Senate Report 108-3 - ARMED FORCES TAX FAIRNESS ACT OF 2003

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

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

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February 11, 2003.--Ordered to be printed

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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.
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The suspension of time applies to the following acts:
(1) Filing any return of income, estate, or gift tax
(except employment and withholding taxes);
(2) Payment of any income, estate, or gift tax
(except employment and withholding taxes);
(3) Filing a petition with the Tax Court for
redetermination of a deficiency, or for review of a
decision rendered by the Tax Court;
(4) Allowance of a credit or refund of any tax;
(5) Filing a claim for credit or refund of any tax;
(6) Bringing suit upon any such claim for credit or
refund;
(7) Assessment of any tax;
(8) Giving or making any notice or demand for the
payment of any tax, or with respect to any liability to
the United States in respect of any tax;
(9) Collection of the amount of any liability in
respect of any tax;
(10) Bringing suit by the United States in respect of
any liability in respect of any tax; and
(11) Any other act required or permitted under the
internal revenue laws specified by the Secretary of the
Treasury.
Individuals may, if they choose, perform any of these acts
during the period of suspension. Spouses of qualifying
individuals are entitled to the same suspension of time, except
that the spouse is ineligible for this suspension for any
taxable year beginning more than 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.
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\2\ The definition is done by cross-reference to 10 U.S.C. 101.
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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

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.
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\4\ Such amounts may, however, be excludable from gross income
under the death benefit exclusion provided in section 102 of the
Victims Bill.
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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).
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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.
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\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.
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The expatriation tax provisions apply to long-term
residents of the United States whose U.S. residency is
terminated. For this purpose, a long-term resident is any
individual who was a lawful permanent resident of the United
States for at least 8 out of the 15 taxable years ending with
the year in which such termination occurs. In applying the 8-
year test, an individual is not considered to be a lawful
permanent resident for any year in which the individual is
treated as a resident of another country under a treaty tie-
breaker rule (and the individual does not elect to waive the
benefits of such treaty).
Subject to the exceptions described below, an individual is
treated as having expatriated or terminated residency with a
principal purpose of avoiding U.S. taxes if either: (1) the
individual's average annual U.S. Federal income tax liability
for the 5 taxable years ending before the date of the
individual's loss of U.S. citizenship or termination of U.S.
residency is greater than $100,000 (the ``tax liability
test''), or (2) the individual's net worth as of the date of
such loss or termination is $500,000 or more (the ``net worth
test''). The dollar amount thresholds contained in the tax
liability test and the net worth test are indexed for inflation
in the case of a loss of citizenship or termination of
residency occurring in any calendar year after 1996. For
calendar year 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.
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\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.
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Special rules apply to U.S. citizens who relinquish their
citizenship and long-term residents who terminate their U.S.
residency within the 10 years prior to the date of death,
unless the loss of status did not have as one its principal
purposes the avoidance of tax (sec. 2107). Under these rules,
the decedent's estate includes the proportion of the decedent's
stock in a foreign corporation that the fair market value of
the U.S.-situs assets owned by the corporation bears to the
total assets of the corporation. This rule applies only if (1)
the decedent owned, directly, at death 10 percent or more of
the combined voting power of all voting stock of the
corporation and (2) the decedent owned, directly or indirectly,
at death more than 50 percent of the total voting stock of the
corporation or more than 50 percent of the total value of all
stock of the corporation.
Taxpayers are deemed to have a principal purpose of tax
avoidance if they meet the 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.

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).