[Senate Report 107-283]
[From the U.S. Government Publishing Office]
Calendar No. 603
107th Congress Report
SENATE
2d Session 107-283
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ARMED FORCES TAX FAIRNESS ACT OF 2002
_______
September 17, 2002.--Ordered to be printed
_______
Mr. Baucus, from the Committee on Finance, submitted the following
R E P O R T
[To accompany H.R. 5063]
[Including cost estimate of the Congressional Budget Office]
The Committee on Finance, to which was referred the bill
(H.R. 5063) 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, having
considered the same, reports favorably thereon with an
amendment in the nature of a substitute and recommends that the
bill, as amended, do pass.
CONTENTS
Page
I. Legislative Background............................................2
II. Explanation of the Bill...........................................2
Title I. Improving Tax Equity for Military Personnel..............2
A. Exclusion From Gross Income of Certain Death Gratuity
Payments............................................. 2
B. Exclusion of Gain on Sale of a Principal Residence by
a Member of the Uniformed Services or the Foreign
Service.............................................. 3
C. Exclusion for Amounts Received Under Department of
Defense Homeowners Assistance Program................ 4
D. Expansion of Combat Zone Filing Rules to Contingency
Operations........................................... 5
E. Above-the-Line Deduction for Overnight Travel Expenses
of National Guard and Reserve Members................ 7
F. Modification of Membership Requirement for Exemption
From Tax for Certain Veterans' Organizations......... 8
G. Clarification of Treatment of Certain Dependent Care
Assistance Programs Provided to Members of the
Uniformed Services of the United States.............. 9
Title II. Other Provisions........................................9
A. Impose Mark-to-Market Tax on Individuals Who
Expatriate........................................... 9
B. Extension of IRS User Fees............................ 21
III.Budget Effects of the Bill.......................................21
A. Committee Estimates................................... 21
B. Budget Authority and Tax Expenditures................. 23
C. Consultation With Congressional Budget Office......... 23
IV. Votes of the Committee...........................................25
V. Regulatory Impact and Other Matters..............................25
A. Regulatory Impact..................................... 25
B. Unfunded Mandates Statement........................... 26
C. Tax Complexity Analysis............................... 26
VI. Changes in Existing Law Made by the Bill as Reported.............26
I. LEGISLATIVE BACKGROUND
The Senate Committee on Finance marked up H.R. 5063 (the
Armed Forces Tax Fairness Act of 2002) on September 12, 2002,
and ordered the bill, as amended, favorably reported by
unanimous voice vote.
The Committee believes, especially around the first
anniversary of the September 11th attacks, that consideration
should be paid to the men and women who are leading America's
response and serving our country. These men and women include:
(1) members of the Armed Forces deployed overseas; (2) members
of the National Guard protecting our borders and airports; and
(3) Foreign Service officers serving in dangerous diplomatic
posts.
The Committee believes, in addition to our thoughts and
thanks, that these individuals deserve to be treated
appropriately under the tax laws. The modest sensible
provisions included in this legislation are the result of a
bipartisan effort to correct the tax treatment of those
individuals serving their country in the uniformed services,
reserves and Foreign Service.
The bill also contains two provisions that raise revenue to
offset the cost of the other provisions. In the case of the
provision to modify the tax treatment of certain individual
expatriates, these provisions seem especially fitting to offset
the improved tax treatment of the men and women serving their
country.
II. EXPLANATION OF THE BILL
TITLE I. IMPROVING TAX EQUITY FOR MILITARY PERSONNEL
A. Exclusion From Gross Income of Certain Death Gratuity Payments
PRESENT LAW
Present law provides that qualified military benefits are
not included in gross income. Generally, a qualified military
benefit is any allowance or in-kind benefit (other than
personal use of a vehicle) which: (1) is received by any member
or former member of the uniformed services of the United States
or any dependent of such member by reason of such member's
status or service as a member of such uniformed services; and
(2) was excludable from gross income on September 9, 1986,
under any provision of law, regulation, or administrative
practice which was in effect on such date. Generally, other
than certain cost of living adjustments no modification or
adjustment of any qualified military benefit after September 9,
1986, is taken into account for purposes of this exclusion from
gross income. Qualified military benefits include certain death
gratuities.
REASONS FOR CHANGE
The Committee believes that the amount of the exclusion for
these death gratuities should be conformed to the present-law
levels of such death gratuities. Further, the Committee
believes that the amount of the exclusion should be
automatically adjusted for future changes in these death
gratuities.
EXPLANATION OF PROVISION
The bill extends the exclusion from gross income to any
adjustment to the amount of the death gratuity payable under
Chapter 75 of Title 10 of the United States Code.
EFFECTIVE DATE
The provision is effective with respect to deaths occurring
after September 10, 2001.
B. Exclusion of Gain on Sale of a Principal Residence by a Member of
the Uniformed Services or the Foreign Service
PRESENT LAW
Under present law, an individual taxpayer may exclude up to
$250,000 ($500,000 if married filing a joint return) of gain
realized on the sale or exchange of a principal residence. To
be eligible for the exclusion, the taxpayer must have owned and
used the residence as a principal residence for at least 2 of
the 5 years prior to 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 2 years that the ownership and use requirements are met.
There are no special rules relating to members of the uniformed
services, or the Foreign Service of the United States.
REASONS FOR CHANGE
The Committee believes that members of the uniformed
services and the Foreign Service of the United States who would
otherwise qualify for the exclusion of the gain on the sale of
a principal residence should not be deprived the exclusion
because of service to their country.
EXPLANATION OF PROVISION
Under the bill, an individual may elect to suspend for a
maximum of 10 years the 5-year test period for ownership and
use during certain absences due to service in the uniformed
services, or Foreign Service of the United States. The
uniformed services include: (1) the armed forces (the Army,
Navy, Air Force, Marine Corps, and Coast Guard); (2) the
commissioned corps of the National Oceanic and Atmospheric
Administration; and (3) the commissioned corps of the Public
Health Service. If the election is made, the 5-year period
ending on the date of the sale or exchange of a principal
residence does not include any period up to 5 years during
which the taxpayer or the taxpayer's spouse is on qualified
official extended duty as a member of the uniformed services,
or in Foreign Service of the United States. For these purposes,
qualified official extended duty is any period of extended duty
by a member of the uniformed services, or the Foreign Service
of the United States while serving at a place of duty at least
50 miles away from the taxpayer's principal residence or under
orders compelling residence in Government furnished quarters.
Extended duty is defined as any period of duty pursuant to a
call or order to such duty for a period in excess of 90 days or
for an indefinite period. The election may be made with respect
to only one property for a suspension period.
EFFECTIVE DATE
The provision is effective for elections made with respect
to sales after the date of enactment.
C. Exclusion for Amounts Received Under Department of Defense
Homeowners Assistance Program
PRESENT LAW
HAP payment
The Department of Defense Homeowners Assistance Program
(HAP) provides payments to certain employees and members of the
Armed Forces to offset the adverse effects on housing values
that result from military base realignment or closure. The
payments are authorized under the provisions of Title 42,
U.S.C., section 3374.
HAP provides payments to eligible individuals who may, in
general, either (1) receive a cash payment as compensation for
losses that may be or have been sustained in a private sale, in
an amount not to exceed the difference between (a) 95 percent
of the fair market value of their property prior to public
announcement of intention to close all or part of the military
base or installation and (b) the fair market value of such
property at the time of the sale, or (2) receive, as the
purchase price for their property, an amount not to exceed 90
percent of the prior fair market value as such value is
determined by the Secretary of Defense, or the amount of the
outstanding mortgages.
Tax treatment
Unless specifically excluded, gross income for Federal
income tax purposes includes all income from whatever source
derived. Amounts received under HAP are received in connection
with the performance of services, and thus are includable in
gross income as compensation for services. Additionally, such
payments are ``wages'' for Federal Insurance Contributions Act
tax purposes (including Medicare).
REASONS FOR CHANGE
The Committee believes that the exemption from gross income
and FICA taxes is necessary to provide full compensation for
the losses in home values incurred as a result of military base
realignment or closure. The Committee further believes that
this will help to facilitate necessary military base
realignment or closure.
EXPLANATION OF PROVISION
The bill exempts from gross income amounts received under
the Homeowners Assistance Program. Amounts received under the
program are also not considered wages for Federal Insurance
Contributions Act tax purposes (including Medicare).
EFFECTIVE DATE
The provision is effective for payments made after the date
of enactment.
D. Expansion of Combat Zone Filing Rules to Contingency Operations
PRESENT LAW
General time limits for filing tax returns
Individuals generally must file their Federal income tax
returns by April 15 of the year following the close of a
taxable year (sec. 6072). The Secretary may grant reasonable
extensions of time for filing such returns (sec. 6081).
Treasury regulations provide an additional automatic 2-month
extension (until June 15 for calendar-year individuals) for
United States citizens and residents in military or naval
service on duty on April 15 of the following year (the
otherwise applicable due date of the return) outside the United
States (Treas. Reg. sec. 1.6081-5(a)(6)). 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 4-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
(Treas. Reg. sec. 1.6081-4).
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 Internal Revenue 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 (sec. 7508). An individual
who becomes a prisoner of war is considered to continue in
active service and is therefore also eligible for these
suspension of time provisions. The suspension of time also
applies to an individual serving in support of such Armed
Forces in the combat zone, such as Red Cross personnel,
accredited correspondents, and civilian personnel acting under
the direction of the Armed Forces in support of those Forces.
The designation of a combat zone must be made by the President
in an Executive order. The President must also designate the
period of combatant activities in the combat zone (the starting
date and the termination date of combat).
The suspension of time encompasses the period of service in
the combat zone during the period of combatant activities in
the zone, as well as (1) any time of continuous qualified
hospitalization resulting from injury received in the combat
zone\1\ or (2) time in missing in action status, plus the next
180 days.
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\1\ Two special rules apply to continuous hospitalization inside
the United States. First, the suspension of time provisions based on
continuous hospitalization inside the United States are applicable only
to the hospitalized individual; they are not applicable to the spouse
of such individual. Second, in no event do the suspension of time
provisions based on continuous hospitalization inside the United States
extend beyond 5 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.
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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 2
years after the date of termination of combatant activities in
the combat zone.
REASONS FOR CHANGE
The Committee believes that military personnel deployed
outside the United States away from their permanent duty
station while participating in a contingency operation should
be entitled to utilize the same suspension of time provisions
as those deployed in a combat zone.
EXPLANATION OF PROVISION
The bill applies the special suspension of time period
rules to persons deployed outside the United States away from
the individual's permanent duty station while participating in
an operation designated by the Secretary of Defense as a
contingency operation or that becomes a contingency operation.
A contingency operation is defined \2\ as a military operation
that is designated by the Secretary of Defense as an operation
in which members of the Armed Forces are or may become involved
in military actions, operations, or hostilities against an
enemy of the United States or against an opposing military
force, or results in the call or order to (or retention on)
active duty of members of the uniformed services during a war
or a national emergency declared by the President or Congress.
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\2\ The definition is done by cross-reference to 10 U.S.C. 101.
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EFFECTIVE DATE
The provision applies to any period for performing an act
that has not expired before the date of enactment.
E. Above-the-Line Deduction for Overnight Travel Expenses of National
Guard and Reserve Members
PRESENT LAW
National Guard and Reserve members may claim itemized
deductions for their nonreimbursable expenses for travel,
meals, and lodging when they must travel away from home (and
stay overnight) to attend National Guard and Reserve meetings.
These overnight travel expenses are combined with other
miscellaneous itemized deductions on Schedule A of the
individual's income tax return and are deductible only to the
extent that the aggregate of these deductions exceeds two
percent of the taxpayer's adjusted gross income. No deduction
is generally permitted for commuting expenses to and from drill
meetings.
REASONS FOR CHANGE
The Committee believes that all National Guard and Reserve
members incurring unreimbursed overnight expenses to attend
National Guard and Reserve meetings should be able to deduct
these expenses from their income, not just those who itemize
their deductions. Accordingly, the Committee provides an above-
the-line deduction for these expenses.
EXPLANATION OF PROVISION
The bill provides an above-the-line deduction for the
unreimbursed overnight travel, meals, and lodging expenses of
National Guard and Reserve members who must travel away from
home (and stay overnight) as part of their official duties.
Accordingly, these individuals incurring these expenses may
deduct them from gross income regardless of whether they
itemize their deductions. Expenses eligible for this provision
include unreimbursed expenses to attend National Guard and
Reserve meetings as well as unreimbursed expenses incurred as
part of a mobilization ordered by either the President or the
Governor. The amount of the expenses that may be deducted may
not exceed the general Government per diem rate applicable to
that locale.
EFFECTIVE DATE
The provision is effective for amounts paid or incurred in
taxable years beginning after December 31, 2001.
F. Modification of Membership Requirement for Exemption From Tax for
Certain Veterans' Organizations
PRESENT LAW
Under present law, a veterans' organization as described in
section 501(c)(19) of the Code generally is exempt from
taxation. The Code defines such an organization as a post or
organization of past or present members of the Armed Forces of
the United States (1) that is organized in the United States or
any of its possessions; (2) no part of the net earnings of
which inures to the benefit of any private shareholder or
individual; and (3) that meets certain membership requirements.
The membership requirements are that (1) at least 75 percent of
the organization's members are past or present members of the
Armed Forces of the United States, and (2) substantially all of
the remaining members are cadets or are spouses, widows, or
widowers of past or present members of the Armed Forces of the
United States or of cadets. No more than 2.5 percent of an
organization's total members may consist of individuals who are
not veterans, cadets, or spouses, widows, or widowers of such
individuals.\3\
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\3\ Treas. Reg. sec. 1.501(c)(19)-1(b)(2). The Treasury has not
amended this regulation to reflect changes made by P.L. 97-248.
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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.\4\
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\4\ Sec. 170(c)(3); sec. 2522(a)(4).
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REASONS FOR CHANGE
As the membership of veterans' organizations changes due to
aging and the deaths of members, veterans' organizations that
currently qualify for tax exemption under section 501(c)(19)
may cease to qualify for exempt status under that section, even
though the membership, apart from changes due to deaths,
remains the same. The Committee believes that a limited
expansion of the membership of veterans' organizations will
enable certain of such organizations to retain exempt status,
which might otherwise be in jeopardy, and will not unduly
expand the membership base beyond persons with a close
connection to members of the Armed Forces or cadets.
EXPLANATION OF PROVISION
The bill permits ancestors or lineal descendants of past or
present members of the Armed Forces of the United States or of
cadets to qualify as members for purposes of the
``substantially all'' test. The bill does not change the
requirement that 75 percent of the organization's members must
be past or present members of the Armed Forces of the United
States.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment.
G. Clarification of Treatment of Certain Dependent Care Assistance
Programs Provided to Members of the Uniformed Services of the United
States
PRESENT LAW
Present law provides that qualified military benefits are
not included in gross income. Generally, a qualified military
benefit is any allowance or in-kind benefit (other than
personal use of a vehicle) which: (1) is received by any member
or former member of the uniformed services of the United States
or any dependent of such member by reason of such member's
status or service as a member of such uniformed services; and
(2) was excludable from gross income on September 9, 1986,
under any provision of law, regulation, or administrative
practice which was in effect on such date. Generally, other
than certain cost of living adjustments, no modification or
adjustment of any qualified military benefit after September 9,
1986, is taken into account for purposes of this exclusion from
gross income.
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 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. 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 are also 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, 2001. No inference is intended as to the tax
treatment of such amounts for prior taxable years.
TITLE II. OTHER PROVISIONS
A. Impose Mark-to-Market Tax on Individuals Who Expatriate
PRESENT LAW
In general
U.S. citizens and residents generally are subject to U.S.
income taxation on their worldwide income. The U.S. tax may be
reduced or offset by a credit allowed for foreign income taxes
paid with respect to foreign-source income. Nonresidents who
are not U.S. citizens are taxed at a flat rate of 30 percent
(or a lower treaty rate) on certain types of passive income
derived from U.S. sources, and at regular graduated rates on
net profits derived from a U.S. business.
Income tax rules with respect to expatriates
An individual who relinquishes his or her U.S. citizenship
or terminates his or her U.S. residency with a principal
purpose of avoiding U.S. taxes is subject to an alternative
method of income taxation for the 10 taxable years ending after
the expatriation or residency termination under section 877.
The alternative method of taxation for expatriates modifies the
rules generally applicable to the taxation of nonresident
noncitizens in several ways. First, the individual is subject
to tax on his or her U.S.-source income at the rates applicable
to U.S. citizens rather than the rates applicable to other
nonresident noncitizens. Unlike U.S. citizens, however,
individuals subject to section 877 are not taxed on foreign-
source income. Second, the scope of items treated as U.S.-
source income for section 877 purposes is broader than those
items generally considered to be U.S.-source income under the
Code.\5\ Third, individuals subject to section 877 are taxed on
exchanges of certain types of property that give rise to U.S.-
source income for property that gives rise to foreign-source
income.\6\ Fourth, an individual subject to section 877 who
contributes property to a controlled foreign corporation is
treated as receiving income or gain from such property directly
and is taxable on such income or gain. The alternative method
of taxation for expatriates applies only if it results in a
higher U.S. tax liability than would otherwise be determined if
the individual were taxed as a nonresident noncitizen.
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\5\ For example, gains on the sale or exchange of personal property
located in the United States, and gains on the sale or exchange of
stocks and securities issued by U.S. persons, generally are not
considered to be U.S.-source income under the Code. Thus, such gains
would not be taxable to a nonresident noncitizen. However, if an
individual is subject to the alternative regime under sec. 877, such
gains are treated as U.S.-source income with respect to that
individual.
\6\ For example, a former citizen who is subject to the alternative
tax regime and who removes appreciated artwork that he or she owns from
the United States could be subject to immediate U.S. tax on the
appreciation. In this regard, the removal from the United States of
appreciated tangible personal property having an aggregate fair market
value in excess of $250,000 within the 15-year beginning 5 years prior
to the expatriation will be treated as an ``exchange'' subject to these
rules.
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The expatriation tax provisions apply to long-term
residents of the United States whose U.S. residency is
terminated. For this purpose, a long-term resident is any
individual who was a lawful permanent resident of the United
States for at least 8 out of the 15 taxable years ending with
the year in which such termination occurs. In applying the 8-
year test, an individual is not considered to be a lawful
permanent resident for any year in which the individual is
treated as a resident of another country under a treaty tie-
breaker rule (and the individual does not elect to waive the
benefits of such treaty).
Subject to the exceptions described below, an individual is
treated as having expatriated or terminated residency with a
principal purpose of avoiding U.S. taxes if either: (1) the
individual's average annual U.S. Federal income tax liability
for the 5 taxable years ending before the date of the
individual's loss of U.S. citizenship or termination of U.S.
residency is greater than $100,000 (the ``tax liability
test''), or (2) the individual's net worth as of the date of
such loss or termination is $500,000 or more (the ``net worth
test''). The dollar amount thresholds contained in the tax
liability test and the net worth test are indexed for inflation
in the case of a loss of citizenship or termination of
residency occurring in any calendar year after 1996. For
calendar year 2002, the dollar thresholds for the tax liability
test and the net worth test are $120,000 and $599,000,
respectively. An individual who falls below these thresholds is
not automatically treated as having a principal purpose of tax
avoidance, but nevertheless is subject to the expatriation tax
provisions if the individual's loss of citizenship or
termination of residency in fact did have as one of its
principal purposes the avoidance of tax.
Certain exceptions from the treatment that an individual
relinquished his or her U.S. citizenship or terminated his or
her U.S. residency for tax avoidance purposes may also apply.
For example, a U.S. citizen who loses his or her citizenship
and who satisfies either the tax liability test or the net
worth test (described above) can avoid being deemed to have a
principal purpose of tax avoidance if the individual falls
within certain categories (such as being a dual citizen) and
the individual, within 1 year from the date of loss of
citizenship, submits a ruling request for a determination by
the Secretary of the Treasury as to whether such loss had as
one of its principal purposes the avoidance of taxes.
Estate tax rules with respect to expatriates
Nonresident noncitizens generally are subject to estate tax
on certain transfers of U.S.-situated property at death.\7\
Such property includes real estate and tangible property
located within the United States. Moreover, for estate tax
purposes, stock held by nonresident noncitizens is treated as
U.S.-situated if issued by a U.S. corporation.
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\7\ The Economic Growth and Tax Relief Reconcilation Act of 2001
(the Act) repealed the estate tax for estates of decedents dying after
December 31, 2009. However, the Act included a ``sunset'' provision,
pursuant to which the Act's provisions (including estate tax repeal) do
not apply to estates of decedents dying after December 31, 2010.
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Special rules apply to U.S. citizens who relinquish their
citizenship and long-term residents who terminate their U.S.
residency within the 10 years prior to the date of death,
unless the loss of status did not have as one its principal
purposes the avoidance of tax (sec. 2107). Under these rules,
the decedent's estate includes the proportion of the decedent's
stock in a foreign corporation that the fair market value of
the U.S.-situs assets owned by the corporation bears to the
total assets of the corporation. This rule applies only if (1)
the decedent owned, directly, at death 10 percent or more of
the combined voting power of all voting stock of the
corporation and (2) the decedent owned, directly or indirectly,
at death more than 50 percent of the total voting stock of the
corporation or more than 50 percent of the total value of all
stock of the corporation.
Taxpayers are deemed to have a principal purpose of tax
avoidance if they meet the 5-year tax liability test or the net
worth test, discussed above. Exceptions from this tax avoidance
treatment apply in the same circumstances as those described
above (relating to certain dual citizens and other individuals
who submit a timely and complete ruling request with the IRS as
to whether their expatriation or residency termination had a
principal purpose of tax avoidance).
Gift tax rules with respect to expatriates
Nonresident noncitizens generally are subject to gift tax
on certain transfers by gift of U.S.-situated property. Such
property includes real estate and tangible property located
within the United States. Unlike the estate tax rules for U.S.
stock held by nonresidents, however, nonresident noncitizens
generally are not subject to U.S. gift tax on the transfer of
intangibles, such as stock or securities, regardless of where
such property is situated.
Special rules apply to U.S. citizens who relinquish their
U.S. citizenship or long-term residents of the United States
who terminate their U.S. residency within the 10 years prior to
the date of transfer, unless such loss did not have as one of
its principal purposes the avoidance of tax (sec. 2501(a)(3)).
Under these rules, nonresident noncitizens are subject to gift
tax on transfers of intangibles, such as stock or securities.
Taxpayers are deemed to have a principal purpose of tax
avoidance if they meet the 5-year tax liability test or the net
worth test, discussed above. Exceptions from this tax avoidance
treatment apply in the same circumstances as those described
above (relating to certain dual citizens and other individuals
who submit a timely and complete ruling request with the IRS as
to whether their expatriation or residency termination had a
principal purpose of tax avoidance).
Other tax rules with respect to expatriates
The expatriation tax provisions permit a credit against the
U.S. tax imposed under such provisions for any foreign income,
gift, estate, or similar taxes paid with respect to the items
subject to such taxation. This credit is available only against
the tax imposed solely as a result of the expatriation tax
provisions, and is not available to be used to offset any other
U.S. tax liability.
In addition, certain information reporting requirements
apply. Under these rules, a U.S. citizen who loses his or her
citizenship is required to provide a statement to the State
Department (or other designated government entity) that
includes the individual's social security number, forwarding
foreign address, new country of residence and citizenship, a
balance sheet in the case of individuals with a net worth of at
least $500,000, and such other information as the Secretary may
prescribe. The information statement must be provided no later
than the earliest day on which the individual (1) renounces the
individual's U.S. nationality before a diplomatic or consular
officer of the United States, (2) furnishes to the U.S.
Department of State a statement of voluntary relinquishment of
U.S. nationality confirming an act of expatriation, (3) is
issued a certificate of loss of U.S. nationality by the U.S.
Department of State, or (4) loses U.S. nationality because the
individual's certificate of naturalization is canceled by a
U.S. court. The entity to which such statement is to be
provided is required to provide to the Secretary of the
Treasury copies of all statements received and the names of
individuals who refuse to provide such statements. A long-term
resident whose U.S. residency is terminated is required to
attach a similar statement to his or her U.S. income tax return
for the year of such termination. An individual's failure to
provide the required statement results in the imposition of a
penalty for each year the failure continues equal to the
greater of (1) 5 percent of the individual's expatriation tax
liability for such year, or (2) $1,000.
The State Department is required to provide the Secretary
of the Treasury with a copy of each certificate of loss of
nationality approved by the State Department. Similarly, the
agency administering the immigration laws is required to
provide the Secretary of the Treasury with the name of each
individual whose status as a lawful permanent resident has been
revoked or has been determined to have been abandoned. Further,
the Secretary of the Treasury is required to publish in the
Federal Register the names of all former U.S. citizens with
respect to whom it receives the required statements or whose
names or certificates of loss of nationality it receives under
the foregoing information-sharing provisions.
Immigration rules with respect to expatriates
Under U.S. immigration laws, any former U.S. citizen who
officially renounces his or her U.S. citizenship and who is
determined by the Attorney General to have renounced for the
purpose of U.S. tax avoidance is ineligible to receive a U.S.
visa and will be denied entry into the United States. This
provision was included as an amendment (the ``Reed amendment'')
to immigration legislation that was enacted in 1996.
REASONS FOR CHANGE
The Committee is aware that some individuals each year
relinquish their U.S. citizenship or terminate their U.S.
residency for the purpose of avoiding U.S. income, estate, and
gift taxes. By so doing, such individuals reduce their annual
U.S. income tax liability and reduce or eliminate their U.S.
estate tax liability.
The Committee recognizes that citizens and residents of the
United States have a right not only physically to leave the
United States to live elsewhere, but also to relinquish their
citizenship or terminate their residency. The Committee does
not believe that the Internal Revenue Code should be used to
stop U.S. citizens and residents from relinquishing citizenship
or terminating residency; however, the Committee also does not
believe that the Code should provide a tax incentive for doing
so. In other words, to the extent possible, an individual's
decision to relinquish citizenship or terminate residency
should be tax-neutral.
The Committee is concerned that the present-law
expatriation tax rules are difficult to administer. In
addition, the Committee is concerned that the alternative
method of taxation under section 877 can be avoided by
postponing the realization of U.S.-source income for 10 years.
The Committee believes that the expatriation tax rules are
largely ineffective in taxing U.S. citizens and residents who
relinquish citizenship or terminate residency with a principal
purpose to avoid tax.
The Committee believes that the present-law expatriation
tax rules should be replaced with a tax regime applicable to
former citizens and residents that does not rely on
establishing a tax avoidance motive. Because U.S. citizens and
residents who retain their citizenship or residency generally
are subject to income tax on accrued appreciation when they
dispose of their assets, as well as estate tax on the full
value of assets that are held until death, the Committee
believes it fair to tax individuals on the appreciation in
their assets when they relinquish their citizenship or
terminate their residency. The Committee believes that an
exception from such a tax should be provided for individuals
with a relatively modest amount of appreciated assets. The
Committee also believes that, where U.S. estate or gift taxes
are avoided with respect to a transfer of property to a U.S.
person by reason of the expatriation of the donor, it is
appropriate for the recipient to be subject to an income tax
based on the value of the property.
The Committee also believes that the present-law
immigration rules applicable to former citizens are
ineffective. The Committee believes that the rules should be
modified to eliminate the requirement of proof of a tax
avoidance purpose, and to coordinate the application of those
rules with the tax rules provided under the new regime.
EXPLANATION OF PROVISION
In general
The bill generally subjects certain U.S. citizens who
relinquish their U.S. citizenship and certain long-term U.S.
residents who terminate their U.S. residence to tax on the net
unrealized gain in their property as if such property were sold
for fair market value on the day before the expatriation or
residency termination. Gain from the deemed sale is taken into
account at that time without regard to other Code provisions;
any loss from the deemed sale generally would be taken into
account to the extent otherwise provided in the Code. Any net
gain on the deemed sale is recognized to the extent it exceeds
$600,000 ($1.2 million in the case of married individuals
filing a joint return, both of whom relinquish citizenship or
terminate residency). The $600,000 amount is increased by a
cost of living adjustment factor for calendar years after 2002.
Individuals covered
Under the bill, the mark-to-market tax applies to U.S.
citizens who relinquish citizenship and long-term residents who
terminate U.S. residency. An individual is a long-term resident
if he or she was a lawful permanent resident for at least 8 out
of the 15 taxable years ending with the year in which the
termination of residency occurs. An individual is considered to
terminate long-term residency when either the individual ceases
to be a lawful permanent resident (i.e., loses his or her green
card status), or the individual is treated as a resident of
another country under a tax treaty and the individual does not
waive the benefits of the treaty.
Exceptions from the mark-to-market tax are provided in two
situations. The first exception applies to an individual who
was born with citizenship both in the United States and in
another country; provided that (1) as of the expatriation date
the individual continues to be a citizen of, and is taxed as a
resident of, such other country, and (2) the individual was not
a resident of the United States for the 5 taxable years ending
with the year of expatriation. The second exception applies to
a U.S. citizen who relinquishes U.S. citizenship before
reaching age 18\1/2\, provided that the individual was a
resident of the United States for no more than 5 taxable years
before such relinquishment.
Election to be treated as a U.S. citizen
Under the bill, an individual is permitted to make an
irrevocable election to continue to be taxed as a U.S. citizen
with respect to all property that otherwise is covered by the
expatriation tax. This election is an ``all or nothing''
election; an individual is not permitted to elect this
treatment for some property but not for other property. The
election, if made, would apply to all property that would be
subject to the expatriation tax and to any property the basis
of which is determined by reference to such property. Under
this election, the individual would continue to pay U.S. income
taxes at the rates applicable to U.S. citizens following
expatriation on any income generated by the property and on any
gain realized on the disposition of the property. In addition,
the property would continue to be subject to U.S. gift, estate,
and generation-skipping transfer taxes. In order to make this
election, the taxpayer would be required to waive any treaty
rights that would preclude the collection of the tax.
The individual also would be required to provide security
to ensure payment of the tax under this election in such form,
manner, and amount as the Secretary of the Treasury requires.
The amount of mark-to-market tax that would have been owed but
for this election (including any interest, penalties, and
certain other items) shall be a lien in favor of the United
States on all U.S.-situs property owned by the individual. This
lien shall arise on the expatriation date and shall continue
until the tax liability is satisfied, the tax liability has
become unenforceable by reason of lapse of time, or the
Secretary is satisfied that no further tax liability may arise
by reason of this provision. The rules of section 6324A(d)(1),
(3), and (4) (relating to liens arising in connection with the
deferral of estate tax under section 6166) apply to liens
arising under this provision.
Date of relinquishment of citizenship
Under the bill, an individual is treated as having
relinquished U.S. citizenship on the earliest of four possible
dates: (1) the date that the individual renounces U.S.
nationality before a diplomatic or consular officer of the
United States (provided that the voluntary relinquishment is
later confirmed by the issuance of a certificate of loss of
nationality); (2) the date that the individual furnishes to the
State Department a signed statement of voluntary relinquishment
of U.S. nationality confirming the performance of an
expatriating act (again, provided that the voluntary
relinquishment is later confirmed by the issuance of a
certificate of loss of nationality); (3) the date that the
State Department issues a certificate of loss of nationality;
or (4) the date that a U.S. court cancels a naturalized
citizen's certificate of naturalization.
Deemed sale of property upon expatriation or residency termination
The deemed sale rule of the bill generally applies to all
property interests held by the individual on the date of
relinquishment of citizenship or termination of residency.
Special rules apply in the case of trust interests, as
described below. U.S. real property interests, which remain
subject to U.S. tax in the hands of nonresident noncitizens,
generally are excepted from the bill. Regulatory authority is
granted to the Treasury to except other types of property from
the bill.
Under the bill, an individual who is subject to the mark-
to-market tax is required to pay a tentative tax equal to the
amount of tax that would be due for a hypothetical short tax
year ending on the date the individual relinquished citizenship
or terminated residency. Thus, the tentative tax is based on
all income, gain, deductions, loss, and credits of the
individual for the year through such date, including amounts
realized from the deemed sale of property. The tentative tax is
due on the 90th day after the date of relinquishment of
citizenship or termination of residency.
Retirement plans and similar arrangements
Subject to certain exceptions, the provision applies to all
property interests held by the individual at the time of
relinquishment of citizenship or termination of residency.
Accordingly, such property includes an interest in an employer-
sponsored retirement plan or deferred compensation arrangement
as well as an interest in an individual retirement account or
annuity (i.e., an IRA).\8\ However, the provision contains a
special rule for an interest in a ``qualified retirement
plan.'' For purposes of the provision, a ``qualified retirement
plan'' includes an employer-sponsored qualified plan (sec.
401(a)), a qualified annuity (sec. 403(a)), a tax-sheltered
annuity (sec. 403(b)), an eligible deferred compensation plan
of a governmental employer (sec. 457(b)), or an IRA (sec. 408).
The special retirement plan rule applies also, to the extent
provided in regulations, to any foreign plan or similar
retirement arrangement or program. An interest in a trust that
is part of a qualified retirement plan or other arrangement
that is subject to the special retirement plan rule is not
subject to the rules for interests in trusts (discussed below).
---------------------------------------------------------------------------
\8\ Application of the provision is not limited to an interest that
meets the definition of property under section 83 (relating to property
transferred in connection with the performance of services).
---------------------------------------------------------------------------
Under the special rule, an amount equal to the present
value of the individual's vested, accrued benefit under a
qualified retirement plan is treated as having been received by
the individual as a distribution under the plan on the day
before the individual's relinquishment of citizenship or
termination of residency. It is not intended that the plan
would be deemed to have made a distribution for purposes of the
tax-favored status of the plan, such as whether a plan may
permit distributions before a participant has severed
employment. In the case of any later distribution to the
individual from the plan, the amount otherwise includible in
the individual's income as a result of the distribution is
reduced to reflect the amount previously included in income
under the special retirement plan rule. The amount of the
reduction applied to a distribution is (1) the excess of the
amount included in income under the special retirement plan
rule over (2) the total reductions applied to any prior
distributions. However, under the provision, the retirement
plan, and any person acting on the plan's behalf, will treat
any later distribution in the same manner as the distribution
would be treated without regard to the special retirement plan
rule.
It is expected that the Treasury Department will provide
guidance for determining the present value of an individual's
vested, accrued benefit under a qualified retirement plan, such
as the individual's account balance in the case of a defined
contribution plan or an IRA, or present value determined under
the qualified joint and survivor annuity rules applicable to a
defined benefit plan (sec. 417(e)).
Deferral of payment of tax
Under the bill, an individual is permitted to elect to
defer payment of the mark-to-market tax imposed on the deemed
sale of the property. Interest is charged for the period the
tax is deferred at a rate 2 percentage points higher than the
rate normally applicable to individual underpayments. Under
this election, the mark-to-market tax attributable to a
particular property is due when the property is disposed of
(or, if the property is disposed of in whole or in part in a
nonrecognition transaction, at such other time as the Secretary
may prescribe). The mark-to-market tax attributable to a
particular property is an amount which bears the same ratio to
the total mark-to-market tax for the year as the gain taken
into account with respect to such property bears to the total
gain taken into account under these rules for the year. The
deferral of the mark-to-market tax may not be extended beyond
the individual's death.
In order to elect deferral of the mark-to-market tax, the
individual is required to provide adequate security to the
Treasury to ensure that the deferred tax and interest will be
paid. Other security mechanisms are permitted provided that the
individual establishes to the satisfaction of the Secretary
that the security is adequate. In the event that the security
provided with respect to a particular property subsequently
becomes inadequate and the individual fails to correct the
situation, the deferred tax and the interest with respect to
such property will become due. As a further condition to making
the election, the individual is required to consent to the
waiver of any treaty rights that would preclude the collection
of the tax.
The deferred amount (including any interest, penalties, and
certain other items) shall be a lien in favor of the United
States on all U.S.-situs property owned by the individual. This
lien shall arise on the expatriation date and shall continue
until the tax liability is satisfied, the tax liability has
become unenforceable by reason of lapse of time, or the
Secretary is satisfied that no further tax liability may arise
by reason of this provision. The rules of section 6324A(d)(1),
(3), and (4) (relating to liens arising in connection with the
deferral of estate tax under section 6166) apply to liens
arising under this provision.
Interests in trusts
Under the bill, detailed rules apply to trust interests
held by an individual at the time of relinquishment of
citizenship or termination of residency. The treatment of trust
interests depends on whether the trust is a qualified trust. A
trust is a qualified trust if a court within the United States
is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust.
Constructive ownership rules apply to a trust beneficiary
that is a corporation, partnership, trust, or estate. In such
cases, the shareholders, partners, or beneficiaries of the
entity are deemed to be the direct beneficiaries of the trust
for purposes of applying these provisions. In addition, an
individual who holds (or who is treated as holding) a trust
instrument at the time of relinquishment of citizenship or
termination of residency is required to disclose on his or her
tax return the methodology used to determine his or her
interest in the trust, and whether such individual knows (or
has reason to know) that any other beneficiary of the trust
uses a different method.
Nonqualified trusts.--If an individual holds an interest in
a trust that is not a qualified trust, a special rule applies
for purposes of determining the amount of the mark-to-market
tax due with respect to such trust interest. The individual's
interest in the trust is treated as a separate trust consisting
of the trust assets allocable to such interest. Such separate
trust is treated as having sold its net assets as of the date
of relinquishment of citizenship or termination of residency
and having distributed the assets to the individual, who then
is treated as having recontributed the assets to the trust. The
individual is subject to the mark-to-market tax with respect to
any net income or gain arising from the deemed distribution
from the trust.
The election to defer payment is available for the mark-to-
market tax attributable to a nonqualified trust interest.
Interest is charged for the period the tax is deferred at a
rate 2 percentage points higher than the rate normally
applicable to individual underpayments. A beneficiary's
interest in a nonqualified trust is determined under all the
facts and circumstances, including the trust instrument,
letters of wishes, and historical patterns of trust
distributions.
Qualified trusts.--If an individual has an interest in a
qualified trust, the amount of unrealized gain allocable to the
individual's trust interest is calculated at the time of
expatriation or residency termination. In determining this
amount, all contingencies and discretionary interests are
assumed to be resolved in the individual's favor (i.e., the
individual is allocated the maximum amount that he or she could
receive). The mark-to-market tax imposed on such gains is
collected when the individual receives distributions from the
trust, or if earlier, upon the individual's death. Interest is
charged for the period the tax is deferred at a rate 2
percentage points higher than the rate normally applicable to
individual underpayments.
If an individual has an interest in a qualified trust, the
individual is subject to the mark-to-market tax upon the
receipt of distributions from the trust. These distributions
also may be subject to other U.S. income taxes. If a
distribution from a qualified trust is made after the
individual relinquishes citizenship or terminates residency,
the mark-to-market tax is imposed in an amount equal to the
amount of the distribution multiplied by the highest tax rate
generally applicable to trusts and estates, but in no event
will the tax imposed exceed the deferred tax amount with
respect to the trust interest. For this purpose, the deferred
tax amount is equal to (1) the tax calculated with respect to
the unrealized gain allocable to the trust interest at the time
of expatriation or residency termination, (2) increased by
interest thereon, and (3) reduced by any mark-to-market tax
imposed on prior trust distributions to the individual.
If any individual's interest in a trust is vested as of the
expatriation date (e.g., if the individual's interest in the
trust is non-contingent and non-discretionary), the gain
allocable to the individual's trust interest is determined
based on the trust assets allocable to his or her trust
interest. If the individual's interest in the trust is not
vested as of the expatriation date (e.g., if the individual's
trust interest is a contingent or discretionary interest), the
gain allocable to his or her trust interest is determined based
on all of the trust assets that could be allocable to his or
her trust interest, determined by resolving all contingencies
and discretionary powers in the individual's favor. In the case
where more than one trust beneficiary is subject to the
expatriation tax with respect to trust interests that are not
vested, the rules are intended to apply so that the same
unrealized gain with respect to assets in the trust is not
taxed to both individuals.
Mark-to-market taxes become due if the trust ceases to be a
qualified trust, the individual disposes of his or her
qualified trust interest, or the individual dies. In such
cases, the amount of mark-to-market tax equals the lesser of
(1) the tax calculated under the rules for nonqualified trust
interests as of the date of the triggering event, or (2) the
deferred tax amount with respect to the trust interest as of
that date.
The tax that is imposed on distributions from a qualified
trust generally is deducted and withheld by the trustees. If
the individual does not agree to waive treaty rights that would
preclude collection of the tax, the tax with respect to such
distributions is imposed on the trust, the trustee is
personally liable for the tax, and any other beneficiary has a
right of contribution against such individual with respect to
the tax. Similar rules apply when the qualified trust interest
is disposed of, the trust ceases to be a qualified trust, or
the individual dies.
Coordination with present-law alternative tax regime
The bill provides a coordination rule with the present-law
alternative tax regime. Under the bill, the expatriation income
tax rules under section 877, and the expatriation estate and
gift tax rules under sections 2107 and 2501(a)(3) (described
above), do not apply to a former citizen or former long-term
resident whose expatriation or residency termination occurs on
or after September 12, 2002.
Treatment of gifts and inheritances from a former citizen or former
long-term resident
Under the bill, the exclusion from income provided in
section 102 (relating to exclusions from income for the value
of property acquired by gift or inheritance) does not apply to
the value of any property received by gift or inheritance from
a former citizen or former long-term resident (i.e., an
individual who relinquished U.S. citizenship or terminated U.S.
residency), subject to the exceptions described above relating
to certain dual citizens and minors. Accordingly, a U.S.
taxpayer who receives a gift or inheritance from such an
individual is required to include the value of such gift or
inheritance in gross income and is subject to U.S. tax on such
amount. Having included the value of the property in income,
the recipient would then take a basis in the property equal to
that value. The tax does not apply to property that is shown on
a timely filed gift tax return and that is a taxable gift by
the former citizen or former long-term resident, or property
that is shown on a timely filed estate tax return and included
in the gross U.S. estate of the former citizen or former long-
term resident (regardless of whether the tax liability shown on
such a return is reduced by credits, deductions, or exclusions
available under the estate and gift tax rules). In addition,
the tax does not apply to property in cases in which no estate
or gift tax return is required to be filed, where no such
return would have been required to be filed if the former
citizen or former long-term resident had not relinquished
citizenship or terminated residency, as the case may be.
Applicable gifts or bequests that are made in trust are treated
as made to the beneficiaries of the trust in proportion to
their respective interests in the trust.
Information reporting
The bill provides that certain information reporting
requirements under present law (sec. 6039G) applicable to
former citizens and former long-term residents also apply for
purposes of the bill.
Immigration rules
The bill amends the immigration rules that deny tax-
motivated expatriates reentry into the United States by
removing the requirement that the expatriation be tax-
motivated, and instead denies former citizens reentry into the
United States if the individual is determined not to be in
compliance with his or her tax obligations under the bill's
expatriation tax provisions (regardless of the subjective
motive for expatriating). For this purpose, the bill permits
the IRS to disclose certain items of return information of an
individual, upon written request of the Attorney General or his
delegate, as is necessary for making a determination under
section 212(a)(10)(E) of the Immigration and Nationality Act.
Specifically, the bill would permit the IRS to disclose to the
agency administering section 212(a)(10)(E) whether such
taxpayer is in compliance with section 877A and identify the
items of noncompliance. Recordkeeping requirements, safeguards,
and civil and criminal penalties for unauthorized disclosure or
inspection would apply to return information disclosed under
this provision.
EFFECTIVE DATE
The bill generally is effective for U.S. citizens who
relinquish citizenship or long-term residents who terminate
their residency on or after September 12, 2002. The provisions
of the bill relating to gifts and inheritances are effective
for gifts and inheritances received from former citizens and
former long-term residents on or after September 12, 2002,
whose expatriation or residency termination occurs on or after
such date. The provisions of the bill relating to former
citizens under U.S. immigration laws are effective on or after
the date of enactment.
B. Extension of IRS User Fees
PRESENT LAW
The IRS provides written responses to questions of
individuals, corporations, and organizations relating to their
tax status or the effects of particular transactions for tax
purposes. The IRS generally charges a fee for requests for a
letter ruling, determination letter, opinion letter, or other
similar ruling or determination. Public Law 104-117 \9\
extended the statutory authorization for these user fees \10\
through September 30, 2003.
---------------------------------------------------------------------------
\9\ An Act to provide that members of the Armed Forces performing
services for the peacekeeping efforts in Bosnia and Herzegovina,
Croatia, and Macedonia shall be entitled to tax benefits in the same
manner as if such services were performed in a combat zone, and for
other purposes (March 20, 1996).
\10\ These user fees were originally enacted in section 10511 of
the Revenue Act of 1987 (Public Law 100-203, December 22, 1987).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that it is appropriate to provide a
further extension of these user fees.
EXPLANATION OF PROVISION
The bill extends the statutory authorization for these user
fees through September 30, 2012. The bill also moves the
statutory authorization for these fees into the Internal
Revenue Code.
EFFECTIVE DATE
The provision, including moving the statutory authorization
for these fees into the Code and repealing the off-Code
statutory authorization for these fees, is effective for
requests made after the date of enactment.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the provisions of
the committee amendment to the bill as reported.
The bill, as reported is estimated to have the following
budget effects for fiscal years 2003-2012.
ESTIMATED BUDGET EFFECTS OF H.R. 5063, THE ``ARMED FORCES TAX FAIRNESS ACT OF 2002,'' AS REPORTED BY THE COMMITTEE ON FINANCE
[Fiscal years 2003-2012, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003-07 2003-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Improving tax equity for military personnel:
1. Exclusion from gross income of certain death gratuity doa 9/10/01 -1 -1 -1 -1 -1 -1 -1 -1 -1 -1 -5 -9
payments.................................................
2. Exclusion of gain on sale of a principal residence by a sa DOE -2 -14 -14 -15 -15 -16 -16 -18 -19 -21 -59 -149
member of the uniformed services or the foreign service..
3. Exclusion for amounts received under Department of pma DOE (\1\) -2 -2 -2 -2 -2 -2 -2 -2 -2 -9 -19
Defense Homeowners Assistance Program....................
4. Expansion combat zone filing rules to contingency (\2\) -9 (\1\) (\1\) (\1\) (\1\) -1 -1 -1 -1 -1 -11 -14
operations...............................................
5. Above-the-line deduction for oversight travel expenses apoli tyba 12/31/01 -83 -71 -73 -75 -76 -78 -80 -82 -84 -86 -377 -788
of national guard and reserve members....................
6. Modification of membership requirement for exemption tyba DOE -1 -1 -1 -1 -2 -2 -2 -2 -2 -2 -7 -16
from tax for certain veterans' organizations.............
7. Clarification of treatment of certain dependent care tyba 12/31/01 No Revenue Effect
assistance programs provided to members of the uniformed
services of the United States............................
--------------------------------------------------------------------------------------------------------
Total of improving tax equity for military personnel.... ....................... -96 -89 -91 -94 -96 -100 -102 -106 -109 -113 -468 -995
========================================================================================================
Other provisions:
1. Impose mark-to-market on individuals who expatriate.... (\3\) 5 102 85 80 74 71 67 61 57 54 346 656
2. Extension of IRS user fees (through 9/30/12 \4\........ rma DOE ...... 33 34 35 36 38 39 41 42 44 138 341
--------------------------------------------------------------------------------------------------------
Total of other provisions............................... ....................... 5 135 119 115 110 109 106 102 99 98 484 997
========================================================================================================
Net total............................................... ....................... -91 46 28 21 14 9 4 -4 -10 -15 16 2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ The provisions applies to any period for performing an act that has not expired before the date of enactment.
\3\ Generally effective for U.S. citizens who relinquish citizenship or long-term residents who terminate their residency on or after September 12, 2002.
\4\ Estimate provided by Congressional Budget Office.
Legend for ``Effective'' column: apoli = amounts paid or incurred in; doa = deaths occurring after; DOE = date of enactment; pma = payments made after; rma = requests made after; sa = sales
after; tyba = taxable years beginning after.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the revenue provisions of the committee
amendment to the bill do not involve new or increased budget
authority.
Tax expenditures
In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
committee amendment to the bill involve increased tax
expenditures (see revenue table in Part III.A., above). The
revenue increasing provisions of the Committee amendment to the
bill generally involve reduced tax expenditures (see revenue
table in Part III.A., above).
C. Consultation With Congressional Budget Office
In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office
submitted the following statement on this bill.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 13, 2002.
Hon. Max Baucus,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 5063, the Armed
Forces Tax Fairness Act of 2002.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Annie
Bartsch.
Sincerely,
Barry B. Anderson
(For Dan L. Crippen, Director).
Enclosure.
H.R. 5063--Armed Forces Tax Fairness Act of 2002
Summary: H.R. 5063 would raise the exclusion for death
gratuity payments for the military, provide military and
foreign service homeowners with relief from capital gains
taxes, impose a mark-to-market tax on individuals who
expatriate, and extend Internal Revenue Service (IRS) user fees
through September 30, 2012. In addition, H.R. 5063 would
provide individual taxpayers serving in the National Guard and
Reserve with a deduction for certain overnight travel expenses,
including meals and overnight lodging, incurred while attending
National Guard and Reserve meetings. The deduction would be
``above the line.'' Such deductions are statutorily allowed
subtractions from gross income that are used to compute
adjusted gross income and may be taken by both taxpayers who
itemize the deductions and those who do not.
The Joint Committee on Taxation (JCT) and the Congressional
Budget Office (CBO) estimate that enacting H.R. 5063 would
reduce revenues by $91 million in 2003 and increase revenues by
$16 million over the 2003-2007 period and by $2 million over
the 2003-2012 period. Because the act would affect receipts,
pay-as-you-go procedures would apply.
JCT has determined that H.R. 5063 contains no
intergovernmental mandates as defined in the Unfunded Mandates
Reform Act (UMRA), and would not affect the budgets of state,
local, or tribal governments. JCT has also determined that the
provision imposing mark-to-market taxes or expatriates contains
a private-sector mandate. The total cost of complying with the
mandate would not exceed the threshold established by UMRA
($115 million in 2002, adjusted annually for inflation).
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 5063 is shown in the following table.
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
--------------------------------------------
2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Market-to-market tax on expatriates................................ 5 102 85 80 74
Above-the-line deduction for travel expenses....................... -83 -71 -73 -75 -76
Extension of IRS user fees......................................... 0 33 34 35 36
Tax relief from capital gains for military and foreign service -2 -14 -14 -15 -15
homeowners........................................................
Other provisions................................................... -11 -4 -4 -4 -5
--------------------------------------------
Total changes................................................ -91 46 28 21 14
----------------------------------------------------------------------------------------------------------------
Note.--Components may not sum to totals because of rounding.
Sources: CBO and the Joint Committee on Taxation.
Basis of estimate: All estimates, with the exception of the
provision affecting IRS user fees, were provided by JCT. A
number of provisions would reduce revenues if enacted, and
several would increase revenues. All together, the act's
provisions would reduce revenues by $91 million in 2003, and
would increase revenues by $16 million over the 2003-2007
period and by $2 million over the 2003-2012 period.
Most of the revenue reductions would incur from the
provisions providing reservists with an above-the-line
deduction allowance for travel expenses and providing military
and foreign service homeowners relief from taxation of capital
gains. The provisions raising the exclusion for death gratuity
payments for individuals in the military, providing an
exclusion for amounts received under the Department of Defense
Homeowners Assistance Program, expanding combat zone filing
rules to contingency operations, and extending section
501(c)(19) membership to certain relatives of military
personnel would also decrease governmental receipts. As
estimated by JCT, all of these provisions together would reduce
revenues by $96 million in 2003, by about $468 million over the
2003-2007 period, and by about $995 million over the 2003-2012
period.
JCT estimates that the provision imposing a mark-to-market
tax on individuals who expatriate would increase revenues by $5
million in 2003, by $346 million over the 2003-2007 period, and
by $656 million over the 2003-2012 period.
The act also would extend the period during which the IRS
may charge fees on businesses for providing ruling, opinion,
and determination letters. Under current law, the IRS's
authority to charge such fees will expire at the end of the
fiscal year 2003. The act would extend the authority to charge
such fees until September 30, 2012. Based on the amount of fees
collected in recent years and on information from the IRS, CBO
estimates that extending the fees would increase governmental
receipts by a total of $341 million over the 2004-2012 period.
JCT and CBO estimate that combined, these two provisions
would increase revenues by $5 million in 2003, by about $484
million over the 2003-2007 period, and by about $997 million
over the 2003-2012 period.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. For the
purposes of enforcing pay-as-you-go procedures, only the
effects through 2006 are counted.
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
---------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays.............................................. Not applicable
Changes in receipts............................................. 0 -91 46 28 21 14 9 4 -4 -10 -15
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated impact on state, local, and tribal governments:
JCT has determined that H.R. 5063 contains no intergovernmental
mandates as defined in UMRA and would not affect the budgets of
state, local, or tribal governments.
Estimated impact on the private sector: JCT has determined
that the provision relating to mark-to-market taxes on
expatriates contains a private-sector mandate, and that the
direct cost of complying with the mandate would not exceed the
threshold established by UMRA ($115 million in 2002, adjusted
annually for inflation).
Estimate prepared by: Annie Bartsch.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis.
IV. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the Committee states that H.R.
5063 was, with a quorum present, ordered favorably reported, as
amended, by unanimous voice vote on September 12, 2002.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.
Impact on individuals and businesses
The bill includes provisions relating to the exclusion from
gross income of certain death gratuity payments, gain on
certain sales of principal residence by a member of the
uniformed services or the Foreign Service, and certain amounts
received under the Department of Defense Homeowners Assistance
Program. The bill also extends the combat zone filing rules to
contingency operations and modifies the exemption rules for
certain tax-exempt veterans' organizations. Most of these
provisions are not expected to impose additional administrative
requirements on individuals or businesses. The bill also
creates an above-the-line deduction for overnight travel
expenses of National Guard and Reserve member. Finally the bill
imposes a mark-to-market tax on certain individuals who
expatriate and extends certain IRS user fees. These provisions
may increase regulatory burdens on individuals and businesses.
Impact on personal privacy and paperwork
The provisions of the Committee amendment to the bill do
not impact personal privacy.
Some provisions of the bill relating to the exclusion of
death gratuities and homeowners assistance payments will reduce
paperwork burdens on certain individuals. Other provisions may
impose additional burdens on certain individuals. For example,
the provision regarding the imposition of a mark-to-market tax
on individuals who expatriate will impose some such additional
paperwork.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
The Committee has determined that one of the revenue
provisions of the bill does impose a Federal mandate on the
private sector. That provision relates to the imposition of a
mark-to-market tax on individuals who expatriate. The Committee
has determined that the revenue provisions of the bill do not
impose a Federal intergovernmental mandate on State, local, or
tribal governments.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the IRS Reform Act) requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the Senate Committee on
Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the Code) and has widespread applicability to individuals or
small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Code and that have ``widespread
applicability'' to individuals or small businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).