19–006

108TH CONGRESS REPORT " HOUSE OF REPRESENTATIVES ! 1st Session 108–23

ARMED FORCES TAX FAIRNESS ACT OF 2003

MARCH 5, 2003.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. THOMAS, from the Committee on Ways and Means, 

submitted the following 

R E P O R T 

together with 

ADDITIONAL VIEWS 

[To accompany H.R. 878] 

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the 

bill (H.R. 878) to amend the Internal Revenue Code of 1986 to provide a special rule for members of the uniformed services and Foreign Service in determining the exclusion of gain from the sale of 

a principal residence and to restore the tax exempt status of death 

gratuity payments to members of the uniformed services, and for 

other purposes, having considered the same, report favorably thereon with an amendment and recommend that the bill as amended 

do pass.

CONTENTS 

Page 

I. Summary and Background ........................................................................... 16 

A. Purpose and Summary .................................................................... 16 

B. Background and Need for Legislation ............................................ 16 

C. Legislative History ........................................................................... 16 

II. Explanation of the Bill .................................................................................. 17 

Title I. Improving Tax Equity for Military Personnel ................................ 17 

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

of the Uniformed Services, the Foreign Service or the Peace 

Corps. (sec. 101 of the bill and sec. 121 of the Code) .................. 17 

B. Exclusion from Gross Income of Certain Death Gratuity Payments (sec. 102 of the bill and sec. 134 of the Code) ................... 18 

C. Exclusion for Amounts Received Under Department of Defense 

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

132 of the Code) .............................................................................. 19 

2

D. Expansion of Combat Zone Filing Rules to Contingency Operations (sec. 104 of the bill and sec. 7508 of the Code) ................. 20 

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) ..................................................... 22 

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) ......................................................................................... 23 

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) ...................................................................... 24

H. Suspension of Tax-Exempt Status of Terrorist Organizations 

(sec. 108 of the bill and sec. 501 of the Code) .............................. 25 

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) ....................................................................... 27 

Title II. Miscellaneous Provisions ................................................................ 28 

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

201 of the bill and secs. 101, 692, and 2201 of the Code) ........... 28 

B. Coordinate Farmers Income Averaging and the Alternative 

Minimum Tax (sec. 202 of the bill and sec. 55 of the Code) ....... 32 

C. Capital Gains Treatment to Apply to Outright Sales of Timber 

by Landowner (sec. 203 of the bill and sec. 631(b) of the 

Code) ................................................................................................ 32 

D. Special Rules for Livestock Sold on Account of Weather-Related 

Conditions (sec. 204 of the bill and secs. 1033 and 451 of 

the Code) ......................................................................................... 33 

E. Simplification of Excise Tax Imposed on Bows and Arrows (sec. 

205 of the bill and sec. 4161 of the Code) ..................................... 35 

F. Repeal Excise Tax on Fishing Tackle Boxes (sec. 206 of the 

bill and sec. 4162 of the Code) ....................................................... 36 

G. Btu-Based Rate for Diesel/Water Emulsion Fuel (sec. 207 of 

the bill and secs. 408 and 6427 of the Code) ................................ 36 

H. Expand Human Clinical Trials Expenses Qualifying for the 

Orphan Drug Tax Credit (sec. 208 of the bill and sec. 280C 

of the Code) ..................................................................................... 37 

I. Consumer Options under the Refundable Credit for Health Insurance Costs of Eligible Individuals (sec. 209 of the bill and 

sec. 35 of the Code) ......................................................................... 38 

J. Modify At-Risk Rules for Publicly Traded Nonrecourse Debt 

(sec. 210 of the bill and sec. 465(b)(6) of the Code) ..................... 42

K. Exclusion of Certain Horse-Racing Gambling Winnings from 

the Income of Nonresident Noncitizen Individuals (sec. 211 

of the bill and sec. 872(b) of the Code) ......................................... 43 

L. Payment of Dividends on Stock of Cooperatives Without Reducing Patronage Dividends (sec. 212 of the bill and sec. 1388 

of the Code) ..................................................................................... 44 

M. Pilot Project for Forest Conservation Activities (sec. 213 of 

the bill) ............................................................................................ 46 

N. No Impact on Social Security Trust Funds Under Title II of 

the Social Security Act (sec. 214 of the bill) ................................. 50 

Title III. Revenue Provisions ........................................................................ 50 

A. Modification of the Tax Treatment of Citizenship Relinquishment and Residency Termination (sec. 301 of the bill and 

secs. 877, 2107, 2501, and 6039G of the Code) ............................ 50 

B. Add Vaccines Against Hepatitis A to the List of Taxable Vaccines (sec. 302 of the bill and sec. 4132 of the Code) ................... 56 

III. Votes of the Committee ................................................................................. 57 

IV. Budget Effects of the Bill .............................................................................. 61 

A. Committee Estimate of Budgetary Effects ..................................... 61 

B. Statement Regarding New Budget Authority and Tax Expenditures Budget Authority .................................................................. 64 

C. Cost Estimate Prepared by the Congressional Budget Office ...... 64 

D. Macroeconomic Impact Analysis ..................................................... 67 

V. Other Matters to be Discussed Under the Rules of the House .................. 67 

A. Committee Oversight Findings and Recommendations ................ 67 

3

B. Statement of General Performance Goals and Objectives ............ 67 

C. Constitutional Authority Statement ............................................... 67 

D. Information Relating to Unfunded Mandates ............................... 68 

E. Applicability of House Rule XXI 5(b) .............................................. 68 

F. Tax Complexity Analysis ................................................................. 68 

VI. Changes in Existing Law Made by the Bill, as Reported ........................... 68 

VII. Additional Views ............................................................................................ 95

The amendment is as follows: 

Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS. 

(a) SHORT TITLE.—This Act may be cited as the ‘‘Armed Forces Tax Fairness Act 

of 2003’’. 

(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment 

to, or repeal of, a section or other provision, the reference shall be considered to be 

made to a section or other provision of the Internal Revenue Code of 1986. 

(c) TABLE OF CONTENTS.—The table of contents of this Act is as follows:

Sec. 1. Short title; references; table of contents. 

TITLE I—ARMED FORCES 

Sec. 101. Special rule for members of uniformed services and foreign service and peace corps volunteers and 

employees in determining exclusion of gain from sale of principal residence. 

Sec. 102. Restoration of full exclusion from gross income of death gratuity payment. 

Sec. 103. Exclusion for amounts received under Department of Defense homeowners assistance program. 

Sec. 104. Expansion of combat zone filing rules to contingency operations. 

Sec. 105. Modification of membership requirement for exemption from tax for certain veterans’ organizations. 

Sec. 106. Clarification of the treatment of certain dependent care assistance programs. 

Sec. 107. Clarification relating to exception from additional tax on certain distributions from qualified tuition 

programs, etc., on account of attendance at military academy. 

Sec. 108. Suspension of tax-exempt status of terrorist organizations. 

Sec. 109. Above-the-line deduction for overnight travel expenses of national guard and reserve members. 

TITLE II—MISCELLANEOUS PROVISIONS 

Sec. 201. Tax relief and assistance for families of astronauts who lose their lives on a space mission. 

Sec. 202. Income averaging for farmers not to increase alternative minimum tax. 

Sec. 203. Capital gain treatment under section 631(b) to apply to outright sales by landowners. 

Sec. 204. Special rules for livestock sold on account of weather-related conditions. 

Sec. 205. Simplification of excise tax imposed on bows and arrows. 

Sec. 206. Repeal of excise tax on fishing tackle boxes. 

Sec. 207. Reduced motor fuel excise tax on certain mixtures of diesel fuel. 

Sec. 208. Expansion of human clinical trials qualifying for orphan drug credit. 

Sec. 209. Health insurance costs of eligible individuals. 

Sec. 210. Treatment under at-risk rules of publicly traded nonrecourse debt. 

Sec. 211. Exclusion of income derived from certain wagers on horse races from gross income of nonresident 

alien individuals. 

Sec. 212. Payment of dividends on stock of cooperatives without reducing patronage dividends. 

Sec. 213. Pilot project for forest conservation activities. 

Sec. 214. Protection of social security. 

TITLE III—REVENUE PROVISIONS 

Sec. 301. Individual expatriation to avoid tax. 

Sec. 302. Vaccine tax to apply to hepatitis A vaccine.

TITLE I—ARMED FORCES 

SEC. 101. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND FOREIGN SERVICE 

AND PEACE CORPS VOLUNTEERS AND EMPLOYEES IN DETERMINING EXCLUSION 

OF GAIN FROM SALE OF PRINCIPAL RESIDENCE. 

(a) IN GENERAL.—Subsection (d) of section 121 (relating to exclusion of gain from 

sale of principal residence) is amended by adding at the end the following new paragraph: 

‘‘(10) MEMBERS OF UNIFORMED SERVICES AND FOREIGN SERVICE AND PEACE

CORPS VOLUNTEERS AND EMPLOYEES.—

‘‘(A) IN GENERAL.—At the election of an individual with respect to a property, the running of the 5-year period referred to in subsections (a) and 

(c)(1)(B) and paragraph (7) of this subsection with respect to such property 

shall be suspended during any period that such individual or such individual’s spouse is serving on qualified official extended duty as a member of 

the uniformed services or of the Foreign Service or as a Peace Corps volunteer or an employee of the Peace Corps. 

‘‘(B) MAXIMUM PERIOD OF SUSPENSION.—Such 5-year period shall not be 

extended more than 5 years by reason of subparagraph (A). 

4

‘‘(C) QUALIFIED OFFICIAL EXTENDED DUTY.—For purposes of this paragraph— 

‘‘(i) IN GENERAL.—The term ‘qualified official extended duty’ means 

any extended duty while serving at a duty station which is at least 150 

miles from such property or while residing under Government orders 

in Government quarters. 

‘‘(ii) UNIFORMED SERVICES.—The term ‘uniformed services’ has the 

meaning given such term by section 101(a)(5) of title 10, United States 

Code, as in effect on the date of the enactment of this paragraph. 

‘‘(iii) FOREIGN SERVICE.—The term ‘member of the Foreign Service’ 

has the meaning given the term ‘member of the Service’ by paragraph 

(1), (2), (3), (4), or (5) of section 103 of the Foreign Service Act of 1980, 

as in effect on the date of the enactment of this paragraph. 

‘‘(iv) EXTENDED DUTY.—The term ‘extended duty’ means any period of 

active duty pursuant to a call or order to such duty for a period in excess of 180 days or for an indefinite period. 

‘‘(v) RULES RELATING TO THE PEACE CORPS.—

‘‘(I) EXTENDED DUTY.—In the case of a Peace Corps volunteer, the 

term ‘extended duty’ means any period of active duty assigned to 

a Peace Corps volunteer under the Peace Corps Act for a period in 

excess of 180 days or for an indefinite period. 

‘‘(II) PEACE CORPS VOLUNTEER.—The term ‘Peace Corps volunteer’ means an individual enrolled as a volunteer or volunteer leader under the Peace Corps Act. 

‘‘(III) EMPLOYEE OF THE PEACE CORPS.—The term ‘employee of 

the Peace Corps’ means a person employed in the Peace Corps 

under section 7 of the Peace Corps Act. 

‘‘(IV) REFERENCES TO PEACE CORPS ACT.—References in this 

clause to the Peace Corps Act mean references to the Peace Corps 

Act (22 U.S.C. 2501 et seq.) as in effect on the date of the enactment of this clause. 

‘‘(D) SPECIAL RULES RELATING TO ELECTION.—

‘‘(i) ELECTION LIMITED TO 1 PROPERTY AT A TIME.—An election under 

subparagraph (A) with respect to any property may not be made if such 

an election is in effect with respect to any other property. 

‘‘(ii) REVOCATION OF ELECTION.—An election under subparagraph (A) 

may be revoked at any time.’’. 

(b) EFFECTIVE DATE; SPECIAL RULE.—

(1) EFFECTIVE DATE.—The amendment made by this section shall take effect 

as if included in the amendments made by section 312 of the Taxpayer Relief 

Act of 1997. 

(2) WAIVER OF LIMITATIONS.—If refund or credit of any overpayment of tax resulting from the amendment made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of 

this Act by the operation of any law or rule of law (including res judicata), such 

refund or credit may nevertheless be made or allowed if claim therefor is filed 

before the close of such period.

SEC. 102. RESTORATION OF FULL EXCLUSION FROM GROSS INCOME OF DEATH GRATUITY 

PAYMENT. 

(a) IN GENERAL.—Paragraph (3) of section 134(b) (relating to qualified military 

benefit) is amended by adding at the end the following new subparagraph: 

‘‘(C) EXCEPTION FOR DEATH GRATUITY ADJUSTMENTS MADE BY LAW.—Subparagraph (A) shall not apply to any adjustment to the amount of death 

gratuity payable under chapter 75 of title 10, United States Code, which 

is pursuant to a provision of law enacted before December 31, 1991.’’. 

(b) CONFORMING AMENDMENT.—Section 134(b)(3)(A) is amended by striking ‘‘subparagraph (B)’’ and inserting ‘‘subparagraphs (B) and (C)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply with respect to deaths occurring after September 10, 2001. 

SEC. 103. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF DEFENSE HOMEOWNERS ASSISTANCE PROGRAM. 

(a) IN GENERAL.—Subsection (a) of section 132 (relating to certain fringe benefits) 

is amended by striking ‘‘or’’ at the end of paragraph (6), by striking the period at 

the end of paragraph (7) and inserting ‘‘, or’’ and by adding at the end the following 

new paragraph: 

‘‘(8) qualified military base realignment and closure fringe.’’. 

5

(b) QUALIFIED MILITARY BASE REALIGNMENT AND CLOSURE FRINGE.—Section 132 

is amended by redesignating subsection (n) as subsection (o) and by inserting after 

subsection (m) the following new subsection: 

‘‘(n) QUALIFIED MILITARY BASE REALIGNMENT AND CLOSURE FRINGE.—

‘‘(1) IN GENERAL.—For purposes of this section, the term ‘qualified military 

base realignment and closure fringe’ means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment 

of this subsection). 

‘‘(2) LIMITATION.—With respect to any property, such term shall not include 

any payment referred to in paragraph (1) to the extent that the sum of all such 

payments related to such property exceeds the amount described in clause (1) 

of subsection (c) of such section (as in effect on such date).’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to payments made after the date of the enactment of this Act. 

SEC. 104. EXPANSION OF COMBAT ZONE FILING RULES TO CONTINGENCY OPERATIONS. 

(a) IN GENERAL.—Subsection (a) of section 7508 (relating to time for performing 

certain acts postponed by reason of service in combat zone) is amended—

(1) by inserting ‘‘or when 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 (as defined in

section 101(a)(13) of title 10, United States Code) or which became such a contingency operation by operation of law’’ after ‘‘section 112’’, 

(2) by inserting in the first sentence ‘‘or at any time during the period of such 

contingency operation’’ after ‘‘for purposes of such section’’, 

(3) by inserting ‘‘or operation’’ after ‘‘such an area’’, and 

(4) by inserting ‘‘or operation’’ after ‘‘such area’’. 

(b) CONFORMING AMENDMENTS.—

(1) Section 7508(d) is amended by inserting ‘‘or contingency operation’’ after 

‘‘area’’. 

(2) The heading for section 7508 is amended by inserting ‘‘or contingency operation’’ 

after ‘‘combat zone’’. 

(3) The item relating to section 7508 in the table of sections for chapter 77 

is amended by inserting ‘‘or contingency operation’’ after ‘‘combat zone’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to any 

period for performing an act which has not expired before the date of the enactment 

of this Act. 

SEC. 105. MODIFICATION OF MEMBERSHIP REQUIREMENT FOR EXEMPTION FROM TAX FOR 

CERTAIN VETERANS’ ORGANIZATIONS. 

(a) IN GENERAL.—Subparagraph (B) of section 501(c)(19) (relating to list of exempt 

organizations) is amended by striking ‘‘or widowers’’ and inserting ‘‘, widowers, ancestors, or lineal descendants’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act. 

SEC. 106. CLARIFICATION OF THE TREATMENT OF CERTAIN DEPENDENT CARE ASSISTANCE 

PROGRAMS. 

(a) IN GENERAL.—Subsection (b) of section 134 (defining qualified military benefit) 

is amended by adding at the end the following new paragraph: 

‘‘(4) CLARIFICATION OF CERTAIN BENEFITS.—For purposes of paragraph (1), 

such term includes any dependent care assistance program (as in effect on the 

date of the enactment of this paragraph) for any individual described in paragraph (1)(A).’’. 

(b) CONFORMING AMENDMENTS.—

(1) Section 134(b)(3)(A) (as amended by section 102) is further amended by 

inserting ‘‘and paragraph (4)’’ after ‘‘subparagraphs (B) and (C)’’. 

(2) Section 3121(a)(18) is amended by striking ‘‘or 129’’ and inserting ‘‘, 129, 

or 134(b)(4)’’. 

(3) Section 3306(b)(13) is amended by striking ‘‘or 129’’ and inserting ‘‘, 129, 

or 134(b)(4)’’. 

(4) Section 3401(a)(18) is amended by striking ‘‘or 129’’ and inserting ‘‘, 129, 

or 134(b)(4)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to taxable years beginning after December 31, 2002. 

6

SEC. 107. CLARIFICATION RELATING TO EXCEPTION FROM ADDITIONAL TAX ON CERTAIN DISTRIBUTIONS FROM QUALIFIED TUITION PROGRAMS, ETC., ON ACCOUNT OF ATTENDANCE AT MILITARY ACADEMY. 

(a) IN GENERAL.—Subparagraph (B) of section 530(d)(4) (relating to exceptions 

from additional tax for distributions not used for educational purposes) is amended 

by striking ‘‘or’’ at the end of clause (iii), by redesignating clause (iv) as clause (v), 

and by inserting after clause (iii) the following new clause: 

‘‘(iv) 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, to 

the extent that the amount of the payment or distribution does not exceed the costs of advanced education (as defined by section 2005(e)(3) 

of title 10, United States Code, as in effect on the date of the enactment 

of this section) attributable to such attendance, or’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall take effect for 

taxable years beginning after December 31, 2002. 

SEC. 108. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS. 

(a) IN GENERAL.—Section 501 (relating to exemption from tax on corporations, certain trusts, etc.) is amended by redesignating subsection (p) as subsection (q) and 

by inserting after subsection (o) the following new subsection: 

‘‘(p) SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.— ‘‘(1) IN GENERAL.—The exemption from tax under subsection (a) with respect 

to any organization described in paragraph (2), and the eligibility of any organization described in paragraph (2) to apply for recognition of exemption under 

subsection (a), shall be suspended during the period described in paragraph (3). 

‘‘(2) TERRORIST ORGANIZATIONS.—An organization is described in this paragraph if such organization is designated or otherwise individually identified— 

‘‘(A) under section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act as a terrorist organization or foreign terrorist organization, 

‘‘(B) in or pursuant to an Executive order which 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 of 1945 for 

the purpose of imposing on such organization an economic or other sanction, or 

‘‘(C) in or pursuant to an Executive order issued under the authority of 

any Federal law if—

‘‘(i) 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); and 

‘‘(ii) such Executive order refers to this subsection. 

‘‘(3) PERIOD OF SUSPENSION.—With respect to any organization described in 

paragraph (2), the period of suspension—

‘‘(A) begins on the later of—

‘‘(i) the date of the first publication of a designation or identification 

described in paragraph (2) with respect to such organization, or 

‘‘(ii) the date of the enactment of this subsection, and 

‘‘(B) ends on the first date that all designations and identifications described in paragraph (2) with respect to such organization are rescinded 

pursuant to the law or Executive order under which such designation or 

identification was made. 

‘‘(4) DENIAL OF DEDUCTION.—No deduction shall be allowed under section 170, 

545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for any contribution to an 

organization described in paragraph (2) during the period described in paragraph (3). 

‘‘(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL CHALLENGE OF SUSPENSION OR

DENIAL OF DEDUCTION.—Notwithstanding section 7428 or any other provision of 

law, no organization or other person may challenge a suspension under paragraph (1), a designation or identification described in paragraph (2), the period 

of suspension described in paragraph (3), or a denial of a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal 

tax liability of such organization or other person. 

‘‘(6) ERRONEOUS DESIGNATION.—

‘‘(A) IN GENERAL.—If—

‘‘(i) the tax exemption of any organization described in paragraph (2) 

is suspended under paragraph (1), 

7

‘‘(ii) each designation and identification described in paragraph (2) 

which has been made with respect to such organization is determined 

to be erroneous pursuant to the law or Executive order under which 

such designation or identification was made, and 

‘‘(iii) the erroneous designations and identifications result in an overpayment of income tax for any taxable year by such organization, 

credit or refund (with interest) with respect to such overpayment shall be 

made. 

‘‘(B) WAIVER OF LIMITATIONS.—If the credit or refund of any overpayment 

of tax described in subparagraph (A)(iii) is prevented at any time by the 

operation of any law or rule of law (including res judicata), such credit or 

refund may nevertheless be allowed or made if the claim therefor is filed 

before the close of the 1-year period beginning on the date of the last determination described in subparagraph (A)(ii). 

‘‘(7) NOTICE OF SUSPENSIONS.—If the tax exemption of any organization is 

suspended under this subsection, the Internal Revenue Service shall update the 

listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of such suspension and of the fact that contributions to such organization are not deductible during the period of such suspension.’’. 

(b) EFFECTIVE DATE.—The amendments made by this section shall apply to designations made before, on, or after the date of the enactment of this Act.

SEC. 109. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL EXPENSES OF NATIONAL 

GUARD AND RESERVE MEMBERS. 

(a) DEDUCTION ALLOWED.—Section 162 (relating to certain trade or business expenses) is amended by redesignating subsection (p) as subsection (q) and inserting 

after subsection (o) the following new subsection: 

‘‘(p) TREATMENT OF EXPENSES OF MEMBERS OF RESERVE COMPONENT OF ARMED

FORCES OF THE UNITED STATES.—For purposes of subsection (a)(2), in the case of 

an individual who performs services as a member of a reserve component of the 

Armed Forces of the United States at any time during the taxable year, such individual shall be deemed to be away from home in the pursuit of a trade or business 

for any period during which such individual is away from home in connection with 

such services.’’. 

(b) DEDUCTION ALLOWED WHETHER OR NOT TAXPAYER ELECTS TO ITEMIZE.—Paragraph (2) of section 62(a) (relating to certain trade and business deductions of employees) is amended by adding at the end the following new subparagraph: 

‘‘(E) CERTAIN EXPENSES OF MEMBERS OF RESERVE COMPONENTS OF THE

ARMED FORCES OF THE UNITED STATES.—The deductions allowed by section 

162 which consist of expenses, not in excess of $500, paid or incurred by 

the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the 

United States for any period during which such individual is more than 100 

miles away from home in connection with such services.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to 

amounts paid or incurred in taxable years beginning after December 31, 2002.

TITLE II—MISCELLANEOUS PROVISIONS

SEC. 201. TAX RELIEF AND ASSISTANCE FOR FAMILIES OF ASTRONAUTS WHO LOSE THEIR 

LIVES ON A SPACE MISSION. 

(a) INCOME TAX RELIEF.—

(1) IN GENERAL.—Subsection (d) of section 692 (relating to income taxes of 

members of Armed Forces and victims of certain terrorist attacks on death) is 

amended by adding at the end the following new paragraph: 

‘‘(5) RELIEF WITH RESPECT TO ASTRONAUTS.—The provisions of this subsection 

shall apply to any astronaut whose death occurs while on a space mission, except that paragraph (3)(B) shall be applied by using the date of the death of 

the astronaut rather than September 11, 2001.’’. 

(2) CONFORMING AMENDMENTS.—

(A) Section 5(b)(1) is amended by inserting ‘‘, astronauts,’’ after ‘‘Forces’’. 

(B) Section 6013(f)(2)(B) is amended by inserting ‘‘, astronauts,’’ after 

‘‘Forces’’. 

(3) CLERICAL AMENDMENTS.—

(A) The heading of section 692 is amended by inserting ‘‘, astronauts,’’ after 

‘‘forces’’. 

8

(B) The item relating to section 692 in the table of sections for part II 

of subchapter J of chapter 1 is amended by inserting ‘‘, astronauts,’’ after 

‘‘Forces’’. 

(4) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

with respect to any astronaut whose death occurs after December 31, 2002. 

(b) DEATH BENEFIT RELIEF.— (1) IN GENERAL.—Subsection (i) of section 101 (relating to certain death benefits) is amended by adding at the end the following new paragraph: 

‘‘(4) RELIEF WITH RESPECT TO ASTRONAUTS.—The provisions of this subsection 

shall apply to any astronaut whose death occurs while on a space mission.’’. 

(2) CLERICAL AMENDMENT.—The heading for subsection (i) of section 101 is 

amended by inserting ‘‘OR ASTRONAUTS’’ after ‘‘VICTIMS’’. 

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to amounts paid after December 31, 2002, with respect to deaths occurring after 

such date. 

(c) ESTATE TAX RELIEF.— (1) IN GENERAL.—Subsection (b) of section 2201 (defining qualified decedent) 

is amended by striking ‘‘and’’ at the end of paragraph (1)(B), by striking the period at the end of paragraph (2) and inserting ‘‘, and’’, and by adding at the 

end the following new paragraph: 

‘‘(3) any astronaut whose death occurs while on a space mission.’’. 

(2) CLERICAL AMENDMENTS.— (A) The heading of section 2201 is amended by inserting ‘‘, deaths of astronauts,’’ 

after ‘‘forces’’. 

(B) The item relating to section 2201 in the table of sections for subchapter C of chapter 11 is amended by inserting ‘‘, deaths of astronauts,’’ 

after ‘‘Forces’’. 

(3) EFFECTIVE DATE.—The amendments made by this subsection shall apply 

to estates of decedents dying after December 31, 2002. 

SEC. 202. INCOME AVERAGING FOR FARMERS NOT TO INCREASE ALTERNATIVE MINIMUM 

TAX. 

(a) IN GENERAL.—Subsection (c) of section 55 (defining regular tax) is amended 

by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph 

(1) the following new paragraph: 

‘‘(2) COORDINATION WITH INCOME AVERAGING FOR FARMERS.—Solely for purposes of this section, section 1301 (relating to averaging of farm income) shall 

not apply in computing the regular tax.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2002.

SEC. 203. CAPITAL GAIN TREATMENT UNDER SECTION 631(b) TO APPLY TO OUTRIGHT SALES 

BY LANDOWNERS. 

(a) IN GENERAL.—The first sentence of section 631(b) (relating to disposal of timber with a retained economic interest) is amended by striking ‘‘retains an economic 

interest in such timber’’ and inserting ‘‘either retains an economic interest in such 

timber or makes an outright sale of such timber’’. 

(b) CONFORMING AMENDMENTS.— (1) The third sentence of section 631(b) is amended by striking ‘‘The date of 

disposal’’ and inserting ‘‘In the case of disposal of timber with a retained economic interest, the date of disposal’’. 

(2) The heading for section 631(b) is amended by striking ‘‘WITH A RETAINED

ECONOMIC INTEREST’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to sales 

after the date of the enactment of this Act.

SEC. 204. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED CONDITIONS. 

(a) RULES FOR REPLACEMENT OF INVOLUNTARILY CONVERTED LIVESTOCK.—Subsection (e) of section 1033 (relating to involuntary conversions) is amended—

(1) by striking ‘‘CONDITIONS.—For purposes’’ and inserting ‘‘CONDITIONS.— ‘‘(1) IN GENERAL.—For purposes’’, and 

(2) by adding at the end the following new paragraph: 

‘‘(2) EXTENSION OF REPLACEMENT PERIOD.—

‘‘(A) IN GENERAL.—In the case of drought, flood, or other weather-related 

conditions described in paragraph (1) which result in the area being designated as eligible for assistance by the Federal Government, subsection 

(a)(2)(B) shall be applied with respect to any converted property by substituting ‘4 years’ for ‘2 years’. 

‘‘(B) FURTHER EXTENSION BY SECRETARY.—The Secretary may extend on 

a regional basis the period for replacement under this section (after the apVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00008 Fmt 6659 Sfmt 6621 E:\HR\OC\HR023.XXX HR023
9

plication of subparagraph (A)) for such additional time as the Secretary determines appropriate if the weather-related conditions which resulted in 

such application continue for more than 3 years.’’. 

(b) INCOME INCLUSION RULES.—Subsection (e) of section 451 (relating to special 

rule for proceeds from livestock sold on account of drought, flood, or other weatherrelated conditions) is amended by adding at the end the following new paragraph: 

‘‘(3) SPECIAL ELECTION RULES.—If section 1033(e)(2) applies to a sale or exchange of livestock described in paragraph (1), the election under paragraph (1) 

shall be deemed valid if made during the replacement period described in such 

section.’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to any 

taxable year with respect to which the due date (without regard to extensions) for 

the return is after December 31, 2002.

SEC. 205. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS. 

(a) BOWS.—Paragraph (1) of section 4161(b) (relating to bows) is amended to read 

as follows: 

‘‘(1) BOWS.—

‘‘(A) IN GENERAL.—There is hereby imposed on the sale by the manufacturer, producer, or importer of any bow which has a draw weight of 30 

pounds or more, a tax equal to 11 percent of the price for which so sold. 

‘‘(B) ARCHERY EQUIPMENT.—There is hereby imposed on the sale by the 

manufacturer, producer, or importer—

‘‘(i) of any part or accessory suitable for inclusion in or attachment 

to a bow described in subparagraph (A), and 

‘‘(ii) of any quiver or broadhead suitable for use with an arrow described in paragraph (3), 

a tax equal to 11 percent of the price for which so sold.’’. 

(b) ARROWS.—Subsection (b) of section 4161 (relating to bows and arrows, etc.) is 

amended by redesignating paragraph (3) as paragraph (4) and inserting after paragraph (2) the following: 

‘‘(3) ARROWS.—

‘‘(A) IN GENERAL.—There is hereby imposed on the sale by the manufacturer, producer, or importer of any arrow, a tax equal to 12 percent of the 

price for which so sold. 

‘‘(B) EXCEPTION.—The tax imposed by subparagraph (A) on an arrow 

shall not apply if the arrow contains an arrow shaft subject to the tax imposed by paragraph (2). 

‘‘(C) ARROW.—For purposes of this paragraph, the term ‘arrow’ means any 

shaft described in paragraph (2) to which additional components are attached.’’. 

(c) CONFORMING AMENDMENT.—The heading of section 4161(b)(2) is amended by 

striking ‘‘ARROWS.—’’ and inserting ‘‘ARROW COMPONENTS.—’’. 

(d) EFFECTIVE DATE.—The amendments made by this section shall apply to articles sold by the manufacturer, producer, or importer after the 90th day after the 

date of the enactment of this Act.

SEC. 206. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES. 

(a) REPEAL.—Paragraph (6) of section 4162(a) (defining sport fishing equipment) 

is amended by striking subparagraph (C) and by redesignating subparagraphs (D) 

through (J) as subparagraphs (C) through (I), respectively. 

(b) EFFECTIVE DATE.—The amendment made by this section shall take effect 30 

days after the date of the enactment of this Act.

SEC. 207. REDUCED MOTOR FUEL EXCISE TAX ON CERTAIN MIXTURES OF DIESEL FUEL. 

(a) IN GENERAL.—Clause (iii) of section 4081(a)(2)(A) is amended by inserting before the period ‘‘(19.7 cents per gallon in the case of a diesel-water fuel emulsion 

at least 14 percent of which is water)’’. 

(b) REFUNDS FOR TAX-PAID PURCHASES.—

(1) IN GENERAL.—Section 6427 (relating to fuels not used for taxable purchases) is amended by redesignating subsections (m) through (p) as subsections 

(n) through (q), respectively, and by inserting after subsection (l) the following 

new subsection: 

‘‘(m) DIESEL FUEL USED TO PRODUCE EMULSION.—

‘‘(1) IN GENERAL.—Except as provided in subsection (k), if any diesel fuel on 

which tax was imposed by section 4081 at the regular tax rate is used by any 

person in producing an emulsion described in section 4081(a)(2)(A) which is sold 

or used in such person’s trade or business, the Secretary shall pay (without interest) to such person an amount equal to the excess of the regular tax rate over 

the incentive tax rate with respect to such fuel. 

10

‘‘(2) DEFINITIONS.—For purposes of paragraph (1)—

‘‘(A) REGULAR TAX RATE.—The term ‘regular tax rate’ means the aggregate rate of tax imposed by section 4081 determined without regard to the 

parenthetical in section 4081(a)(2)(A). 

‘‘(B) INCENTIVE TAX RATE.—The term ‘incentive tax rate’ means the aggregate rate of tax imposed by section 4081 determined with regard to the parenthetical in section 4081(a)(2)(A).’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall take effect on 

October 1, 2003. 

SEC. 208. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN DRUG CREDIT. 

(a) IN GENERAL.—Paragraph (2) of section 45C(b) (relating to qualified clinical 

testing expenses) is amended by adding at the end the following new subparagraph: 

‘‘(C) TREATMENT OF CERTAIN EXPENSES INCURRED BEFORE DESIGNATION.—

For purposes of subparagraph (A)(ii)(I), if a drug is designated under section 526 of the Federal Food, Drug, and Cosmetic Act not later than the 

due date (including extensions) for filing the return of tax under this subtitle for the taxable year in which the application for such designation of 

such drug was filed, such drug shall be treated as having been designated 

on the date that such application was filed.’’. 

(b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply to expenses incurred after the date of the enactment of this Act. 

SEC. 209. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS. 

(a) CONSUMER OPTIONS.—Paragraph (2) of section 35(e) is amended by inserting 

at the end the following new subparagraph: 

‘‘(C) WAIVER BY ELIGIBLE INDIVIDUALS.—With respect to any month which 

ends before January 1, 2005, this paragraph shall not apply with respect 

to any eligible individual and such individual’s qualifying family members 

if such eligible individual elects to waive the application of this paragraph 

with respect to such month.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to months 

beginning after the date of the enactment of this Act.

SEC. 210. TREATMENT UNDER AT-RISK RULES OF PUBLICLY TRADED NONRECOURSE DEBT. 

(a) IN GENERAL.—Subparagraph (A) of section 465(b)(6) (relating to qualified nonrecourse financing treated as amount at risk) is amended by striking ‘‘share of’’ and 

all that follows and inserting ‘‘share of—

‘‘(i) any qualified nonrecourse financing which is secured by real 

property used in such activity, and 

‘‘(ii) any other financing which—

‘‘(I) would (but for subparagraph (B)(ii)) be qualified nonrecourse 

financing, 

‘‘(II) is qualified publicly traded debt, and 

‘‘(III) is not borrowed by the taxpayer from a person described in 

subclause (I), (II), or (III) of section 49(a)(1)(D)(iv).’’. 

(b) QUALIFIED PUBLICLY TRADED DEBT.—Paragraph (6) of section 465(b) is amended by adding at the end the following new subparagraph: 

‘‘(F) QUALIFIED PUBLICLY TRADED DEBT.—For purposes of subparagraph 

(A), the term ‘qualified publicly traded debt’ means any debt instrument 

which is readily tradable on an established securities market. Such term 

shall not include any debt instrument which has a yield to maturity which 

equals or exceeds the limitation in section 163(i)(1)(B).’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to debt 

instruments issued after the date of the enactment of this Act. 

SEC. 211. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON HORSE RACES FROM 

GROSS INCOME OF NONRESIDENT ALIEN INDIVIDUALS. 

(a) IN GENERAL.—Subsection (b) of section 872 (relating to exclusions) is amended 

by redesignating paragraphs (5), (6), and (7) as paragraphs (6), (7), and (8), respectively, and inserting after paragraph (4) the following new paragraph: 

‘‘(5) INCOME DERIVED FROM WAGERING TRANSACTIONS IN CERTAIN PARIMUTUEL

POOLS.—Gross income derived by a nonresident alien individual from a legal 

wagering transaction initiated outside the United States in a parimutuel pool 

with respect to a live horse race in the United States.’’. 

(b) CONFORMING AMENDMENT.—Section 883(a)(4) is amended by striking ‘‘(5), (6), 

and (7)’’ and inserting ‘‘(6), (7), and (8)’’. 

(c) EFFECTIVE DATE.—The amendments made by this section shall apply to proceeds from wagering transactions after September 30, 2003. 

11

SEC. 212. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT REDUCING PATRONAGE DIVIDENDS. 

(a) IN GENERAL.—Subsection (a) of section 1388 (relating to patronage dividend 

defined) is amended by adding at the end the following: ‘‘For purposes of paragraph 

(3), net earnings shall not be reduced by amounts paid during the year as dividends 

on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise 

payable to patrons which are derived from business done with or for patrons during 

the taxable year.’’. 

(b) EFFECTIVE DATE.—The amendment made by this section shall apply to distributions in taxable years beginning after the date of the enactment of this Act. 

SEC. 213. PILOT PROJECT FOR FOREST CONSERVATION ACTIVITIES. 

(a) TAX-EXEMPT BOND FINANCING.— (1) IN GENERAL.—For purposes of the Internal Revenue Code of 1986, any 

qualified forest conservation bond shall be treated as an exempt facility bond 

under section 142 of such Code. 

(2) QUALIFIED FOREST CONSERVATION BOND.—For purposes of this section, the 

term ‘‘qualified forest conservation bond’’ means any bond issued as part of an 

issue if—

(A) 95 percent or more of the net proceeds (as defined in section 150(a)(3) 

of such Code) of such issue are to be used for qualified project costs, 

(B) such bond is an obligation of the State of Washington or any political 

subdivision thereof and is issued for the Evergreen Forest Trust, and 

(C) such bond is issued before October 1, 2004. 

(3) LIMITATION ON AGGREGATE AMOUNT ISSUED.—The maximum aggregate 

face amount of bonds which may be issued under this section shall not exceed 

$250,000,000. 

(4) QUALIFIED PROJECT COSTS.—For purposes of this subsection, the term 

‘‘qualified project costs’’ means the sum of—

(A) the cost of acquisition by the Evergreen Forest Trust from an unrelated person of forests and forest land—

(i) which are located in the State of Washington, and 

(ii) which at the time of acquisition or immediately thereafter are 

subject to a conservation restriction described in subsection (c)(2), 

(B) capitalized interest on the qualified forest conservation bonds for the 

3-year period beginning on the date of issuance of such bonds, and 

(C) credit enhancement fees which constitute qualified guarantee fees 

(within the meaning of section 148 of such Code). 

(5) SPECIAL RULES.—In applying the Internal Revenue Code of 1986 to any 

qualified forest conservation bond, the following modifications shall apply: 

(A) Section 146 of such Code (relating to volume cap) shall not apply. 

(B) For purposes of section 147(b) of such Code (relating to maturity may 

not exceed 120 percent of economic life), the land and standing timber acquired with proceeds of qualified forest conservation bonds shall have an 

economic life of 35 years. 

(C) Subsections (c) and (d) of section 147 of such Code (relating to limitations on acquisition of land and existing property) shall not apply. 

(D) Section 57(a)(5) of such Code (relating to tax-exempt interest) shall 

not apply to interest on qualified forest conservation bonds. 

(6) TREATMENT OF CURRENT REFUNDING BONDS.—Paragraphs (2)(C) and (3) 

shall not apply to any bond (or series of bonds) issued to refund a qualified forest conservation bond issued before October 1, 2004, if—

(A) the average maturity date of the issue of which the refunding bond 

is a part is not later than the average maturity date of the bonds to be refunded by such issue, 

(B) the amount of the refunding bond does not exceed the outstanding 

amount of the refunded bond, and 

(C) the net proceeds of the refunding bond are used to redeem the refunded bond not later than 90 days after the date of the issuance of the 

refunding bond. 

For purposes of subparagraph (A), average maturity shall be determined in accordance with section 147(b)(2)(A) of such Code. 

(7) EFFECTIVE DATE.—This subsection shall apply to obligations issued after 

the date of the enactment of this Act. 

(b) ITEMS FROM QUALIFIED HARVESTING ACTIVITIES NOT SUBJECT TO TAX OR

TAKEN INTO ACCOUNT.—

(1) IN GENERAL.—Income, gains, deductions, losses, or credits from a qualified 

harvesting activity conducted by the Evergreen Forest Trust shall not be subject 

12

to tax or taken into account under subtitle A of the Internal Revenue Code of 

1986. 

(2) QUALIFIED HARVESTING ACTIVITY.—For purposes of paragraph (1)—

(A) IN GENERAL.—The term ‘‘qualified harvesting activity’’ means the 

sale, lease, or harvesting, of standing timber—

(i) on land owned by the Evergreen Forest Trust which was acquired 

with proceeds of qualified forest conservation bonds, and 

(ii) pursuant to a qualified conservation plan adopted by the Evergreen Forest Trust. 

(B) EXCEPTIONS.—

(i) CESSATION AS QUALIFIED ORGANIZATION.—The term ‘‘qualified harvesting activity’’ shall not include any sale, lease, or harvesting during 

any period that the Evergreen Forest Trust is not a qualified organization. 

(ii) EXCEEDING LIMITS ON HARVESTING.—The term ‘‘qualified harvesting activity’’ shall not include any sale, lease, or harvesting of 

standing timber on land acquired with proceeds of qualified forest conservation bonds to the extent that—

(I) the average annual area of timber harvested from such land 

exceeds 2.5 percent of the total area of such land, or 

(II) the quantity of timber removed from such land exceeds the 

quantity which can be removed from such land annually in perpetuity on a sustained-yield basis with respect to such land. 

The limitations under subclauses (I) and (II) shall not apply to salvage 

or sanitation harvesting of timber stands which are substantially damaged by fire, windthrow, or other catastrophe, or which are in imminent danger from insect or disease attack. 

(3) TERMINATION.—This subsection shall not apply to any qualified harvesting 

activity occurring after the date on which there is no outstanding qualified forest conservation bond or any such bond ceases to be a tax-exempt bond. 

(4) PARTIAL RECAPTURE OF BENEFITS IF HARVESTING LIMIT EXCEEDED.—If, as 

of the date that this subsection ceases to apply under paragraph (3), the average annual area of timber harvested from the land exceeds the requirement of 

paragraph (2)(B)(ii)(I), the tax imposed by chapter 1 of the Internal Revenue 

Code of 1986 shall be increased, under rules prescribed by the Secretary, by the 

sum of the tax benefit attributable to such excess and interest at the underpayment rate under section 6621 for the period of the underpayment. 

(c) DEFINITIONS.—For purposes of this section—

(1) QUALIFIED CONSERVATION PLAN.—The term ‘‘qualified conservation plan’’ 

means a multiple land use program or plan which—

(A) is designed and administered primarily for the purposes of protecting 

and enhancing wildlife and fish, timber, scenic attributes, recreation, and 

soil and water quality of the forest and forest land, 

(B) mandates that conservation of forest and forest land is the singlemost significant use of the forest and forest land, 

(C) requires that timber harvesting be consistent with—

(i) restoring and maintaining reference conditions for the Westside 

Douglas Fir forest type, 

(ii) restoring and maintaining a representative sample of young, mid, 

and late successional forest age classes, 

(iii) maintaining or restoring the resources’ ecological health for purposes of preventing damage from fire, insect, or disease, 

(iv) maintaining or enhancing wildlife or fish habitat, 

(v) enhancing research opportunities in sustainable renewable resource uses, or 

(vi) preserving or protecting open space. 

(2) CONSERVATION RESTRICTION.—The conservation restriction described in 

this paragraph is a restriction which—

(A) is granted in perpetuity to an unrelated person which is described in 

section 170(h)(3) of such Code and which, in the case of a nongovernmental 

unit, is organized and operated for conservation purposes, 

(B) meets the requirements of clause (ii) or (iii)(II) of section 170(h)(4)(A) 

of such Code, 

(C) obligates the Evergreen Forest Trust to pay the costs incurred by the 

holder of the conservation restriction in monitoring compliance with such 

restriction, and 

(D) requires an increasing level of conservation benefits to be provided 

whenever circumstances allow it. 

13

(3) QUALIFIED ORGANIZATION.—The term ‘‘qualified organization’’ means an 

organization—

(A) which is a nonprofit organization organized and operated exclusively 

for charitable, scientific, or educational purposes including but not limited 

to acquiring, protecting, restoring, managing, and developing forest lands 

and other renewable resources for the long-term charitable, educational, scientific, and public benefit of the State of Washington, 

(B) more than half of the value of the property of which consists of forests 

and forest land acquired with the proceeds from qualified forest conservation bonds,

(C) which periodically conducts educational programs designed to inform 

the public of environmentally sensitive forestry management and conservation techniques, 

(D) which has a board of directors that at all times is comprised of 9 

members—

(i) at least 2 of whom represent the holders of the conservation restriction described in paragraph (2), and 

(ii) at least 2 of whom are public officials, 

(E) of which not more than one-third of the members of the board of directors is comprised of individuals who are or were at any time within 5 

years before the beginning of a term of membership on the board, an employee of, independent contractor with respect to, officer of, director of, or 

held a material financial interest in, a commercial forest products enterprise with which the Evergreen Forest Trust has a contractual or other financial arrangement, 

(F) the bylaws of which require at least two-thirds of the members of the 

board of directors to vote affirmatively to approve the qualified conservation 

program and any change thereto, and 

(G) upon dissolution, is required to dedicate its assets to—

(i) an organization described in section 501(c)(3) of such Code which 

is organized and operated for conservation purposes, or 

(ii) a governmental unit described in section 170(c)(1) of such Code. 

(4) EVERGREEN FOREST TRUST.—The term ‘‘Evergreen Forest Trust’’ means a 

nonprofit corporation known as the Evergreen Forest Trust which was incorporated on February 25, 2000, under chapter 24.03 of the Revised Code of 

Washington and which, on May 11, 2001, was recognized as an organization described in section 501(c)(3) of the Internal Revenue Code of 1986. 

(5) UNRELATED PERSON.—The term ‘‘unrelated person’’ means a person who 

is not a related person. 

(6) RELATED PERSON.—A person shall be treated as related to another person 

if—

(A) such person bears a relationship to such other person described in 

section 267(b) (determined without regard to paragraph (9) thereof), or 

707(b)(1), of such Code, determined by substituting ‘‘25 percent’’ for ‘‘50 percent’’ each place it occurs therein, and 

(B) in the case such other person is a nonprofit organization, if such person controls directly or indirectly more than 25 percent of the governing 

body of such organization. 

SEC. 214. PROTECTION OF SOCIAL SECURITY. 

The amounts transferred to any trust fund under title II of the Social Security 

Act shall be determined as if this title (other than this section) and title I of this 

Act had not been enacted.

TITLE III—REVENUE PROVISIONS

SEC. 301. INDIVIDUAL EXPATRIATION TO AVOID TAX. 

(a) EXPATRIATION TO AVOID TAX.—

(1) IN GENERAL.—Subsection (a) of section 877 (relating to treatment of expatriates) is amended to read as follows: 

‘‘(a) TREATMENT OF EXPATRIATES.—

‘‘(1) IN GENERAL.—Every nonresident alien individual to whom this section 

applies and who, within the 10-year period immediately preceding the close of 

the taxable year, lost United States citizenship shall be taxable for such taxable 

year in the manner provided in subsection (b) if the tax imposed pursuant to 

such subsection (after any reduction in such tax under the last sentence of such 

subsection) exceeds the tax which, without regard to this section, is imposed 

pursuant to section 871. 

14

‘‘(2) INDIVIDUALS SUBJECT TO THIS SECTION.—This section shall apply to any 

individual if—

‘‘(A) the average annual net income tax (as defined in section 38(c)(1)) of 

such individual for the period of 5 taxable years ending before the date of 

the loss of United States citizenship is greater than $122,000, 

‘‘(B) the net worth of the individual as of such date is $2,000,000 or more, 

or 

‘‘(C) such individual fails to certify under penalty of perjury that he has 

met the requirements of this title for the 5 preceding taxable years or fails 

to submit such evidence of such compliance as the Secretary may require. 

In the case of the loss of United States citizenship in any calendar year after 

2003, such $122,000 amount shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 

1(f)(3) for such calendar year by substituting ‘2002’ for ‘1992’ in subparagraph 

(B) thereof. Any increase under the preceding sentence shall be rounded to the 

nearest multiple of $1,000.’’. 

(2) REVISION OF EXCEPTIONS FROM ALTERNATIVE TAX.—Subsection (c) of section 877 (relating to tax avoidance not presumed in certain cases) is amended 

to read as follows: 

‘‘(c) EXCEPTIONS.—

‘‘(1) IN GENERAL.—Subparagraphs (A) and (B) of subsection (a)(2) shall not 

apply to an individual described in paragraph (2) or (3). 

‘‘(2) DUAL CITIZENS.—

‘‘(A) IN GENERAL.—An individual is described in this paragraph if—

‘‘(i) the individual became at birth a citizen of the United States and 

a citizen of another country and continues to be a citizen of such other 

country, and 

‘‘(ii) the individual has had no substantial contacts with the United 

States. 

‘‘(B) SUBSTANTIAL CONTACTS.—An individual shall be treated as having no 

substantial contacts with the United States only if the individual—

‘‘(i) was never a resident of the United States (as defined in section 

7701(b)), 

‘‘(ii) has never held a United States passport, and 

‘‘(iii) was not present in the United States for more than 30 days during any calendar year which is 1 of the 10 calendar years preceding the 

individual’s loss of United States citizenship. 

‘‘(3) CERTAIN MINORS.—An individual is described in this paragraph if—

‘‘(A) the individual became at birth a citizen of the United States, 

‘‘(B) neither parent of such individual was a citizen of the United States 

at the time of such birth, 

‘‘(C) the individual’s loss of United States citizenship occurs before such 

individual attains age 18 1⁄2, and 

‘‘(D) the individual was not present in the United States for more than 

30 days during any calendar year which is 1 of the 10 calendar years preceding the individual’s loss of United States citizenship.’’. 

(3) CONFORMING AMENDMENT.—Section 2107(a) is amended to read as follows: 

‘‘(a) TREATMENT OF EXPATRIATES.—A tax computed in accordance with the table 

contained in section 2001 is hereby imposed on the transfer of the taxable estate, 

determined as provided in section 2106, of every decedent nonresident not a citizen 

of the United States if the date of death occurs during a taxable year with respect 

to which the decedent is subject to tax under section 877(b).’’. 

(b) SPECIAL RULES FOR DETERMINING WHEN AN INDIVIDUAL IS NO LONGER A

UNITED STATES CITIZEN OR LONG-TERM RESIDENT.—Section 7701 (relating to definitions) is amended by redesignating subsection (n) as subsection (o) and by inserting 

after subsection (m) the following new subsection: 

‘‘(n) SPECIAL RULES FOR DETERMINING WHEN AN INDIVIDUAL IS NO LONGER A

UNITED STATES CITIZEN OR LONG-TERM RESIDENT.—An individual who would not 

(but for this subsection) be treated as a citizen or resident of the United States shall 

continue to be treated as a citizen or resident of the United States until such individual—

‘‘(1) gives notice of an expatriating act or termination of residency (with the 

requisite intent to relinquish citizenship or terminate residency) to the Secretary of State or the Secretary of Homeland Security, and 

‘‘(2) provides a statement in accordance with section 6039G.’’. 

(c) PHYSICAL PRESENCE IN THE UNITED STATES FOR MORE THAN 30 DAYS.—Section 

877 (relating to expatriation to avoid tax) is amended by adding at the end the following new subsection: 

15

‘‘(g) PHYSICAL PRESENCE.—This section shall not apply to any individual for any 

taxable year during the 10-year period referred to in subsection (a) in which such 

individual is present in the United States for more than 30 days in the calendar 

year ending in such taxable year, and such individual shall be treated for purposes 

of this title as a citizen or resident of the United States for such taxable year.’’.

(d) TRANSFERS SUBJECT TO GIFT TAX.—Subsection (a) of section 2501 (relating to 

taxable transfers) is amended by adding at the end the following: 

‘‘(6) TRANSFERS OF CERTAIN STOCK.—

‘‘(A) IN GENERAL.—Paragraph (3) shall not apply to the transfer of stock 

described in subparagraph (B) by any individual to whom section 877(b) applies, and section 2511(a) shall be applied without regard to whether such 

stock is property which is situated within the United States. 

‘‘(B) VALUATION.—For purposes of subparagraph (A), the value of stock 

shall be determined as provided in section 2103, except that—

‘‘(i) if the donor owned (within the meaning of section 958(a)) at the 

time of such transfer 10 percent or more of the total combined voting 

power of all classes of stock entitled to vote of a foreign corporation, 

and 

‘‘(ii) if such donor owned (within the meaning of section 958(a)), or 

is considered to have owned (by applying the ownership rules of section 

958(b)), at the time of such transfer, more than 50 percent of—

‘‘(I) the total combined voting power of all classes of stock entitled to vote of such corporation, or 

‘‘(II) the total value of the stock of such corporation,then that 

proportion of the fair market value of the stock of such foreign corporation owned (within the meaning of section 958(a)) by such 

donor at the time of such transfer, which the fair market value of 

any assets owned by such foreign corporation and situated in the 

United States, at the time of such transfer, bears to the total fair 

market value of all assets owned by such foreign corporation at the 

time of such transfer, shall be included in the value of such property. 

For purposes of the preceding sentence, a donor shall be treated as owning 

stock of a foreign corporation at the time of such transfer if, at such time, 

by trust or otherwise, within the meaning of sections 2035 to 2038, inclusive, he owned such stock.’’.

(e) ENHANCED INFORMATION REPORTING FROM INDIVIDUALS LOSING UNITED

STATES CITIZENSHIP.—

(1) IN GENERAL.—Subsection (a) of section 6039G is amended to read as follows: 

‘‘(a) IN GENERAL.—Notwithstanding any other provision of law, any individual to 

whom section 877(b) applies for any taxable year shall provide a statement for such 

taxable year which includes the information described in subsection (b).’’. 

(2) INFORMATION TO BE PROVIDED.—Subsection (b) of section 6039G is amended to read as follows: 

‘‘(b) INFORMATION TO BE PROVIDED.—Information required under subsection (a) 

shall include—

‘‘(1) the taxpayer’s TIN, 

‘‘(2) the mailing address of such individual’s principal foreign residence, 

‘‘(3) the foreign country, in which such individual is residing, 

‘‘(4) the foreign country of which such individual is a citizen, 

‘‘(5) information detailing the assets and liabilities of such individual, 

‘‘(6) the number of days that the individual was present in the United States 

during the taxable year, and 

‘‘(7) such other information as the Secretary may prescribe.’’. 

(3) INCREASE IN PENALTY.—Subsection (d) of section 6039G is amended to 

read as follows: 

‘‘(d) PENALTY.—If—

‘‘(1) an individual is required to file a statement under subsection (a) for any 

taxable year, and 

‘‘(2) fails to file such a statement with the Secretary on or before the date 

such statement is required to be filed or fails to include all the information required to be shown on the statement or includes incorrect information, 

such individual shall pay a penalty of $5,000 unless it is shown that such failure 

is due to reasonable cause and not to willful neglect.’’. 

(4) CONFORMING AMENDMENT.—Section 6039G is amended by striking subsections (c), (f), and (g) and by redesignating subsections (d) and (e) as subsection (c) and (d), respectively.

16

(f) EFFECTIVE DATE.—The amendments made by this section shall apply to individuals who expatriate after February 27, 2003. 

SEC. 302. VACCINE TAX TO APPLY TO HEPATITIS A VACCINE. 

(a) IN GENERAL.—Paragraph (1) of section 4132(a) (defining taxable vaccine) is 

amended by redesignating subparagraphs (I), (J), (K), and (L) as subparagraphs (J), 

(K), (L), and (M), respectively, and by inserting after subparagraph (H) the following 

new subparagraph: 

‘‘(I) Any vaccine against hepatitis A.’’

(b) EFFECTIVE DATE.—

(1) SALES, ETC.—The amendments made by subsection (a) shall apply to sales 

and uses on or after the first day of the first month which begins more than 

4 weeks after the date of the enactment of this Act. 

(2) DELIVERIES.—For purposes of paragraph (1) and section 4131 of the Internal Revenue Code of 1986, in the case of sales on or before the effective date 

described in such paragraph for which delivery is made after such date, the delivery date shall be considered the sale date.

I. SUMMARY AND BACKGROUND 

A. PURPOSE AND SUMMARY

The bill, H.R. 878, as amended, provides needed tax relief to the 

Armed Forces and makes other necessary changes to the tax laws. 

The bill provides net tax reductions of over $402 million over fiscal years 2003–2008. 

B. BACKGROUND AND NEED FOR LEGISLATION

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 that in addition to receiving our 

thoughts and thanks, 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 various other provisions to reduce complexity and eliminate inequitable effects in the tax law. 

The bill also contains two provisions that raise revenue to offset 

the cost of the other provisions. In the case of the provision to modify the treatment of certain individual expatriates, the provision 

seems especially fitting to offset the improved tax treatment of the 

men and women serving their country. The provision relating to individual expatriates replaces the present law subjective test with 

a more administrable objective test. The provision relating to vaccines extends the protection of the Vaccine Injury Compensation 

Program to families of Hepatitis A vaccine recipients. 

C. LEGISLATIVE HISTORY

The House Committee on Ways and Means marked up the 

Armed Forces Tax Fairness Act of 2003 on February 27, 2003, and 

ordered the bill, as amended, favorably reported by voice vote.

17

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, THE FOREIGN SERVICE OR

THE PEACE CORPS

(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, 

the Foreign Service of the United States, or the Peace Corps 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. The Committee believes that it is 

unfair that members of the uniform services and Foreign Service 

of the United States are unable to avail themselves of the exclusion 

due to relocations required by service to their country. 

EXPLANATION OF PROVISION

Under the bill, an individual may elect to suspend for a maximum of five years the five-year test period for ownership and use 

during certain absences due to service in the uniformed services, 

the Foreign Service of the United States, or as Peace Corps volunteers or employees. The uniformed services include: (1) the Armed 

forces (the Army, Navy, Air Force, Marine Corps, and Coast 

Guard); (2) the commissioned corps of the National Oceanic and Atmospheric Administration; and (3) the commissioned corps of the 

Public Health Service. If the election is made, the five-year period 

ending on the date of the sale or exchange of a principal residence 

does not include any period up to five years during which the taxpayer or the taxpayer’s spouse is on qualified official extended duty 

as a member of the uniformed services, in Foreign Service of the 

United States, or on active duty assigned to a Peace Corps volunVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00017 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
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1 22 U.S.C. 2501 et. seq. 

teer under the Peace Corps Act1 or an employee of the Peace Corps. 

For these purposes, qualified official extended duty is any period of 

extended duty by a member of the uniformed services, or the Foreign Service of the United States while serving at a place of duty 

at least 150 miles away from the taxpayer’s principal residence or 

under orders compelling residence in Government furnished quarters. Extended duty is defined as any period of duty pursuant to 

a call or order to such duty for a period in excess of 180 days or 

for an indefinite period. Active duty for Peace Corps volunteers 

means a period in excess of 180 days or for an indefinite period. 

The election may be made with respect to only one property for a 

suspension period. 

EFFECTIVE DATE

The provision is effective for sales or exchanges after May 6, 

1997. 

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. The amount of death gratuity was increased to $6,000 but 

the amount of the exclusion was not increased to take into account 

this change. 

REASONS FOR CHANGE

The Committee believes that the amount of the exclusion for 

death gratuities provided to military personnel should be conformed to the present-law levels of such 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 that is pursuant to a provision of law enacted before December 31, 1991, with respect to the 

death of certain members of the Armed services on active duty, inactive duty training, or engaged in authorized travel. Therefore the 

amount of the exclusion is increased to $6,000. 

19

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 

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. 

In general, under HAP eligible individuals 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) as the purchase price for their property, an amount not to exceed 90 percent 

of the prior fair market value as is determined by the Secretary of 

Defense, or the amount of the outstanding mortgages. 

Tax treatment 

Unless specifically excluded, gross income for Federal income tax 

purposes includes all income from whatever source derived. 

Amounts received under HAP are received in connection with the 

performance of services. These amounts are includible in gross income as compensation for services to the extent such payments exceed the fair market value of the property relinquished in exchange 

for such payments. Additionally, such payments are wages for Federal Insurance Contributions Act (‘‘FICA’’) tax purposes (including 

Medicare). 

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. 

EXPLANATION OF PROVISION

The bill generally exempts from gross income amounts received 

under the HAP (as in effect on the date of enactment of this bill). 

Amounts received under the program also are not considered wages 

for FICA tax purposes (including Medicare). The excludable 

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

20

EFFECTIVE DATE

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

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 reVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
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2Two 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. 3The definition is done by cross-reference to 10 U.S.C. 101. 

sulting from injury received in the combat zone 2 or (2) time in 

missing in action status, plus the next 180 days. 

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 military personnel 

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 3 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 retenVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00021 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
22

tion 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. 

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. 

23

EFFECTIVE DATE

The provision is effective for taxable years beginning after the 

date of enactment. 

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) 

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. 

24

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

credits or certificates on behalf of a designated beneficiary which 

entitle the beneficiary to the waiver or payment of qualified higher 

education expenses of the beneficiary, or (2) in the case of a program established by and maintained by a State or agency or instrumentality thereof, may make contributions to an account which is 

established for the purpose of meeting the qualified higher education expenses of the designated beneficiary of the account. Contributions to qualified tuition programs may be made only in cash. 

Qualified tuition programs must have adequate safeguards to prevent contributions on behalf of a designated beneficiary in excess 

of amounts necessary to provide for the qualified higher education 

expenses of the beneficiary. 

The Code provides tax-exempt status to Coverdell education savings accounts (‘‘ESAs’’), meaning certain trusts or custodial accounts which are created or organized in the United States exclusively for the purpose of paying the qualified education expenses of 

a designated beneficiary. Contributions to ESAs may be made only 

in cash. Annual contributions to ESAs may not exceed $2,000 per 

beneficiary (except in cases involving certain tax-free rollovers) and 

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

Earnings on contributions to an ESA or qualified tuition program 

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

the gross income of the distributee to the extent that the total distribution does not exceed the qualified education expenses incurred 

by the beneficiary during the year the distribution is made. 

If the qualified education expenses of the beneficiary for the year 

are less than the total amount of the distribution from an ESA or 

qualified tuition program, then the qualified education expenses 

are deemed to be paid from a pro-rata share of both the principal 

and earnings components of the distribution. In such a case, only 

a portion of the earnings is excludable (i.e., the portion of the earnings based on the ratio that the qualified education expenses bear 

to the total amount of the distribution) and the remaining portion 

of the earnings is includible in the beneficiary’s gross income. 

The earnings portion of a distribution from an ESA or qualified 

tuition program that is includible in income is generally subject to 

an additional 10 percent tax. The 10 percent additional tax does 

not apply if a distribution is made on account of the death or disability of the designated beneficiary, or on account of a scholarship 

received by the designated beneficiary (to the extent it does not exceed the amount of the scholarship). 

Service obligations are required of recipients of appointments to 

the United States Military Academy, the United States Naval 

25

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. 

REASONS FOR CHANGE

The Committee believes that it is appropriate to treat appointments to a United States Service Academy in a manner similar to 

the treatment of qualified scholarships. Accordingly, 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 beneficiary at the United States 

Military Academy, the United States Naval Academy, the United 

States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy. 

The amount of funds that can be withdrawn penalty free is limited to the costs of advanced education as defined in 10 United 

States Code section 2005(e)(3) (as in effect on the date of the enactment of the bill) at such Academies. 

EFFECTIVE DATE

The provision applies to taxable years beginning after December 

31, 2002. 

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 demVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00025 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
26

onstrate 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. 

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 (or 

from the date of enactment of the bill, whichever is later) to the 

date when all designations or identifications with respect to the organization have been rescinded pursuant to the law or Executive 

order under which the designation or identification was made. 

The bill describes a terrorist organization as an organization that 

has been designated or otherwise individually identified (1) as a 

terrorist organization or foreign terrorist organization under the 

authority of section 212(a)(3)(B)(vi)(II) or section 219 of the Immigration and Nationality Act; (2) in or pursuant to an Executive 

order that is related to terrorism and issued under the authority 

of the International Emergency Economic Powers Act or section 5 

of the United Nations Participation Act for the purpose of imposing 

on such organization an economic or other sanction; or (3) in or 

pursuant to an Executive order that refers to the 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 

27

bill for any contribution to a terrorist organization under section 

170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 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 

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 bill is effective for designations made before, on, or after the 

date of enactment. 

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.

28

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 

expenses from their income, not just those who itemize their deductions. Accordingly, the Committee provides an above-the-line deduction for a portion of 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 $500 for any period during which the individual is more than 100 miles from home in connection with such 

services. 

EFFECTIVE DATE

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

TITLE II. MISCELLANEOUS PROVISIONS 

A. EXTENSION OF CERTAIN TAX RELIEF PROVISIONS TO ASTRONAUTS

(Sec. 201 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 

29

4Present law does not provide relief from self-employment tax liability. 

5Such amounts may, however, be excludable from gross income under the death benefit exclusion provided in section 102 of the Victims Bill. 6Thus, for example, payments made over a period of years could qualify for the exclusion. 

wounds or injury occurred.4 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 income tax for years eligible for the exclusion under the provision is 

less than $10,000, the individual is treated as having made a tax 

payment for such individual’s last taxable year in an amount equal 

to the excess of $10,000 over the amount of tax not imposed under 

the provision. 

Subject to rules prescribed by the Secretary, the exemption from 

tax does not apply to the tax attributable to (1) deferred compensation which would have been payable after death if the individual 

had died other than as a specified terrorist victim, or (2) amounts 

payable in the taxable year which would not have been payable in 

such taxable year but for an action taken after September 11, 2001. 

Thus, for example, the exemption does not apply to amounts payable from a qualified plan or individual retirement arrangement to 

the beneficiary or estate of the individual. Similarly, amounts payable only as death or survivor’s benefits pursuant to deferred compensation preexisting arrangements that would have been paid if 

the death had occurred for another reason are not covered by the 

exemption. In addition, if the individual’s employer makes adjustments to a plan or arrangement to accelerate the vesting of restricted property or the payment of nonqualified deferred compensation after the date of the particular attack, the exemption 

does not apply to income received as a result of that action.5 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 6) 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 

30

to rules prescribed by the Secretary, the exclusion does not apply 

to amounts that would have been payable if the individual had died 

for a reason other than the attack. The exclusion does apply, however, to death benefits provided under a qualified plan that satisfy 

the incidental benefit rule. 

For purposes of the exclusion, self-employed individuals are 

treated as employees. Thus, for example, payments by a partnership to the surviving spouse of a partner who died as a result of 

the September 11, 2001, attacks may be excludable under the provision. 

The tax relief does not apply to any individual identified by the 

Attorney General to have been a participant or conspirator in any 

terrorist attack to which the provision applies, or a representative 

of such individual. 

Estate tax relief 

Present law provides a reduction in Federal estate tax for taxable estates of U.S. citizens or residents who are active members 

of the U.S. Armed Forces and who are killed in action while serving in a combat zone (sec. 2201). This provision also applies to active service members who die as a result of wounds, disease, or injury suffered while serving in a combat zone by reason of a hazard 

to which the service member was subjected as an incident of such 

service. 

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 

31

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 eligible for Federal estate tax reduction under section 2201. In addition, 

the executor of an estate that is eligible for special estate tax treatment under section 2201 may elect not to have section 2201 apply 

to the estate. Thus, in the event that an estate may receive more 

favorable treatment without the application of section 2201 in the 

year of death than it would under section 2201, the executor may 

elect not to apply the provisions of section 2201, and the estate tax 

owed (if any) would be determined pursuant to the generally applicable rules. 

Under the Victims 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 by providing 

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 on a space mission (including the individuals who lost their 

lives in the space shuttle Columbia disaster). 

EFFECTIVE DATE

The provision is generally effective for qualified individuals 

whose lives are lost in the line of duty after December 31, 2002. 

32

B. COORDINATE FARMERS INCOME AVERAGING AND THE

ALTERNATIVE MINIMUM TAX

(Sec. 202 of the bill and sec. 55 of the Code) 

PRESENT LAW

An individual taxpayer engaged in a farming business as defined 

by section 263A(e)(4) may elect to compute his or her current year 

tax liability by averaging, over the prior three-year period, all or 

a portion of his or her taxable income from the trade or business 

of farming. The averaging election is not coordinated with the alternative minimum tax. Thus, some farmers may become subject to 

the alternative minimum tax solely as a result of the averaging 

election. 

REASONS FOR CHANGE

The Committee believes that farmer income averaging should be 

coordinated with the alternative minimum tax so that a farmer’s 

alternative minimum tax liability is not increased solely because he 

or she elects income averaging. 

DESCRIPTION OF PROPOSAL

The bill coordinates farmers income averaging with the alternative minimum tax. Under the bill, a farmer would owe alternative minimum tax only to the extent he or she would owe alternative minimum tax had averaging not been elected. This result is 

achieved by excluding the impact of the election to average farm 

income from the calculation of both regular tax and tentative minimum tax, solely for the purpose of determining alternative minimum tax. 

EFFECTIVE DATE

The bill is effective for taxable years beginning after December 

31, 2002. 

C. CAPITAL GAINS TREATMENT TO APPLY TO OUTRIGHT SALES OF

TIMBER BY LANDOWNER

(Sec. 203 of the bill and sec. 631(b) of the Code) 

PRESENT LAW

Under present law, a taxpayer disposing of timber held for more 

than one year is eligible for capital gains treatment in three situations. First, if the taxpayer sells or exchanges timber that is a capital asset (sec. 1221) or property used in the trade or business (sec. 

1231), the gain generally is long-term capital gain; however, if the 

timber is held for sale to customers in the taxpayer’s business, the 

gain will be ordinary income. Second, if the taxpayer disposes of 

the timber with a retained economic interest, the gain is eligible 

for capital gain treatment (sec. 631(b)). Third, if the taxpayer cuts 

standing timber, the taxpayer may elect to treat the cutting as a 

sale or exchange eligible for capital gains treatment (sec. 631(a)). 

33

REASONS FOR CHANGE

The Committee believes that the requirement that the owner of 

timber retain an economic interest in the timber in order to obtain 

capital gain treatment under section 631(b) results in poor timber 

management because the buyer, when cutting and removing timber, has no incentive to protect young or other uncut trees because 

the buyer only pays for the timber that is cut and removed. Therefore, the Committee bill eliminates this requirement and provides 

for capital gain treatment under section 631(b) in the case of outright sales of timber. 

EXPLANATION OF PROVISION

Under the bill, in the case of a sale of timber by the owner of 

the land from which the timber is cut, the requirement that a taxpayer retain an economic interest in the timber in order to treat 

gains as capital gain under section 631(b) does not apply. Outright 

sales of timber by the landowner will qualify for capital gains treatment in the same manner as sales with a retained economic interest qualify under present law, except that the usual tax rules relating to the timing of the income from the sale of the timber will 

apply (rather than the special rule of section 631(b) treating the 

disposal as occurring on the date the timber is cut). 

EFFECTIVE DATE

The provision is effective for sales of timber after the date of enactment. 

D. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHERRELATED CONDITIONS

(Sec. 204 of the bill and secs. 1033 and 451 of the Code) 

PRESENT LAW

Generally, a taxpayer recognizes gain to the extent the sales 

price (and any other consideration received) exceeds the seller’s 

basis in the property. The recognized gain is subject to current income tax unless the gain is deferred or not recognized under a special tax provision. 

Under section 1033, gain realized by a taxpayer from an involuntary conversion of property is deferred to the extent the taxpayer 

purchases property similar or related in service or use to the converted property within the applicable period. The taxpayer’s basis 

in the replacement property generally is the same as the taxpayer’s 

basis in the converted property, decreased by the amount of any 

money or loss recognized on the conversion, and increased by the 

amount of any gain recognized on the conversion. 

The applicable period for the taxpayer to replace the converted 

property begins with the date of the disposition of the converted 

property (or if earlier, the earliest date of the threat or imminence 

of requisition or condemnation of the converted property) and ends 

two years after the close of the first taxable year in which any part 

of the gain upon conversion is realized (the ‘‘replacement period’’). 

Special rules extend the replacement period for certain real property and principal residences damaged by a Presidentially declared 

34

disaster to three years and four years, respectively, after the close 

of the first taxable year in which gain is realized. 

Section 1033(e) provides that the sale of livestock (other than 

poultry) that is held for draft, breeding, or dairy purposes in excess 

of the number of livestock that would have been sold but for 

drought, flood, or other weather-related conditions is treated as an 

involuntary conversion. Consequently, gain from the sale of such 

livestock could be deferred by reinvesting the proceeds of the sale 

in similar property within a two-year period.

In general, cash-method taxpayers report income in the year it 

is actually or constructively received. However, section 451(e) provides that a cash-method taxpayer whose principal trade or business is farming who is forced to sell livestock due to drought, flood, 

or other weather-related conditions may elect to include income 

from the sale of the livestock in the taxable year following the taxable year of the sale. This elective deferral of income is available 

only if the taxpayer establishes that, under the taxpayer’s usual 

business practices, the sale would not have occurred but for 

drought, flood, or weather-related conditions that resulted in the 

area being designated as eligible for Federal assistance. This exception is generally intended to put taxpayers who receive an unusually high amount of income in one year in the position they would 

have been in absent the weather-related condition. 

REASONS FOR CHANGE

The Committee is aware of situations in which cattlemen sold 

livestock in excess of the their usual business practice as a result 

of weather-related conditions, but have been unable to purchase replacement property because the weather-related conditions have 

continued. The Committee believes it is appropriate to extend the 

time period for cattlemen to purchase replacement property in such 

situations. 

EXPLANATION OF PROVISION

The provision extends the applicable period for a taxpayer to replace livestock sold on account of drought, flood, or other weatherrelated conditions from two years to four years after the close of 

the first taxable year in which any part of the gain on conversion 

is realized. The extension is only available if the taxpayer establishes that, under the taxpayer’s usual business practices, the sale 

would not have occurred but for drought, flood, or weather-related 

conditions that resulted in the area being designated as eligible for 

Federal assistance. In addition, the Secretary of the Treasury is 

granted authority to further extend the replacement period on a regional basis should the weather-related conditions continue longer 

than 3 years. Also, for property eligible for the provision’s extended 

replacement period, the provision provides that the taxpayer can 

make an election under section 451(e) until the period for reinvestment of such property under section 1033 expires. 

EFFECTIVE DATE

The provision is effective for any taxable year with respect to 

which the due date (without regard to extensions) for the return is 

after December 31, 2002. 

35

7Sec. 4161(b)(1)(A). 

8Sec. 4161(b)(2). 

9Sec. 4161(b)(1)(B). 

E. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS

(Sec. 205 of the bill and sec. 4161 of the Code) 

PRESENT LAW

The Code imposes an excise tax of 11 percent on the sale by a 

manufacturer, producer or importer of any bow with a draw rate 

of 10 pounds or more.7 An excise tax of 12.4 percent is imposed on 

the sale by a manufacturer or importer of any shaft, point, nock, 

or vane designed for use as part of an arrow which after its assembly (1) is over 18 inches long, or (2) is designed for use with a taxable bow (if shorter than 18 inches).8 No tax is imposed on finished 

arrows. An 11-percent excise tax also is imposed on any part of an 

accessory for taxable bows and on quivers for use with arrows (1) 

over 18 inches long or (2) designed for use with a taxable bow (if 

shorter than 18 inches).9

REASONS FOR CHANGE

Under present law, foreign manufacturers and importers of arrows avoid the 12.4 percent excise tax paid by domestic manufacturers because the tax is placed on arrow components rather than 

finished arrows. As a result, arrows assembled outside of the 

United States have a price advantage over domestically manufactured arrows. The Committee believes it is appropriate to close this 

loophole. The Committee also believes that adjusting the minimum 

draw weight for taxable bows from ten pounds to 30 pounds will 

better target the excise tax to actual hunting use by eliminating 

the excise tax on instructional (‘‘youth’’) bows. 

EXPLANATION OF PROVISION

The bill increases the minimum draw weight for a taxable bow 

from 10 pounds to 30 pounds. The bill also imposes an excise tax 

of 12 percent on arrows generally. An arrow for this purpose is defined as an arrow shaft to which additional components are attached. The present law 12.4-percent excise tax on certain arrow 

components is unchanged by the proposal. The bill provides that 

the 12-percent excise tax on arrows will not apply if the arrow contains an arrow shaft that was subject to the tax on arrow components. Finally, the bill subjects certain broadheads (a type of arrow 

point) to an excise tax equal to 11 percent of the sales price instead 

of 12.4 percent. 

EFFECTIVE DATE

The provision is effective for articles sold by the manufacturer, 

producer, or importer 90 days after the date of enactment. 

36

F. REPEAL EXCISE TAX ON FISHING TACKLE BOXES

(Sec. 206 of the bill and sec. 4162 of the Code) 

PRESENT LAW

Under present law, a 10-percent manufacturer’s excise tax is imposed on specified sport fishing equipment. Examples of taxable 

equipment include fishing rods and poles, fishing reels, artificial 

bait, fishing lures, line and hooks, and fishing tackle boxes. Revenues from the excise tax on sport fishing equipment are deposited 

in the Sport Fishing Account of the Aquatic Resources Trust Fund. 

Monies in the fund are spent, subject to an existing permanent appropriation, to support Federal-State sport fish enhancement and 

safety programs. 

REASONS FOR CHANGE

The Committee observes that fishing ‘‘tackle boxes’’ are little different in design and appearance from ‘‘tool boxes,’’ yet the former 

are subject to a Federal excise tax at a rate of 10-percent, while 

the latter are not subject to Federal excise tax. This excise tax can 

create a sufficiently large price difference that some fishermen will 

choose to use a ‘‘tool box’’ to hold their hooks and lures rather than 

a traditional ‘‘tackle box.’’ The Committee finds that such a distortion of consumer choice places an inappropriate burden on the 

manufacturers and purchasers of traditional tackle boxes, particularly in comparison to the modest amount of revenue raised by the 

present-law provision, and that this burden warrants repeal of the 

tax. The Committee also believes that elimination of the excise tax 

on tackle boxes will provide some modest simplification of the tax 

system for both taxpayers and the Internal Revenue Service. 

EXPLANATION OF PROVISION

The excise tax on fishing tackle boxes is repealed. 

EFFECTIVE DATE

The provision is effective beginning 30 days after the date of enactment. 

G. BTU-BASED RATE FOR DIESEL/WATER EMULSION FUEL

(Sec. 207 of the bill and secs. 4081 and 6427 of the Code) 

PRESENT LAW

A 24.3 cents per gallon excise tax is imposed on diesel fuel to finance the Highway Trust Fund. Gasoline and most special motor 

fuels are subject to tax at 18.3 cents per gallon for the Trust Fund. 

The statutory rate for certain special motor fuels is determined on 

an energy equivalent basis, as follows:

Liquefied petroleum gas (propane) ........................................................ 13.6 cents per gallon.

Liquefied natural gas ............................................................................. 11.9 cents per gallon.

Methanol derived from petroleum or natural gas ................................ 9.15 cents per gallon.

Compressed natural gas ......................................................................... 48.54 cents per MCF.

37

No special tax rate is provided for diesel fuel blended in a water 

emulsion fuel. 

REASONS FOR CHANGE

The Highway Trust Fund taxes are structured to reflect use of 

the highway system. Because diesel/water emulsion fuels have 

fewer Btu’s, larger quantities must be purchased to travel the same 

number of miles as regular diesel fuel. A Btu-based tax rate better 

correlates highway use and tax paid, and is consistent with the 

present law principle of taxing special motor fuels based on their 

energy content. The Committee further understands that the diesel 

fuel/water emulsion fuel may reduce air pollutants relative to regular diesel fuel and believes that the Btu-based rate, by removing 

a tax disadvantage to use of the fuel, will be beneficial to the environment. 

EXPLANATION OF PROVISION

A special tax rate of 19.7 cents per gallon is provided for diesel 

fuel blended with water into a diesel/water emulsion fuel to reflect 

the reduced Btu content per gallon resulting from the water. Emulsion fuels eligible for the special rate must consist of not more than 

86 percent diesel fuel (and other minor chemical additives to enhance combustion) and at least 14 percent water. 

EFFECTIVE DATE

The provision applies to fuels removed after September 30, 2003. 

H. EXPAND HUMAN CLINICAL TRIALS EXPENSES QUALIFYING FOR

THE ORPHAN DRUG TAX CREDIT

(Sec. 208 of the bill and sec. 280C of the Code) 

PRESENT LAW

Taxpayers may claim a 50-percent orphan drug tax credit for expenses related to human clinical testing of drugs for the treatment 

of certain rare diseases and conditions, generally those that afflict 

less than 200,000 persons in the United States. Qualifying expenses are those paid or incurred by the taxpayer after the date 

on which the drug is designated as a potential treatment for a rare 

disease or disorder by the Food and Drug Administration (‘‘FDA’’) 

in accordance with section 526 of the Federal Food, Drug, and Cosmetic Act. 

REASONS FOR CHANGE

The Committee understands that approval for human clinical 

testing and designation as a potential treatment for a rare disease 

or disorder require separate reviews within the FDA. As a result, 

in some cases, a taxpayer may be permitted to begin human clinical testing prior to a drug being designated as a potential treatment for a rare disease or disorder. If the taxpayer delays human 

clinical testing in order to obtain the benefits of the orphan drug 

tax credit, which currently may be claimed only for expenses incurred after the drug is designated as a potential treatment for a 

rare disease or disorder, valuable time will have been lost and 

Congress’s original intent in enacting the orphan drug tax credit 

38

10 Joint Committee on Taxation, Study of the Overall State of the Federal Tax System and Recommendations for Simplification, Pursuant to Section 8022(3)(b) of the Internal Revenue Code 

of 1986, Vol. II (JCS–3–01), April 2001, p. 310. 11Present and prior law allows the custodial parent to release the right to claim the dependency exemption for a child to the noncustodial parent. In addition, if certain requirements are 

met, the parents may decide by agreement that the noncustodial parent is entitled to the dependency exemption with respect to a child. In such cases, the provision treats the child as the 

dependent of the custodial parent for purposes of the credit.

will have been partially thwarted. Because taxpayers generally 

seek designation of a potential drug as a treatment for a rare disease or disorder at the time they seek approval to clinically test 

such drugs, the Committee believes it is appropriate to make such 

expenses related to human clinical testing that the taxpayer incurs 

prior to FDA designation eligible for the orphan drug tax credit to 

help speed cures to such insidious diseases.

The Committee also observed that the staff of the Joint Committee on Taxation recommended this change as part of its 2001 

simplification study.10

EXPLANATION OF PROVISION

The bill expands qualifying expenses to include those expenses 

related to human clinical testing incurred after the date on which 

the taxpayer files an application with the FDA for designation of 

the drug under section 526 of the Federal Food, Drug, and Cosmetic Act as a potential treatment for a rare disease or disorder. 

As under present law, the credit may only be claimed for such expenses related to drugs designated as a potential treatment for a 

rare disease or disorder by the FDA in accordance with section 526 

of such Act. 

EFFECTIVE DATE

The provision is effective for expenditures paid or incurred after 

the date of enactment. 

I. CONSUMER OPTIONS UNDER THE REFUNDABLE CREDIT FOR

HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS

(Sec. 209 of the bill and sec. 35 of the Code) 

PRESENT LAW

Refundable health insurance credit: in general 

In the case of taxpayers who are eligible individuals, a refundable tax credit is provided for 65 percent of the taxpayer’s expenses 

for qualified health insurance of the taxpayer and qualifying family 

members for each eligible coverage month beginning in the taxable 

year. The credit is available only with respect to amounts paid by 

the taxpayer. The credit is available in taxable years beginning 

after December 31, 2002. 

Qualifying family members are the taxpayer’s spouse and any dependent of the taxpayer with respect to whom the taxpayer is entitled to claim a dependency exemption.11 Any individual who has 

other specified coverage is not a qualifying family member. 

Persons eligible for the credit 

Eligibility for the credit is determined on a monthly basis. In 

general, an eligible coverage month is any month if, as of the first 

39

12The date of enactment is August 6, 2002. 13Part I of subchapter B, or subchapter D, of chapter 2 of title II of the Trade Act of 1974. 14 Excepted benefits are: (1) coverage only for accident or disability income or any combination 

thereof; (2) coverage issued as a supplement to liability insurance; (3) liability insurance, including general liability insurance and automobile liability insurance; (4) worker’s compensation or 

similar insurance; (5) automobile medical payment insurance; (6) credit-only insurance; (7) coverage for on-site medical clinics; (8) other insurance coverage similar to the coverages in (1)–

(7) specified in regulations under which benefits for medical care are secondary or incidental 

to other insurance benefits; (9) limited scope dental or vision benefits; (10) benefits for long-term 

care, nursing home care, home health care, community-based care, or any combination thereof; 

and (11) other benefits similar to those in (9) and (10) as specified in regulations; (12) coverage 

only for a specified disease or illness; (13) hospital indemnity or other fixed indemnity insurance; and (14) Medicare supplemental insurance. 15 An amount is considered paid by the employer if it is excludable from income. Thus, for 

example, amounts paid for health coverage on a salary reduction basis under an employer plan 

are considered paid by the employer. 16Specifically, an individual is not eligible for the credit if, as of the first day of the month, 

the individual is (1) entitled to benefits under Medicare Part A, enrolled in Medicare Part B, 

or enrolled in Medicaid or SCHIP, (2) enrolled in a health benefits plan under the Federal EmContinued

day of the month, the taxpayer (1) is an eligible individual, (2) is 

covered by qualified health insurance, (3) does not have other specified coverage, and (4) is not imprisoned under Federal, State, or 

local authority. In the case of a joint return, the eligibility requirements are met if at least one spouse satisfies the requirements. An 

eligible month must begin more than 90 days after the date of enactment of the Trade Act of 2002.12

An eligible individual is (1) an eligible TAA recipient, (2) an eligible alternative TAA recipient, and (3) an eligible PBGC pension recipient. 

An individual is an eligible TAA recipient during any month if 

the individual (1) is receiving for any day of such month a trade 

adjustment allowance 13 or who would be eligible to receive such an 

allowance but for the requirement that the individual exhaust unemployment benefits before being eligible to receive an allowance 

and (2) with respect to such allowance, is covered under a certification issued under subchapter A or D of chapter 2 of title II of the 

Trade Act of 1974. An individual is treated as an eligible TAA recipient during the first month that such individual would otherwise 

cease to be an eligible TAA recipient. 

An individual is an eligible alternative TAA recipient during any 

month if the individual (1) is a worker described in section 

246(a)(3)(B) of the Trade Act of 1974 who is participating in the 

program established under section 246(a)(1) of such Act, and (2) is 

receiving a benefit for such month under section 246(a)(2) of such 

Act. An individual is treated as an eligible alternative TAA recipient during the first month that such individual would otherwise 

cease to be an eligible TAA recipient. 

An individual is a PBGC pension recipient for any month if he 

or she (1) is age 55 or over as of the first day of the month, and 

(2) is receiving a benefit any portion of which is paid by the Pension Benefit Guaranty Corporation (the ‘‘PBGC’’). 

An otherwise eligible taxpayer is not eligible for the credit for a 

month if, as of the first day of the month the individual has other 

specified coverage. Other specified coverage is (1) coverage under 

any insurance which constitutes medical care (except for insurance 

substantially all of the coverage of which is for excepted benefits) 14

if at least 50 percent of the cost of the coverage is paid by an employer 15 (or former employer) of the individual or his or her spouse 

or (2) coverage under certain governmental health programs.16 A 

40

ployees Health Benefit Plan, or (3) entitled to receive benefits under chapter 55 of title 10 of 

the United States Code (relating to military personnel). An individual is not considered to be 

enrolled in Medicaid solely by reason of receiving immunizations. 17For this purpose, ‘‘individual health insurance’’ means any insurance which constitutes 

medical care offered to individuals other than in connection with a group health plan. Such term 

does not include Federal- or State-based health insurance coverage. 18 Creditable coverage is determined under the Health Care Portability and Accountability Act 

(Code sec. 9801(c)). 

rule aggregating plans of the same employer applies in determining 

whether the employer pays at least 50 percent of the cost of coverage. A person is not an eligible individual if he or she may be 

claimed as a dependent on another person’s tax return. A special 

rule applies with respect to alternative TAA recipients. 

Qualified health insurance 

Qualified health insurance eligible for the credit is: (1) COBRA 

continuation coverage; (2) State based continuation coverage provided by the State under a State law that requires such coverage; 

(3) coverage offered through a qualified State high risk pool; (4) 

coverage under a health insurance program offered to State employees or a comparable program; (5) coverage through an arrangement entered into by a State and a group health plan, an issuer 

of health insurance coverage, an administrator, or an employer; (6) 

coverage offered through a State arrangement with a private sector 

health care coverage purchasing pool; (7) coverage under a Stateoperated health plan that does not receive any Federal financial 

participation; (8) coverage under a group health plan that is available through the employment of the eligible individual’s spouse; 

and (9) coverage under individual health insurance if the eligible 

individual was covered under individual health insurance during 

the entire 30-day period that ends on the date the individual became separated from the employment which qualified the individual for the TAA allowance, the benefit for an eligible alternative 

TAA recipient, or a pension benefit from the PBGC, whichever applies.17

Qualified health insurance does not include any State-based coverage (i.e., coverage described in (2)–(8) in the preceding paragraph), unless the State has elected to have such coverage treated 

as qualified health insurance and such coverage meets certain requirements. Such State coverage must provide that each qualifying 

individual is guaranteed enrollment if the individual pays the premium for enrollment or provides a qualified health insurance costs 

eligibility certificate and pays the remainder of the premium. In 

addition, the State-based coverage cannot impose any pre-existing 

condition limitation with respect to qualifying individuals. Statebased coverage cannot require a qualifying individual to pay a premium or contribution that is greater than the premium or contribution for a similarly situated individual who is not a qualified individual. Finally, benefits under the State-based coverage must be 

the same as (or substantially similar to) benefits provided to similarly situated individuals who are not qualifying individuals. A 

qualifying individual is an eligible individual who seeks to enroll 

in the State-based coverage and who has aggregate periods of creditable coverage 18 of three months or longer, does not have other 

specified coverage, and who is not imprisoned. A qualifying indiVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00040 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
41

vidual also includes qualified family members of such an eligible 

individual. 

Qualified health insurance does not include coverage under a 

flexible spending or similar arrangement or any insurance if substantially all of the coverage is of excepted benefits. 

Other rules 

Amounts taken into account in determining the credit may not 

be taken into account in determining the amount allowable under 

the itemized deduction for medical expenses or the deduction for 

health insurance expenses of self-employed individuals. Amounts 

distributed from a medical savings account are not eligible for the 

credit. The amount of the credit available through filing a tax return is reduced by any credit received on an advance basis. Married taxpayers filing separate returns are eligible for the credit; 

however, if both spouses are eligible individuals and the spouses 

file a separate return, then the spouse of the taxpayer is not a 

qualifying family member. 

The Secretary of the Treasury is authorized to prescribe such 

regulations and other guidance as may be necessary or appropriate 

to carry out the provision. 

Advance payment of refundable health insurance credit; reporting 

requirements 

The credit is to be payable on an advance basis (i.e., prior to the 

filing of the taxpayer’s return) pursuant to a program to be established by the Secretary of the Treasury no later than August 1, 

2003. The disclosure of return information of certified individuals 

to providers of health insurance information is permitted to the extent necessary to carry out the advance payment mechanism. Any 

person who receives payments during a calendar year for qualified 

health insurance and claims a reimbursement for an advance credit 

amount is required to file an information return with respect to 

each individual from whom such payments were received or for 

whom such a reimbursement is claimed. 

REASONS FOR CHANGE

The laws of most States do not impose the requirements necessary for State-based coverage to qualify as qualified health insurance eligible for the refundable health insurance tax credit. Otherwise eligible individuals in some State pools are not able to receive 

the tax credit unless the States affirmatively change their requirements. Given the relatively small number of individuals otherwise 

eligible for the heath insurance tax credit in any particular State, 

the Committee believes that it is unlikely that States will affirmatively change their laws. Therefore, few individuals are able to access the tax credit for State-based coverage. 

EXPLANATION OF PROVISION

The bill allows State-based coverage to meet the definition of 

qualified health insurance eligible for the refundable health insurance tax credit if the eligible individual elects to waive the requirements for State-based coverage, including the requirements that 

the State-based coverage would otherwise have to meet with reVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00041 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
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19Sec. 465. 20Sec. 465(b)(6). 21Sec. 49(a)(1)(D)(iv). 22Sec. 465(b)(3)(C). 23Sec. 465(b)(6)(A). 

spect to guaranteed issue, preexisting conditions, premiums, and 

similar benefits. 

EFFECTIVE DATE

The provision is effective for eligible coverage months beginning 

after the date of enactment and before January 1, 2005. 

J. MODIFY AT-RISK RULES FOR PUBLICLY TRADED NONRECOURSE

DEBT

(Sec. 210 of the bill and sec. 465(b)(6) of the Code) 

PRESENT LAW

Present law provides an at-risk limitation on losses from business and income-producing activities, applicable to individuals and 

certain closely held corporations.19 Under the at-risk rules, a taxpayer generally is not considered at risk with respect to borrowed 

amounts if the taxpayer is not personally liable for repayment of 

the debt (e.g., nonrecourse loans), and in certain other circumstances. 

In the case of the activity of holding real property, however, an 

exception is provided for qualified nonrecourse financing that is secured by real property used in the activity.20 The qualified nonrecourse financing rules require, among other things, that the financing be borrowed by the taxpayer from a qualified person or 

from certain governmental entities. For this purpose, a qualified 

person is one that is actively and regularly engaged in the business 

of lending money (and that is not a related person with respect to 

the taxpayer, is not a person from whom the taxpayer acquired the 

property or a related person, and is not a person that receives a 

fee with respect to the taxpayer’s investment or a related person.21

A related person is one with certain types of relationships to the 

taxpayer defined by statute.22 The qualified nonrecourse financing 

rules also require that the financing be secured by real property 

used in the activity.23

REASONS FOR CHANGE

The Committee understands that the rule requiring that the financing be borrowed from a person that is actively and regularly 

engaged in the business of lending money hinders the use of publicly traded debt in real estate financing to which the at-risk rules 

apply, because absent restrictions on sale of the debt, the holders 

of publicly traded debt could be persons other than those who are 

actively and regularly engaged in the business of lending money 

(even though such persons are not related persons). In addition, the 

Committee understands that publicly traded debt may often be 

debt that is not mortgage debt and is not otherwise secured by real 

property used in the real estate activity. Nevertheless, the Committee is aware that seller financing and related-party financing 

can give rise to deduction shifting and overvaluation problems that 

43

the at-risk rules are designed to address. Thus, the Committee bill 

provides that qualified nonrecourse financing in the case of the activity of holding real property can include certain publicly traded 

debt that is not borrowed from a person who is actively and regularly engaged in the business of lending money, and that is not secured by property used in the real estate activity, so long as the 

present-law prohibitions against seller financing and related party 

financing continue to apply. In addition, to address concerns about 

shifting deductions among taxpayers through the use of relatively 

risky debt with a relatively high yield, which may tend to resemble 

an equity investment, the yield on the publicly traded debt under 

the provision is limited in the same manner as the yield under 

high-yield debt obligations under present law. 

EXPLANATION OF PROVISION

The bill modifies the rules relating to qualified nonrecourse financing to provide that, in the case of an activity of holding real 

property, a taxpayer is considered at risk with respect to the taxpayer’s share of certain financing that is not borrowed from a person that is regularly engaged in the business of lending money, and 

that is not secured by real property used in the activity, if the financing is qualified publicly traded debt. 

The financing may not be borrowed from a person that is a related person with respect to the taxpayer, that is a person from 

whom the taxpayer acquired the property or a related person, or 

that is a person that receives a fee with respect to the taxpayer’s 

investment or a related person. 

Qualified publicly traded debt generally means any debt instrument that is readily tradable on an established securities market. 

However, qualified publicly traded debt does not include any debt 

instrument, the yield to maturity on which equals or exceeds the 

applicable Federal rate of interest for the calendar month in which 

it is issued, plus 5 percentage points. The applicable Federal rate 

is the rate determined under section 1274(d) with respect to the 

term of the debt instrument. Under the bill, it is intended that 

‘‘readily tradable on an established securities market’’ have the 

same meaning as under section 453(f)(5). 

EFFECTIVE DATE

The provision is effective for debt instruments issued after the 

date of enactment. 

K. EXCLUSION OF CERTAIN HORSE-RACING GAMBLING WINNINGS

FROM THE INCOME OF NONRESIDENT NONCITIZEN INDIVIDUALS

(Sec. 211 of the bill and sec. 872(b) of the Code) 

PRESENT LAW

Under section 871, certain items of gross income received by a 

nonresident noncitizen from sources within the United States are 

subject to a flat 30–percent withholding tax. Gambling winnings received by a nonresident noncitizen from wagers placed in the 

United States are U.S.-source and thus generally are subject to this 

withholding tax, unless exempted by treaty. Currently, several U.S. 

income tax treaties exempt U.S.-source gambling winnings of resiVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00043 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
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24 In pari-mutuel wagering (common in horse racing), odds and payouts are determined by the 

aggregate bets placed. The money wagered in placed into a pool, the party maintaining the pool 

takes a percentage of the total, and the bettors effectively bet against each other. Pari-mutuel 

wagering may be contrasted with fixed-odds wagering (common in sports wagering), in which 

odds (or perhaps a point spread) are agreed to by the bettor and the party taking the bet and 

are not affected by the bets placed by other bettors. 

dents of the other treaty country from U.S. withholding tax. In addition, no withholding tax is imposed under section 871 on the nonbusiness gambling income of a nonresident noncitizen from wagers 

on the following games (except to the extent that the Secretary determines that collection of the tax would be administratively feasible): blackjack, baccarat, craps, roulette, and big-6 wheel. Various 

other (non-gambling-related) items of income of a nonresident noncitizen are excluded from gross income under section 872(b) and 

are thereby exempt from the 30-percent withholding tax, without 

any authority for the Secretary to impose the tax by regulation. In 

cases in which a withholding tax on gambling winnings applies, 

section 1441(a) of the Code requires the party making the winning 

payout to withhold the appropriate amount and makes that party 

responsible for amounts not withheld. 

With respect to gambling winnings of a nonresident noncitizen 

resulting from a wager initiated outside the United States on a 

pari-mutuel 24 event taking place within the United States, the 

source of the winnings, and thus the applicability of the 30-percent 

U.S. withholding tax, depends on the type of wagering pool from 

which the winnings are paid. If the payout is made from a separate 

foreign pool, maintained completely in a foreign jurisdiction (e.g., 

a pool maintained by a racetrack or off-track betting parlor that is 

showing in a foreign country a simulcast of a horse race taking 

place in the United States), then the winnings paid to a nonresident noncitizen generally would not be subject to withholding 

tax, because the amounts received generally would not be from 

sources within the United States. However, if the payout is made 

from a ‘‘merged’’ or ‘‘commingled’’ pool, in which betting pools in 

the United States and the foreign country are combined for a particular event, then the portion of the payout attributable to wagers 

placed in the United States could be subject to withholding tax. 

The party making the payment, in this case a racetrack or off-track 

betting parlor in a foreign country, would be responsible for withholding the tax. 

REASONS FOR CHANGE

The Committee recognizes that there is significant interest in 

American horse racing around the world. Because of the barriers 

in present law, the wagers of nonresident noncitizens generally are 

not placed in U.S. pari-mutuel wagering pools. Thus, while the domestic horse industry is ‘‘exporting’’ their product via simulcasting 

of their races, they are doing so to a market effectively limited by 

the 30 percent withholding rule. Specifically, the host track is deprived of the 2–3 percent fees on additional amounts that would be 

wagered if nonresident noncitizens could participate in larger and 

more stable pools. These funds increase the purses for horse owners and support the seven million jobs directly and indirectly supported by the domestic horse industry. Passage of this legislation 

will increase horse industry revenue and the jobs it supports. AcVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00044 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
45

25Treas. Reg. sec. 1.1388–1(a)(1). 

cordingly, the Committee believes the structure of present law, 

which discourages nonresident noncitizens from placing wagers on 

U.S. horse races, is an impediment to the continued growth of this 

domestic industry. 

EXPLANATION OF PROVISION

The bill provides an exclusion from gross income under section 

872(b) for winnings paid to a nonresident noncitizen resulting from 

a legal wager initiated outside the United States in a pari-mutuel 

pool on a live horse race in the United States, regardless of whether the pool is a separate foreign pool or a merged U.S.-foreign pool. 

EFFECTIVE DATE

The provision applies to proceeds from wagering transactions 

after September 30, 2003. 

L. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT

REDUCING PATRONAGE DIVIDENDS

(Sec. 212 of the bill and sec. 1388 of the Code) 

PRESENT LAW

Under present law, cooperatives generally are treated similarly 

to pass-through entities in that a cooperative is not subject to corporate income tax to the extent the cooperative timely pays patronage dividends. In general, patronage dividends are comprised of 

amounts that are paid to patrons (1) on the basis of the quantity 

or value of business done with or for patrons, (2) under a valid enforceable written obligation to the patron that was in existence before the cooperative received such amounts, and (3) which are determined by reference to the net earnings of the cooperative from 

business done with or for patrons.

Treasury Regulations provide that net earnings are reduced by 

dividends paid on capital stock or other proprietary capital interests (referred to as the ‘‘dividend allocation rule’’).25 The effect of 

this rule is to reduce the amount of earnings that a cooperative can 

treat as patronage income and, thus, the amount that the cooperative can deduct as patronage dividends. 

REASONS FOR CHANGE

The Committee believes that the dividend allocation rule should 

not apply to the extent that the organizational documents of a cooperative provide that capital stock dividends do not reduce the 

amounts owed to patrons as patronage dividends. To the extent 

that capital stock dividends are in addition to amounts paid under 

the cooperative’s organizational documents to patrons as patronage 

dividends, the Committee believes that those capital stock dividends are not being paid from earnings from patronage business. 

In addition, the Committee believes cooperatives should be able 

to raise needed equity capital by issuance of capital stock without 

dividends paid on such capital stock causing taxation of the cooperative on a portion of its patronage income. 

46

26 Residential rental projects must satisfy low-income tenant occupancy requirements for a 

minimum period of 15 years. 

EXPLANATION OF PROVISION

The bill provides a special rule for dividends on capital stock of 

a cooperative. To the extent provided in organizational documents 

of the cooperative, dividends on capital stock do not reduce patronage income. 

EFFECTIVE DATE

The provision is effective for distributions made in taxable years 

beginning after the date of enactment. 

M. PILOT PROJECT FOR FOREST CONSERVATION ACTIVITIES

(Sec. 213 of the bill) 

PRESENT LAW

Tax-exempt bonds 

In general 

Interest on debt incurred by States or local governments is excluded from income if the proceeds of the borrowing are used to 

carry out governmental functions of those entities or the debt is repaid with governmental funds (section 103). Interest on bonds that 

nominally are issued by States or local governments, but the proceeds of which are used (directly or indirectly) by a private person 

and payment of which is derived from funds of such a private person is taxable unless the purpose of the borrowing is approved specifically in the Code or in a non-Code provision of a revenue Act. 

These bonds are called ‘‘private activity bonds.’’ The term ‘‘private 

person’’ includes the Federal Government and all other individuals 

and entities other than States or local governments. 

Private activities eligible for financing with tax-exempt private activity bonds 

Present law includes several exceptions permitting States or 

local governments to act as conduits providing tax-exempt financing for private activities. Both capital expenditures and limited 

working capital expenditures of charitable organizations described 

in section 501(c)(3) of the Code may be financed with tax-exempt 

bonds (‘‘qualified 501(c)(3) bonds’’). 

States or local governments may issue tax-exempt ‘‘exempt-facility bonds’’ to finance property for certain private businesses. Business facilities eligible for this financing include transportation (airports, ports, local mass commuting, and high speed intercity rail facilities); privately owned and/or privately operated public works facilities (sewage, solid waste disposal, local district heating or cooling, and hazardous waste disposal facilities); privately owned and/

or operated low-income rental housing; 26 and certain private facilities for the local furnishing of electricity or gas. A further provision 

allows tax-exempt financing for ‘‘environmental enhancements of 

hydro-electric generating facilities.’’ Tax-exempt financing also is 

authorized for capital expenditures for small manufacturing facilities and land and equipment for first-time farmers (‘‘qualified 

47

small-issue bonds’’), local redevelopment activities (‘‘qualified redevelopment bonds’’), and eligible empowerment zone and enterprise 

community businesses. Tax-exempt private activity bonds also may 

be issued to finance limited non-business purposes: certain student 

loans and mortgage loans for owner-occupied housing (‘‘qualified 

mortgage bonds’’ and ‘‘qualified veterans’’ mortgage bonds’’). 

With the exception of qualified 501(c)(3) bonds, private activity 

bonds may not be issued to finance working capital requirements 

of private businesses. In most cases, the aggregate volume of taxexempt private activity bonds that may be issued in a State is restricted by annual volume limits. 

Several additional restrictions apply to the issuance of tax-exempt bonds. First, private activity bonds (other than qualified 

501(c)(3) bonds) may not be advance refunded. Governmental bonds 

and qualified 501(c)(3) bonds may be advance refunded one time. 

An advance refunding occurs when the refunded bonds are not retired within 90 days of issuance of the refunding bonds. 

Issuance of private activity bonds is subject to restrictions on use 

of proceeds for the acquisition of land and existing property, use of 

proceeds to finance certain specified facilities (e.g., airplanes, 

skyboxes, other luxury boxes, health club facilities, gambling facilities, and liquor stores) and use of proceeds to pay costs of issuance 

(e.g., bond counsel and underwriter fees). Additionally, the term of 

the bonds generally may not exceed 120 percent of the economic 

life of the property being financed and certain public approval requirements (similar to requirements that typically apply under 

State law to issuance of governmental debt) apply under Federal 

law to issuance of private activity bonds. Present and prior law 

precludes substantial users of property financed with private activity bonds from owning the bonds to prevent their deducting tax-exempt interest paid to themselves. Finally, owners of most privateactivity-bond-financed property are subject to special ‘‘change-inuse’’ penalties if the use of the bond-financed property changes to 

a use that is not eligible for tax-exempt financing while the bonds 

are outstanding. 

Taxation of income from timber harvesting 

In general, gross income for Federal income tax purposes means 

all income from whatever source derived, including gross income 

derived from a trade or business. An organization exempt from taxation generally is subject to tax on its unrelated business taxable 

income, generally defined to mean gross income (less deductions) 

derived from a trade or business, the conduct of which is not substantially related to the exercise or performance of the organization’s exempt purposes or functions, that is regularly carried on by 

the organization. Special unrelated trade or business income rules 

applicable to the cutting of timber are contained in sections 

512(b)(5) and 631. Under these rules, the determination of whether 

income derived from the cutting of timber constitutes unrelated 

trade or business income depends upon a variety of factors. 

REASONS FOR CHANGE

Many forests have a higher fair market value as land to be developed for residential purposes than as working forests or as forests 

dedicated to conservation purposes. These increased fair market 

48

27The Evergreen Forest Trust is a nonprofit corporation incorporated on February 25, 2000, 

under chapter 24.03 of the Revised Code of Washington, recognized as an organization described 

under section 501(c)(3) on May 11, 2001. 

values oftentimes make it difficult or impossible for nonprofit conservation organizations or governments to acquire forests so that 

they can be used and managed consistent with long-term conservation purposes. The Committee believes that it is appropriate to provide certain tax incentives to further the goal of permanently setting aside working forests for qualified conservation purposes. The 

Committee believes that providing tax-exempt financing to nonprofit organizations for the purpose of acquiring forests and forest 

lands to be dedicated to qualified conservation purposes will increase their ability to purchase such properties from commercial 

owners and operators, and that providing limited exclusions from 

income tax to such nonprofit organizations will enable them to conduct charitable and conservation activities as they make debt service payments on the bonds. 

EXPLANATION OF PROVISION

Exempt facility bonds 

The bill permits the Evergreen Forest Trust 27 to acquire forest 

and forest land in the State of Washington using up to $250 million 

of tax-exempt bonds. The bill creates a new category of tax-exempt 

bonds, the qualified forest conservation bond. A qualified forest 

conservation bond means any bond issued as part of an issue if: (1) 

95 percent or more of the net proceeds of such issue are to be used 

for qualified project costs; (2) such bond is an obligation of the 

State of Washington or any political subdivision thereof and is 

issued for the Evergreen Forest Trust; and (3) such bond is issued 

before October 1, 2004. 

Qualified project costs include the cost of acquisition by the Evergreen Forest Trust, from an unrelated person, of forest and forest 

land that are located in the State of Washington and that, at the 

time of acquisition or immediately thereafter, are subject to a conservation restriction. Qualified project costs also include interest on 

the qualified forest conservation bonds for the three-year period beginning on the date of issuance of such bonds, and credit enhancement fees that constitute qualified guarantee fees. 

Subject to the following exceptions and modifications, issuance of 

these tax-exempt bonds is subject to the general rules applicable to 

issuance of exempt-facility private activity bonds: 

(1) Issuance of the bonds is not subject to the aggregate annual State private activity bond volume limits (section 146); 

(2) The restrictions on acquisition of land and existing property do not apply (section 147(c) and (d)); 

(3) For purposes of section 147(b) (relating to the rule that 

maturity may not exceed 120 percent of economic life) the land 

and standing timber acquired with the proceeds of the bonds 

is treated as having an economic life of 35 years; and 

(4) Interest on the bonds is not a preference item for purposes of the alternative minimum tax preference for private activity bond interest (section 57(a)(5)). 

Qualified forest conservation bonds may be currently refunded if 

certain circumstances are met, but may not be advance refunded. 

49

Exclusion of certain income from income tax 

Under the bill, income, gains, deductions, losses, or credits from 

a qualified harvesting activity conducted by the Evergreen Forest 

Trust are not subject to tax or taken into account for Federal income tax purposes. A qualified harvesting activity means the sale, 

lease, or harvesting of standing timber on land acquired by the 

trust with the qualified forest conservation bond proceeds and pursuant to a qualified conservation plan. The exclusion of income derived from a qualified harvesting activity generally applies so long 

as the trust retains its status as a nonprofit entity organized and 

operated for charitable and conservation purposes, and the qualified forest conservation bonds are outstanding and qualify as section 142 bonds. 

Timber cutting and the sale or lease of timber is not a qualified 

harvesting activity during any period the trust fails to satisfy certain organizational requirements (i.e., it ceases to be a qualified organization). Further, timber cutting and the sale or lease of timber 

is not a qualified harvesting activity to the extent the timber cutting exceeds certain prescribed limits. For this purpose, the average annual area of timber harvested cannot exceed 2.5 percent of 

the total area of the land acquired with the qualified forest conservation bonds, and the quantity of timber removed from the land 

cannot violate sustained-yield principles (i.e., the removal of timber 

cannot diminish the forest’s timber yield potential on an ongoing 

basis). Certain deviations from these restrictions are permitted to 

protect the forest from catastrophic danger. 

A qualified conservation plan means a multiple use plan (a) designed and administered primarily for specific conservation purposes, including the protection of wildlife, fish, timber, scenic attributes, recreation, and soil and water quality of the forest and 

forest land, (b) mandates that forest conservation is the single-most 

significant use of the forest and land, and (c) requires that timber 

harvesting be consistent with restoring and maintaining the forest 

to its historic condition as to types and ages of trees, preventing 

damage from fire, insect and disease, promoting certain forestry 

management research, and protecting or preserving wildlife, fish, 

and open space. 

The Evergreen Forest Trust remains a qualified organization so 

long as (a) it is a nonprofit entity organized and operated exclusively for charitable purposes, specifically with respect to forest 

lands and other renewable resources, (b) more than one half of the 

value of property of which consists of forest and forest lands acquired with the qualified forest conservation bonds, (c) it periodically conducts public education programs, (d) its board satisfies certain board composition requirements designed to ensure that it represents public conservation interests, (e) a supermajority vote is required to approve and amend the trust’s qualified conservation 

plan, and (f) upon dissolution, the trust’s assets must be dedicated 

to a qualified conservation organization exempt from tax under section 501(c)(3) or a governmental unit. 

Once the qualified forest conservation bonds are no longer outstanding (or cease to qualify as section 142 bonds), the trust is liable for a recapture of tax benefits (plus interest) it derived from the 

bill’s special exclusion rules, to the extent the trust’s harvesting activities exceeded the 2.5 percent average annual area limitation. 

50

EFFECTIVE DATE

The provision is effective for obligations issued after the date of 

enactment. 

N. NO IMPACT ON SOCIAL SECURITY TRUST FUNDS UNDER TITLE II 

OF THE SOCIAL SECURITY ACT

(Sec. 214 of the bill) 

PRESENT LAW

Present law provides for the transfer of Social Security taxes and 

certain self-employment taxes to the Social Security trust funds. In 

addition, the income tax collected with respect to a portion of Social 

Security benefits included in gross income is transferred to the Social Security trust funds. 

EXPLANATION OF PROVISION

The bill provides that any amounts to be transferred to any trust 

fund under Title II of the Social Security Act are determined as if 

this bill has not been enacted. This will ensure that the income and 

balances of those Social Security trust funds are not reduced as a 

result of this bill. 

EFFECTIVE DATE

The provision is effective on the date of enactment. 

TITLE III. REVENUE PROVISIONS 

A. MODIFICATION OF THE TAX TREATMENT OF CITIZENSHIP

RELINQUISHMENT AND RESIDENCY TERMINATION

(Sec. 301 of the bill and secs. 877, 2107, 2501, and 6039G of the 

Code) 

PRESENT LAW

Since 1966, special tax rules have applied to a U.S. citizen who 

relinquishes U.S. citizenship with a principal purpose of avoiding 

U.S. taxes. These rules are referred to as the ‘‘alternative tax regime.’’ In 1996, several significant changes were made to the alternative tax regime. These amendments followed press reports and 

Congressional hearings indicating that a small number of very 

wealthy individuals had relinquished their U.S. citizenship to avoid 

U.S. income, estate, and gift taxes, while nevertheless maintaining 

significant contacts with the United States. 

Under present law, the alternative tax regime applies both to 

U.S. citizens who relinquish citizenship and long-term residents 

who terminate residency with a principal purpose of avoiding U.S. 

taxes. A U.S. citizen who relinquishes citizenship or a long-term 

resident who terminates residency is treated as having done so 

with a principal purpose of tax avoidance (and, thus, generally is 

subject to the alternative tax regime) if: (1) the individual’s average 

annual U.S. Federal income tax liability for the five taxable years 

preceding citizenship relinquishment or residency termination exceeds $100,000; or (2) the individual’s net worth on the date of citizenship relinquishment or residency termination equals or exceeds 

51

$500,000. These amounts are adjusted annually for inflation. Certain categories of individuals may avoid being deemed to have a 

tax avoidance purpose for relinquishing citizenship or terminating 

residency by submitting a ruling request to the IRS regarding 

whether the individual relinquished citizenship or terminated residency principally for tax reasons. 

Under present law, the Immigration and Nationality Act governs 

the determination of when a U.S. citizen is treated for U.S. Federal 

tax purposes as having relinquished citizenship. Similarly, an individual’s U.S. residency is considered terminated for U.S. Federal 

tax purposes when the individual ceases to be a lawful permanent 

resident under the immigration law (or is treated as a resident of 

another country under a tax treaty and does not waive the benefits 

of such treaty). In view of this reliance on immigration-law status, 

it is possible in many instances for a U.S. citizen or resident to convert his or her Federal tax status to that of a nonresident noncitizen without notifying the IRS. 

Under the alternative tax regime, a former citizen or long-term 

resident is subject to an alternative method of income taxation for 

10 years following citizenship relinquishment or residency termination. For the 10-year period, the individual is subject to tax only 

on U.S.-source income at the rates applicable to U.S. citizens, rather than the rates applicable to noncitizens who are nonresidents. 

However, for this purpose, U.S.-source income has a broader scope 

than it does for normal U.S. Federal tax purposes and includes, for 

example, gain from the sale of U.S. corporate stock or debt obligations. The alternative tax regime applies only if it results in a higher U.S. tax liability than the liability that would result if the individual were taxed as a noncitizen who is a nonresident. 

In addition, the alternative tax regime includes special estate 

and gift tax rules. Under present law, estates of nonresident noncitizens are subject to U.S. estate tax on U.S.-situated property. 

For these purposes, stock in a foreign corporation generally is not 

treated as U.S.-situated property, even if the foreign corporation 

itself owns U.S.-situated property. However, a special estate tax 

rule (sec. 2107) applies to former citizens and former long-term 

residents who are subject to the alternative tax regime. Under this 

rule, certain closely-held foreign stock owned by the former citizen 

or former long-term resident is includible in his or her gross estate 

to the extent that the foreign corporation owns U.S.-situated assets, if the former citizen or former long-term resident dies within 

10 years of citizenship relinquishment or residency termination. 

This rule prevents former citizens and former long-term residents 

who are subject to the alternative tax regime from avoiding U.S. 

estate tax through the expedient of transferring U.S.-situated assets to a foreign corporation (subject to income tax on any appreciation under section 367). In addition, under the alternative tax regime, the individual is subject to gift tax on gifts of U.S.-situated 

intangibles, such as U.S. stock, made during the 10 years following 

citizenship relinquishment or residency termination. 

Anti-abuse rules are provided to prevent circumvention of the alternative tax regime through conversion of U.S.-source income or 

property to foreign-source income or property. Thus, the alternative 

tax regime applies to foreign property acquired in nonrecognition 

transactions. Amounts earned by former citizens and former longVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00051 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
52

28These provisions reflect recommendations contained in Joint Committee on Taxation, Review of the Present Law Tax and Immigration Treatment of Relinquishment of Citizenship and 

Termination of Long-Term Residency, (JCS–2–03), February 2003. 

term residents through controlled foreign corporations are subject 

to the alternative tax regime. The 10-year liability period is suspended during any time at which a former citizen’s or former longterm resident’s risk of loss with respect to property subject to the 

alternative tax regime is substantially diminished, among other 

measures. 

Individuals subject to the alternative tax regime are required to 

provide certain tax information, including tax identification numbers, upon relinquishment of citizenship or termination of residency. The penalty for failure to provide the required tax information is the greater of $1,000 or five percent of the tax imposed 

under the alternative tax regime for the year. In addition, the U.S. 

Department of State and other governmental agencies are required 

to provide this information to the IRS. 

Under present law, U.S. citizens who relinquish citizenship and 

long-term residents who terminate residency generally are required 

to provide information about their assets held at the time of their 

citizenship relinquishment or residency termination. If the collective fair market value of the former citizen’s or former long-term 

resident’s assets exceeds $500,000, then detailed information about 

the individual’s assets must be provided. However, this information 

generally is required to be provided only once. 

Former citizens and former long-term residents who are subject 

to the alternative tax regime also are required to file annual income tax returns, but only in the event that they owe U.S. Federal 

income tax. If a tax return is required, the former citizen or former 

long-term resident is required to provide the IRS with a statement 

setting forth (generally by category) all items of U.S.-source and 

foreign-source gross income, but no detailed information with respect to all assets held by the individual. 

REASONS FOR CHANGE

One of the major difficulties in administering the present-law alternative tax regime is that the IRS is required to determine the 

subjective intent of taxpayers who relinquish citizenship or terminate residency. The present-law presumption of a tax-avoidance 

purpose in cases in which objective income tax liability or net 

worth thresholds are exceeded mitigates this problem to some extent. However, the present-law rules still require the IRS to make 

subjective determinations of intent in cases involving taxpayers 

who fall below these thresholds, as well for certain taxpayers who 

exceed these thresholds but are nevertheless allowed to seek a ruling from the IRS to the effect that they did not have a principal 

purpose of tax avoidance. The Committee believes that the replacement of the subjective determination of tax avoidance as a principal purpose for citizenship relinquishment or residency termination with objective rules will result in easier administration of 

the tax regime for individuals who relinquish their citizenship or 

terminate residency.28

Although individuals who relinquish their citizenship or terminate their residency are required to provide tax information statements (e.g., IRS Form 8854), difficulties have been encountered in 

53

enforcing this requirement, and in many cases the IRS does not receive timely information that it needs to administer the alternative 

tax regime. In these cases, an individual may become a non-resident non-citizen of the United States for Federal tax purposes—and 

enjoy reductions in U.S. taxes from such tax status—despite failing 

to provide the tax information statements necessary for the IRS to 

monitor and enforce compliance with the alternative tax regime. 

Thus, the Committee believes that the tax benefits of citizenship 

relinquishment or residency termination should be denied unless 

and until the information necessary for the IRS to enforce the alternative tax regime is provided. 

Individuals who relinquish citizenship or terminate residency for 

tax reasons often do not want to fully sever their ties with the 

United States. In other words, they hope to retain some of the benefits of citizenship or residency without being subject to the U.S. 

tax system as a citizen or U.S. resident. These individuals generally may continue to spend significant amounts of time in the 

United States following citizenship relinquishment or residency termination—approximately four months every year—without being 

treated as a U.S. resident. The Committee believes that provisions 

in the bill that impose full U.S. taxation if the individual is present 

in the United States for more than 30 days in a calendar year will 

substantially reduce the incentives to relinquish citizenship or terminate residency for individuals who desire to maintain significant 

ties to the United States. 

The Committee is concerned that the present-law estate and gift 

tax rules under the alternative tax regime do not adequately address opportunities for avoidance of tax on the value of assets held 

by a foreign corporation whose stock the individual transfers. Thus, 

the Committee bill imposes gift tax under the alternative tax regime in the case of gifts of certain stock of a closely held foreign 

corporation. 

The Committee believes that the present-law information-reporting and return-filing provisions under the alternative tax regime 

fail to provide the IRS sufficient information to enable it to monitor 

effectively the compliance of former citizens and former long-term 

residents. The Committee bill consequently adds a reporting requirement and a penalty for failure to comply with the reporting 

requirement. 

EXPLANATION OF PROVISION

In general 

The provision provides: (1) objective standards for determining 

whether former citizens or former long-term residents are subject 

to the alternative tax regime; (2) tax-based (instead of immigrationbased) rules for determining when an individual is no longer a U.S. 

citizen or long-term resident for U.S. Federal tax purposes; (3) the 

imposition of full U.S. taxation for individuals who are subject to 

the alternative tax regime and who return to the United States for 

extended periods; (4) imposition of U.S. gift tax on gifts of stock of 

certain closely-held foreign corporations that hold U.S.-situated 

property; and (5) an annual return-filing requirement for individuals who are subject to the alternative tax regime, for each of the 

54

29Section 877(a). 

10 years following citizenship relinquishment or residency termination. 

Objective rules for the alternative tax regime 

The provision replaces the subjective determination of tax avoidance as a principal purpose for citizenship relinquishment or residency termination under present law with objective rules.29 Under 

the provision, a former citizen or former long-term resident would 

be subject to the alternative tax regime for a 10-year period following citizenship relinquishment or residency termination, unless 

the former citizen or former long-term resident: (1) establishes that 

his or her average annual net income tax liability for the five preceding years does not exceed $122,000 (adjusted for inflation after 

2003) and his or her net worth does not exceed $2 million, or alternatively satisfies limited, objective exceptions for dual citizens and 

minors who have had no substantial contact with the United 

States; and (2) certifies under penalties of perjury that he or she 

has complied with all U.S. Federal tax obligations for the preceding 

five years and provides such evidence of compliance as the Secretary of the Treasury may require. 

The monetary thresholds under the provision replace the 

present-law inquiry into the taxpayer’s intent. In addition, the provision eliminates the present-law process of IRS ruling requests. 

The alternative tax regime does not apply to a former citizen who 

is a dual citizen or a minor with no substantial contacts with the 

United States prior to relinquishing citizenship. These exceptions 

for dual citizens and minors retain the present-law definitions of 

such individuals found in sections 877(c)(2)(A) and 877(c)(2)(C). If 

a former citizen or former long-term resident exceeds the monetary 

thresholds, that person is excluded from the alternative tax regime 

if he or she falls within one of the specified exceptions (provided 

that the requirement of certification and proof of compliance with 

Federal tax obligations is met). These exceptions provide relief to 

individuals who have never had any substantial connections with 

the United States, as measured by certain objective criteria, and 

eliminate IRS inquiries as to the subjective intent of such taxpayers. 

In order to be excepted from the application of the alternative 

tax regime under the provision, whether by reason of falling below 

the net worth and income tax liability thresholds or qualifying for 

the dual-citizen or minor exceptions, the former citizen or former 

long-term resident also is required to certify, under penalties of 

perjury, that he or she has complied with all U.S. Federal tax obligations for the five years preceding the relinquishment of citizenship or termination of residency and to provide such documentation 

as the Secretary of the Treasury may require evidencing such compliance (e.g., tax returns, proof of tax payments). Until such time, 

the individual remains subject to the alternative tax regime. It is 

intended that the IRS should continue to verify that the information submitted was accurate, and it is intended that the IRS should 

randomly audit such persons to assess compliance. 

55

30Sections 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)–(D). 

Termination of U.S. citizen or long-term resident status for U.S. 

Federal income tax purposes 

Under the provision, an individual continues to be treated as a 

U.S. citizen or long-term resident for U.S. Federal tax purposes, including for purposes of section 7701(b)(10), until the individual: (1) 

gives notice of an expatriating act or termination of residency (with 

the requisite intent to relinquish citizenship or terminate residency) to the Secretary of State or the Secretary of Homeland Security, respectively; and (2) files a complete and accurate tax information statement with the IRS. 

Sanction for individuals subject to the individual tax regime who 

return to the United States for extended periods 

The provision provides that a former citizen or former long-term 

resident who is subject to the alternative tax regime and who is 

present in the United States for more than 30 days in any calendar 

year during the 10-year period following citizenship relinquishment 

or residency termination is treated as a U.S. resident for that calendar year and thus is subject to U.S. Federal income tax on a 

worldwide basis. 

Similarly, if an individual subject to the alternative tax regime 

is present in the United States for more than 30 days in any year 

during the 10-year period following citizenship relinquishment or 

residency termination, and the individual dies during that year, he 

or she is treated as U.S. resident, and the individual’s worldwide 

estate is subject to U.S. estate tax. Likewise, if an individual subject to the alternative tax regime is present in the United States 

for more than 30 days in any year during the 10-year period following citizenship relinquishment or residency termination, the individual is subject to U.S. gift tax on any transfer of his or her 

worldwide assets by gift during that year.

For purposes of these rules, an individual is treated as present 

in the United States on any day if such individual is physically 

present in the United States at any time during that day, with no 

exceptions. The present-law exceptions from being treated as 

present in the United States for residency purposes 30 do not apply 

for this purpose. 

Imposition of gift tax with respect to stock of certain closely held foreign corporations 

The provision provides that gifts of stock of certain closely-held 

foreign corporations by a former citizen or former long-term resident who is subject to the alternative tax regime are subject to gift 

tax, if the gift is made within the 10-year period after citizenship 

relinquishment or residency termination. The gift tax rule applies 

if: (1) the former citizen or former long-term resident, before making the gift, directly or indirectly owns 10 percent or more of the 

total combined voting power of all classes of stock entitled to vote 

of the foreign corporation; and (2) directly or indirectly, is considered to own more than 50 percent of (a) the total combined voting 

power of all classes of stock entitled to vote in the foreign corporation, or (b) the total value of the stock of such corporation. If this 

stock ownership test is met, then taxable gifts of the former citizen 

56

31Sec. 4131 

or former long-term resident include that proportion of the fair 

market value of the foreign stock transferred by the individual, at 

the time of the gift, which the fair market value of any assets 

owned by such foreign corporation and situated in the United 

States (at the time of gift) bears to the total fair market value of 

all assets owned by such foreign corporation (at the time of gift). 

This gift tax rule applies to a former citizen or former long-term 

resident who is subject to the alternative tax regime and who owns 

stock in a foreign corporation at the time of the gift, regardless of 

how such stock was acquired (e.g., whether issued originally to the 

donor, purchased, or received as a gift or bequest). 

Annual return 

The provision requires former citizens and former long-term residents to file an annual return for each year following citizenship 

relinquishment or residency termination in which they are subject 

to the alternative tax regime. The annual return is required even 

if no U.S. Federal income tax is due. The annual return requires 

certain information, including information on the permanent home 

of the individual, the individual’s country of residency, the number 

of days the individual was present in the United States for the 

year, and detailed information about the individual’s income and 

assets that are subject to the alternative tax regime. 

Former citizens and former long-term residents who are subject 

to the alternative tax regime are required to provide annual income 

and balance sheet information on their U.S. assets, as well as foreign assets that are subject to U.S. tax under the alternative tax 

regime. This requirement includes information relating to foreign 

stock potentially subject to the special estate tax rule of section 

2107(b) and the gift tax rules of this provision. 

If the individual fails to file the statement in a timely manner 

or fails correctly to include all the required information, the individual is required to pay a penalty of $5,000. The $5,000 penalty 

does not apply if it is shown that the failure is due to reasonable 

cause and not to willful neglect. 

EFFECTIVE DATE

The provisions apply to individuals who relinquish citizenship or 

terminate long-term residency after February 27, 2003. 

B. ADD VACCINES AGAINST HEPATITIS A TO THE LIST OF TAXABLE

VACCINES

(Sec. 302 of the bill and sec. 4132 of the Code) 

PRESENT LAW

A manufacturer’s excise tax is imposed at the rate of 75 cents per 

dose 31 on the following vaccines routinely recommended for administration to children: diphtheria, pertussis, tetanus, measles, 

mumps, rubella, polio, HIB (haemophilus influenza type B), hepatitis B, varicella (chicken pox), rotavirus gastroenteritis, and streptococcus pneumoniae. The tax applied to any vaccine that is a comVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00056 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
57

32The Committee recognizes that, to become covered under the Vaccine Injury Compensation 

Program, the Secretary of Health and Human Services also must list the hepatitis A vaccine 

on the Vaccine Injury Table. 

bination of vaccine components equals 75 cents times the number 

of components in the combined vaccine. 

Amounts equal to net revenues from this excise tax are deposited 

in the Vaccine Injury Compensation Trust Fund to finance compensation awards under the Federal Vaccine Injury Compensation 

Program for individuals who suffer certain injuries following administration of the taxable vaccines. This program provides a substitute Federal, ‘‘no fault’’ insurance system for the State-law tort 

and private liability insurance systems otherwise applicable to vaccine manufacturers. All persons immunized after September 30, 

1988, with covered vaccines must pursue compensation under this 

Federal program before bringing civil tort actions under State law. 

REASONS FOR CHANGE

The Committee is aware that the Centers for Disease Control 

and Prevention have recommended that children in 17 highly endemic States be inoculated with a hepatitis A vaccine. The population of children in the effected States exceeds 20 million. Several 

of the effected States mandate childhood vaccination against hepatitis A. The Committee is aware that the Advisory Commission on 

Childhood Vaccines has recommended that the vaccine excise tax 

be extended to cover vaccines against hepatitis A. For these reasons, the Committee believes it is appropriate to include vaccines 

against hepatitis A as part of the Vaccine Injury Compensation 

Program. Making the hepatitis A vaccine taxable is a first step.32

In the unfortunate event of an injury related to this vaccine, families of injured children are eligible for the no-fault arbitration system established under the Vaccine Injury Compensation Program 

rather than going to Federal Court to seek compensatory redress. 

EXPLANATION OF PROVISION

The bill adds any vaccine against hepatitis A to the list of taxable vaccines. The bill also makes a conforming amendment to the 

trust fund expenditure purposes. 

EFFECTIVE DATE

The provision is effective for vaccines sold beginning on the first 

day of the first month beginning more than four weeks after the 

date of enactment.

III. VOTES OF THE COMMITTEE 

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the following statements are made concerning the votes of the Committee on Ways and Means in its consideration of the bill, H.R. 878. 

MOTION TO REPORT THE BILL

The bill, H.R. 878, as amended, was ordered favorably reported 

by voice vote (with a quorum being present). 

58

VOTES ON AMENDMENTS

A roll call vote was conducted on the following amendments to 

the Chairman’s amendment in the nature of a substitute. 

An amendment by Mrs. Johnson, which would strengthen current law by providing an objective test to determine if a U.S. citizen renounced their citizenship or a long-term resident terminated 

their residency for tax avoidance reasons, was agreed to by a roll 

call vote of 40 yeas to 0 nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ X ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... ........... ........... .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... X ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... X ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

An amendment by Mr. Herger, which would allow payment of 

dividends on stock of cooperatives without reducing patronage dividends, was agreed to by a roll call vote of 22 yeas to 16 nays. The 

vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... ........... ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... ........... ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... ........... ........... .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... X .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

59

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Cantor ............................. X ........... .............

An amendment by Mr. McCrery, which would permit an individual to access a 65-percent health care tax credit through statearranged pooling options, by allowing them to waive pre-existing 

conditions and guaranteed issue requirements, was agreed to by a 

roll call vote of 23 yeas to 15 nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... X ........... ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... ........... ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... X .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. X ........... .............

An amendment by Mr. McCrery, which would correct a flaw in 

the tax code that prevents non-resident aliens from placing wagers 

on U.S. horse races as part of a merged pool of wagers, was agreed 

to by a roll call vote of 20 yeas to 18 nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... ........... X .............

Mr. Crane .............................. X ........... ............. Mr. Stark .............................. ........... X .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ ........... X .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. ........... X .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ ........... X .............

Mr. Herger ............................. X ........... ............. Mr. McDermott ..................... ........... X .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... ........... X .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... ........... X .............

Mr. Ramstad ......................... ........... ........... ............. Mr. Neal ............................... ........... X .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... ........... X .............

Mr. Johnson ........................... X ........... ............. Mr. Jefferson ........................ ........... X .............

Ms. Dunn .............................. X ........... ............. Mr. Tanner ............................ ........... X .............

Mr. Collins ............................ X ........... ............. Mr. Becerra .......................... ........... ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... ........... X .............

Mr. English ........................... X ........... ............. Mr. Pomeroy ......................... ........... X .............

Mr. Hayworth ......................... X ........... ............. Mr. Sandlin .......................... ........... X .............

Mr. Weller .............................. X ........... ............. Ms. Tubbs Jones .................. ........... X .............

Mr. Hulshof ........................... X ........... .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. X ........... .............

Mr. Ryan ............................... X ........... .............

60

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Cantor ............................. ........... ........... .............

An ammendment by Mr. McDcDermott, which would add Peace 

Corps personnel to the list of members who could use a special rule 

to determine the exclusion of gain from the sale of a principal residence, was agreed to by a roll call vote of 24 yeas to 12 nays. The 

vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... X ........... ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ ........... ........... .............

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... ........... ............. Mr. McDermott ..................... X ........... .............

Mr. McCrery ........................... X ........... ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. X ........... ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... X ........... ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. ........... X ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ X ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ ........... ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... ........... ........... .............

Mr. Portman .......................... X ........... ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... X ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... X ........... .............

Mr. Foley ............................... X ........... .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... X ........... .............

Mr. Cantor ............................. ........... ........... .............

Mr. Neal offered an amendment that would add a new section to 

disregard for U.S. tax purposes corporate expatriation transactions 

completed after September 11, 2001. Corporations that completed 

expatriation transactions on or before September 11, 2001, would 

be taxed as U.S. corporations beginning after December 31, 2003. 

This amendment was defeated by a roll call vote of 15 yeas to 19 

nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ ........... ........... .............

Mrs. Johnson ......................... ........... ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ X ........... ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... ........... ............. Mr. McDermott ..................... ........... ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... ........... ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... X ........... .............

Mr. Lewis (KY) ...................... ........... X .............

61

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

An amendment by Mr. Neal that would add a new section to disregard for U.S. tax purposes corporate expatriation transactions 

completed after September 11, 2001, was defeated by a roll call 

vote of 14 yeas to 21 nays. The vote was as follows:

Representatives Yea Nay Present Representative Yea Nay Present 

Mr. Thomas ........................... ........... X ............. Mr. Rangel ........................... X ........... .............

Mr. Crane .............................. ........... X ............. Mr. Stark .............................. X ........... .............

Mr. Shaw ............................... ........... X ............. Mr. Matsui ............................ ........... ...........

Mrs. Johnson ......................... X ........... ............. Mr. Levin .............................. X ........... .............

Mr. Houghton ........................ ........... X ............. Mr. Cardin ............................ X ........... .............

Mr. Herger ............................. ........... ........... ............. Mr. McDermott ..................... ........... ........... .............

Mr. McCrery ........................... ........... X ............. Mr. Kleczka ........................... X ........... .............

Mr. Camp .............................. ........... X ............. Mr. Lewis (GA) ..................... X ........... .............

Mr. Ramstad ......................... ........... X ............. Mr. Neal ............................... X ........... .............

Mr. Nussle ............................. X ........... ............. Mr. McNulty .......................... X ........... .............

Mr. Johnson ........................... ........... X ............. Mr. Jefferson ........................ ........... ........... .............

Ms. Dunn .............................. ........... X ............. Mr. Tanner ............................ X ........... .............

Mr. Collins ............................ ........... X ............. Mr. Becerra .......................... ........... ........... .............

Mr. Portman .......................... ........... X ............. Mr. Doggett .......................... X ........... .............

Mr. English ........................... ........... X ............. Mr. Pomeroy ......................... X ........... .............

Mr. Hayworth ......................... ........... X ............. Mr. Sandlin .......................... ........... ........... .............

Mr. Weller .............................. ........... X ............. Ms. Tubbs Jones .................. X ........... .............

Mr. Hulshof ........................... ........... X .............

Mr. McInnis ........................... ........... X .............

Mr. Lewis (KY) ...................... ........... X .............

Mr. Foley ............................... ........... X .............

Mr. Brady .............................. ........... X .............

Mr. Ryan ............................... ........... X .............

Mr. Cantor ............................. ........... X .............

IV. BUDGET EFECTS OF THE BILL 

A. COMMITTEE ESTIMATE OF BUDGETARY EFFECTS

In compliance with clause 3(d)(2) of the rule XIII of the Rules of 

the House of Representatives, the following statement is made concerning the effects on the budget of the revenue provisions of the 

bill, H.R. 878 as reported. 

The bill is estimated to have the following effects on budget receipts for fiscal years 2003–2008:

ESTIMATED BUDGET EFFECTS OF H.R. 878, THE ‘‘ARMED FORCES TAX FAIRNESS ACT OF 2003,’’ AS REPORTED BY THE COMMITTEE ON WAYS AND MEAN

[Fiscal years 2003–2008, in millions of dollars] 

Provision Effective 2003 2004 2005 2006 2007 2008 

Improving tax equity for Military Personnel: 

1. Exclusion of gain on sale of a principal residence by a member of the uniformed services, the foreign service, or the Peace Corp. soea 5/6/97 ¥66 ¥13 ¥14 ¥14 ¥15 ¥16 

2. Exclusion from gross income of certain death gratuity payments .................................... doa 9/10/01 ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 

3. Exclusion for amounts received under Department of Defense Homeowners Assistance 

Program.

pma DOE [1] ¥2 ¥2 ¥2 ¥2 ¥2 

4. Expansion of combat zone filing rules to contingency operations .................................... (2) ¥9 (1) (1) (1) (1) ¥1 

5. modification of membership requirement for exemption from tax for certain veterans’ 

organizations.

tyba DOE ¥1 ¥1 ¥1 ¥1 ¥2 ¥2 

6. Clarification of treatment of certain dependent care assistance programs provided to 

members of the uniformed services of the United States.

tyba 12/31/02 No Revenue Effect 

7. 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) 

8. Suspension of tax-exempt status of designated terrorist organizations ........................... (3) Negligible Revenue Effect 

9. Above-the-line deduction of up to $500 for overnight travel expenses of National Guard 

and reserve members traveling more than 100 miles from home.

apoia 12/31/02 ¥4 ¥19 ¥19 ¥19 ¥19 ¥19 

Total of Improving Tax Equity for Military Personnel ......................................................... ...................................... ¥81 ¥36 ¥37 ¥37 ¥39 ¥41 

Miscellaneous Provisions: 

1. Tax relief and assistance for families of astronauts who lose their lives on a space 

mission.

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

2. Coordinate farmers income averaging and the alternative minimum tax ........................ tyba 12/31/02 (1) ¥2 ¥2 ¥2 ¥3 ¥4 

3. Capital gain treatment under section 631(b) to apply to outright sales by landowners sota DOE Negligible Revenue Effect 4. Special rules for livestock sold on account of weather-related conditions—Increase reinvestment period from 2 to 4 years for involuntary conversion of livestock due to result of drought, floor, or other weather-related conditions. trda 12/31/02 ................ ................ ¥18 ¥7 ¥4 ¥3 

5. Simplification of excise taxes imposed on bows and arrows ............................................ asbmpoi 90da DOE ¥1 ¥1 ¥1 ¥1 ¥1 ¥1 

6. Repeal excise tax on fishing tackle boxes ......................................................................... 30da DOE ¥1 ¥3 ¥3 ¥3 ¥3 ¥3 

7. Btu-based rate for diesel/water emulsion fuel .................................................................. fra 9/30/03 (1) (1) (1) (1) (1) (1) 

8. Expand of human clinical trials expenses qualifying for the orphan drug tax credit ...... epoia DOE ¥6 ¥15 ¥16 ¥16 ¥17 ¥18 

9. Consumer options under the refundable credit for health insurance costs of eligible individuals. before 1/1/05 ¥4 ¥40 ¥13 ................ ................ ................ 

10. Modify at-risk rules publicly traded nonrecourse debt .................................................... diia DOE ¥1 ¥2 ¥3 ¥5 ¥6 ¥8 

11. Exclusion of certain horse-racing gambling winnings from the income of nonresident 

noncitizen individuals.

wta 9/30/03 ................ ¥1 ¥2 ¥2 ¥2 ¥2 

12. Payment of dividends on stock of cooperatives without reducing patronage dividends dmi tyba DOE (1) (1) (1) ¥1 ¥1 ¥1 

13. Pilot project for forest conservation activities ................................................................. oia DOE 14 12 ¥18 ¥18 ¥13 ¥10 

14. No impact on Social Security Trust Funds ....................................................................... DOE No Revenue Effect

Total of Miscellaneous Provisions ....................................................................................... ...................................... 1 ¥52 ¥76 ¥55 ¥50 ¥50 

Revenue Provisions: 

1. Modification of the tax treatment of citizenship relinquishment and residency termination. (5) 3 16 18 21 24 28 

2. Add Hepatitis A to the list of taxable vaccines ................................................................. (6) 3 8 9 9 9 9 

Total of Revenue Provisions ................................................................................................ ...................................... 6 24 27 30 33 37 Net total .............................................................................................................................. ...................................... ¥74 ¥64 ¥86 ¥62 ¥56 ¥54 

1 Loss of less than $500,0002 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 before, 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 Effective for individuals who relinquish citizenship or terminate long-term residency after February 27, 2003. 6 Effective for vaccines sold beginning on the first day of the first month beginning more than four weeks after the date of enactment.

Legend for ‘‘Effective’’ column: apola=amounts paid or incurred after; asbmpoi=articles sold by the manufacturer, producer, or importer; diia=debt instruments issued after; dmi=distributions made in; doa=deaths occurring aft

of enactment; ecmba=eligible coverage months beginning after; epola=expenditures paid or incurred after; fra=fuel removed after; oia=obligations issued after; pma=payments made after; soea=sales or exchanges after; sota=saafter; trda=tax returns due after; tyba=taxable years beginning after; wta=wagering transactions after; 30da=30 days after; 90da=90 days after.

Note.—Details may not add to totals due to rounding. 

64

B. STATEMENT REGARDING NEW BUDGET AUTHORITY AND TAX

EXPENDITURES BUDGET AUTHORITY

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee states that the bill involves no new or increased budget authority. The Committee further states that the revenue reducing income tax provisions involve 

increased tax expenditures. (See amounts in table in Part IV.A., 

above.) 

C. COST ESTIMATE PREPARED BY THE CONGRESSIONAL BUDGET

OFFICE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, requiring a cost estimate prepared by 

the CBO, the following statement by CBO is provided.

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, March 5, 2003. 

Hon. WILLIAM ‘‘BILL’’ M. THOMAS, Chairman, Committee on Ways and Means, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 878, the Armed Forces 

Tax Fairness Act of 2003. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Annie Bartsch. 

Sincerely, 

DOUGLAS HOLTZ-EAKIN, 

Director. 

Enclosure.

H.R. 878—Armed Forces Tax Fairness Act of 2003

Summary: H.R. 878, the Armed Forces Tax Fairness Act of 2003, 

would raise the exclusion for death gratuity payments for the military and provide military and foreign service homeowners with relief from capital gains taxes. In addition, the bill would provide individual taxpayers serving in the National Guard and Reserve with 

a deduction for up to $500 dollars of certain overnight travel expenses, including meals and overnight lodging, incurred while attending National Guard and Reserve meetings. The bill contains 

several miscellaneous provisions that would also reduce revenues. 

In addition, the bill would raise revenue by modifying the tax 

treatment of individuals who expatriate and by adding Hepatitis A 

to the list of taxable vaccines. H.R. 878 would increase on-budget 

federal outlays and reduce off-budget outlays by the same amounts 

by requiring a new general fund payment to the Social Security 

trust funds to replace any loss of payroll taxes that would result 

from the bill. 

The Joint Committee on Taxation (JCT) estimates that enacting 

the bill would reduce revenues by $74 million in 2003, by $401 million over the 2003–2008 period, and by $615 million over the 2003–

2013 period. CBO estimates that the bill would have no effect on 

total direct spending, but it would both increase on-budget direct 

spending and decrease off-budget direct spending by $5 million 

65

over the 2003–2008 period, and by $10 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 revising 

the alternative tax regime for individuals who expatriate 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 H.R. 878 is shown in the following table.

By fiscal year, in millions of dollars 

2003 2004 2005 2006 2007 2008

CHANGES IN REVENUES

Tax relief from capital gains for military and foreign service 

homeowners ............................................................................. ¥66 ¥13 ¥14 ¥14 ¥15 ¥16

Above-the-line deduction for up to $500 of overnight travel expenses ...................................................................................... ¥4 ¥19 ¥19 ¥19 ¥19 ¥19

Other tax relief for military personnel ......................................... ¥11 ¥4 ¥4 ¥4 ¥5 ¥6

Expansion of human clinical trials expenses qualifying for orphan drug tax credit ............................................................... ¥6 ¥15 ¥16 ¥16 ¥17 ¥18

Modification of tax treatment of individuals who expatriate ...... 3 16 18 21 24 28

Add Hepatitis A to the list of taxable vaccines .......................... 3 8 9 9 9 9

Other provisions ........................................................................... 7 ¥37 ¥60 ¥39 ¥33 ¥32

Total changes: 

On-budget ............................................................................ ¥74 ¥63 ¥85 ¥61 ¥55 ¥53

Off-budget ........................................................................... (*) ¥1 ¥1 ¥1 ¥1 ¥1

Total ....................................................................... ¥74 ¥64 ¥86 ¥62 ¥56 ¥54

CHANGES IN DIRECT SPENDING

On-budget ..................................................................................... (*) 1 1 1 1 1

Off-budget .................................................................................... (*) ¥1 ¥1 ¥1 ¥1 ¥1

Total ..................................................................................... 0 0 0 0 0 0

Sources. CBO and the Joint Committee on Taxation. 

*=Change of less than $500,000. 

Details do not add to totals due to rounding. 

Basis of Estimate 

Revenues 

All estimates were provided by JCT. A number of provisions 

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

$74 million in 2003, by $401 million over the 2003–2008 period, 

and by $615 million over the 2003–2013 period. 

H.R. 878 contains nine provisions intended to provide tax relief 

for military personnel, seven of which would reduce federal receipts. Most of the reduction in revenues would occur from the provisions providing military and foreign service homeowners relief 

from taxation of capital gains and reservists with a deduction allowance for up to $500 of travel expenses. The deduction for qualifying travel expenses 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. 

66

Other tax relief for military personnel includes provisions that 

would raise the exclusion for death gratuity payments for individuals in the military, provide an exclusion for amounts received 

under the Department of Defense (DOD) Homeowners Assistance 

Program, expand combat zone filing rules to include contingency 

operations, extend section 501(c)(19) membership to certain relatives of military personnel, and permit service academy appointments to be treated as scholarships for certain purposes. As estimated by JCT, all of these provisions together would reduce revenues by $81 million in 2003, by $273 million over the 2003–2008 

period, and by $482 million over the 2003–2013 period. A small 

portion of those reductions would apply to off-budget receipts. The 

exclusion for amounts received under the Homeowners Assistance 

Program would reduce off-budget receipts by $5 million over the 

2003–2008 period and by $10 million over the 2003–2013 period. 

In addition to the above provisions intended to provide tax relief 

for military personnel, H.R. 878 contains fourteen other miscellaneous provisions that would also affect federal receipts. Of these, 

the provision expanding human clinical trials that qualify for the 

orphan drug tax credit would have the largest effect on revenues. 

JCT estimates that, together, these miscellaneous provisions would 

decrease revenues by $283 million over the 2003–2008 period and 

by $552 million over the 2003–2013 period. 

Two other provisions contained in H.R. 878 would both increase 

revenues. JCT estimates that these provisions, which would modify 

the tax treatment of individuals who expatriate and add Hepatitis 

A to the list of taxable vaccines, would increase revenues by $6 million in 2003, by $155 million over the 2003–2008 period, and by 

$419 million over the 2003–2013 period. 

Direct spending 

Section 214 of the bill would require that amounts transferred to 

the Social Security trust funds be determined as if H.R. 878 were 

not enacted. The Treasury Department transfers the estimated 

amount of payroll tax collections to the trust funds as the withholding payments are received. CBO and JCT estimate that providing an exclusion for amounts received under the Department of 

Defense Homeowners Assistance Program would reduce Social Security revenues by $1 million in each of the years from 2004 

through 2013. Therefore, CBO estimates that comparable amounts 

would be transferred to the Social Security trust funds during 

those years as a result of section 214. Those transfers would be recorded as on-budget outlays and off-budget receipts. 

Effect on revenues and direct spending: The overall effect of H.R. 

878 on on-budget revenues and direct spending is shown in the 

table below.

By fiscal year, in millions of dollars 

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Changes in receipts ... ¥74 ¥63 ¥85 ¥61 ¥55 ¥53 ¥51 ¥48 ¥38 ¥35 ¥38

Changes in outlays .... 0 1 1 1 1 1 1 1 1 1 1

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 manVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00066 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
67

dates 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 revising the alternative tax regime for individuals 

who expatriate 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).

Previous CBO estimate: On February 10, 2003, CBO transmitted 

a cost estimate for the Armed Forces Tax Fairness Act of 2003, as 

ordered reported by the Senate Committee on Finance. That 

version of the bill would reduce increase revenues by $6 million 

over the 2003–2013 period, whereas the Committee on Ways and 

Means’ version of the bill has an estimated revenue loss of $615 

million over the same period. A major difference is the inclusion of 

additional revenue-reducing provisions in the Ways and Means’ 

version. Another significant difference is the inclusion of several 

revenue-raising provisions in the Finance Committee’s version, 

namely the extension of IRS user fees and imposition of a markto-market tax on individuals who expatriate. The Ways and Means’ 

version imposes a more limited penalty for expatriation. 

Estimate prepared by: Annie Bartsch. 

Estimate approved by: G. Thomas Woodward, Assistant Director 

for Tax Analysis. 

D. MACROECONOMIC IMPACT ANALYSIS

In compliance with clause 3(h)(2) of rule XIII of the Rules of the 

House of Representatives, the following statement is made by the 

Joint Committee on Taxation with respect to the provisions of the 

bill amending the Internal Revenue Code of 1986: the effects of the 

bill on economic activity are so small as to be incalculable within 

the context of a model of the aggregate economy. 

V. OTHER MATTERS TO BE DISCUSSED UNDER THE 

RULES OF THE HOUSE 

A. COMMITTEE OVERSIGHT FINDINGS AND RECOMMENDATIONS

With respect to clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives (relating to oversight findings), the Committee advises that it was a result of the Committee’s oversight review concerning the tax burden on military personnel that the 

Committee concluded that it is appropriate and timely to enact the 

revenue provision included in the bill as reported.

B. STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

With respect to clause 3(c)(4) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the bill contains no measure that authorizes funding, so no statement of general performance goals and objectives for which any measure authorizes funding is required. 

C. CONSTITUTIONAL AUTHORITY STATEMENT

With respect to clause 3(d)(1) of the rule XIII of the Rules of the 

House of Representatives (relating to Constitutional Authority), the 

68

Committee states that the Committee’s action in reporting this bill 

is derived from Article I of the Constitution, Section 8 (‘‘The Congress shall have Power To lay and collect Taxes, Duties, Imposts 

and Excises. . . ‘‘), and from the 16th Amendment to the Constitution. 

D. INFORMATION RELATING TO UNFUNDED MANDATES

This information is provided in accordance with section 423 of 

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

The Committee has determined that the bill contains one Federal 

mandate on the private sector—the revisions to the alternative tax 

regime for individuals who expatriate. The costs required to comply 

with the private sector mandate generally are no greater than the 

aggregate estimated budget effects of the provision as reflected in 

Part IV.A., above. Benefits from the provision include improved administration of the tax laws and a more accurate measurement of 

income for Federal income tax purposes. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

E. APPLICABILITY OF HOUSE RULE XXI 5(b) 

Rule XXI 5(b) of the Rules of the House of Representatives provides, in part, that ‘‘A bill or joint resolution, amendment, or conference report carrying a Federal income tax rate increase may not 

be considered as passed or agreed to unless so determined by a 

vote of not less than three-fifths of the Members voting, a quorum 

being present.’’ The Committee has carefully reviewed the provisions of the bill, and states that the provisions of the bill do not 

involve any Federal income tax rate increases within the meaning 

of the rule. 

F. 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 House Committee on Ways and Means, the 

Senate Committee on Finance, or any committee of conference if 

the legislation includes a provision that directly or indirectly 

amends the Internal Revenue 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 Internal Revenue Code and that have ‘‘widespread applicability’’ to individuals or small businesses.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS 

REPORTED 

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitVerDate Dec 13 2002 08:11 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00068 Fmt 6659 Sfmt 6602 E:\HR\OC\HR023.XXX HR023
69

ted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

INTERNAL REVENUE CODE OF 1986

Subtitle A—Income Taxes 

* * * * * * *

CHAPTER 1—NORMAL TAXES AND SURTAXES 

* * * * * * *

Subchapter A—Determination of Tax Liability 

* * * * * * *

PART I—TAX ON INDIVIDUALS 

* * * * * * *

SEC. 5. CROSS REFERENCES RELATING TO TAX ON INDIVIDUALS. 

(a) * * *

(b) SPECIAL LIMITATIONS ON TAX.—

(1) For limitation on tax in case of income of members of 

Armed Forces, astronauts, and victims of certain terrorist attacks on death, see section 692. 

* * * * * * *

PART IV—CREDITS AGAINST TAX 

* * * * * * *

Subpart C—Refundable Credits 

* * * * * * *

SEC. 35. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS. 

(a) * * *

* * * * * * *

(e) QUALIFIED HEALTH INSURANCE.—For purposes of this section—

(1) * * *

(2) REQUIREMENTS FOR STATE-BASED COVERAGE.— (A) * * *

* * * * * * *

(C) WAIVER BY ELIGIBLE INDIVIDUALS.—With respect to 

any month which ends before January 1, 2005, this paragraph shall not apply with respect to any eligible individual and such individual’s qualifying family members if 

such eligible individual elects to waive the application of 

this paragraph with respect to such month.

* * * * * * *

70

Subpart D—Business Related Credits 

* * * * * * *

SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR 

RARE DISEASES OR CONDITIONS. 

(a) * * *

(b) QUALIFIED CLINICAL TESTING EXPENSES.—For purposes of 

this section—

(1) * * *

(2) CLINICAL TESTING.— (A) * * *

* * * * * * *

(C) TREATMENT OF CERTAIN EXPENSES INCURRED BEFORE

DESIGNATION.—For purposes of subparagraph (A)(ii)(I), if a 

drug is designated under section 526 of the Federal Food, 

Drug, and Cosmetic Act not later than the due date (including extensions) for filing the return of tax under this subtitle for the taxable year in which the application for such 

designation of such drug was filed, such drug shall be 

treated as having been designated on the date that such application was filed.

* * * * * * *

PART VI—MINIMUM TAX FOR TAX PREFERENCES 

* * * * * * *

SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED. 

(a) * * *

* * * * * * *

(c) REGULAR TAX.—

(1) * * *

(2) COORDINATION WITH INCOME AVERAGING FOR FARMERS.—

Solely for purposes of this section, section 1301 (relating to 

averaging of farm income) shall not apply in computing the regular tax.

ø(2)¿ (3) CROSS REFERENCES.— For provisions providing that certain credits are not allowable 

against the tax imposed by this section, see sections 26(a), 29(b)(6), 

30(b)(3) and 38(c).

* * * * * * *

Subchapter B—Computation of Taxable Income 

* * * * * * *

PART I—DEFINITION OF GROSS INCOME, ADJUSTED 

GROSS INCOME, TAXABLE INCOME, ETC. 

* * * * * * *

SEC. 62. ADJUSTED GROSS INCOME DEFINED. 

(a) GENERAL RULE.—For purposes of this subtitle, the term ‘‘adjusted gross income’’ means, in the case of an individual, gross income minus the following deductions: 

(1) * * *

71

(2) CERTAIN TRADE AND BUSINESS DEDUCTIONS OF EMPLOY- EES.—(A) * * *

* * * * * * *

(E) CERTAIN EXPENSES OF MEMBERS OF RESERVE COMPO- NENTS OF THE ARMED FORCES OF THE UNITED STATES.—The 

deductions allowed by section 162 which consist of expenses, not in excess of $500, paid or incurred by the taxpayer in connection with the performance of services by 

such taxpayer as a member of a reserve component of the 

Armed Forces of the United States for any period during 

which such individual is more than 100 miles away from 

home in connection with such services.

* * * * * * *

PART III—ITEMS SPECIFICALLY EXCLUDED FROM 

GROSS INCOME 

* * * * * * *

SEC. 101. CERTAIN DEATH BENEFITS. 

(a) * * *

* * * * * * *

(i) CERTAIN EMPLOYEE DEATH BENEFITS PAYABLE BY REASON OF

DEATH OF CERTAIN TERRORIST VICTIMS OR ASTRONAUTS.—

(1) * * *

* * * * * * *

(4) RELIEF WITH RESPECT TO ASTRONAUTS.—The provisions of 

this subsection shall apply to any astronaut whose death occurs 

while on a space mission.

* * * * * * *

SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE. 

(a) * * *

* * * * * * *

(d) SPECIAL RULES.— (1) * * *

* * * * * * *

(10) MEMBERS OF UNIFORMED SERVICES AND FOREIGN SERVICE AND PEACE CORPS VOLUNTEERS AND EMPLOYEES.—

(A) IN GENERAL.—At the election of an individual with 

respect to a property, the running of the 5-year period referred to in subsections (a) and (c)(1)(B) and paragraph (7) 

of this subsection with respect to such property shall be suspended during any period that such individual or such individual’s spouse is serving on qualified official extended 

duty as a member of the uniformed services or of the Foreign Service or as a Peace Corps volunteer or an employee 

of the Peace Corps. 

(B) MAXIMUM PERIOD OF SUSPENSION.—Such 5-year period shall not be extended more than 5 years by reason of 

subparagraph (A). 

72

(C) QUALIFIED OFFICIAL EXTENDED DUTY.—For purposes 

of this paragraph— 

(i) IN GENERAL.—The term ‘‘qualified official extended duty’’ means any extended duty while serving at 

a duty station which is at least 150 miles from such 

property or while residing under Government orders in 

Government quarters. 

(ii) UNIFORMED SERVICES.—The term ‘‘uniformed 

services’’ has the meaning given such term by section 

101(a)(5) of title 10, United States Code, as in effect on 

the date of the enactment of this paragraph. 

(iii) FOREIGN SERVICE.—The term ‘‘member of the 

Foreign Service’’ has the meaning given the term 

‘‘member of the Service’’ by paragraph (1), (2), (3), (4), 

or (5) of section 103 of the Foreign Service Act of 1980, 

as in effect on the date of the enactment of this paragraph. 

(iv) EXTENDED DUTY.—The term ‘‘extended duty’’ 

means any period of active duty pursuant to a call or 

order to such duty for a period in excess of 180 days 

or for an indefinite period. 

(v) RULES RELATING TO THE PEACE CORPS.— (I) EXTENDED DUTY.—In the case of a Peace 

Corps volunteer, the term ‘‘extended duty’’ means 

any period of active duty assigned to a Peace 

Corps volunteer under the Peace Corps Act for a 

period in excess of 180 days or for an indefinite period. 

(II) PEACE CORPS VOLUNTEER.—The term ‘‘Peace 

Corps volunteer’’ means an individual enrolled as 

a volunteer or volunteer leader under the Peace 

Corps Act. 

(III) EMPLOYEE OF THE PEACE CORPS.—The term 

‘‘employee of the Peace Corps’’ means a person employed in the Peace Corps under section 7 of the 

Peace Corps Act. 

(IV) REFERENCES TO PEACE CORPS ACT.—References in this clause to the Peace Corps Act mean 

references to the Peace Corps Act (22 U.S.C. 2501 

et seq.) as in effect on the date of the enactment of 

this clause. 

(D) SPECIAL RULES RELATING TO ELECTION.— (i) ELECTION LIMITED TO 1 PROPERTY AT A TIME.—An 

election under subparagraph (A) with respect to any 

property may not be made if such an election is in effect with respect to any other property. 

(ii) REVOCATION OF ELECTION.—An election under 

subparagraph (A) may be revoked at any time.

* * * * * * *

SEC. 132. CERTAIN FRINGE BENEFITS. 

(a) EXCLUSION FROM GROSS INCOME.—Gross income shall not include any fringe benefit which qualifies as a—

(1) * * *

* * * * * * *

73

(6) qualified moving expense reimbursement, øor¿

(7) qualified retirement planning servicesø.¿, or

(8) qualified military base realignment and closure fringe.

* * * * * * *

(n) QUALIFIED MILITARY BASE REALIGNMENT AND CLOSURE

FRINGE.—

(1) IN GENERAL.—For purposes of this section, the term 

‘‘qualified military base realignment and closure fringe’’ means 

1 or more payments under the authority of section 1013 of the 

Demonstration Cities and Metropolitan Development Act of 

1966 (42 U.S.C. 3374) (as in effect on the date of the enactment 

of this subsection). 

(2) LIMITATION.—With respect to any property, such term 

shall not include any payment referred to in paragraph (1) to 

the extent that the sum of all such payments related to such 

property exceeds the amount described in clause (1) of subsection (c) of such section (as in effect on such date).

ø(n)¿ (o) REGULATIONS.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section. 

* * * * * * *

SEC. 134. CERTAIN MILITARY BENEFITS. 

(a) * * *

(b) QUALIFIED MILITARY BENEFIT.—For purposes of this section—

(1) * * *

* * * * * * *

(3) LIMITATIONS ON MODIFICATIONS.— (A) IN GENERAL.—Except as provided in øsubparagraph 

(B)¿ subparagraphs (B) and (C) and paragraph (4), no 

modification or adjustment of any qualified military benefit after September 9, 1986, shall be taken into account. 

* * * * * * *

(C) EXCEPTION FOR DEATH GRATUITY ADJUSTMENTS MADE

BY LAW.—Subparagraph (A) shall not apply to any adjustment to the amount of death gratuity payable under chapter 75 of title 10, United States Code, which is pursuant to 

a provision of law enacted before December 31, 1991. 

(4) CLARIFICATION OF CERTAIN BENEFITS.—For purposes of 

paragraph (1), such term includes any dependent care assistance program (as in effect on the date of the enactment of this 

paragraph) for any individual described in paragraph (1)(A).

* * * * * * *

PART VI—ITEMIZED DEDUCTIONS FOR INDIVIDUALS 

AND CORPORATIONS 

* * * * * * *

SEC. 162. TRADE OR BUSINESS EXPENSES. 

(a) * * *

* * * * * * *

(p) TREATMENT OF EXPENSES OF MEMBERS OF RESERVE COMPONENT OF ARMED FORCES OF THE UNITED STATES.—For purposes of 

74

subsection (a)(2), in the case of an individual who performs services 

as a member of a reserve component of the Armed Forces of the 

United States at any time during the taxable year, such individual 

shall be deemed to be away from home in the pursuit of a trade or 

business for any period during which such individual is away from 

home in connection with such services.

ø(p)¿ (q) CROSS REFERENCES.— (1) For special rule relating to expenses in connection with subdividing real property for sale, see section 1237.

* * * * * * *

Subchapter E—Accounting Periods and Methods 

of Accounting 

* * * * * * *

PART II—METHODS OF ACCOUNTING 

* * * * * * *

Subpart B—Taxable Year for Which Items of Gross Income 

Included 

* * * * * * *

SEC. 451. GENERAL RULE FOR TAXABLE YEAR OF INCLUSION. 

(a) * * *

* * * * * * *

(e) SPECIAL RULE FOR PROCEEDS FROM LIVESTOCK SOLD ON AC- COUNT OF DROUGHT, FLOOD, OR OTHER WEATHER-RELATED CONDI- TIONS

(1) * * *

* * * * * * *

(3) SPECIAL ELECTION RULES.—If section 1033(e)(2) applies to 

a sale or exchange of livestock described in paragraph (1), the 

election under paragraph (1) shall be deemed valid if made 

during the replacement period described in such section.

* * * * * * *

Subpart C—Taxable Year for Which Deductions Taken 

* * * * * * *

SEC. 465. DEDUCTIONS LIMITED TO AMOUNT AT RISK. 

(a) * * *

(b) AMOUNTS CONSIDERED AT RISK.— (1) * * *

* * * * * * *

(6) QUALIFIED NONRECOURSE FINANCING TREATED AS AMOUNT

AT RISK.—For purposes of this section—

(A) IN GENERAL.—Notwithstanding any other provision 

of this subsection, in the case of an activity of holding real 

property, a taxpayer shall be considered at risk with respect to the taxpayer’s øshare of any qualified nonrecourse 

financing which is secured by real property used in such 

activity.¿ share of—

75

(i) any qualified nonrecourse financing which is secured by real property used in such activity, and 

(ii) any other financing which—

(I) would (but for subparagraph (B)(ii)) be qualified nonrecourse financing, 

(II) is qualified publicly traded debt, and 

(III) is not borrowed by the taxpayer from a person described in subclause (I), (II), or (III) of section 49(a)(1)(D)(iv). 

* * * * * * *

(F) QUALIFIED PUBLICLY TRADED DEBT.—For purposes of 

subparagraph (A), the term ‘‘qualified publicly traded debt’’ 

means any debt instrument which is readily tradable on an 

established securities market. Such term shall not include 

any debt instrument which has a yield to maturity which 

equals or exceeds the limitation in section 163(i)(1)(B).

* * * * * * *

Subchapter F—Exempt Organizations 

* * * * * * *

PART I—GENERAL RULE 

* * * * * * *

SEC. 501. EXEMPTION FROM TAX ON CORPORATIONS, CERTAIN 

TRUSTS, ETC. 

(a) * * *

* * * * * * *

(c) LIST OF EXEMPT ORGANIZATIONS.—The following organizations 

are referred to in subsection (a): 

(1) * * *

* * * * * * *

(19) A post or organization of past or present members of the 

Armed Forces of the United States, or an auxiliary unit or society of, or a trust or foundation for, any such post or organization—

(A) * * *

(B) at least 75 percent of the members of which are past 

or present members of the Armed Forces of the United 

States and substantially all of the other members of which 

are individuals who are cadets or are spouses, widows, øor 

widowers¿, widowers, ancestors, or lineal descendants of 

past or present members of the Armed Forces of the 

United States or of cadets, and 

* * * * * * *

(p) SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANI- ZATIONS.—

(1) IN GENERAL.—The exemption from tax under subsection 

(a) with respect to any organization described in paragraph (2), 

and the eligibility of any organization described in paragraph 

(2) to apply for recognition of exemption under subsection (a), 

76

shall be suspended during the period described in paragraph 

(3). 

(2) TERRORIST ORGANIZATIONS.—An organization is described 

in this paragraph if such organization is designated or otherwise individually identified— 

(A) under section 212(a)(3)(B)(vi)(II) or 219 of the Immigration and Nationality Act as a terrorist organization or 

foreign terrorist organization, 

(B) in or pursuant to an Executive order which 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 of 1945 for the purpose of imposing on such organization an economic or other 

sanction, or 

(C) in or pursuant to an Executive order issued under the 

authority of any Federal law if—

(i) 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); and 

(ii) such Executive order refers to this subsection. 

(3) PERIOD OF SUSPENSION.—With respect to any organization 

described in paragraph (2), the period of suspension—

(A) begins on the later of—

(i) the date of the first publication of a designation 

or identification described in paragraph (2) with respect to such organization, or 

(ii) the date of the enactment of this subsection, and 

(B) ends on the first date that all designations and identifications described in paragraph (2) with respect to such 

organization are rescinded pursuant to the law or Executive 

order under which such designation or identification was 

made. 

(4) DENIAL OF DEDUCTION.—No deduction shall be allowed 

under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), 

or 2522 for any contribution to an organization described in 

paragraph (2) during the period described in paragraph (3). 

(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL CHALLENGE OF

SUSPENSION OR DENIAL OF DEDUCTION.—Notwithstanding section 7428 or any other provision of law, no organization or 

other person may challenge a suspension under paragraph (1), 

a designation or identification described in paragraph (2), the 

period of suspension described in paragraph (3), or a denial of 

a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal tax liability of such organization or other person. 

(6) ERRONEOUS DESIGNATION.— (A) IN GENERAL.—If—

(i) the tax exemption of any organization described in 

paragraph (2) is suspended under paragraph (1), 

(ii) each designation and identification described in 

paragraph (2) which has been made with respect to 

77

such organization is determined to be erroneous pursuant to the law or Executive order under which such 

designation or identification was made, and 

(iii) the erroneous designations and identifications 

result in an overpayment of income tax for any taxable 

year by such organization, 

credit or refund (with interest) with respect to such overpayment shall be made. 

(B) WAIVER OF LIMITATIONS.—If the credit or refund of 

any overpayment of tax described in subparagraph (A)(iii) 

is prevented at any time by the operation of any law or rule 

of law (including res judicata), such credit or refund may 

nevertheless be allowed or made if the claim therefor is 

filed before the close of the 1-year period beginning on the 

date of the last determination described in subparagraph 

(A)(ii). 

(7) NOTICE OF SUSPENSIONS.—If the tax exemption of any organization is suspended under this subsection, the Internal Revenue Service shall update the listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of such 

suspension and of the fact that contributions to such organization are not deductible during the period of such suspension.

ø(p)¿ (q) CROSS REFERENCE.— For nonexemption of Communist-controlled organizations, see 

section 11(b) of the Internal Security Act of 1950 (64 Stat. 997; 50 

U.S.C. 790(b)).

* * * * * * *

PART VIII—HIGHER EDUCATION SAVINGS ENTITIES 

* * * * * * *

SEC. 530. COVERDELL EDUCATION SAVINGS ACCOUNTS. 

(a) * * *

* * * * * * *

(d) TAX TREATMENT OF DISTRIBUTIONS.—

(1) * * *

* * * * * * *

(4) ADDITIONAL TAX FOR DISTRIBUTIONS NOT USED FOR EDUCATIONAL EXPENSES.—

(A) * * *

(B) EXCEPTIONS.—Subparagraph (A) shall not apply if 

the payment or distribution is—

(i) * * *

* * * * * * *

(iii) made on account of a scholarship, allowance, or 

payment described in section 25A(g)(2) received by the 

account holder to the extent the amount of the payment or distribution does not exceed the amount of the 

scholarship, allowance, or payment, øor¿

(iv) 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 MaVerDate Jan 31 2003 06:27 Mar 06, 2003 Jkt 019006 PO 00000 Frm 00077 Fmt 6659 Sfmt 6601 E:\HR\OC\HR023.XXX HR023
78

rine Academy, to the extent that the amount of the payment or distribution does not exceed the costs of advanced education (as defined by section 2005(e)(3) of 

title 10, United States Code, as in effect on the date of 

the enactment of this section) attributable to such attendance, or

ø(iv)¿ (5) an amount which is includible in gross income solely by application of paragraph (2)(C)(i)(II) for 

the taxable year. 

* * * * * * *

Subchapter I—Natural Resources 

* * * * * * *

PART III—SALES AND EXCHANGES 

* * * * * * *

SEC. 631. GAIN OR LOSS IN THE CASE OF TIMBER, COAL, OR DOMESTIC IRON ORE. 

(a) * * *

(b) DISPOSAL OF TIMBER øWITH A RETAINED ECONOMIC INTEREST¿.—In the case of the disposal of timber held for more than 1 

year before such disposal, by the owner thereof under any form or 

type of contract by virtue of which such owner øretains an economic interest in such timber¿ either retains an economic interest 

in such timber or makes an outright sale of such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shall be considered as 

though it were a gain or loss, as the case may be, on the sale of 

such timber. In determining the gross income, the adjusted gross 

income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. øThe date of disposal¿ In the case of disposal of timber with a retained economic 

interest, the date of disposal of such timber shall be deemed to be 

the date such timber is cut, but if payment is made to the owner 

under the contract before such timber is cut the owner may elect 

to treat the date of such payment as the date of disposal of such 

timber. For purposes of this subsection, the term ‘‘owner’’ means 

any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber. 

* * * * * * *

Subchapter J—Estates, Trusts, Beneficiaries, and 

Decedents 

* * * * * * *

PART II—INCOME IN RESPECT OF DECEDENTS

Sec. 691. Recipients of income in respect of decedents. 

79

Sec. 692. Income taxes of members of Armed Forces, astronauts,

and victims of certain terrorist attacks on death.

* * * * * * *

SEC. 692. INCOME TAXES OF MEMBERS OF ARMED FORCES, ASTRONAUTS, AND VICTIMS OF CERTAIN TERRORIST ATTACKS 

ON DEATH. 

(a) * * *

* * * * * * *

(d) INDIVIDUALS DYING AS A RESULT OF CERTAIN ATTACKS.— (1) * * *

* * * * * * *

(5) RELIEF WITH RESPECT TO ASTRONAUTS.—The provisions of 

this subsection shall apply to any astronaut whose death occurs 

while on a space mission, except that paragraph (3)(B) shall be 

applied by using the date of the death of the astronaut rather 

than September 11, 2001.

* * * * * * *

Subchapter N—Tax Based on Income from 

Sources Within or Without the United States 

* * * * * * *

PART II—NONRESIDENT ALIENS AND FOREIGN 

CORPORATIONS 

* * * * * * *

Subpart A—Nonresident Alien Individuals 

* * * * * * *

SEC. 872. GROSS INCOME. 

(a) * * *

(b) EXCLUSIONS.—The following items shall not be included in 

gross income of a nonresident alien individual, and shall be exempt 

from taxation under this subtitle: 

(1) * * *

* * * * * * *

(5) INCOME DERIVED FROM WAGERING TRANSACTIONS IN CERTAIN PARIMUTUEL POOLS.—Gross income derived by a nonresident alien individual from a legal wagering transaction initiated outside the United States in a parimutuel pool with respect to a live horse race in the United States.

ø(5)¿ (6) CERTAIN RENTAL INCOME.—Income to which paragraphs (1) and (2) apply shall include income which is derived 

from the rental on a full or bareboat basis of a ship or ships 

or aircraft, as the case may be. 

ø(6)¿ (7) APPLICATION TO DIFFERENT TYPES OF TRANSPOR- TATION.—The Secretary may provide that this subsection be 

applied separately with respect to income from different types 

of transportation. 

80

ø(7)¿ (8) TREATMENT OF POSSESSIONS.—To the extent provided in regulations, a possession of the United States shall be 

treated as a foreign country for purposes of this subsection. 

* * * * * * *

SEC. 877. EXPATRIATION TO AVOID TAX. 

ø(a) TREATMENT OF EXPATRIATES.—

ø(1) IN GENERAL.—Every nonresident alien individual who, 

within the 10-year period immediately preceding the close of 

the taxable year, lost United States citizenship, unless such 

loss did not have for one of its principal purposes the avoidance 

of taxes under this subtitle or subtitle B, shall be taxable for 

such taxable year in the manner provided in subsection (b) if 

the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed 

pursuant to section 871. 

ø(2) CERTAIN INDIVIDUALS TREATED AS HAVING TAX AVOIDANCE PURPOSE.—For purposes of paragraph (1), an individual 

shall be treated as having a principal purpose to avoid such 

taxes if—

ø(A) the average annual net income tax (as defined in 

section 38(c)(1) of such individual for the period of 5 taxable years ending before the date of the loss of United 

States citizenship is greater than $100,000, or 

ø(B) the net worth of the individual as of such date is 

$500,000 or more. 

In the case of the loss of United States citizenship in any calendar year after 1996, such $100,000 and $500,000 amounts 

shall be increased by an amount equal to such dollar amount 

multiplied by the cost-of-living adjustment determined under 

section 1(f)(3) for such calendar year by substituting ‘‘1994’’ for 

‘‘1992’’ in subparagraph (B) thereof. Any increase under the 

preceding sentence shall be rounded to the nearest multiple of 

$1,000.¿

(a) TREATMENT OF EXPATRIATES.—

(1) IN GENERAL.—Every nonresident alien individual to 

whom this section applies and who, within the 10-year period 

immediately preceding the close of the taxable year, lost United 

States citizenship shall be taxable for such taxable year in the 

manner provided in subsection (b) if the tax imposed pursuant 

to such subsection (after any reduction in such tax under the 

last sentence of such subsection) exceeds the tax which, without 

regard to this section, is imposed pursuant to section 871. 

(2) INDIVIDUALS SUBJECT TO THIS SECTION.—This section 

shall apply to any individual if—

(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable 

years ending before the date of the loss of United States 

citizenship is greater than $122,000, 

(B) the net worth of the individual as of such date is 

$2,000,000 or more, or 

(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 

81

5 preceding taxable years or fails to submit such evidence 

of such compliance as the Secretary may require. 

In the case of the loss of United States citizenship in any calendar year after 2003, such $122,000 amount shall be increased 

by an amount equal to such dollar amount multiplied by the 

cost-of-living adjustment determined under section 1(f)(3) for 

such calendar year by substituting ‘‘2002’’ for ‘‘1992’’ in subparagraph (B) thereof. Any increase under the preceding sentence shall be rounded to the nearest multiple of $1,000.

* * * * * * *

ø(c) TAX AVOIDANCE NOT PRESUMED IN CERTAIN CASES.— ø(1) IN GENERAL.—Subsection (a)(2) shall not apply to an individual if—

ø(A) such individual is described in a subparagraph of 

paragraph (2) of this subsection, and 

ø(B) within the 1-year period beginning on the date of 

the loss of United States citizenship, such individual submits a ruling request for the Secretary’s determination as 

to whether such loss has for one of its principal purposes 

the avoidance of taxes under this subtitle or subtitle B. 

ø(2) INDIVIDUALS DESCRIBED.— ø(A) DUAL CITIZENSHIP, ETC.—An individual is described 

in this subparagraph if—

ø(i) the individual became at birth a citizen of the 

United States and a citizen of another country and 

continues to be a citizen of such other country, or 

ø(ii) the individual becomes (not later than the close 

of a reasonable period after loss of United States citizenship) a citizen of the country in which—

ø(I) such individual was born, 

ø(II) if such individual is married, such individual’s spouse was born, or 

ø(III) either of such individual’s parents were 

born. 

ø(B) LONG-TERM FOREIGN RESIDENTS.—An individual is 

described in this subparagraph if, for each year in the 10- 

year period ending on the date of loss of United States citizenship, the individual was present in the United States 

for 30 days or less. The rule of section 7701(b)(3)(D)(ii) 

shall apply for purposes of this subparagraph. 

ø(C) RENUNCIATION UPON REACHING AGE OF MAJORITY.— An individual is described in this subparagraph if the individual’s loss of United States citizenship occurs before such 

individual attains age 18-1⁄2. ø(D) INDIVIDUALS SPECIFIED IN REGULATIONS.—An individual is described in this subparagraph if the individual 

is described in a category of individuals prescribed by regulation by the Secretary.¿

(c) EXCEPTIONS.— (1) IN GENERAL.—Subparagraphs (A) and (B) of subsection 

(a)(2) shall not apply to an individual described in paragraph 

(2) or (3). 

(2) DUAL CITIZENS.— (A) IN GENERAL.—An individual is described in this 

paragraph if—

82

(i) the individual became at birth a citizen of the 

United States and a citizen of another country and 

continues to be a citizen of such other country, and 

(ii) the individual has had no substantial contacts 

with the United States. 

(B) SUBSTANTIAL CONTACTS.—An individual shall be 

treated as having no substantial contacts with the United 

States only if the individual—

(i) was never a resident of the United States (as defined in section 7701(b)), 

(ii) has never held a United States passport, and 

(iii) was not present in the United States for more 

than 30 days during any calendar year which is 1 of 

the 10 calendar years preceding the individual’s loss of 

United States citizenship. 

(3) CERTAIN MINORS.—An individual is described in this 

paragraph if—

(A) the individual became at birth a citizen of the United 

States, 

(B) neither parent of such individual was a citizen of the 

United States at the time of such birth, 

(C) the individual’s loss of United States citizenship occurs before such individual attains age 18 1⁄2, and 

(D) the individual was not present in the United States 

for more than 30 days during any calendar year which is 

1 of the 10 calendar years preceding the individual’s loss 

of United States citizenship. 

* * * * * * *

(g) PHYSICAL PRESENCE.—This section shall not apply to any individual for any taxable year during the 10-year period referred to 

in subsection (a) in which such individual is present in the United 

States for more than 30 days in the calendar year ending in such 

taxable year, and such individual shall be treated for purposes of 

this title as a citizen or resident of the United States for such taxable year.

* * * * * * *

Subpart B—Foreign Corporations 

* * * * * * *

SEC. 883. EXCLUSIONS FROM GROSS INCOME. 

(a) INCOME OF FOREIGN CORPORATIONS FROM SHIPS AND AIRCRAFT.—The following items shall not be included in gross income 

of a foreign corporation, and shall be exempt from taxation under 

this subtitle: 

(1) * * *

* * * * * * *

(4) SPECIAL RULES.—The rules of paragraphs ø(5), (6), and 

(7)¿ (6), (7), and (8) of section 872(b) shall apply for purposes 

of this subsection. 

* * * * * * *

83

Subchapter O—Gain or Loss on Disposition of 

Property 

* * * * * * *

PART III—COMMON NONTAXABLE EXCHANGES 

* * * * * * *

SEC. 1033. INVOLUNTARY CONVERSIONS. 

(a) * * *

* * * * * * *

(e) LIVESTOCK SOLD ON ACCOUNT OF DROUGHT, FLOOD, OR OTHER

WEATHER-RELATED øCONDITIONS.—For purposes¿ CONDITIONS.—

(1) IN GENERAL.—For purposes of this subtitle, the sale or exchange of livestock (other than poultry) held by a taxpayer for 

draft, breeding, or dairy purposes in excess of the number the 

taxpayer would sell if he followed his usual business practices 

shall be treated as an involuntary conversion to which this section applies if such livestock are sold or exchanged by the taxpayer solely on account of drought, flood, or other weather-related conditions.

(2) EXTENSION OF REPLACEMENT PERIOD.—

(A) IN GENERAL.—In the case of drought, flood, or other 

weather-related conditions described in paragraph (1) 

which result in the area being designated as eligible for assistance by the Federal Government, subsection (a)(2)(B) 

shall be applied with respect to any converted property by 

substituting ‘‘4 years’’ for ‘‘2 years’’. 

(B) FURTHER EXTENSION BY SECRETARY.—The Secretary 

may extend on a regional basis the period for replacement 

under this section (after the application of subparagraph 

(A)) for such additional time as the Secretary determines 

appropriate if the weather-related conditions which resulted in such application continue for more than 3 years.

* * * * * * *

Subchapter T—Cooperatives and Their Patrons 

* * * * * * *

PART III—DEFINITIONS; SPECIAL RULES 

* * * * * * *

SEC. 1388. DEFINITIONS; SPECIAL RULES. 

(a) PATRONAGE DIVIDEND.—For purposes of this subchapter, the 

term ‘‘patronage dividend’’ means an amount paid to a patron by 

an organization to which part I of this subchapter applies—

(1) * * *

* * * * * * *

Such term does not include any amount paid to a patron to the extent that (A) such amount is out of earnings other than from business done with or for patrons, or (B) such amount is out of earnings 

from business done with or for other patrons to whom no amounts 

84

are paid, or to whom smaller amounts are paid, with respect to 

substantially identical transactions. For purposes of paragraph (3), 

net earnings shall not be reduced by amounts paid during the year 

as dividends on capital stock or other proprietary capital interests 

of the organization to the extent that the articles of incorporation or 

bylaws of such organization or other contract with patrons provide 

that such dividends are in addition to amounts otherwise payable 

to patrons which are derived from business done with or for patrons 

during the taxable year.

* * * * * * *

Subtitle B—Estate and Gift Taxes 

* * * * * * *

CHAPTER 11—ESTATE TAX 

* * * * * * *

Subchapter B—Estates of Nonresidents Not 

Citizens 

* * * * * * *

SEC. 2107. EXPATRIATION TO AVOID TAX. 

ø(a) TREATMENT OF EXPATRIATES.—

ø(1) RATE OF TAX.—A tax computed in accordance with the 

table contained in section 2001 is hereby imposed on the transfer of the taxable estate, determined as provided in section 

2106, of every decedent nonresident not a citizen of the United 

States if, within the 10-year period ending with the date of 

death, such decedent lost United States citizenship, unless 

such loss did not have for one of its principal purposes the 

avoidance of taxes under this subtitle or subtitle A—

ø(2) CERTAIN INDIVIDUALS TREATED AS HAVING TAX AVOIDANCE PURPOSE.—

ø(A) IN GENERAL.—For purposes of paragraph (1), an individual shall be treated as having a principal purpose to 

avoid such taxes if such individual is so treated under section 877(a)(2). 

ø(B) EXCEPTION.—Subparagraph (A) shall not apply to a 

decedent meeting the requirements of section 877(c)(1).¿

(a) TREATMENT OF EXPATRIATES.—A tax computed in accordance 

with the table contained in section 2001 is hereby imposed on the 

transfer of the taxable estate, determined as provided in section 

2106, of every decedent nonresident not a citizen of the United 

States if the date of death occurs during a taxable year with respect 

to which the decedent is subject to tax under section 877(b).

* * * * * * *

85

Subchapter C—Miscellaneous

Sec. 2201. Combat zone-related deaths of members of the Armed 

Forces, deaths of astronauts, and deaths of victims 

of certain terrorist attacks. 

* * * * * * *

SEC. 2201. COMBAT ZONE-RELATED DEATHS OF MEMBERS OF THE 

ARMED FORCES, DEATHS OF ASTRONAUTS, AND DEATHS 

OF VICTIMS OF CERTAIN TERRORIST ATTACKS.

(a) * * *

(b) QUALIFIED DECEDENT.—For purposes of this section, the term 

‘‘qualified decedent’’ means—

(1) any citizen or resident of the United States dying while 

in active service of the Armed Forces of the United States, if 

such decedent—

(A) * * *

(B) died as a result of wounds, disease, or injury suffered 

while serving in a combat zone (as determined under section 112(c)), and while in the line of duty, by reason of a 

hazard to which such decedent was subjected as an incident of such service, øand¿

(2) any specified terrorist victim (as defined in section 

692(d)(4))ø.¿, and

(3) any astronaut whose death occurs while on a space mission.

* * * * * * *

CHAPTER 12—GIFT TAX 

* * * * * * *

Subchapter A—Determination of Tax Liability 

* * * * * * *

SEC. 2501. IMPOSITION OF TAX. 

(a) TAXABLE TRANSFERS.—

(1) * * *

* * * * * * *

(6) TRANSFERS OF CERTAIN STOCK.— (A) IN GENERAL.—Paragraph (3) shall not apply to the 

transfer of stock described in subparagraph (B) by any individual to whom section 877(b) applies, and section 

2511(a) shall be applied without regard to whether such 

stock is property which is situated within the United 

States. 

(B) VALUATION.—For purposes of subparagraph (A), the 

value of stock shall be determined as provided in section 

2103, except that—

(i) if the donor owned (within the meaning of section 

958(a)) at the time of such transfer 10 percent or more 

of the total combined voting power of all classes of 

stock entitled to vote of a foreign corporation, and 

86

(ii) if such donor owned (within the meaning of section 958(a)), or is considered to have owned (by applying the ownership rules of section 958(b)), at the time 

of such transfer, more than 50 percent of—

(I) the total combined voting power of all classes 

of stock entitled to vote of such corporation, or 

(II) the total value of the stock of such corporation,then that proportion of the fair market value 

of the stock of such foreign corporation owned 

(within the meaning of section 958(a)) by such 

donor at the time of such transfer, which the fair 

market value of any assets owned by such foreign 

corporation and situated in the United States, at 

the time of such transfer, bears to the total fair 

market value of all assets owned by such foreign 

corporation at the time of such transfer, shall be 

included in the value of such property. 

For purposes of the preceding sentence, a donor shall be 

treated as owning stock of a foreign corporation at the time 

of such transfer if, at such time, by trust or otherwise, within the meaning of sections 2035 to 2038, inclusive, he 

owned such stock.

* * * * * * *

Subtitle C—Employment Taxes 

* * * * * * *

CHAPTER 21—FEDERAL INSURANCE 

CONTRIBUTIONS ACT 

* * * * * * *

Subchapter C—General Provisions 

* * * * * * *

SEC. 3121. DEFINITIONS. 

(a) WAGES.—For purposes of this chapter, the term ‘‘wages’’ 

means all remuneration for employment, including the cash value 

of all remuneration (including benefits) paid in any medium other 

than cash; except that such term shall not include—

(1) * * *

* * * * * * *

(18) any payment made, or benefit furnished, to or for the 

benefit of an employee if at the time of such payment or such 

furnishing it is reasonable to believe that the employee will be 

able to exclude such payment or benefit from income under 

section 127 øor 129¿, 129, or 134(b)(4); 

* * * * * * *

87

CHAPTER 23—FEDERAL UNEMPLOYMENT TAX 

ACT 

* * * * * * *

SEC. 3306. DEFINITIONS. 

(a) * * *

(b) WAGES.—For purposes of this chapter, the term ‘‘wages’’ 

means all remuneration for employment, including the cash value 

of all remuneration (including benefits) paid in any medium other 

than cash; except that such term shall not include—

(1) * * *

* * * * * * *

(13) any payment made, or benefit furnished, to or for the 

benefit of an employee if at the time of such payment or such 

furnishing it is reasonable to believe that the employee will be 

able to exclude such payment or benefit from income under 

section 127 øor 129¿, 129, or 134(b)(4); 

* * * * * * *

CHAPTER 24—COLLECTION OF INCOME TAX 

AT SOURCE ON WAGES 

* * * * * * *

Subchapter A—Withholding from Wages 

* * * * * * *

SEC. 3401. DEFINITIONS. 

(a) WAGES.—For purposes of this chapter, the term ‘‘wages’’ 

means all remuneration (other than fees paid to a public official) 

for services performed by an employee for his employer, including 

the cash value of all remuneration (including benefits) paid in any 

medium other than cash; except that such term shall not include 

remuneration paid—

(1) * * *

* * * * * * *

(18) for any payment made, or benefit furnished, to or for the 

benefit of an employee if at the time of such payment or such 

furnishing it is reasonable to believe that the employee will be 

able to exclude such payment or benefit from income under 

section 127 øor 129¿, 129, or 134(b)(4); 

* * * * * * *

Subtitle D—Miscellaneous Excise Taxes 

* * * * * * *

88

CHAPTER 32—MANUFACTURERS EXCISE 

TAXES 

* * * * * * *

Subchapter A—Automotive and Related Items 

* * * * * * *

PART III—PETROLEUM PRODUCTS 

* * * * * * *

Subpart A—Gasoline and Diesel Fuel 

* * * * * * *

SEC. 4081. IMPOSITION OF TAX. 

(a) TAX IMPOSED.— (1) * * *

(2) RATES OF TAX.— (A) IN GENERAL.—The rate of the tax imposed by this 

section is—

(i) * * *

* * * * * * *

(iii) in the case of diesel fuel or kerosene, 24.3 cents 

per gallon (19.7 cents per gallon in the case of a dieselwater fuel emulsion at least 14 percent of which is 

water). 

* * * * * * *

Subchapter C—Certain Vaccines 

* * * * * * *

SEC. 4132. DEFINITIONS AND SPECIAL RULES. 

(a) DEFINITIONS RELATING TO TAXABLE VACCINES.—For purposes 

of this subchapter—

(1) TAXABLE VACCINE.—The term ‘‘taxable vaccine’’ means 

any of the following vaccines which are manufactured or produced in the United States or entered into the United States 

for consumption, use, or warehousing: 

(A) * * *

* * * * * * *

(I) Any vaccine against hepatitis A.

ø(I)¿ (J) Any vaccine against hepatitis B. 

ø(J)¿ (K) Any vaccine against chicken pox. 

ø(K)¿ (L) Any vaccine against rotavirus gastroenteritis. 

ø(L)¿ (M) Any conjugate vaccine against streptococcus 

pneumoniae. 

* * * * * * *

Subchapter D—Recreational Equipment 

* * * * * * *

89

PART I—SPORTING GOODS 

* * * * * * *

SEC. 4161. IMPOSITION OF TAX. 

(a) * * *

(b) BOWS AND ARROWS, ETC.—

ø(1) BOWS.—

ø(A) IN GENERAL.—There is hereby imposed on the sale 

by the manufacturer, producer, or importer of any bow 

which has a draw weight of 10 pounds or more, a tax equal 

to 11 percent of the price for which so sold. 

ø(B) PARTS AND ACCESSORIES.—There is hereby imposed 

upon the sale by the manufacturer, producer, or importer—

ø(i) of any part of accessory suitable for inclusion in 

or attachment to a bow described in subparagraph (A), 

and 

ø(ii) of any quiver suitable for use with arrows described in paragraph (2), a tax equivalent to 11 percent of the price for which so sold.¿

(1) BOWS.—

(A) IN GENERAL.—There is hereby imposed on the sale by 

the manufacturer, producer, or importer of any bow which 

has a draw weight of 30 pounds or more, a tax equal to 11 

percent of the price for which so sold. 

(B) ARCHERY EQUIPMENT.—There is hereby imposed on 

the sale by the manufacturer, producer, or importer—

(i) of any part or accessory suitable for inclusion in 

or attachment to a bow described in subparagraph (A), 

and 

(ii) of any quiver or broadhead suitable for use with 

an arrow described in paragraph (3), 

a tax equal to 11 percent of the price for which so sold.

(2) øARROWS¿ ARROW COMPONENTS.—There is hereby imposed on the sale by the manufacturer, producer, or importer 

of any shaft, point, nock, or vane of a type used in the manufacture of any arrow which after its assembly—

(A) * * *

* * * * * * *

(3) ARROWS.—

(A) IN GENERAL.—There is hereby imposed on the sale by 

the manufacturer, producer, or importer of any arrow, a tax 

equal to 12 percent of the price for which so sold. 

(B) EXCEPTION.—The tax imposed by subparagraph (A) 

on an arrow shall not apply if the arrow contains an arrow 

shaft subject to the tax imposed by paragraph (2). 

(C) ARROW.—For purposes of this paragraph, the term 

‘‘arrow’’ means any shaft described in paragraph (2) to 

which additional components are attached.

ø(3)¿ (4) COORDINATION WITH SUBSECTION (A).—No tax shall 

be imposed under this subsection with respect to any article 

taxable under subsection (a). 

* * * * * * *

90

SEC. 4162. DEFINITIONS; TREATMENT OF CERTAIN RESALES. 

(a) SPORT FISHING EQUIPMENT DEFINED.—For purposes of this 

part, the term ‘‘sport fishing equipment’’ means—

(1) * * *

* * * * * * *

(6) the following items of fishing supplies and accessories—

(A) fish stringers, 

(B) creels, 

ø(C) tackle boxes,¿

ø(D)¿ (C) bags, baskets, and other containers designed to 

hold fish, 

ø(E)¿ (D) portable bait containers, 

ø(F)¿ (E) fishing vests, 

ø(G)¿ (F) landing nets, 

ø(H)¿ (G) gaff hooks, 

ø(I)¿ (H) fishing hook disgorgers, and 

ø(J)¿ (I) dressing for fishing lines and artificial flies, 

* * * * * * *

Subtitle F—Procedure and Administration 

* * * * * * *

CHAPTER 61—INFORMATION AND RETURNS 

* * * * * * *

Subchapter A—Returns and Records 

* * * * * * *

PART II—TAX RETURNS OR STATEMENTS 

* * * * * * *

Subpart B—Income Tax Returns 

* * * * * * *

SEC. 6013. JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE. 

(a) * * *

* * * * * * *

(f) JOINT RETURN WHERE INDIVIDUAL IS IN MISSING STATUS.—For 

purposes of this section and subtitle A—

(1) * * *

(2) EFFECT OF ELECTION.—If the spouse of an individual described in paragraph (1)(A) elects to file a joint return under 

subsection (a) for a taxable year, then, until such election is revoked—

(A) such election shall be valid even if such individual 

died before the beginning of such year, and 

(B) except for purposes of section 692 (relating to income 

taxes of members of the Armed Forces, astronauts, and victims of certain terrorist attacks on death), the income tax 

liability of such individual, his spouse, and his estate shall 

91

be determined as if he were alive throughout the taxable 

year. 

* * * * * * *

PART III—INFORMATION RETURNS 

* * * * * * *

Subpart A—Information Concerning Persons Subject to 

Special Provisions 

* * * * * * *

SEC. 6039G. INFORMATION ON INDIVIDUALS LOSING UNITED STATES 

CITIZENSHIP. 

ø(a) IN GENERAL.—Notwithstanding any other provision of law, 

any individual who loses United States citizenship (within the 

meaning of section 877(a) shall provide a statement which includes 

the information described in subsection (b). Such statement shall 

be—

ø(1) provided not later than the earliest date of any act referred to in subsection (c), and 

ø(2) provided to the person or court referred to in subsection 

(c) with respect to such act. 

ø(b) INFORMATION TO BE PROVIDED.—Information required under 

subsection (a) shall include—

ø(1) the taxpayer’s TIN, 

ø(2) the mailing address of such individual’s principal foreign 

residence, 

ø(3) the foreign country, in which such individual is residing, 

ø(4) the foreign country of which such individual is a citizen. 

ø(5) in the case of an individual having a net worth of at 

least the dollar amount applicable under section 877(a)(2)(B), 

information detailing the assets and liabilities of such individual, and 

ø(6) such other information as the Secretary may prescribe. 

ø(c) ACTS DESCRIBED.—For purposes of this section, the acts referred to in this subsection are—

ø(1) the individual’s renunciation of his United States nationality before a diplomatic or consular officer of the United 

States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), 

ø(2) the individual’s furnishing to the United States Department of State a signed statement of voluntary relinquishment 

of United States nationality confirming the performance of an 

act of expatriation specified in paragraph (1), (2), (3), or (4) of 

section 349(a) of the immigration and Nationality Act (8 U.S.C. 

1481(a)(1)-(4)), 

ø(3) the issuance by the United States Department of State 

of a certificate of loss of nationality to the individual, or 

ø(4) the cancellation by a court of the United States of a naturalized citizen’s certificate of naturalization. 

ø(d) PENALTY.—Any individual failing to provide a statement required under subsection (a) shall be subject to a penalty for each 

year (of the 10-year period beginning on the date of loss of United 

States citizenship) during any portion of which such failure continues in an amount equal to the greater of—

92

ø(1) 5 percent of the tax required to be paid under section 

877 for the taxable year ending during such year, or 

ø(2) $1,000,unless it is shown that such failure is due to reasonable cause and not to willful neglect.¿

(a) IN GENERAL.—Notwithstanding any other provision of law, 

any individual to whom section 877(b) applies for any taxable year 

shall provide a statement for such taxable year which includes the 

information described in subsection (b). 

(b) INFORMATION TO BE PROVIDED.—Information required under 

subsection (a) shall include—

(1) the taxpayer’s TIN, 

(2) the mailing address of such individual’s principal foreign 

residence, 

(3) the foreign country, in which such individual is residing, 

(4) the foreign country of which such individual is a citizen, 

(5) information detailing the assets and liabilities of such individual, 

(6) the number of days that the individual was present in the 

United States during the taxable year, and 

(7) such other information as the Secretary may prescribe. 

(c) PENALTY.—If—

(1) an individual is required to file a statement under subsection (a) for any taxable year, and 

(2) fails to file such a statement with the Secretary on or before the date such statement is required to be filed or fails to 

include all the information required to be shown on the statement or includes incorrect information, 

such individual shall pay a penalty of $5,000 unless it is shown 

that such failure is due to reasonable cause and not to willful neglect.

ø(e)¿ (d) INFORMATION TO BE PROVIDED TO SECRETARY.—Notwithstanding any other provision of law—

(1) * * *

* * * * * * *

ø(f) REPORTING BY LONG-TERM LAWFUL PERMANENT RESIDENTS

WHO CEASE TO BE TAXED AS RESIDENTS.—In lieu of applying the 

last sentence of subsection (a), any individual who is required to 

provide a statement under this section by reason of section 

877(e)(1) shall provide such statement with the return of tax imposed by chapter 1 for the taxable year during which the event described in such section occurs. 

ø(g) EXEMPTION.—The Secretary may by regulations exempt any 

class of individuals from the requirements of this section if he determines that applying this section to such individuals is not necessary to carry out the purposes of this section.¿

* * * * * * *

CHAPTER 65—ABATEMENTS, CREDITS, AND 

REFUNDS 

* * * * * * *

93

Subchapter B—Rules of Special Application 

* * * * * * *

SEC. 6427. FUELS NOT USED FOR TAXABLE PURPOSES. 

(a) * * *

* * * * * * *

(m) DIESEL FUEL USED TO PRODUCE EMULSION.—

(1) IN GENERAL.—Except as provided in subsection (k), if any 

diesel fuel on which tax was imposed by section 4081 at the regular tax rate is used by any person in producing an emulsion 

described in section 4081(a)(2)(A) which is sold or used in such 

person’s trade or business, the Secretary shall pay (without interest) to such person an amount equal to the excess of the regular tax rate over the incentive tax rate with respect to such 

fuel. 

(2) DEFINITIONS.—For purposes of paragraph (1)—

(A) REGULAR TAX RATE.—The term ‘‘regular tax rate’’ 

means the aggregate rate of tax imposed by section 4081 determined without regard to the parenthetical in section 

4081(a)(2)(A). 

(B) INCENTIVE TAX RATE.—The term ‘‘incentive tax rate’’ 

means the aggregate rate of tax imposed by section 4081 determined with regard to the parenthetical in section 

4081(a)(2)(A).

ø(m)¿ (n) REGULATIONS.—The Secretary may by regulations prescribe the conditions, not inconsistent with the provisions of this 

section, under which payments may be made under this section. 

ø(n)¿ (o) PAYMENTS FOR TAXES IMPOSED BY SECTION 4041(d).—

For purposes of subsections (a), (b), and (c), the taxes imposed by 

section 4041(d) shall be treated as imposed by section 4041(a). 

ø(o)¿ (p) GASOHOL USED IN NONCOMMERCIAL AVIATION.—Except 

as provided in subsection (k), if—

(1) * * *

* * * * * * *

ø(p)¿ (q) CROSS REFERENCES.— (1) * * *

* * * * * * *

CHAPTER 77—MISCELLANEOUS PROVISIONS

Sec. 7501. Liability for taxes withheld or collected. 

* * * * * * *

Sec. 7508. Time for performing certain acts postponed by reason of 

service in combat zone or contingency operation. 

* * * * * * *

SEC. 7508. TIME FOR PERFORMING CERTAIN ACTS POSTPONED BY 

REASON OF SERVICE IN COMBAT ZONE OR CONTINGENCY 

OPERATION. 

(a) TIME TO BE DISREGARDED.—In the case of an individual serving in the Armed Forces of the United States, or serving in support 

of such Armed Forces, in an area designated by the President of 

the United States by Executive order as a ‘‘combat zone’’ for purposes of section 112 or when deployed outside the United States 

94

away from the individual’s permanent duty station while participating in an operation designated by the Secretary of Defense as a 

contingency operation (as defined in section 101(a)(13) of title 10, 

United States Code) or which became such a contingency operation 

by operation of law, at any time during the period designated by 

the President by Executive order as the period of combatant activities in such zone for purposes of such section or at any time during 

the period of such contingency operation, or hospitalized as a result 

of injury received while serving in such an area or operation during 

such time, the period of service in such area or operation, plus the 

period of continuous qualified hospitalization attributable to such 

injury, and the next 180 days thereafter, shall be disregarded in 

determining, under the internal revenue laws, in respect of any tax 

liability (including any interest, penalty, additional amount, or addition to the tax) of such individual—

(1) * * *

* * * * * * *

(d) MISSING STATUS.—The period of service in the area or contingency operation referred to in subsection (a) shall include the period during which an individual entitled to benefits under subsection (a) is in a missing status, within the meaning of section 

6013(f)(3). 

* * * * * * *

CHAPTER 79—DEFINITIONS 

* * * * * * *

SEC. 7701. DEFINITIONS. 

(a) * * *

* * * * * * *

(n) SPECIAL RULES FOR DETERMINING WHEN AN INDIVIDUAL IS NO

LONGER A UNITED STATES CITIZEN OR LONG-TERM RESIDENT.—An 

individual who would not (but for this subsection) be treated as a 

citizen or resident of the United States shall continue to be treated 

as a citizen or resident of the United States until such individual—

(1) gives notice of an expatriating act or termination of residency (with the requisite intent to relinquish citizenship or terminate residency) to the Secretary of State or the Secretary of 

Homeland Security, and 

(2) provides a statement in accordance with section 6039G.

ø(n)¿ (o) CROSS REFERENCES.— (1) * * *

(95)

VII. ADDITIONAL VIEWS 

We support immediate enactment of the Armed Services Tax 

Fairness Act of 2003. H.R. 878 would provide important tax relief 

to the men and women serving in our military and show our support for their personal sacrifices in defense of our Nation. 

This legislation should have been approved by the Congress and 

sent to the President for signature last year. However, it was not 

completed then because of the Republicans’ refusal to support the 

Senate’s provision to address individual expatriates leaving the 

country to avoid taxes. 

As the Committee on Ways and Means considered the legislation 

this year, unfortunately, we found that it had been designated as 

the ‘‘2003 tax Christmas tree’’ where Members could add-on whatever unrelated tax provisions they wanted. This is just plain irresponsible and an insult to our Armed Forces. 

H.R. 878, as introduced and presented to the Committee for approval, was a noncontroversial, bipartisan bill. Its sole purpose and 

goal was to provide tax relief to men and women in the uniformed 

services serving abroad. We do not agree with the Committee 

Chairman’s decision to throw out the bipartisan spirit and support 

for the bill—just to give his Republican Members a chance in 2003 

to put forward any tax amendment, even if totally unrelated to 

military tax relief. This decision puts real tax relief for the men 

and women of our Armed Services at great risk. These games are 

being played at the very time our Armed Forces may be asked to 

sacrifice their lives in order to defend our Nation. 

A much better approach to consideration of this bill would have 

been to pass H.R. 878 without amendment or to pass the bill as 

approved by the Senate Finance Committee earlier this year. The 

Democrats’ substitute amendment would have accomplished this 

goal. Had our amendment been adopted, significant tax relief for 

our military could have moved quickly through the Senate and to 

the President for signature. 

We were not alone in our concern that the Armed Services Tax 

Fairness Act should not be used as a special interest ‘‘gameboard.’’ 

Even the Republican House Budget Committee Chairman joined us 

in calling repeatedly for the Committee to refrain from offering totally extraneous amendments that could delay tax relief to the men 

and women serving our Country. Together we argued that it was 

critically important that we do not jeopardize tax relief for members of the Armed Services who potentially could be fighting in 

Iraq within a month. Our calls for restraint were ignored. More than $300 million in 

unrelated, special interest tax breaks were added to the bill by the 

Republicans. Among those offered and approved were (1) a tax 

break for foreigners who place bets outside the United States on 

U.S. horse races, (2) a special tax rate on fuel that is a blend of 

96

diesel fuel and water benefitting the few companies that manufacture such fuels, (3) a tax break to benefit manufacturers of fishing 

tackle boxes, (4) a tax break to benefit landowners who sell timber 

from their land, (5) an extension of the time allowed for ranchers 

to utilize a tax break for the weather-related sale of livestock, and 

(6) a tax break for several varieties of archery bows. While some 

may believe in the merits of one or more of these amendments, the 

Armed Services Tax Fairness Act is not the proper place or time 

for their consideration.

One particularly offensive amendment, which was described 

when offered as a ‘‘technical correction’’ to the health tax credit 

provisions included in the Trade Act of 2002, is nothing more than 

a thinly-veiled attempt to gut the few consumer protections that 

were included in that legislation. The practical effect of this 

amendment is to negate a carefully constructed compromise 

reached during the conference negotiation on the Trade Act which 

specified the coverage options available for individuals who are eligible for the Trade Adjustment Assistance (TAA) health tax credit 

and required insurance companies and other sponsors of coverage 

under specified state pooling arrangements to (1) issue a policy 

without exclusions for pre-existing conditions, (2) limit the premium to what would be charged to other similarly situated individuals, and (3) to offer benefits to TAA-eligibles that are substantially similar to those offered to other individuals. These protections, which would substantially limit the ability of insurance companies to turn down applicants or otherwise seek to cover only the 

healthiest individuals, are critical if persons with any type of current or potential health condition are to be able to actually use the 

tax credit toward the purchase of meaningful coverage. Under the 

guise of consumer choice, this amendment overrides these important federal protections. All Republican members of the Committee 

voted for these safeguards just seven months ago. Further, the bill, as passed the Committee, includes $662 million 

less tax relief than the similar Senate Finance Committee-passed 

bill for National Guard and Reserve members who have to travel 

more than 100 miles from home. The Committee’s bill caps the deduction for overnight travel expenses at $500. The Senate Finance 

Committee’s bill covers all such expenses.

97

We strongly believe that tax relief for the military needs to move 

forward, but do not believe it was appropriate to use this vehicle, 

H.R. 878, to enact provisions unrelated to Americans serving overseas. The Committee should have approved legislation identical to 

that reported by the Senate Finance Committee. If we had done 

that, the bill could have been on the President’s desk in a short period of time and tax relief for our Armed Services a reality.

CHARLES B. RANGEL. 

JERRY KLECZKA. 

XAVIER BECERRA. 

JIM MCDERMOTT. 

STEPHANIE TUBBS JONES. 

MICHAEL R. MCNULTY. 

ROBERT T. MATSUI. 

BEN CARDIN. 

PETE STARK. 

JOHN LEWIS. 

SANDER LEVIN. 

RICHARD NEAL. 

WILLIAM J. JEFFERSON. 

LLOYD DOGGETT. 

MAX SANDLIN. 

JOHN S. TANNER.

Æ