[DOCID: f:hr023.108]
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108th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     108-23
======================================================================
 
                 ARMED FORCES TAX FAIRNESS ACT OF 2003

                                _______
                                

 March 5, 2003.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

    Mr. Thomas, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 878]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 878) 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, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
  I. Summary and Background..........................................16
          A. Purpose and Summary.................................    16
          B. Background and Need for Legislation.................    16
          C. Legislative History.................................    16
 II. Explanation of the Bill.........................................17
     Title I. Improving Tax Equity for Military Personnel............17
          A. Exclusion of Gain on Sale of a Principal Residence 
              by a Member of the Uniformed Services, the Foreign 
              Service or the Peace Corps. (sec. 101 of the bill 
              and sec. 121 of the Code)..........................    17
          B. Exclusion from Gross Income of Certain Death 
              Gratuity Payments (sec. 102 of the bill and sec. 
              134 of the Code)...................................    18
          C. Exclusion for Amounts Received Under Department of 
              Defense Homeowners Assistance Program (sec. 103 of 
              the bill and sec. 132 of the Code).................    19
          D. Expansion of Combat Zone Filing Rules to Contingency 
              Operations (sec. 104 of the bill and sec. 7508 of 
              the Code)..........................................    20
          E. Modification of Membership Requirement for Exemption 
              from Tax for Certain Veterans' Organizations (sec. 
              105 of the bill and sec. 501(c)(19) of the Code)...    22
          F. Clarification of Treatment of Certain Dependent Care 
              Assistance Programs Provided to Members of the 
              Uniformed Services of the United States (sec. 106 
              of the bill and sec. 134 of the Code)..............    23
          G. Treatment of Service Academy Appointments as 
              Scholarships for Purposes of Qualified Tuition 
              Programs and Coverdell Education Savings Accounts 
              (sec. 107 of the bill and secs. 529 and 530 of the 
              Code)..............................................    24
          H. Suspension of Tax-Exempt Status of Terrorist 
              Organizations (sec. 108 of the bill and sec. 501 of 
              the Code)..........................................    25
          I. Above-the-Line Deduction for Overnight Travel 
              Expenses of National Guard and Reserve Members 
              (sec. 109 of the bill and sec. 162 of the Code)....    27
     Title II. Miscellaneous Provisions..............................28
          A. Extension of Certain Tax Relief Provisions to 
              Astronauts (sec. 201 of the bill and secs. 101, 
              692, and 2201 of the Code).........................    28
          B. Coordinate Farmers Income Averaging and the 
              Alternative Minimum Tax (sec. 202 of the bill and 
              sec. 55 of the Code)...............................    32
          C. Capital Gains Treatment to Apply to Outright Sales 
              of Timber by Landowner (sec. 203 of the bill and 
              sec. 631(b) of the Code)...........................    32
          D. Special Rules for Livestock Sold on Account of 
              Weather-Related Conditions (sec. 204 of the bill 
              and secs. 1033 and 451 of the Code)................    33
          E. Simplification of Excise Tax Imposed on Bows and 
              Arrows (sec. 205 of the bill and sec. 4161 of the 
              Code)..............................................    35
          F. Repeal Excise Tax on Fishing Tackle Boxes (sec. 206 
              of the bill and sec. 4162 of the Code).............    36
          G. Btu-Based Rate for Diesel/Water Emulsion Fuel (sec. 
              207 of the bill and secs. 408 and 6427 of the Code)    36
          H. Expand Human Clinical Trials Expenses Qualifying for 
              the Orphan Drug Tax Credit (sec. 208 of the bill 
              and sec. 280C of the Code).........................    37
          I. Consumer Options under the Refundable Credit for 
              Health Insurance Costs of Eligible Individuals 
              (sec. 209 of the bill and sec. 35 of the Code).....    38
          J. Modify At-Risk Rules for Publicly Traded Nonrecourse 
              Debt (sec. 210 of the bill and sec. 465(b)(6) of 
              the Code)..........................................    42
          K. Exclusion of Certain Horse-Racing Gambling Winnings 
              from the Income of Nonresident Noncitizen 
              Individuals (sec. 211 of the bill and sec. 872(b) 
              of the Code).......................................    43
          L. Payment of Dividends on Stock of Cooperatives 
              Without Reducing Patronage Dividends (sec. 212 of 
              the bill and sec. 1388 of the Code)................    44
          M. Pilot Project for Forest Conservation Activities 
              (sec. 213 of the bill).............................    46
          N. No Impact on Social Security Trust Funds Under Title 
              II of the Social Security Act (sec. 214 of the 
              bill)..............................................    50
     Title III. Revenue Provisions...................................50
          A. Modification of the Tax Treatment of Citizenship 
              Relinquishment and Residency Termination (sec. 301 
              of the bill and secs. 877, 2107, 2501, and 6039G of 
              the Code)..........................................    50
          B. Add Vaccines Against Hepatitis A to the List of 
              Taxable Vaccines (sec. 302 of the bill and sec. 
              4132 of the Code)..................................    56
III. Votes of the Committee..........................................57
 IV. Budget Effects of the Bill......................................61
          A. Committee Estimate of Budgetary Effects.............    61
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................    64
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................    64
          D. Macroeconomic Impact Analysis.......................    67
  V. Other Matters to be Discussed Under the Rules of the House......67
          A. Committee Oversight Findings and Recommendations....    67
          B. Statement of General Performance Goals and 
              Objectives.........................................    67
          C. Constitutional Authority Statement..................    67
          D. Information Relating to Unfunded Mandates...........    68
          E. Applicability of House Rule XXI 5(b)................    68
          F. Tax Complexity Analysis.............................    68
 VI. Changes in Existing Law Made by the Bill, as Reported...........68
VII. Additional Views................................................95

  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE; REFERENCES; TABLE OF CONTENTS.

  (a) Short Title.--This Act may be cited as the ``Armed Forces Tax 
Fairness Act of 2003''.
  (b) Amendment of 1986 Code.--Except as otherwise expressly provided, 
whenever in this Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, the reference 
shall be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986.
  (c) Table of Contents.--The table of contents of this Act is as 
follows:

Sec. 1. Short title; references; table of contents.

                         TITLE I--ARMED FORCES

Sec. 101. Special rule for members of uniformed services and foreign 
service and peace corps volunteers and employees in determining 
exclusion of gain from sale of principal residence.
Sec. 102. Restoration of full exclusion from gross income of death 
gratuity payment.
Sec. 103. Exclusion for amounts received under Department of Defense 
homeowners assistance program.
Sec. 104. Expansion of combat zone filing rules to contingency 
operations.
Sec. 105. Modification of membership requirement for exemption from tax 
for certain veterans' organizations.
Sec. 106. Clarification of the treatment of certain dependent care 
assistance programs.
Sec. 107. Clarification relating to exception from additional tax on 
certain distributions from qualified tuition programs, etc., on account 
of attendance at military academy.
Sec. 108. Suspension of tax-exempt status of terrorist organizations.
Sec. 109. Above-the-line deduction for overnight travel expenses of 
national guard and reserve members.

                   TITLE II--MISCELLANEOUS PROVISIONS

Sec. 201. Tax relief and assistance for families of astronauts who lose 
their lives on a space mission.
Sec. 202. Income averaging for farmers not to increase alternative 
minimum tax.
Sec. 203. Capital gain treatment under section 631(b) to apply to 
outright sales by landowners.
Sec. 204. Special rules for livestock sold on account of weather-
related conditions.
Sec. 205. Simplification of excise tax imposed on bows and arrows.
Sec. 206. Repeal of excise tax on fishing tackle boxes.
Sec. 207. Reduced motor fuel excise tax on certain mixtures of diesel 
fuel.
Sec. 208. Expansion of human clinical trials qualifying for orphan drug 
credit.
Sec. 209. Health insurance costs of eligible individuals.
Sec. 210. Treatment under at-risk rules of publicly traded nonrecourse 
debt.
Sec. 211. Exclusion of income derived from certain wagers on horse 
races from gross income of nonresident alien individuals.
Sec. 212. Payment of dividends on stock of cooperatives without 
reducing patronage dividends.
Sec. 213. Pilot project for forest conservation activities.
Sec. 214. Protection of social security.

                     TITLE III--REVENUE PROVISIONS

Sec. 301. Individual expatriation to avoid tax.
Sec. 302. Vaccine tax to apply to hepatitis A vaccine.

                         TITLE I--ARMED FORCES

SEC. 101. SPECIAL RULE FOR MEMBERS OF UNIFORMED SERVICES AND FOREIGN 
                    SERVICE AND PEACE CORPS VOLUNTEERS AND EMPLOYEES IN 
                    DETERMINING EXCLUSION OF GAIN FROM SALE OF 
                    PRINCIPAL RESIDENCE.

  (a) In General.--Subsection (d) of section 121 (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 and 
        peace corps volunteers and employees.--
                  ``(A) In general.--At the election of an individual 
                with respect to a property, the running of the 5-year 
                period referred to in subsections (a) and (c)(1)(B) and 
                paragraph (7) of this subsection 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 or as a 
                Peace Corps volunteer or an employee of the Peace 
                Corps.
                  ``(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.
                          ``(v) Rules relating to the peace corps.--
                                  ``(I) Extended duty.--In the case of 
                                a Peace Corps volunteer, the term 
                                `extended duty' means any period of 
                                active duty assigned to a Peace Corps 
                                volunteer under the Peace Corps Act for 
                                a period in excess of 180 days or for 
                                an indefinite period.
                                  ``(II) Peace corps volunteer.--The 
                                term `Peace Corps volunteer' means an 
                                individual enrolled as a volunteer or 
                                volunteer leader under the Peace Corps 
                                Act.
                                  ``(III) Employee of the peace 
                                corps.--The term `employee of the Peace 
                                Corps' means a person employed in the 
                                Peace Corps under section 7 of the 
                                Peace Corps Act.
                                  ``(IV) References to peace corps 
                                act.--References in this clause to the 
                                Peace Corps Act mean references to the 
                                Peace Corps Act (22 U.S.C. 2501 et 
                                seq.) as in effect on the date of the 
                                enactment of this clause.
                  ``(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. 102. RESTORATION OF FULL EXCLUSION FROM GROSS INCOME OF DEATH 
                    GRATUITY PAYMENT.

  (a) In General.--Paragraph (3) of section 134(b) (relating to 
qualified military benefit) 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.--Section 134(b)(3)(A) 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. 103. EXCLUSION FOR AMOUNTS RECEIVED UNDER DEPARTMENT OF DEFENSE 
                    HOMEOWNERS ASSISTANCE PROGRAM.

  (a) In General.--Subsection (a) of section 132 (relating to 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 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 clause (1) of 
        subsection (c) 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. 104. EXPANSION OF COMBAT ZONE FILING RULES TO CONTINGENCY 
                    OPERATIONS.

  (a) In General.--Subsection (a) of section 7508 (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 insection 
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) is amended by inserting ``or contingency 
        operation'' after ``area''.
          (2) The heading for section 7508 is amended by inserting 
        ``<SUP>or</SUP> contingency</SUP> operation</SUP>'' after 
        ``<SUP>combat</SUP> zone</SUP>''.
          (3) The item relating to section 7508 in the table of 
        sections for chapter 77 is amended by inserting ``or 
        contingency operation'' after ``combat zone''.
  (c) Effective Date.--The amendments made by this section shall apply 
to any period for performing an act which has not expired before the 
date of the enactment of this Act.

SEC. 105. MODIFICATION OF MEMBERSHIP REQUIREMENT FOR EXEMPTION FROM TAX 
                    FOR CERTAIN VETERANS' ORGANIZATIONS.

  (a) In General.--Subparagraph (B) of section 501(c)(19) (relating to 
list of exempt organizations) is amended by striking ``or widowers'' 
and inserting ``, 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. 106. CLARIFICATION OF THE TREATMENT OF CERTAIN DEPENDENT CARE 
                    ASSISTANCE PROGRAMS.

  (a) In General.--Subsection (b) of section 134 (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) (as amended by section 102) is 
        further amended by inserting ``and paragraph (4)'' after 
        ``subparagraphs (B) and (C)''.
          (2) Section 3121(a)(18) is amended by striking ``or 129'' and 
        inserting ``, 129, or 134(b)(4)''.
          (3) Section 3306(b)(13) is amended by striking ``or 129'' and 
        inserting ``, 129, or 134(b)(4)''.
          (4) Section 3401(a)(18) is amended by striking ``or 129'' and 
        inserting ``, 129, or 134(b)(4)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2002.

SEC. 107. 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) (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 designated beneficiary 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. 108. SUSPENSION OF TAX-EXEMPT STATUS OF TERRORIST ORGANIZATIONS.

  (a) In General.--Section 501 (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. 109. ABOVE-THE-LINE DEDUCTION FOR OVERNIGHT TRAVEL EXPENSES OF 
                    NATIONAL GUARD AND RESERVE MEMBERS.

  (a) Deduction Allowed.--Section 162 (relating to certain trade or 
business expenses) is amended by 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.--
Paragraph (2) of section 62(a) (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.

                   TITLE II--MISCELLANEOUS PROVISIONS

SEC. 201. TAX RELIEF AND ASSISTANCE FOR FAMILIES OF ASTRONAUTS WHO LOSE 
                    THEIR LIVES ON A SPACE MISSION.

  (a) Income Tax Relief.--
          (1) In general.--Subsection (d) of section 692 (relating to 
        income taxes of members of Armed Forces and victims of certain 
        terrorist attacks on death) is amended by adding at the end the 
        following new paragraph:
          ``(5) Relief with respect to astronauts.--The provisions of 
        this subsection shall apply to any astronaut whose death occurs 
        while on a space mission, except that paragraph (3)(B) shall be 
        applied by using the date of the death of the astronaut rather 
        than September 11, 2001.''.
          (2) Conforming amendments.--
                  (A) Section 5(b)(1) is amended by inserting ``, 
                astronauts,'' after ``Forces''.
                  (B) Section 6013(f)(2)(B) is amended by inserting ``, 
                astronauts,'' after ``Forces''.
          (3) Clerical amendments.--
                  (A) The heading of section 692 is amended by 
                inserting ``<SUP>,</SUP> astronauts,</SUP>'' after 
                ``<SUP>forces</SUP>''.
                  (B) The item relating to section 692 in the table of 
                sections for part II of subchapter J of chapter 1 is 
                amended by inserting ``, astronauts,'' after 
                ``Forces''.
          (4) Effective date.--The amendments made by this subsection 
        shall apply with respect to any astronaut whose death occurs 
        after December 31, 2002.
  (b) Death Benefit Relief.--
          (1) In general.--Subsection (i) of section 101 (relating to 
        certain death benefits) is amended by adding at the end the 
        following new paragraph:
          ``(4) Relief with respect to astronauts.--The provisions of 
        this subsection shall apply to any astronaut whose death occurs 
        while on a space mission.''.
          (2) Clerical amendment.--The heading for subsection (i) of 
        section 101 is amended by inserting ``or Astronauts'' after 
        ``Victims''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to amounts paid after December 31, 2002, with 
        respect to deaths occurring after such date.
  (c) Estate Tax Relief.--
          (1) In general.--Subsection (b) of section 2201 (defining 
        qualified decedent) is amended by striking ``and'' at the end 
        of paragraph (1)(B), by striking the period at the end of 
        paragraph (2) and inserting ``, and'', and by adding at the end 
        the following new paragraph:
          ``(3) any astronaut whose death occurs while on a space 
        mission.''.
          (2) Clerical amendments.--
                  (A) The heading of section 2201 is amended by 
                inserting ``<SUP>,</SUP> deaths</SUP> of</SUP> 
                astronauts,</SUP>'' after ``<SUP>forces</SUP>''.
                  (B) The item relating to section 2201 in the table of 
                sections for subchapter C of chapter 11 is amended by 
                inserting ``, deaths of astronauts,'' after ``Forces''.
          (3) Effective date.--The amendments made by this subsection 
        shall apply to estates of decedents dying after December 31, 
        2002.

SEC. 202. INCOME AVERAGING FOR FARMERS NOT TO INCREASE ALTERNATIVE 
                    MINIMUM TAX.

  (a) In General.--Subsection (c) of section 55 (defining regular tax) 
is amended by redesignating paragraph (2) as paragraph (3) and by 
inserting after paragraph (1) the following new paragraph:
          ``(2) Coordination with income averaging for farmers.--Solely 
        for purposes of this section, section 1301 (relating to 
        averaging of farm income) shall not apply in computing the 
        regular tax.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2002.

SEC. 203. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO 
                    OUTRIGHT SALES BY LANDOWNERS.

  (a) In General.--The first sentence of section 631(b) (relating to 
disposal of timber with a retained economic interest) is amended by 
striking ``retains an economic interest in such timber'' and inserting 
``either retains an economic interest in such timber or makes an 
outright sale of such timber''.
  (b) Conforming Amendments.--
          (1) The third sentence of section 631(b) is amended by 
        striking ``The date of disposal'' and inserting ``In the case 
        of disposal of timber with a retained economic interest, the 
        date of disposal''.
          (2) The heading for section 631(b) is amended by striking 
        ``With a Retained Economic Interest''.
  (c) Effective Date.--The amendments made by this section shall apply 
to sales after the date of the enactment of this Act.

SEC. 204. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
                    RELATED CONDITIONS.

  (a) Rules for Replacement of Involuntarily Converted Livestock.--
Subsection (e) of section 1033 (relating to involuntary conversions) is 
amended--
          (1) by striking ``Conditions.--For purposes'' and inserting 
        ``Conditions.--
          ``(1) In general.--For purposes'', and
          (2) by adding at the end the following new paragraph:
          ``(2) Extension of replacement period.--
                  ``(A) In general.--In the case of drought, flood, or 
                other weather-related conditions described in paragraph 
                (1) which result in the area being designated as 
                eligible for assistance by the Federal Government, 
                subsection (a)(2)(B) shall be applied with respect to 
                any converted property by substituting `4 years' for `2 
                years'.
                  ``(B) Further extension by secretary.--The Secretary 
                may extend on a regional basis the period for 
                replacement under this section (after the application 
                of subparagraph (A)) for such additional time as the 
                Secretary determines appropriate if the weather-related 
                conditions which resulted in such application continue 
                for more than 3 years.''.
  (b) Income Inclusion Rules.--Subsection (e) of section 451 (relating 
to special rule for proceeds from livestock sold on account of drought, 
flood, or other weather-related conditions) is amended by adding at the 
end the following new paragraph:
          ``(3) Special election rules.--If section 1033(e)(2) applies 
        to a sale or exchange of livestock described in paragraph (1), 
        the election under paragraph (1) shall be deemed valid if made 
        during the replacement period described in such section.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to any taxable year with respect to which the due date (without regard 
to extensions) for the return is after December 31, 2002.

SEC. 205. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS.

  (a) Bows.--Paragraph (1) of section 4161(b) (relating to bows) is 
amended to read as follows:
          ``(1) Bows.--
                  ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                bow which has a draw weight of 30 pounds or more, a tax 
                equal to 11 percent of the price for which so sold.
                  ``(B) Archery equipment.--There is hereby imposed on 
                the sale by the manufacturer, producer, or importer--
                          ``(i) of any part or accessory suitable for 
                        inclusion in or attachment to a bow described 
                        in subparagraph (A), and
                          ``(ii) of any quiver or broadhead suitable 
                        for use with an arrow described in paragraph 
                        (3),
                a tax equal to 11 percent of the price for which so 
                sold.''.
  (b) Arrows.--Subsection (b) of section 4161 (relating to bows and 
arrows, etc.) is amended by redesignating paragraph (3) as paragraph 
(4) and inserting after paragraph (2) the following:
          ``(3) Arrows.--
                  ``(A) In general.--There is hereby imposed on the 
                sale by the manufacturer, producer, or importer of any 
                arrow, a tax equal to 12 percent of the price for which 
                so sold.
                  ``(B) Exception.--The tax imposed by subparagraph (A) 
                on an arrow shall not apply if the arrow contains an 
                arrow shaft subject to the tax imposed by paragraph 
                (2).
                  ``(C) Arrow.--For purposes of this paragraph, the 
                term `arrow' means any shaft described in paragraph (2) 
                to which additional components are attached.''.
  (c) Conforming Amendment.--The heading of section 4161(b)(2) is 
amended by striking ``Arrows.--'' and inserting ``Arrow components.--
''.
  (d) Effective Date.--The amendments made by this section shall apply 
to articles sold by the manufacturer, producer, or importer after the 
90th day after the date of the enactment of this Act.

SEC. 206. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.

  (a) Repeal.--Paragraph (6) of section 4162(a) (defining sport fishing 
equipment) is amended by striking subparagraph (C) and by redesignating 
subparagraphs (D) through (J) as subparagraphs (C) through (I), 
respectively.
  (b) Effective Date.--The amendment made by this section shall take 
effect 30 days after the date of the enactment of this Act.

SEC. 207. REDUCED MOTOR FUEL EXCISE TAX ON CERTAIN MIXTURES OF DIESEL 
                    FUEL.

  (a) In General.--Clause (iii) of section 4081(a)(2)(A) is amended by 
inserting before the period ``(19.7 cents per gallon in the case of a 
diesel-water fuel emulsion at least 14 percent of which is water)''.
  (b) Refunds for Tax-Paid Purchases.--
          (1) In general.--Section 6427 (relating to fuels not used for 
        taxable purchases) is amended by redesignating subsections (m) 
        through (p) as subsections (n) through (q), respectively, and 
        by inserting after subsection (l) the following new subsection:
  ``(m) Diesel Fuel Used To Produce Emulsion.--
          ``(1) In general.--Except as provided in subsection (k), if 
        any diesel fuel on which tax was imposed by section 4081 at the 
        regular tax rate is used by any person in producing an emulsion 
        described in section 4081(a)(2)(A) which is sold or used in 
        such person's trade or business, the Secretary shall pay 
        (without interest) to such person an amount equal to the excess 
        of the regular tax rate over the incentive tax rate with 
        respect to such fuel.
          ``(2) Definitions.--For purposes of paragraph (1)--
                  ``(A) Regular tax rate.--The term `regular tax rate' 
                means the aggregate rate of tax imposed by section 4081 
                determined without regard to the parenthetical in 
                section 4081(a)(2)(A).
                  ``(B) Incentive tax rate.--The term `incentive tax 
                rate' means the aggregate rate of tax imposed by 
                section 4081 determined with regard to the 
                parenthetical in section 4081(a)(2)(A).''.
  (c) Effective Date.--The amendments made by this section shall take 
effect on October 1, 2003.

SEC. 208. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN DRUG 
                    CREDIT.

  (a) In General.--Paragraph (2) of section 45C(b) (relating to 
qualified clinical testing expenses) is amended by adding at the end 
the following new subparagraph:
                  ``(C) Treatment of certain expenses incurred before 
                designation.--For purposes of subparagraph (A)(ii)(I), 
                if a drug is designated under section 526 of the 
                Federal Food, Drug, and Cosmetic Act not later than the 
                due date (including extensions) for filing the return 
                of tax under this subtitle for the taxable year in 
                which the application for such designation of such drug 
                was filed, such drug shall be treated as having been 
                designated on the date that such application was 
                filed.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to expenses incurred after the date of the enactment of this Act.

SEC. 209. HEALTH INSURANCE COSTS OF ELIGIBLE INDIVIDUALS.

  (a) Consumer Options.--Paragraph (2) of section 35(e) is amended by 
inserting at the end the following new subparagraph:
                  ``(C) Waiver by eligible individuals.--With respect 
                to any month which ends before January 1, 2005, this 
                paragraph shall not apply with respect to any eligible 
                individual and such individual's qualifying family 
                members if such eligible individual elects to waive the 
                application of this paragraph with respect to such 
                month.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to months beginning after the date of the enactment of this Act.

SEC. 210. TREATMENT UNDER AT-RISK RULES OF PUBLICLY TRADED NONRECOURSE 
                    DEBT.

  (a) In General.--Subparagraph (A) of section 465(b)(6) (relating to 
qualified nonrecourse financing treated as amount at risk) is amended 
by striking ``share of'' and all that follows and inserting ``share 
of--
                          ``(i) any qualified nonrecourse financing 
                        which is secured by real property used in such 
                        activity, and
                          ``(ii) any other financing which--
                                  ``(I) would (but for subparagraph 
                                (B)(ii)) be qualified nonrecourse 
                                financing,
                                  ``(II) is qualified publicly traded 
                                debt, and
                                  ``(III) is not borrowed by the 
                                taxpayer from a person described in 
                                subclause (I), (II), or (III) of 
                                section 49(a)(1)(D)(iv).''.
  (b) Qualified Publicly Traded Debt.--Paragraph (6) of section 465(b) 
is amended by adding at the end the following new subparagraph:
                  ``(F) Qualified publicly traded debt.--For purposes 
                of subparagraph (A), the term `qualified publicly 
                traded debt' means any debt instrument which is readily 
                tradable on an established securities market. Such term 
                shall not include any debt instrument which has a yield 
                to maturity which equals or exceeds the limitation in 
                section 163(i)(1)(B).''.
  (c) Effective Date.--The amendments made by this section shall apply 
to debt instruments issued after the date of the enactment of this Act.

SEC. 211. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON HORSE 
                    RACES FROM GROSS INCOME OF NONRESIDENT ALIEN 
                    INDIVIDUALS.

  (a) In General.--Subsection (b) of section 872 (relating to 
exclusions) is amended by redesignating paragraphs (5), (6), and (7) as 
paragraphs (6), (7), and (8), respectively, and inserting after 
paragraph (4) the following new paragraph:
          ``(5) Income derived from wagering transactions in certain 
        parimutuel pools.--Gross income derived by a nonresident alien 
        individual from a legal wagering transaction initiated outside 
        the United States in a parimutuel pool with respect to a live 
        horse race in the United States.''.
  (b) Conforming Amendment.--Section 883(a)(4) is amended by striking 
``(5), (6), and (7)'' and inserting ``(6), (7), and (8)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to proceeds from wagering transactions after September 30, 2003.

SEC. 212. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT 
                    REDUCING PATRONAGE DIVIDENDS.

  (a) In General.--Subsection (a) of section 1388 (relating to 
patronage dividend defined) is amended by adding at the end the 
following: ``For purposes of paragraph (3), net earnings shall not be 
reduced by amounts paid during the year as dividends on capital stock 
or other proprietary capital interests of the organization to the 
extent that the articles of incorporation or bylaws of such 
organization or other contract with patrons provide that such dividends 
are in addition to amounts otherwise payable to patrons which are 
derived from business done with or for patrons during the taxable 
year.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to distributions in taxable years beginning after the date of the 
enactment of this Act.

SEC. 213. PILOT PROJECT FOR FOREST CONSERVATION ACTIVITIES.

  (a) Tax-Exempt Bond Financing.--
          (1) In General.--For purposes of the Internal Revenue Code of 
        1986, any qualified forest conservation bond shall be treated 
        as an exempt facility bond under section 142 of such Code.
          (2) Qualified forest conservation bond.--For purposes of this 
        section, the term ``qualified forest conservation bond'' means 
        any bond issued as part of an issue if--
                  (A) 95 percent or more of the net proceeds (as 
                defined in section 150(a)(3) of such Code) of such 
                issue are to be used for qualified project costs,
                  (B) such bond is an obligation of the State of 
                Washington or any political subdivision thereof and is 
                issued for the Evergreen Forest Trust, and
                  (C) such bond is issued before October 1, 2004.
          (3) Limitation on aggregate amount issued.--The maximum 
        aggregate face amount of bonds which may be issued under this 
        section shall not exceed $250,000,000.
          (4) Qualified project costs.--For purposes of this 
        subsection, the term ``qualified project costs'' means the sum 
        of--
                  (A) the cost of acquisition by the Evergreen Forest 
                Trust from an unrelated person of forests and forest 
                land--
                          (i) which are located in the State of 
                        Washington, and
                          (ii) which at the time of acquisition or 
                        immediately thereafter are subject to a 
                        conservation restriction described in 
                        subsection (c)(2),
                  (B) capitalized interest on the qualified forest 
                conservation bonds for the 3-year period beginning on 
                the date of issuance of such bonds, and
                  (C) credit enhancement fees which constitute 
                qualified guarantee fees (within the meaning of section 
                148 of such Code).
          (5) Special rules.--In applying the Internal Revenue Code of 
        1986 to any qualified forest conservation bond, the following 
        modifications shall apply:
                  (A) Section 146 of such Code (relating to volume cap) 
                shall not apply.
                  (B) For purposes of section 147(b) of such Code 
                (relating to maturity may not exceed 120 percent of 
                economic life), the land and standing timber acquired 
                with proceeds of qualified forest conservation bonds 
                shall have an economic life of 35 years.
                  (C) Subsections (c) and (d) of section 147 of such 
                Code (relating to limitations on acquisition of land 
                and existing property) shall not apply.
                  (D) Section 57(a)(5) of such Code (relating to tax-
                exempt interest) shall not apply to interest on 
                qualified forest conservation bonds.
          (6) Treatment of current refunding bonds.--Paragraphs (2)(C) 
        and (3) shall not apply to any bond (or series of bonds) issued 
        to refund a qualified forest conservation bond issued before 
        October 1, 2004, if--
                  (A) the average maturity date of the issue of which 
                the refunding bond is a part is not later than the 
                average maturity date of the bonds to be refunded by 
                such issue,
                  (B) the amount of the refunding bond does not exceed 
                the outstanding amount of the refunded bond, and
                  (C) the net proceeds of the refunding bond are used 
                to redeem the refunded bond not later than 90 days 
                after the date of the issuance of the refunding bond.
        For purposes of subparagraph (A), average maturity shall be 
        determined in accordance with section 147(b)(2)(A) of such 
        Code.
          (7) Effective date.--This subsection shall apply to 
        obligations issued after the date of the enactment of this Act.
  (b) Items From Qualified Harvesting Activities Not Subject to Tax or 
Taken Into Account.--
          (1) In general.--Income, gains, deductions, losses, or 
        credits from a qualified harvesting activity conducted by the 
        Evergreen Forest Trust shall not be subject to tax or taken 
        into account under subtitle A of the Internal Revenue Code of 
        1986.
          (2) Qualified harvesting activity.--For purposes of paragraph 
        (1)--
                  (A) In general.--The term ``qualified harvesting 
                activity'' means the sale, lease, or harvesting, of 
                standing timber--
                          (i) on land owned by the Evergreen Forest 
                        Trust which was acquired with proceeds of 
                        qualified forest conservation bonds, and
                          (ii) pursuant to a qualified conservation 
                        plan adopted by the Evergreen Forest Trust.
                  (B) Exceptions.--
                          (i) Cessation as qualified organization.--The 
                        term ``qualified harvesting activity'' shall 
                        not include any sale, lease, or harvesting 
                        during any period that the Evergreen Forest 
                        Trust is not a qualified organization.
                          (ii) Exceeding limits on harvesting.--The 
                        term ``qualified harvesting activity'' shall 
                        not include any sale, lease, or harvesting of 
                        standing timber on land acquired with proceeds 
                        of qualified forest conservation bonds to the 
                        extent that--
                                  (I) the average annual area of timber 
                                harvested from such land exceeds 2.5 
                                percent of the total area of such land, 
                                or
                                  (II) the quantity of timber removed 
                                from such land exceeds the quantity 
                                which can be removed from such land 
                                annually in perpetuity on a sustained-
                                yield basis with respect to such land.
                        The limitations under subclauses (I) and (II) 
                        shall not apply to salvage or sanitation 
                        harvesting of timber stands which are 
                        substantially damaged by fire, windthrow, or 
                        other catastrophe, or which are in imminent 
                        danger from insect or disease attack.
          (3) Termination.--This subsection shall not apply to any 
        qualified harvesting activity occurring after the date on which 
        there is no outstanding qualified forest conservation bond or 
        any such bond ceases to be a tax-exempt bond.
          (4) Partial recapture of benefits if harvesting limit 
        exceeded.--If, as of the date that this subsection ceases to 
        apply under paragraph (3), the average annual area of timber 
        harvested from the land exceeds the requirement of paragraph 
        (2)(B)(ii)(I), the tax imposed by chapter 1 of the Internal 
        Revenue Code of 1986 shall be increased, under rules prescribed 
        by the Secretary, by the sum of the tax benefit attributable to 
        such excess and interest at the underpayment rate under section 
        6621 for the period of the underpayment.
  (c) Definitions.--For purposes of this section--
          (1) Qualified conservation plan.--The term ``qualified 
        conservation plan'' means a multiple land use program or plan 
        which--
                  (A) is designed and administered primarily for the 
                purposes of protecting and enhancing wildlife and fish, 
                timber, scenic attributes, recreation, and soil and 
                water quality of the forest and forest land,
                  (B) mandates that conservation of forest and forest 
                land is the single-most significant use of the forest 
                and forest land,
                  (C) requires that timber harvesting be consistent 
                with--
                          (i) restoring and maintaining reference 
                        conditions for the Westside Douglas Fir forest 
                        type,
                          (ii) restoring and maintaining a 
                        representative sample of young, mid, and late 
                        successional forest age classes,
                          (iii) maintaining or restoring the resources' 
                        ecological health for purposes of preventing 
                        damage from fire, insect, or disease,
                          (iv) maintaining or enhancing wildlife or 
                        fish habitat,
                          (v) enhancing research opportunities in 
                        sustainable renewable resource uses, or
                          (vi) preserving or protecting open space.
          (2) Conservation restriction.--The conservation restriction 
        described in this paragraph is a restriction which--
                  (A) is granted in perpetuity to an unrelated person 
                which is described in section 170(h)(3) of such Code 
                and which, in the case of a nongovernmental unit, is 
                organized and operated for conservation purposes,
                  (B) meets the requirements of clause (ii) or 
                (iii)(II) of section 170(h)(4)(A) of such Code,
                  (C) obligates the Evergreen Forest Trust to pay the 
                costs incurred by the holder of the conservation 
                restriction in monitoring compliance with such 
                restriction, and
                  (D) requires an increasing level of conservation 
                benefits to be provided whenever circumstances allow 
                it.
          (3) Qualified organization.--The term ``qualified 
        organization'' means an organization--
                  (A) which is a nonprofit organization organized and 
                operated exclusively for charitable, scientific, or 
                educational purposes including but not limited to 
                acquiring, protecting, restoring, managing, and 
                developing forest lands and other renewable resources 
                for the long-term charitable, educational, scientific, 
                and public benefit of the State of Washington,
                  (B) more than half of the value of the property of 
                which consists of forests and forest land acquired with 
                the proceeds from qualified forest conservation bonds,
                  (C) which periodically conducts educational programs 
                designed to inform the public of environmentally 
                sensitive forestry management and conservation 
                techniques,
                  (D) which has a board of directors that at all times 
                is comprised of 9 members--
                          (i) at least 2 of whom represent the holders 
                        of the conservation restriction described in 
                        paragraph (2), and
                          (ii) at least 2 of whom are public officials,
                  (E) of which not more than one-third of the members 
                of the board of directors is comprised of individuals 
                who are or were at any time within 5 years before the 
                beginning of a term of membership on the board, an 
                employee of, independent contractor with respect to, 
                officer of, director of, or held a material financial 
                interest in, a commercial forest products enterprise 
                with which the Evergreen Forest Trust has a contractual 
                or other financial arrangement,
                  (F) the bylaws of which require at least two-thirds 
                of the members of the board of directors to vote 
                affirmatively to approve the qualified conservation 
                program and any change thereto, and
                  (G) upon dissolution, is required to dedicate its 
                assets to--
                          (i) an organization described in section 
                        501(c)(3) of such Code which is organized and 
                        operated for conservation purposes, or
                          (ii) a governmental unit described in section 
                        170(c)(1) of such Code.
          (4) Evergreen forest trust.--The term ``Evergreen Forest 
        Trust'' means a nonprofit corporation known as the Evergreen 
        Forest Trust which was incorporated on February 25, 2000, under 
        chapter 24.03 of the Revised Code of Washington and which, on 
        May 11, 2001, was recognized as an organization described in 
        section 501(c)(3) of the Internal Revenue Code of 1986.
          (5) Unrelated person.--The term ``unrelated person'' means a 
        person who is not a related person.
          (6) Related person.--A person shall be treated as related to 
        another person if--
                  (A) such person bears a relationship to such other 
                person described in section 267(b) (determined without 
                regard to paragraph (9) thereof), or 707(b)(1), of such 
                Code, determined by substituting ``25 percent'' for 
                ``50 percent'' each place it occurs therein, and
                  (B) in the case such other person is a nonprofit 
                organization, if such person controls directly or 
                indirectly more than 25 percent of the governing body 
                of such organization.

SEC. 214. 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 title (other than 
this section) and title I of this Act had not been enacted.

                     TITLE III--REVENUE PROVISIONS

SEC. 301. INDIVIDUAL EXPATRIATION TO AVOID TAX.

  (a) Expatriation To Avoid Tax.--
          (1) In general.--Subsection (a) of section 877 (relating to 
        treatment of expatriates) is amended to read as follows:
  ``(a) Treatment of Expatriates.--
          ``(1) In general.--Every nonresident alien individual to whom 
        this section applies and who, within the 10-year period 
        immediately preceding the close of the taxable year, lost 
        United States citizenship shall be taxable for such taxable 
        year in the manner provided in subsection (b) if the tax 
        imposed pursuant to such subsection (after any reduction in 
        such tax under the last sentence of such subsection) exceeds 
        the tax which, without regard to this section, is imposed 
        pursuant to section 871.
          ``(2) Individuals subject to this section.--This section 
        shall apply to any individual if--
                  ``(A) the average annual net income tax (as defined 
                in section 38(c)(1)) of such individual for the period 
                of 5 taxable years ending before the date of the loss 
                of United States citizenship is greater than $122,000,
                  ``(B) the net worth of the individual as of such date 
                is $2,000,000 or more, or
                  ``(C) such individual fails to certify under penalty 
                of perjury that he has met the requirements of this 
                title for the 5 preceding taxable years or fails to 
                submit such evidence of such compliance as the 
                Secretary may require.
        In the case of the loss of United States citizenship in any 
        calendar year after 2003, such $122,000 amount shall be 
        increased by an amount equal to such dollar amount multiplied 
        by the cost-of-living adjustment determined under section 
        1(f)(3) for such calendar year by substituting `2002' for 
        `1992' in subparagraph (B) thereof. Any increase under the 
        preceding sentence shall be rounded to the nearest multiple of 
        $1,000.''.
          (2) Revision of exceptions from alternative tax.--Subsection 
        (c) of section 877 (relating to tax avoidance not presumed in 
        certain cases) is amended to read as follows:
  ``(c) Exceptions.--
          ``(1) In general.--Subparagraphs (A) and (B) of subsection 
        (a)(2) shall not apply to an individual described in paragraph 
        (2) or (3).
          ``(2) Dual citizens.--
                  ``(A) In general.--An individual is described in this 
                paragraph if--
                          ``(i) the individual became at birth a 
                        citizen of the United States and a citizen of 
                        another country and continues to be a citizen 
                        of such other country, and
                          ``(ii) the individual has had no substantial 
                        contacts with the United States.
                  ``(B) Substantial contacts.--An individual shall be 
                treated as having no substantial contacts with the 
                United States only if the individual--
                          ``(i) was never a resident of the United 
                        States (as defined in section 7701(b)),
                          ``(ii) has never held a United States 
                        passport, and
                          ``(iii) was not present in the United States 
                        for more than 30 days during any calendar year 
                        which is 1 of the 10 calendar years preceding 
                        the individual's loss of United States 
                        citizenship.
          ``(3) Certain minors.--An individual is described in this 
        paragraph if--
                  ``(A) the individual became at birth a citizen of the 
                United States,
                  ``(B) neither parent of such individual was a citizen 
                of the United States at the time of such birth,
                  ``(C) the individual's loss of United States 
                citizenship occurs before such individual attains age 
                18 \1/2\, and
                  ``(D) the individual was not present in the United 
                States for more than 30 days during any calendar year 
                which is 1 of the 10 calendar years preceding the 
                individual's loss of United States citizenship.''.
          (3) Conforming amendment.--Section 2107(a) is amended to read 
        as follows:
  ``(a) Treatment of Expatriates.--A tax computed in accordance with 
the table contained in section 2001 is hereby imposed on the transfer 
of the taxable estate, determined as provided in section 2106, of every 
decedent nonresident not a citizen of the United States if the date of 
death occurs during a taxable year with respect to which the decedent 
is subject to tax under section 877(b).''.
  (b) Special Rules for Determining When an Individual is no Longer a 
United States Citizen or Long-Term Resident.--Section 7701 (relating to 
definitions) is amended by redesignating subsection (n) as subsection 
(o) and by inserting after subsection (m) the following new subsection:
  ``(n) Special Rules for Determining When an Individual is no Longer a 
United States Citizen or Long-Term Resident.--An individual who would 
not (but for this subsection) be treated as a citizen or resident of 
the United States shall continue to be treated as a citizen or resident 
of the United States until such individual--
          ``(1) gives notice of an expatriating act or termination of 
        residency (with the requisite intent to relinquish citizenship 
        or terminate residency) to the Secretary of State or the 
        Secretary of Homeland Security, and
          ``(2) provides a statement in accordance with section 
        6039G.''.
  (c) Physical Presence in the United States for More Than 30 Days.--
Section 877 (relating to expatriation to avoid tax) is amended by 
adding at the end the following new subsection:
  ``(g) Physical Presence.--This section shall not apply to any 
individual for any taxable year during the 10-year period referred to 
in subsection (a) in which such individual is present in the United 
States for more than 30 days in the calendar year ending in such 
taxable year, and such individual shall be treated for purposes of this 
title as a citizen or resident of the United States for such taxable 
year.''.
  (d) Transfers Subject to Gift Tax.--Subsection (a) of section 2501 
(relating to taxable transfers) is amended by adding at the end the 
following:
          ``(6) Transfers of certain stock.--
                  ``(A) In general.--Paragraph (3) shall not apply to 
                the transfer of stock described in subparagraph (B) by 
                any individual to whom section 877(b) applies, and 
                section 2511(a) shall be applied without regard to 
                whether such stock is property which is situated within 
                the United States.
                  ``(B) Valuation.--For purposes of subparagraph (A), 
                the value of stock shall be determined as provided in 
                section 2103, except that--
                          ``(i) if the donor owned (within the meaning 
                        of section 958(a)) at the time of such transfer 
                        10 percent or more of the total combined voting 
                        power of all classes of stock entitled to vote 
                        of a foreign corporation, and
                          ``(ii) if such donor owned (within the 
                        meaning of section 958(a)), or is considered to 
                        have owned (by applying the ownership rules of 
                        section 958(b)), at the time of such transfer, 
                        more than 50 percent of--
                                  ``(I) the total combined voting power 
                                of all classes of stock entitled to 
                                vote of such corporation, or
                                  ``(II) the total value of the stock 
                                of such corporation,then that 
                                proportion of the fair market value of 
                                the stock of such foreign corporation 
                                owned (within the meaning of section 
                                958(a)) by such donor at the time of 
                                such transfer, which the fair market 
                                value of any assets owned by such 
                                foreign corporation and situated in the 
                                United States, at the time of such 
                                transfer, bears to the total fair 
                                market value of all assets owned by 
                                such foreign corporation at the time of 
                                such transfer, shall be included in the 
                                value of such property.
                For purposes of the preceding sentence, a donor shall 
                be treated as owning stock of a foreign corporation at 
                the time of such transfer if, at such time, by trust or 
                otherwise, within the meaning of sections 2035 to 2038, 
                inclusive, he owned such stock.''.
  (e) Enhanced Information Reporting From Individuals Losing United 
States Citizenship.--
          (1) In general.--Subsection (a) of section 6039G is amended 
        to read as follows:
  ``(a) In General.--Notwithstanding any other provision of law, any 
individual to whom section 877(b) applies for any taxable year shall 
provide a statement for such taxable year which includes the 
information described in subsection (b).''.
          (2) Information to be provided.--Subsection (b) of section 
        6039G is amended to read as follows:
  ``(b) Information To Be Provided.--Information required under 
subsection (a) shall include--
          ``(1) the taxpayer's TIN,
          ``(2) the mailing address of such individual's principal 
        foreign residence,
          ``(3) the foreign country, in which such individual is 
        residing,
          ``(4) the foreign country of which such individual is a 
        citizen,
          ``(5) information detailing the assets and liabilities of 
        such individual,
          ``(6) the number of days that the individual was present in 
        the United States during the taxable year, and
          ``(7) such other information as the Secretary may 
        prescribe.''.
          (3) Increase in penalty.--Subsection (d) of section 6039G is 
        amended to read as follows:
  ``(d) Penalty.--If--
          ``(1) an individual is required to file a statement under 
        subsection (a) for any taxable year, and
          ``(2) fails to file such a statement with the Secretary on or 
        before the date such statement is required to be filed or fails 
        to include all the information required to be shown on the 
        statement or includes incorrect information,
such individual shall pay a penalty of $5,000 unless it is shown that 
such failure is due to reasonable cause and not to willful neglect.''.
          (4) Conforming amendment.--Section 6039G is amended by 
        striking subsections (c), (f), and (g) and by redesignating 
        subsections (d) and (e) as subsection (c) and (d), 
        respectively.
  (f) Effective Date.--The amendments made by this section shall apply 
to individuals who expatriate after February 27, 2003.

SEC. 302. VACCINE TAX TO APPLY TO HEPATITIS A VACCINE.

  (a) In General.--Paragraph (1) of section 4132(a) (defining taxable 
vaccine) is amended by redesignating subparagraphs (I), (J), (K), and 
(L) as subparagraphs (J), (K), (L), and (M), respectively, and by 
inserting after subparagraph (H) the following new subparagraph:
                  ``(I) Any vaccine against hepatitis A.''
  (b) Effective Date.--
          (1) Sales, etc.--The amendments made by subsection (a) shall 
        apply to sales and uses on or after the first day of the first 
        month which begins more than 4 weeks after the date of the 
        enactment of this Act.
          (2) Deliveries.--For purposes of paragraph (1) and section 
        4131 of the Internal Revenue Code of 1986, in the case of sales 
        on or before the effective date described in such paragraph for 
        which delivery is made after such date, the delivery date shall 
        be considered the sale date.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill, H.R. 878, as amended, provides needed tax relief 
to the Armed Forces and makes other necessary changes to the 
tax laws.
    The bill provides net tax reductions of over $402 million 
over fiscal years 2003-2008.

                 B. Background and Need for Legislation

    The Committee believes 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 that in addition to receiving our 
thoughts and thanks, 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 various other provisions to reduce 
complexity and eliminate inequitable effects in the tax law.
    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 treatment of certain individual 
expatriates, the provision seems especially fitting to offset 
the improved tax treatment of the men and women serving their 
country. The provision relating to individual expatriates 
replaces the present law subjective test with a more 
administrable objective test. The provision relating to 
vaccines extends the protection of the Vaccine Injury 
Compensation Program to families of Hepatitis A vaccine 
recipients.

                         C. Legislative History

    The House Committee on Ways and Means marked up the Armed 
Forces Tax Fairness Act of 2003 on February 27, 2003, and 
ordered the bill, as amended, favorably reported by voice vote.

                      II. EXPLANATION OF THE BILL


          TITLE I. IMPROVING TAX EQUITY FOR MILITARY PERSONNEL


 A. Exclusion of Gain on Sale of a Principal Residence by a Member of 
     the Uniformed Services, the Foreign Service or the Peace Corps


(Sec. 101 of the bill and sec. 121 of the Code)

                              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 two of 
the five years ending on 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 two 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, the Foreign Service of the United States, or the 
Peace Corps 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. The 
Committee believes that it is unfair that members of the 
uniform services and Foreign Service of the United States are 
unable to avail themselves of the exclusion due to relocations 
required by service to their country.

                        EXPLANATION OF PROVISION

    Under the bill, an individual may elect to suspend for a 
maximum of five years the five-year test period for ownership 
and use during certain absences due to service in the uniformed 
services, the Foreign Service of the United States, or as Peace 
Corps volunteers or employees. 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 five-year period ending on the date of 
the sale or exchange of a principal residence does not include 
any period up to five years during which the taxpayer or the 
taxpayer's spouse is on qualified official extended duty as a 
member of the uniformed services, in Foreign Service of the 
United States, or on active duty assigned to a Peace Corps 
volunteer under the Peace Corps Act\1\ or an employee of the 
Peace Corps. 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 150 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 180 days or for an 
indefinite period. Active duty for Peace Corps volunteers means 
a period in excess of 180 days or for an indefinite period. The 
election may be made with respect to only one property for a 
suspension period.
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    \1\ 22 U.S.C. 2501 et. seq.
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                             EFFECTIVE DATE

    The provision is effective for sales or exchanges after May 
6, 1997.

   B. Exclusion from Gross Income of Certain Death Gratuity Payments


(Sec. 102 of the bill and sec. 134 of the Code)

                              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. The amount of death gratuity was increased to 
$6,000 but the amount of the exclusion was not increased to 
take into account this change.

                           REASONS FOR CHANGE

    The Committee believes that the amount of the exclusion for 
death gratuities provided to military personnel should be 
conformed to the present-law levels of such 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 that is 
pursuant to a provision of law enacted before December 31, 
1991, with respect to the death of certain members of the Armed 
services on active duty, inactive duty training, or engaged in 
authorized travel. Therefore the amount of the exclusion is 
increased to $6,000.

                             EFFECTIVE DATE

    The provision is effective with respect to deaths occurring 
after September 10, 2001.

     C. Exclusion for Amounts Received Under Department of Defense 
                     Homeowners Assistance Program


(Sec. 103 of the bill and sec. 132 of the Code)

                              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.
    In general, under HAP eligible individuals 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) as the purchase price for their 
property, an amount not to exceed 90 percent of the prior fair 
market value as 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. These amounts are includible 
in gross income as compensation for services to the extent such 
payments exceed the fair market value of the property 
relinquished in exchange for such payments. Additionally, such 
payments are wages for Federal Insurance Contributions Act 
(``FICA'') tax purposes (including Medicare).

                           REASONS FOR CHANGE

    The Committee believes that the exclusion 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.

                        EXPLANATION OF PROVISION

    The bill generally exempts from gross income amounts 
received under the HAP (as in effect on the date of enactment 
of this bill). Amounts received under the program also are not 
considered wages for FICA tax purposes (including Medicare). 
The excludable amount is limited to the reduction in the fair 
market value of property.

                             EFFECTIVE DATE

    The provision is effective for payments made after the date 
of enactment.

   D. Expansion of Combat Zone Filing Rules to Contingency Operations


(Sec. 104 of the bill and sec. 7508 of the Code)

                              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. The Secretary may grant reasonable extensions of 
time for filing such returns. Treasury regulations provide an 
additional automatic two-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. 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 four-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.
    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 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. 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 \2\ or (2) time in missing in action status, plus the next 
180 days.
---------------------------------------------------------------------------
     \2\ 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 five 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.
---------------------------------------------------------------------------
    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 two 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 military personnel 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 \3\ 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.
---------------------------------------------------------------------------
    \3\ The definition is done by cross-reference to 10 U.S.C. 101.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to any period for performing an act 
that has not expired before the date of enactment.

 E. Modification of Membership Requirement for Exemption From Tax for 
                    Certain Veterans' Organizations


(Sec. 105 of the bill and sec. 501(c)(19) of the Code)

                              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.
    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.

                           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.

  F. Clarification of Treatment of Certain Dependent Care Assistance 
 Programs Provided to Members of the Uniformed Services of the United 
                                 States


(Sec. 106 of the bill and sec. 134 of the Code)

                              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 (as in effect on the 
date of enactment of this bill) 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 subject to the present-
law rules. 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 also are 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, 2002. No inference is intended as to the tax 
treatment of such amounts for prior taxable years.

   G. Treatment of Service Academy Appointments as Scholarships for 
Purposes of Qualified Tuition Programs and Coverdell Education Savings 
                                Accounts


(Sec. 107 of the bill and secs. 529 and 530 of the Code)

                              PRESENT LAW

    The Code provides tax-exempt status to qualified tuition 
programs, meaning programs established and maintained by a 
State or agency or instrumentality thereof or by one or more 
eligible educational institutions under which a person (1) may 
purchase tuition credits or certificates on behalf of a 
designated beneficiary which entitle the beneficiary to the 
waiver or payment of qualified higher education expenses of the 
beneficiary, or (2) in the case of a program established by and 
maintained by a State or agency or instrumentality thereof, may 
make contributions to an account which is established for the 
purpose of meeting the qualified higher education expenses of 
the designated beneficiary of the account. Contributions to 
qualified tuition programs may be made only in cash. Qualified 
tuition programs must have adequate safeguards to prevent 
contributions on behalf of a designated beneficiary in excess 
of amounts necessary to provide for the qualified higher 
education expenses of the beneficiary.
    The Code provides tax-exempt status to Coverdell education 
savings accounts (``ESAs''), meaning certain trusts or 
custodial accounts which are created or organized in the United 
States exclusively for the purpose of paying the qualified 
education expenses of a designated beneficiary. Contributions 
to ESAs may be made only in cash. Annual contributions to ESAs 
may not exceed $2,000 per beneficiary (except in cases 
involving certain tax-free rollovers) and may not be made after 
the designated beneficiary reaches age 18.
    Earnings on contributions to an ESA or qualified tuition 
program generally are subject to tax when withdrawn. However, 
distributions from an ESA or qualified tuition program are 
excludable from the gross income of the distributee to the 
extent that the total distribution does not exceed the 
qualified education expenses incurred by the beneficiary during 
the year the distribution is made.
    If the qualified education expenses of the beneficiary for 
the year are less than the total amount of the distribution 
from an ESA or qualified tuition program, then the qualified 
education expenses are deemed to be paid from a pro-rata share 
of both the principal and earnings components of the 
distribution. In such a case, only a portion of the earnings is 
excludable (i.e., the portion of the earnings based on the 
ratio that the qualified education expenses bear to the total 
amount of the distribution) and the remaining portion of the 
earnings is includible in the beneficiary's gross income.
    The earnings portion of a distribution from an ESA or 
qualified tuition program that is includible in income is 
generally subject to an additional 10 percent tax. The 10 
percent additional tax does not apply if a distribution is made 
on account of the death or disability of the designated 
beneficiary, or on account of a scholarship received by the 
designated beneficiary (to the extent it does not exceed the 
amount of the scholarship).
    Service obligations are required of recipients of 
appointments to 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. Because of these service obligations, 
appointments to the Academies are not considered scholarships 
for purposes of the waiver of the additional 10 percent tax on 
withdrawals from ESAs and qualified tuition programs that are 
not used for qualified education purposes.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to treat 
appointments to a United States Service Academy in a manner 
similar to the treatment of qualified scholarships. 
Accordingly, the Committee believes that it is appropriate to 
waive the additional 10 percent tax on withdrawals from ESAs 
and qualified tuition programs that are not used for qualified 
education purposes because the designated beneficiary received 
an appointment to a United States Service Academy.
    The Committee believes that imposing an additional tax on 
earnings from educational savings accounts and qualified 
tuition plans is inappropriate in the case of individuals who 
choose to serve their country as a member of the military and 
who, as a part of that service, obtain their education at one 
of the Service Academies.

                        EXPLANATION OF PROVISION

    The bill permits penalty-free withdrawals from Coverdell 
education savings accounts and qualified tuition programs made 
on account of the attendance of the beneficiary 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.
    The amount of funds that can be withdrawn penalty free is 
limited to the costs of advanced education as defined in 10 
United States Code section 2005(e)(3) (as in effect on the date 
of the enactment of the bill) at such Academies.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2002.

     H. Suspension of Tax-Exempt Status of Terrorist Organizations


(Sec. 108 of the bill and sec. 501 of the Code)

                              PRESENT LAW

    Under present law, the Internal Revenue Service generally 
issues a letter revoking recognition of an organization's tax-
exempt status only after (1) conducting an examination of the 
organization, (2) issuing a letter to the organization 
proposing revocation, and (3) allowingthe organization to 
exhaust the administrative appeal rights that follow the issuance of 
the proposed revocation letter. In the case of an organization 
described in section 501(c)(3), the revocation letter immediately is 
subject to judicial review under the declaratory judgment procedures of 
section 7428. To sustain a revocation of tax-exempt status under 
section 7428, the IRS must demonstrate that the organization is no 
longer entitled to exemption. There is no procedure under present law 
for the IRS to suspend the tax-exempt status of an organization.
    To combat terrorism, the Federal government has designated 
a number of organizations as terrorist organizations or 
supporters of terrorism under the Immigration and Nationality 
Act, the International Emergency Economic Powers Act, and the 
United Nations Participation Act of 1945.

                           REASONS FOR CHANGE

    An organization that has been designated or otherwise 
identified by the Federal government as a terrorist 
organization pursuant to certain authority should not be exempt 
from federal income tax and contributions to such organizations 
should not be deductible for Federal income tax purposes. The 
Committee believes that the Federal government's designation or 
identification of an organization as a terrorist organization 
is ground for suspension of tax-exempt status, and that in such 
cases a separate investigation of the organization by the 
Internal Revenue Service is not necessary. Further, because a 
terrorist organization may challenge the Federal government's 
designation or identification of the organization under the law 
authorizing the designation or identification, recourse to the 
declaratory judgment procedures of the Internal Revenue Code to 
challenge the suspension of tax-exemption is not appropriate.

                        EXPLANATION OF PROVISION

    The bill suspends the tax-exempt status of an organization 
that is exempt from tax under section 501(a) for any period 
during which the organization is designated or identified by 
U.S. Federal authorities as a terrorist organization or 
supporter of terrorism. The bill also makes such an 
organization ineligible to apply for tax exemption under 
section 501(a). The period of suspension runs from the date the 
organization is first designated or identified (or from the 
date of enactment of the bill, whichever is later) to the date 
when all designations or identifications with respect to the 
organization have been rescinded pursuant to the law or 
Executive order under which the designation or identification 
was made.
    The bill describes a terrorist organization as an 
organization that has been designated or otherwise individually 
identified (1) as a terrorist organization or foreign terrorist 
organization under the authority of section 
212(a)(3)(B)(vi)(II) or section 219 of the Immigration and 
Nationality Act; (2) in or pursuant to an Executive order that 
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 for the purpose of imposing on 
such organization an economic or other sanction; or (3) in or 
pursuant to an Executive order that refers to the bill and is 
issued under the authority of any Federal law if 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). During the period of suspension, no deduction is allowed 
under the bill for any contribution to a terrorist organization 
under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 
2106(a)(2), or 2522.
    No organization or other person may challenge, under 
section 7428 or any other provision of law, in any 
administrative or judicial proceeding relating to the Federal 
tax liability of such organization or other person, the 
suspension of tax-exemption, the ineligibility to apply for 
tax-exemption, a designation or identification described above, 
the timing of the period of suspension, or a denial of 
deduction described above. The suspended organization may 
maintain other suits or administrative actions against the 
agency or agencies that designated or identified the 
organization, for the purpose of challenging such designation 
or identification (but not the suspension of tax-exempt status 
under this provision).
    If the tax-exemption of an organization is suspended and 
each designation and identification that has been made with 
respect to the organization is determined to be erroneous 
pursuant to the law or Executive order making the designation 
or identification, and such erroneous designation results in an 
overpayment of income tax for any taxable year with respect to 
such organization, a credit or refund (with interest) with 
respect to such overpayment shall be made. If the operation of 
any law or rule of law (including res judicata) prevents the 
credit or refund at any time, the credit or refund may 
nevertheless be allowed or made if the claim for such credit or 
refund is filed before the close of the one-year period 
beginning on the date that the last remaining designation or 
identification with respect to the organization is determined 
to be erroneous.
    The bill directs the IRS to update the listings of tax-
exempt organizations to take account of organizations that have 
had their exemption suspended and to publish notice to 
taxpayers of the suspension of an organization's tax-exemption 
and the fact that contributions to such organization are not 
deductible during the period of suspension.

                             EFFECTIVE DATE

    The bill is effective for designations made before, on, or 
after the date of enactment.

 I. Above-the-Line Deduction for Overnight Travel Expenses of National 
                       Guard and Reserve Members


(Sec. 109 of the bill and sec. 162 of the Code)

                              PRESENT LAW

    National Guard and Reserve members may claim itemized 
deductions for their nonreimbursable expenses for 
transportation, 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 a portion of these expenses.

                        EXPLANATION OF PROVISION

    The bill provides an above-the-line deduction for the 
overnight transportation, meals, and lodging expenses of 
National Guard and Reserve members who must travel away from 
home more than 100 miles (and stay overnight) to attend 
National Guard and Reserve meetings. Accordingly, these 
individuals incurring these expenses can deduct them from gross 
income regardless of whether they itemize their deductions. The 
amount of the expenses that may be deducted may not exceed $500 
for any period during which the individual is more than 100 
miles from home in connection with such services.

                             EFFECTIVE DATE

    The provision is effective with respect to amounts paid or 
incurred after December 31, 2002.

                   TITLE II. MISCELLANEOUS PROVISIONS


      A. Extension of Certain Tax Relief Provisions to Astronauts


(Sec. 201 of the bill and secs. 101, 692, and 2201 of the Code)

                              PRESENT LAW

In general

    The Victims of Terrorism Tax Relief Act of 2001, (the 
``Victims Bill'') provided certain income and estate tax relief 
to individuals who die from wounds or injury incurred as a 
result of the terrorist attacks against the United States on 
September 11, 2001, and April 19, 1995 (the bombing of the 
Alfred P. Murrah Federal Building in Oklahoma City) or as a 
result of illness incurred due to an attack involving anthrax 
that occurred on or after September 11, 2001, and before 
January 1, 2002.

Income tax relief

    The Victims Bill extended relief similar to the present-law 
treatment of military or civilian employees of the United 
States who die as a result of terrorist or military activity 
outside the United States to individuals who die as a result of 
wounds or injury which were incurred as a result of the 
terrorist attacks that occurred on September 11, 2001, or April 
19, 1995, and individuals who die as a result of illness 
incurred due to an attack involving anthrax that occurs on or 
after September 11, 2001, and before January 1, 2002. Under the 
Victims Bill, such individuals generally are exempt from income 
tax for the year of death and for prior taxable years beginning 
with the taxable year prior to the taxable year in which the 
wounds or injury occurred.\4\ The exemption applies to these 
individuals whether killed in an attack (e.g., in the case of 
the September 11, 2001, attack in one of the four airplanes or 
on the ground) or in rescue or recovery operations.
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    \4\ Present law does not provide relief from self-employment tax 
liability.
---------------------------------------------------------------------------
    Present law provides a minimum tax relief benefit of 
$10,000 to each eligible individual regardless of the income 
tax liability of the individual for the eligible tax years. If 
an eligible individual's income tax for years eligible for the 
exclusion under the provision is less than $10,000, the 
individual is treated as having made a tax payment for such 
individual's last taxable year in an amount equal to the excess 
of $10,000 over the amount of tax not imposed under the 
provision.
    Subject to rules prescribed by the Secretary, the exemption 
from tax does not apply to the tax attributable to (1) deferred 
compensation which would have been payable after death if the 
individual had died other than as a specified terrorist victim, 
or (2) amounts payable in the taxable year which would not have 
been payable in such taxable year but for an action taken after 
September 11, 2001. Thus, for example, the exemption does not 
apply to amounts payable from a qualified plan or individual 
retirement arrangement to the beneficiary or estate of the 
individual. Similarly, amounts payable only as death or 
survivor's benefits pursuant to deferred compensation 
preexisting arrangements that would have been paid if the death 
had occurred for another reason are not covered by the 
exemption. In addition, if the individual's employer makes 
adjustments to a plan or arrangement to accelerate the vesting 
of restricted property or the payment of nonqualified deferred 
compensation after the date of the particular attack, the 
exemption does not apply to income received as a result of that 
action.\5\ Also, if the individual's beneficiary cashed in 
savings bonds of the decedent, the exemption does not apply. On 
the other hand, the exemption does apply, for example, to a 
final paycheck of the individual or dividends on stock held by 
the individual when paid to another person or the individual's 
estate after the date of death but before the end of the 
taxable year of the decedent (determined without regard to the 
death). The exemption also applies to payments of an 
individual's accrued vacation and accrued sick leave.
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    \5\ Such amounts may, however, be excludable from gross income 
under the death benefit exclusion provided in section 102 of the 
Victims Bill.
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    The tax relief does not apply to any individual identified 
by the Attorney General to have been a participant or 
conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.

Exclusion of death benefits

    The Victims Bill generally provides an exclusion from gross 
income for amounts received if such amounts are paid by an 
employer (whether in a single sum or otherwise \6\) by reason 
of the death of an employee who dies as a result of wounds or 
injury which were incurred as a result of the terrorist attacks 
that occurred on September 11, 2001, or April 19, 1995, or as a 
result of illness incurred due to an attack involving anthrax 
that occurs on or after September 11, 2001, and before January 
1, 2002. Subject to rules prescribed by the Secretary, the 
exclusion does not apply to amounts that would have been 
payable if the individual had died for a reason other than the 
attack. The exclusion does apply, however, to death benefits 
provided under a qualified plan that satisfy the incidental 
benefit rule.
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    \6\ Thus, for example, payments made over a period of years could 
qualify for the exclusion.
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    For purposes of the exclusion, self-employed individuals 
are treated as employees. Thus, for example, payments by a 
partnership to the surviving spouse of a partner who died as a 
result of the September 11, 2001, attacks may be excludable 
under the provision.
    The tax relief does not apply to any individual identified 
by the Attorney General to have been a participant or 
conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.

Estate tax relief

    Present law provides a reduction in Federal estate tax for 
taxable estates of U.S. citizens or residents who are active 
members of the U.S. Armed Forces and who are killed in action 
while serving in a combat zone (sec. 2201). This provision also 
applies to active service members who die as a result of 
wounds, disease, or injury suffered while serving in a combat 
zone by reason of a hazard to which the service member was 
subjected as an incident of such service.
    In general, the effect of section 2201 is to replace the 
Federal estate tax that would otherwise be imposed with a 
Federal estate tax equal to 125 percent of the maximum State 
death tax credit determined under section 2011(b). Credits 
against the tax, including the unified credit of section 2010 
and the State death tax credit of section 2011, then apply to 
reduce (or eliminate) the amount of the estate tax payable.
    Generally, the reduction in Federal estate taxes under 
section 2201 is equal in amount to the ``additional estate 
tax.'' The additional estate tax is the difference between the 
Federal estate tax imposed by section 2001 and 125 percent of 
the maximum State death tax credit determined under section 
2011(b) as in effect prior to its repeal by the Economic Growth 
and Tax Relief Reconciliation Act of 2001.
    The Victims Bill generally treats individuals who die from 
wounds or injury incurred as a result of the terrorist attacks 
that occurred on September 11, 2001, or April 19, 1995, or as a 
result of illness incurred due to an attack involving anthrax 
that occurred on or after September 11, 2001, and before 
January 1, 2002, in the same manner as if they were active 
members of the U.S. Armed Forces killed in action while serving 
in a combat zone or dying as a result of wounds or injury 
suffered while serving in a combat zone for purposes of section 
2201. Consequently, the estates of these individuals are 
eligible for the reduction in Federal estate tax provided by 
section 2201. The tax relief does not apply to any individual 
identified by the Attorney General to have been a participant 
or conspirator in any terrorist attack to which the provision 
applies, or a representative of such individual.
    The Victims bill also changes the general operation of 
section 2201, as it applies to both the estates of service 
members who qualify for special estate tax treatment under 
present and prior law and to the estates of individuals who 
qualify for the special treatment only under the Act. Under the 
Victims bill, the Federal estate tax is determined in the same 
manner for all estates that are eligible for Federal estate tax 
reduction under section 2201. In addition, the executor of an 
estate that is eligible for special estate tax treatment under 
section 2201 may elect not to have section 2201 apply to the 
estate. Thus, in the event that an estate may receive more 
favorable treatment without the application of section 2201 in 
the year of death than it would under section 2201, the 
executor may elect not to apply the provisions of section 2201, 
and the estate tax owed (if any) would be determined pursuant 
to the generally applicable rules.
    Under the Victims bill, section 2201 no longer reduces 
Federal estate tax by the amount of the additional estate tax. 
Instead, the Victims bill provides that the Federal estate tax 
liability of eligible estates is determined under section 2001 
(or section 2101, in the case of decedents who were neither 
residents nor citizens of the United States), using a rate 
schedule that is equal to 125 percent of the pre-EGTRRA maximum 
State death tax credit amount. This rate schedule is used to 
compute the tax under section 2001(b) or section 2101(b) (i.e., 
both the tentative tax under section 2001(b)(1) and section 
2101(b), and the hypothetical gift tax under section 2001(b)(2) 
are computed using this rate schedule). As a result of this 
provision, the estate tax is unified with the gift tax for 
purposes of section 2201 so that a single graduated (but 
reduced) rate schedule applies to transfers made by the 
individual at death, based upon the cumulative taxable 
transfers made both during lifetime and at death.
    In addition, while the Victims bill provides an alternative 
reduced rate table for purposes of determining the tax under 
section 2001(b) or section 2101(b), the amount of the unified 
credit nevertheless is determined as if section 2201 did not 
apply, based upon the unified credit as in effect on the date 
of death. For example, in the case of victims of the September 
11, 2001, terrorist attack, the applicable unified credit 
amount under section 2010(c) would be determined by reference 
to the actual section 2001(c) rate table.

                           REASONS FOR CHANGE

    The Committee wishes to honor the bravery of individuals 
who lost their lives in the space shuttle Columbia disaster by 
providing these tax relief measures to those individuals and 
their families.

                        EXPLANATION OF PROVISION

    The bill extends the exclusion from income tax, the 
exclusion for death benefits, and the estate tax relief 
available under the Victims of Terrorism Tax Relief Act of 2001 
to astronauts who lose their lives on a space mission 
(including the individuals who lost their lives in the space 
shuttle Columbia disaster).

                             EFFECTIVE DATE

    The provision is generally effective for qualified 
individuals whose lives are lost in the line of duty after 
December 31, 2002.

 B. Coordinate Farmers Income Averaging and the Alternative Minimum Tax


(Sec. 202 of the bill and sec. 55 of the Code)

                              PRESENT LAW

    An individual taxpayer engaged in a farming business as 
defined by section 263A(e)(4) may elect to compute his or her 
current year tax liability by averaging, over the prior three-
year period, all or a portion of his or her taxable income from 
the trade or business of farming. The averaging election is not 
coordinated with the alternative minimum tax. Thus, some 
farmers may become subject to the alternative minimum tax 
solely as a result of the averaging election.

                           REASONS FOR CHANGE

    The Committee believes that farmer income averaging should 
be coordinated with the alternative minimum tax so that a 
farmer's alternative minimum tax liability is not increased 
solely because he or she elects income averaging.

                        DESCRIPTION OF PROPOSAL

    The bill coordinates farmers income averaging with the 
alternative minimum tax. Under the bill, a farmer would owe 
alternative minimum tax only to the extent he or she would owe 
alternative minimum tax had averaging not been elected. This 
result is achieved by excluding the impact of the election to 
average farm income from the calculation of both regular tax 
and tentative minimum tax, solely for the purpose of 
determining alternative minimum tax.

                             EFFECTIVE DATE

    The bill is effective for taxable years beginning after 
December 31, 2002.

  C. Capital Gains Treatment to Apply to Outright Sales of Timber by 
                               Landowner


(Sec. 203 of the bill and sec. 631(b) of the Code)

                              PRESENT LAW

    Under present law, a taxpayer disposing of timber held for 
more than one year is eligible for capital gains treatment in 
three situations. First, if the taxpayer sells or exchanges 
timber that is a capital asset (sec. 1221) or property used in 
the trade or business (sec. 1231), the gain generally is long-
term capital gain; however, if the timber is held for sale to 
customers in the taxpayer's business, the gain will be ordinary 
income. Second, if the taxpayer disposes of the timber with a 
retained economic interest, the gain is eligible for capital 
gain treatment (sec. 631(b)). Third, if the taxpayer cuts 
standing timber, the taxpayer may elect to treat the cutting as 
a sale or exchange eligible for capital gains treatment (sec. 
631(a)).

                           REASONS FOR CHANGE

    The Committee believes that the requirement that the owner 
of timber retain an economic interest in the timber in order to 
obtain capital gain treatment under section 631(b) results in 
poor timber management because the buyer, when cutting and 
removing timber, has no incentive toprotect young or other 
uncut trees because the buyer only pays for the timber that is cut and 
removed. Therefore, the Committee bill eliminates this requirement and 
provides for capital gain treatment under section 631(b) in the case of 
outright sales of timber.

                        EXPLANATION OF PROVISION

    Under the bill, in the case of a sale of timber by the 
owner of the land from which the timber is cut, the requirement 
that a taxpayer retain an economic interest in the timber in 
order to treat gains as capital gain under section 631(b) does 
not apply. Outright sales of timber by the landowner will 
qualify for capital gains treatment in the same manner as sales 
with a retained economic interest qualify under present law, 
except that the usual tax rules relating to the timing of the 
income from the sale of the timber will apply (rather than the 
special rule of section 631(b) treating the disposal as 
occurring on the date the timber is cut).

                             EFFECTIVE DATE

    The provision is effective for sales of timber after the 
date of enactment.

   D. Special Rules for Livestock Sold on Account of Weather-Related 
                               Conditions


(Sec. 204 of the bill and secs. 1033 and 451 of the Code)

                              PRESENT LAW

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