DESCRIPTION OF THE 

CHAIRMAN’S MARK OF H.R. 878, THE 

“ARMED FORCES TAX FAIRNESS ACT OF 2003”

Scheduled for Markup

By the

COMMITTEE ON WAYS AND MEANS

on February 27, 2003

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

February 26, 2003

JCX-11-03
i

CONTENTS

Page

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

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

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

Services or the Foreign Service .................................................................................................. 2

B. Exclusion from Gross Income of Certain Death Gratuity Payments .................................. 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. Modification of Membership Requirement for Exemption from Tax for Certain Veterans’ 

Organizations .............................................................................................................................. 8

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

Members of the Uniformed Services of the United States.......................................................... 9

G. Treatment of Service Academy Appointments as Scholarships for Purposes of Qualified 

Tuition Programs and Coverdell Education Savings Accounts ................................................ 10

H. Suspension of Tax-Exempt Status of Terrorist Organizations.......................................... 12

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

Reserve Members...................................................................................................................... 14

J. Protection of Social Security............................................................................................. 15
1

INTRODUCTION

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

description of the Chairman’s Mark of H.R. 878, the “Armed Forces Tax Fairness Act of 2003.” 

The House Committee on Ways and Means has scheduled a markup of this proposal for 

February 27, 2003.

 

1

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

the Chairman’s Mark of H.R. 878, the “Armed Forces Tax Fairness Act of 2003” (JCX-11-03), 

February 26, 2003.
2

I. IMPROVING TAX EQUITY FOR MILITARY PERSONNEL

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

of the Uniformed Services or the Foreign Service

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.

Description of Proposal

Under the proposal, an individual may elect to suspend for a maximum of five 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 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.
3

B. 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 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.
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. These amounts are includable 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 tax purposes (including Medicare).

Description of Proposal

The proposal generally exempts from gross income amounts received under the 

Homeowners Assistance Program (as in effect on the date of enactment of this proposal). 

Amounts received under the program also are not considered wages for Federal Insurance 

Contributions Act 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

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. The Secretary may grant reasonable extensions of time for 

filing such returns. Treasury regulations provide an additional automatic two-month extension 

(until June 15 for calendar-year individuals) for United States citizens and residents in military or 

naval service on duty on April 15 of the following year (the otherwise applicable due date of the 

return) outside the United States. No action is necessary to apply for this extension, but 

taxpayers must indicate on their returns (when filed) that they are claiming this extension. 

Unlike most extensions of time to file, this extension applies to both filing returns and paying the 

tax due.

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

four-month extension (until August 15 for calendar-year individuals) for any individual timely 

filing that form and paying the amount of tax estimated to be due. 

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

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

be a payment of estimated taxes.

Suspension of time periods

In general, the period of time for performing various acts under the Code, such as filing 

tax returns, paying taxes, or filing a claim for credit or refund of tax, is suspended for any 

individual serving in the Armed Forces of the United States in an area designated as a "combat 

zone" during the period of combatant activities. An individual who becomes a prisoner of war is 

considered to continue in active service and is therefore also eligible for these suspension of time 

provisions. The suspension of time also applies to an individual serving in support of such 

Armed Forces in the combat zone, such as Red Cross personnel, accredited correspondents, and 

civilian personnel acting under the direction of the Armed Forces in support of those Forces. 

The designation of a combat zone must be made by the President in an Executive Order. The 

President must also designate the period of combatant activities in the combat zone (the starting 

date and the termination date of combat).

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

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

hospitalization resulting from injury received in the combat zone 2 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 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 

becomes a contingency operation. A contingency operation is defined3 as a military operation 

 

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.

3

 The definition is done by cross-reference to 10 U.S.C. 101.
7

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

date of enactment.
8

E. Modification of Membership Requirement for Exemption from Tax

for Certain Veterans’ Organizations

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.

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 provision is effective for taxable years beginning after the date of enactment.
9

F. 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 (as in effect on the date of enactment of this proposal) 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.
10

G. Treatment of Service Academy Appointments as Scholarships

for Purposes of Qualified Tuition Programs and

Coverdell Education Savings Accounts

Present Law

The Code provides tax-exempt status to qualified tuition programs, meaning programs 

established and maintained by a State or agency or instrumentality thereof or by one or more 

eligible educational institutions under which a person (1) may purchase tuition credits or 

certificates on behalf of a designated beneficiary which entitle the beneficiary to the waiver or 

payment of qualified higher education expenses of the beneficiary, or (2) in the case of a 

program established by and maintained by a State or agency or instrumentality thereof, may 

make contributions to an account which is established for the purpose of meeting the qualified 

higher education expenses of the designated beneficiary of the account. Contributions to 

qualified tuition programs may be made only in cash. Qualified tuition programs must have 

adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess of 

amounts necessary to provide for the qualified higher education expenses of the beneficiary. 

The Code provides tax-exempt status to Coverdell education savings accounts (“ESAs”), 

meaning certain trusts or custodial accounts which are created or organized in the United States 

exclusively for the purpose of paying the qualified education expenses of a designated

beneficiary. Contributions to ESAs may be made only in cash. Annual contributions to ESAs 

may not exceed $2,000 per beneficiary (except in cases involving certain tax-free rollovers) and 

may not be made after the designated beneficiary reaches age 18.

Earnings on contributions to an ESA or qualified tuition program generally are subject to 

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

excludable from 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 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).
11

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.

Description of Proposal

The proposal 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 proposal) at such Academies.

Effective Date

The provision applies to taxable years beginning after December 31, 2002. 
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H. Suspension of Tax-Exempt Status of Terrorist Organizations

Present Law

Under present law, the Internal Revenue Service generally issues a letter revoking 

recognition of an organization’s tax-exempt status only after (1) conducting an examination of 

the organization, (2) issuing a letter to the organization proposing revocation, and (3) allowing 

the organization to exhaust the administrative appeal rights that follow the issuance of the 

proposed revocation letter. In the case of an organization described in section 501(c)(3), the 

revocation letter immediately is subject to judicial review under the declaratory judgment 

procedures of section 7428. To sustain a revocation of tax-exempt status under section 7428, the 

IRS must demonstrate that the organization is no longer entitled to exemption. There is no 

procedure under present law for the IRS to suspend the tax-exempt status of an organization.

To combat terrorism, the Federal government has designated a number of organizations 

as terrorist organizations or supporters of terrorism under the Immigration and Nationality Act, 

the International Emergency Economic Powers Act, and the United Nations Participation Act of 

1945. 

Description of Proposal

The proposal 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 proposal 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 proposal, 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 proposal 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 proposal 

and is issued under the authority of any Federal law if the organization is designated or otherwise 

individually identified in or pursuant to such Executive order as supporting or engaging in 

terrorist activity (as defined in section 212(a)(3)(B) of the Immigration and Nationality Act) or 

supporting terrorism (as defined in section 140(d)(2) of the Foreign Relations Authorization Act, 

Fiscal Years 1988 and 1989). During the period of suspension, no deduction is allowed under 

the proposal for any contribution to a terrorist organization under section 170, 545(b)(2), 

556(b)(2), 642(c), 2055, 2106(a)(2), or 2522.
13

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 proposal 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 proposal is effective for designations made before, on, or after the date of enactment. 
14

I. 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 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.

Description of Proposal

The proposal 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 $500 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 after December 31, 

2002.
15

J. Protection of Social Security

Present Law

Present law provides for the transfer of social security taxes and certain self-employment 

taxes to the Social Security Trust Fund. In addition, the income taxes collected with respect to a 

portion of social security benefits included in gross income is transferred to the Social Security 

Trust Fund.

Description of Proposal

The proposal provides that the amounts transferred to any trust fund under title II of the 

Social Security Act are determined as if the proposals had not been enacted.

Effective Date

The proposal is effective on the date of enactment.