DESCRIPTION OF THE CHAIRMAN’S MODIFICATION

TO H.R. 5063, “ARMED FORCES

TAX FAIRNESS ACT OF 2002”

Scheduled for Markup

By the

SENATE COMMITTEE ON FINANCE

on September 5, 2002

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

September 3, 2002

JCX-85-02
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

I. IMPROVING TAX EQUITY FOR MILITARY PERSONNEL................................................ 2

A. Exclusion from Gross Income of Certain Death Gratuity Payments.................................. 2

B. Exclusion of Gain on Sale of a Principal Residence by a Member of the Uniformed 

Services or the Foreign Service .......................................................................................... 3

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

Program............................................................................................................................... 4

D. Expansion of Combat Zone Filing Rules to Contingency Operations................................ 5

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

Reserve Members................................................................................................................ 8

F. Modification of Membership Requirement for Exemption From Tax for Certain 

Veteran’s Organizations...................................................................................................... 9

G. Clarification of Treatment of Certain Dependent Care Assistance Programs Provided to 

Members of the Uniformed Services of the United States............................................... 10

II. OTHER PROVISIONS............................................................................................................ 11

A. Impose Mark-to-Market Tax on Individuals Who Expatriate .......................................... 11

B. Extension of IRS User Fees.............................................................................................. 20
1

INTRODUCTION

This document1, prepared by the staff of the Joint Committee on Taxation, provides a 

description of the Chairman’s Modification to H.R. 5063, the “Armed Forces Tax Fairness Act 

of 2002.” The Senate Committee on Finance has scheduled a markup of this bill for September 

5, 2002.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Description of 

the Chairman’s Modification to H.R. 5063, the “Armed Forces Tax Fairness Act of 2002” (JCX85-02), September 3, 2002.
2

I. IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

A. Exclusion from Gross Income of Certain Death Gratuity Payments

Present Law

Present law provides that qualified military benefits are not included in gross income. 

Generally, a qualified military benefit is any allowance or in-kind benefit (other than personal 

use of a vehicle) which: (1) is received by any member or former member of the uniformed 

services of the United States or any dependent of such member by reason of such member’s 

status or service as a member of such uniformed services; and (2) was excludable from gross 

income on September 9, 1986, under any provision of law, regulation, or administrative practice 

which was in effect on such date. Generally, other than certain cost of living adjustments no 

modification or adjustment of any qualified military benefit after September 9, 1986, is taken 

into account for purposes of this exclusion from gross income. Qualified military benefits 

include certain death gratuities.

Description of Proposal

The proposal extends the exclusion from gross income to any adjustment to the amount 

of the death gratuity payable under Chapter 75 of Title 10 of the United States Code.

Effective Date

The proposal is effective with respect to deaths occurring after September 10, 2001.
3

B. Exclusion of Gain on Sale of a Principal Residence by a Member

of the Uniformed Services or the Foreign Service

Present Law

Under present law, an individual taxpayer may exclude up to $250,000 ($500,000 if 

married filing a joint return) of gain realized on the sale or exchange of a principal residence. To 

be eligible for the exclusion, the taxpayer must have owned and used the residence as a principal 

residence for at least two of the five years prior to the sale or exchange. A taxpayer who fails to 

meet these requirements by reason of a change of place of employment, health, or, to the extent 

provided under regulations, unforeseen circumstances is able to exclude an amount equal to the 

fraction of the $250,000 ($500,000 if married filing a joint return) that is equal to the fraction of 

the 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.

Description of Proposal

Under the proposal, 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 five 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 proposal is effective for elections made with respect to sales after the date of 

enactment.
4

C. Exclusion for Amounts Received Under

Department of Defense Homeowners Assistance Program

Present Law

HAP payment

The Department of Defense Homeowners Assistance Program (“HAP”) provides 

payments to certain employees and members of the Armed Forces to offset the adverse effects on 

housing values that result from military base realignment or closure. The payments are 

authorized under the provisions of Title 42 U.S.C. section 3374. 

HAP provides payments to eligible individuals who may, in general, either (1) receive a 

cash payment as compensation for losses that may be or have been sustained in a private sale, in 

an amount not to exceed the difference between (A) 95 percent of the fair market value of their 

property prior to public announcement of intention to close all or part of the military base or 

installation and (B) the fair market value of such property at the time of the sale, or (2) receive, 

as the purchase price for their property, an amount not to exceed 90 percent of the prior fair 

market value as such value is determined by the Secretary of Defense, or the amount of the 

outstanding mortgages. 

Tax treatment

Unless specifically excluded, gross income for Federal income tax purposes includes all 

income from whatever source derived. Amounts received under HAP are received in connection 

with the performance of services, and thus are includable in gross income as compensation for 

services. Additionally, such payments are “wages” for Federal Insurance Contributions Act tax 

purposes (including Medicare).

Description of Proposal

The proposal exempts from gross income amounts received under the Homeowners 

Assistance Program. Amounts received under the program are also not considered wages for 

Federal Insurance Contributions Act tax purposes (including Medicare).

Effective Date

The proposal is effective for payments made after the date of enactment.
5

D. Expansion of Combat Zone Filing Rules to Contingency Operations

Present Law

General time limits for filing tax returns

Individuals generally must file their Federal income tax returns by April 15 of the year 

following the close of a taxable year (sec. 6072). The Secretary may grant reasonable extensions 

of time for filing such returns (sec. 6081). Treasury regulations provide an additional automatic 

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 (Treas. Reg. sec. 1.6081-5(a)(6)). No 

action is necessary to apply for this extension, but taxpayers must indicate on their returns (when 

filed) that they are claiming this extension. Unlike most extensions of time to file, this extension 

applies to both filing returns and paying the tax due.

Treasury regulations also provide, upon application on the proper form, an automatic 

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 (Treas. Reg. sec. 1.6081-4). 

In general, individuals must make quarterly estimated tax payments by April 15, June 15, 

September 15, and January 15 of the following taxable year. Wage withholding is considered to 

be a payment of estimated taxes.

Suspension of time periods

In general, the period of time for performing various acts under the Internal Revenue 

Code, such as filing tax returns, paying taxes, or filing a claim for credit or refund of tax, is 

suspended for any individual serving in the Armed Forces of the United States in an area 

designated as a "combat zone" during the period of combatant activities (sec. 7508). An 

individual who becomes a prisoner of war is considered to continue in active service and is 

therefore also eligible for these suspension of time provisions. The suspension of time also 

applies to an individual serving in support of such Armed Forces in the combat zone, such as 

Red Cross personnel, accredited correspondents, and civilian personnel acting under the 

direction of the Armed Forces in support of those Forces. The designation of a combat zone 

must be made by the President in an Executive Order. The President must also designate the 

period of combatant activities in the combat zone (the starting date and the termination date of 

combat).

The suspension of time encompasses the period of service in the combat zone during the 

period of combatant activities in the zone, as well as (1) any time of continuous qualified 

hospitalization resulting from injury received in the combat zone2 or (2) time in missing in action 

status, plus the next 180 days.

 

2

 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 
6

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 in regulations prescribed under section 7508 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.

Description of Proposal

The proposal 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 

 

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.
7

becomes a contingency operation. A contingency operation is defined3 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.

Effective Date

The proposal applies to any period for performing an act that has not expired before the 

date of enactment.

 

3

 The definition is done by cross-reference to 10 U.S.C. 101.
8

E. Above-the-Line Deduction for Overnight Travel

Expenses of National Guard and Reserve Members

Present Law

National Guard and Reserve members may claim itemized deductions for their 

nonreimbursable expenses for travel, meals, and lodging when they must travel away from home 

(and stay overnight) to attend National Guard and Reserve meetings. These overnight travel 

expenses are combined with other miscellaneous itemized deductions on Schedule A of the 

individual’s income tax return and are deductible only to the extent that the aggregate of these 

deductions exceeds two percent of the taxpayer’s adjusted gross income. No deduction is 

generally permitted for commuting expenses to and from drill meetings.

Description of Proposal

The proposal provides an above-the-line deduction for the overnight travel, meals, and 

lodging expenses of National Guard and Reserve members who must travel away from home 

(and stay overnight) to attend National Guard and Reserve meetings. Accordingly, these 

individuals incurring these expenses may 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 Government per diem rate applicable to that locale.

Effective Date

The proposal is effective for amounts paid or incurred in taxable years beginning after 

December 31, 2001.
9

F. Modification of Membership Requirement for Exemption From Tax

for Certain Veteran’s Organizations

Present Law

Under present law, a veteran’s 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.4

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.5

Description of Proposal

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

 

4

 Treas. Reg. sec. 1.501(c)(19)-1(b)(2). The Treasury has not amended this regulation to 

reflect changes made by P.L. 97-248.

5

 Sec. 170(c)(3); sec. 2522(a)(4).
10

G. Clarification of Treatment of Certain Dependent Care Assistance Programs

Provided to Members of the Uniformed Services of the United States

Present Law

Present law provides that qualified military benefits are not included in gross income. 

Generally, a qualified military benefit is any allowance or in-kind benefit (other than personal 

use of a vehicle) which: (1) is received by any member or former member of the uniformed 

services of the United States or any dependent of such member by reason of such member’s 

status or service as a member of such uniformed services; and (2) was excludable from gross 

income on September 9, 1986, under any provision of law, regulation, or administrative practice 

which was in effect on such date. Generally, other than certain cost of living adjustments, no 

modification or adjustment of any qualified military benefit after September 9, 1986, is taken 

into account for purposes of this exclusion from gross income.

Description of Proposal

The proposal clarifies that dependent care assistance provided under a dependent care 

assistance program for a member of the uniformed services by reason of such member’s status or 

service as a member of the uniformed services is excludable from gross income as a qualified 

military benefit. The uniformed services include: (1) the armed forces (the Army, Navy, Air 

Force, Marine Corps, and Coast Guard); (2) the commissioned corps of the National Oceanic and 

Atmospheric Administration; and (3) the commissioned corps of the Public Health Service.

Effective Date

The proposal is effective for taxable years beginning after December 31, 2001. No 

inference is intended as to the tax treatment of such amounts for prior taxable years.
11

II. OTHER PROVISIONS

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

Present Law

In general

U.S. citizens and residents generally are subject to U.S. income taxation on their 

worldwide income. The U.S. tax may be reduced or offset by a credit allowed for foreign income 

taxes paid with respect to foreign-source income. Nonresidents who are not U.S. citizens are 

taxed at a flat rate of 30 percent (or a lower treaty rate) on certain types of passive income 

derived from U.S. sources, and at regular graduated rates on net profits derived from a U.S. 

business. 

Income tax rules with respect to expatriates

An individual who relinquishes his or her U.S. citizenship or terminates his or her U.S. 

residency with a principal purpose of avoiding U.S. taxes is subject to an alternative method of 

income taxation for the 10 taxable years ending after the expatriation or residency termination 

under section 877. The alternative method of taxation for expatriates modifies the rules 

generally applicable to the taxation of nonresident noncitizens in several ways. First, the 

individual is subject to tax on his or her U.S.-source income at the rates applicable to U.S. 

citizens rather than the rates applicable to other nonresident noncitizens. Unlike U.S. citizens, 

however, individuals subject to section 877 are not taxed on foreign-source income. Second, the 

scope of items treated as U.S.-source income for section 877 purposes is broader than those 

items generally considered to be U.S.-source income under the Code.6 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.7 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 

 

6

 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.

7

 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.
12

liability than would otherwise be determined if the individual were taxed as a nonresident 

noncitizen.

The expatriation tax provisions apply to long-term residents of the United States whose 

U.S. residency is terminated. For this purpose, a long-term resident is any individual who was a 

lawful permanent resident of the United States for at least 8 out of the 15 taxable years ending 

with the year in which such termination occurs. In applying the 8-year test, an individual is not 

considered to be a lawful permanent resident for any year in which the individual is treated as a 

resident of another country under a treaty tie-breaker rule (and the individual does not elect to 

waive the benefits of such treaty). 

Subject to the exceptions described below, an individual is treated as having expatriated 

or terminated residency with a principal purpose of avoiding U.S. taxes if either: (1) the 

individual’s average annual U.S. Federal income tax liability for the 5 taxable years ending 

before the date of the individual’s loss of U.S. citizenship or termination of U.S. residency is 

greater than $100,000 (the “tax liability test”), or (2) the individual’s net worth as of the date of 

such loss or termination is $500,000 or more (the “net worth test”). The dollar amount 

thresholds contained in the tax liability test and the net worth test are indexed for inflation in the 

case of a loss of citizenship or termination of residency occurring in any calendar year after 

1996. For calendar year 2002, the dollar thresholds for the tax liability test and the net worth test 

are $120,000 and $599,000, respectively. An individual who falls below these thresholds is not 

automatically treated as having a principal purpose of tax avoidance, but nevertheless is subject 

to the expatriation tax provisions if the individual’s loss of citizenship or termination of 

residency in fact did have as one of its principal purposes the avoidance of tax.

Certain exceptions from the treatment that an individual relinquished his or her U.S. 

citizenship or terminated his or her U.S. residency for tax avoidance purposes may also apply. 

For example, a U.S. citizen who loses his or her citizenship and who satisfies either the tax 

liability test or the net worth test (described above) can avoid being deemed to have a principal 

purpose of tax avoidance if the individual falls within certain categories (such as being a dual 

citizen) and the individual, within 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.8 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.

 

8

 The Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”) repealed 

the estate tax for estates of decedents dying after December 31, 2009. However, the Act 

included a “sunset” provision, pursuant to which the Act’s provisions (including estate tax 

repeal) do not apply to estates of decedents dying after December 31, 2010.
13

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 fiveyear 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, 
14

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.

Description of Proposal

In general

The proposal generally subjects certain U.S. citizens who relinquish their U.S. citizenship 

and certain long-term U.S. residents who terminate their U.S. residence to tax on the net 

unrealized gain in their property as if such property were sold for fair market value on the day 

before the expatriation or residency termination. Gain from the deemed sale is taken into 

account at that time without regard to other Code provisions; any loss from the deemed sale 

generally would be taken into account to the extent otherwise provided in the Code. Any net 

gain on the deemed sale is recognized to the extent it exceeds $600,000 ($1.2 million in the case 

of married individuals filing a joint return, both of whom relinquish citizenship or terminate 

residency). The $600,000 amount is increased by a cost of living adjustment factor for calendar 

years after 2002.
15

Individuals covered

Under the proposal, 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 proposal, 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, as well as any excise tax imposed with respect to 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.

Date of relinquishment of citizenship

Under the proposal, 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.
16

Deemed sale of property upon expatriation or residency termination

The deemed sale rule of the proposal 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 proposal. An exception also applies for interests in qualified retirement plans so long as such 

interests are subject to tax upon distribution and, subject to a limit of $500,000, interests in 

certain foreign pension plans as prescribed by regulations. Regulatory authority is granted to the 

Treasury to except other types of property from the proposal.

Deferral of payment of tax

Under the proposal, an individual is permitted to elect to defer payment of the mark-tomarket 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-tomarket 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 markto-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. 

Treasury may impose a lien in favor of the U.S. on any interest in U.S. situs real property owned 

by the individual or may require a bond in the amount of the deferred tax and interest in order to 

assure adequate security. 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.

Interests in trusts

Under the proposal, 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.

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 
17

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-tomarket 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.

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 to 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.
18

Coordination with present-law alternative tax regime

The proposal provides a coordination rule with the present-law alternative tax regime. 

Under the proposal, 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 the date of first passage by the Senate Finance Committee of this proposal.

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

Under the proposal, 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 an individual who was subject to 

the mark-to-market expatriation tax (i.e., an individual who relinquished U.S. citizenship or 

terminated U.S. residency and to whom the mark-to-market tax was applicable). 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 would 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 would not apply to property in cases in which no estate or gift tax 

return is required to be filed, where credits, deductions, or exclusions available under the estate 

and gift tax rules eliminate any tax liability, provided that such credits, deductions, or exclusions 

also would have eliminated any tax liability if the expatriated individual had not relinquished 

citizenship or terminated U.S. residency. 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 proposal 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 proposal.

Immigration rules

The proposal 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 denying former citizens reentry into the United States if the individual is determined by 

the Attorney General, after consultation with the Treasury Secretary, not to be in compliance 

with his or her tax obligations under the proposal’s expatriation tax provisions (regardless of the 

subjective motive for expatriating). For this purpose, the proposal generally permits, upon 

written request of the Attorney General, the returns of individuals or return information with 

respect to such individuals to be open to inspection by, or disclosure to, officers and employees 
19

of the Federal agency responsible for making a determination under section 212(a)(10)(E) of the 

Immigration and Nationality Act. Such inspection or disclosure would not be permitted for 

purposes of section 6103(i)(6) (relating to matters that would identify a confidential informant or 

seriously impair a tax investigation).

Effective Date

The proposal generally is effective for U.S. citizens who relinquish citizenship or longterm residents who terminate their residency on or after the date of first passage by the Senate 

Finance Committee of this proposal. The provisions of the proposal relating to gifts and 

inheritances are effective for gifts and inheritances received from former citizens and former 

long-term residents on or after the date of first passage by the Senate Finance Committee of this 

proposal, whose expatriation or residency termination occurs on or after such date. The 

provisions of the proposal relating to former citizens under U.S. immigration laws are effective 

on or after the date of enactment.
20

B. Extension of IRS User Fees

Present Law

The IRS provides written responses to questions of individuals, corporations, and 

organizations relating to their tax status or the effects of particular transactions for tax purposes. 

The IRS generally charges a fee for requests for a letter ruling, determination letter, opinion 

letter, or other similar ruling or determination. Public Law 104-1179 extended the statutory 

authorization for these user fees10 through September 30, 2003.

Description of Proposal

The proposal would extend the statutory authorization for these user fees through 

September 30, 2012. The proposal would also move the statutory authorization for these fees 

into the Internal Revenue Code.

Effective Date

The proposal, including moving the statutory authorization for these fees into the Code 

and repealing the off-Code statutory authorization for these fees, would be effective for requests 

made after the date of enactment.

 

9

 An Act to provide that members of the Armed Forces performing services for the 

peacekeeping efforts in Bosnia and Herzegovina, Croatia, and Macedonia shall be entitled to tax 

benefits in the same manner as if such services were performed in a combat zone, and for other 

purposes (March 20, 1996).

10 These user fees were originally enacted in section 10511 of the Revenue Act of 1987 

(Public Law 100-203, December 22, 1987).