[Congressional Record Volume 153, Number 94 (Tuesday, June 12, 2007)]
[Senate]
[Pages S7548-S7554]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By 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):
  S. 1593. A bill to amend the Internal Revenue Code of 1986 to provide 
tax relief and protections to military personnel, and for other 
purposes; to the Committee on Finance.
  Mr. BAUCUS. Mr. President, this week, we celebrate Flag Day, and in a 
few weeks we will celebrate the Fourth of July.
  We ask a lot from our men and women in the armed services, and their 
sacrifices are essential to protecting our freedom here at home. One 
way to support them is to make the Tax Code a little friendlier to the 
troops.
  That is why I am introducing the Defenders of Freedom Tax Relief Act 
of 2007. This bill would extend the tax rules favoring the military 
that expire in 2007 and 2008. It would also eliminate roadblocks in the 
current tax laws that present difficulties for veterans and 
servicemembers.
  Our troops should fight against our Nation's enemies, not our 
Nation's Tax Code. Family members of fallen soldiers killed in the line 
of duty receive a death benefit of $100,000. But the Tax Code restricts 
the survivors from contributing this benefit into a tax-favored 
retirement account. My bill would exempt this benefit from the current 
restrictions on contribution amounts and income limitations. That way, 
the family members of fallen soldiers could take advantage of tax-
favored Roth IRA accounts.
  Lower ranking, lower income soldiers do most of the heavy lifting in 
combat situations. Under the current Tax Code, their income is not 
counted in computing the earned income tax credit, or EITC. The EITC is 
a beneficial tax provision available to working Americans. It makes no 
sense to deny it to our troops. My bill would count combat duty income 
for EITC purposes, and it would make this change to the Tax Code 
permanent.
  My bill would also eliminate the confusion that surrounds State gifts 
to servicemembers. Military members should not be caught in the 
crossfire of competing Tax Code interpretations.
  Another hazard facing our troops in the Tax Code is the statute of 
limitations for filing a tax refund. Most Veterans' Administration 
disability claims filed by veterans are quickly resolved. But thousands 
of disability awards are delayed due to lost paperwork or the appeals 
of rejected claims. Once a disabled veteran finally gets a favorable 
award, the good news is that the disability award is tax-free. But many 
of these disabled veterans get ambushed by a statute that bars them 
from filing a tax refund claim. My bill would give disabled veterans in 
this situation an extra year to claim their tax refunds.
  Our men and women in uniform provide an invaluable service to our 
country. They, along with their families, make sacrifices and live a 
demanding lifestyle. The Tax Code should not add to their hardships as 
they move from assignment to assignment around the globe.
  Protecting American interests around the world requires most of our 
troops to move a number of times during their career. Restricting 
favorable mortgage bond financing to only first-time homebuyers does 
not make much sense for them. Therefore, my bill would eliminate this 
restriction for veterans who served in the active military.
  The bill would make permanent a provision that allows intelligence 
community employees to make use of the exclusion of gain on the sale of 
their home when they are assigned overseas or 50 miles away from their 
home.
  A soldier's rucksack is heavy enough as it is without piling tax 
paperwork on top of it. My bill would help reduce paperwork.
  My bill would treat differential pay as wages. This would make it 
easer for employers to contribute to a reservist's retirement plans. 
And it would eliminate the reservist's need to make estimated tax 
payments.
  My bill would also make permanent certain taxpayer information 
reporting rules, so that the Social Security Administration and the 
Veterans' Administration could facilitate the administration of veteran 
needs-based pension and compensation programs.
  A further roadblock for military service men and women is the 10-
percent penalty triggered for early withdrawal from a qualified 
retirement plan. If reservists are called to active duty, the last 
thing that they should have to worry about is their 401(k) plan or IRA 
account. This provision would permit penalty-free early withdrawal. And 
it would give reservists 2 years from the time that they stop active 
duty to roll over their IRAs or 401(k) plans.
  Small business employers are being asked to make sacrifices here at 
home. My bill would help.
  Mobilization of Reserve personnel creates unexpected employee 
absences. This hits small businesses especially hard. Some employers 
voluntarily take on the added burden of eliminating any pay gap 
experienced by their reservist-employees. These employers pay the 
difference between the civilian salary and the military pay. In 
recognition of their patriotism, my bill would provide small businesses 
with fewer than 50 employees a tax credit of 20 percent of the 
differential pay, up to $20,000, for those small businesses that make 
differential payments to reservists called up to active duty.
  This bill is fully paid for with a change in the Tax Code that makes 
sure that anyone relinquishing their U.S. citizenship is still on the 
hook to pay their fair share of U.S. taxes.
  We owe the Americans fighting in our Armed Forces an enormous debt of 
gratitude. These important tax reforms are one small way of saluting 
them for all that they do. I urge my colleagues to join me in 
supporting this measure.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 1593

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 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

[[Page S7549]]

     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.

     SEC. 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.

     SEC. 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.

     SEC. 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.

     SEC. 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.

[[Page S7550]]

     SEC. 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.

     SEC. 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.

     SEC. 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''.

     SEC. 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.

     SEC. 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.

     SEC. 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:

     ``SEC. 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:


[[Page S7551]]


``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.

     SEC. 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:

     ``SEC. 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 18\1/
     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--

[[Page S7552]]

       ``(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.

[[Page S7553]]

       ``(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.

  Mr. KERRY. Mr. President, today Senators Baucus, Grassley and I, 
along with other Finance Committee members, are introducing the 
Defenders of Freedom Tax Relief Act of 2007. Earlier in the year, 
Senator Smith and I introduced the Active Duty Military Tax Relief Act 
of 2007, which would help those who are valiantly serving their country 
and the families that they leave behind.
  The Defenders of Freedom on Tax Relief Act of 2007 includes several 
provisions from the Active Duty Military Tax Relief Act of 2007. It 
also includes additional provisions to help military families and 
veterans who often struggle financially.
  The best definition of patriotism is keeping faith with those who 
wear the uniform of our country. That means giving our troops the 
resources they need to keep them safe while they are protecting us. And 
it means supporting our troops at home as well as abroad.
  Currently, there are over 149,700 military personnel serving in Iraq. 
There are approximately 22,100 U.S. servicemembers in Afghanistan. Many 
of these men and women are reservists and have been called to active 
duty, frequently for multiple tours.
  Most large businesses have the resources to provide supplemental 
income to reservist employees called up and to replace them with 
temporary employees. I applaud the businesses that have been able to 
pay supplemental income to their reservists, but

[[Page S7554]]

it is not easy for small businesses to do the same.
  In January, the Committee on Small Business and Entrepreneurship held 
a hearing on veterans' small business issues. A majority of our 
veterans returning from Iraq and Afghanistan are Reserve and National 
Guard members--35 percent of whom are either self-employed or own or 
are employed by a small business.
  We heard some disturbing statistics about the impact and unintended 
consequences the call up of reservists is having on small businesses. 
According to a January 2007 survey conducted by Workforce Management, 
54 percent of the businesses surveyed responded that they would not 
hire a citizen soldier if they knew that they could be called up for an 
indeterminate amount of time. I am concerned that long call ups and 
redeployments have made it hard for small businesses to be supportive 
of civilian soldiers.
  The Active Duty Military Tax Relief Act of 2007 provides a tax credit 
to small businesses to assist with the cost of paying the salary of 
their reservist employees when they are called to active duty. A 
similar provision is included in the Defenders of Freedom Tax Relief 
Act of 2007.
  In addition to helping small businesses, the Active Duty Military Tax 
Relief Act of 2007 addresses concerns related to differential military 
pay, income tax withholding, and retirement plan participation. These 
provisions will make it easier for employers who would like to pay 
their employees supplemental income, above their military pay, and make 
pension contributions. Our legislation would make differential military 
pay subject to Federal income tax withholding. In addition, with 
respect to the retirement plan rules, the bill provides that a person 
receiving differential military pay would be treated as an employee of 
the employer making the payment, and allows the differential military 
pay to be treated as compensation. These provisions are included in the 
Defenders of Freedom Tax Relief Act of 2007.
  The Active Duty Military Tax Relief Act of 2007 would make permanent 
the existing provision which allows taxpayer to include combat pay as 
earned income for purposes of the earned-income tax credit, EITC. 
Without this provision some military families would no longer be 
eligible to receive the EITC because combat pay is currently not 
taxable.
  Last Congress, Senator Smith and I introduced the Fallen Heroes 
Family Savings Act, which we have incorporated into the Active Duty 
Military Tax Relief Act. This provision provides tax relief for the 
death gratuity payment that is given to families who have lost a loved 
one in combat. This payment is currently $100,000.
  Our current tax laws do not allow the recipients of this payment to 
use it to make contributions to tax-preferred saving accounts that help 
with saving for retirement. The Active Duty Military Tax Relief Act of 
2007 would allow military death gratuities to be contributed to certain 
tax-preferred accounts. These contributions would be treated as 
qualified rollovers. A similar provision is included in the Defenders 
of Freedom Tax Relief Act of 2007.
  Our service men and women need to know that we are honoring their 
valor by taking care of those they leave behind. Helping ease the tax 
burden on the death gratuity will enable military families to save more 
for retirement. These changes to our tax laws will help our military 
families with some of their financial burdens. It cannot repay the 
sacrifices they have made for us, but it is a small way we can support 
our troops and their families at home as well as abroad.
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