TECHNICAL EXPLANATION OF H.R. 1308, THE

“ALL-AMERICAN TAX RELIEF ACT OF 2003,”

AS SCHEDULED FOR CONSIDERATION

BY THE HOUSE OF REPRESENTATIVES

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

June 12, 2003

JCX-60-03
i

CONTENTS

Page

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

I. EXPLANATION OF THE BILL ................................................................................................ 2

A. Expansion of the Child Tax Credit

(sec. 101 of the bill and sec. 24 of the Code)...................................................................... 2

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

Services or the Foreign Service (sec. 201 of the bill and sec. 121 of the Code)................. 4

C. Exclusion from Gross Income of Certain Death Gratuity Payments (sec. 202 of the

bill and sec. 134 of the Code) ............................................................................................. 5

D. Exclusion for Amounts Received Under Department of Defense Homeowners

Assistance Program (sec. 203 of the bill and sec. 132 of the Code)................................... 6

E. Expansion of Combat Zone Filing Rules to Contingency Operations (sec. 204 of the

bill and sec. 7508 of the Code) ........................................................................................... 7

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

Veterans’ Organizations (sec. 205 of the bill and sec. 501(c)(19) of the Code)............... 10

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

to Members of the Uniformed Services of the United States (sec. 206 of the bill and

sec. 134 of the Code) ........................................................................................................ 11

H. Treatment of Service Academy Appointments as Scholarships for Purposes of

Qualified Tuition Programs and Coverdell Education Savings Accounts (sec. 207

of the bill and secs. 529 and 530 of the Code).................................................................. 12

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

Reserve Members (sec. 208 of the bill and sec. 162 of the Code).................................... 14

J. Suspension of Tax-Exempt Status of Terrorist Organizations (sec. 301 of the bill and

sec. 501 of the Code) ........................................................................................................ 15

K. Extension of Certain Tax Relief Provisions to Astronauts (sec. 401 of the bill and

secs. 101, 692, and 2201 of the Code).............................................................................. 17
1

INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a 

technical explanation of H.R. 1308, the “All-American Tax Relief Act of 2003,” as scheduled for 

consideration by the House of Representatives.

H.R. 1308 originally passed the House of Representatives, by a voice vote, under the 

suspension calendar on March 19, 2003. The bill, as amended, passed the Senate on June 5, 

2003. The bill, as further amended, is scheduled for consideration by the House on June 12, 

2003.

 

1

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

Explanation of H.R. 1308, the “All-American Tax Relief Act of 2003,”as Scheduled for 

Consideration by the House of Representatives (JCX-60-03), June 12, 2003.
2

I. EXPLANATION OF THE BILL

A. Expansion of the Child Tax Credit

(sec. 101 of the bill and sec. 24 of the Code)

 Present Law

In general

For 2003, an individual may claim a $1,000 tax credit for each qualifying child under the 

age of 17. In general, a qualifying child is an individual for whom the taxpayer can claim a 

dependency exemption and who is the taxpayer’s son or daughter (or descendent of either), 

stepson or stepdaughter (or descendent of either), or eligible foster child.

The child tax credit is scheduled to revert to a lower amount in 2005 and then increase to 

$1,000 over the next several years. These scheduled increases were enacted in the Economic 

Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”).

Table 1, below, shows the scheduled amounts of the child tax credit.

Table 1.–Scheduled Increase of the Child Tax Credit

Taxable Year Credit Amount Per Child

2003-2004 $1,000

2005-2008 $700

2009 $800

20101$1,000

1 The credit reverts to $500 in taxable years beginning after 

December 31, 2010, under the sunset provision of EGTRRA.

The child tax credit is phased-out for individuals with income over certain thresholds. 

Specifically, the otherwise allowable child tax credit is reduced by $50 for each $1,000 (or 

fraction thereof) of modified adjusted gross income over $75,000 for single individuals or heads 

of households, $110,000 for married individuals filing joint returns, and $55,000 for married 

individuals filing separate returns.2 The length of the phase-out range depends on the number of 

qualifying children. In 2003, for example, the phase-out range for a single individual with one 

qualifying child is between $75,000 and $95,000 of modified adjusted gross income. The phaseout range for a single individual with two qualifying children is between $75,000 and $115,000.

 

2

 Modified adjusted gross income is the taxpayer’s total gross income plus certain 

amounts excluded from gross income (i.e., excluded income of U.S. citizens or residents living 

abroad (sec. 911); residents of Guam, American Samoa, and the Northern Mariana Islands (sec. 

931); and residents of Puerto Rico (sec. 933)).
3

The amount of the tax credit and the phase-out ranges are not adjusted annually for 

inflation.

Refundability

For 2003, the child credit is refundable to the extent of 10 percent of the taxpayer’s 

earned income in excess of $10,500.3 The percentage is increased to 15 percent for taxable years 

2005 and thereafter. Families with three or more children are allowed a refundable credit for the 

amount by which the taxpayer’s social security taxes exceed the taxpayer’s earned income credit, 

if that amount is greater than the refundable credit based on the taxpayer’s earned income in 

excess of $10,500 (for 2003). The refundable portion of the child credit does not constitute 

income and is not treated as resources for purposes of determining eligibility or the amount or 

nature of benefits or assistance under any Federal program or any State or local program 

financed with Federal funds. For taxable years beginning after December 31, 2010, the sunset 

provision of EGTRRA applies to the rules allowing refundable child credits.

Alternative minimum tax liability

The child credit is allowed against the individual’s regular income tax and alternative 

minimum tax. For taxable years beginning after December 31, 2010, the sunset provision of 

EGTRRA applies to the rules allowing the child credit against the alternative minimum tax.

Explanation of Provision

The bill accelerates to 2003 the increase in refundability of the child credit to 15 percent 

of the taxpayer’s earned income in excess of $10,500. The bill also increases the credit to $1,000 

for taxable years 2005-2009. Therefore, the maximum child credit is $1,000 per child for taxable 

years 2003-2010.4 Finally, the bill provides that the beginning point of the phase-out range for 

the child credit is $150,000 for married individuals filing joint returns ($75,000 for unmarried 

individuals and married individuals filing separately) for taxable years beginning after December 

31, 2002, and before January 1, 2011. All modifications to the child credit under the bill are 

subject to the sunset provision of EGTRRA. 

Effective Date

The provision is effective for taxable years beginning after December 31, 2002. 

 

3

 The $10,500 amount is indexed for inflation.

4

 The credit reverts to $500 in taxable years beginning after December 31, 2010, under 

the sunset provision of EGTRRA.
4

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

of the Uniformed Services or the Foreign Service

(sec. 201 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.

Explanation of Provision

Under the bill, an individual may elect to suspend for a maximum of five years the fiveyear test period for ownership and use during certain absences due to service in the uniformed 

services or the 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 the Foreign Service of the United States. For 

these purposes, qualified official extended duty is any period of extended duty while serving at a 

place of duty at least 150 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 180 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.
5

C. Exclusion from Gross Income of Certain Death Gratuity Payments

(sec. 202 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. The amount of the military death gratuity benefit has been 

increased since September 9, 1986 to $6,000 pursuant to Chapter 75 of Title 10 of the United 

States Code, however the amount of the exclusion from gross income was not increased to take 

into account this change. 

Explanation of Provision

The bill extends the exclusion from gross income for military benefits to any adjustment 

to the amount of the death gratuity payable under Chapter 75 of Title 10 of the United States 

Code that is pursuant to a provision of law enacted before December 31, 1991, 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.
6

D. Exclusion for Amounts Received Under Department

of Defense Homeowners Assistance Program

(sec. 203 of the bill and sec. 132 of the Code)

Present Law

Homeowners Assistance Program 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 a military base realignment or closure.5 

In general, under HAP, eligible individuals receive either: (1) 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) as the purchase price for their 

property, an amount not to exceed 90 percent of the prior fair market value as 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. These amounts are includible in gross income as 

compensation for services to the extent such payments exceed the fair market value of the 

property relinquished in exchange for such payments. Additionally, such payments are wages 

for Federal Insurance Contributions Act (“FICA”) tax purposes (including Medicare).

Explanation of Provision

The bill generally exempts from gross income amounts received under the HAP (as in 

effect on the date of enactment of this bill). Amounts received under the program also are not 

considered wages for FICA tax purposes (including Medicare). The excludable amount is 

limited to the reduction in the fair market value of property.

Effective Date

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

 

5

 The payments are authorized under the provisions of Title 42 U.S.C. section 3374.
7

E. Expansion of Combat Zone Filing Rules to Contingency Operations

(sec. 204 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 zone6 or (2) time in missing in action 

status, plus the next 180 days.

 

6

 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 
8

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.

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 defined7 as a military operation that is 

 

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

 The definition is by cross-reference to 10 U.S.C. 101.
9

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 

of) active duty of members of the uniformed services during a war or a national emergency 

declared by the President or Congress.

Effective Date

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

date of enactment.
10

F. Modification of Membership Requirement for Exemption

from Tax for Certain Veterans’ Organizations

(sec. 205 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.

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.
11

G. Clarification of Treatment of Certain Dependent Care Assistance Programs

Provided to Members of the Uniformed Services of the United States

(sec. 206 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.

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.
12

H. Treatment of Service Academy Appointments as Scholarships

for Purposes of Qualified Tuition Programs and

Coverdell Education Savings Accounts

(sec. 207 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 a qualified tuition program generally are subject 

to tax when withdrawn. However, distributions from an ESA or qualified tuition program are 

excludable from the 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 a 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).
13

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.

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 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 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 such Academies.

Effective Date

The provision applies to taxable years beginning after December 31, 2002. 
14

I. Above-the-Line Deduction for Overnight Travel Expenses

of National Guard and Reserve Members

(sec. 208 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.

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 $1,500 per taxable year and is only available for any period during 

which the individual is more than 100 miles from home in connection with such services.

Effective Date

The provision is effective with respect to amounts paid or incurred in taxable years 

beginning after December 31, 2002.
15

J. Suspension of Tax-Exempt Status of Terrorist Organizations

(sec. 301 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 current 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. 

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 (or from the date 

of enactment of the bill, whichever is later) 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 provision 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 for any 

contribution to a terrorist organization is allowed under the Code, including under sections 170, 

545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522.
16

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 is effective for designations made before, on, or after the date of 

enactment. 
17

K. Extension of Certain Tax Relief Provisions to Astronauts

(sec. 401 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 Act”) 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 Act 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 Act, 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.8 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.

Present law provides tax relief of at least $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 

 

8

 Present law does not provide relief from self-employment tax liability.
18

exemption does not apply to income received as a result of that action.9 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.

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 Act generally provides an exclusion from gross income for amounts 

received if such amounts are paid by an employer (whether in a single sum or otherwise10) 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 occurred 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. The exclusion does apply, however, to death benefits provided under a 

qualified plan that satisfy the incidental benefit rule. 

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.

 

9

 Such amounts may, however, be excludable from gross income under the death benefit 

exclusion provided in section 102 of the Victims Act.

10 Thus, for example, payments made over a period of years could qualify for the 

exclusion.
19

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 EGTRRA.

The Victims Act 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 Act also changed 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 Act, 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 Act, section 2201 no longer reduces Federal estate tax by the amount 

of the additional estate tax. Instead, the Victims Act 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 Act 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 
20

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.

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 on a space mission (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 on a 

space mission after December 31, 2002.