To amend the Internal Revenue Code of 1986 to provide income and employment tax relief for military and civilian victims of terroristic or military action.

Summary: Military and Civilian Victims Payroll Tax Relief Act of 2001 - Amends the Internal Revenue Code to exempt from income and employment taxes any individual who dies as a result of wounds, injury, or illness incurred as a result of terroristic or military action.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Military and Civilian Victims 
Payroll Tax Relief Act of 2001''.

SEC. 2. INCOME AND EMPLOYMENT TAXES OF MEMBERS OF THE ARMED FORCES AND 
              VICTIMS OF TERRORISTIC OR MILITARY ACTIONS.

    (a) Individuals Dying as a Result of Terroristic or Military 
Actions.--Section 692 of the Internal Revenue Code of 1986 (relating to 
income taxes of members of Armed Forces on death) amended by adding at 
the end the following new subsection:
    ``(d) Individuals Dying as a Result of Terroristic or Military 
Actions.--
            ``(1) In general.--In the case of any individual who dies 
        as a result of wounds, injury, or illness incurred as a result 
        of terroristic or military action (other than a death to which 
        subsection (a) or (c) applies), any tax imposed by this 
        subtitle shall not apply--
                    ``(A) with respect to the taxable year in which 
                falls the date of such individual's death, and
                    ``(B) with respect to any prior taxable year in the 
                period beginning with the last taxable year ending 
                before the taxable year in which the wounds, injury, or 
                illness were incurred.
            ``(2) Exceptions.--
                    ``(A) Taxation of certain benefits.--Subject to 
                such rules as the Secretary may prescribe, paragraph 
                (1) shall not apply to the amount of any tax imposed by 
                this subtitle which would be computed by only taking 
                into account the items of income, gain, or other 
                amounts attributable to--
                            ``(i) amounts payable in the taxable year 
                        by reason of the death of an individual 
                        described in paragraph (1) which would have 
                        been payable in such taxable year if the death 
                        had occurred by reason of an event other than 
                        an event described in paragraph (1), or
                            ``(ii) amounts payable in the taxable year 
                        which would not have been payable in such 
                        taxable year but for an action taken after the 
                        date of the applicable terrorist attack.
                    ``(B) No relief for perpetrators.--Paragraph (1) 
                shall not apply with respect to any individual 
                identified by the Attorney General to have been a 
                participant or conspirator in any event described in 
                paragraph (1) or a representative of such individual.
            ``(3) Terroristic or military action.--For purposes of this 
        subsection, the term `terroristic or military action' has the 
        meaning given to such term by subsection (c)(2). Such term 
        includes the terrorist attacks against the United States on 
        April 19, 1995, September 11, 2001, and the terrorist attack 
        involving anthrax occurring on or after September 11, 2001, and 
        before January 1, 2002.''.
    (b) Refund of Other Taxes Paid.--Section 692 of such Code, as 
amended by subsection (a), is amended by adding at the end the 
following new subsection:
    ``(e) Refund of Employment Taxes Paid.--In determining the amount 
of tax under this section to be credited or refunded as an overpayment 
with respect to any individual for any period, such amount shall be 
increased by an amount equal to the amount of taxes imposed and 
collected under chapter 21 and sections 3201(a), 3211(a)(1), and 
3221(a) with respect to such individual for such period.''.
    (c) Conforming Amendments.--
            (1) Section 5(b)(1) is amended by inserting ``and victims 
        of certain terrorist attacks'' before ``on death''.
            (2) Section 6013(f)(2)(B) is amended by inserting ``and 
        victims of certain terrorist attacks'' before ``on death''.
    (d) Clerical Amendments.--
            (1) The heading of section 692 is amended to read as 
        follows:

``SEC. 692. INCOME AND EMPLOYMENT TAXES OF MEMBERS OF ARMED FORCES AND 
              VICTIMS OF TERRORIST ATTACKS ON DEATH.''.

            (2) The item relating to section 692 in the table of 
        sections for part II of subchapter J of chapter 1 is amended to 
        read as follows:

                              ``Sec. 692. Income and employment taxes 
                                        of members of Armed Forces and 
                                        victims of terrorist attacks on 
                                        death.''.
    (e) Effective Date; Waiver of Limitations.--
            (1) Effective date.--The amendments made by this section 
        shall apply to taxable years ending before, on, or after 
        September 11, 2001.
            (2) Waiver of limitations.--If refund or credit of any 
        overpayment of tax resulting from the amendments made by this 
        section is prevented at any time before the close of the 1-year 
        period beginning on the date of the enactment of this Act by 
        the operation of any law or rule of law (including res 
        judicata), such refund or credit may nevertheless be made or 
        allowed if claim therefor is filed before the close of such 
        period.