To amend the Internal Revenue Code of 1986 to allow a deduction to members of the Armed Forces reserves for contributions to savings accounts which may be used when the members are called to active duty.

April 7, 2003

Mr. NELSON of Nebraska (for himself, Ms. Mikulski, Mr. DASCHLE, Mr. Levin, Mr. Leahy, Mrs. Clinton, Mr. Chambliss, and Ms. Collins) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to allow a deduction to members of the Armed Forces reserves for contributions to savings accounts which may be used when the members are called to active duty.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Mobilized Reserve Savings Account Act'.

SEC. 2. DEDUCTION FOR CONTRIBUTIONS TO SAVINGS ACCOUNTS OF ARMED FORCES RESERVES.

(a) IN GENERAL- Part VII of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals) is amended by redesignating section 223 as section 224 and by inserting after section 222 the following new section:

`SEC. 223. CONTRIBUTIONS TO ARMED FORCES RESERVE SAVINGS ACCOUNTS.

`(a) DEDUCTION ALLOWED-

`(1) IN GENERAL- In the case of an individual who is a qualified reservist, there shall be allowed as a deduction for the taxable year an amount equal to the contributions of the individual to an Armed Forces reserve savings account of the individual for the taxable year.

`(2) MAXIMUM AMOUNT- The amount allowable as a deduction under subsection (a) to any individual for a taxable year shall not exceed the lesser of--

`(A) $5,000, or

`(B) $25,000, reduced by the aggregate contributions by such individual to Armed Forces reserve savings accounts for all preceding taxable years.

`(b) QUALIFIED RESERVIST- For purposes of this section, the term `qualified reservist' means an individual who, on the last day of the taxable year, is a member of a reserve component of the Armed Forces.

`(c) ARMED FORCES RESERVE SAVINGS ACCOUNT- For purposes of this section, the term `Armed Forces reserve savings account' means a trust created or organized in the United States for the exclusive benefit of an individual and the individual's beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:

`(1) No contribution will be accepted unless it is in cash.

`(2) The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which that person will administer the trust will be consistent with the requirements of this section.

`(3) No part of the trust assets will be invested in life insurance contracts.

`(4) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

`(5) The interest of an individual in the balance of the individual's account is nonforfeitable.

`(d) TAX TREATMENT OF DISTRIBUTIONS-

`(1) IN GENERAL- Except as otherwise provided in this subsection, any amount paid or distributed out of an Armed Forces reserve savings account shall be included in the gross income of the payee or distributee for the taxable year in which the payment or distribution is received in the manner provided under section 72.

`(2) EXCESS CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN- Paragraph (1) shall not apply to the distribution of any contribution paid during a taxable year to an Armed Forces reserve savings account to the extent that such contribution exceeds the amount allowable as a deduction under subsection (a) if--

`(A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual's return for such taxable year,

`(B) no deduction is allowed under subsection (a) with respect to such excess contribution, and

`(C) such distribution is accompanied by the amount of net income attributable to such excess contribution.

Any net income described in subparagraph (C) shall be included in the gross income of the individual for the taxable year in which such excess contribution was made.

`(3) ROLLOVER CONTRIBUTION-

`(A) IN GENERAL- Paragraph (1) shall not apply to any amount paid or distributed from an Armed Forces reserve savings account to the account holder to the extent the amount received is paid to another such account for the benefit of such holder not later than the 60th day on which the holder receives the payment or distribution.

`(B) LIMITATION- If an individual receives more than 1 payment or distribution during any 12-month period, this paragraph shall not apply to any such payment or distribution to the individual if this paragraph previously applied to any such payment or distribution.

`(4) ADDITIONAL TAX ON CERTAIN DISTRIBUTIONS-

`(A) IN GENERAL- The tax imposed by this chapter on the account holder for any taxable year in which there is a payment or distribution from an Armed Forces reserve account which is includible in gross income shall be increased by 10 percent of the amount which is so includible.

`(B) EXCEPTIONS RELATED TO MILITARY SERVICE- Subparagraph (A) shall not apply if the payment or distribution is made--

`(i) during any period during which the account holder is serving on active duty to which called or ordered under a provision of law referred to in section 101(a)(13)(B) of title 10, United States Code, or

`(ii) after the account holder ceases to be a member of a reserve component of the Armed Forces or is transferred to the retired list of such a reserve component.

For purposes of clause (i), a payment made during the 60-day period immediately preceding or following the period described in clause (i) shall be treated as made during the period so described.

`(C) EXCEPTIONS FOR DISABILITY OR DEATH- Subparagraph (A) shall not apply if the payment or distribution is made after the account holder becomes disabled within the meaning of section 72(m)(7) or dies.

`(5) INVESTMENT IN COLLECTIBLES TREATED AS DISTRIBUTIONS- Rules similar to the rules of section 408(m) shall apply for purposes of this section.

`(e) TAX TREATMENT OF ACCOUNTS-

`(1) EXEMPTION FROM TAX- An Armed Forces reserve savings account is exempt from taxation under this subtitle unless such account has ceased to be an Armed Forces reserve savings account by reason of paragraph (2). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).

`(2) LOSS OF EXEMPTION OF ACCOUNT WHERE INDIVIDUAL ENGAGES IN PROHIBITED TRANSACTION-

`(A) IN GENERAL- If the individual for whose benefit an Armed Forces reserve savings account is established or any individual who contributes to such account engages in any transaction prohibited by section 4975 with respect to the account, the account shall cease to be an Armed Forces reserve savings account as of the first day of the taxable year (of the individual so engaging in such transaction) during which such transaction occurs.

`(B) ACCOUNT TREATED AS DISTRIBUTING ALL ITS ASSETS- In any case in which any account ceases to be an Armed Forces reserve savings account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) shall apply as if there was a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day).

`(3) EFFECT OF PLEDGING ACCOUNT AS SECURITY- If, during any taxable year, the individual for whose benefit an Armed Forces reserve savings account is established uses the account or any portion thereof as security for a loan, the portion so used shall be treated as distributed to the individual so using such portion.

`(f) SPECIAL RULES-

`(1) TIME WHEN CONTRIBUTIONS DEEMED MADE- A taxpayer shall be deemed to have made a contribution to an Armed Forces reserve savings account on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (not including extensions thereof).

`(2) DEATH AND DIVORCE- Rules similar to the rules of sections 401(a)(9), 401(a)(11), and 408(d)(6) shall apply for purposes of this section.

`(3) COMMUNITY PROPERTY LAWS- This section shall be applied without regard to any community property laws.

`(g) REPORTS- The trustee of an Armed Forces reserve savings account shall make such reports regarding such account to the Secretary and to the account holder with respect to contributions, distributions, and such other matters as the Secretary may require under regulations. The reports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by those regulations.'

(b) ALLOWANCE OF DEDUCTION IN COMPUTING ADJUSTED GROSS INCOME- Subsection (a) of section 62 of such Code (defining adjusted gross income) is amended by inserting after paragraph (18) the following new paragraph:

`(19) CONTRIBUTIONS TO ARMED FORCES RESERVE SAVINGS ACCOUNTS- The deduction allowed by section 223(a).'

(c) TAX ON EXCESS CONTRIBUTIONS- Section 4973 of such Code (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended--

(1) in subsection (a), by striking `or' at the end of paragraph (3), by inserting `or' at the end of paragraph (4), and by inserting after paragraph (4) the following new paragraph:

`(5) an Armed Forces reserve savings account (as defined in section 223(c)),', and

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

`(g) EXCESS CONTRIBUTIONS TO AN ARMED FORCES RESERVE SAVINGS ACCOUNT- For purposes of this section, in the case of an Armed Forces reserve savings account, the term `excess contributions' means the sum of--

`(1) the aggregate amount contributed for the taxable year to the account which is not allowable as

a deduction under section 223 for such taxable year, and

`(2) the amount determined under this subsection for the preceding taxable year, reduced by--

`(A) the distributions out of the accounts which were included in gross income under section 223(d)(1) for the taxable year, over

`(B) the amount contributed to the accounts for the taxable year.

For purposes of this subsection, any contribution which is distributed out of the Armed Forces reserve savings account in a distribution to which section 223(d)(2) applies shall be treated as an amount not contributed.'.

(d) TAX ON PROHIBITED TRANSACTIONS- Section 4975 of such Code (relating to prohibited transactions) is amended--

(1) by adding at the end of subsection (c) the following new paragraph:

`(6) SPECIAL RULE FOR ARMED FORCES RESERVE SAVINGS ACCOUNTS- An individual for whose benefit an Armed Forces reserve savings account is established and any contributor to such account shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be an Armed Forces reserve savings account by reason of the application of section 223 to such account.', and

(2) in subsection (e)(1), by striking `or' at the end of subparagraph (E), by redesignating subparagraph (F) as subparagraph (G), and by inserting after subparagraph (E) the following new subparagraph:

`(F) an Armed Forces reserve savings account described in section 223, or'.

(e) FAILURE TO PROVIDE REPORTS ON ARMED FORCES RESERVE SAVINGS ACCOUNTS- Paragraph (2) of section 6693(a) of such Code (relating to failure to provide reports on certain tax-favored accounts or annuities) is amended by striking `and' at the end of subparagraph (C), by striking the period at the end of subparagraph (D) and inserting `, and', and by adding at the end the following new subparagraph:

`(E) section 223(g) (relating to Armed Forces reserve savings accounts).'.

(f) CONFORMING AMENDMENT- The table of sections for part VII of subchapter B of chapter 1 of such Code is amended by striking the item relating to section 223 and inserting the following new items:

`Sec. 223. Contributions to Armed Forces reserve savings accounts.

`Sec. 224. Cross reference.'

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

END