To amend the Internal Revenue Code of 1986 to provide a temporary exclusion for members of reserve components of the Armed Forces and Department of Defense civilian employees serving in a combat zone and to extend the exclusion for serving in a combat zone to Department of Defense civilian employees.

Summary: Amends the Internal Revenue Code to provide a temporary exclusion from gross income for members of reserve components of the Armed Forces and Department of Defense civilian employees serving in a combat zone and extends the exclusion for serving in a combat zone to Department of Defense civilian employees.

SECTION 1. TEMPORARY EXCLUSION FOR RESERVISTS CALLED TO ACTIVE DUTY AND 
              FOR DEPARTMENT OF DEFENSE CIVILIAN EMPLOYEES SERVING IN A 
              COMBAT ZONE.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 is amended by inserting after section 139 
the following new section:

``SEC. 139A. TEMPORARY EXCLUSION FOR RESERVISTS CALLED TO ACTIVE DUTY 
              AND FOR DEPARTMENT OF DEFENSE CIVILIAN EMPLOYEES SERVING 
              IN A COMBAT ZONE.

    ``(a) In General.--In the case of an eligible individual, if the 
amount excluded from gross income of the taxpayer by section 112 for an 
applicable taxable year does not exceed $40,000, gross income of the 
taxpayer shall be reduced (but not below zero) by the amount described 
in subsection (b).
    ``(b) Amount.--
            ``(1) In general.--If the exclusion referred to in 
        subsection (a) does not exceed $30,000, the amount described in 
        this subsection is the lesser of--
                    ``(A) $30,000, and
                    ``(B) gross income (without regard to this 
                section).
            ``(2) Phaseout.--If the exclusion referred to in subsection 
        (a) is over $30,000 but not over $40,000, the amount described 
        in paragraph (1) shall be reduced (but not below zero)--
                    ``(A) by an amount which bears the same ratio to 
                gross income (without regard to this section), as
                    ``(B) the excess of the amount excluded from gross 
                income by section 112 over $30,000 bears to $10,000.
            ``(3) Part-year service in combat zone.--If the period of 
        active duty with respect to a member of a reserve component or 
        service in a combat zone with respect to a civilian employee of 
        the Department of Defense is less than an entire applicable 
        taxable year, the amount described in this subsection shall be 
        the same portion of the amount determined under paragraphs (1) 
        and (2) such period bears to the entire taxable year.
    ``(c) Eligible Individual Serving in a Combat Zone.--For purposes 
of this section--
            ``(1) Eligible individual.--The term `eligible individual' 
        means--
                    ``(A) any individual who is a member of a reserve 
                component (as defined in section 101 of title 37, 
                United States Code) and who is ordered or called to 
                active duty for a period of more than 30 days or for an 
                indefinite period, and
                    ``(B) a civilian employee of the Department of 
                Defense while such employee is serving in a combat 
                zone.
            ``(2) Employee.--The term `employee' has the meaning given 
        to such term by section 5561 of title 5, United States Code, 
        except that an individual shall not fail to be treated as an 
        employee for purposes of this section solely because such 
        individual is a nonappropriated fund instrumentality employee 
        (as defined in section 1587(a) of title 10, United States 
        Code).
            ``(3) Combat zone.--The term `combat zone' has the meaning 
        given to such term by section 112.
    ``(d) Applicable Taxable Year.--The term `applicable taxable year' 
means any taxable year beginning in 2003.''
    (b) Clerical Amendment.--The table of sections for part III of 
subchapter B of chapter 1 of such Code is amended by inserting after 
the item relating to section 139 the following new item:

                              ``Sec. 139A. Temporary exclusion for 
                                        reservists called to active 
                                        duty and for department of 
                                        defense civilian employees 
                                        serving in a combat zone.''
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 2. TAX TREATMENT OF CIVILIAN EMPLOYEES OF DEPARTMENT OF DEFENSE IN 
              COMBAT ZONES.

    (a) Exclusion of Combat Zone Compensation.--Section 112 of the 
Internal Revenue Code of 1986 (relating to prisoners of war, etc.) is 
amended by adding at the end the following new subsection:
    ``(e) Civilian Employees of Department of Defense.--
            ``(1) Service in combat zone.--Gross income does not 
        include so much of the compensation as does not exceed the 
        maximum enlisted amount received for active service as a 
        civilian employee of the Department of Defense serving in 
        support of the Armed Forces of the United States for any month 
        during any part of which such employee--
                    ``(A) served in a combat zone, or
                    ``(B) was hospitalized as a result of wounds, 
                disease, or injury incurred while serving in a combat 
                zone.
        Subparagraph (B) shall not apply for any month beginning more 
        than 2 years after the date of the termination of combatant 
        activities in such zone.
            ``(2) Definitions.--For purposes of this subsection, the 
        terms `active service' and `employee' have the respective 
        meanings given to such terms by section 5561 of title 5, United 
        States Code, except that an individual shall not fail to be 
        treated as an employee for purposes of this subsection solely 
        because such individual is a nonappropriated fund 
        instrumentality employee (as defined in section 1587(a) of 
        title 10, United States Code).''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.