Full text of Press Releases of the United States Department of the Treasury : Volume 170

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JUN 1 6 1972

TREASURY DEPARTMENT

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JUN 1 6 1972

TREASURY DEPARTMENT

Department 01 the TREASURY
IASHINGTON. O.C. 20220

TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

August 3, 1970

TWO NAMED TO TREASURY TAX POSTS
Treasury Secretary David M. Kennedy today announced the
appointments of John E. Chapoton, to be Deputy Tax Legislative
Counsel, and Jerry L. Oppenheimer, to be Associate Tax
Legislative Counsel.
Both appointees will assist Meade Whitaker, Tax
Legislative Counsel in carrying out the responsibilities of
that office. Mr. Chapoton succeeds Daniel I. Halperin, who
has left the Treasury to teach at the University of
Pennsylvania Law School. Mr. Oppenheimer succeeds
Mr. Chapoton, who has served as Associate Tax Legislative
Counsel.
Messrs. Whitaker, Chapoton and Oppenheimer are
responsible for domestic tax legislative matters under the
direction of Assistant Secretary for Tax Policy, Edwin S.
Cohen.
Mr. Chapoton, 34, is a native of Galveston, Texas. He
attended Washington and Lee University in Lexington,
Virginia and the University of Texas, Austin, Texas, receiving
his BBA degree, with honors, from the University of Texas in
1958. He received his LL.B. degree, with honors, from the
University's Law School in 1960. While at the University he
was an editor of the Texas Law Review and a member of the
Order of the Coif, a legal honor fraternity. After law
school, Mr. Chapoton was on Active Duty with the U.S. Army
for one year. He then joined the Houston firm of Andrews,
Kurth, Campbell and Jones, where he practiced law until his
appointment to the Treasury Department, May 1969.
Mr. Chapoton is married to the former Sarah Eastham, of
Houston. They have two children and make their home in
Washington.
(OVER)
K-463

- 2 -

Mr. Oppenheimer, 33, is a native of Birmingham, Alabama.
He attended the University of North Carolina at Chapel Hill,
receiving his BS degree in Business Administration in 1958.
He received his LL.B. degree from the Law School of the
University of Virginia in 1961. While at the University he was
an editor of the Virginia Law Review and a member of the Order
of the Coif, a legal honor fraternity.
After law school, Mr. Oppenheimer joined the Washington,D.C.
firm of Covington and Burling, where he practiced law until
he joined the Treasury Department in 1969.
Mr. Oppenheimer is married to the former Joan Harris
Chadwick-Collins of Washington, D. C. They have two
children and make their home in Washington, D. C.

000

Dtportmentof the
_MINGTON. D.C. 20220

TREASURY
tllEPHONE W04-2041

FOR RELEASE IN AM'S
OF TUESDAY, AUGUST 4,1970

August 3, 1970

TREASURY ANNOUNCES PROPOSED REGULATIONS
ON CHARITABLE REMAINDER TRUSTS
The Treasury Department announced today that it has
sent to the Federal Register for publication on August 5
tentative Income Tax Regulations under section 664 of the
Internal Revenue Code of 1954, relating to charitable remainder trusts, which was added by the Tax Reform Act of
1969.
Section 664 defines two new types of trusts -- charitable remainder annuity trusts and charitable remainder
unitrusts -- and provides r~les under which deductions are
allowable for income, estate, and gift tax purposes for
gifts of remainder interests in property to charities.
Such gifts are a major source of philanthropic support for
educational, religious, and other publicly-supported charitable institutions. The publication of the proposed regulations should help resolve uncertainties as to the tax
status of such gifts and should permit donors to proceed with
gifts that may have been delayed pending clarification of
their status.
Prior to final adoption of the proposed regulations,
the Treasury will give consideration to any comments or
suggestions pertaining to them which are submitted in
writing to the Commissioner of Internal Revenue,
Attention: CC:LR:T, Washington, D.C. 20224, within 30
days from the date of publication of the Notice in the
Federal Register.

000

DeDortmentof the
HINBTON. D.C. 20220

TREASURY
TELEPHONE

ADVANCE FOR RELEASE _y~'

W04~2041

3 P. M.

EDT, TUESDAY, AUGUST 4

REMARKS OF THE HONORABLE JOHN R. PIITTY
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
BEFORE THE AMERICAN CHAMBER OF COMMERCE OF
MEXICO, HILTON HOTEL, MEXICO CITY
TUESDAY, AUGUST 4, 1970

Mexico occupies a special place in the Latin American
economic relations of the United States. It seems fair to
say also that you, the members of the American Chamber of
Comma:"ce in Mexico City, occupy a special place within that
economic relationship. You are a vital part of the most
impressive and sustained economic growth performance in
Latin America. I am happy to have the opportunity today
to learn more about that growth experience, from your
perspective as participants. At the same time I would
like to sketch, from my perspective in Washington, some
thoughts about U.S.-Latin American trade and payments
relationships that are relevant to a better understanding
of economic relations within our hemisphere.
The first point I would make concerns the pattern
of U.S.-Latin American trade over the past decade or so.
I am afraid that much that is said on this subject assumes,
perhaps unconsciously, that the hemisphere trade accounts
always run heavily in favor of the United States. Contrary
to this widespread belief, the United States has not had a
large and persistent trade surplus with Latin America.
While the situation obviously varies from country to country and from year to year, the aggregate picture at first
glance appears to be of a normally modest U.S. trade
surplus with the 19 Latin American Republics. But this
surplus disappears in most of the years of the past decade
when account is taken of the fact that about $200 million

- 2 -

per year of oil recorded as coming from the Netherlands
Antilles, where it is refined, is in fact Venezuelan oil.
When this adjustment is made in our trade figures, it
turns out that the merchandise trade balance is normally
in favor of Latin America. In fact, Latin America sold
over $450 million more. to the United States than the
United States sold to Latin America during the period
1961-1969. Only in 19ffi and 1969 -- years of relative
prosperity for Latin America -- did the U.S. have annual
trade surpluses in excess of $100 million. There are
many arguments for emphasizing improved access to Latin
America to the markets of industrial nations, but there
is not included among these reasons a Latin American
trade deficit with us.
Despite the fact that our trade in goods with Latin
America has not been characterized by major ~balances in
favor of the United States, the commodity composition of
that trade has still not been altogether satisfactory
from the Latin American standpoint. Latin America's
exports continue to consist very heavily of primary products. Even though manufactured exports from Latin
America expanded more than three times as fast as exports
of primary products during the period 1960-1967, such
manufactured products still only am ounted to 15% of
exports in 1967.
What will be the shape of our trade patterns during
the 1970's? To answer this we need better analysis of
the long term, qualitative factors at work in Latin
Americaneconomies and in the U.S. economy. The case of
Mexico illustrates the possibilities for fairly rapid
change in the character of trade between the United
States and Latin America and in directions favorable to
Latin American development. The economies of the U.S o
and of Mexico today are not the same as they were in
the early 60's or as they will be at the end of the
1970's. It is natural that trade patternsneflect the
ways in which they are changing.

- 3 -

For example, let us take the major trade categories
of chemicals, non-food manufactured goods, machinery and
transportation.equipment, and miscellaneous manufactures
(i.e., Sections 5-8 of the Standard International Trade
Classification). These categories comprised 20% of U.S.
goods imports from Mexico in 1963. In 1968, the latest
year for which full data are available, imports in these
categories represented 26% of total U.S. imports from
Mexico. Clearly, Mexico's capacity to produce higher
value semi-finished and finished goods increased markedly
over the relatively brief period noted, and the trade
accounts reflect this development.
During the same period, U.S. exports to Mexico in
the category of machinery and transportation equipment
(i.e., Section 7 of the SITC embracing goods reflecting
heavy elements of advanced U.S. technology) increased
from 47% of 1963 exports to Mexico to 53% of 1968 exports.
Correspondingly, the share of other U.S. manufactures in
our exports to Mexico declined somewhat from 30% to 28%.
Once again, the trade shifts reflect the underlying
developments in the respective domestic economies: the
increasing concentration of the United States on technology-intensive equipment and the increasing production
capacity in Mexico for semi-finished and finished products
for export and to replace goods previously imported.
The second point I would like to make which is
essential to a fuller understanding of U~S.-Latin American
economic relations involves our full balance of payments
accounts, a much broader concept than just our trade
balance. On the basis of all recorded transactions the
United States -- again contrary to widespread belief -- has
been in substantial deficit with Latin America taking the
past decade as a whole.
In the period 1961-64, our deficit with Latin America
on recorded transactions totaled $1.5 billion. In the
period 1965-68, our deficit dropped to $82 million, as a
result of three years with modest surpluses and one year

- 4 with a large deficit. Only in 1969 did we have a large
surplus, $666 million, reflecting Latin America's high
financial capacity to import and low U.S. private capital
outflows. (In these figures, I have treated so-called
"special transactions" as liquid assets and part of Latin
America's reserves.)
Our over-all balance of payments with Latin America
car:. also be examined from the standpoint of changes in
Latin America's principal reserve assets, its gold and
short-term dollar balances. In doing so, we must be
mindful that Latin America may earn or lose dollars, or
buy or sell gold in transactions with other areas of the
world. In fact, Latin America has had large trade surpluses with Europe and Japan since 1963. These have
averaged more than three-quarters of a billion dollars
annually. They provide the basis for a triangular
movement in which Latin America gains net earnings
outside the hemisphere and uses them to build up dollar
reserve balances in the United States or, when necessary,
to finance net payments to the United States in particular years.
Examination of reserve balances reveals that Latin
America's reserve position has shown steady and substantial
improvement over the decade in relation to growth of Latin
American trade or GNP. Latin American gold and dollar
holdings increased by $1.1 billion in the four years 1961-64
and by $1.45 billion in the next four years, 1965-68. Only
in 1969 was there a decline -- $441 million -- largely
reflecting the reversal of the "spec ial transactions" I
mentioned earlier.
The point is that Latin America's financial relations
with the United States have not been at the expense of a
satisfacmry growth of reserves. Rather, Latin America
was in the fortunate position of regional balance, or
better, most of this past decade with both Europe and the
U.S. If the trends of the past continue, the allocations
of SDR's will only serve to emphasize this regional
characteristic.

Let \(,(;' admit promptly Cd~. what I have Just Sci';,)
involves a great deal of aggregaticn. t:hu;~ Gbscurl
Ci1t';
reality that sc:me countr iea have added h.eavil y tn t!·c. i ~
reserves at the Sijlm~ time others are dr£~wing them dO",~ '.
But the example of those countries ~<njoyilil.g stron~ icr:'l(~;
and reser'.} e g.cQwth J" esul ts does sugger e: n~'LH: the b<:i 'i:. "'-l(. :.
of payme1i~;s healU) of ind-~vtl.hjt:ll.l Latin p..rHeric~;r.~ naci0/~'
depends at le~st ad heavily cn the qualIty of their
national economic policy planning and executi.on, as on
external facto.rs~l..nclu,ding the po1ici':';8 clf majox tr8d~
partners. The United State:s is making em:-nest effQltt~ t
ass tst Lat in Amerl.c n to th:c' m2ximmn e,v:tc.."nt Lhr.f."ugh favol:'
able trade and ,,'!ssistance poli,cies. These efforts, howc\1',;~:z
are complementf~''(Y to those of th~' I.atin American n8tions
themselves.
I think that Mexico ha.s provided ,an example
to other Latin Amertcan countries in the effective mobilization of d('~u)_esti,c and exterr.al resources as part of a
coordinat~d dev~lopmerlt effort
c,

These past two subjects ~- the U.. S. trade position
and the U.S. payments position with Latin America -- lay
the groundwork for a subject that is always somewhat
tender in U~S.-Latin American economic relations -- U.S.
direct investment in Lat in America. Such investment
remains an issue within Latin America.
Its detractors
call invest.ment a problem because in their words U~ S.
investors ''bring home more money as earntngs from Latin
America than they put in n5 new :Z.nv'CRtmet~t," This is
the financial nub of thl(; ,~riticism? alt~1Dugh there ts
a wide variety of additional and not nec(!ssarily economic
concerns involving Wh.!:lt is called national soverelg:-jt:y,
or cited as exploltation.
Much of t his discuss :Lon concern ir::g ll .. S ~ d iree t
investment must leave in the mind ,.;:i the listene:r tnI:"
image of a 100 percent-owned and 100 percent-opet'atc1
subsidiary of a U.S@ company operating in a Latin
American country. We should bear in mind that thi.s is
the exception and not the rule; that these investments
are becoming less and less U",.f, -operated ~:mcl that the
degree of ownership is moving~- ,:Hc~ "lr':., in M~xico so
well know -- far away frocil 100 r>{"'t'c~~t ownership, toward

-

6 -

balanced joint ventures. Many, too, miss the point that
when the United States talks about fostering priv8t~
investment, we· place special emphasis upon local pri"vate
investment. We emphasize the need to develop the entrepreneurial skills and job-creating benefits of local
private investment and it does not necessarily follow
that there has to be a U.S. equity investment to make
this come about.
The basic statistical facts of U.S. private invest,"
in Latin America are well known, although subject to gra\
problems of measurement. The value of U.S. private direc
investment in Latin America totals $11 biilion or more;
we add to this at annual rates of from $200 million to
$600 million per year; and profit remittances amount to
$1 billion or so per year. But even with agreement on these
basic facts concerning U.S. direct investment, there are
marked differences in the conclusions reached by different
observers as to its input and desirability.
Those who are doubtful about foreign direct investment
generally state three points of view: they feel that direct
foreign investment becomes a burden to the balance of payments
of the host country -- largely because of profit remittances;
they note that total profits over time may equal or exceed
the initial investment, and this raises a conceptual question
about the nature of the profit repatriated by a foreign investor; and they tend to resist recognition of the broader
benefits, some easily measured and others not, that are
obtained from foreign investment.
the first point, conclusions differ because some
reach their results by balancing this year's inflow of new
capital against this year's outflow of profits. These
profits, however, were generated by the entire stock of
capital accumulated over many decades. If the aim is to
see if the profit outflow is reasonable, the more common
and more logical practice would be to show repatriated
earnings in relation to the direct investment inflow
accumulated over the years. Whichever compilation is
employed, however, I doubt that these statistics alone
can be used to answer satisfactorily all the relevant
questions about the advantages or disadvantages of
foreign private capital.
On

- 7 Maybe more work needs to be done by the economists
which would help us to understand such important considerations as: the development of resources more quickly
than would otherwise take place; the advantages of a world
marketing organization; the stimulative effect on existing
business; whether or not the rate of profit earned is fair
in relation to invested capital; whether or not the investment represents a rational use of resources; and the
possibilities a new investment may open for participation
in regional trade groupings. No statistical series will
tell the full story and judgments inevitably will be
involved. But a better understanding of the range of
considerationsmlevant to these judgments would help each
of us in our task.
On the second point, both our own and Latin American
balance of payments presentations properly classify profit
remittances as payments on current account, not capital
account. Interest payments on loans are similarly treated.
This reflects the fact that profit remittances are payments
for the use of an imported factor of production, capital;
they are not a return to the investor of his capital itself;
just as a loan is not amortized by interest payments on it.
To treat profits as a return flow of capital is both misleading and inappropriate.
The third point is that a balanced judgment can only
be reached if a great many more elements than just remitted
profits are taken into account. A very large proportion
of the output of U.S. affiliates in Latin America earns
foreign exchange through exports or saves it through
import substitution. The reinvested earnings of subsidiaries never even show up in balance of payments
accounts. And what about the non-quantifiable elements
the introduction of new productive technology and managerial
techniques, the creation of new jobs and consequent increases
in incomes and the revenue base, improvement in the skills
of the work force, etc? These are primary benefits resulting
from private investment. The new wealth they create would
have nQt existed without the investment.

- 8 -

When all these considerations are taken into account,
the vital role of foreign private investment in Latin
America's balance of payments position and in its over-all
economic performance may be seen with clearer perspective.
Satisfactory growth rates require it, and a modernizing
thrust cannot be provided to the region's economies without it. This was specifically noted by Dr. Raul Prebisch
recently at the Punta del Este meeting of the Governors
of the Inter-American Development Bank, where he said,
"I assign an important role to private foreign investment,
particularly when it is accompanied by technologies not
previously available to Latin America, as will continue
to be the case in view of the dynamics of technological
innovation." As I have already noted, foreign private
investment needs to be complemented by a strengthening
of the domestic private sector in many countries, and an
increasing amount of international attention is being
devoted to ways to stimulate this.
The thrust of the economic argument on direct investment is that Latin America pays for more than it gets,
that the returns to the local economy do not measure
against the costs. This view contracts strikingly with
the mounting concern in the United States over the advantages to the U.S. economy of the continued level of
foreign investment, including especially the implications
of the multinational corporation. I find it hard to
understand how such investment can simultaneously be
harmful to both economies, the United States and those
abroad. But the United States does not measure its
policy purely in statistical terms. The great development the United States received from the massive inflow
of European capital over the last part of the last century
and the first part of this century is not indexed by the
level of interest payments and capital remittances we paid
back to European investors.
I have covered some of the factual and statistical
territory of the U.S.-Latin American trade and balance of
payments accounts with you today as a contribution to better
discussions of hemispheric economic policy matters. The

- 9 -

issues that are involved
trade, development financing,
investment -- are too important to allow folklore to substitute for fac,ts as a basis for public policy decisions.
But as I have pointed out, even statistical facts sometimes
need to be given appropriate qualifications, interpretations
and analytical adjustments if they are to reflect in a
balanced way the state of affairs.
When carefully analyzed in this way, the historical
record indicates that our trade and payments accounts with
Latin America over the past decade have not been seriously
out of balance. A balanced appraisal of the contribution
of foreign private investment to Latin America's growth
also indicates that such investment, properly measured,
has been positive and beneficial.
The United States is today engaged in a broad and
sincere effort to assist Latin America's own measures
to realize its full economic and social potential. This
effort springs from many sources, including our long and
rich history of hemispheric cooperation. We perceive a
profound national interest in strengthening our economic
relationships with Latin America, and this perception
does not depend on the idea of compensating for Lmbalances
indicated by loosely interpreted statistical indicators.
It stems instead from our considered appraisal of the real
nature of our on-going economic and political interactions.
It is with the understanding of these basic facts that we
in the Western Hemisphere should be proceeding to further
evolve a balanced approach to our ''mature partnership."

ADVANCE FOR RELEASE AT 3 P.M. EDT, TUESDAY, AUGUST 4

U. S. BALANCE OF
THE

P;'Y~Z~TS

LATI~ A~~RICAN REPUB~I:SI

WITH
1961-1969

(millions of dollars)
1968

1969

Trade Surplus
Net Services Surplus

1961
197
854

1962
-145
957

1963
-247
1044

1964
223
1178

1965
L;'8
1271

1966
190
143U

1967
188
1487

33T

~

1613

1')08

Net Surrlus on Gooas and Services
Net Unilateral Transfers
U.S. Private Capital
U.S. Government Capital
Foreign Capital

1050
-262
-453
-703
74

813
-293
-218
-501
112

798
-399
-166
-378
38

1401
-373
-1005
-247
175

1319
-451
-340
-332
41

1620
-402
-519
-361
152

1676
-394
-898
-414
357

1944
-413
-584
-648
57

2G50
-405
-302
-540
-287

Net Recorded Transactions
Adjustments:
Imports of Venezuelan Oil via
3rd Countries
Special Transactions

-293

-87

-108

-49

236

489

327

356

526

-200

-200

-200
-41

-200
-124

-200

-200
-203

-200
-376

-200
-111

-200
+340

Net Recorded Transactions Adjusted

-493

-287

-349

-373

36

86

-249

45

666

Errors and Omissions and Transfers
between Areas

280

339

-247

-44

-461

-146

-262

-673

-218

-212
-109
-103

52
176
-124

-595'
32
-627

-417
56
-473

-426
1.7
-443

-59
-39
-20

-512

-628
-60

-521

-sse

448
-')2

160

-115

616

438

361

-so

540

599

-441

~et

1/
Surelus or Deficit{-2Net GOld Purchases/Sales
Liquid Liabilitiesl/

U.S.~iquidity

Memorandum Item:
Change in Latin American Dollar
and Gold Holdingsll ~I

9

soo

1/ Differs from Survey of Current Business presentation by treating inveSCQents related to special transactions as :hou60
fj

they were liquid liabilities of the U.S .. (i.e., as Latin American dollar holdings).
Differs from U.S. liquidity surplus or deficit by amount of Latin American net gold purchases or sales in other areal
than the United States.
L
July 30, 1970

Department of the

TELEPHONE W04-2041

HINGTON, D.C. 20220

TTENTION:

TREASURY

FINANCIAL EDITOF

'OR RELEASE 6: 30. P.M.,
tbnday, August 3, 1970.
RESULTS o.F TREASURY I S WEEKLY

BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
ills, one series to be an additional issue of the bills dated May 7, 1970.
, and
he other series to be dated August 6, 1970.
, which were offered on July 29, 1970.,
'ere opened at the Federal Reserve Banks today. Tenders were invited for $l,So.o.,ooo.,o.o.o.,
lS2-day
r thereabouts, of 91 -day bills and for $1,30.0.,0.0.0.,0.0.0. or thereabouts, of
ills. The details of the two series are as follows:
ANGE OF ACCEPTED
OMPETITIVE BIDS:

High
Low
Average

91 -day Treasury bills
November 5, 1970.
Approx. Equiv.
Price
Annual Rate

lS2-day Treasury bills
rnaturi~ February 4: 2 1971
Approx. Equi v •
Annual Rate
Price

98.396
98.370
98.379

96.749
96.690
96.716

maturin~

6.345%
6.448%
6.413%

Y

6.431%
6.547%
6.496%

Y

68% of the amount of 91-d~ bills bid for at the low price was accepted
63% of the amount of lS2-day bills bid for at the low price was accepted
OTAL TENDERS APPLIED FCR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

AEElied For
AcceEted
$ 31,50.0,000 $ 21,500,000
2,0.02,80.0,0.0.0.
1,30.1,0.40.,0.0.0.
48,0.90.,0.0.0.
23,0.90.,0.0.0.
43,890.,00.0
43,190.,0.0.0.
18,90.0.,0.0.0.
16,90.0.,0.0.0.
56,660. ,0.0.0.
47,990.,0.0.0.
143,250,0.00.
132,0.50.,0.0.0.
47,0.30.,0.0.0.
42,340,0.0.0.
26,750.,0.0.0.
26,750.,0.0.0.
37,30.0.,0.0.0
33,150.,0.0.0.
30.,390.,0.0.0.
20. ,390. ,0.0.0.
134,350. 20.0.0.
91,810.,0.0.0.
$2,620.,910,0.0.0.

$1,80.0.,200.,0.0.0 ~

Applied For
$ 18,080.,0.0.0.
1,60.2,0.70.,0.0.0.
11,340.,0.0.0.
23,190.,0.0.0.
18,920.,00.0.
53,360.,0.0.0.
123,90.0.,0.0.0.
25,560.,0.0.0.
26,270.,0.0.0.
29,410.,0.0.0.
28,830.,0.0.0.
95,520.,0.0.0.

AcceEted
$
8,0.80.,0.0.0.
948,220,0.0.0.
1l,34(),nOQ
23,190.,0.0.0.
17,920.,0.00.
42,540,0.00
10.6,770. ,000.
23,360.,0.0.0.
26,270.,0.0.0.
26,410.,0.0.0.
19,460.,0.0.0.
46 2490. 20.0.0.

$2,0.56,450.,0.0.0.

$1,30.0.,0.50.,0.00.

pJ

Y,Includes $ 347,110.,0.0.0. noncompetitive tenders accepted at the average price of 98.379
)j Includes $ 211,690. ,COo. noncompetitive tenders accepted at the average price of 96.716
/ These rates are on a bank discount basis. '!he equivalent coupon issue yields are
6.6110 for the 91-day bills, and 6.8110 for the lS2 -day bills.

Department of the
tHNGTON. O.C. 20220

TREASURY
TELEPHONE W04·2041

FOR IMMEDIATE RELEASE

August 4, 1970

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$3,100,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing August 13, 1970,
in the amount of
$3,002,694,000,
as follows:
91 -day bills (to maturity date) to
in the amount of $1,800,000,000,
or
an additional amount of bills dated May
mature November 12, 1970,
originally
$1,301,580,000,
the additional and
freely interchangeable.

be issued August 13, 1970,
thereabouts, representing
14, 1970,
and to
issued in the amount of
original bills to be

l82-day bills, for $1,300,000,000,
dated August 13, 1970,
and to mature

or thereabouts, to be
February 11, 1971.

The bills of both series will be issued on a discount basis
under competitive and noncompetive bidding as hereinafter provided,
and at maturity their face amount will be payable without i.nterest.
They will be issued in bearer form only, and in denominations of
$10,000, $50,000, $100,000, $500,000, and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p. m., Eastern Daylight Sa~ing
time, Monday, August 10, 1970.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even mUltiple of $10,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may
not be used. It is urged that tenders be made on the printed
forms and forwarded in the special envelopes which will be supplied
by Federal Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted. to
submit tenders except for their own account. Tenders will be received
without deposit from incorporated banks and trust companies and from

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce
ment will be made by the Treasury Department of the amount and price ra
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on August 13, 1970, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing August 13, 1970.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differ£l~es.between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered tO,be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank o&OAranch.

Deportment of the TREASURY
lSHlNGTON. D.C. 20220

TElEPHONE W04·2041

August 4, 1970
FOR IMMEDIATE RELEASE
COMBAT ZONE TAX REGULATION
The Treasury Department announced today that it will
publish in the Federal Register on August 5, 1970, a "Notice
of Proposed Rule-Making" which will permit uniform tax benefits for military personnel in all combat areas, including
those who recently served in Cambodia.
The proposed regulation will make it clear that the
present tax benefits are available to members of the armed
forces who perform military duties In areas outside a designated combat zone when the duties are in support of the
military operations in the zone and entitle the individual

--

to "hostile fire pay" under current military procedures.
Such military personnel would thus receive the same tax
benefits as those whose duties require them to be physically
present In a designated combat zone.
It will apply to the men who served In the Cambodian
incursion, and also will cover men who receive hostile fire
pay while serving in Laos, or who are eligible for hostile
fire pay because of air flights into combat although based
elsewhere, such as in Okinawa, In Thailand, or aboard

ship~

in the western Pacific outside of a designated combat zone.

2

The proposed regulation also interppets the statute
as not extending these tax benefits to soldiers who merely
stop over in Vietnam while on leave or fOr other personal
reasons unless under Department of Defense regulations
they should become entitled to Dostile fire pay.

This

interpretation will apply, however, only to periods of
time subsequent to the publication of the notice of rule
making.
The proposed regulation will provide greater guidance
to the Internal Revenue Service in its application of the
1965 Executive Order which designated Vietnam as a combat
zone.
The text of the proposed rule

Attachment

~s

attached.

August 4, 1970

BACKGROUND INFORMATION
COMBAT ZONE REGULATION
The Treasury Department today announced the publication
of a proposed income tax regulation that will confer combat
zone tax benefits on members of the armed forces who, although
serving outside Vietnam, come under the risk of hostile fire
while supporting Vietnamese military operations.

The proposed regulations will appear in the Federal
Register for August 5, 1970. Under the new regulations, combat zone tax benefits will be granted to members of the armed
forces who support Vietnamese military operations in areas
outside Vietnam itself, under conditions which qualify those
members for "hos tile fire pay." Under the regulatory amendments, those who have served in Cambodia and Laos will be
eligible for combat zone tax benefits. The same benefits will
also go to air crews who have qualified for hostile fire pay
while supporting Vietnamese operations from areas such as
Thailand and Okinawa.
The principal combat zone tax benefits are the Section
112 combat pay exclusion and the death benefits provided by
Sections 692 and 2201 of the Internal Revenue Code. The combat pay exclusion exempts all enlisted and warrant officers'
pay from Federal income tax, and up to $500 per month in commissioned officers' pay.
Section 692 forgives income taxes
owed by persons killed as a result of service in a combat
zone, and Section 2201 provides a reduced estate tax rate ~n
those cases.
The proposed regulations will apply automatically in the
case of those who served in Cambodia this year.
In addition,
the regulations will permit income tax refunds for taxable
years that are open under the applicable statute of limitations.
In general, this means that members of the armed forces
who have qualified for hostile fire pay while supporting
Vietnamese operations in areas such as Laos and Thailand will
be able to claim tax refunds for each of the past three calendar years.
In a few cases, the applicable limitations rules
may permit refunds for earlier periods.
Refund claims should
be sent to the Internal Revenue Service Center for the area
in which the taxpayer permanently resides.

2

The proposed regulations also contain a provision
designed to curb abuses of the existing combat zone tax
exclusions.
Under present interpretations of the law, members of the armed forces become eligible for combat zone tax
benefits if they merely fly through the airspace over a combat zone or make an in-transit stop or layover at an airport
in a combat zone. These tax benefits are also available if
a member of the armed forces voluntarily enters a combat zone
while on leave. If a person visits a combat zone on temporary
official duty or flies over a combat zone on a mission which
qualifies him for hostile fire pay, combat zone tax benefits
are appropriate.
But these benefits are generally not appropriate in other cases.
Consequently, the proposed regulations will terminate allowance of combat zone tax benefits
in the case of trips made in the future in which a member of
the armed forces merely passes through the airspace over a
combat zone, or makes an in-transit stop or layover for his
own convenience in a combat zone, without performing official
temporary duty or qualifying for hostile fire pay. In addition, persons who voluntarily enter combat zones while on
leave will generally no longer be eligible for combat zone
tax benefits. The following are examples of the way in which
the proposed rules will apply:
1. Service in Cambodia. An enlisted member of the armed
forces performed service in Cambodia in May 1970 and qualified
for hostile fire pay as a result of such service. Under the
proposed rules, this individual may exclude from gross income
his military pay for the month of May.
If he was killed in
Cambodia, or died as a result of wounds, disease or injuries
received in Cambodia, his survivors would be entitled to the
income tax benefits of Section 692 and the estate tax benefits of Section 2201 of the Internal Revenue Code.
2.
Air Crews. An officer who was a member of an alr
crew operating from bases in Thailand qualified for hostile
fire pay in June 1970 as a result of flying a mission which
drew fire over Cambodia on June 2. Under the proposed rules,
he is eligible to exclude from gross income up to $500 in
military pay for the month of June 1970.
Furthermore, if he
was killed during the June 2 mission or died as a result of
wounds or injuries received during that mission (including
takeoff and landing portions of the mission), his survivors
are eligible for income and estate tax benefits under Sections
692 and 2201. However, if he died on June 13 as a result of
an automobile accident during an inspection trip in Thailand,
the Sections 692 and 2201 benefits would not apply, because
a Thai inspection trip will not qualify him for hostile fire
pay. He would, however, be entitled to hostile fire pay
through the date of death since he qualified for hostile fire
pay for the month of June.

3

3.
Flyovers and Visit q . A member of the armed forces
flies from Okinawa to Bangkok in October 1970 and passes
through Vietnamese airspace during the flight.
The plane is
not fired on and the individual does not qualify for hostile
fire pay as a result of the flight.
Under the proposed
rules, the individual would not be entitled to combat ZODS
tax benefits.
The result would be the same even if he mal;p
an in-transit layover in Saigon for five or fewer days,
without qualifying for hostile fire pay. However, if the
individual had qualified for hostile fire pay as a result
of a hostile attack on the plane, he would be entitled to
combat zone tax benefits, including exclusion from gross
income of his military pay for the month of October 1970
and Sections 692 and 2201 death benefits for his survivors
if he were killed as a result of the attack on his plane.
4.
Temporary Official Dut~.
A military courier flies
to Saigon on temporary duty QUr1ng October 1970. He remains
only two days and for that reason does not qualify for hostile fire pay.
Nevertheless, under the existing law and
under the proposed rules, the courier is entitled to Section
112 benefits for October 1970, and his survivors and entitled
to Sections 692 and 2201 benefits if he is killed during his
stay in Saigon.
5.
Leave. A member of the armed forces who is assigned
to a unit based in Okinawa voluntarily visits Vietnam in November
1970 while on leave.
Under the proposed rules, he is not
entitled to combat zone tax benefits. However, if this individual came under hostile fire while visiting Vietnam and
qualified for hostile fire pay, he would be entitled to combat
zone benefits.
In addition, if the same individual were later
permanently reassigned to a unit in Vietnam and took leave in
Vietnam during the period of his assignment, his combat zone
benefits would continue while he was on leave in Vietnam.

PUBLIC LAW 88-132-0CT. 2, 1963
37 USC 301-309

(77 STAT.)

SPECIAL PAY FOR DUTY SUBJECT TO HOSTILE FIRE
Section 9. (a) Chapter 5 of title 37, United States
is amended as follows:
(1)

,,§ 310.

Code~

The following new section is added after section 309:
Special pay:

duty subj ect to hostile fire

"(a) Except in time of war declared by Congress, and under
regulations prescribed by the Secretary of Defense, a member of a uniformed service may be paid special pay at the
rate of $55 a month for any month in which he was entitled
to basic pay and in which he-"(1) was subject to hostile fire or explosion
of hostile mines;
"(2) was on duty in an area in which he was in
imminent danger of being exposed to hostile fire or
explosion of hostile mines and in which, during the
period he was on duty in that area, other members of
the uniformed services were subject to hostile fire
or explosion of hostile mines; or
"(3) was killed, injured, or wounded by hostile
fire, explosion of a hostile mine, or any other
hostile action.
A member covered by clause (3) who is hospitalized for the
treatment of his injury or wound may be paid special pay
under this section for not more than three additional months
during which he is so hospitalized.
"(b) A member may not be paid more than one special
pay under this section for any month.
A member may be paid
special pay under this section in addition to any other pay
and allowances to which he may be entitled.
"(c) Any determination of fact that is made in administering this section is conclusive.
Such a determination
may not be reviewed by any other officer or agency of the
United States unless there has been fraud or gross negligenc~.
However, the determination may be changed on the basis of n"
evidence or for other good cause.
'1

2

"(d) The Secretary of Defense shall report to Congress
by March 1 of each year on the administration of this section,during the preceding calendar year."
(2)
"310.

The following new item is inserted ln the analysis:

Special pay:

duty subject to hostile fire."

(b) The Combat Duty Pay Act of 1952 (50 App. U.S.C.
2351 et seq.) is repealed.

DEPARTMENT OF· THE TREASURY
INTERNAL REVENUE ,SERVICE
TREATMENT OF CERTAIN COMBAT PAY
OF MEMBERS OF THE ARMED FORCES
NOTICE OF PROPOSED RULE MAKING
Notice is hereby given that the regulations set forth
in tentative form in the attached appendix are proposedl
I

to be prescribed by the Commissioner of Internal Revenue,

I

with the approval of the Secretary of. the Treasury or his
delegate.

Prior to the final adoption of such regula-

tions, consideration will be given to any comments or
suggestions pertaining thereto which are submitted

~n

writing, preferably in qUintuplicate, to the Commissioner
of Internal Revenue, Attention:
D. C.

20224, within the

~eriod

CC:LR:T, Washington,
of

30

days from the

d~t~

of publication of this notice in the Federal Register.

Any

~ritten

cow~~ents

or suggestions not specifically

designated as confidential in accordance

~.yith

26 CFR

601.601 {b) may be inspected by any person upon written

- 2 -

request.

Any

p~1;'son

subrnitting written comments

Or

suggestions who desires an opportunity to comment orally
at a public hearing on these proposed rcgulati.ons should
submit his request, in writing, to the COlmnissioner
within the 30 ... day period.

In such case, a public hearing

will be held, and notice of the time, place, and date
will be published in a subsequent issue of the Federal
Regi.ster~

The proppsed regulations are to be issued

under the authority contained in section 7805 of the
Internal Revenue Code of 1954 (68A Stat. 917; 26

u. s . C. 7805).

Commissioner of Internal Revenue

APPENDIX (PROPOSED REGULATIONS)
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE,
DEPARTHENT OF THE TREASURY
SUBCHAPTER A--INCOHE TAX
[INCOHE TAX REGULATIONS]
PART 1--INCOHE TAX; TAY.ABLE YEARS BEGINNING
AFTER DSCEHBER 31, 1953
TreC\~.ment o~ eel.-tain e_QQ1};>J~Lp-ay

of' members of

the Armc.'d Forces

DEPARTHENT OF THE TREASURY,
Office of Cornrnissioner of Intcrnn1 Revenue)
Washington, D. C. 20224
TO OFFICERS AND EHPLOYEES OF
THE INTERNAL REVENUE SERVICE
AND OTHERS CONCE1G1ED:
In order to clarify the Incom,:: Tax Regulations
(26 CFR Part 1) under section 112 of the Internal Revenue

Code of 1954, such regul8.t:i on:;; m:"e

amCndec.L

as follows:

.. 2 ...

Section 1 •.112 .. 1 is amended by adding fmmediately
after paragraph (i) net\' paragraphs (j) and (k).

These

amended provisions read as fo110\l.7s:

:i 1.112-1 Compensation of members of the Armed Forces
of the United States for service in a
combat zone during an induction period, or
for service while hospitalized as a result
of such combat-zone

*
(j)

service~

*

*

*

Persons who perform military duties in

areas outside an area

designate~

as a combat zone

by Executive order, whi.ch duties are in support

of military operations in such zone and are
performed under conditions \vh:i ch qualify such
persons for Hostile Fire Pay (as authoriz(':d under
section 9 (a) of the Uniformed Services Pay Act of
1963 (37 U.S.C. 310», shall, during the period of

,

such qU31::.fying service, be deem.ed to be performing
service in such combat zone.

.. 3 -

(k) (1)

Active service is "performed in a

combat zone" provided either- ..
(i)

That an individual is physi.cally present

in such zone by reason of the performance of military
duties, or
(ii)

That ae a result of physical presence in

such zone such pe.rson qualifies for Hostile Fire Pay
(as authorized under section 9 (a) of the Uniformed
I

Services Pay Act of 1963 (37 U.S.C. 310».
(2)

For periods sul>sequent to the date of

publication of this notice as a Treasury decision, an
individual will not be considered to be physi.cally
present in a combat zone "by reason of the perf01·mance
of military duties" merely because ......
(i)

Such individual is physically present

in a combat zone while on leave from a duty
station which is not located inside a combat
zone or is otherwise present solely for his
own personal convenience, or

- 4 (ii)

During the course of a trip between

two points both of' which lie outside a combat
zone, such individual passes through the ai.rspace
over a combat zone.
This subparagraph shall not apply to individuals
who are assigned to units in a combat zone or

\<Jho

are ordered on official ternpc..n.·al-Y duty to a combnt
zone.
.,.-

..

-.~-

UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH July 31, 1970
(Dollar amounts in millions - rounded and will not necessarily add to totals)
DESCRIPTION

TURED
;Nips A-1935 thru D-1941
,€'fies F' and G-1941 thru 1952
;eries J and K-1952 thru 1957

AMOUNT ISSUEDY

AMOUNT
REDEEMEOY

AMOUNT
OUTSTANDINGY

, OUTSTANDING
OF AMOUNT ISSUED

5,003
29,521
3,754

4,997
29,489
3,738

1,893
8,351
13,432
15,676
12,328
5,600
5,320
5,506
5,446
4,765
4,119
4,314
4,930
5,026
5,237
5,061
4,768
4,654
4,363
4,373
4,439
4,296
4,789
4,667
4,563
4,915
4,866
4,616
4,321
1,294
848

1,686
7,449
12,016
13,937
10,796
4,735
4,351
4,421
4,297
3,704
3,202
3,332
3,728
3,736
3,842
3,673
3,402
3,207
2,954
2,846
2,747
2,555
2,649
2,609
2,529
2,580
2,463
2,188
1,638
162
1,131

168,777

124,566

44,211

26.19

5,485
7,475

3,659
2,211

1,826
5,264

33.30
70.42

12,960

5,870

7,090

54.71

181,736

130,436

51,300

28.23

38,277
181,736
220,014

38,224
130,436
168,660

54
51,300
51,354

.14
28.23
23.34

6
32
16

.12
.11

.43

~ATURED

,€'fies E.1/ :
1941
1942
1943 _
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
Unclassified
Total Series E
~ries H (1952 thru May, 1959)}j

H (June, 1959 thru 1970)
Total Series H
Total Series E and H

rota1 matwed
I Series

Total unmatured
Grand Total

206
902
1,416
1,740
1,532
865
969
1,086
1,149
1,061
917
982
1,203 '
1,291
1,395
1,389
1,366
1,447
1,409
1,527
1,691
1,741
2,140
2,058
2,034
2,335
2,403
2,429
2,683
1,132
- 283

1ea accrued discount.
nt redemption value.
lion 01 owner bonds may be held and will earn interest lor additlona' periods alter origina' maturity dates.

Form PO 3812 (Rev. Mor. 1970) - TREASURY DEPARTMENT - Bureau of the Public Debt

10.88
10.80
10.54
11.10
12.43
15.45
18.21
19.72
21.10
22.23
22.26
22.76
24.40
25.69
26.64
27.45
28.65
31.09
32.29
34.92
38.09
40.53
44.69
44.10
44.58
47.51
49.38
52.62
62.09
87.48

-

Department 01 the TREASURY
HINGTDN. D.C. 20220

TElEPHONE W04-2041

August 7, 1970
FOR IMMEDIATE RELEASE
HURRICANE CELIA
The Treasury announced today that at the direction
of Secretary David M. Kennedy, the Department is moving
quickly to be of maximum assistance to victims of Hurricane
Celia.
Sidney S. Sokol, Commissioner of the Department's
Bureau of Accounts, disclosed that emergency Treasury disbursing offices will begin operations on Monday, August 10,
in space provided by the Small Business Administration in
its disaster loan headquarters in Corpus Christi, Texas.
Treasury personnel will work side by side with SBA loan
specialists and will issue checks to the storm victims
within a few minutes after SBA has approved their loan
authorizations.
Quick action has also been taken by the Department
to speed replacement of, or payment for, U.S. Savings Bonds
and Freedom Shares lost, stolen or destroyed in the area of
Texas adversely affected by the storm.
Under the emergency
procedure, the six-month waiting period on replacement of
lost Bonds and Freedom Shares has been waived. At the same
time, the Treasury has authorized paying agents to pay any
Series E Bonds in hardship caSeS, even though the Bonds
have not been held the required 60 days, or any Savings
Note (Freedom Share), even though the Note has not been
held one year from date of issue.
Comptroller of the Currency William B. Camp, as
administrator of national banks, has pledged all possib~e
cooperation to banks affected by the hurricane damage.
Regulations governing bank operations will be interpreted
sympathetically to help banks maintain whatever services
they can offer and to assist in the restoration of full
banking services as quickly as possible.

K-464

(OVER)

2
The Treasurer of the United States, Mrs. Dorothy
Elston, has assigned priority to the settlement
of claims for the loss or destruction of Government checks
cove' ;ng annuities, salaries, or other payments, and to
claims resulting from the damage of currency.
Mrs. Elston
has directed that special attention be given to cases
involving hardship.
'~S

Commissioner of Internal Revenue Randolph W. Thrower
issued a reminder that certain tax relief measures are
available to victims of the disaster.
In addition to
casualty loss deductions available under Federal tax laws
to those filing calendar year returns, fiscal year taxpayers
may deduct their losses if the hurricane occurred after the
end of their tax year but before the due date of their tax
returns.
Those taxpayers who are required to file declarations of estimated tax may amend their declarations on or
bc:fore September 15, 1970, to reflect any decrease 1.n
estimated tax as a result of casualty losses.

THE HISTORIC U. S. TREASURY BUILDING
The impatience of President Andrew Jackson played
a vital role in determining the location of today's
historic Treasury Building.
Disgusted with the delays in selecting the site for
the new Treasury, President Jackson stalked across the
street from the White House, stuck his cane in the dirt,
and said, "Here, right here, I want the cornerstone laid."
And there it was laid.
As the architect, Robert Mills, said, '~he precise
position of the building was determined by the positive
directions of the President."
However, the building that "rose from Jackson's cane"
was not the first Treasury Building. The original building was occupied in 1800 and housed the Treasury employees,
some personnel from the Navy Department, and the entire
seven-man staff of the State Department. This early
structure, which was located on the east side of the present
Building site, was burned by the British in 1814.
A second building was constructed on the site shortly
thereafter, and stood until it was destroyed by an early
morning fire in 1833.
Congress then authorized the con'struction of a "fireproof building of such dimensions as may be required for
the present and future accommodations" of the Treasury
Department. After Jackson selected the site, construction
started and the building was completed in 1842. Extension
were added in 1855, 1861, and 1869 to provide the Treasury
with the structure which exists today.

-2-

Since the Civil War, parts of the building have been
used for a President's office, an inaugural ball, and
even a shelter for the President in case of enemy attack.
After the assassination of Abraham Lincoln, an
office on the third floor of the Treasury was used as the
Chief Executive's office by the President Andrew Johnson.
At the time, Johnson felt that it would be a hardship on
Mrs. Lincoln to have to move out of the White House
immediately, so he occupied the adjoining office to that
of the Secretary of the Treasury.
Because Mrs. Lincoln suffered a grave nervous collapse
after the assassination, it was almost eight weeks after
her husband's death before she completed the move from the
White House.
Probably the most memorable document issued by President
Johnson from his desk in the Treasury was the famous Reconstruction Proclamation. It granted amnesty and restoration
of all rights of property to participants in the War between
the States.
The Cash room in the Treasury Building was the scene of
the 1869 Inaugural Ball for President Ulysses S. Grant. The
elaborate room was relatively small, and when a larger than
anticipated crowd arrived, chaos prevailed. In the jam,
many women lost their escorts. Near the end of the ball,
the throngs at the cloakroom prevented most guests from obtaining their wraps -- and at ten o'clock the next morning
nearly a thousand people were still clamoring for their
hats and coats. Among those most angered was Horace Greely
who left cursing Washington and its Inaugural Balls.
One of the Treasury Building's most devoted officials
was F.E. Spinner who served as Treasurer of the United States
from 1861-1875. Awakening at his home one night with a
strong impression that something was wrong at the Treasury,
Spinner got up at two o'clock in the morning and decided
to go to the Treasury to see for himself. On his way, he
met a watchman from the Department, who was hastening to
arouse him with the information that the door of one of
the'vaults had just been found standing wide open. Shortly
thereafter, Spinner acquired the nickname of "Watchdog of
the Trearury," for he converted an adjoining Treasury
room into an apartment, and started sleeping in the build-

-3-

ing to see that the nation's money was safe.
During World War II, Franklin Roosevelt had one of
the rooms in the Treasury vault converted into an office
which he could enter from a White House tunnel in case of
enemy attack. Similar facilities were also set up to
provide the Cabinet a place of safety in case that became
necessary.
The Treasury Building still stands much as it did
after the last extension was completed in 1869.
The original cornerstone is no longer visible, for
it has since been covered by the addition of a new
exterior wall. However, much history is still to be found
within the building. Most recently, a new exhibit hall
was opened which recaptures much of the two-hundred year
history of the Department.
The room in which Andrew Johnson ran the country fir
eight weeks, still contains some of his original furniture,
as well as authentic newspaper etchings of Presidential
meetings in the Treasury. The room of the Director of
the Mint contains furniture from the San Francisco office
of the Mint which survived the San Francisco earthquake
and fire.
000

Department 01 the TREASURY
BlffIlN. D.C. 20220

TelEPHONE W04·2041

FOR IMMEDIATE RELEASE

August 7, 1970

TREASURY DEPARTMENT REVOKES SANSINENA'S
COASTWISE WAIVER
The Treasury Department today made the following
announcement:
The waiver of coastwise trading restrictions on
the tanker SS Sansinena has been revoked.
The waiver was granted on March 2, 1970, and
suspended on March 10. Treasury then began an
administrative review of the case. The waiver was
revoked because the Treasury Department subsequently
was advised by the Maritime Administration that
granting of the waiver at this time could jeopardize
attainment of an adequate domestic ship construction
capability. Development of long-range construction
capability is a goal of this Administration.
Further, in its advisory dated June 11, 1970, the
Maritime Administration stated that existing
shipyards have facilities capable of meeting current
U.S. flag requirements.
Should these circumstances or conditions change,
the situation can be re-examined with a view to
determining whether waivers under the Jones Act might
be called for.
Arguments that the Secretary of the Treasury
lacked statutory authority to grant a waiver or
.... .LaC granting uf a waiver cannot Le substantiated
as being in the interest of national defense were
LUUlH.1 LLl Dt! without merit, in the review pruceedings.
However, the review found the arguments of the
. ,
._

J-

.1\.::

~ \~.

,

A copy of the Treasury decision is attached.
Attachment
K-~65

TREASURY DECISION IN THE MATTER OF THE
SS SANSINENA

In an application to the Treasury Department dated
August 5, 1969, Union 'Oil Company of California requested
a waiver of the coastwise trading restrictions on the
tanker SS SANSINENA, with intention to use the ship under
American registry primarily for the transportation of Alaskan
crude oil to West Coast refineries.
The tanker was built by the Newport News Shipbuilding &
Drydock Co., Newport News, Virginia, and was delivered to
the owner, Barracuda Tanker Corporation of Hamilton,
Bermuda, on October 24, 1958. The vessel has a speed of
17.5 knots and is of 70,700 dead weight tons. Its cargo
capacity is 488,000 barrels and its draft just under 47 feet.
It carries a crew of 36 men. The vessel is registered under
Liberian flag. It is chartered by the Barracuda Tanker
Corporation to the Union Oil Company of California.
Under Section 27 of the Merchant Marine Act of 1920
(46 U.S.C. 883), as amended, no merchandise may be
transported by water between points in the United States in
any other vessel than a vessel built in and documented under
the laws of the United States and owned by persons who are
citizens of the United States, and no vessel built in the
United States and later sold foreign or placed under foreign
registry may thereafter acquire the right to engage in the
coastwise trade. However, the Act of December 27, 1950,
authorizes the head of any dep~rtment responsible for the
administration of the navigation laws to waive compliance
with such laws whenever he deems that such action is
necessary in the interest of national defense.
On March 2, 1970, the Treasury Department, acting in
the interest of national defense, waived the restrictions
against engaging in the coastwise trade imposed on the
SS SANSINENA with the understanding and upon the conditions
that (1) the vessel would be documented under the laws of the
United States, (2) it would be owned by a United States
corporation, all of the stockholders of which would be
citizens of the United States, (3) it would be manned by
American-licensed and unlicensed crews, and (4) it would be
used primarily for the transportation of Alaskan crude oil
to West Coast refineries.
.

- 2 -

After the waiver was granted, allegations were made that
it could have a disruptive effect on the new maritime program
recommended by the President to the Congress. On March 10,
1970, the Secretary of the Treasury suspended the waiver
stating that he was doing so because of questions which had
arisen over the merits of the cas,e since the waiver was granted
and indicating his int~ntion to initiate an administrative
review of the waiver action.
II.
In addition to submissions from the public, comments
were sought and received by the Treasury Department from
the Maritime Administration. In a letter dated June 11,
1970, the Honorable A. E. Gibson, Maritime Administrator,
stated that the coastwise laws are part of the country's
vital maritime policy and that their integrity should be
preserved in the absence of overriding national defense
considerations. He also stated that if a shortage of
u.S. bottoms threatened serious harm to the nation's economy,
the Maritime Administration would consider this possible
grounds for supporting a limited entry into domestic trade
of foreign-flag vessels until that situation were remedied.
Mr. Gibson pointed out, however, that it is difficult
to predict long-range trends for tanker requirements
because of possible major shifts in oil delivery patterns.
He indicated that a projected strain on United States tanker
capacity was expected to come from demands to carry oil from
the North Slope of Alaska but pointed out that the
completion of the pipeline from the North Slope to Valdez
has been postponed.
He advised that it would appear that anticipated tanker
demands for the next decade could reasonably be expected to
be met with our present tanker fleet and the projected
capacity of U.S. shipyards. His letter concluded:
'~s a result, attainment of an adequate ship
construction capability -- one of the goals
of the new maritime program -- could, under
present circumstances, be jeopardized by the

- 3 -

grant of a waiver at this time for tankers
otherwise ineligible for operation in the
coastwise trade.
"Should, however, circumstances or conditions
change that 'would indicate that our shipyards
are unable to meet the projected need for the
carriage of this country's oil and that such
situation could threaten our nation with
serious economic harm, we would have to
review the record and to decide on the facts
and circumstances then available whether
subsequent waivers of the Jones Act might be
justified."
III.
The Treasury Department has carefully considered all the
arguments submitted by all persons in connection with its
review. The argumeqts that the Secretary of the Treasury
lacks statutory authority to grant the waiver and that the
waiver cannot be substantiated as being in the interest of
national defense are considered without merit. The opinion,
on the other hand, of the Maritime Administrator as to the
adverse effect of the granting of the waiver on United
States maritime policy is compelling. For this reason, the
waiver for the SS SANSINENA, granted on March 2, 1970, will
be revoked.

000

Department of the fREASURf
~INGTON.

TElEPHONE W04·2041

D.C. 20220

.TTENTION: FINANCIAL EDITOR

August 7, 1970

'OR IMMEDIATE RELEASE

PRELIMINARY RESULTS OF CURRENT TREASURY OFFERING
Preliminru~y reports indicate that the Treasury, in its current combination
xchange and cash offering, will raise a net of some $1.9 billion of cash on
ugust 17, when $6.S billion of maturing notes and bonds, of which $S.6 billion are
eld by the general public and $0.9 billion are held by Federal Reserve Banks and
overnment accounts, will be payable.

XCHANGE OFFERING
The general public has exchanged $4.S billion of the $S.6 billion eligible
ecurities held by it for new notes maturing in February 1974 and August 1977, leaving
1.1 billion, or 19.4% of the eligible securities unexchanged.
The following is a summary of the exchanges
ELIG IBLE FOR
EXCHANGE
escri12tion

Total

TO BE
7-3/4%
Notes
2L.lSL.74

-3/8% notes

$1,948

$1,103

% bonds

lotals

3 2 657
$S,60S

ISSUED
7-3/4%
Notes
8L.lSL.77
$ S61

~

the public (in millions of dollars):
UNEXCHANGED

Total

Total

$1,664

$

% of
Eligible

284

14.6

721

1~131

2 2 8S2

80S

22.0

$2,824

$1,693

$4,S17

$1,088

19.4

l~

In addition,.Federal Reserve Banks and Government accounts have exchanged $0.6
illion of eligible securities held by them, $0.1 billion for the notes maturing in
=bruary 1974 and $O.S billion for the notes maturing in August 1977.
\SH OFFERING
The general public has subscribed for a total of $18.8 billion of the offering of
billion, or thereabouts, of new notes maturing in February 1972. Subscriptions
~om commercial banks for their own account totaled $11.3 billion and all other
lbscriptions from the public totaled $7. 5 billion.
~.75

Subscriptions totaling $3.0
billion have been accepted. Subscriptions up to
~OO,OOO are being allotted in full; other subscriptions are subject to a ~ %
Llotment with a minimum allotment of $200,000 per subscription.
In addition, $0.2 billion of the new notes maturing in February 1972 are being
Llotted to Federal Reserve Banks and Government accounts in exchange for maturing
:curities held by them.

Department of the TREASURY
IItIGTON. D.C. 20220

TELEPHONE W04-2041

ADVANCE FOR RELEASE AT 3 P.M. EDT SUNDAY, AUGUST 9
REMARKS OF THE HONORABLE CHARLS E. WALKER
UNDER SECRETARY OF THE TREASURY
BEFORE THE TAX SECTION OF THE
AMERICAN BAR ASSOCIATION
ST. LOUIS, MISSOURI
AUGUST 9, 1970
When future ecologists get around to the job of
tracing the ups and downs of this nation's efforts against
air pollution, the month of July 1970 may well come in for
special attention.
Thermal inversion--high temperatures and little wind-trapped smog and polluted air at close to ground level in
major cities all along the east coast. There were widespread
reports of eye irritation and an increase in complaints about
respiratory ailments.
City officials, attempting to deal with this massive
health hazard, warned older people with respiratory problems
to remain indoors. Some cities limited municipal and private power generation because of the pollutants being spewed
into the air by the fuels burned to create the power. Others
considered restricting automobile traffic in congested areas.
These developments all received extensive coverage in
the news media. Yet, another event took place during the
last part of July that will be of even more interest to
ecologists in the years ahead.
While the smog was still hovering over the nation's
capital, the Administration formally submitted to Congress
its proposal to reduce automobile exhaust pollution by taxing the lead additives in gasoline.
The Administration's proposal to tax lead additives,
called the "Clean Air Tax Act of 1970," is a clear challenge
to all of us to "get the lead out" and start cleaning the
air we breathe.

K-466

- 2 As the President has stated, "Air is our most vital
resource, and its pollution is our most serious environmental problem. Most air pollution is produced by burning
fuels. About half is produced from motor vehicles."
Much research has been done on the various aspects of
exhaust-created pollution from combustion engines, much
more is now in progress. Hopefully, none of us will see
the day when such research stops.
But we cannot wait until
the last report is filed on the last research project on
the last phase of this problem.
If we do, we may well be
too late.
In the meantime we have every reason to believe that
lead levels in the atmosphere are rising. Although inconclusive, there are growing indications that this development
can cause serious health problems for the nation.
Moreover,
there is no doubt that there is a direct correlation between
the lead level in a given area and the volume of gasoline
sold in that area.
The time to step up the battle against air pollution is
now. And a very good place to start is with lead additives
in,gasoline.
The Administration's proposal is quite simple. We
recommend that a tax of $4.25 be imposed on each pound of
lead used as additives in gasoline.
This straightforward approach will help insure that
the 1975 model automobiles will meet the low emission requirements set for that date bv the Federal Government.
Obviously, in meeting this problem we must also tak:
the time to consider sympathetically the problems that w1II
result for those plants that now make lead additives for
gasoline.
It is conceivable that these plants will need
help in order to convert their operations.
Lead has played a key role in e~abling g~soline refi~ers
to meet the high octane requirements of the h1gh compress 1on
.
. d us t ry.
Lead
eng1nes
produced by the auto 1~
. is the cheapest
way to increase the octane rat1ng of gasol 1ne .
Without the tax, gasoline.producers would have less
incentive to develop the Subst1tute ~pp:oach:s.necessa~he
to meet the octane requirements. Th1S 1S cr1t~cal to
.
long-run success of our efforts to eliminate a1r pollut1on,
because it will help assure car manufa?turers that such gasoline will be widely available by the t1me the cars are on
the market.
By passing this tax quickly--and the Administration will
do all it can to seek its passage by Congress as soon as
possible--the signal to all parties will be loud and clear.

-

3 -

Fast action is imperative.
From the standpoint of
the oil industry, they cannot completely convert refinery
capacity overnight to non-leaded gasoline.
It will mean
new refining and blending procedures.
Some major conversion and construction programs will have to be undertaken
and in some cases this could take up to 24 months between
the decision and the activation of new facilities.
The automobile industry must gear up to produce the
engines that will run on low octane non-leaded fuel.
These decisions, which will be irrevocable, must be made
early in 1971 if the various parts of the total approach
are to be in place by late 1974.
We have all heard quite a bit lately about the lead
in gasoline, but you might be interested in a few points
that have not been stressed in public.
First, as much as
90 percent of the solid matter spouted into the air from
auto exhausts is made up of lead compounds.
However, the problem does not stop there.
Experiments
have shown that it is extremely difficult to devise exhaust
controls to reduce other emissions when a leaded gasoline
is used.
The lead salts foul up the equipment designed to
reduce other waste generated by the engine. Some such
devices can be made inoperative with one tank of leaded
gasoline.
A firm decision by Congress to tax lead additives
will enable engineers to design the necessary equipment,
knowing beforehand the type of fuel and the type of engine
that will be in use in the years ahead.
What will the cost of the non-leaded gas be at the
pump? Estimates vary, but the average increase is about
2¢ per gallon.
If you figure that out, it comes to about
30¢ per week or approximately $15 per year. However, this
figure can be misleading because the average motorist might
well save that much in maintenance costs by using lead-free
gasoline.
On this subject, another point should be made. Many
drivers today are wasting money on the gasoline they buy.
Only 32 percent of the cars on the road at the present
time require premium -- 100 octane -- gasoline; yet 43
percent of the gasoline sold is premium.
The extra cost
brings no extra benefits to the motorists who could use
regular gasoline -- 94 octane.

- 4 The emphasis on the lead in gasoline and the octane
ratings will encourage more drivers to find out about the
requirements of their own cars and pay more attention to
their fuel selections.
What will the ta~ mean in terms of revenue to the
Treasury? That is always a consideration in tax matters,
and particularly now when we are faced with the problem of
increased spending and reduced income. We estimate that
during the first year the tax will produce additional
revenue of $1.6 billion. Unlike other taxes; the revenue
will not increase with the growth of the economy. Instead,
the revenue will diminish as refiners switch to the production of non-leaded gasoline.
In summarizing these remarks, I want to stress 3 points.
First, it would be extremely difficult to make substantial
headway in controlling air pollution with the continued use of
lead additives in gasoline.
Second, unless Congress, through the adoption of the
clean Air Tax Act of 1970, assures all interested parties
that lead-free gasoline will be available in the near future,
they will not have a firm base for research and planning.
My third and final point is this. The Administration
has given this legislation high priority. We plan to make
every effort to get this tax enacted during the current
session of Congress.
I believe that we will succeed. In so doing, we will
take a vital step in the battle to clean up our air.
000

Department 01 the TREASURY
UNGTON. D.C. 20220

TElEPHONE W04-2041

ADVANCE FOR RELEASE AM'S
TUESDAY, AUGUST 11, 1970
TREASURY DEPARTMENT ANNOUNCES APPOINTMENTS IN
INTERNATIONAL DIVISION REORGANIZATION
Secretary of the Treasury David M. Kennedy today announced
three appointments within the Office of the Assistant
Secretary for International Affairs.
Appointed were Donald A. Webster of Washington, D.C.,
as Deputy Assistant Secretary for Trade and Investment;
Wilson E. Schmidt of Blacksburg, Virginia, as Deputy
Assistant Secretary for Research, and John M. Hennessy of
Cambridge, Massachusetts, as Deputy Assistant Secretary for
Development Finance.
The new appointments coincide with an impending
reorganization in the Office of the Assistant Secretary for
International Affairs, designed to increase Treasury's
contribution to international economic, finance and trade
policies.
Mr. Webster was Assistant to Secretary Kennedy prior
to the new appointment. In his new post, he will aid
Assistant Secretary for International Affairs John R. Petty
in the formulation and implementation of policies dealing
with foreign trade, commerce, capital markets and investments.
He will also be Acting Assistant Secretary for International
Affairs in Mr. Petty's absence.
Before joining the Treasury, Mr. Webster participated
in studies on the Nixon-Agnew Key Issues Committee, having
previously been Minority Staff Economist for the Joint
Economic Committee of the Congress from 1962 to 1968. He
was also a research writer for Congressional Quarterly.

K-467

- 2 Mr. Webster's prior government service also included a
period as research assistant to Senator Frederick G. Payne
of Maine (1955-56) and as Assistant to the Assistant
Administrator for Congressional and Public Affairs,
General Services Administration (1961-62).
From 1955 to 1959
he was on active duty in the Navy as a reserve officer in
photo intelligence.
Born in Rochester, New York, he holds degrees from
Hamilton College, Clinton, New York, and Johns Hopkins
School of Advanced International Studies.
Mrs. Webster is the former Helen Long of Falmouth,
Massachusetts.
Mr. Schmidt, who will assume his post as the new
Deputy Assistant Secretary for Research in early September,
will be primarily responsible for directing major poli~y
research studies on the variety of international monetary,
economic and financial issues with which the Department is
concerned.
Mr. Schmidt, 43, is currently Professor and Head of the
Department of Economics at Virginia Polytechnic Institute and
State University where he has been associated since 1966.
Prior to that time, Mr. Schmidt was a member of the economics
faculty at George Washington University where, during his last
year, he chaired the Department.
An authority in the areas of international economics
and economic development, Mr. Schmidt, in 1960, was visiting
Professor of economic development at the School of Advanced
International Studies of Johns Hopkins University,
Washington, D.C.
From 1963 to 1965 he was visiting Professor
at the University's Center in Bologna, Italy.
He holds degrees from the University of Maryland, the
University of Pittsburgh and the University of Virginia.
He is married to the former Eleanor Parker of
Hyattsville, Maryland.
The Schmidt's have three sons.

- 3 -

The responsibility of Mr. Hennessy, who will assume the
post of Deputy Assistant Secretary for Development Finance
in mid-September will be primarily within the area of development
assistance, focusirig on U.S. relations with the multi-lateral
lending institutions.
Mr. Hennessy, 34, a native of Boston, is currently with
Arthur D. Little, Inc., of Cambridge, Massachusetts,
consulting on development programs in Latin America.
He joined the First National City Bank. New York, in
1958 working in New York, Argentina, Uruguay and Paraguay.
Subsequently, he was manager of the bank's offices in
La Paz, Bolivia and Lima, Peru.
He graduated magna cum laude from Harvard in 1958 and
is currently completing his thesis for a Ph.D. at
Sloan School of Management, Massachusetts Institute of
Technology, where is is also a course instructor.
Mrs. Hennessy, a native of Paraguay, is the former
Margarita Cassacia. The Hennessy's have a son, Michael,
and a daughter, Alexandra.

000

Department of the
~f.lN.

D.C. 20220

TREASURY
TelEPHONE W04·2041

ADVANCE FOR RELEASE AM'S
TUESDAY, AUGUST 11, 1970
REX BEACH NAMED ASSISTANT TO TREASURY SECRETARY
Treasury Secretary David M. Kennedy today announced
the promotion of Rex Beach to Assistant to the Secretary,
succeeding Donald A. Webster.
Mr. Beach was formerly Deputy Assistant to the Secretary
and Director of the Executive Secretariat.
Before coming to the Treasury, he was an Assistant
Professor of Economics at Arizona State University and
previously served as legislative assistant to Senator
James B. Pearson of Kansas.
A native of Kansas City, Kansas, Mr. Beach attended
Cornell University and Kansas State University, receiving
his B.Ao from Kansas State. He also attended the Justus
Liebig Universitaet, Giessen, West Germany, as an exchange
student. He received his MoA. degree in international relations from John Hopkins University, and his Ph.D. in
economics from Brown University.
Mr. Beach, his wife and three sons live in McLean,
Virginia.
000

K-468

Department of the
HINGTON. O.C. 20220

A'ITENTION:

TREASURY
TELEPHONE W04-2041

FINANCIAL EDITOR

FOR RELEASE 6:30 P.M.,
Monday, August 10, 1970.
RESULTS OF 'l'REASURY' S WEEKLY BILL OFFERING
Ihe lreasury Department announced that the tenders for two series of 'lreasury
bills, one series to be an additional issue of the bills dated May 14, 1970
, and
the other series to be dated August 13, 1970
,which were offered on August 4, 1970,
vrere opened at the Federal Reserve Banks today.
Tenders were invited for $1,800,000,000
JY thereabouts, of
91-day bills and for $1,300,000,000, or thereabouts, of 182 -day
:)jlls. The details of the two series are as follows:
~ANGE

OF ACCEPTED
BIDS:

~()MH~TITIVE

High
Low
Average

91-day Treasury bills
maturing November 12, 1970
Approx. Equiv.
Price
Annual Rate
98.365
98.342
98.354

sI

182-day Treasury bills
maturing February 11, 1971
Approx. Equiv.
Price
Annual Rate
96.638
96.618
96.622

6.468%
6.559%
6.512%

J:j

6.650%
6.690%
6.682%

J:j

~ Excepting 3 tenders totaling $1,260,000

83% of the amount of 91-day bills bid for at the low price was accepted
43% of the amount of 182-day bills bid for at the low price was accepted
'OTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

A]2]21ied For
$ 31,480,000
1,794,870,000
52,540,000
39,010,000
20,970,000
46,510,000
212,570,000
41,550,000
27,710,000
36,070,000
28,770,000
166,06°2°°0

Acce]2ted
21,480,000
$
1,186,360,000
27,540,000
39,010,000
20,970,000
42,340,000
209,850,000
39,250,000
16,710,000
36,050,000
19,770,000
14°2 720 ,000

$2,498,110,000

$1,800,050,000

~lied

For
18,690,000
1,846,540,000
11,980,000
30,490,000
32,850,000
31,440,000
145,960,000
25,640,000
24,720,000
21,480,000
30,500,000
254,220,000

EI

$2,474,510,000

AcceEted
6,690,000
939,410,000
11,680,000
29,770,000
15,850,000
18,390,000
50,240,000
20,170,000
7,660,000
19,680,000
17,300,000
164,400,000

$

$1,301,240,000

sf

Includes $ 380 ,180 ,000 noncompeti ti ve tenders accepted at the avera.cs e price of 98.354
Includes $210,520,000 noncompetitive tenders accepted at the average price of 96.622
These rates are on a bank discount basis. 'lhe equivalent coupon issue yields are
6.71% for the 91-day bills, and 7.01% for the 182 -day bills.

~ Department of the TRfASU RY
;HINGTON. D.C. 20220 .

TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

August 11, 1970

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites te.;d,i~rs
for two series of Treasury bills to the aggregate amount of
$ 3,100,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing August 20 , 1970 ,
in the amount of
$2,987,355,000,
as follows:
9l-day bills (to maturity date) ~o be issued August 20, 1970,
in the amount of $1,800,000,000,
or thereabouts, representing
an additional amount of bills dated May 21, 1970,
and to
mature November 19, 1970,
originally issued in the amount of
$ 1,303,530,000,
the additional and original bills to be
freely interchangeable.'
l82-day bills, for $1,300,000,000,
or thereabouts, to be
dated August 20, 1970,
and to mature February 18, 1971.
The bills of both series will be issued on a discount basis
under competitive and noncompetive bidding as hereinafter provided,
and at maturity their face amount will be payable without i.nterest.
They will b~ issued in bearer form only, and in denominations of
$10,000, $50,000, $100,000, $500,000, and $1,000,000 (maturity value),
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p. m., Eastern Daylight Saving
time, Monday, August 17, 1970.
Tenders will not be
received at the Treasury Department, Washington. Each tender must
be for an even mUltiple of $10,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may
not be used. It is urged that tenders be made on the printed
forms and forwarded in the special envelopes which will be supplied
by Federal Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders'for account of
provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except f0r their own account. Tenders will be receiv~
~ithout deposit from incorporated banks and trust companies and from

~ustomers

- 2 responsible and recognized dealers in investment securitlelil. Tenderl
from others must be accompanied by payment of 2 percent of the lacl
amount of Treasury bills applied for, unle •• the tender. are
accompanied by an express guaranty of payment by an incorporated b.~
or trust company.
Immediately after the closing hour, tender. will be opened at
the Federal Reserve Banks and Branches, following which public annOUftee,
ment will be made by the Treasury Department of the amount and price
,]f accepted bids. Only those submitting _competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the re.pective issues.
Settlement for accepted tenders in accordance with the bids must be
!aade or completed at the Federal Reserve Bank on August 20, 1970, in
cash or ot~er immediately available funds or in a like face amount
of Treasury bills maturing August 20, 1970.
Ca.h and exchange
tenders will receive equal treatment. Cash adjustment. will be mad.
for differ£llces between the par value of maturing billl accepted in
exchange and the issue price of the new bill ••
The income derived from Treasury bill., whether interelt or
gain from the sale or other disposition of. the bill., doe. not have
any exemption, as such, and losl from the la1e or other dilposition
of Treasury bills does not have any special treatment, as .uch,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxe., whether Federal or
State, but are exempt from all taxation now or her.after impoled on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of dilcount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills iS8ued
her.eunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companie.) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank o~nAranch.

Department 01 the TREASURY
HtNGTON. D.C. 20220

TELEPHONE W04~2041

FOR RELEASE UPON DELIVERY
STATEMENT OF THE HONORABLE CHARLS E. WALKER
THE UNDER SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON EDUCATION OF THE COMMITTEE
ON LABOR AND PUBLIC WELFARE, U. S. SENATE,
WEDNESDAY, August 12, 1970 10:00 A.M. (EST)
As one who has had a deep commitment to student loan programs
for close to a decade, it is both a pleasure and a privilege to
appear before the Subcommittee on Education.
My primary purpose here today is to discuss the secondary
market provisions of the Administration's Higher Education Opportunity Act of 1970.
I want to concentrate my remarks on the secondary market
aspects for two reasons:

First, since the secondary market,

unlike other provisions of the Act, is primarily a financing
•

matter and therefore of particular interest to the Treasury,
paJ;'ticipated·in drafting it.

~ve

Secondly, if my mail from lenders,

schools, state guarantee agencies, and financial aid officers
is any indication, the secondary market is most urgently needed.
The guaranteed loan plan, for all intents and purposes, is
just completing its fourth school year.

So far

2~

million loans

totaling $2t billion have been made to students attending some
7,000 educational institutions.

Close to 20,000 lenders -- mainly

banks -- have participated in this program.

K-469

The cost to the

government in interest benefits from November 8, 1965,through
JlUle 30, 1970, has been just undet

(;.-.,.~

lr~ll.ioL.

allowance passed l~st year cost $4.8 million.

Th.e-;' " : ; i

The total cost

of the guaranteed loan program since November 1965, through
June 30, 1970,was $159.5 million.
Let me make a flat statement in which I strongly be lieve:
guaranteed loan program has helped

~

students, with

~

Thl

money,

at a lower cost to the government per student than any other type
of student financial aid program.
The program continues to grow.

That is quite a record.
During the year ending

June 30, some $840 million in loans were made to some 920,000
students.

That is $152 million more than last year.

The program

has grown because more students have learned about the program,
more students need loans to meet the rising costs of education,
more schools have become eligible, and more lenders are participatir
This growth is all the more encouraging when you consider
that student loan volume continued to expand while other longterm borrowers were cut back during the past year.

I am sure

I do not have to tell any member of Congress about the problems
home buyers and state and local governments had in raising funds.
Yet, the very growth and success of the student loan program is cause for serious concern in the long run.

For as lenders

continue to make the loans, they also put themselves in a liquidity

s~l.let=!ze.

Some

5::u';·~nt

borrowers, for example, who were

- 3 -

freshmen in 1966 when the program got under way, will not make
their first principal payment on the loan for seven more months.
For those who go tQ graduate school, into the service, or join
the Peace Corps or Vista, still more years will elapse before
repayment starts.
These loans have a mixture of characteristics that make
them markedly different from other loans.

Like a consumer loan,

the size is small, payments are made monthly, and the handling
costs are large.

In terms of repayment schedules, the loans

are more like mortgage loans.

Yet, unlike consumer and mortgage

loans, payment of principal is deferred.
The liquidity squeeze will eventually catch up with any
lender who is really active in the program.

Those who have made

these loans from the outset are starting to feel the squeeze now.
Their problems are complicated by the general liquidity squeeze
on financial institutions and the heavy demand for capital from
all quarters.

These developments have caused several states to

design their own secondary markets, but these local markets cannot meet all of the need.
The varied nature of these student loans, together with the
success of the program across the nation, makes the creation of
the National Student Loan Association necessary.

- 4 Although the detailed operations of any secondary financial
market are necessarily complicated, the concept is simple.
Briefly stated., S. 3636 would establish a National Student
Loan Association, a private corporation which would buy, sell,
and otherwise deal in all types of student loans insured under
the Higher Education Act of 1965.
The Association would raise its initial capital by selling
common stock to eligible lenders -- commercial banks, savings
and loan associations, mutual savings banks, credit unions, and
educational institutions.

It could also sell preferred stock to

anyone interested in supporting higher education.

The Associa-

tion would then issue its own obligations which are guaranteed
in terms of both principal and interest, thus attracting new
sources of funds into the student loan program.

Pension funds,

foundations, college endowment funds, and insurance companies
which, for a variety of reasons, are not equipped to serve as
lenders under the program, should be interested in supporting
this program.
The Association would use the money thus raised to make
advances against student loans (warehousing) or to purchase
loans from qualified lenders.
The warehousing provision stipulates that the Association
will advance no more than 80 percent of the face value of the

- 5 -

insured loans pledged.

It further states that the proceeds

from such an advance can be reinvested only in additional
student loans.
The warehousing operation is needed because the various
state guarantee programs are not uniform.

For example, some

do not guarantee 100 percent of the loan, making them hard to
sell.

Warehousing is not a sale; it is a temporary arrangement

in which the original lender pledges the loan for a set period
and agrees to take it back.

The originator, of course, would

have to pay interest on the funds advanced to him under the
warehousing proposal.
The warehousing arrangement can provide a temporary source
of liquidity for lenders, but by itself it would not have the
flexibility or impact that can be achieved with a full-fledged
secondary market operation.
I want to stress this point.

Warehousing will not solve

the long-term liquidity problems created by a sizeable student
loan portfolio.

The lender must at some point repay the advance.

The flexibility to adjust to changing market conditions would not
be provided by warehousing alone.
A full secondary market would also add flexibility to various
objectives of the loan program itself.

A major purpose of the

secondary market would be to relieve pressure points --' for

- 6 example, lenders in college towns with a high percentage of
loanable funds in student loans.

It would have the flexibility

to show preference for freshmen loans, minority loans, or loans
in specific geographic areas where demand is outrunning supply.
The Association could buy certain amounts of various types of
loans in package deals.
In the purchasing operation, the Association would adjust
the rates at which it buys student loans with fluctuations in
the money markets.
How would this work?

The Association would invite bids

from originators of student loans.

In effect, the Association

would ask lenders what price they would be willing to take for
student loans in their portfolio.

The prices -- at a discount

or a premium -- would vary according to both the interest rate
on the loan (some have a six percent rate, some have seven, etc.)
and the length of time before the note is finally paid off.
As I said earlier, this may sound very complicated, but
every lender in the country has access to books and tables
which show how various prices, interest rates, and maturities
interact on loans of this type.
Loan originators would continue to service the loans for
a fee.

This fee, which would be set by the Association, would

probably have to be in the range of

It

to

l~

percent at' the

- 7 outset.

The figure may sound high, stated as a percentage,

but in dollar terms it is not.

For example, the

l~

percent

fee would mean that the lender would receive $15 for handling
the billing and collection procedure for a $1,000 loan for one
year.

While the figure may not be a break-even proposition

for a lender on a $1,000 loan, it would average out with larger
loans in the consolidated stages.

The Association could adjust

this fee as it gains experience in the operation.
When interest rates come down, the Association could sell
loans from its portfolio.

And, over a period of, say, five

years, the Association could take advantage of fluctuations in
money markets in order to balance out its operations and earn
a profit.
The proposal to establish the National Student Loan Association is intentionally broad as far as its operations are concerned.
It would have to adjust and adapt its operating procedures with
experience and as market conditions dictated.

Flexibility is

of paramount importance within the framework of the goals and
purposes as set forth in the legislation.

Within limits, the

Association should be able to establish its own rules and by-laws,
and not have these set by legislation.

Obviously -- and again,

within limits -- a new venture such as this should be able to
experiment with different approaches.

- 8 The secondary market for student loans is needed now to
help assure liquidity to financial institutions which hold
$2~

billion in student loan paper.

With a new source of funds

perhaps never tapped by many of them -- they will continue to
support this program.

The secondary market would also encourage

new lenders to participate.

The assurance that there is a

ready market for student loans, whether used or not, would
certainly increase the attractiveness of the program.
Office of Education estimates the dollar volume for student
loans will approach one billion dollars in the school year starting in September.

With the weakness in labor markets, many

students may not earn as much as usual this summer.

That factor,

plus the continuing rise in the cost of education, will push
up demand for loan funds.
The establishment of a true secondary market is essential
if the student loan program is to reach its full potential in
the months and years ahead.
By way of summarizing these remarks, let me stress three
points.
First, the liquidity problem caused by the long-term nature
of these loans is the biggest problem confronting the continued
expansion of the guaranteed student loan plan.
Second, while proposals to set up warehousing
would provide limited funds, a secondary market

ope~ations

with a

- 9 warehousing facility included, would be much more flexible and
more effective in increasing the flow of funds into student
loans.
Third, the liquidity situation in financial institutions
today is very tight.

Under these circumstances, lenders want

to preserve their own flexibility and options as much as possible.
Yet, there is nothing flexible or assuring about a student loan
which might be on the lender's books for 15 years or more.

Just

knowing the loans can be sold to obtain additional funds will
increase their attractiveness.

This factor, coupled with the

strong commitment of the majority of institutions making these
loans, should enable the program to meet its full potential
during the 1970's.
# # # # # # # # # # # #
NEW TAX BENEFITS FOR COLLEGE STUDENTS AND THEIR FAMILIES
Some critics of the Administration's proposals claim that
the middle-income families are being ignored. To put the whole
matter in its proper context, it is imperative that the impact
of the Tax Reform Act of 1969 be considered, particularly those
provisions dealing with tax liabilities of students and their
families.
I have a table which shows the impact on a family of four
under different circumstances and assumptions.
In 1973, when these provisions become fully effective,
student who earns less than $1,750 will not have any taxes
withheld from his pay and will not have any tax liability.
1969, this same student would have become taxable with only
of earned income, and if he earned $1,750 would have had to

a
In
$900
pay

- 10 $124 in taxes. More importantly, parents will still be able
to claim these students as dependents if they contribute more
than half of their support.
For example, q married couple with $7,500 in income and
two student dependents who each earn the maximum $1,750 will
have a total family tax bill of $518 when the law is fully
effective in 1973. Last year the same family would have had
a tax of $1,004.
The table shows the impact on families with different
income levels and with one or two students in school earning
the maximum. The two most important factors causing the change
are the increase in the personal exemption and the increase in
family income which is not subject to taxes.
I didn't want to take a lot of time with this matter but
I thought the table might be helpful in considering the total
matter of student financial affairs. Although I have only
submitted one table to show the full impact of the whole Act,
I would be happy to furnish other tables showing the impact
in each year, or any.other combination that might be helpful
to the Committee.

*******

Illustration for Calendar Year 1973 of New Tax Law
on Families with Children Earning Income of $1,750
(Includes 10 Percent Surcharge Under Old Law)

Parents
income 1/

Students
income

Family
income 2/

Old Law

Tax under
New Law

31

41

Married CouEle with One Student DeEendent

$ 7,500

$1,750

$ 9,250

$1,005

$ 646

10,000

1,750

11,750

1,475

1,050

15,000

1,750

16,750

2,537

1,987

20,000

1,750

21,750

3,772

3,200

Married CouPle With Two Student DeEendents

:$ 7,500

$3,500

$11,000

$1,004

$ 518

10,000

3,500

13,500

1,473

909

15,000

3,500

18,500

2,516

1,824

20,000

·3,500

23,500

3,724

3,014

ce of the Secretary of the Treasury
fice of Tax Analysis

June 4, 1970

Parents contribute more than one-half of the support of the student(s).
Sum of parents and students income.

Law prior to tax year 1970; assumes the standard deduction or deductions 10 percent
Jf income whichever is higher, in computing parents tax and students tax. The tax
Jf the one student under old law is $124. The tax of the two students under old law
is $248. The combined parents and students tax is shown. Includes 10 percent surcharge.
Personal exemption of $750, minimum standard deduction of $1,000 and standard
ieduction of 15 percent; $2,000 ceiling or itemized deduction of 10 percent.

Department 01 the TREASURY
;HINGTON, D.C. 20220

TElEPHONE W04-2041

FOR IMMEDIATE RELEASE

August 11, 1970

ARTEMUS E. WEATHERBEE NAMED TO U. S. DIRECTOR
OF THE ASIAN DEVELOPMENT BANK
Treasury supplied the following background material on
Artemus E. Weatherbee who was nominated today by president
Nixon for a two-year term as executive director of the
Asian Development Bank, Manila:
Mr. Weatherbee, age 52, a legal resident of
Bangor, Maine, has over 30 years of Federal service.
He was appointed to his present post, the Department's
top career general management position, in 1959 by
Secretary Anderson with tQe approval of President
Eisenhower.
He has served as an Assistant Secretary
longer than anyone in the history of the Treasury
Department and under five Secretaries and four
Under Secretaries.
Prior to his Treasury service, Mr. Weatherbee
served in the Post Office as Deputy Assistant
Postmaster General, in the State Department in
several capacities including Deputy Director of
Personnel and in several other Agencies. He entered
Federal service in 1939 via an intership in public
administration as one of 40 students selected in
nation-wide competition by the National Institute of
Public Affairs. He saw overseas service in World War II
as a Naval Officer and is on the retired list as a
Commander.
Mr. Weatherbee was an honor graduate of the
University of Maine where he worked his way through,
participating in a number of extra curricular
activities and graduating as Class Valedictorian,
a member of Phi Beta Kappa and Phi Kappa Phi '. and a
nominee of the University for a Rhodes Scholarship.
He was a graduate of Bangor High School where he
received the Kirstein Scholarship to the most deserving
graduate (male).
(OVER)
K-470

- 2 -

Mr. Weatherbee has been active in the Washington
United Givers Fund, serving several years as Vice
President, and in the promotion of Savings Bonds sales
as alternate to the Secretary of the Treasury on the
Interdepartmental Savings Bonds Committee. He has
served as president of the Maine State Society,
President of the D.C. University of Maine Alumni
Association, and Commanding Officer of his Naval
Reserve Company. He is a member of the University of
Maine Development Council and has been involved in a
number of community, church, scouting, veterans and
professional organizations.
Service awards have included the State Department's
Meritorious Service Award and Treasury's Exceptional
Service Award as well as the Arthur Flemming Award from
the U.S. Junior Chamber of Commerce as one of the ten
outstanding young men in Government in 1956, the
Career Service Award from the National Civil Service
League as one of ten outstanding career civil servants
in the Federal Government in 1965 and the Rockefeller
Public Service Award for Distinguished Service in 1968.
Mr. Weatherbee was married in 1940 to Pauline
Jellison of Bangor, Maine and has three children,
Sue (Mrs. William C. Polini) of Marlborough,
Massachusetts, Richard Charles of Takoma Park, Maryland,
and Steven Sherman of Silver Spring, Maryland, and two
grandchildren, Michael and David (Polini). His
stepfather and mother, Mr. and Mrs. Ray W. Sherman,
are residents of Bangor as is his mother-in-law,
Mrs. Charles A. Jellison. Mrs. Weatherbee is also an
honor graduate of the University of Maine and a member
of Phi Beta Kappa, also attended Bangor High School,
and also received the Kirstein Scholarship to the most
deserving graduate (female).
Mr. and Mrs. Weatherbee reside at 12613 Springloch
Court, Silver Spring, Maryland, 20904, but will be moving
to Manila in a few weeks. They may be reached there
c/o American Embassy, APO San Francisco, California 96528.

000

Department of the TREASURY
TELEPHONE Wtl4·2041

HINGTON. D.C. 20220

FOR IMMEDIATE RELEASE

August 17, 1970

CHINESE CENSUS
The Treasury Department announced today that it is taking
a census

o~ Ch~nesc

Control Re,';uLJ.t Lons.

property blocked under the Foreign Assets
.<-1.

census of

last taken early in 1951, shortly
issued.

blocl~ed
1..1.~ter

Chinese property was

the Reculations were

The new census \Iill provide the Treasury Department

wi.th current data concerning the amount, location and nature of
the blocked assets.
Under the new census all blocked Chinese property must be
reported to the Treasury Department not later than October 1,
1970 by persons in the United States who held any such property
as of July 1, 1970.

In addition, 1..1.11 persons who reported

Chinese property on Form TFR-603 under the earlier census must

c,

file a current report with respect to that property whether or
not it is still bloc]<::ed, unless the property reported in 1951
was that of a person vlho was chen in Taiwan.
Reports under the current census are to be

~iled

on Form

TFR-6l0, copies of which are being forwarded to all persons on
the Foreign Assets Control mailing list and to all persons who
filed reports in 1951 on Form TFR-603.

:n;

Other persons who require

the reports may obtain them from Unit 610, Foreign Assets Control,
Department of the Treasury, Hashington, D.C. 20220 or from the
Foreirrn
Assets Control Division of the Federal Reserve
o

K-471

New York, 33 Liberty Street, New York, New York 10045·

Ban;~

of

Department of the
........

TREASURY

~t ',1ft,~"".

~,~-:~~

rTENTION:

FINANCIAL EDITOR

)R RELEASE 6: 30 P.M.,
onday, August 17, 1970.
RE8LJL'rS OF TREASURY'S WEEKLY

BILL OFFERING

'11)(: l l rcasury

j)('prtt'lrTlflli ,'1.nnc)lJ[lC'ed I.hrtL Lhe I.ellder::; for two series of Treasury
ills, one series to be an additional issue of the bills dated
May 21, 1970
,and
le other series to be dated August 20, 1970
,which were offered on August 11, 1970
~re opened at the Federal Reserve Banks today.
Tenders were invited for $1,800,000,000
r thereabouts, of 91 -day bills and for $1,300,000,000 or thereabouts, of
182-day
ills. The details of the two series are as follows:

OF ACCEPTED
)MPETITIVE BIDS:
~GE

High
Low
Average

91-day Treasury bills
maturing November 19, 1970
Approx. Equiv.
Annual Rate
Price
98.365 ~
98.346
98.350

6.468%
6.543%
6.527%

182-day Treasury bills
maturing February 18, 1971
Approx. Equi v .
Price
Annual Rate
96.678 E./
6.571%
96.662
6.603%
96.670
6.587%

EI Excepting 1 tender of $1,000,000
Excepting 1 tender of ~240 ,000;
54% of the amount of ~l-day bills bid for at the low price was accepted
1510 of the amount of JiJ2-day bills bid for at the low price was accepted
~

)TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

A12121ied For
$ 34,210,000
2,115,380,000
51,170,000
43,870,000
37,930,000
44,790,000
287,510,000
40,250,000
27,380,000
38,250,000
28,900,000
193,540,000

Acce12ted
$ 23,950,000
1,222,760,000
26,150,000
43,550,000
37,930,000
29,690,000
241,930,000
30,200,000
18,920,000
33,230,000
15,900,000
76,080,000

$2,943,180,000

$1,800,290,000

A12121ied ,For
$ Itl ,? 90,000
1,906,740,000
14,660,000
41,970,000
16,300,000
35,300,000
184,590,000
39,990,000
25,370,000
30,120,000
26,600,000
177,060,000

£I

$2,517,490,000

AcceEted
8,690,000
978,360,000
13,840,000
37,590,000
16,300,000
18,460,000
85,540,000
29,690,000
11,020,000
24,410,000
16,600,000
59,570,000

$

$1,300,070,000 ~

InclUdes $ 378,380,000 noncompeti ti ve tenders accepted at the average price of 98.350
Includes $222,460,000 noncompeti tive tenders accepted at the average price of 96.670
These rates are on a bank discount basis. The equivalent coupon issue yields are
6. 73 10 for the 91 -day bills, and 6.91 %for the 182 -day bills.

~epartment of the fREASU RY
IGTON. D.C. 20220

TELEPHONE W04·2041

OR IMMEDIATE RELEASE

August 18, 1970

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
or two series of Treasury bills to the aggregate amount of
3,200,000,000, or thereabouts, for cash and in exchange for
reasury bills maturing August 27, 1970,
in the amount of
3,102,755,000,
as follows:
92-day bills (to maturity date) to
n the amount of $ 1,800,000,000,
or
n additional amount of bills dated May
lature November 27, 1970,
originally
1,300,780,000,
the additional and
~eely interchangeable.
l82-day bills, for $ 1,400,000,000,
ated August 27, 1970,
and to mature

be issued August 27, 1970,
thereabouts, representing
28, 1970,
and to
issued in the amount of
original bills to be
or thereabouts, to be
February 25, 1971.

The bills of both series will be issued on a discount basis
.nder competitive and noncompetive bidding as hereinafter provided,
nd at maturity their face amount will be payable without i.nterest.
bey will be issued in bearer form only, and in denominations of
10,000, $50,000, $100,000, $500,000, and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches
.p to the closing hour, one-thirty p. m., Eastern Daylight Savin~
irne, Monday, August 24, 1970.
Tenders will not be
'eceived at the Treasury Department, Washington. Each tender must
e for an even mUltiple of $10,000, and in the case of competitive
enders the price offered must be expressed on the basis of lPO,
'ith not more than three decimals, e. g., 99.925. Fractions may
.ot be used. It is urged that tenders be made on the printed
orms and forwarded in the special envelopes which will be supplied
y Federal Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
ustomers provided the names of the customers are set forth in such
enders. Others than banking institutions will not be permitted to
ubmit tenders except for their own account. Tenders will be received
ithout eepoSl~ from inoorporated banks and trust companies and from

- 2 responsible and recognized dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announce·
ment will be made by the Treasury Department of the amount and price ra~
of accepted bids. Only those sUbmitting_competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly re'serves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subj ect to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on August 27, 1970, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing August 27, 1970.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differ£~ces between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition o~ the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of .
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current reviSion) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank 0bO~ranch.

Department of the TREASURY
HINGTON. O.C. 20220

TElEPHONE W04-2041

FOR RELEASE AT NOON
THURSDAY, AUGUST 20, 1970
REMARKS BY THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE
THE COMBINED CIVIC CLUBS OF SALT LAKE CITY, UTAH,
AT NOON, THURSDAY, AUGUST 20, 1970
I don't need to tell my friends here today that it's
always a pleasure to return to Salt Lake City. I am
particularly grateful to be able to take advantage of this
pleasant occasion to share some thoughts with you about the
state of the economy and what this Administration is doing
to facilitate the transition from inflation to stable
growth, and from a wartime to a peacetime economy.
The essential task we faced when this Administration
came into office 19 months ago was to find a way of cooling
the economy without tipping it into recession. You are all
well aware that in the three years prior to the last election,
the Federal Government had spent some $38 billion more than it
had collected in taxes. These large deficits, reflecting
primarily the rapid build-up of the Vietnam war, set in
motion inflationary forces that only now are we beginning
to see subside.
Many of us who took on responsible positions in the
Administration came to our tasks with a view that the
Federal Government should interfere as little as possible
in the economic processes of our nation. Nevertheless, we
all recognize that the Government has a major responsibility
with respect to the functioning of our economy -- a
responsibility that was abdicated by those who permitted
such sizeable deficits at a time when our resources, both
human and industrial, were already fully employed.

- 2 Our first order of business then, on coming into office,
was to take steps to restore a more orderly rate of growth.
Specifically, we had the difficult and unrewarding task
of holding Federal expenditures to a more sustainable level
than had been the case in earlier years. Despite the
difficulties, bordering at times on anguish, this task
in fact has largely been accomplished. From expenditure
increases averaging 12 percent from Fiscal Year 1965 to 1969,
the growth in outlays was slowed to just over 6 percent last
year and is projected to grow at an even slower pace this
year.
The President's effort to keep the budget under control
has meant that many programs which under other circumstances
would merit expansion have had to be held in check. The
President's continuing commitment to responsible expenditure
policies was once again made clear in his courageous decision
last week to veto popular bills in the field of education
and housing that would have added more than $1 billion to
the amounts that he had asked for.
This policy of expenditure restraint is beginning to
payoff. No one would claim that a complex economy such
as ours can be slowed after four years of excessive inflation
without some costs. Those costs have shown up not only in
our inability to take on projects that we would like to pursue,
but more clearly in the form of higher unemployment than we
as a nation should tolerate for any protracted period. But
these costs could not have been avoided by refusing to face
the problem of inflation -- they could only have been
postponed, with greater costs in the future.
As I said, I think we are now in a position to begin
to see the results of our perseverance in policies of
restraint. Excessive demand pressures that were so evident
last year have been clearly dissipated. Indeed, it becomes
increasingly clear that the economy has already passed
through the most difficult period of transition. This does
not mean that all of our problems are over, of course; but
it does mean that we can look forward to a gradually
increasing rate of expansion in the months ahead.

- 3 I am not sure that there is sufficient appreciation
of the fact that our economy has been subjected to two
different kinds of strain over the past year and a half.
Not only has it had to respond to the shift from overheated
expansion to a slower pace of growth generally, but on top
of this, it has had to absorb the pressures that have
inevitably accompanied the substantial reduction in defense
outlays that reflected the President's effort to shift
priorities into human resource programs. As the president
said in his speech on the economy in June, approximately
700,000 people have become job seekers as a result of
reductions in our military forces and in employment in
defense industries. Fortunately, no one believes any
longer that the strength of an economy such as ours depends
on the stimulation of war-related expenditures. There are
too many other obvious needs -- in the rebuilding of our
inner-cities and the safeguarding of our environment, to
name just two -- to fear any lack of effective demand.
But the fact remains that this particular period of
transition has been made more difficult by the phasing out
of our participation in Vietnam.
Although I am convinced that we have made substantial
progress in restoring the basis for sustained growth in the
future, I am the first to recognize that progress in slowing
price advances has been less rapid than all of us would
desire. I think we can take some comfort, however, from the
careful analysis that has just been prepared by the Council
of Economic Advisors in the form of its first Inflation Alert.
While that "alert" car-efu11y avoids pointing a finger at
specific culprits as the cause of inflation, its analysis of
the process of inflation indicates that reduced demand
pressures, brought about by the kinds of basic policies we have
been pursuing, do result in reduced price advances. I believe
that in the next few months we will begin to see the taperingoff in inflation that all of us have been looking for.
At the same time that the president requested the Council
of Economic Advisors to prepare periodic Inflation Alerts,
he appointed a Commission on Productivity, composed of leaders
from industry, labor, the public and the Government to
focus on the processes of inflation with a view to devising
policies that will stand us in better stead in the future to

- 4 -

avoid the kind of inflationary excesses that we have suffered
in recent years. Basic to any such policies must be a greater
emphal1is on productivity, as the name of this Commission implies.
One of the reasons for my belief that price advances will taper
off in the months ahead is the record of past business cycles
that indicates that W8 can expect a rise in productivity as we
move into a period of re-expansion such as I believe lies aheac.
Although I am optimistic about the course of the economy
over the coming months, I want to point out that we cannot
afford to relax prematurely our basic economic policies. This
is not to say that we mutt avoid any deficit in the budget at
all costs. In fact, as you know, the last official budget
estimate for the current fiscal year foresaw some shortfall in
revenues. And the evidence since that forecast was made in May
indicates that the deficit will be larger than the $1.3 billion
indicated at that time. Moreover, given the change in the
economic climate that has taken place in recent months, I think
it is entirely appropriate that the Federal Reserve has eased
up on its monetary policy recently.
But we cannot permit the budget again to become so
unbalanced as to rekindle the inflationary pressures that only
recently have died down. This means that we must keep a tight
rein on government expenditures this year. It also means that
the tax proposals now before the Congress must be enacted. The
President has requested accelerated payment of gift and estate
taxes which would yield $1.5 billion of additional revenue,
on a one-shot basis, in this fiscal year. He also has asked
for a tax on lead in gasoline which would result in a further
$1.6 billion and a renewal of telephone and automobile excise
taxes.
My comments thus far have dealt with the state of the
economy in general. But the Administration is also acutely
aware of the need to focus attention on Government policies that
are directed primarily to state and local economies. As a timely
example, I want to applaud Congressman Burton on the report which
was recently presented to the President by the Public Land Law
Review Commission. You are indeed fortunate to have had

- 5 -

Congressman Burton represent you on this Commission. Its
purpose was to examine with a view to reform the existing methods
of administering the public lands of the United States and the
laws which affect the~. With almost 70 percent of the land within
the State of Utah being owned by the Federal Government, the
future of the Commission's proposals will undoubtedly have great
impact on Utah's economic growth. Highly important questions
were raised regarding Federal compensation to the states for the
use and occupancy of public lands, the coordination of public
land use within local economic planning frameworks and the
proper use of public lands in order to achieve environmental
objectives.
This is just one example, though an important one,
of the kind of productive partnership that can be forged
between governments at the national and the local level. This
kind of "federalism" underlies many of the initiatives of this
Administration, initiatives that can work to the benefit of all
the people.

000

Department 01 the TREASURY
TElEPHONE W04-2041

IINGTON. D.C. 20220

ATTENTION:

FINANCIAL EDITOR
August 18, 1970

FOR IMMED IATE RELEASE
RESULTS OF TREASURY OFFERINGS OF NOTES

The Treasury today announced that further tabulation of subscriptions to its
combined exchange and cash offerings of notes this month disclosed that these offerings had raised a net of $2.3 billion cash. This is an increase of $0.4 billion over
the amount which was originally announced on August 7. It is expected that these
additional funds, coupled with a continuation of the $100 million increase in weekly
offerings of regular Treasury bills, will enable the Treasury to meet its needs
through the third quarter and provide a portion of the cash requirements anticipated
later in the year.
The results of the exchange offering
tabulation (in millions of dollars):
ELIGIBLE FOR
EXCHANGE
DescriEtion
3-3/8% notes
1% bonds
Totals

~

the public are shown in the following

TO BE ISSUED
7-3/410
7-3/410
Notes
Notes
Total

2L15L74

8L15L77

UNEXCHANGED
Total

Total

%of
Eli~ible

$1,948

$1,142

$ 564

$ 1,706

$ 242

12.4

3 2657

1 2849

12221

3 2070

587

16.1

$5 ,605

$2,991

$1,785

$ 4,776

$ 829

14.8

In addition, Federal Reserve banks and Government accounts exchanged for $0.1
)illion of the notes maturing February 15, 1974, and for $0.5 billion of the notes
naturing August 15, 1977.
In the cash offering of 7-1/2% Treasury notes maturing February 15, 1972,
lubscriptions totaled $18.6 billion from the public of which $3.2 billion was accepted.
~ addition, $0.2 billion of the notes were allotted to Federal Reserve banks and
~vernment accounts.

Department of the

TREASURY
TElEPHONE W04-2041

SHINGTON. D.C. 20220

FOR IMMEDIATE RELEASE

August 19, 1970

TREASURY'S MONTHLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$ 1,700,000,000, or thereabouts, for cash and in exchange for
Treasury bills maturing August 31, 1970,
in the amount of
$ 1,701,192,000,
as follows:
273-day bills (to maturity date) to
in the amount of $ 500,000 000,
or
an additional amount of biils dated May
mature May 31, 1971,
originally
$1 , 200 , 170 , 000 ,
the additional and
freely interchangeable.
dated

be issued August 31, 1970,
thereabouts, representing
31, 1970,
and to
issued in the amount of
original bills to be

365-day bills, for $ 1,200,000,000,
or thereabouts, to be
August 31, 1970,
and to mature August 31, 1971.

The bills of both series will be issued on a discount basis
under competitive and noncompetive bidding as hereinafter provided,
and at maturity their face amount will be payable without i.nterest.
They will be issued in bearer form only, and in denominations of
$10,000, $50,000, $100,000, $500,000, and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches
up to the closing hour, one-thirty p. m., Eastern Daylight Saving
time, Tuesday August 25 1970.
Tenders will not be
received at th~ Treasury Department, Washington. Each tender must
be for an even mUltiple of $10,000, and in the case of competitive
tenders the price offered must be expressed on the basis of 100,
with not more than three decimals, e. g., 99.925. Fractions may
not be used. (Notwithstanding the fact that ~he one-year bills will
run for 365 days, the discount rate will be computed on a bank discount
basis of 360 days, as is currently the practice on all issues of
Treasury bills.) It is urged that tenders be made on the printed forms
and forwarded in the special envelopes which will be supplied by Federal
Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
~ustomers provided the names of the customers are set forth in such
:enders. Others than banking institutions will not be permitted to
"'""

- 2 submit tenders except for their own account. Tenders will be recei
without deposit from incorporated banks and trust companies and fr~
responsible and recognized dealers in investment securltle.. ~
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tender. are
accompanied by an express guaranty of payment by an incorporated bank
or trust company.
Immediately after the closing hour, tenders will be opened at
the Federal Reserve Banks and Branches, following which public announcement will be made by the Treasury Department of the amount and price range
of accepted bids. Only those sUbmitting_competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly re'serves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompetitive tenders
for each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three
decimals) of accepted competitive bids for the respective issues.
Settlement for accepted tenders in accordance with the bids must be
made or completed at the Federal Reserve Bank on August 31, 1970, in
cash or other immediately available funds or in a like face amount
of Treasury bills maturing August 31, 1970.
Cash and exchange
tenders will receive equal treatment. Cash adjustments will be made
for differ£Llces between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
The income derived from Treasury bills, whether interest or
gain from the sale or other disposition of, the bills, does not have
any exemption, as such, and loss from the sale or other disposition
of Treasury bills does not have any special treatment, as such,
under the Internal Revenue Code of 1954. The bills are subject to
estate, inheritance, gift or other excise taxes, whether Federal or
State, but are exempt from all taxation now or hereafter imposed on
the principal or interest thereof by any State, or any of the
possessions of the United States, or by any local taxing authority.
For purposes of taxation the amount of discount at which Treasury
bills are originally sold by the United States is considered to be
interest. Under Sections 454 (b) and 1221 (5) of the Internal
Revenue Code of 1954 the amount of discount at which bills issued
hereunder are sold is not considered to accrue until such bills are
sold, redeemed or otherwise disposed of, and such bills are excluded
from consideration as capital assets. Accordingly, the owner of
Treasury bills (other than life insurance companies) issued hereunder
need include in his income tax return only the difference between
the price paid for such bills, whether on original issue or on
subsequent purchase, and the amount actually received either upon
sale or redemption at maturity during the taxable year for which the
return is made, as ordinary gain or loss.
Treasury Department Circular No. 418 (current revision) and this
notice prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
from any Federal Reserve Bank o~o~ranch.

Deportment of the

TREASURY

IINGTON, D.C. 20220

TELEPHONE W04·2041

MEMORANDUM FOR CORRESPONDENTS:

August 19, 1970

The attached, Administrative Bulletin No. 70-73,
which is being distributed to all Treasury employees,
describes the establishment of a Departmental Federal
Women's Program Coordinating Committee to develop a
program of action to assure equal opportunity for Treasury
employees.

For further information, contact

Mr. David Sawyer, telephone WO 4-5035.

Attachment 1

THE DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.

20220

ilSTANT SECRETARY

Administrative Bulletin No. 70-73
August 6, 1970
TO BE DISCARDED AFTER July 31, 1971
To Heads of Bureaus and All Employees,
Department of the Treasury
SUBJECT:

Federal Women's Prosram

To assure equity among all Treasury employees, the Director,
Equal Employment Opportunity is happy to announce an important part
of his program on this 26th day of August, which is the 50th anniversary of women's right to vote.
The Treasury Department recently established a Departmental
Federal Women's Program Coordinating Committee with responsibilities
to review needs of women employees and to develop a program of action
to assure equal opportunity for Treasury employees. This Coordinating
Committee is composed of:
Mrs. Esther C. Lawton, Chairman, Office of the Secretary
Mrs. Barbara Gainey, Bureau of Customs
Vxs. Erma Cordover, U. S. Savings Bonds Division
Mr. Philip N. Sansotta, Internal Revenue Service
Mrs. Sadie Mitchell, Bureau of Engraving and Printing
Mrs. Barbara R. Thompson, Internal Revenue Service
Mrs. Dolores Morgan, Bureau of Accounts
The Committee has developed an action program specifically
geared to women in the Treasury Department. Among the proposals are:
1. Development of plans to assure dissemination of information
about the Federal Women's Program to all levels.
2. Provision for opportunities for attendance of women at
top-level meetings.
3. Bringing up to date the 1966 study on the status of women
in the ~reasury Department and determining the extent to which that
study has been implemented.

(OVER)

- 2 -

4. Development of.a plan to obtain a current skills inventory,
assurance of its implementation and a follow-up with a periodic
inventory; identification of underutilized women and development of
procedures to initiate remedial action.
5. Analysis of latest occupational inventory to determine
possible intentional or unintentional patterns of discrimination.
6. Development of procedures to assure circularization of lists
of vacant positions.
70

Assurance that materials affecting women are presented in
an affirmative manner.

8. Provision for orientation at all levels of supervisory and
managerial personnel, men or women, to break down traditional concepts on qealing with women employees, myths about employment of
women, etc; and development of means to eValuate supervisory personnel, at least in part, on degree of their observance of equal
employment policies.

9. Development of plans to counsel women on employment and
other personnel matters.
10. Development of plans for trainingEEO counsellors on
employment of women.
11. Provision for scrutiny of complaints and grievances based
on sex discrimination.
Other plans will also be developed concurrently or subsequent
to initiation of those listed.

A. E. Weatherbee
Assistant Secretary for Administration

Distribution:

To be distributed to employees on or before August 26, 1970.

Department of the

TRfASURY

IINGTON. D.C. 20220

TElEPHONE W04·2041

ADVANCE FOR RELEASE FOR AMs
SUNDAY, AUGUST 23, 1970

TAX WITHHOLDING RULES BENEFITING RETIRED PERSONS
ANNOUNCED BY TREASURY DEPARTMENT
The Treasury Department today announced regulations that
will greatly simplify income tax payment methods next year for
people who receive pensions or annuities.
The new regulations will enable retired persons and others
who receive pensions and annuities to pay their Federal income
taxes through a system of withholding starting in 1971. At
present, tax withholding is not available to these persons.
Instead, they have been required to file estimated income tax
returns by April 15 of each year and make quarterly payments
during the year to avoid penalties for failure to pay estimated
tax.
Annuities which are wholly exempt from Federal taxation,
such as social security pensions and Veterans Administration
annuities, are excluded from the new rules.
The Treasury regulations interpret provisions of the
Tax Reform Act of 1969 providing for withholding of income tax
on pension and annuity payments beginning in 1971. They were
published as a Treasury Decision in the Federal Register of
Saturday, August 22.
Under the new rules, the person receiving a pension or
annuity may ask the payer to withhold any specified whole
dollar amount from each annuity payment, provided that the
amount to be withheld is at least $5 a month and does not
reduce the net amount of any payment to less than $10.
The
amount withheld need not equal the recipient's tax liability
on the annuity.
The request for withholding must be made on a new Internal
Revenue Service form, W-4P.
This form will be available shortly
at IRS district offices and will also be mailed by IRS to most
K-472

(OVER)

- 2 payers of pensions and annuities.
Upon receipt of a correctly
completed Form W-4P, the payer of an annuity must begin withholding the amounts requested in the first payment made after
the expiration of three months from receipt of the request.
The regulations also provide that a request for withholding
may be amended as to the amount to be withheld, or may be
terminated altogether, by written direction of the annuitant.
Most individual taxpayers receive the greater part of
their income through salary and wages which are subject to
withholding of income tax when paid.
They therefore need not
file estimated tax returns, and need not make quarterly payments
of estimated tax if their estimated tax liability, less tax to
be withheld during the year, is less than $40.
Upon retirement, the taxpayer's wage and salary income
normally ends, and he receives instead a retirement annuity.
However, until adoption of the 1969 Tax Reform Act, there
was no provision for withholding of tax from annuity paym~nts.
Thus the retired person has had to file an estimated income tax
return, usually for the first time, and make quarterly payments
of estimated tax to avoid penalties.
By taking advantage of the
new withholding procedure, the retired person will be able to
avoid filing an estimated tax return, provided he requests
withholding of an amount per month that will cover his tax
liability for the year.

A retired person who has income from other sources

th~t

would require the filing of an estimated tax return and the
quarterly payment of estimated tax can also use the new withholding procedure to advantage.
Since the dollar amount of withholding from his monthly annuity payments is flexible, he can
specify an amount that will also cover all or part of his
estimated tax liability on his other income.
If his estimated
tax liability for the year is paid in this way, he will not have
to file an estimated tax return.
The new Treasury regulations also specify that the
present requirements for the withholding, paying, depositing
and reporting of income tax at source, and the sanctions
for failure to comply, will apply to annuity payments on
which withholding has been requested.

000

Department of the TREASURY
.aINGTDN. D.C. 20220

TElEPHONE W04-2041

FOR IMMEDIATE RELEASE

August 24, 1970

ERNEST C. BETTS, JR. NAMED
ASSISTANT SECRETARY FOR ADMINISTRATION
Secretary of the Treasury David M. Kennedy today announced President
Nixon's approval of the appointment of Mr. Ernest C. Betts, Jr. as
Assistant Secretary for Administration. He will succeed Artemus E.
Weatherbee who has held that post for 11 years and who has been nominated
by the President, subject to Senate confirmation, as the U.S. Executive
Director of the Asian Development Bank with headquarters in Manila,
Philippines.
Mr. Betts, as the senior career official, will direct the administration and management affairs of the Department. He is 56 years old
and has had 32 years of service in the Federal Government in a number
of progressively responsible administrative positions in various agencies,
principally Agriculture, State, and Treasury. He h8,S served the past six
yeats as Deputy Assistant Secretary for Administration in this Department
and has been concurrently the Director of the Office of Budget and Finance.
He is the only career official known to have served both as the Director
of Personnel and the principal budget officer of different executive
departments. He also served overseas as the Attache for Administration
for the U. S. Embassy at Burut.
Mr. Betts was 'born in Hillsboro, Wisconsin in 1914. He graduated
from Sparta High School and attended Wisconsin State University, Platteville,
and Vernon County Teachers College. He was a teacher and principal in
rural and elementary schools in Wisconsin before entering the Government
Service in 1939.
Mr. Betts has maintained an active interest in education and civic
affairs. He is a former member of the Arlington County School Board and
a former PTA President, and has been active in several professional
management organizations, church affairs, and the Boy Scouts. He has
received the Treasury Department's Meritorious and Exceptional Service
Awards for his work as Director of the Office of Budget and Finance and
Deputy Assistant Secretary.
Mr. and Mrs. Betts have three married sons and reside at 815 South
26th Street, Arlington, Virginia, and Epping Fore~t, Annapolis, Maryland.
000

K-474

Department of the TREASURY
P,t.20220

tEt,lPItONE

FOR IMMEDIATE RELEASE

W(}4~2041

August 24, 1970

NEW $15,000 DENOMINATION OF TREASURY BILLS
The Treasury announced today that a new $15,000 denomination
Treasury bill will be authorized for use effective September 1, 1970.
The new denomination will bear the portrait of Lyman J. Gage who served
as Secretary of the Treasury from March 6, 1897, to January 31, 1902.
The $15,000 denomination will be authorized for transactions in
outstanding issues of Treasury bills bearing issue dates of March 5,
1970, or later, and for all new issues of Treasury bills to be issued
September 3, 1970, and thereafter.
Tenders for Treasury bills will continue to be received in the
minimum amount of $10,000, but effective with the auction on Monday,
August 31, 1970, for the regular weekly bills to be issued September 3,
tenders above the $10,000 minimum may be in multiples of $5,000.

Department 01 the TREASURY
iIIH1TON. D.C. 20220

TElEPHONE W04·2041

FOR IMMEDIATE RELEASE

August 25, 1970

U.S. TREASURY ANNOUNCES 1/2 PERCENT
BONUS ON SAVINGS BONDS
Secretary of the Treasury David M. Kennedy, acting to
implement a law signed last night by President Nixon, announced
that a 1/2 percent bonus will be added to the interest rate
paid to longer-term holders of United States Savings Bonds.
This bonus will raise the effective interest rate on
new Bonds, when held to maturity, from 5 to 5-1/2 percent.
The increase, which is retroactive to June 1, 1970,
will also result in improved yields on outstanding
Series E and Series H Bonds.
The millions of Americans who own Savings Bonds -including those 10 million persons who purchase them
regularly through payroll savings plans -- will now have
an extra incentive to hold on to them. For those who have
not yet purchased Savings Bonds, the increase provides the
added attraction of a bonus on their savings, savings that
make an important contribution to the sound financing of
our nation's government, Secretary Kennedy said.
The Secretary noted that the bonus provides a means of
increasing the return to longer-term savers at a time of
generally high interest rates. While the Treasury will retain
flexibility to modify the bonus on future sales and extensions,
Secretary Kennedy emphasized that all Bonds now held or
newly purchased are assured of receiving the full 1/2 percent
bonus through their next maturity.
The accompanying fact sheet explains the bonus in
detail as it applied to both new and outstanding issues of
Series E and Series H Bonds.

Attachment
K-473

F Ar:r SHEET

UNITED STATES SAVINGS BONDS
IMPROVEMENTS IN YIELD RETROACTIVE TO JUNE 1, 1970
SERIES E
1.

Series E Bonds purchased on or after June 1, 1970

when held to maturity will receive an extra 1/2 percent,
payable at maturity, raising the yield to 5 1/2 percent
from date of issue to date of maturity.
2.

Outstanding E Bonds that have not reached their first

maturity

will receive a 1/2 percent increase in yield for

semiannual interest periods beginning on or after June 1,
1970, payable as a bonus at maturity.
3.

Outstanding E Bonds that have reached first maturity,

or are extended beyond first maturity while the bonus is
in effect, will have the 1/2 percent credited at the end
of each semiannual interest period beginning on or after
June 1, 1970, through their next maturity.
payable whenever the bonds are redeemed.

The bonus is

-2-

SERIES H
1.

Series H Bonds purchased on or after June 1, 1970

will yielc!, approximately 5.12 percent for the first 5
years and 6 percent for the remaining 5 years to maturity,
providing an over-all yield of 5 1/2 percent from date of
issue to date of maturity.
2.

Outstanding H Bonds that have been held for less than

5 years will receive a 1/2 percent increase in yield for
semiannual interest periods beginning on or after June 1,
1970~

payable 'li _ bonus in the form of increased semi-

annual interest payments during the second 5 years to
maturity.)"
3.

H Bonds that have been, held 5

year~

or are extended

while the bonus is in effect, will receive a 1/2 percent
increase in yield for semiannual interest periods beginning
on

or

after June.l, 1970.

The bonus will be added to

semiannual interest checks through next maturity.

Department 01 the TREASURY
TELEPHONE W04·2041

INGTON. O.C. 20220

TTENTION:

FINANCIAL EDITOR

8R RELEASE 6: 30 P.M.,
[onday, August 24, 1970
RESULTS OF TREASURY'S WEEKLY

BILL OFFERING

,.
The Treasury Department announced that the tenders for two series of Treasury
'ills, one series to be an additional issue of the bills dated May 28, 1970
, and
.he other series to be dated August 27, 1970
, which were offered on August 18, 1970
::ere opened at the Federal Reserve Banks today. Tenders were invited for $1,800,000,000
r thereabouts, of 92 -day bills and for $1,400,000,000 or thereabouts, of
182-day
ills. The details of the two series are as follows:
!l..NGE OF ACCEPTED
)MPETITIVE BIDS:

High
Low
Average

92 -day Treasury bills
maturing November 27 , 1970
Approx. Equiv.
Price
Annual Rate
98.445
6.085%
98.408
6.230%
98.416
6.198%

182-day Treasury bills
maturing February 25, 1971
Approx. Equiv.
Price
Annual Rate
96.818
96.787
96.796

Y

6.294%
6.355%
6.338%

Y

32% of the amount of 92 -day bills bid for at the low price was accepted
63% of the amount of 182 -day bills bid for at the low price was accepted
)TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
'Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

Acce12ted
AEE1ied For
34,630,000 $
34,350,000
$
1,944,960,000
1,253,900,000
41,910,000
26,910,000
45,520,000
45,020,000
47,860,000
47,520,000
48,960,000
42,330,000
211,330,000
147,570,000
45,780,000
32,180,000
37,770,000
32,770,000
50,300,000
48,000,000
30,640,000
17,960,000
129 217°2°°0
71 2 79°2°° 0
$2,668,830,000

$1,800,300,000 ~

AEE1ied For19,630,000
1,827,880,000
20,330,000
24,980,000
49,680,000
40,650,000
330,710,000
31,220,000
41,010,000
35,430,000
24,390,000
14°2 49 °2°° 0

AcceEted
6,670,000
$
905,980,000
9,460,000
24,930,000
33,680,000
25,810,000
264,390,OGv
15,940,000
29,110,000
22,160,000
10,890,000
51 255°2°° 0

$2,586,400,000

$1,400,570,000 ~

$

Includes $368,850,000 noncompetitive tenders accepted at the average price of 98.416
Includes $190,900,000 noncompetitive tenders accepted at the average price of 96.796
These rates are on a bank discount basis. The equivalent coupon issue yields are
6.39 %for the 92 -day bills, and 6.64% for the 182 -day bills.

Department of the

TREASURY

IlIUM. D.C. 20220

TelEPHONE W04·2041

FOR IMMEDIATE RELEASE

AUGUST 25, 1970

TREASURY ISSUES COUNTERVAILING DUTY PROCEEDING NOTICE
ON TOMATO PRODUCTS FROM GREECE
The Treasury announced today that it has issued a countervailing
duty proceeding notice covering tomato products from Greece.
The notice states that the Treasury has received information
that subsidies are being paid on exports of Greek tomato products
to the United States.
If this information is accurate, the subsidies
would constitute the payment or bestowal of a "bounty or grant" within
the meaning of the U.S. countervailing duty law, and the imports in
question would be subject to an additional (countervailing)duty
equivalent to the amount of the subsidy.
The notice invites submission of comments in time to be received
within 30 days from the date of publication in the Federal Register.
It is scheduled to be published on Wednesday, August 26, 1970.
If the Treasury finds that "bounties or grants" are being paid
or bestowed within the meaning of the countervailing duty law, it
would issue a countervailing duty order proclaiming the amounts.
The countervailing duty would become effective 30 days after publication of the order in the Customs Bulletin.
Tomato products affected include peeled tomatoes, tomato paste,
~nd tomato juice.
Treasury information regarding the full amount of
the subsidy being paid is incomplete at the moment.
Subsidies cover
rebates and refunds of certain bank charges, social security and
Lncome taxes.
Subsidies on tomato paste range from $38 to $84 per metric ton,
depending on the concentration and packing. During calendar year 1969
Greece exported slightly under eight million pounds of tomato paste
valued at approximately 1.3 million dollars.
Subsidies on peeled tomatoes appear to be about $30 per metric
ton, and on tomato juice about $13 per metric ton.
In calendar year
1969 there were about three million pounds of peeled tomato imports
into the United States from Greece valued at approximately $260,000.
The quantity of tomato juice imports was negligible.
000

Deportment of theTREASURY
I*GTON. D.C. 20220

Y£LEPMOftE .04·2841

FOR lMMEDIATE RELEASE

August 25, 1970

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$3,200,000,000, or thereabouts, for cash and in exchange for Treasury
bills maturing September 3, 1970, in the amount of $3,102,590,000,
as follows:
9l-day bills (to maturity date) to be issued September 3, 1970,
in the amount of $1,800,000,000,
or thereabouts, representing an
additional amount of bills dated June 4, 1970,
and to mature
December 3, 1970, originally issued in
the amount of $1,306,400,000, the additional and original bills to b~
freely interchangeable.
182- day bills, for $1,400,000,000, or thereabouts, to be dated
,eptember 3, 1970,
and to mature March 4, 1971,
:CUSIP No. 912793 JX5).
The bills of both series will be issued on a discount basis under
and noncompetive bidding as hereinafter provided, and at
latllrit/ their face amount will be payable without interest. They will
Ie issued in bearer form only, and in denominations of $10,000,
15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value).
omp~titive

Tenders will be received at Federal Reserve Banks and Branches up
:0 the closing hour, one-thirty p.m., Eastern Daylight Saving time,
funday, AU3ust 31, 1970. Tenders will not be received at the Treasury
)epartment, Washington. Each tender must be for a minimum of $10,000.
Lenders over $10,000 must be in multiples of $5,000. In the case of
:ornpetitive tenders the price offered must be expressed on the basis of
.00, with not more than three decimals, e. g., 99.925. Fractions may
lot be used. It is urged that tenders be made on the printed forms
~nd forwarded in the special envelopes which will be supplied by
'ederal Reserve Banks or Branches on application therefor.
Banking institutions generally may submit tenders for account of
lstorners provided the names of the customers are set forth in such
'nders. Others than banking institutions will not be permitted to

- 2 -

submit tenders except for their own account. Tenders will be receiv
without deposit from incorporated banks and trust companies and from
responsible and recognized dealers in investment securities. Tenden
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are accompani
by an express guaranty of payment by an incorporated bank or trust
company.
Immediately aftel:" the closing houl:", tendel:"s will be opened at the
Fedel:"al Resel:"ve Banks and Bl:"anches, following which public announcement
will be made by the Tl:"easul:"y Depal:"tment of the amount and pl:"ice ran~
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance 01:" I:"ejection thereof. The Secl:"etary of the
Tl:"easul:"Y expl:"essly I:"esel:"ves the I:"ight to accept 01:" I:"e;ect any 01:" all
tendel:"s, in whole 01:" in pal:"t, and his action in any such I:"espect shall
be final. Subject to these I:"esel:"vations, noncompetitive tendel:"s for
each issue fol:" $200,000 01:" less without stated pl:"ice fl:"om anyone
biddel:" will be accepted in full at the average pl:"ice (in three decimals
of accepted competitive bids for the I:"espective issues. Settlement for
accepted tenders in accol:"dance with the bids must be made 01:" completed
at the Fedel:"al Reserve Bank on September 3, 1970,
in cash 01:" other immediately available funds 01:" in a like face amount 0:
Tl:"easul:"Y bills maturing September 3, 19700
Cash and exchange tenderl
will I:"eceive equal tl:"eatment. Cash adjustments will be made fol:"
differences between the par value of matul:"ing bills accepted in
exchange and the issue price of the new bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue C~e
of 1954 the nmount of discount at which bills issued hel:"eundel:" are sold
is considered to accrue when the bills al:"e sold, I:"edeemed 01:" otherwise
disposed of, and the bills al:"e excluded fl:"om considel:"ation as capital
ass~ts.
Accordingly, the ownel:" of Tl:"easury bills (othel:" than life
insurance companies) issued hereunder must include in his income tax
I:"eturn, as ordinal:"Y gain or loss, the difference between the pl:"ice paU
fol:" the bills, whether on original issue or on subsequent purchase, a~
the amount actually received either upon sale or I:"edemption at maturity
dUl:"ing the taxable yeal:" fol:" which the I:"eturn is made.
Treasul:"Y Department Cil:"cular No. 418 (curl:"ent revision) and this
notice, prescl:"ibe the terms of the Treasury bills and govel:"n the .
condi tions of their issue. Copies of the cil:"cular may be obtained from
any Fedel:"a1 Resel:"ve Bank or Bl:"anch.

000

~TTENTION:

FINANCIAL EDITO,R

::'OR RELEASE 6: 30 P. M. ,

uesday, August 25, 1970,
RESULTS OF TREASURY'S MON'Iffi.,Y BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
d11s, one series to bE!! an additional i!):me of the bills dated May 31, 1970
, :1./1(i
,hI" other series to be dated August 31, 1~70
, which were offered on August 19, 1:)"/11,
'ere opened at the Federal Reserve Banks today. Tenders were invited for $ 500,000,000,
,r thereabouts, of 273-day bills and for $ 1,200,000,000, or thereabouts, of 365 -day
:,i11s, The deta.ils of the two series are as follows:
~ANGE

OF ACCEPTED
BIDS:

'~OMPETITIVE

High
Low
Aver8f!,e

273-day Treasury bills
maturin€; May 31, 1971
Approx. Equiv.
Price
Annual Rate
95.087
95.040
95.063

6.479%
6.541%
6.510%

Y

365-d~

Treasury bills
maturi!!fi August 31~ 1971
Approx. Equiv.
Price
Annual Rate
93.564
6.348~
93.476
6.435~
93.515
6.396~
Y

39% of the amount of 273-day bills bid for at the low price was accepted
72% of the amount of 365-day bills bid for at the low price was accepted
OTAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
• District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

I
I

27~5602000

Applied For
$ 12,010,000
1,533,030,000
4,210,000
20,470,000
18,010,000
32,180,000
209,140,000
14,870,000
9,800,000
12,840,000
16,370,000
149 286°2°°0

AcceEted
2,010,000
$
927,230,000
4,210,000
10,470,000
12,730,000
21,870,000
121,650,000
14,590,000
8,800,000
12,540,000
3,370,000
60 2560 2OO()

500,080,000

~ $2,032,790,000

$1,200,030,OOCJ

AEElied For
$ 10,790,000
949,980,000
750,000
1,080,000
8,660,000
14,970,000
95,790,000
12,600,000
15,700,000
11,590,000
14,450,000
83 212°2°°0

AcceEted
$ 10,790,000
374,880,000
750,000
1,080,000
5,050,000
6,020,000
40,740,000
10,600,000
13,180,000
7,980,000
1,450,000

$1,219,480,000

$

EJ

InclUdes $ 24,100,000 noncompetitive tenders accepted at the average price of 95.063
Includes $ 60,660,000 noncompetitive tenders accepted at the average price of 93.515
I These rates are on a bank discount basis. The equivalent coupon issue yields al'('
6.87% for the 273-day bills, and 6.82% for the 365-day bills.

Department of the

TRfASURY

INGTON. D.C. 20220

TElEPHONE W04-2041

MEMORANDUM FOR THE PRESS:

August 27, 1970

As Acting Treasury Secretary, Paul A. Vo1cker
has written Senator John C. Stennis, Chairman
of the Subcommittee on Transportation of the
Senate Appropriations Committee, to clarify his
position regarding the continued development of
the United States supersonic transport.
letter is attached.

000

Attachment

K-475

The

TH E SECRETARY OF TH E TREASU RY
WASHINGTON

August 27, 1970

Dear Senator Stennis:
The report by Senator William Proxmire's Joint
Economic Subcommittee on Economy in Government quotes
a portion of a letter from me to the effect that "the
potentially adverse impact on our travel account from
development of a U.S. SST could equal or outweigh the
positive impact on the aircraft sales account."
The report does not quote another portion of my
letter which is as follows:
"If one were fairly sure
that a foreign SST would become a viable commercial
proposition within the foreseeable future, then the
ba1ance-of-payments arguments against proceeding with
a U.S. SST lose force.
However, I have not kept in
close touch with technical and commercial appraisals
of the Concorde since my participation last year on
the Ad Hoc Committee.
I am, therefore, not in a position
to provide you with an up-to-date assessment of the
commercial prospects for this plane."
I submit that the total content of the letter
should have been quoted to convey the correct impression
of my view.
When members of the Department first commented on
this issue better than a year ago, the prevailing opinion
was that the overall ba1ance-of-payments effect would
probably be negative, in the absence of a viable foreign
competitive aircraft.
Now, I understand, the Concorde
flight tests reportedly have been quite successful,
and it appears likely that the British-French SST will
be in commercial service by 1974.

2

On this basis, and consistent with my earlier
statement, the balance-of-payments argument against
the SST attribu:ted to the Department of the Treasury
in the JEC Report loses force.
Moreover, in view of calculations by the Department
of Transportation on the extent of the Nation's trade
balance affected by the SST over the next 20 years -calculations based on assumptions which I find to be
reasonable and proper at this time -- the potential
balance-of-payments impact supports the advisability
of going forward with the U.S. SST. As Secretary Kennedy
indicated to the President, the program has our strong
endorsement.
Sincerely,

Paul A. Volcker
Acting Secretary

The Honorable John C. Stennis
Chairman
Subcommittee on Transportation
Senate Appropriations Committee
1235 New Senate Office Building
Washington, D. C.

Department of the
HINGTON. D.C. 20220

TREASURY
TElEPHONE W04·2041

FOR IMMEDIATE RELEASE
August 28, 1970

TREASURY'S WEEKLY BILL OFFERING
The Tr:asury Department, by this public notice, invites tenders
for two serIes of Treasury bills to the aggregate amount of .
$~,200,000,?00, or thereabouts, for cash and in exchange for Treasury
bIlls maturIng September 10, 1970, in the amount of $3 104 310 000
:is follows:
'
,
,
,
91-day bills (to maturity date) to be issued September 10, 1970,
In the amount of $1,800,000,000,
or thereabouts representing an
Idditional amount of bills dated June 11, 1970, ,
and to mature
originally issued
)ecember 10, 1970,
he amount of $1,302,860,000, the additional and original bills to be
'reelv interchangeable.
182- ddY bills, for $1,400,000,000, or thereabouts, to be dated
:eptember 10, 1970, and to mature March 11, 1971
=1;511' Nu. 912793 JY3).
The hills of both series will be issued on a discount basis under
)mpL't i tive and noncompetive bidding as hereinafter provided, and at
ItliriLy their face amount will be payable without interest.
They will

, is.sut'J in bearer form only, and in denominations of $10,000,
1,C()(), S50,OOO, $100,000, $500,000 and $1,000,000 (maturity value).

Tenders will be received at Federal Reserve Banks and Branches up
the closing hour, one-thirty p.m., Eastern Daylight Saving
me, Friday, September 4, 1970.
Tenders will not be received
the Treasury Department, Washington. Each tender must be for a
nimum of $10,000. Tenders over $10,000 must be in mUltiples of
,000. In the case of competitive tenders the price offered must be
Jressed on the basis of 100, with not more than three decimals,
~., 99.925.
Fractions may not be used. It is urged that tenders be
Ie on the printed forms and forwarded in the special envelopes which
.1 be supplied by Federal Reserve Banks or Branches on application
~ refor .
Banking institutions generally may submit tenders for account of
tomers provided the names of the customers are set forth.in such
ders. Others than banking institutions will not be permItted to

- 2 submit tenders except for their own account. Tenders wi~l be received
without deposit from incorporated banks and trust compan1es and fr~
responsible and recognized dealers in investment securities. Te~e~
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are accompani
by an express guaranty of payment by an incorporated bank or trust
company.

Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announce~~
will be made by the Treasury Department of the amount and price ranp
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or re;ect any or all
tenders, in whole or in part, and his action in any such respect shall
be final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three decimals
of accepted competitive bids for the respective issues. Settlement for
accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank on September 10, 1970,
in cash or other immediately available funds or in a like face amount 0
Treasury bills maturing September 10, 1970.
Cash and exchange tenderi
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue C~e
of 1954 the amount of discount at which bills issued hereunder are sold
is considered to accrue when the bills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capital
assets. Accordingly, the owner of Treasury bills (other than life
insurance companies) issued hereunder must include in his income tax
return, as ordinary gain or loss, the difference between the price pa~
for the bills, whether on original issue or on subsequent purchase, a~
the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained froo
any Federal Reserve Bank or Branch.

FACT SHEET
WITHHOLDING OF APPRAISEMENT
ON TELEVISION RECEIVING SETS FROM JAPAN
The initial dumping "complaint" was filed on March 22,
1968, on behalf of the Imports Committee, Tube Division,
Electronic Industries Association. An "antidumping proceeding
notice" was issued on June 10, 1968. The withholding notice
will be published in the Federal Register within approximately
one week.
Products covered in the complaint and also in the
withholding of appraisement notice are black and white, and
color TV receiving sets from Japan.
During the year 1969, approximately one quarter of a
billion dollars worth of sets were exported to the United
States from Japan. The major Japanese manufacturers involved
a:r;e:
1. Matsushita Electric Industrial Company, Ltd.
2. Tokyo Shibaura Electric Company, Ltd.
3. Hayakawa Electric Company, Ltd.
4. Hitachi, Ltd.
5. Sony Corporation.
Q's and A's
1.

What is dumping?
In order to have dumping, there must be:
A.

A determination of sales at less than fair value
by the Treasury Department; and

B.

A determination of injury to U.s. industry
by the Tariff Commission.

A typical case of sales at less than fair value would take
place in a situation where a foreign company sells merchandise
in the United States at prices which are less than those in his
home market. The home market price and that at which he sells
in the United States, which are used for comparison purposes,
are ex factory in both instances. This assures that price
comparisons are made on an equal basis. If the foreign manufacturer sells in the U.s. market through a subsidiary, a
wholly different set of standards for comparison purposes is
prescribed under the law. This too is designed to ensure equity

in the resulting price comparisons.
2.

What are the" procedures followed in dumping cases?

Normally a dumping case is initiated as a result of a
"complaint" submitted to the Burec:.u of Customs by an American
producer. The "complaint" is analyzed preliminarily by the
Bureau to determine whether it contains adequate information
to support initiation of a full-scale dumping investigation.
If the decision is affirmative, an "Antidumping Proceeding
Notice" is published in the Federal Register. This constitutes,
in effect, an official announcement that an antidumping
investigation has been initiated.
This is followed by an exhaustive investigation by the
Bureau of Customs, both abroad and in the United States,
which takes into account factors leading to the establishment
of bases for comparing home market price with that at which
the foreign manufacturer or exporter sells in the United States.
If questions arise, as frequently happens, these are
taken up directly by the Bureau of Customs with the attorneys
for the foreign manufacturer. The attorneys for the"complainant"
also have an opportunity to confer with the Customs caseworker
regarding the casco Ultimately a report is prepared by the
Bureau of Customs recommending preliminary action to the
Treasury Department. This may take the form of a withholding
of appraisement, as in the Japanese TV case, or a tentative
determination of no sales at less than fair value.
Within three months after such preliminary action, a
final determination of sales at less than fair value, whether
affirmative or negative, is issued by the Treasury Department.
During this three-month period between preliminary and final
action, any interested party may request a conference at the
Treasury Department to discuss the issues involved. When
such conferences are requested, all interested parties are
invited to attend. Thus the Treasury Department is in a
position to consider all viewpoints at that time.
If the Treasury's final determination is affirmative,
the case is then referred to the Tariff Commission for an
injury determination, which under the law must be made within
three months.
If it is negative, the case is closed with a
determination of no sales at less than fair value.

If the Tariff Commission determines injury, the case
is referred back to the Treasury Department for assessment
of dumping dutie~, where applicable.
3.

What does "withholding of appraisement" mean?

For purposes of the Antidumping Act, withholding of
appraisement means that, if later there is a determination
of sales at less than fair value by the Treasury Department
and of injury by the Tariff Commission, dumping duties will
be assessed on all sales of dumped merchandise as of the
date the order of withholding is published in the Federal
Register. It should be noted that withholding of appraisement
does not stop the continued flow of the affected merchandise
into the United States.
4.

Who pays dumping duties in the event a finding of dumping
is issued?
The importer.

Department 01 the TRfASURY
bGTON, D.C. 20220

TELEPHONE W04·2041

FOR IMMEDIATE RELEASE

August

8, 1970

WITHHOLDING OP APPRAISE~illNT ON
TELEVISION RECEIVING SETS FROM JAPJl.N
Assistant Secretary of the Treasury Eugene T. Rossides
announced today that the Bureau of Customs is instructing
customs field officers to withhold appraisement of television
receiving sets, monochrome and color, from Japan pending a
determination as to whether this merchandise is being sold
at less than fair value within the meaning of the Antidumping
Act, 1921, as amended (19 U.S.C. 160 et seq.).
Under the Antidumping Act the Secretary of the Treasury
is required to withhold appraisement whenever he has reasonable
cause to believe or suspect that sales at less than fair value
may be taking place.
A final Treasury decision in this investigation will be
made within three months. Appraisement will be withheld for a
period not to exceed 6 months from the date of publication
of the "Withholding of Appraisement Notice" in the Federal
Register.
Under the Antidumping Act, a determination of sales in
the United States at less than fair value requires that the
case be referred to the Tariff Commission, which would consider
whether American industry was being injured. Both dumping
margins and injury must be shown to justify a finding of
dumping under the law.
During the period January 1, 1967, through May 31, 1970,
television receiving sets valued at approximately $638,828,000
were exported to the United States from Japan.
000

K-476

~eportmentof the TREASURY
. . I.e. 2022(1
:NTION:

TELEPHONE W04·2041

F INANC IAL ED ITOR

RELEASE 6: 30 P.M.,
ay, August 31, 1970.
RESULTS OF TREASURY'S WEEKLY BILL OFFERING
'The Treasury Department announced that the tenders for two series of Trr':).~ll tV
.s, one series to be an additional issue of the bills dated June 4, 1970
, n.nd
other series to be'dated September 3,1970 ,which were offered on August. Z:5, 1~J7(),
~ opened at the Federal Reserve Banks today.
Tenders were invited for $1,800,000,000,
,hereabouts, of 91-day bills and for $1,400,000,000, or thereabouts, of
18?-rhy
,s. The details of the two series are as follows:
,E OF ACCEPTED

)ETITIVE BIDS:

High
Low
Average

91 -day Treasury bills
maturin~ December 3, 1970
Approx. Equiv.
Price
Annual Rate
98.408
98.383
98.397

6.298%
6.397%
6.342%

Y

182-day Treasury bills
March 4, 1971
Approx. Equiv.
Annual Ratp
Price
6.474%
96.727
6.5.');:;')(,
96.686
6.508%
96.710
maturin~

Y

83% of the amount of 91-day bills bid for at the low price was accepted
58% of the amount of 182-day bills bid for at the low price was accepted

L TErmERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
strjct
ston
w York
iladelphia
eveland
ehmond
lanta
iea.go
. Louis
nneapolis
nsas City
lIas
n Francisco
TOTALS

Applied For
$ 28,930,000
1,708,875,000
38,600,000
40,965,000
43,840,000
46,130,000
198,465,000
50,170,000
26,155,000
33,035,000
31,755,000
131,450,000

Accepted
$ 28,900,000
1,228,025,000
23,600,000
40,965,000
43,840,000
41,880,000
167,615,000
46,820,000
26,155,000
32,035,000
24,585,000
95,600,000

$2,378,370,000

$1,800,020,000 ~

Applied For
$
16,535,000
1,594,855,000
8,230,000
20,480,000
31,655,000
41,325,000
128,420,000
23,650,000
24,645,000
23,970,000
26,940,000
134,270,000
$2,074,975,000

Accepted
16,535,000
1,074,315,000
8,230,000
20,480,000
27,655,000
31,375,000
70,380,000
23,150,000
16,225,000
22,970,000

$

14,~40,00U

73,870,UUu
$1,400,125,000

E/

neludes $346,380,000 noncompetitive tenders accepted at the averaee price of 98.397
neludes $178,475,000 noncompetitive tenders accepted at the average price of 96.710
hese rates are on a bank discount basis. The equivalent coupon issue y j (' JdSll
53% for the 91 -day bills, and 6.82% for the 182 -day bills.
l

1.

Department of the

TRfASURY

I1NGTON. D.C. 20220

TELEPHONE W04-2041

rENTION:
~

FINANCIAL EDITOR

RELEASE 6:30 P.M.,

iday, September 4, 1970
RESULTS OF TREASURY'S WEEKLY

BILL OFFERING

The Treasury Department announced that the tenders for two series of Treasury
lls, one series to be an additional issue of the bills dated
June 11, 1970
,and
e other series to be dated September 10, 1970, which were offered on August 28, 1970,
re opened at the Federal Reserve Banks today. Tenders were invited for $1,800,000,000,
thereabouts, of 91-day bills and for $1,400,000,000, or thereabouts, of 182-day
lIs. The details of the two series are as follows:
NGE OF ACCEPTED
MPETITIVE BIDS:

91-day Treasury bills
maturing December 10, 1970
Approx. Equiv.
Price
Annual Rate

182-day Treasury bills
maturing Ma:rch 11, 1971
Approx. Equiv.
Price
Annual Rate
96. 693 ~
96.677
96.686

High
98.408
6.298%
Low
98.384
6.393%
Average
98.391
6.365%!/
~ Excepting 1 tender of $600,000
70% of the amount of
49% of the amount of

6.541%
6.573%
6.555%!/

91-day bills bid for at the low price was accepted
bills bid for at the low price was accepted

182-d~

TAL TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
District
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

AEElied For
$ 29,965,000
1,957,975,000
36,320,000
43,715,000
43,565,000
42,600,000
228,995,000
49,915,000
31,235,000
42,135,000
28,470,000
218,780,000
$2,753,670,000

2,299,285,000
9,400,000
21,315,000
22,530,000
37,190,000
177 ,170 ,000
34,020,000
25,510,000
27,685,000
25,045,000
278,615,000

AcceEted
5,545,000
$
1,130,785,000
9,300,000
19,215,000
12,430,000
13,900,000
30,905,000
27,220,000
9,310,000
18,185,000
11,445,000
112,555,000

$1,800,335,000 ~ $2,976,310,000

$1,400,795,000

AcceEted
19,545,000
$
1,127,975,000
21,195,000
43,300,000
32,465 ,000
27,665,000
209,895,000
45,915,000
25,675,000
40,755,000
15,870,000
190,080,000

AEElied For

$

ls,545,000

::J

Includes $313,535, 000 noncompetitive tenders accepted at the average price of 98.391
Includes $165,585,000 noncompeti tive tenders accepted at the average price of 96.686
These rates are on a bank discount basis. The equivalent coupon issue yields are
6.56'% for the 91 -day bills, and 6.87 %for the 182 -day bills.

Deportment of the TREASURY
NGTON. D.C. 20220

TElEPHONE W04-2041

September 8, 1970

FOR IMMEDIATE RELEASE

DOUGLAS C. FRECHTLING APPOINTED
DEPUTY ASSISTANT TO THE SECRETARY
Treasury Secretary David M. Kennedy today announced
the appointment of Douglas C. Frecht1ing as Deputy
Assistant to the Secretary and Director of the Executive
Secretariat. He succeeds Rex Beach who was recently
named Assistant to the Secretary.
Before joining the Treasury, Mr. Frecht1ing served
first as a Research Assistant and then a Minority
Economist for the Joint Economic Committee, United States
Congress.
A native of Washington, D. C., Mr. Frecht1ing
received his B.A. degree from Hamilton College, Clinton,
New York in 1965. In January of this year he received
a Master of Philosophy degree from George Washington
University where he is presently working on his disertation
for a ph.D. in economics.
Mr. Frecht1ing is married to the former Joy A. Miller
of Chicago, Illinois. They live in Bethesda, Maryland.

000

K-477

Department of the

TREASURY

INGTON. D.C. 20220

TElEPHONE W04-2041

FOR IMMEDIATE

SEP 8 1970

REL~ASE

WITHHOLDING OF APPRAISEMENT ON
ALUMINUM ELECTROLYTIC AND CERAMIC CAPACITORS FROM JAPAN
Assistant Secretary of the Treasury Eugene T. Rossides
announced today that the Bureau of Customs is instructing
customs field officers to withhold appraisement of aluminum
electrolytic and ceramic capacitors from Japan pending a
determination as to whether this merchandise is being sold
at less than fair value within the meaning of the Antidumping
Act, 1921, as amended (19 U.S.C. 160 et seq.).
Under the Antidumping Act the Secretary of the Treasury
is required to withhold appraisement whenever he has reasonable
cause to believe or suspect that sales at less than fair value
may be taking place.
A final Treasury decision in this investigation will be
made within three months. Appraisement will be withheld for a
period not to exceed 6 months from the date of publication
of the "Withholding of Appraisement :Jotice" in the Federal
Register.
Under the Antidumping Act, a determination of sales in
the United States at less than fair value requires that the
case be referred to the Tariff Commission, which would consider
whether American industry was being injured. Both dumping
margins and injury must be shown to justify a finding of
dumping under the law.
During the period January 1, 1968, through May 1, 1970,
aluminum electrolytic and ceramic capacitors valued at
approximately $9,637,000 were exported to the United States
from Japan.
000

K-478

Department 01 the TREASURY
TELEPHONE

UNGTON. D.C. 20220

W04~2041

R IMMEDIATE RELEASE

September 8, 1970

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
r two series of Treasury bills to the aggregate amount of
,200,000,000, or thereabouts, for cash and in exchange for Treasury
11s maturing September 17, 1970, in the amount of$3,105,940,000,
follows:
91-day bills (to maturity date) to be issued September 17, 1970,
the amount of $1,800,000,000,
or thereabouts, representing an
ditional amount of bills dated June 18, 1970,
and to mature
cember 17, 1970 originally issued in
_
e amount of $1,302,670,000, the additional and original bills to be
eelv interchangeable.
182- day bills, for $1,400,000,000, or thereabouts, to be dated
ptember 17, 1970, and to mature March 18, 1971
;SIP ~0. 912793 JZO).
The hills of both series will be issued on a discount basis under
~etitive and noncompetive bidding as hereinafter provided, and at
:urity their face amount will be payable without interest. They will
issued in hearer form only, and in denominations of $10,000,
),GOO, $50,000, $100,000, $500,000 and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches up
the closing hour, one-thirty p.m., Eastern Daylight Saving
ne, Monday, September 14, 1970.
Tenders will not be received
the Treasury Department, Washington. Each tender must be for a
limum of $10,000. Tenders over $10,000 must be in multiples of
,000. In the case of competitive tenders the price offered must be
)ressed on the basis of 100, with not more than three decimals,
~., 99.925.
Fractions may not be used. It is urged that tenders be
Ie on the printed forms and forwarded in the special envelopes which
.1 be supplied by Federal Reserve Banks or Branches on application
!refor.
Banking institutions generally may submit tenders for account of
;tomers provided the names of the customers are set forth in such
tders. Others than banking institutions will not be permitted to

- 2 submit tenders except for their own account. Tenders will be recel~
without deposit from incorporated banks and trust companies and fr~
responsible and recognized dealers in investment securities. Tenden
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are accomp~
by an express guaranty of payment by an incorporated bank or trust
company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement
will be made by the Treasury Department of the amount and price ran~
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reiect any or all
tenders, in whole or in part, and his action in any such respect shall
be final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three deci~~
of accepted competitive bids for the respective issues. Settlement for
accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank on
September 17, 1970,
in cash or other immediately available funds or in a like face amount 01
Treasury bills maturing September 17, 1970.
Cash and exchange tendert
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue Co~
of 1954 the amount of discount at which bills issued hereunder are sold
is considered to accrue when the bills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capital
assets. Accordingly, the owner of Treasury bills (other than life
insurance companies) issued hereunder must include in his income tax
return, as ordinary gain or loss, the difference between the price ~~
for the bills, whether on original issue or on subsequent purchase, and
the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the .
conditions of their issue. Copies of the circular may be obtained fr~
any Federal Reserve Bank or Branch.

000

UNITED STATES SAVINGS BONDS ISSUED AND REDEEMED THROUGH

August 31, 1970

(Dollar amounts in millions - rounded and will not necessarily add to totals)
OESCRIPTION

URED
des A-1935 thru D-1941
ries F and 0-1941 thru 1952
rles J and K-1952. thru 1957

AMOUNT
OUTSTANOINGlI

'70 OUTSTANDING
OF AMOUNT ISSUED

AMOUNT ISSUEOY

AMOUNT
REOEEMEOY

5,003
29,521
3,754

4,997
29,489
3,738

6
31
15

.12
.11
.40

1,893
8,354
13,436
15,683
12,331
5,603
5,323
5,510
5,450
4,769
4,122
4,320
4,935
5,031
5,243
5,066
4,772
4,659
4,367
4,381
4,448
4,301
4,797
4,675
4,571
4,923
4,874
4,624
4,330
1,810
712

1,689
7,459
12,031
13,955
10,813
4,744
4,361
4,432
4,309
3,716
3,212
3,343
3,740
3,749
3,856
3,688
3,417
3,224
2,971
2,865
2,767
2,579
2,669
2,631
2,549
2,607
2,493
2,227
1,724
289
898

204
895
1,404
1,728
1,518
859
962
1,078
1,141
1,053
911
978
1,195'
1,282
1,386
1,379
1,356
1,435
1,396
1,516
1,680
1,722
2,128
2,044
2,021
2,317
2,381

10.78
10.71
10.45
11.02
12.31
15.33
18.07
19.56
20.94
22.08
22.10
22.64
24.21
25.48
26.44
27.22
28.42
30.80
3l.97
34.60
37.77
40.04
44.36
43.72
44.21
47.06
48.85
51.86
60.18
84.09

169,314

125,006

44,308

26.17

5,485
7,504

3,672
2,250

1,813
5,254

33.05
70.02

12,988

5,922

7,066

54.40

182,303

130,928

51,375

28.18

38,277
182,303
220,580

38,225
130,928
169,153

52
51,375
51,427

.14
28.18
23.31

ATURED
E.J/:
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
Unclassified
Total Series E
ies H (1952 thru May, 1959).J/
H (June, 1959 thru 1970)
Total Series H
Total Series E and H

Series

{TOtal
matured
Total unmatured
Grand Total

2J398

2,606
1,522
- 186

f ••• Ccrued dlecounl.

nl redempllon value.
lion 01 owne, bond. may be held and will ea,n In'e,e,,' fo, additional perl ode alte, orlilinal maturity dale ••

Form PO 3812 (Rev. Mar. 1970) - TREASURY DEPARTMENT - Bureau of the Public Debt

-

Department of the

TREASURY

IINGTON. D.C: 20220

TELEPHONE W04-2041

STATEMENT OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE
THE COMMITTEE ON WAYS AND MEANS
WEDNESDAY, SEPTEMBER 9, 1970

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:

The President has recommended three tax measures which
deserve your immediate consideration
A tax on lead additives used in the refining of
gasoline;
an acceleration in the required
gift and estate taxes; and

tim~

of payment of

a one year postponement of scheduled reductions. in
the automobile and communication services excise
taxes.
The tax on lead additives in gasoline is an essential
step at this time to deal with our increasing problem of
pollution. The other measures are principally short term
revenue raising measures, although the acceleration in
payment of estate and gift taxes also permanently improves
the operation of the estate and gift tax laws by giving
the Government, subject to reasonable limitations, more
current use of its tax revenues.

K-479

- 2 I will describe each of these measures separately.

TAX ON LEAD ADDITIVES
One of our greatest national concerns at the present
time is the preservation and improvement of our environment.
We must stop further deterioration in environmental conditions,
particularly in the most vital element of all -- the air we
breathe. We must insure that our air remains clean and fit
for human use. This is an obligation we have to future
generations as well as to ourselves.
One of the largest contributors to air pollution at the
present time is the internal combustion engine in our automobiles. The Administration has established a priority
program to reduce this air pollution. Our recommendation of a
tax on lead used in gasoline additives is a vital element of
that program.
The need for this tax is immediate. Gasoline refiners
use lead additives to obtain higher octane ratings at the
lowest cost. Because of these additives, lead compounds are
discharged into the air in the exhaust fumes. The presence
of these compounds in the environment is dangerous, both for
the present as well as for the future. This tax will impose
an economic penalty on the use of such additives which will
permit unleaded gasoline to be produced and marketed at a
price competitive with leaded gasoline of similar octane
rating. This, in conjunction with other steps being taken,
will reduce the use of these additives.
At the present time, lead compounds account for a major
portion of the solids contained in exhaust fumes. Public
health scientists are becoming increasingly concerned that
the presence of these compounds in the air we breathe is
damaging to human health. Furthermore, research is developing convincing evidence that the small particles serve as
nuclei or surface catalysts for the formation of the smog
which is choking so many of our major cities and which itself
is a major health hazard.

- 3 -

Furthermore, lead is not the only major pollutant in
automobile exhaust. Auto exhaust also contains afterproducts of the internal combustion itself -- hydrocarbons,
carbon monoxide, and oxides of nitrogen. These, along with
lead, are the source of smog.
The Federal Government has been working closely with the
automobile industry to develop major solutions to the problem
of air pollution. One element of the program is to adopt
engine designs in new automobiles which will operate on lower
octane gasoline. Since lead is added to increase octane,
abatement of the octane race makes it feasible to begin now
to reduce and eventually eliminate the lead in gasoline.
An equally important element in the program is a requirement that automobile manufacturers build into their new
automobiles, beginning with 1975 models, devices to eliminate
the noxious elements in the exhaust -- the hydrocarbons,
carbon monoxide, and oxides of nitrogen. Thus, stringent
standards for automotive emissions will go into effect at
that time, and these can be satisfied only with emission
control devices presently under development.
At the present time, there are no production-proven
emission control devices that will meet these standards. An
important device currently being developed by private industry
to meet the standards, the catalytic reactor, could be
destroyed by a single tankful of highly leaded fuel.
Accordingly, impending future needs require that at this
time we create an effective incentive to industry to convert
to the production of gasoline with little lead and in time
no lead. Unleaded gasoline must be generally available in
large quantity by mid-summer of 1974 if the emission control
standards program is to succeed.

- 4 Imposition of the tax will provide necessary assurance
to the automobile industry that the fuels their products will
require will be available. Decisions are currently being made
concerning the design of the 1975 model year automobiles.
Confidence that unleaded fuel will be available will permit
firm conclusions to be made as to incorporation of catalytic
rEactors or other such devices. In addition, during the intervening years, limited user testing of various engine and
emission control designs will be a vital element in the
eventual development of the best over-all system. This entire
program of development to reduce air pollution from the
internal combustion engine will be greatly facilitated if the
auto industry knows with certainty that unleaded fuel will be
generally available by the time their 1975 model automobiles
are in production.
The gasoline refining industry requires at least two years'
lead-time before decisions to make significant alterations or
expansion of refining facilities can be put into effect. This
expansion and alteration will be necessary to insure the
availability of sufficient quantities of lead-free fuel. We
recognize that some companies have recently made such fuels
available on a limited basis. However, the quantities available
are in fact quite 1L~ited in relation to our total gasoline
requirements. This tax will provide reasonable economic
pressure to assure that a complete conversion takes place on
a reasonable basis over a period of timeo It is important
that this industry recognize the seriousness of this effort
and the Gover~~ent's complete dedication to achieving the
goa1o Enactment of this tax will adequately signal our
intentions in this respect.
Adoption of the tax, coupled with suitable regulatory
requirements as to fuel composition, as also proposed by the
President, is the most appropriate way of achieving the
objective of removal of lead from gasoline. Imposition of
the tax will complement regulatory requirements as they come
into existence by creating an immediate economic incentive to
switch to low-leaded and unleaded gasoline. The amount of

- 5 -

the tax is set so as to minimize any cost advantage as a
result of the use of lead. By making it possible for refiners
to effectively market unleaded and low-lead gasoline, the tax
will create a competitive situation causing refiners to convert to such output. Competitive pressures in this regard
already are in evidence, undoubtedly influenced by anticipation of the imposition of the tax.
The proposed tax rate is sufficient to induce refiners
to increase their production of 91 octane unleaded fuel and
94 octane low-lead fuel within the limits of present octane
production capability. This coincides with the automakers'
announcement that their 1971 model cars will operate on such
a fuel. The result of the tax will be to assure the availability
of fuels which minimize lead use as quickly as conditions allow
and to assure general availability of lead-free gasoline by
mid-summer of 1974.
In addition to the benefits described above, enactment
of the tax may well have a beneficial effect for the average
motorist in reducing his maintenance costs. Large amounts of
lead compounds can cause rapid deterioration of muffler and
exhaust systems. Lead deposits also foul ignition systems
and other internal engine parts. Elimination or reduction of
lead may therefore lead to operating economies for every
motorist. These economies will help overcome any increase
in gasoline price resulting from the inability of refiners
to use lead to achieve the desired octane levels.
In summary, adoption of the tax at this time is vital to
our attempt to reduce some air pollution immediately. Furthermore, it will assure significant future improvement, thus
reducing a health danger and minimizing smog conditions. It
will cause gasoline refiners to begin conversion to low-lead
and eventually non-leaded fuel so that there will be assurance
of incorporation of effective pollution control devices in
the 1975 automobile models. Finally, we believe that it will
stimulate research and development of even more effective
pollution control systems by providing assurance that nonleaded fuel will be generally available in the near future.

-

6 -

We reconrrnend a tax of ~!~. 2 5 per pound of lead in lead
additives used in gasoline. The tax should be imposed on
sales of the lead additives by manufacturers and importers.
The tax should become effective as of October 1, 1970. A
floor stock tax would be imposed on all inventories of lead
additives held by persons other than manufacturers or importers
on that date.
To prevent undue hardship on smaller refiners, we
reconrrnend that in the case of any corporate group, additives
containing up to one million pounds be freed of the tax in
its first full year of operation. This amount should be
decreased at the rate of 200,000 pounds per year so that the
tax will be fully in effect in 1976.
If the tax is made effective on October 1, 1970, as we
reconrrnend, it will result in a revenue increase of $1.1 billion
in the fiscal year ending June 30, 1971.
ACCELERATION IN GIFT AND ESTATE TAX PAYMENTS
The President has reconrrnended that the collection of
estate and gift taxes be accelerated in order to provide
approximately $1.5 billion in additional receipts for fiscal
year 1971. We have submitted to Congress full details for
implementing the President's proposal.
Our proposal "would require the filing of the gift tax
return and payment of the tax on a quarterly basis on the
last day of the month following the end of the calendar
quarter in which the gift was made. This will not be a
burdensome requirement. Timing of gifts is at the donor's
option, and gifts made during any calendar quarter are
readily identifiable
At the present time, a substantial
majority of donors make all their gifts in a single calendar
quarter of any year; thus, it is expected that few additional
gift tax returns will be required under the quarterly system.
0

-

,-

Our original proposal would also require the payment of
an estimated estate tax seven months after death. This
recommendation has generated considerable interest and
controversy. Representatives of the Trust Division of the
American Bankers Association and the Tax Section of the
American Bar Association have proposed an alternative under
which there would be no estimated tax requirement. Instead,
the time for filing the estate tax return and paying the
estate tax would be changed from fifteen months to nine
months after death. An accompanying change would shift the
alternate valuation date from one year to six months after
death. The alternative proposal also calls for speed-up in
the auditing of federal estate tax returns and the release
of fiduciaries other than the executor from personal liability
for the tax. The alternative proposal would also change the
holding period rule so that any property included in the gross
estate which is sold within six months after death would be
given long term capital gain treatment.
This alternative proposal is designed to reduce the time
necessary to complete administration of estates due to tax
considerations. By requiring the filing of the estate tax
return and payment of the estate tax six months earlier than
under present law, the alternative proposal should normally
shorten the period of estate administration by at least six
months. This would represent a major improvement in our
legal system.
This alternative proposal has received widespread
endorsement from various bar associations, professional
fiduciaries, and other taxpayers and their representatives.
After study, we have concluded that this alternative is
preferable to our original proposal for an estimated
estate tax, and accordingly we now recommend the principal
features of the proposal to you for adoption. We have some
minor modifications in the specific proposals of these
groups, and we are submitting for the record at this time
a draft bill incorpora'ting our recommendations for adoption
of the alternative proposal.

- 8 An important feature of the proposal is a speed-up in
the time of auditing federal estate tax returns. While
this cannot be reflected in the draft legislation, we are
prepared to make changes in the Internal Revenue Service's
audit procedure in order to shorten the time now required
to complete audits of estates. These steps will reduce
further the time necessary for the administration of estates.
A major advantage of the alternative proposal is its
simplicity when compared to the proposal for estimated estate
tax returns. No additional return would be required; the
time for filing the final return would merely be shortened.
In order that this proposal achieve its primary revenueraising purpose, it is absolutely essential that it be made
effective so as to require the filing of the estate tax returns
of decedents dying prior to September 30, 1970, no later than
June 15, 1971, or nine months after death, if later. Returns
of decedents dying after September 30, 1970, will be required
to be filed nine months after death. In the case of persons
dying before September 30, 1970, there is no unfairness in
shortening the fifteen months' period under existing law.
None of these estates will be required to file returns less
than nine months after the decedent's death. Notice of our
intention to seek this type of legislation was first announced
to the public in April, 1970.
This recommendation will result in a revenue increase of
$1.5 billion in the fiscal year ending June 30, 1971.
EXCISE TAX EXTENSION
The existing budget situation and economic outlook
require continuation of the present 7 percent excise tax on
automobiles and 10 percent excise tax on telephone services
through calendar year 1971. These taxes at present levels
have played an important part in the anti-inflation program,
and the scheduled reductions of these taxes would seriously
weaken the program which has proven so successful in recent

- 9 months. Thus, it is proposed that all scheduled reductions
of these taxes be deferred for one year, and that their
repeal be deferred until December 31, 1974.
The recommended extensions of present levels of excise
taxes will prevent a revenue loss of $650 million in the
fiscal year ending June 30, 1971, and $1,250 million in the
fiscal year ending June 30, 1972.

****
At this t~e, Chairman Russell E. Train of the Council
on Environmental Quality, Under Secretary John G. Veneman of
the Department of Health, Education and Welfare, and Oro Hubert
Heffner, Deputy Director of the Office of Science and
Technology will present their statements with respect to the
tax on lead used in gasoline additives. Following their
statements, we will all be available to answer questions on
the lead tax. Members of my staff and myself will answer
questions on the estate and gift tax acceleration and the
excise tax extension. Thank you.
000

Department of the

TREASURY

INGTON. D.C. 20220

TElEPHONE W04-2041

September 9, 1970

ADVANCE FOR RELEASE AMs
TUESDAY, SEPTEMBER 15, 1970

TREASURY EXHIBIT FOLLOWS AMERICAN HISTORY
Almost 200 years of the American past are recalled in
a new Exhibit Hall of the U.S. Treasury Department.
The sound and light display will be opened to the
public Wednesday, September 16, in the Main Treasury
building next door to the White House.
Treasury's strides through American history are traced
at 20 audio-visual stations -- from the need to finance the
American Revolution to the Twentieth-Century Treasury of
computers, narcotics control and the GNP.
A number of questions are answered: How did the
dollar sign originate? Why an income tax? A national
currency?
Other exhibits tell of the "lick the stamps, lick the
Kaiser" campaign for War Bonds in 1917, the narcotics crisis
of the Gay Nineties, and the Treasury struggle against
counterfeiting.
The exhibit, designed and built for $68,000, will be
permanent. Estimates are that 100,000 to 200,000 Americans
will view it annually.
Totally automated, the design makes the exhibit one
of the few displays of its kind. At the end of audio-visual
presentation at one station, light and sound are activated
at the next one.
George Nelson and Company of New York, which designed
exhibits at the New York World Fair, the U.S. National
Exhibition in MOSCOW, and Colonial Williamsburg, were design
contractors for the Hall.
Admission is free. Information pamphlets will be
available at the exhibit.
The Exhibit Hall is entered at ground level from East
Executive Avenue at midway in the Main Treasury building.
000

Oepartmentof the

TREASURY

IINGTON. D.C. 20220

TELEPHONE W04-2041

FOR RELEASE AT 12:00 NOON
THURSDAY, SEPTEMBER 10, 1970

REMARKS BY HENRY c. WALLICH,
SEYMOUR H. KNOX PROFESSOR OF ECONOMICS, YALE UNIVERSITY,
AND

SENIOR CONSULTANT TO SECRETARY OF THE TREASURY
DAVID M. KENNEDY
BEFORE
THE LUNCHEON OF THE MANAGEMENT CONFERENCE
ASSOCIATION OF STOCK EXCHANGE FIRMS
NEW YORK HILTON HOTEL, NEW YORK, NEW YORK
THURSDAY, SEPTEMBER 10, 1970
AN EARLY BIRD'S VIEW OF 1971
It is too late in the year to say much of interest about
the remaining outlook for 1970. It is too early for a
detailed look at 1971. But the time is always right to try
to understand an experience and hopefully to profit from it.
The Hangover from Inflation
Quite possibly the third quarter of 1970, which is now
drawing to a close, may record an increase in economic
activity. In that case, since the second quarter also
showed a small rise, some future historian may record that
it was during the winter or spring of 1970 that the present
contraction bottomed outo It is entirely possible that the
downward movement came to an end long before we recognized
the turn. In that event, the prophets of boom and doom
will both have been refuted o The boom did not go on forever,
but neither did it end in cataclysmic depression. If that
should prove to be the shape of things past, the principal
characteristic of the contraction will have been the
contrast between its mildness in what economists call "real"
and its virulence in financial terms. In terms of measures
of output, income, employment and profits, it would have
been the mildest of postwar contractionso Even in 1960-61,

K-4BO

- 2 -

these "real" factors fell more than they did so far in 196970. The financial impact, on the other hand, has been
severe. This has been the first postwar contraction marked
by bankruptcies of major corporations and other serious
difficulties. The stock market drop has been the sharpest
since 1938.
Interest rates have reach 100 year highs, and
the drop in the bond market has been correspondingly
agonizing.
It is instructive to review the probable reasons for
the severity of the contractions in the financial area in
the face of so mild a movement in the rest of the economy.
We have been plagued by a prolonged and accelerating
inflation, unparalleled in some respects in peace time.
The inflation has had time to grow deep roots in people's
expectations. It is, in my judgment, a remarkable
performance unequalled in our history, to have slowed the
overheated economy, without passing through a serious
recession to the point where definite signs of success in
the struggle against inflation are surfacing. The task
was even harder than expected, and the difficulties were
observable in the long lags with which the economy responded
to policy actions. This is one reason why strains in the
financial sphere were bound to build up.
It is perhaps not altogether unjustified to say that
business on its part contributed somewhat to the development
of these strains. For a long time, a widespread belief
held sway that the economy would not be slowed down, that the
government lacked either the means or the will to do what
had to be done. In consequence, business expectations in
early 1970 remained high, plans for business investment
continued to rise, and astounding interest rates were bid
for money to carry through these plans.
Financial pressures gained in intensity also because,
in the partnership of fiscal policy and monetary policy,
the heavier burden fell upon monetary policy. The budget
was kept under good control
The deficit for the fiscal
year 1970 was small, and the short fall from the originally
estimated $1.5 billion surplus was the result largely of
a drop in revenues induced by the economic slowdown.
Indirectly, however, the Federal government contributed to
a loosening of restraints because of its numerous government
o

- 3 -

assisted credit programs. Whether one chooses to regard these
as quasi-government expenditures outside the budget, or as
additional credit demands thrown by government upon the
private financial markets, these programs place an extra
burden on monetary policy. Monetary policy on its part was
probably even more restraining than appeared, because a
slow rate of growth of the money supply, during part of 1969
a zero growth rate, was maintained in the face of rapidly
rising prices, which required the velocity of money to rise
likewise. A given rate of growth of the money supply does
not mean the same thing when prices are stable and when
they are rising rapidly, as was the case in 1969 and 1970.
Thus, what economists call the mix of fiscal and monetary
policy was of a sort that added to the pressures upon
financial markets. More fiscal and less monetary restraint
would have eased those pressures.
The stockmarket particularly was affected by the
combined impact of inflation and monetary restraint.
Corporate profits, to be sure, dropped only moderately in
absolute terms, although rather more in terms of their
share in the national income
But the significant fact
was that, after 1968, corporate profits did not respond
favorably to inflation, as many had believed they would.
As time went by, the inflation increasingly shifted from
demand pull to cost push. Under such conditions, the
stockmarket was no inflation hedge. On the contrary,
confronted with very high interest rates in the bond market,
stocks had to adjust. High interest rates had a particularly
severe impact on growth stocks because high interest rates
discount the distant future more heavily. Emphasis on
growth therefore has made the stockmarket more vulnerable
to increases in interest rates even when expectations of
future growth remain unaffected by the slowdown.
0

One general lesson emerges from all this: inflation is
far more unpleasant and painful than even the advocates of
a vigorous policy of stable prices could have imagined.
To those who advocated a more relaxed policy toward
inflation, the experience must have come as a severe shock.
Inflation was not a neutral process in which few are hurt,
where incomes rise with prices, where savers make up on
their equities and homes what they lose on their savings
deposits and insurance policies, and where all sectors of the
economy experience a mild stimulation from the illusion that

- 4 everything is going up.
Inflation has severely distorted the
economy.
It did its greatest damage to the housing industry,
and might have wrought real havoc but for the vigorous
action of the government in channeling money into that area
when normal flows subsided.
Inflation interfered with the
execution of state and local investment projects as interest
rates rose beyond what these governmental units could pay.
Inflation added to social tensions, because by no means
all incomes kept up with rising prices.
It disturbed
financial institutions and injured the international
competiveness of American products. All in all, the
experience should h~ve ~one some way toward reducing the
Nielsen rating of the perpetual advocates of bigger
government spending and bigger government deficits.
The economic foundations have now been laid for
progressively reducing the rate of inflation.
Excess
demand has been eliminated. The economy has been slowed to
the point of suffering a slight contraction. But even though
it is quite possible that we are already moving up again, a
substantial margin of excess capacity in the economy means
that resumption of economic expansion need not interfere
with the subsidence of inflation. We can have a rising
economy and diminishing inflation provided we do not push
for renewed expansion at a rate that would bring back
overheating.
At the present time, we can observe some of the early
signs of strength in various economic series. The Gross
National Product was up slightly in the second quarter.
The production index rose marginally in July. New orders
for manufacturers durables were up for the first time. New
housing starts have shown considerable strength. None of
these movements as yet constitutes a trend.
Reversals are
possible especially in the presence of considerable
uncertainty over the labor outlook. There is no evidence
that the economy is poised for a new takeoff at a rapid
rate.
It is more likely to gather momentum slowly and to
move forward increasingly in 1971. The task of economic
policy will be to move the economy back toward full employment
while giving the financial markets a chance to consolidate
their position, reducing further the rate of inflation, and
making sure tr i l the approach to full employment does not
reaccelerate the price trend
What are the prospects that
this can be achieved in 1971?
v

- 5 Outlook by Sectors
Let me review first the areas of the economy that are not
likely to show strength. One such is Federal government
purchases of goods and services. The drop in Federal
defense expenditures for several quarters has been one of the
principal causes of the recent contraction. A further
decline is to be expected. The leading indicators of
defense spending point downwards. The reduction in the
number of men and women in the Armed Forces will reduce
military spending as well as add to the civilian labor force.
But while Federal purchases are coming down, the
Federal government is adding to the forces of expansion in
other ways. Tax cuts, government pay increases, and
social security boosts have already added to purchasing power
at a $15 billion annual rate. Their effects will be felt
principally in the form of added consumer spending.
Unfortunately, further effects will be felt also in the form
of added Federal demands upon the capital markets, thereby
reducing the funds available to other borrowers.
State and local expenditures which advanced at an
unusually slow rate during the last year can be expected
to recover their normal rhythm as interest rates come down
while statutory ceilings go up, and as Federal grants-in-aid
expand strongly. Demands for expanded public services are
strong and it is hard to believe that in one way or another
they will not be met.
Business spending for plant and equipment, as you know,
has for years been in an extraordinarily strong uptrend.
Even in the face of negative factors such as the removal of
the investment tax credit, the increase in interest rates,
the fall in the stock market, a general shortage of credit,
and finally a rise in industrial excess capacity, this
trend has continued, although at a slower rate. Recently,
moreover, the increase has been exclusively due to higher
prices. In constant dollars, plant and equipment spendin~
has been falling for several quarters. Given present low
operating rates, reduced profitability, and diminished
cash flow, it seems unlikely that the plant and equipment
boom will soon revive. A period of consolidation will
probably have to pass before it can resume. Nevertheless,
no serious slump, of the kind that occurred in 1957-1958,
seems to threaten. Utilities, operating under capacity

- 6 pressures of their own, have sharply stepped up their
investment plans.
The latest survey of manufacturers'
appropriations for capital expenditures, moreover, shows
virtually no continuation of the downward slide that had
been in progress for two quarters.
Inventory accumulation has been a strong factor in the
contraction, but not nearly so strong as it has been on
past occasions. While in other contractions businessmen
sharply reduced their inventories, pulling economic
activity down with them, in 1969-70 they merely reduced the
rate of accumulation. Inventory/sales ratios seem to be
reasonably satisfactory and would probably call for
substantial restocking if sales should expand once more at
a good rate.
Residential construction was one of the prime victims
of inflation. It is now showing some signs of strength.
The demand for housing is obviously there.
The money is
beginning to be there too, although interest rates are still
high. There is a question about the supply capacity of the
housing industry, particularly after the painful upheaval
that it has just gone through. A serious threat to high
volume construction, moreover, comes from rapidly mounting
costs.
In any event, housing should make a substantial
contribution to recovery.
The consumer has reacted negatively to inflation. This
behavior runs counter to the popular belief that, as people
see their money losing its value, they will rush out and
buy.
Businessmen may have purchased plant and equipment
in that spirit. The consumer has been more conservative.
He has apparently been concerned primarily with the risks
of an inflationary climate, and has pushed his savings rate
unusually high.
This has been one of the few compensations that
financial markets have had in these trying times
One
extra percentage point on the rate of saving out of
disposable income means close to $7 billion a year. The
increase in consumer saving over the last year has been many
times larger than the decline in corporate saving. Consumer
saving, moreover, for the most part flows through the
financial markets, which is not the case of corporate saving.
A rather subdued tone of consumer expenditures has in good
part been made up, therefore, by the growing volume of funds
available in financial markets.
v

- 7 It is not to be supposed that consumers will save at a
rate of 7-~ percent of disposable income for very long. One
contributory explanation of the high rate of saving could be
that the consumer may not yet have fully adjusted to recent
tax cuts and increases in social security benefits. Typically
these adjustments occur with a lag of some quarters. An
increase in consumer outlays in proportion to gains in
income may therefore be ahead in 1971, if not in 1970.
A modest contribution to expansion, finally, can be
expected from the growth of American exports relative to
imports. The improvement in our trade balance also means
that an important aspect of our international balance of
payment is strengthening. The balance of payments, in our
country, however, is less important in determining economic
activity than in influencing the international position of
the dollar. For the most part, the balance of payments
continues to be dominated by international capital flows,
in recent years increasingly of a short term character.
These movements, and their possible influence on monetary
policy and interest rates, are very difficult to predict
although their importance is obvious.
Two Milestones in an Expansion
I would now like to take a broader look at the
evolution of the economy that may be ahead. In the
course of a business cycle one important milestone is the
lower turning point. As I said at the beginning, it is
quite possible that this turning point is already well
behind us. In any event, because the slowdown has been
very moderate an~ on charts will look more like a saucer
rather than a V, the lower turning point may not be very
well defined. This will be all the more true if, as I
expect, the resumption of economic growth occurs rather
graduallyo
There is a second important milestone -- the point
at which the rate of expansion of the economy overtakes
the rate of growth of its potential, i.e. its capacity.
Once that second milestone is passed, excess capacity and
unemployment begin to diminish. In V shaped cyclical
slowdowns and !-ccoveries, the two milestones tend to be
very close together. Unemployment and excess capacity may
begin to diminish as soon as recovery sets in. In the

- 8 present instance, a considerable distance may intervene
between the first and second milestone. The rate of expansion
is not likely to go immediately above the 4.3 percent rate of
growth which the Council of Economic Advisers regards as the
grmvth rate of the economy's potential. At some time during
1971, this milestone will have to be passed if the economy
is to return toward full employment.
The movement toward the crossover point will test the
skill of fiscal and monetary policymakers. Too slow a
movement will needlessly waste resources and increase the
unhappiness created by unemployment. Too fast a movement
runs a risk of rekindling inflation. Past experience shows
that the economy can expand at rates considerably in
excess of potential without causing inflation. During the
first half of the 1960's, for instance, the economy
expanded at a rate in excess of 6 percent about half of the
time, although not continuously. The performance, however,
occurred under conditions of substantial unemployment. It
has been argued that, as the economy returns to full
employment, inflationary pressure results from the speed
with which the capacity ceiling is approached as well as
from the closeness to the ceiling itself. For instance, the
inflation beginning in 1965 has been explained as being due
at least in part to too rapid a rate of expansion as the
economy was approaching its limitso
Since the gap between actual and potential in 1971, even
at its maximum, should be very much smaller than it was
during the early 1960's, the danger of approaching the
capacity ceiling too rapidly will have to be kept in mind.
This is all the more important because, in contrast to the
early 1960's, the economy will not be operating at stable
prices but at a still substantial albeit diminishing rate
of inflation o
The inflation can confidently be expected to diminish
precisely because of the existence of excess capacity, and
because the evidence that inflation is being slowed will
break present expectations of continued price increases and
engender expectations of greater stability. To maintain
this movement toward lower rates of price increase, however,
will require a very careful control of the rate of expansion
of the economy and avoidance of any semblance of overheating.

- 9 In this simultaneous movement toward both full employment
and greater price stability, we must not let ourselves be
sidetracked by the mirage of a tradeoff between unemployment
and inflation. One of the victims of inflationary experience
during the last two years precisely has been the faith that
we can permanently enjoy a lower rate of unemployment if we
are prepared to accept a slightly higher rate of :inflation.
That strategy may work so long as inflation goes unnoticed.
But the rates of inflation reached recently, will not go
unnoticed. A still higher rate of inflation will then be
needed to achieve the same beneficial effect on unemployment,
leading to still higher wage increases and still higher
inflation, and so on. In the long run, alert employers
and alert labor leaders are not likely to be fooled by
inflation. Our best hope for reducing unemployment below
levels now consistent with reasonable price stability is
structural improvement in labor markets, manpower training,
and restraint on the part of labor and business in wage and
price policy.
Profits
If events should evolve somewhat along the lines
suggested, what will be the outlook for corporate profits?
Profits have fallen, relative to GNP and absolutely, but
from a high point in both respects and by a margin that is
modest compared to earlier drops. As the economy moves
back toward full employment, I would expect profits to
move back toward their traditional relation to the GNP of
roughly 10 percent, although perhaps not to the levels well
above 10 reached during the last expansion.
The cyclical restoration of profits is a complex and
delicate movement, subject to many influences. During the
eacly part of the 1960's, a number of special influences was
at work that may have mislead analysts as to the subsequent
outlook for corporate profits. It may be useful to examine
the special factors operative at that time, and to compare
with them other special factors whose influence may be felt
hereafter. During the early 1960's, several circumstances
made corporate profits after taxes advance more rapidly than
would have been sustainable in the long run
First, the
economy was recovering from a recession and was expanding
at a rate faster than it could sustain once the capacity
ceiling had been reached. Second, during that period profits
increased relative to GNP, making up for the substantial drop
they had experienced earlier o Third, post-tax profits
benefitted from the investment tax credit and from the tax
o

- 10 cut of 1964. Finally, all this happened initially in an
environment of stable prices. When inflation first began
in 1965, it took the form 02 demand-pull inflation. That
means that profit margins we~e widened and profits increased
further, until the inflation shifted into its cost-push phase
and beg2~ to squeeze profit ~qrgins. In other words, most of
the special f.:lctcrs operative duri.ng that period. were of a kind
to make the gro\vth of profits higher, or look higher, than
could b .' s'_~stai.ned in the long run.
During the early 70's, t~es2 factors will be rather
different. Whi10 the GNP will recover relative to its
potenti~l ?~d prcfits will ~e~0ver relative to GNP, other
element: Day slo':- down the a·:tv.'3.::.ce of profits. There >;"i11 still
be cost ~ush pr2~sures from past wage increases, from high
interest rates, :=rom maturing ec'!2rities that have to be refunded
There will ~e r.cw costs resulti~g from efforts to combat
pollution.
r

Capital Scarcity and the

Se~~~ities

Industry

In the cour~e of the CCT L,lS c;xp~nsion, we sh.2.ll become
increasingly a~vare of a probl"::'r:l already on the horizon: the
United St&tes faces the prospect of a period of capital scarci~.
It is t:.cue th;>.t the tremendo' .~; eoom in plant and equipment
spending may h.9ve taken care of ffi2ny future needs for some time
to come. But the demand fo:: capit,"!l will be high to help rebuild
our cities, to iC"1prove local services, improve mass transit,
and protect the environment. This is a long and costly bill, and
the capital markets will have to find the means. The job has
not been made easier by the tax changes of 1969. While we have
made gratifying progress toward greater tax equity, we have also
favored cons~~ption at the expense of saving.
How far these new capital needs are already expressed in
the high level of long term interest rates, and how f?r those
rates reflect the more temporary influences of inflation and
monetary policy, I would hesitate to guess. I do see ahead a
great need to stimulate saving. The role of the financial markets
in meeting this need have alre:dy been underscored by the over
$44 billicn of bonds and over $8 billion of stocks that were
raised in 1969. The recent 5urvey of ownership by the New York
Stock Exc~ange, showing 30 Lillion stockholders, indicates how
broad a b?se is already available to raise more capital.
There is urgent eeed to build and rebuild the interest and the
confidence of in'1estors small as well as large. For the securitie
industry, a tremendous challee:e lies ahead.
cOo

Deportment of the TREASURY
INGTON, D.C. 20220

TELEPHONE W04-2041

FOR RELEASE ON DELIVERY
Rl!MARKS FOR AMOO N. LATHAM, JR ... DIREC'.OOR OF PERSONNEL,

BEFORE THE NATIONAL FEDERATION OF FEDERAL EMPLOYEES CONVENTION ..
WOODLAKE INN, SACRAMENTO, CALIFORNIA, SEP.ID4BER 15 .. 10:00 A.M. PDT

It is a great pleasure for me to attend another HFFE Convention.

I

always look f'orward to the opportunity of meeting my old :friends at NFFE
and to making new ones. I'll sure that this Will be the case this year

even though you may not agree With some of what I'll about to say. Indeed,
I am looking forward to round table discussions with the Treasury family
when we can explore further the matters that I Will touch upon.
The purpose of this year's NFFE Convention is to draft a "Program of'
Progress." When I learned of' this purpose the question which came to my
mind was what do we mean by progress? "Progress" can mean many things,
but Philosopher Alfred North Whitehead offered an unusual definition when
he said "The art of progress is to preserve order aa1d change and to preserve
change amid order." It is signif'icant that Whitehead calls progress an
art. In today's world it sanetimes seems that it is an art practicet. only
by a dWindling number of artists.
But, I don't believe that the art of' progress Will be lost or forgotten.
I think that in Federal Labor Relations, for example, both the Government
and the Federal employee unions have to a large degree mastered the art of
progress. Almost all of the change experienced in the Federal. Labor Relations Program has been orderly change. There have been exceptiODs .. natab~
the Post Office and F.A.A. strikes. But, for the lIost part, change has
been orderly.
Since 1961 we have moved f'ran no formal Governmentwide system of labor
relations to E.O. 10988; f'ran E.O. 10988 to B.O. 11491; fraa E.O. 11491 to
Postal Reform and we are nov moVing toward nev pay legislation wh1ch Will
allow union participation in the setting of wages for classified Government
Workers. Throughout this period the NFFE and its leadership through its
"Truth Campaign" and other programs has ranked high among those to be COlRmended for responsible efforts and leadership in supporting a history of
Orderly change in Federal Labor Management Relations.
I think that we have made and are now making progress. We have made
progress even during the short time that E.O. 11491 has been in eft'ect.
As you know.. E.O. 1149l initially created many problems for unions and
management. There were voids between the old order and the new and the

- 2 transition fram one to the other raised questions and caused contusion.
Matters were not helped by the fact that the adm1nistrati ve bodies; the
Federal Labor Relations Council; the Department of Labor; the Federal
Service Impasses Panel and the Federal Mediation and Conciliation Service
vere slow in issuing regulations.
Staffing of the various administrative bodies took place slowly. This
was probably necessary to line up the excellent people that have been hired.
But, it caused a large backlog of cases and questions to be decided. Worst
of all, it created a vacuum in which agencies and unions were forced to
struggle unaided. During this period of vacuum we saw the Postal and F.A.A.
strikes occur. One of these strikes, that of the air traffic controllers,
perhaps could have been prevented if the new Executive Order bad been tul..ly
operational. Basically, that was a strike for union recognition and not a
strike for wages as was the Postal strike.
Today I think the situation under E.O. 11491 has progressed to where
ve are in an initial period of stabilization. The membership of the Federal
Labor Relations Council itself is firm and the Council has increased its
professional staff. The Impasses Panel is now :fully staffed. The Department
of Labor is now organized to handle its increased workload. Several hundred
elections have been supervised and a number of unfair labor practice and
representation cases have already been decided by Labor.
Federal union membership and representation apparently is approaching
a plateau. The dramatic increases of the past are no longer occurring. 1969
showed only a 6~ gain in the number of non-Postal employees covered in
exclusive units. Prior years showed 21~, 45~ and 3610 gains, respective~.
Postal Reform has apparently resolved the most pressing problems of
the Postal employee. And the F.A.A. situation has been channeled into the
system of E.O. 11491.
So the machinery of the new Order is now oiled and running. Now is the
time to let it operate and to identify and correct its flaws. The Order
itself has a built-in provision for continuous review and improvement. In
fact, the Federal Labor Relations Council has scheduled for this October the
first of periodic hearings to review the efficacy of the Order. Such hearings provide an excellent means for updating the Order and correcting its
weaknesses. The Executive Order in this respect has a very great advantage
over legislation. Changes can be made much faster administratively by the
PreSident than they can by attempting to have Congress amend legislation.
I do not oppose legislation per se. However, I feel that we now have
a progressive and workable Executive Order. In addition, we will probably
soon have pay legislation providing for union participation in setting

- 3 Federal pay lines for classified employees. Since the beginning of the year
we have seen new and revolutionary state legislation on public employee
relations. This stat~ legislation provides us in the Federal Government nth
a unique opportW1ity to observe the experience under the variOl1s systems set
up by the states. We should be able to learn trail their mistakes and to
incorporate their successes into the current Executive Order or perhaps into
future Federal law. It is true that the Federal Government has an obligation
to lead the country in the field of public -employee management relations. Yet
to do this the Government itself must be sure that it has an effective, stable
and successf'ul system. We should remember that the most successf'ul man is
the man who holds onto the old as long as it is good and grabs the new just
as soon as he is sure that it is better.
Again, I want you to know that I am delighted to be here. The Department of the Treasury and NFFE have always enjoyed an excellent relationship.
Thank you and I am sure that this will be another great NFFE Convention.

Otpartment of the TRfASU RY
NGTON. D.C. 20220

;;rn'ION:
RELEAS~;

TElEPHONE W04-2041

FINANCIAL EDITOR
6:30 P.M.,

iay, September 14, 1970.

RESULTS OF TREASURY'S WEEKLY

BILL OFFERING

'l1le Treasury Department announced that the tenders for two series of Treasury
Ls, one series to be an additional issue of the bills dated June 18, 1970
and
other series to be dated September 17, 1970 , which were offered on September 8, 1970,
; opened at the Federal Reserve I3anks today. Tenders were invited for $1,800,000,000,
Lhcrcabouts, of 91-day bills and for $1,400,000,000, or thereabouts, of
182 -day
Is. 1he details of the two series are as follows:
a~ OF' ACCEPTED
tJi':TI'l'IVE BIDS:

i.ow

91 -day Treasury bills
maturing December 17, 1970
Approx. Equiv.
Price
Annual Rate

182-day Treasury bills
maturing March 18, 1971
Approx. Equiv.
Price
Annual Rate

98.416
98.396
98.404

96.744
96.708
96.717

6.266%
6.345%
6.314%

6.440%
6.512%
6.494%

60% of the amount of 9Lday bills bid for at the low price was accepted
70% of the amount of 182-day bills bid for at the low price was accepted
1\1.

'l'1~ImERS

APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

istrict
'Iston
l:1-l York
jj Ln.delphLa
leveland
ichmoncl
tlo.Tl ta
'tico.!;o
t. Louis
Lnneapolls
an3n.S City
alIas
o.n Franeisco

TOTALS

A}2}21ied For
39,675,000
1,964,965,000
41,710,000
55,945,000
29,340,000
55,155,000
211,555,000
47,770,000
38,610,000
39,780,000
33,585,000
154,830,000

Acce}2ted
$ 29,675,000
1,165,165,000
26,710,000
51,195,000
29,340,000
45,685,000
197,555,000
44,170,000
38,610,000
38,560,000
24,785,000
108,575,000

~lied

For
26,285,000
1,912,895,000
9,495,000
29,490,000
44,740,000
35,845,000
218,390,000
35,410,000
25,930,000
27,465,000
32,485,000
208,185,000

Accepted
$ 11,035,000
1,038,395,000
9,405,000
29,190,000
31,710,000
26,390,000
134,290,000
26,310,000
17,030,000
25,635,000
17,585,000
33,070,000

$2,712,920,000

$1,800,025,000 ~

$2,606,615,000

$1,400,045,000

*

£I

Includes $381,965,000 noncompetitive tenders accepted at the average price of 98.404
Includes $203,035,000 noncompetitive tenders accepted at the average price of 96.717
These rates are on a bank discount basis. Ihe equivalent coupon issue yields are
,.51 '~ for the 91-day bills, and 6.81% for the 182 -day bills.

Deportment of the TREASURY
MUlONI D.C. 20220

TElEPHONE WD4·2041

STATEMENT OF THE HONORABLE JOHN S. NOLAN
DEPUTY ASSISTANT SECRETARY
BEFORE THE
HOUSE INTERIOR AND INSULAR AFFAIRS COMMITTEE
ON H.R. 15007 AND THE GENERAL TAX RELATIONSHIPS
BETWEEN GUAM AND THE UNITED STATES
9:45 A.M. (EDT), SEPTEMBER 15, 1970

Mr. Chairman and Members of the Committee:
I am pleased to appear today to present the Treasury
Department's proposals for changes in the existing tax relationship between the United States and Guam.
The bill pending before this Committee, H.R. 15007,
would eliminate the 30% withholding tax on dividends, interest and other payments from a Guam subsidiary to a
United States parent corporation imposed as part of the
territorial income tax of Guam.

While our proposals in-

clude the specific change which would be accomplished by
enactment of H.R. 15007, we believe that it would be appropriate at this time to propose more comprehensive changes
in existing law.

Our proposed changes are designed to

modernize and render more efficient the tax relationship
between the United States and Guam.

These changes are in

substance the same as those which Treasury proposed during
hearings before the Senate Interior Committee last June
in connection with S. 3155, a bill identical to H.R. 15007.

- 2 -

I will explain briefly why we have taken this comprehensive approach'and will outline the substance of our
proposals.

They are explained in greater detail in the

General Explanation which we have submitted to the Committee
and which is available at the Treasury's Public Information
Office.

We have also prepared implementing legislative

language which we have submitted with this statement.

Since

the language would also require amendments to the U. S.
Internal Revenue Code, we have also submitted copies of this
statement and the draft bill to the House Ways and Means
Committee and the Senate Finance Committee.
The Organic Act of Guam provides that the United States
Internal Revenue Code shall apply in Guam as a territorial
income tax; for this purpose, references to the united
States are treated as referring to Guam except where that
substitution is manifestly incompatible with application of
•

the Code in Guam.

Section 932 of the Code provides that

citizens of Guam not resident in the united States shall be
subject to Federal income tax as non-resident aliens under
the Code.

Section 7701 of the Code has the effect of

characterizing Guam corporations as foreign corporations
for United States tax purposes.

The converse of these rules

- 3 -

in the application of the Code as a territorial tax in Guam
is that mainland citizens not resident in Guam are taxed in
Guam as non-resident aliens and U. S. corporations are
treated as foreign to Guam for Guam tax purpose ••
Under this regime, individuals and corporations with
both U. S. and Guam source income must pay taxes to both
jurisdictions.

They report all of their income in the

returns at their place of citizenship and residence and are
allowed a credit for taxes paid to the other jurisdiction;
they pay tax only on the income having its source in the
other jurisdiction to that jurisdiction.
Off'cials of the U. S. Department$of the Treasury and
the Interior met in December, 1968, with representatives of
Guam, the Virgin Islands and American Samoa to discuss tax
problems that have arisen in each of these possessions.

Two

conclusions became evident as a result of that conference:

.

first, application of the Internal Revenue Code as a territorial tax presents difficulties in many particulars which
were not anticipated when the system was devised, especially
with regard to tax relations between the possessions and
the United States; and second, each of the possessions has
tax problems which are so unique that developing a uniform
method of taxation to cover all of them would be difficult
at this stage.

- 4 -

The need for changes in Guam's tax status became
especially apparent as a result of that conference.

The in-

troduction of H.R. 15007, touching as it does one aspect of
Guam's tax status vis-a-vis the United States, is an appropriate occasion for seeking a legislative solution for the
most troublesome of the difficulties regarding Guam.
Treasury has periodically consulted with Guam officials
since the introduction of this bill, and we have developed
the following proposals in light of those consultations.
We propose two fundamental changes in the tax relationship between Guam and the United States.

First, in lieu of

the non-resident alien status of Guamanian citizens for
U. S. tax purposes, and the converse non-resident alien
status of U. S. citizens for Guam tax purposes, we propose
a single filing return system for individuals.

Under this

system an individual with both U. S. and Guam source income
will file a single return at the place of hig residence on.
the last day of the tax year in which he will report his
,
world-wide income. He will have no other reporting requirement to either jurisdiction but will be allowed an
unlimited credit for any income taxes withheld on wages
and any estimated tax payments made during the year to the
other jurisdiction.

- 5 -

The single filing system for individuals will permit
repeal of the Code provision designating Guamanians as nonresident aliens for U. S. tax purposes, a characteristic
which Guamanians find objectionable.

Substantively, it

will avoid excessive taxation which occurs under existing
law and which is unavoidable without a change in the statute.
For example, a citizen of Hawaii who works for most of a tax
year in Guam without permanently residing there will have
taxes withheld in Guam.

His status in Guam will have been

that of a non-resident alien, and thus taxes will have been
withheld on the basis of the single exemption to which nonresident aliens are limited.

In his U. S. tax return filed

in Hawaii, he will report his Guam source income together
with his other income.

He will be entitled to a foreign tax

credit for taxes withheld in Guam, but the credit i. limited
under section 904 of the Internal Revenue Code to the effective U. S. tax on the Guam income.

•

Because the total U. S.

tax will be reduced by operation of all allowable exemptions
and deductions (including the standard deduction where
elected), and because joint return privileges are available,
the taxpayer will not be entitled to a credit for the full
tax paid to Guam.

Thus, ultimately he will have paid a

higher overall tax than he 'WOUld if all of his income were

- 6 -

earned in the United States, or alternatively, were earned
entirely in Guam,while he was a permanent resident of Guam.
Under the system we propose, Guam would withhold from
this taxpayer's compensation in Guam no differently than it
would for a citizen and resident of Guam.

The taxpayer

would file a single United States return on which he would
claim a full credit, with no limitation, for the taxes
held by Gu.am.

wi~-

The same regime would apply in the converse

situation of a Guamanian citizen temporarily employed in
the united States, with the Guamanian filing his return in
Guam rather than in the United States.
Insofar as this proposal affects persons who are resident in Guam on the last day of the year, it follows the
single filing return system added to the Organic Act of the
Virgin Islands in 1954.
system in

exten~~_ ~

It goes beyond the Virgin Islands

the single filing provisions to persons
•

resident in the United States on the last day of the t.xable
year.

We see no justification for now establishing the

single filing recruiT

~

aent on an asymmetrical basis,

especially in view of the Guamanian attitude toward nonresident alien cLaracterization.

- 7 -

One effect of eliminating the non-resitiel"lL itl iUl

c.. t.:.!

eus

would be that U•. S. citizens and Guamanian citizens could
join in Subchapter S corporations of both jurisdictions.

We

do not believe that the non-resident alien shareholder exelusion for Subchapter S corporation status should apply to
possession residents and citizens.

In the case of a Sub-

chapter S election by a Guam corporation, however, each
shareholder should be required to report his share of the
Guam corporation's Guam source income to Guam and then treat
subsequent distributions from the corporation as if they had
been made from a domestic Subchapter S corporation.

Losses

of such electing Guam corporations, however, ought not to be
used to offset U. S. source income.
The current arrangements for servicemen and civilian
employees of the United States Government stationed in Guam
would continue and would be given more specific statutory
sanction.

•

These arrangements are described in the General'

Explanation.
The second fundamental' change we propose would alter the
status of United States corporations as foreign to Guam and
Guamanian corporations as foreign to the United States.

This

would be applicable for purposes of the 30% withholding tax
on divid.nds, interest and other such income.
of the Code imposes that tax on dividends,

Section 881

int~rest

and

certain other forms of income paid from U. S. sources to

- 8 foreign corporations.

The 30% withholding rate is, practi-

a sufficiently

cally speaking,

high rate of tax that it is

frequently reduced by our treaties with other countries to
15% or less as to dividends and to no tax as to interest
and royalties.

Naturally enough, U. S. corporations

planning operations in Guam use branch offices in lieu of
~e

separate Guam subsidiaries in almost every case to avoid
30% tax which would be imposed on dividends, interest and
royalties repatriated to the U. S. parent by a separate
Guam subsidiary.

To the extent that U. S. corporations

would prefer to invest in Guam through a subsidiary, the
present law is a deterrent to such investments.
More significant is the unavoidable negative impact

~I

existence of the 30% tax has on prospective loans to Guam by
financial institutions in the United States.

Such institu-

.

tions are generally unwilling or unable to establish
branches in Guam because the volume of business in Guam
would make such a course unrealistic for most financial
institutions.

These United States financial institutions

cannot realistically expect to profit from loans in Guam
if they must bear a 30% tax on interest received.

This

high rate is applied to the gross interest received.

- 9 As a result, the tax so paid is often creditable only in part
against the united States tax liability of the financial institution because the credit is limited to the effective
rate on the taxable income of the U. S. corporation from
such source.

The evidence collected by the Governor of Guam

demonstrates that in all probability repeal of the 30% tax
will substantially enhance the attractiveness of Guam for
loans and other investments from the United States.
will be little revenue loss to Guam.

There

The economy of Guam

will be strengthened, and greater opportunities for investment in Guam by U. S. interests will be made available.
Although estimates are difficult, it appears that the
only substantial income presently derived by Guam from the
30% tax on corporations is paid on royalties from the distribution of motion pictures, and that amount is approximately $200,000 per year.

In the case of individuals, the

30% withholding tax yields at best an amount·of $300,000
annually.

This latter annual amount, however, has never

been actually collected by Guam because of certain disputes
with a number of large taxpayers under existing law and is
the subject of continuous litigation.

In any event, it is

anticipated that over time any revenue loss to Guam as a
result of elimination of this 30% withholding tax will be

- 10 more than recouped by the increased taxes resulting from
augmented economic activity in Guam resulting from these
proposals.
The Treasury Department therefore recommends elimination of the 30% withholding tax both as it applies to United
States corporations with dividend, interest and similar
income from Guam sources, and as it applies to Guam corporations with such income from U. S. sources.

While the effect

of the latter change will be negligible under present circumstances, we think that in principle the law should retain
its symmetry so that the status of Guam corporations vis-a-vis
the united States is not different from the status of United
States corporations vis-a-vis Guam.

Payors should be re-

quired to report dividend and interest payments as they do
under domestic law.
In the case of individuals, the 30% withholding tax
would be eliminated by the single filing reqoirement
proposal.

H.R. 15007, the bill now pending before this

Committee, would eliminate only the 30% withholding tax
on dividends paid from a Guam subsidiary to a controlling
United States parent.

While Treasury has no objection to

H.R. 15007 so far as it goes, we believe the withholding
tax should be removed entirely and in both directions.

~

11 -

The net result of our proposal with respect to corporations would be taxation in Guam only on the income of U. S.
corporate operations in Guam, irrespective of the form in
which conducted, and credit would be available in the United
States under sections 901 and 902 for Guam taxes paid with
respect to income derived from Guam or received in the form
of dividends from a Guam subsidiary.

In those cases in

which a Guam subsiqiary of a United States corporation pays
no taxes to Guam by reason of its qualification for a tax
holiday under Guam's Economic Development Act, there will be
no current U. S. tax on that subsidiary's earnings, but when
the earnings are paid to the U. S. parent in the form of
dividends they will be taxed at the full U. S. rate because,
to the extent of the tax holiday, they will carry no foreign
tax credit.
Treasury is continuing to examine collection dif/

ficulties experienced by Guam with respect to the Guam tax
liabilities of individuals not permanently resident in Guam
and corporations which also operate elsewhere in the United
States.

At this time, however, we propose no broadening of

the law in this area.
Today we have submitted to the Committee a draft bill
which implements our proposals and a General Explanation
which provides further background.
be made regarding the draft bill.

Several points need to

- 12 -

First, notwithstanding the symmetry between Guam and
the United States which is implied by the mirror concept,
Section 2 of our draft bill includes specific amendments to
the Organic Act of Guam to provide in Guam the converse of
the changes in the Internal Revenue Code regarding Guam
source income and the status of Guamanians for united States
tax purposes which are contained in Section 1 of our bill.
We have taken this approach out of an abuddance of caution
and to ensure against misinterpretation of the intended
results.

It is our view that our purpose could also be

achieved simply by amending the Internal Revenue Code to
provide in the United States the results desired with respect
to Guamanians and Guam source income, and to allow the mirror
concept as set forth in the existing Organic Act provisions
to produce the converse in Guam with respect to mainland
residents and United States source income.

However,

•

dis~

agreement among courts and administrative officials &s to
the full implications of the mirror concept have persuaded
us to spell out in the draft bill the mirror results we are
seeking to achieve.

- 13 Second, we have included in our draft bill a provision
authorizing regulations to be issued jointly by Treasury
and the Government of Guam to implement these proposals.

dur

intention here is to provide an administrative framework in
which the two Governments may mutually resolve questions of
interpretation and construction of these provisions.

Un-

doubtedly questions of application of the principles involved in these proposals will arise in situations which we
cannot anticipate and which have not been brought to our
attention.

As such questions arise, they may be resolved

by mutual regulations agreed to by Treasury and Guam
officials.

The authority of the Government of Guam to

issue rulings and regulations regarding the wholly internal
application of the Guam territorial income tax remains
unchanged.
Third, the draft bill includes a provision specifically
authorizing agreements between the Internal

~evenue

Serviqe

and the Government of Guam regarding attribution to Guam or
the United States of income of taxpayer with operations in
both jurisdictions, allocation of income among different
but related taxpayers operating in the two jurisdictions,
and any other matter where agreement is necessary to avoid
incompatibility between the tax administrations of the two
jurisdictions.

Such agreements have been made in the past

to the mutual satisfaction of the two taxing authorities

- 14 -

but this provision would remove any doubt regarding the
legal basis for such agreements.
To summarize, we propose two substantive changes in the
existing system of tax relationships between Guam and the
United States.

The changes will eliminate excessive taxa-

tion on individuals temporarily working in the other
jurisdiction, will remove a significant barrier to loans
to and investment in Guam, will involve only a modest
revenue loss, and will simplify and render more efficient
the tax collection systems of both jurisdictions.

Addi-

tionally, classification of Guamanians as non-resident aliens
for tax purposes, a classification to which the Guamanians
have long objected, will be eliminated.

APPENDIX

A BILL
To amend the Internal Revenue Code of 1954 and the Organic
Act of Guam to modify the income tax relationship
between the United States and Guam.
Be it enacted by the Senate and House of Representatives
of the United States of America in Congress assembled.
SECTION 1.
(a)

AMENDMENTS TO INTERNAL REVENUE CODE OF 1954.
Section 33 of the Internal Revenue Code of 1954

(relating to taxes of foreign countries and possessions of
the United States) is amended--

(1)

by striking out "The amount of taxes"

and inserting in lieu thereof "(a) Foreign Tax
Credit.--The amount of taxes", and
(2)

by adding thereto the following new

subsection:
"(b)

Guam Tax Paid on Account of Income Taxes.--

Any amount of Guam Territorial income tax withheld under
chapter 24 of the income tax laws in force in Guam pursuant
to section 31 of the Organic Act of Guam (72 Stat. 681;
48 U.S.C. l42li) on the wages of, or paid to Guam as estimated tax under section 6153 of such laws with respect to

- 2 the income of, an individual who is a citizen or resident of
the united States, and who is not a permanent resident of
Guam, on the last day of the taxable year shall be allowed
as a credit against the income tax imposed on such citizen or
resident by this subtitle and shall be considered as a payment on account of such tax for the taxable year.

The Clmount

so withheld during any calendar year shall be allowed
credit in the manner provided in section 31 (a)
(b)

.IS

d

(2)."

Section 881 of the Internal Revenue Code of 1954

(relating to tax on income of foreign corporations not
connected with united States business) is amended by redesignating subsection (b) as subsection (c) and adding
after subsection (a) the following new subsection:
" (b)

Exception for Guam Corporations. --For purposes

of this section, the term 'foreign corporation' does not
include a corporation created or organized in Guam or
under the law of Guam."
(c)

Section 932 of the Internal Revenue Code of 1954

(relating to citizens of possessions of the United States)
is a.mended by striking out the period at the end of subsection (a) and inserting in lieu thereof "or of Guam."
(d)

Section 1375 of the Internal Revenue Code of 1954

(relating to distributionsbf electing small business
corporations) is amended by adding at the end thereof the
following new subsection:

-

"(g)

3 -

For purposes of this section and section 1376,

distributions from a corporation organized under the laws
of Guam (and which has elected not to be taxed under the
Guam territorial income tax) to a shareholder who has paid
income tax to Guam with respect to his share of such corporation's undistributed

tax~le

income shall be treated as

having been made by a domestic corporation which

ha~

c 1 ~.:l;

Led

not to be taxed under this Subchapter."
(e)

Section 1442 of the Internal Revenue Code of 1954

(relating to the withholding of tax on foreign corporations)
is amended by adding at the end thereof the following new
subsection:
"(c)

Exception for Guam Corporations.--For purposes

of this section, the term 'foreign corporation' does not
include a corporation created or organized in Guam or under
the law of Guam."
~

(f)

Section 6401 of the Internal Revenue Code of 1954

(relating to amounts treated as overpayments) is amended by
striking out "withheld on wages) ," and inserting in lieu
thereof "withheld on wages), 33 (b)

(relating to Guam tax

paid on account of income taxes),".
SEC. 2.
(a)

AMENDMENTS TO ORGANIC ACT OF GUAM.
Section 30 of the Organic Act of Guam (64 Stat.

384, 392; 74 Stat. 941; 48 U.S.C. l421h) is amended--

.... 4 ....
(1)

by striking out "All customs duties" and

inserting in lieu thereof "(a)

All customs duties",

and
(2)

by adding thereto the following new sub-

section:
"(b)

Notwithstanding subsection (a) of this section,

Federal income taxes derived from Guam in the case of an
individual who is a citizen or resident of the United States,
and who is not a permanent resident of Guam, on the last day
of the taxable year and in the case of a corporation created
or organized in the United States or under the law of the
United States shall not be covered into the treassfY of Guam.
This subsection shall not apply in the case of any member of
the Armed Forces of the United States or any civilian
employee of any department or agency of the United States."
(b)

Section 31 of the Organic Act of Guam (72 Stat.

681; 48 U.S.C. 1421i) is amended-(1)

by striking out "The income-tax laws"

in the first sentence of subsection (d)

(1) and

inserting in lieu thereof "Except as otherwise
provided in paragraph (2) of this subsection,
the income-tax laws", and

- 5 (2)

by striking out paragraph (2) of sub-

section (d) and inserting in lieu thereof the
following paragraphs:
U(2)

The income-tax laws in force in Guam

pursuant to subsection (a) of this section shall
also be deemed to include the following provisions:
U(A)

For purposes of the Guam Terri-

torial income-tax, a citizen of the United
States who was not born or naturalized in
Guam shall not be treated as a nonresident
alien individual.
U(B)

All individuals whose permanent

residence is in Guam on the last day of the
taxable year shall satisfy their income tax
obligations under the Internal Revenue Code
of 1954 and under the income-tax laws in
force in Guam pursuant to subsectipn (a) of
this section by paying their tax on income
derived from all sources both within and
without Guam into the treasury of Guam.
Any amount of United States income tax
withheld under chapter 24 of the Internal
Revenue Code of 1954 on the wages of, or
paid to the United States as estimated tax

- 6 under section 6153 of such Code with respect
to the income of, such an individual shall be
allowed as a credit against the tax of such
individual, as determined under this subparagraph, and shall be considered as a payment
on account of such tax for the taxable year.
The amount so withheld during any calendar
year shall be allowed as a credit in the
manner provided in section 31 (a)

(2).

This

subparagraph shall also apply to a citizen
of the United States who was born or
naturalized in Guam and who is a resident
of a foreign country on the last day of the
taxable year, if such citizen's last place
of permanent residence before he established
residence outside the United States (as
defined in section 7701 (a)

(9) of·the

Internal Revenue Code of 1954) was in Guam.
n(C)

No Guam Territorial income tax is

required to be paid for any taxable year by
an individual who is a citizen or resident of
the United States, and who is not a permanent
resident of Guam, on the last day of the taxable year, except amounts of such tax

- 7 (i) required to be withheld on wages under
chapter 24 of the income-tax laws in force in
Guam pursuant to subsection (a) of this section,

(ii) paid to quam as estimated tax for

such year under section 6153 of such laws
with respect to income derived from sources
in Guam from the operation of a trade or
business in Guam, or (iii) due by reason of
the application of the provisions of subchapter S of such laws to an electing small
business corporation of which such individual
is a shareholder and which was created or
organized in Guam or under the law of Guam.
In the case of tax so withheld on wages this
subparagraph shall

app~y

to the tax which is

allowed as a credit for such year under section 31 (a)

"eD)

(2) of such laws.
For purposes of the Guam Territorial

income tax the term 'foreign corporation', as
used in sections 881 and 1442 of the incometax laws in force in Guam pursuant to subsection (a) of this section, does not include a
corporation created or organized in the United

- 8 -

States or under the law of the united States or
of any. State of the united States.
"(3)

The Governor or his delegate shall have

the same administrative and enforcement powers and
remedies with regard to the Guam Territorial income
tax as the Secretary of the Treasury, and other
United States officials of the executive branch,
have with respect to the United States income tax.
The Governor shall prescribe all needful rules and
regulations for the enforcement of the Guam Territorial income tax, except that he shall prescribe,
jointly with the Secretary of the Treasury, such
rules and regulations as they mutually deem
necessary for the implementation and enforcement
of paragraph (2) of this subsection.

The Governor

or his delegate shall have authority to issue,
•

from time to time, in whole or in part, the text
of the income-tax laws in force in Guam pursuant
to subsection (a) of this section."
" (4)

The Governor or his delegate and the

Secretary of the Treasury or his delegate shall
endeavor to resolve by mutual agreement any inconsistencies with respect to--

- 9 (A)

the attribution of income, deduc-

tions, credits or allowances to a trade or a
business in Guam or the United States of a
person liable to tax in the other jurisdiction,
(B)

the allocation of income, deduc-

tions, credits, or allowances between a taxpayer subject to the Guam Territorial incomp
tax and a related taxpayer subject to tax
under the Internal Revenue Code, and
(C)

any other matter necessary to avoid

incompatibility in the operation of the Internal Revenue Code and the Guam Territorial
income tax."
SEC. 3.

EFFECTIVE DATE.

The amendments made by this Act shall apply only with
respect to taxable years beginning after December 31, 1969.

September 15, 1970
General Explanation of Treasu~'s
Proposed Revision of the Tax Relation~ip between
Guam and the United States
I.

The Present Income Tax System
Section 31 of the Organic Act of Guam (48 U.S.C.

l42li) provides that the Internal Revenue Code shall be
applicable in Guam as the "Guam Territorial income tax,"
the administration and enforcement of which shall be
under the supervision of the Governor of Guam.

Section

31 further provides that in applying the territorial tax
references to the United States should be read as.referring
to Guam.
Section 932 of the Code provides ·that citizens of
the possessions, including Guam,

shall be treated as

non-resident aliens for purposes of U. S. taxation and
section 7701(a) defines domestic corporattons to

includ~

only those organized under the laws of any State or
Territory, a reference historically construed as excluding
Guam.

The result of these provisions is that a Guam

citizen not resident in the united States is taxed as a
non-resident alien by the United States and Guam corporations are treated as foreign to the United States.

The

converse of these rules in the application of the Code

- 2 -

as a territorial tax in Guam is that mainland

citiz~n3

not resident in Guam are taxed there as non-resident
aliens and U. ·S. corporations with Guam source income are
taxed as foreign corporations under the appropriate Code
provisions.

This converse result, described in operation

as the "mirror" theory, has been sustained by the courts
as a correct interpretation of the Organic Act and the
Internal Revenue Code provisions.
Procedurally, the result of the "mirror" concept is
that persons and corporations with both Guam source and
U. S. source income must file two returns, one in each
jurisdiction.

World-wide income is reported on the return

to the jurisdiction of citizenship and residence 'with a
foreign tax credit allowed for the tax paid to the other
jurisdiction on income sourced there.

The full 30 percent

withholding tax on dividends, interest, royal tie., etc.,
applies in each jurisdiction
of the other jurisdiction.

to income paJ,d to reside.nts
Individuals wi th earned income

in one jurisdiction but who do not reside there are limited
to a single exemption and are denied the privilege of
filing a joint return.
Section

30

of the Organic Act of Guam (48 U.S.C.

l42lh) provides that the Federal income taxes, among
others, derived from Guam shall be covered into the Guam
Treasury by the United States.

The meaning 0f this
4

- 3 -

provision has never been entirely clear and the tax
administrators of both jurisdictions have developed
certain mutually agreeable formulae and procedure,s to
meet its terms, as is described more fully below.
Guamanian revenue derives almost entir.ely from
income, gross receipts and excise taxes collected
directly by the Guamanian Government and income taxes
covered into the Guam Treasury by the united States.
In fiscal 1969 Guam collected $26.5 million in income
taxes, $8.95 million of which was paid over by the
United States for taxes withheld from military and
civilian federal employees.

Of total operating revenues

of $47.6 million, the remainder derived from local gross
receipts, excise and property taxes, and approximately
$4 million in federal grants.

II.

TreasuEY's Proposed Revision of the
A.

E~istin2

Sxstem

Individuals

Residents of Guam or of the mainland United States
will file a single tax return in the jurisdiction where
they reside on the last day of the tax year.

This return

will report the taxpayer's world-wide income for the
entire year and the tax will be paid to the jurisdiction
with which the ret.urn is filed.

Thus, a mainland resident

with Guam source income will have no

filing~requirement

or

- 4 -

tax liability in Guam.

Likewise, a Guam resident with

mainland source income will have no tax liability or
filing requirement in the United States.

In the event

the taxpayer had tax on his salary or wages withheld,
or made payments of estimated tax, during the course of
the year by or to the jurisdiction other than the one
in which he files his return, the jurisdiction with
which he file. his return will allow a credit for the
tax withheld or estimated tax so paid and will pay any
refund due.

The purpose and effect of this proposal

is to permit repeal of section 932 of the Code as it
applies to Guamanians and to do away with the dual filing
requirements to which Guamanians and U. S. citizens with
Guam source income are subject.

Thus, each jurisdiction

will give up the tax it now collects (other than that
which it has collected by withholding on salary and
wages and by way of estimated tax payments) on the income
of persons who are both citizens and residents of the other
jurisdiction derived from sources within the taxing
jurisdiction.

Citizens who are third country residents

will also have a single filing requirement based upon their
last place of residence within either of the two taxing
jurisdictions.

- 5 'I',

An exception to the single filing requirement will be
made for U. S. shareholders of a Guam corporation which
elects Subchapter S treatment.

In that event each share-

holder will file a return with Guam reporting and paying
tax on his share of the corporation's income and will treat
subsequent distributions from the Guam corporation as if
they had been made by a domestic electing corporation.
B.

Corporations

Mainland corporations operauing in Guam through
branches will continue to report in tax returns to Guam
their income effectively connected with their branch
operations; in their U. S. returns they will also continue
to report that income and receive a foreign tax credit for
taxes paid to Guam.

Similarly, Guamanian corporations

operating in the U. S. through branches will continue to
report their branch income in U. S. tax returns and will
•

receive a credit for U. S. taxes in their Guam returns . .
However, U. S. corporations will not be treated as foreign
to Guam for purposes of section 881 of the Code and will
therefore be exempt from the Guam withholding tax on
dividends, interest, royalties and other categories of
passive income.

Likewise, Guam corporations will not be

- 6 -

considered foreign to the U. S. for purposes of section
881 as applied in the U. S.

In short, each jurisdiction

will tax corporations of the other jurisdiction on their
income effectively connected with their operations in
the taxing jurisdiction but will not tax passive income
and distributions paid to corporations of the other
jurisiiction.

This requires that each jurisdiction give

up the tax it now collects on the passive income and
distributions paid from its sources to corporations of
the other jurisdiction.
C.

The "covering over" question

Section 30 of the Guam Organic Act (48 U.S.C. l421h)
provides that all customs duties and Federal income taxes
derived from Guam shall be covered into the Treasury of
Guam.

Under this provision taxes withheld from military

and civilian Government personnel working in Guam are
annually paid over to Guam by the U. S.

Fegeral income

taxes paid by military personnel are considered as having
been derived from sources in Guam notwithstanding that,
by reason of the Soldiers and Sailors Civil Relief Act,
military personnel stationed in Guam do not acquire
residence there.

Moreover, by administrative arrangement,

- 7 Federal civilian personnel, file returns only with the
U. S.

irrespect~ve

purposes.

of their technical residence for tax

Under the above proposal military personnel

would remain free of any Guam filing requirement.
Under the proposed revision, the united States would
be collecting a tax on

~uam

source income of persons not

resident in Guam on the last day of the taxable year and
of U. S. corporations with respect to which a tax is
presently being paid to Guam and a foreign tax credit
is presently allowed by the United States.

Under the

proposed system, and with no further change in the covering over provision, this increment of tax would be subject
to covering over as a tax collected by the United States
but derived from Guam.

To avoid the considerable adrninis-

trative problem of identifying the tax collected on such
income for purposes of payment over to Guam, the

Orqanm~

•

Act should be amended to exclude from the covering over .
provision income taxes paid to the United States by nonresidents of Guam other than Federal :nili tary and civilian

- 8 -

D.

Revenue Effects

The

Governm~nt

of Guam estimates that under the pro-

posed -system wi"th respect to individual residents of Guam
it expects to realize a small gain in revenue.

This is

based upon the assumption that among persons who split
their residence in a tax year between Guam and the mainland, but who will file their returns in Guam at the end
of the year, the additional tax due at the' end of the year
will exceed the amount of refunds to which they are entitled.
Treasury believes that it is at least as likely that with
respect to the totality of individuals who split a tax year
between Guam and the mainland, neither Guam nor the United
States will experience more than a token gain or loss of
revenue.
The Government of Guam estimates that with respect
to non-resident alien individuals who are U. • S. citizens
and realize income effectively connected with a trade or
business in Guam (including the performance of personal
services), Guam paid. refunds totalling $22,450 in 1968
and $28,625.06 in 1969, amounts which under the proposed
system it would retain.
With respect to the 30 percent withholding tAX on investment income paid to non-Guamanian individuals, Guam's

.... 9 ....

best estimate is that $339,420 of asserted annual tax liabilities would be foregone.

This figure, however, does not

represent collectible taxes because much of it iS,directly
or indirectly involved in pending litigation which challenges
the right of Guam to collect the tax, the outcome of which
is something less than certain.

With respect to corporations,

Guam estimates a loss of $205,717.25, based upon 1968 returns,

u.s. film dis-

representing '30 percent of royalties paid to
tributors for films shown in Guam.

It is expected that these

revenue losses will be more than made up in the long run from
the extra revenues derived from the increased economic activity
financed by mainland lending institutions which are presently
inhibited from making capital available in Guam because of the
30 percent withholding tax.
The revenue effect in the United States of the changes
proposed herein is expected to be negligible.

It is probable

•

that the loss in revenue attributable to individuals who split
the tax year between Guam and the mainland and file their returns in Guam will be substantially offset by the gain in revenue.
attributable to persons who reside in the United States at the
end of the tax year and no longer will file returns in Guam.
The loss in revenue attributable to elimination of the withholding tax on U. S. source income' pr-.id to Guam individuals and
corporations is token at the most.

On the

co~orate

only measurable revenue effect will occur in Guam.

side, the

.. 10 -.

III.

Purpose of the Changes
The 'above proposals accept the view that it is inap-

propriate to treat Guamanians as non-resident aliens for
tax purposes, both for the symbolic significance attached
to that nomenclature and because the economic relationship
prac~ical

between Guam and the mainland is, as a

matter,

different from and closer than the relationship between the
united States and foreign countries.

Nonetheless,

Treasu~

believes that the dual law theory should otherwise remain
in effect and that Guam should continue to administer the
Code as a separate taxing jurisdiction.

This aspect of

~e

relationship between the u. S. and Guam is part of the overall policy obj ecti ve of achieving in Guam a substantial measure of fiscal independence from the Federal government, and
it is not intended that these proposals should alter that
policy.

.

The status of individuals who split a tax year

be-

tween the mainland and Guam is most easily determined as of
the last day of the year, and each individual taxpayer's
single filing requirement is determined on the basis of residence as of the last day of .the year.

A credit for taxes

witheld by the other jurisdiction on salaries and wages

~d

estimated tax payments without any covering over requirement
is thought to be the most efficient means of accomodating
the interests of each jurisdiction consistently with a single filing requirement.

It is expected that the credits

- 11 -

allowed by Guam and the United States, respectively, under
this system will roughly equal one another, thus justifying
the termination of two filing requirements for each taxpayer
in this position.

There would be no covering over by the

U. S. of taxes it collects on the Guam source income of U.S.
persons and corporations
than U.

s.

sho~~

on returns to the U.

s.

other

military and civilian employees stationed in Guam.

Most important, these changes will cure the inequity
which arises when a mainland citizen in Guam, or a Guamanian
in the mainland, pays tax on earned income as a non-resident
alien which, because of the limitation on exemptions and deductions available to non-resident aliens, is taxed a higher
rate than he would bear as a resident.

When such a taxpayer

claims a foreign tax credit in his return filed with the
jurisdiction of his residence, he confronts the credit
limitation which limits the credit to the tax on that income as shown in the return.

For example, a Hawaiian who

works part of the year in Guam where tax is ;ithheld as if'
he were a non-resident alien, and who then reports the
income on his return filed in Hawaii, is allowed in Hawaii
a credit for taxes paid to Guam which in most cases will be
less than the actual tax paid to Guam, resulting in a higher
tax burden for such persons than for persons who earn all
of their income either in Guam or Hawaii.
The filing and withholding requirements under existing law
in both Guam and the U.

s.

for persons who receive passive in-

come from the jurisdiction in which they do not reside seems an

- 12 unnecessary burden for the small amounts involved.

Guam

is willing to give up its tax on Guam source income of nonresident

indivi~uals

in order to achieve the single filing

requirement, so long as the united States does the converse.
The proposal implements this position.

Insofar as the pro-

posal eliminates dual filing for Guamanians it merely follows
the provisions of section 28(a) of the Organic Act of the Virgin Islands (48 U.S.C. 1642).

This proposal goes further,

however, and provides the converse for u.s. residents with
Guam source income.
Treasury believes that if non-resident individuals are
no longer to be treated as "foreign" to the other taxing jurisdiction, then corporations should no longer be "foreign" either
for withholding tax purposes.

Very little revenue is obtained

under the withholding provisions by Guam because almost all
u.s. corporations operating in Guam do so tPrough branches.
Treasury believes that U.S. corporations ought to be free to
operate through subsidiaries in Guam without any withholding
tax, as should Guam corporations in the united States.

More-

over, it appears likely that removal of the withholding provisions would attract more investment capital into Guam from
the mainland from investment sources not willing or able to
establish branches in Guam.

This result may be more beneficial

to Guam than what appears to be the relatively small tax collections now made under section 881.

- 13 -

The tax system described herein

wou~d ov~rlay

the

ta~

hOliday available to certain Guam corporations under the·
Guam Economic Development Act of 1965.

The assumption above

has been that either a Guam corporate tax or a u.s. corporate
tax would be paid on corporate income arising in Guam.

Since

the tax.rates in the two jurisdictions are identical, the effect of the foreign tax credit for taxes paid to
duce the u.s.· tax on Qusiness income
to zero.

derive~

Where a Guam tax holiday for a

G~am

is to re-

from Guam sources

Gu~anian

subsidiary

of a U.S. corporation reduces the Guam income tax on that subI

sidiary's current income below the U.S. corporate rate, the
United states will in effect tax the

~ifference,

ation of the dee·med-paid foreign tax

cre~it,

through oper-

if ana when earn-

ings are paid back to the parent cQrporation in the form of
dividends.

Department 01 the
~INGTON. D.C. 20220

TREASURY
TELEPHONE W04-2041

FOR RELEASE ON WEDNESDAY, SEPTEMBER 16, 1970, 12:00 NOON, EDT
Highlights of Weidenbaum Speech to
Missouri Municipal League
September 16, 1970
Treasury Assistant Secretary Murray L. Weidenbaum emphasized
the continued importance of the proposed program of sharing
Federal revenues with state and local governments. "Let me
assure you that revenue sharing is a high priority item in
the domestic program of the Nixon Administration."
Weidenbaum, who serves as Chairman of the Administration's
Committee on Revenue Sharing, answered some of the key questions that have arisen in connection with the proposal:
Why make the expensive "round trip" of tax dollars to Washington and back again? "Actually, the Treasury has lower tax
collection costs than any state or local government agency.
Since revenue sharing will not require any new Federal agency
or bureau, the round trip will be quite economical."
Do we really have any excess Federal revenue to share? "We
are not talking about sending back to the states 'excess'
revenues left over from Federal program requirements. We
are talking about rearranging existing Federal priorities.
The alternative to revenue sharing is not a larger Federal
surplus or a smaller deficit, but a higher level of Federal
spending on lower priority programs."
Does the proposal provide enough money for the large urban
areas? "Nearly every large city will receive more per capita
than its smaller neighbors -- not just because they are
bigger, but because they bear a larger fiscal burden."
Does revenue sharing separate the responsitility for raising
taxes from the act of spending tax revenues? "The real question is control over the funds. We will continue to have some
separation of the taxing power and the spending power via Federal
aid to the states, counties, and cities. Revenue sharing repres~nts an opportunity for state and local governments to have
dIscretion over the allocation of a modest portion of these
funds."

K-481

DEPARTMENT OF THE TREASURY
Washington, D. C.
FOR RELEASE UPON DELIVERY
REMARKS BY THE HONORABLE MURRAY L. WEIDENBAUM
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE ANNUAL MEETING OF THE MISSOURI MUNICIPAL LEAGUE
ST. LOUIS, MISSOURI, SEPTEMBER 16, 1970
The Need for Revenue Sharing
We all like to talk about the need to strengthen our
Federal form of government, about moving government from
Washington closer to the people. Most of the time, let us
face it, that is just talk.
However, we in the Nixon Administration are really
trying to decentralize government and to take specific action
to strengthen local government. We call it the New Federalism.
The basic idea of the New Federalism is to shift some measurable part of national decision-making back to state and local
governments.
I have come here today to tell you about the program
that is at the heart of the New Federalism -- the idea of
sharing a portion of Federal revenues with state and local
governments, to, in effect, truly Federalize the income taxes
collected by the Department of the Treasury.
Before I get into the details, I want to make one
fundamental point. I am not just talking about another program
of sending Federal dollars around the country -- there certainly
is no shortage of ways of doing that already.
What I am talking about is the shift of decision-making
power to state and local governments. Revenue sharing is unlike
any existing grant-in-aid program. Under revenue sharing, the
money that you get from the U. S. Treasury becomes your money.
Nobody in Washington tells you how to use the money. Revenue
sharing money can go into your general fund, and it is up to
you to decide how to spend it.
Incidentally
and this is a real first -- 100 percent
of the revenue sharing appropriation is paid out to the states,
cities, and counties. There is no Federal "cut" for overhead

K-481

- 2 -

or administration. That is part of the beauty of it. We
have tried to set it up so that the program will work automatically, without the need for a new Federal bureaucracy.
Let me give you a very brief outline of our revenuesharing proposal. First, the total size of the fund is fixed
by law. You can count on it in your long-term planning. To
ease the budget impact, we start small, but there are phased
increases to a level of approximately $S billion in the fiscal
year 1976. Thereafter, the amount increases as the economy
and our tax base grows.
Second, the distribution among states is on the basis
of each state's share of the national population. There is
just one simple adjustment -- for the state's own tax effort.
Third, the distribution within each state to the cities
and counties is established by formula spelled out in the
Federal statute. The key point is that each city and county
gets its share as a matter of right and does not have to
negotiate with the Federal or state government. The amount
which each local government receives corresponds to its share
of all general revenues raised in the state by local and state
governments.
Fourth, there are no strings or limitations on the use
of these funds, no plans to submit for Federal review, and
no matching requirements.
During the past year, I have been on what my friends
call my private Chautauqua circuit, explaining revenue sharing
to governors, mayors, city managers, and other interested
people. It has been a pleasant experience to observe the
breadth and depth of support for this program which exists
In America today. This is why I welcome the opportunity to
be here.
In these meetings, a few key questions come up time and
again. They may have occurred to you today. Let me, as best
I can, provide some answers. But let me assure you I do not
consider myself a snake oil salesman -- revenue sharing is no
panacea. It will not cure all your problems, but I believe
that it will help.
The first question is, Does all the money go to the
state governments exclusively? The answer is "No". Each city
gets a portion of the revenue sharing fund automatically. We

- 3 -

have worked out a guarantee which both protects the cities
and maintains the Federal form of government. This is different from most earlier revenue-sharing plans.
It is true that initially the U. S. Treasury makes payments to the states but -- and this is a fundamental "but" -each state must, in order to qualify for the Federal money,
pass on to each city and county a predetermined share. The
states have no discretion in this matter. Each state must
pass on to its local governments the shares spelled out in
the Federal law. This provision is called the mandatory
pass-through. It was developed in joint consultations with
the National League of Cities, the U. S. Conference of Mayors,
the National Governors Conference, the National Association
of Counties, and other state and local organizations. The
mandatory inclusion of local as well as state governments in
Federal revenue sharing has the support of the major state
and local associations. I hope that it has yours, too.
The second question is, Does the proposal provide enough
money for the large urban areas? I believe that the amounts
are quite generous, particularly in view of the national
budgetary situation.
Our approach is to distribute revenue-sharing funds
within a state to each city and county in proportion to its
general revenue collections. So-called "tax havens" with low
tax collections and a narrow range of functions will receive
very small shares. In contrast, cities with heavy program
responsibilities and, hence, large tax revenues will get
bigger amounts, even if their populations are the same.
In practice, nearly every large city will receive not
just absolutely more money but also more per capita than its
smaller neighbors. However, the large central cities will get
more revenue-sharing money not just because they are bigger,
but because they bear a larger fiscal burden.
The third question is, Why bother to make the expensive
"round trip" of tax dollars to Washington - - why not leave the
money in those states and localities where it originates?
Actually, the Department of the Treasury has lower tax
costs than any state or local government agency.
SInce revenue sharing will not require any new Federal agency
or bureau
all that is required is a simple check-writing
procedure -- the round trip will be quite economical.
c~llection

- 4 The fourth question is, Do we really have any excess
Federal revenue to share -- won't revenue sharing increase
our budget deficit? This question apparently results from
some confusion over the purpose and operation of a revenuesharing program. Revenue sharing is an expenditure for a basic
national purpose -- strengthening our Federal system of government. We are not talking about sending back to the states
"excess" revenues left over from Federal program requirements.
Rather, we are talking about rearranging existing Federal
program priorities.
Let me express this important point in a slightly different way. Revenue sharing will not raise the existing Federal
tax burden. The alternative to revenue sharing is not a larger
Federal surplus or a smaller Federal deficit. The alternative
is a higher level of Federal spending in some other -- and, in
our view, lower priority -- program areas. In his current budget,
President Nixon has proposed substantial expenditure reductions
for defense, foreign aid, and space programs; and he has called
for termination or money-saving restructuring of various outmoded programs.
In turn, he has requested authority to begin
a modest program of Federal revenue sharing now, and to increase
this program in line with the revenue increases that accompany
economic growth. This is a sensible and fiscally responsible
step in the reordering of our Federal priorities.
The fifth question -- Is the Administration proposal
large enough? I am reminded of Samuel Gompers' answer to
a somewhat similar question. His answer was, "More". But,
this is not really a basic objection to the substance of our
proposal, but rather a disappointment over its size. I can
sympathize with such disappointment, but do not believe it is
really warranted .. In any event, that is not a reason to withhold your support. Let me give you our reasoning on this.
Given the budget outlook, we realistically faced two alternatives for introducing revenue sharing:
(1) either delay
introducing the plan until it looked as if enough funds were
available to begin a large-scale program, or (2) establish the
revenue-sharing program now if only on a modest scale, and
provide for future increases as budget pressures permit, and
the peace dividend becomes a reality. There is no question in
my mind that this second course of action is clearly preferable.
With all the competing claims on the Federal Treasury, it is
important to establish the principle of revenue sharing as soon
as we can -- call it foot in the door, camel's nose under the
tent, strike when the iron's hot. I believe that it is the
wise decision.

- 5 -

We have deliberately promised only what could be afforded, so that no false expectations might be raised. But
please keep in mind that a modest start now does not preclude
our increasing the amounts later when we have demonstrated
that the revenue-sharing approach works.
Now, let me turn to a question which I get very frequently: Are state and local governments competent to use
revenue-sharing money effectively? This question presents
a real challenge to you. Personally, I view revenue sharing
as an experiment. I hope and believe that it will work.
I certainly think that strengthening our Federal form of
government by helping state and local governments is an objective worthy of an investment of several billion dollars
a year.
Frankly, I am not certain that all of the money will
be used wisely. Of course, neither am I certain that all
direct Federal spending or indeed that all private spending
is sensible. Certainly there is nothing inherent in the
revenue-sharing concept which would encourage wasteful spending. Public responsibility must be tied direct to the individuals in charge of conducting government programs,
regardless of the source of financing.
I do believe that the ultimate amounts that the Congress
will be willing to appropriate for revenue sharing will depend
on how effectively the money is used. But, more than money is
transferred to state and local governments under our revenuesharing plan. Unlike the existing grant-in-aid system (which
is not affected by the revenue-sharing plan) there are no
strings. Decision-making responsibility for the use of these
funds is also delegated to the states, counties, and cities.
You, and not Federal agencies, will establish priorities. You,
and not Federal agencies, will allocate expenditures in accordance with the needs of your jurisdiction, as you see those needs
The ultimate success of revenue sharing, therefore, will depend
on your ability to make the most efficient and judicious use
of these funds.
The Nixon Administration maintains a large measure of
confidence in the ability and willingness of local government
to respond positively to those particularly local problems
which require public solutions. A major purpose of revenue
sharing is to enhance the financial ability of state and local
government to respond effectively to the urgent problems that
face us today. We recognize that all governments are beset
with problems. But we are convinced that the potential for
effective management of social and public systems is extremely
high at the local level.

- 6 One question that I get frequently may sound philosophical, but it is important since I get it from the Congress:
Does revenue sharing separate the responsibility for raising
taxes from the act of spending tax revenues? While this may
appear to have a logical ring to it, I believe that it is
misleading. It ignores two important facts. At the national
level, we have the precedent that the Federal Government already
"shares" $25 billion annually, in the form of categorical
grants, with state and local governments. At the state level,
we have the precedent that every state shares revenue with its
local governments, many in a completely unrestricted manner.
The real question is the control over the funds. It
seems quite clear to me that we will continue to have some
separation of the taxing power and the spending power -- via
rising amounts of Federal aid to the states, counties and cities.
What revenue sharing does represent is an opportunity for state
and local governments to have discretion over the allocation
of a modest portion of these funds.
There is a hooker in all this, of course. Revenue sharing
will take legislation by the Congress. Bills have been introduced in both the Senate and the House of Representatives to
put into law the revenue-sharing plan that I have been describing. Senator Howard Baker of Tennessee and over 30 other
Senators have sponsored the Administration bill in the Senate.
Congressman Jackson Betts of Ohio and over 80 other Congressmen
have sponsored our bill in the House. But we need your support your strong support. Hence, if you agree with me that revenue
sharing will be a good thing for the country, then it is up to
you to work for it.
Let me assure you that revenue sharing is a high priority
item in the domestic program of the Nixon Administration. In
d special memorandum to all senior officials of the Administration:; the President recently stated, "I want to emphasize the
imrortance of revenue sharing in our total domestic policy.
Revenne sharing is the financial heart of the New Federalism."
I thank you for the opportunity to be here. It is always
a pleasure for a Treasury official not to have to collect taxes
but to talk about giving some of them back.

000

ot TRfASURY

Department the
INSTON. D.C. 20220

TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 15, 1970

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
for two series of Treasury bills to the aggregate amount of
$3,200,000,000, or thereabouts, for cash and in exchange for Treasury
bills maturing September 24,1970,
in the amount of $3,103,440,000,
as follows:
91-day bills (to maturity date) to be issued September 24, 1970,
in the amount of $ 1,800,000,000, or thereabouts, representing an
additional amount of bills dated June 25, 1970,
and to mature
December 24, 1970, or.igina11y issued in
the amount of $ 1,302,570,000, the additional and original bills to be
freely interchangeable.
182 - day bills, for $1,400,000,000, or thereabouts, to be dated
September 24, 1970, and to mature March 25, 1971
(CI;SIP No. 912793 KA3).
The bills of both series will be issued on a discount basis under
ompetitive and noncompetive bidding as hereinafter provided, and at
naturitv their face amount will be payable without interest. They will
Je issu~d in bearer form only, and in denominations of $10,000,
S15,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches up
to the closing hour, one-thirty p.m., Eastern Daylight Saving
time, Monday, September 21, 1970.
Tenders will not be received
at the Treasury Department, Washington. Each tender must be for a
ninimum of $10,000. Tenders over $10,000 must be in multiples of
$5,000. In the case of competitive tenders the price offered must be
~xpressed on the basis of 100, with not more than three decimals,
~.g., 99.925.
Fractions may not be used. It is urged that tenders be
~ade on the printed forms and forwarded in the special envelopes which
Jill be supplied by Federal Reserve Banks or Branches on application
:herefor.
Banking institutions generally may submit tenders for account of
provided the names of the customers are set forth in such
:enders. Others than banking institutions will not be permitted to
~ustomers

- 2 submit tenders except for their own account. Tenders will be recei~
without deposit from incorporated banks and trust companies and fr~'
responsible and recognized dealers in investment securities. Te~en
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are acco~~b
by an express guaranty of payment by an incorporated bank or trust
company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement
will be made by the Treasury Department of the amount and price range
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rej ection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reiect any or all
tenders, in whole or in part, and his action in any such respect shall
be final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three decimals)
of accepted competitive bids for the respective issues. Settlement for
accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank on September 24, 1970,
in cash or other immediately available funds or in a like face amount of
Treasury bills maturing September 24, 1970.
Cash and exchange tenders
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue C~e
of 1954 the amount of discount at which bills issued hereunder are sold
is considered to accrue when the bills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capital
assets. Accordingly, the owner of Treasury bills (other than life
insurance companies) issued hereunder must include in his income tax
return, as ordinary gain or loss, the difference between the price pa~
for the bills, whether on original issue or on subsequent purchase, and
the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained from
any Federal Reserve Bank or Branch.

000

Department of the TRfASU RY
Mf,ON. D.C. 20220

TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 15, 1970

MISS PHYLLIS SHANTZ SWORN IN AS FIRST WOMAN MEMBER
OF EXECUTIVE PROTECTIVE SERVICE
Miss Phyllis Shantz of Rome, New York was sworn in
today by Eugene T. Rossides Assistant Secretary of the
Treasury for Enforcement and Operations, as the first
woman member of the newly establiE'hed Executive Protective
Service (EPS) a uniformed force supervised by the Secret
Service.
Miss Shantz and six more women who will join the
EPS soon will assist with the responsibilities of the
Executive Protective Service, which are: the protection
of the White House, the President and the members of
his immediate family, and diplomatic missions in the
metropolitan area of Washington, D.Co
Policewomen of the Executive Protective Service
will also interview juveniles and females who come to
the attention of the Secret Service and the Executive
Protective Service during the course of their protective
activities, and when necessary, will supervise their
custody.
The women selected having prior police experience
will receive in-service training, while those having
no prior police experience will participate in the
EPS Recruit Training Course.
The salary, benefits, and promotional opportunities
will correspond with those for other EPS officers.
Physical requirements are basically the same as
Civil Service Commission requirements for the position
of policewomen with the Metropolitan Police Department.

Department of theTRfASU RY
;tGTON. D.C. 20220

TElEPHONE W04-2041

JR RELEASE AT 10: 00 P.M.
JESDAY, SEPTEMBER 15, 1970

SECRETARY KENNEDY LEADS UNITED STATES
DELEGATI0N TO IMF-WORLD BANK MEETINGS
Treasury Secretary David M. Kennedy will lead a
rrited States delegation to Copenhagen, Denmark, for the
~70 annual meetings of the International Monetary Fund and
Je International Bank for Reconstruction and Development,
~ptember 21 through September 25.
Secretary Kennedy is U.S. Governor of the Fund, and of
le Bank.
The delegation will depart Andrews Air Force Base, near
lshington, Thursday morning. En route it will stop in
russels where Secretary Kennedy and Arthur Burns,
lairman of the Board of Governors of the Federal Reserve
~stem, will participate in a meeting, September 18-19, of
le Ministers and Governors of the Group of Ten. The
tnance Ministers and Central Bank Governors of the ten major
ldustrial countries, which are members of the IMF General
rrangements to Borrow, have customarily met each year at the
lme of the Annual Meetings of the Fund. They are meeting
1 Brussels at the invitation of the current chairman,
lron Snoy et d'Oppuers, Minister of Finance of Belgium.
Following the IMF-Bank meetings Secretary Kennedy will
~op at Madrid for discussion of topics of mutual interest
lth several Spanish Government ministers, September 25-26.
lairman Burns will calIon the Governor of the Bank of
Jain and other government officials.
·482

- 2 -

Among those in the official U.S. delegation in addition
to Mr. Burns will be:
Paul A. Yolcker, Under Secretary of the Treasury for
Monetary Affairs; Paul W. McCrack~n, Chairman of the
Council of Economic Advisers; Nathaniel Samuels, Deputy
Under Secretary of State and Alternate Governor of the Fund
and Bank; Samuel R. Pierce, General Counsel of the Treasury;
and John R. Petty, Assistant Secretary of the Treasury for
International Affairs.
Others in the delegation will include: William McChesney
Martin and Marriner Eccles, former Chairmen of the Federal
Reserve Board; John Snyder, Henry H. Fowler and Joseph W.
Barr, each a former Secretary of the Treasury; William B.
Dale, U.S. Executive Director of the Fund, and
Robert E. Wieczorowski, U.S. Executive Director of the Bank.
Congressional advisors and observers expected to join
the official delegation include:
Wright Patman, Texas, Chairman of the House Banking
and Currency Committee; and William B. Widnall, New Jersey,
ranking minority member of the House Banking and Currency
Committee; and Albert W. Johnson, Pennsylvania; Chester L.
Mize, Kansas, and Garry Brown, Michigan, members of the
House Banking and Currency Committee.

000

Department of the TREASURY
'tlNGTON. D.C. 20220

TElEPHONE W04-2041

September

FOR IMMEDIATE R.ELEASE

16~

1970

HELVIN HASUDA APPOINTED
,\I1UTE HOUSE FELLOW
He1vin M. H. Masuda) a native of Hawaii, has been
appointed a Hhite House Fellow and assigned to the Office
of the Secretary of the Treasury.
Mr. Masuda, 27, received a B.A. degree from Princet0n
University in 1965. In 1968 he earned a LL.B. degree
from Yale Law School where he served as an editor of
The Yale Law Journal.
Before his appointment as a h1hite House Fellow,
Mr. Masuda was an attorney in private practice in Honolulu
with the firm of Carlsmith, Carlsmith, Wichman and Case.
Recently, he was appointed special assistant to the
President of the Uni ve rs ity of Ha~",aii.
Established in 1964, the White House Fellows program is
designed to give potential leaders a year of first-hand)
high-level experience working ~rJith government officials in
"formulating and effecting national policy. In his
assignment to Treasury Secretary David M. Kennedy and his
staff, Mr. Nasuda will be able to observe and study
Treasury's domestic and international operations.
In addition to their jobs, \\7hi te House Fe1lovJs
participate in an educational program that includes
~nformal discussion with government officials, scholars,
Journalists, and leaders from other segments of private
life.

000

K-483

Department 01 the TREASURY
ftNGTON, D.C. 20220

TElEPHONE W04-2041

FOR RELEASE AT 3: 3'0 P. M., E. D• T • ,
WEDNESDAY, SEPTEMBER 16, 1970
U. S. ANNOUNCES SEVERAL PARTIALLY OFFSETTING
TRANSACTIONS WITH INTERNATIONAL MONETARY FUND
The United States Treasury today announced several
partly-offsetting gold and SDR transactions with the
International Monetary Fund to take place this month.
The first of these transactions is related to a decision
of the IMF, announced today, to sell $325 million in gold to
replenish its holdings of various currencies. The United
States' share is about $132 million o The United States has
exercised its option to take $30 million of this amount in
SDR's in lieu of gold.
In connection with the decision to sell $325 million in
gold, the IMF will withdraw approximately $23 million from
its $210 million deposit of gold with the U.S. Treasury.
This gold was deposited in connection with the quota increases
that took place in 1965-1966. The deposit was designed to
mitigate the effects of the U.S. gold stock of concentrated
purchases from the United States by other countries which had
to pay gold to the IMF at the time of the quota increases.
It wa& agreed at that time that future sales of gold by the
Fund would normally be made in part from such deposit in
proportion to the amount that the deposit bore to total IMF
gold holdings.
In a second transaction, the IMF has also agreed to a
Treasury proposal that the IMF repurchase at this time
$400 million of the $800 million in gold that the United
States had purchased from the Fund in the years 1956, 1959
and 1960. These sales to the United States were made to
provide the IMF with funds for investment to augment its
other income in order to meet its administrative expenses
and to establish a reserve. Since the need for this
investment has been reduced, half of this investment is
being eliminated.

K-484

(OVER)

- 2 The IMF will obtain the funds to repurchase the gold
by selling U.S. Treasury bills from its investment account.
This sale will be arranged in such a way as to minimize any
impact on the money market and bank reserves.
The result of these transactions will be a reduction of
about $322 million' in the U.S. gold stock and an increase of
$30 million in U.S. SDR holdings. In connection with the
reduction in the gold stock, the Treasury will transfer $250
million in gold from the General Fund to the Exchange
Stabilization Fund to replenish the balance of the ESF.
As a result of this transfer, an equivalent amount of gnld
certificates issued by the Treasury to the Federal Reservr
System will be redeemed.

epartmentof the

TRfASURY

GTON, D.C. 20220

TELEPHONE W04-2041

fOR IMMEDIATE RELEASE
REMARKS OF THE HONORABLE
DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE THE JOINT LUNCHEON SESSION OF
NATIONAL COMMITTEE OF NEWSPAPER PUBLISHERS
AND
NATIONAL PANEL ON PUBLIC RELATIONS FOR U. S. SAVINGS BONDS
WASHINGTON ROOM, WASHINGTON HOTEL
WEDNESDAY, SEPTEMBER 16, 1970, 1:15 P.M., EDT

MR. CHAIRMAN, LADIES AND GENTLEMEN:
I've had the privilege of addressing few groups with
which I feel as much at home as with yours. We share common
concerns for the welfare of our communities and for our
national family of communities. We are charged with serving
the well-being of the public, and we view an improved Savings
Bonds Program as a means of benefiting the people of communities everywhere, particularly the employed population.
You are the leaders of communications. You maintain the
means of articulating ideas.
I can think of no more vital
time for us to enjoy your interest and support. We are I~et
together shortly following President Nixon's signing legislation -- retroactive to June 1 of this year -- which improved
the advantages of Savings Bonds ownership.
Those holding Savings Bonds until maturity and those
retaining matured bonds through a period of extended maturity,
will receive a 1/2-percent bonus. The 1/2-percent bonus
assists our financial structure, by encouraging longer-term
saving and by helping to restrain the inflation on which we've
already tightened the reins. At the same time, it rewards the
publics of your communities -- indeed all Americans -- by
providing a better return.
And we intend to review the
Savings Bonds Program with regularity, to make sure that it
fulfills its mission.
There are four major objectives of that mission

-2~

Savings Bonds are intended to encourage
and provide a convenient means to achieve -- the
principle of thrift and individual financial security
as a national goal.
Savings Bonds stimulate regular
savings habits.
- Savings Bonds provide the average saver a handy
and secure method, offering a fair and reasonable
return, in which to place his faith and his funds.
Bonds also serve those wishing to diversify their
savings.
But the program is not intended to draw
funds from private institutions through aggressive
competition.
Often Savings Bonds purchases lead to
the opening of accounts in private savings sectors.
- And Savings Bonds provide the people of your
communities -- all communities -- with an opportunity
to participate directly in government financing.
- We intend that the Savings Bonds Program shall
continue as an important tool in national debt management,
by supplementing other sources of funding the government.
I appreciate how busy you are, and yet you have taken time
to offer us the very skills and talents that have enabled you
to become masters of your enterprise.
I want to thank you'
for this important public service you are giving - on top of
many, many others I know you are called upon to give.
I understand that this morning's sessions have provided
provocative and promising ideas.
I am confident that the
remaining sessions will be as productive. We need your
" a dvice-and-action. "
I have thoroughly enjoyed meeting with you and am pleased
now to present certificates of appointment to the members of
the National Committee of Newspaper Publishers and the
National Panel on Public Relations for U. S. Savings Bonds.
And now Jim Coleman, I've saved you for last, because we
wish to present something else to you, in addition to your
certificate of appointment.
This Liberty Bell Award is
presented to "James T. Coleman, who, as Chairman of the
National Panel on Public Relations for U. S. Savings Bonds,
serves with dedication and distinction in this leadership
mission." Jim, congratulations.
Thank you, Mr. Chairman, and ladies and gentlemen.

~epartment of the TREASURY
TELEPHONE W04-2041

NGTON, D.C. 20220

IMMEDIATE RELEASE

September 17, 1970

TREASURY'S MONTHLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders for
series of Treasury bills to the aggregate amount of $ 1,700,000,000,
thereabouts, for cash and in exchange for Treasury bills
uring September 30,1970, in the amount of $ 1,505,392,000,
follows:
273-day bills (to maturity date) to be issued September 30, 1970,
the amount of $500,000,000,
or thereabouts, representing an
itiona1 amount of bills dated June 30, 1970,
and to mature
~ 30, 1971,
originally issued in the'
unt of $1,201,430,000,
the additional and original bills to be
ely interchangeable.
365-day bills, for $ 1,200,000,000,
or thereabouts, to be dated
tember 30,1970,
and to mature
September 30, 1971
SIP No. 912793 KS4).
The bills of both series will be issued on a discount basis under
petitive and noncompetitive bidding as hereinafter provided, and at
urity their face amount will be payable without interest. They will
issued in bearer form only, and in denominations of $10,000, $15,000,
,000, $100,000, $500,000 and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches up
the cloSing hour, one-thirty p.m., Eastern Daylight Saving
e, Thursday, September 24, 1970. Tenders will not be received at the
asury Department, Washington. Each tender must be for a minimum of
,0000 Tenders over $10,000 must be in mUltiples of $5,0000 In the
e of competitive tenders the price offered must be expressed on the
is of 100, with not more than three decimals, e.g. 99.925.
ctions may not be used. (Notwithstanding the fact that the one-year
ls will run for 365 days, the discount rate will be computed on a bank
COunt basis of 360 days, as is currently the practice on all issued of
asury bills.) It is urged that tenders be made on the printed forms
forwarded in the special envelopes which will be supplied by Federal
erve Banks or Branches on application therefor.

- 2 Banking institutions generally may submit tenders for account
customers provided the names of the customers are set forth in such
tenders. Others than banking institutions will not be permitted to
submit tenders except for their own account. Tenders will be receive
without deposit from incorporated banks and trust companies and from
responsible and recogni~ed dealers in investment securities. Tenders
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are
accompanied by an express guaranty of payment by an incorporated bank 01
trust company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement
will be made by the Treasury Department of the amount and price ranp
accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rei ec tion thereof. The Sec retary of the
Treasury expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and his action in any such respect shall
be final. Subject to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone bidde
will be accepted in full at the average price (in three decimals) of
accepted competitive bids for the respective issues. Settlement for
accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank on September 30, 1970,
in cash or other immediately available funds or in a like face amount
Treasury bills maturing September 30, 1970.
Cash and exchange tendecs will receive equal treatment. Cash adjust~d
will be made for differences between the par value of maturing bills
accepted in exchange and the issue price of the new bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue Code
1954 the amount of discount at which bills issued hereunder are sold is
considered to accrue when the bills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capitd
assets. Accordingly, the owner of Treasury bills (other than life
insurance companies) issued hereunder must include in his income tax
return, as ordinary gain or loss, the difference between the price p~
for the bills, whether on original issue or on subsequent purchase, and
the amount actually received either upon sale or redemption at maturit!
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revis ion) and this
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained fr(j
any Federal Reserve Bank or Branch.
000

epartment of the

TREASURY
TElEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 17, 1970

TREASURY ISSUES DUMPING FINDING WITH RESPECT
TO WHOLE DRIED EGGS FROM HOLLAND
Assistant Secretary of the Treasury Eugene T. Rossides
announced today that the Treasury Department has issued a
dumping finding with respect to whole dried eggs from Holland.
The finding will be published in the Federal Register of
Friday, September 18, 1970.
On April 21, 1970, the Treasury Department advised the
Tariff Commission that whole dried eggs from Holland were
being sold at less than fair value within the meaning of the
Antidumping Act, 1921, as amended.
On July 31, 1970, the Tariff Commission issued a
determination that an industry in the United'States is being
injured by reason of the importation of whole dried eggs from
Holland sold, or likely to be sold, at less than fair value
within the meaning of the Antid~ping Act, 1921, as amended.
During the period January I, 1969, through June 30, 1970,
whole dried eggs valued at approximately $750,500 were imported
from Holland.000

K-485

leportment of the

TRfASURY

GTON, D.C. 20220

TELEPHONE W04-2041

September 17, 1970

FOR IMMEDIATE RELEASE
MEMORANDUM FOR THE PRESS:

Attached is a letter sent by the Treasury
to the New York Times.

000

Attachment

OFFICE OF THE SECRETARY OF THE TREASURY
WASHINGTON. D.C. 20220

September 16, 1970

Dear Sir:
In your editorial "Pollution and Taxes," on
September 14, 1970, you state that the case for the tax
on lead in gasoline is ambiguous. The editorial, however,
does not reflect a full understanding of the merits of
this proposal.
This tax is not being proposed primarily as a revenue
measure.
If revenue were the goal, it would have been
appropriate to capitalize on the petroleum refiners' Inability to avoid using lead additives by imposing a
significantly higher tax. Your assertion that a tax steep
enough to discourage sales would bring in little revenue
fails to recognize that on a short term basis, gasoline
refiners would not be capable of producing large quantities
of lead free gasoline of an octane rating s~fficient to
satisfy the needs of a large number of automobiles
currently on our highways.
You state that this tax ls·an interim measure. You
are quite correct; but it is an interim or transitional
step in our environmental control program to deal with
air pollution, not an interim device to raise revenue.
Of course any resulting revenue will be helpful in offsetting the deficit in the fiscal 1971 budget, but that is
not the motivating factor.
The tax is a vital element
in a well planned, concerted, government-wide effort to
attack the problem of automotive air pollution.
As your editorial correctly points out, leaded
gasoline is truly dangerous to the environment. However,
the existing family of automobiles on the road were built
to operate on 94 octane (regular) and 100 octane (premium)
gasoline, and it would be prohibitively costly to consumers to require production of gasolines of these octane
ratings without lead over the next four or five years.
At the same time, the 1971 and subsequent family of
automobiles are being built to operate on 91 octane
gasoline which can be produced without lead, or with very
low lead, at a cost averaging only two to three cents per
gallon more than 94 octane leaded gasoline. Thus, we have
an extraordinarily difficult transition problem -- in the
short run, we must allow leaded gasoline to be produced
for old automobiles but induce owners of new automobiles
to use lower octane unleaded gasoline which costs more
than leaded gasoline. The proposed tax, which would

-2make 94 octane regular gasoline slightly more expenslve
than 91 octane unleaded gasoline, is the only way to achieve
this transition.
Stated another way, without the tax, refiners will
produce leaded gasoline of regular grades at a price lower
than unleaded gasolines of the lower octane ratings that
are satisfactory for the new automobiles currently being
produced to operate on such low octane gasoline. It is
self-evident that consumers will not accept a higher price
for a lower octane rated gasoline. Faced with this lack
of consumer acceptance, gasoline refiners would have little
incentive to undertake the conversion necessary to make
available large quantities of unleaded and low leaded
gasolines. Yet large quantities of unleaded gasolines must
be available by the summer of 1974 to make the emission
control devices that will be installed on new automobiles
produced after that time operate properly.
Thus, the principal effect of the tax will be to
provide an economic incentive to produce such low octane
unleaded gasolines by placing a premium cost on the use
of lead additives. No method has been advanced, other than
the proposed tax, which will create this needed economic
incentive. It is apparently the only answer to the difficult
transitional problem we face in our program to reduce automotive pollution.
Your editorial states that unleaded high octane gasolines
produce higher emissions of hydrocarbon and thus more smog.
The study upon which this assertion is based was developed
with reference to premium grade gasoline, not regular, and is
subject to serious doubt in the scientific community. Even
if true, it has no bearing upon the lead tax proposal because
the tax rate is not high enough to preclude the use of lead
additives in premium grades. Furthermore, it is doubtful that
the refiners have the capacity to shift to unleaded premium
grades on a short term basis. By the time that capacity has
been achieved, the new pollution control devices will be
operating to limit significantly the hydrocarbon emissions.
Sincerely yours,
(signed) John S. Nolan
John S. Nolan
Deputy Assistant Secretary for Tax Policy

Editor, The New York Times
229 w. 43rd Street
New York, New York 10036

Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Newspaper Article

Number of Pages Removed:

Author(s):
Title:

"Pollution and Taxes"

Date:

1970-09-14

Journal:

The New York Times

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

Department of the
HINGTON. D.C. 20220

TRfASURY
TELEPHONE W04-2041

FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE MURRAY L. WEIDENBAUM
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE WASHINGTON, D. C., CHAPTER OF THE
DAUGHTERS OF THE AMERICAN REVOLUTION
SUNDAY, SEPTEMBER 20, 1970, 2:30 P.M., EDT
THE PRICE OF GOOD CITIZENSHIP
It is a pleasure for me to be here and to take part
in the celebration of the l83rd Anniversary of the signing
of the Constitution. When I was sworn in as an Assistant
Secretary of the Treasury, I took an oath to uphold the
Constitution of the United States. Therefore, I would like
to take this occasion to present my ideas on what it truly
means to uphold the Constitution -- and not just from the
vantage point of an office-holder but from the point of
view of every citizen.
.
Let us turn to the preamble of the Constitution itself,
to those stirring words which set a tone, and not that of
an arid and antiquated document but of a very deep concern
with the relation of the individual and his government and
his society -- " ... to form a more perfect union ... ", here
we have the early and continuing question of the relationship between the states and the national government within
a Federal system; " ... establish justice ... ", an ever-present
concern; " ... insure domestic tranquility ... ", the very real
problem of the peaceful relation of our people with each other;
" ... provide for the common defense ... ", the burden of armaments as a continuing responsibility of us all; " ... promote
the general welfare ... ", the noble thought of the greater
good of the Commonwealth rather than merely our individual
needs; " ... and secure the blessings of liberty to ourselves
and our posterity ... ", that clear indication of the long-term
nature of our Constitutional responsibilities.
The specific question I would like to discuss is how do
we achieve these fundamental objectives of the Constitution.
Let me assure you that I do not pretend to have the answer.

K-486

- 2 Rather, here are the views of one fellow citizen as to some
of the things that should be included in the role of the good
citizen.
There are some simple and obvious things that we can do
to show our love of country and OUT support of its principles
of government. For example, my family displays the flag on
holidays and other appropriate occasions. We have a flag decal
on the family car. We go to Fourth of July celebrations and
similar patriotic events (and we continue to respect those
who do not do any of these things).
Yet, I am impressed by the compelling belief that these
desirable manifestations of patriotism are the capstone of
a much larger structure of actions -- the tip of the iceberg,
so to speak. As I see it, to truly uphold the Constitution
also requires taking and supporting those sometimes difficult
and even unpleasant actions which will help to achieve its
basic and stated purposes.
Some of the actions that I have in mind may cost us
money; others may involve our doing without something that
we would like to have; still others may require us to go out
of our way to do something we would rather not bother doing.
It is the totality of these voluntary actions that we take
which are motivated not by our immediate self-interest but
in order to make for a better country that I call the price
of good citizenship.
Let me provide some examples. We hear a great deal of
talk these days about cleaning up the environment, reducing
crime, restoring fiscal responsibility, strengthening government at the grass roots, and so forth. Frankly, I find it
easy, perhaps too easy, to get people to agree, even enthusiastically, with the need to achieve these objectives. I say
perhaps too easy because what is disconcerting is that too
many of the same people seem to lose interest in the subject
when we get down to the hard decisions of how to actually
accomplish these laudahle purposes and to pay for them.
As one example among many, let us take the desire to
restore fiscal responsibility in the Federal Government, to
get government spending ullder hetter control. The generalized
support for lower budgets clearly is not enough. How many
citizens actually stanJ IIp anJ oppose a spending program which
would benefit their area or their segment of the economy even

- 3 -

though they know they really can do without it? I'm afraid
that my definition of good citizenship does not end where
a person's self-interest begins.
We hear so much these days about the need for cleaner
air. To help accomplish this objective, the Department of
the Treasury has urged the Congress to enact a tax on the
lead going into gasoline because the lead is such a major
pollutant; this would encourage people to buy unleaded gasoline
and companies to shift more quickly into the production of
more unleaded gasoline. How many of our citizens who support
a cleaner environment have done something specific to further
the passage of this "cleaner air" legislation?
Let me take another case. We all have been concerned
over the need to strengthen state and local governments. There
is a specific way of doing that. It is not a panacea, but it
is a major innovation in terms of shifting governmental power
back to state governments, county governments, and city governments. I have in mind our program of sharing a portion of
Federal revenues with state and local governments. It is
a basic part of the President's New Federalism effort. How
many of our citizens who have supported the numerous state
and city resolutions in favor of revenue sharing have followed
that up with some specific action in order to obtain congressional hearings for this legislation?
In the important area of crime control, the Congress
has thus far enacted only two of the many specific proposals
contained in the President's October 1969 message. As I list
some of the President's proposals which have not yet been
enacted, think about what, if anything, you have done personally to further these constructive steps.
--- The proposed Controlled Dangerous Substances Act.
This bill would substantially revise existing drug laws by
providing new means for controlling dangerous drugs, by establishing a new, comprehensive, and realistic penalty structure,
and by providing more effective enforcement tools.
The proposed Organized Crime Control Act. This bill·
embodies the recommendations of the President's Crime Commission and of the National Commission on Reform of Federal
Criminal Laws.
.
The proposed Explosives Regulation legislation.
ThIS would regulate more effectively the importing, manufacture,
and dealing in explosives.

- 4 --- The Omnibus Crime Control and Safe Streets Amendments. This legislation would expand and continue the work
of the Law Enforcement Assistance Administration which is
helping state and local governments strengthen their law
enforcement programs.
It would seem that too little of the generalized concern over the problem of crime has yet been translated into
actual working for and supporting of constructive measures
which would actually help to reduce crime.
The general point I am trying to make here transcends
the merits of these individual proposals. Indeed, reasonable
men and women may differ on many of the particulars. Rather,
my point is that the price of good citizenship is far higher
than merely nodding (or even shouting) approval of general
and often vague objectives. The price of good citizenship
is to do something that may cost the individual something
in either money or leisure time, and to do it with good
grace -- or to forego doing or getting something at the
expense of the Commonwealth. Maybe it is a frame of mind
that gets a positive value out of doing something that will
make this a better country.
If anyone finds it particularly easy or comfortable
trying to help in even a small way to achieve these objectives,
I suggest that he may be defining them too narrowly. This is
a difficult period in which we are in, and it will at different
times require some abstinence or .some difficult actions in
order to maintain the strength and vitality of our country.
I would like to cite a simple but basic example. I believe
that it is important for each citizen to make his or her views
known on the critical issues of the day. But how many people
actually sit down and carefully study the question, how many
go to the library and read even the layman's summary of a proposed bill before writing to their elected representatives or
to the responsible government department? I would suggest
that those who have done their homework in this regard -including seriously considering the views of those on the
opposite side of the question -- find that, in turn, their
views are considered more seriously and have greater effect.
If I may sum up, in order to uphold the Constitution,
we, of course, must obey the laws which have been enacted"
pursuant to the Constitution. That is surely essential, but
just the irreducible minimum. But I just do not think that
is enough. We must each in our daily lives do those additional
and positive things which will " ... form a more perfect Union,
establish justice, insure dQmestic tranquility, provide for
the common defense, promote the general welfare, and secure
the blessings of liberty to ourselves and our posterity ... "
000

. Department 01 theTREASURY
:NGTON. D.C. 20220

TElEPHONE W04·2041

FOR RELEASE ON DELIVERY
REMARKS BY BRUCE K. MacLAURY
DEPUTY UNDER SECRETARY
FOR MONETARY AFFAIRS
THE DEPARTMENT OF THE TREASURY
BEFORE THE NATIONAL ASSOCIATION
OF BANK WOMEN
MAYFLOWER HOTEL, WASHINGTON, D. C.
SEPTEMBER 21, 1970, 2:00 P. M.

Debt Management - Relevance for Economic Policy
I want to thank you for this opportunity to participate
in your annual meeting, and share some thoughts with you on
the subject of debt management in today's world.
If you are wondering why, with all of the exciting topics
of current interest and concern, I have chosen debt management
from the bottom of the pile, I can fully sympathize with you.
There are basically two reasons -- first, and most obvious,
the problems of managing the public debt are part of my
daily life at the Treasury. And just as collectors of
butterflies can wax ecstatic about the secret life of the
swallowtail, I find a certain drama in the arcane mysteries
of pricing a note refunding in an uncertain market. But
this would not be sufficient reason to bother you with the
subject, were it not for a second fact -- quite simply, that
debt management has been so far down toward the bottom of
the pile of subjects that people talk about, that it's time
to dust it off and take a look at it again, if only to see
whether its obscurity is deserved.

K-487

- 2 -

Debt management, as a national concern, is no Johnnycome-lately on the scene. In fact, one of the major
accomplishments of the illustrious first Secretary of the
Treasury, Alexander Hamilton, was to bring order out of the
chaos that was the legacy of financing the Revolutionary
War. Consolidat~ng and funding the hodge-podge of earlier
issues was a first order of business if the credit of the
new nation were to be established with foreign lenders on
whom we depended at that time.
Over the years, the mores of prudent debt management have
changed, reflecting the changing role of the Federal Government
in the economic life of the nation. There was a time, not too
many years ago, when the notion of a "permanent" debt was
abhorrent (even though in fact, the debt -- except for one
brief moment -- had been permanent.) During that period the
maxims of debt management were simple: (1) Avoid a "floating"
debt -- one that wa~ short-term and, hence, troublesome.
(2) To do so, fund the debt into long-term obligations.
(3)' Finally, pay the debt off in orderly fashion as it
comes due.
The Great Depression of the 1930's and World War II
changed all that. Out of the experience of the thirties
there emerged a changed theory of the role of government
in the economy. This change was formalized in the
Employment Act of 1946 -- in which the Federal Government
pledged itself to promote stable growth. And out of World
War II came an unprecedented national debt. At the end of
hostilities, that debt stood at just under $260 billion -nearly 1 - 1/4 times the total national output at that time.
In the years that have followed, there has been a
growing acceptance of the fact that the Federal debt is a
permanent, and indeed necessary, fixture in the financial
life of the nation. Given this acceptance of Federal debt
as a fact of life, attention has turned from the frustrating
and futile exercise of devising ways to payoff the debt -though we still get a good number of suggestions as to how
this could be accomplished in the day's mail -- to the problem
of finding ways to manage the debt and, at the same time,
contribute to national economic policy.

- 3 -

There is the old saw about economists, that if all of
them were laid end-to-end they wouldn't reach a conclusion.
Alas, I must report to you that economists are not in full
agreement about debt management.
There are basically three views on the subject. One,
the least ambitious -- but not necessarily the least sensible
is to work toward a manageable debt structure and stick with
it throughout the interest rate cycle -- sort of a dollaraveraging approach to debt management. A seoond view would
place greater responsibility on the Treasury to minimize the
interest burden on the taxpayer by minimizing the costs of
servicing the debt. The third view emphasizes the role of
debt management as a tool for positive economic management in
altering the overall liquidity of the economy. While it is
sometimes the case that alternative views of the same process
lead to identical policy prescriptions, these varying views
of the role of debt management unfortunately do not. They
lead to quite different guides to action.
The dollar averaging approach to debt management is
based on several plausible assumptions:
First, that there exists at any point in time a
maturity structure for the federal debt that facilitates
the management -- i.e., refinancing
of that debt
in the least obtrusive manner, and, on average, at
reasonable interest cost.
Second, that Treasury officials, despite their
presumed competence, are in no better position to
forecast interest rate fluctuations than other market
participants, and therefore should not be expected to
gamble the taxpayers' money on their assessment of
the likely interest rate swings, and
Third, that the possible advantages of either the
"minimum cost" or "liquidity management" approaches
are outweighed by the risk of potentially disruptive
effects on financial markets and the economy from wellintentioned but poorly executed pursuit of either of
these goals.

- 4 The "minimum cost" approach is more ambitious in that it
places a greater premium on keeping interest costs low, and
would argue that Treasury officials who aren't willing to
be judged by their performance against this standard don't
deserve the job. Obviously, there is great appeal to the
notion that with the taxpayer paying the freight, borrowing
operations ought to be handled in such a way as to minimize
interest costs. (And there may be some appeal to the notion
of frying Treasury officials for mismanagement!)
In theory, the prescribed course of action is simple
enough -- borrow long when interest rates are low, and
short when they are temporarily high.
But as anyone knows who has tried to play that game,
it's pretty difficult to know with confidence when interest
rates are temporarily high. In fact, given the generally ris~g
interest rate trend over the postwar period, and the unprecedentec
rise in rates during the last couple of years, those who felt
that they were minimizing interest costs by staying short
and they were certainly a majority -- found that just the
opposite turned out to be the case.
Finally, the third, or "liquidity management" approach
argues that the Federal Government should use all the tools
at its disposal, including debt management, in an effort to
keep the economy tracking close to its full-employment
potential. Again, in theory, the prescription is easy
enough -- shift debt toward the long end of the maturity
spectrum whenever the pace of economic activity is overheated,
with a view to 1) raising long-term rates and thus discouraging
investment, and 2) reducing the liquidity of the economy and
thus the potential for spending. And the opposite, of course,
in periods of economic slack.
As you will note, this policy prescription is just the
contrary of the "minimum cost" approach, and any debt manager
who simultaneously tried to achieve both would be
schizophrenic or worse. In any case, serious questions have
been raised as to the validity and practicability of trying
to influence the course of the economy through debt management. For one thing, debt management, in the sense of

- 5 liquidity management, is now frequently considered to be just
a branch, and a not very important branch, of monetary policy.
On this argument, anything that could be achieved by the
Treasury through shifting the maturity structure of the
public debt countercyclically could be achieved more effectively
by the Fed, so why go through all the fuss. Second, there is
a question as to whether anything at all is accomplished from
the point of view of influencing the economy by changing the
maturity composition of the public debt. It is argued that
at any given time, holders of securities have a structure of
liquidity preferences, and that small changes in the interest
rate curve will induce shifts in private debt that would
offset the influence of shifting public debt. In other words,
aggregate liquidity can be influenced by monetary policy,
but it cannot be influenced by changing the maturity
structure of one segment, even though an important segment,
of the total debt outstanding. Lastly, even if the liquidity
management approach were without critics on theoretical
grounds, there is a real question as to how effectively it
could be put into practice, at least during periods of
credit restraint. There is a limited appetite for longterm government debt at any time, and contrary to what might
seem logical, shoving out long-term debt in an unreceptive
market doesn't just raise interest rates, it can demoralize the
market itself.
Apart from the theoretical uncertainties and the practical
constraints that I have mentioned so far, there are several
other factors that seem to me to argue for a modest rather
than an ambitious goal for debt management. One of these
may surprise you -- namely, that the federal debt is becoming
an increasingly less significant magnitude in the financial
firmament. I have heard many comments about the crushing
burden of the federal debt. In some sense, this may be true
and whether true or not, it is certainly still a good target
for political epithets. But that fact is public debt in the
hands of private investors has actually declined by about
$6 billion since 1945. It's quite true that the total of
public debt securities outstanding has increased from the
$260 billion figure I mentioned at the outset to $364 billion
at the end of last year. But during this same period,
various government trust funds have absorbed some $65 billion,
and the Federal Reserve, to provide for the necessary increase
in the money supply, has added $33 billion to its holdings of
Government securities.

- 6 -

The decline in the role of federal debt is even more
dramatic when compared with other economic magnitudes. For
example, government debt in private hands was somewhat greater
than our total national output in 1945, as I indicated earlier,
but by last year, growth in output reduced the relative size
to one-third of GNP. Similarly, during this period when
total public debt increased less than 40%, corporate debt
rose more than 6 times, mortgage debt 9 times, and consumer
debt 20 times.
Obviously, the declining relative weight of Federal debt
has a bearing on the relevance of the liquidity management
view as a guide to debt management actions. In other words,
even if shifts in the maturity structure of the Federal debt
did affect the economy, it is clear that the potential for
any such effect has been dwindling with the passage of time,
and is small relative to the potential effects of shifts in
other forms of debt outstanding.
Though it may sound paradoxical, this declining relative
importance in the size of the public debt has not brought
with it parallel benefits in the ease with which the debt
can be handled. There are several reasons for thiso First,
there are sharp seasonal swings in federal revenues, both
within the year and within each month, that have to be
bridged through flexible borrowing. Second, there are times
such as FY '68, when the federal budget runs into sizable
deficit, with the result that the Treasury must come to the
market for large amounts of new cash. Finally, the Treasury
in recent years has had to manage the debt with one hand tied
behind its back, so to speak. It may sound incredible, but
we are limited by a law dating from the first world war,
half a century ago, to paying no more than 4 1/4 percent on
bonds. This constraint has meant that the Treasury has been
unable to issue any debt beyond seven years maturity since
1965. With the passage of time taking its inevitable toll,
the average maturity of the marketable debt has dropped
from 5 years 4 months to 3 years 8 months. In effect, we
have had to run increasingly fast just to stand still, as
the volume of maturing coupon issues has risen to over $20
billion per year.

- 7 In fact, given the limitation of the 4 1/4 percent
ceiling, the discussion of alternative strategies for debt
management becomes somewhat academic. This becomes clear
when you realize that the Treasury has offered the longest
maturity legally open to it in nearly every refunding since
1965. And despite this, the volume of short maturities has
been increasing. In other words, far from having the luxury
to choose among various debt management goals, there is a
serious question as to whether we have even been able to
achieve the minimum target of stabilized dollar averaging.
Within these various constraints, the Treasury does,
of course, take into consideration not only immediate market
factors, but the state of the economy more generally, in
deciding on a particular pattern for meeting its cash
and refunding needs in a given period. Despite the limited
range of available options, there are opportunities for
shading the relative attractiveness of issues in various
maturities, and for altering the mix between bills and
coupon issues. Thus, while there is little opportunity for
any sizable shifting of public debt maturities, we do
try to insure that the marginal impact of our operations is
consistent with the needs of the market and the economy in
a given situation.
If debt management in the traditional sense of handling
the government's own obligations efficiently holds little
scope for innovation at the moment, (and this does not rule
out certain improvements in technique) there is a related
area where new thinking and possibly new institutional
arrangement~ are called for.
I have in mind the growing
importance of federally-sponsored credit programs. There
is not time to go into this matter in any detail today.
But let me mention that from a mere one percent of public
debt iS$ues in 1954, the obligations of federally-sponsored
agencies such as FNMA, the Home Loan Bank, the Farm Credit
Agencies, etc., have expanded to the point that they are
now equal to 10 percent of the public debt. The fact that
these agencies are now outside the federal budget, and that
they are likely to be joined by new sister acronyms such
as Sally Mae, EFA, etc., means that the task of insuring

- 8 -

orderly marketing, and keeping some sort of control over
their aggregate demands on the capital markets, is at one
and the same time becoming more necessary and more difficult.
Thus, while the subject of debt management in the
traditional sense may deserve the low profile it has had
in recent years, the challenge of coordinating expanding
federal credit programs requires more airing than it has
had to date. And for this reason, among others, I'm delighted
to have had this opportunity to touch upon it briefly before
this group of opinion makers in the financial field.

00

00

00

Department of the TREASURY
UNGTON. D.C. 20220

TElEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 18, 1970

TREASURY DEPARTMENT ANNOUNCES PREDEPARTURE
INSPECTION PROGRAM TO COMBAT AIR PIRACY
Assistant Secretary of the Treasury Eugene T. Rossides
announced today, after consultation with the Department of
Transportion and the Air Transport Association, that the
Bureau of Customs is being instructed to institute, as part
of the President's anti-air piracy program, a predeparture
inspection procedure for aircraft bound for overseas
destinations.
The new program will include instructions to Customs
inspectors to examine the hand baggage of outbound passengers
and, whenever appropriate, suspected individuals will be
searched for instruments of piracy or sabotage.
The program is going into effect today at John F. Kennedy
International Airport, New York and at New Orleans and Dulles
International Airports.
On Saturday the program will be initiated at a number of
additional airports. The program will be expanded in the
immediate future to include all gateway airports used by
international travelers.

000

K-488

STATEMENT OF HONORABLE MEADE WHITAKER
TAX LEGISLATIVE COUNSEL
UNITED STATES TREASURY DEPARTMENT
BEFORE

THE COMMITTEE ON FINANCE
UNITED STATES SENATE
ON INFORMATION REPeRTING OF PAYMENTS BY THIRD
PARTIES TO PROVIDERS OF HEALTH CARE SERVICES
SEPTEMBER 21, 1970, 10:00 A.M.

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE:
I am pleased to present to the Committee the views of
the Treasury Department on the need for additional legislation
to require insurance companies and others to file information
returns with the Internal Revenue Service with respect to the
amount of payments made directly and indirectly to doctors
and other health care providers.
During consideration of the Tax Reform Act of 1969, the
Committee on Finance adopted an amendment designed to broaden
the existing statutory information reporting requirements
covering health care payments.

This provision, which would

have required insurance carriers to file information reports
with respect to payments made directly to health care

- 2 providers as well as to insured individuals, was deleted by
the Conference Committee.
Our continuing study of this problem has confirmed our
view that more effective information reporting of health
care payments is essential.

We have also concluded that it

can only be accomplished by legislation.
EXISTING LAW
The background of this problem is cogently set forth
on pages 145-149 of the report dated February 3, 1970 of
the Staff to the Committee on Finance entitled, "Medicare
and Medicaid - Problems, Issues and Alternatives."

The

Internal Revenue Code provides that every person making payments of certain types in the course of his trade or business
to another person, amounting to $600 or more in a calendar
year, must file an information return showing the amounts
paid and the name, address, and identification number of the
recipient.

However, until late in 1969 the Internal Revenue

Service did not apply the information return requirements to
payments to doctors, dentists, and other suppliers of health
care services.

- 3 This matter was reconsidered last year and on November 13,
1969, the Internal Revenue Service announced the issuance
of Revenue Ruling 69-595 (1962-2, Cum. Bull. 242).

That

ruling applied section 6041 of the Internal Revenue Code to
insurance companies, including those participating in Medicare,
Blue Cross-Blue Shield organizations, state agencies participating in the Medicaid program, and unions and employers
having self-insured or self-administered plans.

The ruling

requires these payers to file the Form 1099 Information
Return with respect to payments aggregating $600 or more annually made directly to doctors and other health care providers.
payments.

Direct payments are sometimes described as "assigned"
Under this ruling, no return is required for or

with respect to amounts paid as reimbursement of amounts paid
or payable to a provider .. These payments are known as
indirect or "unassigned" payments.
For insurers under the government-sponsored health care
programs, the ruling applies to payments made after
January 1, 1969, except that in the case of carriers whose
accounting systems were not geared to retrieving and reporting
information on payments made in 1969, the ruling applied only

- 4 to payments made on and after January 1, 1970.

An additional

one-year extension was granted to payers not under Medicare
and Medicaid programs, so that the ruling will not be fully
effective until January 1, 1971.

The prospective application

of the ruling was in response to the representation of many
insurers that a reporting system could not be installed
within a shorter lead time without undue cost.

The year's

extension was used in part for a study by a joint Internal
Revenue Service/Insurance Industry Task Force of the systemic
and procedural aspects of information reporting.

I am pleased

to present the Committee with copies of this Task Force
report.
The Staff of the Senate Finance Committee and the Internal
Revenue Service have separately concluded that information
reporting of health care payments as authorized by present
law leaves a good deal to be desired.

Chief among the defects,

in our judgment, is the absence of a reporting requirement
for unassigned payments for health cnre services.
At present, unassigned payments account for approximately
60 percent of all payments made by commercial carriers,
other than Blue Cross and Blue Shield.

Aside from this large

- 5 -

gap in information reporting, the omission of unassigned
payments may lead to massive shifts in billing practices by
providers of health care services seeking to avoid the impact of information reporting, including the cost to the
payer.
gap.

Such a shift would increase the information reporting
It would also tend to have serious implications for

those patients who may be without sufficient financial resources to pay medical costs prior to reimbursement under
health insurance.

This is, of course, the group for whom

health insurance is most necessary and for whom the present
trend toward assigned payments is most beneficial.
The Treasury Department recognizes that the 1969 revenue
ruling, in its application to assigned payments, has certain
deficiencies and inadequacies.

These result in part from

provisions of existing regulations and in part from lack of
statutory authority.

For example, reporting is not required

of payments to corporations, such as professional service
corporations.

We believe this problem can be corrected

administratively.

- 6 -

The ruling does not impose a reporting requirement upon
payees acting as conduits.

For example, many clinics or as-

sociations of doctors may designate a single individual to
receive payments for services by each member of the group.
The reporting of large payments to such an agent or nominee
without a requirement for a further reporting of his redistribution of the payments makes the information less
beneficial to the Internal Revenue Service.

Also, the ruling

omits a requirement that the payers furnish copies of information returns to the payees, which, of course, is an
eminently desirable aspect of information reporting.
Except for extending the reporting requirement to corporations, it is at best uncertain how far the Internal
Revenue Service can achieve administrative solutions to these
problems.

In fact, it has been suggested that there is some

question as to the statutory authority for the issuance of
this ruling.

And, in any event, it is clear that legislation

is needed to authorize information reporting with respect to
unassigned payments.
Unassigned payments present a somewhat different information reporting problem than assigned payments.

Since an

- 7 assigned payment is paid directly to the health care provider, it is that amount which is useful to the Service.
In the case of an unassigned payment, it is not the
reimbursement to the insured which is significant but
rather it is the separate charges for health care whiLll
provide the Service with useful information.

Thus, informa-

tion reporting with respect to unassigned payments requires
classification, storage and retrieval of the various charges
to the payee by the health care providers.
We are aware of the concern expressed by the insurance
industry with respect to the costs of implementing a reporting system with respect to the full amount of unassigned
payments.

However, prior cost estimates were based on the

reporting of all payments to health care providers aggregating
$600 or more in a single yea,".

That would require classifi-

cation,storage and retrieval of data on all such reimbursed
charges.

The major influence on the cost is the number of

items processed.
In an effort to reduce the burden on the payers without
materially reducing the value and usefulness of the information furnished, we are proposing a reporting system based on

- 8 -

the amount of each statement rendered by a provider included
in a claim with respect to which reimbursement is made.

For

the first two years, separate statements under $100 would not
be reported.

This amount would drop to $50 for the succeeding

two years, after which it would be fixed at a floor of $25.
This would mean, for example, that as the insurance carrier
analyzed each claim, it would eliminate for reporting purposes
during the first two years every separate statment under $100.
We believe that this approach which requires the collection
and retrieval of significant transactions only rather than
all amounts aggregating at least $600, together with the
transitional phase-in, will materially reduce the burden on
the insurance industry while providing the Service with an
important aid to compliance.
Questions have also been raised as to the ability of
the Internal Revenue Service to use effectively the information required to be furnished.
that neither taxpayers nor the

We fully concur with the view
Int':~ ~na1

Revenue Service should

be burdened with returns or documents which serve no useful
purpose.

However, experience has demonstrated that informa-

tion reporting can effect an almost miraculous reversal of
a serious deficiency in voluntary reporting of income.

- 9 The Statistics of Income reveal that, from 1960 to
1963, the number of individual income tax returns reporting
interest income increased more than 100 percent, from 10.3
million to 21.4 million, while the dollars of reported interest income increased from $5.1 million to $9.2 million.
During this same period the number of returns filed increased
less than 3 percent and adjusted gross income ahout 10 percent.

The important event during that period was that the

level of information reporting on interest was reduced from
$600 to $10 per year.
is obvious.

The conclusion which can be drawn

Information reporting on items of income has a

direct and beneficial effect on voluntary reporting for income tax purposes.
That there is a need to improve the level of compliance
in the reporting of health care payments is also clear.
During the past year, the Internal Revenue Service has
processed returns of about 11,000 physicians receiving
Medicare and Medicaid payments.

Pr(;liminary results in-

dicate a number of instances of subt; tantial, unreported income, including some where the omif;sion exceed $100,000.
This confirms other indications of non-compliance on the
part of health care practitioners.

- 10 -

The salutory effect on the level of voluntary compliance
resulting from commencement of information reporting is too
well demonstrated in other areas to require justification.
Moreover, the availability of the information itself, even
to the limited extent provided by the 1969 revenue ruling
alone, will measurably assist in efficient and effective
utilization of revenue agent manhours assigned to the audit
process.

However, for the reasons already stated, reporting

should not be limited to the narrow scope of this revenue
ruling.

Neither should any doubt as to the authority of the

Internal Revenue Service to enforce reasonable information
reporting requirements be permitted to exist.
If this legislation is enacted, arrangements will be
made by the Internal Revenue Service to match data from the
information returns against rhe Individual Master File to detect those providers of health care services who have failed
to file an income tax return.

The data will also be associated

with individual tax returns selected for audit in the regular
classification process, which will, as stated, improve the
ability of the agent to effect a thorough and speedy audit.
In addition, it is anticipated that analysis of the information

- 11 -

from the various programs utilizing these documents
will lead to the identification of special
return selection criteria which will facilitate the selection of high yield returns for audit.

These factors together

will contribute substantially to the ability of the Internal
Revenue Service to maintain its responsibility in the compliance area.
The need for this legislation is clear.

An effective

information reporting system is probably the strongest available incentive to support the voluntary reporting of income.
Where it becomes feasible, as now in the case of health care
payments, it should be adopted.

Accordingly, I am recom-

mending to the Committee legislation similar to section 944
of H. R. 13270, as reported out by this Committee in 1969
but deleted in Conference, modified as I have indicated.
I would now like to discuss in more detail our specific
recommendations.
Recommendations
(1)

Authorization
(a)

Information reporting by insurance companies, Blue

Cross-Blue Shield organizations, Medicare and Medicaid

- 12 agencies, employers, and unions operating health insurance
plans and similar payers with respect to unassigned payments
should be authorized:
(i)

Reporting should be made annually of the

amount of each health care statement in excess of
the specified minimum amount with respect to which
a payment is made, with all charges by each separate
provider reflected by such statements aggregated for
the year;
(ii)

Reporting should commence with respect

to charges reimbursed after December 31, 1971;
(iii)

For the years 1972 and 1973, the re-

porting should exclude all statements less than
$100; for the years 1974 and 1975 all statements
less than $50; and thereafter all statements less
than $25 should be excluded;
(iv)

Reporting should not be required with

respect to any charge on aCCOUllL of health care
services furnished by an instrumentality of the
Federal Government or by any state or local government or by any tax-exempt organization;

- 13 (v)

The $600 floor of existing law should not

apply.
(b)

Information reporting by the same group of payers

of assigned payments should similarly be authorized, with
the same exclusions phased-in during the same periods, except that such reporting should be commenced at the $100
level for all assigned payments made on and after
January 1, 1971.

Each separate payment in excess of the

excluded amounts to each payee should be aggregated and
reported annually.
(2)

Copies of information returns
Copies of information returns should be supplied to each

payee in the case of assigned payments.

In the case of un-

assigned payments, each provider of health care services
with respect to whom an information return is filed should
be furnished a copy of the return.
(3)

Nominee reporting
A further reporting requirement should be imposed

on each health care provider who receives any payment
in excess of the prescribed amounts which such provider
is obligated to disburse to one or more other providers.

- 14 (4)

Separate payments for merchandise
Reporting should not be required with respect to any

separate payment (assigned or unassigned) for merchandise
or property such as drugs, eye glasses, prosthetic devices,
wheel chairs, beds, crutches and the like.
(5)

Exclusion of Tort Claims
Payments in settlement of tort claims shall not be

subject to information reporting under this provision even
though such payments may include amounts referable to the
cost of health care services.

The Treasury Department strongly supports the need to
clarify and extend the information reporting requirements
applicable to health care payments.

I appreciate the op-

portunity to appear before the Committee on this matter.

My staff and I will be happy to answer any questions the
Committee may have.

epartment of the fREASU RY
TELEPHONE W04-2041

BTON. D.C. 20220

:NTION:

FINANCIAL EDITOR

RELEASE 6: 30 P.M.,
Lay. September 21, 1970.

RESULTS OF TREASURY'S WEEKLY BILL OFFERING
The Treasury Department announced that the tenders for two series of Treasury
.s, one series to be an additional issue of the bills dated June 25, 1970
,and
other series to be dated September 24, 1970 , which were offered on Se~tember 15, 1970,
~ opened at the Federal Reserve Banks tod~.
Tenders were invited for ~1,800,000,000,
lliereabouts, of 91-d~ bills and for $1,400,000,000, or thereabouts, of
182-d~
Ls. The details of the two series are as follows:
}E OF ACCEPTED
91-day Treasury bills
PETITIVE BIDS: ___m_a_t.;..;ur.;;;.;;i~n~g:....-D..;;..e~ce..;;..mb...;;..e.;..;r,--2""::4::",,~1..;;..9__70__
Approx. Equiv.
Price
Annual Rate
•
. 5.898%'
98.509,
High
Low
98.491
5.970%
Average
98.495
5.954%

182-day Treasury bills
maturing March 25, 1971
Approx. Equi v •
Price
Annual Rate
96.868
96.836
96.845

6.195%
6.258%
6.241%

92% of the amount of 91-day bills bid for at the low price was accepted
4-1:% of the amount of 182 -d~ bills bid for at the low price was accepted
AI. TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

istrict
oston
ew York
bilade1phia
leve1and
ichmond
tlanta
:licago
t. Louis
inneapolis
!IJlsas City
u1as
!IJl Francisco
TOTALS

AcceEted
AEE1ied For
$ 28,395,000 $ 18,385,000
·2,199,685,000 1,269,030,000
46,720,000
21,365,000
46,470,000
45,350,000
32,905,000
32,905,000
57,185,000
39,525,000
242,175,000
180,130,000
47,600,000
38,600,000
32,975,000
23,695,000
50,295,000
34,660,000
30,590,000
17,090,000
79,320,000
177 ,liO zOOO
$2,992,1(5 ,000 $1,800,055!000 ~

AEElied For
29,315,000
1,828,195,000
19,785,000
24,915,000
38,845,000
37,755,000
256,445,000
32,655,000
30,110,000
36,090,000
29,565,000
166 z020z000

Acce]2ted
18,315,000
963,435,000
14,455,000
21,115,000
34,845,000
23,955,000
151,085,000
25,555,000
14,270,000
22,125,000
15,765,000
95 z160 z000

$

$

$2,529,695,000

$1,400,080,000

EI

~c1udes *373,210,000 noncompetitive tenders accepted at the average price of 98.495
~cludes $ 203,945, 000 noncompeti ti ve tenders accepted at the average price of 96.845

l'hese rates are on a bank discount basis. The equivalent coupon issue yields are
;.13$ for the 91_day bills, and 6.53 %for the 182 -d~ bills.

epartmentof the

TREASURY

ION. D.C. 28220

TELEPHONE W04·2041

FOR RELEASE ON DELIVERY
STATEMENT BY JOHN M. HENNESSY, DEPUTY ASSISTANT
SECRETARY FOR DEVELOPMENT FINANCE, DEPARTMENT
OF THE TREASURY,BEFORE THE FOREIGN OPERATIONS
AND GOVERNMENT INFORMATION SUBCOMMITTEE OF THE
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS,
TUESDAY, SEPTEMBER 22, 1970
Mr. Chairman, I appreciate the opportunity to appear before your
Subcormni ttee this afternoon.

I welcome the Corranittee 's interest in

the problem of overdue foreign debts.

This is a highly complex area

involving a long history of complicated international negotiations.
I hope my testimony will provide some background to the Subcannnittee
of the efforts which have been and are being made to improve the
collection procedures of delinquent foreign obligations.
Although the Treasury Department's responsibility for collecting
foreign debts is limited, the collection of such debts has been of
serious concern to the Department.

As the

~gency

primarily concerned

with the overall financial condition of the United states, and
particularly with the status of amounts owed to the Government, we
have throughout the years cooperated closely with the agencies responsible
I

for collecting particular categories of debts, including the state
DepaYiOIDeD-t, which is gen~lly responsible for the international

- 2 negotiations concerning the delinquent accotmts.

In addi tian I the

Secretary of the Treasury, as Chairman of the National Advisory Councu
on International Financial and Monetary Policies, coordinates with
the other member agencies

attempts at major debt settlements and the

extent ion of new credits to foreign countries against the background
of outstanding debts.
Without questioning the seriousness of delinquent foreign
obligations, I think it is important to place the problem in proper
context.

The delinquent accounts represent only a minor portion of

the total amount of credits extended by the United States in one
or another to foreign governments since the Second World War.

fOnD

To

illustrate this point, as indicated in the Treasury publication
"Foreign Credits by the United States Government," foreign credits
authorized to be extended by the United States Government to

count~

and international organizations totalled approximately $39 billion
on June 30, 1969.

This figure represents authoriz.ed loans which have

not been fully repaid, have not been cancelled or

terminated~

and haVl

- J not expired.

Of this smn, $JJ billion had been utilized as of that

date, of which $6.6 billion in principal had been repaid.

In addition,

$5.4 billion in interest and commissions had been paid to the United
States.

Thus, when we discuss principal and interest due and unpaid

90 days or more amounting to slightly less than $295 million as of
June 30, 1969, this figure, while substantial, must be seen in relation
to the very large amount of principal outstanding on that date -$33 billion -- and the approximately $12 billion already collected
on outstanding foreign loans and credits.

Of the total amount lent,

delinquencies on principal and interest payments amounted to only
approximately one percent.
Furthermore, Mr. Chairman, I think it is important to note that
out of forty nations reported as being in delinquent status on
December 31, 1969, the largest portion of the delinquency, about
%290 million of the $325 million outstanding, is accounted for by
only seven countries.

Of these seven, the United Arab Republic, Cuba

and the Soviet Union are responsible for $170 million, while China,

- 4 India, Indonesia, and Iran account for another $120 million.

Also,

a large portion of the debts outstanding, about 62% of the $325 milliCl\ ,
are connected with the lend-lease and surplus property disposal program
conducted by the United states Government after World War II.

These

obligations often involve difficult political and economic considerati(J)S,
In the case of lend-lease and surplus property, there have been

negotiations going back for almost a quarter of a century.

The point

to be emphasized here, Mr. Chairman, is that while I am sure there is
roam for improvement in the collection procedures followed by the
several responsible agencies, there is no assurance that such

improv~~t

would bring about a rapid collection of the largest portion of these
debts.
In addition, the arrearages reported in the booklet "Foreign
Credits by the United states Government" which has been distributed
to the Members of the Cormnittee, brought up to December 1969 in the
inserted table, do not necessarily imply default.

Some of these

short-tem arrearages will be cleared up when the next payments are
made and will not be outstanding for an appreciable time.

-s However, the fact that the overdue debts are 8mall in relation
to the a.aunts lent and that the larlest part of the8e delinquencies
are due to politically difficult problem8, does not call for any
relaxation of efforts to collect these debts.
must not and do not 10 ilnored.

Payments aot received

First and foremost, in goyernmental a.

well as in private creditor-debtor relationships, recognition of the
obligation to repay is required.

Secondly, careful and individual

consideration by each party of the course that is most likely to
enhance the proposects for repayment is needed.
It may be helpful, Mr. Chairman, to analyze briefly, at this
point, the several categories of overdue debts which are currently
outstanding and the efforts which have been made and the difficulties
which we are facing in this area of foreign debt collection.

Slightly

over $200 million of the out8tanding amount represents obligations
arising from lend-lease pipeline and surplus property sales made
shortly after World War II.

The largest portion of this total is

represented by the lend-lease pipeline which amounted to $141.5 million.

- 6 -

Three countries are reaponsible for thia arrearale.

They are the Sotht

Union, vhich owes $82.2 million, China owina $58.6 adllion aad Iraa
$712,000.
The Soviet lend-lease account represents the value of material.
delivered by the United States after V-J Day.

In an agre..ent algaed
a1111~

on October 15, 1945, the Soviet Government undertook to pay $222.5
for these articles.

This vas to be paid in 22 annual install.ent. at

2-3/8 percent annual interest.

While the Soviet Govera.ent ha. beea

makina regular pay.ents on this account, which, a. of July I, 1970,
totaled $187 milliOD, it has been deducting certain su.a fro. the
payments.

The deductions, in part, represent clai.. by the Soviet

Government for alleged damages re.ulting from the failure of the UDltH
States to complete deliveries under the lend-leaae agree..nt.

In

addition, the Soviets have ..de deductions unrelated to lend-Iea.e for
alleged da..ges inflicted by Cuban anti-ca..uniats on a Soviet shi"
for alleged da..ge. resulting from the attach..nt of Soviet-owned
in Puerto Rico, and for da..ge. to ca..ercial Soviet vessela in
allegedly reaultiaa fr9a U.S. ailitary action.

8~r

Bai,h~

S1Dce the United Stat••

- 7 ba. rejected tbe.e clai.. , the deductions by the Soviet Goveru.ent are
listed as an arrearage.
The Chinese lend-lease pipeline credit ste.. in part fra. an
agreement dated June 14, 1946, which provided for the delivery of
nonmilitary equipment and supplie..

The agreement, in the amount of

$50.3 million, called for 30 year. repayment beginning July I, 1947,
witb annual intere.t at the rate of 2-3/8 percent.
China bas been in default on thi. agreement.

Since July 1949,

The second source of

tbe delinquency is a lend-lease "cash account," in the original amount
of $27 million, representing a Chinese obligation to pay for certain
lend-lea.e transfers.

On this account, China has paid $10.4 .illion,

leaving a balance past due of $20.2 million.
Finally, in the case of Iran, the lend-lease agreeaent of
December 20, 1945, provided for payment in tbe amount of $8.5 million.
Of tbis amount, Iran has paid $7.8 million, leaving a balance in
arrears of $712,000.

The shortage represented a claim by Iran which

- 8 -

the United States has repeatedly rejected.

Although Iran has beeD

requested on several occasions to settle this outstanding

obligati~,

our Government's efforts have not met with ariy success.
The second largest category of debts, $115 million as of Jul, 31,
1970, represents delinquent obligations due the Export-Import BaDk of
the United States.

Here again, the largest portion of the debt, about

$103 million, is represented by the delinquent accounts of only four
countries.

Cuba owes us $43 million, the United Arab Republic i8

delinquent in the amount of $17 million, and Indonesia is in default
to the extent of $6 million.

In addition, China is listed as owing

$37 million, concerning which the Eximbank's report for fiscal year
1969 make. the following comment:

"

•. by agreement, the Republic

of China is not at this time being called upon to make payments

0*

that portion of four loans made to the Republic of China prior to
1947, when the seat of the Government was on the Mainland, which relate.
to assets no longer under the Government's control."

As far as the

other three arrearages are concerned, only the Cuban debt appears to

- 9 be uncollectible in the foreseeable future.

The Bank'8 effort8 to

obtain paywent, including negotiations between Bank officia18 and the
Cuban Goveraaent in the early 1960's, have failed to aeet with any
8ucce88.

At the pre8ent time, 8ince the United States maintains no

diplomatic relation8 with Cuba, the Bank is unable to take further 8teps
in thi8 regard.

On the other hand, there have been negotiations with

the !&yptian Government during the past two years

con~erning

the

rescheduling of delinquent U.A.R. credits, including obligations due
the Eximbank.

Although agreement has not been reached, the apparent

willingness of the Egyptian Government to negotiate a settlement may
be regarded as an encouraging sign.

Similarly, tbe Indonesian debt

is part of the plan now under consideration to reschedule all outstanding
Indoneaian credits.
The next category of credits in arrear8, which represent obligations
stemming from surplu8 property sales, amounted to approximately $58.6
million on December 31, 1969.

Of the several countries responsible

for thi8 arrearage, Iran's delinquency, in the amount of $33.3 million,
i8 the large8t.

Iran's indebtedness arises under four surplus property

- 10 -

credit

agree~nts

signed between Deceaber 12, 1945 and July 29,

l~.

pursuant to which Iran utilized credits in the amount of $24.6 aillt.
acquiring mainly supplies and equipment of military nature fro. the
United States.

Although the United States, beginning January I, lM9,

has 8ubmitted bills to the Iranian Government requesting pay.ent for
the outstanding obligation, the Iranian Government has ..de no
on its delinquent surplus debt since 1951.

p.~Dt

Efforts on the part of

the United States Govern.ent, including informal discussions with
Iranian officials, to obtain pay.ent on this debt have not been
successful so far.
The second largest item in this category is the Korean debt
amounting to approximately $8 .illion.

This represents delinquent

interest payments under the surplus property agreement of September 11,
1948 between the United States and the Government of South Korea.
Except for the annual interest payments received between 1949 and 1953
the debt agreement has remained in default.

Recently, negotiatioDl

have been undertaken to find a way to reach a settlement of the debt.

- 11 ~

the couatries havial delin••eat surplus property credits

are two Eastern European countries, Czechoslovakia aDd Buasary.
Czechoslovakia owes approxi..tely $5.6
arrears in the a.auat of $1.7 aaillion.

~llioa,

while BuDlary is ia

With Czechoslovakia, the

United States atteapted to Delotiate a settle.. nt of this delia.ueat
credit during 1968.

Rowever, the aegotiations, which covered the

whole ranle of unsettled clal.. between the two couatries, did Dot
re8ult in an agree..nt.

In the case of HUDlary, settleaent was reached

in August 1969, when that Govern.ent agreed to a drawdowa rate on the
surplus property debt which the United States found acceptable.

On

Ausust 15, 1969, letters were exchanged between the two Governments
ref.lecting the understandl. reached.
The Chinese surplus property debt, 1n the a.aunt of $5.5 .illion,
arises from the so-called "naDlnan Dockyard" surplus property contract
of May IS, 1946.

UDder this agree.. nt China is obligated to pay $4

adllion a year in 30 anaual install..nts of 2-3/8 percent yearly
interest.

Bowever, China has ..de no pa,..nt

OD

this account, althouah

- 12 a credit of $122,000 for services by the Riangnan Dockyard from May

1947 through November 1948 was applied to the account.

The

settle~nt

of

this account, it would appear, awaits the overall settlement of Chinea,
obligations connected with wartime and post-war United States financial
assistance.
The delinquent surplus property debt of the remaining two countri,s,
India and Indonesia, total $4.5 million.

These accounts will presuaably

be settled in conjunction with the rescheduling of the outstanding
foreign credits of these countries.

It may be of interest to note that

tbe Indian arrearage, which stems from the Mutual Aid Settlement
Agreement of Hay 16, 1946, is payable in Indian rupees.
In addition to delinquencies ariSing from foreign surplus property
sales, there is one outstanding credit repre8enting sale of domestic
surplus property.

Under an agreement dated October 3, 1947, domestic

surplus property was sold to the Republic of Haiti in the amount of

$150,500.

Approximately $137,000 in principal and interest remains

- 13 oatstaodiaa uDder this

o~lilation,

collection of which has been

turaed over to State Department and the General Accountinl Office by
the General SerVices Ad.inistration.
The next ite. on the list, approxi.. tely $23 million, consists
of delinquencies arisins uDder the Agricultural Trade Development Act
of 1954, as amended, popularly known as Public Law 480.

The larlest

portion of delinquent credits under this heading represents 10an8
to foreiln loveraments and private enterprises which are repayable
in fore ian currencies.

The delinquent loans owed by foreiln lovern-

aents, aaountins to approximately $11 million, are almost entirely
represented by the United Arab Republic's account of $9 million and
the

indebted~ess

by the Syrian Arab Republic of $1.3 million.

The

defaulted foreign currency loans to private enterprises amounted to
$9 million on December 31, 1969.

The largest portion of this aafunt

i. shared by enterprises located in India ($4.9 million), the
Philippines ($1.7 million), and in Paraguay ($1.7 million).

Attempts

to recover most of these arrearagea are being made through the Justiee
Department.

- 14 -

In addition, there are outstanding dollar obligations under this
program, which represent delinquent payments on long term Public
Law 480 dollar credit sales.

Of these obligations, which totalled

$3.2 million at the end of 1969, the largest amount -- $2.6 million
-- is owed by the United Arab Republic.

The remaining portion of the

debt represents charges for late payment by the debtor countries

88

well as different fees which have been incurred, such as banking,
transportation and transfer fees.

In most cases these smaller amounts

are outstanding only because they have arisen between two annual
billings.

Once these items are presented to the debtor country as

part of the next annual billing they are paid as a matter of course.
For example, while approximately $600,000 (in addition to Egypt's
delinquency) was outstanding under Public Law 480 dollar sales on
December 31, 1969, by June 30 of this year the whole amount, with the
exception of $277, was paid in full.

- 15 Finally. under the Foreign Assistance Act and related legialation,
there are outstanding, as of December 31, 1969, country loans in
the amount of $22 million.

The largest delinquency here again is

accounted for by the United Arab Republic's default of $14.6 adllion.
This outstanding obligation, together with other Egyptian credits
in arrears, have been subject to extended discussions with the
Government of the U.A.R.
been no

agree~nt

in arrears.

However, as I mentioned earlier, there has

reached on the rescheduling of Egyptian credits

The balance of the country loans in default consists

mostly of loans to private firms in In41a ($2.4 million), in Bolivia

($2.3 million) and in the Philippines ($1.3 million).

We understand

that some of these outstanding loans are being currently litigated
by the Justice Department.
The status of the overdue debts which I have summarized for you
today are a cause for continuing concern.

There are many very

difficult cases here which are not susceptible to quick or easy

- 16 solutions.

We are alert to this situation and are anxious that

full pa,.ent be made by the debtor countries.

Where the econoldc

situation of a developing country is the cause of delays in pa,..Dt,
we must seek a just arrange..nt, in conjunction with others, that
will best a.sure eventual fulfillment of the debtor's obligations.
Where the debtor does Dot indicate a willingness to pay, we

~st

vigorously pursue all reasonable avenues of pressing for pro.pt
settlement.

In these efforts, Mr. Chairman, we appreciate the

support of this Comadttee.

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partmentof the

TREASURY

roN. D.C. 20220

TElEPHONE W04·2041

R IMMEDIATE RELEASE

September 22, 1970

TREASURY'S WEEKLY BILL OFFERING

The Treasury Department, by this public notice, invites tenders
r two series of Treasury bills to the aggregate amount of
,200,000,000, or thereabouts, for cash and in exchange for Treasury
11s maturing October 1, 1970,
in the amount of $3,107,760,000,
follows:
9l-day bills (to maturity date) to be issued October 1, 1970,
the amount of $1,800,000,000,
or thereabouts, representing an
ditional amount of bills dated December 31, 1969, and to mature
eember 31, 1970, originally issued in the amount of $1,002,063,000
dditiona1 amounts of $500,400,000 and $1,303,120,000 were issued
reh 31, 1970, and July 2, i979, respectively), the additional and
iginal bills to be freely interchangeable.
.
182- day bills, for $1,400,000,000, or thereabouts, to be dated
tober 1, 1970,
and to mature April 1, 1971
,;51P :~o. 912793 KB1).
Thp bills of both series will be issued on a discount basis under
~etitive and nonco~petive bidding as hereinafter provided, and at

turity their face amount will be payable without interest. They will
issued in bearer form only, and in denominations of $10,000,
5,000, S50,000, $100,000, $500,000 and $1,000,000 (maturity value),
Tenders will be received at Federal Reserve Banks and Branches up
the closing hour, one-thirty p.m., Eastern Daylight Saving
ne, Monday, September 28, 1970.
Tenders will not be received
the Treasury Department, Washington. Each tender must be for a
~imum of $10,000.
Tenders over $10,000 must be in multiples of
,000. In the case of competitive tenders the price offered must be
Jressed on the basis of 100, with not more than three decimals,
5', 99.925. Fractions may not be used. It is urged that tenders be
je on the printed forms and forwarded in the special envelopes which
11 be supplied by Federal Reserve Banks or Branches on application
~refor.

Banking institutions generally may submit tenders for account of
Homers provided the names of the customers are set. forth in such
~ders.
Others than banking institutions will not be permitted to

- 2 -

submit tenders except for their qwn account. Tenders will be
without deposit from incorporated banks and trust companies and f~
responsible and recognized dealers in investment securities. ~~en
from others must be accompanied by payment of 2 percent of the face '
amount of Trea-sury bills applied for, unless the tenders are accomp-.
by an express guaranty of payment by an incorporated bank or trust
company.
Immediately after the closing hour, tenders will be opened at t~
Federal Reserve Banks and Branches, following which public announc-.
will be made by the Treasury Department of the amount and price range
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or re1ect any or all
tenders, in whole or in part, and his action in any such respect shall
be final. Subj ect to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three decimaU'
of accepted competitive bids for the respective issues. Settlement f~
accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank on October 1, 1970,
in cash or other immediately available funds or in a like face amoun't
Treasury bills maturing October 1, 1970.
Cash and exchange tend~
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue C~e
of 1954 the amount of discount at which bills issued hereunder are sol
is considered to acc rue when the bills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capital
assets. Accordingly, the owner of Treasury bills (other than life
insurance companies) issued hereunder must include in his income ~ax
return, as ordinary gain or loss, the difference between the price
for the bills, whether on original issue or on subsequent purchase,
the amount actually received either upon sale or redemption at maturitJ
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revision)· and ~h
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
any Federal Reserve Bank or Branch.

000

~artment of the TREASURY
ON. D.C. 20220

TElEPHONE W04-2041

FOR RELEASE ON DELIVERY

REMARKS BY THOMAS W. WOLFE
DIRECTOR, OFFICE OF DOMESTIC GOLD AND SILVER OPERATIONS
BEFORE THE AMERICAN METAL MARKET SILVER FORUM
NEW YORK HILTON, NEW YORK CITY
WEDNESDAY, SEPTEMBER 23, 1970

2:15 P.M., E.D.T.

When the Treasury halts silver sales through the General Services
Administration on next November 10 it will mean the end of the latest
and presumably the last - great cycle of Government intervention in
the silver market which began in 1933. I will not here undertake a
historical review of this period, but in essence there occurred over
a 38-year period an accumulation and monetization of some 3 billion
ounces of silver and a subsequent return of that silver, by one means
or another, to the control of the private market - the whole process
yielding a very substantial profit to the Government.
In a sense this operation could be termed a prolonged price
stabilization program for a basic commodity, involving price support
and Government stockpiling over a long period when private silver
production greatly exceeded industrial needs, and the gradual resale
of the commodity as the supply-demand situation eventually turned
around. Moreover, during this long period of time, instead of
remaining inert and relatively useless as most commodity stockpiles
do, a fairly useful purpose was made of the silver as circulating
money either directly or in the form of silver certificates. Although,
of course, other means would have served this purpose as well.
Eventually, as it became apparent that American industry could
finally make effective use of this great stockpile of silver which in
earlier years no one had wanted, the silver was gradually returned to
the private market from which it came. The over-all effect of this
policy - whatever the short-run objectives - was to maintain output
of silver in volume when production resources were in excess supply
and costs were cheap, with the silver ultimately made available for
useful purposes when there was a gap between current supply and demand.
This occurred during World War II as well as in the 1960's. It is
interesting to note that after GSA sales end on November 10, the
Treasury's remaining inventory of silver will be almost exactly what
it was on June 30, 1933.

K-489

- 2 Looking back with a perspective of three decades, the
monetization of this accumulation of ~i1ver - largely through issuan~
of silver certificates - was clearly not lite logical objective of the
program. The principal purpose was to lend support to a hard pressed
industry - similar, to the support given at the time to the producers
of other commodities. The issuance of silver certificates was SUlply
a practical way to finance the stockpile purchases with the side
benefit of a little monetary expansion at a time when it was most
needed. In principle, silver certificates were not very different
from debt instruments issued with any other commodity asset as
collateral - such as participation certificates in wheat, for ex~le.
or mortgages. The difference between silver certificates and related
Federal deht instrll!IlC'TH': W;IS ,-h,lt :;il'!cr certificAtes were issued in
very small denominations and were designated and freely circulated
as legal tender. The same function is now efficiently served by small
denominations of Federal Reserve notes.
By 1960 the Treasury still held in excess of 2 billion ounces of
silver. The ref; 1:01'<.1 tion to thl' I'ri V:I tc marke t of this massive hoard
was accompli::II"d 1-1'l-()'1,~h Ihn'I' j",dlll'ip,ll :rJf'JlIH'S.
First, nearly a billion ounces of silver has been used for
coinage since 1960, most of it during the high coinage production
years of 1963 through 1965. ' Virtually none of these coins are now
circulating and presumably, the' greate r part of this amount;: ultimately
will be melted down and consumed.
The second principal means for returning silver to the private
market was through sale - by one means or another - at the fixed
$1.29 per ounce price. From 1960 until the redemption of silver
certificates was halted in June 1968, about 700 million ounces of
silver was returned to the private market by this means.
The third, and in my view, most sensible means of disposing of
the surplus stock of silver was begun in August 1967 when the GSA
began its weekly offerings of silver to be sold through open
competitive bids. When this competitive bid sales program ends on
November 10, over 300 million ounces of silver will have been sold
through competitive bidding at an average price over the period of
about $1.85 per ounce. Close to 200 million ounces of this total
represented melted dimes and quarters.
All of tlH~se various silver disposal procedures have realized·
a considerable profit to the Government since none of the silver
was originally purchased at a price in excess of 90-1/2 cents an
ounce. The total profit returned during the 39 months of the GSA
sales program alone ~iTill total over $160 million.

- 3 -

But, in developing a rational silver disposal program over the
past three years, maximizing the Treasury's revenue was certainly
not the major concern. The Joint Commission on the Coinage, which
has been responsible for es.tab1ishing the basic policy for silver
disposal, early in the game strongly emphasized that a basic objective
for the sales program was to facilitate an orderly withdrawal of the ~
Government as a supplier of silver under conditions which would
encourage the development of a strong and stable private market. To
accomplish this objective, the Treasury adopted a policy of giving
full disclosure at frequent intervals of statistics on its remaining v
stock of silver. To give the market time to develop its own stable
institutional structure, the Treasury also affirmed its intent to
maintain a regular weekly sale of silver for a period estimated as
closely as possible and made known to the public. It was felt that
the removal of uncertainty regarding the future of the Government's
silver policy would add a stability to the silver market that would
be welcomed by both producers and consumers. For example, in the
summer of 1968 it was stated that sales would be maintained for at ~
least two more years. In November of 1969 it was stated - I believe
before this very forum - that sales would be maintained for about
one more year. No significant information on the Treasury's silver
stock and intent to maintain open bid sales has, to my knowledge,
been held back at any time in the past three years.
Another basic principle in the Treasury's silver disposal
policy during the period of private market development has been to
keep changes in sales procedures to a m1n1mum. Since the current
GSA sales program began in August 1967 there has been no change whatever in the rule of accepting all bids - up to the amount of silver
offered - over a cut-off price based on the fair market value of the
silver on the day of sale, with, of course, appropriate adjustments
for the fineness and location of the silver. Whether the total
amount offered is sold to the last ounce or only in part, the
procedure for accepting bids has not varied. In fact, the only
changes of any consequence in the sales program were made in May 1969
when the weekly amount offered was reduced from 2 to 1-1/2 million
ounces and the end-use requirement for GSA silver was eliminated.
And it should be nO,ted that the intent to remove the end-use
requirement was first announced in July 1967.
So, throughout the three-year GSA sales program there have been
no abrupt changes in policy, no surprises, and no shocks to the
silver market despite a steady flow of rumors to the contrary, all
of which proved groundless.
Consequently, the GSA silver sales program has provided a most
useful bridge from the hectic and uncertain period immediately
following the end of unlimited Treasury silver sales at the fixed

- 4 $1.29 price to the more stable and orderly market conditions that
prevail today and that are expected to continue after GSA sales are
ended on November 10. Moreover, the GSA sales program provided a
convenient means for gradually reducing the market's dependence ~
the Government as a source of silver supply. This effect is sh~
by the reduction in the Treasury's silver supply to the market from
189 million ounces in 1967, to 178 million ounces in 1968, 92 mil11~
ounces in 1969, and about 65 million ounces in 1970. This ''weaning''
period during which the supply of Government silver was gradually
reduced on a year to year basis gave the silver market an adequate
opportunity to make a reasonable adjustment to full dependence upon
private sources of supply.
All of this has contributed to the development of a stable and
mature silver market in which the price of silver now reflects a
rational collective judgment as to the current and prospective supplydemand picture. Silver can now proudly take its place with potatoes,
pork bellies, frozen orange juice and other commodi ties over which the
Government exercises no significant price influence.
One matter of some interest on which I might briefly comment
concerns the amount of silver in private hands in the form of coins.
I will not make any estimate of this total mainly because we don't
really know how much it is. Perhaps more accurately we don't know
what proportion of the silver coins withdrawn from circulation over
the past three years is, as a practical matter, available to the
market in the short run, and what proportion might be locked up .
indefinitely in millions of cookie jars throughout the country. We
do know that the Treasury withdrew and melted just over 200 million
ounces of perhaps 700 million ounces of silver estimated to be in
circulating dimes and quarters in 1967. Perhaps othe~here can shed
some light on the status of the remainder.
Except for the rather unusual circumstances of the period
immediately before and after World War II, silver has not, for a
very long period of time, been a monetary metal of any consequence
in the modern world. But, the old historical concept of silver as
a monetary reserve still lingers in the public's mind to a surprising
extent. This attitude on occasion leads to some rather curious
reactions from some segments of the public to what appear to be
rational Government measures. For example, a distinction is often
made as to the wisdom of disposing of surplus silver by whatever
practical and profitable method may be available compared to selling
other surplus stockpile commodities. Oddly enough, there are still
those who feel that the nation is somehow stronger if a large hoard
of silver is stored away by the Government rather than converted
into the industrial and consumer goods that add to the wealth of our
economy.

- 5 The lingering myth of silver as primarily a monetary metal also
tends to affect the public's attitude as to how and why the price of
silver changes. Investors who may take a perfectly rational approach
to factors whicl. determine the price of copper, lead, zinc or any
other commodity are often willing to accept changes in the price of
silver as due to mystical forces unrelated to basic supply and demand.
But, I think this attitude is fast fading, and silver is, as it should
be, accepted as an industrial commodity whose price is subject to the
same kinds of fa.ctors that influence other commodities.
In the longer run the price of silver will, therefore, depend
on a balance between, on the one hand, what consumers are willing to
pay for fabricated products containing silver, and, on the other, how
much producers are willing and able to expand output at given price
levels. This market pricing process must, of course, be considered
in the context of changes in general economic conditions and the
possible development of substitute materials. All of this is simply
a rather elaborate way of saying that it is just as difficult to
forecast the price of silver as it is for any other commodity - as
no doubt most of you have learned over the past few years. There is
no simple cut and dried answer, no short cut to investment profits.
On the whole, the Federal Government's silver policy actions
during the hectic decade since 1960 have worked out pretty well.
The great 2 billion ounce plus hoard of silver which, if it was still
in Treasury hands would make the development of a free silver market
almost impossible, has been returned to private ownership where it
belongs, except, of course, for an amount deemed adequate for the
strategic stockpile. And, perhaps most important of all, there has
been developed a strong and viable private market in which the price
of silver rationally reflects current and anticipated supply and
demand.
At this point it might be of some interest to summarize the
over-all effect of the Government's silver actions during the key
transition period 1967 through 1969, and try to make some sense out
of the apparently conflicting data on the total supply and use of
silver.
Taking the demand side first, the industrial use of silver in
terms of fabricated products over the three-year period, 1967 1969, has been estimated to be about 440 million ounces. The net
silver export balance over this period was about 90 million ounces.
The increase in inventories of refiners, fabricators and dealers,
and on the commodity exchange, has been estimated by the Department
of Interior to be roughly 150 million ounces. Most of the inventory
growth was due to the start of silver trading on the commodity
exchange, and is not likely to be repeated in a similar magnitude
in the years ahead. Adding these figures give a total silver demand
in the U. S. market over the three-year period of some 680 million
ounces.

- 6 -

Taking the supply side we find that the Treasury supplied to.
the private market during 1967 - 1969 in sales of bullion and silver
certificate exchanges about 460 million ounces of silver, and U. S.
mining production has been estimated at about 110 million ounces for
a total of 570 million ounces. An asswnption that all of these figures
are reasonably accurate would lead to a conclusion that somewhere
around 110 million ounces of silver was recovered from secondary
sources over the three-year period, including some private melting
of coins.
Although we do not, of course, yet have any definite figures
available for 1970, some major components of the silver supply-demud
picture can be very roughly estimated. Silver supplied by the
Government in 1970 will total about 65 million ounces through
November 10. Domestic silver mining production, which has been
running strongly this year, should well exceed the 42 million ounce
total for 1969. Net silver imports - and we are likely to have an
import balance this year - might be perhaps 20 million ounces. Net
silver imports in the first half of 1970 alone totaled over 13 million
ounces. The total current silver supply in the U. S. market, therefore, apart from secondary sources, should be somewhere around 125
million ounces for all of 1970. The added margin required to meet
industrial consumption needs - which should be close to last year's
level - plus any inventory increases will come from secondary sources.
For the future, with the Government out of the silver picture,
it is clear that if the need for silver by industry is not met by
rising domestic production and an increased supply from secondary
sources, silver imports will have to fill the gap. But, I, for one,
am optimistic that the technical competence and ingenuity of Americu
silver producers and refiners will be able to keep pace with
industrial needs. The future trend of silver imports will be the
measure of how well they meet this challenge.

0-00-0-00-0

,epartmentof the TREASURY
IGTON. D.C. 20220

TElEPHONE W04-2041

FOR IMMEDIATE RELEASE

September 22, 1970

WILLIAM Co CATES APPOINTED DEPUTY ASSISTANT
SECRETARY FOR INTERNATIONAL AFFAIRS FOR
INDUSTRIAL NATIONS FINANCE
Secretary of the Treasury David M. Kennedy today
announced the appointment of William C. Cates as Deputy
Assistant Secretary for International Affairs for Industrial
Nations Finance.
Before joining the Treasury, Mr. Cates, 42, was with
the brokerage firm of Laidlaw & Co., New York, where he
was Manager of the institutional department.
Currently a resident of Connecticut, Mr. Cates holds a
Bachelor of Arts degree from the University of Chicago and
degrees of Bachelor of Science in Economics and Master of
International Affairs from Columbia University.

Mr. Cates is a past executive vice-president and
manager of United International Fund, Ltd., of Toronto,
Ontario, Canada. He was formerly associated with F. Eberstadt
& Co., New York.
Mr. Cates' appointment follows the announcement last
month of a reorganization in the Office of the Assistant
Secretary for International Affairs which is designed to
increase Treasury's contribution to international economic,
financial and trade policies.
As Deputy Assistant Secretary for Industrial Nations
Finance, Mr. Cates will be concerned with the United States'
financial relations with other industrial nations and with
organizations concerned with international financial problems.
Mrs. Cates 1S the for:ne~:.' lnge Stuhl of Berlin, Germany.
The Cates' have one daughter, Barbara, 12.
K=491

tpartment of the TREASURY
IGlON. D.C. 20220

TELEPHONE W04-2041

FOR RELEASE 11 :00· A.M. ,
CENTRAL EUROPEAN TIME
TUESDAY, SEPTEMBER 22. 1970

REMARKS OF THE HOOORABLE DAVID M. KENNEDY
SECRETARY OF THE U. S. TREASURY
AT THE ANNUAL MEETINGS OF THE GOVERNOR OF GOVERNORS
OF THE INTERNATIONAL MONETARY FUND AND THE INTERNATIONAL BANK
FOR RECONSTRUCTION AND DEVELOPMENT
COPENHAGEN, DENMARK
TUESDAY, SEPTEMBER 22, 1970
I want first to express the appreciation of the United
States to our Danish hosts for opening this historic city of
Copenhagen to our Annual Meetings. Americans have always
been con.cious of the lar~e contribution of Denmark to our
own people and to our national life. We are delighted that
these meetings bring us into further contact with your people
and your culture.
The year since we last met together has been marked by
important accomplishments. Special Drawing Rights have begun
to playa useful role among the complex of reserve assets.
We look forward to sizeable increases in Fund quotas. The
World Bank Group has passed an historic milestone in becoming
the largest source of development finance. Its vigor is
further reflected in imaginative efforts to bring its funds
to bear more directly on pressing development problems. The
agreement looki~g toward replenishment of the resources of
the International Development Association at a level of
$800 million a year should help to assure the availability of
funds to maintain this forward momentum. Progress of our
institutions has been accompanied by vigorous growth in trade,
a marked reduction in exchange market pressures, and
substantial repayments of the short-term and emergency credits
accumulated in earlier years. These are substantial achievements. Yet events of the past year have also clearly exposed
basic challenges to the financial stability and liberal
trading order upon which the success of the Fund and the Bank
must ultimately rest.

K-490

I.
Inflation is the first of those challenges. In nearly
every indultrialized country, wage and other income clai~
are rising faster than capacity to expand real goods and
services. As a consequence, the foundations of orderly
economic progress are undermined.
I believe our actions have demonstrated the central
importance we in the United States have attached to dealing
with inflation. We did not shrink from the painful task of
applying the tested instruments of firm budgetary control
and strong monetary restraints.
I should point out, too, that -- alongside the general
program of restraint -- the determined efforts of President
Nixon to scale down the Vietnam conflict have set the stage
for a decline in defense spending projected at more than
$5 billion during the current fiscal year. Manpower and
budget resources are being released for more productive use
in areas of high social and economic priority. We are thus
beginning to reverse a process that contributed so strongly
to the build-up of inflationary momentum in the second half
of the 1960's.
Eliminating excess demand and braking inflation exacted
a cost: by the turn of the year, real economic growth in
the United States had been temporarily brought to a standstill.
As pressu~es on the labor market subsided, the unemployment
rate this Summer rose to about 5 percent -- considerably
higher than would be appropriate over any extended period of
time.
However, considerable evidence is also accumulating that
the needed adjustments in expectations and actual pricing
behavior are under way. The most encouraging sign is that
industrial wholesale prices -- normally 8 good barometer of
the pricing environment -- rose at a seasonally adjusted
annual rate of barely more than 2-1/2 percent over the Summer,
substantially less than the 4 percent rate experienced in
1969. Productivitv growth seems to be resuming, helping
manufacturers toSbaocb higher labor costs. The rise in
consumer prices has also begun to slow.

- 3 -

At the same time, we fully recognize that the inflationary
process in the United States, as in the world at large, is
not yet under full control. As elsewhere, the response has
been slower than experience or theory would have led us to
expect. In these circumstances, I believe we could all profit
from intensive consideration of recent experience in the Fund
and in the Organization for Economic Cooperation and
Development or other forums, looking toward both effective and
mutually satisfactory solutions.
For our own part, we are determined to maintain cautious
and responsible financial policies. We are willing to accept
some budgetary deficit this year when the economy is not under
demand pressure. We are also willing to see some rebuilding
of private liquidity. Our money and capital markets
already reflect some easing of tensions, and we now see signs
of a resumption of economic growth.
Our progress in guiding the economy toward reasonable
price stability, without lapsing into serious recession, is,
I believe, a noteworthy achievement. But we are as fully
aware of the danger of too fast expansion and renewed overheating as we were of deep recession. We mean to keep
government spending below the limits set by our revenue
potential at high levels of income and employment. We will
not encourage an expansion of money and credit of proportions
that could fuel an excessive burst of demand. A steady,
rather than precipitous, advance offers the best prospect
for combining fuller employment with greater price stability.
II.
The process of internal adjustment has been accompanied
by sharp cross currents in our external accounts. Our current
account has improved rather substantially. Indeed, helped by
a considerable expansion in exports; transactions in nonmilitary goods and services were generating net receipts at
an annual rate of nearly $7-1/2 billion during the first half
of the year, more than $2-1/2 billion higher than a year ago.
On the othe~han9,continued heavy government expenditures
overseas required for security and for aid and other
purposes were practically as large as that surplus. At the
same time, there was a sharp reversal of the extraordinarily
favorable pattern of capital flows in recent years, throwing
our over-all accounts into substantial deficit. In the first

- 4 six months, we recorded a deficit on official settlements of
some $4-1/2 billion, an amount slightly exceeding the su~l~
accumulated over the two previous years.
I believe sizeable short-term swings in our payments
position must be anticipated in a world of relatively free
markets and volatile capital movements. I believe we have
the capacity to handle those swings so long as they take pl~e
within the context of a strengthening current surplus.
The current recovery in our t~ade account, while favorably
affected by cyclical developments, points in the right
direction. But I recognize it can only be a start.
The steady growth in earnings on our foreign investment
account -- which nearly tripled in the past decade -- is a
long-term element of strength. As interest rates return to
more normal 'levels, we should also be able to look forward
to some lightening of the extraordinary burden that interest
payments have placed on our position. The phasing down of
the Vietnam conflict -- as well as a more equitable sharing
of the costs of mutual security in other areas -- coild help
reduce our foreign exchange outlays for defense. But,
fundamentally, our effort must rest on a solid competitive
position arising from much better domestic price performance.
In that respect, our domestic and balance of payments
goals coincide.
III.
The gq)wing friction and concern about trading relations
among nations are a third major challenge. In my own
country, protectionist sentiments have been increasingly
expressed by elements in labor and industry, and restrictive
legislation has considerable congressional support.
President Nixon has made clear his commitment to resist
these pressures. We mean to preserve and expand the enormoW
benefits flowing from free and competitive world commerce.
In developing measures to meet our own trading problems, we
have emphasized measures to support the efforts of our own
industry to look outward and compete abroad on a fair and
equal basis.

- 5 But it is clear that success in maintaining a liberal
trading environment can be achieved only by means of a worldwide effort.
Those countries in a strong position, but with markets
heavily protected by outmoded quantitative restrictions,
should accept a special responsibility to reduce and eliminate
import barriers. Agricultural policies that artificially
but effectively close markets to more efficient producers
urgently require review. Temptations to achieve trading
advantage through discriminatory trading arrangements at
odds with broader international obligations should be
resisted, for they can only be divisive and provoke
protectionist reactions elsewhere. The important efforts
under way to open markets more freely to the poorer countries,
and to free ~id from special procurement restrictions, can
succeed only as all industrial countries are ready to
cooperate fairly and fully. In the best of circumstances,
the way ahead will not be smooth and easy. The danger is
that-we all could be swept into a self-defeating spiral of
efforts to defend particular interests. The only answer
can be to reassert -- forcefully and widely -- the primacy
of our strong mutual interest in freer and multilateral
trade.

IV.
In the international financial area, our successes in
reducing restrictions and freeing markets have brought a
different set of problems. International flows of liquid
funds have become enormous. They are highly sensitive to
differences in cyclical circumstances and monetary policy in
individual countries. As a result, independent national
monetary policies must often work within narrow limits. At
the same time, we have learned that gradual divergences
of trends in costs, prices, and incomes can, over longer
periods of time, produce exceedingly difficult problems of
balance of payments adjustment.

- 6 It is in this context that I welcome the very useful
Report of the Executive Directors on the Role of Exchange
Rates in the Adjustment of International Payments. That
Report, and the discussions that have contributed to it, have
done much to clar"ify and advance our thinking. Indeed, I
believe it is fair to say that, while important differences
of opinion remain, the report rather clearly points toward
an evolving consenus of official thinking in important
respects.
The authors wisely emphasize the value of a broad
stability in exchange rate relationships and practices. At
the same time, the Report seems to me to recognize that theu
are circumstances in which more flexible techniq~es and
practices, "within the general context of the Bretton Woods
system, could make a practical and useful contribution to
maintaining the basic conditions for free trade and orderly
markets. For the present, judgment is suspended as to the
desirability or form of a particular amendment to the
Articles to define more specifically the range of possible
and desirable actions.
These conclusions imply, I believe, a desire to test
the possible need for formal amendments against the evolving
situation. We will be particularly interested to see whether
national and Fund decision-making, within the considerable
latitude of the present articles, can and will benefit from
the new thinking and new techniques reflected in the Report.
The Executive Directors may also want to examine more
precisely the forms an amendment might take, should our
objectives and experience subsequently make it desirable to
move in that direction.
As I indicated a year ago, I do not believe the techn~~s
of limited exchange flexibility can provide any kind of a
substitute for effective policies on our part to deal with
our inflation and balance of payments. As in the past, the
dollar must be strong and stable to play its key role in the
monetary system, alongside gold and, now SDR.
I know of no exchange rate mechanism that can change that
fundamental need.

- 7 -

v.
President Nixon only last week, in a special message to
the Congress, stressed the determination of the United States
to respond positively to the challenge of reshaping foreign
assistance to meet the needs of the 1970's. As a fundamental
part of sweeping changes in the U.S. approach to development
finance, he emphasized our commitment to an increasingly
multilateral approach -- the approach epitomized by the
World Bank Group. We aim to increase substantially our
support for the international lending institutions. Our
remaining bilateral development assistance will be restructured,
with the objective of concentrating more fully on longerrange needs and working more closely with other providers
of funds. .
I am glad to report that major legislation is already
progressing through the Congress that will help flesh out
these intentions with fresh commitments of funds to the World
Bank, the Inter-American Development Bank and its Fund for
Special Operations, and the Asian Development Bank. We plan
to submit legislation for IDA replenishment early in the next
session.
The new thrust of our own program helps highlight some
emerging problems of foreign aid programming. It is commonplace today for a primary donor to be joined by other country
donors -- for one institution to work with or through sister
or companion institutions -- and for official assistance to
take place side by side with private sector participation.
These efforts of donor countries must be integrated with the
critically important efforts of the developing countries to
enlarge their own savings and to employ them effectively.
Rising debt burdens among many developing countries need to
be appraised, and the implications more consciously considered,
before crisis situations disrupt the development process.
These and other elements bearing upon the question of an
appropriate level and composition of development lending are
further complicated by the long time horizon in generating
fresh flows of resources. For instance, the initial planning
for the IDA replenishment took place in 1969. The approval
process is not likely to be completed much before 1972. The
funds will not be fully committed until 1975 and the
disbursements will extend into the early 1980's.

- 8 In the face of these complexities and the long time
perspective, we cannot escape the requirement for longer.range
planning. We want to retain the strength that flows from
the diversity and flexibility inherent in a variety of aid
sources. Nevertheless, we do, it seems to me, need a better
framework for setting priorities, for assessing available
resources against needs over a period of years, and for
dividing responsibilities sensibly.
With its special competence at the center of development
finance, the World Bank has properly begun to providp some
of the elements essential to a sensible planning process.
I refer particularly to its long-range country studies and
expanded program for economic missions. I hope the Bank
will build on these efforts, collaborating closely, as
desirable, with
the Fund, the regional financial institutioM ,
.
United Nations and other development agencies, and individual
donor countries. Obviously, planning alone cannot meet the
needs of the 1970's. The multilateral institutions must
be able to demonstrate their capacity to use sharply
augmented funds effectively, and with appropriate balance,
if they are to retain the support of sometimes skeptical
legislatures. For that reason, I welcome the efforts
of the Bank to broaden the scope of its internal auditing
activity and to work toward better measurement of achievements against goals.
Our own progress in channeling more aid through the
multilateral institutions will be dependent upon
willingness of other countries to keep pace, thus
appropriately spreading the burden. The broadening
contributions to the Special Funds of the Asian
Development Bank, the search for a satisfactory mechanism
for special contributions for the African Development
Bank, and the possibility of added members in the InterAmerican Development Bank, all open new opportunities.
I mus t also emphas ize the importance we attach to enlisting
the full energies of private citizens -- whether in donor
or receiving countries -- in the development process. We
look to the International Finance Corporation to play an
increasing role. We would also urge an early agreement to
proceed with an International Investment Insurance Agency,
and I hope that it will have support from both investing
countries and developing countries.

- 9 -

Finally, the President has made clear that the United States
is ready to participate fully in those important aspects of
development policy -- including untying and generalized tariff
preferences -- that complement financial aid. I would note
particularly his proposal for a U.S. International Development
Institute. The Institute would focus precisely on those areas
including population planning -- where technological breakthrough could potentially contribute enormously to the development
process.
VI.

In reviewing the challenges that seem to press in on us
so strongly from many directions, I am struck by the interaction
among them. The problems of inflation, exchange markets, trade,
capital movements, and aid cannot be kept in tight compartments.
The Bank and the Fund were founded on a vision of a free and
prosperous community of nations, each sharing fairly in the
enormous benefits that flow from multilateral trade, financial
stability, and rapid development. That vision of the common
good must shine as brightly today, if it is to guide our way
through the maze of difficulties before us. My country means to
do its part. We mean to do so first of all by restoring a
balance in prices, production, and income in our own economy. We
propose to provide our fair share of assistance, public and
private. We want to pay our way by competing fairly in world
markets -- and we expect markets to be open to us.
I believe these are goals that all can share.
working together, they can be achieved.

000

And, by

)epartment of the

TRfASURY

~6TON.

TElEPHONE W04-2041

D.C. 20220

FOR RELEASE AT 12':00 NOON, EDT
MONDAY, SEPTEMBER 28, 1970
REMARKS OF THE HONORABLE MURRAY L. WEIDENBAUM
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE MORTGAGE BANKERS ASSOCIATION
WASHINGTON, D. C.
SEPTEMBER 28, 1970
THE ECONOMIC OUTLOOK:

FAIR AND WARMER

My own reading of the economic indicators leads me to
believe that the economy is in the process of turning up.
A new buoyancy in the economic environment has emerged.
Clearly, earlier fears by some of cumulative declines have
been transformed into widespread anticipation of economic
growth. However, it is important during this period of
transition to keep the inevitable month-to-month fluctuations
in per spect i ve.
For
tics may
pause or
of these
has been
tile and
trend.

the period immediately ahead, each month's statisnot steadily reflect an upturn. In fact, a short
even a temporary downturn for a month or so in some
statistical series ii quite likely and, in some cases,
occurring. We need to avoid confusing these volatemporary fluctuations with changes in the underlying

It is when we examine these underlying trends that we
find the basis for the expectations of advancement in the
level of economic activity. For example, over the course of
recent months, we have witnessed a general expansion in the
following key indicators (but not necessarily increases every
month): new orders for durable goods, the stock market, the
money supply, housing starts, personal income from the private
sector, and the composite leading indicators themselves.
.
,

Perhaps the major and very real change that we have been
is in the general atmosphere of improved ex~ecta­
tlons. That, in turn, would tend to reinforce the belIef that
the indicators could be expected to turn more buoyant later
this year ..

w~tnessing

K-490

- 3 -

that score: ignoring inevitable month-to-month fluctuations,
the trend in 1970 to date shows a marked dampening in the rate
of inflation. My forecast for the coming year is along the
same 1 ines: ignor.ing inev i tab Ie month - to -month fluctuations,
the outlook is for a further dampening in the rate of.inflation.
The specific degree of improvement in the price level, of course,
will depend in part on the results of decisions in the private
sector on wages and other elements of costs and prices.
Given this background of economic developments, the
budget situation is a source of considerable attention.
It
is too early for any definitive statement on the prospects
for the fiscal year 1971. There are still actions which can,
and should, be taken on both the revenue and expenditure sides
which would hold down the likely deficit to reasonable proportions.
The budget rule announced by the President on recent
occasions certainly provides a good and clear guide: to keep
expenditures within the limits of the revenues that our Federal
tax structure provides at full employment. By following this
guideline, we would restore budgetary balance when the economy
is operating at full potential; also, we would then be avoiding
the inflationary potential that would be present if the budget
were in deficit at high employment.
To those concerned with the need for fiscal restraint,
let me assure you that this enlightened budgetary rule is
no "cop out." Upon examination, keeping expenditures within
full employment revenues turns out to be a rather rigorous
requirement. It will not be easy to attain, especially if
new initiatives are to be pursued, let alone the general updrift in costs of existing programs. It is likely to require
hard decisions on the expenditure side -- perhaps some program
deferrals, reductions, and phase-outs -- in order to accomplish
the objective.
Let me indicate some of the upward pressures on the
Federal budget. Appropriation bills for the fiscal year 1971
alr~ady enacted plus mandatory spending bills already approved
(malnly for veterans' benefits, retroactive payments under
.
postal pay reform, and railroad retirement) will add approximat~l~ $1.7 billion of outlays to the Federal budget.
In
addltlon, the President's recent statement on his proposed
Economy Act indicated that $700 million of recommended budget
savings have not yet been authorized by the Congress.

- 4 So far, there has been no legislative action on a postal
rate increase which would bring in an additional $1.4 billion
in program receipts for the year, nor has action been taken
on the accelerat~on of estate and gift taxes nor on taxing the
lead used in gasoline. Over $3 billion of additional Treasury
revenues thus remains in doubt. All this is in addition to
appropriation and authorization legislation pending in the
Congress which would, if passed in their present form, further
increase expenditures over the budget estimates.
Thus, I suggest that a fiscal policy adequate and proper
for the transition to a period of renewed growth but lessened
inflationary pressures calls for a tighter control over Federal
spending. It is desirable and necessary to keep expenditures
wi thin the revenues that can be expected when the economy returns to full employment, but to do so will require some hard
choices among al ternative spending programs - - the ability to
say no, or not yet, or not so much.
There is much talk these days about the need to change
our priorities. Well, there are two parts to the process.
The attractive and much easier part of increasing spending for
high priority items has, as would be expected, received the
great bulk of the attention. We now need to focus on the
second and harder step which is necessary in order to achieve
the required shift of resources: identifying those programs
of lower priority which can be reduced, postponed, or even
eliminated and then taking action to do so. Not until this
second step is accomplished will the necessary changes in
priorities truly be effected.
It was to this second, and more difficult, activity
that the President directed our attention when he identified
57 specific actions which could be taken to reduce unnecessary
Federal spending by over $2 billion this year. It is now up
to the Congress to follow the President's lead in this drive
to reorder priorities while limiting Federal spending to
full employment revenue levels.

000

TElEPHONE W04-2041

ON. D.C. 20220

'ION:

FINANCIAL EDITOR

:LEASE 6 :30 P.M.,

lay, September 24, 1970.
RESULTS OF TREASURY'S MONTHLY BILL OFFERING
:':'he Treasury Department announced that the tenders for two series of Treasury
one series to be an additional issue of the bills dated June 30, 1970
, and
her series to be' dated September 30, 1970 , which were offered on September 17, 1970,
pened at the Federal Reserve Banks today. Tenders were invited for $500,000,000,
reabouts, of 273-day bills and for $1,200,000,000, or thereabouts, of
365-day
The details of the two series are as follows:
OF ACCEPTED

365-d~

273 -day Treasury bills

maturing

nTIVE BIDS: _ _...;;m.....a_t;,.;;ur~i.;;.;;n~g_J_un.,--e_3_0-',:.....-1~9~7_1..,.-_

Price
95.313 ~
95.245
95.270

Approx. Equiv.
Annual Rate
6.181%
6.270%
6.237%

Price

Treasury bills
Se~tember ,30, 1971
Approx. Equi v .
Annual Rate

93.795
93.638
93.698

1.1

6.120%
6.275%
6.216%

~ Excepting 2 tenders totaling $1,130,000

6% of the amount of 27::rday bill's bid for at the low price was accepted
10% of the amount of 365-day bills bid for at the low price was accepted

TENDERS APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
trict
ton
York
ladelphia
veland
hmond.
anta
::!ago
Louis
neapolis
sas City
las
Francisco
TOTALS

Applied For
Accepted
$ 10,440,000 $
440,000
922,820,000
349,820,000
4,310,000
4,310,000
1,005,000
1,005,000
1,180,000
1,180,000
13,770,000
6,770,000
96,705,000
56,805,000
13,055,000
12,835,000
12,450,000
11,450,000
6,105,000
5,105,000
14,715,000
3,275,000
47,105,000
72 2 665 02 °00
$1,169,220,000

$500,100,000

Applied For
11,745,000
1,366,235,000
5,l90,000
5,195,000
4,480,000
20,085,000
154,910,000
16,240,000
14,990,000
8,055,000
15,935,000
96 254°2°° 0

$

,..'

£I

$1,719,600,000

Accepted

$ 1,745,000
908,235,000
5,190,000
5,195,000
4,480,000
16,085,000
137,910,000
16,240,000
14,990,000
8,055,000
8,935,000
73,540,000
$1,200,600,000 ~

~ludes $26,040,000 noncompetitive tenders accepted at the average price of 95.270
~ludes $64,535,000 noncompetitive tenders accepted at the average price of 93 6S8
9se rates are on a bank disc01.mt basis. The equivalent 'coupon issue yields are·
5~ for the 273-day bills, and 6.6'ZP/a for the 365 -day bills.

partmentof the TREASURY
'TON. D.C. 20220

TElEPHONE W04-2041

FOR RELEASE ON DELIVERY
REMARKS OF BRUCE K. MACLAURY
DEPUTY UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
BEFORE
THE ANNUAL CONVENTION OF
THE NATIONAL COUNCIL OF TEACHER RETIREMENT
HONOLULU, HAWAII
WEDNESDAY, SEPTEMBER 30, 1970
9:30 A.M. (HST)
THE IMPACT OF THE FEDERAL GOVERNMENT ON FINANCIAL MARKETS
Somehow, the world of finance seems far away in this
land of swaying palms and pounding surf. But you were good
enough to invite me here to discuss the impact of the
Federal Government on financial markets, so I shall try to
forget these idyllic surroundings for the next few minutes
and ask you, too, to focus on the changing relationship
between Washington and Wall Street, and the implications of
t~at change for your responsibilities as managers of other
people's money.
A fe~-J years ago, any discussion of the impact of the
federal government on the nation's financial markets could
have been confined largely to a recital of the budget outlook,
with perhaps a brief aside on debt management operations.
Today, the scope of the topic is necessarily much broader.
It encompasses not only the behavior of the government's own
accounts, but the large and growing activities of governmentSponsored agencies and federal credit programs.
I think there are two broad, and to some degree related,
explanations for this change -- first, the distortions
introduced into the economy, and into the capital markets
especially, by the inflationary pressures under which the
economy has been operating during the past few years; and
K-49~

- 2 second, the tight constraints that have had to be imposed on
budget expenditures during this same period.
It is generally acknowledged that the effort to finance
the Vietnam war without adequate increases in taxation set
off an unfortunate chain of events in the economy that has not
even now run its ,full course. One of the first obvious costs
of the decision to try to increase the output of both guns
and butter was the credit crunch of 1966, as monetary policy
tried to step in where fiscal policy had failed. It is
pointless here to rummage through the claims and counterclaims
as to who was responsible for what in that episode. But it is
relevant that the excessive burden thrust on monetary policy
in 1966, and the repetition of the same kinds of stresses
last year, have left no doubt as to the kinds of distortions
in financial flows that result under such circumstances.
The virtual disappearance of mortgage money in 1966, for
example, was fair warning of the consequences that result from
a sharp credit squeeze and rapidly rising interest rates.
Housing starts plummeted by roughly 50 percent in six months.
And only concerted action by the Federal government prevented
a repetition, at least to the same degree, of the same
sequence of events last year, a point to which I'd like to
return in a moment. Another major casualty of excessive
reliance on credit restraint, however necessary that
restraint may have been from the point of view of slowing
inflationary pressures, was the state and local governments
that found the market for their tax-exempt bonds drying up
as banks found their resources inadequate to meet demands.
Needed capital improvements had to be deferred or whittled
down, as a total of $4 billion local government issues had
to be postponed or cancelled in 1968 and 1969.
One might take the view that this is exactly what
monetary restraint is designed to accomplish -- deferred
demand for goods and services. But the question, of course,
is not whether demands should be shaved, but which demands,
and by how much. The consensus, I think,is that housing
and local government financing took it on the chin when
capital was scarce, and that the federal government had
little chOice, or indeed had a positive obligation, to do
something to offset the social costs of this kind of
disproportionate impact.

- 4 A second method of reducing the budget cost of
credit assistance has been the tendency to shift from
full cost grants as the means for providing the federal
share of jointly sponsored capital investment programs, to
installment payments spread out over time to provide
varying proportions of debt service. This shift has
put the government, like consumers, increasingly in the
business of flying now and paying later.
A third change that has also had a substantial effect
in reducing budget outlays without reducing the
ability of the government to provide credit assistance
has been the change in the status of certain government
agencies. A number of agencies that until recently were
government-owned, and therefore defined to be in the
budget, have now become private, so that their lending
operations are no longer considered budget outlays.
These include Fanny Mae and two of the Farm Credit agencies.
Finally, although the sale of participations in
government loans has come to a halt, there still exists
a sizable program for selling off certain loans themselves,
with much the same benefit in terms of reduced budget
outlays.
Within the growing total of federally-sponsored credit
programs, a second kind of change has been taking place that
tends to intensify the impact of these programs on financial
markets. I am referring to the trend toward guarantees of
marketable securities, as distinguished from guarantees of
loans that are originated and held by financial institutions.
One obvious example of this development is the
initiation of government-guaranteed mortgage backed bonds.
Whereas previously, the federal government had put its credit
behind those mortgages that qualified under the FHA or VA
programs, it is now prepared to guarantee marketable bonds
based upon pools of these mortgages in the hopes of
attracting investors such as yourselves who might not be .
prepared to handle mortgages as such.
Similarly, the guaranteed student loan program to which
I referred a moment ago has found it difficult to sustain
its momentum as the participating banks became loaded up with
these long-term, non-marketable assets. To help ease this
problem, the Administration has recommended the establishment
of a National Student Loan Association, a private corporation,

- 5 to warehouse, buy, sell, or otherwise deal in these loans.
To finance its purchases, the Association would be empowered
to issue obligations fully guaranteed as to principal and
interest by the federal government, again with the hope of
attracting non-bank funds into the program.
Perhaps the broadest measure of the growth in federal credit
programs is a set of figures taken from last year's budget
document. This showed an increase in federally assisted
borrowing of $12-1/2 billion in 1969, $15-1/2 billion in 1970,
and over $20 billion in 1971. These numbers are out of date,
(though they are the latest available), but they accurately
indicate the trend: net borrowing from the public under
federally-assisted credit programs was scheduled to rise from
something around 12 percent of total funds raised in 1969, to as
much as 20 percent in 1971.
Indeed, you may be surprised to learn the extent to which
the government has already become involved in certain areas.
For example, during the fourth quarter of last year, when
mortgage money was particularly scarce, the Federal Government,
through the operations of Fanny Mae, and Home Loan Banks, the
Farmers Home Administration, and Ginny Mae was providing
nearly two-thirds of the funds for housing. And the proportion
for fiscal year 1970 as a whole approached fifty percent.
I cite these trends not because there is anything insidious
about them ~ see On the contrary, against the background
of the distortions imposed on the markets by the inflation of
the past few years, they fill an obvious need, and probably
forestall even more direct interference in the markets by the
government. But I think that you, who have a direct stake in
the functioning of our capital markets, should be aware that
the Federal Government, without itself providing many of the
funds directly, is exerting a substantial impact on the
allocation of funds in those markets, even though not in the
traditional manner. Given the unfortunate pressures to which
the markets have been subjected, people were no longer content
to let the capital markets allocate funds simply on the basis
of ability to pay. Just as in the economy as a whole, we have
moved Some distance from the theoretical model of Adam Smith,
so in the credit markets, circumstances have required that the
Federal Government intervene to influence credit flows. Once
again, the question is not whether, but when, where, and to
what extent.

- 6 -

I think it is worth emphasizing that to date dissatisfaction
with the distortions that crept into the capital markets under
the strain of inflationary pressures has expressed itself mainly
in the form of incentives and assistance provided by Congress to
help disadvan~aged borrowers, and not, by and large, in ~incentives
or prohibitions on borrowing by supposedly privil~ged or less
needy borrowers. (I leave out of account here the capital
restraint programs on the export of funds for direct investment
or by financial institutions as having a very different origin.)
But I hardly need tell you that the element of compulsion at
times has not been very far below the surface. For example, this
past spring a bill was introduced by Congressman Patman that would
have required private pension funds such as your own to invest a
certain portion of their assets in residential mortgages as a
price for maintaining their privileged tax status. Even more
ominously, the Congress granted authority to the President last
December, as part of a bill extending Regulation Q "to regulate
and control any or all extensions of credit." The President
specifically stated he had no intention of making use of this
authority, but the mood of the Congress was clear.
Thus far, I have concentrated on the growth of Federal
credit programs outside the budget. At the same time, I think
it's only fair to point out that the Federal Government's own
demands on the credit markets have not been excessive. In fact,
to step back into history for a moment, I think it is worth
noting that public debt in the hands of private investors has
actually declined by about $6 billion since 1945. It's quite
true that the total of public debt securities outstanding has
increased from $260 billion to $364 billion at the end of last
year. But during this same period, various government trust funds
have absorbed some $65 billion, and the Federal Reserve, to
provide for the necessary increase in the money supply, has
added $33 billion to its holdings of Government securities.
The relative decline in federal debt is even more dramatic
when compared with other economic magnitudes. For example,
government debt in private hands was somewhat greater than' our
total national output in 1945, but by last year, growth in output
reduced the relative size to one-third of GNP. Similarly, during
this period when total public debt increased less than 40 percent,
corporate debt rose more than 6 times, mortgage debt 9 times,
and consumer debt 20 times. Though this comparison would be

- 7 altered to some extent, if federally-sponsored credit programs
were included, the popular notion of spiraling federal debt is
still a figment of someone's imagination.
It is true that the outlook for the budget during the
coming year is rather cloudy. The last official estimate of the
deficit, at $i.3 billion, is now nearly five months old and
clearly out of date. But I for one do not anticipate any great
difficulty in meeting the governments own need for funds in the
months ahead. And if anything, the demands on the market by the
federally-sponsored agencies should taper off somewhat as
private financial institutions move back into positiori to supply
more nearly their traditional share of home financing.
What, then, can be said in summary about the impact of the
federal government on the financial markets, and the implications
for managers of pension funds?
First, the increased federal involvement in credit markets
is largely a legacy of the intense pressures that have been felt
in those markets as a result of inflation and the distortions
in flows that resulted.
Second, with interest rates declining and inflationary
pressures on the wane, the need for increased government
involvement should diminish. In particular, the idea of direct
allocation, never an attractive alternative, should no longer
have any appeal, even to its earlier advocates.
Third, the fact that credit assistance has been provided in
ways that minimize the budget costs is a reflection of the
strongly competing claims for limited budget dollars in recent
years.
Fourth, while there are positive advantages that can
derive from the use of private rather than government credit,
for example in the student loan program, there is a danger that
the government will look to the financial markets as a source
of endless funds whenever budget dollars become acutely sc'arce,
and thus intensify the pressures in those markets while
complaining about excessively high interest rates.
Fifth, and finally, the proliferation of government-sponsored
agencies and guaranteed securities, though in some cases a
dubious method for the government to finance its needs, does
provide an opportunity for managers of pension funds to obtain
highly marketable securities of a quality closely comparable to
the governments own direct obligations at yields 1/2 percent
above governments, and with longer maturities more suited to
their needs.
000

partmentof the

TREASURY

rON. O.C. 20220

TELEPHONE W04-2041

~OR

RELEASE ON DELIVERY

REMARKS OF THE HONORABLE PAUL A. VOLCKER
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
AT THE ANNUAL MEETING
OF
THE BOSTON STOCK EXCHANGE
AT THE SHERATON BOSTON HOTEL, BOSTON, MASSACHUSETTS
ON MONDAY, SEPTEMBER 28, 1970, at 7 :00 P.M. ,EDT

I must confess to having spent the past week participating
In a particular kind of orgy in Copenhagen -- an orgy of
)ratory by dozens of the world's finance ministers at the
~nnual Meetings of the International Monetary Fund and
.,orld Bank. There is, I assure you, a group of
~onnoisseurs -- a group to which I, myself, aspire -- that
:akes considerable delight in listening to that annual out)ouring of words and in appraising the significance of the
;ubject matter. But even we recognize that the art form has
Lts limitations for a general audience.
I will not, therefore, attempt to summarize or elaborate
:he discussion in all its variety -- it ranged from such
~soteric technical matters as slightly wider margins for
~oreign exchange rates to the enormous human challenge of
)opulation planning. But I would like to take as my starting
joint tonight the principal recurring theme of the Meetings
:he debilitating effects of the spread of inflation through
;he advanced indus trialized countries. '
I will readily admit that, in a meeting of , finance
linisters and central bankers, concern with inflation hardly
'anks as sensational news. But this' year, I suspect the
:oncern was wider and deeper than at any of the twenty-five
!arlier meetings of the 'International Monetary Fund.
-494

- 2 -

The reason is simple. Inflation has become a worldwide
iisease. Even in those countries already enjoying high
.iving standards and accustomed to orderly growth with a high
legree of price stability, wage claims and other demands for
lncreasedincome have substantially exceeded the growth in
:apacity to expand outuut.
Among the poorer, developing countries, this same
;ituation has long been endemic. But I was interested in
~op'enhagen to hear the extent of the concern among
representatives of those same countries that their own
~fforts to achieve stability.and promote development ~re now
Jeing undermined by the spread of inflation in the
industrialized world.
As you know, the United States has not been exempt
from this general pattern. In fact, after a relatively
good price record over a period of years, prices began
rising steadily and with growing momentum in the latter
half of the 1960's, somewhat earlier than in many important
European countries. By the time President Nixon took
office, inflation plainly represented the major challenge
to the economy. Measures to deal with it properly assumed
a first priority in the President's economic program.
The need to cool off an economy that had become
dangerously overheated -- and to do so without precipitating
a serious recession -- has not led to a comfortable term
of office for economic policy-makers. Tough decisions
and persistence have been the order of the day. But now
after many long months of waiting -- Secretary Kennedy was
able to report to his fellow ministers more hopeful news.
Concrete results are beginning to emerge from our efforts.
For instance, the riSing trend of wholesale prices of
industrial goods -- which are a good barometer of the
pricing environment in industry -- tapered off to a rate of
little more than 2-1/2 percent per year 'over the Summer.
That is still too high -- bu~ it is far better than the
4 percent rate maintained last year. Consumer prices,
heaVily we1ghted with services where price increases tend
to be most persistent, have been slower to respond, but
they are not exempt from the easing trend. Those prices
noved 6 percent higher in 1969; the rate of increase
remained close to that figure over the first half of 1970;
but, in July and August, the rate dropped to 3.6 percent.

- 3 At the same time, rising productivity in industry and
reduction in costly overtime hours are now helping to
moderate pressures on the cost structure.
It is too early to claim that the battle against
inflation has yet been won. Obviously, many wage settlements
remain far higher than can be accommodated within a
framework of price stability. Nor has the progress toward
restoring price stability been made without cost. For a
time, the real growth of the economy was brought to a
standstill. Unemployment -- although well below levels
associated with recession years -- has risen higher than
we would like to see it.
Nevertheless, I believe we can fairly claim we are
further along the path toward price stability than most
other industrial countries. And I also believe that we
have laid the ground for further improvement.
The discussions at Copenhagen helped make clear why
this past progress -- and our future prospects -- are
vitally important to other countries as well. 'The inflation
since the mid-1960's in the United States steadily undermined our trading and competitive position in world markets.
Our traditional trade surplus had diminished almost to the
vanishing point.
The full implications of this were obscured for a time
by the special controls on capital outflows, as well as by
the effects of high interest rates and an exuberant investment
climate in the United States. Foreign capital poured into
both our stock markets and money markets in large volume
in 1968 and 1969. This permitted us to balance our over-all
international payments position, despite the deteriorating
trade position.
But that situation could not last. This year, the
foreign capital inflow into our stock market has ceased and
short-term money market funds have tended to return abroad.
As a result, a large basic deficit 'in our payments has been
exposed. Concern about our balance of payments position is
rising once again.

- 4 Ironically,
that concern is expressed just as evidence
is accumulating that the needed process of improvement in
our trade and current account has begun. But we also need
to recognize that restoring a position of solid strength in
that respect will take time -- that we cannot afford serious
relapses if we are to protect the strength of the dollar
internationally ~nd enable it to perform its key role in the
international monetary system.
Inflation is a complex and stubborn process. We need
to learn more about how to deal with it effectively. But
I believe one overriding lesson stands out from this whole
inflationary episode.
The longer action is delayed in coming to grips with
inflationary pressures, the greater the distortions
introduced into the economy and the more difficult and
costly it becomes to restore balance when action is finally
taken.
I think there is broad agreement that our recent
economic problems began with the acceleration in the war
effort in Vietnam in 1965. Large new demands were suddenly
imposed on an economy that was already almost fully employed.
For too long, there was a refusal to face up to the implications
of that decision by cutting spending elsewhere, or by
ralslng taxes, or by some adequate combination of the two.
Restrictive monetary policy was asked to carry too much of
the burden of restraint and was not up to the task of
dealing with inflation almost singlehanded in the face of
high budgetary defici ts.
The reason that delay was costly is not difficult to
understand. There is a momentum to economic activity that
can be self-reinforcing. As soon as a certain rate of
inflation comes to be expected, it becomes imbedded in the
millions of individual decisions on investment, consumption
and saving, and wages and interest rates that collectively
determine the course of the economy. And the decisions made
today on wage contracts, interest rates, and many prices will
affect the cost and price environment for some time into the
future.

- 5 Obviously, once an inflation psychology of this sort
begins to permeate the decision-making process, the problem
of slowing inflation becomes far more difficult. It is not
simply a matter of squeezing out the excess demand that had
been the initial source of trouble. The economic environment
must be changed for a long enough period of time to change
expectations and'work through earlier distortions.
This is the reason why we have had to pay the price of
three consecutive quarters in which there was -- on balance
virtually no growth in real output at all. There may still be
some who think that this was a price that needn't have been
paid -- in the sense that inflationary pressures could have
eased without this much pause in economic growth& I would
remind them that we were well into the Spring of this year
after six months of essentially level output -- before
decision-makers became generally convinced that the
excessive demand pressures that had plagued the economy had
at least been brought under control. One piece of evidence
but not the only one -- is that longer-term interest rates
remained at peak levels, reflecting the combin~d desire of
investors for interest rates that included a large "inflation
premium" and the willingness of borrowers to commit to those
rates for long periods in the future. For a time, there was
a kind of economic "credibility gap." The price indexes had
not yet reflected much progress, and there was a widespread
belief that the pause in economic activity could quickly
yield to renewed inflationary exuberance.
The cost of "no growth" can be measured in economic terms
in the amount of output lost. Or it can be measured in social
terms -- in the increase in unemployment that accompanies a
pause or slow growth. There is no doubt that control of
inflation has exacted these real costs. Nor is there any
doubt, in my view, that these costs were higher because
inflation was allowed to take root for so long.
Before this audience, I would like to emphasize another
aspect of the costs of delayed action -- the costs reflected
in distortions in financial markets. No matter to what
sector of the financial markets one turns, the cumulative
pressures of prolonged restraint left their mark on the
institutions involved and the clients they served.

- 6 -

This was perhaps most obvious in the drying up of the cash
flow of thrift institutions traditionally oriented toward
mortgage markets. Those institutions had been in the habit of
borrowing short to lend long, leaving them vulnerable to a
violent upward shift in the entire structure of interest
rates. Policy loans were also playing hob with the ability
of life insurance companies to maintain the flow of
commitments that ·assure orderly financing in the capital
markets.
There is sometimes a tendency to blame official interest
rate ceilings for these interrupted flows of funds. In some
cases, these may have been a contributing factor, but it is
clearly too shallow an explanation. The underlying fact is
that the structure of assets and liabilities of many savings
institutions is simply not adapted to coping with rapid
increases in interest rates. The stresses and strains
associated with retention of deposit ceilings would have
been compounded by the pressures implicit in competition
for funds at rates the institutions could simply not afford
to pay, desirable as a competitive freeing of rates may be
over the longer run.
Financial institutions were not the only ones to get
caught in a liquidity squeeze. All types of borrowers
found the pressures mounting, with differing degrees of
discomfort and concern. Corporations heavily dependent on
short-term debt, with relatively thin margins of equity,
were squeezed from two directions -- shrinking profit
margins and financing difficulty. In the circumstances, we
heard talk of an impending liquidity crisis. We can all
cite instances of what, in earlier years, was considered
aggressive financial management turning out -- in the harsh
light of a credit squeeze -- to have been financial brinksmanship. Even closer to home, so far as this audience is
concerned, have been the considerable difficulties of
brokerage houses, first asked to cope with a sharply inflated
trading volume and then faced with a sharp decline in both
stock prices and trading volume.
I mentioned a moment ago that the pressures of
prolonged -- necessarily prolonged -- monetary restraint left
their mark not only on institutions but on their customers.
Two categories of borrowers come quickly to mind: local
authorities and those seeking mortgage funds.

- 7 You are undoubtedly familiar with the fact that some
$4 billion of State and local government issues are estimated
to have been postponed or cancelled during the last two years.
Dependence on commercial banks as the major source of funds
during a period when the banks were under increasing pressure
meant that costs·rose more rapidly, and availability shrank
faster, for local governments than for many other kinds of
borrowers not so heavily dependent on a single source of funds.
Similarly, though for different reasons, commitments to make
mortgage loans dropped off sharply in 1969. Private housing
starts fell by some 20 percent between the first and last
quarters of the year. Thus, the economic disturbances
arising from inflation were not evenly spread, but focussed
particularly on two socially important, but financially
vulnerable, areas of the economy.
Let me sum up the chain of events as I see them. We
started with the fact that inflation had been permitted to
gather momentum for at least three years, from 1965 to 1968,
before effective action was taken by the Government to deal with
it. By that time, it had become imbedded in the decision-making
processes of the economy.
As a result, it was far more
difficult to check than had effective action been initiated
earlier. This, in turn, meant that the degree of restraint had
to be more prolonged and, in the case of monetary policy in
particular, more intense than would have been necessary or
desirable had there not been such a late start. Finally, the
costs that have been exacted -- in terms of higher
unemployment rates, houses not built, a weakened trade position,
and financial disturbances -- are greater than should have had
to be paid.
There is one more cost in this chain of events that is
worth more emphasis than it has received. That cost is the
increased Government involvement in the financial affairs of
the Nation. That involvement has not been sought, but rather
has been thrust upon us in an effort to mitigate the
un~esirable consequences of prolonged inflationary pressures.,
ThlS is most evident in the housing field. Federal assistance
has reached unprecedented volume in recent years; more than
half of all the mortgage credit extended in the past year has
been absorbed by such public or quasi-public agencies as FNMA,

.. 8 ..

the Farmers Home Administration, and the Federal Home Loan
Banks. As one measure of the pressures for Federal financial
assistance to credit markets, total lending by the Federal
Government and associated agencies was estimated at some
$20 billion in P~esident Nixon's 1971 budget, nearly double
the amount two years earlier.
In particular cases, the financial problems of major
businesses have raised questions as to the desirability of
Federal support in that area -- the controversy surrounding
the Penn Central bankruptcy being a leading case in point.
The Congress has before it bills that would point toward
re-estab1ishment of an RFC-type lending authority for business.
Or again closer to home, I am sure you are aware that we are close
to passage of legislation that will establish an insurance
fund to protect customers of securities brokers or dealers in
the event of loss.
In general, this Federal intervention in the flow of
credit and capital has so far been limited to a variety of
subsidies or other incentives to private lenders, or to the actual
provision of credit by an agency for specific purposes. But I
am frank to say that the pressures for more direct controls on
private institutions were evident on a number of occasions during
the past year. For instance, proposals have been pushed in the
Congress to require certain institutions to allocate fixed
proportions of their funds to mortgages. Legislation actually
passed providing the President with sweeping authority to regulate
flows of credit by direct controls.
President Nixon has successfully resisted these efforts
to push the Government even more deeply into the business of
allocating credit. But there is little doubt that such proposals
would have been pressed even harder had inflationary pressures
not been reduced and permitted restoration of a better balance
in financial markets.
In a nutshell, I am convinced that inflationary pressures
left unchecked, would have brought vast and irreversible
changes in the American economy. The repercussions would have
been worldwide.
Fortunately, we are now in the process of turning back that
~ha~lenge. The process has not been painless. But is is notable
It lS being accomplished without precipitating the heavy cost of
a sharp recession in economic activity.

- 9 -

We are already reaping some of the benefits. Productivity
is advancing once again. Tensions have eased in the credit
markets, and interest rates have moved substantially below the
century-long peaks established inearlier months. We can look
forward to renewed growth in economic activity at a moderate,
sustainable pace.
These favorable developments can be consistent with
further needed progress on the inflation front. Indeed, if
we rekindle inflationary forces in an attempt to do too much,
too· soon, prospects for orderly growth will be undermined.
That was the experience of the second half of the 1960's.
We mean to learn from that experience -- not repeat it.

000

Department of the

TRfASURY

NGTON, D.C. 20220

TELEPHONE W04·2041

~ION:

FINANCIAL EDITOR

;LEASE 6: 30 P.M.,

r, September 28, 1970
RESULTS OF TRE.A..SURY'S WEEKLY

BILL OFFERING

_'he Treasury Department announced that the tenders for two series of Treasury

one series to be an additional issue of the bills dated December 31, 1969 , and
;her series to be dated October 1, 1970
, which were offered on September 22, 1970,
)pened at the Federal Reserve Banks today. Tenders were invited for $1,800,000,000
~reabouts, of 91-day bills and for $1,400,000,000 or thereabouts, of
182-day
The details of the two series are as follows:

OF ACCEPTED
~ITIVE

BIDS:

!irr,h
,ow
\verage

91 -day Treasury bills
maturing December 31 1 1970
Approx. Equiv.
Price
Annual Rate
98.553
98.511
98.532

5.724%
5.891%
5.807%

182 -day Treasury bills
maturing A~ril 12 1971
Approx. Equiv.
Annual Rate
Price
6.322%
96.804 ~
6.397%
96.766
96.778
6.373%

Y

Y

~ Excepting 2 tenders totaling $800,000

:1% of the amount of 91 -day bills bid for at the low price was accepted
2% of the amount of 182 -day bills bid for at the low price was accepted
mNDERSIU'PLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:
;r lct

Louis
eapolis
as City
as
Francisco

Applied For
$ 28,715,000
1,806,755,000
41,170,000
40,540,000
25,670,000
47,555,000
217 ,080,000
46,185,000
39,710,000
35,055,000
28,910,000
95,715,000

Accepted
$ 18,415,000
1,202,505,000
26,070,000
40,540,000
23,170,000
40,765,000
217,080,000
44,210,000
39,710,000
34,555,000
22,910,000
90,715,000

TOTALS

$2,453,060,000

$1,800,64,S,000

,on
York

adelphia
'eland
!mond
..nta
ngo

Applied For
15,510,000
1,810,775,000
14,670,000
35,780,000
11,080,000
36,825,000
318,735,000
42,245,000
25,560,000
30,115,000
27,420,000
116,415,000

$

£.-'

$2,485,130,000

Accepted
15,510,000
922,825,000
9,320,000
35,280,000
8,580,000
20,935,000
233,735,000
35,165,000
20,560,000

$

26~875,000

14,420,000
56,975,000
$1,400,180,000

Y

ludes $337,505,000 noncompetitive tenders accepted at the average price of 98.532
ludes $208,630,000 noncompetitive tenders accepted at the average price of 96.778
se% rates are on a bank discount basis. 1he equivalent coupon issue yields are
'8'lo for the 9J -da1r hi];J.~ -...and ~8% for the 182 -day bills.

artmentof the TRfASU RY
iN. D.C. 20220

TELEPHONE W04-2041

IMMEDIATE RELEASE

September 29, 1970

TREASURY'S WEEKLY BILL OFFERING
The Treasury Department, by this public notice, invites tenders
two series of Treasury bills to the aggregate amount of
200,000,000, or thereabouts, for cash and in exchange for Treasury
1s maturing October 8, 1970,
in the amount of $3,105,520,000,
follows:
91-day bills (to maturity date) to be issued October 8, 1970,
the amount of $1,800,000,000,
or thereabouts, representing an
and to mature
litiona1 amount of bills dated July 9, 1970,
~ary 7, 1971,
originally issued in
_
! amount of $1,311,020,000, the additional and original bills to be
!elv interchangeable.
182- day bills, for $1,400,000,000, or thereabouts, to be dated
:ober 8, 1970,
and to mature
April 8, 1971
'S1 P :~o. 912793 Ke9).
The bills of both series will be issued on a discount basis under
~etitive and noncompetive bidding as hereinafter provided, and at
urity their face amount will be payable without interest. They will
issued in bearer form only, and in denominations of $10,000,
1,000, $50,000, $100,000, $500,000 and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches up
the clOSing hour, one-thirty p.m., Eastern Daylight Saving
le, ,Monday, October 5, 1970.
Tenders will not be received
the Treasury Department, Washington. Each tender must be for a
limum of $10,000. Tenders over $10,000 must be in multiples of
.000. In the case of competitive tenders the price offered must be
)ressed on the basis of 100, with not more than three decimals,
~., 99.925.
Fractions may not be used. It is urged that tenders be
Ie on the printed forms and forwarded in the special envelopes which
.1 be supplied by Federal Reserve Banks or Branches on application
!refor.
Banking institutions generally may submit tenders for account of
;tomers provided the nameS of the customers are set forth in such
lders. Others than banking institutions will not be permitted to

- 2 submit tenders except for their own account. Tenders will be reo.
without deposit from incorporated banks and trust companies and f~~
respons ible and recognized dealers in inves tment securities. Tender
from others must be accompanied by payment of 2 percent of the face
ambunt of Treasury bills applied for, unless the tenders are acco~~~
by an express guaranty of payment by an incorporated bank or trust
company.
Immediately after the closing hour, tenders will be opened at the
Federal Reserve Banks and Branches, following which public announcement
will be made by the Treasury Departm~nt of the amount and price ~n~
of accepted bids. Only those submi tting competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of t~
Treasury expressly reserves the right to accept or reiect any or all
tenders, in whole or in part, and his ac tion in any such respect ,shall
be final.
Subj ect to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three decimals)
of accepted competitive bids for the respective issues. Settlement for
accepted tenders in accordance with the bids must be made or completed
at the Federal Reserve Bank on October 8, 1970,
in cash or other immediately available funds or in a like face amount of
Treasury bills maturing October 8, 1970.
. Cash and exchange te~~
will receive equal treatment. Cash adjustments will be made for
differences between the par value ,of maturing bills accepted in
exchange and the issue price of the hew bills.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue Cooe
of 1954 the amount· of.· discount at which bills issued hereunder are sold
is considered to accrue when the bills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capital
assets. Accordingly, the owner of Treasury bills (other than life
insurance companies) issued hereunder must include in his income tax
return, as ordinary gairi or loss, the difference between the price pa~
for the bills, whether on original issue or on subsequent purchase, and
the amount actually received either upon sale or redemption at maturity
during the taxable year for which the return is made.
Treasury Department Circular No .. ' 418 (current revision) and this
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained from
any Federal Reserve Bank or Branch.

000

epartmentof the TREASURY
fEtEPHONE W04·2041

-FOR

SEPTEMBER 30, 1970

IMMEDIATE RELEASE

RICHARD D. CHOTARD RESIGNS POST AS ASSISTANT TO
THE UND~~SECRETARY TO JOIN CONSULTING FIRM
Secretc!t'y of the Treasury David M. Kennedy today
announced with regret the resignation of Richard D.
Chotard, 33, a former Jackson, Mississippi, banker,
who has been assistant to Under Secretary of the
Treasury Charls E. Walker.
Chotard worked on one-bank holding company
legislation, tax reform legislation, and handled
Internal Revenue Service and banking projeCt5 at
Treasury.

He is joining an international management

consulting, research and development firm, Booz, Allen
and Hamilton, November 1, at Chicago.
A native of St. Louis and graduate of Columbus,
Mississippi high school,

Chotard holds degrees from

the liniversity of Mississippi, Jackson School of Law,
and Rutgers.
He was vice president of the Deposit Guaranty
Bank In Jackson when he joined Treasury in 1969.

·000

~Qrtmentof the TREASURY
'M~ D.C. 20220

TELEPHONE W04·2041

FOR RELEASE ON DELIVERY
REMARKS OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE
THE KIWANIS CLUB OF LAS VEGAS, NEVADA
WEDNESDAY, SEPTEMBER 30, 1970, 12:00 NOON, P.D.T.
When this Administration took office some 21 months ago,
the Nation was on an inflationary binge. There is no way to
disguise that fact. We had gotten into that situation by
superimposing war costs of up to 30 billion dollars a year
on top of an economy which was already moving rapidly towards
full employment, without fully paying for that war. The
result facing us was a situation where too much money was
chasing too few goods -- a classic case of inflation.
That inflation was the most serious economic problem
facing the Nixon Administration. We adopted a program to
cool the inflation, and succeeded -- perhaps more slowly
than we had wished. But we now know that our policies are
working.
Perhaps even more important, these economic policies
have been working while the Nation was beginning the
transition from a wartime to a peacetime economy.
The adjustments underway in the economy reflect the
results of the two domestic economic policy objectives of
the Administration:
To curb the accelerated rise in prices since
mid-1965, by reducing the rate of increase in
money demand through fiscal and monetary
restraints.

- 2 -

To avert any serious contraction in real growth
and employment and to assure a revival in the
economy by the second half of 1970, while
checking the growth of total money expenditures.
In broad outline, if not precisely, the twin policy
objectives are being met. Of course, there have been some
departures from the expected pattern of developments -- but
these were not entirely unexpected. The departures related
to the usual difficulties in making exact forecasts,
especially the exact span of time lags between policy
measures and intended results.
The objective of economic coo10ff had been planned by
means of traditional policies of monetary and fiscal restraint,
and its arrival had been expected during the first half of
1970. On this score, the economic plan of the Administration
must be considered successful. The excess of demand, which
had generated overheating in the economy and produced the
fundamental condition of the inflation, in fact, was
eliminated in the expected time frame.
This process was accompanied by difficult adjustments,
which, in the past, had been accompanied by cumulative and
deep declines in economic activity. Indeed, the risks of a
cumulative economic decline were even greater this time because
two major forces were exerting downward pressures:
cutbacks in defense spending, which were part of
a shift in the reordering of Federal expenditure
priorities; and
the fiscal and monetary restraints imposed to
control inflation.
Through the use of appropriate and flexible policies, the
successful avoidance of a recession must surely be considered
a considerable achievement.
Most measures of general output, income, and employment
indicate how small the falloffs from peak rates of activity
have been, as compared with other postwar contractions. For
example, the index of industrial production has decline less
than 2 percent (annual rates) during the adjust of the past
eight months; during the first eight months after the Korean
War peak, that index declined at an annual rate of 14 percent.
Personal income, which declinedone percent during the Korean
adjustment actually rose by six percent during the past eight
months.

- 3 The slowdown in economic activity now appears to be
''bottoming out." Following a slight decline in the first
quarter of 1970, real economic growth (GNP in constant 1958
dollars) in the second quarter increased a bit, and some
additional growth is expected in the third quarter.

On the other hand, it is clear that the fallout from the
cooling off process generated somewhat higher unemployment
and that greater obstacles towards deceleration of price
increases emerged than had been anticipated.
The cutbacks in defense ordering and the accelerated
release of men from the Armed Forces added substantially
to somewhat higher-than-expected unemployment rates. Total
defense employment (Department of Defense military and
civilian employees) was reduced by 550,000 over the past year.
An additional 200,000 cutback resulted from the direct effect
on defense plant employment.
The rapidity of the previous inflation had aroused
expectations of further large advances. For awhile, private
price decisions were so based -- until it became evident
that the Administration was determined to carry out its
objective to eliminate excess demand. Once this was recognized,
prices did continue to rise, but for other reasons than demandpull inflation. Cost-push influences arose as the prime mover
in extending the ~rend of rising prices.
But even here, substantial progress towards reducing the
rates of price advances has been made in recent months. For
example, during the past six months, the wholesale price index
rose at the annual rate of 1-1/2 percent, a substantial slowdown
in the rate of inflation compared to the 5-1/2 percent rate during
the preceding half year. The figures for September, released today,
show a .4 percent increase. The increase was in the farm and
food component which is highly volatile. But this does not
affect the conclusion that the trend for the six months is
encouraging. The index of raw materials prices declined .
13-1/2 percent during the last six months, while it rose by
9 percent a half year earlier.
Furthermore, as labor markets have softened, cost-push
influences have been diminishing and may be expected to exert
less pressure on prices in the months ahead. Large and sometimes excessive wage settlements with unions have been few and
tend to dominate the news. Only 6 percent of the labor force
will be affected by new major wage negotiations in 1970.
Actually, by the second quarter of 1970, average compensation
per man-hour had declined to an annual rate of 5.6 percent, as
co~~ared with 7.7 percent during the fourth quarter of 1969.
'i'.l:tb productivity beginning to increase in 1970 unit labor
costs hav~ tended towards stabi1izat'ion. By th~ second quarter

- 4 of 1970, the rise at an annual rate of 2 percent in the private
economy was the lowest for any quarter back to 1962. Accordi~ly,
the basis for a reduction in pressure for price increases has
been made. These are the factors -- rising productivity and
diminishing unit labor costs -- which already have contributed
to the slower rate of price increase which we recently have been
experiencing.
We are determined that inflation will not go back to its
former wild growth. And it should be apparent to any American
that one way to avoid another binge is to avoid spending ourselves
back into inflation. The President has already vetoed some highly
popular bills because they were inflationary. And I will tell you
sincerely that the advice from his economic advisors, including
myself, will continue to be: view overspending with deep
distrust. We just cannot afford to let inflation take hold again.
The Economic Outlook
While figures on economic activity may not show progress
every single month in the period ahead, the economy clearly has
moved past a crossover point towards expansion. On the fiscal
side, the swing towards deficit in the first half of 1970 -mainly reflecting a falloff in receipts rather than expansion
in expenditures -- has helped to sustain growth in disposable
incomes. This has provided support to the economy at an
appropriate time.
On the monetary side, interest rates have receded from
historic highs, following a changeover from contraction to
expansion in the money supply and in other monetary aggregates,
as bank credit and the bank reserve base.

~~

A new buoyancy in the economic environment has emerged.
The rise in the stock market and the slowdown in the advance of
wholesale and retail prices have contributed to expectations of
expansion in the months aheado Certain developments iri the
American economy now seem probable for the period ahead.
Consumers may be expected to spend moreo Much of the
special additions to their income -- more social security benefits,
phasing out of the income tax surcharge, and increased Federal pay"
have been reflected in higher saving rates than in spending.
This will change as consumer spending patterns adjust to the
higher levels of income.

- 5 -

Inventories have not become excessive, as in other slowdowns.
As sales improve, production for inventories will add strength
to the recovery. Housing starts already have responded to
monetary policy, as funds have accumulated at mortgage-granting
institutions.
Prospects for a turnaround in business investment appear
brighter in view of an upturn expected in new appropriations by
manufacturers in the third quarter, as reported to the
National Industrial Conference Board. State and local
governments will resume strong growth in spending, as lowered
bond yields promote what already are heavy flotations.

- 6 Some Policy Issues
This Admini~~ t~ration beJ jelJes that reactivation of
inflationary pre:::'~,lre'3 can be averted.
One pri'TIe requisite
is the management ,Jt fiscal l'olicy, which is not Ovt21'stimulative; and at the same time to assure that important national
needs are met through the Federal Budget. This would protect
against sharp ~wlnss ln mone~3ry policy directeJ to stabilize
the economy.
Hopefully, the recovery ()f the economy will proceed at
such a pace wherein inflationary fires are not c2kin.Jled by
an abrupt elimination of the gap between potential ~nd actual
ca?acity of the economy to produce.
A gradual path in
eliminating this gap is the best promise of full employment
without inflation.
Under these circumstances, the power of
productivity gains to offset the effects of wage increases on
unit labor costs, over the long run, could oper~te to reduce
upward price pressures.
Finally, removal of structural barriers to th~ operations
of labor markets by eliminating such barriers to entry as
racial discrimination, overlong apprenticeships, better
matching of skills with unfilled jobs, etc., could expand the
supply of labor, increase product i vi ty, and reduce inflationary
pressures.
Now having reviewed the economic state of the nation
at some length, I would like to briefly discuss our national
situation in a slightly broader context.
I should like, in a
sense, to give you a view of some of the other issues facing
the nation as I see it, not just from the Treasury, but from
my post ~s a member of the President's Cabinet.
What are some of the issues? Well, we are for
order in our society -- "maintain domestic tranquility" are
the noble words in the preamble to the Constitution.
I might
put that in the context of my job at Treasury -- which
supervises the Secret Service, Customs and the Internal Revenue
Service with its Alcohol, Tobacco and Firearms control
responsibilities.
President Nixon has told me that he is determined to
rid this nation of heroin and other narcotics menace, and he
has asked the Treasury to support that very important goal.

-7-

As a result of added appropriations by the Congress, our
Customs force has added some 815 men to hunt heroin. We are
fighting smugglers of heroin, and we shall not stop.
In similar fashion, Treasury Agents are playing a key
role in the war against skyjackers. And the ATF unit of
Internal Revenue is playing a key role in investigating some
of the recent tragic bombings.
The Administration is also for progressive change. At
Treasury, for example, we have had a team working on ways in
which we can support the efforts to meet the crisis of
pollution. Some years ago when I visited Las Vegas I felt
this was one of the cities of the old West -- with few of
the "honking-auto problems" of Chicago or New York.
Today you
seem able to match some of our Washington rush-hour traffic
jams. And those cars are all spewing lead into the atmosphere.
We have asked that the Congress pass a tax to help force the
lead out of gasoline by the time the new air quality standards
come into effect in 1975. We will do more.
In still another area, the President, the Cabinet and I
are for certain essential reforms.
Our proposal for sharing
Federal revenues with the states is an essential part of this
program.
To put all this in another way, your government· is
committed to changing priorities to meet the needs of our
society, The fact is that in one essential area we already
have changed our priorities. We have accomplished one of
our major goals -- which has and is to put more emphasis on
human resource programs than on defense.
I

In 1968 this nation spent 45 percent of its budget on
defense and put 32 percent of its resources into human
resource areas.
In the 1971 fiscal year now underway we are
spending 41 percent on human resource programs . . and 37
percent on defense.
In short, in the present Administration we have tried
to take some new initiatives.
President Nixon recently has
referred to part of this process as the "New Federalism"
and an effort to bring the government more closely to the
people.

- 8 -

Too often in Washington people feel that they have
arrived at the only spot that counts, that everything is
happening right there.
President Nixon believes -- and as
a lover of my native Utah and the Wes~ -- I agree there is
an awful lot more to this country than the space between the
Washington Monument and Capitol Hill.
I am here, in part,
to hear you.
And in part, to try to tell you face to face
about some of our ideas, and to ask that you support them.

000

epartment of the TREASURY
aTON. D.C. 20220

TelEPHONE W04-2041

September 30, 1970

QR IMMEDIATE' RELEASE

MEMORANDUM FOR THE PRESS:

Attached is a copy of the fifth semiannual report on Uo S. purchases and sales of gold
and the state of the Uo S. gold stock forwarded by
Acting Treasury Secretary Charls E. Walker to the
President of the Senate, Speaker of the House
and appropriate committee chairmen.
the first half of 1970.

000

Attachments

K-495

The report covers

Semiannual Report on Purchases and Sales of Gold
and Other Reserve Assets and the
State of the United States Gold Stock
January 1 - June 30, 1970

~k

During January through June of 1970 the United States gold
increased by $30 million to $11,889 million.
The United States reserve position in the International

~tary Fund - the amount automatically available for drawings
~easeo by $26 million and U.S. holdings of Special Drawing

lts by $957 million.
The increase in the U.S. reserve
Ltion in the IMF represented the use of dollars by the
~rnational Monetary Fund in the drawings of others in the
~oximate amount of $175 million, offset in large part by
U.S. drawing of $150 million in Dutch guilders and Belgian
~cs previously announced.
The large increase in SDR, which came into being at the
set of 1970, was due to the allocation of $867 million to
United States as its share of the total allocation and the
~nce of $90 million represented the net purchases alld sales
SDR b~tween the U.S. and other countries, plus about $9 million
~neration paid by the IMF on the U.S. creditor position in
Fund. Gross sales by the U.S. to other countries totaled
million and gross purchases amounted to $101 million.
Offsetting the reserve gains in gold, SDR and Fund reserve
ition was a decline of $1,649 million in U.S. foreign exchange
jings. The bulk of U.S. foreign exchange was held under
p arrangements and the decline reflected repayment of these
ps, primarily by the United Kingdom and France, the latter
Nhich completely repaid its drawings on U.S. facilities.
U. S. Reserve Assets declined during this period by
6 million to $16,328 million, as shown in the following

1e:

U.S. Reserve Assets
(in millions of dollars)
December 31, 1969
Gold
Special Drawing
Rights
Convertible Foreign
Currencies
Reserve Position ln
International
Monetary Fund

June 30, 1970

Net Change

11,889

+30

957

+957

2,781

1,132

~1,649

2,314
16,964

2,350
16,328

+26
-636

11,859

-2-

Purchases and sales of gold during the period are as
set forth in the attached table. There were no large transactions during the period. All sales were to countries which h~
gold payments to make to international institutions, except f~
a $5 million sale to Argentina to enlarge that country's gold
reserves.
Gold traded in the major free markets in a narrow range.
In the first quarter it fluctuated between a low of $34.75
per fine ounce - based on London market fixing quotations and a high of $35.30 in the closing days of the quarter. In
the second quarter the price reached a high of $36.24 in early
May, the low for the quarter was $35.12 in June.
During the period, primarily in the first quarter when the
price was frequently below $35, South Africa sold approximately
$307 million in gold to the IMF under the agreement reached in
the IMF last December. A small sale was also made by South
Africa to Switzerland. Since Switzerland is not an IMF member,
its transactions are handled separately but within the basic
framework of the understanding with South Africa.

UNITED STATES NET MONETARY GOLD TRANSACTIONS WITH
FOREIGN COUNTRIES AND INTERNATIONAL INSTITUTIONS
January I-June 30, 1970
(In millions of dollars at $35 per fine troy ounce)

Area and Country
Europe
Greece
Iceland
Ireland
Malta
Turkey
Vatican City
Total
Latin America
Argentina
Bolivia
Chile
Colombia
Dominican Republic
El Salvador
Guatemala
Haiti
Peru
Uruguay
Total
Asia
Afghanistan
Burma
Indonesia
Korea
Kuwait
Pakistan
Philippines
Syria
Yemen Arab Republic
Total

First
Quarter

-0.1
+2.2
+2.5
-0.3

+4.4

-0.3
-0.1

-2.1
+1. 2
-1. 3

-5.0

Total

-0.3
-0.1
+2.2
+2.5

-2.4
+1. 2
+3.1

-5.0

*

*

-0.1
-0.1
-7.3

-0.5
-0.1
-0.1
-0.1
-0.1
-0.1
-0.2
-8.0
-9.1

-16:4

-0.2

-0.2

-0.3

-0.8
-1.1
-0.1
-0.1
-0.1

*

-0.8

-1. 4
-0.2
-0.1
-0.1
-0.6

-0.2
-0.1
-0.1
-0.6

*

*

+23.7

*

-0.8

+24.9
-0.4
+0.9
-0.1
-1.5
+22.6

-0.4

-1. 5
+24.0

-1. 3
-1.2
-0.2
-0.1
-0.2
-0.1
-0.3
-8.1

*

*

+24.9
-0.4
+1. 2

Africa
Cameroon
Central African Republic
Gabon
Ghana
Guinea
*
-0.1
Liberia
-0.2
Morocco
Sierra Leone
-0.4
Sudan
Tunisia
*
United Arab Republ~c
-0.7
Total
I~F

Second
Quarter

*
*

*
-0.1
-0.2

*

-0.4
-0.2

-0.8
-0.2

-0.6

-0.6

-2.2

-3.0

+23.7

+30.0
-14.0
+44.0
TOTAL
*Under $50,000.00.
Fl~Ule5 may nat add to totals because of rounding.

partment of the

TREASURY

rON. D.C. 20220

TElEPHONE W04-2041

FOR IMMEDIATE RELEASE

October 2, 1970

TREASURY ACTION RESTRICTING IMPORTS OF
"MONTEREY" CHEESE FROM NEW ZEALAND
Assistant Secretary of the Treasury Eugene T. Rossides
today announced the issuance of a ruling which will change
the tariff classification of so-called "Monterey" cheese from
New Zealand and have the effect of subjecting importations of
this cheese to more restrictive import quota limitations. The
ruling will become effective ninety days after it is published
in the Customs Bulletin on Wednesday, October 7, 1970.
The new ruling follows determinations by the Food and
Drug Administration that the cheese in question being imported
from New Zealand is improperly labeled as "Monterey," and must
instead be labeled as "Cheddar." The Food and Drug Administration
had previously passed importations of this cheese labeled as
"Monterey. "
The impact of the Treasury ruling will be to reduce the
quota limitation on New Zealand "Monterey" cheese from seven and
a half million pounds annually to approximately five and a half
million pounds annually, the overall quota allocation to
New Zealand for Cheddar cheese. The latter figure will now cover
imports of both "Monterey" and Cheddar cheese from New Zealand.
A slight increase in duty will also result from the ruling.

000

)epartment of the

TREASURY

IIlON. D.C. 2022()

TElEPHONE W04-2041

FOR RELEASE IN AM'S

SUNDAY, OCTOBER 4, 1970
ASSISTANT SECRETARY ROSSIDES LEADS UNITED STATES DELEGATION
TO INTERPOL MEETING IN BRUSSEL, BELGIUM
Eugene T. Rossides Assistant Secretary of the Treasury •
for Enforcement and Operations, left Washington, for Brussels,
Belgium today to be chairman of tro U.S. delegation at the
1970 General Assembly of the International Criminal Police
Organization, (Interpol). The meeting will last from October
5th thru 10th.
The assembly will discuss matters of world wide law
enforcement concern such as: illicit drug traffic, organized
smuggling, hijacking, as well as routine business.
The purpose of Interpol is to enable police forces in
different countries to coordinate their work effectively in
the double aim of law enforcement and crime prevention.
The U.S. Interpol National Central Bureau is administered
by the Secret Service in Washington.
The other members of the U.S. delegation are:
Mr. Myles Ambrose
Comrniss ioner
Bureau of Customs

Mr. Byron Engle
Director, Office of
Public Safety AID
Depa.rtment of State

Mr. Frank A. Bartimo
Assistant General Counsel
D~partment of Defense
Mr. Carl W. Bplcher
Chief, General Crimes Section
Department of Justice

K-496

Mr. John Finlator
Deputy Director
Bureau of Narcotics &
Dangerous Drugs
Mr. George Gaffney
Special Asst. to the Director
Bureau of Narcotics &
Dangerous Drugs
(OVER)

-2-

Mr. Kenneth S. Giannoules
Chief, NCB, Interpol
Department of the Treasury
Mr. William Gottlieb
Internal Revenue Service
Bonn, G~rmany
Mr. James F. Greene
Associate Commissioner
Immigration & Naturalization Service
Mr. Andrew P. O'Malley
U.S. Secret Service
Paris, France
Mr. Martin R. Pollner
Director, Office of
Law Enforcement
Department of the Treasury
Mr. Harold F. Smith
Assistant Commissioner
Bureau of Customs

Mr. Samuel F. Pryor
Advisor to the Asst. Secretary
Department of the Treasury

# # #

~partment 01 the TREASURY
D.C. 20220

TELEPHONE W04-204!

Ii IMMEDIATE RELEASE

October~2,

1970

TREASURY I S WEEIO..Y BILL OFFERING

The Treasury Department, by this public notice, invites tenders
Jr two series of Treasury bills to the aggregate amount of
l,200,OOO,OOO, or thereabouts, for cash and in exchange for Treasury
lils maturing
October 15, 1970, in the amount of $3,104,180,000,
follows:
91-day bills (to maturity date) to be issued October 15, 1970,
~ the amount of $1,800,000,000,
or thereabouts, representing an
jditional amount of bills dated July 16, 1970,
and to mature
muary 14, 1971, original1-y issued in
he amount of $ 1,304,530,000, the additional and original bills to be
reely interchangeable.
182_ day bills, for $1,400,000,000, or thereabouts, to be dated
:tober 15, 1970,
and to mature April 15, 1971
:l;SIP :;rD. 912793 KD7).
The bills of both series will be issued on a discount basis under
tive and noncompetive bidding as hereinafter provided, and at
~turity their face amount will be payable without interest.
They will
~ issued in bearer form only, and in denominations of $10,000,
l1,OOO, $50,000, $100,000, $500,000 and $1,000,000 (maturity value).
)mpeti

Tenders will be received at Federal Reserve Banks and Branches up
the closing hour, one-thirty p.m., Eastern Daylight Saving
lme, Friday, October 9, 1970.
Tenders will not be received
t the Treasury Department, Washington. Each tender must be for a
inimum of $10,000. Tenders over $10,000 must be in mUltiples of
5,000. In the case of competitive tenders the price offered must be
Kpressed on the basis of 100, with not more than three decimals,
.g., 99.925. Fractions may not be used. It is urged that tenders be
ade on the printed forms and forwarded in the special envelopes which
III be supplied by Federal Reserve Banks or Branches on application
lerefor.
~

Banking institutions generally may submit tenders for account of
Jstomers provided the names of the customers are set forth in such
~nders.
Others than banking institutions will not be permitted to

- 2 submit tenders except for their own account. Tenders will be rw
without deposit from incorporated banks and trust companies and
responsible and recognized dealers in investment securities.
from others must be accompanied by payment of 2 percent of the face
amount of Treasury bills applied for, unless the tenders are accolllp
by an express guaranty of payment by an incorporated bank or trust
company.
Immediately after the closing hour, tenders will be opened at
Federal Reserve Banks and Branches, following which public annOO~e
will be made by the Treasury Department of the amount and price
of accepted bids. Only those submitting competitive tenders will be
advised of the acceptance or rejection thereof. The Secretary of the
Treasury expressly reserves the right to accept or reiect any or all
tenders, in whole or in part, and his action in any such respect s~
be final.
Subj ect to these reservations, noncompetitive tenders for
each issue for $200,000 or less without stated price from anyone
bidder will be accepted in full at the average price (in three deci.
of accepted competitive bids for the respective issues. Settlement
accepted tenders in accordance with the bids must be made or complet
at the Federal Reserve Bank on October 15, 1970,
in cash or other immediately available funds or in a like face amOUn
Treasury bills maturing October 15, 1970.
Cash and exchange ten
will receive equal treatment. Cash adjustments will be made for
differences between the par value of maturing bills accepted in
exchange and the issue price of the new bills.

u.

Under Sections 454 (b) and 1221 (5) of the Internal RevenueC~
of 1954 the amount of discount at which bills issued hereunder are d
is considered to accrue when the bills are sold, redeemed or othe~U
disposed of, and the bills are excluded from consideration 8S capit~
assets. Accordingly, the 6wner of Treasury bills (other than lifi
insurance companies) issued hereunder must include in his income tax
return, as ordinary gain or loss, the difference between the pricep
for the bills, whether on original issue or on subsequent purchase,
the amount actually received either upon sale or redemption at maturt
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revision) and th
notice, prescribe the terms of the Treasury bills and govern the
conditions of their issue. Copies of the circular may be obtained
any Federal Reserve Bank or Branch.

000

partment of the TRfASU RY
D.C. 20220

TELEPHONE W04-2041

FOR RELEASE UPON DEL IVERY
REMARKS OF THE HONORABLE MURRAY L. WEIDENBAUM
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE MUNICIPAL FINANCE FORUM
WASHINGTON, D. C.
TUESDAY, OCTOBER 6, 1970, 12:00 NOON, EDT
A REEVALUATION OF FEDERAL CREDIT PROGRAMS
I am delighted to have the opportunity to appear before
the Municipal Finance Forum to discuss the role of Federal
credit programs in governmental budget policy. The current
rapid expansion of these Government and Government-assisted
lending activities raises a number of broad public policy
issues -- the size of the public sector, the role of the
government, the structure of financial markets, the effectiveness of monetary and fiscal policies, and the relative importance
of large sectors of the Nation -- agriculture, housing, foreign
trade, and so forth.
After trying to piece together a picture of recent and
prospective developments in the area of Federal credit programs,
I would like to discuss several of the major problems stemming
from the current treatment of credit activities in the Federal
budget. Finally, I will outline some of the major issues and
indicate some promising approaches. When I speak of "us," I
refer not only to the Administration or to Government; these
issues have a bearing on all participants in the economic
process. But before launching into these matters, it may be
helpful to review some of the basic functions of a financial
system. We can then think about the Federal credit programs
in terms of their impact on these basic functions.
In any assessment of the implications of Federal credit
programs, we need to be concerned with their impact on resource
allocation and with their effects on the efficiency of the
financial system.

K-497

2

When a national government enters financial markets, it
possesses advantages not available to private borrowers such
as its position as a virtually riskless borrower. To some
extent, as we will see, it can transfer some of these governmental attributes to ostensibly private organizations who are
empowered to issue obligations backed or otherwise supported
by the U. S. Treasury. Thus, even if the Federal Government
itself exercises restraint in its direct borrowing, expanded
credi t operations by these "assisted" agencies may result in
increasing portions of available funds being preempted and
not available to truly private borrowers.
Against the background of these remarks, I would like
now to turn to a description of the present treatment of
Federal credit programs in the budget.
Present Treatment of Credit Programs
As recommended by the Budget Concepts Commission, the
Federal budget totals cover only direct loans. That is, loans
are included in the unified budget only when they are made
directly by agencies of the Federal Government, including trust
funds and mixed ownership corporations.
The budget does not include what are termed Federallyassisted loans. For example, loans by agencies which are
Federally-sponsored but are entirely privately owned -- such
as the Federal National Mortgage Association (FNMA), the
Federal Home Loan Banks, and the farm credit agencies -- are
no longer included in the budget. Similarly, Federally guaranteed loans -- which include loans financed in the municipal
market, e.g., for public housing and urban renewal -- and
nonguaranteed loans made by private lenders with a Federal
interest subsidy -- such as for college housing and academic
facilities -- are not included in the unified budget.
As it turns out, this particular accounting convention
means that the bulk of Federal credit assistance is excluded
from the budget. Of the estimated $22 billion net increase
in Federal and Federally-assisted loans for fiscal 1971, only
$1-1/2 billion are included in the budget.
The funds for Federa1ly-assjsted private credit must come
from some place other than the Federal Government. They are
borrowed from the public. If the budget forecasts are realized,
there will be $20 billion of net borrowing in fiscal 1971 --

3

well over 20 percent of the funds advanced and borrowed
directly in credit markets, and about one-third greater
than in fiscal 1970. Moreover, there is every presumption
that Federally-assisted credit financed outside the budget
will continue to grow rapidly after 1971.
Problems in the Current Treatment of Credit Programs
The fact that a Federal program is big and growing does
not by itself mean that it is. cause for concern. It may
simply reflect the success of the program. It may simply be
evidence that the program works. What then is all the fuss
about?
It strikes me that the Federally-assisted credit programs
pose several important problems that should be faced explicitly.
It may be that we would choose to do nothing about these problems.
(An old professor of mine once told me that there are two kinds
of problems: those about which you can do nothing, and those
that go away of their own accord.) Even so, I want to be sure
that the problems to which I shall allude are fully recognized
and that we do not simply lose ground by default.
At the present time, government control over the growth
of Federally-assisted credit programs is quite limited. I am
sure that some people would view this state of affairs as
desirable, and not a problem. However, in light of the way
in which these programs have been developing, I believe that
we need to take note of some of the problems that have emerged.
1. A major share of the Federally-assisted loans outstanding in fiscal 1971 will require direct Federal payments
of interest or other debt service subsidies. Based on the
budget estimates, the increase in directly subsidized loans
this fiscal year will amount to $7.8 billion, or more than
double the $3.7 billion increase in fiscal 1970. Thus, we
are building additional "uncontrollable" items into the
Federal budget. As a result, future economic decisions
become.increasingly less responsive to future needs and
strongly limited by decisions based on the needs of the past.
2. A second problem is related to the method of financing.
Over $3.6 billion of the estimated net increase in guaranteed
loans outstanding in fiscal 1971 will be financed by net sales
of loan assets. For the most part, these are loans made

4

initially by Federal agencies and then sold to private
investors as 100 percent guaranteed instruments (e.g.,
Farmers Home Administration notes, Export-Import Bank
certificates of beneficial interest, etc.). All of the
additional financing costs are absorbed by the Federal
selling agency, and not by the borrower. The Federal
agency generally continues to service the loans after
they are sold.
What does all this accomplish? The Federal Government
has influenced the allocation of resources in the economy,
but has done so outside of the discipline of the budget and
without reference to the broad economic plan outlined within
the budget. Also, in doing this, we have not taken advantage
of the most efficient means of financing -- direct Treasury
borrowing.
3. Finally, it must be recognized that the very nature
of credit assistance is to create advantages for some groups
of borrowers and disadvantages for others. Perhaps I should
put this thought somewhat differently. A Federal credit
assistance program would seem to overcome initial disadvantag~
of some groups, and thereby place them on a more equal footing
with others.
However, as matters have worked out, it seems that these
programs not only avoid the discipline of the Federal budget
but also escape some of the basic monetary policy restraints.
By converting direct loans into securities that are more attru·
tive to many investors, housing and a few other Government
programs have been able to hold their positions in a difficult
cap i tal rna rke t . I n part icul ar, they have been ab Ie to overcome,
to some extent, the restraints imposed upon institutional
lenders and others who must rely upon deposit-type savings
inflows, especially during periods of financial stringency.
As a result, there is a further reduction in credit supplies
to those who, by virtue of their limited credit reputation,
must rely most heavily upon banks or other intermediaries.
Consider another example: An increasing volume of
guaranteed loans is now being made at fixed interest rates
to the borrowers, below the market rates charged by the
private lenders. Specific activities so financed include
academic facilities, college housing, students' tuition,
agricultural and other rural facilities, and low and moderate

5

income housing -- all worthy purposes. In each case, a
Federal credit agency pays the difference between the fixed
rate paid by the borrower (say, 3 percent) and the market
rate required by the private investor. During periods when
market interest rates increase, the relative advantage to
the newly subsidized borrower actually increases. Far from
being placed on an equal footing, such borrowers actually
are placed at an advantage. The borrower has always had a
vested interest in inflation, but for most borrowers that
interest emerges after the loan contract has been made. The
subsidized borrowers in these cases actually benefit from
high intere~t rates and an inducement to obtain the Federallyassisted financing.
Previously, loans such as those just described were
generally included in the budget as direct loans. Accordingly,
they came under budget scrutiny. Now, subsidized borrowers
tend to be insulated from both monetary and fiscal restraints.
To pull together some key threads, let me make the
following points. So long as Federally-assisted loans are
excluded from the budget and not otherwise subject to effective controls, there will be the potential for problems
arising in five areas:
1.

Increased Government involvement in private
credit flows, with borrowing techniques that
are substantially exempt from the discipline
of both the budget and the 'private market;

2.

Higher budget outlays for interest subsidies;

3.

Further proliferation in the capital markets
of inefficient and, at times, inequitable forms
of Federal guaranteed obligations (e.g., asset
sales, tax exempt bonds);

4.

Higher interest rates than would otherwise be
experienced; and

s.

Misleading changes in budget estimates.

6

Possible Changes
What shoulJ be done? The complexity and variety of
FeJeral creJit programs require that any changes be carefully Jevclopcd and reviewed within a fairly broad context.
First, we should have a clear conception of the nature of
the problem.
In this connection, I should indicate that
the question of Federal credit programs has been receiving
and continues to receive a great deal of attention.
Let me offer some ideas which would seem to merit
that careful Jevelopmerit and review. Hence, the following
are suggestions for consideration rather than any firm
recommenJations.
1. There seems to be a clear need for greater emphasis
on FeJerally-assisted credit programs, in the formulation of
the Nation's overall budget and economic plans. It is irnportan
that the economic impact of the relevant programs be explicitly
considereJ anJ acted upon during the budget decision process.
We should satisfy ourselves that these programs are
consistent with economic stability and growth as well as
with budget priorities. Decisions ~o give certain groups
of borrowers more or better access to credit markets than
would otherwise be the case may often require offsetting
fiscal or credit policy changes. In other occasions, it
may even be necessary to impose controls over the total
volume of Federally-assisted programs in order to prevent
an undue stimulation to the economy or to some sectors.
2. This leads to my second major proposition. There
needs to be an improvement in controls over the total volume
of Federally-assisted credit. At present, Federal controls,
when exercIsed, are uneven and subject to considerable time
lags. There is no ready-made remedy that is apparent. Moreover, procedures should be established that permit review of
commitments far enough in advance to permit an evaluation of
their likely impact on the economy at the time the commitments
are to be taken down.
3. A related need is for improvements in the review of
specific credi t program sectors. Each sector should be evaluated in the light of related budget programs in the functional
area concerned.

7
4. Finally, my own thinking has led me to the judgment
that, as a matter of longer-range policy, we should minimize
the sale of assets as a financing technique and minimize the
debt service subsidy as an assistance device. It strikes me
that the chief test is whether a program is justified on its
merit and in light of program priorities. If so, I am moving
toward the belief that, wherever possible, the program should
be budgeted explicitly and that the lending should become a
part of the normal Treasury financing process.
Of necessity, such changes would compel more stringent
in some areas, expanded budget outlays in others.
In either event, the budget impact would be brought in line
with the impact on the use of economic resources and on
financial markets. To the extent that additional Treasury
borrowing substitutes for Federally-subsidized private borrowing, the long-run budget costs would be reduced. Finally,
these programs would be subject to the same budget discipline
as other programs, and their growth could be more easily
appraised and controlled.
c~tbacks

It is important to emphasize the point that Federal
credit programs are more than mere financing instruments.
Changes in the nature and volume of these programs also
become changes in public sector priorities and in the
allocation of national resources. Hence~ any suggested
changes need to be reviewed carefully and in a broad enough
framework to take account of these interrelated concerns.

000

FOR RELEASE ON DELIVERY

REMARKS OF THE HONORABLE DAVID M. KENNEDY
SECRETARY OF THE TREASURY
BEFORE
THE NATIONAL PRESS CLUB
WASHINGTON, D.C.
TUESDAY, OCTOBER 6" 1970, 12: 00 NOON, EDT
I am very pleased to be with you this noon. It is
still early in the day -- at least for most of you -- and
I welcome this chance to have the first word on the
economic situation. I have been in this town long enough to
know that some of you will have the last word.
In discussing the current economic situation, it is
hard to add much to what has been said or written before.
To a considerable extent, that is a tribute to your
activities. Economic and financial events have probably
never received more thorough press coverage than during the
past year or so.
Whether the adjustment turns out to have been a "pause,"
a "retardation," a "micro-mini recession," or is described
by some equally inventive phrase, it surely has not
conformed to the pattern usually associated with the term
"recession. "
I am sure that it must sometimes try the patience of
those who actually bear the brunt of economic adjustment to
hear that after careful study of the evidence it has been
decided that there has been no recession, and anyway things
are getting better. Similar pronouncements must sometimes
have a hollow ring for the unemployed, for those on fixed
incomes trying to cope with inflation, and for the unwary
investor. Even a mild slowdown in the economy means loss of
job opportunities and some personal hardship. But the
al te.rnati ves to a mild s lowdown would have been much worse.

K-499

- 2 -

The control of inflation was neglected for a good many
years. This meant that inflation had gained considerable
momentum. If this momentum had been allowed to build up
still further, the eventual adjustment would undoubtedly have
been an extremely severe one. But it would have made little
sense to try to halt inflation by deliberately pushing the
economy down intb recession. Therefore, the effort has been
to apply only restraint to push down the rate of inflation,
not the entire economy.
The policy of a measured degree of restraint -applied by fiscal and monetary means -- was definitely the
right choice, in my opinion. We have chosen to rely, upon
orthodox policies, rather than starting down the road to
intensive government intervention in private economic
affairs. Important progress has been made in reducing the
rate of inflation -- far more progress than we could have
made by somehow trying to legislate an end to inflation. _
Fundamental economic correctives have been applied and they
have worked.
Unemployment has risen as was inevitable with a slowdown
in economic activity. The employment situation has also been
affected temporarily by the beginnings of the welcome move
from a wartime to a peacetime economy. While the long-run
strength of the economy does not depend upon war-related
activities, defense cutbacks can impose some burdens of
adjustment in the short run. Some of the rise in regional
unemployment rates during the past year is surely attributable
to reduced defense orders.
Even so, the decline in economic activity has been very
shallow by almost any standard. For example, industrial
production fell by 10 percent in the recession of 1948-49,
9 percent in 1953-54, 14 percent in 1957-58, and 6 percent
in 1960-61. The decline during the pause in early 1967
was 2-1/2 percent and it has been a little less than
3-1/2 percent this time.
Gross national product in constant prices declined
fractionally in the final quarter of last year and by a
modest amount in the first quarter of this year. Growth
resumed in the second quarter. Incomplete data suggest
that real GNP will also show a rise in the quarter just
completed. A variety of other comparisons might be drawn,
most of which would point to the relative mildness of the
current slowdown in what some of my economists are prone to
call the "real" sectors.

J

,I 2

- 3 Some of the strain and turbulence in the financial
sectors during the past year seemed real enough to me.
There were times when it was possible to wonder whether
private financial difficulties could begin to undercut
confidence in the general business outlook. Fortunately,
this never came to pass. A flexible policy response by the
Federal Reserve must be given a great deal of credit for
restoring a more settled atmosphere. But we have some
lessons to learn from recent financial experience.
In particular, I think we need to recognize the
progressive deterioration in financial standards that comes
from living too long with inflation. Ordinarily we count
on market tests and regulatory processes to maintain the
somewhat elusive, but essential, "quality" of credit.
However, prolonged exposure to inflation begins to create
a different atmosphere, at least on the fringes, where
"anything goes." Loose financial standards have been the
exception rather than the rule. This is fortunate since
widespread financial over-extension could obviously pose
a threat to economic stability. Recent difficulties were
far from reaching this danger point but there were some early
warning signals.
Our financial institutions and arrangements have been
built up over the years on the presumption of a reasonable
degree of price stability and moderate rates of interest.
They function best under those conditions. While financial
institutions have weathered the recent adjustment in good
fashion, there is a need now for a period during which
liquidity can be rebuilt and lending standards upgraded.
Meanwhile the President's Commission on Financial Structure
and Regulation will be formulating recommendations for any
long-range improvement in the structure and regulation of
financial institutions that may seem to be required. Our
problem here was the failure of the Federal Government to
control the inflation that began to accelerate in 1965.
The best insurance against any recurrence of financial strain
is effective control over inflation.
One stabilizing element of great recent importance has
been consumer behavior. While some other borrowers \Jere
falling allover themselves to raise funds, almost
irrespective of cost, consumers WEre very cautious in taking
on extra debt. As a result, the consumer financial picture
is strong and can help to support the expansion now getting
underway.

- 4 We all welcome the resumption of economic expansion. It
:rust he ob\'ious, hOh1 ever, t~at costs and prices are still
~in(lcr
. : I ·~" •.'3rd tJressun:.
A year 3>;0 \,'e Ivere looking
[or :'-~-:l~' ,~ 1,::prov(:,rJlcnt in the price situation.
c.;O\v, a
veat- la:::er, clear si2;ns of i:llprovement have emerged.
l:onsumer
l)ricl'
>;c(v· risen I~~ore slo\'.'ly in recent months.
hfllolesale
i n c.\>J ~ L d d 1 Hie e s roc: e :3 t I c s s t han 3 l per c c n tan 11\ I a 1 L1 t l'
this ., ::1'.:ol(';, \vell below earlier rates.
Incrca ..:;es in industrial productivity can prc\vicle~nlT)t'
offse'.:: to rapidly rising wage costs. But despite imprlw('L l'llt
in t 1;c' 20C: l-price situation, there obviously is stil1 SOIlll'
dis t a;; c t' t c' sob e for eon e c 0 u 1 d beg i n to say t hat ~1 r (' ;1 S () 11 ,1 h 1('
degree of ;i.-ice stability had been restored.
This COLll1Sl'lS
ac;ains t too rapid, forced expans ion of the economy.
Jus t CIS
policy \vasarlier set to ~uide the economy betVl'l'll thl'
risks of uncontrolled inflation or deep recession, the task
no\v is t o " t policy so as to avoid stagnation \\lhil('
continuing ro make progress toward a reasonable de:~rel' or
price ",::at;'itv.
1

'~'len:

~olid

ground for optimism that a suitable pace
of expansio,' can be established.
It should be easier for
fiscal and "onetary policy to promote a '.;radual and
balanced expansion than it was to cool dOlm an overheated
econom~\: ~,;j_t~!out causing recession.
In the process of
promotiil~ cpansion it \\'ill be important that fiscal and
monetarv p~- icies are combined in appropriate proportions.
-,S

:~: l L
t I ;'ldVC seen over the pas t few years leads me
1) t ~ 1
cJ t
t ~ 1 L r l i ~ ani rll) u i 1 t ten den c v for f i sea 1
-,01 ic.- .
:::o:-:le +'::00 ilJO.')C.
T~-;is tendency has been resisted
vigor,l,;,..,l
y t'li:J Adrr,inistration and the Congre:;s has
imposec..: c;<~cncit ire ceilings.
In the fiscal year just
cC):-;;pl('~C'"
}'?~~rcl cx;::>enditures I.:ere held about SL billior:
t)t'lo',\' i::
-- orl;C1t'\ e:::ti"att.'.
Even so, t!le actual incr(:Cl5e
("lvc.'r
,~~'\ -=:eJi112 ',-i~cal ','(,3~- a'':'tOuntcd to about ';12 billion.
t 0

L

'

"1

r'~ C' r c~L:3 Cl .:: ( '\ ::: l~ i n ' -L c
the pro s p e c t i v e b e h a v i 0 r 0 f
federal c)-JH.:'nditure3 over the next year or so outv}eighs
in i:'1 ~ l) r ~ cl ~~ c e t ~lC :J ;; r tic '--: 1 a r s i z t 0 f the F C' d era 1 de f i cit
that r,a\ e:",er2;c.
I think ',e all recognize that
t r a [~ s i ~ i. ~") n ~" b '- cl set de f i cit s a r (' '--l n a v 0 ida b lev) h i 1 c: rev e 11 u e s
~ re \':l' ak (~:~.i t:le ec ono:-:':." i 5 ~ro"Jing s 1 0\',' 1 y.
The y need
lnvolv0. r c !reat ~inancin~ problems in such a setting.
But t'J:;::'~ --..::" )\\'t h In Foder31 expe:1ditures (/lould amount to ar
entir0~
~i:~c~lnt St~t2 of ~ffairs altogether.

;) !

3

- 5 Rapid expenditure growth and large deficits would
inevitably constrain the monetary authorities in their
freedom to expand money and credit and rebuild liquidity
While we might be fortunate enough not to return all the way
to large budget deficits and very tight money, the risk
would surely be there. It would be much better, in my
opinion, to make every effort to hold down the rate of
growth in Federal expenditures while proceeding with an
appropriate rate of monetary expansion. Otherwise we run
the risk of being locked into a high structure of interest
rates and an unbalanced flow of credit.
A Federal deficit of growing size -- arl~1ng primarily
because of a rapid rise in Federal expenditures -- could
place great strain on credit markets. The point here is
not the size of the deficit in terms of total national
output, but the size of the deficit in terms of the flow of
funds through the credit markets and their absorptive
capacit~ Forcing too large a financing task on the market
means upward pressure on interest rates and diversion of
funds away from potential private borrowers.
The President has referred on several recent occasions
to a budget rule appropriate to our present circumstances.
Total Federal outlays would be held within the revenues
generated by a high employment economy. Successful
application uf such a rule would keep fiscal policy in a
stabilizing posture and provide for some budget surplus
at high employment. In terms of credit market impact,
it would help to insure that Federal financing requirements
remain well within the capacity of the markets and thus
consistent with a continuation of the long-awaited trend
toward lower interest rates that is now underway.
At the recent meeting of the International Monetary
Fund and the World Bank, there was considerable discussion
as there has been in other international forums -- of the
need to control what threatens to become a worldwide
tendency toward inflation
Hardly any country is
satisfied with its recent price record. Certainly we are
not. And, we recognize the special responsibility that
we have in view of our size and the importance of the
dollar to the international financial system.
v

- 6 But I think in this country we can now look forward to
much better price performance and a gradually increasing
rate of economic growth. It will be necessary to insure that
total demand does not rise too rapidly. Certainly, there
will continue to be a need for restraint over Federal
expenditures. At least, from my vantage point at the
Treasury, the task of domestic economic policy now will be t~e
more welcome one of guiding an expansion rather than
enforcing a contraction.

000

STATEMENT OF THE HONORABLE EDWIN S. COHEN
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE COMMITTEE ON FOREIGN RELATIONS OF THE
UNITED STATES SENATE
ON
A PROPOSED ESTATE TAX CONVENTION WITH THE NETHERLANDS
AND ON PROPOSED INCOME TAX CONVENTIONS WITH
TRINIDAD AND TOBAGO, FINLAND, AND BELGIUM
Tuesday, October 6, 1970, 10:30 (EDT)

Mr. Chairman and Members of the Committee:
This is my first appearance before this Committee
since taking office and I welcome the opportunity to
discuss with you an estate tax treaty which has been
signed with the Government of the Netherlands and three
income tax treaties which have been signed with the
Governments of Trinidad and Tobago, Finland and Belgium.
I believe that income and estate tax treaties are a
very important aspect of our tax program.

Tax treaties

are important in preventing unjustified double taxation of
income or estates and thus removing fiscal barriers to
international trade and investment.

They are also

important in providing for an equitable division between
countries of revenues from international transactions

K-498

- 2 and for the prevention of tax evasion and avoidance.

We

are devoting increasing attention to these problems and
are seeking solutions through treaties, legislation and
administrative action.
The three income tax conventions pending before
this Committee bring up to date and would replace existing
income tax conventions with Belgium, Finland and Trinidad
and Tobago.

The fourth pending convention is an estate

tax treaty with the Netherlands which is new both in the
sense that we do not now have an estate tax treaty with
the Netherlands and in the sense that it represents a new
approach to dealing with international estate tax problems.

ESTATE TAX TREATY WITH THE NETHERLANDS
The purposes of the proposed estate tax convention
with the Netherlands are the same as those of the twelve
other estate tax conventions now in force between the
1/
United States and other countries;- namely, to minimize
the burdens of double taxation at death, to assure an
equitable division of revenue between the two Contracting
States and to prevent fiscal evasion with respect to taxes
on estates and inheritances.
1/ Australia, Canada, Finland, France, Greece, Ireland, Italy,
Japan, Norway, the Republic of South Africa, Switzerland,
and the United Kingdom.

Jr~
- 3 -

In accomplishing these purposes, the convention
departs from the pattern of our existing estate tax
conventions in order -(a) to take into account problems which employees
of international businesses assigned to foreign
countries have encountered under previous
conventions;
(b) to follow the direction indicated by the U. S.
Foreign Investors Tax Act of 1966 (FITA) in
assisting out balance of payments by minimizing
deterrents to foreign portfolio investment in the
united states; and
(c) to conform to the extent practicable with the
provisions of the Draft Double Taxation Convention on Estates and Inheritances published in
1966 by the Organization for Economic Cooperation
and Development (OECD).
As background, it would be useful if I briefly outlined
the United States and Dutch tax systems to indicate the
problems which the treaty attempts to solve.
The United States imposes an estate tax which is
applied to the estates of decedents who are citizens or
residents of the United States and to the estates of other

- 4 -

decedents who left property located in the united States.
In the case of citizens and residents of the United States,
the gross estate which is subject to the estate tax includes
worldwide assets.

In our Internal Revenue Code double

taxation is avoided (assuming the estate of the decedent
is not subject to taxation by another country on a worldwide
basis) by our allowing a credit for foreign estate or
inheritance taxes against that part of the U. S. estate
tax which is attributable to property located in a
foreign country.
In the case of decedents who were neither U. S.
citizens nor residents, only the property with a U. S.
situs is included in the gross estate and there is a
$30,000 specific exemption which makes our estate tax
applicable only to U. S. property in excess of that
amount.
An alien in the United States acquires residence for
purposes of the estate tax if he is physically present in
the United States and has an intention to remain indefinitely.
This is really a "domicile" test, but the term "resident"
is used in our Internal Revenue Code.
lS

The term "domicile"

used in the proposed convention and hereafter in this

statement.

- 5 The Netherlands imposes a Succession Duty on all
property
wh~r,e
.~

~u

"Cne estates of domiciliaries, regardless of

the property is located.

The Netherlands also levies

transfer tax at death which is, in general, applicable

to transfers by non-residents of real property and unincorporated business assets located in the Netherlands.
It should be noted that it is easier for an alien in

theNe~herlands to acquire domicile!!for purposes of its
Succession Duty than for an alien in the United States to
a.cquire domicile for purposes of the estate tax.

While the

United States requires both physical presence and an intention to remain here indefinitely, Dutch domicile is equated
oIlly with the location of one's principal abode.

A rented

house or apartment in which an individual lived in the
Netherlands with his wife and children would generally be
con~idered

to be his principal abode.

The Netherlands law only partially eliminates double
taxation in cases where a resident of the Netherlands had
property in foreign countries subject to estate or in~eritance

.!7

tax there, since with respect to some types of

This is a translation of the Dutch word "woomplats"
which apparently can be translated either as "domicile"
or "residence".

- 6 property, including investments in marketable securities,
the Netherlands normally allows the foreign tax only as a
deduction in computing the net amount subject to Dutch tax
rather than allowing a credit for the foreign tax against
the amount of Dutch tax. 1/
Thus, under Dutch law, a U. S. citizen who dies in
the Netherlands and who rented or purchased a house or
apartment is likely to be treated as a domiciliary for
Dutch estate tax purposes.

All of his assets would therefore

be subject to the Dutch Succession Duty.

Since he is a

U. S. citizen all of his assets would also be subject to
the Federal estate tax.

The U. S. would give a credit

(subject to the statutory limitations) for the Dutch taxes
on assets our law considers to be located in the Netherlands,
but this may be of limited benefit because under our law
most of his assets may be regarded as being located in the

liThe difference between a deduction and credit can be
- illustrated by assuming that States A and B both impose
a 50 percent tax on the same assets with a value of
$100,000. If State B allows a credit for the tax of
State A the net effect is that the tax of $50,000 is
paid to State A; no tax is paid to State B. On the
other hand, if State B allows a deduction for the tax,
State B imposes a tax of $25,000 by applying its 50
percent rate to the assets net of the tax imposed by
State A. The result is a total tax liability of 75
percent rather than of 50 percent as individually
imposed by both States A and B.

- 7 U. S

or thlrd countrles.

Moreover, the Netherlands

would, for most types of property, only permit a deduction
for the U. S. tax.

If, for example, such a decedent left

an'estate of'$250,OOO, consisting primarily of stocks and
oob.g-ations issu ~tj by U. S. corporations, and bequeathed

all of lt to hlS wi£e, the U. S. tax would be $10,900 and
the Dutch tax would be -$23,930.

The combined tax liability

or$-:3'4-jS30 exceeds the tax either country would impose
by ±tself .-

ana

$2~,6~2

$10,90~

in the

c~se

of the United States

ln the case of the Netherlands.

sirn~lar

sltuation arises where a Dutch citizen and

leSl:'a-ent i'riVests in U. S. securi ties the value of which
e'X'ceeC1S

30,000 at his death.

Again, the

U.

S. tax

would only be partially offset by the deduction allowed
urrder-Dutc!1: law ~

Our ulder treaties contained comprehensive situs rules
and

typtcally eliminated double taxation by giving the

pr1mary rlght to tax
councryor SltUS

4

glven type of property to the

The country of citizenship or domicile

had tneresidual right to tax and then,if a tax was levied,
a' credit was given for the situs country's tax on property
situated within its borders.

In certain cases, as where

- 8 property is situated in a third country, each treaty
country gives a partial credit for the tax imposed by
the other.
While existing treaties have more or less eliminated
double taxation, they have not eliminated the compliance
problems of a decedent's survivors, since the basic estate
tax laws of both countries have continued to apply.

As

a consequence of the differing domicile laws a decedent
may be considered to have been domiciled in both signatory
countries and the problems associated with filing estate
tax returns in two countries, such as complying with the
valuation procedures of both countries, continue unabated.
This has been a source of difficulty and concern to the
families of businessmen who die abroad.
The proposed Dutch treaty deals with these problems
of double taxation and compliance in the following ways:
1.

Elimination of dual domicile

year rule.

Seven-out-of-ten-

The treaty eliminates all cases of dual domicile

by providing a series of tests under which the decedent is
treated as being domiciled in only one of the treaty
countries.

The most important of these tests, which unlike

- 9 the others is not based on the OEeD model, is the sevenout-of-ten year domiciliary rule.

This rule is one of

the principal innovations of this convention.

Under this

rule a decedent who is considered by each country as
having been domiciled therein at death will generally be
deemed to have been domiciled only in the country of which
he was a citizen if he had been resident in the otner
country for less than seven years in the ten-year period
ending at his death and did not have the intent to remain
there indefinitely.
This provision is largely designed to deal with the
problem of estates of employees of multinational corp6tations who are sent abroad for a limited tour of duty.
Under the proposed convention, an employee of a U. S.
corporation or its Dutch subsidiary stationed in the
Netherlands for less than seven years, without indicating
an intent to remain in the Netherlands indefinitely,
would not be treated as a domiciliary of the Netherlands
for purposes of its inheritance tax.

Dutch tax would not

apply except to real estate or unincorporated business
property located in the Netherlands.

Thus, there would

- 10 -

be no Dutch tax unless the value of such Dutch property
exceeded the exemption provided elsewhere in the treaty.
On a reciprocal basis, the same rules would be applicable
to a Dutch citizen temporarily in the United States.
The seven-year domiciliary rule applies to persons in the
other country for professional, educational, training,
tourism, or a similar purpose (or in his caparity as the
spouse or a dependent member of the family of a person
who is in the other country for such a purpose) .
2.
basis.

Credit where both countries tax on a worldwide
The provisions determining a sinale domicile will

generally result in only one State taxing on a worldwide
basis.

However, both will still tax on a worldwide basis

when a U. S. citizen either (a) stays in the Netherlands
for more than seven years or (b) goes there with the
intention to remain indefinitely.

In the first case the

treaty provides that the U. S. will give a credit for
the Dutch tax regardless of the situs of the property of
the estate, except that in the case of real estate or
unincorporated business property in the U. S., the
Netherlands would give a credit.

In the second case a

- 11 -

cre01t formula limits the total tax to the greater of
the two taxes and provides for a division thereof between
the two countr1es.
3.

Limiting taxation of residents of the other

country to local real
assets.

estat~

and unincorporated business

To deal with the case of the Dutch resident who

invests in U. S. securities, the U. S. agrees to forego
its

~ax

on the securities even if the value of the U. S.

nssets exceeds the $30,000 U. S. exemption.

To accomplish

this the treaty provides that each State will only tax the
local real

estate and unincorporated business property in

the estate of domiciliaries of the other State.

The U. S.

however still reserves the right.to tax its citizens on
a worldw1de baS1S even if they are Dutch domiciliaries.
In this connection, it should be noted that this treaty
provision will involve little revenue loss.

The treaty

seeks to assure that a Dutch tax will be paid on U. S.
securities by retaining the requirements for filing a
return in the U. S. This will enable the U. S. to obtain
the information on U. S. securities held by Dutch decedents
so that such information might be forwarded to the Dutch.

- 12 4.

Matching allowances granted by the Netherlands.

Because the special U. S. tax rate schedule applicable
to nonresident aliens that was enacted as part of the
FITA is essentially equivalent to our giving Dutch
estates the marital deduction, the Dutch have agreed to
reciprocate.

In Article 10 of the convention, they have

agreed to give a 50 percent marital deduction with respect
to real property and unincorporated business property
going to the spouse of a decedent.

This exemption provided

under the convention by the Netherlands will apply only
as long as the favorable treatment provided for nonresident
aliens under FITA continues to apply.
The Dutch have also agreed to give,
a "disappearing" $30,000 exemption to the estates of
decedents who were U. S. domiciliaries or citizens not
domiciled in the

Netherlands at death.

This corresponds

to the $30,000 exemption the United States granted to
nonresident alien estates under FITA.

The convention

exemption will completely relieve from tax an estate
of $30,000 or less of a decedent who was not a domiciliary
of the Netherlands.

It applies to a lesser extent to

- 13 estates of up to $34,090 and not at all to larger estates,
and thus may be said to "disappear" with respect to larger
estates.

*

*

*

As in the case of our income tax conventions, the
proposed Dutch estate tax convention includes an article
on the exchange of information.' This provision is primarily
designed to assist in the prevention'of tax evasion.
The convention would applyto'estates of persons
dying on or after the date on'which instruments of
ratification are ~xchangedand'wilicontinue in force
unless terminated, subsequent to five years after
ratification, by the Uni ted States or the Ne'therlands.
I should like t6 note the pioneering nature of
"this c6nvention.

It

is'ou~

along the lines of the

OEeD

first estate tax conVention
model.

It ties

to~ether

two countries with differing Views regarding the primary
basis for tax jurisdiction, the United States emphasizing
citizenship and domicile and the Netherlands emphasizing
residence.

It deals with a serious problem of double

taxatiori which has been of great concern, especially to
those Americans temporarily living in the Netherlands.
We feel that this approach will not only avoid double
taxation but make it easier for taxpayers to fulfill their
obligations.

-

14 -

This convention will serve as a prototype for our
future estate tax negotiations.
We have submitted a technical explanation which
discusses the proposed convention article by article.

REVISED INCOME TAX CONVENTIONS WITH
TRINIDAD AND TOBAGO, FINLAND AND BELGIUM
I now turn to the proposed income tax conventions
with Trinidad and Tobago, Finland, and Belgium.

I would

like to emphasize that all three conventions closely
follow our recent treaty with France which was approved
by the Senate in 1968.

These conventions are also along

the lines of the OECD income tax model and recent treaties
entered into by other countries.
Each of these conventions is a revision of an
existing convention.

For the most part the changes made

are the result of the rethinking of tax treaty concepts
and language which has taken place during the years since
the original conventions were signed.

A major influence

on this rethinking process has been the work of the Fiscal
Committee of the OECD which published its Draft Double
Taxation Convention on Income and Capital in 1963 and

- 15 which has held continuing discussions since then on the
various provisions.

Also an important influence is the

oolicv development reflected in the Foreign Investors
Tax Act of 1966.
An important example of the modernization of treaty
concepts that these conventions embody is the elimination
of what has come to be called the "force of attraction" rule
which is incorporated in the existing treaties with Finland
and Belgium.

Under that rule, if a resident of one State

enqaqes in trade or business through a fixed place of
business (permanent establishment) in the other State,
all of his income from the other States is taxed as profit
of the permanent establishment.

The limitations on the

rate of tax which can be imposed on dividends, interest
and royalties or the exemption for interest or royalties
and the exemption for capital gains would be applicable.
Recent treaties, including the three under consideration, provide instead that only income which is "effectively
connected" with a permanent establishment will be taxed as
business profits without regard to the limitations which
the treaty provides for the tax which may be imposed on certain
types of income; therefore, dividends, interest and royalty
income not attributable to a permanent establishment will be
accorded any reduced rate provided for in the treaty and
the exemption for capital gains not so attributable could apply.

- 16 The basic functions of an income tax treaty are to
avoid double taxation, to provide for a fair division of
tax revenues between the two States, and to prevent fiscal
evasion.

To accomplish these purposes, a number of basic

rules are set forth in the proposed treaties with Trinidad
and Tobago, Finland and Belgium.

The rules, which are

described in greater detail in the technical explanations
that have been submitted for the record, are as follows:
1.

Taxation of business profits.

In order to give

business flexibility to undertake foreign operations in a
preliminary or limited fashion without being subject to
foreign income taxes, the treaties provides that a resident
of one State (including a corporation) is not subject to
tax in the other State on industrial or commercial profits
unless it has a permanent establishment in that other St.te.
The definition of industrial and commercial profits in the
proposed conventions with Finland and Belgium and in our
existing convention with France includes motion picture
rents and royalties and results in the taxation of motion
picture royalties by the State of source only if the income
is attributable to a permanent establishment in that State.
In general a permanent establishment is a fixed place
of business, but following the OEeD model, certain types of

17 -

fixed places of business (such as .purchasing offices) do
not constitute permanent estab1isnments ana

certa~n

activi-

ties carried on without a fixed place of business (such as
a local dependent agent who concludes contracts) do
constitute a permanent estab1is,hment.
2.

Air and sea carriers.

The treaties provide

reciprocal exemption for international
3.

ai~

and sea carriers.

Double taxation arising from inconsistent treatment.

The treaties provide a mechanism for avoiding double taxation
resulting from different allocations of income and deductions
between head office and branch or between related companies
in the two countries.

This is to be accomplished by con-

sultation between the ."competent authorities" of the two
States for the purpose of seekina to aaree on an allocation.

If an aqreernent is reached, the treaties provide

that taxes will be imposed or adiusted to reflect the
al19cat~ons

asreea upon.

~n

addition to problems of

allocation, the treaties provide for mutual aqreement to
resolve differences in source rules and to deal with
difficulties or doubts arising in the application of the
provisions of the convention.
4.

Credit or exemption ,to avoid double taxation.

While the United States and some other countries have
provisions in their domestic law to avoid double taxation

-l' on income from foreign source. which is subject to foreign
tax, it is trAditional to agree in income tAX conventions
to allow a tax credit or exempt such income.

Thus, in

each of these convention. the U. S. agree. to grant a
foreign tax credit for the tax paid to the other country.
This obligation is met by the provisions of our domestic
law.

Trinidad and Tobago similarly agrees to grant a

credit.

Finland agrees to a credit in certain cases and

an exemption in other ca.es.

Belgium agrees to a partial

or full exemption in certain cases and a credit in other
cases.

In the case of both Finland and Belgium, exempt

income can be taken into account for purposes of determining
the applicable rate of tax.
5.

Taxation of dividends, interest and royalties

and exemption of capital gains.

The treaties contain

provisions establishing the maximum rates of tax on direct
investment and portfolio dividends, interest and royalties
which may be imposed by the State of source.

These provi-

sions are for the purpose of both avoiding double taxation
and dividing the revenue between the payor's and recipient's
country.

The treaties (other than the one with Trinidad

and

Tobago) provide exemption for capital gains for a resident
of the other country.

The conditions for the exemption

- l~

-

differ somewhat in the Finnish and Belgian treaties, but
will generally be met by the ordinary investor.

In the

case of Trinidad and Tobago, both it and the United States
nave domestic rules which provide a large measure of
exemption for foreigners deriving capital gains and it
was thought unnecessary to have a treaty provision.
6.

Exemption for individuals.

In order to give

flexibility to employees and independent persons (such
as doctors and lawyers) of the type given to businesses,
the treaty similarly provides in general that activities
of a temporary or limited nature by a resident of one
State in the other State will not result in the resident
being subject to income tax in that other State.
OECD model artists and

entertaine~s

In the

do not qualify for

these benefits; they are taxable wherever they perform
services.

Finland agreed not to treat such persons

differently, but the Belgium and Trinidad treaties compromise
by providing special dollar limits (and in the Belgian case
a shorter time period) for such persons if they are not to
become sUbJect to tax in the State visited.
7.

Retirement and alimony.

The treaties deal with the

taxation of retirement incone and include provisions for the
taxation of pensions, annuities and, except in Trinidad, social
security.payments.

Each also contains a provision on alimony.

-

8.

20 -

Students and teachers.

In order to encourage

cultural exchanges of students, trainees and teachers,
temporary exemption from host State taxes are provided.
9.

Nondiscrimination.

The treaties contain a

nondiscrimination provision.
10.

Measures against evasion.

for exchanges of information.

The treaties provides

While the provisions are

standard, the U. S. has in recent months given increased
attention to the most effective use of these provisions to
prevent tax evasion and avoidance.
Before turning to separate discussion of each of
these treaties, I should note that the proposed conventions
with Trinidad and Tobago and Belgium specifically include
continental shelf areas as part of the respective countries.
While a similar provision was proposed to Finland, and
while the concept was agreeable to Finland as well as to
the United States, we could not agree on a provision in the
absence of certain Finnish policy decisions.
I will now review briefly the special features of
each of the proposed income tax conventions.

- 21 Treaty with Trinidad and Tobago
The,proposed treaty with Trinidad and Tobago would
replace an abbreviated, interim treaty, which was signed
in 1966 and expired on December 31, 1969.
The interim treaty was limited in scope and covered
only the withholding tax on dividends and the allowance
of a

fo~eign

tax credit.

The proposed treaty is compre-

hensive, covering the full range of commercial and
financial transactions between the United States and
Trinidad and Tobago.
1.

Tax Deferral for Technical Assistance
To facilitate the flow of technical ass,istance and

know-how to Trinidad and ToJ::>ago, we have included, as
Article 7 of the proposed treaty, a provision for the
deferral of the tax in both countries where stock is
received in exchange for patents, technical assistance,
know-how

~nd

ancillary services.

When the stock

;~

disposed of, tax is imposed.
While a similar result can be achieved under section
367 and other provisions of

~he

U. S. Internal Revenue

Code, the treaty provisions is somewhat broader and applies
to taxes of both countries.

Absent this provision,. the

taxes which would be imposed would often act as a barrier

- 22 -

to such technical assistance since the transaction does not
qive rise to the liquid assets necessary to pay the tax.
We consider this type of provision appropriate to
treaties with developing countries.
2.

Taxation of Investment Income
Under the interim treaty, the withholding tax rate

on dividends was limited, on a reciprocal basis, to
25 percent, except that in the case of direct investment
dividends where the recipient corporation owned 10 percent
or more of the voting stock of the paying corporation,
the rate was limited to 5 percent.
Under the proposed treaty Trinidad will reduce its
rates of withholding tax on dividends from the statutory
level of 30 percent to 25 percent, except that direct
investment dividends will be taxed at 10 percent.

There

is to be no reduction in the U. S. statutory withholding
rate of 30 percent.
The proposed convention provides for the reciprocal
exemption of interest paid to the government of a
Contracting State or its wholly owned instrumentalities.
Interest derived from sources in Trinidad and Tobago
by a resident of the United States which is a bank or

- 23 other financial institution not having a permanent
establishment in Trinidad and Tobago will be subject
to Trinidad withholding at a reduced rate of 15 percent.
United States tax in the reciprocal case will be levied
at the full 30 percent rate.
~ithholding

rates on royalties, under the proposed

treaty, are to be reduced from the statutory level of
30 percent in both countries to 15 percent.

While artistic royalties are generally exempt under
this provision, at the insistence of Trinidad and Tobago
royalties are defined to exclude motion picture royalties.
Neither are such royalties included in the definition of
industrial and commercial profits as in the case of
Finland and Belgium.

As a result, payments from motion

pictures will continue to be taxed under the respective
laws of the two countries.

In the case of Trinidad, tax

will presumably continue to be imposed on t~e basis of a

- 24 1956 agreement with the motion picture distributors, under
which the distributors are taxed on the portion of their
worldwide net income allocable to Trinidad and Tobago.
3.

Effective Date
In Article 28, Trinidad and Tobago has agreed to

put into effect the reduced rate of tax on dividends as
of the date of signing of the convention (January 9,
1970).

This unilateral reduction of the withholding rate

will terminate on December 31, 1970, unless instruments
of ratification are exchanged by that date.

Therefore,

Senate action in time to permit an exchange of instruments
of ratification this year is most important.

If this is

done there will be no hiatus in treaty coverage as it
will have effect for taxable years beginning on or
after January 1, 1970.
4.

Investment Incentive
The Government of Trinidad and Tobago was most eager,

throughout the neqotiations, to have included in the
proposed treaty a provision that would preserve for U. S.
investment in Trinidad and Tobago the effect of a tax
incentive program provided under their law.

In a view

shared by most developing countries, they feel that such
tax incentive can be an important factor in the economic

- 25 -

development of the developing country, and that

its

preservation in a tax treaty is an appropriate quid pro
quo for the revenue loss which a standard type treaty
imposes on the developing country.

In order to expedite

ratification of the new treaty, Tr1n1dad and TObago
nevertheless agreed to a treaty without such an incentive.
It was agreed, however, through an exchange of notes
which I have submitted to the Committee for publication
in the record of these hearings, that further
discussions would be held between the two governments in
an effort to agree on some form of supplementary
protocol that would provide a tax impetus to
direct investment in Trinidad and Tobago.

u.

S.

Such a

protocol would, of course, be submitted to the Senate
for its advice and consent.

Treaty with Finland
The conventi6n with Finl~nd was s1gnedonM~rch 6,
1970, and repl.aces our earlier treaty signed.Lll 1"95'L

1.

Taxes Covered
The existing treaty limits the coverage of Finnish

taxes to 'the national incoine'1:.ax.

The proposedtreaVI

-

26 -

expands this coverage to include the communal tax,
the sailors tax and the capital tax.
As the United States does not have a separate net
wealth tax, the new article reciprocally exempting nonbusiness property, other than real property, of a
resident of one State from the capital tax of the other
State, represents a unilateral concession by
2.

~inland.

Investment Income
The proposed convention eases the requirements

necessary to obtain the reduced treaty rates on direct
investment dividends.

The existing treaty provides

for a maximum rate of 5 percent of intercorporate
dividends if the parent corporation owns at least
95 percent of the stock of the paying corporation.
The proposed convention maintains the 5 percent rate
and lowers the stock ownership requirements from 95 percent
to 10 percent.
The proposed convention limits the rate of tax on
other dividends to 15 percent which is the Finnish statutory
withholding rate.
The exemption of interest in the country of source
is carried over to the new treaty from the present treaty.

27 -

The proposed convention carries over the provision
in the existing treaty exempting royalties in the State
of source.

However, it also extends the exemption by

broadening the definition of royalties significantly
beyond the copyright royalties covered by the existing
convention to include such royalties as patent, secretprocess and trademark royalties.
3.

Income of Finnish Trainees
There is a new provision in Article 23, not included

in any previous U. S. convention, which provides that an
individual who is a resident of one contracting State and
is present as a teacher, student, or trainee in the other
State' and qualifies for exemption under the teacher or student
and trainee article of the treaty shall be allowed by his
State of residence to 'deduct foreign travel and living
expenses.

Such expenses are deemed to be at least 30 percent

of the income exempted in the State visited.
~lthough

the provision is written reciprocally it

has art impact only on Finnish tax.

There are joint

u.

S. -

Fihnish programs, privately administered, to encourage young
tlnnlsh

tr~inees

to come to the United States for periods of

six months to a year to work in

u.

S. industry.

Under Finnish

law the income they earn here continues to be subject to the
steeply progressive Finnish income tax but no deduction is
given for their travel and living expenses.

Their expenses

-

28 -

are higher as participants in these programs than
they would be if they remained in Finland, but their
Finnish tax is not reduced to reflect this.

This

result has discouraged Finns from participating in
these programs and is corrected by the treaty provisions.

Treaty with Belgium
The convention with Belgium was originally signed
in 1948.

It has been subsequently amended, most

recently in 1965 in connection with major amendments
in Belgium law in a Protocol which expires as of
December 31 of this year.

The Protocol was deliberately

limited in duration to assure that the convention would
receive a prompt and thorough review which both sides
recognized to be desirable.
1.

Brancb Profits:

Statutory Discrimination Eliminated

Belgian tax law treats branches of foreign corporations
less favorably

tha~

Belgian corporations.

Foreign branches

are taxed at the highest statutory rate which applies to
undistributed profits of domestic corporations, presently
40.6 percent.

Recognizing that this treatment is inconsistent

- 29 with the treaty principle of nondiscrimination, Belgium has
since 1968 been applying its lower rate (37.7 percent) for
distributed profits to the profits of Belgian branches of
U. S. corporations which can be assumed to have been distributed.

In the new treaty this practice is confirmed.

Thus,

if a U. S. corporation with a Belgian branch distributes
one-half of its total profits, the Belgian branch will be
assumed to have also distributed one-half of its profits
on which it will pay the lower ra·te.
2.

Taxation of Investment Income
The statutory Belgian withholding rate on dividends

paid to nonresidents is 20 percent.

The new United States-

Belgian treaty retains the exis ting treaty maximum of 15
percent by either State on dividends paid to residents of
the other State.

Because the Belgian corporate tax is

relatively low (37.7 percent on distributed profits) Belgium
is not willing to give up additional

revenu~

by reducing its

withholding rate on direct investment dividends below 15
percent.

No B~lgian treaty atithorizesa lower rate for

direct investment dividends.
The new convention maintains for the general case the
15 percent limit on interest paid to a resident of the other
State found in the existing convention, but introduces

- 311

exemption in selected cases.

-

Under the new treaty, generally,

there will be no tax at source on interest:

(a) paid to

governments and their instrumentalities,

arising from

commercial credit,

(b)

(c) paid between banks and (d) paid on

bank deposits.
With respect to royalties, it was agreed to retain
exemption at source as provided for in the eYisting
convention.
3.

Effective Date
The convention will enter into force one month after

the exchange of instruments of ratification and will have
effect with respect to income of calendar or taxable years
beginning on or after January 1, 1971.

In conclusion, Mr. Chairman, I would strongly urge,
on behalf of the Administration, that the Senate, as
promptly as possible, give its advice and consent to the
ratification of these four conventions.

October 6, 1970

'l'.€'chnical Explanation of
Pro~osed

U.S.-Netherlands

Estate Tax Convention

Introduction
The proposed Estate Tax Convention and Protocol with
the Netherlands is the first estate tax convention to
be sent to the Senate since the Convention between the
United States and Canada, which was ratified on January 31,
1962.

That Convention replaced an earlier estate tax

convention between the two countries.
~ost

Prior to that the

recent estate tax convention forwarded to the Senate

was with Italy.

It was ratified on July 29, 1955.

The proposed Convention is substantially different
. t'1ng t ax convent10ns.
1/prlnclpa
.
. 11y
f rom t h e t we 1 ve eX1S

because-of two significant developments since the
negotiation of our last estate tax convention.

The new

convention is the first to reflect changes and the
policies underlying those changes in United States

1/ The United States has estate tax conventions in force
;ith Australia, Canada, Finland, France, Greece, Ireland,
Italy, Japan, Norway, Switzerland, the Republic of South
Africa, and the united Kingdom.

-

2 -

estate taxation of nonresident aliens contained in the
Foreign Investors Tax Act of 1966.

The proposed

convention is also based, in part, on the provisions of
the OECD Model Estate Tax Convention (entitled Draft
Double Taxation Convention on Estates and Inheritances),
published in 1966 by the Organization for Economic
Co-operation and Development, to the extent consistent
with the laws and policies of the United States and
the Netherlands.

The United States played a substantial

part in the drafting of the model convention.

As the

united States nears the completion of its income tax
convention network in Western Europe

(based on the OECD

Model Income Tax Convention), we are seeking a complementary
estate tax convention system.

The proposed convention

reflects a coordination and rationalization of the Netherlands succession and transfer duties

(typical of Western

European legal systems) with the United Sta~e~ estate
tax.
However, most of the provisions in the proposed
convention are found in the existing conventions and only
a few provisions are new, such as Article 4, which
provides rules designed to ameliorate tax problems of persons
temporarily present in a foreign country, and Article 10 (l),
which provides for a marital exemption.

-

3 -

The provisions of the proposed Convention are
discussed article by article below, after brief summaries
of the

Fed~ral

estate tax, the Dutch

su~cession

and

transfer duties, and the general approaches of existing
United States estate tax conventions and the OECD Model
Convention.
Federal Estate Tax
The Federal estate tax is imposed with respect to
the worldwide estates of decedents who were citizens or
residents of the United States at death and on the estates
of nonresidents who were not citizens (referred to
hereafter as nonresident aliens) with respect to their
property deemed situated in the United States.

For

Federal estate tax purposes, a resident of the united States
is a domiciliary therein, i.e., a person residing in the
United States who has the intention to remain in the
United States indefinitely or a person who has lived in
the United States with such an intention and who subsequently
left the United States without having the intention to
remain indefinitely in the country of his new residence.
In other words, while the term "resident"

is used in

the estate tax laws, it is generally defined in terms
of the common law rules with respect to domicile.

- 4 For situs rules of United States domestic law, see
sections 2104 and 2105 of the Internal Revenue Code of
1954 (the

~Code")

and the regulations thereunder; for

a discussion of the more important types of property
taxable on the basis of situs under these rules but
exempt under the Convention see the commentary on Article 8
in this technical explanation.
Estates of citizens or residents are allowed:
$60,000 exemption;

(a)

a

(b) a marital deduction for property

passing to the surviving spouse of the decedent of up to
50 percent of the adjusted gross estate; and (c) deductions
for debts, funeral and administration expenses, and
claims against, and losses of, the estate.

The taxable

estate is taxed at rates progressing from 3 to 77 percent.
Credits are allowable for foreign death taxes with respect
to property which is considered under United States
situs rules to be situated in the taxing foreign country
and which is included in the gross estate for Federal
estate tax purposes.
Since the enactment of the Foreign Investors Tax
Act of 1966, estates of nonresident aliens are allowed a
$30,000 exemption plus deductions for a proportion of the
debts,

funeral

and losses

and administration expenses,

claims,

(based on the proportion of the decedent's

- 5 worldwide estate which is located in the united States).
The united States estate is taxed at rates ranging from
5 percent to 25 percent.

The lower rates are designed to

compensate for the fact that no marital deduction is
allowable.

See Senate Report No. 1707, 89th Congress,

2d Session (1966), page 50.
Netherlands Succession and Transfer Taxes
The Netherlands imposes a succession duty with
respect to the worldwide estates of residents of the
Netherlands on each beneficiary of the estate.

For this

purpose, a decedent is considered a resident of the
Netherlands if he had a habitual abode in the Netherlands,
even though he had no intent to remain there indefinitely
and was therefore not a domici1iary of the NetherlaLds
under United States law.

This is one of the basic

differencesin the assertion of taxes at death between the
United States and the Netherlands.

The proposed convention

attempts to rationalize this difference on a more complete
and equitable fashion then is found in existing conventions.
Exemptions and rates under Netherlands law vary with
the degree of relationship between the decedent and
the beneficiary.

The surviving spouse is entitled to

an exemption equivalent to $69,450, while other beneficiaries

- 6 have exemptions equivalent to from $139 to $2,778.

The

rates are progressive and range from 3 percent to 17
percent in the case of the spouse and children of the
decedent and from 36 percent to 54 percent in the case
of unrelated beneficiaries.
for debts and funeral

Deductions are allowable

expenses.

Administration expenses

are not deductible but normally are smaller than in
the united states.

Foreign taxes are creditable against

tax or deductible as debts, depending on the jurisdictional
basis upon which they are imposed.
Citizens of the Netherlands who were not residents
of the Netherlands at death but were residents thereof
within 10 years of death are deemed residents of the
Netherlands for purposes of the death duty.

However,

all taxes of the country of actual residence are credited
rather than deducted in such cases.
A transfer duty at death is the only tax imposed
with respect to estates of nonresidents and is only
imposed on immovable (real) property, mortgages,
business assets

(including ships, boats, and aircraft),

and certain types of business investments other than
marketable securities, if deemed situated in the Netherlands.
No deductions

(other than for debts specifically related

to taxable property) or exemptions are allowed with respect
to the transfer duty, which is imposed at a rate of 6 percent.

- 7 Existing United States Conventions and
OECD Model Convention
Existing United States estate tax conventions
provide for the taxation of the worldwide estates of
decedents by the country of domicile or citizenship
(nationality).

Like United States domestic law, these

conventions are based on the situs principle of taxation.
That is, tax is imposed on estates of nonresident aliens
with respect to property located in the taxing country,
and a credit is granted by the country of which the
decedent was a citizen or domiciliary for estate or
inheritance taxes paid to the other country with respect
to the property.

In certain cases (for example, where

the property is deemed situated in or outside both countries),
existing conventions provide that the countries each gave
a partial credit.
Such conventions provide comprehensive situs rules
(more detailed than, and at times differing from, those
contained in the Code) and state that situs shall be
"determined exclusively in accordance with" these rules.
Accordingly, property considered under such a convention
to be situated in a country may be taxable by it, notwithstanding that the property would not be taxed or taxable

- 8 by that country under its domestic law in the absence
of the convention.

However, some conventions contain a

provision, corresponding to Article 5(3) of the Convention,
which limits the maximum amount of tax of a country under
the convention to the amount of tax which would be imposed
by the country· in the absence of the convention.
On the other hand, Articles 5, 6, and 7 of the OECD
Model Convention provide that certain specified categories
of property may be taxed by a country in which the property
is deemed located even though the decedent was nether a
domiciliary nor a citizen of that country.

Accordingly,

it appears that the OECD Model Convention would not extend
the taxing jurisdiction of the countries beyond that
provided in their domestic laws.
The OECD Model Convention places principal emphasis
on domicile of the decedent.

It provides that all property

shall be taxable by the country in which the decedent was
domiciled at death.

However, real (immovable) property

and business assets other than ships and aircraft may also
be taxed by the country in which they are situated.

Ships

and aircraft may also be taxed by the country where their
effective management is located.

In order to eliminate

double taxation of such property, the country of domicile

- 9 shall grant an exemption for such property or a credit
for the other country's taxes thereon.

Although the

taxing rules relating to real property, business assets,
and ships and aircraft are similar in effect to situs
rules the former are more limited.

Accordingly, taxing

jurisdiction of a country in which the decedent was not
domiciled is more limited under the OECD Model Convention
than

und~r

the Code or existing united States tax conventions.

In addition, the OECD Model Convention makes no provision
for the taxation of the worldwide estates of decedents
based upon citizenship or nationality.

It does offer

an alternative provision which might be used to authorize
such taxation, but such provision would be subsidiary to
taxation based on domicile and would require the country
of citizenship in effect to relinquish primary taxing
jurisdiction to the domiciliary country through an
exemption or credit.
In determining domicile, the OECD Model Convention
refers to the law of each of the countries.

If both

countries find domicile, the OECD Model Convention resorts
to a sequence of tests, the application of which is
intended to assure that there is one and only one domicile.
This series of tests involves the concepts of permanent

- 10 home, center of vital interests, habitual abode, and
citizenship, in that order.

If these tests do not solve

the question of domicile in any given case, the OECD Model
Convention provides that the countries shall settle the
question by mutual agreement.
These concepts are highly uncertain in their actual
application, involving factual determinations in each case
which may be extremely difficult to make and very controversial.
They follow the general European pattern of little more
than residence giving rise to domicile for both estate
and income tax purposes.

The OECD Model Convention

reflects the substantially different jurisdictional
concepts of most European countries and the United States.
The United States asserts primary taxing jurisdiction
based on citizenship or domicile.

European countries

assert primary jursidcition generally based on residence
without regard to nationality or citizenship or domicile.
The common law concept of "domici Ie II is generally unknown
under European laws.

See the commentary on Article 4.

Analysis of Proposed Convention:
Article 1.

ESTATES COVERED

The Convention shall apply to egtates of decedents
which are subject to the taxing jurisdiction of the

- 11 united States or the

Ne~herlands

by reason of the

decedent's domicile therein or citizenship thereof at
death.

Because of the domestic laws of the two states,

the Convention applies to the estate of a decedent who
was either a domiciliary or a citizen of the United States
or who was a domiciliary of the Netherlands.

Dutch law

does not provide for taxation based solely on citizenship.
However, the estate of a nonresident citizen of the
Netherlands is taxed on the basis of constructive residence
In the Netherlands if the decedent had been a nonresident
of the Netherlands less than 10 years at his death.

See

the discussion of the Dutch succession duty in the
introduction and under Article 9 (relating to taxation
on the basis of citizenship).
The Convention refers to citizenship (and domicile)
at death; decedents described in section 2107 of the
Internal Revenue Code of 1954 (relating to decedents who
are united States expatriates and who relinquish United
States citizenship for the principal purpose of avoiding
taxes) are not Unit.edStates citizens for this purpose.
See also Article 9.

However, the estate of a United States

expatriate decedent who died domiciled in the Netherlands
will be covered by the Convention on the basis of such
domicile.

- 12 The second sentence of the article is necessitated
by section 2209 of the Code.

That sentence provides,

in effect, that the Convention shall not apply to the
estate of a citizen of the United States described in
section 2209

(i.e., a resident of a possession of the

United States whose citizenship resulted solely from his
citizenship of, or his birth or residence in, the possession
and who is therefore not subject to federal estate tax
as a citizen under the provision of section 2209 of the
Code) unless his estate is subject to the taxing jurisdiction of the Netherlands by reason of his actual or
deemed domicile therein at death.
Article I of the Protocol to the Convention which was
executed at the signing of the Convention states that the
Convention shall not affect property rights under laws
relating to descent, distribution, succession, inheritance,
or other similar matters.
Article 2.

TAXES COVERED

This article designates the taxes of the United States
and the Netherlands which are the subject of the Convention.
With respect to the United States, the tax included is
the Federal estate tax.

With respect to the Netherlands,

- 13 the taxes included are the succession duty and the
transfer duty at death.

The Convention also applies to

subsequently enacted taxes on estates and inheritances
imposed on the occasion of death, in the form of a tax
on the corpus of the estate, a tax on inheritance, transfer
duties, or taxes on donations mortis causa.

It does not

apply to such taxes ad documentary stamp taxes with respect
to transfers at death or income taxes on the appreciation
of capital assets at death.

Nor does it apply to taxes

imposed by any of the States of the United States or
other local authorities.
This article provides further that the competent
authorities of the United States and the Netherlands shall
notify each other of any substantial changes in their
respective laws relating to taxes on estates and inheritances.
Article 3. GENERAL DEFINITIONS
This article defines the terms "State", "United States",
"Netherlands", "tax", "credit", and "competent authority".
The term "State", as used in the Convention, refers to
the United States of America (when used in the geographical
sense it refers to the several States of the United States
and the District of Columbia) and the part of the Kingdom

- 14 of the Netherlands that is situated in Europe.

The treaty

does not cover Surinam or the Netherlands Antilles which
are part of the Kindgom of the Netherlands.

No reference

is made to the continental shelf.
The article also provides that any term not otherwise
defined in the Convention shall, unless the context otherwise
requires, have the meaning which it has under the laws of
the State whose tax is being determined.

Article II of

the Protocol provides that if the meaning of a term under
the laws of one State is different from the meaning of the
term under the laws of the other State, or if the meaning
of such a term under the laws of one or both States is not
readily determinable, the competent authorities of the
States may, in order to prevent double taxation or to
further any other purpose of the Convention, establish a
common meaning of the termfur purposes of the Convention.
Article 4.

FISCAL DOMICILE

This article sets forth rules for determining fiscal
domicile for purposes of the Convention.

Fiscal domicile

is important since the domicile of the decedent is a
basis for imposing estate tax or succession duty on his
entire estate wherever situated.

- 15 Article IV of the Protocol states that, as used in
the Convention, the term "domicile" with respect to each
of the states means residence for purposes of its tax.
Under the definition of fiscal domicile contained
in this article each State looks first to its domestic
law (however, see the discussion below of Article V of
the Protocol, relating to the lO-year rule under Netherlands
law).

The definition then provides rules for determining

a single domicile in cases in which both of the states
regard the decedent as having been a domiciliary.
(Existing conventions do not provide for the elimination
of double domicile, but rather give relief from double
taxation in double domicile cases by means of a prorated
credit similar to that provided in Article 11(2) (c) of
this Convention).
The proposed Convention provides that a decedent who
at his death was a citizen of one Df the States without
being a citizen of the other State, and who would be
considered as domiciled in both States under their respective
laws, shall be deemed to have been domiciled only in the
State of which he was a citizen if (l) he died when having
been domiciled (for purposes of tax) in the other State
in the aggregate less than 7 years during the lO-year

- 16 period ending at his death, and (2) he was in the other
State for business, professional, educational, training,
tourism, or a similar purpose

(or as the spouse or a

dependent member of the family of a person who was in
that other State for such a purpose), and if he did not
have a clear intention to remain indefinitely in the
other State.

Unless all of the evidence considered together

is clear and convincing to the contrary it shall be
presumed that the decedent did not have a clear intention
to remain indefinitely in the State of which he was not
a citizen.

The use of a 7-out-of-IO year rule rather

than a simple period of time avoids issues arising from
a relatively short change in status.

(As a corollary to

this 7-out-of-IO year rule, the State of citizenship
yields priority of taxation (by means of a credit) to the

o~~

State after 7 years of domicile therein in a lO-year
period.

See Article 11(2) (a).

This rule conforms the

Convention to some extent to the OECD Model Convention
approach and recognizes that decedents who lived in a
foreign country for a substantial number of years preceding
death normally have significant ties with that country
justifying the imposition of primary taxing jurisdiction
by such country.

- 17 In the cases in which a single domicile is not
determined under the above rules,~/additional tests are
set forth to resolve the decedent's domicile.

These tests

are based on the tests for determining domicile contained
in the OECD Model Conventioh, with certain variations.
The first such test provides that the decedent shalJ bE::
deemed to have been domiciled in the State in which he
made his permanent home for 5 years or more immediately
preceding his death.

Article III of the Protocol provides

that for this purpose a decedent shall not be deemed
to have more than one permanent home.

If that test does

not determine the decedent's domicile, his domicile shall
be deemed to be in the State in which his personal
relations were closest.

If that cannot be determine.i

i

his domicile shall be deemed to be in the State of wh:;
was a citizen.

~;h

he

If the decedent was a citizen of both

States or neither of them, the competent authorities shall
determine the State of his domicile by mutual agreement,
Article VI of the Protocol provides that since it is

2/ For example, cases of double citizenship, citizenSflLl-'
In a third country, or a decedent in the State of which
he was not a citizen for more than 7 out of 10 years \</i 1:I"lO,:d:.
the clear intention to remain there indefinitely.

- 18 intended by Article 4 to resolve all cases of double
domicile, the competent authorities of the States shall
resolve any dispute with respect to the domicile of the
decedent for purposes of the Convention which is presented
to one or both of them within the period of time prescribed
under Article 12 for the filing of a claim for credit
or refund of tax.
Article V of the Protocol provides that the Netherlands
will not, for purposes of determining domicile under this
article, assert its domestic la-year rule presumptive of
domicile with respect to decedents who were citizens of
the Netherlands andwhowere in the United States for less
than 10 years immediately preceding death, if the decedent
had the intention to remain indefinitely in the United
States.

Accordingly, a citizen of the Netherlands,who at

his death was in the United States with the intention of
remaining indefinitely is considered a domiciliary of the
United States for purposes of the Convention, although
he did not have a permanent home here for 5 years.

The

Netherlands may, however, tax the worldwide estate of
such a decedent pursuant to Article 9 of the Convention,
relating to taxation based on citizenship.

Double taxa-

tion is avoided through the credit provisons of Article 11.

- 19 Article 5.

APPLICATION OF DOMESTIC LAWS

This article provides for the application of
domestic law except as otherwise provided in the Convention.
Accordingly, for example, the deductibility of debts is
determined by each State under its domestic laws.
Under Netherlands law debts secured by property described
in Article 6 or 7 are deducted entirely from the value of
the property to which they relate.

Under united States

law debts of the decedent are prorated among all of the
assets of the estate for purposes of determining the
taxable estates of nonresident aliens and the credit
allowable with respect to estates of united States
domiciliaries or citizens.

See example

(6) in the commentary

on Article 11.
This article provides further that, in any case in
which the laws of a State allocate deductions on the basis
of the situs of property, property shall be deemed for the
purpose of determining the amount of any deductions to
have a situs in that State only if that State may tax it
under the Convention.

For example, in the case of a Dutch

domiciliary and citizen who dies owning real property
in the United States and stock of united States corporations,
allocation of debts should be made under section 2l06(a) (1)
of the Internal Revenue Code of 1954 based solely on the

- 20 ownership of the United States real property since the
stock is not taxable by the united States under the
Convention.
In order to allocate debts properly for credit
purposes, this article further provides that property
shall be deemed for the purpose of determining the amounts
of any credits to have a situs in the other State only if a
credit is allowable under the Convention for the tax of
that other State with respect to the property.
Article 5 also preserves reporting and recordkeeping
requirements of domestic law based upon situs with respect
to property which Article 8 of the Convention exempts from
tax.

See section 60l8(a) (2) of the Internal Revenue Code

of 1954 and §§ 20.6036-l(a) and 20.6325-l(b) of the Estate
Tax Regulations.

This provision relates specifically to

information or tax returns or notices, transfer certificates,
or maintenance of records, and provides that sanctions
under domestic law (civil and criminal) shall not be
affected by exemption under

the Convention.

In other

words, in the preceding example, if the estate fails to
file returns or notices or obtain transfer certificates,
or maintain records, as would be required in the absence
of exemption of the stock, then sanctions may be imposed

- 21 to the same extent as if the Convention had not exempted
the stock from tax.

This provision is necessary in

order to have effective sanctions since most civil
sanctions are based upon the amount of the underpayment
of tax, which in this case may be zero by reason of
the Article 8 exemption.
One of the principal purposes of the proposed
convention is the prevention of fiscal evasion.

Even

though the United States relinquishes jurisdiction to tax
certain property, such as stock of United States companies,
retention of the above requirement and sanctions is designed
to prevent evasion of Netherlands tax.

In the event

that any of these requirements or sanctions proves to be
unnecessary it may be removed or modified by regulations.
Finally, this article provides that the Convention
shall not result in an increase in the amount of the
tax imposed be either State (except to the extent that
the increase results from the reductioi1 under the Conventi.(jL
of the tax paid to the other State for which credit is
allowable) .
Article 6.

IMMOVABI~E

PROPERTY

Article 6 provides that immovable property may be
taxed by a State if the property is si tuated in that State.

- 22 The United States has no law defining "immovable property".
The term as applied to United States property is considered
to mean real property for purposes of the Convention.
Security interests are not deemed rea1 property for this
purpose.
The last paragraph of Article 6 (and of Article 7),
together with the usage of the permissive words "may be
taxed" in the first paragraph, precludes any extension of
a State's taxing jurisdiction under this article beyond
that provided in it.s r1omcsti("
Article 7.

],1'.'.

BUSINESS PROPERTY OF A PLRMANENT ESTABLISHMENT
AND ASSETS PERTAINING TO A FIXED BASE USED
FOR THE PERFORMANCE OF PROFESSIONAL SERVICES

This article provides that assets

(other than ships,

boats, and aircraft operated in international traffic,
movahle property related thereto, and immovable property)
which form part of the business property of a permanent
establishment may be taxed by a State if the permanent
establishment is situated in that State.
applies to such assets to

thp

0~tent

The article

they were used or

held for use in the conduct of the business of the permanent
establishment.

-

71 -

The article defines the term "permanent establishment".
The definition is an updated adaptation of the definition
found in the I nc()me Tax Convcn t ion
and the Netherlands.

b('tw"\;D

the United States

As so defined, the term "permanent

establishment" means a fixed place of business through
which a decedent was engaged in trade

o~

business.

This

includes a decedent's interest in a partnership or other
unincorporated association (which is Ilot taxed as a
corporation).
a branch,

all

The term "fixed place of business" includes
office, a factory, a

orkshop, a sales outlet,

v7

a mine, quarry, or other place ul extraction of natural
resources, and a building site or a construction or
assembly I)roject which

exi~;t.s

lor won) t.hCltl 12 months

(including any period of existence after the decedent's
death) .
The article specifically excludes from the definition
of permanent establishment a fixed place of business used
solely for one or more of the following activities:

(1)

The storage, display, or delivery of goods or merchandise
belonging to the decedent;

(2)

the maintenance of a stock

of goods or merchandise belonging to the decedent for the
purpose of storage, display, or delivery;

(3) the maintenance

of a stock of goods or merchandise b0Jonging to the
decedent forfue purpose of processing by another;

-

(4)

24 fn(;rchdn(a~e,

the purcha::,t-: O:i::POG3 0'-

or the

collection of information, Lor tIle d2C8Uent;

advertising /

(5)

supplying information, conducting scientific research, or

character, for the .j·:,':.;ecLIl·t; or (6)
fixed place of

bLl::": ~~_!-:

other than tha.t cr

(~y

ss

a

t.he

per~,011

li'diIl·ce11c;.~'lCe

of a

acting in a capaci ty

ae,.Ler; for tL.-" pu:cpuse of investing

5.

or trading in stocks, securities, or commodities for the
decedent's own
L

acco~n~,

oicer or other age ... ,
The decedent

whether directly

or through a

c

w~ll

1

s consjdered to have had a

permanent establishmert if he engaged in business through
~.n

an agent (other than

independent agent acting in the

ordinary course of hjs business or an agent described

exercised

~utho~itr

the decedent,

unles~

the

aaen~

on~!

2x0r~iscd

such

On the other hand,
a permanent es tab li:;- r'c'"

The f2ct tll2:<t
she 1 J not be take;'.

r

-,-'

, . .:.

L'

·~t::::·.·'1

__ ,c",

.: . -:~

,';,__

_..... ·.)L·-:.\·.

:~ ....

~.

;

••

<

"

": .... ~ ',.

'",r,,,,.

i..~ C

,~.,01~")

,

.L

- 2c) -

the decedent had a permanent

establi~-:;hrr','nt.

Thus,

for example, an activity of the decedent will not be
deemed a permal18()t 8:.-;tablishment l:Jy

led!;Cln

of the

fact that the deced0nt controlled a corporation operating
(through a permanent establishment or otherwise) in the
same State.
Assets

(other than immovable property) of a fixed

base used for the performance of professional services
or similar activities may be taxed by a State if the
fixed base is situated
Article 8.

thcr~in.

TAXA'rrON ON THE BASIS OF DOlvlICILE

This article authori zes the State o-f \v'h ich the
decedent was a domiciliary at death to tax all property
in the estate wherever situated (if taxable under the
domestic law of the State), and prohiblts a State of
which the decedent was neither a citizen nor a domiciliary
from taxing property

(or taking property into account in

determining the rate of tax) except to 'he extent provided
in Article 6 or 7.

Under this provision, and subject to

the provisions of Article 9, a State of which the decedent
was not a domiciliary may not tax such property as stock,
bonds, life insurance

pr()(>~ed.s,

jewe lry, art objects, or

immovable property si tuat,. J in another country 9 unless
the property is taxable by it under Article 7.

Nor may

- 26 such a State tax ships or aircraft operated in international traffic or movable property pertaining to their
operation.
Article 9.

TAXATION ON THE BASIS OF CITIZENSHIP

This article provides that a State may tax property
in accordance with its laws in the case of an estate of
a decedent who is a citizen of that State at his death,
notwithstanding that the property is not property enumerated
in Article 6 or 7 or that the decedent was not domiciled
in the State.

This article preserves the right of the

United States and the Netherlands to tax the worldwide estates
of their citizens.

The Netherlands may tax its citizens

under it even though its tax is based on constructive
domicile in the Netherlands (under the Dutch lO-year rule)
rather than citizenship

and the decedent is treated

under Article 4 of the Convention (by reason of Article V
of the Protocol) as not having been domiciled in the
Netherlands.
Article 10.

EXEMPTIONS

Paragraph

(l)

of t his article provides for an

exemption which roughly corresponds to the marital deduction
provided in section 2056 of the Internal Revenue Code
of 1954.

The exemption applies to separate property which

-

27 -

passes to the surviving spouse from a decedent, if the
decedent was a domiciliary or citizen of the United States,
and if the property may be taxed by the Netherlands solely
by reason of Article 6 or 7 (i.e., is not taxable on the
basis of the decedent's citizenship or dorr.icile in the
Netherlands).

Such property shall be included in the

estate subject to the Netherlands transfer duty only to
the extent that its value exceeds 50 percent of the
value of all property included in the Dutch estate.

The

value of the Dutch estate and of property which passes
to the surviving spouse is determined after taking into
account any applicable deductions but, as provided in
Article VII of the Protocol, before allOY-lance of the
$30,000 exemption provided in paragraph (2) of this
article.
The exemption described above is inapplicable during
any period when the laws of

th~

imposed by it with respect to

United States make the tax

e~;tates

of nonresident

aliens substantially less favorahle in relation to the
tax imposed by it with respect to estates of its citizens
of domiciliaries than is the case when the Convention
was signed (July 15, 1969).

- 28 Paragraph (2) of this article provides that where a
State may tax solely by reason of Article 6 or 7 that State
shall not impose any tax if the aggregc: '.e value of the
property included in the estate subject to its tax (after
taking into account any applicable dedl,ctions and after
taking into account the marital exemption, but before
taking into account any other exemptions) does not exceed
$30,000.

If the value so determined exceeds $10,000, the

tax imposed shall not exceed the lesser of 50 percent of
the value in excess of $30,000 or the amount of the tax
determined in accordance with the provisions of the
Convention (taking into account any exemptions allowable
under the laws of the State).
This exemption relieves an estate of $30,000 or less,
which is not taxable by the Netherlands under Article 8
or 9, of liability for Dutch tax.

It applies to a lesser

extent, by reason of its 50 percent limitation and the
6 percent Netherlands rate, to estates of up to $34,090.

By operation of section 2106(a) (3) of the Internal Revenue
Code of 1954 and Article 10

(2) (b), the United states

provides a flat $30,000 exemption with respect to its tax
on estates not taxaLle by the United States under Article
8 or 9.

-

29 -

The application of the provisions of Article 10 may
be illustrated by the following examples:
Exampls

(1).

D, a U. S. citizen and domiciliary,

owned Dutch immovable property

(his only Dutch property)

valued under Dutch law at $200,000 and subject to a
$150,000 mortgage.

D devised the property, which was not

community property, to W, his wife.

Under Dutch law, the

mortgage is entirely deductible from the Dutch property
in determining the taxable estate.
Dutch estate is $50,000.

Accordingly, the net

Under Article 10(1), a marital

exemption of 50 percent of that amount, or $25,000, is
allowable.

The $30,000 exemption eliminates the remaining

$25,000 of the estate so there

1S

no taxable estate for

purposes of the Dutch transfer duty.
Example (2).

Assume the same facts as in example (1)

except that D owned additional immovable property in the
Netherlands (unmortgaged) valued at $75,000 which he
dev~sed

to

Sf

his son.

The marital exemption allowable

under Article 10(1) in this case would be the full $50,000
net value of property passing to W since this amount does
not exceed 50 percent of $125,000
total Dutch estate).

(the net value of the

The exemption of Article 10(2) is

-

30 -

ina p p 1 i cab 1 e i n t 11 .i.. ~, cas ~ be C.J. use the D,1 t L~ I' t a x ab 1('
estate of $75,000 (after allowance of tl"I' [1lari ta 1 excmptivJ';'
exceeds $30,000, and the tr.lnsfcr duty ell thL' est:.t,
percent x $"/5,000

~

$4,SOO)

is less than

eli fference hetween the Dutch t axab ; e c,
Article 11.

~)O

d.t.'

l,ercenr

If'
lie

L'.l

($ 7) ,0 n n)

aLC) $ 11,

CR~DITS

This article plovides

tha~

a

~tate

t~xins

on t'c DJsis

of the decedent's citize:'.ship or d'lmicl1e is to alLJ\'J a
credit for taxes paid tc the ether State

wit~

resFnct to

property taxable by that other State in accordance with
Article 6 or 7.

For this purpose, reference to

prnp~rty

taxable by a State in accordance with Article 6 or 7
includes property which would be taxahle by that State
under the terms of one of those articles if taxable by the
State under its laws, whether or not jt is a150

taxo~le

on the basis of the decedent's domici 1/' or ci tizenship at
death.
Subject to other limitations de8cribed herein, If
both States tax a decedent's WG:llh'L,:'L est.Jt;·, th211 "lth
respect to property not taxRble by either in accordancp
with

~rticle

(1)

6 or 7:

If at death thp decedpnt was

one State, was a domiciliary of the

~

citizen of only

oth~State,

and under

- 31 the domestic law of such other State had been domiciled
therein in the aggregate 7 or more years during the lO-year
period ending at his death, then the State of which he
was a citizen shall allow a credit equal to the amount of
the tax imposed by such other State;
(2)

If at death the decedent was a citizen of both

States and a domiciliary of one State, then the State of
which he was not a domiciliary shall allow a credit equal
to the amount of the tax imposed by the other State; or
(3)

III other cases, each State shall allow a credit

in the amount which bears the same proportion to the amount
of its tax attributable to such property, or to the amount
of the other State's tax attributable to the same property,
whichever is less, as the former amount bears to the sum
of both amounts.
The first situation described above provides for the
State of citizenship to yield priority of taxation (as a
correlative to the 7-out-of-lO-year domiciliary rule in
Article 4).

The second situation provides for priority

of taxation to the State of which the decedent was both a
citizpo and a domiciliary.
for

,'l

The third situdtion provides

<;p.1ittintj of the credit..Che most common

CCl':)(:;

-

32 -

expected to come within the latter situation is that of
a decedent who was a citizen of one Stat0 who was
permanently living ("domiciled") in the other State for
less than 7 years at his death.
Notwithstanding these provisions the total amount of
all credits allowed by a State pursuant to the Convention
or under its laws or other conventions

with respect to

all property in respect of which a credit is allowable
under this Convention shall not exceed that part of the
tax of the crediting State which is Cltt,ri.hutahle to such
property.

For purposes of this determination, all property

for which credit is given under the Convention is aggregated
and not treated individually.

See example (5) hereinafter.

This limitation is not applicable to the third situation
described above since that situation has such a limitation
built into its credit formula, and since inclusion in the
computation of property to which that provision applies
might result in excessive credits for other property.
The article provides that in deterMining the amount
of the tax imposed by a State with respect to or attributable
to property there shall be

;~uLst.racted

from the gross tax

so imposed all credits all()l"red by the State wi th respect
to the property except credits which are allowable under
this article.

- 33 No credit is to be finally allowed ,nti] thp tax for
which the credit is allowable

(reduced by any credit

allowable wi th respect thereto) has b,'en paid.
Stat..~

for the tax imposed by the other

allowed pending proof of paym8nt thE:l

I

Cr,'eli ts

will be tentatively
I,It

•

Any credits under this article are in lieu of any
credits authorized by the

respe~tive

ld-,",

uf tll(~ States

for the taxes of the other State.
The operation of Article 11 may be illustrated by
the followinq (;Xdmpl<'s (in

·,,;\lieh

r(>f,>r(~ll("(·~~

t(;

(lomici

1(~

assume resolution of possible double domicile under
Article 4) :
Example (1).

D, a citizen and domiciliary of the

Netherlands, owned immovable property in the United States,
immovable property in the Netherlands, and corporate stock
(property not described in Article 6 or 7).

The Federal

estate tax imposed with respect to the immovable property
in the United

S~ates

is $11,000, and the portion of the

Netherlands' succession duty attributable to that property
is $10,000.

Under Article 11(1), the Netherlands must

allow a credit of $11,000 on its succession duty.
under Article 11(3) the amount of

th~

However,

credit is reduced

to $10,000, the succession duty attrihutable thereto.

- 34 Example

(2).

D, a citizen of the United States and

domiciliary of the Netherlands for 12 years at his death,
owned immovable property in the united States, the Netherlands,
and Country X, and stock of three corporations.

The amount

of the Federal estate tax imposed with respect to each
piece

of immovable property and each block of stock is

$11,000, while the succession duty with respect to each is
$10,000.

Country X imposed $8,000 in death taxes with

respect to the immovable property therein, for which the
United States and the Netherlands each gave a full tax
credit under their internal laws.

In addition, under

Article 11(1) the United States must allow a credit of
$10,000 for the Netherlands tax with respect to immovable
property in the Netherlands, and under Article 11(2) (a)
credits of $30,000 for the Netherlands tax with respect
to the three blocks of stock and $2,000

($10,000 - $8,000)

for the residual Netherlands tax on the immovable property
in Country X, or total credits under Article 11 of $42,000.
Under Article 11(1) the Netherlands must allow a credit
for the United States tax with respect to the immovable
property in the Uni ted States, a crec'li t which under lArt.icle 11 (3)
shall be limited to the amount of Netherlands tax attributable
to the property, or $10,000.

- 36 parcels because it was left to a charity, but $8,000
Federal estate tax was paid with respect to the other.
Under Article 11(3), the amount of the credit to be
allowed by the united States for Netherlands tax is
limited to $8,000, the amount of the Federal estate tax
attributable to all property taxable by the Netherlands
under Article 6 or 7.

The fact that the Dutch tax with

respect to the only property that the United States taxed
is less than $8,000 ($5,000) is irrelevant since the
credit computations are based upon the total tax of the
other State with respect to all property for which credits
are allowable.
Example (6).

0, a domiciliary and citizen of the

United States, owned immovable property in the United States
valued at $50,000 and subject to a mortgage of $30,000.
He also owned unmortgaged immovable property in the
Netherlands ·valued at $10,000 and corporate stock valued
at $40,000.

The administration expenses of his estate

totalled $10,000.

Under Article 5(1), the Netherlands

allocates deductions according to its own law for purposes
of the imposition of its transfer duty.

Under this

principle the Netherlands would impose a transfer duty

- 35 Example

(3).

The facts are the same as in example (2)

except that D ~as a citizen of both the United States and
the Netherlands and a domiciliary of the Netherlands for
only 6 months at his death.

The credits allowable under

Article 11(1) are unaffected by these changes, and the
credit allowable by the United States under Article 11(2)
(a) is replaced by a credit in an. equal amount allowable
by the United States under Article 11(2) (b).
Example (4).

The facts are the same as in example (2)

except that D had been domiciled in the Netherlands for
4 years at his death.

The credits allowable under Article 11

(1) are unaffected by this change, but the credit allowable
by the United States under Article 11(2) (a) is no longer
applicable.

Instead, under Article 11(2) (c) the United

States must allow a credit for $16,941 ($32,000 x

$36,000
and the Netherlands must allow a credit for
$36,000 + $32,000)
$15,059

($32,000 x

Example (5).

$32,000
$32,000 + $36,000)·
D, a domiciliary and citizen of the

United States, owned two parcels of immovable prpperty in
the Netherlands.

Transfer duties in the amount of $5,000

were paid to the Netherlands with respect to each parcel.
No Federal estate tax was paid with respect to one of the

-

37 -

on the full $10,000 value of the Dutch immovable property,
unreduced by any deductions.

Under Article 11, the

united states in determining for credit purposes the amount
of its tax attributable under its law to the Dutch
immovable property would allocate $4,000 of the debts
and administration expenses ($40,000 total deductions x
$10,000 value of Dutch property) to the Dutch immovable
$100,000 value of all property
property.

Accordingly, the United States would limit

its credit for the Dutch transfer duty to the Federal
estate tax attributable to $6,000 ($10,000 minus $4,000
debts and administration expenses).
Example (7).

The facts are the same as in example (6)

except that D was a domiciliary of the Netherlands for
15 years at his death.

In this case, under Article 11(1),

the Netherlands will allow a credit for the lesser of the
Federal estate tax and the Dutch succession duty attributable
to the net value of the immovable property in the
United states of $20,000

($50,000 minus $30,000) and

the United States would again allow a credit for the lesser
of the two taxes attributable to $6,000.

In addition,

under Article 11(2) (c) each State will allow a proportionate
credit with respect to the corporate stock.

- 38 Article 12.

LIMITATION ON CLAIMS FOR CREDIT OR REFUND

This article imposes a limitation on the period of
time during which claims for credit or refund may be made.
Under this provislon the period for making such a claim
is longer than the period under the Internal Revenue Code
of 1954, but only if the claim is founded on the provisions
of the

Convc~tLon.

S~ch

a claim may be made any time

before the expiration of the latest of:
(1)

The time for making a claim for refund of tax

under the laws of the State to which a claim for credit
or refund is made;
(2)

Five years from the date of the death of the

decedent in respect of whose estate the claim is made; or
(3)

One year after final determination (administrative

or judicial) and payment of tax for which any credit under
Article 11 is claimed, provided that the determination
and payment are made within 10 years of the date of death
of the decedent.
The article provides that any refund based on the
provisions of the Convention is to be made without interest.
Artic.l~

13.

cor1Pi~TENT

AUT:IORl'rISS

This article provides for the consideration by the
competent authorities of the States of cases in which a

- 39 person considers that taxation not in accordance with the
Convention will result for him from the actions of one
or both of the States.

It provides further that the

competent authorities shall endeavor to resolve any
difficulties or doubts about the interpretation or
application of the Convention.

It also provides that

each competent authority may prescribe such regulations
and forms as may be necessary or appropriate to give
effect to and implement the provisions of the Convention.
Article 14.

EXCHANGE OF INFORMATION

This article provides for a system of administrative
cooperation between the competent authorities of the two
states.

It provides for the furnishing of such information

as is pertirent to carrying out the Convention or preventing
fraud or fiscal evasion (including information with respect
to property which is exempt under Article 8 from the tax
of the furnishing State).

However, information is not

required of a competent authority with
property if the information
that State.

lS

~espect

to exempted

not in the possession of

The furnishing of i.nformation may be either

on a routine basis or on request.

Information which is

provided is to be treated as secret.

- 40 T'ie art i -:::~

to

clC)t~S not impose on the States the obligation

to carry out administrative measures.at variance with the laws
~ractice

or administrative

of that or the other State, to

supply parLLclllars \v:lich a::ce not obtainable under the laws
or in the normal course of the administration of that or
the other State, or to supply information which would
disclose any trade, busines:3, industrial, commercial,
or professional secret or trade process, or information
the disclosure of which would be contrary to public policy.
Article '1.1 r I of_he Protocol provides that it is
understood that the Netherlands cannot disclose information
obtained from banks and certain similar institutions,
including insurance companies.

This results from the

treatment under Dutch law of such information as confidential.
This exception does not apply if the bank or other institution
is the executor or

a~llini.,;c.:La_to:L-

of t.he esLate.

Also, it has been agreed that there will be an
excl-tange he+-.,,:-,,:ol-:

~_hf'

comI'p'J~'ll~

author i tles containing

the substance of -:he: foLl.ov,ling nrOV,l.2lon:
It is Und2ystood that

~rtjcle
~in

other St.dCe \vilL

rc~,;pect

to

J4 of the Convention

',shnfornation to the

~C'CtlLLLlE:;S

lssued by residents

(corporate o~ otherwise) of that other State

(other than

- 41 securities taxable by that other State under Article 7)
included in the estate of a domiciliary of the firstmentioned State who is not a citizen of that other State.
Article 15.

DIPLOMATIC AND CONSULAR OFFICIALS

This article preserves the existing fiscal privileges
of diplomatic and consular officials and officials of
international organizations.

It provides further that the

right to tax estates of such persons shall be reserved to
the country in whose service the persons are employed and
that such persons shall not be deemed to be domiciled in
the receiving State.

Accordingly, diplomats of a "third

country" domiciled in one of the States, but exempt from
tax therein because of such status, cannot assert rights
under

t~Convention

as domiciliaries with respect to

taxes imposed by the other State.
Article 16.

ENTRY INTO FORCE

This article and Article X of the Protocol provide
for the ratification of the Convention and Protocol and
for the exchange of instruments of ratification as soon
as possible.

The Convention and Protocol will enter into

force on the date on which the instruments of ratification
are exchanged and their provisions will apply to estates
of persons dying on or after that date.

-

Article 17.

TERRI~0RIAL

42 -

E~TENSION

This article provides a method for extending the
Convention to the countries of Surinam or the Netherlands
Antilles and to all or any of the territr)ries for whose
international relations the united States is responsible
(such as Puerto Rico). if the country or area concerned
imposes a tax substantially similar in character to those
to which the Convention applies.

The procedure prescribed

is an exchange of notes throu0D diplomatic channels.

The

notes are subject to ratification, however, and the
instruments of ratification must be exchanged.
Unless otherwise specified in the notice of termination
referred to in Article 18, the termination of the Convention
will not also terminate the application of the Convention
to any country or area to which it has been extended.
Article 18.

TERMINATION

The Convention will continue in effect indefinitely,
but may be terminated by either State as of the end of
any calendar year, providing that the termination date
does not occur earlier
of tIle Convention.

thal~

5 years after the effective

The tErmination may be effected by

givinn at least 6 months' ~otice in writing of the
termination.

If the Convention is terminated, the

da~

-

43 -

termination shall be effective with respect to estates
of decedents dying after the expiration of the calendar
year with respect to the end of which the Convention has
been terminated.
Article IX of the Protocol provides that if the
effects of the Convention are substantially altered as
a result of changes made in the laws of either State, then
at the request of either State, the two States shaIl
consult together with a view to making appropriate modifications in the Convention.

PRIME MINISTER

Port of Spain,
Trinidad.
9 January, 1970.
Sir,
I h::o.vc the honour to refer to 'Jour letter Cif the 9 Ja.nua.r'J
~hich

reads

&3

follo~s:

"I l1:1ve' tIle honor to refer to the income tax treatJ
the Govcrnmentc of Trini~ad and Tobac6 and the United
~t<':',';cs, ',':hich haG been siened today.
This treaty maltes no
provision for cpccia~ recocnition, in the co.lculation of '
United States tax on income derived frOM Unit~d States direct
investment in Trinidad and TobaGo, of tax incentives offered
by Trinicad and Tobaco to &ttract such investment.

bet~een

l;y Government recoGnizeG the value to Trinidad and
Tobaco of increased United States invcctment in your country
~nd the importance which your Government places on promotinc
such investment throuch the tax tre~ty mechanism. I w~nt,
t!lcrci'ore, to aGsura that r:l'Y Govcrnr:lcnt is ~repared, at an
early date, to rccumc discussions with rcrrcsentatives of
Tri~idad and Tobago ~ith a view toward reachins aGree~ent on
a su~)ler.'lentary protocol that Vlould provide a tax impetus to
United States direct investment in Trinidad and Tobago."
I have1the honour to

'Jou that my Government accepts
the above ocntioned assuranceG and looks forward to the eo.r1;r
resu~Dtion

infol~

of discussions on this subject.

Accept, Sir, the renewed assurances of my hichest consideration.

Prime Hinister.
The Honourable J. Fife Symington Jr.,
Acb:u;;;:;o,dor Extraordinary and Plenipotentiary,
Er.tbas:3j'. of the United States of Ar.le:rica,

CERTIFICATION
TRINIDAD AND TOBAGO
)
CITY OF PORT OF SPAIN
)
EMBASSY OF THE UNITED STATES OF AMERICA )

SS

I, Robert J. MacQ.ua.id, Consul. of the United States of America
at Port of Spain, Trinidad,

w~st

Indies, duly commissioned and qualified,

do hereby certify that the attached copy of Embassy Note No. 1 of
January 9, 1970 to Dr. the Right Honourable Eric Williams" Prime Minister

of Trinidad and Tobago, signed by J. Fife Symington, Jr., American
Ambassador, is a true and faithful copy of the original.
IN WITNESS WHEREOF I have hereunto set my hand and affixed the
seal of the Embassy at Port of Spain, Trinidad, West Indies, this
9th day of January, 19'70.

Port of Spain,

JUJJA:q ~,

1910

10. 1
81r:

I have the honor to
tbo

r~er

to the 1neane tax treaty betwee12

Govermnents ot 'trin1dad and 'lobngo and the United States, which

baa been signed today.

~

treaty makos no

prov1slo~

tor apecial

recognition, in the calculation or United States tax 012 incaue derived

trom United, States direct investment in trln1da4 and 1\:)bago, ot tax
1Deentives otf'ered by Trinidad aDd Tobago to attract auch investment.

ot increased United States 1nveatment 111 your country and
which your Govermnent places

tax treaty mechanism.

OD

4-"

importance

promoting such inveGtment through the

I want, therefore, to usure you tbat

fIl¥

Govel"DDlent

i. prepared, at an early date, to resume diacuasionav1th representatives

ot 1'r1n1dad

aDd 'lobaao with a vieW' toward reaehi oS agreement

0l.I. ..

aupplcseatary protocol that would provide a tax 1mpet.ua to United Statea

Accept, Sir, the'renewed uswoancea or rq h1gbeat cona1deration.
J

Dr. the Right Ibnourable Me W1lliams

Pr1tAe MinUte,.

Fife Symington, Jr,

October 6, 1970

Technical Explanation
of
Proposed U.S.-Trinidad and Tobago Income Tax Convention
Signed January q, 1970
Article 1.

TAXES COVERED

This Article designates the taxes of the respective States
which are the subject of the proposed Convention.

With respect

to the United States, the taxes included are the United States
Federal income taxes imposed by the Internal Revenue Code.
This includes, for example, the surtax and wO·lld also include
such taxes as the temporary surcharge which was in force
from 1968 to 1970.

However, the Convention is not intended

to apply to taxes which are in the nature of a penalty such
as the taxes imposed under section 531 (accumulated earnings
tax) and section 541 (personal holding company tax) of the
Internal Revenue Code.

These two taxes were expressly excluded

to avoid uncertainty as to their status.
With respect to Trinidad and Tobago the taxes included
are the corporation tax and the income tax.
Pursuant to paragraph (2) of this Article the proposed
Convention would also apply to taxes substantially similar to
those enumerated which are imposed, in addition to or in place
of the existing income taxes, after the date of signature of
this Convention (January 9, 1970).
For purposes of Article 6 (Nondiscrimination) the Convention
applies to taxes of every kind which are, or may be, imposed by
the respective~tates, at the National, State, or local level.

-

r;ENER.l\L DEF INITIONS

',ticlc 2.
r::'l\i-:
t-(.

2 -

·\rticlc sets out definitions of certain of the basic

::1''' ll';cd ie', the proposed Convention and sets forth rules for

<, ~E'rnl

ni:l::J fiscal domici Ie or residence for purposes of the

nroposed Convention.
d~finE'd

A number of important terms, however, are

elsewhere in the Convention.

Any term used in this Convention which

1S

not defined

the'rein shall, unless the context otherwise requires, have
thr meaning which it has under the laws of the State which
is

i~posing

the tax.

The proposed Convention also provides

a procedure under \"lhich a common definition may be arrived
at by the competent authorities of the united States and
Trinidad and Tobago, in order to prevent double taxation
or further any other purpose of this Convention, if the
definition of such term under the respective internal laws
of the States differs or if the term is not readily definable
under the laws of one or both of the States.

The common

meaning is to be arrived at by means of the mutual agreement
procedure which is described in Article 23
Procedures) of the proposed Convention.

(Mutual Agreement

While treaties in

the past did not specify the power of the competent
authorities to resolve such differences in definitions,
this power is nevertheless inherent in the authority set
forth in the mutual agreement article of these treaties
to resolve "difficulties or dOUbts."

-

3 -

This Article defines geographical Trinidad and Tobago
and geographical United States to include their respective
continental shelves.

The addition of a definition of the

continental shelf is intended to clarify what the Contracting
states consider to be included within their respective
jurisdictions to tax.

The United States continental shelf

is defined as the seabed and subsoil of the adjacent submarine
areas beyond the territorial sea over which the United States
exercises exclusive rights in accordance with international
law for the purpose of exploration and exploitation of the
natural resources of such area, but only to the axtent that
the person, property, or activity to which this Convention is
being applied is connected with such exploration or exploitation.
For example, the income earned by a ship and its employees
engaged in taking seismograph soundings on the United States
continental shelf will be treated for tax purposes the
same as the income from a comparable activity on the land
of one of· the States of the United States.
is used in the case of Trinidad and Tobago.

A comparable definition
The definition

of the continental shelf in the case of the United States
only includes the continental shelf surrounding the 50 States.
Thus, for example, the continental shelf surrounding Puerto Rico
is not included.

If the Treaty were extended beyond the 50

States and the District of Columbia (see Article 29 - Extension
of Convention) the continental shelf of the extended areas

- 4 would also be covered.

While the territorial sea is part .of the

united States and Trinidad and Tobago for all purposes, the defir
continental shelf is only part of the united States or
Trinidad and Tobago, as the case may be, in limited situations.
It is included only to the extent that a person or property
or activity to which the Convention is being applied is
connected with exploration or exploitation of the continental
shelf.

The phrase "connected with" does not "'-equire physical

attachment to the continental shelf to be within the scope
of the definition.
This Article also sets forth rules for determining
residence for purposes of the proposed Convention.

Residence

is important because, in general, only a resident of the
Contracting States may qualify for the benefits of the
Convention.
A resident of one of the Contracting States is a corporatiol
of that State (as defined in this Article) or any person
(other than a corporation) who is a resident of that State
for purposes of its tax.

Specifically in the case of the

united States the term "a resident of the United States"
means a United States corporation and any person (except
a corporation or any other entity treated as a corporation
for United States tax purposes) resident in the United States
for purposes of its tax.

The parenthetical language In

the definition of a resident of the United States is intended

- 5 to make clear that a foreign corporation, or other entity
treated as a foreign corporation for United States tax
~urposes,

which is a resident of the United States for

certain purposes of its income tax law is not, under the
Convention, a resident of the United States.

A similar

rule was needed in the case of Trinidad and Tobago.
In the case of the United States, the definition provides
that a partnership, estate, or trust is treat·d as a resident
only to the extent that the income derived by such person
is subject to United States tax as the income of a resident.
This language, although different from the Income Tax
Convention between the United States and France, signed
July 28, 1967, is intended to achieve the same result.
Under United States law, a partnership is never, and an
estate or trust is often not, taxed as such.

Under the

proposed Convention, in the case of the United States,
income received by a partnership, estate, or trust will
not qualify for the benefits of the Convention unless
such income is subject to tax in the United States.
iri

effec~,

Thus,

the status of income which is subject to tax

only in the hands of the partners or beneficiaries will
be determined by the residence of such partners or beneficiaries.
With respect to income taxej in the hands of the estate or
trust, the residence of the estate or trust is determinative.
This provision is reciprocal because of the presence of a similar
problem under Trinidad and Tobago law.

- 6 Unlike our other conventions, the proposed Convention with
Trinidad and Tobago does not provide a mechanism for

determini~

a single residence fcrindividuals who are tr2ated by each State
as being respectively resident therein.

In addition, corporation

could be treated by both States as being resident therein under
the definitions set forth in the treaty.

Dual residency in the

case of corporations is a relatively easy situation for them to
c3void.
This Article also provides that the terms "paid,"
"distributed," and "received" when applied to income shall
include amounts which are "credited."

This provision, which

has not appeared in previous income tax conventions to which
the United States is a party, is intended to make clear that
a dividend paid by a Trinidad and Tobago corporatlon includes
an amount credited by such corporation.
Article 3.

GENERAL RULES OF TAXATION

The general rules of taxation applicable under the
proposed Convention are as follows:
A resident of one State may be taxed by the other State
only on income from sources within that other State (including
industrial or commercial profits attributable to a permanent
establishment located ln that other State), subject to the
limitations set forth ln this Convention.

The jurisdictional

rules of the proposed Convention parallel those set forth
in section 872(a) of the United States Internal Revenue Code,

- 7 relating to nonresident alien individuals, and section 882(b),
relating to foreign corporations engaged in trade or business
in the United States, as amended by the Foreign Investors
Tax Act of 1966.
The proposed Convention contains the general rule (also
found in our new French Convention) that the Convention does
not affect in any manner any exclusion, exemption, deduction,
credit, or other allowance now or hereafter accorded by
the laws of a State in the determination of a tax imposed
by that State, or by any other agreement between the States.
Even though the OECD Model Convention does not contain a
comparable provision,this rule reflects the well-established
principle that the Convention will not

h~ve

the effect of

increasing the tax burden on residents of the signatory
countries.

This rule represents the position of the United

States under all conventions to which it is a party except
that to the extent a convention specifically provides, it
may be necessary to waive certain rights as a condition to
claiming more advantageous treaty benefits.
The proposed Convention also contains the traditional
savings clause under which the United States reserves the
right to tax its citizens and residents as if the Convention
had not corne into effect.
not

~ply

However, the savings clause does

in several cases in which its application would

- 8 contravene policies reflected in the Convention.

Thus,

the savings clause does not affect the provisions with
respect to the foreign tax credit, nondiscrimination, or
tax deferral for technical assistance.

Although the

provisions dealing with the mutual agreement procedure are not
specifically excepted from the savings clause, agreements
made by the competent authorities may nevertheless inure
to the benefit of a citizen or resident of thr United States
or a resident of Trinidad and Tobago.

Moreover, the savings

clause will not deny the benefits of the Convention to governmental employees or teachers or students unless such individua
are citizens of the United States or have immigrant status
in the United States.

The OECD Model Convention does not

contain a savings clause because it is oriented toward
the residence principle of taxation.
This Article also provides that any income from sources
within a State to which the Convention is not expressly
applicable will be taxable by that State in accordance
with its own law.

For example, because income from prizes

or awards is not covered by the Convention, such income will
be taxed in accordance with the internal law of the State
from which such lncome is derived.

The OECD Model Convention

differs on this point and provides that income which is
not expressly mentioned will be taxable only in the state
of residence.

In any event it should be noted that the

proposed Convention specifically covers most types of

inco~,

-

9 -

Another general rule of taxation is that subject to the
provisions of paragraph (4) a state may tax a resident of that
State whether or not that person is also a resident of the other
State.
Article 4.

RELIEF FROM DOUBLE TAXATION

Under the existing Convention, the United States provides
relief from double taxation by allowing a credit for Trinidad
and Tobago tax subject to the provisions of the law of the
United States.
The proposed Convention employs the same method of avoiding
double taxation in providing that subject to the provisions of
United States law in effect for the taxable year (which do not
affect the general principle of the Article) credit will be
allowed to a United States citizen or resident for Trinidad
and Tobago tax paid but not in excess of the portion of United
States tax which net income from Trinidad and Tobago sources
bears to total net income.

Except for the special source

rules provided by the Convention, this provision does not add
to the rights that a United States citizen or resident has to
the foreign tax credit, including his right under current law
to elect the

o~~all

limitation, but is for the purpose of

giving treaty recognition to such rights.

Modifications in

United States law after the effective date of the Convention
which concern the foreign tax credit will be applicable with
respect to Trinidad and Tobago source income if such modifications
do not contravene the general principles of the Convention.

~it0

t,!

~

10 -

respect to the treatment of dividends which are

~'~ited

St2~~S

re~iw

corporation from a corporation resident in

7rinid2d 2nd TclagG in which such United States corporation
owns at lC2st 10 percent of the voting power, the proposed
Convention differs in one respect from the provisions which
woulJ Ge applicable to such dividend under the Internal Revenue
Code.

The proposed Convention provides that in the case of

such 2 dividend such United States corporation must include in
gross income the amount of Trinidad and Tobago tax which the Trir::li,
and Tobago corporation paid on the profits out of which such
dividend is paid and which the recipient corporation ':"s "deemed"
to have paid.

Thus, the dividend must be grossed up.

Under

the Internal Revenue Code, however, a dividend does not have
to be grossed up in order for the recipient United States corpor
to claim a deemed paid credit, if the dividend is paid by a
less developed country corporation and most Trinidad and Tobago
corpordtions will be considered less developed country corporati
Inasmuch as the computation of the deemed paid tax eredi t wi thou!
gross-up under the Internal Revenue Code will often produce a
more favorable result than the

gross-up

computation under

the proposed Convention, it may be to the advantage of United sti
corporations In some cases to use the Code rules in computing thf
deemed paid credit.

Of course, in these cases United States

corporations may continue to use the Code rules rather than thoS
found in the proposed Convention.

In a case where the taxpayer

follov·;s the Code rules on gross-up, it may nevertheless use the
same rules set forth in Article 5 of the proposed Convention.

- 11 The proposed Convention provides that Trinidad and Tobago
will allow its residents a credit for the amount of income
taxes paid to the United States.

In the case of a Trinidad

and Tobago corporation which receives a dividend from a
United States corporation in which such recipient corporation
controls, directly or indirectly, at least 10 percent of the
voting power, such corporation will be allowed a credit against
its Trinidad and Tobago tax for the amount of the United States
tax paid ,on the coprorate profits out of which such dividend
is paidi

This credit is, of course, in addition to the credit

allowed for the taxes paid to the United States by the Trinidad
and Tobago corporation.

Under the internal law of Trinidad

and Tobago the indirect credit would be allowed only if the
recipient corporation owned at least 25 percent of the voting
stock in the payor United States corporation.

The foreign

tax credit Trinidad and Tobago will allow is subject to a
per-country limitation.
Article 5.

SOURCE OF INCOME

This Article sets forth in a single provision all of
the various rules which are to be applied to determine the
source of the different kinds of income covered by the treaty:
dividends, interest, royalties, income from real property,
including gains derived from the sale of such property,
and compensation for personal services.

These rules affect

the application of Article 3 (General Rules of Taxation)
and Article 4 (Relief from Double Taxation).

- 12 The source of any kind of income not covered by the
treaty shall be determined under the internal law of the
two States.

In the case of different source rules applicable

to an item of income the competent authorities of the two
States under the mutual agreement procedure may establish a
common source for the item of income.
Dividends paid by a corporation of one State are treated
as from sources within that State and dividends paid by any
other corporation are treated as from sources outside that
State.

However, dividends paid by a Trinidad and Tobago corporat

shall be treated as income from sources within the United States
if, for the 3-year period ending with the close of its taxable
year preceding the declaration of such dividend (or for such
portion of that period as the corporation has been in existence)
such corporation (a) had a permanent establishment in the
United States, and (b) derived 50 percent or more of its gross
income from industrial or commercial profits effectively
connected with the industrial or commercial activity engaged
in through such permanent establishment.

The provision was

included to offset a provision in Trinidad and Tobago law
which imposed a withholding tax on remitted profits of a
United States permanent establishment in Trinidad and Tobago.
However, the amount of the dividend to be treated as from
United States sources under this provision is not to exceed
an amount which bears the same ratio to the entire dividend

inco~e

as the gross

of the corporation for such period

which is pffectively connected with the commercial or industrial
activity engaged in through such permanent establishment within
the united· States bears. to its gross income from all sources.
A further limitation is that in no case
oJ. sUc::h
w~thin

div~dend

shall the amount

which is treated as income from sources

the united States exceed the net amount of money or

money's worth transferred from such permanent
during such period.
bv

es~ablishment

This rule as applied to dividends paid

a Trinidad and Tobago corporation conforms to United States

statutory law except that, under section 861(a) (2) (B) of the
Internal Re enue COde, there is no limitation regarding the
net amount

f money or money's worth transferred.

This limitation

which.is S1 ilar to a provision in the laws of Trinidad and
Tobago is i

tenced to insure that the United States will not

treat divic nds paid by a Trinidad and Tobago corporation as
income from United States sources to the extent the Drofits of
a

~ermanpnt

establishment which such corporation maintains in

the United States are retained and reinvested.
~nterest

paid by that State, including any local government

within such State, or by a resident of such State is treated
as from sources within that State.

Interest paid by any

other person. will be treated as from sources outside that
State.

However, interest paid by a resident of any State

with a permanent establishment in any other State, directJv or

- 14 indirectly, out of the funds of such permanent establishment
~ill

be treated as income from sources within the State where

such permanent establishment is located.

The rules set forth

above in the first two sentences correspond generally to the
Internal Revenue Code provision dealing with interest (other
than interest on deposit
business).

with persons carrying on the banking

The exception to this general rule, set forth above

in the third sentence, is not contained in the Internal Revenue
Code

but is substantially similar to the same rule in the

United States-Belgian Income Tax Convention signed July 9, 1970.
Royalties paid for the use of,or the right to use,
property described in paragraph

(4) of Article 14 (Royalties)

in a State are treated as income from sources within that state.
Income from real property and royalty income from the
operation of mines, quarries, or other natural resources
are to be treated as income from sources within the State in
which such property is located.
Income from the rental of tangible personal property is
to be treated as income from sources within the State in
which such property is located when rented.

Notwithstanding

some minor differences in terms compared with like provisions
in recent treaties, this language is intended to reflect
the rule of the Internal Revenue Code and recent treaties
that the source of such rental income is the State in which
the property is located during the period of the lease.

- 15 Compensation received by an individual for his performance
of personal services and income received by a person from
the furnishing of personal services of another are to be
treated as income from

source~

such services are performed.

within the State in which
If services are perrormed

partly within and partly outsloe any State, income from the
performance or furnishing of such services shall be treated
as income from sources partly within and partly outside that
State.

Compensation for personal services. and prlvate pensions

and annuities paid in respect of sucn services, performed
aboard ships or aircraft operated in international traffic
by a resident of a State and, in the case of the United States,
registered

i~

the United States, provided the services are

performed by a member of the regular complement of the ship
or aircraft,are to be treated as income from sources within
that State.
Income from the purchase and sale of personal movable
property is to be treated as income from sources within the
State in which such property is sold.

This rule conforms to

the rule set forth in section 86l(a) (6) of the Internal
Revenue Code.
Notwithstanding the rules contained in paragraphs (1)
throuoh. (Z), industrial and commercial profits attributable
tn a pp-rmanent establishment which the recipient, being a

- 16 resident of one State has in the other State, including income
dealt with in the articles pertaining to dividends, interest,
royalties, and income from real property if from rights or
property which are effectively connected with such permanent
establishment, shall be treated solely as income from sources
within that other State.

The factors taken into account in

determining whether such effective connection exists will
include whether the income is derived from property used, or
held for vse,in the conduct of the commercial or industrial
activities carried on through such permanent establishment were
a material factor in the realization of the income.

As

previou5~

noted under Article 3 (General Rules of Taxation), this source
rule conforms to United States policy governing the taxation
of business profits and investment income as expressed in
the Foreign Invesotrs Tax Act of 1966.

Such policy is also

reflected in the recent French Convention as well as the
protocols to the German, Netherlands, and united Kingdom
Conventions.
Several of the source rules set out in this Article differ
to some degree from those existing in the Internal Revenue Code.
Since Article 3 (General Rules of Taxation) provides that the
Convention will not increase a person's United States tax,
a taxpayer is entitled to use the more beneficial of the Code
or Convention rules in calculating his income for United States

- 17 tax purposes, or in the case of a citizen or resident of
the United States, his foreign tax credit.

The rule on

interest in this Article permits Trinidad and Tobago, under
the proper circumstances, to impose a tax on any interest paid
by a permanent establishment in Trinidad and Tobago of a
Unit~~

States corporation.

While the rule appears to be fully

reciprocal, the United States will not, because of section
86l(a)11) (B) of the Code, impose on nonresident aliens and foreign
corporations a tax on interest paid by a resident of the United States
unless such resident derives 20 percent or more of its gross
income from United

St~tes

sources for the 3-year period ending

with tne C.lose of the taxable year of such resident precedir q
the payment of such interest.
It should also be noted tnat the source rules do not
serve to extend the benefits of this proposed Convention to
persons other tnan reSlaents of the two States.

Generally,

the rules are only applicable for taxing residents of either
State ana, therefore, are not applicable in determining source
of income ot residents or other States, although the income
of such other residents is of a type referred to in this Article.
Article 6.

NONDISCRIMINATION

The proposed Convention bans discrimination by one State
against the nationals of the other State or of a permanent
establishment of nationals or corporations of the other State.

- 18 Thus,

for example, a national of Trinidad and Tobago who is

a resident of the United States and who otherwise meets the
requirements specified in section 911 of the Internal Revenue
Code ~ould under this Article of the proposed Convention be
eligible for the benefits of section 911 although such national
1S

not

~

citizen of the United States.

This Article provides, however, that a State may
accord special treatment to its own residents on the basis
of civil status or family responsibility.

This Article also

provides that Trinidad and Tobago is not prohibited from
imposing a branch profits tax in accordance with paragraph (5)
of Article 12

(Dividends) and the United States from imposing

a comparable tax burden on the income of a permanent establishment
maintained by residents of Trinidad and Tobago in the United State
The ban on discrimination extends to all taxes without
regard to subject matter and whether imposed at the national,
State, or local level.
This Article is substantially similar to the nondiscriminati
Article of the OECD Model Convention except that the Model
includes a provision concerning Stateless persons which has
been

o~itted

Article 7.

from the proposed Convention.
TAX DEFERRAL FOR TECHNICAL ASSISTANCE

This Article provides for a reciprocal tax deferral
which will be applicable when patents, processes, know-how

- 19 and similar items, and ancillary technical services rendered
in connection with the furnishing of such property or information,
are provided by a resident of one State to a corporation of
the other State in return for stock of the corporation of
such other State.

Under paragraph (3) of Article 28 (Effective

Dates and Ratification) this Article shall only be effective
with respect to stock received on or after the date the
proposed Convention was signed (January 9, 1970).
Under this provision, a resident of one of the States
may elect not to include in income, both for United States
and Trinidad and Tobago tax purposes, any amount otherwise
includible by reason of the receipt of stock in return for
the enumerated items of property, information, or ancillary
services.

In order to qualify for the deferral, such resident

must receive stock of a corporation of the other State as
consideration for providing ,to such corporation, for use in
connection wtih a trade or business actively conducted in
that other State by such corporation, any of the following
properties, information, or services:
(1)

Any patent, invention, model, design, secret formula

or process, or similar property right;
(2)

Informa·tion concerning industrial, commercio.l or

scientific knowledge, experience, or skill; or

- 20 (3)

Technical, managerial, engineering, architectural,

scientific, skilled, industrial, commerc~al, or like services
which are ancillary and subsidiary to the transfer of the
property rights referred to in (1) or any information referred
to in (2).
Where such an election is made, expenses allocable to
amounts excluded from income may not be deducted currently.
Where the stock received is later disposed of, the amount
originally excluded will then be included in income in the
manner in which it would have been included upon receipt of
such stock.

Where the stock is sold for less than the amount

originally excluded, the amount actually received on the sale
is included in income as it initially would have been in the
absence of this deferral provision.

vfuen the stock is

disposed of, deductions previously disallowed because allocable
to excluded amounts will be allowed and any gain upon such
disposition will be determined as if the gain had been included
in income, and the deductions allowed, upon original receipt
of the stock.
This provision is made subject to regulations to be
issued by both parties to the treaty.
In the case of the United States the Secretary of the Treas U
or his delegate may prescribe such regulations as are necessary
to effectuate the provisions of this Article and to further

- 21 define

an~

determine the terms, conditions, and amounts

referred to in this Article.

In the case of Trinidad and

Tobago the Minister of·Finance or his authorized representative
may

prescri~e

such regulations as are necessary to effectuate

the provisinns of this Article and to further define the terms,
conditions, .andamounts referred to in this Article.

In

part.i,cular, the Minister of Finance or his authorized representative
is

spe~ifically

authorized to prescribe by regulation standards

for det;epnining whether services referred to in paragraph (1)
of this Article are ancillary and subsidiary to the property
riqh~s

or information referred to in that paragraph.

In such regulations, the Minister of Finance could
provi,de that this provison will only apply to an equity
interest in a Trinidad and Tobago corporation issued to the
United.States shareholder in conformance with the Trinidad and Tobago
law. dealinq. wi th the allowable extent of foreign equi ty
interes~R

in Trinidad and Tobago corporations.

:n.uthorization is granted to each State to require, by
requlations. that a portion of the stock received in return
for the enumerated property, information, or services be
deposited with a design~ted bank or other depository for the
purpose of assuring collection of any taxes payable upon its
disposi tion.

- 22 Under this provislon, a United States corporation
can make a transfer of property to a Trinidad and Tobago
corporation in exchange for the stock of that Trinidad and
Tobago corporation, without regard to the provisions of
scctic 1 n 351 of the Code,

and elect not to include in income

for United States tax purposes any gain ctherwise recognized
(whether under sections 1231 or 1249 of the Code) as a result
of such transfer.

In addition, that united States corporation

can furnish "know-how" to the Trinidad and Tobago corporation
and obtain the deferral for United States tax purposes without
initially having to consider whether such "know-how" constitutes
property for purposes of the application of section 351 of
the Code.

It can also provide the enumerated services, to

the extent that they are rendered in connection with and
subsidiary to the furnishing of property rights or information
which are covered under the Article, without having the value
of the portion of such stock which is attributable to the
services included in income.

This elective deferral privilege,

which avoids cash problems involved in having to pay a current
tax on the receipt of stock where the recipient wishes to
hold, rather than sell, such stock, would, of course, also
apply for purposes of the imposition of any Trinidad and
Tobago tax otherwise due by reason of the transaction.

Thus,

- 23where the connected services are rendered in Trinidad and
the,'l;'rin~dad

and Tobago corporation to

such'service~ ar~ prov~ded

is taken in consideration

To}::)ago and stock i,n
which

thereofjthe,UnitedState$ resident taking
not subject to (1) Trinidad and -Tobaqo
of the

stOC~i

ani

reason

of,th~.

receipt of such stock.

t~x,

suchsto~k

j~

until,later disposition

{2' any United States tax otherwise due by

- 24 Article 8.

BUSINESS PROFITS

This Article sets forth the typical treaty rule that
industrial or commercial profits of a resident of one
State are taxable in the other State only if the resident
has a permanent establishment in that other State.

Where

there is a permanent establishment only the industrial
or commercial profits attributable to the permanent establishment can be taxed by that other State.
This Article represents an acceptance by Trinidad
and Tobago of the principle that investment income should
be taxed separately from industrial and commercial profits
where appropriate.

Absent the provision, Trinidad and

Tobago would tax all income

direc~ly

or indirectly accrued

in or derived from Trinidad and Tobago whether or not
effectively connected with a permanent establishment at
the regular corporate rates.
Under most of the United States Conventions negotiated
prior to the new French Treaty, industrial or commercial
profits are not taxed in the absence of a permanent establishment.

However, once there is a permanent establishment

these conventions, and the old French Convention, provide
that the provisions reducing the tax rates on interest and

- 25 dividends and exempting royalties are not applicable.
This rule is known as the "force of attraction" principle
and is replaced in the proposed Convention, as in our
new treaty with France, with the effectively connected
concept.

Under the new approach, only that interest,

dividends and rovalties which are effectively connected
with the permanent establishment are taxable

,s part of

the industrial or commercial profits and only such income
does not benefit from the reduced rate or exemption.
In determining the proper attribution of industrial
or commercial profits under the proposed treaty, the
permanent establishment is generally to be treated as nn
independent entity and considered as realizing the profits
which would be realized if the permanent establishment
dealt with the resident of which it is a permanent establishment on an arm's-length basis.

Expenses, wherever incurred,

which are reasonably connected with profits attributable
to the permanent establishment, including executive and
general administrative expenses, will be allowed as deductions
by the State in which the permanent establishment is located
in computing the tax due to such State.

However, it is not

necessary to allow a profit to the head office for ancillary

-

26 -

and management serVlces furnished to the permanent establishment as long as the permanent establishment is allowed to
deduct the costs incurred by the head office.
The mere purchase of goods or merchandise in a State
by the permanent establishment, or by the

reside~t

of which

it is a permanent establishment, for the account of such
reside~t

will not

cause attribution of profits to such

permanent establishment.
The term "industrial or commercial profits" means
income derived from the active conduct of a trade or business.
For example, it includes profits from manufacturing,
mercantile, agricultural, fishing, and transportation
activities.

However, the term also includes investment

income but only if the right or property giving rise to
the income is effectively connected to a permanent establishmer
Income received by an individual as compensation for
personal services

(either as an employee or in an independent

capacity) or insurance premiums, are not included within the
definition of industrial or commercial profits.
rentals from

~otion

Further,

picture films or films or tapes for

radio or television broadcasting are not included within the
definition of the term industrial or commercial profits under
the proposed Convention.

- 27 -

This Article is substantially similar to the business
profits article of the OECD Model Convention except that
the Model Convention does not contain a definition of
industrial or commercial profits.
Article 9.

PERMANENT ESTABLISHMENT

This Article defines the term "permanent establishment."
The existence of a permanent establishment is, under the
terms of the proposed Convention, a prerequisite for one
State to tax the industrial or commercial profits of a
resident of the other State.

The concept is also significant

in determining the applicability of other provisions of
the Convention, such as Article 12 (Dividends), Article 13
(Interest), and Article 14 (Royalties).

The definition of

"permanent establishment" is a modernized version of the
definition found in some of our older treaties.

The new

deflnition is similar to the definition found in our French
Convention.
The term "permanent establishment" means "a fixed place
of business through which a resident of one of the Contracting
States engages in industrial or commercial activity."
Illustrations of the concept of a fixed place of business
include a seat of management, an office, a store or other

-

28 -

sales outlet, a workshop, a factory, a warehouse, a place
of extraction of natural resources, or a building,
construction, or installation project which is used for
such purpose for 6 months or more.

As a general rule,

any fixed facility through which an individual, corporation
or other person conducts industrial or commercial activity
will be treated as its permanent establishment unless it
falls in one of the specific exceptions described below.
The proposed Convention uses the term "a seat of management" which was the term used in our Convention with France.
The technical explanation of our French Convention explains
the definition of the term "a seat of management" and its
difference in meaning from the term "a place of management"
as follows:
It should be noted that this convention uses the
term "seat of management" where the OECD model
convention and prior agreements to which the United
States is a party used the t::.erm "place of management";
both terms are translations of the French term "un
siege de direction" and it is believed the translation
found in this convention is the more accurate. Prior
agreements in which the term "place of management"
appears will be interpreted therefore as if the words
"seat of management" had been used.
That explanation is applicable to the proposed Trinidad and
Tobago Convention.

- 29 -

This Article specifically provides that a permanent
establishment does not include a fixed place of husiness
of a resident of one of the Contracting States which is
located in the other Contracting State if it is used only

Tor one or more of the following:
Ca) the processing by another person, whether
related or unrelated, under arrangements or conditions
which are or would be made between independent persons,
of goods or merchandise belonging to the resident;
(b) the purchase, under arrangements or conditions
which are or would be made between independent persons,
of goods or merchandise for the account of the restdent;
(c) the storage and/or Gelivery of goods belonging
to the resident,

(other than goods or merchandise held

for sale by such resident in a store or other sales
outlet)

i

(d) the collection of information for the resident;
(e)

~dvertising,

the conduct of scientific research,

the display of goods or merchandise, or the supply of
information, if such activities have a preparatory and
auxiliary character in the trade or business of the
resident; or

-

(f)

30 -

construction, assembly, or installation

projects if the site or facilities are used for such
purpose for less than 6 months.
These exceptions are cumulative and a site or facility
used solely for more than one of these purposes will not
be considered a permanent establishment under the proposed
Convention.

The construction project rule is a physical

test under which the resident must be actively engaged in
the project during the specified period.
Notwithstanding the other provisions of this Article,
a person will be considered to have a permanent establishment
if he engages in business through an agent, other than an
independent agent, who has and regularly exercises authority
to conclude contracts in the name of such person unless the
agent only exercises such authority to purchase goods or
merchandise.

The proposed Convention further provides that

a resident of one State will be considered to have a
permanent establishment in the other State if such resident
engages in business in such other State through a person,
who maintains in that other State, a stock of goods or
merchandise belonging to such resident from which such
person regularly fills orders or makes deliveries.

A

- 31 -

resident of one State.will also be considered to have a
pennanent. establishment in the other State if such
resident maintains equipment or machinery

f~r

rental or

other, purposes within. that o·ther State tor a period of
6 month? or more.
With respect to an independe,ntagent, the proposed
Con:vention also provides that a resident of one State
~stablishment

will not be deemed to have a permanent

in

the other State if such resident engages in industrial
or commercial aC,tivi ty in such other State through an
independent agent, such as a broker or general commission
agent, if such agent is acting in

th~

ordinary course of

his business.
The; determination of whether a resident. of one State
has a permanent establishment in the other Stat-p. is to
be made without regard to any control relationship of such
resident.with respect,tQ a resident of the other State or
with.:respectto a person which ,engages in industrial or
. commercial activity in that,other St.ate (whether thr0ugh
a'pennanent establisl;lment or otherwise)
The Article provides that a resident of one of the
States has a pennanent establishment in the other State

- 32 if it sells in that other State goods or merchandise that
are either (1) subjected to substantial processing in
that other State (whether or not purchased in the other
State) or (2) purchased in that other State and such goods
or merchandise are not subjected to substantial processing
outside the other State.

Under this rule, which is similar

to the rule contained in the proposed Belgium Convention
the taxpayer will have a permanent establishment whether
or not he maintains a sales office in the other State.
Thus, where an independent agent acting for a United States
corporation arranges for the sale of goods in Trinirlad and
Tobago, the United States corporation will nevertheless
be deemed to have a permanent establishment in Trinidad
and Tobago where those goods were purchased in Trinidad
and Tobago for that corporation by the agent (or by any
other person) and then resold by the corporation without
having been subjected to processing outside Trinidad and
Tobago prior to such resale.

With respect to a United

States corporation selling goods purchased outside Trinidad
and Tobago (or produced outside Trinidad and Tobago), their
resale (or sale) in Trinidad and Tobago will of itself give
rise to a permanent establishment only if these goods are
subjected to substantial processing in Trinidad and Tobago.

- 33 If a resident of one State maintains a permanent
establishment in the other State at any time during the
taxable year, the permanent establishment will be
considered to have existed for the entire taxable year.

-

Article 10.

34 -

SHIPS AND AIRCRAFT

This Article provides that, notwithstanding the rules
of Article 8 concerning business profits, a resident of
Trinidad and Tobago will be exempt from tax in the united
Stutes on income derived from the operation in international
traffic of ships or aircraft, including capital gain derived
from the sale of a ship or aircraft used in such traffic,
and that a resident of the United States will be exempt from
tax in Trinidad and Tobago on income derived from the operation
in international traffic of ships or aircraft, including
capital gain derived from the sale of a ship or aircraft
used in such traffic, registered in the United States.

It

should be noted that the registration requirement is only
applicable in the case of a resident of the United States.
This Article also will apply to income derived from the
leasing, to a person engaged in the operation of ships or
air~raft,

of a ship or aircraft under a full or bareboat

charter, where the lessor is engaged in the operation of
ships or aircraft if such lease is ancillary to the lessor's
other operations.

For example, if an airline of one of the

Contracting States which has excess equipment in the winter
months leases several aircraft which are excess during that
period to an airline in the other Contracting State, the
lessor is not subject to tax by that other Contracting State.

- 35 -

Article 11.

RELATED PERSONS

This Article complements section 482 of the Internal
Revenue Code of 1954 and confirms the power of each government to allocate items of income, deduction, credit, or
allowances in cases in which a resident of one State is
related to any other person if such related persons impose
conditions between themselves which are different from
conditions which would be imposed between

independent persons.

This provision is similar to the provision contained in
the OECD Model Convention.
Provision is made in Article 23 (Mutual Agreement
Procedures) for consultation and agreement between the
two States where an allocation by either State results
or would result in double taxation.
Article 12.

DIVIDENDS

The proposed Convention provides for unilateral reduction
on the part of Trinidad and Tobago with respect to dividends
which are derived from sources within Trinidad and Tobago by
a resident of the United States.

Thus, the United States

withholding tax which is imposed at a 30-percent rate on
non-effectively connected dividends paid by United States
corporations to nonresidents of the United States is not
affected by the proposed Convention.

In the absence of a

-

36 -

convention, Trinidad and Tobago imposes a 30-percent
withholding tax on dividends and branch profits remitted
to nonresidents of Trinidad and Tobago.

To determine

the source of adividend for the purposes of this article,
the rules contained in paragraph (1) of Article 5 (Source
of Income) are used.
Under the proposed Convention Trinidad and Tobago may
impose a withholding tax of 25 percent on the gross amount
actually distributed with respect to portfolio investment
dividends.

The proposed Convention further provides that

Trinidad and Tobago may impose a maximum rate of 10 percent
with respect to intercorporate dividends if the recipient
owns 10 percent or more of the stock of the paying corporation
and generally if not more than 25 percent of the gross income
of the paying corporation consists of dividends and interest.
The rate of withholding which is imposed by Trinidad and Tobago
on profits of a branch of a United States corporation located
in Trinidad and Tobago is also limited to 10 percent.
The proposed Convention abandons the "force of at traction"
concept by providing that the reduced rate of tax on dividends is denied only if the shares with respect to which the
dividends are paid are effectively connected with a permanent
establishment which the recipient United States resident has

-

in Trinidad and Tobago.

37 -

In such a case the divldends may

be taxed as business profits in accordance with Article 8
(Business Profits) of the ~roposed Convention.
The proposed Convent1on als.;:. f-J:ovides specific definitions of the term "dividends" in the case of the United
States and Trinidad and 'tobago.

These terms aliuw each

State to treat those payments which, under their internal
law are treated as dividends, to be so treated for purposes
of the proposed Convention.

This rule is directly related

to the position adopted in the proposed Convention with
respect to remittances of a branch of a United States
corpora tion, loea ted 1n rl'rin:tdad and Tobago, to su;ch
corporation.
The proposed Convention also provides that dividends
paid by a corporation of one of the States to a person
other than a resident of the other State (in the case of
dividends paid by a Trinidad and Tobago corporation, other
than to a citizen of the United States) shall be exempt
from tax by that other State unless such dividends are
treated as income from sources within that other State
under Article 5 (Source of Income).

Thus, for example,

if dividends are paid by a Trinidad and Tobago corporation
to an individual who is a resident of a country other than

-

)8 -

the Unitec: States 3nd who

lS

not a citizen of the

enited St.:ltes, and such oividends are not effectively
connected with .:l permanent establishment located in the
United States, the United States will not be able to
subject this oividend to tax unless the Trinidad and
Tobago corporation had a permanent establishment in
the United States for a 3-year period and derived at
least 50 percent of its gross income from industrial
and commercial profits which are effectively connected
with such permanent establishment and then the only
amount subject to tax would be the pro rata portion of
the permanent establishment's income which is effectively
connected with the United States trade or business.

In

no case will the amount of the dividend which was treated
as income from sources within the United States exceed the
net amount of money or money's worth transferred from such
permanent"establishment during the 3-year period.
The proposed Convention also provides that where a
corporation of one State has a permanent establishment in
the other State and derives profits or income which are
effectively connected with that permanent establishment,
any remittance of such profits or income by that permanent
establishment may be taxed as a distribution in accordance

-

39 -

with the law of the other State at a rate which will not
exceed 10 percent.

This 10-percent rate corresponds to

the reduced rate which is applied to intercorporate
dividends under paragraph (1) (b) of this Article.

This

provision has been included to take into account the
taxation of such remittances under the tax laws of Trinidad
and Tobago.

This provision only applies to remittances

that are attributable to gains, profit, or income which
is effectively connected with the permanent establishment
in Trinidad and Tobago.

Thus, if there is a permanent

establishment in Trinidad and Tobago and no income is earned
which is treated as effectively connected with that permanent
establishment,

no portion of any remittance from that

permanent establishment to the United States home office
would be subject to this IO-percent tax.
It should be noted that this provision in no way affects
the United States taxation of such remittances.

Thus, since

the United States would not treat such remittances as a
dividend, the lO-percent tax which is imposed would not be
treated as a tax imposed on the operations of the corporatinn
in Trinidad and Tobago through a permanent establishment.
It should also be noted that the proposed Convention
does not contain an Article dealing with capital gains.

Both

Trinidad and Tobago and the United States have domestic rules

-

40 -

which provide a large measure of exemption for foreigners
deriving capital gains.

In the case of the united States,

a nonresident alien is exempt from tax on capital gains
unless he is present in the United States for a period
or periods aggregating 183 days or more during the taxable
year.

In the case of Trinidad and Tobago, capital gains

are taxed at normal rates.

However, if the holding period

of the asset is longer than 12 months, the gain is not
regarded as income and is exempt from taxation.
the proposed Convention does not provide

Since

special rule for

capital gains, paragraph (2) of Article 3 (General Rules
of Taxation) applies.
Article 13.

INTEREST

The proposed Convention provides for a unilateral
reduction by Trinidad and Tobago of the rate of withholding
tax which is imposed on interest which is received from
sources within Trinidad and Tobago by a resident of the
United States which is either a bank or other financial
institution not having a permanent establishment in Trinidad
and Tobago.

In the case of such residents of the United

States the rate of tax imposed by Trinidad and Tobago shall
not exceed 15 percent of the gross amount paid.

For

purposes of determining the source of an interest payment,

- 41 the rule provided in paragraph (2) of Article 5 (SO.ll:ce
of Income) shall be used.

It should be noted that if the

recipient of an interest payment from sources withln
Trinidad and Tobago is a resident of the United states
other than a bank or financial institution which does not

have a permanent establishment in Trinidad and Tobago,
the reduced rate of tax which is provided in the proposed
Convention will not apply.

The proposed Convention also

provides that interest received by one of the States
or any wholly owned instrumentality of that State is
exempt from tax by the other State.

Thus, for example,

interest which is received from sources within Trinidad
and Tobago by the Export-Import Bank of the Uni ted States
would not be subject to Trinidad and Tobago tax under this
Article.
As in the case of dividends, the United States has not
reduced its rate of wi thholding on interest: under the
proposed Convention.

Thus, Hw united States may impose

its withholding tax at the statutory rate of 30 percent
on noneffectively connected interest which is derived by
residents or corporations of Trinidad and Tobago from sources
within the United States, except that interest derived by
the Go'"ernment of Trinidad and Tobago or any of its wholly
owned agencies is exempt from such tax.

- 42 -

Under Trinidad and Tobago lncome tax law any interest
payment made by a subsidiary to his parent is deemed to
be a nondeductible distribution of profits if the parent
owns 50 percent or more of the stock of the payor subsidiary.
Paragraph (5) has been added so as to limit the application
of this rule to situations where the taxpayer cannot
demonstrate the absence of tax avoidance as the motive for
making the interest payment.

Under the proposed Convention

where excess interest payments are made because th.e payor
and the recipient are related, the provisions of this
Article apply only to so much of the interest as would have
been paid to an unrelated person.

The excess payment may

be taxed by each State according to its own law including
the provisions of the proposed Convention where applicable.
This Article contains a provision which is comparable
to that found in Article 12 (Dividends) which states that
interest paid by a corporation of one of the States to a
person other than a resident of the other State (and, in
the case of interest paid by a Trinidad and Tobago corporation, other than a citizen of the United States) shall be
exempt from tax by the other State,unless such interest is
treated as income from sources within that other State under
paragraph (2) (b) or (8) of Article 5 (Source

0

f Income).

-

Article 14.

43 -

ROYALTIES

The proposed Convention provides on a reciprocal
basis an exemption for artistic and literary royalties
but permits a tax to be levied at a maximum rate of
15 percent on other royalties.
The term "royalties" is defined to include payments
of any kind made as consideration for the use of, or the
right to use,copyrights, artistic or scientific works;
patents, designs, plans, secret processes or formulae,
trademarks, or other like property or rights (not including
motion picture films or films or tapes for radio or
television broadcasting), or information concerning
industrial, commercial, or scientific knowledge, experience,
or skill.
For purposes of the proposed Convention, the term
"royalties" does not include any royalties, rentals, or
other amounts paid in respect of the operation of mines or
quarrles or other resources.

The rules applicable to such

income are contained in Article 15 (Income from Real Property)
of the proposed Convention.
The provisions of this Article do not apply if the
recipient of a royalty has a permanent establishment in

0

State of source and the rights or property givin0 rise to

- 44 such royalty is effectively connected with such
permanent establishment.

In such a case, the royalty

may be taxed as industrial or commercial profits under
Article 8 (Business Profits).

Thus, the "force of

attraction" principle is also abandoned wi th respect
to royalties.

To determine the source of a particular

royalty, the rules provided in paragraph (3) cf Article 5
(Source of Income) shall be used.
Under the proposed Convention, if excess royalties
are paid because the payor and recipient are related, the
provisions of the royalties Article apply only to so much
of the royalty as would have been paid to an unrelated
person.

The excess payment may be taxed by each State,

according to its own law including the provisions of the
proposed Convention where applicable.
Article 15.

INCOME FROM REAL PROPERTY

This Article provides a resident who is subject to
taxation on income from real property with an election to
be taxed on a net basis.

The election applies to income

from real property, including gains derived from the sale
or exchange of such property, and natural resource royalties.
Each State retains the right to tax income from real property
under paragraph (1) of Article 3 (General Rules of Taxation).

-

Article 16.

45 -

INVESTMENT OR HOLDING COMPANIES

This Article denies the benefits of the dividends,
interest, and royalties

A~ticles

to a corporation of one of

the States deriving such income from sources within the other
State if (1) such corporation is entitled to

sp~cial

tax

benefits which result in the tax imposed on such income being
substantially less than the tax generally imposed on corporate
profits in such State, and (2) 25 percent or more'of the capital
of the corporation
or. morp

~s

owned directly or indirectly by one

oersons who are not individual residents of such

State or, in the case of a Trinidad and Tobago corpotation, are
citizens of the united States.
The purpose of this Article is to deal
abuse

whic~

~ith

a potential

could occur if one 6f the States provided preferential

rates of tax for investment or holding companies.

In such

a case, residents of third countries could organite a
corporation in the State

~xtending

the preferential rates

for the purpose of making investments in the

otherSt~te.

The combination of the low tax rates in the first State
and the reduced rates or 'exemptions in the other State
would enable the
benefits.

third~country

residents to realize unintended

-

Article 17.

46 -

INCOME FROM PERSONAL SERVICES

This Article provides that an individual resident of
one State is exempt from tax by the other State with respect
to income from personal services performed in such other
State if such person 1S physically present there for not
more than 183 days, in the aggregate, during the taxable year
and either

(1) such individual is an employee of a resident

of a State other than the State of source

(or an employee of

a permanent establishment of a resident of the State of source
located outside such State)

and the amount of such income is

not deducted 1n computing the profits of a permanent establishment
of the State of source; or

(2)

such income does not exceed

$3,000 or its equivalent in Trinidad and Tobago dollars.
Thus, if such individual's employment income does not exceed
$3,000 or its equivalent in Trinidad and Tobago dollars, such
individual need only satisfy the physical presence limitation
in order to qualify for the exemption.
Compensation for services performed as a member of the
regular complement aboard ships or aircraft operated 1n
international traffic by a resident of one State

(and in the

case of the United States, registered in the United States)
are exempt from tax in the other State.

This exception

does not limit a State's right to tax its own citizens or
residents.

- 47 "Income from personal services" includes income from
the performance of ,personal services in an indepE?ndeIft
capacity and "employment income."

Employment income includes

income from services performed by officers and directors of
corporations.

However, income from personal. services performed

by partners is treated as income from the performance of
services in an independent capacity.
The exemption applicable to personal service income is
limited in the case of (1) public entertainers, such as
musicians, actors, or professional athletes, -and (2) any
person providing the services of a person described in
(1)

even though such income may otherwise .be considered

exempt under some other provision of .this Convention.
persons are taxable if their income from
exceeds $100

suc~

These

activities

(or its equivalent in Trinidad and Tobago dollars)

for each day the individual is present for purposes of
performing within the State.
Article 18.

TEACHING AND RESEARCH

This Article of the proposed Convention provides a
reciprocal exemption from tax for personal service income of
visiting teachers or researchers.

This exemption applies to an

individual who is a resident of one State at the time he
is invited by the Government of the other State or by an
accredited educational institution of the other State to
teach or do research in the other State and temporarily

- 48 comes to such other State in order to engage in such teaching
or research.

However, the exemption does not apply to income

(1) from research undertaken not in the public interest but
primarily for private benefit of a specific person or
persons or (2) in cases where an agreement exists between the
Governments of States for the provision of the services of
such individuals.

If the individual's visit

exc~eds

a period

of 2 years from the date of arrival, the exemption applies
to the income received by the individual before the expiration
of such 2-year period.

Under this provision an individual who

has been a student or trainee and has been receiving the
benefits of exemption under Article 19 (Students and Trainees)
will not generally be entitled to the benefits of this Article
if he subsequently becomes a teacher in the other State since
one of the requlrements of this Article is that the individual
must be a resident of the first State at the time of his
invitation
Article 19.

to~ach

in the other State.

STUDENTS AND TRAINEES

This Article provides that an individual who is a resident
of one State at the time he becomes temporarily present in
the other State for the purpose of studying at a university or
other accredited institution, of securing training for
qualification in a profession or of studying or doing research

-

49 -

as a recipient of a grant, allowance, or award from a
governmental, religious, charitable, scientific, literary,
or educational institution is exempt from tax in the host State on:
(1)

Gifts from abroad for his maintenance and study;

(2)

The grant, allowance, or award;

(3)

Income 'from personal services performed in the

host State not in excess of $2,000 (or its equivalent in
Trinidad and Tobago dollars) for any taxable year.
The $2,000 exemption is increased to $5,000 if a resident
is securing training required to qualify him 'to practice
a profession or a professional specialty.
These exemptions continue for such period of time as may
be

reason~bly

or customarily required" to effectuate the

purpose of his visit but in no event mayan indiVidual

ha~e

the benefit of this Article and Article 18 (Teachers) for
more than a total of 5 taxable years from the date of arrival.
In addition, a resident of one State employed by or
under contract with a resident of that State who, at the
time he is a resident of that State, becomes temporarily
present in the other State for the purpose of studying or
acquiring technical, professional, or business experience
other than from a resident of the first-mentioned State
is exempt from tax in the host State on income not in excess
of $5,000

(or its equivalent in Trinidad and Tobago dollars)

-

fro~

50 -

personal serVlces rendred in the host State.

The

individual is exempt for a perod of one year which period
commences witl1 the first day of the first month in which he
110gins working or receives compensation.
Also, an individual who is a resident of one State at
the time he becomes temporarily present in the other State
for a period not exceeding one year and who is temporarily
present in the host State as a participant in a government
program of the host State for the primary purpose of training,
research, or study is entitled to an exemption by the host
State with respect to his income from personal serfices relating
to such training, research, or study performed in the host
State in an amount not in excess of $10,000 United States
dollars

(or its equivalent in Trinidad and Tobago dollars).

If an individual qualifies for the benefits of more
than ore of the provisions of the personal services Articles,
he may choose the provision most favorable to him but he
may not claim the benefits of more than one provision

in any taxable year.

Article 20.

GOVERNMENTAL SALARIES

The proposed Convention provides that wages, salaries,
and similar compensation, pensions, annuities, or similar
benefits, which are paid by or from the public funds of one

- 51 -

of the States to an individual who is a national of that
state for services rendered, to that State in the discharge of
governmental functions shall be exempt from tax by the other
State.
Unlike the French Convention the proposed Convention does
not apply to political subdivisions of a State.

Thus, for

example, empoyees of a State or municipal government of the
united States employed in Trinidad and Tobago will not be exempt
from Trinidad and Tobago tax under the proposed Convention.
with respect to the application of this provision to
Trinidad

an~

Tebago, it should be noted that Trinidad and Tobago

taxes on the basis of residence and not citizenship.

Further,

a person loses his resident status in Trinidad and Tobago for
tax purposes if he remains outside the country for a continuous
period of 6 months.

Thus, a resident of Trinidad and Tobago

employed abroad can be subject to tax in Trinidad and Tobago
for no more than 6 months.
The proposed Convention also adds a specification that
the compensation must be paid in connection with the discharge
functions of a governmental nature.

Compensation paid in

connection with industrial or commercial activity is treated
the same as compensation received from a private employer.

- 52 -

The

proviE~ons

relating to dependent personal services,

private pensions and annuities, and social security payments
would apply in such a case.
Article 21.

RULES APPLICABLE TO PERSONAL INCOME ARTICLES

This Article extends the benefits of the personal services
Articles

(Articles 17 through 20) to reimbursed travel expenses.

However, such reimbursed expenses will not be taken into
account in computing the maxiumum amount of exemptions specified
in Articles 17 (Income from Personal Services) and 19 (Students
and Trainees).

If an individual qualifies for the benefits of

more than one of the provisions of Articles 17 through 20, he
may choose the provision most favorable to him but he may
not claim the benefits of more than one Article with respect
to the same incGme in anyone taxable year.
Article 22.

PRIVATE PENSIONS AND ANNUITIES

The proposed Convention provides that private pensions,
private life annuities, and alimony which are paid to an
individual who is a resident of one of the States shall be
exempt from tax in the State of source.
The term "life annuities" is defined to mean a stated
sum paid periodically at stated times during life, or during
a

specified number of years, under an obligation to make payments

- 53 -

in return for adequate and full consideration in money or
money's worth.
The term "pension" is defined as periodic payments made
after retirement or death in consideration for services
rendered, or by way of compensation for injuries received
in connection with past employment.
The term "alimony" is defined as periodic payments
made pursuant to a decree of divorce or of separate maintenance
~hich

are taxable to the recipient under the internal laws

of the state of which he is a resident.

Thus, the term

Jlalimony" would not include a payment which would not be
taxable to the recipient under the laws of the State ln
which he is a resident even though such payment is made pursuant
to a decree of divorce or of separate maintenance.
The effect of this provision is the same as that of the
OECD Model Convention.
Article 23.

MUTUAL AGREEMENT PROCEDURES

This Article provides that the competent authorities of
the States may prescribe regulations for implementing the
present Convention within their respective States and may
coromunicate with each other directly for the purpose of
carrying out and giving effect to the provisions of this
Convention.

-

54 -

This Article also provides that the competent authorities
of the two States will endeavor to settle by mutual agreement
cases of taxation not in accordance with the Convention
as well as any other difficulties or doubts arising as to the
application of the Convention.

Some particular areas on

which the competent authorities may consult and reach agreement
are

(1) the amount of industrial and commercial profits to

be attributed to a permanent establishment,

(2)

the allocation

of income ,deductions, credits, or allowances between a resident
and any related person, and (3) the determination of the
source of particular items of income in accordance with the
rules set forth in Article 5

(Source of Income).

In implementing the provisions of this Article, the
competent authorities will communicate with each other
directly and meet together for an exchange of oral opinions
where advisable.
In cases in which the competent authorities reach agreement
with respect to a particular matter, taxes will be adjusted
and refunds or credits allowed in accordance with such agreement.
This provision permits the lssuance of a reund or credit
notwithstanding procedural barriers otherwise existing under
a State's law, such as the Statute of Limitations.
This provision will apply only where agreement or partial
agreement has been reached between the competent authorities

- 55 -

and will apply in the case of any such agreement after the
Convention goes into effect even though the agreement may
concern taxable years prior thereto.
Reven~e

Procedure 70-18 sets forth the procedures followed

by the united States in implementing its obligations under

this type of article.

- 56 -

Article 24.

EXCHANGE OF INFORMATION

This Article provides for a system of administrative
cooperation between the competent authorities of the two
States and specifies conditions under which information
may be exchanged to facilitate the administration of the
Convention and to prevent fraud and the avoidance of taxes
to which the Convention relates.
Information exchanged is treated as secret and may
not be disclosed to any persons other than those (including
a court or administrative body)

concerned with the assess-

ment, collection, enforcement, or prosecution of taxes
subject to the Convention, but this does not prohibit
incidental disclosure in the course of a court proceeding.
In no case does this Article impose an obligation on either
State to exchange information which would disclose trade
secrets or similar information.

Further, information shall

not be exchanged unless that information is available to
a Contracting State under its taxation laws and administrative procedures.
The mutual exchange of information called for by these
provisions is presently in effect in most of the conventions
to which the United States is a party.

-

Article 25.

57 -

ASSISTANCE IN COLLECTION

This Article provides for mutual assistance in the
collection of taxes where required to avoid an abuse of
the Convention.

The provision is intended merely to

insure that the benefits of the Convention will only be
available with respect to persons entitled to such
benefits; it does not in any way alter the rights under
other provisions of the Convention.
The Article provides that each State will endeavor
to collect for the other State such amounts as may be
necessary to insure that any exemption or reduced rate
of tax granted under the proposed Convention will not

L~

availed of by persons not entitled- to those benefits.
However, this Article will not require a State, in order
to collect taxes which.are.imposed by the other State,
to undertake any administrative measures that differ from
its internal regulations or practices nor will this Article
require a State to undertake any administrative or judicial
measures which are contrary to that State's sovereignty,
security, or public policy.
Article 26.

TAXPAYER CLAIMS

This Article provides for the administrative review
of taxpayer claims.

Thus, when a resident of one State

-

58 -

considers that action has resulted or will possibly result
in taxation contrary to the provisions of the Convention,
such resident may present his case to the competent
authority of the State of which he is a resident.

This

remedy is ln addition to any remedy provided by the law
of either State.

The competent authority of the State to

which the claim is made shall, if he thinks the claim has
merit, endeavor to settle this claim with the competent
authority of the other State.

In cases in which the

competent authorities reach agreement with respect to a
particular matter, taxes will be imposed and refunds or
credits allowed (as provided in Article 24 (Mutual Agreement
Procedures) in accordance with such agreement.
Article 27.

EXCHANGE OF LEGAL INFORMATION

This Article specifically provides that the competent
authority of each State will advise the competent authority
of the other State of any addition to or amendment of tax
laws which concern the imposition of taxes which are the
subject of this Convention.

It is further provided that

the competent authority of each State will exchange the
texts of all published material interpretin9 the present
Convention under the laws of the respective States, whether
in the form of regulations, rulings, or judicial decisions.

-

Article 28.

59 -

EFFECTIVE DATES AND RATIFICATION

This Article provides for the ratification of the
proposed Convention and for the exchange of instruments
of ratification.

The proposed Convention will have

effect for taxable years beginning on or after the first
day of January of the year in which the instruments of
ratification are exchanged.

However,

(I) the provisions

of paragraph (2) of Article 7 (Tax Deferral for Technical
Assistance) shall be effective with respect to stock
received on or after the date of the signing of the
Convention and (2) Trinidad and Tobago agrees, following
the signing of this Convention, to take all steps that
are necessary to give effect to the provisions of
Artic:le 12 {Dividends) so· that the provisions of- that
articleshal·l be effective from January- 1,

1970~

and shall

tenninateon December- 31., 1970, unless this Convention has
been !ratified by both States.

This provision was added

ino.rder·tbauthorize Trinidad and Tobago to reduce the
rate bf its withholding on dividends as soon as the Convention
is signed and not postpone this reduction until the Convention
is ratified ..
This Article also provides rules for terminating the
Convention.

The Convention will continue in effect

- 60 -

indefinitely, but may be terminated by either State at
any time after 5 years from the first day of January of
the year in which the instruments of ratification are
exchanged.

A State seeking to terminate the Convention

must give notice at least 6 months before the end of
the calendar year through diplomatic channels.

If the

Convention is terminated such termination shall be
effective for taxable years beginning on or after the
first day of January next following the expiration of
the 6-month period.
Article 29.

EXTENSION OF CONVENTION

This Article provides a method by which either State
may extend the Convention, either in whole or in part or
with such modification as may be found necessary for
special application in a particular case, to all or any
areas for whose international relations the State is
responsible and which area imposes taxes substantially
similar in character to those which are the subject of
this Convention.
Extension to an area may be accomplished by a State
through a written notification given to the other State

- 61 -

through diplomatic channels.

The other State shall

indicate its acceptance by a written communication through
diplomatic channels.

When the notification and communica-

tion have been ratified in accordance with the constitutional
procedures of each State and instruments of ratification exchanged
the extension will take effect for the date

speci~ien

in,

and be subject to such conditions as are specified in,
the notification.

Without such acceptance and exchange

of instruments of ratification in respect of an area, none
of the provisions of this Convention shall apply to such
areas.
Either of the States may terminate an extension with
respect to an area by 6 months' prior written notice of
termination given to the other State at any time after
the date of entry into force of the extension.

The

termination will take effect for taxable years beginning
on or after the first day of January next following the
expiration of the 6-month period.

The termination of an

extension to a particular area shall not affect the application of the Convention to the united States, Trinidad and
Tobago, or any other area to which the Convention has been
extended.

October 6, 1970
Technical Explanation
of
U.S.-Belgium Income Tax Convention
Signed July 9, 1970

Article 1.

PERSONAL SCOPE

This Article, which is a new provision for United
states treaties, is similar to Article 1 of the Draft
Double Taxation Convention on Income and Capital developed
by the Fiscal Committee of the Organization for Economic

Cooperation and Development and published in 1963 (hereinafter referred to as the OECD Model Convention).
Article does not have substantive importance.

The

Its purpose

is to generally delineate the persons who corne within the
scope of the Convention.

The Article is not complete in

its delineation of persons covered in that persons who
are residents of one or both of the Contracting States are
sometimes not covered in the Convention and that other
persons who are not residents of either of the Contracting
States are covered by this Convention.

For example,

Article 19 (Governmental Functions) applies to citizens
of a third State who corne to one of the Contracting States
expressly for the purpose of being employed by the other
Contracting State.

While the title of Article 1 is

-

"Pe rsonal Scope,

11

2 -

the Convention, of course, is applicable

to corporations and other entities as well as to individuals.
Article 2.

TAXES COVERED

This Article designates the taxes of the respective
States which are the subject of the proposed Convention.
With respect to the United States, the taxes included are
the United States Federal income taxes imposed by the
Internal Revenue Code.

This includes, for example, the

surtax and would also include such taxes as the temporary
surcharge which was in force from 1968 to 1970.

However,

the Convention is not intended to apply to taxes which
are in the nature of a penalty such as the taxes imposed
under section 531 (accumulated earnings tax) and section 541
(personal holding company tax) of the Internal Revenue Code.
With respect to Belgium, the taxes included are (1)
the individual income tax;

(2) the corporate income tax;

(3) the income tax on legal entities;
on nonresidents;

(4) the income tax

(5) the prepayments and additional pre-

payments; and (6) surcharges on any of the taxes referred
to in (1) through (5), including the communal supplement
to the individual income tax.

-

3 -

The Belgian individual income tax is payable by
resident individuals on income from all sources but
with reduced rates for foreign source income.
The Belgian corporate income tax is payable by
resident Belgian companies on income from all sources
but with reduced rates for foreign source income.
The Belgian income tax on legal entities is a tax
payable in lieu of the corporate income tax and is imposed
upon the political subdivisions of Belgium and those
resident legal entities which are not engaged in business
activity.
capital

This tax is levied solely on income from movable

(general~y

dividend and interest income) and real

property.
The Belgian income tax on nonresidents is payable by
nonresident individuals, corporations, and other legal
. entities on income earned or received in Belgium.
In addition to the above-enumerated taxes, prepayment
of tax in the form of withholding by the payor is required
by Belgian law in the case of income from movable capital
(generally dividend and interest income) and income from
real property.

There is also a standard professional pre-

payment (withholding) which applies to wages and salaries,
remuneration paid by a corporation to managers, directors

- 4 and persons with similar functions, and to pensions,
certain prizes and subsidies, and in the case of a nonresident recipient, alimony.
"les precomptes."

These taxes are known as

While Article 2 also lists "additional

prepayments" (complements de precomptes), that tax, which
was an additional 15 percent prepayment on income from
movable capital, has not been in force since January 1,
1967.

It was included at the request of Belgium in the

case such tax is re-established, although even in the
absence of an express reference, a new or re-established
tax would be covered by paragraph (2) of this Article.
In the case of income from real property, Belgian law
provides for an additional advance payment in the case
of taxpayers subject to the income tax on nonresidents
whose fiscal domicile is in a country with whom Belgium
has concluded a double taxation agreement giving Belgium
exclusive right to tax real property situated in her
territory.

Since, under Article 23 (Relief from Double

Taxation), the United States reserves the right to tax
its citizens and residents as if the Convention had not
come into effect, Belgium does not have an exclusive
right to tax United States residents on income from real
property and therefore there is no additional advance
payment on such income paid to United States residents.

- 5 -

Pursuant to paragraph (2) of this Article the proposed
Convention would also apply to taxes substantially similar
to those enumerated which are imposed, in addition to or
in place of the existing income taxes, after the date of
signature of this Convention (July 9, 1970).
This Article also provides that the competent authorities
of the Contracting States are to notify each other of any
amendments of the laws imposing the enumerated taxes and
of the adoption of any taxes which are subsequently imposed
by transmitting the text of any amendments or new statutes
at least once a year.

Further, the competent authorities

are to notify each other of the publication by their
respective States of any material concerning the application
of this Convention, whether in the form of regulations,
rulings, or judicial decisions, by transmitting the text of
any such material at least once a year.
Article 3.

GENERAL DEFINITIONS

This Article sets out definitions of certain of the
basic terms used in the proposed Convention.

A number of

important terms, however, are defined elsewhere in the
Convention.
Any term used in this Convention which is not defined
therein shall, unless the context otherwise requires, have

- 6 the meaning which it has under the laws of the State which
is imposing the tax.

However, in a case where a term has

a different meaning under the laws of Belgium and the
United States or where the meaning under the laws of one
or both of the States is not clear, the competent authorities
may agree on a uniform definition.
Agreement Procedure).

See Article 25 (Mutual

While treaties in the past did not

specify the power of the' competent authorities to resolve
such differences in definitions, this power is nevertheless
inherent in the authority set forth in the mutual agreement
article of these treaties to resolve "difficulties or
doubts. "
This Article defines geographical Belgium and geographical United States to include their respective continental
shelves.

The addition of a definition of the continental

shelf is intended to clarify what the Contracting States
consider to be included within their respective jurisdictions
to tax.

The United States continental shelf is defined as

the seabed and subsoil of the adjacent submarine areas
beyond the territorial sea over which the United States
exercises exclusive rights in accordance with international
law for the purpose of exploration and exploitation of the
natural resources of such area, but only to the extent that
the person, property, or activity to which this Convention

- 7 is being applied is connected with such exploration or
exploitation.

For example, the income earned by a ship

and its employees engaged in taking seismograph soundings
on the United States continental shelf will be treated for
tax purposes the same as the income from a comparable
activity on the land of one of the States of the United
States.
Belgium.

A comparable definition is used in the case of
The definition of the continental shelf in the

case of the United States only includes the continental shelf
surrounding the 50 States.

Thus, for example, the continental

shelf surrounding,Puerto Rico is not included.

If the treaty

were extended beyond the 50 States and the District of
Columbia (see Article 29 - Extension to Territories) the
continental shelf of the extended areas would also be
covered.

The defined continental shelf is only part of

the united States or Belgium, as the case may be, in limited
situations.

It is included only to the extent that a person

or property or activity to which the Convention is being
applied is connected with exploration or exploitation of
the continental shelf.

The phrase "connected with" does

not require physical attachment to the continental shelf to
be within the scope of the definition.
The Article also defines "United States corporation"
and "Belgian corporation."

Because of the difference in

concept, an entity could under Belgian law be considered

- 8 to be a Belgian corporation and under united States law
to be a United states corporation.

For purposes of the

proposed Convention, such a corporation would be treated
as a

cor~oration

of neither State because of the provisions

in the definitions of a corporation of the United States,
and a corporation of Belgium, that an entity may not be
considered a corporation of the United States, or Belgium,
if it is a corporation of the other State under domestic
law of that other State.

While such a result would make

the benefits of the Convention generally unavailable,
it is relatively easy for taxpayers to avoid such a
situation.
Article 4.

FISCAL DOMICILE

This Article sets forth rules for determining "fiscal
domicile" or residence of individuals, corporations and
other persons for purposes of the proposed Convention.
Residence is important because, in general, only a resident
of one of the Contracting States may qualify for the
benefits of the Convention.

This Article is patterned

generally after the fiscal domicile article of the OEeD
Model Convention.
The term "a resident of Belgium" means a corporation
of Belgium as defined in Article 3 (General Definitions)
and any person (other than a corporation) who is a resident
of Belgium for purposes of its tax.

The term "a resident

of the United States" means a United states corporation as
defined in Article 3 (General Definitions) and any person
(except a corporation or any other entity treated as a
corporation for United States tax purposes) resident in
the United States for purposes of its tax.

The language

in the parenthesis is intended to deal with the problem
of dual residency of a corporation.

An entity which

would be considered a Belgian corporation under Belgian
law and a United States corporation under United States
law would, under Article 3 (General Definitions) of the
Convention, be neither a Belgian corporation nor a
United States corporation.

Therefore, it was necessary

to make clear that such an entity is not included within
the term "any person" for purposes of the second part
of the definitions.

In addition, the parenthetical language

in the definition of a resident of the United States
is intended to make clear that a foreign corporation,
or other entity treated as a foreign corporation for
United States tax purposes, which is a resident of the
United States for certain purposes of its income tax law
is not, under the Convention, a resident of the United States.
In the case of the United States, the definition
provides that a partnership, estate, or trust is treated as
a resident only to the extent that the income derived by
such person is subject to United States tax as the income

- 10 of a resident.

This language, although different from

the Income Tax ~onvention between the United States and
France, signed July 28, 1967, is intended to achieve the
same result.

Under United States law, a partnership is

never, and an estate or trust is often not, taxed as such.
Under the proposed Convention, in the case of the United
States, income received by a partnership, estate, or trust
will not qualify for the benefits of the Convention unless
such income is subject to tax in the United States.

Thus,

in effect, the status of income which is subject to tax
only in the hands of the partners or beneficiaries, will
be determined by the residence of such partners or beneficiaries.

With respect to income taxed in the hands of the

estate or trust, the residence of the estate or trust is
determinative.

This provision is nonreciprocal

bec~use

of

the absence of a similar problem under Belgian law.
An individual who is a resident of both States under
the rules of domestic law employed by such States for
determining residence will be deemed to be a resident of
the State in which he has his permanent home, his center
of vital interests (closest economic and personal relations),
his habitual abode, or his citizenship, in the order listed.
If the issue is not settled by these tests, the competent
authorities will decide by mutual agreement the one State
of which he will be considered to be a resident.

Thus for

- 11 purposes of the Convention, including the savings clause
of Article 23(1), an individual can be resident in Belgium
or the United States, but not both.
Article 5.

PERMANENT ESTABLISHMENT

This Article defines the term "permanent establishment."
The existence of a permanent establishment is, under the
terms of the proposed Convention, a prerequisite for one
State to tax the industrial or commercial-profits of a
resident of the other State.

The concept is also significant

in determining the applicability of other provisions of the
Convention, such as Article 10 (Dividends), Article 11
(Interest), Article 12 (Royalties), and Article 13 (Capital
Gains).

The definition of "permanent establishment" is a

modernized version of the definition found in some of our
older treaties including the 1948 Convention with Belgium.
The new definition is similar to the definition found in
our French Convention.
The term "permanent establishment" means "a fixed
place of business through which a resident of one of the
Contracting States engages in industrial or commercial
activity."

Illustrations of the concept of a fixed place

of business include a seat of management, a branch, an

- 12 office, a factory, a workshop, a warehouse, a place of
extraction of natural resources, or a building site or
construction or installation project which exists for
more than 12 months.

As a general rule, any fixed

facility through which an individual, corporation or other
person conducts industrial or commercial activity will
be treated as its permanent establishment unless it falls
in one of the specific exceptions described below.

The

proposed Convention uses the term "a seat of management"
which was the term used in our Convention with France.
The technical ex-planation of our French Convention explains
the definition of the term "a seat of management" and its
difference in meaning from the term "a place of management"
as follows:
It should be noted that this convention uses the
term "seat of management" where the OECD model
convention and prior agreements to which the united
States is a party used the term "place of management";
both terms are translations of the French term "un
siege de direction" and it is believed the translation
found in this convention is the more accurate. Prior
agreements in which the term "place of management"
appears will be interpreted therefore as if the words
"seat of management" had been used.
That explanation is applicable to the proposed Belgian
Convention.
This Article specifically provides that a permanent
establishment does not include a fixed place of business
of a resident of one of the Contracting States which is

- 13 located ln the other Contracting State if it is used only
for one or more of the following -- (1) the use of facilities for the purpose of storage, display, or delivery
of goods or merchandise belonging to the resident;

(2)

the

maintenance of a stock of goods or merchandise belonging
to the resident for the purpose of storage, display, or
delivery;

(3) the maintenance of a stock of goods or

merchandise belonging to the resident for the purpose of
processing by another person;

(4) the maintenance of a

fixed place of business for the purpose of purchasing goods
or merchandise, or for collecting information, for the
resident;

(5) the

maintenance of a fixed place of business

for the purpose of advertising, or the supplying of information/

for scientific research, or for similar activities

which have a preparatory or auxiliary character,for the
resident; or (6)

the maintenance of a building site or

construction or installation project which does not exist
for more than 12 months.

The building site or construc-

tion or installation project exception is merely a clarification of the rule that such an activity for more than 12
months is a permanent establishment and, accordingly, such
an activity for 12 months or less is not a permanent
establishment.

These exceptions are cumulative and a site

or facility used solely for more than one of these purposes
will not be considered a permanent establishment under the

- 14 -

proposed Convention.

The l2-month construction project

rule is a physical test under which the resident must be
actively engaged in the project during that l2-month
period.
This

~rticle

also provides that notwithstanding the

provisions described in the preceding paragraph if three
conditions are met, a resident of one State will have a
permanent establishment in the other State.

The conditions

are:
1.

The resident has a fixed place of business in

that other State (a) which consists of facilities for the
storage, display or delivery of goods or merchandise
belonging to the resident;

(b) which consists of a stock

of goods or merchandise belonging to the resident which
lS

held for processing by another person; or (c) which is

used for the purpose of purchasing goods or merchandise
for the resident;
2.

The goods or merchandise described in paragraph 1

above are either subject to substantial processing in that
State (whether or not purchased there) or are purchased in
that other State (and are not thereafter subject to
substantial processing in another State); and

- 15 3.

Allor part of such goods or merchandise is

sold by the resident or his agent for use, consumption,
or disposition in that other State.
Under this rule, the taxpayer will have a permanent
establishment whether or not he maintains a sales office
in the other State.
Thus, for example, if an independent agent acting
for a United States corporation arranges the sales of the
corporation's goods in Belgium, the United States corporation will, nevertheless, be deemed to have a permanent
establishment in Belgium if those goods were purchased
in Belgium through a fixed place of business of the
corroration (ordinarily a purchasing office would not
constitute a permanent establishment) and then resold
therein wi thout having been subjected to processing outside
Belgium prior to such resale.
Notwithstanding the other provisions of this Article,
a person will be considered to have a permanent establishment if he engages in business through an agent, other
than an independent agent, who has and regularly exercises
authority to conclude contracts in the name of such person
unles:s the agent only exercises such authority to purchase
goods or merchandise.

- 16 -

With respect to an independent agent, the proposed
Convention also provides that a resident of one State will
not be deemed to. have a permanent establishment in the
other State if such resident engages in industrial or
commercial activity in such other State through an independent agent,such as a broker or general commission agent,if
such agent is acting in the ordinary course of his business.
This rule does not apply with respect to a broker or agent
acting on behalf of an insurance company if such broker or
agent has, and habitually exercises, an authority to conclude contracts in the name of that company.

It was agreed,

however, that an insurance company of one State writing
reinsurance contracts in the other State would not for that
reason be treated as having a permanent establishment, but
since it was understood that foreign companies writing relnsurance on Belgian risks do not authorize Belgian brokers
or agents to conclude reinsurance contracts in the name
of the foreign reinsurance company, it was not necessary
to specifically exclude reinsurance contracts from the
exception.
The determination of whether a resident of one State
has a permanent establishment in the other State is to be
made without regard to any control relationship of such

- 17 resident with respect to a resident of the other State or
with respect to a person which engages in
commercial

acti~ity

industrial or

in that other State (whether through

a permanent establishment or otherwise) .
Although this Article is generally drafted with
reference to a resident of one of the States engaging in
industrial or commercial activity in the other State,
for certain purposes

the proposed Convention deals with

a nonresident engaging in industrial or commercial activity
in one of the States or a resident of one of the States
engaging in industrial or commercial activity in a third
State.

For these purposes, the principles set forth in

Article 5 are to be applied in determining whether there
is a permanent establishment.
Article 6.

INCOME FROM REAL PROPERTY

This Article which is similar to an article in the
existing treaty provides that a resident of one State may
be subject to tax in the other State on income from real
property and royalties in respect of natural resources if
the property or natural resource is located in such other
State.

This Article does not, as do the existing treaty

and the 1967 treaty between the United States and France,
provide for an election by the resident to compute his
tax on such income on a net basis since under the internal
laws of Belgium and, since 1967, the United States this
can be done.

The income referred to in this Article

- 18 includes gain from the sale or exchange of such property
or such natural resource rights, but does not include
interest on mortgages and similar instruments.

The latter

type of income is covered by Article 11 (Interest).
Article 7.

BUSINESS PROFITS

This Article sets forth the typical treaty rule that
industrial or commercial profits of a resident of one State
are taxable in the other State only if the resident has a
permanent establishment in that other State.

Where there

is a permanent establishment only the profits attributable
to the permanent establishment can be taxed by that other
State.

For purposes of Article 23 (Relief From Double

Taxation) which, among other things, provides that a foreign
tax credit will be allowed by the United States, such

rro£its are considered to be from sources within the
State in which the permanent establishment is located.
While under the existing Belgian Convention, as under
the old French Convention, industrial or commercial profits
are not taxed in the absence of a permanent establishment,
once there is a permanent establishment the existing
Convention, as did the old French Convention, provides that
the provisions reducing the tax rates on interest and dividends and exempting royalties are not applicable.

This rule

- 19 -

is known as the "force of attraction" principle and is
replaced in the proposed Convention, as in our new treaty
with France, with the effectively connected concept.
Under the new approach, only thoseinterest, dividends
and royalties which are effectively connected with the
permanent establishment are taxable as part of the industrial
or commercial profits and

do

not benefit from the reduced

rate or exemption.
In determining the proper attribution of industrial
or commercial profits under the proposed treaty, the
permanent establishment is generally to be treated as an
independent entity and considered as realizing the profits
which would be realized if the permanent establishment dealt
with the resident of which it is a permanent establishment
on an arm's-length basis.

Expenses, wherever incurred,

which are reasonably connected with profits attributable
to the permanent establishment, including executive and
general administrative expenses, will be allowed as
deductions by the State in which the permanent establishment
lS

located in computing the tax due to such State.

Hovlever';

it is not necessary to allow a profit to the head office
for ancillary and management services furnished to the
permanent establishment as long as the permanent es-tabli.shment
is allowed to deduct the costs incurred by the head office.

- 20 The mere purchase of goods or merchandise in a State by
the permanent establishment, or by the resident of which it is a
permanent establishment, for the account of such resident will
not cause attribution of profits to such permanent establishment.
While some of our more recent conventions attempt a broad
defini tion of "industrial or commercial profi ts" by setting
forth examples of activities which will be considered as giving
rise to such profits, this Convention is limited to setting
three rules of inclusion and exclusion.

for~

In spite of the

difference in approach, the term "industrial or commercial
profits" has a meaning generally similar to that in our other
recent treaties.

It includes income derived from manufacturing,

mercantile, agricul tural, fishing, or mining activities, from th
operation of ships or aircraft, from the furnishing of personal
services of others, from the rental of tangible personal propert
and from insurance activities.
Thi s Article speci fically provides that the term "industria
or commercial profi ts" includes rents or royal ties derived from
motion picture films or films or tapes used for radio or
television broadcasting or from copyrights thereof and rents
derived from the leasing of tangible personal property.

- 21 The Article further provides that the term does not include
items of income specifically dealt with in other articles of
this Convention

~xcept

as provided in such articles.

Thus,

income derived from real property and natural resources and
dividends, interest, royalties

(as defined in paragraph (2) of

Article 12 (Royalties), capital gains, and income described in
Article 22

(Income Not Expressly Mentioned) constitute

industrial or commercial profits only if the right or property
giving rise to such amounts is effectively connected with a
permanent establishment which the recipient, being a resident
of one of the States, has in the other State.

Where such amounts

do not constitute industrial or commercial profits, they may
be taxed separately or together with industrial or commercial
profits in accordance with the laws of the State whose tax is
being determined, but the limits on the rate of taxation to which
such amounts may be subject must be observed.
For example, if a Belgian bank without a permanent
establishment in the United States loaned money to a United States
manufacturer in the United States, the interest paid by the
United States manufacturer to the Belgian bank would be treated
as interest and not as industrial or commercial profits and
would be governed by Article 11 (Interest) of the proposed
Convention which provides for either an exemption or a IS-percent
withholding rate.

-

22 -

In the reverse situation where a United states bank with
a branch in Belgium derives interest from Belgium which is not
effectively connected with its Belgian branch, Belgium could tax
the interest together with the income of the permanent
establishment as long as the rate of tax on the gross amount of
the interest did not exceed the IS-percent limitation.
Income from independent and dependent personal services
are specifically dealt with in Articles 14

(Independent Personal

Services and IS (Dependent Personal Services) and, therefore,
are not treated as business profits.

It is noted that in some

of our other recent conventions, there is an express provision
excl udinsr such services from the terms "industrial or conunercial
profits."

While there is no such provision in the Belgian

Convention, the resul t is the same.
Article 8.

SHIPPING AND AIR TRANSPORT

This Article provides that, notwithstanding the rules of
Article 7 (Business Profits) and Article 13 (Capital Gains),
income which a resident of one of the States derives from
the operation in international traffic of ships registered
in that State and gains which a resident of one of the States
derives from the sale, exchange, or other disposition of ships

- 23 -

operated in international traffic by such residents and
registered in that State shall be exempt from tax by the
other State.
A resident of one of the States will also be exempt
from tax in the other State on income derived from the
operation in international traffic of aircraft registered
in either State or in a State with which the other State
has an income tax convention exempting such income.

Gains

which a resident of one of the States derives from the
sale, exchange, or other disposition of aircraft are
accorded the same treatment.

An exchange of notes specifi-

cally exempting income from the operation of aircraft from
tax in the respective States is not considered as an income
tax convention exempting such income.
This Article also will apply to income derived from
the leasing, to a person engaged in the operation of ships
or aircraft, of a ship or aircraft under a full or bareboat
charter, where the lessor is engaged in the operation of
ships or aircraft if such lease is ancillary to the lessor's
other

~perations.

For example, if an airline of one of

the Contracting States which has excess equipment in the
winter months leases several aircraft

which are excess

during that period to an airline in the other Contracting
State, the lessor is not subject to tax by that other
Contracting State.

- 24 The exemption provided by this Article is also
a~plicdble

to profits derived from any activities incidental

tc the operatio~ of ships or aircraft in international traffic.
'l'hus, for example, commissions derived by a Belgian inter,ational aircarrier from the sale of passenger tickets in
~)nited

tLc

States as agent for other persons operating ships or

aircraft,

if incidental to its own international operations,

will be exempt from United States tax under Article 8.
Further, a Belgian airline company might have facilities at
an international airport in the United States which are used
~o

service and maintain its own aircraft.

In order to

make maximum use of the facilities, the company might also
service and maintain aircraft of other companies.

The profits

cleri'Jed from the furnishing of such services to others would
be exempt

under Article 8 unless such activity ceased to be

only an incidental activity.

However, income derived by a

Belgian airline company from the operation of a hotel in the
Cr,i ted States ",,'ould not be inciden tal to the operation of
~ircraft

!~,

and would not be exempt.

ct i c 1 e 9.

ASSOCIATED ENTERPRISES

This Article complements section 482 of the Internal
Revenue Code of 1954 and confirms the power of each aovern::;2nt

to allocate items of income, deduction, credit, or

- 25 allowances in cases in which a resident of one State is
related to a resident of the other State if such related
persons impose conditions between themselves which are
different from conditions which would be imposed between
independent persons.

This provision is similar to the

provision contained in the OECD Hodel Convention.
Provision is made in Article 25 (Mutual Agreement
Procedure) for consultation and agreement between the
two States where an allocation by either State results or
would result in double taxation.
Article 10.

DIVIDENDS

The existing Convention provides that dividends
derived from sources within one State by a resident of the
other State not having a permanent establishment in the
former State will be subject to tax in the former State at
a rate not in

excess of 15 percent.

The proposed Convention

continues the 15 percent rate on dividends.
As indicated above, the proposed Convention abandons
the "force of attraction" concept in the existing Convention
by providing that the reduced rate of tax on dividends is

denied only if the shares with respect to which the dividends
are paid are effectively connected with a permanent establishment which the recipient has in the State of source.

The

- 26 -

elimination of the "force of attraction" principle will
make uniform the rate of tax levied on dividend income
by a resident of one State from sources within the

other State unless such income is effectively connected
to a permanent establishment in the State of source.

In

those cases where the shares with respect to which the
dividends are paid are so effectively connected, the
dividends may be taxed as industrial and commercial
profits under Article 7 (Business Profits) .

Income

which is so effectively connected may be taxed at the
normal rates applicable to such income in the State of
source.

However, this does not prevent Belgium from

imposing its movable property prepayment in accordance
with Belgian law, and this would be credited against the
tax owed by the permanent establishment.
The dividend Article of the proposed Convention is
PQtterned generally after the OECD Model Convention.
However, the proposed Convention additionally provides
th:it the term "dividends" includes income from invested
capital received by members of Belgian companies other than
companies with share capital where, under Belgian law,
such income is taxable in the same way as dividends.
These are companies whose shareholders

are

restricted to individuals and are generally

-

similar to partnerships.

27 -

Such companies are not entitled to

an interest deduction on a loan made by a shareholder to the
company.

Inter~st payments by such a company to a shareholder

are treated similarly to dividends for purposes of Belgian law
and are treated as dividends under the proposed treaty.
companies covered by this latter rule are

Societ~s

Responsabilite Limitee, Societes en nom Collectif

The

de Personnes a
Societes en

Commandite Simple, and Societes Cooperatives.
Under Belgian law dividends paid to an individual from
sources outside of Belgium which are received within Belgium
are subject to a 20-percent precompte mobiliere.

The precompte

is used by Belgium as a collection device since most securities
are in bearer form and the residency of the owner is not
readily determinable.

Belgium has agreed under this Article

to waive collection of the precompte on dividends paid by
United States corporations to an individual who is a resident
or citizen of the United States and not a resident of Belgium.
Such individual when he goes to a Belgian bank to collect on
a dividend will have to substantiate his citizenship and
residency and it is anticipated that the Belgian Government
will verify the fact that such person is the proper recipient
of the dividend by submitting their names to the Internal
Revenue Service.

- 28 In other cases, dividends paid by a corporation of
one of the States to a person other than a resident of
the other State are exempt from tax by the other State
unless the dividends are effectively connected with a
permanent establishment of the recipient maintained in
the other State or the dividends are paid by a United States
corporation and are received within Belgium by a person other
than a citizen or resident of the United States.
Article 11.

INTEREST

The existing Convention provides that interest derived
from sources within one State by a resident of the other State
not having a permanent establishment in the former State will
be subject to tax in the former State at a rate not in excess
of 15 percent.
The proposed Convention retains the 15 percent rate on
interest replacing the "force of attraction" principle by
the effpctively connected approach.

In four important cases,

however, the proposed Convention provides for exemption
in the State of source.

First, interest is exempt at source

if it arises out of commercial credit--including credit which
lS

represented by commercial paper--resulting from deferred

payments for goods or merchandise or services supplied by a
resident of one of the States to a resident of the other State.
This exception would apply to interest derived by a bank or

-

29 -

other financial institution which purchases paper which
arose out of commercial credit which the seller of goods or
services discounted at such bank or financial institution.
It would also apply to interest derived by a finance company
which is a subsidiary of a sellinq company and which is used
by the parent to finance its sales.

Second, interest paid

between banks is exempt except on loans represented by bearer
instruments.

Under this provision, interest on advances

between banks would be exempt as would interest on loan from a
United States bank to a Belgian bank, assuming that there was
not a bearer instrument representing the indebtedness.

Third,

an exception is provided for interest arising from deposits,
not represented by bearer instruments, made in banks or other
financial institutions.

Fourth, interest beneficially derived

by one of the States, or by an instrumentality of that State,
not subject to tax by that State on its income, would be exempt
from tax by the other State.

Under this rule, interest income

derived by the Export-Import Bank of the united States on loans
made to Belgian residents would be exempt from tax in Belgium.
This would still be the case if the Export-Import Bank sold
interest-participation certificates on such a loan.

On the

-

30 -

other hand, this rule would not apply if the Export-Import
Bank discounted or sold the instrument representing the
loan.

However, in such a case the exception for interest

arising out of commercial credit may be applicable.
As noted above in connection with the dividend
Article, the proposed Convention abandons the "force of
attraction"principle.

Thus, the reduced rates of tax

applicable to interest apply unless the recipient has a
permanent establishment in the State of source and the
indebtedness giving rise to the interest is effectively
connected with such permanent establishment.

In such a

case, the interest may be taxed as industrial or commercial
profits.
Interest is defined generally as income from any kind
of debt -claim or any income treated as interest under the
tax law of the State of source.

In cases in

which excessive

inten"!st is paid by reason of a special relationship between
the payor and the recipient, the provisions of the interest
ffticle do not apply to the excess part of the payments.
Excess interest payments may be taxed according to the law
of the State from which the interest is derived.

In the

case of excess interest derived from the United States, the
excess interest may be taxed as dividend.

Under Belgian law,

-

31 -

the excess interest is disallowed as a deduction, but, in
the hands of the recipient, continues to retain its character
as interest.

However, the recipient is not entitled to the

benefits of this Article with respect to such excess.
Thus, for example, in the case of the united States the
rules provided in section 482 of the Internal Revenue Code
would be applicable if excess interest is paid between related
persons.

On the other hand, if a Belgian resident pays excess

interest to a united States related person, the Belgian tax
authorities would disallow such excess as a deduction to the
Belgian resident, and would continue to treat such excess as
interest, and subject such excess to the 20-percent rate of
withholding, as provided under Belgian domestic law, since such
excess is not entitled to treaty benefits.
The term "interest" does not include amounts which are
considered as dividends as discussed above in connection with
Article 10

(Di vidends) .

In the case of Belgium, the term

"interest" includes prizes on lottery bonds.
Interest is from sources within a State when the payor
is that state, a political subdivision, a local authority
thereof, or a resident of that State.

However, if the payor

(who is not a resident of one of the Contracting States) has
a permanent establishment in one of the States and the
indebtedness on which the interest is paid is effectively
connected with such permanent establishment and the interest

-

1S

32 -

borne by such permanent establishment, such interest shall

be deemed to be 30urced within the State in which the
permanent establishment is located.
In other cases, interest paid by a corporation of one of
the States to a person other than a residen t of the other State
is exempt from tax by the other State unless the interest is
effectively connected with a permanent establishment of the
recipient maintained in the other State or the interest is paid
by a United States corporation and is received within Belgium
by a person other than a citizen or resident of the
Uni ted Sta tes.
As in the case of dividends, the interest Article also
contains a special rule dealing with interest from sources
\'Jithin the United States which is received within Belgium by a
resident of the United States or a citizen of the United States
who is not a resident of Belgium.

In such a case Belgium has

agreed to waive its withholding tax.

In addition, if a

permanent establishment which a resident of one of the
Contracting States has in a third State borrows money from a
resident of the other Contract ina State, for purposes of the
treaty, the interest paid by the permanent establishment will
be treated as from sources within the third State if the loan
effectively connected with, and interest is borne by, such
permanent establishment.

-

Article 12.

33 -

ROYALTIES

The existin,g Convention provides that royalties derived
from sources within one of the States by a resident of the
other State shall be exempt from tax by the former State.

The

proposed Convention continues this exemption for royalties.
The term "royalties" is defined to include (a) payments of
any kind made as consideration for the use of, or the right to
use, copyrights of literary, artistic, or scientific works
(but not including copyrights of motion picture films or films
or tapes used for radio or television broadcasting), patents,
designs, models, plans, secret processes or formulae, trademarks,
or other like property or rights, or knowledge, experience, or
skill (know-how) and (b) gains derived from the sale or exchange
of such rights or property, but only if payment is contingent
on productivity, use, or disposition of the property.

If the

payments are not so contingent, the capital gains Article
applies.
The provisions of this Article do not apply if the
recipient of a royalty has a permanent establishment in the
State of source and the rights or property giving rise to the
royalty is effectively connected to such permanent establishment.
In such a case, the royalty may be taxed as industrial or
commercial profits under Article 7 (Business Profits).
"force

0

f

Thus, the

at traction" principle is also abandoned wi th respect

to royalties.

-

34 -

The source rule on royalties is different from the source
rule found in most of our recent treaties and the rule in
section 861

(a)

(4) of the Internal Revenue Code.

The proposed

Convention provides that royalties shall be treated as income
from sources within one of the States if paid by such State, a
political subdivision, or a local authority thereof, or by a
resident of that State.

However,

(a) if the person paying the

royalty is not a resident of either Contracting State and has a
permanent establishment in one of the States with which the right
or property giving rise to the royalty is effectively connected
and such royalties are borne by such permanent establishment, or
(b)

if the person paying the royalty is a resident of one of the

Contracting States and has a permanent establishment in-a third
State with which the right or property giving rise to the
royalty is effectively connected and such royalties are borne
by such permanent establishment--such royalties are deemed to
be from sources within the State in which the permanent
establishment is located.

This source rule is similar to the

interest source rule found in Article 11 (Interest) of the
proposed Convention and to the source rule for royalties under
Belgian domestic law.

On the United States side, since royalties

are exempt at source, the source rule on royalties is relatively
unimportant.

However, on the Belgian side, because of the

treatment given under Belgian law for excessive royalty payments,

-

35 -

the source of the royalty has importance.

Under the proposed

Convention, if excessive royalties are paid because the payor and
the recipient are related,

the provisions of the royalty Article

apply only to so much of the royalty as would have been paid
The excess payment way be taxed

to an unrelated person.

according to its own law by the State from v"hich the royal ty
is derived.

In the case of Belgium, Belgium would deny a

deduction for the excess royalty payments, but, in the hands
of the recipient, the payment would still be considered to be
a royalty under Belqiim

c1()m('~t ic

1"

is not entitled to the benefits of this article with respect
to such excess.
If a nonresident has a permanent establishment in Belgium
or the United States,
connected with)

royalties attributable to

(effectively

such permanent establishment are not subject to

withholding but are subject to tax in Belgium or the United States

at the rates normally applicable to industrial or cowmercial
profl ts.

Article 13.
T~lC

CAPITAL GAINS

existina Convention

deriveci in one State from

i'

p~:o'"-:.c1E:s

r:':','1i"'~

no srcci,1
r , : ' ] : j ' , ,',

rule.; f:-,,' 'lains
'~{:

securities, commodities, or othf.?r capital assets hy
of the

0

ther Sta te.

re,C:l..:Jent

('j

The proposed Cnn ;76,n t ion pro':'ides

til,:'

t

such

gains shall be exempt from tax b,:, th'? ::::t"t r", of ~;()\1rCe,

IlowevlO'r!

the exemption does not apply if

a

(1)

thE:?

CJ(:]l'

cc;-i'vcd

0)'

-

36 -

resident of one State arises out of the sale or exchange of
property described in Article 6 (Income from Real Property)
which is situated within the other State,

(2)

the recipient of

the gain has a permanent establishment or maintains a fixed
base ln that other State and the property giving rise to the
gain is effectively connected with such permanent establishment
or such fixed base, or (3)

the recipient of the gain being an

individual resident of the first State is present in that other
State for a period or periods aggregating 183 days or more in
the taxable year.

Gains which are effectively connected

with a permanent establishment may be taxed as industLial or
commercial profits under Article 7 (Business Profits).

Gains

on real property are subject to the provisions of Article 6
(Income from Real Property) which permits taxation of such gains
by the State lnwhich the real property is situated.

The

Belgians do not tax capital gains of individuals arising from
a casual sale of nonbusiness assets.
Article 14.

INDEPENDENT PERSONAL SERVICES

The existing Convention provides that an individual
resident of one State shall be exempt from tax by the other stat
if he meets either of two conditions:

(a) he is present in wat

other State for not more than 183 days and his compensation is
for services performed as a worker or employee of, or under
contract with, a resident of the first State who bears the
actual burden of the remuneration; or (b) he is temporarily

-

37 -

present within that other State for a period or periods not
exceeding 90 days during the calendar year and the compensation
received for such services does not exceed $3,000 in the
aggregate.

The 90-day, $3,000 rule under the existing Convention

does not apply to remuneration of " a dministrateurs,

II

"cornrnissaires," or "liquidateurs" of, or of other individuals
exercising similar functions in, corporations created or
organized In Belgium, nor to remuneration of officers and
directors of United States corporations.
The proposed Convention generally deals with personal
services in two articles and creates a

dis~inc~lon

based upon

whether the services are independent or dependent personal
services.

The proposed Convention also provides a special rule

for independent individuals who are artists or athletes, and a
separate Article dealing with directors' fees.

Thus, for

example, a doctor or lawyer typically renders independent personal
services.

Also an entertainer who under comwon law concepts is

an independent contractor is considered as rendering independent
personal services.
Generally, under Article 14 of the proposed Convent-iorl,
inco~e

earned by an individual resident of one state froIT,

independent personal services performed in thp other State may
not be taxed in that other State.

However, such income will be

Subject to tax in the State of source (i.e.
are performed)

I

where the sec7ices

if the recipient is present in that State

- 38 for a period or periods aggregating 183 days or more in the
taxable year or if the individual maintains a fixed base In
that other State for a period or periods aggregating 183 days
or more in the taxable year and the income is attributable to
such fixed base.
Independent personal services means services performed by
an individual for h is own accoun t whe re he rece i ve s the proceeds
or bears the losses arising from such services.

Commercial,

industrial, or agricultural activities are not considered
independent personal services and the income therefrom is taxed
as industrial or commercial profits under Article 7 (Business
Profi ts) .
Thus, for example, if a physician, resident in one State,
has an office available In the other State for a period
aggrega ting 183 day s or more during the taxable year, the income
he earns from the performance of services wi thin the other State
will be subject to tax in that other State regardless of whether
he is physically present in that other State for 183 days or
more durin0 the taxable year and regardless of whether others
make use of his office in his absence.
An individual who derives income from independent personal
services as a public entertainer is nevertheless subject to tax
in the other State if his stay in such State exceeds 90 days
during the taxab Ie year or h is in come is in exces s

0

f $ 3,000 or

its equivalent in Belgian francs durin a the taxable year.

-

Article 15.

39

-

DEPENDENT PERSONAL SERVICES

Generally, under the proposed Convention income from labor
or personal services as an employee may be taxed in the State
in which such labor or personal services are performed (except
as provided in Article 20
Trainees)).

(Teachers) and Article 21 (Students and

However, such income will be exempt from tax in the

State of source if (1)

the recipient, beinq a resident of one of

the Contracting States, is present in the State of source for a
period or periods aggregating less than 183 days during the
taxable year;

(2)

the recipient is an employee of a resident of

the State of his residence (or a permanent establishment located
in the State of his residence); and (3) the remuneration is not
borne as such by a permanent establishment which the employer
has in the State of source.

Thus, the rule applicable to

dependent personal services is similar to that contained in
existing Convention.

the

However, income from personal services

performed in Belgium by a United States resident who is employed
by a Belgian permanent establishment maintained by a
United States corporation would no longer be exempt from tax in
Belgium (nor would there be an exemption from United States tax
in the reverse situation).

In addition, the proposed Convention

would eliminate the rule in the existing Convention generally
exempting a resident of one State from taxation by the other
State of compensation received for services performed in the
other State where such resident is temporarily present in the

- 40 other State for a period aggreqating 90 days or less during the
taxable year and, the compensation received for such services
is not in excess of $3,000.

The proposed Convention also adds

a rule that income from personal services aboard ships or
aircraft registered in one State and operated by a resident
of that State in international traffic will not be taxed in the
other State so long as the services are rendered by a member
of the regular complement of the ship or aircraft.
This Article of the proposed Convention is substantially
similar to the

Or~CD

f10del ConvC'JII i'lll

('1'('('1>1

111,11,

11))(1('1'

trw

proposed Convention, an individual temporarily present in one
State who is an employee of a permanent establishment located
in the other State and maintained by a corporation of the
first-mentioned State will be exempt from taxation by the
first-mentioned State on wages earned while temporarily present
thc~cin

if the other requirements are

~et.

DIRECTOR'S FEES

Cnde r the exis ting Con ven tion, compensation recei'Ted by an
individual who is a resident of one State as a director of a
corporation of the other State is taxable by the other State.
This rcsul t is obtained by the exclusion of such individuals
from the 90-day, $3,000 rule.

The proposed Convention continue:

- 41 this treatment, in part, in a specific Article dealing with
the treatment of director's fees.

The Article provides that a

director's fee derived by an individual who is a resident of one
of the States in his capacity as a member of the board of
directors of a corporation of the other State may be taxed by
the other State.

This rule is limited to fees which an

individual receives as a director as contrasted to fees that
he might receive as an officer or eillployee of a corporation,
by providing that a director's fee does not include fixed or
contingent payments derived by an inrli'-.-irlua1

in his capacity

as an officer or employee of a corporation.

Further, to be a

director's fee the payment must be of the type which cannot
be taken as a deduction by the corporation paying the fee but
is treated as a distribution of profits.
payme~ts

These types of

are typically rade by Belgian corporations.

Director's fees taxable by Belgium under this Article
~re

treated as Belgian source income for purposes of the

~~~ted

States foreign tax credit limitation regardless of

~~ere

sC2h services as a director are performed.

whi2h

di~fers

This rule,

from the normal United States source rule, is

deslC;::ed to avoid c10uble taxation.

- 42 Article 17.

SOCIAL SECURITY PAYMENTS

This Article provides that social security payments paid
by one State to 'an individual who is a resident of the other
State will be taxed, if at all, by the payor State.

Also

included under this Article are other public pensions such as
railroad retirement benefi ts.

Nei ther the existing Convention

nor the OECD Model Convention contains a comparable provision.
Article 18.

PRIVATE PENSIONS AND ANNUITIES

The existing Convention provides that private pensions
and annuities dorived from sources within one state by an
individual resident of the other State are exempt from tax
in the State of source.

The proposed Convention continues the

existing rule by providing that pensions and other similar
remuneration paid in consideration of past employment and
annuities received by a resident of a State will be taxable
only in the State of residence.
the scope of Article 19

However, pensions coming within

(Governmental Functions) will be taxable

only by the State making payment.
The

proposed Convention also provides that alimony paid to

a resident of a State will be taxable only in the State of
residence.

A

Unit~d

States rpsident making

a1 imony payments to a Belgian residen t may '<P(lllct such

-

43 -

payments (unless section 71 (d) or 682 of the United States
Internal Revenue Code applies).
The term "annuities" is de fined as a stated sum paid
periodically at stated times during life, or during a specified
number of years, under an obligation to make the payments in
return for adequate and full consideration (other than for
services rendered).

The term "pensions" is defined as periodic

payments made after retirement or death in consideration for
services rendered, or by way of compensation for injuries
received in connection with past employment.
The effect of this provision is generally the same as that
of the OECD Model Convention .
.a.rticle 19.

GOVERNMENTAL FUNCTIONS

The existing Convention exempts compensation including
pensions and annuities paid by one of the States or a political
subdivision or territory thereof to a citizen of that State
residing in the other State (whether or not also a citizen of
the other State) from taxation by that other State.

The proposed

Convention continues the exemption but adds a specification that
the compensation must be paid in connection wi th the discharge
of functions of a governmental nature.

Compensation paid in

connection with industrial or commercial activity is treated
the same as compensation received from a private employer.

The

- 44 provisions relating to dependent personal services, private
pensions and annuities, and social security payments would
apply in such a case.
The proposed Convention extends the category of individuals
who are eligible for the exemption to citizens of a third
State who corne to a State expressly for the purpose of
being employed by the other State, a political subdivision,
or a local authority thereof.
Article 20.

TEACHERS

The existing Convention provides that teachers who
are citizens of one State and who, pursuant to agreements
between the States or teaching establishments in the States,
accent a teaching position at an educational institution
in the other State shall be exempt from taxation in such
other State on remuneration received for such teaching,
for a maximum period of two years.
The proposed Convention continues and broadens the 2-year
exemption period for visiting teachers.

This exemption applies

to an individual who is a resident of one State at the time he
is invited by the other State or by a recognized educational
institution of the other State to teach or do research in the
other State and temporarily comes to such other State in order
to engage in such teaching or research.

Invitation may be by

the Government or a university or other recognized educational

- 45 institution.

For purposes of the United States, the term

"recognized" will be construed to mean accredited.

However,

the exemption does not apply to income from research undertaken
not in the public interest

but primarily for private benefit of

a specific person or persons.

If the individual's visit exceeds

a period of 2 years from the date of arrival, the exemption
applies to the income received by the individual before the
expiration of such 2-year period.

Under this provision an

individual who has been a student or trainee and has been
receiving the benefits of exemption under Article 21 (Students
and Trainees) wili not generally be entitled to the benefits
of this Article if he subsequen tly becomes a teacher in the
other State since one of the requirements of this Article is
that the individual must be a resident of the first State at
the time of his invitation to teach in the other State.
Article 21.

STUDENTS AND TRAINEES

Under the existing Convention remittances received from
within one State by citizens of the other State residing in
the first-mentioned State for the purpose of study are exempt
from tax by the other State.

The OECD Model Convention includes

a similar provision.
The proposed Convention expands the exemption available to
students by providing that an individual who is a resident of one
State at the time he becomes temporarily present in the other

-

46 -

State for the purpose of studying at a university or other
recognized

insti~ution,

of securing training for aualification

in a profession or of studying or doing research as a recipient
of a grant, allowance, or award from a governmental, religious,
charitable, scientific, literary, or educational institution is
exempt from tax in the host State on:
(1)

Gifts from abroad for his maintenance and study;

(2)

The grant, allowance, or award;

(3)

Income from personal services performed in the

host State not in excess of $2,000 (or its equivalent in
Belgian francs)

for any taxable year.

These exemptions continue for such period of time as may be
reasonably or customarily required to effectuate the purpose
of his visit but in no event mayan individual have the benefit
of this Article and Article 20

(Teachers) for more than a total

of 5 taxable years from the date of arrival.
In addition, a resident of one State employed by or under
contract with a resident of that State who, at the time he is
a resident of that State: becomes temporarily present in the
other state for the purpose of studying or acquiring technical,
professional, or business experience is exempt from tax in the

- 47 host State on income not in excess of $5,000 (or its equivalent
in Belgian francs)
State.

from personal services rendered in the host

The individual is exempt for a period of 12 consecutive

months which period commences with the first month in which
he begins working or receives compensation.
Also, an individual who is a resident of one State
is temporarily present in the host State

and

who

as a participant in

a government program of the host State for the primary purpose
of training, research, or study is entitled to an exemption
by the host State with respect to his income from personal
services relating to such training, research, or study
performed in the host State in an amount not in excess of
$10,000 United States dollars
francs).

(or its equivalent in Belgian

To be entitled to this exemption the program must be

- 48 a program which does not exceed 1 year in duration.

If

this qualification is met then the income from personal
services received with respect to such program is exempt.
If an individual qualifies for the benefits of
more than one of the provisions of the personal services
Article 5, he may choose the provision most favorable
to him but he may not claim the benefits of more than
one provision as a means of avoiding the limitations provided.
Article 22.

INCOME NOT EXPRESSLY MENTIONED

This Article of the proposed Convention contains a
general rule that items of income of a resident of one
of the States which are not expressly mentioned in the
foregoing articles of the proposed Convention shall be
taxable only in that State except that, if such income
is derived from sources within the other State, that other
State may also tax such income.

This rule provides for

the same result as found in paragraph (1) of Article 22
(General Rules of Taxation) of our French Convention
which provides that any income from sources within a State
to which the Convention is not expressly applicable will
be taxable by that State in accordance with its own law.
For example, because income from prizes or awards is not
generally covered by the Convention, such income will

- 49 -

ordinarily be taxed in accordance with the internal law
of the State from which such income is derived.

However,

this Article does not apply to industrial and commercial
profits attributable to a permanent establishment since
such income is expressly covered in Article 7 (Business
Profits).

The existing convention does not contain an

express statement of this general rule.

The OECD Model

Convention differs on this point and provides that income
which is not expressly mentioned will be taxable only
in the State of residence.

In any event it should be

noted that the proposed Convention specifically covers
most types of income.
Article 23.

RELIEF FROM DOUBLE TAXATION

Under the existing Convention the United States
provides relief from double taxation by allowing a credit
for Belgian tax which credit shall not exceed that
proportion of the United States tax which the net income
from sources within Belgium bears to the total net income
of such citizen or resident.
The proposed Convention employs the same method of
avoiding double taxation.

It provides that subject to

the provisions of United States law applicable for the
taxable years, a credit against united States tax will be

-

50 -

allowed to a citizen or resident of the united States
for Belgian tax paid.

The credit is based upon the amount

of tax paid to Belgium but will not exceed the amount of
United States tax attributable to such income.

Except

for the special source rules provided by the Convention
this provision does not add to the rights which a United
States citizen or resident has to the foreign tax credit,
but is for the purpose of giving treaty recognition to
such rights.

Modifications in United States law after

the effective date of the Convention which concern

the

foreign tax credit will be applicable with respect to
Belgium source income if such modifications do not
contravene the general principle of the Convention.
The proposed Convention also contains the traditional
savings clause under which the United States reserves the
right to tax its citizens and residents as if the Convention
had not come into effect.

However, the savings clause

does not apply in several cases in which its application
would contravene policies reflected in the Convention.
Thus, the savings clause does not affect the provisions
with respect to the foreign tax credit, social security
payments, nondiscrimination, or mutual agreement procedure.
Moreover, the savings clause will not deny the benefits

- 51 -

of the. C!a)flvention 1:;0 governmental employees or teachers
or. st\.lPents un;l,ess such individuals are oi ti~ens of the
U'nt,te:~:

State;:3 or have immigrant status in the united

St~~$t1i:.
~he

In
~~J,.$cj;

Gase of

~elgium

PPo'ced\1r;e for the avoidance of double taxation.

G~>ral'lv,

t,h.e method used is the exemption method but

jui.S01'R~ e~rC;:':Ul'stances,

sy....t~.Q.f avoidance
found in the
"a.$Q ~pon

Qf

t~~

the Article provides a

oe

e~is,ting

it is the credit method.

This

double taxation is similar to that
Convention.

The provisions are

the law of Belgium relating to the

impositio~

on Belgians receiving income from outside Belgium •.

Ht>warer, under this Article, present Belgian statutory
law is liberalized with respect to (1) United States
sourc'e dividends received by a Belgian corporation, (2)
Uni.ted States source business and personal services
inaome. and (3) certain items of United States source
1ncome~

xreeeivE;:!d by a citizen of the United Sta.tes who

resident of Belgium.

These provisions are contained

inp.~~graph

(3)

SU~p4li'a9t:aph

(a) of paragraph (3) corresponds to

g.ubp~ra9raph

(f) of paragraph (3) of Article '12 of the

of A,rticle 23 of the proposE;:!d Convention.

exi,tl;..ng Convention.
inc~

i~

Under this provision, items of

which are not subject to the provisions of

- 52 -

subparagraphs (b) through (d) and which have been taxed
by the United States in accordance with the provisions
of Articles 6 through 21, are exempt by Belglum from tax.
But, Belgium may take such items of lncome intb account
for the purpose of determining the rate of tax which
is to be applied against the remaining income.

The items

of income included in this provislon are (1) industrial
and commercial profits subject to United States tax oy
reason of their being attributable to the malntenance by
the taxpayer of a permanent establishment in the
United States;

(2)

the United States;

income from real property

situa~edin

(3) salaries, pensions, and annuifies

paid by the United States or by any political sUbdivision
thereof to United States citizens or other individuaLs
who qualify for the governmental exemption and reside
in Belgium;

(4) compensation for labor or personal

services performed in Lhe United States and taxed by
the United States in accordance with the dependent or
independent personal services Articles, and (5) any other
business or personal service income whIch may .De taxed by the
United States in accordance with the Convention.

Also

included within the- scope of subparagraph (a) are 1tems
of income that are covered by subparagraph (g) of the
existinq Convention.

These items are interest, dividends,

- 53 -

and royalties which are taxed by the United States by
reason of the fact that they are effectively connected
with a permanent establishment in the United States
maintained by a Belgian taxpayer.
Subparagraph (b) conforms generally to subparagraphs (c)
and (d) of the existing Convention.

Subparagraph (b)

grants a credit based upon existing Belgian law subject
to any subsequent modification thereof which, however,
may not affect the principles of existing law, for
dividends received by an individual and interest and
royalties received by any resident of Belgium.

The

credit is allowed against the tax imposed on the net
amount of dividends from corporations in the United
States as well as of interest and royalties from sources
in the United States which have been taxed there.

At

the present time the credit is an amount equal to 15
percent.

This is fixed by Belgian law regardless of

the amount of tax paid.
Subparagraph (c) is a new provision dealing with
income not expressly mentioned which is taxable by
the State of source under Article 22 (Income Not
Expressly Mentioned).

Under this provision where

a resident of Belgium receives income which has been
taxed by the United States under Article 22 (Income Not

-

Expressly Mentioned)

54 -

the amount of Belgian tax

proportionately attributable to such income shall not
exceed the amount which would be imposed in accordance
with Belgian law if such income were taxed as earned
income derived from sources outside Belgium and subject
to foreign tax.

In the case of corporations, the

rate would be one-fourth the normal rate.

In the case

of individuals, the rate would be one-half the normal
rate.
Subparagraph (d) corresponds to subparagraph (a)
of the existing convention.

This provision has the

effect of incorporating into the Convention the present
statutory treatment of corporations or other entities.
It provides that dividends taxed by the United States
under paragraph (2) of Article 10 (Dividends) of the
Convention at the reduced lS-percent rate shall be exempt
from Belgian corporate income tax to the extent that
such exemption would be granted under Belgian law if
both corporations were Belgian corporations subject to
the Belgian corporate income tax.

The Belgian law to

be applied is the Belgian law applicable at the time the
dividends were received by the Belgian

corpor~tion.

present Belgian law the amount of the exemption is 95

Under

- 55 -

percent (90 percent in the case of portfolio holding
companies) of the amount of the dividend after
reduction for all taxes including the United States
withholding tax and the Belgian personal property
prepayment (precompte mobilier).

This provision does

not prohibit the withholding from these dividends
of such precompte as imposed by Belgian law.

The

present rate of tax is 10 percent of the amount of the
dividend actually received by the Belgian corporation.
Subparagraph (e) corresponds genp.rally to
subparagraph (b) of the existing Convention and provides
an exception in favor of United States source dividends
to the rules provided in subparagraph (d) dealing with
the imposition by Belgium of the tax on dividends
(precompte mobiler) received by a Belgian corporation
or other entity subject to Belgian corporate tax.
This exception is in addition to the exemption provided in
subparagraph (d).

Under this provision a Belgian

corporation which receives dividends from a united States
corporation on stock which has been directly owned by
that Belgian corporation during the whole of the
accounting period of the United States corporation which
is subject in the United States to tax on its profits

-

56 -

may elect to have such dividends exempted from the
lelgian personal property prepayment (precompte mobilier)
ordinarily applicable to such dividends.

A Belgian

corporation may elect this treatment by making a written
request for such exemption when filing its annual tax
return or before the expiration of the period allowed
for the filing of such return.

Under this provision the

Belgian corporation deriving a dividend from a United
States corporation (after the withholding of United
States tax at the source at the IS-percent treaty rate)
(1) will not be required to pay the personal property
prepayment otherwise due on receipt, and (2) will be
permitted to calculate its statutory corporate income
tax exemption (as provided in subparagraph (d) on the
full dividend received.
Belgian corporation

This permits the qualified
receiving dividends

from United States corporations to accumulate or reinvest
a larger portion of such dividends than would be the
case under Belgian law in the absence of this treaty
provision.

However, dividends accorded this exemption

can not be deducted for purposes of determining the
personal property prepayment applicable to dividends

- 57 distributed by the recipient corporation or other
entity to its shareholders or members.

This provision

differs from the existing provision in that, if
Belgian legislation ever imposed a la-percent ownership
requirement for eligibility of the 90 and 95 percent
dividend exemption for intercorporate dividends, then
such similar la-percent ownership requirement would
also apply in order for a Belgian corporation to obtain
the benefits of this provision.
Subparagraph (f) is generally comparable to
subparagraph (e) of the existing Convention.

This

provision contains special relief with respect to
certain income derived by a citizen of the united States
who is a resident of Belgium and thus liable to
inco~e

tax in both States on a worldwide basis.

The

existing provision provides that the Belgian individual
income tax proportionately attributable to dividends,
interest, pensions, annuities, or royalties received

by a citizen of the United States residing in Belgium
from sources within the united States may not exceed 15
percent of that income after allowance of the lump sum
foreign tax credit.

Though residence in Belgium would

ordinarily entitle individuals to an exemption from, or

-

58 -

reduction ir rate of, United States tax on specified items of
income under the Convention, such benefits are not available
to United States citizens.

The existing and proposed

provisions provide a measure of relief in these circumstances by
reducing the amount of Belgian tax which can be imposed on the
specified items of income.

The proposed provision provides

that the Belgian income tax proportionately attributable
to the dividends, interest, or royalties received by a
citizen of the United States residing in Belgium from
sources witllin the United States may not exceed 20 percent
of that income after allowance of the lump-sum foreign tax
credit.

The existing provision was based on a personal

property prepayment at the rate of 15 percent, which is now
20 percent.

In the case of other income concerned, the

amount nf tax which would be imposed is the amount which
would be imposed if such income were taxed as earned
income derived from sources outside Belgium and subject to
a foreign tax.

This provision only applies to income

\vhich is not exempt from Belgian tax under subparagraph (a)
or covered by subparagraph (c) which covers items of income
not expressly mentioned.
Subparagraph (g) generally corresponds to subparagraph
of the existing Convention.

Proposed subparagraph (g)

provides that when, in accordance with Belgian law, losses

(h)

- 59 -

incurred by a resident of Belgium in a permanent establishment
situated in the United States have been effectively deducted
f:om the profits of that resident for purposes of his taxation
in Belgium, the exemption provided in subparagraph (a)
should not apply in Belgium to the profits of other taxable
periods attributable to the permanent establishment to
the extent that those profits have also been reduced for
United States tax purposes by reason of allowance of such
losses.
Paragraph (4)

provides for relief from double taxation

in accordance with the principles of paragraphs (2) and (3)
in the case of a corporation which is treated as a United
States corporation for United States tax purposes and a
Belgian corporation for Belgian tax purposes.
Article 24.

NONDISCRIMINATION

Paragraph (3) of Article 20 of the existing Convention
provides that citizens or corporations or other juridical
persons of one State will not be subjected to more burdensome
taxes in the other State than are imposed on the citizens
or corporations or other juridical persons of such other
State.

The proposed Convention substitutes a modernized

nondiscrimination Article which bans discrimination by one
State against the citizens of the other State or permanent
establishments of residents or corporations of the other

- 60 State.

Thus, for example, a citizen of Belgium who lS

a resident of the United States and who meets the
requirements specified in section 911 of the Internal
Revenue Code would, under this Article of the proposed
Convention, be eligible for the benefits of section 911
although he is not also a citizen of the United States.
This Article provides, however, that a State may
accord special treatment to its own residents on the
basis of civil status or family responsibility.
This Article also deals with the fact that Belgian
domestic law provides for a lower rate on distributed
earnings of a Belgian corporation (30% basic rate)
than on retained earnings of a Belgian corporation
(up to 35% basic rate) and applies only the higher
rate to the income of a Belgian permanent establishment
of a foreign corporation.

This is recognized as

discriminatory and the proposed Convention provides
that in the case of a Belgian permanent establishment
of a United States corporation the lower rate for
retained earnings will apply to that part of the earnings
of the permanent establishment deemed distributed.
It is provided in this Convention that the permanent
establishment is deemed to distribute the same percentage
of its earnings as the corporation of which it is

- 61 a part distributes of its earnings.

The provision permits

Belgium, however, to impose its surcharge on the hioher
rate consistent with its domestic law.
The ban on discrimination extends to all taxes
without regard to subject matter and whether imposed
at the national, State or local level.
This Article is substantially similar to the
nondiscrimination Article of the OECD Model Convention
except that the Model includes a provision concerning
Stateless persons which has been omitted from the proposed
Convention.
Article 25.

MUTUAL AGREEMENT PROCEDURE

This Article modernizes the mutual agreement
procedures found in the existing Convention by adopting
provisions similar to those in the recent amendments
to our Conventions with the Netherlands, the United
Kingdom, and the Federal Republic of Germany and in
our recently revised Convention with France.
When a resident of one State considers that action of
one or both States has resulted, or will possibly
result, in taxation contrary to the provisions of the
proposed Convention, such resident may present his case
to the competent authority of the State of which he

- 62 -

is a resident 'within 2 years from the date the resident
is notified (or collection is made at the source) of
the tax (or, where the problem arises from inconsistent
action

of

both States, within two years from the

date the resident is notified or

fro~

collection at source

of the tax which has been last asserted or collected).
This remedy is in addition to any remedy provided
by the national laws of either State.
This Article contemplates that the competent
authorities of the two States will endeavor to
settle by mutual agreement such cases of taxation not
in accordance with the Convention as well as any other
difficulties or doubts arising as to the application of
the Convention.

Some particular areas on which the

competent authorities may consult and reach agreement
are the amount of industrial and commercial profits to
be attributed to a permanent establishment, the allocation
of income, deductions, credits, or allowances
between a resident and a related person, the determination
of source of particular items, and the meaning of any
term used in the Convention.
In implementing the provisions of this Article,
the competent authorities will communicate with each

- 63 -

other directly and meet together for an exchange of
oral opinions when advisable.
In cases in which the competent authorities reach
agreement with respect to a particular matter, taxes
will be adjusted and refund or credits allowed in
accordance with such agreement.

This provision permits

the issuance of a refund or credit notwithstanding
procedural barriers otherwise existing under a
State's law, such as the Statute of Limitations.
This provision will apply only where agreement
or partial agreement has been reached between the
competent authorities and will apply in the case of
any such agreement after the Convention goes into
effect even though the agreement may concern taxable
years prior thereto.
Revenue Procedure 70-18 sets forth the procedure
followed by the United States in implementing its
obligations under this type of Article.
Article 26.

EXCHANGE OF INFORMATION

This Article provides for a system of administrative
cooperation between the competent authorities of the
two States and specified conditions under which
information may be exchanged to faciliate the

-

64 -

administration of the Convention and to prevent fraud
and the avoidance of taxes to which the Convention relates.
Information exchanged is treated as secret and may
not be disclosed to any persons other than those

(including

a court or administrative body) concerned with the
assessment, collection, enforcement, or prosecution of
taxes subject to the Convention, but this does not prohibit
incidental disclosure in the course of a court proceeding.
In no case does this Article impose an obligation on
either state to disclose trade secrets or similar information or to carry out administrative measures or supply
particulars where such action would be at variance with
the laws or administrative practice of that State, or
contrary to public policy.

In general, the standard for

the exchange of information is the standard used by the
States in the enforcement of their own laws by administrative
and jUdicial authorities.
The mutual exchange of information called for by
these provisions is presently in effect in most of the
conventions to which the United States is a party and is
substantially similar to the provision contained in the
existing Convention.

- 65 -

Article 27.
This
.il

ASSISTANCE IN COLLECTION.

Artic~e,

substantially similar to the assistance

collection Article in the existing Convention, provides

for mutual assistance in the collection of taxes where
required to avoid an abuse of the Convention.

The pro-

vision is intended merely to insure that the benefits of
the Convention will only be available with respect to persons
entitled to such benefits; it does not in any way alter
rights under other provisions of the Convention.
The Article provides that each State will endeavor
to collect for the other State such amounts as may be
necessary to insure that any exemption or reduced rate of
tax granted under the proposed Convention will not be
availed of by persons not entitled to those benefits.
However, this Article will not require a State, in order
to collect taxes which are imposed by the other State,
to undertake any administrative measures that differ
from its internal regulations or practices nor will this
Article require a State to undertake any administrative
or judicial measures which are contrary to that State's
sovereignty, security, or public policy.
Article 28.

MISCELLANEOUS

This Article contains provisions normally found in
other parts of tax conventions to which the United States

- 66 -

1S

a party.

Paragraph

the French Convention.

(1)

1S

identical to Article 28 of

This paragraph preserves the

existing fiscal privileges of diplomatic and consular
officials under the general rules of international law
or under the provisions of special agreements.
(2) is substantially identical to paragraph
Article 22 of the French Convention.

Paragraph

(3) of

This continues the

general rule of taxation found in most tax conventions
that the Convention does not affect in any manner any
exclusion, exemption, deduction, credit, or other
allowance now or hereafter accorded by the laws of a State
in the determination of tax imposed by that State, or
by any other agreement between the States.

Even though

the OECD Model Convention does not contain a comparable
~rovision,

this rule reflects the well-established principle

that the Convention will not have the effect of increasing
the tax burden on residents of the signatory countries.
This rule represents the position of the United States
under all conventions to which it is a party except that,
to the extent a Convention specifically provides, it may
be necessary to waive

certain rights as a condition of

claiming more advantageous treaty benefits.

Paragraph (3)

provides that the competent authorities of the two States

- 67 -

may communicate with each other directly for the purpose
of carrying out, the provisions of this Convention.
Article 29.

EXTENSION TO TERRITORIES

This Article provides a method for extending the
Convention, either in whole or in part or with such modifications as may be found necessary for special application
in a particular case, to all or any areas for whose international relations the United States is responsible and which
area imposes taxes substantially similar in character to
those which are the subject of the Convention.

It is

limited to extension by the United States since Belgium
no longer has any colonies or territories.
Extension to an area may be accomplished through a
written notification given to Belgium through diplomatic
channels.

Belgium shall indicate its acceptance by a

written communication through diplomatic channels.

When

the notification and communication have been ratified in
accordance with the constitutional procedures of each State
and instruments of ratification exchanged, the extension
will take effect from the date of, and be subject to such
conditions as are specified in, the notification.

Without

such acceptance and exchange of instruments of ratification
in respect of an area, nore of the provisions of the
Convention shall apply to such areas.

- 68 Either of the States may terminate an extension with
respect to an area by 6 months' prior written notice of
termination given to the other State at any time after the
date of entry into force of the extension.

The termination

will take effect for taxable years beginning on or after the
first day of January next following the expiration of the
6-month period.

The termination of an extension to a

particular area will not affect the application of the
Convention to the United States, Belgium, or any other
area to which the Convention has been extended.
Termination' of the Convention by either State in
accordance with Article 31 (Termination) shall, unless
otherwise expressly agreed by both States, terminate the
application of the Convention to any area to which the
Convention has - been extended under this Article.
Article 30.

ENTRY INTO FORCE

This Article

provi~es

for the ratification of the

proposed Convention and for the exchange of instruments of
ratification.

The Convention will enter into force one

month after the date of exchange of such instruments.
However, the provisions shall first have effect with respect
to income of calendar years or taxable years beginning
(or in the case of taxes payable at source, payments made)
on or after January 1, 1971.

- 69 -

The entry into force of the proposed Convention will
terminate the

~onvention

of October 28, 1948, the Supplementary

Conventions of September 9, 1952, and August 22, 1957,
as well as the Protocol of May 21, 1965.
Article 31.

TERMINATION

The Convention will continue in effect indefinitely,
but may be terminated by either State at any time after
the year 1975.

A State seeking to terminate the Convention

must give notice at least 6 months before the end of the
calendar year through diplomatic channels.

If the Convention

is terminated, such termination will be effective with
respect to income of calendar years or taxable years
beginning (or, in the case of taxes payable to source,
payments made) on or after January 1 next following the
expiration of the 6-month period.

However,

upon prior

notice to be given through diplomatic channels, the
provisions of Article 17 (Social Security Payments) may be
terminated by either State at any time after this Convention
enters into force.

October 6, 1970
Technical Explanation of
Proposed U. S. - Finlapd Income Tax Convention
Signed March 6, 1970
Article 1.

TAXES COVERED

This Article designates the taxes of the respective
States which are the subject of the proposed Convention.
With respect to the United States, the taxes included
are the United Stabes Federal income taxes imp0sed by
the Internal Revenue Code.

This includes, for example,

the surtax and would also include such taxes as the
temporary surcharge which was in force from 1968 to
1970.

However, the Convention is not intended to. apply

to taxes which are in the nature of a penalty such as
the taxes imposed under section 531 (accumulated earnings
tax) and section 541 (personal holding company tax)
of the Internal Revenue Code.
with respect to Finland, the taxes included are
the State

(national) income and capital tax, the

Communal tax, and the Sailors' tax.

The national income

tax is levied at graduated rates on the worldwide income
of resident individuals and corporations.

The capital

tax is levied at graduated rates on the worldwide net
wealth of resident individuals and on nonresident
individuals owning real property located in Finland,

- 2 shares of stock in a Finnish corporation or other personal
property exclusive of bonds, bank accounts, and foreign
trade credits.

The Church tax, a local income tax

levied at rates ranging from 1 to 2 percent from members
of the Evangelical Lutheran and Greek Orthodox churches
and from resident corporations, is not included in the
category of taxes covered; it is among the taxes included
in the nondiscrimination article, however.

The Communal

tax, also a local income tax levied against resident
individuals and corporations at rates which vary from
8.5 percent to 16 percent, is covered.

The Sailors' tax

is deducted at the source from compensation of seamen
employed abroad Finnish ships.

It is imposed in lieu

of the State income tax and the Communal tax.

The effect of

including the Communal and Sailor's taxes in the Treaty
is to broaden the Finnish taxes against which Finland
will give a credit for United States taxes.

It does not

expand the credit allowed in the United States since
we already give a credit under our statute for these
taxes.
The present Finnish Convention includes within the
category of Finnish taxes covered only the national
income tax.

- 3 -

The present Finnish Convention enumerates within
the category of united States taxes covered also the
the surtax and excess profits tax.

The "surtax" was

eliminated as unnecessary and possibly confusing in view
of the enactment of the "surcharge"; the excess profits
tax has been repealed.

In addition, the accumulated

earnings and personal holding company tax were
specifically excluded from the taxes covered in the
proposed Convention in order to avoid uncertainty as to
status of these taxes.
Pursuant to paragraph (2) of this Article the
proposed Convention would also apply to taxes substantially
similar to those enumerated which are imposed, in addition
to or in place of the existing

taxes, after the

date of signature of this Convention (March 6, 1970).
For purposes of

Article 7

~ondiscrimination),

the

Convention applies to taxes of every kind which are, or
may be imposed by the respective States, at the national,
State, or local level.
Article 2.

GENERAL DEFINITIONS

This Article sets out definitions of certain of the
basic terms used in the proposed Convention.

A number of

important terms, however, are defined elsewhere in the
Convention.

- 4 Any term used in this Convention which is not defined
therein shall, unless the context otherwise requires,
have the meanin9 which it has under the laws of the
State which is imposing the tax.

The proposed Convention

also provides a procedure under which a cornmon definition
may be arrived at by the competent authorities of Finland
and the united States in order to prevent double taxation
or further any other purpose of this Convention, if the
definition of such term under the respective internal
laws of the States differs.

The cornmon meaning is to be

arrived at by means of the mutual agreement procedure
which is described in Article 28 (Mutual Agreement
Procedure) of the proposed Convention.
Article 3.

FISCAL DOMICILE

This Article sets forth rules for determining "fiscal
domicile" or residence of individuals, corporations and
other persons for purposes of the proposed Convention.
Residence is important because, in general, only a
resident of one of the Contracting States may qualify
for the benefits of the Convention.

This Article is

patterned generally after the fiscal domicile article
of the OECD Model Convention.

- 5 -

The term "a. resident of Finland" means a corporation
of Finland as defined in Article 2 (General Definitions)
and any person (except a corporation or any entity which
under Finnish law. is treated as a corporation) who is
a resident of Finland for purposes of its tax.

The

term "a resident of the united states" means a United
States corporation as defined in Article 2 (General
Definitions) and any other person (except a corporation
or any other ent'i ty treated under United States law as
a corporation) who is a resident in the United States
for purposes of its tax.
The parenthetical language in the definition of a
resident of the United States is intended to make clear
that a foreign corporation for united States tax
purposes, which is a resident of the United States for
certain purposes of its income tax law is not, under the
Convention, a resident of the United States.

A similar

rule was needed in the case of Finland.
In the case of the United States and Finland, the
definition provides that a person acting as a partner or
a fiduciary is a resident only to the extent that the
income derived by such person in that capacity is taxed
as income of a resident.

- 6 This language, although different from the Income Tax
Convention between the United States and Belgium, signed
July 9, 1970, is intended to achieve the same result.
Under United States law, a partnership is never, and
an estate or trust is often not, taxed as such.

Under

the proposed Convention, in the case of the United States,
income received by a partnership, estate, or trust will
not qualify for the benefits of the Convention unless such
income is subject to tax in the United States.

Thus, in

effect, the status of income which is subject to tax only
in the hands of the partners or beneficiaries, will be
determined by the residence of such partners or beneficiaries.
With respect to income taxed in the hands of the estate or
trust, the residence of the estate or trust is determinative.
This provision is reciprocal because of the presence of a
similar problem under Finnish law.
An individual who is a resident of both States under
the rules of domestic law employed by such States for
determining residence will be deemed to be a resident of
the State in which he has his permanent home, his center
of vital interests (closest economic and personal relations),
or his habitual abode, in the order listed.
1S

If the issue

not settled by these tests, the competent authorities will

decide by mutual agreement the one State of vlhich he will be
considered to be a resident.

- 7 Article 4.

GENERAL RULES OF TAXATION

The present Convention sets forth in a separate article
the general rules of taxation applicable under the Convention.
The general rules of taxation applicable under the proposed
Convention are as follows:
A resident of one State may be taxed by the other State
only on income from sources within that

other State (including

industrial or commercial profits attributable to a permanent
establishment located in that other State), subject to the
limitations set forth in this Convention.

The jurisdictional

rules of the proposed Convention parallel those set forth in
section 872

(a) of the Uni ted States Internal Revenue Code,

relating to nonresident alien individuals, and section 882 (b),
relating to foreign corporations engaged in trade or business
in the United States, as amended by the Foreign Investors Tax
Act of 1966.
The existing Finnish Convention contains the "force of
attraction" doctrine, under which all Finnish source income of
a resident of the United States having a permanent

establish~ept

in Finland is attributed to the permanent establishment and
subject to tax at ordinary rates.

In the converse case the

existing treaty provides that United states source income of a
Finnish resident is subject to United States tax at ordinary
rates.

However, under the changes in united States statutory

law made by the Foreign Investors Tax Act of 1966, only the

-

8 -

investment income in fact attributable to the permanent
establishment is taxed at ordinary rates.

Other United States

source income of a foreigner having a permanent establishment
in the United States may qualify for the reduced rates provided
by a tax convention.
The proposed Convention contains a similar but more inclusive rule.

Only that business and investment income

effectively connected with the permanent establishment is taxed
as part of the income of the permanent establishment and loses
the exemptions and reduced rate benefits otherwise provided by
the trea tie s .
Both the proposed Convention and the existing Convention
contain the general rule of taxation (also found in our new
French Convention)

that the Convention does not affect in any

manner any exclusion, exemption, deduction, credit, or other
allowance now or hereafter accorded by the laws of a State in
the determination of tax imposed by that State, or by any other
agreement between the States.

Even though the OECD Model

Convention does not contain a comparable provision, this rule
reflects the well-established principle that the Convention
will not have the effect of increasing the tax burden on
residents of the signatory countries.

This rule represents the

position of the United States under all Conventions to which it
is a party, except that to the extent a convention specifically

- 9 provides, it may be necessary to waive certain rights as a condition to claiming more advantageous treaty benefits.
The proposed Convention also contains the traditional
savings clause under which the United States reserves the right
to tax its citizens and residents as if the Convention had not
come into effect.

However, the savings clause does not apply

in several cases in which its application would contravene policies
reflected in the Convention.

Thus, the savings clause does not

affect the provisions with respect to the foreign tax credit,
social security payments, nondiscrimination, or mutual agreement
procedure.

Moreover, the savings clause will not deny the

benefits of the Convention to governmental employees or
teachers or students unless such individuals are citizens of
the United States or have

immigran~

status in the United States.

The savings clause is nonreciprocal because Finland

i~poses

tax

on the basis of residence rather than citizenship.
The benefits of paragraph (3) of Article 23

(Rules Applicable

to Personal Income Articles) are not excepted from the savings
clause.

As noted hereinafter, that paragraph provides that a

teacher, student, or apprentice of one of the States,
temporarily present in the other State and who is entitled to
exemption from tax in the other State under the Convention,
shall be allowed by the State of residence as deductions
from taxable income travel and living expenses (in the
minimum amount

- 10 of 30 percent)
State.

incurred while temporarily present in the other

The purpose of paragraph (3) of Article 23

(Rules

Applicable to Personal Income Articles) is to relieve some of
the burden of Finnish taxes imposed on Finnish teachers,
students, and apprentices who corne to the United States to study
or work.

Although this provision is reciprocal in form, it is

not applicable to United States citizens and residents.

The

taxability of scholarship and fellowship grants and of compensation received by United States citizens and residents who go
to Finland to study or work is determined under sections 61,
117, and 911 of the Internal Revenue Code.
The last paragraph of this Article provides that any income
from sources within a State to which the Convention is not
expressly applicable will be taxable by that State in accordance
with its own law.

For example, because income from prizes or

awards is not covered by the Convention, such income will be
taxed in accordance with the internal law of the State from
which such income is derived.

The existing Convention does

not contain an express statement of this general rule.

The

OECD Hodel Convention differs on this point and provides that
income which is not expressly mentioned will be taxable only
in the State of residence.

It should be noted

that the proposed Convention specifically covers
income.

~ost tp~es

of

- 11
Article 5.

~

RELIEF FROM DOUBLE TAXATION

Under the existing Convention, the United states provides
relief from double taxation by allowing a credit for Finnish
tax in accordance with rules set forth in section 131 of the
Internal Revenue Code of 1939.
The proposed Convention employs the same method of avoiding
double taxation in providing that credit will be allowed to a
united States citizen or resident for Finnish income tax paid
but not in excess of the portion of united States tax which
net income from Finnish sources bears to total net income.
Except for the special source rules provided by the Convention,
this provision does not add to the rights that a United States
citizen or resident has to the foreign tax credit, including
his right under current law to elect the overall limitation,
but is for the purpose of giving treaty recognition to such
rights.

Modifications in United States law after the effective

date of the Convention which concern the foreign tax credit
will be applicable with respect to Finnish source income if
such modifications do not contravene the general principles
of the Convention.
In the case of Finland, generally double taxation will
be avoided by a combination of three methods:
credit, and exemption with progression.

exemption, tax

With resrect to

United State source income (other than dividend

inco~o)

or

- 12 capital which under the treaty is taxable in both States
paragraph (2)

(a) provides that Finland will give a credit

against Finnish income or capital tax for the amount of the
Finnish income or capital tax attributable to such Uni ted States
source income or capital.

Although written in the form of a

credit, the effect of this provision is to exempt from tax in
Finland income and capital which under the Con'iention is taxable
in the United States; for example, real property income and
personal services income.
di vidends

With respect to United States source

(other than in tercorpora te dividends) paragraph (2)

(b)

provides that Finland will allow a credit for the United States
tax withheld on such dividends but not in excess of that portion
of Finnish tax which the United States source dividends bear to
total Finnish taxable income.
dividends are tax exempt.

Under Finnish law intercorporate

Paragraph (2)

(c) of the proposed

Convention extends this exemption to dividends paid by a
United States subsidiary to a Finnish parent corporation as
long as Finland retains the rule of exemption for intercorporate
dividends received by Finnish corporations.

With respect to

income or capital which under the treaty is exempt from Finnish
tax, Finland retains the right to take the amount of exempt
income or capital into account when determinina- the qraduated
.

rate of Finnish tax to be imposed on total taxable income and

- 13 net wealth.

This is the exemption with progression

method of providing relief from double taxation.

Examples

of income and capital included in this category are
industrial and commercial profits and capital attributable
to a United States permanent establishment, income and
capital attributable to ships and aircraft
~e

r~gistered

in

united States, and Government salaries and social

security payments.
The operation of the Finnish combined exemption and
credit method may be illustrated by the following example.
A resident of Finland receives $6,500 income from United

States sources.

This is his total incowe from all sources.

The $6,500 consists of $5,000 salary, $500 rental income,
and $1,000 dividends.

He pays a total United States tax

of $350 of which $200 is attributable to salary and rental
income and $150 is withheld on the dividends.

In the

absence of a treaty he would pay a total Finnish tax of
$550 of which $4(5.30

($5,500 x $550) is attributable to
$6,500
salary and rental income. Under paragraph (2) (a) of this

Article the Finnish resident is entitled to a credit for the
full amount of the $465.39 of Finnish tax attributable to the
salary and rental income - which, in effect, exempts such
income from Finnish tax.

Under paragraph (2) (b) the

- 14 Finnish resident is also entitled to a deduction from his
Finnish tax on the Sl,OOO dividend received from the United
States in an amount equal to the United States tax paid
on such dividends.

However, under the limitation of the

second sentence of paragraph (2) (b), the amount by which
the United States tax attributable to such dividend ($150)
exceeds the Finnish tax attributable to such dividend
($84.61) cannot be set off against Finnish tax attributable
to the salary and rental income.

- 15 -

Article 6.

SOURCE OF INCOME

The present Finnish Convention does not specify the
rules for determining the source of the different kinds
of income covered by the Treaty.

This Article sets

forth in a single provision all of the various rules
which are to be applied to determine the source of
the different kinds of income covered by the treaty:
dividends, interest, royalties, income from real property,
including gains derived from the sale of such property,
and compensation for personal services.

These rules

affect the application of Article 4 (General Rules of
Taxation) and Article 5 (Relief from Double Taxation).
The source df any kind of income not covered by the
treaty shall be determined under the local law of the
two States.

In the case of different source rules

applicable to an item of income the competent authorities
of the two States under the mutual agreement procedure
may establish a common source for the item of income.
The source rule under which dividends paid by a
corporation of one State are treated as from sources
within that State and dividends paid by any other
corporation are treated as from sources outside
State conforms to both United States and

Finnis~

t~at

- 16 -

statutory law.

The source rule under which dividends

paid by a corporation of any State are treated as from
sources within one of the States if, during the previous
3 years, the corporation had a permanent establishment
in that State and more than 80 percent of such corporation's
income was attributable to such permanent establishment
conforms to some extent to United States statutory law.
Under section 861(a) (2) (B) of the Internal Revenue Code
if more than 50 percent of a foreign corporation's income
is effectively connected with a United States business,
a pro rata share of such corporation's dividends are
treated as from sources within the United States.

The

difference will result in the United States imposing
tax in fewer cases under the Convention source rule than
under the statutory source rule.
The source rule under which interest paid by a
resident of one of the States, including a political
subdivision of such State is treated as from sources
within that State and interest paid by a resident or
political subdivision of any other State is treated
as from sources outside that State conforms to both
united States and Finnish statutory law.

The source

- 17 -

rule under which interest paid by a resident, individual,
or corporation, of any State is treated as from sources
within one of the States if, during the previous 3
years, the resident has a permanent establish in that
state and more than 80 percent of such corporation's
income was attributable to such permanent establishment
represents a combination and modification of the two
source rules of· section 861 (a) (1) (B) and (C) of the
Internal Revenue Code.
Royalties paid for the use, or right to use, property
(as defined in Article 14 (Royalties» in a State are
treated as from sources within that State.

Income from

real property (including the sale of such property)
located in a State is treated as from sources within that State.
These source rules correspond to that found in section
861(a) (4) and (5) of the Internal Revenue Code.
Personal service income is treated as from sources
within the State where the services are performed.

This

source rule corresponds to the general rule of section
86l(a) (3) of the Internal Revenue Code.

- 18 Industrial and commercial profits attributable to a
permanent establishment, and dividends, interest, royalties,
real property income, and capital gains derived from
rights or property effectively connected with a permanent
establishment are treated as from sources within the
State where such permanent establishment is located.

In

general the factors which under the proposed Convention
determine whether the property giving rise to the investmenttype income is effectively connected with a permanent
establishment are the same as the factors which under
section 864(c) of the Internal Revenue Code determine
whether fixed or determinable annual or periodical income
is effectively connected with the conduct of a trade or
business in the United States.
Article 7.
Th~

NONDISCRIMINATION

existing Convention provides that citizens of

one State will not be subjected to more burdensome taxes
in the other State than are imposed on the citizens of
such other State.

The term "ci ti zen II is defined to include

all legal persons, partnerships, and associations created
or organized under the laws of the respective States.
The proposed Convention substitutes a modernized
nondiscrimination Article which bans discrimination by

- 19 one State against the citizens of the other State or
permanent establishments of residents or corporations
of the other State.

Thus, for example, a citizen of

Finland who is a resident of the United States and who
meets the requirements specified in section 911 of the
Internal Revenue Code would, under this Article of the
proposed Convention, be eligible for the benefits of
section 911 although he is not also a citizen of the
United States.
This Article provides, however, that a State may
accord special treatment to its own residents on the
basis of civil status or family responsibility.
The ban on discrimination extends to all taxes without
regard to subject matter and whether imposed at national,
State, or local level.
This Article is substantially similar to the nondiscrimination Article of the OECD Model Convention except that the
model includes a provision concerning Stateless persons which
has been omitted from the proposed Convention.

- 20 -

Article 8.

BUSINESS PROFITS

This article sets forth the typical treaty rule that
industrial or commercial profits of a resident of one State
are taxable in the other State only if the resident has a
permanent establishment in that other State.

Where

there is a permanent establishment only the profi ts attributable
to the permanent establishment can be taxed by that other
State.

For purposes of Article 5 (Relief From Double

Taxation) which, among other things, provides that a
foreign tax credit will be allowed by the United States,
such profits are considered to be from sources within the
State in which the permanent establishment is located.
While under the existing Finnish Convention, as under
the old French Convention, industrial or commercial profits
are not taxed in the absence of a permanent establishment,
once there is a permanent establishment the existing
Convention, as did the old French Convention, provides that
the provisions reducing the tax rates on interest and
dividends and exempting royalties are not applicable.
This rule is known as the "force of attraction" principle
and is replaced in the proposed Convention, as in our
new treaty with France, with the effectively connected
concept.

Under the new approach, only interest, dividends

- 21 -

and royalties which are effectively connected with the
permanent establishment are taxable as part of the
industrial or commercial profits and do not benefit
from the requcpd rate or exemption.
In determining the proper attribution of industrial
or commercial profits under the proposed treaty, the permanent
establishment is generally to be treated as an independent
p.ntity and considered as realizing the profits which would
be realized if the permanent establishment dealt with the
resident of which it is a permanent establishment on an
arm'~-length

basis.

ar~reasonably

Expenses, wherever incurred, which

connected with profits attributable to

the permanent establishment, including executive and general
administrative expenses, will be ailowed as deductions by
the State in which the permanent establishment is located
i.n compu:ting the tax due to such State.

However, it is

not necessary to allow a profit to the head office for
ancillary and management services furnished to the
permanent establishment as long as the permanent establishment is allowed to deduct the costs incurred by the head
o.ffice.
The mere purchase of goods or merchandise in a State
by the permanent establishment, or by the resident of which

- 22 -

it is a permanent establishment, for the account of such
resident will not cause attribution of profits to such
permanent establishment.
Paragraph (5) of this article defines the

term

"industrial or commercial profitl? of a resident" as including,
inter alia, income derived from agricultural activity,
the furnishing of personal services of others, the rental
of tangible personal property, insurance activities and
from rents or royalties derived from motion picture films,
films or tapes of radio or television broadcasting.
The inclusion of rents and royalties from motion
pictures and related activities represents a change from
the existing Convention.

The existing Convention allows

Finland to tax Finnish source motion picture rents and
royalties paid to United States distributors whether or
not the distributors operate through a permanent establishment in Finland.

The inclusion of motion picture royalties

in industrial and commercial profits conforms to the rule
in our new French treaty.

Its effect is to provide on a

reciprocal basis that motion picture royalties will be
taxable by the source State only if they are attributable
to a permanent establishment located in such State.

- 23 -

The definition of "industrial and commercial profits"
specifically includes investment income if the right or
property giving rise to the income is effectively connected
with a permanent establishment.

Income received by an

individual as compensation for personal services either
as an employee or in an independent capacity is not treated
as industrial or commercial profits.
This Article is substantially similar to the business
profits article of the OECD Model Convention except that
the Model Convention does not contain a definition of
industrial and commercial profits.
Article 9.

PERMANENT ESTABLISHMENT

This Article defines the term "permanent establishment."
The existence of a permanent establishment is, under the
terms of the proposed Convention, a prerequisite for one
State to tax the industrial or commercial profits of a
resident of the other State.

The concept is also significant

in determining the applicability of other provisions of the
Convention, such as Article 12 (Dividends)
(Interest), Article 14 (Royalties)
Gains).

I

I

Article 13

and Article 16 (Capital

The definition of "permanent establishment" is a

- 24 modernized version of the definition found in some of our
older treaties.

The new definition is similar to the

definition found in our French Convention.
The term "permanent establishment" means "a fixed
place of business through which a resident of one of the
Contracting States engages in industrial or commercial
activity."

Illustrations of the concept of a permanent

establishment include a seat of management, a branch, an
office, a factory, a workshop, a warehouse, a place of
extraction of natural resources, or a building site or
construction or installation project which exists for more
than 12 months.

The 12-month construction project rule is

a physical test under which the resident must be actively
engaged in the project during that-12-month period.

As a

general rule, any fixed facility through which an individual,
corporation or other person conducts industrial or commercial
activity will be treated as its permanent establishment unless
it falls in one of the specific exceptions described below.
The proposed Convention uses the term "a seat of management II
which was the term used in our Convention with France.

The

technical explanation of our French Convention explains the
defini tion of the term "a seat of management" and its differenc
in meaning from the term "a place of management" as follows:

- 25 -

It should be noted that this convention uses the
term "seat of management" where the OEeD model
convention and prior agreements to which the
United States is a party used the term "place of
management"; both terms are translations of the
French term "un siege de direction" and it is
believed the translation found in this convention
is the more accurate. Prior agreements in which
the term "place of management" appears will be
interpreted therefore as if the words "seat of
management" had been used.
Th~t

explanation is applicable to the proposed Finnish

convention.
This Article specifically provides that a permanent
establishment does not include a fixed place of business
of a resident of one of the Contracting States which is
lo~ated

in the other Contracting State if it is used only

for one or more of the following -- (1)

the use of

facilities for the purpose of storage, display, or delivery
of goods or merchandise belonging to the resident;

(2)

the

maintenance of a stock of goods or merchandise belonging
to the resident for the purpose of storage, display, or
delivery;

(3) the maintenance of a stock of goods or

merchandise belonging to the resident for the purpose of
processing by another person;

(4) the maintenance of a

fixed place of business for the purpose of purchasing goods
or merchandise, or for collecting information, for the

- 26 resident; or (5)

the maintenance of a fixed place of

business for the purpose of advertising, or the supplying,
of information, for scientific research, or for similar
activities which have a preparatory or auxiliary character,
for the resident.

These exceptipns are cumulative and a

site or facility used solely for more than one of these
purposes will not be considered a permanent establishment
under the proposed Convention.
Notwithstanding the other provisions of this Article,
a person will be considered to have a permanent establishment
if he engages in business through an agent, other than an
independent agent, who has and regularly exercises authority
to conclude contracts in the name of such person unless the
agent exercises such authority only to purchase goods or
merchandise.

The existing Convention likewise provides that

a purchasing agent is not a permanent establishment.
With.respect to an independent agent, the proposed
Convention also provides that a resident of one State will
not be deemed to have a permanent establishment in the
other State if such resident carries on business in such
other State through an independent agent, such as a broker
or general commission agent, if such agent is acting in the
ordinary course of his business.

- 27 -

The determination of whether a resident of one
State has a permanent establishment in the other State
is to be made without regard to any control relationship
of such resident with respect to a resident of the other
State or with respect to a person

who

engages in

industrial or commercial activity in that other State
(whether through a permanent establishment or otherwise) .
Article 10.

SHIPPING AND AIR TRANSPORT

This Article provides that, notwithstanding the rules
of Article 8 (Business Profits), a resident of one State
will be exempt from tax in the other State on income derived
from the operation in international traffic of ships or
aircraft, including capital gain derived from the sale of
a ship or aircraft, registered in the former State.

This

Article is substantially the same as Article V of the
existing Convention.
This·Article also will apply to income derived from
the leasing, to a person engaged in the operation of ships
or aircraft, of a ship or aircraft under a full or bareboat
charter, where the lessor is engaged in the operation of
ships or aircraft if such lease is ancillary to the lessor's
other operations.

For example, if an airline of one of the

Contracting States which has excess equipment in the winter
months leases several aircraft which are excess during that
period to an airline in the other Contracting State, the
lessor is not subject to tax by that other Contracting State.

- 28 The exemption provided by this Article is also
applicable to profits derived from any activities incidental
to the operation of ships or aircraft in international
traffic.

Thus, for example, commissions derived by a

Finnish international air-carrier from the sale of passenger
tickets in the United States as agent for other persons
operating ships or aircraft, if incidental to its own
international operations, will be exempt from United States
tax under Article 8.

Further, a Finnish airline company

might have facilities at an international airport in the
United States which are used to service and maintain its
own aircraft.

In order to make maximum use of the facilities,

the company might also service and maintain aircraft of
other companies.

The profits derived from the furnishing

of such services to others would be exempt under Article 8
unless such activity ceased to be only an incidental activity.
However, income derived by a Finnish airline company from
the operation of a hotel in the United States would not be
incidental to the operation of aircraft and would not be
exempt.
Article 11.

RELATED PERSONS

This Article complements section 482 of the Internal
Revenue Code of 1954 and confirms the power of each government

- 29 to allocate items of income, deductions, credits, or
allowances in cases in which a resident of one State is
related to a resident of the other State if such related
persons impose conditions between themselves which are
different from conditions which would be imposed between
independent persons.

This provision is similar to the

provision contained in the OECD Model Convention.
Provision is made in Article 28 (Mutual Agreement
Procedure) for· consultation and agreement between the two
States where an allocation by either State results or
would result in double taxation.
Article 12.

DIVIDENDS

The eXisting Convention provides that dividends derived
from sources within one State by a resident of the other
State not having a permanent establishment in the former
State will be subject to tax in the former State at a rate
not ln excess of 15 percent.

In the case of intercorporate

dividends, however, if the recipient owns 95 percent or
more of the stock of the paying corporation and, generally,
if not more than 25 percent of the gross income of the
paying corporation consists of dividends and interest the

- 30 maximum rate of tax is 5 percent.

The proposed Convention

continues the 15 percent rate with respect to dividends
on portfolio investments and the 5 percent rate with respect
to direct investments with the further requirement that in
the case of Finnish source dividends, the combined dividend
tax and capital tax on the capital stock of the paying
corporation owned by the United States resident cannot
exceed the specified maximum rates.

The proposed Convention

reduces the stock ownership requirement for direct investment
dividends from 95 percent to 10 percent.
The proposed Convention abandons the "force of attractioo"
concept in the existing Convention by providing that the
reduced rate of tax on dividends is denied only if the
shares with respect to which the dividends are paid are
effectively connected with a permanent establishment which
the recipient has in the State of source.

If so connected,

the dividends are taxed as industrial or commercial profits
under Article 8 (Business Profits) .
The elimination of the "force of attraction" principle
will make uniform the rate of tax levied on dividend income
by a resident of one State from sources within the other
State unless such income is effectively connected to a

- 31 permanent establishment in the State of source.

In those

cases where the shares with respect to which the dividends
are paid are effectively connected with a permanent
establishment, the dividends may be taxed as industrial
or

commercial profits under Article 8 (Business Profits)

The policy reflected in the abandonment of the "force of
attraction" principle is also embodied in the recent
revisions of the German, Dutch, and United Kingdom Conventions,
our new Convention with France, and in the Foreign Investors
Tax Act of 1966.
In the absence of a Convention) Finland would withhold
at a rate of 15 percent of dividends paid by a Finnish
corporation to a United States resident.

The capital stock

of a Finnish corporation owned by a United States resident
would also be subject t6 the annual Finnish capital tax
at graduated rates which range from .52 percent to 2.5 percent.

In the absence of the Convention the United States

would withhold at a rate of 30 percent on dividends paid
by a United States corporation to a Finnish resident.
The dividend Article of the proposed Convention is
patterned generally after the OECD Model Convention except
as follows:

With respect to qualification for the 5-percent

intercorporate dividend rate, a la-percent ownershi?

- 32 requirement is substituted for the 25-percent ownership
requirement of the OECD draft.

The 10-percent rule

conforms to the United States concept of direct investment
especially as expressed in section 902 of the Internal
Revenue Code.

The proposed Convention also limits to 25 per-

cent the amount of passive income which may be derived by a
corporation paying dividends which qualify for the intercorporat

- 33 dividend rate.

This provision, which is included in most

Conventions to which the United States is a party but
which is not found in the DECD Draft, reflects the policy
tha,t the reduced rate should not be made available to
dividends paid by certain holding companies.

Dividends

and interest received by the Finnish corporation paying
dividends from 50 percent or more owned subsidiaries are
not considered passive income.
Article 13.

INTEREST

The existing Convention provides that interest derived
from sources within one State by a resident of the other
State not having a permanent establishment in the former
State will bG exempt from tax in the former State.
The proposed Convention retains this rule on interest
replacing the "force of attraction principle" by the
effectively connected approach.
Thus, the reduced rates of tax applicable to the
inLerest apply unless tne recipient nas a permanent establishment in the State of source and the indebtedness

~ivin~

rise

- 34 -

to the interest is effectively connected with such permanent
establishment.

In such as case, the interest may be taxed
,

as industrial or commercial profits.
Interest is defined generally as income from any kind
of debt-claim or any income treated as interest under the
tax law of the State of source.

In cases in which excessive

interest is paid by reason of a special relationship between
the payor and the recipient, or between both of them and
some other person, the provisions of the interest Article
do not apply to the excess part of the payments.

Excess

interest payments may be taxed according to the law of
each contracting State subject to the other provisions of
the proposed Convention.
In the absence of a convention interest income derived
from Finland by nonresidents is exempt from the national
income tax and all local income taxes.

This includes

interest on bonds, bank accounts, and accounts originating
from international trade.

Likewise, such bonds and accounts

are exempt from the capital tax if owned by nonresidents.
In the absence of a convention the United States would
generally withhold tax at 30 percent from interest income

- 35 derived by a nonresident from sources within the United
States unless such nonresident was engaged in trade or
business in the United States and such income was effectively
connected to such trade or business; in the latter case,
interest income would not be subject to withholding but
would be subject to tax at ordinary rates.
Article 14.

ROYALTIES

The existing Convention applies only to copyright
royalties (not including motion picture royalties) and
provides that they shall be exempt by the State of source
provided the recipient does not have a permanent establishment in the source State.

Patent and trademark royalties

are not covered by the existing Convention.

The proposed

Convention Article, which is substantially the same as the
OECD Model Convention, continues the rule of exemption at
source.

It also extends the definition of royalties to

include (in addition to copyrights, artistic or scientific
works) patents, designs or models, plans, secret processes
or formulae, trademarks, and industrial, commercial, or
scientific equipment, knowledge, experience, or skill

- 36 -

(know-how); it also includes gains from the sale or exchange
of the property described in the Article provided the payment
is contingent on productivity, use, or disposition of the
property.

If the payments are so contingent, Article 16

(Capital Gains) applies.

This all inclusive definition

is based on the royalties Article in the new French Convention.
Under the proposed Convention, if excessive royalties
are paid because the payor and recipient are related, the
provisions of the royalties Article apply only to so much
of the royalty as would have been paid to an unrelated
person.

Excess royalty payments may be taxed as dividends

under Article 12 (Dividends).
In the absence of a convention, a nonresident of Finland
receiving royalties, including film royalties, from Finland
is deemed by Finland to be engaged in business in Finland
and, consequently, is subject to income tax on net profit
from the royalties at the regular corporate or individual
rates.

For the purposes of taxing film royalties, the

net profit is presumed to be 7 percent of gross.

- 37 Under the proposed Convention film royalties are
treated as industrial or cormnercial profits and exempt
from tax in the State of source unless the recipient has
a permanent establishment in that State to which the
royalties are effectively connected.
Royalties are not subject to withholding tax at source
in Finland.

However, nonresident taxpayers receiving such

income are preassessed on the basis of the last year1s
income (with adjustments in certain cases) at the current
year's rate.

In the absence of a convention, the United

States would withhold tax at a rate of 30 percent from
royalties paid to a nonresident unless such nonresident
were engaged in business in the United States and such
royalties were effectively connected to such business; in
the latter case, such amounts would not be subject to
withh9lding but would be subject to tax at ordinary rates
in the United States
Article 15.

INCOME FROM REAL PROPERTY

This Article which is similar to an article in the
existing treaty provides that a resident of one State may
be subject to tax in the other State on income from real
property and royalties in respect of natural resources if

- 38 -

th~

~'rl)rerty

~tate.

or natural resource is located in

su~ h

ether

This Article does not, as do the existing treaty

and the 1967 treaty between the United States and France,
provide for an election by the resident to compute his tax
on such income on a net basis since under the internal laws
of Finland and, since 1967, the United States this can be
done.

The income referred to in this Article includes

gain from the sale or exchange of such property or such
natural resource rights, but does not include interest
on mortgages and similar instruments.

The latter type of

income is covered by Article 13 (Interest).
Article 16.

CAPITAL GAINS

The existing Convention provides no special rules for
gains derived in one State from the sale or exchange of
stock, securities, commodities or other capital assets by
a resident of the other State.

The proposed Convention

provides that such gains shall be exempt from tax by the
State of source.

However, the exemption does not apply

if (1) the gain derived by a resident of one State arises
out of the sale or exchange of property described in

- 39 -

Article 15 (Income from Real Property) which is situated
within the other State; (2) the recipient of the gain has
a permanent establishment or maintains a fixed base in
that other State and the property giving rise to the gain
is effectively connected with such permanent establishment
or such fixed base, or (3) the recipient of the gain being
an individual resident of the first State is present in
that other State for a period or periods aggregating 183
days or more in the taxable year.

Gains which are effectively

connected with a permanent establishment may be taxed as
industrial or commercial profits under Article 8 (Business
Profits).

Gains on real property are subject to the pro-

visions of Article 15 (Income from Real Property) which
permits taxation of such gains by the State in which the
real property is situated.
Article 17.

CAPITAL TAXES

The existing Convention does not contain an Article
relative to capital taxes since they are not one of the taxes
covered by the Convention.

The proposed Convention provides,

- 40 0n a reciprocal basis,

be

excmr~

that a resident of one State shall

from capital tax by the other State on all

nonbusiness property (excluding real property) and on
ryroperty pertaining to the operation of ships and aircraft.
Since the United States does not impose a separate
capital (net wealth)

tax~

this Article represents a

unilateral concession by Finland.

In the absence of a

convention individuals who are not residents of Finland
are subject to the national net wealth tax with respect
to

llll'i

r

I)I'L

Ivl'.11th si tllG-led i_n Finland \vi th the exception

of bonds, bank accounts, and foreign trade credits.

rate is graduated from .52 percent to 2.5 percent.

The
The

national net wealth tax was repealed for all corporations
effective January 1, 1968.
,\)-cicle 18.

INDEPENDENT PERSONAL SERVICES

The existing Convention does not distinguish between
income from the performance of personal services in an
independent capacity or a dependent capacity.
lJ11

a

n2C

i proc a1 bas is tha t

C

It provides

ompensa t ion f or personal services

shall be exempt from tax by the source State (where earned)

- 41 if the resident is temporarily present in that State for
not more than 183. days

and if the resident either (1)

is employed by a resident (including a corporation) of

i~e

other State or (2) does not earn more than $lO}OOO.
The proposed Convention generally deals with personal
services in two articles a"nd creates a distinction based upon
whether the services are independent or dependent personal
services.

Generally, income from independent acti.vittes

may be taxed in the State in which such activities are
exercised.

Such income will be exempt from tax in the

State of source if the recipient is present there for not
more than 183 days during the taxable year.
Independent personal services means services performed
by an individual for his own account independently where he
receives the proceeds or bears the losses arising from such
services.

Thus, for example, a doctor or lawyer typically

renders independent personal serviceso

Also, an individual

who under common law concepts is an independent contractor
is considered as rendering independent personal services.

- 42 -

Article produces the same result as the
lG~~2ndent

activities Article of the OECD Model Convention

except that a 183-day rule is substituted for the fixed
'ase rule of the OECD Model as a qualification for exemption
of personal service income in the State of source.
Article 19.

DEPENDENT PERSONAL SERVICES

Generally, under the proposed Convention income from
or personal services as an employee may be taxed in
the State in which such labor or personal services are
performed.

However, such income will be exempt from tax

in the State of source if (1) the recipient, being a
resident of one of the Contracting States, is present in
the State of source for a period or periods aggregating
less than 183 days during the taxable year; (2) the
.·u...:ipient is an employee of a resident of the State of his
residence (or a permanent establishment located in the
~)td[e

of his residence); and (3) the remuneration is not

borne as such by a permanent establishment which the
employer has in the State of source.

The proposed Convention

also adds a rule that income from personal services aboard

- 43 -

ships or aircraft registered in one State and operated
by a resident of that State will not be taxed in the
other State so long as the services are rendered by a
member of the regular complement of the ship or aircraft.
This Article of the proposed Convention is substantially
similar to the OECD Model Convention except that, under
the proposed Convention, an individual temporarily present
in one State who is an employee of a permanent establishment located in the other State and maintained by a
corporation of the first-mentioned State will be exempt
from taxation by the first-mentioned State on wages earned
while temporarily present therein if the other requirements
are met.
Article 20.

TEACHERS

The existing Convention covers teaching but not research
and provides for a 2-year exemption for income received from
teaching.
The proposed Convention continues and broadens the 2-year
exemption period for visiting teachers.

This exemption

applies to an individual who is a resident of one State

- 44 at the time he is invited by the other State or by an
accredited educational institution of the other Stat,e
to teach or do research in the other State and temporarily
comes to such other State in order to engage in such teaching
or research.

Invitation may be by the Government or a

university or other accredited educational institution of
the other State and research or teaching may be done at
such a university or recognized educational institution.
However, the exemption does not apply to income from
research undertaken not in the public interest but primarily
for private benefit of a specific person or persons.

If

the individual's visit exceeds a period of 2 years from
the date of arrival, the exemption applies to the income
received by the individual before the expiration of such
2-year period.

Under this provision an individual who

has been a student or trainee and has been receiving the
benefits of exemption under Article 21 (Students and Trainees)
will not generally be entitled to the benefits of this Article
if he subsequently becomes a teacher in the other State since
one of the requirements of this Article is that the individual

• 45 must be a resident of the first State at the time of his
invitation to teach in the other State.
Article 21.

STUDENTS AND TRAINEES

Under the existing Convention remittances received
from within one State by students of such State residing
in the other State for the purpose of study are exempt from
tax by the latter State.

The DECD Model Convention includes

a similar provision.
The proposed Convention expands the exemption

available

to students by providing that an individual who is a resident
of one State at the time he becomes temporarily present

in

the other State for the purpose of studying at a university
or other accredited institution, of securing training for
qualification in a profession or of studying or doing
research as a recipient of a grant, allowance, or award
from a governmental, religious, charitable, scientific,
literary, or educational institution is exempt from tax
in the host State on:
(1)
and study;

Gifts from abroad for his maintenance

- 46 (2)

The grant, allowance, or awardi

(3)

Income from personal services performed

in the

ho~t

State not in excess of $2,000

(or its

equivalent in Finnish markkas) for any taxable year.
These exemptions continue for such period of time as may
be reasonably or customarily required to effectuate the
purpose of his visit but in no event mayan individual
have the benefit of this Article and Article 20

(Teachers)

for more than a total of 5 taxable years from the date of
arrival.
In addition, a resident of one State employed by or
under contract with a resident of that State who, at the
time he

1S

a resident of that State, becomes temporarily

present in the other State for the purpose of studying
or acquiring technical, professional, or business experience
lS

exempt from tax in the host State on income not in excess

of $5,000 (or its equivalent in Finnish Markkas) from
personal services rendered in the host State.

The individual

is exempt for a period of 12 consecutive months which period
commences with the first month in which he begins working
or receives compensation.
Also, an individual who is a resident of one State
at the time he becomes temporarily present in the other

- 47 State and who is temporarily present in the host State
as a participant in a government program of the host
State for the primary purpose of training, research, or
study is entitled to an exemption by the host State with
respect to his income from personal services relating to
such training, research, or study performed in the host
State in an amount not in excess of $lOiOOO United States
dollars (or its equivalent in Finnish markkas).

To

be

entitled to this exemption the program must be a program
which does not exceed 1 year in duration.

If this qualifj-

cation is met then the income from personal services
received with respect to such program is exempt.
If an individual qualifies for the benefits of more
than one of the provisions of the personal services
articles, he may choose the provision most favorable to
him but he may not claim the benefits of more than one
provision as a means of avoiding the limitations provided.
Article 22.

GOVERNMANTAL FUNCTIONS

The existing Convention provides that compensation,
including pensions, paid by one State or a political subdivision thereof to its citizens residing in the other

-

48 -

State (other than citizens of such other State) shall be
exempt from tax by the State of residence.

The proposed

convention continues the exemption but adds a specification
that the compensation must be paid in connection with
the discharge of functions of a governmental nature.
compensation paid in connection with industrial or commercial
activity is treated the ?ame as compensation received from
a private employer.

The provisions relating to dependent

personal services, private pensions and annuities, and
social security payments would apply in such a case.
Article 23.

RULES APPLICABLE TO PERSONAL INCOME ARTICLES

This Article extends the benefits of the personal
services income Articles

(Articles 18 through 22) to

reimbursed travel expenses.

However, such reimbursed

expenses will not be taken into account in computing the
maximum amount of exemptions specified in Article 21
(Students and Trainees).

If an individual qualifies for

the benefits of more than one of the provisions of
Article 18 through 22, he may choose the provision most
favorable to him but the benefits claimed must be reduced
by any benefits previously allowed with respect to the
same income.

-

49 -

Paragraph (3) of this Article is a new provision not
previously included in any convention signed by the United
States.

It was inserted at the request of Finland and is

designed to relieve Finnish exchange students and teachers
from Finnish tax on income earned while temporarily present
in the United States.

Although reciprocal in form, the

provision is not reciprocal in substance since the United
States, under the savings clause, retains the right to tax
its citizens and residents as if the Convention were not
in effect.
Under the new provision, an individual of one of the
Contracting States temporarily present in the other
Contracting State as a teacher, student, or trainee would
be allowed as deductions by the former State, for purposes
of computing his income tax therein, all travel expenses
(including travel fares, meals and lodging, and expenses
incident to travel) incurred while traveling between the
two States and all ordinary and necessary living expenses
(including meals and lodging) incurred while temporarily
present in such other Contracting State.

It is presumed,

for purposes of this rule, that the deductible expenses of
the individual amount to at least 30 percent of the income
from personal services which he derives as a teacher,

-

50

-

-:tuu 1·1-. or train~e in the latter country and which is

-,:empt from tax in that country under Article 20
or 21 (Students and Trainees).
t~e

(Teachers)

It is contemplated that

effect of this deduction will be such that the Finnish

tax borne by Finns on the income which they derive while
t2mporarily present in the United States as teachers,
students, and trainees will be roughly the same as the
United States tax which they would have incurred but for
the

tr(~aty.

Article 24.

PRIVATE PENSIONS AND ANNUITIES

The existing Convention provides that private pensions
and annuities derived from sources within one State by an
individual resident of the other State are exempt from tax
by the source State.
The proposed Convention continues the existing rule
by providing that pensions and other similar remuneration
paid in consideration of past employment and annuities
received by a resident of a State will be taxable only in
t:,~

Sta te of residence.

However, pensions corning wi thin

the scope of Article 22 (Governmental Functions) will be
taxable only by the State making payment.

- 51 The proposed Convention also provides that alimony
paid to a resident of a State will be taxable only in
the State of residence.
The term "annuities" is defined as a stated sum paid
periodically at stated times during life, or during a
specified number of years, under an obligation to make
the payments in return for adequate and full consideration
(other than services rendered).

The term "pensions" is

defined as periodic payments made after retirement in
consideration for services rendered, or by way of compensation for injuries received in connection with, past
employment.
The effect of this provision is generally the same as
that of the OECD Model Convention.
Article 25.

SOCIAL SECURITY PAYMENTS

This Article provides that social security payments
i'aiel by one State to an individual who is a resident of
thE; other State will be taxed, if at all, by the payor State.
Also included under this Article are other public pensions
such as railroad retirement benefits.

Neither the existing

Convention nor the OECD Model Convention contains a comparaole provision.

- 52 Article 26.

DIPLOMATIC AND CONSULAR OFFICERS

This Article preserves the existing or subsequent
_iscal privileges of diplomatic and consular officials
under the general rules of international law or under
the provisions of special agreements.
Article 27.

INVESTMENT

OR HOLDING COMPANIES

This Article denies the benefits of the dividends,
interest, and royalties Articles to a corporation of one
of the States deriving such income from sources within
the other State if

(1)

such corporation is entitled to

special tax benefits which result in the tax imposed on
such income being substantially less than the tax generally
imposed on corporate profits in such State, and (2)
25 percent or more of the capital of the corporation is
o~ncd

directly or indirectly by one or more persons who

arc not individual residents of such State or, in the case

of

~

rinnish corporation, are citizens of the United States.
The purpose of this Article is to deal with a potential

ahuse which could occur if one of the States provided
prefC'rential rates of tax for investment or holding companies.
In such a case, residents of third countries could organize

- 53 -

a corporation in the State extending the preferential
rates for the purpose of making investments in the other
state.

The combination of the low tax rates in the

first State and the reduced rates or exemptions in the
other State would enable the third-country residents to
realize unintended benefits.
Article 28.

MUTUAL AGREEMENT PROCEDURE

This Article modernizes the mutual agreement procedures
found in the existing Convention by adopting provisions
similar to those in the recent amendments to our Conventions
with the Netherlands, the United Kingdom, and the Federal
Republic of Germany, and in our recently revised Convention
with France.

When a resident of one State considers that

the action of one or both States has resulted, or will
possibly result, in taxation contrary to the provisions of
the proposed Convention, such resident may present his case
to the competent authority of the State of which he is a
resident.
This Article contemplates that the competent authorities
of the two States will endeavor to settle by ~utual agreement

such cases of taxation not in accordance with the Convention
as well as any other difficulties or doubts arising as to
the application of the Convention.

Some particular areas

-

54 -

.,. ,:hich the comr'etent authorities may consult and reach
agreement are the amount of industrial and commercial
profits to be attributed to a permanent establishment, the
~'location

of income, deductions, credits, or allowances,

jetween a resident and a related person, and the determination of source of particular items.
In implementing the provisions of this Article, the
competent authorities will communicate with each other
directly and meet together for an exchange of oral opinions
where advisable.
In cases in which the competent authorities reach
agreement with respect to a particular matter, taxes will
be adjusted and refunds or credits allowed in accordance
\vith such agreement.

This provision permits the issuance

of a refund or credit notwithstanding procedural barriers
olhervise existing under a State's law, such as the Statute
of

!~in~i

tations.

This provision will apply only where agreement or
partlal agrcement has been reached between the

compet~nt

authorities and will apply in the case of any such agreement
after the Convention goes into effect even though the agreerlcnt

;nd~'

concern taxable years prior thereto.

Rc\-. Proc. 70-18 sets forth the procedure followed by
the United States in implementing its obligations under
this type of article.

- 55 Article 29.
This

EXCHANGE OF INFORMATION

Artic~e

provides for a system of administrative

cooperation between the competent authorities of the two
States and specifies conditions under which information
may be exchanged to facilitate the administration of the
Convention and to prevent fraud and the avoidance of taxes
to which the Convention relates.
Information exchanged is treated as secret and may
not be disclosed to any persons other than those (including
a court or administrative body) concerned with the assessment, collection, enforcement, or prosecution of taxes
subject to the Convention, but this does not prohibit
incidental disclosure in the course of a court proceeding.
In no case does this Article impose an obligation on either
State to disclose trade secrets or similar information or
to carry out administrative measures or supply particulars
where such action would be at variance with the laws or
administrative practice of that State, or contrary to public
policy.

In general, the standard for the exchange of

information is the standard used by the States in the enforcement of their own laws by administrative and judicial
authorities.

-

56 -

The mutual exchange of information called for by
hese provisions is presently in effect in most of the
conventions to which the United States is a party and
is substantially similar to the provision contained in
the existing Convention.
In addition, paragraphs

(4)

and

(5)

of this Article

specifically provide that the competent authority of each
State will advise the competent authority of the other
State of any addition to or amendment of tax laws which
concern the imposition of taxes which are the subject of
the Convention.

It is further provided that the competent

authority of each State will exchange the texts of all
published material interpreting the present Convention
under the laws of the respective States, whether in the
form of regulations, rulings, or judicial decisions.
In addition, it is provided that adjustment of some
of the provisions of the Convention may be made without
affecting its general principles by an exchange of notes
or ln any other manner in accordance with the constitutional
procedure of the respective States.

For example, if changes

were made In the tax law of one of the States which did not
affect the yeneral principles of the Convention but which

- 57 -

nonetheless required an appropriate adjustment of the
provisions of the Convention, such adjustment could be
accomplished by an exchange of notes.
Article 30.

ASSISTANCE IN COLLECTION

This Article, substantially similar to the assistance
in collection Article in the existing Convention, provides
for mutual assistance in the collection of taxes where
required to avoid an abuse of the Convention.

The provision

is intended merely to insure that the benefits of the
Convention will only be available with respect to persons
entitled to such benefits; it does not in any way alter
rights under other provisions of the Convention.
The Article provides that each State will endeavor to
collect for the other State such amounts as may be necessary
to insure that any exemption or reduced rate of tax granted
under the proposed Convention will not be availed of by
persons not entitled to those benefits.

However, this

Article will not require a State, in order to collect taxes
which are imposed by the other State, to undertake any
administrative measures that differ from its internal regulations or practices nor will this Article require a State to

- 58 '1rl~rtake
~re

any administrative or judicial measures which

contrary to that State's sovereignty, security, or

Jublic policy.
Article 31.

ENTRY INTO FORCE

This Article provides for the ratification of the
proposed Convention and for the exchange of instruments
of ratification.

The Convention will enter into force

cwo months after the date of exchange of such instruments.
However, the provisions of the proposed Convention shall
be effective:
In the case of Finland to taxes which are levied for
the

~~xable

thp

V8~r

year beginning on or after January 1, following

in which the instruments of ratification are

exchanged;
T~

the case of the United States:
III as respects the rate of withholding tax,

to
~~e

~rn0urlts

received on or after the date on which

Convention enters into force; and

(2) as respects other income taxes, to taxable
years beginning on or after January 1, following the
year in which the instruments of ratification are
exchanged.
The entry into force of the proposed Convention will terminate
the Convention of December 18, 1952.

- 59 l\rticle 32.

TERMINATION

The Convention will continue in effect indefinitely,
but may be terminated by either State at any time after
the year 1973.

A State seeking to terminate the Convention

must give notice at least 6 months before the end of the
calendar year through diplomatic channels.
If the Convention is terminated, such termination
will be effective:
In the case of Finland to taxes which are levied for
taxable years beginning on or after January 1 of the year
in which notice is given;
In the case of the United States:
(1) as respects withholding taxes, on January 1
of the year following the year in which notice is
given;
(2)

as respects other income taxes, for any taxabJe

year beginning on or after January 1 of the year following the year in which notice is given.
However, upon prior notice to be given through diplom:3.tic
channels, the provisions of Article 25

(Social Security

Payments) may be terminated by either State at any time
after this Convention enters into force.

Department 01 the TREASURY
IINGTDN. D.C. 20220

TELEPHONE W04-2041

October 6, 1970

FOR IMMEDIATE RELEASE

STATE-FEDERAL FINANCIAL MANAGEMENT CONFERENCE
Secretary Kennedy, Director Shultz, Chairman Hampton and Comptroller
General Staats announced today that officials of their respective agencies
are convening this week, on October 8-9, with financial executives of the
State governments at the Washington Hilton. The meeting is designed to
provide for discussions of mutual problems relative to State-Federal
relationships, particularly as they relate to the financial manag~ment of
grant-in-aid programs and to the financial tools needed to improve the
management of such programs.
Talks to be given by Brevard Crihfield, Executive Director of the
Council of State Governments, Elmer Staats, Comptroller General of the
United States, William Snodgrass, Comptroller of the Treasury of Tennessee,
Dwight Ink, Assistant Director of the Office of Management and Budget,
Wayne McGown, Secretary of Administration for Wisconsin, and Robert Joss,
Assistant to the Assistant Secretary of the Treasury for Economic Affairs,
will highlight the two-day program. Their addresses will be pointed
toward methods whereby the States and the Federal government can better
work together to improve State-Federal relationships in the financial
management of grant-in-aid programs. In addition, there will be workshops
on technical subjects in the fields of auditing, budgeting, accounting
and f inanc ing.
This will hopefully be the first of a series of conferences being
developed by a committee of members of the Council of State Governments;
the National Association of State Auditors, Comptrollers, and Treasurers;
the National Association of State Budget Officers; the Fiscal Review and
Post-Audit Workshops of the National Legislative Conference; and the
Federal Joint Financial Management Improvement Program under the leadership
of the Comptroller General of the United States, the Director of the Office
of Management and Budget, the Chairman of the Civil Service Commission,
and the Secretary of the Treasury.
Attending the conference from State governments are State treasurers,
budget officers, comptrollers, auditors, legislative fiscal review personnel,
and governors' financial assistants. Attending the conference from the
Federal government are officials of the sponsoring agencies--the General
Accounting Office, Office of Management and Budget, Civil Service Commission
and Treasury Department--and officials of the Federal agencies with large
grant-in-aid programs.

000

K-501

Department of the

TRfASURY

'INGTON, D.C. 20220

TElEPHONE W04-2041

FOR RELEASE UPON DELIVERY
REMARKS OF THE HONORABLE MURRAY L. WEIDENBAUM
ASSISTANT SECRETARY OF THE TREASURY FOR ECONOMIC POLICY
BEFORE THE ANNUAL MEETING OF THE BOARD OF DIRECTORS
OF THE FEDERAL RESERVE BANK OF ST. LOUIS
LITTLE ROCK, ARKANSAS
THURSDAY, OCTOBER 8, 1970, 12:00 NOON, CDT
FISCAL POLICY FOR A PERIOD OF TRANSITION
It is a great personal pleasure for me to address- this
combined meeting of the Board of Directors of the Federal
Reserve Bank of St. Louis and of its Little Rock branch. As
a St. Louisian, I am keenly aware of the important contribution that this institution is making to our region.
As an economist, I am perhaps even more aware of the
very useful role of the Eighth Federal Reserve District in
emphasizing the importance of monetary factors in our national
economy. I come here to pay tribute to the pioneering work
of the Bank and its economists even though my own approach to
economic policy may differ in some substantial respects.
1 thought that it might be useful today if I provided
some thoughts on that area of economic policy in which I have
particular involvement, and that is fiscal policy. Before
turning to the outlook for the economy and the budget, I would
like to offer some personal observations on the role of fiscal
policy.
Only a few years ago, it seemed that fiscal policy was
all that mattered. Monetary considerations were largely
ignored. In good measure because of the work of economists
specializing in monetary policy, I believe that shortcoming
has been corrected. As modern economists in general now
realize, money, of course, does matter. However, as with
many things in life, there is always the danger that the
correction will be carried too far.

K-500

- 2 -

I sense a parallel here with the dentist .ho ••• 5 ••
as two rows of teeth surrounded by a lot of miscellaneous
matter. Similarly, exclusive focus on a single economic
variable! no mat1;er how important, is l,oun-d to finor.
significant characteristics of our complicated econOMic
structufe. The fiscal position of the Governntent. of course,
is also impuTtailt in economic policy, and frlO1ft at I •• ,t two
standpoints. On the one hand, government spending and taxing
have a direct impact on the levels of income ana. output in
the economy and, hence, on the allocation of resources. On
the other hand, there is the fiscal effect on credit markets
~s the Government competes for investment funds to finance
its deficits and related government-sponsor~d operation •.
Impacts of Fiscal Policy
I thought that it might be helpful if I turn directly
to some of the more recent, and controversial, instances Df
the use of fiscal policy. Events following the tax cut of
1964 seemed to verify the predictability of fiscal policy
in promoting, as forecasted, a substantial expansion in the
Nat ion's output and employment. The belated tax' increase,
of 1968 did not quite live up to that earlier standard of
predictability in terms of producing the forecasted behavior
in total spending.
The reasons are compI ex and deserve, careful ·study. It
does seem to m~ th~t disil1usion~ent with fiscal·~olicy, while
unc.ierst8.ndable, is decidedly premature. My own analysis of
the experience wit\~ the imposition of the income t.x surch.ra e
in 1968 convinces me that Cha!1gcs in taxation do have a visible
impact on the allocation of personal income among: consumption,
taxatJon, and saving. The available data do show that increases in income taxes, temporary or permanent, do have the
desired effects; they do tend -- as would be expected -- to
depress both personal consumption expenditures and personal
saving.
However, the precise proportions of these impacts, as
we have seen, may vary according to the changing Influence of
many factors, including consumer expectations con,.rniftl the
future. Hence, the repercussions may be More .od~st than had
been expected, at least by some analysts, but the results
seem to me to be quite clear. A complicating consideration
in analyzing the repercussions may be the swampin, of effect.
from tax changes because other factors were operatinl. Thi.
does not mean that the tax changes, per se, 'were not effe-ctlv.:
they may merely be hidden under the surface of more dramatic
events.
I

- 3 For example, consumer spending averaged 78.2 percent
of personal income in the 18 months before the Federal income
tax surcharge was enacted in July 1968, and 77.3 percent in
the 18 months after that tax increase became effective.
If
we make what often is the heroic assumption that all other
factors were held constant, it would appear that the 10 percent surcharge caused the proportion of personal income which
was devoted to consumpti9n to decline by nine-tenths of one
percentage point. Similarly, the proportion of income saved
dropped by 1.3 percentage points.
A somewhat more sophisticated analysis would make some
allowance for the lags that may occur between the time that
personal income is changed and a shift in consumer spending
patterns is evident. For example, the authoritative study
at the University of Michigan by George Katona and Eva Mueller
of the 1964 tax legislation revealed a lag between tax action
and personal spending of perhaps 6 months or more. For purposes of illustration, let us assume a more modest three-month
lag for the temporary 10 percent increase in Federal income
tax rates enacted in 1968.
Hence, let us analyze the relationship between consumer
spending and saving in a given quarter of a year and the income received in the preceding quarter. On that basis (see
Table 1), the imposition of the income tax surcharge was
followed by a drop of 1.2 percentage points in the proportion
of personal income devoted to personal consumption expenditures:and a decline of one percentage point in the savings
ratio for the time periods under study. In an economy the
size of our own, a one percentage point shift is quite
striking when we translate it into billions of dollars.
I suggest that, in retrospect, the direct economic impact
of the surcharge was as we should have expected: the major
share of the higher taxes carne out of funds that consumers
otherwise would have devoted to personal consumption expenditures, and the remainder carne out of income that would otherwise
have been saved and invested. To me, this experience vindicates rather than discredits the usefulness of fiscal policy
for purposes of economic stabilization.
Our experience to date with the phase-out of the surcharge tends to confirm the pattern of adjustment. Both
consumer spending and consumer saving have risen as a proportion of personal income, and, here again, a lagged reaction
may be developing. The impact on saving seems to have been
greater in the immediate period than it is likely to be in

Table 1
EFFECT OF THE SURCHARGE ON CONSUMER SPENDING AND SAVING
Percentage Distribution of Personal Income
Personal
Personal
Personal
Consumption
Taxes, etc.
Total
Expenditures
Saving

Period
18 t-1onths Before the

Tax Surcharge
"<t"

Average of quarterly data for
January 1967 - June 1968

79.8

6.3

13.9

100.0

78.6

5.5

16.1

100.0

18 Months After Imposition

of Tax

Surchar~

Average. of quarterly data for
July 1968 - December 1969

NOTE:

Consumption and saving are lagged one quarter

(see

text).

- 5 -

subsequent months when consumers have had time to adjust
their consumption patterns to their higher disposable income.
Hence, we can expect the savings ratio to recede somewhat from
its current peak. Certainly, the phase-out of the surcharge
has contributed to the higher level of economic activity and,
together with appropriate monetary policy, has enabled us to
make the current economic adjustment to a less inflationary
economy without the customary recession.
Hence, the current wave of skepticism concerning the
effectiveness of fiscal policy seems quite ill-advised, and
I do sense its ebbing. Although fiscal measures have helped
to slow down the economy, what neither fiscal nor monetary
restraint has done was to arrest quickly a strong inflationary
momentum. This should provide a sobering experience for
advocates in either camp.
To this observer, one clear lesson of the last few years
is the importance of the Federal fiscal position to money and
capital markets. Federal deficits at high employment spell
trouble in terms of overstrained financial markets and upward
pressures on interest rates.
To be sure, a distinction between "passive deficits"
(resulting from economic slowup) and "active deficits" (to
stimulate economic growth) still can be made. As economic
s ] a \\Ill p d eve lop s, Fed era 1 r e c e i p t s f all , and, in dee d, t his was
a factor in the more-than-projected deficit of the past fiscal
ye;1 r . Th i s has meant mar e Feder al f inanc ing and more pres su re
in financial markets, already feeling the effects of continuing heavy private requirements for liquidity. Interest
rates, of course, nevertheless have subsided somewhat -- but
not yet in as substantial a degree as has characterized many
other cyc]ical slowups. The small decline of yields in both
short- and long-term markets has been one manifestation
of this.
And, as long as the economic adjustment now underway
remains small, as it has, the pressure in financial markets
~ill place limits to the decline in yields.
The risk is now
turning in the other direction -- to higher yields, should
the recovery now apparently in progress move up too fast.
Unfortunately, this could channel the flow of funds to sectors
other than those with high national priority -- allocation
of credit to housing, state and local governments, small
businessmen, etc.

- 6 -

Hence, appropriate fiscal policy in an economy of high
employment must playa strategic role; the links between
fiscal and monetary policies are complex and unbreakable.
Some fiscal'skeptics fail to see how a few billion
dollars -- of government money -- can matter one way or
another. What some of the critics forget is that the extra
Federal borrowing, while small relative to total output,
impinges on credit markets whose short-run capacity is limited.
This can be disruptive in terms of the functioning of markets,
the allocation of credit among different classes of borrowers
(e.g., for home mortgages), and the level of interest rates.
We do need to recognize the practical limitations under
which fiscal policy operates. There are serious harriers to
very frequent changes for short-run stabilization purposes.
Political restraints may at times result in an inappropriate
fiscal policy. Certainly, the $25 billion budget deficit in
the fiscal year 1968 was a mark of wrong, but not of ineffectual,
fiscal policy. In retrospect, we would have hoped that fiscal
effects then were weaker than they actually were.
To sum up, there are many s ides to the economic elephant,
around which economists are stumbling and of which we are
taking various measurements. Money matters, as do fiscal
actions. The state of our economic knowledge does not justify
a doctrinaire dismissal of either stabilization policy approach.
~e have too few effective economic policy tools to be in
a position to abandon any.
Indeed, as we examine economic policy in recent periods,
do indeed find that we have continued to utilize fiscal
too 1 s. For exampl e, at the Pres ident' s request, the Congress
passed se\'eral re\'enue-raising measures last year which were
designed to assist in dampening down a then overheated economy.

~c

The items that I have in mind include extending the
10 percent income tax surcharge from June 30, 1969 to Decem-

ber 31, 1969, and, at a five percent rate, to June 30, 1970.
Also, scheduled reductions in selected excises were postponed
one year (and the Administration has asked that these tax
reductions be postponed again).
It is clear to me that fiscal measures continue to play
an important, but not solitary, role in the execution of
national economic policy.

- 7 Federal-State-Local Relations
I would like to turn briefly to an aspect of fiscal and
economic policy that often is overlooked in discussions of
national trends -- the interrelationships between the Federal
Government and state and local governments. The Federal Government, as we know, possesses rather potent monetary and fiscal
tools which it can use to help promote economic stabilization
and growth.
In contrast, state and local governments, far more
limited in their fiscal capabilities, are more in the position
of reacting to aggregate economic trends. Many local governments, for example, find themselves in a budgetary bind when
so much of their income comes from sources not responsive to
economic growth, such as the property tax.
Mindful of the financial problems facing state and local
governments, the Nixon Administration has advanced an innovative
program for sharing a portion of Federal revenues with states,
counties, and cities. Under the revenue-sharing proposal,
a percentage of the Federal personal income tax base -- the
fairly steadily rising total of individual taxable incomes
reported to the Internal Revenue Service -- will be disbursed
each quarter to every state, county, and city in the Nation.
Although revenue sharing will not be a panacea, it
should help to strengthen the capability of state and local
governments to respond to the needs of their citizens.
The Outlook
My own reading of the economic tea leaves leads me to
believe that the economy is in the process of turning up while
inflationary pressures are being reduced. However, it is
important during this period of transition to keep the inevitable month-to-month fluctuations in their proper perspective.
For the period immediately ahead, each month's statistics
are not likely to steadily reflect an upturn in the level of
economic activity nor a downward trend in the rate of inflation.
In fact, a short pause or even a temporary turn for a month or
so in some of these statistical series is quite likely and, in
some cases, has been occurring. We need to avoid confusing
these volatile and temporary fluctuations with changes in the
underlying trend.
It is when we examine these underlying trends that we
find the basis for the expectations of advancement in the
level of economic activity and a continued reduction in the

- 8 -

rate of price increases.
Perhaps the major and very real
change that \\'C hcl\'c been witnessing is in the general atmosphere of improved expectations.
Dcspite the current strike in the automobile industry,

I anticipate that real GNP will rise in the third quarter of
The results for the fourth quarter will depend in good
mea~\lrl' on the extent to which the strike will continue.
In
any event, I would expect the current work stoppage merely
to slo~ down or interrupt the recovery which is already under
\"av.
19~O.

~y own evaluation of the economic outlook leads me to
conclude that the upturn will be moderate enough to be accompanied by continued measurable progress in bringing down
the rate of inflation. The performance of both consumer
prices and wholesale prices in recent months is quite reassuring on that score: ignoring inevitable month-to-month
fluctuations, the trend in 1970 to date shows a dampening in
the rate of inflation. My forecast for the coming year is
a Ion g the sam eli n e s : i g nor in gin e v ita b I e m0 n t 11 - to - m0 nth
fluctuations, the outlook is for a further dampening in the
rate of inflation. The specific degree of improvement in
the price level, of course, will depend in part on the results
of decisions in the private sector on wages and other elements
of costs and prices.

Given this background of economic developments, the
budget situation is a source of considerable attention. It
is too early for any definitive statement on the prospects
for the fiscal year 1971. There are still actions which can,
and should, be taken on both the revenue and expenditure
sides which would hold down the likely deficit to reasonable
proportions.
The budget rule announced by the President on recent
occasions certainly provides a good and clear guide: to keep
expenditures within the limits of the revenues that our Federal
tax structure provides at full employment. By following this
guideline, we will restore budgetary balance when the economy
is operating at full potential.
Keeping expenditures within full employment revenues
not be easy to do, especially if new initiatives are t~
be pursueJ, let alone the general updrift in costs of existlng
programs.
It is likely to require hard decisions on the .
expenJiture side - - perhaps some program deferrals, reductlons
dnd phase-outs.
Ivill

- 9 -

In the area of military spending, the leading indicators
all portend a continued slowdown in dollar terms and a further
decline in real terms in coming months. In the longer run,
the trend of defense expenditures will depend on the course
of international developments and this Nation's reaction
to them.
In the area of civilian government outlays, I am struck
by the cogency of the recent war~ing of Caspar Weinberger,
the Deputy Director of the Office of Management and Budget:
"A pilot project normally turns into an essential program in
three years . . . The distance from an urgent priority to
an untouchable sacred cow is usually no more than five fiscal
years. "
A fiscal policy adequate and proper for the transition
to a period of renewed growth but lessened inflationary pressures calls for a tighter control over Federal spending. To
keep expenditures within the revenues that can be expected
when the economy returns to full employment will require hard
choices among alternative spending programs.
There is much talk these days about the need to change
our priorities. But, there are two parts to the process.
The attractive and much easier part of increasing spending
for high priority items has, as we would expect, received
the great bulk of the attention. We now need to focus on
the second and harder step which is necessary in order to
achieve the required shift of resources: identifying those
programs of lower priority which can be reduced, postponed,
or even eliminated and then taking action to do so. Not
until this second step is accomplished will the necessary
changes in priorities truly be effected.

000

Deportment of the
HINGTON. D.C. 20220

TREASURY
TELEPHONE W04-2041

ADVANCE FOR RELEASE AT 2:30 P.M. (CDT) - 1:30 P.M. (EDT)
THURSDAY, O~TOBER 8, 1970
FORMER HOUSTON LAWYER APPOINTED TO HIGH
TREASURY POST
Secretary of the Treausry David M. Kennedy today named
John E. Chapoton of Texas as Acting Tax Legislative Counsel,
a major post in the formulation of U.S. tax policy.
Mr. Chapoton, 34, a former Houston, Texas, lawyer has
been Deputy Tax Legislative Counsel. He played a major role
in shaping the 1969 Tax Reform Act.
.:.

He succeeds Meade Whitaker, who resigned to return to
the practice of law in Birmingham, Alabama. Mr. Whitaker
will rejoin the firm of Cabaniss, Johnston, Gardner and
Clark, of which he was a partner at the time of his appointment
as Tax Legislative Counsel by Secretary Kennedy in July 1969.
Mr. Chapoton will direct a staff of lawyers and accountants
who compose one of the two major units under Assistant Treasury
Secretary for Tdx Policy Edwin S. Cohen.
The other unit is the
Offic€ of Tax Analysis, a staff of economists.
Mr. Chapoton joined the staff of the Tax Legislative
Counsel in May 1969 after eight years as a lawyer in the Houston
firm of Andrews, Kurth, Campbell and Jones.
In August 1969, he was appointed Associa~e Tax Legislative
Counsel, and in July 1970 he was promoted to Deputy Tax
Legislative Counsel.
A native of Galveston, Texas, Mr. Chapoton attended
Washington and Lee University, Lexington, Virginia, and graduated
with honors from the University of Texas, as a Bachelor of
Business Administration, in 1958. He also graduated with honors
in 1960 from the University of Texas Law School, where he was
an editor of the Texas Law Review and a member of the Order of
the Coif, a legal honor fraternity.
.

(OVER)
K-503

2

Earning a commission in the R.O.T.C., Mr. Chapoton
served in the Army, 1960-61.
Mr. Chapoton is married to the former Sarah Eastham
of Houston. They have two children and make their home
ln Washington. The appointment was effective October 1.

000

Department of the
HINGTON. D.C. 20220

TREASURY
TELEPHONE W04-2041

MEMORANDUM FOR THE PRESS:

October 8, 1970

REGULATIONS BENEFITING OIL-WELL-SERVICING
BUSINESSES
The Treasury Department has published tentative
which will help oil-well-servicing and other
businesses that use motor vehicles equipped with certain
specialized machinery.

r~gulations

A tax is now imposed on the fuel used in motor
vehicles designed to carry loads from one place to
another, and in many instances the tax has been applied
even when fuel is consumed to operate specialized equipment.
This has been particularly true of oil-wellservicing equipment.
Treasury has now acted to assure that the fuel used
during those times when the motor vehicle is substantially
immobilized and operating special equipment will be
tax-exempt.
Specifically, it has said that a motor vehicle
will not be classified as a "motor vehicle" at those times,
and, therefore, the fuel consumed during use of the special
equipment will not be taxed.
Text of the proposed regulation is attached.

Attachment

2

Proposed Rule Making
OEPARTMENT OF THE TREASURY
Internal Revenue Service
[ 26 eFR Part 48 1

MANUFACTURERS AND RETAILERS
EXCISE TAXES
Taxability of Special Fuels

the period the vehicle is incapable of
motion and the equipment or machinery
is performing the operation for which it
is primarUy adapted U(a) The primary use of such equipment or machinery 1s other than in
connection with the loading, unloading,
handling, processing, preserving, or
otherwise carIng for any cargo transported or processed on the vehicle, and
<b) The vehicle assumes the essential
Characteristics of an immobile piece of
equipment or machinery designed for a
specialized use.
After the mobility of the vehicle is restored, the vehicle shall again be considered a motor vehicle within the
meaning of subparagraph (1) of this
paragraph. For purposes of this subparagraph, the mere fact that a vehicle, in
order for the equipment or machinery
to perform the operation for which it
is primarily adapted, is rendered Immobile by placing wedges or chock blocks
against the tires or by the switching or
pulling of a lever such as a handbrake
or power takeoff is not suffiCient to satisfy the requirement that the vehicle be
incapable of motion.
(ii) The provisions of subdivision (j)
of this subparagraph may be illustrated
by the following examples:

Notice is hereby given that the regulations set forth in tentative form below
are proposed to be prescribed by the
Commissioner ot Internal Revenue, with
the appro'al of the Secretary of the
Treasury or his delegate. Prior to the
flnal adoption of such regulations, conSideration w1ll be given to any comments
or suggestions pertaining thereto which
are submitted in writing, preferably in
quintupl1c~te, to the Commissioner of
Internal Revenue. Attention: CC:LR:T,
Washington, D.C. 20224, within the
period of 30 days from the date of publication of this notice in the FEDERAL
REGISTER. Any written comments or suggestions not specifically designated as
confidential in accordance with 26 CFR
601.601lb) may be Inspected by any person upon written request. Any person
submitting written comments or suggestions who desires an opportunity to commen' orally at a public hearing on these
Example (1). The X Company which Is
proposed regulations should submit his
request. in writing, to the Commissioner engaged in the all-well-servicing business
vehicle which Is primarily
within the 30-day period. In such case, uses a motor
to all well servicing. X Company
a public hearing will be held, and notice adapted
moves a motor vehicle on which Is mounted
of the time, place, and date will be pub- servicing equipment to a wellhead which
liShed in a subsequent issue of the FED- Is to be serviced. At the wellhead, the vehicle
Is Immoblllzed by the erection at a mast
ERAL REGISTER. The proposed regulations
are to be Issued under the authority con- stablllzed by the use of Jacks, either
tailled in section 7805 of the Internal hydraulic or mechanical. This Immobll!zatlon process Is essentlal In order that the
Revenue Code of 1954 (68A Stat. 917; 26 mast
be secure and ~vel over the wellhead
U.S.C. 7805).
and, when completed, the vehicle is InrSEAL]

RANDOLPH

W.

'THROWER,

Com1llissioner of Internal Revenue.

Section 48.4041-7Ic\ (2) (relating to
temporary loss of classification as a
motor vehicle) of the ManufactUrers and
Retailers Excise Tax Regulations (26
CPR Part 48, is hercby amended to read
as follows:
~ 11I.IOll_7

1)..Iill;I; .. ",.

Motor veT/ieles . • • •
Temporary lo~s of classification as
motor vehicle. 1 j) A vehicle on which
(c)

12)

a
equipment or machinery having a spe<:inlized use 1 as for example specialized
Oilfield machinerY I is mounted and
which (except for' tlle provisions of this
subparagraph) would be considered a
motor vehicle under subparagraph (1)
of this paragraph shall not be considered
a motor vehicle during a period in which
It does not have the essential characteristics of a motor vehicle. Such vehicle will
be considered as not having the essential
characteristics of a motor vehicle during

vehicle on which Is mounted a concrete
mixer. The vehicle Is used for transportlns
concrete, mlldJ13 concrete whlle In tranalt, or
mixing concrete at the Jobelte. TIle power
used for operating the concrete mIXer III obtained by means of a power transfer tram the
same motor which Is used to propel the vehicle. Because this vehicle Is transporting or
processing Its cargo, It can not meet the requirements of subdivision (4) of subparagraph (2) (1) and does not temporarily lOBe
Its classIfication as a motor vehicle.

•

•

•

IF.R. Doc. 70--12768: Filed, Sept. 23, 1970:
8:51 a.n1.1

capable of movement. TIle power used for
operating the special eqUipment needed to
service the all well is obtaIned by means of
a power transfer from the same motor which
Is used to propel the vehicle. Since the requirements of subdivision (l) of this Bubparagraph are satisfied, during the time the
vehicle Is Immoblllzed It Is not considered
a motor vehicle for purposes of subparagraph
(I) of this paragraph.
Example (2). The Y Company Is engaged
In the business of trimming tree Ilmbs away
from telephone and electric transmission
lines. Y Company uses a motor vehicle on
which Is mounted aerial 11ft eqUipment In
order to trim these trees. Before trimming
these trees, the vehicle Is made Incapable of
motion by use of hydraulic or mechanical
Jacks which prevent movement of the truck
during the trimming process. TIle power used
for operating the aerial llft equipment Is
obtained by means of a power transfer from
tl1e same motor which is used to propel the
vehicle. Since the requirements of subdivision (I) of this subparagraph are satlsfie<l,
during the time the vehicle Is immobilized
It Is not considered a motor vehicle for purposes of subparagraph (1) of this paragraph.
Example (.1). Z Company which Is enll"aged
In the concrete-mixing business uses a motor

FEDERAL REGISTER, VOL. 35, NO. 186-THURSDAY, SEPTEMBER 24, 1970

Deportment of the
HINGTON. D.C. 20220

TRfASURY
TElEPHONE W04-2041

ADVANCE fOR RELEASE AT 11:45 A.M. (EDT), FRIDAY, OCT. 9,1970
HOVE TOWARD "COMPOSITE CHECKS"
fOR GOVERNMENT EMPLOYEES;
AID TO ANTI-FORGERY FIGHT
Secretary of the Treasury David M. Kennedy announced today
a government-wide campaign to use "composite checks" where a
number of government workers voluntarily have their paychecks all
sent to a single bank or other financial institution. The plan
is designed to help the government's effort to fight check
forgeries, save the U.S. money, and provide added convenience to
government workers.
"It is too early to regard this as a step toward a checkless society; rather it is a move toward fewer checks,"
Mr. Kennedy said.
At present, 10.3 per cent of the government's 2,700,000
civilian employees have their paychecks sent directly to a bank.
About one check in every 10,000 is stolen and forged.
Other
checks are stolen or lost and never cashed. Under the
"composite check" system a single check will be made out where
several employees bank at a single institution and voluntarily
ask to have their checks mailed directly to the bank.
This check will be forgery-proof, in that it will be made
out to a financial institution rather than to an individual.
The bank or other financial institution will also get a payroll
record from the employee's agency in a separate mailing from
the actual composite check. This will permit crediting to
every account involved even though the check itself might go
astray.
The government will save approximately 8 cents each on
every check that is eliminated.
As of today this could mean
elimination of 900,000 checks annually. The plan is expected
to save the government $72,000 this year with increasing sum9
thereafter.
Mr. Kennedy emphasized that the plan involves voluntary
action on the part of government employees.
"There is no intent
here to force any worker to have his check sent to a bank; rather
it is a recognition of the savings possible because of the
increasing numbers of employees who find this system of check
depositing convenient," he said.
~~nlchments

000

I ;-'!I ,~\

New ReeuJ.atio"ls for PayinG Govern1J'('Et P(~TSOnn(~J by Direct
_
Crea i ·t~, Q.,_:~~..Q..Q1m.t.0...J. n F5I1..9:lJ.£i~.J ._(~nL!mtz;~!::U Q.9.E _ __
The Treasury Dep8.Ttment today called attention to ~""egulations issued
to all Federal agencil'::~D estabUshing new requirements in paying personnel
who elect to receive tbeir net pay regularly by direct credit to their
accounts in designated banks and other financial orGanizations. Commissioner
of Accounts, Sidney S. Sokol, said that the Treasury Fiscal Requirements
Manual, in a release dated September 28, 1970, now makes it ma,ndatory that
if at least five :indjvi'.hnJs in the same payroll designdte tbe same financial
organization a single (composite) check shall be issued in favor of the
financial organization covering all the personnel involved. The account
of each participating person is credited on the basis of a separate list.
Under certain standard:~ the use of this procedure may be approved for even
fewer than five participants. Agencies are required to convert their payrolling systems as proITJp-tily as possible to achieve these results, but not
later than June 30, 1971.
The option of receiving full net pay regularly in the form of a check
drawn in favor of a financial organization h&8 been available to Goverrrment
personnel for several years. It has been carried out largely by means :)f
an individual check so issued for each person. The composite check technique,
now mandatory, has heretofore been used in a number of agencies, but not
universally. Whether the check covers only one person or is a cumposite
payment for a group of persons, the fact that it is drm-ill in favor of a
bank or other financial organization makes it "forgery-proof1t in the event
of loss or theft.
In addition to the basic safety feature, for persopnel and the Gove:r'nment, the composite check system offers other significant advantages.
Operating costs are reduced when one check can be prepared and mailed to
pay five, ten, a hundred or several hundred persons. Equally significant
for all concerned are certain special arrangements which vIill be made
gradually with all financial organizations designated by the participants.
The payment list, which will be mailed prior to the composite check, will
be the basis for crediting each personts account on the established payday
even if the composite check is not received ill the mail on that payday.
The financial organization is guaranteed timely credit by the Government
and is thus able to guarantee credit on payday, without fail, for each of
its participating customers.
, To the extent that personnel voluntarily elect to be paid by direct
credit in a financial organization, delays in payment, lost or stolen pay
checks, substitute checks, forged pay checks, and all related problems,
many of an emergency nature potentially involving large quantities of
individual checks in bulk Shipments -- all can become a thing of the past.
From a longer range standpoint there are significant potentialities for
possible application to other classes of Government payments.

(OVER)

- 2 There is still H ~,onf£ "my to f!,O for Uw j]i!JiiuLhtc ()Ljt:cLjv«~
applicable to paynJ(;nts to tJ-w GovermscnV ~ ()\'JTl jJ] ,-]wu,c;c p2;r;;'onnc;1. The
percentage of vol11nteJ:J:;Y p[·n·L:'~ciIuti.on, \!lrlch is f~L:Jl1 1-8J;:"tivcly low,
can be much great8l'. ri'o tll:i~: c:md J thC:) nCH l'oguJaUonf; requi:cc o.lJ <J[Cncj8,-~
to info]-'m all per;3c!n!wl about -ens i'actf; [)Jed mutuaJ n:1vc1lltagc,s. '1.'110 appro[)ch
remain;.:; purely voluntary but "ith a PO;2:i. ~:ive offor t to ::',ee to it that &1J.
who fail to take [l0VC3ntL',ge of the option ciTe in thc:lt category by choice j
not through neglect or lack of information
j

0

Data on participB_tion will be developed in a census to be taken
through Goverrunent disbursing offices for the last pay period in December.

Bureau of Accounts
Office of tbe Commissioner
October 6, 1970

I.

...

\.."".

,·.---r
,..,./

_~.~.A.""

TREt,SUPY

FI;;C:~L REQUlf:;c~M:l'rlS t,'.'j:Ui~L

GUID/·.NCe 0;-' L) [

r~ M~ IT,i~ t :'!~.

FU:';

td-!D ACT [:C.: If::;;

TRANSMITTAL LETTER HO. 53
TO HEADS OF GOVERNt,1ENT DEPARTtllil,\,TS AND AGENCIES AND OTHERS

CONCERNj~D:

PREFACE

Five years have elapsed since the law gave Government personnel the
option of receiving their ~ull net P8Y regularly by direct credit to accounts
in banks or other financial organizations, by means of: checks dra'w'TI in favor
of the financial organizations. The extent of voluntary participation has
been relatively minor; it C8,n be much greater, voluntari.ly,
Two years have elapsed since the procedure itself, originally optional
for Government agencies, ,vas made mandatory--so that all checks mailed to
the designated financial organiza~lons would he dra,m in favor of such organizations. In all but a few places, this is now the uniform practice.
Consequently, conditions now warrant establishment of specific criteria
for mandatory convertlion to the "composite check" procedure. Some agC'ncies
have already acted in this direction; others are in process. Many others
will need to assign priority for conversion of those steps in their payrolling
systems that are needed to produce net pay outputs in cODQosite groupings of
personnel with corrunon financial organization payees. Cost reduction for the
Government continues to be an objective; but the procedure now to be used
also adds a new dimension, to give all participating personnel assurance that
their accounts will be credited on pay day, without fail, regardless of what
might happen to the composite check. This alone should motivate greater
voluntary participation.
PO.6 e :the pJr..oPO.6W-OI1 .tha:t by 79 gO vw:uoily al!.-t, ,tn 110.t aLt, GO\lCAnment
paymento /110W ovCA 600 m-uuof1 CUl!lltiliyT WLC- bcAJ'lg made --lll .the mwULCA covvLed

Qrj thrue pJWCedWLe.-6. Alld lUtz tjowG6u{lvhat \lcdu.e .th--l.!J LiJ-i..fJ:. have ~jll tVUM
(1) bettvL qu.f),~lj 06 M!./tV--lc.e:to .tfl('- teJ10 06 m~J'.L.LOnh 06 JLeUp~C)l:to; (2)

ob

e.c.Of1omy 06 ope.JLa.t.tOJ1.!J eVCAljwhCAe; and (3) above ill, c.ompiue d~))appeatLal1.c.e
'cJIAJn~Jla1. --lndu,/~;tfLlj' w/uc.il teed;" 011 tfw6t and fJOfLg e)'Llj 06
Govel!.f1Jnen.t, c.hec.lv.., w~;th ili :tJtV?lel1.dOM 12.6 bed 011 dOUCUL VO,iLLe.-6 60h the public
and pJti..va;te .6ecto/W aJ1d OI1.-Va£ue!.J tha:t VtWL6cc:nd the doliCUL .6~11.

06 tha;t POVJ..OI1 Db

The --lY'nmecLtate c.halienge, c.oJ16~f1ed IU i l ~ .to paymCJ1,:(-:f, .to the. GOl!C'/Lf1Jnent'.6
own on-boaJLd PVWOVtJ1eX, L6 bu:t a .!Jmali PaJ{;t 06 :the :total gOa!--JleXauvulj m..tIWh

-Your

FIt/IIY(

IVa.6 US,

j'rll'/!/(lJ BondJ
<>

- 2 -

be..c..allA e.. d co \1eJ(/.) Clvt be,;) -t t v:',~ tflrm 20 IX' hcr)! t 0 ( aX£.. GOVCjiliiil~vd pauw! U;(lJ
and JtclatJ..vr::'-lJ ,s'{J)lpfc, c(l;]ccptu"a):Ju af,d o)Jc'.;'ioL(()!:rlf1-y, COI:ij!(JJ!Cr{ to ;tIL~
mo"~{V~ "n~L;,':lC'lJ On pCflJo(!Lc pct!jnJCl1t-:\ to till? 9'll:C",C{{ rubUc -in lllc vcwou/.)
,
Y;t
" ,Uilme
'. d',U ·U2
,. CdCUz-ClifiC'; ,Cit app~tc..(:X~(lll
f""
,Ig!W}))-6.
e, ),,2C
~o CVCJL!j
[JiAy'LUU, tahg e.. and ,smaD'i .(,/S YlO -6'{)lIpfr uYideJI):a ,r~{YL9 and ,{);, t{U!_ hcy to
derlloiubw;{:'cJ1g tiLe va1.uc/) --t)lheJLe..)U --tIL ;011:'_ to:tuf ohj c,c;ttvc,
It--6 -Ouc..c..C--6!)
ILcJ.dJ., on tilc active -trUC1Ckt Wid C.bGOJll 06 mCl.i1a~JC'mCJ1.t -tH c..\)(!Jilj agency, ,U1
"-' [t-i~Ll': '1.g not OJtfy the ;x;"y!wU pfwcc..c{wca-f COHVe)L,S,Lol1, but ))106t 06 aLt., ~Y1
maiu,ng -6UJtc -that aLt PCfcMJl1IlU MI2 tpLfy CU()MC oil thc bC',llc6,l.:t~, -60 tha.t
aLe. who 6Ctvlf ,to take.. advantage.. 06 tfl;'~ option WLC -tn tha-t c..atcgoJty by c..ho.tc..c"
riot thJwugh YH!gtec..t OIL .tack 06 -tl1bO)Ui/a;t;'on.
1

({)I)

,

<

000

PUJ:'J:'OSE.

This transmittal letter pertains to (1) only those provlslons of
31 U.~ .C. 492 and the implementing Treasury regulations contained in De;:J.lrtment Circular No. 1076 (First Revision); and (2) only those procedures
covered by Chapter 7000, Part III of this Manual ,,,,hich deal t",ith "net pay."
(1) Coverage includes "net pay" to military personnel, notwithstanding the fact that the statute and regulations cited are now confined
to ~Iocedures for paying civilian personnel (as a result of Public Law
90-365 of 1968).
(2) Although the subject of allotments of pay for savings
accounts of civilian personnel is included in the regulations cited (becavse it was incorporated in 31 U.S.C. 492) that subject is not within the
scope of this transmittal letter. Nor is the subject of military al1otmpnt-s nf pay in any way related to this transmittal letter (or to the
statute or regulations ~ited).
b.

The purpose of this transmittal letter is:

(1) To reiterate existing requirements concerning the drawing
of indiVidual checks for n~t pay in favor of financial organizations for
credjt to accounts of personnel;
(2) To establish (a) net.;> requirements for the application of
the composite check method of having the net pay of personnel credited
"it financial organizations, and Cb) certain beneficial procedures relating
thereto;
(3) To request all agencies to convey to all personnel a
general reminder of the option to be paid by direct credit in a financial organization, with particular emphasis on the benefits inherent
:in -It-em (2) in the mutual interests of the personnel and the Government;

(LI) To obtclill certain (;,;'.I!·rllmen1"""j(I:' ,~t,";t'i,;t'i('G on Ill!'
subject matter, car})' in 1971, ,;CI\'jllf, to llf',rl::':(' Llic d(IL:-: ()n net pc;y
obtained in 1'169 ill cc'w:e.qucncC' of Tr;,"~;T:':i ii:~; L,tter j';fJ, 35 -- fOi'
the pLlrpo~e of (D) Cls:;c.';:"i;lg proi.':'"(:;': in thc: :~C:1C1'8.1 ,:J,::in:i,;trat:i.on
of this program and eb) (;cn,~'lyjJli:, \.'iUl COJlijl'ilin:; reql!c::l:~ of the
House Committee on Govcrnment OpCl <'!t )IIUS fOJ CUj"l.t:nt ilJfoJ"I!1.::':LioIl on
status and pi"ogress uncleI' the st aLutf,'.

c. Various sections of hlrt 111, ChapCC1" 7000 of tills l-hnuEtl
will be updated 3.t 'i later date, jn conformiLy \,,:i tlJ the provisions of
this transmittal letter.
2.
INDIVlplJ/0.: CH~CK FOP~rj\Y11ENLQF_l~~:r PAY"}~Q_.g;'l.~~_.P"T}I.Y"IT)UAL BY
DIRECT CREDIT TO AN ACCOmn IN A Fll\/'.NCIAL m:ct\iHZJ~TJ()];.

a. Under existing Treasury regulations, (1) it is optional for
civilian employees to request to receive their net pay regularly by
direct credit to their accounts in financial organizations of their
choice; (2) it is mandatory that such payments be made in the form of
checks drawn to the onler of the de",:ignatecJ fiu3ncial organizations,
each individual check being for crc"cijt to one employee\ s account (unless
the composite check procedure is applicable:); ond (3) agency payrolling
was required to be converted by not Llter t11an June 30, 1969 to cause
the checks to be dravlH in accordance with item (2).
b. ~lile net pay by direct credit to an account in a financial
organization, in b~half of military personnc<t, is technically no lOll2;er
within the scope of 31 U.S,C. 492 and the I'cJ2tcd Treasllry regulations,
the basic objectives Clre the S8.me as indicated in sub-paragraph a above.
Accordingly, uniform observance of item (2) of sub-paragraph a is
requested of every agency, with respect to its military as well as
civilian personnel.
c. Every agency is requested to make a report to t11is office on
the extent to which former procedures~ \>7hich are no longer optional,
are still being observed; viz., the payroll records still cause the
check to be drawn in favor of the individuo l"~s the pa.x!::~, and tbe
individual's request to have his account credited regularly at a financial organization is accomplished by sending such check to the
,financial organization -- in which case (1) tho " name onlylt check is
mailed by the administrative office with a mri) ling insert, or (2) the
check, inscribed by the disbursing office to sllO\'] " C / O financial
organization and the address,'! is mailed by the disbursing office.
The report will indicate (1) the number of personnel so bcing paid
(separate figures for civilian and military personnel), and (2) the
reason or reasons why the payroll records have not yet been converted
to the procedure prescribed. If applicable, negative reports are
requested.

unde"c the ~rrC2,(~t.lry1(""; ccr1t-f{l.1 d . !,·htj~~~illg E,\':-.tC'Pl
Hill 1llekc tl1cir reportE, to thi ~ c,rfi.cc, 11:.< J:.-t';l~ tl,,'I: rcLr'J~jr~' 1, }971.,
based uni fc,rmly on L110i r p.s.yrnlL: [()}- the j;:;L 1';].)' IJ''',-jCjr 1 cnclinl, in
December 1970.

(1)

F.Lgel1C~(~S

(2) Agencies which per[(Jnl; tl1(} r o\;n disbuLc;in,,; v'Lll \llckc
their reports on thi~) 1fIatler [;5 ;; purt of tLc C(,nSlJS :ccpor ts required
in accordaT"tce Fith pc.ragr2.ph 6 [)clop,

3.

CffittOSX£E C:!lECJ5_.L:Qg I'A\i,}iEEL_9JLJ.:}:T

BY DIRECT' c;ZI·:DIT
TO
___

l\CCO!Jl~TS

P:'~L:O~_..'~_L~LQ:.:I~_l;?_Qr D'WI:::IQ~LLS

JJ: ___
;,-__ ..FHU;}JCli,j.
____ __ ... __
~

(';~C,Y!nLJT]()j:,
__
..-_.. __ __

~_~~,

J.~_

~

~r

_

a. The drawing of indiviuu5il r.:lwcks to the order of financial
organizations [or the purpose of carrying out desires of person~e1 to
be paid regllla::-ly by direct .credit in their firtancial orgClnizations
provides certain irrrrnediate advantages, e.g., (1) it oDviE!tes a po~;rcr
of attorney from the individual to the financial orgoni~ation, and (2)
a check, so drawn, is virtually i1forgery-proo[i! in tho e\:ent of loss,
etc. Even more significant, for both immcd:lc tc:~ and l011Z" ~. ange oh j ect ives,
is the fact that the designation. of a fin;)flcial orgalli2JDtion as the
payee of a check establishes a common payee for as nr:::r!)' nersons in a
given payroll as may select the sarne financi8.1 organiz"tion. The so··
called "coE!posite check lt is dn:.~m in favor of a financic,l organii:ation in
the aggregate amount of net pay of a group of :inuividua l~;, supported by
a remittance record in ~.;rhich each individuo.l if; identified as to n?.me,
depositor account number and amount.
b. Joint activities of the Bureau of Accounts and the agencies
under the Treasury disbursing system, in tlie 8pplication of the composite check procedure, since January 1969, hHve produced sufficient
experience to now require a uniform ground-rule for mandatory extension
of that procedure in respect of such agencies.
(1) Agency payrolls sh8l1 be organized as soon as possible,
but not later than June 30, 1971, (a) to produce a rcrrlitto.nce record
and to cause a composite check to be issued in favor of a financi.sl
organization in the total amount of such rewittance record, wherever
five or more persons in a payroll have designated the SCl1n8 financial
organization; and (b) for the time being, to cause an i!2ji,-:1dua1 check
to be issued in favor of a financial organi~ation for credit to the
account of one person, ,,7herever fewer than five pCL'scms have designated
the same financial organization.
(2) The standard of Irfive or yaorc ll per fin:::ncial organization
applies to a financial organization as a single entity, with a single
mailing address and identified by its single account number (i. e., its
Employer Identification number assigned by the Intern21 Revenue Service).
In working with each financial organization involved, the Bureau of

Accounts \;") 11 not r'Cl'jl;:
r;l\"i_~f; ~;-i : "".~ (I.r LIi(.' Lr);·I;.)("·,~·.j tc cLe·: i' 1);_~ocC:(~iJr(~
if the fjTj(;~~c'ial org~jri'- f.• i"·l .i c·n G(_;;'~~ ~;f-'t \)(-;'\1/· ~.) '~. ('>p.c;~,l~!.·.~.i 1)" of d;,:cl.'l/~ j.n~J,
rC1tlii·t(1ncc~~ 2.t n sin~lll' p~-.:i~.lL~ (-j.,(' .. :. jf sCl··'..I_-.!_:"j:., Y(;1!lj(~L;-·llf~f·:~ 11ccd to 1)0
recc::i\icd C:.t ind i.vidu.·,1. 'l1;·i.lch ofi-ic'_<).
k')l,;ll':;i1CC:~; ,,;,jl1 co\\tirl\;<.: to oe
lPaGe to 8Ldi of its '''IT', ,,;.hl~ L) ,',1'.1': of-fic( ~:i1i l'11C fc!! ,,; or indi',;,"\,:.-·l
checks dr,:~'n jn fevor ( l i c:uch b) ,';)]'_'1 1 0tLic('s u-.;;:U sllcli fiji\.::. '';:'C-L-ll~;--'­
fin,llicii'il OI-f',snizatiull ,':,vises tlL,i it' 113.s d,c,;('}oL-,ed t):c (;;:'i)(,J,il:ily of
hcmdlhlg the deposit cU:l'i i_ts floor,· i.'l. (>:ntrnl [!oint, 2.L \'<-ii.cll one c;';"i'"site
clieck and i-cmi t tallCCo reccrd call be j'ccf:ivccJ f ('l the pr; 1 t.i Cl1.L::1. pd),ro il.
\6

;,

(3) In the couc:';e of the foregoin8: rl.n-,:i.nger"ellt:_; '.d_th the fin;l.n··
cial organizations, the Eurcau of hCCOliIltS obtcd.ns the c'rj ; , ] icahle Elilploye'C
Identification numbers D,ld furnj;;hC'~: 1:11cm i.u tl)f.' Bgcncy rOY use in its
payroll system.
In the lW~"t rc:vision of tl:c f;l:O.r:Jord FO!'i] 1189, provision Hill be made for having the fill£lncJ.&J. (Jrg~,ni~al:ioLl illsert Lhat
number on the form, so ef; to be b'cml/',ht hitO the paY1'01] rc'corcis c'.l: tbe
outset. In the meantime, persoDPcl ex~cuting S.y. 1189 [or the first
tillle should he asked to have their financial o::2,ardzD.Li.on insert its
E.1. number alongside ils name.
(4) In the co'-,lposite check procedure:, e2tch fil\;o'!1Cic:\l orgc,nizotion
E.1. number represents cn indivjc111C.l. 2cccunt sC:2,::1(2nt \-Til::l~-'l the 1'o.yro1L.
Unlike the similar needs with respect to the: allotments of P&y [or Gavings
accounts, there will be r~o E. I. numbc;(' suf [ixes in t1)(;; system for net
pay and consequently, none of the proliferatiun of aCCOl,nt segments
that exist in the allotment of pc:')' situation (for the reason indicated
in item (2) above».
Generally spc8king, t11C "cc:ntrali:c:cd 11 c0pabj lity of
financial organiz.9.tions at this tirnc is much more adV(\i1Ced with resi)cct
to checking account depoQ it s than for savin gs accounts.
Cons ider jng the
fact that very few do not have that capability for cllccking accounts,
the emphasis at this stage is to continue individual CL2c1:s to hrdnchcs
and to move to a composite check \"hen the financial or[,;aniz&.tion has
developed the centralized capability.
(5) As soon as the payroll of any agency reacllcs the point where
a t'financial inst itut ion segment ll covers at leas t fiv8 inc1 ivid1181s, the
agency is required to consult Tvith tl1e Bureau of Accounts (Tec:-ll-lical
Staff, 964-8386, area code 202) concerning the mutual <::c:tions to be
undertaken in the application of U1e composite check p-roc(':dure for thnt
payroll. The Bureau of Accounts me'y initiatE' such consultation. As
a matter of inform<ltion, a number of agenci cc: ?])o t]lC Bl1re;l,\l of Accounts
are presently in the preliminary or implementing stages in converting
to composite check procedures vlhich will permit avoid2nce at more th3.n
one million individual checka annually.

(6) In the joint

~fforts

preliminary to application of the
composite check procedure for <lny payroll, consideration 'will be given

-

to a prupo~:;2.1 t!:,at

tll\..",-

6 -

1ninil\,';J! ~;t::P(~(-!'cd

(J~

nS~_l\!1...-

\";.

1)'-1, C',n

L...:

\\,.;\'\'r..1~

This cOlltcri1plat('s LIla/.: trlC tfco:,ll}{):-j"itc ('I;',J'l ... . ~ rCi'I'
"-i,/ (',
J"CC()~ l_~!; ("~~LPlltC>
w~"'\lJld be produced uniforrl11y > ~.,J-~! LC:.vel __ )',\ :- -i.n::-i (. 1-,~~ I
j·:;:·:-.iJ('!_~ (\ '5 :.-.!-..ou.J.::
suffix) of a fin;:nci<d cn:ij:l;;: :l(,iOl\ 11;-;' 1",,',' :i,ij~:(
,,:,(1 i,'lto lll:' PD)'l:cJll.,
ing syst(-~nl as thc' }.13.)'CC acc~\:,:';)l id(?nt~j -; (~<·t ilJl'};; J-C '~I-(~.\('~~s of the:: n1Jfl;~jC:J:
of pC'r~.;on:3 to be' l:i s~cd 01"1 1:1)'- r(Tllit;':,I:;lC,,' ; L~(:(lL(l"
C:,)l1:; ldccaric>:;.; CO~'!,m
ducivc to such R v;'iliv~r inc'li,l(},. (a) ,~'" ;.,;:;~cs of Clj;;F'.J;,,.;:L~,y ci IHLl;;r2"l,:;:>g
and operaUons in agency payrllJ]iCl L;; (l) Lk, C-:::i:-:L(;:(~l' of: rcl:ll:~_'.<ly fe'.';'
segments beloH the 5 La 1 rai ,lo ,:llld i',l,,, )<,,-,-<,1 0~/),:( c:li~;':;_on U:(;i..:, in tir:":,
there will be even fewer or no scgmcn~~ ~;t]j low r~lios, L2C~U~C iGcrcasing numhers of pen;onnel will cJect to il, p:,iG by l>i),,,cl: credit c::,L a
financial organi7.C:ll:ion; and (c) tlle £C,cL tLd:, in corn:cction \dth certajn
procedural mattC'TS described hereiJ'li1:Ltcr, the' "co,:,;)o:--~i,tc clleck - rC?r,lit-,
tance record ll method (even for il 1 to I r:-! ti 0) pro'h des certaill udv;ll1i.:8.gCS
over the "individual check to financial or~;2nizat:Lon< II
!

c. Each agency \-Jhich lwrfoJ:l.lls iu; o\·;n disbul:s),ng is herr-by required
to adopt, in its 0,,'11 regulatioJlo-;, the SA,l!lC: 1\ five 0): P1Ore" stand:'rd for
application of the composite checl< procedure. A different stDn0,:n-d may bo?
authori%ed, in specific circlJrns t ATlC(:S, b~!.,;ed upon an agency IS '':('(lll(2st
for a waiver of this requirement.
4. PROCEDURES FOR DELIVERnlG_~OIfros I1Y CUlj_~'I(S _6,l\T)_~q::L!'_TED I'.:~~LUJ~AN.QE
RECOFJJS.
a. The most recent applications of the cOlnpo.<::L te check tccll:1ique,
with the cooperat i~n of several adminis l r3 t ive agcnc j es and ;]. larGe
number of financial organiza t ions, have inc luded the lest ing of a special
procedure for delivering the composite chcck,~ and the remittance l-ccords
to financial organizations.
The objeclive was to provide a guarantee
that anyone who is paid this \Vc;,y tvill, without £,lil, receive credit in
his account on the established pay day.
Snch a gIJD}~antee is not possible
in the case of an individual check, khether it be (1) dr-al-m :i,l1 f~lvor of
and mailed to a financial organization; or (2) drawn in favor of the
individual and mailed to his home addr('s~; or shipped in bulk \'lith other
pay checks to his agency site for internal distribution. The special
procedure, Hhich is outlined belO\v, has 1I1Ct every e:,;pectation and is
hereby' prescribed for all existin;; and future composite check applications.
The guarantee Hhich it provides should be used, in tlw mutual j nterest of
the Government <'mel its personnel, to motivate perc>ornwl in gleater
numbers to elect to be paid rCBularly by direct credit in accounts at
their financial organizations -- the prerequisite to marc widespread
realization of the composi~c check bellc.cits.
b.

The special procedure is as [ollOl-Js:

(1) The administrative (payro1ling) office sends directly to
the financial organization the remittance record sho\ving name, depositor

account number and amount of net pay for each pe:cson involved. This is
accompanied by a remittance record sllllln~ary sheet 'YJhich, among other things,
identifies all parties in the agency and the chsbursing office whom the
financial organization shoilid contact, if need be. The remittance record
and summary sheet should be released in time to be received at the
financial organization at least one day before the pay day, preferably
two or three days befdre pay day in some cases.
(Some financial organizadens with branch. offices spread over wide geographical ar.eas need more
time than others for processing deposit credits fi~om their central
receiving point. Giving such organizations adequate lead time is, of
course, desirable for purposes of guaranteeing credit to accounts of
personnel on pay day.)
(2) The disbursing office releases in the mails, in
received by th& financial cirganization on the established pay
composite check in the total amount of the remittance record,
by a copy of the sarre special summary sheet which accompanied
tance record from the agency payroll office.

time to be
day, the
accompanied
the remit-

(3) stnce items (1) and (2) are separate mailings (both as to
timing and mailing point) the likelihood of both being delayed or lost
is extremely remote. If either one is not received, the financial
organization is able to make direct contact with the agency or the
disbursing office, as the case may be, based on the information on the
remittance record surrrrnary sheet received.
(4) Should a financial organization ever have to contact a
disbursing office because the composite check is not received on pay day,
the disbursing office will take immediate steps to substitute the missing
check, giving the financial organization the option of either (a) having
the disbursing office mail the substitute check to it, or (b) having the
disbursing office initiate a special action which will cause the account
of the financial organization to be credited through the Federal Reserve
System by not later than one business day folloHing the pay day. This
is the day on which the financial orgellization would normally have
collected the proceeds of the composite check, had it been received on
pay day.
(5) A sample of the remittance record sumnary sheet is attached
as Exhibit No.1. It will be made a standard form following more widespread experience in its use. In the meantime, the small supplies needed
should be Feproduced by those agencies which are affected.
5.

MESSAGE TO ALL GOVERh'MENT PERSONNEL.

a. All agencies are requested to convey to all their personnel
the message on the subject·of "net pay" which is set forth in Exhibit No.2.
The message is to contain the information in the exhibit, as a minimum; it

«

8 -

may be expanded for addi.tional paints which the a.gency wishes to include
to encourage its personnel to eJ.cct to be paid regularly by direct
credit to accounts in financial ot·gl1nizations .. -the method in vlhich everybody gains.
b. With a view to having the maximum number of personnel act
voluntarily in favor of the direct credit option prior to the census to
be taken at the end .of Decenlber 1970, each agency' 8 message on this
subject should be released to reach all its persdnnel as 800n as possible,
but not later than October 30, 1970.
.
6. GOVERNHENT-WIDE C!~~SUS OF NET PAY BY DIRECT CREDIT TO ACCOUNTS IN
FINANCIAL ORGANIZATIONS •.
a. Statistics on net pay will be developed uniformly on the basis
of one pay period; i.e., the last pay period ending in December 1970.
This means, for example, the pay period ending December 26, 1970 for
most civilian agencies and the pay period ending December 31, 1970 for
military personnel.
b. Agencies which do their Ohm disburRing are required to submit
their reports to this office, in the form of Exhibit No.3, not later
than February 15, 1971. The format is the same as \Vas required in the
reports furnished in the 1969 census (Transmittal Letter No. 35) except
that line 1 is expanded to show a breakdowrl of the number of individual
checks dral;m in faVor of individuals according to line la (those that
are still being drawn -payabl~ to one person and are mailed care of
financial organizations) and line Ib (all other). Each report showing
an entry on line la is required to be supported by a narrative statement
giving the reason or reasons why the payroll records have not yet been
converted to the procedure prescribed (namely, to cause the checks to be
drawn to the order of the financial organizations).
c. With respect to all agencies under the Treasury's central
disburSing system, the reports in the format of Exhibit No. 3 will be
developed through our own regional disbursing office facilities. The
breakdown of line 1 1.n each case Hill necessarily depend upon the report
to be furnished by each agency in accordance with paragraph 2c(1) of
this Transmittal Letter. A negative report from an agency, for example,
would be indicative, of the fact that the agency has ( mverted its
payrolling to cause all checks which are to be mailed to financial
organizations to be dru,.;rn in favor of such financial organizations; and
hence, there will be a zero on line la and the total of all individual
checks drawn in favor of individuals will appear on line lb. Except
for furnishing the inforr~tion needed for line 1, administrative
agenci~s will not be involved in developing any of the statistics on
this subject.

-

9 -

d. The United States Coast Guard will submit a report in the
format of Exhibit No. 3 confined to military pay, to the extent of any
semimonthly payrolls paid by its "assistant disbursing officers ll
operating under Treasury delegation.
e. No reports are to be submitted for Bny payrolls paid by any
other assistant disbursing officers (and U. S. Disbursing Officers of
the Department of State) operating under Treasury delegation, inasmuch
as such payrolls would apply almost exclusively to personnel stationed
outside the 48 contiguous states.
7. Any questions should be directed to the'Bureau of
Technical Staff, Treasury Annex No.1, Washington, D.C. 20226
(Telephone 964-8386; also Ar~a Code 202; IDS 184).

Accounts~

~~H:---

Commissioner of Accounts

SUMMARY SHEET-REMITTANCE RECORD FOR NET PAY TO FINANCIAL OR~~IZATION
The attached remittance record lists all the employees o£{
this agency (by name, depositor acco',mt nurr:oer, and amount,
who are being paid by credit to th2ir accounts at your
i
financial organization on the pay date ShO~~l~
I
Sig~.2ture (agency)
To: Name and complete address of financial organization (including name of
specific office within
organization vJhich is to
receivJ the remittance
record
Pay date
Total amol1nt of remittance record

I

.

~~

l~in~""i~l
or~"ni~~t-~~n
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b e ..
ft,
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by

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number

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Number of 2IT:ployc28 paid

-----i

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___ ~_.____~
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FOR INFO:Rl'it"TION OF FmPNCL'1.L ORGl~.NIZ.ATLON: vau sho',ld ,...ace"ve t}]1 S u""'r''C''''''Y
attached remittence record before the pay date 8hm·ro. You should also rec.ei "'~Ie, ~ot l::tc:r!
I
than the pay date, in 3 separate mailing, a single (composite) check in tbe 2zg~eg=ts
i
't

.1_

amaunt of the a.tt9.ched

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~~rr.:~=,ry s'~~e~ fo~ i~~:,ttU~CS:t:O~.. ~l~j~~:'~C: ~ 1 ~:: ~~~~~ ~e~.e~Vi'1~~ :h~ ~'::~~::~::;:'2_,'~'~~::: C~~,.I

"""he /:)ay d~ . . . e, YOu hCl-ve n.OL re_e_vc.G.
~
.!..eJ-ct1.. --.,J ,,--,UtU.l.J..'l-r.l,l utlee.t 0 •.. t..C . . . e~>.!..:.'...J_ .._I.·.:.~ __ 2 ~c'_u._(I_, )V\.:f
should immediately contact 'che agc~icy office shc";,Q belc)Tl.
If, after !:c::,,-,-:L--,;i,~~-; 6,5,3
!
Summa.ry Sheet and attached remittance record, you do not rsceive th'~ co",:;,o::3ite Ch'2d~ GIl !
the pay date, you should irmne6.iately CO:<lt2.ct the disbursing o:Zficej~ s~::;";::. be:,c~~o
L: t.te \
I.- ..

-·~·;-·\..·e-""
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.......

yOl"l_ c:1"O~11~
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rernittall.ce record, on t11e ps.:y d.nte ShO~'T,_1, "\°7"it11 assurc~nC2 ~=ha.t t:le 7~t~;:l.6~ '~i.i~. ~-:~
rJ.·,C:::;:: 2,vaiL:ble to you on the date they would h2:.'e been aV-3i1.:lble 11ad you i:.'2c'2.i",,(:d'2
C.ll?S k clL.L'f-le pav da t.e~.__"""'=--_-=-__:--_____"""7' ~_ _ _ _-::--_ _--,._ _ _ _----:-,,-_
Nam2, t.:omplete address, and telephone
I N2.Tlle and cOc,lplete a(~dress of agency
1 _ O.L
.;: C,:.SDULS:LTI:S
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EXHHlJT

r~().

2

A IYIESSAGE TO ALL GOVErlNil'lEf'H P[f\~~IJi\INEL FROIYi TilE rJEPP,f(H1GlT OF THE TREASURY

1. All personnel hLlve the right to be paid regularly by haIling their
full net pay credited directly to their account in a financial institution.
This message is for you if you want to rBceive your pay in a way that is
safer than any other method~ and mora economical too, because it saves money
and time for the Gover~ment and for you. We join the Department of the
Treasury in encou~2gjng you to exercise this option. Just get Standard
Form 1189 at your payroll office.

a. Net pay refers to the amount of your pay check, whatever
that amount happens to be every pay day, after being reduced by all your
allotments of pay and all other payroll deductions.
b. Any bank, savings bank, savings and loan association or
similar institution or Federal or State chartered credit union may be
the financial institution. The choice is yours alone.
c. There is no charge to any financial institution for this
option. In fact, it was established to permit everyone to gain, including
you and the Government. This should not be confused with the allotments
of pay for savings accounts in financial institutions for which there is a
service charge, paid by the financial institution. You may have as many
as two allotments of pay ~or savings accounts. Whether or not you have
any such allotments, you may elect to receive your net pay directly in any
account in your name at a financial institution.
d. When S:F. 1189 is executed at your financial institution,
please have them insert alongside their name their identification number
(the Employer Identification number aSSigned by Internal Revenue Service).
2. If y6u elect this option for your full net pay, on S.F. 1189,
the following will happen:

a. Your financial institution will be the payee on your pay
checks. If the pay check covers you alone, it will be imprinted to show
it is for credit to your account, identified by your name and depositor
account number. It will be mailed directly by the disbursing office in
time to be received in your financial institution on pay day, regularly.
b. Cornpare this with how you presently receive and dispose of
your pay check and judge for yourself if it saves you time or expense
and if it is safer also. If your pay checks (now drawn to your order as
the payee) are now delivered to you personally in your office, keep in
mind that invariably bulk sh\pments of one form or another have to be
made from the disburSing office to the many agency office points involved.
Delays or losses can occ~r in these, movements, whether they be intra-city,
inter-City or inter-state. When. that occurs, it usually means some
hardship to personnel in the form of pay delay; it always means extra

-2-

work for the Government in issuing substitute checks under emergency procedures. And it can be much more trDlJblm:;ome for all concerned, if such
a check is stolen and forged.
c. Once you exercise the option with S.F. 1189, you need never
be concerned about the possibility of a forgery--becausG your own financial
institution is the payee and a check so drawn is "forgery-proof."
d. But most important of all, for you and for the Government, if
you submit S.F. 1189, it will be possible to re-ar1'ange the procedures to
get certain additional mutual benefits. When a number of persons in the
payroll have deSignated tho same financial institution, the net pay of all
the individuals involved will be shown on a list, and ~ Single, composite
check will be drawn in favor of the financial institution for the aggregate
amount of the list. ObViously, the Government can thereby save the expense
of preparing and mailing not only tens of thousands but potentially millions
of individual pay checks annually. As personnel in increasing numbers elAct
to be paid by direct credit in a financial institution, there will be more
and more opportunities for worth-while use of this composite check procedure,
e. Not only is this a choice which leads to reduced operating
costs, it is for you the safest and most effective way of assuring receipt
of your pay, on time, every pay day. How?
(1) In this procedure, the list (covering as many persons
who have elected to be credited at the same financial institution) is sent
by the payroll office directly to the financial institution well in advance
of pay day.
(2) The c~mposite check is released by the disbursing office
in time to be received by the financial institution on the pay day.
(3) Items (1) and (2) are separate mailings, from different
places at different times. Loss or delay of anyone of them in the mail
does not cause any hardship for any personnel.
(4) In arranging for this procedure with the financial institU.tion, the Government guarantees quick credit to the financial institution
in the event the composite check is not received by pay day. And the finanCial institution guarantees that the accounts of all the participating
£8rsonnel will be credited on the established pay day, based on the list,
regardless of What may happen tot-he composite check. Your account is
credited on time even if the check is delayed or lost and even if itois
stolen--and even if it were to be stolen somewhere it could not conceivably
be cashed anywhere.
3. So--if you are convinced, pick up S.F. 1189 and proceed in your
, OWn self-interest.
.)

ANALYS IS OF NET PAY ACTIVT'i"/

(TRT::ASVRY ~{CULALi- ~,JO -. lOi6--RY\fX.§J~}1)
DEPARTMENT OR

I~PEPENDENT

AGENCY:

Payrolls paid for pay period of:
Pay checks issued:

0

Biweekly

----~-------

o
o

Civi lidll

!11ct

Pay'

NUitary

1'1'-'1: Pay

_ _ _ _ to _ _ __

/~

SemimonthJ.y

_,---

Cl1ccks
....
(2)

.--

1. Individual check dra"m payable to one person
paid (Col. 1 = Col. 2):

a. Mailed c/o financiaJ organization •.••••.•••.•..
b. All otller . o o . o • • • • ~.o . . . . . . l(Io • • • • o • • o • • • • • • • • • • • •
c. Total pay checks drawn in favor of
individuals •••..•..........•...................
2. Individual check drawn payable to a fin.ancial
organization for credit to account of one person
paid (Col. 1 = Col. 2) ••.•••..••.•......•.......•.•..
3. Composite check dra~m payable to a financial
organization for credit to accounts of several
persons paid (as per remittance record) 1/ .........
Total of Column 1

.. .

.............................. .

4. Number of individual checks avoided this pay
period (excess of Col. lover Col. 2 on
1 ine 3 on 1y )

...................................... , .....

Total of Column 2 (equals Col. 1)

0

•

,

•••••

xxxxxx

•••• , ••.••••

5. Annualized volume of individual checks avoided
(lin'e 4, CoL 2, times applicable number of pay
periods annually) ••.•••..•.....••..
0

••••••

,

•••••••••

-----.--- ---.~---

.......

6. Costs avoided (annual) for line 5: ~/
a. For Postage ..

0

••

~ ~

••••••••••••••••••••

0

•••

0.0

Ii

0

b. For all other classes of costs for the
reporting agency only •..• , •.••..........•.
c. Total (estimated annual savings) •..•••••••.••••
0

!/
1:.1

•••

----------

If no composite check applications, so indicate by inserting N/A in
Columns 1 and 2.

Include only the estimates of those costs which. but for th8 ii1d.ividual
--checks avoided, woulq have been incurred with in" the report in~. a£cncv.

he Department of the TRfASU RY
~SHINGTON, D.C. 20220

TELEPHONE W04-2041

FOR RELEASE ON

D~LlVERY

REMARKS OF BRUCE K. MACLAURY
DEPUTY UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
AT THE
MUNICIPAL CONFERENCE OF THE INVESTMENT
BANKERS ASSOCIATION OF AMERICA
SAN ANTONIO, TEXAS
FRIDAY, OCTOBER 16, 1970
9:30 A.M., C.D.T.
THE IMP ACT OF THE FEDERAL GOVERNMENT ON
----THE MARKET FOR
STATE AND LOCAL SECURITIES
When one talks about the impact of the Federal Government
on the market for state and local securities, I can well
imagine that different images come before different peoples'
eyes. I have the distinct impression that during much of
the past year the obvious difficulties of the municipal
market were laid at the door of the federal government, and
to the extent Congress was not the culprit -- specifically
attributed to the actions and attitudes of the Treasury.
I'm referring, of course, to the trials and tribulations
that attended the tax reform effort last year, and the
questions raised more recently by the IRS concerning the
deductibility by banks of interest costs associated with the
carrying of tax-exempt securities. Although I don't hold
out much hope of convincing you that we were not guilty on
any count of the crimes alleged, I am glad that the
improved market conditions of the past few months have
cooled passions sufficiently to permit Treasury officials
to appear once again with safety as guests on IBA panels.

K-S02

- 2 -

I readily concede that tax collectors must always
remain suspect in the eyes of those who buy, sell, or deal
in tax-exempt securities. And indeed, the Treasury was
once on record, back in 1942; as seeking the outright
elimination of tax exemption on all securities, following
its own foreswearing of the use of tax-exemption the
preceding year. But admitting this prejudicial heritage,
I would still maintain that our actions over the past year
should not be read as a failure to keep the faith, but
rather a reflection of the spirit of the times. After all,
it would have been too much to expect, I think, that with
tax reform the irresistible force of the day, tax-exempt
securities would have escaped unnoticed. In fact,it
seems more reasonable to argue that the miracle was that
they emerged from the exercise completely unscathed.
Similarly, although I recognize that the question
concerning IRS interpretation of Section 265(2) of the
Internal Revenue Code as it applied to banks came at an
unfortunate time from the point of view of market
pressures on municipal securities, I assure you that this
timing was in no way intentional. Nor was this an effort
to accomplish through administrative procedures what was
not achieved in legislation, as I've heard alleged. Indeed,
I think you will agree that the resolution of this
difficult problem has met with general satisfaction on
the part of the market.
If the Treasury is not out to "get" tax exemption,
there is no denying that certain aspects of the federal
government's relationship and involvement with State and
local financing do disturb us. One obvious concern -- in
fact one of long standing -- is the continuing battle
against pressures to provide federal guarantees for taxexempt securities. There is an obvious appeal to the idea
of putting the federal government's name on a local
government obligation as guarantor -- it is a way to
provide assistance to potential borrowers without any
apparent cost, and this something-for-nothing aspect of the
guarantee is hard to resist.

- 3 -

But clearly, there are costs associated with guarantees,
apart from the obvious ones of making good in case of
default by the borrower. One cost that is real though hard
to measure is the homogenization of credit that results
from indiscriminate use of guarantees. If we believe that,
broadly speaking, the capital markets do an effective job
of allocating funds to various borrowers on the basis of
risk differentiafs, then drawing an ever-increasing
segment of the flows in the capital markets under the
government's umbrella is unfortunate in that it undercuts
this allocation process. By the same token, of course, if
there are specific credit needs that are not being met,
yet on social or other grounds there is a consensus that
they should be, the federal guarantee can be a useful way
of changing the relative attractiveness of specific debt
instruments. The key here is discriminating, rather than
wholesale, use of federal guarantees.
Another cost that is particularly relevant in the case
of guarantees of local government obligations is the
inescapable need for the federal government to become
involved to a greater or lesser extent in the details of
the projects that are being financed. This follows not
only from the principle of discriminating use of guarantees,
but also from the requirement that the taxpayers' money
that is potentially at risk be committed prudently.
Considerations such as those I've just mentioned apply
to the use of federal guarantees generally, but there are
special problems when the securities to be guaranteed are
tax-exempt. In the first place, by putting its name on a
tax-exempt obligation, the federal government is creating
a piece of paper that is more desirable to investors than
its own obligations. While I stick by my statement that
we're not out to do in tax-exemption, I don't think we
should be expected to add our seal of approval and thereby
enhance tax-exemption at the federal government's expense.
In fact, of course, it's not just the federal government
that loses in this process, but state and local authorities
as well, whose non-guaranteed obligations are required to
compete with these super instruments.

- 4 Losses from federal stimulation of tax exempt issues
through guaranteeE cannot be measured solely in terms of
the presumably higher borrowing costs that will confront
non-guaranteed issuers. The calculation must also take
into account t'~1e inefficiency of tax-exemption as a means
of revenue sharing. This complex and controversial
subject has been.debated endlessly between the Treasury and
the lBA, among others, and I have no hope of resolving the
issue today. But I do want to go on record as personally
being persuaded of the logic of the Treasury's position;
namely, that the revenue loss to the Federal government
from tax exemptions substantially exceeds the value of
reduced interest costs to State and local governments. If
one pushed the logic of this position to its ultimate
conclusion, one would have to admit that tax exemption as
such should be abolished and the resulting increase in
federal revenues be distributed to local governments
through subsidies. Again, however, I would emphasize that
this is not the Treasury's position. At the same time,
howeve~,-r-see no reason why we should go to the opposite
extreme and promote the expansion of an inefficient subsidy
through the encouragement of federal guarantees.
Frnnkly, the Treasury has been making so much noise
about the adverse consequences of federal guarantees of tax
exempt securities f~r s· long, tha~ this is no longer the
hot issue it once was -- though it still continues to crop
up frequently. We now find ourselves having to do battle
against a more subtle variant of the guarantee -- the debt
service grant. Many of those who concede that the
government shouldn't be guaranteeing tax-exempt securities
outright are nevertheless attracted by the concept of the
debt-service grant. This attitude even flourishes in some
areas of the Government, I must sadly confess. Yet the
debt service grant is not only analogous to a guarantee
in that the lender looks to federal government revenues as
the 80urce of his assured repayment, but it is analogous
in the sense of federal government sponsorship and
s ti;\lul.-:, tion of additional tax-exempt borrowing. Indeed, in
this last respect, it is worse than a guarantee since it
norma~ly inspires a larger amount of local government
borrowing than would a program relying on a combination of
Lump sum grants and guarantees. Let me explain. The

- 5 -

attractiveness of the debt service grant from the point of
view of the federal government is the seemingly larger bang
for the current budget buck. Thus, to stimulate a given
level of capital outlays, the federal government can put
up less money in the form of lump sum grants to local
authorities, and instead stimulate the financing of a larger
share of the program through local government borrowing on
the basis of promises to pay in the future. So far as the
Federal budget is concerned, it's fly now, pay later.
The price of reliance on debt service grants is not
only magnified expansion of local government borrowing, but
built-in rigidity for the Federal budget. Everyone laments
the fact that Federal expenditures seem to have a life
force of their own that is very difficult to influence.
This phenomenon has many causes, of course, but one of them
certainly is the fact that so many outlays are uncontrollable
in the short run. Interest on the national debt is the usual
example, along with transfer payments under social insurance
programs. But the contractual obligation to pay debt
service on local government securities is just as
uncontrollable. In effect, the greater the shift from lump
sum grants to debt service grants, the greater the loss of
budget flexibility, and the greater the difficulty in
shifting national priorities.
The impact of the Federal government on the market for
State and local securities is not confined to the issues we
have been discussing so far: tax reform, IRS actions,
guarantees and debt service grants. In fact, the latter
two are simply outward manifestations of the more basic
influence of federal programs on the tax exempt market.
In the broadest sense, of course, the way in which the
federal government finances the totality of its programs
by taxes or by borrowing -- has a very real impact on the
availability of funds for investment in State and local
obligations. But I am referring more specifically to the
growing array of "partnership programs" to be financed
jOintly by federal and local governments.
This partnership concept is by no means new. One of
the granddaddys in this area, both in terms of size and
longevity, is the public housing program. It is estimated
that this year, fiscal 1971, public housing and urban
renewal will generate some $2 billion of obligations to be
financed in the tax exempt market. Over the next 5 years
the development of waste treatment facilities under the

- 6 -

Federal Water Pollution Control program alone is expected to
require a total of $10 billion, of which $6 billion will
have to be supplied on a matching basis by local government
borrowing. An Administration-backed bill before the
Congress for improving public transit systems provides for
$5 billion over the next 5 years with the Federal Government
absorbing $3 billion in this program. In the recently
enacted airports bill the Government will absorb about half
of the price tag of $2.7 billion. Other existing programs,
such as programs for health facilities, college housing,
academic facilities, etc., will no doubt require
expanded credit assistance in the years ahead. All these
examples point unmistakably to one conclusion: that the
Federal government is going to have a very substantial
impact on the state and local market by the expansion of
programs that rely for a substantial portion of their
financing -- under present procedures -- on that very
market. There is a real danger, it seems to me, that
Federally-sponsored programs are going to pre-empt such a
substantial share of this market, that local governments
will find it Increasingly costly to raise funds to meet
their own needs.
And I hardly need point out to this audience that those
needs are very large indeed. At present the amount of
State and local obligations outstanding approaches $140
billion, or about double the amount outstanding at the end
of 1960. This means that the annual rate of growth in
municipal debt during the last decade was slightly less than
9 percent. Even if we assume the same 9 percent growth for
the 1970's, the municipal market will have to expand by
another $100 billion before the present decade is half over.
Actually, this projection may be too conservative. According
to press reports, a group of State Governors during the
recent Governors' Conference held at Osage Beach,Missouri,
estimated municipal borrowing needs at an additional $150
billion over the next 6 years.
Admittedly, one can come up with scare figures at the
drop of a calculator, but the trends are not encouraging,
given the limited elasticity of the tax-exempt market.
Innovations introduced by local governments so far do not
hold out great promise of relief. On the contrary, some
innovations may do more harm than good. The recent

- 7 emergence of State agencies formed for the specific purpose
of raising funds in the tax-exempt market and rechannelling
these funds into the private housing market is a case in
point. Several States have set up such agencies with
plans to raise hundreds of millions of dollars in the near
future. If this practice spreads to other States, the
result could be ?dded demands on the tax-exempt market of
significant proportions -- significance in the sense that
the added supply of tax-exempts would so force rates up as
to diminish further the differential between tax-exempt and
taxable bond yields.
What can the Federal Government do to help the municipal
market? By far the most important contribution would be to
provide a climate of noninflationary growth in the entire
economy. At the same time the Government must establish
better control over the growth of Federal credit programs,
taking them into account as we set the course for monetary
and fiscal policies. Where it seems appropriate, Federallysponsored programs should provide alternative methods for
financing the local government participation. Several
innovations have been made this year alone, and more are
pending before Congress. The recently passed medical
facilities bill makes it possible for the Department of
Health, Education, and Welfare to purchase and sell debt
obligations arising in connection with publicly-owned health
facilities. The Secretary of Health, Education and Welfare
is authorized to sell these obligations in the private
market with Government guarantees and on a taxable, not on
a tax-exempt, basis. As you know, the 1971 budget contains
provisions for loans to rural communities by the Farmers
Home Administration to be sold to private investors with a
Government guarantee. Under proposed legislation, these
asset sales would give rise to taxable rather than taxexempt obligations.
Finally, there is the Administration proposal for an
Environmental Financing P,UthOl.ity. This agency would borrow
funds in the private market by issuing taxable securities,
for the purpose of lending these funds to State and local
governments to finance their portion of the construction
costs associated with the development of waste treatment
facilities in those projects currently receiving grants from
the Department of Interior. 0:11y these municipalities that

- 8 -

were unable to borrow the required funds at reasonable rates would
be eligible to use EFA's facilities. This proposal has already
received widespread support in Congress, and was recently
endorsed by the Advisory Commission on Intergovernmental Relations.
All these innovations have one thing in common:
they are designed to relieve some of the added strains that will
be placed on the tax-exempt market by Federally-sponsored programs
by permitting a portion of the financing requirements to be
shifted to the taxable market. We believe that this approach
has much to commend it from the point of view of all parties
involved. Far from constituting a threat to the privilege of
tax exemption, these innovations will have the effect of
preserving the value of that privilege. If tax exemption is
threatened, it is threatened by a potential inundation of issues,
not by the Machiavellian machinations of the Treasury.

000

Departmento/the TREASURY
HINGTON. D.C. 2D220

TElEPHONE W04-2041

FOR RELEASE ON DELIVERY
TESTIMONY TO BE PRESENTED BY
MR. AMOS N. LATHAM, JR., DIRECTOR OF PERSONNEL
AT HEARINGS CONDUCTEDrBY THE FEDERAL LABOR RELATIONS COUNCIL
ON ExECUTIVE ORDER 11491
OCTOBER 8, 1970
Mr. Chairman, members of the Council, my name is Amos N. Latham, Jr.
I am Director of Personnel of the Department of the Treasury. Before
beginning my comments on Executive Order 11491 I think it may be helpful
to give you an idea of the extent of union activity in our Department.
The Department of the Treasury consists of 10 Bureaus plus the Office of
the Secretary and currently employs about 87,000 people. 58,500 or 67%
of these people are covered by exclusive recognitions. A total of 17
different unions hold exclusive recognitions within the Department and
51 negotiated agreements are currently in effect covering 37,000
employees. As you see, Treasury is one of the most highly unionized
agencies in the Federal Government.

We have been living under E.O. 11491 for about a year now. Our
experience under the Order so far has been limited largely to the areas
of representation and negotiation. But, we have had time to study and
reflect on the whole Order and to develop comments and recommendations
concerning its __ provisions. On the whole we believe that E.O. 11491
establishes a progressive and workable system for Federal labor-management relations. The fundamental structure of the Order is sound and
should remain unchanged. The provisions of the Order dealing with the
scope of pegotiation and with the forms of recognition should also remain
intact.
Our suggestions for change deal (1) with the makeup and workings of
the bodies charged with administering the Order and (2) with what we
consider to be an ambivalent provision of the Order, Section 7(e).
E.O. 11491 initially created many problems for us. There were voids
between the old order and the new and transition from one to the other
raised questions and caused confusion, especially in the area of representation. Matters were not helped by the fact that the administrative
bodies; the Council; the Department of Labor; the Impasses Panel and the
Federal Mediation and Conciliation Service were slow in issuing regulations and in staffing up to meet the new workload. Almost all of these
bodies are now staffed and in operation. Yet, the Coun~il itself has

- 2 -

just issued final review regulations~ has only proposed a date for the
termination of formal recognition and has only proposed eligibility
criteria for national consultation rights. The Council has not as yet
made any interpretations of the Executive Order and it has not publicly
heard any appeals or issued any decisions. We feel that this lack of
~isible activity by the Council has created a harmful vacuum in the labor
relations program. The leadership which the Council should be. providing
bas been missing.
We do not point to these facts to criticize the Council. Rather we
feel that these facts clearly point up a flaw in the required composition
of the Coun~il.. Under the Executive Order the Council is composed of men
who hold positions of th~ highest responsibility and authority in the
Government. It is unfair to presume that the same men who fill these
high,positions can find adequate time above and beyond their normal duties
to provide leadership and direction to a labor relations program involving
more than 2 million federal employees.
Under current conditions~ to function ,at all~ the Council must delegate much of its authority to its Executive Director.. We have great
personal regard for the Executive Director and for his proven ability in
the field of federal labor relations. Yet, when much of the authority
of the Council is reposed on one man the form and spirit of the Council
is lost.
Beyond the time problem we can see inherent conflicts of interest
between membership on the Council and the positions of CSC Chairman,
Secretary of Labor~ and Director of the Office of Management and Budget.
To avoid all of these difficulties we suggest that serious consideration
be ,given to changing the composition of the Council. We suggest that
the'Council consist of .three full-time members appointed by the President.
With full-time members the Council can direct the federal labor relations
program by participating actively in hearings, in decision making, and in
interpreting the Executive Order. By being independent of other agencies
of the, Government the Council members would avoid potential conflict of
interest prpblems. An effective alternative to changing the present
membership of the Council would be to expand the Council. Such expansion
is now possible under Section 4(c) of the Order.
The role of the Department of Labor under the Order apparently needs
clarifying. We believe that interpretations of the'Executive Order should
only be made by the Council and we assumed that under Section 4(b) of the
Order'the Council would be the/only body to issue interpretations of the
Order. Yet, on July 21, 1970: the Assistant Secretary of Labor for 'Labor
Management Relations published a new part to Title 29 USC entitled
Interpretations. This new part contained an interpretation of the
Executive Order by the Assistant Secretary for Labor Management Relations.
Such interpretations by admini3trative bodies other than the Council

- 3 -

cause confusion and can be a divisive influence in the operation of the
labor relations program. They detract from and diminish the Council's
role as administrator and interpreter of the Executive Order and encroach
upon the Council's prerogative to decide major policy issues. Therefore
we recommend that the Council be the sole interpreter of the Order.
In observing the decisions of the Department of Labor in representation matters we are disturged by an apparent heavy reliance upon
National Labor Relations Act and National Labor Relations Board precedent.
We feel that there is a danger in attempting to fit federal representation
questions into the NLRA and NLRB mold. Federal labor relations under the
Executive Order differs from private labor relations under the NLRA.
Unlike the NLRA, the Executive Order not only establishes a labor relations system; it describes the personnel program which the President feels
is needed to effectuate efficient administration of the Government.
Because of this, Federal managers have a double obligation to implement
the Executive Order.
Unlike the private manager, the federal manager is subject to unique
pressures. The pressures of public service, of congressional inte~est,
of Presidential mandate, of law and internal_ and external regulation all
have an impact on labor-management relations. Because of these unique
pressures and the dual obligat~ons under the Order we recommend that the
Council establish a policy whereby all administrative bodies under the
Order are encouraged to employ a flexible approach in solving the problems
before them. This policy should provide that decisions under the Executive Order be molded to fit the unique needs of the federal labor-management relations system. Such a policy, for example, would allow for a
definition of _~professional" which would recognize the unique aspects of
federal positions-.
In general, we have been awed by the proliferation of regulations
which have been issued by the various administrative bodies during the
past ten months. As a result of this proliferation administering the
Executive Order has become highly complex and intricate. Neither management nor the unions can conduct their relations without expert assistance.
Anything that can be done by the Council to simplify administration would
be desirable. One helpful action would be to combine in one reference
pUblication all of the various regulations, decisions and.interpretations
implementing the Order.

- 4We fully agree with the sense of Section 1(e) of the Order. However,
we feel that a provision like this, which deals with intra-management
communication, is out of place in a labor-management relations order.
Devising methods for intra-management communication represents a managerial problem and that problem should be left to the various agencies to
solve. I am sure that all agencies realize the importance of intramanagement communications as well as the importance of making supervisors
truly members of ~anagement.
~ile

recommending that the requirement for a system of intramanagement communication be deleted from the Order, we feel that the
question of supervisory associations should be discussed further in the
Order. We feel that supervisory associations must be defined. Specific
gmdelines and criteria are needed to aid management in determining
whether or not to recognize and consult with supervisory associations.
As a minimum supervisory associations should follow democratic procedures
in the election of officers and be free yrom corrupt influences and influences opposed to basic democratic principles. Supervisory associations
should be required to represent a SUbstantial number of supervisors before
they can gain consultation or dues deduction privileges. While supervisory
associations should be treated differently than labor organizations, some
guidelines are needed.
Thank you for this opportunity to present our views.
to answer any questions.

I will be happy

UNITED STATES SAVINGS BONDS ISSUED AND REDEEME~ THROUGH September 30, 1970
(Dollar amounts in millions - rounded and will not necessarily add to totals)
AMOUNT
REDEEMEOll

AMOUNT ISSUEDlI

DESCRIPTION

lJRED
ries A-1935 thru D-1941
ries F and G-1941 thru 1952
r!es J and K-1952 thru 1957

AMOUNT
OUTSTANOINGli

"10 OUTSTANDING
OF AMOUNT ISSUED

5,003
29,521
3,754

4,997
28,489
3,739

6
31
15

.12
.11
.40

1,893
8,357
13,444
15,686
12,334
5,605
5,326
5,513
5,454
4,773
4,126
4,3 24
4,940
5,037
5,248
5,072
4,779
4,663
4,375
4,386
4,451
4,311
4,804
4,682
4,578
4,931
4,882
4,631
4,338
2,025
842

1,691
7,466
12,045
13,973
10,829
4,752
4,371
4,443
4,321
3,727
3,221
3,352
3,751
3,762
3,870
3,701
3,429
3,234
2,982
2,877
2,780
2,593
2,682
2,643
2,561
2,622
2,510
2,249
1,771
386
850

202
889
1,399
1,713
1,505
853
955
1,070
1,133
1,046
905
972
1,189
1,275
1,378
1,371
1,351
1,429
1,393
1,509
1,671
1,717
2,123
2,039
2,017
2,309
2,372
2,382
2,567
1,639
-8

10.67
10.64
10.41
10.92
12.20
15.22
17.93
19.41
20.77
21.91
21. 93
22.48
24.07
25.31
26.26
27.03
28.27
30.65
31.84
34.40
37.54
39.83
44.19
43.55
44.06
46.83
48.59
51.44
59.17
80.94

HURED
ries E» :
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
Unclassified

I

I
I

Ii
!

rotal Series E
es H (1952 thru May, 1959) 1/
H (June, 1959 thru 1970)
rotal Series H
;otal Series E and H

rotat matured
Series

-

Total unmatured
Grand Total

I

i!

-

-

169,811

125,447

44,364

26.13

5,485
7, 53,~

3,688
2,280

1,797
5,252

32.76
69.71

13,017

5,968

7,049

54.15

182,828

131,415

51,414

28.12

38,277
182,828
221,106

38,225
131,415
169,640

52
51,414
51,466

28.12
23.28

.1/+

I lIeerued dlecounl,
r.dempllon value,

.. ot

oW1le~ bond. may

boo held and witt earn '",ere.' tor IIddillonal period. lifter orlglnlll mllludly dlllell.

For", PD

3812 (re.v. Mar. IV1VJ -

TREASURY DE:PARTMEHT .- Buree u of the Public

1):>1

Deportment of the
HINGTON. D.C. 20220

TRfASURY
TELEPHONE W04-2041

October 8, 1970

FOR IMMEDIATE RELEASE

UNITED STATES AND MOROCCO TO HOLD PRELIMINARY
DISCUSSIONS OF AN INCOME TAX TREATY
The Treasury Department announced today that representatives of the United States and Morocco will meet in
Rabat later this month to begin discussions of a proposed
bilateral income tax treaty.
Currently there is no income tax treaty existing
between the two countries.
The proposed treaty is intended to avoid double taxation and to facilitate trade and investment between the
two countries.
It will be concerned with the tax treatment of income of individuals and companies from business,
investment, and personal services and will establish procedures for administering the provisions of the treaty.
The "model" income tax treaty developed by the
Organization for Economic Cooperation and Development
will be taken into account along with recent united States
treaties with other countries, such as the treaty with
France ratified in July, 1968 and the treaties with Belgium,
Finland and Trinidad and Tobago now pending before the
Senate for ratification.
Persons wishing to comment concerning the proposed
treaty are requested to send their comments in writing by
October 19, 1970 to Edwin S. Cohen, Assistant Secretary
of the Treasury, Treasury Department, Washington, D.C.
20220.

K-505
000

October G,

J~no

81\15 OF $2.5 BI:LLION JU11E 'l'tlX AN'rICTPNfION BrU,S

The TX-eaSUl"y Department tod3.y announced the ::3ale of
$2.5 billion of tax anticipation bills '\vbicb \,,'ill mat-moe in

June 1971.
Tbe bills will be auctioned on Thursday, October 15, for
payment on HeQl'1e s day , October 21.

Commercial ball.KS may m2J:e

payment for their avm and their customers' o.CCCFc,cd tCj'lClcl's by
crediting Treasury tax and loan accounts.
Tbe bills will mature on June 22, 1971, but may be used
at face value in payment of Federal income taxes due on
June 15, 1971.

Department of the TRfASU RY
TElEPHONE W04-2041

ISHINGTON. D.C. 20220

TENTION:

FINlL~CIAL

R ]}f[WIATE RELEASE

EDITOR
October 8, 1970

TREASURY OFFERS $2.5 BILLION IN JUNE TAX BILlS

The Treasury Department, by this public notice, invites tenders for $2,500,000,000,
thereabouts, of 244-day Treasury bills, to be issued on a discount basis under
mpetitive and noncompetitive bidding as liereinafter provided. The bills of this
ries vTill be dated October 21, 1970, and will mature June 22 , 1971 ,
l1SIP No. 912793 t;ID5 ). They will be accepted at face value in payment of income
xes due on JQDe 15, 1971,
and to the extent they are not presented for this
rpose the far.e amount of these bills will be payable without interest at maturity.
~ayers desiring to apply these bills in payment of
June 15, 1971, income taxes
r submit the bills to a Federal Reserve Bank or Branch or to the Office of the
easurer of·the United States, Washington, not more than fifteen days before that
teo In the case of bills submitted in payment of income taxes of a corporation
ey shall be accompanied by a duly completed Form 503 and the office receiving
ese items will effect the deposit on
June 15, 1971
In the case of bills
)mitted in payment of income taxes of all other taxpayers, the office receiving
~ bills wiD. issue receipts therefor, the original of which the taxpayer shall
mit 011 or before June 15, 1971,
to the District Director of Internal Revenue
~ the District in which such taxes are payable.
The bills vTill be issued in
~er form only, and in denominations of $10,000, $15,000, $50,000, $100,000,
)0,000 and $1,000,000 (maturity value).
Tenders will be received at Federal Reserve Banks and Branches up to the
)sing hour, one-thirty p.m., Eastern Daylight Saving time, Thursday, October 15, 1970.
tders will not be received at the Treasury Department, Washington. Each tender
:t be for a minimum of $10,000. Tenders over $10,000 must be in multiples of $5,000.
the case of competitive tenders the price offered must be expressed on the basis
100, with not more than three decimals, e.g., 99.925. Fractions may not be used.
is urged that tenders be made on the printed forms and forwarded in the special
elopes which will be supplied by Federal Reserve Banks or Branches on application
refor.
Banking institutions generally may submit tenders for account of customers
vided the names of the customers are set forth in such tenders. Others than
king institutions will not be permitted to submit tenders except for their o~~
Junt. Tenders ,vill be received vTi thout deposit from incorporated banks and
st companies and from responsible and recognized dealers in investment securities.
lers from others must be accompanied by payment of 2 percent of the face amount
~easury bills applied for, unless the tenders are accompanied by an express
~anty of payment by an incorporated bank or trust company.

- 2 All bidders are required to agree not to purchase or to sell, or to make
any agreements vri th respect to the purchase or sale or other disposition of any
bills of this issue at a specific rate or price, UIltil after one-thi:cty p.m.,
Eastern Daylight Saving time:, Thursday, October 15, 1970.
Immediately after the closing ho"Ur, tenderc will be opened at the Federal
Reserve Banks and Bra.'1ches, follov: in 8 ·Hhich public announcement will be made by
the Treasury Department of' the amount and price range of accepted bid3. Only
those submitting competi ti ve tenders will be ad.vised of the acceptance or rej ection
thereof. The Secretary of the Treasu-ry expressly reserves the right to accept or
reject any or all tenders, in whole or in part, and his action in any such respect
shall be final. Subject to these reservations, noncompeti ti ve tenders fo:..
$400,000 or less wi thont stated price from anyone bidder will be accepted in full
at the average price (in thr.ee decimals) of accepted competitive bids. Settlement
for accepted tenders in accordance 'vi th the bids must be made or completed at the
Federal Reserve Bank in cash or other innnediately available funds on October 21,
1970. Any qualified depositary will be permitted to make settlement by credit in
its Treasury tax and loan account for Treasury bills allotted to it for itself
and. its customers.
Under Sections 454 (b) and 1221 (5) of the Internal Revenue Code of 1954
the amount of discotmt at which bills issued hereunder are sold is considered
to accrue when the bills are sold, redeemed or otherwise disposed of, and the
bills are excluded from consideration as capital assets. Accordingly, the 0W11€r
of Treasury bills (other than life insurance companies) issued hereund_er must
include in his income tax return, as ordinary gain or loss, the difference betvreen
the price paid for the bills, vThether on original issue aT on subsequent purchase,
and the amount actually received either upon sale aT redemption at maturity
during the taxable year for which the return is made.
Treasury Department Circular No. 418 (current revision) ~Dd this notice,
prescribe the terms of the Treasury bills and govern the conditions of their
issue. Copies of the circular may be obtained from any Federal Reserve Bank or
Branch.

Departmento! the TREASURY
;HINGTON. D.C. 20220

TElEPHONE W04-2041

IMMEDIATE RELEASE

FRIDAY, OCTOBER 9, 1970

THE NATION'S MONEY MAKERS AR E SAFETY CONSCIGJS

The Treasury Department presented its 1969 Safety Awards of
Honor to the Bureau of the Mint and the Bureau of Engraving and
Printing at ceremonies held today in the Departmental Auditorium.
Both of these Treasury Bureaus operate indu.strial type plants
where the federal coins and currency are manufactured.
Mary T. Brooks. Director of the Mint, accepted the Safety Award
on behalf of the Mint's 1800 employees from Under Secretary Charls E.
Walker who noted it was the first time the Bureau of the Mint had won
the award.
James A. Conlon, Director of the Bureau of Engraving and Printing.
accepted his Bureau's Safety Award on behalf of his 3,300 employees. It
was the third time his Bureau's employees had won the award since 1962.
Because of the impressive reduction in on-the-job injuries the
Under Secretary said Mint employees are particularly deserving of the
Award.
"Foundry workers face exceptional hazards, as anyone who has
witnessed a metal melt and the pouring of hot metal knows," Under
Secretary Walker said. "Mint workmen face additional hazards as well
in the operation of the heavy machines required to make coins and medals. "
The Bureau of the Mint produces the federal coinage and national
medals at three manufacturing plants located at Philadelphia. Pennsylvania;
Denver, Colorado; and San Francisco. California. The majority of the
Mint's employees are engaged in jobs of a hazardous nature.

- 2 -

The federal currency. other government securities, and postage
stamps are produced by the Bureau of Engraving and Printing. Engaged III
round -the -clock production activity during 1969. the Bureau's production
exceeded thirty-three and a half billion printed security items, the most
productive year in its history.
Since the Safety Awards Program was instituted in 1958, the Mir\.t's
injury rate has improved 59 percent. Over the past three years, the rate
of improvement leaped 32 percent, and the injury rate improvement in 1969
over 1968 was 1. 4 percent. "The success of the Mint's safety program can
be attributed to the hiring in 1966 of a fulltime safety engineer at each of the·
coining institutions who devised and implemehted a safety program tailored to
the specific needs of people working in a foundry and with heavy equipment,"
Mrs. Brooks said.
A new Safety Award Program was instituted in the Bureau of
Engraving and Printing in April1969. emphasizing Safety Awareness. ·As a
result. 19 production sections with over 925 employees worked a full year
without a single disabling injury, and the accident rate dropped throughout
the plant. "The significant improvement was achieved in spite of 24-hour
operations and heavy overtime, which included 7 -day a week requirements,
noted Mr. Conlon. He added, "The target for the Bureau of Engraving and
Printing in the current year is to prove their winning the 1969 Award was
no accident. "

000

DepartmentO/lhe

TREASURY

INGTON D.C. 20220

TELEPHONE W04-2041

ENTION:

FINANCIAL EDITOR

RELEASE 6: 30 P.M.,

day, October 9, 1970
RESULTS OF TREASURY'S WEEKLY

BILL OFFERING

'The Treasury Department announced that the tenders for two series of Treasury
ls, one series to be an additional issue of the bills dated
July 16, 1970
, and
other series to be dated October 15, 1970
,which were offered on October 2, 1970,
e opened at the Federal R~serve Banks today. Tenders were invited for $ 1,800,000,000
thereabouts, of 91 -day bills and for $ 1,400,000,000 or thereabouts, of 182 -day
Is. The details of the two series are as follows:
GE OF ACCEPTED
IPETITIVE BIDS:

91 -day Treasury bills
maturinei January 14, 1971
Approx. Equiv.
Price
Annual Rate
98.488 ~
98.466
98.4 76

High
Low
Average

5.982%
6.069%
6.029%

Y

182-day Treasury bills
maturin~ A:eri1 15 2 1971
Approx. Equiv.
Annual Rate
Price
96.870
96.850
96.853

6.191%
6.231%
6.225%

Y

~J

Excepting 2 tenders totaling $210,000
~O~ of the amount of 91-day bills bid for at the low price was accepted
43% of the amount of 182-day bills bid for at the low price was accepted
'A.L TENDERS

APPLIED FOR AND ACCEPTED BY FEDERAL RESERVE DISTRICTS:

'j::;tr lct
.oston
ew York
hiladelphia
leveland
ichmond
tlanta
hicn.go
t. Louis
Inneapolis
ansas City
allas
an Francisco

TOTALS

A:eI21ied For
$ 27,245,000
2,050,845,000
34,845,000
37,170,000
23,875,000
45,075,000
246,565 ,000
44,530,000
33,045,000
38,665,000
29,430,000
167,125,000
$2,778,415,000

A:e:e1ied For
$ 15 ,590 ,000
2,479,810,000
22,970,000
52,665,000
40,395,000
34,660,000
333,280,000
47,285,000
29,845,000
31,490,000
28,285,000
325,125,000

Accepted
5,340,000
$
1,063,460,000
7,970,000
23,865,000
33,895,000
15,770,000
132,630,000
40,625,000
5,245,000
22,050,000
14,245,000
36,950,000

$1,800,665,000 ~ $3,441,400,000

$1,402,045,000

Acce:eted
$ 18,245,000
1,256,345,000
19,845,000
35,870,000
21,875,000
35,475,000
194,565,000
36,760,000
24,045,000
36,585,000
17,430,000
103,625,000

sf

Includes $ 319,655 ,000 noncompetitive tenders accepted at the average price of 98.476
Includes $ 206,735,000 noncompeti ti ve tenders accepted at the average price of 96.853
These rates are on a bank discount basis. The equivalent coupon issue yields are
).21 %for the 91-day bills, and 6.52 % for the 183-day bills.

Department 01 the
:HINGTON. D.C. 20220

TREASURY
TELEPHONE W04-2041

FOR RELEASE ON DELIVERY
SUMMARY OF
STATEMENT OF THE HONORABLE EDWIN S. COHEN
ASSISTANT SECRETARY FOR TAX POLICY
BEFORE THE
SENATE FINANCE COMMITTEE
ON THE TREASURY'S
DOMESTIC INTERNATIONAL SALES CORPORATION PROPOSAL
10:00 A. M. (EDT), OCTOBER 9, 1970

Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before this
Committee to describe our Domestic International Sales
Corporation (DISC) recommendation and to urae its
approval by the Committee.

We make this recommendation

because the U. S. tax system presently results in an
income tax disadvantage to U. S. eXDort sales as
contrasted with foreign production by subsidiaries of

u.

S. companies, or by foreign-owned companies.

At a

time when the U. S. is making every effort to improve
its balance of trade, this disadvantage should be removed.
The DISC proposal provides for deferral of U. S.
tax for a domestic corporation engaged in export sales
similar to that presently provided for foreian manufacturing
subsidiaries of U. S. companies.

- 2 The DISC proposal is now before the Committee in
the form of Title IV of amendments No. 925 and 1009 tu
H. R. 17550.

The House Ways and Means Committee has

reviewed this proposal in detail and reported it to the
House as Title IV of H. R. 18970.

All of these provi-

sions are identical and I will simply refer to them as
the DISC Bill.
We strongly support the provisions of the DISC
Bi 11 which recogni zes the importance of a change in the inee,,)
tax rules

a~plicable

to U. S. exports.

While income tax factors are important, we recoqnize
that economic factors often tend to favor local production
in or near the market in which the products are being solrl.
Over the last twenty years we have witnessed a constant]!
increasina degree of manufacturing abroad by U. S. comn.wirs
In many cases, for a variety of political and economic
reasons, such local production may be the only means of
comDeti~g

effectively in certain markets.

U. S. tax

nol;~'

can and should, at best, have only a limited effect on
such decisions.

On the other

han~,

the U. S. tax laws

themselves have treated export sales much less favorably
than foreign manufacture and thus have compounded the

- 3 -

emohasis on foreign production.

This inequity in our

tax laws can and should be remedied.
We should compare U.

s. tax rules with those of

many of the developed countries of the world
defer their tax on export income or

exe~nt

from tax, to a greater or lesser extent.

~hich

such income
In addition,

many countries have special tax rules which effectively
promote export activitv such as extraordinary reserve
allowances on export sales and greatly accelerateo
depreciation of export assets.
States taxes currently ann
~vestern

In contrast, the United

(with the exception of the

Hemisphere Traoe Corporation concept) fullv,

the income from any export sale by a domestic corooration
because the corporation is incornorateo in the United
States.

A memorandum summarizin<:" nrovisions in foreign

laws affectinq

e~port

activities is beina furnished today

to the Committee.
In 1962, legislation was enacted to tax cur<rently
Unit~d

States shareholders on certain sales and services

income earned by controlled foreign subsidiaries includinq
income on exports from the United States which were

- 4 diverted to low tax countries.

However, as a result of

certain major exceptions that were enacted at that time,
deferral of export sales income remains available, but
only for the U. S. corporation which also has extensive
foreign manufacturina activities.
This existing U. S. tax treatment of foreign source
income inherently involves a bias in favor of our largest
corporations.

Through their extensive foreign structures,

moreover, they are frequently able to use the foreign tax
credit to reduce, even after distribution, their
tax liability on export earnings.

U. S.

To the extent such

deferral and reduction are being achieved under nresent
law, the tax deferral effect of the DISC proposal would
not involve a revenue loss through a postponed receipt.
The DISC would work particularly in favor of companies
without existing large foreign structures and without
extensive foreign tax credits.
Accordingly, the DISC will provide equivalent opportunities for tax deferral for foreign source income arising
from export sales for smaller corporations and for corporations newly entering the export market or expanding their
export sales.

This additional equity of tax treatment as

between our largest corporations and U. S. business in
general is an important feature of the Administration's
proposal.

- 5 I would like to summarize briefly the main features
of the proposal as set forth in the DISC Bill.
proposal is simple in concept.

The

The Internal Revenue Code

wouln be amended to provide for a new category of domestic
corporation to be known as a Domestic International Sales
Corporation ("a DISC").

The U. S. tax on the export

income of such a corporation would be deferred as long
as it is used in the corporation's export business,
loaned to export producers or invested in obligations
issued or guaranteed hy the Export-Import Bank, and thus
is not distributed to the DISC's shareholders.

Upon

distribution of dividends, the income would be fully
taxed to the shareholders, at the full U. S. corporate
tax rate in the case of corporate shareholders, and at
full personal income tax rates in the case of individual
shareholders.
The qualification requirements are that a DISC must
be a domestic corporation, must have 95 percent of its
receipts in the form of export receipts, must have
95 percent of its assets in the form of qualified assets,
must have only one class of stock and a minimum capitalization of $2,500, and must have made an election to be
treated as a DISC.

- 6 Exports are determined by a destination test.

To

qualify as an export the property must be sold or leased
for direct use, consumption or disposition outside of
the United States (or sold to an unrelated DISC for export
by the latter).

To qualify as export property, not more

than 50 percent of the fair market value of the property
exported can be attributable to articles imported into
the United States.

The President is authorized to exclude

from export property any property determined to be in
short supply domestically.
The DISC may reinvest its export earnings in its
export business.

This would include investments in

warehousing, assembly and transpor.tation facilities used
in its export business and in foreign branches or sales
subsidiaries where 95 percent of the income arises from
the sale of United States export property and 95 percent
of the assets are invested in the export sales business.
We have, in essence, viewed the DISC as a partner
with United States producers exporting to foreign markets.
Therefore, a principal provision of the proposal permits
a DISC to invest its accumulated export income by way of
loans to domestic producers, whether or not related, to

-

7 -

finance the producer's export related assets.

Thus, if

a producer exported 20 percent of his production, the
producer would be entitled to have DISC loans, outstanding
at any time, equal to 20 percent of the producer's assets.
Present rules for pricina between related companies
represent substantial problems for taxpayers and the
Internal Revenue Service in the administration of the tax
laws and are far harsher than those enforced by many
foreign countries.

In formulating our DISC proposal we

have contemplated that a substantial volume of sales will
occur between manufacturing companies and related DISC's.
In order to deal with these problems the proposal contemplates that transfer pricinq, used to determine foreign
source export income, will be accepted where the result
allocates income on export sales to the DISC up to 4 percent
of qualified export receipts, plus 10 percent of the DISC's
export promotion expenses; or 50 percent of the combined
taxable income of the DISC and a related supplier, plus
10 percent of the export promotion expenses; whichever is
higher.

Similar rules would be prescribed in the case of

commission and rental arrangements.

- 8 In order to insure that ordinary income is not
converted into capital gains, any gain on the sale of
DISC stock would be treated as ordinary income to the
extent of the accumulated DISC income.

Similarly, the

stepped-up basis of DISC stock on death of a shareholder
will be reduced by the amount of accumulated DISC income.
While the provisions of the DISC Bill are not
identical to the original proposals of the Administration,
we give our full support to these provisions.
technical problems have been suggested.

Some minor

We have discussed

this in general with the Staff of the Joint Committee on
Internal Revenue Taxation and it was agreed that we wiJl
qive immediate consideration to these problems and to
developing any technical amendments which may be warranted.
We therefore urge that this Committee give its
approval to the DISC Bill.

Department of the TREASURY
HINGTON, D.C. 20220

TELEPHONE W04-2041

FOR RELEASE ON DELIVERY

STATEMENT OF THE HONORABLE EDWIN S. COHEN
ASSISTANT SECRETARY FOR TAX POLICY
BEFORE THE
SENATE FINANCE COMMITTEE
ON THE TREASURY'S
DOMESTIC INTERNATIONAL SALES CORPORATION PROPOSAL
10:00 a.m. (EDT), OCTOBER 9, 1970

Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before this. committee to describe our Domestic International Sales Corporation (DISC) recommendation and to urge its approval by the
Committee. We make this recommendation because the U. S. tax
system presently results in an income tax disadvantage to U.S.
export sales as contrasted with foreign production by subsidiaries of U.S. companies, or by foreign-owned companies. At
a time when the U.S. is making every effort to improve its
balance of trade, this disadvantage should be removed.
The DISC proposal provides for deferral of U. S. tax for
a domestic corporation engaged in export sales similar to that
presently provided for foreign manufacturing subsidiaries of
U. S. companies.
The DISC proposal is now before the Committee in the form
of Title IV of amendments No. 925 and 1009 to H. R. 17550. The
House Ways and Means Committee has reviewed this proposal in
detail and reported it to the House as Title IV of H.R. 18970.
All of these provisions are identical and I will simply refer
to them as the DISC Bill.
We strongly support the provisions of the DISC Bill which
recognize the importance of a change in the income tax rules
applicable to U. S. exports.
While income tax factors are important, we recognize that
economic factors often tend to favor local production in or
near the market in which the products are being sold. Over the
last twenty years we have witnessed a constantly increasing degree of manufacturing abroad by U.S. companies.
In many cases,

- 2 for a variety of political and economic reasons, such local
production may be the only means of competing effectively in
certain markets.
U. s. tax policy can and should, at best,
have only a limited effect on such decisions.
On the other
hand, the U. S. tax laws themselves have treated export sales
much less favorably than foreign manufacture, and thus have
compounded the emphasis on foreign production.
This inequity
in our tax laws can and should be remedied.
We should compare U. S. tax rules with those of many of
the developed countries of the world which defer their tax
on export income or exempt such income from tax, to a greater
or lesser extent.
In addition, many countries have special
tax rules which effectively promote export activity such as
extraordinary reserve allowances on export sales and greatly
accelerated depreciation of export assets.
In contrast, the
United States taxes currently and, with the exception of the
Western Hemisphere Trade Corporation concept, fully, the income
from any export sale by a domestic corporation because the
corporation is incorporated in the united States.
In 1962, legislation was enacted to tax currently United
States shareholders on certain passive income (such as dividends,
interest, and royalties) and on certain sales and services income earned by controlled foreign subsidiaries. Two important
exceptions were made.
First, the Export Trade Corporation exception in section 970 of the Internal Revenue Code provides
specifically for limited deferral of income earned by a foreign
corporation selling U. S. export production.
In retrospect, we
would question whether such deferral should be available only to
a foreign corporation and not where export sales are made directly
by a U. S. corporation. Second, section 963 allows in effect
full U. S. tax deferral of low-taxed income of a foreign sales
company where pursuant to a so-called "minimum distribution"
electio~
such income is averaged with higher taxed income from
foreign manufacturing activities of the same controlled group
if the average effective foreign tax rate reaches 90 percent
of the U.S. tax rate.
In a real sense, the only U.S. exporters,
who benef i t from such deferral are those who also have substantl a1
investments in foreign manufacturing facilities and thus can
achieve this complex averaging effect.
In view of these limitations on deferral, the only way
most U. S. manufacturers are able to obtain the benefits of
full deferral of the U. S. tax is to form a foreign corporation
to manufacture abroad. The income from the sale of goods manufactured by foreign corporations owned by U. S. shareholders,
d
is not taxed by the united States until such income is distrlbu~

-

3 -

to the shareholders (or the stock of the subsidiary is sold).
until distribution (or the sale of the stock), the only applicable income taxes are foreign taxes, and these may be imposed
at a level below the u.s. level or may be completely waived,
especially on exports.
This existing u.s. tax treatment of foreign source income inherently involves a bias in favor of our largest corporations. Through their extensive foreign structures, they
are also frequently able to use the foreign tax credit, either
with or without minimum distribution elections, to reduce, even
after distribution, their u.s. tax liability on export earnings.
To the extent that this deferral and reduction are being achieved
under present law, the tax deferral effect of the DISC proposal
would not involve a revenue loss through a postponed receipt.
The DISC would work in favor of companies without existing large
foreign structures and without extensive foreign tax credits.
Accordingly, the DISC will provide equivalent opportunities
for tax deferral for foreign source income arising from export
sales, for smaller corporations and for corporations newly entering the export market or expanding their export sales. This
additional equity of tax treatment as between our largest corporations and U. s. business in general is an important feature
of the Administration's proposal.
Some would say that the remedy to the inequities we describe is simply to remove the deferral on all foreign earnings
of u. S.-controlled businesses and tax it currently. Such a response clearly acknowledges the inequities we describe.
It also
overlooks some critical facts.
The foreign-owned competitors of
u.S. businesses in the world markets are generally not subject
to such an all-embracing concept of taxation by their home countries. To the contrary, the territoriality principle of the
tax systems of other industrialized countries exem~ts foreign
source earnings, so that their companies o?erating abroad are
able to enjoy the full advantage of tax holidays and reduced
corporate rates, whether directly or through greatly accelerated
depreciation allowances or other special tax allowances or inducements.
Our studies show that the average effective foreign tax
rates are generally below our u.S. effective corporate rate.
For 1964, the effective foreign tax rate on all foreign subsidiaryoperations of u.S. businesses was approximately 38.6
percent. Our u.S. companies presently achieve deferral on the
difference between the foreign tax level and the u.S. tax level
with respect to the earnings of their foreign subsidiaries, and

-

4 -

thus pay no more tax on a current basis than their competitors.
However, virtually every foreign country imposes
a withholding tax on dividends.
If the U. S. were to impose
its taxes on the earnings of U.S.-controlled foreign subsidiaries on a current basis, these subsidiaries would
surely remit their earnings in dividends to be certain of
obtaining the foreign tax credit for the withholdinq taxes
on dividends.
Earnings needed in the businesses of-the
foreign subsidiaries would then. be returned as capital
contributions or loans.
These withholding taxes would largely offset the
residual U. S. tax through the foreign tax credit. The
net effect would be an increase in the current foreign
taxes collected from U. S. businesses wiB1 little, if any,
additional U. S. tax. Thus, the position of the U. S.
businesses in the world market would be prejudiced.
We think it is not wise as a matter of sound national
tax policy to affect adversely the competitive position of
our companies by neutralizing their opportunities to benefit
from lower levels of foreign tax in countries in which they
have substantial operations and which are enjoyed by their
competi tors.
This, 0 f course, would be precisely the effect
of extending our own corporate tax to all foreign source
income of U. ~;. businesses.
The Exist.!.!),) ;::tructure provides
for deferral of the U. S. tax until dividends are paid. The
paymen t of such dividends re flects the fact that the foreign
earnings are no longer needed in the foreign operations.
This is a sound system and is equally sound for export
earnings.
Thus, the basic
remove inequities in
of export earnings.
the proposal as they
Bill.

1.

purpose of the DISC proposal is to
our present system in the tax treatment
I will now outline the main features of
have been incorporated in the DISC

Basic Provisions.

The Internal Revenue Code would be amended to provide
for a new category of domestic corporation to be known as
a Domestic International Sales Corporation (a "DISC"). The
U. S. tax on the export income derived through such a
corporation would be deferred as long as it is either used
in the corporation's export business or is invested in
qualified assets of the DISC, and thus is not distributed

-

5 -

to the DISC's shareholders. Qualified assets would include
loans to U. S. producers, including the DISC's parent
company where the DISC is a subsidiary, to finance investments in U. S. plant, equipment and machinery, inventory,
and research and development to the extent these investments
are deemed export related. The manufacturer's total investments for any of these purposes would be treated as export
related in the same ratio as the manufacturer's sales
destined for export bear to total sales.
In order to qualify as a DISC, a corporation would
be required to confine its activities almost entirely to
export selling and certain related activities. A DISC
could have foreign sales branches and its own foreign sales
subsidiaries where such branches and subsidiaries are engaged in the sale of U. S. exports. The DISC could not
engage in manufacturing or invest in or finance foreign
manufacturing activities.
A DISC could sell the products of any domestic producer
(purchased from, or sold on behalf of, the producer or an
unrelated DISC) and could sell them to any foreign purchaser
for a foreign destination, whether or not related.
Although some complexity is inherent in integrating the
DISC proposal with the existing provisions of the Internal
Revenue Code, the DISC Bill is intended to simplify tax
concepts applicable to export activity to the maximum degree
possible. For example, a destination test for export sales
is substituted to reduce the complexities of the present
passage of title test.
2.

Qualification as a DISC.

The qualification requirements are that a DISC must
be a domestic corporation, must have 95 percent of its
receipts in the form of qualified export receipts, must
have 95 percent of its assets in the form of qualified
assets, must have only one class of stock and a minimum
capitalization of $2,500, and must have made an election to
be treated as a DISC.
To meet the gross receipts test, at least 95 percent
of the DISC's receipts would be required to be received
from export sales activities and from qualified export
assets.
In order to meet the assets test, 95 percent of

- 6 the DISC's assets would be required to be used in its
export business or be in the form of Eximbank obligations
or producers loans (as hereinafter described).
To prevent
inadvertent disqualifications under either of these tests,
the DISC Bill provides that if any income derived from
non-qualified receipts or any non-qualified assets are timely
distributed by a DISC, such receipts or assets will not be
taken into account for purposes of the 95 percent gross
receipts and the 95 percent assets tests.
The following would be treated as giving rise to
qualified receipts:
export sales of goods manufactured, produced,
grown or extracted in the Uni ted sta tes by
persons other than the DISC and sold by the
DISC either on a purchase and resale basis or
as a commission agent;
the leasing or rental of U. S. export property;
the performance of services by the DISC related
and subsidiary to its sales or leases;
interest on obligations which are qualified
export assets;
dividends from foreign sales subsidiaries engaged
in marketing U. S. exports;
dividends from less than 10% equity investments
in unrelated foreign corporations made in furtherance
of export sales ~
gains on the sale of qualified export assets;
receipts derived in connection with the performance
of managerial services in furtherance of the production of qualified export receipts; and
receipts wi b'1 respect to engineering or archi teet ural
services for construction projects located (or
proposed for location) abroad.

-

7 -

Qualified export assets include:
obligations of export customers;
export property held for sale or lease;
other working capital used in the DISC's sales
or commission business;
facilities primarily for the sale, lease, rental,
storage, handling, transportation, packaging,
assembly, or servicing of export property;
assets of foreign sales branches handling U. s.
exports;
obligations issued, guaranteed, or insured by
the Export-Import Bank and certain similar paper;
stock or securities in foreign sales subsidiaries
engaged in marketing U. S. exports, including
foreign packaging and limited assembly operations;
stock or securities in unrelated foreign corporations made in furtherance of an export sale or
sales;
obligations representing loans to domestic producers; and
temporary deposi ts in the united states wi th
persons carrying on the banking business.
3.

Tax Treatment of DISC Income.

So long as the domestic corporation continues to
qualify as a DISC, U. S. tax would not be imposed on its
current or retained export earnings, which would include
dividends and interest from any qualified foreign export
sales subsidiaries.
Upon a dividend distribution or the
liquidation or sale of the shares of the DISC, its retained
export earnings would be taxed to its shareholders as
ordinary income.
Thus, the net effect would be a deferral
of the u. S. tax. The intercorporate dividends-received
deduction would not be available since the DISC would not
have been subject to tax and the tax is only to be deferred
Until distribution by the DISC.

-- 8 -

Dividends of a DISC paid out of accumulated export
income would be treated as foreign source income. With
respect to any foreign income taxes paid bv the DISC, a
foreign tax credit would be available to the corporate
shareholders to offset U. S. tax on foreign source dividends
received from the DISC.
This would approximate the tax
treatment of accumulated earnings and profits of foreign
subsidiaries under present law 'and the present treatment
for exports where passage of title is arranqed to occur
outside of the United States.
4.

Allocable DISC Profits.

Where a DISC sells on behalf of a related person,
the deferral of income tax on exports extends only to that
portion of profits considered to be export sales (or rental)
income.
The portion of profit considered as manufacturing
or domestic profit will continue to be taxed currently
as under present law. Thus, the allocable intercompany
pricinq rules applicable under present law to transactions
between related persons may be used to determine the export
profit and the manufacturing profit. This can be a complicated and uncertain process in some cases and actual
or potential disputes can be a deterrent to export activity.
Therefore, the DISC rules also employ safe haven guidelines
that may be elected where a DISC exports on behalf of a
related company, permitting the DISC to retain as tax
deferred export income the higher of either:
A.

Up to four percent of its sales plus 10 percent
of the "export promotion expenses" incurred by it;
or

B.

Fifty percent of the combined taxable income from
the manufacture in the United States and the
export sale by the DISC, plus 10 percent of the
export promotion expenses incurred by the DISC.

Allocation rules along the foregoing lines would be
analogous to those applied by a number of countries,
generally on an informal basis, in the determination of
their tax liability on exports.
Their primary advantage
would be in providing a greater degree of specificity and
definitiveness in limiting the profit which may be realized
by the DISC vis-a-vis its related U. S. supplier and in
having U. S. exporters subject to the same types of rules
as their forei0n competitors.

9

5.

Producer's Loans

As stated previously, a DISC is to be permitted to
loan its tax deferred profits to its parent manufacturing
company (or any other u. S. export producer), as long as
the cumulative amount loaned to anyone borrower does
not exceed the amount of the borrower's assets considered
as being related to its export sales. This in essence is
the same proportion of the borrower's assets that its
export sales are of its total sales. These loans--termed
"producer's loans"--are to constitute qualified export
assets of a DISC and the interest arising on the loans is
to represent a qualified export receipt of a DISC. However,
the interest on such loans will not be tax deferred income
of the DISC. Where such interest is not distributed
annually, it will be deemed to have been received by the
shareholders annually.
For a loan of a DISC's tax deferred profits to constitute a producer's loan, the loan must be made to a
borrower who is engaged in the manufacturing, production,
growing, or extraction of export property in the united
States and at the time the loan is made it must be designated
as a producer's loan. The loan must be evidenced by a
note (or some other evidence of indebtedness) and have a
stated maturity of not more than 15 years. To qualify as
a producer's loan, a loan must be made out of the tax deferred profits--the accumulated DISC income.
A loan is
to be considered as made out of accumulated DISC income if
at the beginning of the month in which the loan is made,
the amount of the loan, when added to the unpaid balance
of all other producer's loans previously made by the DISC,
does not exceed the DISC's accumulated DISC income.
The limitation imposed on the amount of loans which
a borrower may receive during a taxable year of the borrower
is to be determined by applying the percentage which the
borrower's qualified export receipts arising from its sale
of export property during the three prior taxable years is
of its aggregate gross receipts from the sale of inventory
property during that period, to the total of the borrower's
assets taken into account for this purpose. There are three
categories of a borrower's assets which are taken into
account in determining this limitation for a year: (1) the
amount of the borrower's investment in plant, machinery,
equipment, and supporting production facilities in the

- 10 United states as of the beginning of its taxable year;
(2) the amount of the borrower's inventory at the beginning
of the taxable year; and (3) the aggregate of the borrower's
research and experimental expenditures in the United States
during all preceding years of the borrower which began
after 1970.
It is not contemplated that there will be any tracing
of loans to specific manufacturing facilities or equipment
actually used in production for export.
All loans would be interest bearing, resulting in an
interest deduction to the borrower. The Section 482 safe
haven rules will be applicable:
presently the interest
charged must be a minimum of 4 percent and maximum of
6 percent, although the rate may be higher if an arm'slength rate would be higher.
At maturity, any loan can be renewed, or the principal
loaned to another borrower, provided always that there is
compliance with the rules previously described. Qualified
loans would remain qualified throughout their term regardless of any decreases in export sales. They would not be
treated as constructive dividends.
6.

Acquisition of Export-Import Bank Paper

b~DrSC's.

As stated above, qualified export income would include
interest on credit extended to export customers and interest
on obligations issued, guaranteed, or insured by the ExpnrtImport Bank and certain similar paper.
Such debt obligations
would also constitute qualified export assets.
In cases where
the DISC acts as a commission agent for an export manufacturer, the obligations acquired by the manufacturer in
connection with the extension of credit to export customers
in accordance with normal commercial practice could be
acquired by the DISC.
It would be provided that the following types of
Export-Import Bank obligations and similar paper would
give rise to qualified export income and constitute qualified
export assets:
obligations issued by the Export-Import Banki
obligations guaranteed or insured by the ExportImport Bank in cases where the DISC purchases

-

11 -

the obligations from the Export-Import Bank
or from the exporter;
obligations insured by the Foreign Credit
Insurance Association in cases where the DISC
purchases the obligations from the exporter;
obligations issued by certain domestic corporations organized solely for the purpose of
financing U. S. exports pursuant to an agreement
with the Export-Import Bank whereby such corporation makes export loans guaranteed by the
Export-Import Bank.
7.

Deficienc~Distributions.

In order to prevent inadvertent disqualification of
a DISC, a deficiency dividend procedure would permit continued qualification of the DISC. Deficiency distributions
could be made at two stages where either the income or
asset test had not been met:
Current Deficienc~istributions.
Where the DISC
during the taxable year had at least 70 percent
of its gross receipts in the form of qualified
receipts, and at least 70 percent of its assets
in the form of qualified assets, a distribution
of the income derived from non-aualified gross
receipts could be made at any time after the
close of the DISC's taxable year and prior to
the time for filing the DISC's annual return.
Similarly, any non-qualified asset could be distributed, or such asset could be liquidated with
the proceeds being distributed within such period.
Delayed Deficiency Distributions.
A distribution
of non-quali""fied income or a non-qualified asset
(or a distribution from the proceeds of such an
asset) could be made at any time with respect to
any year as to which the period for assessment of
additional taxes had not expired provided that the
existence of such income or asset and the failure
to distribute it within the return filing period
was due to reasonable cause.

- 12 8.

Disqualific~tio~

of DISC, LiCTuiriation, or Sale of Stock.

Upon liquiriation of a DISC or upon its disqualification (wh0.re the deficiency dividend procedures are not
used), DISC status would terminate and the earninqs and
profits of the DISC on which U. S. taxes had been deferred
would be deemed to be distributed to the shareholders.
Each shareholder would be taxed. as if he had received his
pro rata portion of such income in equal installments in
the year in which such liquidation or disqualification
occurs and in each of the succeeding nine years; except that
if the DISC has not been qualified as such for at least ten
years, the period of distribution will be deemed to be the
number of consecutive years the DISC was qualified
immediately prior to the liquidation or the disqualification.
Upon the sale of stock in a DISC, the gain realized
will be taxed at ordinary income rates to the extent of the
accumulated earnings and profits after the date of the DISC
election.

9.

Export Property.

The ty?e of property which is considered export
property for a DISC is property which-A. has been manufactured, produced, grown or
extracted in the United States by someone other than
a DISC;
B. is held by the DISC primarily for sale, lease,
or rental in the ordinary course of business for use,
consumption or disposition outside the United States,
or which is held by the DISC for sale, lease or
rental to another DISC for such a purpose: and
C. not more than 50 percent of the fair market
value of which is attributable to imported articles.
10.

Reorganization of Existing Export Operations.

It is contemplated that in general tax-free reorgani~a­
tions would be permitted to place existing foreign operatl ons
in a DISC or to put existing foreign sales subsidiaries
under its ownership. The DISC Bill presently provides
that the little used foreign Export Trade Corporation

- 13 provisions of Section 970 of the Internal Revenue Code
will be phased out as the DISC provisions become fully
effective.
11.

Phase-in.

Under the DISC Bill, the deferral of DISC income
will be "phased in" over 3 years, beginning in 1971.
Fifty percent of the allocable DISC income will be deferred from current taxation in 1971; 75 percent in 1972
and 1973; and 100 percent beginning on January 1, 1974.

*

*

*

*

This concludes our description. A more detailed
explanation is found in the House ~'Tays and Means Committee
Report to accompany H. R. 18970.
While the provisions of the DISC Bill are not
identical to the original proposals of the Administration,
we give our full support to these provisions.
Some minor
technical problems have been suggested.
We have discussed
this in general with the Staff of the Joint Committee on
Internal Revenue Taxation and it was agreed that we will
give immediate consideration to these problems and to
developing any technical amendments which may be warranted.
We therefore urge that this Committee give its
approval to the DISC Bill.

Department 01 theTREASURY
:H180N, O.C. 20220

TELEPHONE W04-2041

FOR RELEASE ON DELIVERY
STATEMENT BY THE HONORABLE PAUL A. VOLCKER
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
BEFORE THE SENATE FINANCE COMMITTEE
ON TRADE LEGISLATION
AT 10:00 AM (EDT), FRIDAY, OCTOBER 9, 1970
I welcome this opportunity to testify on the trade
legislation before the Committee.

Last Spring, the Adminis-

tration made several proposals to the Congress on trade
matters.

Those proposals were designed to arm the United

States with the essential tools it needs to maintain forward
momentum toward re d uc ing trade barriers and maintaining the
expansion of international trade and investment under fair
and competitive conditions.

At the same time, they would,

I

believe, protect the legitimate interests of American
business and labor.
As you know, in view of the inability thus far to
achieve voluntary restraints on textile imports, the
Administration also supports the addition to its proposals
of certain provisions relating to quotas on those articles.
You are also aware that in other important respects the bill
that C'm~:rgl'd from the House Ways and Means Committee

(H.R. 18970) differs significantly from the proposals of the
'.\-507

2 -

Administration,

I share'

the decp reservations

l'xpn'ssl'd

!)\'

thl'

hilL, which I hclic\.'l' arc contrarv to tl1L'

HOUSL'

r\ll1hass<.Hlor Gi tbert as to certain

~,h-eaJy

;))'O\'lS

ions of

national intl'rl'st.
will, however, devote my attention principally to
onL' majnr pruvision of !-l.R. 18970 which originated with the
Administ.ration.

I refer to Title: TV thut \\I('ulci permit the

establishment of a rtl'\v typl' of domestic corporation to be
known as thL' Doml'stic International Sulcs Corporation, or
DISC.
The effect of this provision

would be to remove

impediments to exports from the United States that exist in
our present system of corporate taxation.

This

lilOUld

be

accomplished by making available to our exporters tax treatment more comparable to that available to exporters in many
foreign countries and to the treatment accorded subsidiaries
of U.S. companies operating overseas.

This objective would

be achieved, as Assistant Secretary Cohen will further
explain, by permitting the deferral, within carefully defined
limits, of corporate income tax on profits arising from
exports, so long as those profits are employed in support of

- 3 -

export efforts.
The basic purpose of this proposal is to remove one
obstacle to a more effective competitive effort by our
exporters in world markets.

It thus will provide important

support to the balance of payments and to the external
financial position of the United States.
We believe the salutary effects of this legislation
will extend beyond the immediately identifiable impact on
the profitability of exporting implicit in the removal of
an unwarranted drag of taxation.

In combination with our

parallel efforts to improve export facilities, it will, I am
convinced, help direct the attention of American industry
particularly smaller and medium-sized firms -- to the
opportunities available in foreign markets.

It should induce

fresh corporate planning and marketing efforts to develop
those markets, and its impact will be reflected in such basic
corporate decisions as plant location.
The concept and basic provisions of thL'

Pl-op(1s~ll

a thorough review of our tax structure frorr tlw
its impact on our export effort.

That reVlew

t-lfL,ct

c;l~llldj),)i"t

\

i

includ~J

examination of the tax treatment of exports h\' "trll'r cl'untri,·s

- 4 as well as the tax treatment under U. S.

law of export income

as compared to other foreign source income.
We concluded from this analysis that the U. S.
structure does,

in fact,

tax

inadvertently contribute to an

attitude among many American producers that export markL,ts
are not worth a concerted and aggressi\e effort over a period
of years.

Indeed, in certain respects, our tax system

actually gives relative benefits to manufacturing abroad
rather than in the United States.
The proposal before the Corrunittee would remedy these
defects by recognizing that export income of a U.S. corporation is partly foreign source income, just as income from
foreign subsidiaries is foreign source income.

The same

principle is incorporated in the laws and practices of other
countries.

Where this sound tax philosophy has heretofore

gone astray in the operation of our own tax system is that
the tax deferral of retained earnings, which is generally
available on foreign manufacturing income, can be obtained on
export income only through creating a foreign-domiciled
sales subsidiary.

Many companies, particularly

those without extensive foreign operations, find

- 5 this awkward and impractical.

Why should our laws require

a foreign domicile for export income to qualify?

Foreign

source income can appropriately be determined by the
destination of the goods rather than the domicile of the
corporate vehicle through which the sale has passed.

We

believe our proposed rules that would accomplish this
purpose are consistent with international practice and
obligations.
I believe the basic need for this legislation to
correct a long standing anomaly in tax treatment of exports
is apparent from any considered analysis of our balance of
payments and international financial position.

We have been

coping with a severe balance of payments problem for a
lengthy period.

The net outflow of dollars into foreign

central banks and treasuries has fluctuated considerably in
recent years in response to transient factors; the hard iaCl
is that our underlying position has remained unsatisfacto~y.
in the latter half of the 1960's, the most serious
element in the problem was that our traditionally large
surplus on trade and on all current account transactions
dwindl~d

steadily.

I believe we see the beginnlngs of a reversal

- 6 -

of that trend this year.

But, realistically, we must

recognize that this improvement has been exaggerated by the
temporary effects of an economic slow-down here and an
inflationary boom abroad.

Clearly, our current account

surplus is still inadequate to support fully our investment
activity abroad and our international obligations.
Rebuilding that surplus must be a prime policy objective if
we are to protect the stability of the dollar and discharge
our international responsibilities effectively.
I do not believe we have the option of seeking that
necessary improvement by turning inward with restrictive
measures.

It is not just a matter of economic philosophy

or principle, important as freer trade is to the health of
the world economy, standards of living at home and abroad,
and effective competition.

The harsh fact is that

restrictions considered unfair and unacceptable to our trading partners will impair the atmosphere of cooperation built
up so carefully in many of our international economic
relationships and even invite retaliation.

Instead of

benefiting our trade position, spreading restrictions would

- 7 damage our prospects for regaining a substantial surplus
through competitive processes.

I believe, too, at this time

particularly, we must recognize that the flow of imports is
one of the most effective possible checks to domestic
inflationary pressures.

And in the long run, we cannot

expect to maintain a competitive industry behind import
barriers.
The DISC proposal looks outward.

It is designed to

enable our industry to compete fairly but more effectively
in world markets, building on the solid and essential base
of a restoration of greater price stability.

Intensive

contacts with industry support our own conviction that the
impact on the level of exports will be appreciable over a
period of time.

Admittedly, concrete estimates are

difficult . . We have, therefore, prepared estimates based on
differing assumptions -- one set we feel to be conservative
and the other set reflecting more favorable assumptions
emerging from some of our industrial consultations.

Taking

the more conservative estimates, we anticipate the DISC
would generate, over the four to five years

foll(l\·:in'~

its

initiation, almost $1-1/2 billion more exports per \'('ar th<ln

- 8 would otherwise take place.

More optimistic assumptions

suggest that, over the same period of time, the impact could
run to $2-1/2 billion.

In either case, further gains should

accrue in later years.
At the same time, we recognize that these gains will
entail a definite cost in revenues.

In recognition of this

cost and the heavy current pressures on the budgetary
position, the bill contemplates a gradual phasing-in period
extending until 1974.

With this phasing in, we anticipate

that the revenue impact during the remainder of fiscal year
1971

assuming an effective date of January 1st -- would

be less than $75 million.

By the fifth year, our estimates

indicate the direct revenue cost could be expected to rise
progressively to approximately $600 million.
Significant taxable distributions would commence after
the first few years, tending to limit further increases in
costs.

I would also emphasize that these are estimates of

the direct revenue impact.

They do not take into account

the long-range stimulative effect of this proposal -- in the
form of additional jobs, additional investment, and
additional exports.

These long-range benefits cannot be

- 9 isolated statistically, but certainly they will exist.

They

will potentially offset materially the direct revenue costs
of the proposal.
In conclusion, I strongly urge the Committee to support
this aspect of the Administration's trade legislation.
need is urgent.

The

We can no longer afford the luxury of

maintaining provisions in our tax system that tend to discriminate against exports in favor of foreign investment.
Our trade position and our balance of payments position
urgently need improvement.

I firmly believe that the DISC

proposal is in the interests of a strong and healthy expansion
of our economy, consistent with maintaining a strong external
financial position.

000

Department of the
~SHINGTON,

D.C. 20220

TRfASURY
TELEPHONE W04-2041

FOR IMMEDIATE RELEASE

October 9, 1970

TREASURY HONORS EMPLOYEES AT ANNUAL AWARDS
CEREMONY
In its Seven~h Annual Awards Ceremony, the Treas~y
Department has honored 91 employees for outstanding service
and significant o?era~iona1 contributions.
In the fiscal year ended last June 30, Treasury
employees weJ:-e recognized for adopted suggestions and
innovative achievements which yielded almost 1.7 million
dollars of first year benefits.
Among those recognized at the awards ceremony, held
at the Departmental Auditorium, Washington, D. C. were:
1 person who received the Alexander Hamilton
Award for demonstrating outstanding leadership
while working closely with the Secretary.
24 persons who during the year had received either
of the Treasury's two top awards, for Exceptional
Service or for Meritorious Service.
26 employees who, through outstanding suggestions
or service, contributed to significant monetary
savings, increased efficiency, or distinc~
improvements in government service.
31 employees and 2 organizational units for
excellence in furthering special Government-wide
programs.
12 supervisors for notable achievements in
encouraging employee contributions to efficiency
and economy.
(MORE)

- 2 -

lon addition, the awards ceremony honored 11 long .. time
career employees of whom 9 have served more than 40 years
and two more than 45 years.
The highest cash award, $5,000, was received jointly
by Morris V. Boley and Philip B. Neisser of the Bureau of the
Mint for their invention of the new composite metal strip .
to replace coin silver, and assignment of their rights and
interests to the United States Government.
The awards were presented by the Under Secretary of
the Treasury Charls E. Walker, who also honored several
Treasury bureaus., The Bureau of Engraving and Printing was
cited for outstanding participation in the performance phase
of Treasury Department's Incentive Awards Program. The
Bureau of Customs was recognized for outstanding achievement
in its suggestions program. The Bureau of Accounts was
singled out for significant accomplishment in cost reduction
and management improvement program achieving savings which
more than doubled their Bureau's annual goal.
In addition, the Bureau of Engraving and Printing, the
Bureau of the Mint, and the Internal Revenue Service were
recognized for accomplishments in the safety programs.
Attached is a list of those recognized, and their
citations.

000

Attachments

EMPLOYEE SUGGESTIONS AND SERVICES
Recognition by the Secretary of outstanding suggestions or exemplary
services which served to effect significant monetary savings, increased
efficiency, or improvements in Government operations.
JAIME ARBONA, Customs Inspector, Bureau of Customs, Baltimore, Md.
For bringing a difficult narcotics case to a successful conclusion through his knowledge of the language and customs
of Latin Americans. Special Achievement Award-$500.
MORRIS J. ASAMI, Import Specialist, Bureau of Customs, Los
Angeles, Calif.
For supervising and compiling a tabulation of all importations of Japanese plywood made through the ports of Seattle,
Portland, Houston, San Francisco, and Los Angeles. Special
Achievement Award-$500.
ROGER H. BURR, Revenue Officer, Los Angeles District, Internal
Revenue Service, Los Angeles, Calif.
For developing training aids which significantly improved
classroom instruction during Revenue Officer training classes
helll at the Van Nuys Training Center. Special Service
AwarJ--$725.
PETER CAPRIOLE, Tax Examiner, North Atlantic Service Center,
Internal Revenue Service, Andover, Mass.
For suggesting new procedures for sending Tax Deposit
Forms 503 to new corporate entities. Estimated savings$24,835. Suggestion Award-$82S.

5

RONALD D. DANIELSON, Assistant Communications Officer, U.S.
Secret Service
For developing, on his own time, a radio dialer system for
use in official cars which allows agent personnel greater and
freer use of radio equipment, including telephonic calls to
any number directly from an automobile. Special Achievement Award-$500.
JOSEPH E. ENDHS, Formerly Consultant, OtT~ce of the Director,
Bureau of the Mine
For developing and implementing a system for the mail order
retailing of 2,600,000 proof coin sets. Special Achievement
Award-$8oq.
LOUIS D. GERSHENSON, Senior Regional Analyst (Audit), MidAtlantic Regional Office, Ineernal Revenue Service, Philadelphia, Pa.
For suggesting elimination of staff review of unagreed o{flce
audit cases which invDlved approximately 300,000 case files.
Suggestion Award - $600.
JULIUS P. HAJDU, Machining Lead Foreman, United States Mint,
Denver, Colo.
For designing tooling for the manufacture of die holders and
collars at the Demer Mint which resulted in increased production and a high quality finished product. Estimated
savings-$14,227. Surgestion Award-$610

J. LARSON, Tax Examiner, Western Service Center, Internal
Revcnuc Service, OgJen, Utah

OU\,ER

For suggesting a 1'l"0cedur.t! change where the selection of
potcntial :lUdit ('l<;CS ,,'oldd take phce prior ro preparation of
the audit examinari,m reCllrd assembly, thus eliminating
al'proxil<lJtely 300,000 unnecessary audit assemblies. Estim:\tell savings- -$20,327. Suggestion Award-$7SS

LYNN C. MUlRBROOK, Supervisory Cash Assistant, Examination
Division, Western Service Center, Internal Revenue Service,
Ogden, Utah
For suggesting use of a hydraulic paper cutter to detach wage
schedules from Forms 941, 942, and 943 in lieu of manual
detachment. Estjmated savings-$9,OOO. Suggestion Award$500
RUBY K. PETERSON (Retired), Former Senior Attorney, Office of
the Regional Counsel, Southeast Region, Internal Revenue
Service, Jacksonville, Fla.
For the highly exemplary manner in which she discharged
her legal duties while occupying a number of very responsible
positions, thereby making significant contributions to the
efficient operation of the Chief Counsel's office. Superior
Work Performance Award-$500
ALLAN STURGES, Chief, Data Systems Division, U.S. Secret Service
For developing an Automatic Data Processing System geared
to meet the unique needs of the Service through innovations
in intelligence analysis, information retrieval, and improved
analytical and forecast procedures of a highly sophisticated
nature. Special Achievement Award-$500.
JAMES C. WAGNER, JR., Electrolytic Platemaker, Office of Engraving, Bureau of Engraving and Printing
For initiative and ingenuity in proposing a change in the
method of making plates for printing presses which eliminated two processing steps and made the plates available for
use five days earlier. Estimated savings-$8,650. Suggestion
Award-$635.
CALVIN H. WHITE, Supervisory Tax Examiner, Central Service
Center, Internal Revenue Service, Covington, Ky.
For suggesting that the taxpayer's name on Form 3354,
Assessment Ad justment Document, be eliminated in favor of a
four-letter name control to speed preparation of this document. Estimated savings-$15,167. Suggestion Award-$630

7

MORRIS V. BOLBY, Consultant
PHILIP B. NBISSBR, Technical Consultant
Office of the Director, Bureau of the Mint
For inventing a new composite metal strip to replace coin
silver in U.S. coinage and assigning to the United States
the entire right, title, and interest in and to the invention.
Special Achievement Award-$S,OOO
CHARLES

J.

WILSON, Supervisory Customs Inspector

EUGENE B. MICHAEL, (Retired) Formerly Customs Inspector
Bureau of Customs, Buffalo District, Boston Region
For recommending adoption of the Provisional Release
Invoice Number "PRIN" system resulting in significant
savings and improved service to the public. Estimated
savings-$68,879. Suggestion Award-$1,04S
HORACE J. GIBBS, Special Agent in Charge, U.S. Secret Service
Field Office, Baltimore, Md.
JOHN M. COZZA, Special Agent, Special Investigations and Security Division, Washington, D.C.
For conducting a well-coordinated investigation culminating
in numerous arrests and the seizure of large sums in counterfeit notes. Special Achievement Award-$l,OOO
CHARLES J. WILSON, Supervisory Customs Inspector
JOHN B. COOKFAIR, Customs Inspector, Bureau of Customs,
Buffalo District, Boston Region
For recommending a simplification in processing shippers'
export declarations at Customs stations, resulting in
significan t assistance to shippers and savings to the Government. Estimated savings-$25,882. Suggestion Award-$830.

8

DONALD E. WHITB, Assistant District Director, Baltimore, Md.
DAVID C. GOEBBL, Operations Officer, New Orleans, La.
DONALD L. EIDB, Assistant District Director, San Francisco, Calif.
DONAoLD L. BaOWN!BLL, Supervisory Customs Inspector, Los
Angeles, Calif.,
Bureau of Customs
For significant contributions in connection with the Preclearance Operation of Military Personnel from Vietnam.
Special Achievement Award-$1300

9

AWARDS TO SUPERVISORS
Recognition by the Secretary of notable achievements by supervisors in
encouraging employee contributions to efficiency and economy. These
supervisors were selected from Bureau nominees after consideration of
such factors as the siZe of groups supervised, the value of contributions,
and the nature of action by the supervisor.
ELEANOR ANDERSON, Supervisor, Diversified Payments Branch,
Chicago Disbursing Center, Bureau of Accounts
For successfully training and developing employees and
motivating· them to achieve high quality production and
meet rigorous deadlines under adverse conditions.
SEYMOUR BERNETT, Foreman of Plate Printers, Plate Printing
Division, Bureau of Engraving and Printing
For superior leadership in promoting strong employee interest
and active participation in the Incentive Awards Program,
resulting in increased efficiency and reduction of safety
hazards.
ORION L. BIRDSALL, Jr., Chief, Data Processing Training Branch,
Internal Revenue Service
For implementing a training process and developing a highly
effective staff that has produced a data processing training
organization with greater returns for dollars invested.
CHESTER v. CLAUSEN, Manager, Distribution Center, Savings
Bonds Division, Chicago, Ill.
For accomplishing assignments with almost impossible
Je;llllines while maintaining the respect and esteem of his
staff anJ for using the full scope of his abilities to further
the objectives of the Savings Bonds Program.

10

HEsTER A. FISHER, Supervisor, Adjustment Section, Reconciliation Branch, Check Accounting Division, Office of the Treasurer of the U. S.
For selfless devotion to duty and constant efforts to achieve
perfection in her own work and in the work of those under
her supervisioQ.
WILLIAM H. FORD, Foreman, Ink Production Unit, Technical
Services Division, Bureau of Engraving and Printing
For effectively encouraging employee participation in the
Incentive Awards Program, resulting in the elimination of
safety hazards and increased efficiency.
EVELYN B. FREEMAN, Supervisor, Special Payments Section,
Birmingham Disbursing Center, Bureau of Accounts
For successfully developing a high level of employee cooperation and efficiency through instruction and counseling and
giving recognition to employee performance through the
Incentive Awards Program.
MELVIN GABOUREL, Chief, Whole Note Branch, Cash Division,
Office of the Treasurer of the U.S.
For inspiring employees toward greater productivity,
tighter controls, and higher morale through outstanding
leadership and personal example.

J. GIZA, Supervisory Inspector, Inspection and Control
Section, Air Transportation Division, Bureau of Customs,
Chicago, Ill.

LoUIS

For superior leadership and diligence and instilling in his
employees a keen awareness of their enforcement responsibilities, resulting in numerous seizures of narcotics and other
contraband items.

11

WALTER A. PORTEOUS, Supervisory Auditor (Assistant Comptroller (Chief Auditor)), Division of Financial Management,
Bureau of Accounts
For exceptional managerial ability and judgment in supervising and coordinating his professional staff to process a
substantiaUy greater workload and achieve increased
efficiency.
HARVEY E. ROENICKE, Chief, Accounts Section, Division of Public
Deht Accounts and Audit, Bureau of the Public Debt
For leadership and motivation of his personnel to perform at
maximum efficiency during a period of transition with
unusually heavy workloads.
WILLIAM 1. WATSON, Foreman, Carpentry, Painting and Masonry
Shop, Construction and Maintenance Division, Bureau of
Engraving and Printing
For superior leadership in encouraging employee interest and
active participation in the Incentive Awards Program resulting in increased efficiency and improved work operations.

12

SPECIAL AWARDS FOR EXCELLENCE IN
FURTHE~ING SPECIAL GOVERNrvlENT WIDE PROGRAMS
Recognition by the Secretary for outstanding contributions to the furtherance of a number of Government-wide programs ill which the President
has asked for special attwtion and extra effort from the executit'e branch
of the Govermmnt.

MYLESJ. AMDROSE,. Commissioner of Customs
For exceptional contributions to improving the effectiveness
of Treasury operations. Recipient of Presidtntial Management Improvement Certificate.
WILLIAM E. BOARMAN, Deputy Assistant Regional Commissioner,
Bureau of Customs, Houston, Tex.
For leadership in implementing an Equal Employment
Opportunity Program which has successfully identified and
supplied employees' development needs and resulted in significantly increastd opportunities for minority groups.
FRED R. BOYETT, Regional Commissioner, Bureau of Customs,
Chicago, Ill.

Elf furthering the objectives of the program for improved
s.:rvice to the public by personal leadership and by creating
:l spirit of cooperation between Customs employees and the
traveling and importing public.
R\lY C. CAHOON, Assistant to the Director of the Mint
For outstanding leadership in promoting effective communication and service to the public in his official capacity as
Mint liaison with the Congress, the press, and oRicials of the
FcJeral Reserve System.

13

IRENE F. CARPENTER, Office Manager, Savings Bonds Division,
Honolulu, Hawaii
For contributing to the effectiveness of the Savings Bonds
Program throughout the State of Hawaii by the manner in
which she provides information and services to the general
public, Government agencies and Savings Bonds volunteers.
EUGENIA V. CIAMPA, Secretary, Office of the Commissioner, Bureau
of the Public Debt
For outstanding ability in providing excellent service to the
public through direct and responsive communication.
BETHEL G. COOK, Assistant Chief, Securities Division, Office of
the Treasurer o£ the United States.
For exemplary leadership in developing and maintalntng
good communication with and service to the public concerning transactions in Government securities.
LESTER E. CULLEN, Superintendent, Plant Services Division,
Bureau of Engraving and Printing.
For outstanding leadership in planning a continuing program
for placement, on-the-job training, and effective utilization
of the abilities of disadvantaged youths.
I\:ARLN L. DISQUE, Secretary, Office of Public Affairs, U.S. Savings
Bonds Division
For outstanding ability in h:mdling all types of public, Congressional, Office of the Secretary, and White House inquiries and requests related to Savings Bonds information.

E. DOlJGHERTY, Chief, Protective Programs Branch,
FacIlities i\1anagement Division, Internal Revenue Service

EDWARD

Fur developing national guidelines for the protection of emrloyees and offices in emergency situations, thus bringing
gre:'.t credit to the Internal Revenue Service and the
Derartment.

14

ARNOLD S. DREYER, Director, Midwest Service Center, Internal
Revenue Service, Kansas City, Mo.
For outstanding contributions to equal employment opportunity in government through the excellence of his leadership, involvement, commitment, skill, imagination and
perseverance. on behalf of the Kansas City Federal Community
and the Midwest Service Center.
RICHARD L. EDELEN, Public Information Officer, Baltimore District Office, Internal Revenue Service, Baltimore, Md.
For outstanding contributions, unusual competence and
dedicated personal leadership in improving communication
and service to the public and enhancing the image of the
Internal Revef)ue Service.
DONALD G. ELSBERRY, Director, Systems Division, Internal Revenue Service
For exceptional contributions to improving the effectiveness
of Treasury operations. Recipient of Presidential Management Improvement Certificate.
DOLORES FANTONE, Administrative Assistant, Office of Security
and Audit, Bureau of Engraving and Printing
For outstanding performance in working behind the scenes
to coordinate the myriad details involved in preparing and
presenting the many numismatic and philatelic exhibits the
Bureau presents as a service to the public.
LEON ARD

GRANT, Supervisory Import Specialist, Bureau of
Customs, New York, N.Y.
For designing, structuring and maintaining a permanent
EEO Program for his region that may well be a prototype of
future programs and which demanded many hours of off-duty
involvement.

15

QUINTIN W. GUERIN, Chief, Regional Training Branch, Midwest
Region, Internal Revenue Service, Chicago, Ill.
For his innovative and dynamic approaches to training in
the field of human relations and equal employment.
CHESTER J. ruRUCKI, Superintendent, Postage Stamp Division,
Bureau of Engraving and Printing
For superior leadership in furthering the Safety Program in
the Postage Stamp Division of the Bureau of Engraving and
Printing.
DOUGLAS C. LEWIS, Chief, Mail <lnd Files Branch, Administrative
Office, Office of the Treasurer of the U.S.
For special. interest in the potential of disadvantaged and
handicapped employees under his supervision and the development of their productivity, self-reliance, and priJe of
workmanship.
ELECTRA P. MALONE, Regional Office, Southwest Region, Internal
Revenue Service, Dallas, Tex.
For outstanding contributions to equal employment in
government through the excellence of her leadership, involvement, commitment, skill, imagination and perseverance on behalf of the Internal Revenue Service.
S. MICONI, Assistant Accounting Officer, Division of
Financial Management, Bureau of Accounts

A:-'IERICO

For excellence in improving communications and services to
the puhlic through the expeditious handling of claims and
awards.
FRAl':CLS R. B. PETERSON, Placement and Employee Management Relations Specialist, Personnel Office, Bureau of the
Puhlic Dcbt
For unusual excellence in implementing special employment
programs, including those for the employment of the disadvant:lgd and the handicapped

16

LESTER W. PLUMLY, Chief Disbursing Officer, Bureau of Accounts
For exceptional contributions to improving the effectiveness
of Treasury operations. Recipient of Presidential Management Improvement Award.
RICHARD E. RED1:fOND, Equal Employment Opportunity Counselor, Office of Industrial Relations, Bureau of Engraving
and Printing
For outstanding effectiveness in furthering the objectives of
the Equal Employment Opportunity Program in the Bureau.
FRElDA J. RITTENHOUSE, Technical Aide, Office of the Commissioner, Bureau of the Public Debt
For outstanding ability in providing excellent service to
the public through direct and responsive communication.
ROBERT K. ScROGGS, Personnel Management Specialist, Personnel
Administration Staff, Office of the Commissioner, Bureau of
Accounts
For outstanding leadership in furthering the Bureau's
programs for the disadvantaged and the handicapped.
JAMES H. STOVER, Regional Commissioner of Customs, Miami,

Fla.
For continued excellence in furthering cost reduction
and management improvement as evidenced by exceptionally
high regional savings and for vigorous support of Presidential emphasis programs, such as employment of Neighborhood Youth Corps members.
GERALDINE T. TOLKER, Chief, Training and Taxpayer Education
Branch, Administrative Division, Internal Revenue Service,
Baltimore, Md.
For significant contributions to improved communication
and service to the public through extensive involvement
and training leadership in the community.

17

BERNICE P. WILDBNBORG, Securities Examiner, ExaminerReviewer, Division of Loans and Currency, Bureau of the Public
Debt, Chicago, Ill.
For excellence in improving communications and services
to the public by her effectiveness in the preparation of corresponden.ce and the outstanding quality of her writing.
CLAUDE M. DELLINGER, Jr., Foreman of Plate Printers, Plate
Printing Division
JAMES G. ALLs, Machinist, Construction and Maintenance
Division
LEONARD E. BUCKLEY, Designer, Office of Engraving Bureau of
Engraving and Printing,
For a note~·orthy contribution in making available to the
public a beautiful and inspiring patriotic print-"The U.S.
Flag and Allegiance."
MANAGEMENT ANALYSIS DIVISION, Office of Management and
Organization, Office of the Secretary
For exceptional contributions to improving the effectiveness
of Treasury operations. Recipient of Presidential Management Improvement Certificate.
BL'REAU EMPLOYEE COMMITTEES FOR EQUAL EMPLOYMENT OPPORTUNITY, Bureau of Engraving and Printing
For outstanding effectiveness in furthering the objectives of
the Equal Employment Opportunity Program in the Bureau
of Engraving and Printing.

18

THE SECRETARY'S ANNUAL AWARDS
The Secretary of the Treasury presents honorary awards tach year to
recognize hureaus fo,. outstanding performance in a numher of areas.

SECRETARY'S AWARD FOR INCENTIVE AWARDS
PROGRAM (PERFORMANCE)
Bureau of Engraving and Printing
For the best overall results in effectively recognizing employee performance which significantly exceeded normal job
requirements. Over 20 percent of all personnel of the Bureau
of Engraving and Printing received cash awards or high
quality pay increases and tangible benefits from services
recognized averaged over $3,000 per 100 employees.

SECRETARY'S AWARD FOR INCENTIVE AWARDS
PROGRAM (SUGGESTIONS)
Bureau oj Customs
For the best overall results in the suggestion program during
fiscal year 1970. For each 100 employees on its rolls, the
Bureau had over three adopted suggestions and estimated
savings of $2,433.

SECRETARY'S AWARD FOR SIGNIFICANT ACCOMPLISHMENT IN THE COST REDUCTION
AND MANAGEMENT IMPROVEMENT PROGRAM
Bureau of Accounts
For maintaining a consistently active operations review
program during fiscal year 1970 which produced refinements
in procedures resulting in increased individual employee
productivity and significant innovations in equipment
management. Management improvement savings more than
doubled the amount of the Bureau's annual goal.

19

SECRETARY'S AWARDS FOR SAFETY
Bureau oj Engravitlg and Printing
For showing the greatest reduction in the frequency of disabling in juries over the preceding 3-year average for bureaus
with over 1,800 personnel. The Bureau reduced its rate to
6.3 per million man-hours worked, a reduction of 20.3 percent of the previous 3-year average.

Bureau oj the Mint
For showing the greatest reduction in the frequency of disabling in juries over the preceding 3-year average for bureaus
with under.l,800 personnel. The Bureau reduced its rate to
7.0 injuries per million man-hours worked, a reduction of
32 percent of the previous 3-year average.

bzternal Revenue Service
A Special Safety Award presented for sustained outstanding
performance in its Accident Prevention Program for Employees and the Public.

1U

CAREER SERVICE RECOGNITION
Recognition by the Secretary of employees in the Washington, D.C.,
tlrea who attained 50, 45, or 40 years of Federal service during the
past year.

50 Years of Federal Service
None

4?

Years of Federal Service

Ernest L. Elsberry (retired)
Anne M. Mosher

Internal Revenue Service
Internal Revenue Service

40 Years of Federal Service
Thelma A. Cressy
Ralph J. Hayes
Elmer W. Honaback
Mary Little
Irene McAllister (retired)
Florence H. Penland
Herbert A. Sassi (retired)
Jerome E. Schleeper (retired,)
Edgar D. Shanklin

Internal Revenue Service
Office of the Secretary
Internal Revenue Service
Internal Revenue Service
Internal Revenue Service
Bureau of Engraving & Printing
Internal Revenue Service
Office of the Secretary
Internal Revenue Service

21

MERITORIOUS SERVICE AWARD
The Meritorious Service Award is next to the highest award which may
be recommended for presentation by the Secretary. It is confemd on
employees u'ho render meritorious service within or beyond their required
duties.
STANLEY D. ALLEN, Chief, Management Analysis Division,
Office of Organization and Management, Office of the Secretary
For substantial contributions to the increased effectiveness of
management in the Department and for consistently carrying
out difficult and delicate assignments with skill, diplomacy,
and dispatch.
BERNARD J. BEARY, Deputy Director of Personnel, Office of the
Secretary
For noteworthy contributions to the effectiveness of the
personnel management program of the Department, especially
for his leadership in the areas of labor-management relations,
occupational health, and education and counseling for
retirement.
fRANCIS M. BUSCHER (Retired), Formerly Chief, Management
Services Branch, Division of Disbursement, Bureau of Accounts
For notable contributions to the development and improvement of Treasury's central disbursing operations.
KATI![RINE CLEARY, Staff Assistant, Retired Securities Division,
Bureau of the Public Debt
For highly important contributions to the Bureau of the
Public Debt and the Department in the field of servicing
the public debt.
77

GARRETT DEMon (Retired), Formerly Deputy Assistant Commissioner (Data Processing)' Internal Revenue Service
For significant contributions to the development and installation of the automatic data processing system in the Internal
Revenue Service and an unusual ability to resolve complex
technical and managerial problems.
ScHUBERT J. DYCHE, Financial Attache in Tokyo, Office of the
Assistant Secretary for International Affairs
For exceptional contributions to U.S. policy toward Japan
through a deep understanding of the country and its people
and for unusual foresight and skill in preparing economic
studies.
\ SEBASTIAN FAMA, Di'rector, Division of Government Financial
Operations, Bureau of Accounts
For outstanding managerial achievements in maintaining the
ongoing system of central accounts and financial reports
coordinated with the special efforts needed to convert the
system, Government-wide, to the accrual basis recommended
by the President's Commission on Budget Concepts.
MARIUS FARIOLETTI, (Retired), Formerly Director, Planning and
Analysis Division, Internal Revenue Service
For outstanding contributions toward improving the efficiency and effectiveness of the tax system.

L. FIAL, Market Director, Savings Bonds Division, New
York, N.Y.

NATHAN

For outstanding performance in three vital areas of the Savings Bonds Program-payroll savings, relationships with the
banking community, and the effective recruitment of
volunteers.
Jon:-.1 H. GROSVENOR, Jr., (Retired), Formerly Assistant Chief
Counse! and Associate Chief Counsel, Bureau of the Public
Dc};!
For sound legal advice and skillful administrative ability
which contributed substantially to the orderly and efficient
conduct of public debt financing.

23

RICHARD M. HAHN, Associate Chief Counsel (Litigation), Office
of the Chief Counsel, Internal Revenue Service
For exceptional legal and executive ability and unusual
devotion to duty while serving as Acting Chief Counsel for
an extended period of time during the year 1969.
DANIEL I. HALPERIN, Formerly Deputy Tax Legislative Counsel,
Office of the Secretary
For outstanding service in assisting in the development of
comprehensive tax reform pro{Xlsals which in large part were
incotfX>rated into the Tax Reform Act of 1969.
LEONARD LEHMAN, Deputy Chief Counsel, Bureau of Customs
For exceptional skill and professional competence in carrying
out the manifold res{Xlnsibilities of his {Xlsition and in
particular the legislative program of the Bureau of Customs.
CHARLOTTE T. LLOYD, Assistant General Counsel, Office of the
Secretary
For sustained distinguished accomplishments, exceptional
legal ability and superior craftsmanship, which constitute
an outstanding example of the qualifications of a government attorney.
Secretary to the Assistant Secretary for Administration, Office of the Secretary

FRAr-.:CES MIl.HR,

Fur loyal and exemplary service in her present position and in
her previous assignments to a number of officials at the Assistant Secretary level of both political Administrations.
F. NUGENT, Deputy Superintendent, New York Assay
Olliee, Bureau of the Mint, New York, N.Y.

JOSEPH

For superior technical skill and administrative ability
demonstrated throughout 40 years of service at the New York
Assay Office.

~.!

LORIN E. SIBLEY, State Director, Savings Bonds Division, Topeka,
Kans.
For outstanding contributions to the Savings Bonds Program,
and especially for sustaining a highly motivated volunteer
organization which has produced an enviable record of payroll savings accomplishment.
HAROLD M. STEPHENSON (Retired), Formerly Chief of the
Division of Loans and Currency, Bureau of the Public Debt
For effective leadership resulting in a uniformly high level
of service to the investing public and for achieving substantial
savings in both money and personnel through his management improvement efforts.
HARRY O. SWANSON (Retired), Formerly Internal Revenue
Service Representative, Ottawa, Canada
For outstanding dedication in the supervision, direction, and
control of all phases of the operations of the Service in
Canada.
MARY F. TRAPNELL (Retired), Formerly Staff Assistant to the
Director, Collection Division, Internal Revenue Service
For major contributions to the fair and effective administration of the Federal tax system.

25

EXCEPTIONAL SERVICE AWARD
This is the highest fJwfJrd which mfJY be recommended for presentation
by the SecretfJry. The award is conferred OIl employees who distinguish
themselves by exceptional service within or beyond their required duties.
JAMES A. CONLON, Director, Bureau of Engraving and Printing
For his dy?amic management of the Bureau of Engraving
and Printing and his 28-year career of distinguished service
to the Department of the Treasury.
ETHEL HODEL (Retired), Formerly Special Assistant to the Fiscal
Assistant Secretary
For her exceptional performance over a period of many
years in an influential role in the administration of the Department's financing operations.
PAUL McDONALD (Retired), Formerly Director of the Office
of Administrative Services, Office of the Secretary
For outstanding leadership for over two decades of the Office
of Administrative Services and for his contributions in
several special programs of importance to the Treasury
and ~he Government.
HAROLD T. SWARTZ, Assistant
Internal Revenue Service.

Commissioner

(Technical),

For exceptionally outstanding contributions to the effective
and effIcient administration of our self-assessment system of
taxatlor..

26

ALEXANDER HA!\-1]LTON AWARD
This award is conferred by the Secretary to individuals personally designated by him to be so ISonored. It is generally restricted to the highest
officials of the Department who have worked closely with the Secretary
for a substantial period of t;me and who have demonJ·trated outstanding
leadership during that period.
ARTEMUS E. WEATHERBEE, Assistant Secretary for Administration
For distinguished service under five successive Secretaries of
the Treasury. An administrator of unusual competence, his
accomplishments and record of advancement provide an
example to those young men and women who aspire to serve
their government in a business management career.

27

Department 01 the TRfASURY
~SH'NGTON, D.C. 20220

TElEPHONE W04-2041

L\
FOR IMMEDIATE RELEASE
TREASURY

ru~NOUNCES

October 9, 1970

THREE WITHHOLDING OF APPRAISEMENT ACTIONS

Assistant Secretary of the Treasury Eugene T. Rossides
announced today that the Bureau of Customs is instructing
its field officers to withhold appraisement of the following items pending a determination as to whether this merchandise is being sold at less than fair value within the
meaning of the Antidumping Act, 1921, as amended (19 U.S.C.
160 et seg.): ceramic wall tile from the United Kingdom;'
and two cases from Japan, previously stated as pending in
Assistant Secretary Rossides· August 28th press conference:
1) sheet glass; 2) plate and float glass.
Under the Antidumping Act the Secretary of the Treasury
is required to withhold appraisement v-lhenever he has reasonable cause to believe or suspect that sales at less than
fair value may be taking place.
Final Treasurv JGcisions in these investigations will
be made withi.~; ·threE: months. Appraisement will be withheld
for a period not to exceed six months from the date of
pUblication of the withholding of appraisement notices in
the Federal Register.
Under the Antidumping Act, a determination of sales
in the United States at less than fair value requires that
the case be referred to the Tariff Commission, which would
consider whether American industry was being injured. Both
dumping margins and injury must be shown to justify a
finding of dumping under the law.
During the period January 1968 through May 1970,
imports of ceramic tile from the United Kingdom totaled
approximately $10,900 1 000. 88 percent of this amount
consisted of wall tile, and the remainder floor tile.
From January 1969 through April 1970, sheet glass valued
at approximately $5,200,000 was exported to the United States
from Japan. Exports of plate and float glass from Jap~n to
the United States totaled approximately $9,250,000 dur1ng 1969.

K-SOB
000

Deportment 01 the TRfASURY
fUNSTON. D.C. 20220

TELEPHONE W04-2041

FOR RELEASE ON DELIVERY

REMARKS OF THE HONORABLE EDWIN S. COHEN
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
CONFERENCE ON
FOREIGN DIRECT INVESTMENT IN THE UNITED STATES
INSTITu1E FOR INTERNATIONAL AND FOREIGN TRADE LAW
GEORGETOWN UNIVERSITY
AT THE BROOKINGS INSTITUTION
WASHINGTON, D. C.
OCTOBER 13,1970,2:30 P.M. (EDT)
Tax Factors in Foreign Direct Investment in
the United States
The United States tax system provides, I believe, a
fair and reasonable climate in which foreign direct

inve8t~

ment can thrive in our country on a basis consistent with
the taxation of our domestically owned enterprises.
The Treasury welcomes foreign direct investment in
the United States.

In the development of tax policy, as

reflected in legislation, regulation and administrative
application, we are alert to avoid placing any undue tax
burdens on such investment.

Indeed, we have been active

in eliminating rules which inadvertently may have acted as
a deterrent.
The Foreign Investors Tax Act of 1966 changed a
number of rules which foreign investors might have found
troublesome.

The principal change was the abandonment of

... 2 -

the so-called "force of attraction" doctrine.

Under the

•

"force of attraction" doctrine, all income, including
capital gains, from sources within the United States derived
by a foreign taxpayer conducting business in the United
States, or with a permanent establishment in the United
States, was in effect attributed to that business even
though it was not in fact connected with the business
operations here.

The investment income was consequently

taxed as ordinary business income at the graduated individual
rates or at the ordinary corporate rates or taxed at the
special rates applicable to capital gains.

The effect of

this rule was to deny the benefits of the statutory
exemption for capital gains, the fixed withholding rates
established by statute or treaty, or treaty exemptions for
such items as interest and royalties.
The Draft Income Tax Convention, published in 1963
by the Fiscal Committee of the Organization for Economic
Cooperation and Development, as a model for tax treaties
between its members, adopted the position that different
types of income should be taxed on the basis of their actual
relationship to the business activities of a foreign person
in the host country.

It provided that the appropriate tax

treatment should be accorded to each category of income

- 3 -

without regard to the fact that the taxpayer might
simultaneously have

other types of income within the

host country.
Soon afterwards, a Presidential Task Force in the

.

United States recommended that the tax laws of the
United States be changed to adopt the "effectively connected" concept along the lines of the OECD Draft.

That

recommendation was implemented in the Foreign Investors Tax
Act of 1966 with respect to dividends, interest, royalties,
other "periodical income" and capital gains and has been
fully reflected in our income tax treaties and treaty
amendments negotiated since that time.
Our present rules for the taxation of foreign direct
investment income are basically simple.

In the typical case

of a U. S. corporation, operating in the United States,
which is owned by a foreign corporation or foreign individuals,
the rules generally applicable can be summarized in a few
paragraphs.

I hope that this summary will prove useful

in preliminary planning for those beyond our shores who are
considering direct investment in the united States.
1.

Corporate Tax Rate.

The Federal corporate tax

rate on the taxable income of the corporation is 48 percent
on income in excess of $25,000.

The Internal Revenue Code

contains a surtax exemption under which the first $25,000

- 4 -

of income is subject to tax at 22 percent.

When more than

one corporation is owned by the same interests, only one
•

surtax exemption will be available.