[Senate Report 109-64]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 96
109th Congress                                                   Report
                                 SENATE
 1st Session                                                     109-64

======================================================================



 
               UNITED STATES TAX COURT MODERNIZATION ACT

                                _______
                                

                 April 28, 2005.--Ordered to be printed

                                _______
                                

  Mr. Grassley, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 661]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, to which was referred the bill 
(S. 661) to amend the Internal Revenue Code of 1986 to provide 
for the modernization of the United States Tax Court, and for 
other purposes, having considered the same, reports favorably 
thereon with an amendment in the nature of a substitute and 
recommends that the bill, as amended, do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................2
II. Explanation of the Bill...........................................2
    Title I.--Tax Court Procedure.....................................2
        A. Jurisdiction of Tax Court Over Collection Due Process 
            Cases (sec. 101 of the bill and sec. 6330 of the 
            Code)................................................     2
        B. Authority for Special Trial Judges to Hear and Decide 
            Certain Employment Status Cases (sec. 102 of the bill 
            and sec. 7443A of the Code)..........................     4
        C. Confirmation of Tax Court Authority to Apply Doctrine 
            of Equitable Recoupment (sec. 103 of the bill and 
            sec. 6214 of the Code)...............................     5
        D. Tax Court Filing Fees (sec. 104 of the bill and sec. 
            7451 of the Code)....................................     5
        E. Appointment of Tax Court Employees (sec. 105 of the 
            bill and sec. 7471(a) of the Code)...................     6
        F. Expanded Use of Practice Fees (sec. 106 of the bill 
            and sec. 7475 of the Code)...........................     8
    Title II.--Tax Court Pension and Compensation.....................9
        A. Judges of the Tax Court (secs. 201-207 and 213 of the 
            bill and secs. 7443, 7447, 7448, and 7472 of the 
            Code)................................................     9
        B. Special Trial Judges of the Tax Court (secs. 208-213 
            of the bill and sec. 7448 and new secs. 7443A, 7443B, 
            and 7443C of the Code)...............................    12
III.Budget Effects of the Bill.......................................14

IV. Votes of the Committee...........................................19
 V. Regulatory Impact and Other Matters..............................19
VI. Changes in Existing Law Made by the Bill as Reported.............20

                       I. LEGISLATIVE BACKGROUND


Overview

    The Senate Committee on Finance marked up S. 661, the 
``United States Tax Court Modernization Act,'' on April 19, 
2005, and ordered the bill, with an amendment in the nature of 
a substitute, favorably reported by voice vote.

Activity during the 108th Congress

    During the 108th Congress, the Senate passed a bill, H.R. 
1528 as amended by the Senate (the ``Tax Administration Good 
Government Act''), which contained provisions to address the 
same issues addressed by the current bill. During the 108th 
Congress, the Committee also reported several bills addressing 
the same issues as the current bill: (1) S. 753 (the ``Tax 
Court Modernization Act''), reported May 5, 2003; (2) S. 882 
(the ``Tax Administration Good Government Act''), reported May 
4, 2004; and (3) S. 2424 (the ``National Employee Savings and 
Trust Equity Guarantee Act of 2004''), reported May 14, 2004 
(which contained the Tax Court Pension and Compensation 
provisions). The provisions of the current bill are 
substantially the same as the related provisions contained in 
the bills from the 108th Congress.

                      II. EXPLANATION OF THE BILL


                     TITLE I.--TAX COURT PROCEDURE


     A. Jurisdiction of Tax Court Over Collection Due Process Cases


(Sec. 101 of the bill and sec. 6330 of the Code)

                              PRESENT LAW

    In general, the Internal Revenue Service (``IRS'') is 
required to notify taxpayers that they have a right to a fair 
and impartial hearing before levy may be made on any property 
or right to property.\1\ Similar rules apply with respect to 
liens.\2\ The hearing is held by an impartial officer from the 
IRS Office of Appeals, who is required to issue a determination 
with respect to the issues raised by the taxpayer at the 
hearing. The taxpayer is entitled to appeal that determination 
to a court. The appeal must be brought to the United States Tax 
Court (the ``Tax Court''), unless the Tax Court does not have 
jurisdiction over the underlying tax liability. If that is the 
case, then the appeal must be brought in the district court of 
the United States.\3\ If a court determines that an appeal was 
not made to the correct court, the taxpayer has 30 days after 
such determination to file with the correct court.
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    \1\ Sec. 6330(a). Unless otherwise indicated, all section 
references are to the Internal Revenue Code of 1986, as amended.
    \2\ Sec. 6320.
    \3\ Sec. 6330(d).
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    The Tax Court is established under Article I of the United 
States Constitution \4\ and is a court of limited 
jurisdiction.\5\ The Tax Court only has the jurisdiction that 
is expressly conferred on it by statute.\6\ For example, the 
jurisdiction of the Tax Court includes the authority to 
redetermine the correct amount of an income, estate, or gift 
tax deficiency, to make certain types of declaratory judgments, 
and to determine certain worker classification status issues, 
but does not include jurisdiction over most excise taxes 
imposed by the Internal Revenue Code. Thus, the Tax Court lacks 
jurisdiction over the appeal of a due process hearing relating 
to certain collections matters.
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    \4\ Sec. 7441.
    \5\ Sec. 7442.
    \6\ Sec. 7442.
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                           REASONS FOR CHANGE

    The Tax Court does not have jurisdiction over all of the 
tax issues underlying collection due process cases. For 
example, the jurisdiction of the Tax Court does not extend to 
issues involving most excise taxes. Thus, a taxpayer seeking to 
appeal the collection due process determination must know 
whether the Tax Court or a district court has jurisdiction over 
the underlying tax liability.
    The judicial appeals structure of present law was designed 
in recognition of these jurisdictional limitations; however, in 
many cases the underlying taxes are not involved in determining 
the due process issue. The present-law structure can lead to 
taxpayer confusion over which court is the proper court in 
which to file an appeal. Some believe that this confusion may 
also be used by some taxpayers seeking to delay the collection 
process. Accordingly, the Committee believes that the Tax Court 
should have jurisdiction over all appeals of collection due 
process determinations. The Committee believes that the 
simplification provided by the provision will benefit the 
taxpayers seeking judicial review and benefit the IRS by 
eliminating confusion over which court is the proper venue for 
appeal and will reduce the period of time before judicial 
review. This provision will also eliminate the opportunity to 
use the present-law rules in unintended ways to delay or defeat 
the collection process.

                        EXPLANATION OF PROVISION

    The provision modifies the jurisdiction of the Tax Court by 
providing that all appeals of collection due process 
determinations are to be made to the Tax Court.

                             EFFECTIVE DATE

    The provision applies to determinations made by the IRS 
after the date which is 60 days after the date of enactment.

   B. Authority for Special Trial Judges To Hear and Decide Certain 
                        Employment Status Cases


(Sec. 102 of the bill and sec. 7443A of the Code)

                              PRESENT LAW

    In connection with the audit of any person, if there is an 
actual controversy involving a determination by the IRS as part 
of an examination that (1) one or more individuals performing 
services for that person are employees of that person or (2) 
that person is not entitled to relief under section 530 of the 
Revenue Act of 1978, the Tax Court has jurisdiction to 
determine whether the IRS is correct and the proper amount of 
employment tax under such determination.\7\ Any redetermination 
by the Tax Court has the force and effect of a decision of the 
Tax Court and is reviewable.
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    \7\ Sec. 7436.
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    An election may be made by the taxpayer for small case 
procedures if the amount of the employment taxes in dispute is 
$50,000 or less for each calendar quarter involved.\8\ The 
decision entered under the small case procedure is not 
reviewable in any other court and should not be cited as 
authority.
---------------------------------------------------------------------------
    \8\ Sec. 7436(c).
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    The chief judge of the Tax Court may assign proceedings to 
special trial judges. The Code enumerates certain types of 
proceedings that may be so assigned and may be decided by a 
special trial judge. In addition, the chief judge may designate 
any other proceeding to be heard by a special trial judge.\9\
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    \9\ Sec. 7443A(b) and (c).
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                           REASONS FOR CHANGE

    The Committee believes that it is important for special 
trial judges to preside over and enter decisions in proceedings 
involving a determination of employment status in which the 
amount of employment taxes in dispute is $50,000 or less for 
each calendar quarter. The Committee believes that this 
clarification will improve the operations and internal 
functioning of the Tax Court.

                        EXPLANATION OF PROVISION

    The provision clarifies that the chief judge of the Tax 
Court may assign to special trial judges any employment tax 
cases that are subject to the small case procedure and may 
authorize special trial judges to decide such small tax cases.

                             EFFECTIVE DATE

    The provision is effective for any employment status 
proceeding in the Tax Court with respect to which a decision 
has not become final before the date of enactment.

 C. Confirmation of Tax Court Authority To Apply Doctrine of Equitable 
                               Recoupment


(Sec. 103 of the bill and sec. 6214 of the Code)

                              PRESENT LAW

    Equitable recoupment is a common-law equitable principle 
that permits the defensive use of an otherwise time-barred 
claim to reduce or defeat an opponent's claim if both claims 
arise from the same transaction. U.S. District Courts and the 
U.S. Court of Federal Claims, the two Federal tax refund 
forums, may apply equitable recoupment in deciding tax refund 
cases.\10\ In Estate of Mueller v. Commissioner,\11\ the Court 
of Appeals for the Sixth Circuit held that the Tax Court may 
not apply the doctrine of equitable recoupment. More recently, 
the Court of Appeals for the Ninth Circuit, in Branson v. 
Commissioner,\12\ held that the Tax Court may apply the 
doctrine of equitable recoupment.
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    \10\ See Stone v. White, 301 U.S. 532 (1937); Bull v. United 
States, 295 U.S. 247 (1935).
    \11\ 153 F.3d 302 (6th Cir. 1998), cert. den., 525 U.S. 1140 
(1999).
    \12\ 264 F.3d 904 (9th Cir. 2001), cert. den., 535 U.S. 927 (2002).
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                           REASONS FOR CHANGE

    The conflict among the circuit courts regarding the 
application of the doctrine of equitable recoupment results in 
uncertainty and confusion. For example, the cases of similarly 
situated taxpayers may be resolved differently simply because 
the taxpayers reside in different circuit court jurisdictions. 
The Committee believes that it is important to clarify the 
applicability of the doctrine of equitable recoupment in order 
to eliminate the uncertainty or confusion of differing results 
in differing circuits. The Committee also believes that the 
provision will provide simplification benefits to both 
taxpayers and the IRS.

                        EXPLANATION OF PROVISION

    The provision confirms that the Tax Court may apply the 
principle of equitable recoupment to the same extent that it 
may be applied in Federal civil tax cases by the U.S. District 
Courts or the U.S. Court of Federal Claims. No negative 
inference should be drawn as to whether the Tax Court has the 
authority to continue to apply other equitable principles in 
deciding matters over which it has jurisdiction.

                             EFFECTIVE DATE

    The provision is effective for any action or proceeding in 
the Tax Court with respect to which a decision has not become 
final as of the date of enactment.

                        D. Tax Court Filing Fees


(Sec. 104 of the bill and sec. 7451 of the Code)

                              PRESENT LAW

    The Tax Court is authorized to impose a fee of up to $60 
for the filing of any petition for the redetermination of a 
deficiency or for declaratory judgments relating to the status 
and classification of section 501(c)(3) organizations, the 
judicial review of final partnership administrative 
adjustments, and the judicial review of partnership items if an 
administrative adjustment request is not allowed in full.\13\ 
The statute does not specifically authorize the Tax Court to 
impose a filing fee for the filing of a petition for review of 
the IRS's failure to abate interest or for failure to award 
administrative costs and other areas of jurisdiction for which 
a petition may be filed. The practice of the Tax Court is to 
impose a $60 filing fee in all cases commenced by petition.\14\
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    \13\ Sec. 7451.
    \14\ See Rule 20(a) of the Tax Court Rules of Practice and 
Procedure.
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                           REASONS FOR CHANGE

    The Committee believes it is appropriate to clarify that 
the Tax Court filing fee applies to any case commenced by the 
filing of a petition.

                        EXPLANATION OF PROVISION

    The provision clarifies that the Tax Court is authorized to 
charge a filing fee of up to $60 in all cases commenced by the 
filing of a petition. No negative inference should be drawn as 
to whether the Tax Court has the authority under present law to 
impose a filing fee for any case commenced by the filing of a 
petition.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                 E. Appointment of Tax Court Employees


(Sec. 105 of the bill and sec. 7471(a) of the Code)

                              PRESENT LAW

    The Tax Court is a legislative court established by the 
Congress pursuant to Article I of the U.S. Constitution (an 
``Article I'' court).\15\ The Tax Court is authorized to 
appoint employees, subject to the rules applicable to 
employment with the Executive Branch of the Federal Government 
(generally referred to as ``competitive service''), as 
administered by the Office of Personnel Management.\16\
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    \15\ Sec. 7441.
    \16\ Sec. 7471.
---------------------------------------------------------------------------
    Employment with the Federal Executive Branch is governed by 
certain general statutory principles, such as recruitment of 
qualified individuals, fair and equitable treatment of 
employees and applicants, maintenance of high standards of 
employee conduct, and protection of employees against arbitrary 
action. The rules for employment in the Federal Executive 
Branch address various aspects of such employment, including: 
(1) procedures for the appointment of employees in the 
competitive service, including preferences for certain 
individuals (e.g., veterans); (2) compensation, benefits, and 
leave programs for employees; (3) appraisals of employee 
performance; (4) disciplinary actions; and (5) employee rights, 
including appeal rights. In addition, employees are protected 
from certain personnel practices (referred to as ``prohibited 
personnel practices''), such as discrimination on the basis of 
race, color, religion, age, sex, national origin, political 
affiliation, marital status, or handicapping condition.

                           REASONS FOR CHANGE

    The Tax Court was established as an Article I court in part 
because of its need for independence from the Executive Branch 
and its responsibility for reviewing determinations of a 
Federal Executive Branch agency (i.e., the Internal Revenue 
Service).\17\ Accordingly, the Committee believes that the Tax 
Court should have the authority to establish its own personnel 
system, rather than being subject to the rules administered by 
the Federal Executive Branch. Similar authority has previously 
been provided to other Article I courts and to courts 
established under Article III of the U.S. Constitution 
(``Article III'' courts). Currently, the Tax Court is the only 
Federal court (Article I or III) that does not have its own 
personnel system. Authority to establish its own personnel 
system will also provide the Tax Court with greater flexibility 
in meeting its staffing needs, thus enabling the court to 
operate more effectively. The Committee also believes that a 
personnel system established by the Tax Court should be 
consistent with the general principles that govern other 
employment with the Federal Government and should provide 
certain protections to employees.
---------------------------------------------------------------------------
    \17\ See, e.g., S. Rep. No. 91-552, at 302 (1969).
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                        EXPLANATION OF PROVISION

    The provision extends to the Tax Court authority to 
establish its own personnel management system. Any personnel 
management system adopted by the Tax Court must: (1) include 
the merit system principles that govern employment with the 
Federal Executive Branch; (2) prohibit personnel practices that 
are prohibited in the Federal Executive Branch; and (3) in the 
case of an individual eligible for preference for employment in 
the Federal Executive Branch, provide preference for that 
individual in a manner and to an extent consistent with 
preference in the Federal Executive Branch.
    The provision requires the Tax Court to prohibit 
discrimination on the basis of race, color, religion, age, sex, 
national origin, political affiliation, marital status, or 
handicapping condition. The Tax Court is also required to 
promulgate procedures for resolving complaints of 
discrimination by employees and applicants for employment.
    The provision allows the Tax Court to appoint a clerk 
without regard to the Federal Executive Branch rules regarding 
appointments in the competitive service. Under the provision, 
the clerk serves at the pleasure of the Tax Court.
    The provision also allows the Tax Court to appoint other 
necessary employees without regard to the Federal Executive 
Branch rules regarding appointments in the competitive service. 
Under the provision, these deputies and employees are subject 
to removal by the Tax Court.
    The provision allows judges and special trial judges of the 
Tax Court to appoint law clerks and secretaries, in such 
numbers as the Tax Court may approve, without regard to the 
Federal Executive Branch rules regarding appointments in the 
competitive service. Under the provision, a law clerk or 
secretary serves at the pleasure of the appointing judge.
    The provision exempts law clerks from the sick leave and 
annual leave provisions applicable to employees of the Federal 
Executive Branch. Any unused sick or annual leave to the credit 
of a law clerk as of the effective date of the provision 
remains credited to the individual and is available to the 
individual upon separation from the Federal Government, or upon 
transfer to a position subject to such sick leave and annual 
leave provisions.
    The provision allows the Tax Court to fix and adjust the 
compensation of the clerk and other employees without regard to 
the Federal Executive Branch rules regarding employee 
classifications and pay rates. To the maximum extent feasible, 
Tax Court employees are to be compensated at rates consistent 
with those of employees holding comparable positions in the 
Federal Judicial Branch. The Tax Court may also establish 
programs for employee evaluations, premium pay, and resolution 
of employee grievances.
    In the case of an individual who is an employee of the Tax 
Court on the day before the effective date of the provision, 
the provision preserves certain rights that the employee is 
entitled to as of that day. The provision preserves the right 
to: (1) appeal a reduction in grade or removal; (2) appeal an 
adverse action; (3) appeal a prohibited personnel practice; (4) 
make an allegation of a prohibited personnel practice; or (5) 
file an employment discrimination appeal. These rights are 
preserved for as long as the individual remains an employee of 
the Tax Court.
    Under the provision, a Tax Court employee who completes at 
least one year of continuous service under a nontemporary 
appointment with the Tax Court acquires competitive service 
status for appointment to any position in the Federal Executive 
Branch competitive service for which the employee possesses the 
required qualifications.
    The provision also allows the Tax Court to procure the 
services of experts and consultants in accordance with Federal 
Executive Branch rules.

                             EFFECTIVE DATE

    The provision is effective on the date that the Tax Court 
adopts a personnel management system after the date of 
enactment.

                    F. Expanded Use of Practice Fees


(Sec. 106 of the bill and sec. 7475 of the Code)

                              PRESENT LAW

    The Tax Court is authorized to impose on practitioners 
admitted to practice before the Tax Court a fee of up to $30 
per year.\18\ These fees are to be used to employ independent 
counsel to pursue disciplinary matters.
---------------------------------------------------------------------------
    \18\ Sec. 7475.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee understands that many pro se taxpayers are 
not familiar with Tax Court procedures and applicable legal 
requirements. The Committee believes it is beneficial for Tax 
Court fees imposed on practitioners also to be available to 
provide services to pro se taxpayers.

                        EXPLANATION OF PROVISION

    The provision provides that Tax Court fees imposed on 
practitioners also are available to provide services to pro se 
taxpayers.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

             TITLE II.--TAX COURT PENSION AND COMPENSATION


                       A. Judges of the Tax Court


(Secs. 201-207 and 213 of the bill and secs. 7443, 7447, 7448, and 7472 
        of the Code)

                              PRESENT LAW

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution (an ``Article I'' 
court).\19\ The salary of a Tax Court judge is the same salary 
as received by a United States District Court (``District 
Court'') judge.\20\ Present law also provides Tax Court judges 
with some benefits that correspond to benefits provided to 
District Court judges, including a specific retirement program 
for Tax Court judges.\21\
---------------------------------------------------------------------------
    \19\ Sec. 7441.
    \20\ Sec. 7443(c).
    \21\ Sec. 7447.
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    Under the retirement program, a Tax Court judge may elect 
to receive retirement pay from the Tax Court in lieu of 
benefits under another Federal retirement program. A Tax Court 
judge may also elect to participate in a plan providing annuity 
benefits for the judge's surviving spouse and dependent 
children (the ``survivors' annuity plan'').\22\ Generally, 
benefits under the survivors' annuity plan are payable only if 
the judge has performed at least five years of service. Cost of 
living increases in benefits under the survivors' annuity plan 
are generally based on increases in pay for active judges.
---------------------------------------------------------------------------
    \22\ Sec. 7448.
---------------------------------------------------------------------------
    Tax Court judges participate in the Federal Employees Group 
Life Insurance program (the ``FEGLI'' program). Retired Tax 
Court judges are eligible to participate in the FEGLI program 
as the result of an administrative determination of their 
eligibility, rather than a specific statutory provision.
    Tax Court judges are not covered by the leave system for 
Federal Executive Branch employees. As a result, an individual 
who works in the Federal Executive Branch before being 
appointed to the Tax Court does not continue to accrue annual 
leave under the same leave program and may not use leave 
accrued prior to his or her appointment to the Tax Court.
    Tax Court judges are not eligible to participate in the 
Thrift Savings Plan.
    Under the retirement program for Tax Court judges, retired 
judges generally receive retired pay equal to the rate of 
salary of an active judge and must be available for recall to 
perform judicial duties as needed by the court for up to 90 
days a year (unless the judge consentsto more). However, 
retired judges may elect to freeze the amount of their retired pay, and 
those who do so are not available for recall.
    Retired Tax Court judges on recall are subject to the 
limitations on outside earned income that apply to active 
Federal employees under the Ethics in Government Act of 1978. 
However, retired District Court judges on recall may receive 
compensation for teaching without regard to the limitations on 
outside earned income. Retired Tax Court judges who elect to 
freeze the amount of their retired pay (thus making themselves 
unavailable for recall) are not subject to the limitations on 
outside earned income.

                           REASONS FOR CHANGE

    Tax Court judges receive compensation at the same rate as 
District Court judges. In addition, the benefit programs for 
Tax Court judges are intended to accord with similar programs 
applicable to District Court judges.\23\ However, subsequent 
legislative changes in the benefits provided to District Court 
judges and judges in certain other Article I courts have not 
applied to Tax Court judges, thus creating disparities between 
the treatment of Tax Court judges and the treatment of other 
Federal judges.
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    \23\ See, e.g., S. Rep. No. 91-552, at 303 (1969).
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    The Committee believes that, as a general matter, parity 
should exist between the benefits provided to Tax Court judges 
and those provided to District Court judges. Thus, the benefits 
provided to Tax Court judges should be updated to reflect 
benefits currently provided to District Court judges.
    In addition, the Committee is concerned that certain 
aspects of the present-law rules relating to Tax Court judges 
may be inequitable in that Tax Court judges are treated less 
favorably than District Court judges and judges in certain 
other Article I courts. With respect to increases in FEGLI 
premiums for Tax Court judges age 65 or older, the Committee 
believes that the Tax Court should be authorized to pay for 
such increases, similar to authority in other Federal courts. 
In addition, because Tax Court judges are not covered by the 
leave system for Federal Executive Branch employees, a judge 
who has unused accrued annual leave for service with the 
Federal Executive Branch should be able to receive a lump sum 
payment for such accrued annual leave. Moreover, the Committee 
believes that exempting from the limitations on outside earned 
income compensation received by retired Tax Court judges for 
teaching will encourage such judges to remain available for 
recall by the court.

                        EXPLANATION OF PROVISION

Survivor annuities for assassinated judges

    Under the provision, benefits under the survivors' annuity 
plan are payable if a Tax Court judge is assassinated before 
the judge has performed five years of service.

Cost-of-living adjustments for survivor annuities

    The provision provides that cost of living increases in 
benefits under the survivors' annuity plan are generally based 
on cost of living increases in benefits paid under the Civil 
Service Retirement System.

Life insurance coverage

    Under the provision, a judge or retired judge of the Tax 
Court is deemed to be an employee continuing in active 
employment for purposes of participation in the FEGLI program. 
In addition, in the case of a Tax Court judge age 65 or over, 
the Tax Court is authorized to pay on behalf of the judge any 
increase in employee premiums under the FEGLI program that 
occur after April 24, 1999,\24\ including expenses generated by 
such payment, as authorized by the chief judge of the Tax Court 
in a manner consistent with payments authorized by the Judicial 
Conference of the United States (i.e., the body with policy-
making authority over the administration of the courts of the 
Federal Judicial Branch).
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    \24\ This date relates to changes in the FEGLI program, including 
changes to premium rates to reflect employees' ages.
---------------------------------------------------------------------------

Accrued annual leave

    Under the provision, in the case of a judge who is employed 
by the Federal Executive Branch before appointment to the Tax 
Court, the judge is entitled to receive a lump sum payment for 
the balance of his or her accrued annual leave on appointment 
to the Tax Court.

Thrift Savings Plan participation

    Under the provision, Tax Court judges are permitted to 
participate in the Thrift Savings Plan as provided under the 
Thrift Savings Plan. A Tax Court judge is not eligible for 
agency contributions to the Thrift Savings Plan.

Exemption for teaching compensation from outside earned income 
        limitations

    Under the provision, compensation earned by a retired Tax 
Court judge for teaching is not treated as outside earned 
income for purposes of the limitations under the Ethics in 
Government Act of 1978.

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment, 
except that: (1) the provision relating to cost of living 
increases in benefits under the survivors' annuity plan applies 
with respect to increases in Civil Service Retirement benefits 
taking effect after the date of enactment; (2) the provision 
relating to FEGLI coverage applies to any individual serving as 
a Tax Court judge or any retired Tax Court judge on or after 
the date of enactment; (3) the provision relating to payment of 
accrued annual leave applies to any Tax Court judge with an 
outstanding leave balance as of the date of enactment and to 
any individual appointed to serve as a Tax Court judge after 
such date; and (4) the provision relating to teaching 
compensation of a retired Tax Court judge applies to any 
individual serving as a retired Tax Court judge on or after the 
date of enactment.\25\
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    \25\ With respect to participation in the Thrift Savings Plan, 
recent legislation permits elections under the Thrift Savings Plan to 
be made at any time, rather than only during open seasons. Thus, Tax 
Court judges will be able to participate in the Thrift Savings Plan as 
of the date of enactment.
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                B. Special Trial Judges of the Tax Court


(Secs. 208-213 of the bill and sec. 7448 and new secs. 7443A, 7443B, 
        and 7443C of the Code)

                              PRESENT LAW

    The Tax Court is established by the Congress pursuant to 
Article I of the U.S. Constitution.\26\ The chief judge of the 
Tax Court may appoint special trial judges to handle certain 
cases.\27\ Special trial judges serve for an indefinite term. 
Special trial judges receive a salary of 90 percent of the 
salary of a Tax Court judge and are generally covered by the 
benefit programs that apply to Federal Executive Branch 
employees, including the Civil Service Retirement System or the 
Federal Employees' Retirement System.
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    \26\ Sec. 7441.
    \27\ Sec. 7443A.
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                           REASONS FOR CHANGE

    Special trial judges of the Tax Court perform a role 
similar to that of magistrate judges in courts established 
under Article III of the U.S. Constitution (``Article III'' 
courts). However, disparities exist between the positions of 
magistrate judges of Article III courts and special trial 
judges of the Tax Court. For example, magistrate judges of 
Article III courts are appointed for a specific term, are 
subject to removal only in limited circumstances, and are 
eligible for coverage under special retirement and survivor 
benefit programs. The Committee believes that special trial 
judges of the Tax Court and magistrate judges of Article III 
courts should receive comparable treatment as to the status of 
the position, salary, and benefits. This will better enable the 
Tax Court to attract and retain qualified persons to serve in 
this capacity.

                        EXPLANATION OF PROVISION

Magistrate judges of the Tax Court

    Under the provision, the position of special trial judge of 
the Tax Court is renamed as magistrate judge of the Tax Court. 
Magistrate judges are appointed (or reappointed) to serve for 
eight year terms and are subject to removal in limited 
circumstances.
    Under the provision, a magistrate judge receives a salary 
of 92 percent of the salary of a Tax Court judge.
    The provision exempts magistrate judges from the leave 
program that applies to employees of the Federal Executive 
Branch and provides rules for individuals who are subject to 
such leave program before becoming exempt.

Survivors' annuity plan

    Under the provision, magistrate judges of the Tax Court may 
elect to participate in the survivors' annuity plan for Tax 
Court judges. An election to participate in the survivors' 
annuity plan must be filed not later than the latest of: (1) 
twelve months after the date of enactment of the provision; (2) 
six months after the date the judge takes office; or (3) six 
months after the date the judge marries.

Retirement annuity program for magistrate judges

    The provision establishes a new retirement annuity program 
for magistrate judges of the Tax Court, under which a 
magistrate judge may elect to receive a retirement annuity from 
the Tax Court in lieu of benefits under another Federal 
retirement program. A magistrate judge may elect to be covered 
by the retirement program within five years of appointment or 
five years of date of enactment. A magistrate judge who elects 
to be covered by the retirement program generally receives a 
refund of contributions (with interest) made to the Civil 
Service Retirement System or the Federal Employees' Retirement 
System.
    A magistrate judge may retire at age 65 with 14 years of 
service and receive an annuity equal to his or her salary at 
the time of retirement. For this purpose, service may include 
service performed as a special trial judge or a magistrate 
judge, provided the service is performed no earlier than 9\1/2\ 
years before the date of enactment of the provision. The 
provision also provides for payment of a reduced annuity in the 
case of a magistrate judge with at least eight years of service 
or in the case of disability or failure to be reappointed.
    A magistrate judge receiving a retirement annuity is 
entitled to cost of living increases based on cost of living 
increases in benefits paid under the Civil Service Retirement 
System. However, such an increase cannot cause the retirement 
annuity to exceed the current salary of a magistrate judge.
    Contributions of one percent of salary are withheld from 
the salary of a magistrate judge who elects to participate in 
the retirement annuity program. Such contributions must be made 
also with respect to prior service for which the magistrate 
judge elects credit under the retirement annuity program. No 
contributions are required after 14 years of service. A lump 
sum refund of the magistrate judge's contributions (with 
interest) is made if no annuity is payable, for example, if the 
magistrate judge dies before retirement.
    A magistrate judge's right to a retirement annuity is 
generally suspended or reduced in the case of employment 
outside the Tax Court.
    The provision includes rules under which annuity payments 
may be made to a person other than the magistrate judge in 
certain circumstances, such as divorce or legal separation, 
under a court decree, a court order, or a court-approved 
property settlement.
    The provision establishes the Tax Court Judicial Officers' 
Retirement Fund (the ``Fund''). Amounts in the Fund are 
authorized to be appropriated for the payment of annuities, 
refunds, and other payments under the retirement annuity 
program. Contributions withheld from a magistrate judge's 
salary are deposited in the Fund. In addition, the provision 
authorizes to be appropriated to the Fund amounts required to 
reduce the Fund's unfunded liability to zero. For this purpose, 
the Fund's unfunded liability means the estimated excess, 
actuarially determined on an annual basis, of the present value 
of benefits payable from the Fund over the sum of (1) the 
present value of contributions to be withheld from the future 
salary of the magistrate judges and (2) the balance in the Fund 
as of the date the unfunded liability is determined.
    Under the provision, a magistrate judge who elects to 
participate in the retirement annuity program is also permitted 
to participate in the Thrift Savings Plan. Such a magistrate 
judge is not eligible for agency contributions to the Thrift 
Savings Plan.

Retirement annuity rule for incumbent magistrate judges

    The provision provides a transition rule for magistrate 
judges in active service on the date of enactment of the 
provision. Under the transition rule, such a magistrate judge 
is entitled to an annuity under the Civil Service Retirement 
System or the Federal Employees' Retirement System based on 
prior service that is not credited under the magistrate judges' 
retirement annuity program. If the magistrate judge made 
contributions to the Civil Service Retirement System or the 
Federal Employees' Retirement System with respect to service 
that is credited under the magistrate judges' retirement 
annuity program, such contributions are refunded (with 
interest).
    A magistrate judge who elects the transition rule is also 
entitled to the annuity payable under the magistrate judges' 
retirement program in the case of retirement with at least 
eight years of service or on failure to be reappointed. This 
annuity is based on service as a magistrate judge or special 
trial judge of the Tax Court that is performed no earlier than 
9\1/2\ years before the date of enactment of the provision and 
for which the magistrate judge makes contributions of one 
percent of salary.

Recall of retired magistrate judges

    The provision provides rules under which a retired 
magistrate judge may be recalled to perform judicial duties for 
up to 90 days a year.

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the provisions of 
the bill as reported.


                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the revenue provisions of the bill 
involve new or increased budget authority with respect to the 
Tax Court Judicial Officers' Retirement Fund.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue reduction provided for by the 
bill involves increased tax expenditures (see revenue table in 
Part III.A, above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 28, 2005.
Hon. Charles E. Grassley,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 661, the Tax Court 
Modernization Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Geoffrey 
Gerhardt.
            Sincerely,
                                      Elizabeth M. Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

S. 661--Tax Court Modernization Act

    Summary: S. 661 would establish a new retirement program 
for certain employees of the U.S. Tax Court. The bill would 
give all current and future special trial judges of the Tax 
Court the option of being covered by this new retirement 
program in lieu of another federal retirement system. The 
program established under S. 661 would provide retirement and 
survivor benefits similar to those accrued under retirement 
programs that cover regular Tax Court judges. Retirement 
benefits for regular Tax Court judges are more generous than 
those under the Civil Service Retirement System (CSRS) and the 
Federal Employees' Retirement System (FERS).
    CBO estimates that enacting the bill would increase direct 
spending by $2 million in 2006 and by $4 million over the 2006-
2015 period. CBO and the Joint Committee on Taxation (JCT) 
estimate S. 661 would decrease revenue by about $1 million over 
the 2006-2015 period--but by less than $500,000 in each year. 
In addition, implementing the bill would have discretionary 
costs of approximately $1 million in 2006 and $13 million over 
the 2006-2015 period, assuming the appropriation of the 
necessary funds.
    JCT has reviewed the tax provisions of S. 661 and has 
determined they contain no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA). 
CBO has reviewed the nontax provisions of the bill and 
determined that they contain no intergovernmental or private 
sector mandates as defined in UMRA and would have no 
significant impact on the budgets of state, local, or tribal 
governments.
    Estimated cost to the Federal Government: The estimated 
bugetary impact of S. 661 is shown in the following table. The 
costs of this legislation fall within budget function 600 
(income security).

----------------------------------------------------------------------------------------------------------------
                                                          By fiscal year, in millions of dollars--
                                           ---------------------------------------------------------------------
                                             2006   2007   2008   2009   2010   2011   2012   2013   2014   2015
----------------------------------------------------------------------------------------------------------------
                                         CHANGES IN DIRECT SPENDING \1\

Estimated Budget Authority................      2      *      *      *      *      *      *      *      *      *
Estimated Outlays.........................      2      *      *      *      *      *      *      *      *      *

                                  CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization level.............      1      1      1      1      1      1      1      1      1      1
Estimated Outlays.........................      1      1      1      1      1      1      1      1      1      1
----------------------------------------------------------------------------------------------------------------
\1\ Enacting the bill also would affect revenues, but those effects would be less than $500,000 in each year.

 Note.--* = less than $500,000.

    Basis of estimate: For this estimate, CBO assumes the 
legislation will be enacted in September 2005.

Direct spending

    S. 661 would establish a new retirement program for special 
judges of the U.S. Tax Court and rename those positions to be 
magistrate judges of the Tax Court. Under current law, most 
special trial judges participate in either CSRS or FERS, 
depending on when they first entered government service. The 
bill would provide all current and future magistrate judges the 
option of being covered by the new retirement program or 
continuing their coverage under CSRS or FERS. Information 
provided by the U.S. Tax Court indicate that seven special 
trial judges currently work for the court and that these judges 
have been employed by the government for an average of 32 
years. All of these special trial judges are covered under CSRS 
and earn about $150,000 annually.
     Current or newly appointed judges who opt to be covered by 
the new retirement program would be entitled to refunds of 
employee contributions made to either CSRS or FERS. The 
employee contribution rate for most workers covered by CSRS is 
7 percent, while the rate for FERS is 0.8 percent. CBO assumes 
that all of the special judges employed by the court would 
elect to have their retirement contributions refunded and be 
covered by the new retirement program. Based on this assumption 
CBO estimates that enacting S. 661 wouldincrease direct 
spending for refunds of employee contributions by $2 million in 2006 
and by less than $75,000 for each subsequent year.
     Both CSRS and FERS are defined benefit pension programs 
that provide retirement annuities based on the final years of 
salary and amount of creditable service. For workers with the 
age and service history of the current special judges of the 
Tax Court, CSRS replaces about 60 percent of a potential 
retiree's salary and FERS replaces about 30 percent, although 
those in CSRS do not earn Social Security credits while those 
in FERS do. The new retirement program for special trial 
judges, like that for regular Tax Court judges, would replace 
100 percent of a judge's final salary upon retirement. CBO 
estimates that the difference between what these judges would 
have gotten under CSRS and what they would get under the new 
retirement program would increase federal spending by less than 
$500,000 annually during the 2006-2015 period, but total a 
little more than $1 million over the 10-year period.
    Section 106 of the bill would allow the tax court to use 
fees collected from attorneys before the court to pay for 
services for taxpayers who represent themselves. Under current 
law, such fees may only be used to employ independent counsel 
to pursue disciplinary matters. Based on information from the 
Tax Court, CBO estimates that enacting section 106 would 
increase direct spending from the fund in the first few years 
of the period. However, such increases would not be 
significant.
    S. 661 also contains several other proposals that could 
have an effect on direct spending. These include provisions to 
provide survivor annuities for assassinated Tax Court judges 
and cost-of-living adjustments for survivor annuities. CBO 
estimates these provisions would increase federal spending by 
less than $500,000 annually.

Revenues

    The bill would require that judges who elect to be covered 
by the new retirement program contribute 1 percent of their 
salary toward the program. This would reduce overall employee 
retirement contributions since the rate for CSRS employees is 7 
percent of salary. Judges also would have to make a lump-sum 
contribution--at 1 percent of salary--for previous years they 
worked for the court equal to what they would have contributed 
if the new retirement program had been in existence. CBO 
estimates these changes in employee contributions would have a 
negligible effect on receipts.
    S. 661 also would make several changes to existing Tax 
Court procedure and modify laws relating to Tax Court pensions 
and compensation. Title I of the bill would expand filing fees 
to include petition cases and expand use of practice fees to 
include taxpayers who choose to represent themselves pro se 
taxpayers. In addition, title I would provide the Tax Court 
with jurisdiction over all appeals of collection due process 
determinations. JCT estimates that these provisions would have 
a negligible effect on federal revenues. Title II would allow 
Tax Court judges to participate in the Thrift Savings Plan, 
which JCT estimates would decrease governmental receipts by 
about $1 million over the 2006-2015 period.

Spending subject to appropriation

    S. 661 also would require that the Secretary of the 
Treasury establish a new trust fund for the new retirement 
program. This fund, to be called the Tax Court Judicial 
Officers' Retirement Fund, would receive agency and employee 
contributions and payout benefits to retirees and survivors. 
The bill specifies that the Tax Court would make adequate 
contributions to eliminate the program's unfunded liability, 
taking employee contributions into account. Information from 
the Tax Court indicates that this payment would amount to about 
$1 million annually during the 2006-2015 period, subject to the 
availability of appropriated funds.
    In addition, the bill would allow those employed by the 
Federal Executive Service before appointment to the Tax Court 
the right to collect a lump-sum payment for all unused annual 
leave. It would also change eligibility standards for Tax Court 
judges under the Federal Employees' Group Life Insurance 
program. CBO estimates that these provisions would have a 
negligible effect on outlays.
    In total, CBO estimates S. 661 would increase spending 
subject to appropriation by a little more than $1 million 
annually and $13 million over the 2006-2015 period.
    Intergovernmental and private-sector impact: JCT has 
reviewed the tax provisions of S. 661 and has determined they 
contain no intergovernmental or private-sector mandates as 
defined in UMRA. CBO has reviewed the nontax provisions of the 
bill and determined that they contain no intergovernmental or 
private-sector mandates as defined in UMRA and would have no 
significant impact on the budgets of state, local, or tribal 
governments.
    Estimate prepared by: Federal spending: Geoffrey Gerhardt; 
Federal Revenues: Annabelle Bartsch; Impact on State, Local, 
and Tribal Governments: Leo Lex; and Impact on the Private 
Sector: Meena Fernandes.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the votes taken on the Committee's consideration of 
the bill.

Motion to report the bill

    The bill as amended was ordered favorably reported by voice 
vote, a majority and quorum being present, on April 19, 2005.

Votes on amendments

    The amendment in the nature of a substitute was passed by 
voice vote. No other amendments were offered and voted upon.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill.

Impact on individuals and businesses

    The bill includes provisions relating to the jurisdiction 
and procedures of the Tax Court relating to taxpayer appeals of 
collection due process determinations, employment status cases, 
application of the principle of equitable recoupment, authority 
to charge filing fees, and the use of practitioner fees. The 
bill also gives the Tax Court the authority to establish its 
own personnel system, makes changes to the benefit programs and 
outside compensation limitations for Tax Court judges, renames 
the position of special trial judge of the Tax Court as 
magistrate judge of the Tax Court, and provides new 
compensation and benefits rules for magistrate judges. The 
provisions of the bill are not expected to impose additional 
administrative requirements or regulatory burdens on 
individuals or businesses.

Impact on personal privacy and paperwork

    The provisions of the bill do not impact personal privacy.
    The provisions of the bill do not impose increased 
paperwork burdens on individuals.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the revenue provisions of 
the bill do not contain Federal mandates on the private sector. 
The Committee has determined that the revenue provisions of the 
bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the IRS Reform Act) requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
(the Code) and has widespread applicability to individuals or 
small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Code and that have ``widespread 
applicability'' to individuals or small businesses.

        VI. CHANGES IN EXISTING LAW MADE BY THE BILL AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  
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