19–010 

Calendar No. 11

108TH CONGRESS REPORT " SENATE ! 1st Session 108–3

ARMED FORCES TAX FAIRNESS ACT OF 2003

FEBRUARY 11, 2003.—Ordered to be printed 

Mr. GRASSLEY, from the Committee on Finance, 

submitted the following 

R E P O R T 

[To accompany S. 351] 

[Including cost estimate of the Congressional Budget Office]

The Committee on Finance, to amend the Internal Revenue Code 

of 1986 to improve tax equity for military personnel and for other 

purposes, having considered the same, reports favorably thereon an 

original bill, S. 351, and recommends that the bill do pass.

CONTENTS 

Page 

I. Legislative Background .................................................................................... 2

II. Explanation of the Bill ..................................................................................... 3

Title I. Improving Tax Equity for Military Personnel ................................... 3 

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

of the Uniformed Services or the Foreign Service (sec. 101 of 

the bill and sec. 121 of the Code) ...................................................... 3

B. Exclusion from Gross Income of Certain Death Gratuity Payments 

(sec. 102 of the bill and sec. 134 of the Code) .................................. 4 

C. Exclusion for Amounts Received Under Department of Defense 

Homeowners Assistance Program (sec. 103 of the bill and sec. 

132 of the Code) .................................................................................. 4

D. Expansion of Combat Zone Filing Rules to Contingency Operations (sec. 104 of the bill and sec. 7508 of the Code) .................... 6 

E. Modification of Membership Requirement for Exemption from Tax 

for Certain Veterans’ Organizations (sec. 105 of the bill and 

sec. 501(c)(19) of the Code) ................................................................ 8 

F. Clarification of Treatment of Certain Dependent Care Assistance 

Programs Provided to Members of the Uniformed Services of 

the United States (sec. 106 of the bill and sec. 134 of the Code) ... 9

G. Treatment of Service Academy Appointments as Scholarships for 

Purposes of Qualified Tuition Programs and Coverdell Education 

Savings Accounts (sec. 107 of the bill and secs. 529 and 530 

of the Code) ......................................................................................... 9

2

H. Suspension of Tax-Exempt Status of Terrorist Organizations (sec. 

108 of the bill and sec. 501 of the Code) .......................................... 11

I. Above-the-Line Deduction for Overnight Travel Expenses of National Guard and Reserve Members (sec. 109 of the bill and 

sec. 162 of the Code) .......................................................................... 13

J. Extension of Certain Tax Relief Provisions to Astronauts (sec. 

110 of the bill and secs. 101, 692 and 2201 of the Code) ................ 14

Title II. Revenue Provisions ............................................................................ 18 

A. Extension of IRS User Fees (sec. 201 of the bill and new sec. 

7527 of the Code) ................................................................................ 18 

B. Authorize IRS to Enter into Installment Agreements that Provide 

for Partial Payment (sec. 202 of the bill and sec. 6159 of the 

Code) ................................................................................................... 18

C. Impose Mark-to-Market Tax on Individuals Who Expatriate (sec. 

203 of the bill, new sec. 877A of the Code, and secs. 877, 2107, 

2501, and 6039G of the Code) ........................................................... 19 

III. Budget Effects of the Bill ................................................................................. 30 

A. Committee Estimates .......................................................................... 30

B. Budget Authority and Tax Expenditures .......................................... 32

C. Consultation with Congressional Budget Office ................................ 32

IV. Votes of the Committee .................................................................................... 34 

V. Regulatory Impact and Other Matters ........................................................... 34

A. Regulatory Impact ............................................................................... 34

B. Unfunded Mandates Statement .......................................................... 35

C. Tax Complexity Analysis ..................................................................... 35

VI. Changes in Existing Law Made by the Bill as Reported .............................. 35

I. LEGISLATIVE BACKGROUND 

The Senate Committee on Finance marked up the Armed Forces 

Tax Fairness Act of 2003 on February 5, 2003, and ordered the bill, 

as amended, favorably reported by unanimous voice vote. 

The Committee believes that consideration should be paid to the 

men and women who are leading America’s response and serving 

our country. These men and women include: (1) members of the 

Armed Forces deployed overseas; (2) members of the National 

Guard protecting our borders and airports; and (3) Foreign Service 

officers serving in dangerous diplomatic posts. 

The Committee believes, in addition to our thoughts and thanks, 

that these individuals deserve to be treated appropriately under 

the tax laws. The modest sensible provisions included in this legislation are the result of a bipartisan effort to correct the tax treatment of those individuals serving their country in the uniformed 

services, reserves and Foreign Service. 

The bill also contains three provisions that raise revenue to offset 

the cost of the other provisions. In the case of the provision to modify the tax treatment of certain individual expatriates, these provisions seem especially fitting to offset the improved tax treatment 

of the men and women serving their country. 

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II. EXPLANATION OF THE BILL 

TITLE 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

(Sec. 101 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. 

REASONS FOR CHANGE

The Committee believes that members of the uniformed services 

and the Foreign Service of the United States who would otherwise 

qualify for the exclusion of the gain on the sale of a principal residence should not be deprived the exclusion because of service to 

their country. 

EXPLANATION OF PROVISION

Under the bill, 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 

ten 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. 

4

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. 

B. EXCLUSION FROM GROSS INCOME OF CERTAIN DEATH GRATUITY

PAYMENTS

(Sec. 102 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. 

REASONS FOR CHANGE

The Committee believes that the amount of the exclusion for 

these death gratuities should be conformed to the present-law levels of such death gratuities. Further, the Committee believes that 

the amount of the exclusion should be automatically adjusted for 

future changes in these death gratuities.

EXPLANATION OF PROVISION

The bill 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 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. 

C. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF

DEFENSE HOMEOWNERS ASSISTANCE PROGRAM

(Sec. 103 of the bill and sec. 132 of the Code) 

PRESENT LAW

HAP payment 

The Department of Defense Homeowners Assistance Program 

(‘‘HAP’’) provides payments to certain employees and members of 

5

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. Thus, any HAP payments for losses sustained in the private sale of, or foreclosure against, a personal residence are includable in gross income as compensation for services. 

Similarly, in the case of government purchase of the residence 

under the HAP, the excess of the selling price over the fair market 

value of the residence is includable in gross income as compensation for services. Additionally, all such payments includable in income are ‘‘wages’’ for Federal Insurance Contributions Act tax purposes (including Medicare). 

REASONS FOR CHANGE

The Committee believes that the exclusion from gross income 

and FICA taxes is necessary to provide full compensation for the 

losses in home values incurred as a result of military base realignment or closure. The Committee further believes that this will help 

to facilitate necessary military base realignment or closure. 

EXPLANATION OF PROVISION

The bill excludes from gross income amounts received under the 

Homeowners Assistance Program (as in effect on the date of enactment of this bill) that would otherwise be includable in gross income. The exclusion under this provision is limited to the maximum HAP payment described in clause (1) above. Amounts received under the program that are excludable from gross income 

also are not considered wages for Federal Insurance Contributions 

Act tax purposes (including Medicare). 

EFFECTIVE DATE

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

6

1Two 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 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. 

D. EXPANSION OF COMBAT ZONE FILING RULES TO CONTINGENCY

OPERATIONS

(Sec. 104 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 twomonth 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 1 or (2) time in 

missing in action status, plus the next 180 days. 

7

2The definition is done by cross-reference to 10 U.S.C. 101. 

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. 

REASONS FOR CHANGE

The Committee believes that military personnel deployed outside 

the United States away from their permanent duty station while 

participating in a contingency operation should be entitled to utilize the same suspension of time provisions as those deployed in a 

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 defined 2 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 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

(Sec. 105 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. 

REASONS FOR CHANGE

As the membership of veterans’ organizations changes due to 

aging and the deaths of members, veterans’ organizations that currently qualify for tax exemption under section 501(c)(19) may cease 

to qualify for exempt status under that section, even though the 

membership, apart from changes due to deaths, remains the same. 

The Committee believes that a limited expansion of the membership of veterans’ organizations will enable certain of such organizations to retain exempt status, which might otherwise be in jeopardy, and will not unduly expand the membership base beyond persons with a close connection to members of the Armed Forces or 

cadets. 

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. 

9

F. CLARIFICATION OF TREATMENT OF CERTAIN DEPENDENT CARE AS- SISTANCE PROGRAMS PROVIDED TO MEMBERS OF THE UNIFORMED

SERVICES OF THE UNITED STATES

(Sec. 106 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. 

REASONS FOR CHANGE

The Committee believes that it is important to remove any uncertainty regarding the tax treatment of dependent care assistance 

provided to members of the uniformed services. 

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. 

G. TREATMENT OF SERVICE ACADEMY APPOINTMENTS AS SCHOLARSHIPS FOR PURPOSES OF QUALIFIED TUITION PROGRAMS AND

COVERDELL EDUCATION SAVINGS ACCOUNTS

(Sec. 107 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 eduVerDate Dec 13 2002 09:29 Feb 14, 2003 Jkt 019010 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\SR003.XXX SR003
10

cational 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 

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). 

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. 

11

REASONS FOR CHANGE

The Committee believes that it is appropriate to waive the additional 10 percent tax on withdrawals from ESAs and qualified tuition programs that are not used for qualified education purposes 

because the designated beneficiary received an appointment to a 

United States Service Academy. 

The Committee believes that imposing an additional tax on earnings from educational savings accounts and qualified tuition plans 

is inappropriate in the case of individuals who choose to serve their 

country as a member of the military and who, as a part of that 

service, obtain their education at one of the Service Academies. 

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 designated 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 with respect to any academic period 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 the Academy attended by the designated beneficiary for the same academic 

period. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2002. 

H. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST

ORGANIZATIONS

(Sec. 108 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 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. 

12

REASONS FOR CHANGE

An organization that has been designated or otherwise identified 

by the Federal government as a terrorist organization pursuant to 

certain authority should not be exempt from federal income tax and 

contributions to such organizations should not be deductible for 

Federal income tax purposes. The Committee believes that the Federal government’s designation or identification of an organization 

as a terrorist organization is ground for suspension of tax-exempt 

status, and that in such cases a separate investigation of the organization by the Internal Revenue Service is not necessary. Further, 

because a terrorist organization may challenge the Federal government’s designation or identification of the organization under the 

law authorizing the designation or identification, recourse to the 

declaratory judgment procedures of the Internal Revenue Code to 

challenge the suspension of tax-exemption is not appropriate. 

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 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 bill 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 

bill for any contribution to a terrorist organization under any provision of the Internal Revenue Code of 1986, including sections 170, 

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

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 

13

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 to suspend the tax-exempt status of certain terrorist organizations applies to organizations that are designated or 

identified as a terrorist organization prior to, on, or after the date 

of enactment. If an organization is designated or identified as a terrorist organization prior to the date of enactment of this bill, the 

suspension of the organization’s tax-exemption begins from that 

date of enactment and is not retroactive to the date the organization is designated or identified as a terrorist organization. 

I. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL EXPENSES

OF NATIONAL GUARD AND RESERVE MEMBERS

(Sec. 109 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. 

REASONS FOR CHANGE

The Committee believes that all National Guard and Reserve 

members incurring unreimbursed overnight expenses to attend National Guard and Reserve meetings should be able to deduct these 

14

3Present law does not provide relief from self-employment tax liability. 

expenses from their income, not just those who itemize their deductions. Accordingly, the Committee provides an above-the-line deduction for these expenses. 

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 the general Federal Government per diem 

rate applicable to that locale. 

EFFECTIVE DATE

The provision is effective with respect to amounts paid or incurred after December 31, 2002. 

J. EXTENSION OF CERTAIN TAX RELIEF PROVISIONS TO ASTRONAUTS

(Sec. 110 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 

Bill’’) 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 Bill 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 Bill, 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.3 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 a minimum tax relief benefit of $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 inVerDate Dec 13 2002 09:29 Feb 14, 2003 Jkt 019010 PO 00000 Frm 00014 Fmt 6659 Sfmt 6602 E:\HR\OC\SR003.XXX SR003
15

4Such amounts may, however, be excludable from gross income under the death benefit exclusion provided in section 102 of the Victims Bill. 5Thus, for example, payments made over a period of years could qualify for the exclusion. 

6The provision does not apply to amounts received under a qualified plan because such payments are not made by the employer. 

come 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 exemption 

does not apply to income received as a result of that action.4 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 Bill generally provides an exclusion from gross income for amounts received if such amounts are paid by an employer (whether in a single sum or otherwise 5) 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 occurs 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. For example, the provision does 

not apply to payments by an employer under a nonqualified deferred compensation plan 6 to the extent that the amounts would 

have been payable if the death had occurred for another reason. 

16

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.

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 the Economic Growth and Tax Relief Reconciliation 

Act of 2001. 

The Victims Bill 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 bill also changes 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 bill, the Federal estate 

tax is determined in the same manner for all estates that are eligiVerDate Dec 13 2002 09:29 Feb 14, 2003 Jkt 019010 PO 00000 Frm 00016 Fmt 6659 Sfmt 6602 E:\HR\OC\SR003.XXX SR003
17

ble 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 bill, section 2201 no longer reduces Federal 

estate tax by the amount of the additional estate tax. Instead, the 

Victims bill 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 bill 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 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. 

REASONS FOR CHANGE

The Committee wishes to honor the bravery of individuals who 

lost their lives in the space shuttle Columbia disaster. Further, the 

Committee believes it appropriate to provide these tax relief measures to those individuals and their families. 

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 in the line of duty (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 in the line of duty after December 31, 2002.

18

7 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). 8These user fees were originally enacted in section 10511 of the Revenue Act of 1987 (Pub. 

Law No. 100–203, December 22, 1987). 

TITLE II. REVENUE PROVISIONS 

A. EXTENSION OF IRS USER FEES

(Sec. 201 of the bill and new sec. 7527 of the Code) 

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 104–117 7 extended the statutory authorization for these 

user fees 8 through September 30, 2003. 

REASONS FOR CHANGE

The Committee believes that it is appropriate to provide a further extension of these user fees. 

EXPLANATION OF PROVISION

The bill extends the statutory authorization for these user fees 

through September 30, 2013. The bill also moves the statutory authorization for these fees into the Code. 

EFFECTIVE DATE

The provision, including moving the statutory authorization for 

these fees into the Code and repealing the off-Code statutory authorization for these fees, is effective for requests made after the 

date of enactment. 

B. AUTHORIZE IRS TO ENTER INTO INSTALLMENT AGREEMENTS

THAT PROVIDE FOR PARTIAL PAYMENT

(Sec. 202 of the bill and sec. 6159 of the Code) 

PRESENT LAW

The Code authorizes the IRS to enter into written agreements 

with any taxpayer under which the taxpayer is allowed to pay 

taxes owed, as well as interest and penalties, in installment payments if the IRS determines that doing so will facilitate collection 

of the amounts owed. An installment agreement does not reduce 

the amount of taxes, interest, or penalties owed. Generally, during 

the period installment payments are being made, other IRS enforcement actions (such as levies or seizures) with respect to the 

taxes included in that agreement are held in abeyance. 

Prior to 1998, the IRS administratively entered into installment 

agreements that provided for partial payment (rather than full 

payment) of the total amount owed over the period of the agreement. In that year, the IRS Chief Counsel issued a memorandum 

19

9Sec. 7122. 

concluding that partial payment installment agreements were not 

permitted. 

REASONS FOR CHANGE

The Committee believes that clarifying that the IRS is authorized to enter into installment agreements with taxpayers which do 

not provide for full payment of the taxpayer’s liability over the life 

of the agreement will improve effective tax administration. 

The Committee recognizes that some taxpayers are unable or unwilling to enter into a realistic offer in compromise.9 The Committee believes that these taxpayers should be encouraged to make 

partial payments toward resolving their tax liability, and that providing for partial payment installment agreements will help facilitate this. The Committee also believes, however, that the offer in 

compromise program should remain the sole avenue via which taxpayers fully resolve their tax liabilities and attain a fresh start. 

EXPLANATION OF PROVISION

The bill clarifies that the IRS is authorized to enter into installment agreements with taxpayers that do not provide for full payment of the taxpayer’s liability over the life of the agreement. The 

bill requires the IRS to review partial payment installment agreements at least every two years. The primary purpose of this review 

is to determine whether the financial condition of the taxpayer has 

significantly changed so as to warrant an increase in the value of 

the payments being made. 

EFFECTIVE DATE

The provision is effective for installment agreements entered into 

on or after the date of enactment.

C. IMPOSE MARK-TO-MARKET TAX ON INDIVIDUALS WHO EXPATRIATE

(Sec. 203 of the bill, new sec. 877A of the Code, and secs. 877, 2107, 

2501, and 6039G of the Code) 

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 

20

10For 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. 11For 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. 

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.10 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.11 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 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 2003, the dollar thresholds for the 

tax liability test and the net worth test are $122,000 and $608,000, 

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. 

21

12The Economic Growth and Tax Relief Reconciliation Act of 2001 (‘‘EGTRRA’’) repealed the 

estate tax for estates of decedents dying after December 31, 2009. However, EGTRRA included 

a ‘‘sunset’’ provision, pursuant to which EGTRRA’s provisions (including estate tax repeal) do 

not apply to estates of decedents dying after December 31, 2010.

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.12 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. 

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 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). 

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. 

22

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, 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 

23

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. 

REASONS FOR CHANGE

The Committee is aware that some individuals each year relinquish their U.S. citizenship or terminate their U.S. residency for 

the purpose of avoiding U.S. income, estate, and gift taxes. By so 

doing, such individuals reduce their annual U.S. income tax liability and reduce or eliminate their U.S. estate tax liability. 

The Committee recognizes that citizens and residents of the 

United States have a right not only physically to leave the United 

States to live elsewhere, but also to relinquish their citizenship or 

terminate their residency. The Committee does not believe that the 

Internal Revenue Code should be used to stop U.S. citizens and 

residents from relinquishing citizenship or terminating residency; 

however, the Committee also does not believe that the Code should 

provide a tax incentive for doing so. In other words, to the extent 

possible, an individual’s decision to relinquish citizenship or terminate residency should be tax-neutral.

The Committee is concerned that the present-law expatriation 

tax rules are difficult to administer. In addition, the Committee is 

concerned that the alternative method of taxation under section 

877 can be avoided by postponing the realization of U.S.-source income for 10 years. The Committee believes that the expatriation 

tax rules are largely ineffective in taxing U.S. citizens and residents who relinquish citizenship or terminate residency with a 

principal purpose to avoid tax. 

The Committee believes that the present-law expatriation tax 

rules should be replaced with a tax regime applicable to former 

citizens and residents that does not rely on establishing a tax 

avoidance motive. Because U.S. citizens and residents who retain 

their citizenship or residency generally are subject to income tax on 

accrued appreciation when they dispose of their assets, as well as 

estate tax on the full value of assets that are held until death, the 

Committee believes it fair to tax individuals on the appreciation in 

their assets when they relinquish their citizenship or terminate 

their residency. The Committee believes that an exception from 

such a tax should be provided for individuals with a relatively modest amount of appreciated assets. The Committee also believes 

that, where U.S. estate or gift taxes are avoided with respect to a 

transfer of property to a U.S. person by reason of the expatriation 

of the donor, it is appropriate for the recipient to be subject to an 

income tax based on the value of the property. 

24

The Committee also believes that the present-law immigration 

rules applicable to former citizens are ineffective. The Committee 

believes that the rules should be modified to eliminate the requirement of proof of a tax avoidance purpose, and to coordinate the application of those rules with the tax rules provided under the new 

regime. 

EXPLANATION OF PROVISION

In general 

The bill 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 2003. 

Individuals covered 

Under the bill, 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 longterm 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 bill, 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 

25

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. 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. The amount 

of mark-to-market tax that would have been owed but for this election (including any interest, penalties, and certain other items) 

shall be a lien in favor of the United States on all U.S.-situs property owned by the individual. This lien shall arise on the expatriation date and shall continue until the tax liability is satisfied, the 

tax liability has become unenforceable by reason of lapse of time, 

or the Secretary is satisfied that no further tax liability may arise 

by reason of this provision. The rules of section 6324A(d)(1), (3), 

and (4) (relating to liens arising in connection with the deferral of 

estate tax under section 6166) apply to liens arising under this provision. 

Date of relinquishment of citizenship 

Under the bill, 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. 

Deemed sale of property upon expatriation or residency termination 

The deemed sale rule of the bill 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 bill. Regulatory authority is granted to the Treasury to except other types of property 

from the bill. 

Under the bill, an individual who is subject to the mark-to-market tax is required to pay a tentative tax equal to the amount of 

tax that would be due for a hypothetical short tax year ending on 

the date the individual relinquished citizenship or terminated residency. Thus, the tentative tax is based on all income, gain, deductions, loss, and credits of the individual for the year through such 

date, including amounts realized from the deemed sale of property. 

26

13 Application of the provision is not limited to an interest that meets the definition of property under section 83 (relating to property transferred in connection with the performance of 

services). 

The tentative tax is due on the 90th day after the date of relinquishment of citizenship or termination of residency. 

Retirement plans and similar arrangements 

Subject to certain exceptions, the provision applies to all property 

interests held by the individual at the time of relinquishment of 

citizenship or termination of residency. Accordingly, such property 

includes an interest in an employer-sponsored retirement plan or 

deferred compensation arrangement as well as an interest in an individual retirement account or annuity (i.e., an IRA). 13 However, 

the provision contains a special rule for an interest in a ‘‘qualified 

retirement plan.’’ For purposes of the provision, a ‘‘qualified retirement plan’’ includes an employer-sponsored qualified plan (sec. 

401(a)), a qualified annuity (sec. 403(a)), a tax-sheltered annuity 

(sec. 403(b)), an eligible deferred compensation plan of a governmental employer (sec. 457(b)), or an IRA (sec. 408). The special retirement plan rule applies also, to the extent provided in regulations, to any foreign plan or similar retirement arrangement or program. An interest in a trust that is part of a qualified retirement 

plan or other arrangement that is subject to the special retirement 

plan rule is not subject to the rules for interests in trusts (discussed below). 

Under the special rule, an amount equal to the present value of 

the individual’s vested, accrued benefit under a qualified retirement plan is treated as having been received by the individual as 

a distribution under the plan on the day before the individual’s relinquishment of citizenship or termination of residency. It is not intended that the plan would be deemed to have made a distribution 

for purposes of the tax-favored status of the plan, such as whether 

a plan may permit distributions before a participant has severed 

employment. In the case of any later distribution to the individual 

from the plan, the amount otherwise includible in the individual’s 

income as a result of the distribution is reduced to reflect the 

amount previously included in income under the special retirement 

plan rule. The amount of the reduction applied to a distribution is 

the excess of: (1) the amount included in income under the special 

retirement plan rule over (2) the total reductions applied to any 

prior distributions. However, under the provision, the retirement 

plan, and any person acting on the plan’s behalf, will treat any 

later distribution in the same manner as the distribution would be 

treated without regard to the special retirement plan rule. 

It is expected that the Treasury Department will provide guidance for determining the present value of an individual’s vested, 

accrued benefit under a qualified retirement plan, such as the individual’s account balance in the case of a defined contribution plan 

or an IRA, or present value determined under the qualified joint 

and survivor annuity rules applicable to a defined benefit plan (sec. 

417(e)). 

Deferral of payment of tax 

Under the bill, an individual is permitted to elect to defer payment of the mark-to-market tax imposed on the deemed sale of the 

27

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-tomarket 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-to-market 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 

mark-to-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. 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. 

The deferred amount (including any interest, penalties, and certain other items) shall be a lien in favor of the United States on 

all U.S.-situs property owned by the individual. This lien shall 

arise on the expatriation date and shall continue until the tax liability is satisfied, the tax liability has become unenforceable by 

reason of lapse of time, or the Secretary is satisfied that no further 

tax liability may arise by reason of this provision. The rules of section 6324A(d)(1), (3), and (4) (relating to liens arising in connection 

with the deferral of estate tax under section 6166) apply to liens 

arising under this provision. 

Interests in trusts 

Under the bill, 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. 

Constructive ownership rules apply to a trust beneficiary that is 

a corporation, partnership, trust, or estate. In such cases, the 

shareholders, partners, or beneficiaries of the entity are deemed to 

be the direct beneficiaries of the trust for purposes of applying 

these provisions. In addition, an individual who holds (or who is 

treated as holding) a trust instrument at the time of relinquishment of citizenship or termination of residency is required to disclose on his or her tax return the methodology used to determine 

his or her interest in the trust, and whether such individual knows 

28

(or has reason to know) that any other beneficiary of the trust uses 

a different method. 

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 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-to-market 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. 

If any individual’s interest in a trust is vested as of the expatriation date (e.g., if the individual’s interest in the trust is non-contingent and non-discretionary), the gain allocable to the individual’s 

trust interest is determined based on the trust assets allocable to 

his or her trust interest. If the individual’s interest in the trust is 

not vested as of the expatriation date (e.g., if the individual’s trust 

29

interest is a contingent or discretionary interest), the gain allocable 

to his or her trust interest is determined based on all of the trust 

assets that could be allocable to his or her trust interest, determined by resolving all contingencies and discretionary powers in 

the individual’s favor. In the case where more than one trust beneficiary is subject to the expatriation tax with respect to trust interests that are not vested, the rules are intended to apply so that the 

same unrealized gain with respect to assets in the trust is not 

taxed to both individuals. 

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 markto-market tax equals 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. 

Coordination with present-law alternative tax regime 

The bill provides a coordination rule with the present-law alternative tax regime. Under the bill, 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 February 5, 2003. 

Treatment of gifts and inheritances from a former citizen or former 

long-term resident 

Under the bill, 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 a former citizen or 

former long-term resident (i.e., an individual who relinquished U.S. 

citizenship or terminated U.S. residency), subject to the exceptions 

described above relating to certain dual citizens and minors. 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 does 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 

30

rules). In addition, the tax does not apply to property in cases in 

which no estate or gift tax return is required to be filed, where no 

such return would have been required to be filed if the former citizen or former long-term resident had not relinquished citizenship 

or terminated residency, as the case may be. 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 bill 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 bill. 

Immigration rules 

The bill 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 denies 

former citizens reentry into the United States if the individual is 

determined not to be in compliance with his or her tax obligations 

under the bill’s expatriation tax provisions (regardless of the subjective motive for expatriating). For this purpose, the bill permits 

the IRS to disclose certain items of return information of an individual, upon written request of the Attorney General or his delegate, as is necessary for making a determination under section 

212(a)(10)(E) of the Immigration and Nationality Act. Specifically, 

the bill would permit the IRS to disclose to the agency administering section 212(a)(10)(E) whether such taxpayer is in compliance with section 877A and identify the items of noncompliance. 

Recordkeeping requirements, safeguards, and civil and criminal 

penalties for unauthorized disclosure or inspection would apply to 

return information disclosed under this provision. 

EFFECTIVE DATE

The provision generally is effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after February 5, 2003. The provisions of the provisions 

relating to gifts and inheritances are effective for gifts and inheritances received from former citizens and former long-term residents 

on or after February 5, 2003, whose expatriation or residency termination occurs on or after such date. The provisions of the bill relating to former citizens under U.S. immigration laws are effective 

on or after the date of enactment. 

III. BUDGET EFFECTS OF THE BILL 

A. COMMITTEE ESTIMATES

In compliance with paragraph 11(a) of rule XXVI of the Standing 

Rules of the Senate, the following statement is made concerning 

the estimated budget effects of the provisions of the committee 

amendment to the bill as reported. 

The bill, as reported is estimated to have the following budget effects for fiscal years 2003–2013.

ESTIMATED BUDGET EFFECTS OF THE ‘‘ARMED FORCES TAX FAIRNESS ACT OF 2003,’’ AS REPORTED BY THE COMMITTEE ON FINANCE 

[Fiscal years 2003–2013, millions of dollars] 

Provision Effective 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2003–08 

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 (distance of 50 miles; extended stay of 90 days; maximum suspension of 10 years).

soea 5/6/97 ¥66 ¥14 ¥14 ¥15 ¥15 ¥16 ¥16 ¥17 ¥18 ¥18 ¥19 ¥13

B. Exclusion from Gross Income of Certain Death Gratuity Payments .................................. doa 9/10/01 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥

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

Program.

pma DOE (1) ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥1

D. Expansion of Combat Zone Filing Rules to Contingency Operations ................................ (2) ¥9 (1) (1) (1) (1) ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1

E. Modification of Membership Requirements for Exemption from Tax for Certain Veterans’ Organizations. tyba DOE ¥1 ¥1 ¥1 ¥1 ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥2 ¥

F. Clarification of Treatment of Certain Department Care Assistance Programs Provided 

to Members of the Uniformed Services of the United States.

tyba 12/31/02 No Revenue Effect 

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

Tuition Programs and Coverdell Education Savings Accounts.

tyba 12/31/02 (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) ¥

H. Suspension of Tax-Exempt Status of Designated Terrorist Organizations ........................ (3) Negligible Revenue Effect 

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

Members Traveling More Than 100 Miles from Home.

apoii tyba 12/31/02 ¥15 ¥75 ¥77 ¥78 ¥80 ¥82 ¥84 ¥87 ¥89 ¥91 ¥93 ¥40

J. Extend the Benefits Available Under the ‘‘Victims of Terrorism Tax Relief Act of 2001’’ 

(including an exclusion from income tax, an exclusion for death benefits, and estate tax relief) to Astronauts who Lose Their Lives in the Line of Duty (including the individuals who lost their lives in the space shuttle Columbia disaster).

(4) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1) (1

Total of Improving Tax Equity for Military Personnel ................................................ ............................................. ¥92 ¥93 ¥95 ¥97 ¥100 ¥104 ¥106 ¥110 ¥113 ¥115 ¥118 ¥58

II. Revenue Provisions

A. Extension of IRS User Fees (through 9/30/13) 5 ................................................................ ma DOE ............ 33 34 35 36 38 39 41 42 44 45 17

B. Authorize IRS to Enter into Installment Agreements that Provide for Partial Payment ... iaeio/a DOE 11 30 14 5 (6) (6) (6) (6) (6) (6) (6) 6

C. Impose Mark-to-Market on Individuals Who Expartriate ................................................... (7) 3 98 84 80 74 71 67 61 57 54 51 41

Total of Revenue Provisions ...................................................................................... ............................................. 14 161 132 120 110 109 106 102 99 98 96 64Net Total .................................................................................................................... ............................................. ¥78 68 37 23 10 5 (1) ¥8 ¥14 ¥17 ¥22 6

1 Loss of less than $500,000. 2 The provision applies to any period for performing an act that has not expired before the date of enactment. 3 Effective for organizations that are designated or identified as a terrorist organization prior to, on, or after the date of enactment. 4 Generally effective for qualified individuals whose lives are lost in the line of duty after December 31, 2002. 5 Estimate provided by Congressional Budget Office. 6 Gain of less than $500,000. 7 Generally effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after February 5, 2003.

Legend for ‘‘Effective’’ column: apoii = amounts paid or incurred in; doa = deaths occurring after; DOE = date of enactment; iaeio/a = installment agreements entered into on or after; pma = payments made after; rma = requests 

tyba = taxable years beginning after; and soea = sales or exchanges after.

Note.—Details may not add to totals due to rounding.Source: Joint Committee on Taxation. 

32

B. BUDGET AUTHORITY AND TAX EXPENDITURES

Budget authority 

In compliance with section 308(a)(1) of the Budget Act, the Committee states that the revenue provisions of the committee amendment to the bill do not involve new or increased budget authority. 

Tax expenditures 

In compliance with section 308(a)(2) of the Budget Act, the Committee states that the revenue-reducing provisions of the committee 

amendment to the bill involve increased tax expenditures (see revenue table in Part III.A., above). The revenue increasing provisions 

of the Committee amendment to the bill generally involve reduced 

tax expenditures (see revenue table in Part III.A., above). 

C. CONSULTATION WITH CONGRESSIONAL BUDGET OFFICE

In accordance with section 403 of the Budget Act, the Committee 

advises that the Congressional Budget Office submitted the following statement on this bill. 

Armed Forces Tax Fairness Act of 2003

Summary: The Armed Forces Tax Fairness Act of 2003 would 

raise the exclusion for death gratuity payments for the military, 

provide military and foreign service homeowners with relief from 

capital gains taxes, authorize the Internal Revenue Service (IRS) 

to enter into installment agreements that provide for partial payment, impose a mark-to-market tax on individuals who expatriate, 

and extend IRS user fees through September 30, 2013. In addition, 

the bill would provide individual taxpayers serving in the National 

Guard and Reserve with a deduction for certain overnight travel 

expenses, including meals and overnight lodging, incurred while attending National Guard and Reserve meetings. The deduction 

would be ‘‘above the line.’’ Such deductions are statutorily allowed 

subtractions from gross income that are used to compute adjusted 

gross income and may be taken by both taxpayers who itemize 

their deductions and those who do not. 

The Joint Committee on Taxation (JCT) and the Congressional 

Budget Office (CBO) estimate that enacting the bill would reduce 

revenues by $78 million in 2003 and increase revenues by $64 million over the 2003–2008 period and by $6 million over the 2003–

2013 period. 

JCT has determined that the bill contains no intergovernmental 

mandates as defined in the Unfunded Mandates Reform Act 

(UMRA), and would not affect the budgets of state, local, or tribal 

governments. JCT has also determined that the provision imposing 

mark-to-market taxes on expatriates contains a private-sector mandate. The total cost of complying with the mandate would not exceed the threshold established by UMRA ($117 million in 2003, adjusted annually for inflation). 

Estimated cost to the Federal Government: The estimated budgetary impact of the bill is shown in the following table.

33

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007 2008

CHANGES IN REVENUES

Mark-to-market tax on expatriates .............................................. 3 98 84 80 74 71

Extension of IRS user fees ........................................................... 0 33 34 35 36 38

Authorization of IRS to enter into installment agreements ........ 11 30 14 5 (1) (1) 

Tax relief from capital gains for military and foreign service 

homeowners ............................................................................. ¥66 ¥14 ¥14 ¥15 ¥15 ¥16

Above-the-line deduction for travel expenses ............................. ¥15 ¥75 ¥77 ¥78 ¥80 ¥82

Other provisions ........................................................................... ¥11 ¥4 ¥4 ¥4 ¥5 ¥6

Total Changes ................................................................. ¥78 68 37 23 10 5

1 Gain of less than $500,000.

Sources: CBO and the Joint Committee on Taxation. 

Basis of Estimate: All estimates, with the exception of the provision extending IRS user fees, were provided by JCT. A number of 

provisions would reduce revenues if enacted, and several would increase revenues. All together, the bill’s provisions would reduce 

revenues by $78 million in 2003, and would increase revenues by 

$64 million over the 2003–2008 period and by $6 million over the 

2003–2013 period. 

Most of the reduction in revenues would occur from the provisions providing reservists with an above-the-line deduction allowance for travel expenses and providing military and foreign service 

homeowners relief from taxation of capital gains. The provisions 

raising the exclusion for death gratuity payments for individuals in 

the military, providing an exclusion for amounts received under the 

Department of Defense Homeowners Assistance Program, expanding combat zone filing rules to contingency operations, extending 

section 501(c)(19) membership to certain relatives of military personnel, permitting service academy appointments to be treated as 

scholarships for certain purposes, and extending the benefits available under the Victims of Terrorism Tax Relief Act of 2001 to astronauts who lose their lives in the line of duty would also decrease 

governmental receipts. As estimated by JCT, all of these provisions 

together would reduce revenues by $92 million in 2003, by $583 

million over the 2003–2008 period, and by $1.143 billion over the 

2003–2013 period. 

JCT estimates that together, the provisions imposing a mark-tomarket tax on individuals who expatriate and authorizing IRS to 

enter into installment agreements that provide for partial payment 

would increase revenues by $14 million in 2003, by $471 million 

over the 2003–2008 period, and by $763 million over the 2003–2013 

period. 

The act also would extend the period during which IRS may 

charge fees on businesses for providing ruling, opinion, and determination letters. Under current law, IRS’s authority to charge such 

fees will expire at the end of fiscal year 2003. The bill would extend 

the authority to charge such fees until September 30, 2013. Based 

on the amount of fees collected in recent years and on information 

from IRS, CBO estimates that extending the fees would increase 

governmental receipts by $176 million over the 2004–2008 period 

and $386 million over the 2004–2013 period. 

JCT and CBO estimate that these three provisions would in- crease revenues by $14 million in 2003, by about $647 million over 

34

the 2003–2008 period, and by $1.149 billion over the 2003–2013 period. 

Effect on revenues and direct spending: The Armed Forces Tax 

Fairness Act of 2003 contains provisions that both increase and decrease revenues. The overall effect of the bill on revenues is shown 

in the table below. The bill contains no provisions that affect direct 

spending.

By fiscal year, in millions of dollars—

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Changes in receipts ......................................... ¥76 68 37 23 10 5 (1) ¥8 ¥14 ¥17 ¥22

Changes in outlays ........................................... Not applicable 

1 Loss or less than $500,000.

Sources: CBO and the Joint Committee on Taxation. 

Estimated impact on state, local, and tribal governments: JCT 

has determined that the bill contains no intergovernmental mandates as defined in UMRA, and would not affect the budgets of 

state, local, or tribal governments. 

Estimated impact on the private sector: JCT has determined that 

the provision relating to mark-to-market taxes on expatriates contains a private-sector mandate, and that the direct cost of complying with the mandate would not exceed the threshold established by UMRA ($117 million in 2003, adjusted annually for inflation). 

Estimate prepared by: Annie Bartsch. 

Estimate approved by: G. Thomas Woodward, Assistant Director 

for Tax Analysis.

IV. VOTES OF THE COMMITTEE 

In compliance with paragraph 7(b) of rule XXVI of the Standing 

Rules of the Senate, the Committee states that the bill was, with 

a quorum present, ordered favorably reported, as amended, by 

unanimous voice vote on February 5, 2003. 

V. REGULATORY IMPACT AND OTHER MATTERS 

A. REGULATORY IMPACT

Pursuant to paragraph 11(b) of Rule XXVI of the Standing Rules 

of the Senate, the Committee makes the following statement concerning the regulatory impact that might be incurred in carrying 

out the provisions of the bill as amended. 

Impact on individuals and businesses 

The bill includes provisions relating to the exclusion from gross 

income of certain death gratuity payments, gain on certain sales of 

principal residence by a member of the uniformed services or the 

Foreign Service, and certain amounts received under the Department of Defense Homeowners Assistance Program. The bill also extends the combat zone filing rules to contingency operations and 

modifies the exemption rules for certain tax-exempt veterans’ organizations. Most of these provisions are not expected to impose additional administrative requirements on individuals or businesses. 

The bill also creates an above-the-line deduction for overnight travel expenses of National Guard and Reserve member. Finally the 

35

bill imposes a mark-to-market tax on certain individuals who expatriate and extends certain IRS user fees. These provisions may increase regulatory burdens on individuals and businesses. 

Impact on personal privacy and paperwork 

The provisions of the Committee amendment to the bill do not 

impact personal privacy. 

Some provisions of the bill relating to the exclusion of death gratuities and homeowners assistance payments will reduce paperwork burdens on certain individuals. Other provisions may impose 

additional burdens on certain individuals. For example, the provision regarding the imposition of a mark-to-market tax on individuals who expatriate will impose some such additional paperwork. 

B. UNFUNDED MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995 (P.L. 104–4). 

The Committee has determined that one of the revenue provisions of the bill does impose a Federal mandate on the private sector. That provision relates to the imposition of a mark-to-market 

tax on individuals who expatriate. The Committee has determined 

that the revenue provisions of the bill do not impose a Federal 

intergovernmental mandate on State, local, or tribal governments. 

C. TAX COMPLEXITY ANALYSIS

Section 4022(b) of the Internal Revenue Service Reform and Restructuring Act of 1998 (the IRS Reform Act) requires the Joint 

Committee on Taxation (in consultation with the Internal Revenue 

Service and the Department of the Treasury) to provide a tax complexity analysis. The complexity analysis is required for all legislation reported by the Senate Committee on Finance, the House 

Committee on Ways and Means, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue Code (the Code) and has widespread 

applicability to individuals or small businesses. 

The staff of the Joint Committee on Taxation has determined 

that a complexity analysis is not required under section 4022(b) of 

the IRS Reform Act because the bill contains no provisions that 

amend the Code and that have ‘‘widespread applicability’’ to individuals or small businesses. 

VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS 

REPORTED 

In the opinion of the Committee, it is necessary in order to expedite the business of the Senate, to dispense with the requirements 

of paragraph 12 of rule XXVI of the Standing Rules of the Senate 

(relating to the showing of changes in existing law made by the bill 

as reported by the Committee).

Æ