[Senate Report 107-283]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 603
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-283
======================================================================
 
                 ARMED FORCES TAX FAIRNESS ACT OF 2002

                                _______
                                

               September 17, 2002.--Ordered to be printed

                                _______
                                

   Mr. Baucus, from the Committee on Finance, submitted the following

                              R E P O R T

                        [To accompany H.R. 5063]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to which was referred the bill 
(H.R. 5063) to amend the Internal Revenue Code of 1986 to 
provide a special rule for members of the uniformed services in 
determining the exclusion of gain from the sale of a principal 
residence, and to restore the tax exempt status of death 
gratuity payments to members of the uniformed services, having 
considered the same, reports favorably thereon with an 
amendment in the nature of a substitute and recommends that the 
bill, as amended, do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................2
II. Explanation of the Bill...........................................2
    Title I. Improving Tax Equity for Military Personnel..............2
        A. Exclusion From Gross Income of Certain Death Gratuity 
            Payments.............................................     2
        B. Exclusion of Gain on Sale of a Principal Residence by 
            a Member of the Uniformed Services or the Foreign 
            Service..............................................     3
        C. Exclusion for Amounts Received Under Department of 
            Defense Homeowners Assistance Program................     4
        D. Expansion of Combat Zone Filing Rules to Contingency 
            Operations...........................................     5
        E. Above-the-Line Deduction for Overnight Travel Expenses 
            of National Guard and Reserve Members................     7
        F. Modification of Membership Requirement for Exemption 
            From Tax for Certain Veterans' Organizations.........     8
        G. Clarification of Treatment of Certain Dependent Care 
            Assistance Programs Provided to Members of the 
            Uniformed Services of the United States..............     9
    Title II. Other Provisions........................................9
        A. Impose Mark-to-Market Tax on Individuals Who 
            Expatriate...........................................     9
        B. Extension of IRS User Fees............................    21
III.Budget Effects of the Bill.......................................21

        A. Committee Estimates...................................    21
        B. Budget Authority and Tax Expenditures.................    23
        C. Consultation With Congressional Budget Office.........    23
IV. Votes of the Committee...........................................25
 V. Regulatory Impact and Other Matters..............................25
        A. Regulatory Impact.....................................    25
        B. Unfunded Mandates Statement...........................    26
        C. Tax Complexity Analysis...............................    26
VI. Changes in Existing Law Made by the Bill as Reported.............26

                       I. LEGISLATIVE BACKGROUND

    The Senate Committee on Finance marked up H.R. 5063 (the 
Armed Forces Tax Fairness Act of 2002) on September 12, 2002, 
and ordered the bill, as amended, favorably reported by 
unanimous voice vote.
    The Committee believes, especially around the first 
anniversary of the September 11th attacks, that consideration 
should be paid to the men and women who are leading America's 
response and serving our country. These men and women include: 
(1) members of the Armed Forces deployed overseas; (2) members 
of the National Guard protecting our borders and airports; and 
(3) Foreign Service officers serving in dangerous diplomatic 
posts.
    The Committee believes, in addition to our thoughts and 
thanks, that these individuals deserve to be treated 
appropriately under the tax laws. The modest sensible 
provisions included in this legislation are the result of a 
bipartisan effort to correct the tax treatment of those 
individuals serving their country in the uniformed services, 
reserves and Foreign Service.
    The bill also contains two provisions that raise revenue to 
offset the cost of the other provisions. In the case of the 
provision to modify the tax treatment of certain individual 
expatriates, these provisions seem especially fitting to offset 
the improved tax treatment of the men and women serving their 
country.

                      II. EXPLANATION OF THE BILL


          TITLE I. IMPROVING TAX EQUITY FOR MILITARY PERSONNEL


   A. Exclusion From Gross Income of Certain Death Gratuity Payments


                              PRESENT LAW

    Present law provides that qualified military benefits are 
not included in gross income. Generally, a qualified military 
benefit is any allowance or in-kind benefit (other than 
personal use of a vehicle) which: (1) is received by any member 
or former member of the uniformed services of the United States 
or any dependent of such member by reason of such member's 
status or service as a member of such uniformed services; and 
(2) was excludable from gross income on September 9, 1986, 
under any provision of law, regulation, or administrative 
practice which was in effect on such date. Generally, other 
than certain cost of living adjustments no modification or 
adjustment of any qualified military benefit after September 9, 
1986, is taken into account for purposes of this exclusion from 
gross income. Qualified military benefits include certain death 
gratuities.

                           REASONS FOR CHANGE

    The Committee believes that the amount of the exclusion for 
these death gratuities should be conformed to the present-law 
levels of such death gratuities. Further, the Committee 
believes that the amount of the exclusion should be 
automatically adjusted for future changes in these death 
gratuities.

                        EXPLANATION OF PROVISION

    The bill extends the exclusion from gross income to any 
adjustment to the amount of the death gratuity payable under 
Chapter 75 of Title 10 of the United States Code.

                             EFFECTIVE DATE

    The provision is effective with respect to deaths occurring 
after September 10, 2001.

 B. Exclusion of Gain on Sale of a Principal Residence by a Member of 
             the Uniformed Services or the Foreign Service


                              PRESENT LAW

    Under present law, an individual taxpayer may exclude up to 
$250,000 ($500,000 if married filing a joint return) of gain 
realized on the sale or exchange of a principal residence. To 
be eligible for the exclusion, the taxpayer must have owned and 
used the residence as a principal residence for at least 2 of 
the 5 years prior to the sale or exchange. A taxpayer who fails 
to meet these requirements by reason of a change of place of 
employment, health, or, to the extent provided under 
regulations, unforeseen circumstances is able to exclude an 
amount equal to the fraction of the $250,000 ($500,000 if 
married filing a joint return) that is equal to the fraction of 
the 2 years that the ownership and use requirements are met. 
There are no special rules relating to members of the uniformed 
services, or the Foreign Service of the United States.

                           REASONS FOR CHANGE

    The Committee believes that members of the uniformed 
services and the Foreign Service of the United States who would 
otherwise qualify for the exclusion of the gain on the sale of 
a principal residence should not be deprived the exclusion 
because of service to their country.

                        EXPLANATION OF PROVISION

    Under the bill, an individual may elect to suspend for a 
maximum of 10 years the 5-year test period for ownership and 
use during certain absences due to service in the uniformed 
services, or Foreign Service of the United States. The 
uniformed services include: (1) the armed forces (the Army, 
Navy, Air Force, Marine Corps, and Coast Guard); (2) the 
commissioned corps of the National Oceanic and Atmospheric 
Administration; and (3) the commissioned corps of the Public 
Health Service. If the election is made, the 5-year period 
ending on the date of the sale or exchange of a principal 
residence does not include any period up to 5 years during 
which the taxpayer or the taxpayer's spouse is on qualified 
official extended duty as a member of the uniformed services, 
or in Foreign Service of the United States. For these purposes, 
qualified official extended duty is any period of extended duty 
by a member of the uniformed services, or the Foreign Service 
of the United States while serving at a place of duty at least 
50 miles away from the taxpayer's principal residence or under 
orders compelling residence in Government furnished quarters. 
Extended duty is defined as any period of duty pursuant to a 
call or order to such duty for a period in excess of 90 days or 
for an indefinite period. The election may be made with respect 
to only one property for a suspension period.

                             EFFECTIVE DATE

    The provision is effective for elections made with respect 
to sales after the date of enactment.

     C. Exclusion for Amounts Received Under Department of Defense 
                     Homeowners Assistance Program


                              PRESENT LAW

HAP payment

    The Department of Defense Homeowners Assistance Program 
(HAP) provides payments to certain employees and members of the 
Armed Forces to offset the adverse effects on housing values 
that result from military base realignment or closure. The 
payments are authorized under the provisions of Title 42, 
U.S.C., section 3374.
    HAP provides payments to eligible individuals who may, in 
general, either (1) receive a cash payment as compensation for 
losses that may be or have been sustained in a private sale, in 
an amount not to exceed the difference between (a) 95 percent 
of the fair market value of their property prior to public 
announcement of intention to close all or part of the military 
base or installation and (b) the fair market value of such 
property at the time of the sale, or (2) receive, as the 
purchase price for their property, an amount not to exceed 90 
percent of the prior fair market value as such value is 
determined by the Secretary of Defense, or the amount of the 
outstanding mortgages.

Tax treatment

    Unless specifically excluded, gross income for Federal 
income tax purposes includes all income from whatever source 
derived. Amounts received under HAP are received in connection 
with the performance of services, and thus are includable in 
gross income as compensation for services. Additionally, such 
payments are ``wages'' for Federal Insurance Contributions Act 
tax purposes (including Medicare).

                           REASONS FOR CHANGE

    The Committee believes that the exemption from gross income 
and FICA taxes is necessary to provide full compensation for 
the losses in home values incurred as a result of military base 
realignment or closure. The Committee further believes that 
this will help to facilitate necessary military base 
realignment or closure.

                        EXPLANATION OF PROVISION

    The bill exempts from gross income amounts received under 
the Homeowners Assistance Program. Amounts received under the 
program are also not considered wages for Federal Insurance 
Contributions Act tax purposes (including Medicare).

                             EFFECTIVE DATE

    The provision is effective for payments made after the date 
of enactment.

   D. Expansion of Combat Zone Filing Rules to Contingency Operations


                              PRESENT LAW

General time limits for filing tax returns

    Individuals generally must file their Federal income tax 
returns by April 15 of the year following the close of a 
taxable year (sec. 6072). The Secretary may grant reasonable 
extensions of time for filing such returns (sec. 6081). 
Treasury regulations provide an additional automatic 2-month 
extension (until June 15 for calendar-year individuals) for 
United States citizens and residents in military or naval 
service on duty on April 15 of the following year (the 
otherwise applicable due date of the return) outside the United 
States (Treas. Reg. sec. 1.6081-5(a)(6)). No action is 
necessary to apply for this extension, but taxpayers must 
indicate on their returns (when filed) that they are claiming 
this extension. Unlike most extensions of time to file, this 
extension applies to both filing returns and paying the tax 
due.
    Treasury regulations also provide, upon application on the 
proper form, an automatic 4-month extension (until August 15 
for calendar-year individuals) for any individual timely filing 
that form and paying the amount of tax estimated to be due 
(Treas. Reg. sec. 1.6081-4).
    In general, individuals must make quarterly estimated tax 
payments by April 15, June 15, September 15, and January 15 of 
the following taxable year. Wage withholding is considered to 
be a payment of estimated taxes.

Suspension of time periods

    In general, the period of time for performing various acts 
under the Internal Revenue Code, such as filing tax returns, 
paying taxes, or filing a claim for credit or refund of tax, is 
suspended for any individual serving in the Armed Forces of the 
United States in an area designated as a ``combat zone'' during 
the period of combatant activities (sec. 7508). An individual 
who becomes a prisoner of war is considered to continue in 
active service and is therefore also eligible for these 
suspension of time provisions. The suspension of time also 
applies to an individual serving in support of such Armed 
Forces in the combat zone, such as Red Cross personnel, 
accredited correspondents, and civilian personnel acting under 
the direction of the Armed Forces in support of those Forces. 
The designation of a combat zone must be made by the President 
in an Executive order. The President must also designate the 
period of combatant activities in the combat zone (the starting 
date and the termination date of combat).
    The suspension of time encompasses the period of service in 
the combat zone during the period of combatant activities in 
the zone, as well as (1) any time of continuous qualified 
hospitalization resulting from injury received in the combat 
zone\1\ or (2) time in missing in action status, plus the next 
180 days.
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    \1\ Two special rules apply to continuous hospitalization inside 
the United States. First, the suspension of time provisions based on 
continuous hospitalization inside the United States are applicable only 
to the hospitalized individual; they are not applicable to the spouse 
of such individual. Second, in no event do the suspension of time 
provisions based on continuous hospitalization inside the United States 
extend beyond 5 years from the date the individual returns to the 
United States. These two special rules do not apply to continuous 
hospitalization outside the United States.
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    The suspension of time applies to the following acts:
          (1) Filing any return of income, estate, or gift tax 
        (except employment and withholding taxes);
          (2) Payment of any income, estate, or gift tax 
        (except employment and withholding taxes);
          (3) Filing a petition with the Tax Court for 
        redetermination of a deficiency, or for review of a 
        decision rendered by the Tax Court;
          (4) Allowance of a credit or refund of any tax;
          (5) Filing a claim for credit or refund of any tax;
          (6) Bringing suit upon any such claim for credit or 
        refund;
          (7) Assessment of any tax;
          (8) Giving or making any notice or demand for the 
        payment of any tax, or with respect to any liability to 
        the United States in respect of any tax;
          (9) Collection of the amount of any liability in 
        respect of any tax;
          (10) Bringing suit by the United States in respect of 
        any liability in respect of any tax; and
          (11) Any other act required or permitted under the 
        internal revenue laws specified by the Secretary of the 
        Treasury.
    Individuals may, if they choose, perform any of these acts 
during the period of suspension.
    Spouses of qualifying individuals are entitled to the same 
suspension of time, except that the spouse is ineligible for 
this suspension for any taxable year beginning more than 2 
years after the date of termination of combatant activities in 
the combat zone.

                           REASONS FOR CHANGE

    The Committee believes that military personnel deployed 
outside the United States away from their permanent duty 
station while participating in a contingency operation should 
be entitled to utilize the same suspension of time provisions 
as those deployed in a combat zone.

                        EXPLANATION OF PROVISION

    The bill applies the special suspension of time period 
rules to persons deployed outside the United States away from 
the individual's permanent duty station while participating in 
an operation designated by the Secretary of Defense as a 
contingency operation or that becomes a contingency operation. 
A contingency operation is defined \2\ as a military operation 
that is designated by the Secretary of Defense as an operation 
in which members of the Armed Forces are or may become involved 
in military actions, operations, or hostilities against an 
enemy of the United States or against an opposing military 
force, or results in the call or order to (or retention on) 
active duty of members of the uniformed services during a war 
or a national emergency declared by the President or Congress.
---------------------------------------------------------------------------
    \2\ The definition is done by cross-reference to 10 U.S.C. 101.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to any period for performing an act 
that has not expired before the date of enactment.

 E. Above-the-Line Deduction for Overnight Travel Expenses of National 
                       Guard and Reserve Members


                              PRESENT LAW

    National Guard and Reserve members may claim itemized 
deductions for their nonreimbursable expenses for travel, 
meals, and lodging when they must travel away from home (and 
stay overnight) to attend National Guard and Reserve meetings. 
These overnight travel expenses are combined with other 
miscellaneous itemized deductions on Schedule A of the 
individual's income tax return and are deductible only to the 
extent that the aggregate of these deductions exceeds two 
percent of the taxpayer's adjusted gross income. No deduction 
is generally permitted for commuting expenses to and from drill 
meetings.

                           REASONS FOR CHANGE

    The Committee believes that all National Guard and Reserve 
members incurring unreimbursed overnight expenses to attend 
National Guard and Reserve meetings should be able to deduct 
these expenses from their income, not just those who itemize 
their deductions. Accordingly, the Committee provides an above-
the-line deduction for these expenses.

                        EXPLANATION OF PROVISION

    The bill provides an above-the-line deduction for the 
unreimbursed overnight travel, meals, and lodging expenses of 
National Guard and Reserve members who must travel away from 
home (and stay overnight) as part of their official duties. 
Accordingly, these individuals incurring these expenses may 
deduct them from gross income regardless of whether they 
itemize their deductions. Expenses eligible for this provision 
include unreimbursed expenses to attend National Guard and 
Reserve meetings as well as unreimbursed expenses incurred as 
part of a mobilization ordered by either the President or the 
Governor. The amount of the expenses that may be deducted may 
not exceed the general Government per diem rate applicable to 
that locale.

                             EFFECTIVE DATE

    The provision is effective for amounts paid or incurred in 
taxable years beginning after December 31, 2001.

 F. Modification of Membership Requirement for Exemption From Tax for 
                    Certain Veterans' Organizations


                              PRESENT LAW

    Under present law, a veterans' organization as described in 
section 501(c)(19) of the Code generally is exempt from 
taxation. The Code defines such an organization as a post or 
organization of past or present members of the Armed Forces of 
the United States (1) that is organized in the United States or 
any of its possessions; (2) no part of the net earnings of 
which inures to the benefit of any private shareholder or 
individual; and (3) that meets certain membership requirements. 
The membership requirements are that (1) at least 75 percent of 
the organization's members are past or present members of the 
Armed Forces of the United States, and (2) substantially all of 
the remaining members are cadets or are spouses, widows, or 
widowers of past or present members of the Armed Forces of the 
United States or of cadets. No more than 2.5 percent of an 
organization's total members may consist of individuals who are 
not veterans, cadets, or spouses, widows, or widowers of such 
individuals.\3\
---------------------------------------------------------------------------
    \3\ Treas. Reg. sec. 1.501(c)(19)-1(b)(2). The Treasury has not 
amended this regulation to reflect changes made by P.L. 97-248.
---------------------------------------------------------------------------
    Contributions to an organization described in section 
501(c)(19) may be deductible for Federal income or gift tax 
purposes if the organization is a post or organization of war 
veterans.\4\
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    \4\ Sec. 170(c)(3); sec. 2522(a)(4).
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                           REASONS FOR CHANGE

    As the membership of veterans' organizations changes due to 
aging and the deaths of members, veterans' organizations that 
currently qualify for tax exemption under section 501(c)(19) 
may cease to qualify for exempt status under that section, even 
though the membership, apart from changes due to deaths, 
remains the same. The Committee believes that a limited 
expansion of the membership of veterans' organizations will 
enable certain of such organizations to retain exempt status, 
which might otherwise be in jeopardy, and will not unduly 
expand the membership base beyond persons with a close 
connection to members of the Armed Forces or cadets.

                        EXPLANATION OF PROVISION

    The bill permits ancestors or lineal descendants of past or 
present members of the Armed Forces of the United States or of 
cadets to qualify as members for purposes of the 
``substantially all'' test. The bill does not change the 
requirement that 75 percent of the organization's members must 
be past or present members of the Armed Forces of the United 
States.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after the date of enactment.

  G. Clarification of Treatment of Certain Dependent Care Assistance 
 Programs Provided to Members of the Uniformed Services of the United 
                                 States


                              PRESENT LAW

    Present law provides that qualified military benefits are 
not included in gross income. Generally, a qualified military 
benefit is any allowance or in-kind benefit (other than 
personal use of a vehicle) which: (1) is received by any member 
or former member of the uniformed services of the United States 
or any dependent of such member by reason of such member's 
status or service as a member of such uniformed services; and 
(2) was excludable from gross income on September 9, 1986, 
under any provision of law, regulation, or administrative 
practice which was in effect on such date. Generally, other 
than certain cost of living adjustments, no modification or 
adjustment of any qualified military benefit after September 9, 
1986, is taken into account for purposes of this exclusion from 
gross income.

                           REASONS FOR CHANGE

    The Committee believes that it is important to remove any 
uncertainty regarding the tax treatment of dependent care 
assistance provided to members of the uniformed services.

                        EXPLANATION OF PROVISION

    The bill clarifies that dependent care assistance provided 
under a dependent care assistance program for a member of the 
uniformed services by reason of such member's status or service 
as a member of the uniformed services is excludable from gross 
income as a qualified military benefit. The uniformed services 
include: (1) the armed forces (the Army, Navy, Air Force, 
Marine Corps, and Coast Guard); (2) the commissioned corps of 
the National Oceanic and Atmospheric Administration; and (3) 
the commissioned corps of the Public Health Service. Amounts 
received under the program are also not considered wages for 
Federal Insurance Contributions Act tax purposes (including 
Medicare).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2001. No inference is intended as to the tax 
treatment of such amounts for prior taxable years.

                       TITLE II. OTHER PROVISIONS


       A. Impose Mark-to-Market Tax on Individuals Who Expatriate


                              PRESENT LAW

In general

    U.S. citizens and residents generally are subject to U.S. 
income taxation on their worldwide income. The U.S. tax may be 
reduced or offset by a credit allowed for foreign income taxes 
paid with respect to foreign-source income. Nonresidents who 
are not U.S. citizens are taxed at a flat rate of 30 percent 
(or a lower treaty rate) on certain types of passive income 
derived from U.S. sources, and at regular graduated rates on 
net profits derived from a U.S. business.

Income tax rules with respect to expatriates

    An individual who relinquishes his or her U.S. citizenship 
or terminates his or her U.S. residency with a principal 
purpose of avoiding U.S. taxes is subject to an alternative 
method of income taxation for the 10 taxable years ending after 
the expatriation or residency termination under section 877. 
The alternative method of taxation for expatriates modifies the 
rules generally applicable to the taxation of nonresident 
noncitizens in several ways. First, the individual is subject 
to tax on his or her U.S.-source income at the rates applicable 
to U.S. citizens rather than the rates applicable to other 
nonresident noncitizens. Unlike U.S. citizens, however, 
individuals subject to section 877 are not taxed on foreign-
source income. Second, the scope of items treated as U.S.-
source income for section 877 purposes is broader than those 
items generally considered to be U.S.-source income under the 
Code.\5\ Third, individuals subject to section 877 are taxed on 
exchanges of certain types of property that give rise to U.S.-
source income for property that gives rise to foreign-source 
income.\6\ Fourth, an individual subject to section 877 who 
contributes property to a controlled foreign corporation is 
treated as receiving income or gain from such property directly 
and is taxable on such income or gain. The alternative method 
of taxation for expatriates applies only if it results in a 
higher U.S. tax liability than would otherwise be determined if 
the individual were taxed as a nonresident noncitizen.
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    \5\ For example, gains on the sale or exchange of personal property 
located in the United States, and gains on the sale or exchange of 
stocks and securities issued by U.S. persons, generally are not 
considered to be U.S.-source income under the Code. Thus, such gains 
would not be taxable to a nonresident noncitizen. However, if an 
individual is subject to the alternative regime under sec. 877, such 
gains are treated as U.S.-source income with respect to that 
individual.
    \6\ For example, a former citizen who is subject to the alternative 
tax regime and who removes appreciated artwork that he or she owns from 
the United States could be subject to immediate U.S. tax on the 
appreciation. In this regard, the removal from the United States of 
appreciated tangible personal property having an aggregate fair market 
value in excess of $250,000 within the 15-year beginning 5 years prior 
to the expatriation will be treated as an ``exchange'' subject to these 
rules.
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    The expatriation tax provisions apply to long-term 
residents of the United States whose U.S. residency is 
terminated. For this purpose, a long-term resident is any 
individual who was a lawful permanent resident of the United 
States for at least 8 out of the 15 taxable years ending with 
the year in which such termination occurs. In applying the 8-
year test, an individual is not considered to be a lawful 
permanent resident for any year in which the individual is 
treated as a resident of another country under a treaty tie-
breaker rule (and the individual does not elect to waive the 
benefits of such treaty).
    Subject to the exceptions described below, an individual is 
treated as having expatriated or terminated residency with a 
principal purpose of avoiding U.S. taxes if either: (1) the 
individual's average annual U.S. Federal income tax liability 
for the 5 taxable years ending before the date of the 
individual's loss of U.S. citizenship or termination of U.S. 
residency is greater than $100,000 (the ``tax liability 
test''), or (2) the individual's net worth as of the date of 
such loss or termination is $500,000 or more (the ``net worth 
test''). The dollar amount thresholds contained in the tax 
liability test and the net worth test are indexed for inflation 
in the case of a loss of citizenship or termination of 
residency occurring in any calendar year after 1996. For 
calendar year 2002, the dollar thresholds for the tax liability 
test and the net worth test are $120,000 and $599,000, 
respectively. An individual who falls below these thresholds is 
not automatically treated as having a principal purpose of tax 
avoidance, but nevertheless is subject to the expatriation tax 
provisions if the individual's loss of citizenship or 
termination of residency in fact did have as one of its 
principal purposes the avoidance of tax.
    Certain exceptions from the treatment that an individual 
relinquished his or her U.S. citizenship or terminated his or 
her U.S. residency for tax avoidance purposes may also apply. 
For example, a U.S. citizen who loses his or her citizenship 
and who satisfies either the tax liability test or the net 
worth test (described above) can avoid being deemed to have a 
principal purpose of tax avoidance if the individual falls 
within certain categories (such as being a dual citizen) and 
the individual, within 1 year from the date of loss of 
citizenship, submits a ruling request for a determination by 
the Secretary of the Treasury as to whether such loss had as 
one of its principal purposes the avoidance of taxes.

Estate tax rules with respect to expatriates

    Nonresident noncitizens generally are subject to estate tax 
on certain transfers of U.S.-situated property at death.\7\ 
Such property includes real estate and tangible property 
located within the United States. Moreover, for estate tax 
purposes, stock held by nonresident noncitizens is treated as 
U.S.-situated if issued by a U.S. corporation.
---------------------------------------------------------------------------
    \7\ The Economic Growth and Tax Relief Reconcilation Act of 2001 
(the Act) repealed the estate tax for estates of decedents dying after 
December 31, 2009. However, the Act included a ``sunset'' provision, 
pursuant to which the Act's provisions (including estate tax repeal) do 
not apply to estates of decedents dying after December 31, 2010.
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    Special rules apply to U.S. citizens who relinquish their 
citizenship and long-term residents who terminate their U.S. 
residency within the 10 years prior to the date of death, 
unless the loss of status did not have as one its principal 
purposes the avoidance of tax (sec. 2107). Under these rules, 
the decedent's estate includes the proportion of the decedent's 
stock in a foreign corporation that the fair market value of 
the U.S.-situs assets owned by the corporation bears to the 
total assets of the corporation. This rule applies only if (1) 
the decedent owned, directly, at death 10 percent or more of 
the combined voting power of all voting stock of the 
corporation and (2) the decedent owned, directly or indirectly, 
at death more than 50 percent of the total voting stock of the 
corporation or more than 50 percent of the total value of all 
stock of the corporation.
    Taxpayers are deemed to have a principal purpose of tax 
avoidance if they meet the 5-year tax liability test or the net 
worth test, discussed above. Exceptions from this tax avoidance 
treatment apply in the same circumstances as those described 
above (relating to certain dual citizens and other individuals 
who submit a timely and complete ruling request with the IRS as 
to whether their expatriation or residency termination had a 
principal purpose of tax avoidance).

Gift tax rules with respect to expatriates

    Nonresident noncitizens generally are subject to gift tax 
on certain transfers by gift of U.S.-situated property. Such 
property includes real estate and tangible property located 
within the United States. Unlike the estate tax rules for U.S. 
stock held by nonresidents, however, nonresident noncitizens 
generally are not subject to U.S. gift tax on the transfer of 
intangibles, such as stock or securities, regardless of where 
such property is situated.
    Special rules apply to U.S. citizens who relinquish their 
U.S. citizenship or long-term residents of the United States 
who terminate their U.S. residency within the 10 years prior to 
the date of transfer, unless such loss did not have as one of 
its principal purposes the avoidance of tax (sec. 2501(a)(3)). 
Under these rules, nonresident noncitizens are subject to gift 
tax on transfers of intangibles, such as stock or securities. 
Taxpayers are deemed to have a principal purpose of tax 
avoidance if they meet the 5-year tax liability test or the net 
worth test, discussed above. Exceptions from this tax avoidance 
treatment apply in the same circumstances as those described 
above (relating to certain dual citizens and other individuals 
who submit a timely and complete ruling request with the IRS as 
to whether their expatriation or residency termination had a 
principal purpose of tax avoidance).

Other tax rules with respect to expatriates

    The expatriation tax provisions permit a credit against the 
U.S. tax imposed under such provisions for any foreign income, 
gift, estate, or similar taxes paid with respect to the items 
subject to such taxation. This credit is available only against 
the tax imposed solely as a result of the expatriation tax 
provisions, and is not available to be used to offset any other 
U.S. tax liability.
    In addition, certain information reporting requirements 
apply. Under these rules, a U.S. citizen who loses his or her 
citizenship is required to provide a statement to the State 
Department (or other designated government entity) that 
includes the individual's social security number, forwarding 
foreign address, new country of residence and citizenship, a 
balance sheet in the case of individuals with a net worth of at 
least $500,000, and such other information as the Secretary may 
prescribe. The information statement must be provided no later 
than the earliest day on which the individual (1) renounces the 
individual's U.S. nationality before a diplomatic or consular 
officer of the United States, (2) furnishes to the U.S. 
Department of State a statement of voluntary relinquishment of 
U.S. nationality confirming an act of expatriation, (3) is 
issued a certificate of loss of U.S. nationality by the U.S. 
Department of State, or (4) loses U.S. nationality because the 
individual's certificate of naturalization is canceled by a 
U.S. court. The entity to which such statement is to be 
provided is required to provide to the Secretary of the 
Treasury copies of all statements received and the names of 
individuals who refuse to provide such statements. A long-term 
resident whose U.S. residency is terminated is required to 
attach a similar statement to his or her U.S. income tax return 
for the year of such termination. An individual's failure to 
provide the required statement results in the imposition of a 
penalty for each year the failure continues equal to the 
greater of (1) 5 percent of the individual's expatriation tax 
liability for such year, or (2) $1,000.
    The State Department is required to provide the Secretary 
of the Treasury with a copy of each certificate of loss of 
nationality approved by the State Department. Similarly, the 
agency administering the immigration laws is required to 
provide the Secretary of the Treasury with the name of each 
individual whose status as a lawful permanent resident has been 
revoked or has been determined to have been abandoned. Further, 
the Secretary of the Treasury is required to publish in the 
Federal Register the names of all former U.S. citizens with 
respect to whom it receives the required statements or whose 
names or certificates of loss of nationality it receives under 
the foregoing information-sharing provisions.

Immigration rules with respect to expatriates

    Under U.S. immigration laws, any former U.S. citizen who 
officially renounces his or her U.S. citizenship and who is 
determined by the Attorney General to have renounced for the 
purpose of U.S. tax avoidance is ineligible to receive a U.S. 
visa and will be denied entry into the United States. This 
provision was included as an amendment (the ``Reed amendment'') 
to immigration legislation that was enacted in 1996.

                           REASONS FOR CHANGE

    The Committee is aware that some individuals each year 
relinquish their U.S. citizenship or terminate their U.S. 
residency for the purpose of avoiding U.S. income, estate, and 
gift taxes. By so doing, such individuals reduce their annual 
U.S. income tax liability and reduce or eliminate their U.S. 
estate tax liability.
    The Committee recognizes that citizens and residents of the 
United States have a right not only physically to leave the 
United States to live elsewhere, but also to relinquish their 
citizenship or terminate their residency. The Committee does 
not believe that the Internal Revenue Code should be used to 
stop U.S. citizens and residents from relinquishing citizenship 
or terminating residency; however, the Committee also does not 
believe that the Code should provide a tax incentive for doing 
so. In other words, to the extent possible, an individual's 
decision to relinquish citizenship or terminate residency 
should be tax-neutral.
    The Committee is concerned that the present-law 
expatriation tax rules are difficult to administer. In 
addition, the Committee is concerned that the alternative 
method of taxation under section 877 can be avoided by 
postponing the realization of U.S.-source income for 10 years. 
The Committee believes that the expatriation tax rules are 
largely ineffective in taxing U.S. citizens and residents who 
relinquish citizenship or terminate residency with a principal 
purpose to avoid tax.
    The Committee believes that the present-law expatriation 
tax rules should be replaced with a tax regime applicable to 
former citizens and residents that does not rely on 
establishing a tax avoidance motive. Because U.S. citizens and 
residents who retain their citizenship or residency generally 
are subject to income tax on accrued appreciation when they 
dispose of their assets, as well as estate tax on the full 
value of assets that are held until death, the Committee 
believes it fair to tax individuals on the appreciation in 
their assets when they relinquish their citizenship or 
terminate their residency. The Committee believes that an 
exception from such a tax should be provided for individuals 
with a relatively modest amount of appreciated assets. The 
Committee also believes that, where U.S. estate or gift taxes 
are avoided with respect to a transfer of property to a U.S. 
person by reason of the expatriation of the donor, it is 
appropriate for the recipient to be subject to an income tax 
based on the value of the property.
    The Committee also believes that the present-law 
immigration rules applicable to former citizens are 
ineffective. The Committee believes that the rules should be 
modified to eliminate the requirement of proof of a tax 
avoidance purpose, and to coordinate the application of those 
rules with the tax rules provided under the new regime.

                        EXPLANATION OF PROVISION

In general

    The bill generally subjects certain U.S. citizens who 
relinquish their U.S. citizenship and certain long-term U.S. 
residents who terminate their U.S. residence to tax on the net 
unrealized gain in their property as if such property were sold 
for fair market value on the day before the expatriation or 
residency termination. Gain from the deemed sale is taken into 
account at that time without regard to other Code provisions; 
any loss from the deemed sale generally would be taken into 
account to the extent otherwise provided in the Code. Any net 
gain on the deemed sale is recognized to the extent it exceeds 
$600,000 ($1.2 million in the case of married individuals 
filing a joint return, both of whom relinquish citizenship or 
terminate residency). The $600,000 amount is increased by a 
cost of living adjustment factor for calendar years after 2002.

Individuals covered

    Under the bill, the mark-to-market tax applies to U.S. 
citizens who relinquish citizenship and long-term residents who 
terminate U.S. residency. An individual is a long-term resident 
if he or she was a lawful permanent resident for at least 8 out 
of the 15 taxable years ending with the year in which the 
termination of residency occurs. An individual is considered to 
terminate long-term residency when either the individual ceases 
to be a lawful permanent resident (i.e., loses his or her green 
card status), or the individual is treated as a resident of 
another country under a tax treaty and the individual does not 
waive the benefits of the treaty.
    Exceptions from the mark-to-market tax are provided in two 
situations. The first exception applies to an individual who 
was born with citizenship both in the United States and in 
another country; provided that (1) as of the expatriation date 
the individual continues to be a citizen of, and is taxed as a 
resident of, such other country, and (2) the individual was not 
a resident of the United States for the 5 taxable years ending 
with the year of expatriation. The second exception applies to 
a U.S. citizen who relinquishes U.S. citizenship before 
reaching age 18\1/2\, provided that the individual was a 
resident of the United States for no more than 5 taxable years 
before such relinquishment.

Election to be treated as a U.S. citizen

    Under the bill, an individual is permitted to make an 
irrevocable election to continue to be taxed as a U.S. citizen 
with respect to all property that otherwise is covered by the 
expatriation tax. This election is an ``all or nothing'' 
election; an individual is not permitted to elect this 
treatment for some property but not for other property. The 
election, if made, would apply to all property that would be 
subject to the expatriation tax and to any property the basis 
of which is determined by reference to such property. Under 
this election, the individual would continue to pay U.S. income 
taxes at the rates applicable to U.S. citizens following 
expatriation on any income generated by the property and on any 
gain realized on the disposition of the property. In addition, 
the property would continue to be subject to U.S. gift, estate, 
and generation-skipping transfer taxes. In order to make this 
election, the taxpayer would be required to waive any treaty 
rights that would preclude the collection of the tax.
    The individual also would be required to provide security 
to ensure payment of the tax under this election in such form, 
manner, and amount as the Secretary of the Treasury requires. 
The amount of mark-to-market tax that would have been owed but 
for this election (including any interest, penalties, and 
certain other items) shall be a lien in favor of the United 
States on all U.S.-situs property owned by the individual. This 
lien shall arise on the expatriation date and shall continue 
until the tax liability is satisfied, the tax liability has 
become unenforceable by reason of lapse of time, or the 
Secretary is satisfied that no further tax liability may arise 
by reason of this provision. The rules of section 6324A(d)(1), 
(3), and (4) (relating to liens arising in connection with the 
deferral of estate tax under section 6166) apply to liens 
arising under this provision.

Date of relinquishment of citizenship

    Under the bill, an individual is treated as having 
relinquished U.S. citizenship on the earliest of four possible 
dates: (1) the date that the individual renounces U.S. 
nationality before a diplomatic or consular officer of the 
United States (provided that the voluntary relinquishment is 
later confirmed by the issuance of a certificate of loss of 
nationality); (2) the date that the individual furnishes to the 
State Department a signed statement of voluntary relinquishment 
of U.S. nationality confirming the performance of an 
expatriating act (again, provided that the voluntary 
relinquishment is later confirmed by the issuance of a 
certificate of loss of nationality); (3) the date that the 
State Department issues a certificate of loss of nationality; 
or (4) the date that a U.S. court cancels a naturalized 
citizen's certificate of naturalization.

Deemed sale of property upon expatriation or residency termination

    The deemed sale rule of the bill generally applies to all 
property interests held by the individual on the date of 
relinquishment of citizenship or termination of residency. 
Special rules apply in the case of trust interests, as 
described below. U.S. real property interests, which remain 
subject to U.S. tax in the hands of nonresident noncitizens, 
generally are excepted from the bill. Regulatory authority is 
granted to the Treasury to except other types of property from 
the bill.
    Under the bill, an individual who is subject to the mark-
to-market tax is required to pay a tentative tax equal to the 
amount of tax that would be due for a hypothetical short tax 
year ending on the date the individual relinquished citizenship 
or terminated residency. Thus, the tentative tax is based on 
all income, gain, deductions, loss, and credits of the 
individual for the year through such date, including amounts 
realized from the deemed sale of property. The tentative tax is 
due on the 90th day after the date of relinquishment of 
citizenship or termination of residency.

Retirement plans and similar arrangements

    Subject to certain exceptions, the provision applies to all 
property interests held by the individual at the time of 
relinquishment of citizenship or termination of residency. 
Accordingly, such property includes an interest in an employer-
sponsored retirement plan or deferred compensation arrangement 
as well as an interest in an individual retirement account or 
annuity (i.e., an IRA).\8\ However, the provision contains a 
special rule for an interest in a ``qualified retirement 
plan.'' For purposes of the provision, a ``qualified retirement 
plan'' includes an employer-sponsored qualified plan (sec. 
401(a)), a qualified annuity (sec. 403(a)), a tax-sheltered 
annuity (sec. 403(b)), an eligible deferred compensation plan 
of a governmental employer (sec. 457(b)), or an IRA (sec. 408). 
The special retirement plan rule applies also, to the extent 
provided in regulations, to any foreign plan or similar 
retirement arrangement or program. An interest in a trust that 
is part of a qualified retirement plan or other arrangement 
that is subject to the special retirement plan rule is not 
subject to the rules for interests in trusts (discussed below).
---------------------------------------------------------------------------
    \8\ Application of the provision is not limited to an interest that 
meets the definition of property under section 83 (relating to property 
transferred in connection with the performance of services).
---------------------------------------------------------------------------
    Under the special rule, an amount equal to the present 
value of the individual's vested, accrued benefit under a 
qualified retirement plan is treated as having been received by 
the individual as a distribution under the plan on the day 
before the individual's relinquishment of citizenship or 
termination of residency. It is not intended that the plan 
would be deemed to have made a distribution for purposes of the 
tax-favored status of the plan, such as whether a plan may 
permit distributions before a participant has severed 
employment. In the case of any later distribution to the 
individual from the plan, the amount otherwise includible in 
the individual's income as a result of the distribution is 
reduced to reflect the amount previously included in income 
under the special retirement plan rule. The amount of the 
reduction applied to a distribution is (1) the excess of the 
amount included in income under the special retirement plan 
rule over (2) the total reductions applied to any prior 
distributions. However, under the provision, the retirement 
plan, and any person acting on the plan's behalf, will treat 
any later distribution in the same manner as the distribution 
would be treated without regard to the special retirement plan 
rule.
    It is expected that the Treasury Department will provide 
guidance for determining the present value of an individual's 
vested, accrued benefit under a qualified retirement plan, such 
as the individual's account balance in the case of a defined 
contribution plan or an IRA, or present value determined under 
the qualified joint and survivor annuity rules applicable to a 
defined benefit plan (sec. 417(e)).

Deferral of payment of tax

    Under the bill, an individual is permitted to elect to 
defer payment of the mark-to-market tax imposed on the deemed 
sale of the property. Interest is charged for the period the 
tax is deferred at a rate 2 percentage points higher than the 
rate normally applicable to individual underpayments. Under 
this election, the mark-to-market tax attributable to a 
particular property is due when the property is disposed of 
(or, if the property is disposed of in whole or in part in a 
nonrecognition transaction, at such other time as the Secretary 
may prescribe). The mark-to-market tax attributable to a 
particular property is an amount which bears the same ratio to 
the total mark-to-market tax for the year as the gain taken 
into account with respect to such property bears to the total 
gain taken into account under these rules for the year. The 
deferral of the mark-to-market tax may not be extended beyond 
the individual's death.
    In order to elect deferral of the mark-to-market tax, the 
individual is required to provide adequate security to the 
Treasury to ensure that the deferred tax and interest will be 
paid. Other security mechanisms are permitted provided that the 
individual establishes to the satisfaction of the Secretary 
that the security is adequate. In the event that the security 
provided with respect to a particular property subsequently 
becomes inadequate and the individual fails to correct the 
situation, the deferred tax and the interest with respect to 
such property will become due. As a further condition to making 
the election, the individual is required to consent to the 
waiver of any treaty rights that would preclude the collection 
of the tax.
    The deferred amount (including any interest, penalties, and 
certain other items) shall be a lien in favor of the United 
States on all U.S.-situs property owned by the individual. This 
lien shall arise on the expatriation date and shall continue 
until the tax liability is satisfied, the tax liability has 
become unenforceable by reason of lapse of time, or the 
Secretary is satisfied that no further tax liability may arise 
by reason of this provision. The rules of section 6324A(d)(1), 
(3), and (4) (relating to liens arising in connection with the 
deferral of estate tax under section 6166) apply to liens 
arising under this provision.

Interests in trusts

    Under the bill, detailed rules apply to trust interests 
held by an individual at the time of relinquishment of 
citizenship or termination of residency. The treatment of trust 
interests depends on whether the trust is a qualified trust. A 
trust is a qualified trust if a court within the United States 
is able to exercise primary supervision over the administration 
of the trust and one or more U.S. persons have the authority to 
control all substantial decisions of the trust.
    Constructive ownership rules apply to a trust beneficiary 
that is a corporation, partnership, trust, or estate. In such 
cases, the shareholders, partners, or beneficiaries of the 
entity are deemed to be the direct beneficiaries of the trust 
for purposes of applying these provisions. In addition, an 
individual who holds (or who is treated as holding) a trust 
instrument at the time of relinquishment of citizenship or 
termination of residency is required to disclose on his or her 
tax return the methodology used to determine his or her 
interest in the trust, and whether such individual knows (or 
has reason to know) that any other beneficiary of the trust 
uses a different method.
    Nonqualified trusts.--If an individual holds an interest in 
a trust that is not a qualified trust, a special rule applies 
for purposes of determining the amount of the mark-to-market 
tax due with respect to such trust interest. The individual's 
interest in the trust is treated as a separate trust consisting 
of the trust assets allocable to such interest. Such separate 
trust is treated as having sold its net assets as of the date 
of relinquishment of citizenship or termination of residency 
and having distributed the assets to the individual, who then 
is treated as having recontributed the assets to the trust. The 
individual is subject to the mark-to-market tax with respect to 
any net income or gain arising from the deemed distribution 
from the trust.
    The election to defer payment is available for the mark-to-
market tax attributable to a nonqualified trust interest. 
Interest is charged for the period the tax is deferred at a 
rate 2 percentage points higher than the rate normally 
applicable to individual underpayments. A beneficiary's 
interest in a nonqualified trust is determined under all the 
facts and circumstances, including the trust instrument, 
letters of wishes, and historical patterns of trust 
distributions.
    Qualified trusts.--If an individual has an interest in a 
qualified trust, the amount of unrealized gain allocable to the 
individual's trust interest is calculated at the time of 
expatriation or residency termination. In determining this 
amount, all contingencies and discretionary interests are 
assumed to be resolved in the individual's favor (i.e., the 
individual is allocated the maximum amount that he or she could 
receive). The mark-to-market tax imposed on such gains is 
collected when the individual receives distributions from the 
trust, or if earlier, upon the individual's death. Interest is 
charged for the period the tax is deferred at a rate 2 
percentage points higher than the rate normally applicable to 
individual underpayments.
    If an individual has an interest in a qualified trust, the 
individual is subject to the mark-to-market tax upon the 
receipt of distributions from the trust. These distributions 
also may be subject to other U.S. income taxes. If a 
distribution from a qualified trust is made after the 
individual relinquishes citizenship or terminates residency, 
the mark-to-market tax is imposed in an amount equal to the 
amount of the distribution multiplied by the highest tax rate 
generally applicable to trusts and estates, but in no event 
will the tax imposed exceed the deferred tax amount with 
respect to the trust interest. For this purpose, the deferred 
tax amount is equal to (1) the tax calculated with respect to 
the unrealized gain allocable to the trust interest at the time 
of expatriation or residency termination, (2) increased by 
interest thereon, and (3) reduced by any mark-to-market tax 
imposed on prior trust distributions to the individual.
    If any individual's interest in a trust is vested as of the 
expatriation date (e.g., if the individual's interest in the 
trust is non-contingent and non-discretionary), the gain 
allocable to the individual's trust interest is determined 
based on the trust assets allocable to his or her trust 
interest. If the individual's interest in the trust is not 
vested as of the expatriation date (e.g., if the individual's 
trust interest is a contingent or discretionary interest), the 
gain allocable to his or her trust interest is determined based 
on all of the trust assets that could be allocable to his or 
her trust interest, determined by resolving all contingencies 
and discretionary powers in the individual's favor. In the case 
where more than one trust beneficiary is subject to the 
expatriation tax with respect to trust interests that are not 
vested, the rules are intended to apply so that the same 
unrealized gain with respect to assets in the trust is not 
taxed to both individuals.
    Mark-to-market taxes become due if the trust ceases to be a 
qualified trust, the individual disposes of his or her 
qualified trust interest, or the individual dies. In such 
cases, the amount of mark-to-market tax equals the lesser of 
(1) the tax calculated under the rules for nonqualified trust 
interests as of the date of the triggering event, or (2) the 
deferred tax amount with respect to the trust interest as of 
that date.
    The tax that is imposed on distributions from a qualified 
trust generally is deducted and withheld by the trustees. If 
the individual does not agree to waive treaty rights that would 
preclude collection of the tax, the tax with respect to such 
distributions is imposed on the trust, the trustee is 
personally liable for the tax, and any other beneficiary has a 
right of contribution against such individual with respect to 
the tax. Similar rules apply when the qualified trust interest 
is disposed of, the trust ceases to be a qualified trust, or 
the individual dies.

Coordination with present-law alternative tax regime

    The bill provides a coordination rule with the present-law 
alternative tax regime. Under the bill, the expatriation income 
tax rules under section 877, and the expatriation estate and 
gift tax rules under sections 2107 and 2501(a)(3) (described 
above), do not apply to a former citizen or former long-term 
resident whose expatriation or residency termination occurs on 
or after September 12, 2002.

Treatment of gifts and inheritances from a former citizen or former 
        long-term resident

    Under the bill, the exclusion from income provided in 
section 102 (relating to exclusions from income for the value 
of property acquired by gift or inheritance) does not apply to 
the value of any property received by gift or inheritance from 
a former citizen or former long-term resident (i.e., an 
individual who relinquished U.S. citizenship or terminated U.S. 
residency), subject to the exceptions described above relating 
to certain dual citizens and minors. Accordingly, a U.S. 
taxpayer who receives a gift or inheritance from such an 
individual is required to include the value of such gift or 
inheritance in gross income and is subject to U.S. tax on such 
amount. Having included the value of the property in income, 
the recipient would then take a basis in the property equal to 
that value. The tax does not apply to property that is shown on 
a timely filed gift tax return and that is a taxable gift by 
the former citizen or former long-term resident, or property 
that is shown on a timely filed estate tax return and included 
in the gross U.S. estate of the former citizen or former long-
term resident (regardless of whether the tax liability shown on 
such a return is reduced by credits, deductions, or exclusions 
available under the estate and gift tax rules). In addition, 
the tax does not apply to property in cases in which no estate 
or gift tax return is required to be filed, where no such 
return would have been required to be filed if the former 
citizen or former long-term resident had not relinquished 
citizenship or terminated residency, as the case may be. 
Applicable gifts or bequests that are made in trust are treated 
as made to the beneficiaries of the trust in proportion to 
their respective interests in the trust.

Information reporting

    The bill provides that certain information reporting 
requirements under present law (sec. 6039G) applicable to 
former citizens and former long-term residents also apply for 
purposes of the bill.

Immigration rules

    The bill amends the immigration rules that deny tax-
motivated expatriates reentry into the United States by 
removing the requirement that the expatriation be tax-
motivated, and instead denies former citizens reentry into the 
United States if the individual is determined not to be in 
compliance with his or her tax obligations under the bill's 
expatriation tax provisions (regardless of the subjective 
motive for expatriating). For this purpose, the bill permits 
the IRS to disclose certain items of return information of an 
individual, upon written request of the Attorney General or his 
delegate, as is necessary for making a determination under 
section 212(a)(10)(E) of the Immigration and Nationality Act. 
Specifically, the bill would permit the IRS to disclose to the 
agency administering section 212(a)(10)(E) whether such 
taxpayer is in compliance with section 877A and identify the 
items of noncompliance. Recordkeeping requirements, safeguards, 
and civil and criminal penalties for unauthorized disclosure or 
inspection would apply to return information disclosed under 
this provision.

                             EFFECTIVE DATE

    The bill generally is effective for U.S. citizens who 
relinquish citizenship or long-term residents who terminate 
their residency on or after September 12, 2002. The provisions 
of the bill relating to gifts and inheritances are effective 
for gifts and inheritances received from former citizens and 
former long-term residents on or after September 12, 2002, 
whose expatriation or residency termination occurs on or after 
such date. The provisions of the bill relating to former 
citizens under U.S. immigration laws are effective on or after 
the date of enactment.

                     B. Extension of IRS User Fees


                              PRESENT LAW

    The IRS provides written responses to questions of 
individuals, corporations, and organizations relating to their 
tax status or the effects of particular transactions for tax 
purposes. The IRS generally charges a fee for requests for a 
letter ruling, determination letter, opinion letter, or other 
similar ruling or determination. Public Law 104-117 \9\ 
extended the statutory authorization for these user fees \10\ 
through September 30, 2003.
---------------------------------------------------------------------------
    \9\ An Act to provide that members of the Armed Forces performing 
services for the peacekeeping efforts in Bosnia and Herzegovina, 
Croatia, and Macedonia shall be entitled to tax benefits in the same 
manner as if such services were performed in a combat zone, and for 
other purposes (March 20, 1996).
    \10\ These user fees were originally enacted in section 10511 of 
the Revenue Act of 1987 (Public Law 100-203, December 22, 1987).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to provide a 
further extension of these user fees.

                        EXPLANATION OF PROVISION

    The bill extends the statutory authorization for these user 
fees through September 30, 2012. The bill also moves the 
statutory authorization for these fees into the Internal 
Revenue Code.

                             EFFECTIVE DATE

    The provision, including moving the statutory authorization 
for these fees into the Code and repealing the off-Code 
statutory authorization for these fees, is effective for 
requests made after the date of enactment.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the committee amendment to the bill as reported.
    The bill, as reported is estimated to have the following 
budget effects for fiscal years 2003-2012.

                                  ESTIMATED BUDGET EFFECTS OF H.R. 5063, THE ``ARMED FORCES TAX FAIRNESS ACT OF 2002,'' AS REPORTED BY THE COMMITTEE ON FINANCE
                                                                        [Fiscal years 2003-2012, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                           Provision                                   Effective          2003    2004    2005    2006    2007     2008     2009     2010     2011     2012    2003-07   2003-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Improving tax equity for military personnel:
    1. Exclusion from gross income of certain death gratuity               doa 9/10/01       -1      -1      -1      -1      -1       -1       -1       -1       -1       -1        -5        -9
     payments.................................................
    2. Exclusion of gain on sale of a principal residence by a                  sa DOE       -2     -14     -14     -15     -15      -16      -16      -18      -19      -21       -59      -149
     member of the uniformed services or the foreign service..
    3. Exclusion for amounts received under Department of                      pma DOE    (\1\)      -2      -2      -2      -2       -2       -2       -2       -2       -2        -9       -19
     Defense Homeowners Assistance Program....................
    4. Expansion combat zone filing rules to contingency                         (\2\)       -9   (\1\)   (\1\)   (\1\)   (\1\)       -1       -1       -1       -1       -1       -11       -14
     operations...............................................
    5. Above-the-line deduction for oversight travel expenses      apoli tyba 12/31/01      -83     -71     -73     -75     -76      -78      -80      -82      -84      -86      -377      -788
     of national guard and reserve members....................
    6. Modification of membership requirement for exemption                   tyba DOE       -1      -1      -1      -1      -2       -2       -2       -2       -2       -2        -7       -16
     from tax for certain veterans' organizations.............
    7. Clarification of treatment of certain dependent care              tyba 12/31/01                                              No Revenue Effect
     assistance programs provided to members of the uniformed
     services of the United States............................
                                                                                        --------------------------------------------------------------------------------------------------------
      Total of improving tax equity for military personnel....  .......................     -96     -89     -91     -94     -96     -100     -102     -106     -109     -113      -468      -995
                                                                                        ========================================================================================================
Other provisions:
    1. Impose mark-to-market on individuals who expatriate....                   (\3\)        5     102      85      80      74       71       67       61       57       54       346       656
    2. Extension of IRS user fees (through 9/30/12 \4\........                 rma DOE   ......      33      34      35      36       38       39       41       42       44       138       341
                                                                                        --------------------------------------------------------------------------------------------------------
      Total of other provisions...............................  .......................       5     135     119     115     110      109      106      102       99       98       484       997
                                                                                        ========================================================================================================
      Net total...............................................  .......................     -91      46      28      21      14        9        4       -4      -10      -15        16         2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ The provisions applies to any period for performing an act that has not expired before the date of enactment.
\3\ Generally effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after September 12, 2002.
\4\ Estimate provided by Congressional Budget Office.
Legend for ``Effective'' column: apoli = amounts paid or incurred in; doa = deaths occurring after; DOE = date of enactment; pma = payments made after; rma = requests made after; sa = sales
  after; tyba = taxable years beginning after.

Note.--Details may not add to totals due to rounding.

Source: Joint Committee on Taxation.

                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the revenue provisions of the committee 
amendment to the bill do not involve new or increased budget 
authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
committee amendment to the bill involve increased tax 
expenditures (see revenue table in Part III.A., above). The 
revenue increasing provisions of the Committee amendment to the 
bill generally involve reduced tax expenditures (see revenue 
table in Part III.A., above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill.

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 13, 2002.
Hon. Max Baucus,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 5063, the Armed 
Forces Tax Fairness Act of 2002.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Annie 
Bartsch.
            Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
    Enclosure.

H.R. 5063--Armed Forces Tax Fairness Act of 2002

    Summary: H.R. 5063 would raise the exclusion for death 
gratuity payments for the military, provide military and 
foreign service homeowners with relief from capital gains 
taxes, impose a mark-to-market tax on individuals who 
expatriate, and extend Internal Revenue Service (IRS) user fees 
through September 30, 2012. In addition, H.R. 5063 would 
provide individual taxpayers serving in the National Guard and 
Reserve with a deduction for certain overnight travel expenses, 
including meals and overnight lodging, incurred while attending 
National Guard and Reserve meetings. The deduction would be 
``above the line.'' Such deductions are statutorily allowed 
subtractions from gross income that are used to compute 
adjusted gross income and may be taken by both taxpayers who 
itemize the deductions and those who do not.
    The Joint Committee on Taxation (JCT) and the Congressional 
Budget Office (CBO) estimate that enacting H.R. 5063 would 
reduce revenues by $91 million in 2003 and increase revenues by 
$16 million over the 2003-2007 period and by $2 million over 
the 2003-2012 period. Because the act would affect receipts, 
pay-as-you-go procedures would apply.
    JCT has determined that H.R. 5063 contains no 
intergovernmental mandates as defined in the Unfunded Mandates 
Reform Act (UMRA), and would not affect the budgets of state, 
local, or tribal governments. JCT has also determined that the 
provision imposing mark-to-market taxes or expatriates contains 
a private-sector mandate. The total cost of complying with the 
mandate would not exceed the threshold established by UMRA 
($115 million in 2002, adjusted annually for inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 5063 is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                       By fiscal year, in millions of dollars--
                                                                    --------------------------------------------
                                                                       2003     2004     2005     2006     2007
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Market-to-market tax on expatriates................................        5      102       85       80       74
Above-the-line deduction for travel expenses.......................      -83      -71      -73      -75      -76
Extension of IRS user fees.........................................        0       33       34       35       36
Tax relief from capital gains for military and foreign service            -2      -14      -14      -15      -15
 homeowners........................................................
Other provisions...................................................      -11       -4       -4       -4       -5
                                                                    --------------------------------------------
      Total changes................................................      -91       46       28       21       14
----------------------------------------------------------------------------------------------------------------
 Note.--Components may not sum to totals because of rounding.

 Sources: CBO and the Joint Committee on Taxation.

    Basis of estimate: All estimates, with the exception of the 
provision affecting IRS user fees, were provided by JCT. A 
number of provisions would reduce revenues if enacted, and 
several would increase revenues. All together, the act's 
provisions would reduce revenues by $91 million in 2003, and 
would increase revenues by $16 million over the 2003-2007 
period and by $2 million over the 2003-2012 period.
    Most of the revenue reductions would incur from the 
provisions providing reservists with an above-the-line 
deduction allowance for travel expenses and providing military 
and foreign service homeowners relief from taxation of capital 
gains. The provisions raising the exclusion for death gratuity 
payments for individuals in the military, providing an 
exclusion for amounts received under the Department of Defense 
Homeowners Assistance Program, expanding combat zone filing 
rules to contingency operations, and extending section 
501(c)(19) membership to certain relatives of military 
personnel would also decrease governmental receipts. As 
estimated by JCT, all of these provisions together would reduce 
revenues by $96 million in 2003, by about $468 million over the 
2003-2007 period, and by about $995 million over the 2003-2012 
period.
    JCT estimates that the provision imposing a mark-to-market 
tax on individuals who expatriate would increase revenues by $5 
million in 2003, by $346 million over the 2003-2007 period, and 
by $656 million over the 2003-2012 period.
    The act also would extend the period during which the IRS 
may charge fees on businesses for providing ruling, opinion, 
and determination letters. Under current law, the IRS's 
authority to charge such fees will expire at the end of the 
fiscal year 2003. The act would extend the authority to charge 
such fees until September 30, 2012. Based on the amount of fees 
collected in recent years and on information from the IRS, CBO 
estimates that extending the fees would increase governmental 
receipts by a total of $341 million over the 2004-2012 period.
    JCT and CBO estimate that combined, these two provisions 
would increase revenues by $5 million in 2003, by about $484 
million over the 2003-2007 period, and by about $997 million 
over the 2003-2012 period.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. For the 
purposes of enforcing pay-as-you-go procedures, only the 
effects through 2006 are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                         By fiscal year, in millions of dollars--
                                                                 ---------------------------------------------------------------------------------------
                                                                   2002    2003    2004    2005    2006    2007    2008    2009    2010    2011    2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays..............................................                                       Not applicable
Changes in receipts.............................................       0     -91      46      28      21      14       9       4      -4     -10     -15
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated impact on state, local, and tribal governments: 
JCT has determined that H.R. 5063 contains no intergovernmental 
mandates as defined in UMRA and would not affect the budgets of 
state, local, or tribal governments.
    Estimated impact on the private sector: JCT has determined 
that the provision relating to mark-to-market taxes on 
expatriates contains a private-sector mandate, and that the 
direct cost of complying with the mandate would not exceed the 
threshold established by UMRA ($115 million in 2002, adjusted 
annually for inflation).
    Estimate prepared by: Annie Bartsch.
    Estimate approved by: G. Thomas Woodward, Assistant 
Director for Tax Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee states that H.R. 
5063 was, with a quorum present, ordered favorably reported, as 
amended, by unanimous voice vote on September 12, 2002.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

    The bill includes provisions relating to the exclusion from 
gross income of certain death gratuity payments, gain on 
certain sales of principal residence by a member of the 
uniformed services or the Foreign Service, and certain amounts 
received under the Department of Defense Homeowners Assistance 
Program. The bill also extends the combat zone filing rules to 
contingency operations and modifies the exemption rules for 
certain tax-exempt veterans' organizations. Most of these 
provisions are not expected to impose additional administrative 
requirements on individuals or businesses. The bill also 
creates an above-the-line deduction for overnight travel 
expenses of National Guard and Reserve member. Finally the bill 
imposes a mark-to-market tax on certain individuals who 
expatriate and extends certain IRS user fees. These provisions 
may increase regulatory burdens on individuals and businesses.

Impact on personal privacy and paperwork

    The provisions of the Committee amendment to the bill do 
not impact personal privacy.
    Some provisions of the bill relating to the exclusion of 
death gratuities and homeowners assistance payments will reduce 
paperwork burdens on certain individuals. Other provisions may 
impose additional burdens on certain individuals. For example, 
the provision regarding the imposition of a mark-to-market tax 
on individuals who expatriate will impose some such additional 
paperwork.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has determined that one of the revenue 
provisions of the bill does impose a Federal mandate on the 
private sector. That provision relates to the imposition of a 
mark-to-market tax on individuals who expatriate. The Committee 
has determined that the revenue provisions of the bill do not 
impose a Federal intergovernmental mandate on State, local, or 
tribal governments.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the IRS Reform Act) requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
(the Code) and has widespread applicability to individuals or 
small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Code and that have ``widespread 
applicability'' to individuals or small businesses.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                
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