[Senate Report 108-3]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 11
108th Congress                                                   Report
                                 SENATE
 1st Session                                                      108-3
======================================================================
 
                 ARMED FORCES TAX FAIRNESS ACT OF 2003

                                _______
                                

               February 11, 2003.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 351]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to amend the Internal Revenue 
Code of 1986 to improve tax equity for military personnel and 
for other purposes, having considered the same, reports 
favorably thereon an original bill, S. 351, and recommends that 
the bill do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................2
II. Explanation of the Bill...........................................3
    Title I. Improving Tax Equity for Military Personnel..............3
        A. Exclusion of Gain on Sale of a Principal Residence by 
            a Member of the Uniformed Services or the Foreign 
            Service (sec. 101 of the bill and sec. 121 of the 
            Code)................................................     3
        B. Exclusion from Gross Income of Certain Death Gratuity 
            Payments (sec. 102 of the bill and sec. 134 of the 
            Code)................................................     4
        C. Exclusion for Amounts Received Under Department of 
            Defense Homeowners Assistance Program (sec. 103 of 
            the bill and sec. 132 of the Code)...................     4
        D. Expansion of Combat Zone Filing Rules to Contingency 
            Operations (sec. 104 of the bill and sec. 7508 of the 
            Code)................................................     6
        E. Modification of Membership Requirement for Exemption 
            from Tax for Certain Veterans' Organizations (sec. 
            105 of the bill and sec. 501(c)(19) of the Code).....     8
        F. Clarification of Treatment of Certain Dependent Care 
            Assistance Programs Provided to Members of the 
            Uniformed Services of the United States (sec. 106 of 
            the bill and sec. 134 of the Code)...................     9
        G. Treatment of Service Academy Appointments as 
            Scholarships for Purposes of Qualified Tuition 
            Programs and Coverdell Education Savings Accounts 
            (sec. 107 of the bill and secs. 529 and 530 of the 
            Code)................................................     9
        H. Suspension of Tax-Exempt Status of Terrorist 
            Organizations (sec. 108 of the bill and sec. 501 of 
            the Code)............................................    11
        I. Above-the-Line Deduction for Overnight Travel Expenses 
            of National Guard and Reserve Members (sec. 109 of 
            the bill and sec. 162 of the Code)...................    13
        J. Extension of Certain Tax Relief Provisions to 
            Astronauts (sec. 110 of the bill and secs. 101, 692 
            and 2201 of the Code)................................    14
    Title II. Revenue Provisions.....................................18
        A. Extension of IRS User Fees (sec. 201 of the bill and 
            new sec. 7527 of the Code)...........................    18
        B. Authorize IRS to Enter into Installment Agreements 
            that Provide for Partial Payment (sec. 202 of the 
            bill and sec. 6159 of the Code)......................    18
        C. Impose Mark-to-Market Tax on Individuals Who 
            Expatriate (sec. 203 of the bill, new sec. 877A of 
            the Code, and secs. 877, 2107, 2501, and 6039G of the 
            Code)................................................    19
   
III.Budget Effects of the Bill.......................................30

        A. Committee Estimates...................................    30
        B. Budget Authority and Tax Expenditures.................    32
        C. Consultation with Congressional Budget Office.........    32
   
IV. Votes of the Committee...........................................34
 V. Regulatory Impact and Other Matters..............................34
        A. Regulatory Impact.....................................    34
        B. Unfunded Mandates Statement...........................    35
        C. Tax Complexity Analysis...............................    35
VI. Changes in Existing Law Made by the Bill as Reported.............35

                       I. LEGISLATIVE BACKGROUND

    The Senate Committee on Finance marked up the Armed Forces 
Tax Fairness Act of 2003 on February 5, 2003, and ordered the 
bill, as amended, favorably reported by unanimous voice vote.
    The Committee believes 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 three 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 of Gain on Sale of a Principal Residence by a Member of 
             the Uniformed Services or the Foreign Service


(Sec. 101 of the bill and sec. 121 of the Code)

                              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 two of 
the five years ending on 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 two 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 ten years the five-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 five-year period 
ending on the date of the sale or exchange of a principal 
residence does not include any period up to ten 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 sales or exchanges after May 
6, 1997.

   B. Exclusion From Gross Income of Certain Death Gratuity Payments


(Sec. 102 of the bill and sec. 134 of the Code)

                              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 with respect 
to the death of certain members of the Armed services on active 
duty, inactive duty training, or engaged in authorized travel.

                             EFFECTIVE DATE

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

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


(Sec. 103 of the bill and sec. 132 of the Code)

                              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. Thus, any HAP payments for 
losses sustained in the private sale of, or foreclosure 
against, a personal residence are includable in gross income as 
compensation for services. Similarly, in the case of government 
purchase of the residence under the HAP, the excess of the 
selling price over the fair market value of the residence is 
includable in gross income as compensation for services. 
Additionally, all such payments includable in income are 
``wages'' for Federal Insurance Contributions Act tax purposes 
(including Medicare).

                           REASONS FOR CHANGE

    The Committee believes that the exclusion 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 excludes from gross income amounts received under 
the Homeowners Assistance Program (as in effect on the date of 
enactment of this bill) that would otherwise be includable in 
gross income. The exclusion under this provision is limited to 
the maximum HAP payment described in clause (1) above. Amounts 
received under the program that are excludable from gross 
income also are 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


(Sec. 104 of the bill and sec. 7508 of the Code)

                              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. The Secretary may grant reasonable extensions of 
time for filing such returns. Treasury regulations provide an 
additional automatic two-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. 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 four-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.
    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 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. 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 five 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.
---------------------------------------------------------------------------
    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 two 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. Modification of Membership Requirement for Exemption From Tax for 
                    Certain Veterans' Organizations


(Sec. 105 of the bill and sec. 501(c)(19) of the Code)

                              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.
    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.

                           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.

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


(Sec. 106 of the bill and sec. 134 of the Code)

                              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 (as in effect on the 
date of enactment of this bill) 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 subject to the present-
law rules. 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 also are 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, 2002. No inference is intended as to the tax 
treatment of such amounts for prior taxable years.

   G. Treatment of Service Academy Appointments as Scholarships for 
Purposes of Qualified Tuition Programs and Coverdell Education Savings 
                                Accounts


(Sec. 107 of the bill and secs. 529 and 530 of the Code)

                              PRESENT LAW

    The Code provides tax-exempt status to qualified tuition 
programs, meaning programs established and maintained by a 
State or agency or instrumentality thereof or by one or more 
eligible educational institutions under which a person (1) may 
purchase tuition credits or certificates on behalf of a 
designated beneficiary which entitle the beneficiary to the 
waiver or payment of qualified higher education expenses of the 
beneficiary, or (2) in the case of a program established by and 
maintained by a State or agency or instrumentality thereof, may 
make contributions to an account which is established for the 
purpose of meeting the qualified higher education expenses of 
the designated beneficiary of the account. Contributions to 
qualified tuition programs may be made only in cash. Qualified 
tuition programs must have adequate safeguards to prevent 
contributions on behalf of a designated beneficiary in excess 
of amounts necessary to provide for the qualified higher 
education expenses of the beneficiary.
    The Code provides tax-exempt status to Coverdell education 
savings accounts (``ESAs''), meaning certain trusts or 
custodial accounts which are created or organized in the United 
States exclusively for the purpose of paying the qualified 
education expenses of a designated beneficiary. Contributions 
to ESAs may be made only in cash. Annual contributions to ESAs 
may not exceed $2,000 per beneficiary (except in cases 
involving certain tax-free rollovers) and may not be made after 
the designated beneficiary reaches age 18.
    Earnings on contributions to an ESA or qualified tuition 
program generally are subject to tax when withdrawn. However, 
distributions from an ESA or qualified tuition program are 
excludable from gross income of the distributee to the extent 
that the total distribution does not exceed the qualified 
education expenses incurred by the beneficiary during the year 
the distribution is made.
    If the qualified education expenses of the beneficiary for 
the year are less than the total amount of the distribution 
from an ESA or qualified tuition program, then the qualified 
education expenses are deemed to be paid from a pro-rata share 
of both the principal and earnings components of the 
distribution. In such a case, only a portion of the earnings is 
excludable (i.e., the portion of the earnings based on the 
ratio that the qualified education expenses bear to the total 
amount of the distribution) and the remaining portion of the 
earnings is includible in the beneficiary's gross income.
    The earnings portion of a distribution from an ESA or 
qualified tuition program that is includible in income is 
generally subject to an additional 10 percent tax. The 10 
percent additional tax does not apply if a distribution is made 
on account of the death or disability of the designated 
beneficiary, or on account of a scholarship received by the 
designated beneficiary (to the extent it does not exceed the 
amount of the scholarship).
    Service obligations are required of recipients of 
appointments to the United States Military Academy, the United 
States Naval Academy, the United States Air Force Academy, the 
United States Coast Guard Academy, or the United States 
Merchant Marine Academy. Because of these service obligations, 
appointments to the Academies are not considered scholarships 
for purposes of the waiver of the additional 10 percent tax on 
withdrawals from ESAs and qualified tuition programs that are 
not used for qualified education purposes.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to waive the 
additional 10 percent tax on withdrawals from ESAs and 
qualified tuition programs that are not used for qualified 
education purposes because the designated beneficiary received 
an appointment to a United States Service Academy.
    The Committee believes that imposing an additional tax on 
earnings from educational savings accounts and qualified 
tuition plans is inappropriate in the case of individuals who 
choose to serve their country as a member of the military and 
who, as a part of that service, obtain their education at one 
of the Service Academies.

                        EXPLANATION OF PROVISION

    The bill permits penalty free withdrawals from Coverdell 
education savings accounts and qualified tuition programs made 
on account of the attendance of the designated beneficiary at 
the United States Military Academy, the United States Naval 
Academy, the United States Air Force Academy, the United States 
Coast Guard Academy, or the United States Merchant Marine 
Academy.
    The amount of funds that can be withdrawn penalty free with 
respect to any academic period is limited to the costs of 
advanced education as defined in 10 United States Code section 
2005(e)(3) (as in effect on the date of the enactment of the 
bill) at the Academy attended by the designated beneficiary for 
the same academic period.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2002.

     H. Suspension of Tax-Exempt Status of Terrorist Organizations


(Sec. 108 of the bill and sec. 501 of the Code)

                              PRESENT LAW

    Under present law, the Internal Revenue Service generally 
issues a letter revoking recognition of an organization's tax-
exempt status only after (1) conducting an examination of the 
organization, (2) issuing a letter to the organization 
proposing revocation, and (3) allowing the organization to 
exhaust the administrative appeal rights that follow the 
issuance of the proposed revocation letter. In the case of an 
organization described in section 501(c)(3), the revocation 
letter immediately is subject to judicial review under the 
declaratory judgment procedures of section 7428. To sustain a 
revocation of tax-exempt status under section 7428, the IRS 
must demonstrate that the organization is no longer entitled to 
exemption. There is no procedure under present law for the IRS 
to suspend the tax-exempt status of an organization.
    To combat terrorism, the Federal government has designated 
a number of organizations as terrorist organizations or 
supporters of terrorism under the Immigration and Nationality 
Act, the International Emergency Economic Powers Act, and the 
United Nations Participation Act of 1945.

                           REASONS FOR CHANGE

    An organization that has been designated or otherwise 
identified by the Federal government as a terrorist 
organization pursuant to certain authority should not be exempt 
from federal income tax and contributions to such organizations 
should not be deductible for Federal income tax purposes. The 
Committee believes that the Federal government's designation or 
identification of an organization as a terrorist organization 
is ground for suspension of tax-exempt status, and that in such 
cases a separate investigation of the organization by the 
Internal Revenue Service is not necessary. Further, because a 
terrorist organization may challenge the Federal government's 
designation or identification of the organization under the law 
authorizing the designation or identification, recourse to the 
declaratory judgment procedures of the Internal Revenue Code to 
challenge the suspension of tax-exemption is not appropriate.

                        EXPLANATION OF PROVISION

    The bill suspends the tax-exempt status of an organization 
that is exempt from tax under section 501(a) for any period 
during which the organization is designated or identified by 
U.S. Federal authorities as a terrorist organization or 
supporter of terrorism. The bill also makes such an 
organization ineligible to apply for tax exemption under 
section 501(a). The period of suspension runs from the date the 
organization is first designated or identified to the date when 
all designations or identifications with respect to the 
organization have been rescinded pursuant to the law or 
Executive order under which the designation or identification 
was made.
    The bill describes a terrorist organization as an 
organization that has been designated or otherwise individually 
identified (1) as a terrorist organization or foreign terrorist 
organization under the authority of section 
212(a)(3)(B)(vi)(II) or section 219 of the Immigration and 
Nationality Act; (2) in or pursuant to an Executive order that 
is related to terrorism and issued under the authority of the 
International Emergency Economic Powers Act or section 5 of the 
United Nations Participation Act for the purpose of imposing on 
such organization an economic or other sanction; or (3) in or 
pursuant to an Executive order that refers to the bill and is 
issued under the authority of any Federal law if the 
organization is designated or otherwise individually identified 
in or pursuant to such Executive order as supporting or 
engaging in terrorist activity (as defined in section 
212(a)(3)(B) of the Immigration and Nationality Act) or 
supporting terrorism (as defined in section 140(d)(2) of the 
Foreign Relations Authorization Act, Fiscal Years 1988 and 
1989). During the period of suspension, no deduction is allowed 
under the bill for any contribution to a terrorist organization 
under any provision of the Internal Revenue Code of 1986, 
including sections 170, 545(b)(2), 556(b)(2), 642(c), 2055, 
2106(a)(2), and 2522.
    No organization or other person may challenge, under 
section 7428 or any other provision of law, in any 
administrative or judicial proceeding relating to the Federal 
tax liability of such organization or other person, the 
suspension of tax-exemption, the ineligibility to apply for 
tax-exemption, a designation or identification described above, 
the timing of the period of suspension, or a denial of 
deduction described above. The suspended organization may 
maintain other suits or administrative actions against the 
agency or agencies that designated or identified the 
organization, for the purpose of challenging such designation 
or identification (but not the suspension of tax-exempt status 
under this provision).
    If the tax-exemption of an organization is suspended and 
each designation and identification that has been made with 
respect to the organization is determined to be erroneous 
pursuant to the law or Executive order making the designation 
or identification, and such erroneous designation results in an 
overpayment of income tax for any taxable year with respect to 
such organization, a credit or refund (with interest) with 
respect to such overpayment shall be made. If the operation of 
any law or rule of law (including res judicata) prevents the 
credit or refund at any time, the credit or refund may 
nevertheless be allowed or made if the claim for such credit or 
refund is filed before the close of the one-year period 
beginning on the date that the last remaining designation or 
identification with respect to the organization is determined 
to be erroneous.
    The bill directs the IRS to update the listings of tax-
exempt organizations to take account of organizations that have 
had their exemption suspended and to publish notice to 
taxpayers of the suspension of an organization's tax-exemption 
and the fact that contributions to such organization are not 
deductible during the period of suspension.

                             EFFECTIVE DATE

    The provision to suspend the tax-exempt status of certain 
terrorist organizations applies to organizations that are 
designated or identified as a terrorist organization prior to, 
on, or after the date of enactment. If an organization is 
designated or identified as a terrorist organization prior to 
the date of enactment of this bill, the suspension of the 
organization's tax-exemption begins from that date of enactment 
and is not retroactive to the date the organization is 
designated or identified as a terrorist organization.

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


(Sec. 109 of the bill and sec. 162 of the Code)

                              PRESENT LAW

    National Guard and Reserve members may claim itemized 
deductions for their nonreimbursable expenses for 
transportation, 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 
overnight transportation, meals, and lodging expenses of 
National Guard and Reserve members who must travel away from 
home more than 100 miles (and stay overnight) to attend 
National Guard and Reserve meetings. Accordingly, these 
individuals incurring these expenses can deduct them from gross 
income regardless of whether they itemize their deductions. The 
amount of the expenses that may be deducted may not exceed the 
general Federal Government per diem rate applicable to that 
locale.

                             EFFECTIVE DATE

    The provision is effective with respect to amounts paid or 
incurred after December 31, 2002.

      J. Extension of Certain Tax Relief Provisions to Astronauts


(Sec. 110 of the bill and secs. 101, 692 and 2201 of the Code)

                              PRESENT LAW

In general

    The Victims of Terrorism Tax Relief Act of 2001, (the 
``Victims Bill'') provided certain income and estate tax relief 
to individuals who die from wounds or injury incurred as a 
result of the terrorist attacks against the United States on 
September 11, 2001, and April 19, 1995 (the bombing of the 
Alfred P. Murrah Federal Building in Oklahoma City) or as a 
result of illness incurred due to an attack involving anthrax 
that occurred on or after September 11, 2001 and before January 
1, 2002.

Income tax relief

    The Victims Bill extended relief similar to the present-law 
treatment of military or civilian employees of the United 
States who die as a result of terrorist or military activity 
outside the United States to individuals who die as a result of 
wounds or injury which were incurred as a result of the 
terrorist attacks that occurred on September 11, 2001, or April 
19, 1995, and individuals who die as a result of illness 
incurred due to an attack involving anthrax that occurs on or 
after September 11, 2001, and before January 1, 2002. Under the 
Victims Bill, such individuals generally are exempt from income 
tax for the year of death and for prior taxable years beginning 
with the taxable year prior to the taxable year in which the 
wounds or injury occurred.\3\ The exemption applies to these 
individuals whether killed in an attack (e.g., in the case of 
the September 11, 2001, attack in one of the four airplanes or 
on the ground) or in rescue or recovery operations.
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    \3\ Present law does not provide relief from self-employment tax 
liability.
---------------------------------------------------------------------------
    Present law provides a minimum tax relief benefit of 
$10,000 to each eligible individual regardless of the income 
tax liability of the individual for the eligible tax years. If 
an eligible individual's income tax for years eligible for the 
exclusion under the provision is less than $10,000, the 
individual is treated as having made a tax payment for such 
individual's last taxable year in an amount equal to the excess 
of $10,000 over the amount of tax not imposed under the 
provision.
    Subject to rules prescribed by the Secretary, the exemption 
from tax does not apply to the tax attributable to (1) deferred 
compensation which would have been payable after death if the 
individual had died other than as a specified terrorist victim, 
or (2) amounts payable in the taxable year which would not have 
been payable in such taxable year but for an action taken after 
September 11, 2001. Thus, for example, the exemption does not 
apply to amounts payable from a qualified plan or individual 
retirement arrangement to the beneficiary or estate of the 
individual. Similarly, amounts payable only as death or 
survivor's benefits pursuant to deferred compensation 
preexisting arrangements that would have been paid if the death 
had occurred for another reason are not covered by the 
exemption. In addition, if the individual's employer makes 
adjustments to a plan or arrangement to accelerate the vesting 
of restricted property or the payment of nonqualified deferred 
compensation after the date of the particular attack, the 
exemption does not apply to income received as a result of that 
action.\4\ Also, if the individual's beneficiary cashed in 
savings bonds of the decedent, the exemption does not apply. On 
the other hand, the exemption does apply, for example, to a 
final paycheck of the individual or dividends on stock held by 
the individual when paid to another person or the individual's 
estate after the date of death but before the end of the 
taxable year of the decedent (determined without regard to the 
death). The exemption also applies to payments of an 
individual's accrued vacation and accrued sick leave.
---------------------------------------------------------------------------
    \4\ Such amounts may, however, be excludable from gross income 
under the death benefit exclusion provided in section 102 of the 
Victims Bill.
---------------------------------------------------------------------------
    The tax relief does not apply to any individual identified 
by the Attorney General to have been a participant or 
conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.

Exclusion of death benefits

    The Victims Bill generally provides an exclusion from gross 
income for amounts received if such amounts are paid by an 
employer (whether in a single sum or otherwise \5\) by reason 
of the death of an employee who dies as a result of wounds or 
injury which were incurred as a result of the terrorist attacks 
that occurred on September 11, 2001, or April 19, 1995, or as a 
result of illness incurred due to an attack involving anthrax 
that occurs on or after September 11, 2001, and before January 
1, 2002. Subject to rules prescribed by the Secretary, the 
exclusion does not apply to amounts that would have been 
payable if the individual had died for a reason other than the 
attack. For example, the provision does not apply to payments 
by an employer under a nonqualified deferred compensation plan 
\6\ to the extent that the amounts would have been payable if 
the death had occurred for another reason. The exclusion does 
apply, however, to death benefits provided under a qualified 
plan that satisfy the incidental benefit rule.
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    \5\ Thus, for example, payments made over a period of years could 
qualify for the exclusion.
    \6\ The provision does not apply to amounts received under a 
qualified plan because such payments are not made by the employer.
---------------------------------------------------------------------------
    For purposes of the exclusion, self-employed individuals 
are treated as employees. Thus, for example, payments by a 
partnership to the surviving spouse of a partner who died as a 
result of the September 11, 2001, attacks may be excludable 
under the provision.
    The tax relief does not apply to any individual identified 
by the Attorney General to have been a participant or 
conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.

Estate tax relief

    Present law provides a reduction in Federal estate tax for 
taxable estates of U.S. citizens or residents who are active 
members of the U.S. Armed Forces and who are killed in action 
while serving in a combat zone (sec. 2201). This provision also 
applies to active service members who die as a result of 
wounds, disease, or injury suffered while serving in a combat 
zone by reason of a hazard to which the service member was 
subjected as an incident of such service.
    In general, the effect of section 2201 is to replace the 
Federal estate tax that would otherwise be imposed with a 
Federal estate tax equal to 125 percent of the maximum State 
death tax credit determined under section 2011(b). Credits 
against the tax, including the unified credit of section 2010 
and the State death tax credit of section 2011, then apply to 
reduce (or eliminate) the amount of the estate tax payable.
    Generally, the reduction in Federal estate taxes under 
section 2201 is equal in amount to the ``additional estate 
tax.'' The additional estate tax is the difference between the 
Federal estate tax imposed by section 2001 and 125 percent of 
the maximum State death tax credit determined under section 
2011(b) as in effect prior to its repeal by the Economic Growth 
and Tax Relief Reconciliation Act of 2001.
    The Victims Bill generally treats individuals who die from 
wounds or injury incurred as a result of the terrorist attacks 
that occurred on September 11, 2001, or April 19, 1995, or as a 
result of illness incurred due to an attack involving anthrax 
that occurred on or after September 11, 2001, and before 
January 1, 2002, in the same manner as if they were active 
members of the U.S. Armed Forces killed in action while serving 
in a combat zone or dying as a result of wounds or injury 
suffered while serving in a combat zone for purposes of section 
2201. Consequently, the estates of these individuals are 
eligible for the reduction in Federal estate tax provided by 
section 2201. The tax relief does not apply to any individual 
identified by the Attorney General to have been a participant 
or conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.
    The Victims bill also changes the general operation of 
section 2201, as it applies to both the estates of service 
members who qualify for special estate tax treatment under 
present and prior law and to the estates of individuals who 
qualify for the special treatment only under the Act. Under the 
Victims bill, the Federal estate tax is determined in the same 
manner for all estates that are eligible for Federal estate tax 
reduction under section 2201. In addition, the executor of an 
estate that is eligible for special estate tax treatment under 
section 2201 may elect not to have section 2201 apply to the 
estate. Thus, in the event that an estate may receive more 
favorable treatment without the application of section 2201 in 
the year of death than it would under section 2201, the 
executor may elect not to apply the provisions of section 2201, 
and the estate tax owed (if any) would be determined pursuant 
to the generally applicable rules.
    Under the Victims bill, section 2201 no longer reduces 
Federal estate tax by the amount of the additional estate tax. 
Instead, the Victims bill provides that the Federal estate tax 
liability of eligible estates is determined under section 2001 
(or section 2101, in the case of decedents who were neither 
residents nor citizens of the United States), using a rate 
schedule that is equal to 125 percent of the pre-EGTRRA maximum 
State death tax credit amount. This rate schedule is used to 
compute the tax under section 2001(b) or section 2101(b) (i.e., 
both the tentative tax under section 2001(b)(1) and section 
2101(b), and the hypothetical gift tax under section 2001(b)(2) 
are computed using this rate schedule). As a result of this 
provision, the estate tax is unified with the gift tax for 
purposes of section 2201 so that a single graduated (but 
reduced) rate schedule applies to transfers made by the 
individual at death, based upon the cumulative taxable 
transfers made both during lifetime and at death.
    In addition, while the Victims bill provides an alternative 
reduced rate table for purposes of determining the tax under 
section 2001(b) or section 2101(b), the amount of the unified 
credit nevertheless is determined as if section 2201 did not 
apply, based upon the unified credit as in effect on the date 
of death. For example, in the case of victims of the September 
11, 2001, terrorist attack, the applicable unified credit 
amount under section 2010(c) would be determined by reference 
to the actual section 2001(c) rate table.

                           REASONS FOR CHANGE

    The Committee wishes to honor the bravery of individuals 
who lost their lives in the space shuttle Columbia disaster. 
Further, the Committee believes it appropriate to provide these 
tax relief measures to those individuals and their families.

                        EXPLANATION OF PROVISION

    The bill extends the exclusion from income tax, the 
exclusion for death benefits, and the estate tax relief 
available under the Victims of Terrorism Tax Relief Act of 2001 
to astronauts who lose their lives in the line of duty 
(including the individuals who lost their lives in the space 
shuttle Columbia disaster).

                             EFFECTIVE DATE

    The provision is generally effective for qualified 
individuals whose lives are lost in the line of duty after 
December 31, 2002.

                      TITLE II. REVENUE PROVISIONS


                     A. Extension of IRS User Fees


(Sec. 201 of the bill and new sec. 7527 of the Code)

                              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 \7\ 
extended the statutory authorization for these user fees \8\ 
through September 30, 2003.
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    \7\ 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).
    \8\ These user fees were originally enacted in section 10511 of the 
Revenue Act of 1987 (Pub. Law No. 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, 2013. The bill also moves the 
statutory authorization for these fees into the 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.

B. Authorize IRS To Enter Into Installment Agreements That Provide for 
                            Partial Payment


(Sec. 202 of the bill and sec. 6159 of the Code)

                              PRESENT LAW

    The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments if the IRS determines that doing so 
will facilitate collection of the amounts owed. An installment 
agreement does not reduce the amount of taxes, interest, or 
penalties owed. Generally, during the period installment 
payments are being made, other IRS enforcement actions (such as 
levies or seizures) with respect to the taxes included in that 
agreement are held in abeyance.
    Prior to 1998, the IRS administratively entered into 
installment agreements that provided for partial payment 
(rather than full payment) of the total amount owed over the 
period of the agreement. In that year, the IRS Chief Counsel 
issued a memorandum concluding that partial payment installment 
agreements were not permitted.

                           REASONS FOR CHANGE

    The Committee believes that clarifying that the IRS is 
authorized to enter into installment agreements with taxpayers 
which do not provide for full payment of the taxpayer's 
liability over the life of the agreement will improve effective 
tax administration.
    The Committee recognizes that some taxpayers are unable or 
unwilling to enter into a realistic offer in compromise.\9\ The 
Committee believes that these taxpayers should be encouraged to 
make partial payments toward resolving their tax liability, and 
that providing for partial payment installment agreements will 
help facilitate this. The Committee also believes, however, 
that the offer in compromise program should remain the sole 
avenue via which taxpayers fully resolve their tax liabilities 
and attain a fresh start.
---------------------------------------------------------------------------
    \9\ Sec. 7122.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The bill clarifies that the IRS is authorized to enter into 
installment agreements with taxpayers that do not provide for 
full payment of the taxpayer's liability over the life of the 
agreement. The bill requires the IRS to review partial payment 
installment agreements at least every two years. The primary 
purpose of this review is to determine whether the financial 
condition of the taxpayer has significantly changed so as to 
warrant an increase in the value of the payments being made.

                             EFFECTIVE DATE

    The provision is effective for installment agreements 
entered into on or after the date of enactment.

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


(Sec. 203 of the bill, new sec. 877A of the Code, and secs. 877, 2107, 
        2501, and 6039G of the Code)

                              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.\10\ 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.\11\ 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.
---------------------------------------------------------------------------
    \10\ 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.
    \11\ 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 period beginning 
five years prior to the expatriation will be treated as an ``exchange'' 
subject to these rules.
---------------------------------------------------------------------------
    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 2003, the dollar thresholds for the tax liability 
test and the net worth test are $122,000 and $608,000, 
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 one 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.\12\ 
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.
---------------------------------------------------------------------------
    \12\ The Economic Growth and Tax Relief Reconciliation Act of 2001 
(``EGTRRA'') repealed the estate tax for estates of decedents dying 
after December 31, 2009. However, EGTRRA included a ``sunset'' 
provision, pursuant to which EGTRRA's provisions (including estate tax 
repeal) do not apply to estates of decedents dying after December 31, 
2010.
---------------------------------------------------------------------------
    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 five-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 five-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 2003.

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 eight 
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 five 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 and a half, provided that the individual 
was a resident of the United States for no more than five 
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). \13\ 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).
---------------------------------------------------------------------------
    \13\ 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 the excess of: (1) 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 two 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 two 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 two 
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 February 5, 2003.

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 provision generally is effective for U.S. citizens who 
relinquish citizenship or long-term residents who terminate 
their residency on or after February 5, 2003. The provisions of 
the provisions relating to gifts and inheritances are effective 
for gifts and inheritances received from former citizens and 
former long-term residents on or after February 5, 2003, 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.

                    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 2003-2013.

                                       ESTIMATED BUDGET EFFECTS OF THE ``ARMED FORCES TAX FAIRNESS ACT OF 2003,'' AS REPORTED BY THE COMMITTEE ON FINANCE
                                                                          [Fiscal years 2003-2013, millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
               Provision                            Effective              2003     2004     2005     2006     2007     2008     2009     2010     2011     2012     2013    2003-08    2003-13
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  I. Improving Tax Equity for Military
               Personnel

A. Exclusion of Gain on Sale of a        soea 5/6/97...................      -66      -14      -14      -15      -15      -16      -16      -17      -18      -18      -19       -139       -227
 Principal Residence by a Member of the
 Uniformed Services or the Foreign
 Service (distance of 50 miles;
 extended stay of 90 days; maximum
 suspension of 10 years).
B. Exclusion from Gross Income of        doa 9/10/01...................       -1       -1       -1       -1       -1       -1       -1       -1       -1       -1       -1         -6        -10
 Certain Death Gratuity Payments.
C. Exclusion for Amounts Received under  pma DOE.......................    (\1\)       -2       -2       -2       -2       -2       -2       -2       -2       -2       -2        -11        -22
 Department of Defense Homeowners
 Assistance Program.
D. Expansion of Combat Zone Filing       (\2\).........................       -9    (\1\)    (\1\)    (\1\)    (\1\)       -1       -1       -1       -1       -1       -1        -11        -14
 Rules to Contingency Operations.
E. Modification of Membership            tyba DOE......................       -1       -1       -1       -1       -2       -2       -2       -2       -2       -2       -2         -8        -17
 Requirements for Exemption from Tax
 for Certain Veterans' Organizations.
F. Clarification of Treatment of         tyba 12/31/02.................                                                     No Revenue Effect
 Certain Department Care Assistance
 Programs Provided to Members of the
 Uniformed Services of the United
 States.
G. Treatment of Service Academy          tyba 12/31/02.................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)         -1         -2
 Appointments as Scholarships for
 Purposes of Qualified Tuition Programs
 and Coverdell Education Savings
 Accounts.
H. Suspension of Tax-Exempt Status of    (\3\).........................                                                 Negligible Revenue Effect
 Designated Terrorist Organizations.
I. Above-the-Line Deduction for          apoii tyba 12/31/02...........      -15      -75      -77      -78      -80      -82      -84      -87      -89      -91      -93       -407       -851
 Overnight Travel Expenses of National
 Guard and Reserve Members Traveling
 More Than 100 Miles from Home.
J. Extend the Benefits Available Under   (\4\).........................    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      (\1\)      (\1\)
 the ``Victims of Terrorism Tax Relief
 Act of 2001'' (including an exclusion
 from income tax, an exclusion for
 death benefits, and estate tax relief)
 to Astronauts who Lose Their Lives in
 the Line of Duty (including the
 individuals who lost their lives in
 the space shuttle Columbia disaster).
                                                                        ------------------------------------------------------------------------------------------------------------------------
      Total of Improving Tax Equity for  ..............................      -92      -93      -95      -97     -100     -104     -106     -110     -113     -115     -118       -583     -1,143
       Military Personnel.
                                                                        ========================================================================================================================
         II. Revenue Provisions

A. Extension of IRS User Fees (through   ma DOE........................  .......       33       34       35       36       38       39       41       42       44       45        176        386
 9/30/13) \5\.
B. Authorize IRS to Enter into           iaeio/a DOE...................       11       30       14        5    (\6\)    (\6\)    (\6\)    (\6\)    (\6\)    (\6\)    (\6\)         61         63
 Installment Agreements that Provide
 for Partial Payment.
C. Impose Mark-to-Market on Individuals  (\7\).........................        3       98       84       80       74       71       67       61       57       54       51        410        700
 Who Expartriate.
                                                                        ------------------------------------------------------------------------------------------------------------------------
      Total of Revenue Provisions......  ..............................       14      161      132      120      110      109      106      102       99       98       96        647      1,149
                                                                        ========================================================================================================================
      Net Total........................  ..............................      -78       68       37       23       10        5    (\1\)       -8      -14      -17      -22         64          6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ The provision applies to any period for performing an act that has not expired before the date of enactment.
\3\ Effective for organizations that are designated or identified as a terrorist organization prior to, on, or after the date of enactment.
\4\ Generally effective for qualified individuals whose lives are lost in the line of duty after December 31, 2002.
\5\ Estimate provided by Congressional Budget Office.
\6\ Gain of less than $500,000.
\7\ Generally effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after February 5, 2003.

Legend for ``Effective'' column: apoii = amounts paid or incurred in; doa = deaths occurring after; DOE = date of enactment; iaeio/a = installment agreements entered into on or after; pma =
  payments made after; rma = requests made after; tyba = taxable years beginning after; and soea = sales or exchanges 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.

Armed Forces Tax Fairness Act of 2003

    Summary: The Armed Forces Tax Fairness Act of 2003 would 
raise the exclusion for death gratuity payments for the 
military, provide military and foreign service homeowners with 
relief from capital gains taxes, authorize the Internal Revenue 
Service (IRS) to enter into installment agreements that provide 
for partial payment, impose a mark-to-market tax on individuals 
who expatriate, and extend IRS user fees through September 30, 
2013. In addition, the bill 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 their deductions and 
those who do not.
    The Joint Committee on Taxation (JCT) and the Congressional 
Budget Office (CBO) estimate that enacting the bill would 
reduce revenues by $78 million in 2003 and increase revenues by 
$64 million over the 2003-2008 period and by $6 million over 
the 2003-2013 period.
    JCT has determined that the bill 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 on expatriates contains 
a private-sector mandate. The total cost of complying with the 
mandate would not exceed the threshold established by UMRA 
($117 million in 2003, adjusted annually for inflation).
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the bill is shown in the following table.

----------------------------------------------------------------------------------------------------------------
                                                                  By fiscal year, in millions of dollars--
                                                           -----------------------------------------------------
                                                              2003     2004     2005     2006     2007     2008
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Mark-to-market tax on expatriates.........................        3       98       84       80       74       71
Extension of IRS user fees................................        0       33       34       35       36       38
Authorization of IRS to enter into installment agreements.       11       30       14        5    (\1\)    (\1\)
Tax relief from capital gains for military and foreign          -66      -14      -14      -15      -15      -16
 service homeowners.......................................
Above-the-line deduction for travel expenses..............      -15      -75      -77      -78      -80      -82
Other provisions..........................................      -11       -4       -4       -4       -5       -6
                                                           -----------------------------------------------------
      Total Changes.......................................      -78       68       37       23       10        5
----------------------------------------------------------------------------------------------------------------
\1\ Gain of less than $500,000.

Sources: CBO and the Joint Committee on Taxation.

    Basis of Estimate: All estimates, with the exception of the 
provision extending IRS user fees, were provided by JCT. A 
number of provisions would reduce revenues if enacted, and 
several would increase revenues. All together, the bill's 
provisions would reduce revenues by $78 million in 2003, and 
would increase revenues by $64 million over the 2003-2008 
period and by $6 million over the 2003-2013 period.
    Most of the reduction in revenues would occur 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, extending section 501(c)(19) 
membership to certain relatives of military personnel, 
permitting service academy appointments to be treated as 
scholarships for certain purposes, and extending the benefits 
available under the Victims of Terrorism Tax Relief Act of 2001 
to astronauts who lose their lives in the line of duty would 
also decrease governmental receipts. As estimated by JCT, all 
of these provisions together would reduce revenues by $92 
million in 2003, by $583 million over the 2003-2008 period, and 
by $1.143 billion over the 2003-2013 period.
    JCT estimates that together, the provisions imposing a 
mark-to-market tax on individuals who expatriate and 
authorizing IRS to enter into installment agreements that 
provide for partial payment would increase revenues by $14 
million in 2003, by $471 million over the 2003-2008 period, and 
by $763 million over the 2003-2013 period.
    The act also would extend the period during which IRS may 
charge fees on businesses for providing ruling, opinion, and 
determination letters. Under current law, IRS's authority to 
charge such fees will expire at the end of fiscal year 2003. 
The bill would extend the authority to charge such fees until 
September 30, 2013. Based on the amount of fees collected in 
recent years and on information from IRS, CBO estimates that 
extending the fees would increase governmental receipts by $176 
million over the 2004-2008 period and $386 million over the 
2004-2013 period.
    JCT and CBO estimate that these three provisions would 
increase revenues by $14 million in 2003, by about $647 million 
over the 2003-2008 period, and by $1.149 billion over the 2003-
2013 period.
    Effect on revenues and direct spending: The Armed Forces 
Tax Fairness Act of 2003 contains provisions that both increase 
and decrease revenues. The overall effect of the bill on 
revenues is shown in the table below. The bill contains no 
provisions that affect direct spending.

----------------------------------------------------------------------------------------------------------------
                                                     By fiscal year, in millions of dollars--
                                --------------------------------------------------------------------------------
                                  2003    2004   2005   2006   2007   2008   2009   2010   2011    2012    2013
----------------------------------------------------------------------------------------------------------------
Changes in receipts............     -76     68     37     23     10      5  (\1\)     -8     -14     -17     -22
Changes in outlays.............                                   Not applicable
----------------------------------------------------------------------------------------------------------------
\1\ Loss or less than $500,000.

Sources: CBO and the Joint Committee on Taxation.


    Estimated impact on state, local, and tribal governments: 
JCT has determined that the bill 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 ($117 million in 2003, 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 the 
bill was, with a quorum present, ordered favorably reported, as 
amended, by unanimous voice vote on February 5, 2003.

                 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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