair market value and as having distributed all of its assets to the individual as of such time, and (iii)the individual shall be treated as having recontributed the assets to the separate trust. Subsection (a)(2) shall apply to any income, gain, or loss of the individual arising from a distribution described in subparagraph (C)(ii). In determining the amount of such distribution, proper adjustments shall be made for liabilities of the trust allocable to an individual’s share in the trust.(2)

Special rules for interests in qualified trusts

(A)

In general

If the trust interest described in paragraph (1) is an interest in a qualified trust— (i)paragraph (1) and subsection (a) shall not apply, and (ii)in addition to any other tax imposed by this title, there is hereby imposed on each distribution with respect to such interest a tax in the amount determined under subparagraph (B). (B)

Amount of tax

The amount of tax under subparagraph (A)(ii) shall be equal to the lesser of— (i)the highest rate of tax imposed by section 1(e) for the taxable year which includes the day before the expatriation date, multiplied by the amount of the distribution, or (ii)the balance in the deferred tax account immediately before the distribution determined without regard to any increases under subparagraph (C)(ii) after the 30th day preceding the distribution. (C)

Deferred tax account

For purposes of subparagraph (B)(ii)— (i)

Opening balance

The opening balance in a deferred tax account with respect to any trust interest is an amount equal to the tax which would have been imposed on the allocable expatriation gain with respect to the trust interest if such gain had been included in gross income under subsection (a). (ii)

Increase for interest

The balance in the deferred tax account shall be increased by the amount of interest determined (on the balance in the account at the time the interest accrues), for periods after the 90th day after the expatriation date, by using the rates and method applicable under section 6621 for underpayments of tax for such periods, except that section 6621(a)(2) shall be applied by substituting 5 percentage points for 3 percentage points in subparagraph (B) thereof. (iii)

Decrease for taxes previously paid

The balance in the tax deferred account shall be reduced— (I)by the amount of taxes imposed by subparagraph (A) on any distribution to the person holding the trust interest, and (II)in the case of a person holding a nonvested interest, to the extent provided in regulations, by the amount of taxes imposed by subparagraph (A) on distributions from the trust with respect to nonvested interests not held by such person. (D)

Allocable expatriation gain

For purposes of this paragraph, the allocable expatriation gain with respect to any beneficiary’s interest in a trust is the amount of gain which would be allocable to such beneficiary’s vested and nonvested interests in the trust if the beneficiary held directly all assets allocable to such interests. (E)

Tax deducted and withheld

(i)

In general

The tax imposed by subparagraph (A)(ii) shall be deducted and withheld by the trustees from the distribution to which it relates. (ii)

Exception where failure to waive treaty rights

If an amount may not be deducted and withheld under clause (i) by reason of the distributee failing to waive any treaty right with respect to such distribution— (I)the tax imposed by subparagraph (A)(ii) shall be imposed on the trust and each trustee shall be personally liable for the amount of such tax, and (II)any other beneficiary of the trust shall be entitled to recover from the distributee the amount of such tax imposed on the other beneficiary. (F)

Disposition

If a trust ceases to be a qualified trust at any time, a covered expatriate disposes of an interest in a qualified trust, or a covered expatriate holding an interest in a qualified trust dies, then, in lieu of the tax imposed by subparagraph (A)(ii), there is hereby imposed a tax equal to the lesser of— (i)the tax determined under paragraph (1) as if the day before the expatriation date were the date of such cessation, disposition, or death, whichever is applicable, or (ii)the balance in the tax deferred account immediately before such date. Such tax shall be imposed on the trust and each trustee shall be personally liable for the amount of such tax and any other beneficiary of the trust shall be entitled to recover from the covered expatriate or the estate the amount of such tax imposed on the other beneficiary.(G)

Definitions and special rules

For purposes of this paragraph— (i)

Qualified trust

The term qualified trust means a trust which is described in section 7701(a)(30)(E). (ii)

Vested interest

The term vested interest means any interest which, as of the day before the expatriation date, is vested in the beneficiary. (iii)

Nonvested interest

The term nonvested interest means, with respect to any beneficiary, any interest in a trust which is not a vested interest. Such interest shall be determined by assuming the maximum exercise of discretion in favor of the beneficiary and the occurrence of all contingencies in favor of the beneficiary. (iv)

Adjustments

The Secretary may provide for such adjustments to the bases of assets in a trust or a deferred tax account, and the timing of such adjustments, in order to ensure that gain is taxed only once. (v)

Coordination with retirement plan rules

This subsection shall not apply to an interest in a trust which is part of a retirement plan to which subsection (d)(2) applies. (3)

Determination of beneficiaries’ interest in trust

(A)

Determinations under paragraph (1)

For purposes of paragraph (1), a beneficiary’s interest in a trust shall be based upon all relevant facts and circumstances, including the terms of the trust instrument and any letter of wishes or similar document, historical patterns of trust distributions, and the existence of and functions performed by a trust protector or any similar adviser. (B)

Other determinations

For purposes of this section— (i)

Constructive ownership

If a beneficiary of a trust is a corporation, partnership, trust, or estate, the shareholders, partners, or beneficiaries shall be deemed to be the trust beneficiaries for purposes of this section. (ii)

Taxpayer return position

A taxpayer shall clearly indicate on its income tax return— (I)the methodology used to determine that taxpayer’s trust interest under this section, and (II)if the taxpayer knows (or has reason to know) that any other beneficiary of such trust is using a different methodology to determine such beneficiary’s trust interest under this section. (g)

Termination of Deferrals, Etc

In the case of any covered expatriate, notwithstanding any other provision of this title— (1)any period during which recognition of income or gain is deferred shall terminate on the day before the expatriation date, and (2)any extension of time for payment of tax shall cease to apply on the day before the expatriation date and the unpaid portion of such tax shall be due and payable at the time and in the manner prescribed by the Secretary. (h)

Imposition of Tentative Tax

(1)

In general

If an individual is required to include any amount in gross income under subsection (a) for any taxable year, there is hereby imposed, immediately before the expatriation date, a tax in an amount equal to the amount of tax which would be imposed if the taxable year were a short taxable year ending on the expatriation date. (2)

Due date

The due date for any tax imposed by paragraph (1) shall be the 90th day after the expatriation date. (3)

Treatment of tax

Any tax paid under paragraph (1) shall be treated as a payment of the tax imposed by this chapter for the taxable year to which subsection (a) applies. (4)

Deferral of tax

The provisions of subsection (b) shall apply to the tax imposed by this subsection to the extent attributable to gain includible in gross income by reason of this section. (i)

Special Liens for Deferred Tax Amounts

(1)

Imposition of lien

(A)

In general

If a covered expatriate makes an election under subsection (a)(4) or (b) which results in the deferral of any tax imposed by reason of subsection (a), the deferred amount (including any interest, additional amount, addition to tax, assessable penalty, and costs attributable to the deferred amount) shall be a lien in favor of the United States on all property of the expatriate located in the United States (without regard to whether this section applies to the property). (B)

Deferred amount

For purposes of this subsection, the deferred amount is the amount of the increase in the covered expatriate’s income tax which, but for the election under subsection (a)(4) or (b), would have occurred by reason of this section for the taxable year including the expatriation date. (2)

Period of lien

The lien imposed by this subsection shall arise on the expatriation date and continue until— (A)the liability for tax by reason of this section is satisfied or has become unenforceable by reason of lapse of time, or (B)it is established to the satisfaction of the Secretary that no further tax liability may arise by reason of this section. (3)

Certain rules apply

The rules set forth in paragraphs (1), (3), and (4) of section 6324A(d) shall apply with respect to the lien imposed by this subsection as if it were a lien imposed by section 6324A. (j)

Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.

. (b)

Inclusion in Income of Gifts and Bequests Received by United States Citizens and Residents From Expatriates

Section 102 (relating to gifts, etc. not included in gross income) is amended by adding at the end the following new subsection: (d)

Gifts and Inheritances From Covered Expatriates

(1)

Treatment of gifts and inheritances

(A)

In general

Subsection (a) shall not exclude from gross income the value of any property acquired by gift, bequest, devise, or inheritance from a covered expatriate after the expatriation date. (B)

Determination of basis

Notwithstanding sections 1015 or 1022, the basis of any property described in subparagraph (A) in the hands of the donee or the person acquiring such property from the decedent shall be equal to the fair market value of the property at the time of the gift, bequest, devise, or inheritance. (2)

Exceptions for transfers otherwise subject to estate or gift tax

Paragraph (1) shall not apply to any property if either— (A)the gift, bequest, devise, or inheritance is— (i)shown on a timely filed return of tax imposed by chapter 12 as a taxable gift by the covered expatriate, or (ii)included in the gross estate of the covered expatriate for purposes of chapter 11 and shown on a timely filed return of tax imposed by chapter 11 of the estate of the covered expatriate, or (B)no such return was timely filed but no such return would have been required to be filed even if the covered expatriate were a citizen or long-term resident of the United States. (3)

Definitions

For purposes of this subsection, any term used in this subsection which is also used in section 877A shall have the same meaning as when used in section 877A. . (c)

Definition of Termination of United States Citizenship

Section 7701(a) is amended by adding at the end the following new paragraph: (50)

Termination of united states citizenship

(A)

In general

An individual shall not cease to be treated as a United States citizen before the date on which— (i)the individual’s citizenship is treated as relinquished under section 877A(e)(3), and (ii)the individual provides a statement in accordance with section 6039G (if such a statement is otherwise required). (B)

Dual citizens

Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country. . (d)

Ineligibility for Visa or Admission to United States

(1)

In general

Section 212(a)(10)(E) of the Immigration and Nationality Act (8 U.S.C. 1182(a)(10)(E)) is amended to read as follows: (E)

Former citizens not in compliance with expatriation revenue provisions

Any alien who is a former citizen of the United States who relinquishes United States citizenship (within the meaning of section 877A(e)(3) of the Internal Revenue Code of 1986) and who is not in compliance with section 877A of such Code (relating to expatriation) is inadmissible. . (2)

Availability of information

(A)

In general

Section 6103(l) (relating to disclosure of returns and return information for purposes other than tax administration) is amended by adding at the end the following new paragraph: (21)

Disclosure to deny visa or admission to certain expatriates

Upon written request of the Attorney General or the Attorney General’s delegate, the Secretary shall disclose whether an individual is in compliance with section 877A (and if not in compliance, any items of noncompliance) to officers and employees of the Federal agency responsible for administering section 212(a)(10)(E) of the Immigration and Nationality Act solely for the purpose of, and to the extent necessary in, administering such section 212(a)(10)(E). . (B)

Safeguards

Section 6103(p)(4) (relating to safeguards) is amended by striking or (20) each place it appears and inserting (20), or (21). (3)

Effective dates

The amendments made by this subsection shall apply to individuals who relinquish United States citizenship on or after the date of the enactment of this Act. (e)

Conforming Amendments

(1)Section 877 is amended by adding at the end the following new subsection: (h)

Application

This section shall not apply to an expatriate (as defined in section 877A(e)) whose expatriation date (as so defined) occurs on or after the date of the enactment of this subsection. . (2)Section 2107 is amended by adding at the end the following new subsection: (f)

Application

This section shall not apply to any expatriate subject to section 877A. . (3)Section 2501(a)(3) is amended by adding at the end the following new subparagraph: (C)

Application

This paragraph shall not apply to any expatriate subject to section 877A. . (4)Section 6039G(a) is amended by inserting or 877A after section 877(b). (5)The second sentence of section 6039G(d) is amended by inserting or who relinquishes United States citizenship (within the meaning of section 877A(e)(3)) after section 877(a)). (6)Section 7701(n) is amended by adding at the end the following new paragraph: (3)

Application

This subsection shall not apply to any expatriate subject to section 877A. . (f)

Clerical Amendment

The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by inserting after the item relating to section 877 the following new item: Sec. 877A. Tax responsibilities of expatriation. . (g)

Effective Date

(1)

In general

Except as provided in this subsection, the amendments made by this section shall apply to expatriates (within the meaning of section 877A(e) of the Internal Revenue Code of 1986, as added by this section) whose expatriation date (as so defined) occurs on or after the date of the enactment of this Act. (2)

Gifts and bequests

Section 102(d) of the Internal Revenue Code of 1986 (as added by subsection (b)) shall apply to gifts and bequests received on or after the date of the enactment of this Act, from an individual or the estate of an individual whose expatriation date (as so defined) occurs after such date. (3)

Due date for tentative tax

The due date under section 877A(h)(2) of the Internal Revenue Code of 1986, as added by this section, shall in no event occur before the 90th day after the date of the enactment of this Act.