In the Senate of the United States,
October 3, 2002.
Resolved, That the bill from the House of Representa-
tives (H.R. 5063) entitled ‘‘An Act to amend the Internal
Revenue Code of 1986 to provide a special rule for members
of the uniformed services 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.’’, do pass with the following
AMENDMENTS:
Strike out all after the enacting clause and insert:
SECTION 1. SHORT TITLE; ETC.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Armed Forces Tax Fairness Act of 2002’’.
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(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 consid-
ered to be made to a section or other provision of the Inter-
nal Revenue Code of 1986.
(c) TABLE OF CONTENTS.—The table of contents for
this Act is as follows:
Sec. 1. Short title; etc.
TITLE I—IMPROVING TAX EQUITY FOR MILITARY PERSONNEL
Sec. 101. Exclusion from gross income of certain death gratuity payments.
Sec. 102. Exclusion of gain from sale of a principal residence by a member of
the uniformed services or the Foreign Service.
Sec. 103. Exclusion for amounts received under Department of Defense Home-
owners Assistance Program.
Sec. 104. Expansion of combat zone filing rules to contingency operations.
Sec. 105. Above-the-line deduction for overnight travel expenses of National Guard
and Reserve members.
Sec. 106. Modification of membership requirement for exemption from tax for cer-
tain veterans’ organizations.
Sec. 107. Clarification of treatment of certain dependent care assistance pro-
grams.
TITLE II—OTHER PROVISIONS
Sec. 201. Revision of tax rules on expatriation.
Sec. 202. Extension of IRS user fees.
Sec. 203. Partial payment of tax liability in installment agreements.
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TITLE I—IMPROVING TAX EQ-
UITY 
FOR 
MILITARY 
PER-
SONNEL
SEC. 101. EXCLUSION FROM GROSS INCOME OF CERTAIN
DEATH GRATUITY PAYMENTS.
(a) IN GENERAL.—Subsection (b)(3) of section 134 (re-
lating to certain military benefits) is amended by adding
at the end the following new subparagraph:
‘‘(C) EXCEPTION FOR DEATH GRATUITY AD-
JUSTMENTS 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 after September 9,
1986.’’.
(b) CONFORMING AMENDMENT.—Subparagraph (A) of
section 134(b)(3) 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.
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SEC. 102. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL
RESIDENCE BY A MEMBER OF THE UNI-
FORMED SERVICES OR THE FOREIGN SERV-
ICE.
(a) IN GENERAL.—Subsection (d) of section 121 (relat-
ing to exclusion of gain from sale of principal residence)
is amended by adding at the end the following new para-
graph:
‘‘(9) MEMBERS OF UNIFORMED SERVICES AND
FOREIGN SERVICE.—
‘‘(A) IN GENERAL.—At the election of an
individual with respect to a property, the run-
ning of the 5-year period described in subsection
(a) with respect to such property shall be sus-
pended during any period that such individual
or such individual’s spouse is serving on quali-
fied official extended duty as a member of the
uniformed services or of the Foreign Service of
the United States.
‘‘(B) MAXIMUM PERIOD OF SUSPENSION.—
The 5-year period described in subsection (a)
shall not be extended more than 10 years by rea-
son of subparagraph (A).
‘‘(C) 
QUALIFIED
OFFICIAL
EXTENDED
DUTY.—For purposes of this paragraph—
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‘‘(i) IN GENERAL.—The term ‘qualified
official extended duty’ means any extended
duty while serving at a duty station which
is at least 50 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
OF
THE
UNITED STATES.—The term ‘member of the
Foreign Service of the United States’ 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.
‘‘(iv) EXTENDED DUTY.—The term ‘ex-
tended duty’ means any period of duty pur-
suant to a call or order to such duty for a
period in excess of 90 days or for an indefi-
nite period.
‘‘(D) SPECIAL RULES RELATING TO ELEC-
TION.—
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‘‘(i) ELECTION
LIMITED
TO
PROP-
ERTY AT A TIME.—An election under sub-
paragraph (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 re-
voked 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 Re-
lief Act of 1997.
(2) WAIVER OF LIMITATIONS.—If refund or cred-
it 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 al-
lowed if claim therefor is filed before the close of such
period.
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SEC. 103. EXCLUSION FOR AMOUNTS RECEIVED UNDER DE-
PARTMENT OF DEFENSE HOMEOWNERS AS-
SISTANCE PROGRAM.
(a) IN GENERAL.—Section 132(a) (relating to the ex-
clusion from gross income of 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 insert-
ing ‘‘, or’’ and by adding at the end the following new para-
graph:
‘‘(8) qualified military base realignment and clo-
sure fringe.’’.
(b) QUALIFIED MILITARY BASE REALIGNMENT AND
CLOSURE FRINGE.—Section 132 is amended by redesig-
nating subsection (n) as subsection (o) and by inserting
after subsection (m) the following new subsection:
‘‘(n) QUALIFIED MILITARY BASE REALIGNMENT AND
CLOSURE FRINGE.—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 Devel-
opment Act of 1966 (42 U.S.C. 3374) to offset the adverse
effects on housing values as a result of a military base re-
alignment or closure.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to payments made after the date of the
enactment of this Act.
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SEC. 104. EXPANSION OF COMBAT ZONE FILING RULES TO
CONTINGENCY OPERATIONS.
(a) IN GENERAL.—Section 7508(a) (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 des-
ignated 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 contin-
gency 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’’.
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(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. 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 redesig-
nating subsection (p) as subsection (q) and inserting after
subsection (o) the following new subsection:
‘‘(p) TREATMENT OF EXPENSES OF MEMBERS OF RE-
SERVE 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 re-
serve 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 service.’’.
(b) DEDUCTION ALLOWED WHETHER OR NOT TAX-
PAYER ELECTS TO ITEMIZE.—Section 62(a)(2) (relating to
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certain trade and business deductions of employees) is
amended by adding at the end the following new subpara-
graph:
‘‘(E) CERTAIN EXPENSES OF MEMBERS OF
RESERVE COMPONENTS OF THE ARMED FORCES
OF
THE
UNITED
STATES.—The deductions al-
lowed by section 162 which consist of expenses,
in amounts not in excess of the rates for travel
expenses (including per diem in lieu of subsist-
ence) authorized for employees of agencies under
subchapter I of chapter 57 of title 5, United
States Code, paid or incurred by the taxpayer in
connection with the performance of services by
such taxpayer as a member of a reserve compo-
nent of the Armed Forces of the United States.’’.
(c) EFFECTIVE DATE.—The amendments made by this
section shall apply to amounts paid or incurred in taxable
years beginning after December 31, 2001.
SEC. 106. 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 ‘‘, wid-
owers, or ancestors or lineal descendants’’.
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(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. 107. CLARIFICATION OF THE TREATMENT OF CERTAIN
DEPENDENT CARE ASSISTANCE PROGRAMS.
(a) IN GENERAL.—Section 134(b) (defining qualified
military benefit) is amended by adding at the end the fol-
lowing new paragraph:
‘‘(4) CLARIFICATION
OF
CERTAIN
BENEFITS.—
For purposes of paragraph (1), such term includes
any dependent care assistance program for any indi-
vidual described in paragraph (1)(A).’’.
(b) CONFORMING AMENDMENTS.—
(1) Section 134(b)(3)(A) is amended by inserting
‘‘and paragraph (4)’’ after ‘‘subparagraph (B)’’.
(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 Decem-
ber 31, 2001.
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(d) NO INFERENCE.—No inference may be drawn from
the amendments made by this section with respect to the
tax treatment of any amounts under the program described
in section 134(b)(4) of the Internal Revenue Code of 1986
(as added by this section) for any taxable year beginning
before January 1, 2002.
TITLE II—OTHER PROVISIONS
SEC. 201. REVISION OF TAX RULES ON EXPATRIATION.
(a) IN GENERAL.—Subpart A of part II of subchapter
N of chapter 1 is amended by inserting after section 877
the following new section:
‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
‘‘(a) 
GENERAL
RULES.—For 
purposes 
of 
this
subtitle—
‘‘(1) MARK TO MARKET.—Except as provided in
subsections (d) and (f), all property of a covered expa-
triate to whom this section applies shall be treated as
sold on the day before the expatriation date for its
fair market value.
‘‘(2) RECOGNITION OF GAIN OR LOSS.—In the
case of any sale under paragraph (1)—
‘‘(A) notwithstanding any other provision of
this title, any gain arising from such sale shall
be taken into account for the taxable year of the
sale, and
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‘‘(B) any loss arising from such sale shall
be taken into account for the taxable year of the
sale to the extent otherwise provided by this title,
except that section 1091 shall not apply to any
such loss.
Proper adjustment shall be made in the amount of
any gain or loss subsequently realized for gain or loss
taken into account under the preceding sentence.
‘‘(3) EXCLUSION FOR CERTAIN GAIN.—
‘‘(A) IN GENERAL.—The amount which, but
for this paragraph, would be includible in the
gross income of any individual by reason of this
section shall be reduced (but not below zero) by
$600,000. For purposes of this paragraph, allo-
cable expatriation gain taken into account under
subsection (f)(2) shall be treated in the same
manner as an amount required to be includible
in gross income.
‘‘(B) COST-OF-LIVING ADJUSTMENT.—
‘‘(i) IN GENERAL.—In the case of an
expatriation date occurring in any calendar
year after 2002, the $600,000 amount under
subparagraph (A) shall be increased by an
amount equal to—
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‘‘(I) such dollar amount, multi-
plied by
‘‘(II) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year, determined by sub-
stituting ‘calendar year 2001’ for ‘cal-
endar year 1992’ in subparagraph (B)
thereof.
‘‘(ii) 
ROUNDING
RULES.—If 
any
amount after adjustment under clause (i) is
not a multiple of $1,000, such amount shall
be rounded to the next lower multiple of
$1,000.
‘‘(4) ELECTION TO CONTINUE TO BE TAXED AS
UNITED STATES CITIZEN.—
‘‘(A) IN GENERAL.—If a covered expatriate
elects the application of this paragraph—
‘‘(i) this section (other than this para-
graph and subsection (i)) shall not apply to
the expatriate, but
‘‘(ii) in the case of property to which
this section would apply but for such elec-
tion, the expatriate shall be subject to tax
under this title in the same manner as if
the individual were a United States citizen.
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‘‘(B) REQUIREMENTS.—Subparagraph (A)
shall not apply to an individual unless the
individual—
‘‘(i) provides security for payment of
tax in such form and manner, and in such
amount, as the Secretary may require,
‘‘(ii) consents to the waiver of any
right of the individual under any treaty of
the United States which would preclude as-
sessment or collection of any tax which may
be imposed by reason of this paragraph,
and
‘‘(iii) complies with such other require-
ments as the Secretary may prescribe.
‘‘(C) ELECTION.—An election under sub-
paragraph (A) shall apply to all property to
which this section would apply but for the elec-
tion and, once made, shall be irrevocable. Such
election shall also apply to property the basis of
which is determined in whole or in part by ref-
erence to the property with respect to which the
election was made.
‘‘(b) ELECTION TO DEFER TAX.—
‘‘(1) IN GENERAL.—If the taxpayer elects the ap-
plication of this subsection with respect to any prop-
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erty treated as sold by reason of subsection (a), the
payment of the additional tax attributable to such
property shall be postponed until the due date of the
return for the taxable year in which such property is
disposed of (or, in the case of property disposed of in
a transaction in which gain is not recognized in
whole or in part, until such other date as the Sec-
retary may prescribe).
‘‘(2) DETERMINATION OF TAX WITH RESPECT TO
PROPERTY.—For purposes of paragraph (1), the addi-
tional tax attributable to any property is an amount
which bears the same ratio to the additional tax im-
posed by this chapter for the taxable year solely by
reason of subsection (a) as the gain taken into ac-
count under subsection (a) with respect to such prop-
erty bears to the total gain taken into account under
subsection (a) with respect to all property to which
subsection (a) applies.
‘‘(3) TERMINATION OF POSTPONEMENT.—No tax
may be postponed under this subsection later than the
due date for the return of tax imposed by this chapter
for the taxable year which includes the date of death
of the expatriate (or, if earlier, the time that the secu-
rity provided with respect to the property fails to
meet the requirements of paragraph (4), unless the
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taxpayer corrects such failure within the time speci-
fied by the Secretary).
‘‘(4) SECURITY.—
‘‘(A) IN
GENERAL.—No election may be
made under paragraph (1) with respect to any
property unless adequate security is provided to
the Secretary with respect to such property.
‘‘(B) ADEQUATE SECURITY.—For purposes
of subparagraph (A), security with respect to
any property shall be treated as adequate secu-
rity if—
‘‘(i) it is a bond in an amount equal
to the deferred tax amount under paragraph
(2) for the property, or
‘‘(ii) the taxpayer otherwise establishes
to the satisfaction of the Secretary that the
security is adequate.
‘‘(5) WAIVER OF CERTAIN RIGHTS.—No election
may be made under paragraph (1) unless the tax-
payer consents to the waiver of any right under any
treaty of the United States which would preclude as-
sessment or collection of any tax imposed by reason
of this section.
‘‘(6) ELECTIONS.—An election under paragraph
(1) shall only apply to property described in the elec-
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tion and, once made, is irrevocable. An election may
be made under paragraph (1) with respect to an in-
terest in a trust with respect to which gain is re-
quired to be recognized under subsection (f)(1).
‘‘(7) INTEREST.—For purposes of section 6601—
‘‘(A) the last date for the payment of tax
shall be determined without regard to the election
under this subsection, and
‘‘(B) section 6621(a)(2) shall be applied by
substituting ‘5 percentage points’ for ‘3 percent-
age points’ in subparagraph (B) thereof.
‘‘(c) COVERED EXPATRIATE.—For purposes of this
section—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘covered expatriate’ means an ex-
patriate.
‘‘(2) EXCEPTIONS.—An individual shall not be
treated as a covered expatriate if—
‘‘(A) the individual—
‘‘(i) became at birth a citizen of the
United States and a citizen of another
country and, as of the expatriation date,
continues to be a citizen of, and is taxed as
a resident of, such other country, and
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‘‘(ii) has not been a resident of the
United States (as defined in section
7701(b)(1)(A)(ii)) during the 5 taxable
years ending with the taxable year during
which the expatriation date occurs, or
‘‘(B)(i) the individual’s relinquishment of
United States citizenship occurs before such indi-
vidual attains age 181⁄2, and
‘‘(ii) the individual has been a resident of
the United States (as so defined) for not more
than 5 taxable years before the date of relin-
quishment.
‘‘(d) EXEMPT PROPERTY; SPECIAL RULES FOR PEN-
SION PLANS.—
‘‘(1) EXEMPT PROPERTY.—This section shall not
apply to the following:
‘‘(A) UNITED STATES REAL PROPERTY IN-
TERESTS.—Any United States real property in-
terest (as defined in section 897(c)(1)), other
than stock of a United States real property hold-
ing corporation which does not, on the day before
the expatriation date, meet the requirements of
section 897(c)(2).
‘‘(B) SPECIFIED PROPERTY.—Any property
or interest in property not described in subpara-
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graph (A) which the Secretary specifies in regu-
lations.
‘‘(2) SPECIAL RULES FOR CERTAIN RETIREMENT
PLANS.—
‘‘(A) IN GENERAL.—If a covered expatriate
holds on the day before the expatriation date any
interest in a retirement plan to which this para-
graph applies—
‘‘(i) such interest shall not be treated
as sold for purposes of subsection (a)(1), but
‘‘(ii) an amount equal to the present
value of the expatriate’s nonforfeitable ac-
crued benefit shall be treated as having been
received by such individual on such date as
a distribution under the plan.
‘‘(B) TREATMENT
OF
SUBSEQUENT
DIS-
TRIBUTIONS.—In the case of any distribution on
or after the expatriation date to or on behalf of
the covered expatriate from a plan from which
the expatriate was treated as receiving a dis-
tribution under subparagraph (A), the amount
otherwise includible in gross income by reason of
the subsequent distribution shall be reduced by
the excess of the amount includible in gross in-
come under subparagraph (A) over any portion
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of such amount to which this subparagraph pre-
viously applied.
‘‘(C) TREATMENT
OF
SUBSEQUENT
DIS-
TRIBUTIONS BY PLAN.—For purposes of this title,
a retirement plan to which this paragraph ap-
plies, and any person acting on the plan’s behalf,
shall treat any subsequent distribution described
in subparagraph (B) in the same manner as
such distribution would be treated without re-
gard to this paragraph.
‘‘(D) APPLICABLE PLANS.—This paragraph
shall apply to—
‘‘(i) any qualified retirement plan (as
defined in section 4974(c)),
‘‘(ii) an eligible deferred compensation
plan (as defined in section 457(b)) of an el-
igible 
employer 
described 
in 
section
457(e)(1)(A), and
‘‘(iii) to the extent provided in regula-
tions, any foreign pension plan or similar
retirement arrangements or programs.
‘‘(e) DEFINITIONS.—For purposes of this section—
‘‘(1) 
EXPATRIATE.—The 
term 
‘expatriate’
means—
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‘‘(A) any United States citizen who relin-
quishes citizenship, and
‘‘(B) any long-term resident of the United
States who—
‘‘(i) ceases to be a lawful permanent
resident of the United States (within the
meaning of section 7701(b)(6)), or
‘‘(ii) commences to be treated as a resi-
dent of a foreign country under the provi-
sions of a tax treaty between the United
States and the foreign country and who
does not waive the benefits of such treaty
applicable to residents of the foreign coun-
try.
‘‘(2) EXPATRIATION DATE.—The term ‘expatria-
tion date’ means—
‘‘(A) the date an individual relinquishes
United States citizenship, or
‘‘(B) in the case of a long-term resident of
the United States, the date of the event described
in clause (i) or (ii) of paragraph (1)(B).
‘‘(3) RELINQUISHMENT OF CITIZENSHIP.—A cit-
izen shall be treated as relinquishing United States
citizenship on the earliest of—
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‘‘(A) the date the individual renounces such
individual’s 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)),
‘‘(B) the date the individual furnishes 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 Im-
migration and Nationality Act (8 U.S.C.
1481(a)(1)–(4)),
‘‘(C) the date the United States Department
of State issues to the individual a certificate of
loss of nationality, or
‘‘(D) the date a court of the United States
cancels a naturalized citizen’s certificate of natu-
ralization.
Subparagraph (A) or (B) shall not apply to any in-
dividual unless the renunciation or voluntary relin-
quishment is subsequently approved by the issuance to
the individual of a certificate of loss of nationality by
the United States Department of State.
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‘‘(4) LONG-TERM
RESIDENT.—The term ‘long-
term resident’ has the meaning given to such term by
section 877(e)(2).
‘‘(f) SPECIAL RULES APPLICABLE TO BENEFICIARIES’
INTERESTS IN TRUST.—
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), if an individual is determined under para-
graph (3) to hold an interest in a trust on the day
before the expatriation date—
‘‘(A) the individual shall not be treated as
having sold such interest,
‘‘(B) such interest shall be treated as a sep-
arate share in the trust, and
‘‘(C)(i) such separate share shall be treated
as a separate trust consisting of the assets allo-
cable to such share,
‘‘(ii) the separate trust shall be treated as
having sold its assets on the day before the expa-
triation date for their fair market value and as
having distributed all of its assets to the indi-
vidual as of such time, and
‘‘(iii) the individual shall be treated as hav-
ing recontributed the assets to the separate trust.
Subsection (a)(2) shall apply to any income, gain, or
loss of the individual arising from a distribution de-
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scribed in subparagraph (C)(ii). In determining the
amount of such distribution, proper adjustments shall
be made for liabilities of the trust allocable to an in-
dividual’s share in the trust.
‘‘(2) SPECIAL RULES FOR INTERESTS IN QUALI-
FIED TRUSTS.—
‘‘(A) IN GENERAL.—If the trust interest de-
scribed in paragraph (1) is an interest in a
qualified trust—
‘‘(i) paragraph (1) and subsection (a)
shall not apply, and
‘‘(ii) in addition to any other tax im-
posed by this title, there is hereby imposed
on each distribution with respect to such in-
terest a tax in the amount determined
under subparagraph (B).
‘‘(B) AMOUNT OF TAX.—The amount of tax
under subparagraph (A)(ii) shall be equal to the
lesser of—
‘‘(i) the highest rate of tax imposed by
section 1(e) for the taxable year which in-
cludes the day before the expatriation date,
multiplied by the amount of the distribu-
tion, or
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‘‘(ii) the balance in the deferred tax ac-
count immediately before the distribution
determined without regard to any increases
under subparagraph (C)(ii) after the 30th
day preceding the distribution.
‘‘(C) DEFERRED TAX ACCOUNT.—For pur-
poses of subparagraph (B)(ii)—
‘‘(i) OPENING BALANCE.—The opening
balance in a deferred tax account with re-
spect to any trust interest is an amount
equal to the tax which would have been im-
posed on the allocable expatriation gain
with respect to the trust interest if such
gain had been included in gross income
under subsection (a).
‘‘(ii) INCREASE
FOR
INTEREST.—The
balance in the deferred tax account shall be
increased by the amount of interest deter-
mined (on the balance in the account at the
time the interest accrues), for periods after
the 90th day after the expatriation date, by
using the rates and method applicable
under section 6621 for underpayments of
tax for such periods, except that section
6621(a)(2) shall be applied by substituting
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‘5 percentage points’ for ‘3 percentage
points’ in subparagraph (B) thereof.
‘‘(iii) DECREASE
FOR
TAXES
PRE-
VIOUSLY PAID.—The balance in the tax de-
ferred account shall be reduced—
‘‘(I) by the amount of taxes im-
posed by subparagraph (A) on any dis-
tribution to the person holding the
trust interest, and
‘‘(II) in the case of a person hold-
ing a nonvested interest, to the extent
provided in regulations, by the amount
of taxes imposed by subparagraph (A)
on distributions from the trust with re-
spect to nonvested interests not held by
such person.
‘‘(D) ALLOCABLE EXPATRIATION GAIN.—For
purposes of this paragraph, the allocable expa-
triation gain with respect to any beneficiary’s
interest in a trust is the amount of gain which
would be allocable to such beneficiary’s vested
and nonvested interests in the trust if the bene-
ficiary held directly all assets allocable to such
interests.
‘‘(E) TAX DEDUCTED AND WITHHELD.—
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‘‘(i) IN GENERAL.—The tax imposed by
subparagraph (A)(ii) shall be deducted and
withheld by the trustees from the distribu-
tion to which it relates.
‘‘(ii) EXCEPTION WHERE FAILURE TO
WAIVE TREATY RIGHTS.—If an amount may
not be deducted and withheld under clause
(i) by reason of the distributee failing to
waive any treaty right with respect to such
distribution—
‘‘(I) the tax imposed by subpara-
graph (A)(ii) shall be imposed on the
trust and each trustee shall be person-
ally liable for the amount of such tax,
and
‘‘(II) any other beneficiary of the
trust shall be entitled to recover from
the distributee the amount of such tax
imposed on the other beneficiary.
‘‘(F) DISPOSITION.—If a trust ceases to be
a qualified trust at any time, a covered expa-
triate disposes of an interest in a qualified trust,
or a covered expatriate holding an interest in a
qualified trust dies, then, in lieu of the tax im-
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posed by subparagraph (A)(ii), there is hereby
imposed a tax equal to the lesser of—
‘‘(i) the tax determined under para-
graph (1) as if the day before the expatria-
tion date were the date of such cessation,
disposition, or death, whichever is applica-
ble, or
‘‘(ii) the balance in the tax deferred ac-
count immediately before such date.
Such tax shall be imposed on the trust and each
trustee shall be personally liable for the amount
of such tax and any other beneficiary of the trust
shall be entitled to recover from the covered expa-
triate or the estate the amount of such tax im-
posed on the other beneficiary.
‘‘(G) DEFINITIONS AND SPECIAL RULES.—
For purposes of this paragraph—
‘‘(i) QUALIFIED
TRUST.—The term
‘qualified trust’ means a trust which is de-
scribed in section 7701(a)(30)(E).
‘‘(ii) VESTED
INTEREST.—The term
‘vested interest’ means any interest which,
as of the day before the expatriation date, is
vested in the beneficiary.
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‘‘(iii) 
NONVESTED
INTEREST.—The
term ‘nonvested interest’ means, with re-
spect to any beneficiary, any interest in a
trust which is not a vested interest. Such
interest shall be determined by assuming the
maximum exercise of discretion in favor of
the beneficiary and the occurrence of all
contingencies in favor of the beneficiary.
‘‘(iv) ADJUSTMENTS.—The Secretary
may provide for such adjustments to the
bases of assets in a trust or a deferred tax
account, and the timing of such adjust-
ments, in order to ensure that gain is taxed
only once.
‘‘(v) COORDINATION WITH RETIREMENT
PLAN
RULES.—This subsection shall not
apply to an interest in a trust which is
part of a retirement plan to which sub-
section (d)(2) applies.
‘‘(3) DETERMINATION OF BENEFICIARIES’ INTER-
EST IN TRUST.—
‘‘(A) DETERMINATIONS UNDER PARAGRAPH
(1).—For purposes of paragraph (1), a bene-
ficiary’s interest in a trust shall be based upon
all relevant facts and circumstances, including