146 
‘‘(A) subsection (a) would not (but for this 
subsection) apply to such sale or exchange by 
reason of— 
‘‘(i) a failure to meet the ownership 
and use requirements of subsection (a), or 
‘‘(ii) subsection (b)(3), and 
‘‘(B) such sale or exchange is by reason of 
a change in place of employment, health, or, to 
the extent provided in regulations, unforeseen 
circumstances. 
‘‘(d) SPECIAL RULES.— 
‘‘(1) JOINT RETURNS.—If a husband and wife 
make a joint return for the taxable year of the sale 
or exchange of the property, subsections (a) and (c) 
shall apply if either spouse meets the ownership and 
use requirements of subsection (a) with respect to 
such property. 
‘‘(2) PROPERTY OF DECEASED SPOUSE.—For 
purposes of this section, in the case of an unmarried 
individual whose spouse is deceased on the date of 
the sale or exchange of property, the period such un-
married individual owned and used such property 
shall include the period such deceased spouse owned 
and used such property before death.
147 
‘‘(3) PROPERTY OWNED BY SPOUSE OR FORMER 
SPOUSE.—For purposes of this section— 
‘‘(A) PROPERTY TRANSFERRED TO INDI-
VIDUAL FROM SPOUSE OR FORMER SPOUSE.— 
In the case of an individual holding property 
transferred to such individual by such individ-
ual’s spouse or former spouse in a transaction 
incident to divorce, the period such individual 
owns such property shall include the period the 
transferor owned the property. 
‘‘(B) PROPERTY USED BY FORMER SPOUSE 
PURSUANT TO DIVORCE DECREE, ETC.—Solely 
for purposes of this section, an individual shall 
be treated as using property as such individ-
ual’s principal residence during any period of 
ownership while such individual’s spouse or 
former spouse is granted use of the property 
under a divorce or separation instrument. 
‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE 
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
holder in a cooperative housing corporation— 
‘‘(A) the holding requirements of sub-
section (a) shall be applied to the holding of 
such stock, and
148 
‘‘(B) the use requirements of subsection 
(a) shall be applied to the house or apartment 
which the taxpayer was entitled to occupy as 
such stockholder. 
‘‘(5) INVOLUNTARY
CONVERSIONS.—For pur-
poses of this section, the destruction, theft, seizure, 
requisition, or condemnation of property shall be 
treated as the sale of such property. 
‘‘(6) DETERMINATION OF USE DURING PERIODS 
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who— 
‘‘(A) becomes physically or mentally in-
capable of self-care, and 
‘‘(B) owns property and uses such property 
as the taxpayer’s principal residence during the 
5-year period described in subsection (a) for pe-
riods aggregating at least 1 year, then the tax-
payer shall be treated as using such property as 
the taxpayer’s principal residence during any 
time during such 5-year period in which the 
taxpayer owns the property and resides in any 
facility (including a nursing home) licensed by 
a State or political subdivision to care for an in-
dividual in the taxpayer’s condition.
149 
‘‘(7) SALES OF REMAINDER INTERESTS.—For 
purposes of this section— 
‘‘(A) IN GENERAL.—At the election of the 
taxpayer, this section shall not fail to apply to 
the sale or exchange of an interest in a prin-
cipal residence by reason of such interest being 
a remainder interest in such residence, but this 
section shall not apply to any other interest in 
such residence which is sold or exchanged sepa-
rately. 
‘‘(B) EXCEPTION FOR SALES TO RELATED 
PARTIES.—Subparagraph (A) shall not apply to 
any sale to, or exchange with, a related party 
(as defined in section 171). 
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.— 
This section shall not apply to any sale or exchange by 
an individual if rules relating to expatriation to avoid tax 
apply to such individual. 
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.— 
This section shall not apply to any sale or exchange with 
respect to which the taxpayer elects not to have this sec-
tion apply. 
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER 
SECTION 1034.—For purposes of this section, in the case 
of property the acquisition of which by the taxpayer re-
150 
sulted under section 1034 of the Internal Revenue Code 
of 1986 (as in effect on the day before the date of the 
enactment of the Taxpayer Relief Act of 1997) in the non-
recognition of any part of the gain realized on the sale 
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such 
property as the taxpayer’s principal residence, there shall 
be included the aggregate periods for which such other 
residence (and each prior residence taken into account in 
determining the holding period of such property) had been 
so owned and used. 
‘‘SEC. 77. OTHER NONRECOGNITION TRANSACTIONS. 
‘‘(a) INVOLUNTARY CONVERSIONS.—Under regula-
tions prescribed by the Secretary, the involuntary conver-
sion of property held by an individual shall not result in 
gross income to the individual to the extent that the indi-
vidual receives property in exchange for the involuntarily 
converted property. To the extent that income is not rec-
ognized under this subsection, the taxpayer’s basis in the 
converted property shall carry over to the new property. 
‘‘(b) CERTAIN REACQUISITIONS
OF REAL PROP-
ERTY.—Under regulations prescribed by the Secretary, 
gross income shall not be recognized in the case of certain 
reacquisitions of real property. The regulations shall adopt
151 
principles similar to those under section 1038 of the Inter-
nal Revenue Code of 1986. 
‘‘(c) TRANSFERS OF PROPERTY BETWEEN SPOUSES 
OR INCIDENT TO DIVORCE.— 
‘‘(1) GENERAL RULE.—Gross income shall not 
be recognized on the transfer of property from an 
individual to (or in trust for the benefit of)— 
‘‘(A) a spouse, or 
‘‘(B) a former spouse, but only if the 
transfer is incident to divorce. 
‘‘(2) TRANSFER
TREATED
AS
A
GIFT.—Any 
transfer described in paragraph (1) shall be treated 
as a gift. 
‘‘(d) CERTAIN EXCHANGES
OF INSURANCE POLI-
CIES.—Under regulations prescribed by the Secretary, 
gross income shall not be recognized on the exchange of 
insurance policies or another life insurance policy or an 
annuity contract or the exchange of annuity contracts. 
The regulations shall adopt principles similar to those 
under section 1035 of the Internal Revenue Code of 1986. 
‘‘(e) CERTAIN EXCHANGES OF UNITED STATES OB-
LIGATIONS.—When so provided by regulations promul-
gated by the Secretary in connection with the issue of obli-
gations of the United States, no gain or loss shall be rec-
ognized on the surrender to the United States of obliga-
152 
tions of the United States issued under chapter 31 of title 
31 in exchange solely for other obligations issued under 
such chapter. 
‘‘SEC. 78. WASH SALES AND STRADDLES. 
‘‘(a) LOSSES FROM WASH SALES OF STOCK OR SE-
CURITIES.—Under regulations prescribed by the Sec-
retary, no loss shall be recognized on the wash sale of 
stock or securities. The regulations shall adopt principles 
similar to those under section 1091 of the Internal Rev-
enue Code of 1986. 
‘‘(b) STRADDLES.—Under regulations prescribed by 
the Secretary, the loss that can be taken into account from 
1 or more straddle positions shall be limited. The regula-
tions shall adopt principles similar to those under section 
1038 of the Internal Revenue Code of 1986. 
‘‘SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANS-
ACTIONS. 
‘‘(a) NO LOSS ON PERSONAL USE PROPERTY.—No 
loss shall be recognized on the sale or exchange of personal 
use property (as defined in section 210(b)(3)(B)). 
‘‘(b) LIMITATION ON NET CAPITAL LOSS.— 
‘‘(1) IN GENERAL.—Losses from sales or ex-
changes of capital assets in a taxable year shall be 
allowed only to the extent of the gains from such
153 
sales or exchanges, plus $3,000 ($1,500 in the case 
of a married individual filing a separate return). 
‘‘(2) CAPITAL LOSS CARRYOVERS.—Under regu-
lations prescribed by the Secretary, any loss not al-
lowed by reason of paragraph (1) shall be carried 
over to the following taxable year and treated as a 
capital loss incurred in such year. There shall be no 
limit on the number of years that a capital loss can 
be carried forward. 
‘‘(3) CAPITAL ASSETS.—Under regulations pre-
scribed by the Secretary, the principles of the Inter-
nal Revenue Code of 1986 (including, without limi-
tation, sections 1234 (relating to options), 1234A 
(relating to gains or losses from certain termi-
nations), 1253 (relating to franchises and trade-
marks) and 1258 (gain from certain financial trans-
actions) shall apply for purposes of determining 
what is a capital asset and whether an event is to 
be treated as a sale or exchange of capital assets, ex-
cept to the extent inconsistent with principles of this 
chapter. 
‘‘(4) RECAPTURE.—If a taxpayer claimed de-
preciation, amortization or other cost recovery de-
ductions under the Internal Revenue Code of 1986 
with respect to property which is subsequently sold
154 
or exchanged in a transaction that is not treated as 
transaction of a business entity, the amount of gain 
on the exchange of such property which is treated as 
gain from the sale or exchange of a capital asset 
shall be reduced (but not below zero) by the amount 
of such deductions claimed with respect to the prop-
erty. 
‘‘Subchapter D—Rules for Exclusions From 
Gross Income 
‘‘Sec. 91. Interest on tax-exempt bonds. 
‘‘Sec. 92. Combat pay. 
‘‘Sec. 93. Qualified military benefits. 
‘‘Sec. 94. Qualified foster care payments. 
‘‘Sec. 95. Compensation for injury and sickness. 
‘‘Sec. 96. Meals or lodging for convenience of employer. 
‘‘Sec. 97. Certain fringe benefits. 
‘‘SEC. 91. INTEREST ON TAX-EXEMPT BONDS. 
‘‘(a) EXCLUSION.—Except as provided in subsection 
(b), gross income does not include interest on any State 
or local bond. 
‘‘(b) EXCEPTIONS.—Subsection (a) shall not apply 
to— 
‘‘(1) PRIVATE ACTIVITY BOND WHICH IS NOT A 
QUALIFIED BOND.—Any private activity bond which 
is not a qualified bond (within the meaning of para-
graph (3) of subsection (c)). 
‘‘(2) ARBITRAGE BOND.—Any arbitrage bond.
155 
‘‘(3) BOND NOT IN REGISTERED FORM, ETC.— 
Any bond unless such bond meets the applicable re-
quirements set forth in regulations. 
‘‘(c) DEFINITIONS—For purposes of this section— 
‘‘(1) STATE OR LOCAL BOND.—‘State or local 
bond’ means an obligation of a State or political 
subdivision thereof. 
‘‘(2) STATE.—‘State’ includes the District of 
Columbia and any possession of the United States. 
‘‘(3) 
QUALIFIED
BOND.—‘Qualified 
bond’ 
means any private activity bond if— 
‘‘(A) IN GENERAL.—Such bond is— 
‘‘(i) an exempt facility bond, 
‘‘(ii) a qualified mortgage bond, 
‘‘(iii) a qualified veterans’ mortgage 
bond, 
‘‘(iv) a qualified small issue bond, 
‘‘(v) a qualified student loan bond, 
‘‘(vi) a qualified 253(c)(3) bond. 
‘‘(B) VOLUME CAP.—Such bond is issued 
as part of an issue which meets the applicable 
volume cap requirements set forth in regula-
tions.
156 
‘‘(C) OTHER REQUIREMENTS.—Such bond 
meets the applicable requirements set forth in 
regulations. 
‘‘(d) REGULATIONS.— 
‘‘(1) STATUTORY
REGULATIONS.—The Sec-
retary shall publish as regulations governing the ap-
plication of this section the text of part IV of sub-
chapter B of chapter 1 of the Internal Revenue Code 
of 1986 (sections 141 through 149) with only such 
changes as are required to conform cross references. 
‘‘(2) OTHER
REGULATIONS.—The Secretary 
shall have the authority to promulgate such other 
regulations as he deems necessary or proper to im-
plement this section, except that no such regulations 
shall conflict with the regulations mandated by para-
graph (1) except as provided in this subtitle. 
‘‘SEC. 92. COMBAT PAY. 
‘‘(a) ENLISTED PERSONNEL.—Gross income does not 
include compensation received for active service as a mem-
ber below the grade of commissioned officer in the Armed 
Forces of the United States for any month during any 
part of which such member— 
‘‘(1) served in a combat zone, or 
‘‘(2) was hospitalized as a result of wounds, dis-
ease, or injury incurred while serving in a combat
157 
zone; but this paragraph shall not apply for any 
month beginning more than 2 years after the date 
of the termination of combatant activities in such 
zone. 
‘‘(b) COMMISSIONED OFFICERS.—Gross income does 
not include so much of the compensation as does not ex-
ceed $500 received for active service as a commissioned 
officer in the Armed Forces of the United States for any 
month during any part of which such officer— 
‘‘(1) served in a combat zone, or 
‘‘(2) was hospitalized as a result of wounds, dis-
ease, or injury incurred while serving in a combat 
zone; but this paragraph shall not apply for any 
month beginning more than 2 years after the date 
of the termination of combatant activities in such 
zone. 
‘‘(c) DEFINITIONS.—For purposes of this section— 
‘‘(1) ‘Commissioned officer’ does not include a 
commissioned warrant officer. 
‘‘(2) ‘Combat zone’ means any area which the 
President of the United States by Executive Order 
designates, for purposes of this section or cor-
responding provisions of prior income tax laws, an 
area in which Armed Forces of the United States
158 
are or have (after June 24, 1950) engaged in com-
bat. 
‘‘(3) Service is performed in a combat zone only 
if performed on or after the date designated by the 
President by Executive Order as the date of the 
commencing of combatant activities in such zone, 
and on or before the date designated by the Presi-
dent by Executive Order as the date of the termi-
nation of combatant activities in such zone; except 
that June 25, 1950, shall be considered the date of 
the commencing of combatant activities in the com-
bat zone designated in Executive Order 10195. 
‘‘(4) The term ‘compensation’ does not include 
pensions and retirement pay. 
‘‘SEC. 93. QUALIFIED MILITARY BENEFIT. 
‘‘(a) IN
GENERAL.—‘Qualified military benefit’ 
means any allowance or in-kind benefit (other than per-
sonal use of a vehicle) which— 
‘‘(1) is received by any member or former mem-
ber of the uniformed service of the United States or 
any dependent of such member by reason of such 
member’s status or service as a member of such uni-
formed services, and 
‘‘(2) was excludable from gross income on Sep-
tember 9, 1986, under any provision of law, regula-
159 
tion, or administrative practice which was in effect 
on such date (other than a provision of this title). 
‘‘(b) NO OTHER BENEFIT TO BE EXCLUDABLE AS 
PROVIDED BY THIS TITLE.—Notwithstanding any other 
provision of law, no benefit shall be treated as a qualified 
military benefit unless such benefit— 
‘‘(1) is a benefit described in subsection (a), or 
‘‘(2) is excludable from gross income under this 
title without regard to any provision of law which is 
not contained in this title and which is not contained 
in a revenue Act. 
‘‘(c) LIMITATIONS ON MODIFICATIONS.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), no modification or adjustment of any 
qualified military benefit after September 9, 1986, 
shall be taken into account. 
‘‘(2) EXCEPTION FOR CERTAIN ADJUSTMENTS 
TO CASH BENEFITS.—Paragraph (1) shall not apply 
to any adjustment to any qualified military benefit 
payable in cash which— 
‘‘(A) is pursuant to a provision of law or 
regulation (as in effect on September 9, 1986), 
and
160 
‘‘(B) is determined by reference to any 
fluctuation in cost, price, currency, or other 
similar index. 
‘‘SEC. 94. QUALIFIED FOSTER CARE PAYMENTS. 
‘‘(a) QUALIFIED
FOSTER
CARE
PAYMENT
DE-
FINED.— 
‘‘(1) IN GENERAL.—‘Qualified foster care pay-
ment’ means any amount— 
‘‘(A) which is paid by a state or political 
subdivision thereof or by a placement agency 
which is described in section 253(c)(3) and ex-
empt from tax under section 253(a), and 
‘‘(B) which is— 
‘‘(i) paid to the foster care provider 
for caring for a qualified foster individual 
in the foster care provider’s home, or 
‘‘(ii) a difficulty of care payment. 
‘‘(2) QUALIFIED FOSTER INDIVIDUAL.—‘Quali-
fied foster individual’ means any individual who is 
living in a foster family home in which such indi-
vidual was placed by— 
‘‘(A) an agency of a State or a political 
subdivision thereof, or 
‘‘(B) in the case of an individual who has 
not attained age 19, an organization which is li-
161 
censed by a State (or political subdivision there-
of) as a placement agency and which is de-
scribed in section 253(c)(3) and exempt from 
tax under section 253(a). 
‘‘(3) LIMITATION BASED ON NUMBER OF INDI-
VIDUALS OVER THE AGE OF 18.—In the case of any 
foster home in which there is a qualified foster care 
individual who has attained age 19, foster care pay-
ments (other than difficulty of care payments) for 
any period to which such payments relate shall not 
be excludable from gross income under subsection 
(a) to the extent such payments are made for more 
than 5 such qualified foster individuals. 
‘‘(b) DIFFICULTY OF CARE PAYMENTS.—For pur-
poses of this section— 
‘‘(1) DIFFICULTY OF CARE PAYMENTS.—‘Dif-
ficulty of care payments’ means payments to individ-
uals 
which 
are 
not 
described 
in 
subsection 
(a)(1)(B)(i), and which— 
‘‘(A) are compensation for providing the 
additional care of a qualified foster individual 
which is— 
‘‘(i) required by reason of a physical, 
mental, or emotional handicap of such in-
dividual with respect to which the State
162 
has determined that there is a need for ad-
ditional compensation, and 
‘‘(ii) provided in the home of the fos-
ter care provider, and 
‘‘(B) are designated by the payor as com-
pensation described in subparagraph (A). 
‘‘(2) LIMITATION BASED ON NUMBER OF INDI-
VIDUALS.—In the case of any foster home, difficulty 
of care payments for any period to which such pay-
ments relate shall not be excludable from gross in-
come under subsection (a) to the extent such pay-
ments are made for more than— 
‘‘(A) 10 qualified foster individuals who 
have not attained age 19, and 
‘‘(B) 5 qualified foster individuals not de-
scribed in subparagraph (A). 
‘‘SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS. 
‘‘(a) IN GENERAL.—Gross income does not include— 
‘‘(1) amounts received under workers’ com-
pensation acts as compensation for personal injuries 
or sickness; 
‘‘(2) the amount of any damages received 
(whether by suit or agreement and whether as lump 
sums or as periodic payments) on account of per-
sonal injuries or sickness;
163 
‘‘(3) amounts received through accident or 
health insurance for medical care; 
‘‘(4) amounts received through accident or 
health insurance for personal injuries or sickness 
(other than for medical care), but only to the extent 
such amounts (A) are not attributable to contribu-
tions by the employer which were not includible in 
the gross income of the employee, and are (B) not 
paid by the employer; 
‘‘(5) amounts received as pension, annuity, or 
similar allowance for personal injuries or sickness re-
sulting from active service in the armed forces of 
any country or in the Coast and Geodetic Survey or 
the Public Health Service, or as a disability annuity 
payable under the provisions of section 808 of the 
Foreign Service Act of 1980; and 
‘‘(6) amounts received by an individual as dis-
ability income attributable to injuries incurred as a 
direct result of a violent attack which the Secretary 
of State determines to be a terrorist attack and 
which occurred while such individual was an em-
ployee of the United States engaged in the perform-
ance of his official duties outside the United States.
164 
Paragraph (2) shall not apply to any punitive dam-
ages in connection with a case not involving physical 
injury or physical sickness. 
‘‘(b) TERMINATION OF APPLICATION OF SUBSECTION 
(a)(4) IN CERTAIN CASES.— 
‘‘(1) IN GENERAL.—Subsection (a)(4) shall not 
apply in the case of an individual who is not de-
scribed in paragraph (2). 
‘‘(2) INDIVIDUALS
TO
WHOM
SUBSECTION 
(a)(4) CONTINUES TO APPLY.—An individual is de-
scribed in this paragraph if— 
‘‘(A) on or before September 24, 1975, he 
was entitled to receive any amount described in 
subsection (a)(4), 
‘‘(B) on September 24, 1975, he was a 
member of any organization (or reserve compo-
nent thereof) referred to in subsection (a)(4) or 
under a binding written commitment to become 
such a member, 
‘‘(C) he receives an amount described in 
subsection (a)(4) by reason of a combat-related 
injury, or 
‘‘(D) on application therefore, he would be 
entitled to receive disability compensation from 
the Veterans’ Administration.
165 
‘‘(3) SPECIAL RULES FOR COMBAT-RELATED IN-
JURIES.—For purposes of this subsection, the term 
‘combat-related injury’ means personal injury or 
sickness— 
‘‘(A) which is incurred— 
‘‘(i) as a direct result of armed con-
flict, 
‘‘(ii) while engaged in extrahazardous 
service, or 
‘‘(iii) under conditions simulating war; 
or 
‘‘(B) which is caused by an instrumentality 
of war. 
In the case of an individual who is not described in 
subparagraph (A) or (B) of paragraph (2), except as 
provided in paragraph (4), the only amounts taken 
into account under subsection (a)(4) shall be the 
amounts which he receives by reason of a combat- 
related injury. 
‘‘(4) AMOUNT
EXCLUDED
TO
BE
NOT
LESS 
THAN
VETERANS’ DISABILITY
COMPENSATION.—In 
the case of any individual described in paragraph 
(2), the amounts excludable under subsection (a)(4) 
for any period with respect to any individual shall 
not be less than the maximum amount which such
166 
individual, on application therefor, would be entitled 
to receive as disability compensation from the Vet-
erans’ Administration. 
‘‘SEC. 96. MEALS OR LODGING FURNISHED FOR THE CON-
VENIENCE OF THE EMPLOYER. 
‘‘(a) MEALS
AND LODGING FURNISHED
TO EM-
PLOYEE, HIS SPOUSE, AND HIS DEPENDENTS, PURSU-
ANT TO EMPLOYMENT.—There shall be excluded from 
gross income of an employee the value of any meals or 
lodging furnished to him, his spouse, or any of his depend-
ents by or on behalf of his employer for the convenience 
of the employer, but only if— 
‘‘(1) in the case of meals, the meals are fur-
nished on the business premises of the employer, or 
‘‘(2) in the case of lodging, the employee is re-
quired to accept such lodging on the business prem-
ises of his employer as a condition of his employ-
ment. 
‘‘(b) SPECIAL RULES.—For the purposes of sub-
section (a)— 
‘‘(1) PROVISIONS OF EMPLOYMENT CONTRACT 
OR STATE STATUTE NOT TO BE DETERMINATIVE.— 
In determining whether meals or lodging are fur-
nished for the convenience of the employer, the pro-
visions of an employment contract or of a State stat-
167 
ute fixing terms of employment shall not be deter-
minative of whether the meals or lodging are in-
tended as compensation. 
‘‘(2) CERTAIN FACTORS NOT TAKEN INTO AC-
COUNT WITH RESPECT TO MEALS.—In determining 
whether meals are furnished for the convenience of 
the employer, the fact that a charge is made for 
such meals, and the fact that the employee may ac-
cept or decline such meals, shall not be taken into 
account. 
‘‘(3) CERTAIN FIXED CHARGES FOR MEALS.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) an employee is required to pay on 
a periodic basis a fixed charge for his 
meals, and 
‘‘(ii) such meals are furnished by the 
employer for the convenience of the em-
ployer, there shall be excluded from the 
employee’s gross income an amount equal 
to such fixed charge. 
‘‘(B) APPLICATION
OF
SUBPARAGRAPH 
(a).—Subparagraph (A) shall apply— 
‘‘(i) whether the employee pays the 
fixed charge out of his stated compensation 
or out of his own funds, and