To amend the Internal Revenue Code of 1986 to provide a special rule for members of the uniformed services and Foreign Service in determining the exclusion of gain from the sale of a principal residence and to restore the tax exempt status of death gratuity payments to members of the uniformed services, and for other purposes.

February 25, 2003

Mr. THOMAS (for himself, Mr. HOUGHTON, Mr. CAMP, Mr. LEWIS of Kentucky, Mr. HAYWORTH, Mr. SAM JOHNSON of Texas, Mr. HERGER, Mr. RAMSTAD, Mr. CANTOR, Mr. ENGLISH, and Mr. CRANE) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide a special rule for members of the uniformed services and Foreign Service in determining the exclusion of gain from the sale of a principal residence and to restore the tax exempt status of death gratuity payments to members of the uniformed services, and for other purposes.

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 `Armed Forces Tax Fairness Act of 2003'.

SEC. 2. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND FOREIGN SERVICE IN DETERMINING EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

(a) IN GENERAL- Subsection (d) of section 121 of the Internal Revenue Code of 1986 (relating to exclusion of gain from sale of principal residence) is amended by adding at the end the following new paragraph:

`(10) MEMBERS OF UNIFORMED SERVICES AND FOREIGN SERVICE-

`(A) IN GENERAL- At the election of an individual with respect to a property, the running of the 5-year period referred to in subsection (a) with respect to such property shall be suspended during any period that such individual or such individual's spouse is serving on qualified official extended duty as a member of the uniformed services or of the Foreign Service.

`(B) MAXIMUM PERIOD OF SUSPENSION- Such 5-year period shall not be extended more than 5 years by reason of subparagraph (A).

`(C) QUALIFIED OFFICIAL EXTENDED DUTY- For purposes of this paragraph--

`(i) IN GENERAL- The term `qualified official extended duty' means any extended duty while serving at a duty station which is at least 150 miles from such property or while residing under Government orders in Government quarters.

`(ii) UNIFORMED SERVICES- The term `uniformed services' has the meaning given such term by section 101(a)(5) of title 10, United States Code, as in effect on the date of the enactment of this paragraph.

`(iii) FOREIGN SERVICE- The term `member of the Foreign Service' has the meaning given the term `member of the Service' by paragraph (1), (2), (3), (4), or (5) of section 103 of the Foreign Service Act of 1980, as in effect on the date of the enactment of this paragraph.

`(iv) EXTENDED DUTY- The term `extended duty' means any period of active duty pursuant to a call or order to such duty for a period in excess of 180 days or for an indefinite period.

`(D) SPECIAL RULES RELATING TO ELECTION-

`(i) ELECTION LIMITED TO 1 PROPERTY AT A TIME- An election under subparagraph (A) with respect to any property may not be made if such an election is in effect with respect to any other property.

`(ii) REVOCATION OF ELECTION- An election under subparagraph (A) may be revoked at any time.'.

(b) EFFECTIVE DATE; SPECIAL RULE-

(1) EFFECTIVE DATE- The amendment made by this section shall take effect as if included in the amendments made by section 312 of the Taxpayer Relief Act of 1997.

(2) WAIVER OF LIMITATIONS- If refund or credit of any overpayment of tax resulting from the amendment made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of this Act by the operation of any law or rule of law (including res judicata), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period.

SEC. 3. RESTORATION OF FULL EXCLUSION FROM GROSS INCOME OF DEATH GRATUITY PAYMENT.

(a) IN GENERAL- Subsection (b)(3) of section 134 of the Internal Revenue Code of 1986 (relating to certain military benefits) is amended by adding at the end the following new subparagraph:

`(C) EXCEPTION FOR DEATH GRATUITY ADJUSTMENTS MADE BY LAW- Subparagraph (A) shall not apply to any adjustment to the amount of death gratuity payable under chapter 75 of title 10, United States Code, which is pursuant to a provision of law enacted before December 31, 1991.'.

(b) CONFORMING AMENDMENT- Subparagraph (A) of section 134(b)(3) of such Code is amended by striking `subparagraph (B)' and inserting `subparagraphs (B) and (C)'.

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

SEC. 4. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF DEFENSE HOMEOWNERS ASSISTANCE PROGRAM.

(a) IN GENERAL- Section 132(a) of the Internal Revenue Code of 1986 (relating to the exclusion from gross income of certain fringe benefits) is amended by striking `or' at the end of paragraph (6), by striking the period at the end of paragraph (7) and inserting `, or' and by adding at the end the following new paragraph:

`(8) qualified military base realignment and closure fringe.'.

(b) QUALIFIED MILITARY BASE REALIGNMENT AND CLOSURE FRINGE- Section 132 of such Code is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following new subsection:

`(n) QUALIFIED MILITARY BASE REALIGNMENT AND CLOSURE FRINGE-

`(1) IN GENERAL- For purposes of this section, the term `qualified military base realignment and closure fringe' means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of this subsection).

`(2) LIMITATION- With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all such payments related to such property exceeds the amount described in subsection (c)(1) of such section (as in effect on such date).'.

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

SEC. 5. EXPANSION OF COMBAT ZONE FILING RULES TO CONTINGENCY OPERATIONS.

(a) IN GENERAL- Section 7508(a) of the Internal Revenue Code of 1986 (relating to time for performing certain acts postponed by reason of service in combat zone) is amended--

(1) by inserting `or when deployed outside the United States away from the individual's permanent duty station while participating in an operation designated by the Secretary of Defense as a contingency operation (as defined in section 101(a)(13) of title 10, United States Code) or which became such a contingency operation by operation of law' after `section 112',

(2) by inserting in the first sentence `or at any time during the period of such contingency operation' after `for purposes of such section',

(3) by inserting `or operation' after `such an area', and

(4) by inserting `or operation' after `such area'.

(b) CONFORMING AMENDMENTS-

(1) Section 7508(d) of such Code is amended by inserting `or contingency operation' after `area'.

(2) The heading for section 7508 of such Code is amended by inserting `or contingency operation' after `combat zone'.

(3) The item relating to section 7508 of such Code in the table of sections for chapter 77 is amended by inserting `or contingency operation' after `combat zone'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to any period for performing an act which has not expired before the date of the enactment of this Act.

SEC. 6. MODIFICATION OF MEMBERSHIP REQUIREMENT FOR EXEMPTION FROM TAX FOR CERTAIN VETERANS' ORGANIZATIONS.

(a) IN GENERAL- Subparagraph (B) of section 501(c)(19) of the Internal Revenue Code of 1986 (relating to list of exempt organizations) is amended by striking `or widowers' and inserting `, widowers, ancestors, or lineal descendants'.

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

SEC. 7. CLARIFICATION OF THE TREATMENT OF CERTAIN DEPENDENT CARE ASSISTANCE PROGRAMS.

(a) IN GENERAL- Section 134(b) of the Internal Revenue Code of 1986 (defining qualified military benefit) is amended by adding at the end the following new paragraph:

`(4) CLARIFICATION OF CERTAIN BENEFITS- For purposes of paragraph (1), such term includes any dependent care assistance program (as in effect on the date of the enactment of this paragraph) for any individual described in paragraph (1)(A).'.

(b) CONFORMING AMENDMENTS-

(1) Section 134(b)(3)(A) of such Code (as amended by section 3) is further amended by inserting `and paragraph (4)' after `subparagraphs (B) and (C)'.

(2) Section 3121(a)(18) of such Code is amended by striking `or 129' and inserting `, 129, or 134(b)(4)'.

(3) Section 3306(b)(13) of such Code is amended by striking `or 129' and inserting `, 129, or 134(b)(4)'.

(4) Section 3401(a)(18) of such Code is amended by striking `or 129' and inserting `, 129, or 134(b)(4)'.

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

SEC. 8. CLARIFICATION RELATING TO EXCEPTION FROM ADDITIONAL TAX ON CERTAIN DISTRIBUTIONS FROM QUALIFIED TUITION PROGRAMS, ETC., ON ACCOUNT OF ATTENDANCE AT MILITARY ACADEMY.

(a) IN GENERAL- Subparagraph (B) of section 530(d)(4) of the Internal Revenue Code of 1986 (relating to exceptions from additional tax for distributions not used for educational purposes) is amended by striking `or' at the end of clause (iii), by redesignating clause (iv)

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

`(iv) made on account of the attendance of the account holder at the United States Military Academy, the United States Naval Academy, the United States Air Force Academy, the United States Coast Guard Academy, or the United States Merchant Marine Academy, to the extent that the amount of the payment or distribution does not exceed the costs of advanced education (as defined by section 2005(e)(3) of title 10, United States Code, as in effect on the date of the enactment of this section) attributable to such attendance, or'.

(b) EFFECTIVE DATE- The amendment made by this section shall take effect for taxable years beginning after December 31, 2002.

SEC. 9. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.

(a) IN GENERAL- Section 501 of the Internal Revenue Code of 1986 (relating to exemption from tax on corporations, certain trusts, etc.) is amended by redesignating subsection (p) as subsection (q) and by inserting after subsection (o) the following new subsection:

`(p) SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS-

`(1) IN GENERAL- The exemption from tax under subsection (a) with respect to any organization described in paragraph (2), and the eligibility of any organization described in paragraph (2) to apply for recognition of exemption under subsection (a), shall be suspended during the period described in paragraph (3).

`(2) TERRORIST ORGANIZATIONS- An organization is described in this paragraph if such organization is designated or otherwise individually identified--

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

`(B) in or pursuant to an Executive order which is related to terrorism and issued under the authority of the International Emergency Economic Powers Act or section 5 of the United Nations Participation Act of 1945 for the purpose of imposing on such organization an economic or other sanction, or

`(C) in or pursuant to an Executive order issued under the authority of any Federal law if--

`(i) the organization is designated or otherwise individually identified in or pursuant to such Executive order as supporting or engaging in terrorist activity (as defined in section 212(a)(3)(B) of the Immigration and Nationality Act) or supporting terrorism (as defined in section 140(d)(2) of the Foreign Relations Authorization Act, Fiscal Years 1988 and 1989); and

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

`(3) PERIOD OF SUSPENSION- With respect to any organization described in paragraph (2), the period of suspension--

`(A) begins on the later of--

`(i) the date of the first publication of a designation or identification described in paragraph (2) with respect to such organization, or

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

`(B) ends on the first date that all designations and identifications described in paragraph (2) with respect to such organization are rescinded pursuant to the law or Executive order under which such designation or identification was made.

`(4) DENIAL OF DEDUCTION- No deduction shall be allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522 for any contribution to an organization described in paragraph (2) during the period described in paragraph (3).

`(5) DENIAL OF ADMINISTRATIVE OR JUDICIAL CHALLENGE OF SUSPENSION OR DENIAL OF DEDUCTION- Notwithstanding section 7428 or any other provision of law, no organization or other person may challenge a suspension under paragraph (1), a designation or identification described in paragraph (2), the period of suspension described in paragraph (3), or a denial of a deduction under paragraph (4) in any administrative or judicial proceeding relating to the Federal tax liability of such organization or other person.

`(6) ERRONEOUS DESIGNATION-

`(A) IN GENERAL- If--

`(i) the tax exemption of any organization described in paragraph (2) is suspended under paragraph (1),

`(ii) each designation and identification described in paragraph (2) which has been made with respect to such organization is determined to be erroneous pursuant to the law or Executive order under which such designation or identification was made, and

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

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

`(B) WAIVER OF LIMITATIONS- If the credit or refund of any overpayment of tax described in subparagraph (A)(iii) is prevented at any time by the operation of any law or rule of law (including res judicata), such credit or refund may nevertheless be allowed or made if the claim therefor is filed before the close of the 1-year period beginning on the date of the last determination described in subparagraph (A)(ii).

`(7) NOTICE OF SUSPENSIONS- If the tax exemption of any organization is suspended under this subsection, the Internal Revenue Service shall update the listings of tax-exempt organizations and shall publish appropriate notice to taxpayers of such suspension and of the fact that contributions to such organization are not deductible during the period of such suspension.'.

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

SEC. 10. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL EXPENSES OF NATIONAL GUARD AND RESERVE MEMBERS.

(a) DEDUCTION ALLOWED- Section 162 of the Internal Revenue Code of 1986 (relating to certain trade or business expenses) is amended by redesignating subsection (p) as subsection (q) and inserting after subsection (o) the following new subsection:

`(p) TREATMENT OF EXPENSES OF MEMBERS OF RESERVE COMPONENT OF ARMED FORCES OF THE UNITED STATES- For purposes of subsection (a)(2), in the case of an individual who performs services as a member of a reserve component of the Armed Forces of the United States at any time during the taxable year, such individual shall be deemed to be away from home in the pursuit of a trade or business for any period during which such individual is away from home in connection with such services.'.

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

`(E) CERTAIN EXPENSES OF MEMBERS OF RESERVE COMPONENTS OF THE ARMED FORCES OF THE UNITED STATES- The deductions allowed by section 162 which consist of expenses, not in excess of $500, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services.'.

(c) EFFECTIVE DATE- The amendments made by this section shall apply to amounts paid or incurred in taxable years beginning after December 31, 2002.

SEC. 11. PROTECTION OF SOCIAL SECURITY.

The amounts transferred to any trust fund under title II of the Social Security Act shall be determined as if this Act had not been enacted.

END