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-._.__-. ..^_»--»*•»..•

11 >i JBp1——'

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iiiWiiimi • ' w • » | ^ j r

PRESS RELEASES^

B-374
TO
B-547

JGUST 1, 1977
THROUGH
NOVEMBER 10, 197 7

OBRAR?
FEB? 1979
ROOM 5004
TREASURY DEPARTMBfl

FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
AUGUST 1, 197 7
STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY FOR DOMESTIC FINANCE
BEFORE THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

Mr. Chairman and Members of the Committee:
I am pleased to be here today to assist you in your
consideration of the public debt limit. As you know,
on September 30, 1977, the present temporary debt limit
of $700 billion (enacted on June 30, 1976) will expire
and the debt limit will revert to the permanent ceiling
of $400 billion. Legislative action by September 30 will
be necessary, therefore,to permit the Treasury to borrow
to refund securities maturing after September 30 and to
raise new cash to finance the anticipated deficit in the
fiscal year 1978.
In addition, we are requesting an increase in the
$17 billion limit (also enacted June 30, 1976) on the
amount of bonds which we may issue without regard to the
4-1/4 percent interest rate ceiling on Treasury bond issues.
Finally, we are requesting authority to permit the
Secretary of the Treasury, with the approval of the President,
B-374

~~ n Q Savings Bonds if that
to change the interest rate on U.S. Saving
*-.v nnmnses of assuring a fair rate
becomes necessary for purposes
of return to savings bonds holders.
Debt Limit
Turning first to the debt limit, our estimates of the
amounts of the debt subject to limit at the end of each
month through the fiscal year 1978 are shown in the attached
table. The table projects a peak debt subject to limit of
$780 billion at September 30, 1978, which assumes a
$12 billion cash balance. The usual $3 billion margin for
contingencies would raise this amount to $783 billion. We
are thus requesting an increase of $83 billion from the
present temporary limit of $700 billion.
This $83 billion increase reflects the Administration's
current estimates of a fiscal 1978 unified budget deficit
of $61.5 billion, a trust fund surplus of $13.1 billion,
and a net financing requirement for off-budget entities of
$8.5 billion. The trust fund surplus must be added to the
debt requirement because the surplus is invested in Treasury
securities which are subject to the debt limit.
The debt of off-budget entities which affect the
debt limit consists largely of obligations which are issued,
sold or guaranteed by Federal agencies and financed through
the Federal Financing Bank. Since the Federal Financing

Bank borrows from the Treasury, the Treasury is required
to increase its borrowing in the market by a corresponding
amount. This, of course, adds to the debt subject to
limit.
As indicated in the table, it is assumed that the
Treasury's operating cash balance will be at $12 billion
on both September 30, 1977, and September 30, 1978. On
this basis, no net increase in the debt will be required
to finance the cash balance in the fiscal year 1978. We
believe that our $12 billion projection is reasonable
in light of current needs and the actual balances maintained
by the Treasury in recent years. Over the past decade,
the Treasury's cash balances at the end of each fiscal year
have been as follows:
1968
1969
1970
1971
1972
1973
1974
1975
1976
T.Q.
1977
1978

$

5.3 billion
5.9
8.0
8.8
10.1
12.6
9.2
7.6
14.8
17.4
12.0 est.
12.0 est.

The trend to larger cash balances in recent years
reflects the overall growth in Government receipts and
expenditures.

Also, there is a heavy drain in cash from

Government expenditures in the first half of each month,
and there is a sharp increase in cash from tax receipts
in the second half of the tax payment months.

Thus, large

month-end cash balances, which must be financed from
additional borrowing, are essential to the efficient
management of the Government's finances.
Our requested increase in the debt subject to limit
is slightly lower than the $784.9 billion agreed to in
the House-Senate Conference on May 11, 1977, on the First
Concurrent Resolution on the budget for fiscal 1978. This
means that the targeted amount of debt subject to limit in
the May Concurrent Resolution will be adequate to meet the
Administration's estimated requirements of $783 billion.
Bond Authority
I would like to turn now to our request for an increase
in the Treasury's authority to issue long-term securities in
the market with regard to the 4-1/4 percent statutory
ceiling on the rate of interest which may be paid on Treasury
bond issues.

We are requesting that the Treasury's authority

to issue bonds (securities with maturities over 10 years)
be increased by $io billion from the current ceiling of
$17 billion to $27 billion.

5
As you know, the 4-1/4 percent ceiling predates
World War II but did not become a serious obstacle
to Treasury issues of new bonds until the mid-1960's.
At that time, market rates of interest rose above
4-1/4 percent, and the Treasury was precluded from issuing
new bonds.
The Congress first granted relief from the 4-1/4
percent ceiling in 1967 when it redefined, from 5 to 7 years,
the maximum maturity of Treasury notes. Since Treasury
note issues are not subject to the 4-1/4 percent ceiling on
bonds, this permitted the Treasury to issue securities in
the 5 to 7 year maturity area without regard to the interest
rate ceiling. Then, in the debt limit act of March 15, 1976,
the maximum maturity on Treasury notes was increased from
7 to 10 years. Today, therefore, the 4-1/4 percent ceiling
now applies only to Treasury issues with maturities in excess
of 10 years. Concerning amounts exempted from this ceiling,
in 1971 Congress authorized the Treasury to issue up to
$10 billion of bonds without regard to it. This limit then
was increased to the current level of $17 billion in the
debt limit act of June 30, 1976. As a result of these
actions by the Congress, the Treasury has been able to
achieve a better balance in the maturity structure of
the debt and has re-established the market for long-term
Treasury securities.

Today, however, Treasury has nearly exhausted the
present $17 billion authority. Including the $1 billion
new bond issue announced on July 27, the amount of
remaining authority to issue bonds is $1 billion. Since
the last increase in this limit on June 30, 1976, the
Treasury has offered $6.3 billion of new bonds in the
market. This includes $2.5 billion issued in the current
quarter. While the timing and amounts of future bond
issues will depend on current market conditions, a
$10 billion increase in the bond authority would permit
the Treasury to continue this recent pattern of bond issues
throughout the fiscal year 1978. We believe that such
flexibility is essential to efficient management of the
public debt.
Savings Bonds
In recent years, Treasury recommended on several
occasions that Congress repeal the 6 percent statutory
ceiling on the rate of interest that the Treasury may pay
on U.S. Savings Bonds. The 6 percent ceiling rate has
been in effect since June 1, 1970. Prior to 1970 the
ceiling has been increased many times. As market rates of
interest rose, it became clear that an increase in the
savings bond interest rate was necessary in order to provide
holders of savings bonds with a fair rate of return.

7
While we do not feel that an increase in the interest
rate on savings bonds is necessary at this time, we are
concerned that the present process of requiring legislation
for each increase in the rate does not provide sufficient
flexibility to adjust the rate in response to changing market
conditions. The delays encountered in the legislative
process could result in inequities to savings bond purchasers
and holders as market interest rates rise on other competing
forms of savings. Also, the Treasury has come to rely on

the savings bond program as an important and relatively stable
source of long-term funds, and we are concerned that
participants in the payroll savings plan and other savings
bond purchasers might drop out of the program if the interest
rate were not maintained at a level reasonably competitive
with other comparable forms of savings.
Any increase in the savings bond interest rate by the
Treasury would continue to be subject to the provision in
existing law which requires approval of the President. Also,

the Treasury would, of course, give very careful consideration
to the effect of any increase in the savings bond interest
rate on the flow of savings to banks and thrift institutions.
To sum up, we are requesting an increase in the debt
limit to $783 billion through September 30, 1978, and an
increase in the bond authority to $27 billion, and a repeal
of the interest rate ceiling on savings bonds. I will be

happy to try to answer any questions regarding these requests.
Thank you.
oOo

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1977
Based on: Budget Receipts of $358 Billion,
Budget Outlays of $404 Billion,
Unified Budget Deficit of $46 Billion,
Off-Budget Outlays of $10 Billion
($ Billions)
Operating
Cash
Balance
1976
September 30

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

Actual$17.4

$635.8

October 29

12.0

638.7

November 30

8.7

645.8

December 31

11.7

654.7

January 31

12.7

655.0

February 28

14.6

664.5

March 31

9.0

670.3

April 29

17.8

672.2

May 31

7.0

673.2

June 30

16.3

675.6

July 27

9.8

673.0

1977

-EstimatedAugust 31

12.0 690

$693

September 30

12.0 696

699

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1978
Based on: Budget Receipts of $401 Billion,
Budget Outlays of $463 Billion,
Unified Budget Deficit of $62 Billion,
Off-Budget Outlays of $9 Billion
( $ Billions)
Operati.ng
Cash
Balanc:e
1977
September 30

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-Es1:imated$12

$696

$699

October 31

12

708

711

November 30

12

716

719

December 30

12

721

724

January 31

12

720

723

February 28

12

733

736

March 31

12

749

752

April 17

12

757

760

April 28

12

745

748

May 31

12

763

766

June 15

12

770

773

June 30

12

758

761

July 31

12

764

767

August 31

12

775

778

September 29

12

780

783

1978

department of theTREASURY
fASHIM6TOMrD.C.2t220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

August 1, 1977

RESULTS OF TREASURY1S WEEKLY BILL AUCTIONS
Tenders for $ 2,400 million of 13-week Treasury bills and for $3,601 million
of 26-week Treasury bills, both series to be issued on August 4, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-we ek bills
maturinLg November 3, 1977
Price

High
Low
Average

Discount
Rate

98.638
98.625
98.629

5.388%
5.440%
5.424%

:
26-week bills
. maturing February 2, 1978

Investment [
Rate 1/ : Price
5.54%
5.59%
5.58%

Discount
Rate
5.671%
5.697%
5.691%

, 97.133
: 97.120
: 97.123

Investment
Rate 1/
5.92%
5.95%
5.94%

Tenders at the low price for the 13-week bills were allotted 23%.
Tenders at the low price for the 26-week bills were allotted 89%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

$
51,090,000
Boston
3,491,575,000
New York
36,370,000
Philadelphia
44,305,000
Cleveland
27,780,000
Richmond
24,075,000
Atlanta
166,230,000
Chicago
35,640,000
St. Louis
26,845,000
Minneapolis
39,630,000
Kansas City
112,790,000
Dallas
247,805,000
San Francisco

Accepted
$
21,780,000
1,948,800,000
34,755,000
34,305,000*
26,780,000
21,055,000
89,380,000
17,430,000
6,845,000
32,685,000
112,790,000
53,455,000

Received

Accepted

$

58,755,000
5,688,480,000
26,845,000
29,495,000
52,410,000
19,355,000
528,970,000
23,700,000
35,425,000
13,930,000
9,000,000
574,365,000

$
3,755,000
3,332,380,000
6,345,000
9,495,000
16,410,000
17,715,000
168,220,000
9,500,000
3,425,000
13,340,000
6,590,000
13,475,000

Treasury

75,000

75,000

150,000

150,000

TOTALS

$4,304,210,000

$2,400,135,000 a/ $7,060,880,000

$3,600,800,000

a/Includes $ 295,425,000 noncompetitive tenders from the public.
b/lncludes $129 910 000 noncompetitive tenders from the public.
1/Equivalent coupon-issue yield.

B-375

FOR IMMEDIATE RELEASE

August 2, 1977

SIMULTANEOUS WITHHOLDING OF APPRAISEMENT AND
DETERMINATION OF SALES AT LESS THAN FAIR VALUE
ON IMPORTS OF INEDIBLE GELATIN AND ANIMAL GLUE
FROM YUGOSLAVIA, WEST GERMANY,
SWEDEN AND THE NETHERLANDS
The Treasury Department announced today a three-month
withholding of appraisement and simultaneous determination
of sales at less than fair value under the Antidumping Act
with respect to inedible gelatin and animal glue from
Yugoslavia, West Germany, Sweden and the Netherlands.
Sales at less than fair value generally occur when the price
of merchandise sold for export to the United States is less
than the price of comparable merchandise sold in the home
market. Interested persons were offered the opportunity to
present oral and written views prior to these determinations.
These cases, under the Antidumping Act, have been referred to the U.S. International Trade Commission, which
must determine not later than October 29, 1977 whether a
U.S. industry is being, or is likely to be, injured by the
imports. Dumping results only when both sales at less than
fair value and injury have been determined.
If the Commission finds injury, a "Finding of Dumping"
will be issued and dumping duties will be assessed on an
entry-by-entry basis.
Imports of this merchandise during the period January
through September 19 76 were approximately as follows: the
Netherlands, $964,000; Sweden, $506,000; Yugoslavia,
$590,000; and West Germany, $655,000.
Notice of these actions will appear in the Federal
Register of August 3, 1977.
* * *

B-376

FOR RELEASE AT 4:00 P.M.

August 2, 1977

TREASURY'S WEEKLY BILL OFFERING
Tne Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,900 million, to be issued August 11, 1977, as
follows:
91-aay Dills (to maturity date) for approximately $2,400
million, representing an additional amount of bills dated
May 12, 1977, and to mature November 10, 1977 (CUSIP No.
^127_)3 L2 0 ) , originally issued in the amount of $3,303
million, tne adaitional and original bills to be freely
interchangeable.
lb2-oay bills for approximately $3,500 million to be
dated august 11, 1977, and to mature Feoruary 9, 1978 (CUSIP
No. 91z7b>3 N6 9 ) . The 182-day bills, with a limited exception,
will be available in oook-entry form only.
Botn series of Dills will be issued for cash and in
excnange for Treasury Dills maturing August 11, 1977,
outstanding in the amount of $5,903 million, of which
Government accounts and Federal Reserve Banks, for themselves
and as agents of foreign and international monetary
adthorities, presently hold $3,233 million. These accounts may
excnange bills they hold for tne bills now being offered at the
weignted average prices of accepted competitive tenders.
The bills will be issued on a discount basis under
competitive ana noncompetitive biading, and at maturity
tneir par amount will be payable without interest. 91-day
bills will be issued in nearer form in denominations of
$10,0U0, ^>15,U00, ^50,000, $100,000, $500,000 and _?1,000,000
(maturity value), as well as in book-entry form to
designated bidders. Bills in book-entry form will be issued
in a ninimum amount of ^10,000 and in any higher $5,000
multiple. Except for 182-day bills in the $100,000
denomination, which will oe available in definitive form
only to investors who are able to show that they are
required by law or regulation to hold securities in physical
form, the 182-day bills will be issued entirely in
book-entry form on the records either of the Federal Reserve
Banks and Branches, or of tne Department of the Treasury.
B-377

-2Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, August 8, 1977.
Form PD 4632-2 should be used to
submit tenders for bills to be maintained OP the book-entry
records of the Department of the Treasury.
Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report aaily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the 182-day bills
applied for must accompany all tenders suomitted for such
bills to be maintained on the book-entry recoras of the
Department of the Treasury. A cash adjustment will be made
on all accepted tenders for the difference between the par
payment submitted and the actual issue price as determined
in the auction.
No deposit need accompany tenders from incorporated
banks and trust companies and from responsible and
recognized dealers in investment securities for the 91-day
kills and 182-day bills to be maintained on the book-entry
records of Federal Reserve Banks ana Branches, or for
182-day bills issued in bearer form, where authorized. A
deposit of 2 percent of the par amount of the bills applied
for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated
bank or trust company accompanies the tenders.
Trp^nrS1^ f™ouncoment will be made by the Department of the
rnnnL r
the amount and price range of accepted bids.
reiec nn^nf ^ d e r % W 1 i 1 b e a d v i s e d ° f t h * acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all

shall"; f?n:i0l%°rin,Part'

and th

" Secretary's action

t0

these

tenders for f ^ h ?« ^°
reservations! noncompetitive
c
tenders for each issue for $500,000 or less without stared ori
tor til K^^cUve is:Ls!ClmalS) °f °CC°Pted competitive bids

-3Settlement for accepted tenders for the 91-day and 182-day
bills to be maintained on the book-entry records of Federal Reserve
Banks and Branches, and 182-day bills issued in bearer form must be
made or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on August 11, 1977,
in cash or other
immediately available funds or in Treasury bills maturing
August 11, 1977.
Cash adjustments will be made for differences
between the par value of the maturing bills accepted in exchange and
the issue price of the new bills.
Unaer Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

FOR IMMEDIATE RELEASE

August 2, 1977

RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $3,011 million of
$7,929 million of tenders received from the public for the 3-year notes,
Series H-1980, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.78% 1/
Highest yield
Average yield

6.85%
6.84%

The interest rate on the notes will be 6-3/4% . At the 6-3/4% rate,
the above yields result in the following prices:
Low-yield price 99.920
High-yield price
Average-yield price

99.733
99.760

The $3,011 million of accepted tenders includes $684 million of
noncompetitive tenders and $2,200 million of competitive tenders
(including 40% of the amount of notes bid for at the high yield) from
private investors. It also includes $127 million of tenders at the
average price from Federal Reserve Banks as agents for foreign and
international monetary authorities in exchange for maturing securities.
In addition, $J,083 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 15, 1977, ($425 million)
and from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash ($658 million).
1/ Excepting 4 tenders totaling $345,000

B-378

<l>

a™

tederal financing bank

</> CM

a> o

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

Q_ *»

August 2, 1977

SUMMARY OF FEDERAL FINANCING BANK HOLDINGS
June 1-June 30, 1977
Federal Financing Bank activity for the month of June,
1977, was announced as follows by Roland H. Cook, Secretary:
On June 1, the Export-Import Bank issued Note #12 to
the Bank in the amount of $146.2 million. The note matures
on September 1, 1986 and bears interest at a rate of 7.216%
on a quarterly basis.
On June 1, the FFB advanced $144,434 to the Guam Power
Authority at a rate of 7.11%. On June 8, the Bank
advanced $551,576.24 to the Guam Power Authority at a rate
The note matures on December 31, 1978 and is
of
10
guaranteed by the Department of the Interior.
The National Railroad Passenger Corporation (Amtrak)
made the following drawings from the Bank under notes guaranteed
by the Dept. of Transportation:
Interest
Note #
Amount
Maturity
Rate
Date
5 280%
8/01/77
$ 5,000,000
13
6/1
5 277%
8/01/77
5,000,000
13
6/6
5 277%
6/13/77
5,000,000
11
6/6
5 248%
9/12/77
5,000,000
11
6/13
5 280%
9/12/77
35,917,699
11
6/13
5 236%
9/12/77
10,000,000
11
6/17
5 207%
9/12/77
2,500,000
11
6/24
5 239%
9/12/77
1,000,000
11
6/30
The U.S. Railway Association borrowed the following
amounts against Note #8:
Interest
Maturity
Rate
Amount
Date
6.328%
4/30/79
$2,945,000
6/1
6.317%
4/30/79
178,000
6/10
6.219%
4/30/79
5,637,000
6/29
ranteed by the Department of Transportation
The note is gua
B-379

i-H

2 The Bank purchased notes in the following amounts from
ilitv comp
companies guaranteed by the Rural Electrification
utility
Administration:
Interest
Maturity
Rate
Amount
Date Borrower

6/2
6/2

Oglethorpe Elect.
$ 1,110,000
Membership
8,000,000
United Pwr. Assn.
Cooperative Pwr. Assn. 12,000,000
Sierra Telephone Co.
1,271,000

6/3

Dairyland Pwr. Coop. 10,000,000 12/31/11 7.797%

6/1
6/1

Colorado-Ute Electric
729,000
Assn.
6/8
Colorado-Ute Electric
3,600,000
Assn.
6/10 Tri-State Generation 5
Transmission Assn.
13,818,000
6/13 Arkansas Elect. Corp. 46,525,762
6/13 Allied Telephone Co.
of Arkansas
500,364
6/8

6/15

North Florida Telephone
Co.
4,000,000

12/31/11
12/31/11

7.799%
7.799%

12/31/11
6/02/79

7.812%
6.315%

6/08/84

6.295%

12/31/11

7.766%

12/31/11

7.762%

12/31/11

7.729%

12/31/11

7.729%

12/31/11

7.672%

6/16 Cooperative Pwr. Coop. 7,000,000 12/31/11 7.677%
6/17 Big River Elect. Corp. 2,359,000 12/31/11 7.698%
6/20

S. Mississippi Elect.
Power

2,253,000

6/25/79

6.236%

6/22
6/22

Big River Elect. Corp.
155,000
East Kentucky Pwr.Coop. 8,665,000

12/31/11
12/31/11

7.712%
7.712%

6/24
6/24
6/24
6/27
6/27
6/27
6/28
b/28
6/30
6/30
6/30

Commonwealth Tele. Co. 13,052,000
Big River Elect. Corp. 3,200,000
Gulf Telephone Co.
64,000,000
Arizona Elect. Pwr.
9,657,000
Hillsborough § Montgomery
Telephone Co.
249,000
Northwest Telephone Co. 2,628,000
S. Mississippi Elect.
1,885,000
3,300,000
Tri-State
Generation
§
Alabama Elect. Coop.
13,000,000
Transmission
Assn.
Dairyland Pwr. Coop.
5,000,000
Southern 111. Pwr.Coop. 3,890,000

12/31/11
12/31/11
12/31/11
12/31/11
12/31/11
12/31/11
7/02/79
12/31/11
12/31/11
12/31/11
6/30/79

7.653%
7.697%
7.697%
7.653%
7.653%
7.653%
6.227%
7.652%
7.635%
7.635%
6.177%

Interest payments on the above REA borrowings are made
on a quarterly basis.

- 3The Federal Financing Bank made the following advances
to borrowers guaranteed by the Department of Defense;
Borrower

Date

Argentina

6/3
6/22
6/22
6/15
6/29
6/23

Brazil
China
Dom. Rep.
Ecuador

Honduras
Indonesia
Israel
Jordan
Korea
Liberia
Malaysia
Nicaragua

Paraguay
Philippines

Thailand

Tunisia
Turkey
Uruguay

6/27
6/7
6/13
6/17
6/24
6/7
6/23
6/30
6/7
6/24
6/3
6/15
6/17
6/16
6/16
6/3
6/14
6/16
6/23
6/7
6/30
6/3
6/8
6/29
6/30
6/1
6/1
6/15
6/17
6/30
6/30
6/6
6/20
6/15
6/30

Maturity

Interest
Rate

7,999.96
65, 980.00
82, 719.45
1,943, 408.95
373, 806.32
150, 000.00

4/30/83
6/30/83
4/30/83
6/30/83
6/30/83
12/31/82

6.836%
6.716%
6.695%
6.699%
6.663%
6.635%

89, 220.00
9, 442.50
126, 921.00
225, 901.00
88, 234.61
90, 566.00
4,669, 290.00
1,000, 000.00
22,023, 255.16
3,731, 110.47
2,198, 721.83
1,312, 977.80
110, 825.55
1,905, 068.81
408, 002.00
147,,563.76
90, 219.55
240, 000.00
212,,533.87
30,,508.03
20,,910.00
80 ,000.00
36 ,732.35
445 ,187.40
7,000 ,000.00
5 ,660.44
4,629 ,322.93
678 ,279.07
20 ,903.74
30 ,174.30
1,136 ,745.00
59 ,647.44
5,029 ,574.21
8,255 ,395.38
560 ,139.84

6/30/80
6/30/83
6/30/83
6/30/83
6/30/83
6/30/81
6/30/83
6/30/83
10/01/06
6/30/85
6/30/84
6/30/84
6/30/82
6/30/83
12/31/82
6/30/80
6/30/80
6/30/80
6/30/80
6/30/81
6/30/81
6/30/82
6/30/82
6/30/82
6/30/82
12/31/80
6/30/83
12/31/80
6/30/83
6/30/83
12/31/80
6/30/84
6/30/84
10/01/86
6/30/83

6.268%
6.841%
6.767%
6.729%
6.706%
6.574%
6.693%
6.660%
7.797%
6.912%
6.971%
6.776%
6.613%
6.714%
6.657%
6.411%
6.330%
6.305%
6.305%
6.566%
6.400%
6.728%
6.703%
6.519%
6.538%
6.497%
6.844%
6.337%
6.728%
6.661%
6.319%
6.949%
6.816%
6.993%
6.660%

Amount
$

- 4On June 3, the Bank advanced to the Chicago Rock Island
and Pacific Railroad $765,700 at a rate of 7.705%. The note,
under which the advance was made, matures on June Zl, l»»iChicago, Rock Island and Pacific Railroad borrowings from the
Bank are guaranteed by the Department of Transportation.
The FFB purchased participation certificates from the
General Services Administration in the following amounts:
Interest
Date

Series

Amount

6/6 M $5,281,869.00 7/31/03 7.876%
6/13
L
$2,177,324.34

Maturity
11/15/04

Rate—
7.840%

The Student Loan Marketing Association (SLMA) issued the fol
lowing notes to the FFB:
Date

Note #

6/7
6/14
6/21
6/28

83
84
85
86

Amount
$25,000,000
25,000,000
25,000,000
25,000,000

Maturity
9/06/77
9/13/77
9/20/77
9/27/77

Interest
Rate
5.309%
5.260%
5.272%
5.223%

SLMA notes are guaranteed by the Department of Health,
Education and Welfare.
The FFB purchased Series F notes in the following amounts
from the Department of Health, Education and Welfare (HEW):
Interest
Date

Amount

6/14 $2,304,000 7/01/01 7.665%
6/24
545,000

Maturity

Rate

7/01/01

7.668%

The notes were previously acquired by HEW from various
public agencies under the Medical Facilities Loan Program.
On June 14, the Department of Health, Education and Welfare
(HEW) drew the second installment of $3,645,553.13 on a block
of Health Maintenance Organization notes sold to the Bank on
April 29, 1977. The notes mature July 1, 1996, and were sold
to the Bank at a price to yield 7.53%. The notes are guaranteed
&
by HEW.
On June 20, the FFB advanced $11.2 million to the Western
Union Space Communications, Inc., at an annual rate of 7 41%.
The note, which is guaranteed by the National Aeronautics
and Space Administration, will mature on October 1 1989^

- 5The Tennessee Valley Authority issued short-term notes
to the Bank in the following amounts:
Interest
Date
Amount
Maturity
Rate
6/15 $ 55,000,000 9/30/77 5.343%
6/30
420,000,000
9/30/77
5.228%
On June 21, the Bank purchased $650,000,000 of Certificates
of Beneficial Ownership from the Farmers Home Administration:
In terest
]Rate

Amount Maturity

7 .03%
$150,000,000 6/21/83
7 .58%
175,000,000
6/21/87
7 .81%
275,000,000
6/21/92
7 .98%
50,000,000
6/21/97
On June 22, the Bank purchased debentures from Small
Business Investment Companies guaranteed by the Small Business
Administration. The debentures, totalling $4.75 million, bear
interest at the following rates:
Interest
Amount
Maturity
Rate
$ 500,000 6/1/80 6.525%
4,250,000
6/1/87
7.445%
Federal Financing Bank holdings on June 30, 1977, totalled
S50.8 billion.
# 0#

FOR IMMEDIATE RELEASE

August 3, 1977

RESULTS OF AUCTION OF 7-YEAR TREASURY NOTES

The Department of the Treasury has accepted $2,251 million of
$4,989 million of tenders received from the public for the 7-year
notes, Series B-1984, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 7.24% 1/
Highest yield
Average yield

7.27%
7.26%

The interest rate on the notes will be 7-1/4%. At the 7-1/4% rate,
the above yields result in the following prices.
Low-yield price 100.054
High-yield price
Average-yield price

99.892
99.946

The $2,251 million of accepted tenders includes $ 839 million of
noncompetitive tenders and $ 1,412 million of competitive tenders
(including 85% of the amount of notes bid for at the high yield) from
private investors.
In addition, $560 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 15, 1977, ($300 million)
and from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash ($260 million).

1/ Excepting 2 tenders totaling $276,000

B-380

MSHIN6TIM, O.C. 2tZM

^Bj£**,~ff

TELEFHOWC SSS-2M1

FOR IMMEDIATE RELEASE August 4, 1977
RESULTS OF AUCTION OF 29-1/2-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF AUGUST FINANCING
The Department of the Treasury has accepted $1,000 million of the
$2,140 million of tenders received from the public for the 29-1/2-year
7-5/8% Bonds of 2002-2007, auctioned today. The range of accepted
competitive bids was as follows:
Approximate Yield
To First Callable To
Price

Date

High - 99.10 1/ 7.71% 7.70%
Low
98.80
Average 98.94

Maturity

7.73%
7.72%

7.73%
7.72%

The $ 1,000 million of accepted tenders includes $131 million of
noncompetitive tenders and $ 869 million of competitive tenders
(including 91% of the amount of bonds bid for at the low price) from
private investors.
In addition, $199 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 15, 1977.
1/ Excepting 3 tenders totaling $2,025,000
SUMMARY RESULTS OF AUGUST FINANCING
Through the sale of the three issues offered in the August financing,
the Treasury raised approximately $4.0 billion of new money and refunded
$4.9 billion of securities maturing August 15, 1977. The following table
summarizes the results:
\
New Offerings
6-3/4% 7-1/4% 7-5/8%
Notes
Notes
Bonds
8-15-80 8-15-84 2-15-022007

Nonmarketable
Special
Issues

Maturing Net New
Securities Money
Total Held
Raised

Public $3.0 $2.3 $1.0 $ - $6.3 $3.3 $3.0
Government Accounts
and Federal Reserve
Banks

0.4

0.3

0.2

0.7

1.6

__I

0-1

_-_

___.__.

1.6

Foreign Accounts for

Cash.!
T0TAL

$4.1 $2.8 $1.2 $0.7 $8.8 $4.9 $3.9

Details may not add to total due to rounding.

B-381

_____

_L

tpartment of theJRE/\$URY
eHWOTOM f O.C,2«20

ELEPHONE 566-2041

FOR IMMEDIATE RELEASE

August 8, 1977

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,402 million of 13-week Treasury bills and for $3,501 milUon
of 26-week Treasury bills, both series to be issued on August 11, 1977,
vero accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing November 10, 1977
Price

Discount
Rate

98.655
98.643
98.647

5.321%
5.368%
5.353%

Investment
Rate 1/
5.
5.
5.

26-week bills
maturing February 9, 1978
Discount Investment
Price
Rate
Rate 1/
97.141
97.124
97.129

5.655%
5.689%
5.679%

5.
5.94%
5.

Tenders at the low price for the 13-week bills were allotted 99%.
Tenders at the low price for the 26-week bills were allotted 35%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

$
22,055,000
Boston
3,860,855,000
New York
59,790,000
Philadelphia
Cleveland
27,470,000
21,195,000
Richmond
Atlanta
18,630,000
180,665,000
Chicago
39,290,000
St. Louis
20,225,000
Minneapolis
32,420,000
Kansas City
40,590,000
Dallas
San Francisco
377,225,000
Ireasury
TOTALS

125,000
$4,700,535,000

Accepted

Received

$
22,005,000
1,926,605,000
24,790,000
27,470,000
20,185,000
18,630,000
79,655,000
27,290,000
5,225,000
32,420,000
40,590,000
176,675,000

$
33,690,000
5,408,305,000
28,090,000
19,650,000
30,085,000
17,605,000
284,455,000
29,695,000
25,375,000
14,815,000
7,790,000
446,580,000

$
23,690,000
3,124,305,000
8,090,000
9,650,000
17*, 085,000
17,605,000
102,455,000
10,195,000
10,375,000
14,815,000
6,790,000
156,330,000

125,000

60,000

60,000

$2,401,665,000 a/ $6,346,195,000

Includes $304,795,000 noncompetitive tenders from the public.
Includes $126,800,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.

-382

Accepted

$3,501,445,000 b/

CONTACT: George G. Ross
202-566-2356
August 8, 1977
FOR IMMEDIATE RELEASE
US-UK Income Tax Treaty
Technical Explanation
As Submitted to
Senate Foreign Relations Committee
July 19-20, 1977
The United States Treasury Department today released
the technical explanation of the United States-United
Kingdom income tax treaty as submitted to the Senate Foreign
Relations Committee at Hearings on July 19-20, 1977.
With minor changes, the explanation adopts the rules
for crediting advance corporation tax set forth in the proposed amendment to the technical explanation published on
July 1, 1977 (Treasury news release B-322). It also clarifies
the definition of the term "enterprise" used in Article 9(4)
of the treaty. It otherwise corresponds to the technical
explanation of the US-UK income tax treaty published March 9,
1977.
Attached is a copy of the revised technical explanation.
oOo

B-383

For Release Upon Delivery
Expected At 10:00 a.m.
August 9, 1977
STATEMENT OF THE HONORABLE
W. MICHAEL BLUMENTHAL, SECRETARY OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
Mr. Chairman and members of this distinguished Committee:
It is an honor to appear before you to discuss the
National Energy Plan.
The Need for an Energy Plan
The plan anwsers a clear need for a concerted national
attack on our energy problems.
Our dependence on imported crude oil has been rising
steadily. Today almost one-half of the oil consumed in the
United States is imported. Much of our imported oil comes
from insecure foreign sources. Importing this amount of oil
also has serious balance of payments effects: the estimated
$25 billion trade deficit for the current year would be a
surplus of about $20 billion if we imported no fuel.
Even disregarding these international considerations,
we face an obvious peril: Our consumption of oil and gas is
growing considerably faster than are proven domestic and
foreign reserves. Unless restraint is shown now, and we
prepare to shift to alternative energy sources, we risk
potentially severe shortages of oil and gas.
The National Energy Plan aims to encourage energy
conservation, the substitution of alternative fuels for oil
and gas, and increased production of all forms of energy.
R-334

- 2 Conservation lies at the center of the Plan. We are
not seeking an absolute reduction in energy consumption.
Rather, we are aiming to reduce the rate of increase in
energy consumption to less than 2 percent per year. This is
a feasible, prudent, and essential objective. It poses no
threat to our equally important economic objectivesj
Conservation is to be achieved by making consumers of
oil products pay the replacement cost of their consumption,
by substituting more efficient modes of transportation for
less efficient ones, by taxing businesses on their use of
oil and gas1, arid by providing tax incentives for insulation
and for other improvement outlays to improve energy efficiency.
The substitution of coal arid other fuels for oil and^
gas is to be achieved by providing an incentive in the tax
system for businesses to convert to these alternative fuels.
Solar, wind, and geothermal energy sources will also be
favorably treated to encourage greater<residential "and /?
industrial use.
Additional production will be stimulated by allowing
;
newly discovered oil to be priced at world price levels and
by providing an incentive price for newly discovered natural
gas.
The Plan's Provisions
In general, the House did an admirable job with the
energy bill. However, there are some areas where additional
measures need to be considered. Additional energy savings
can be accomplished by changes that I would like to offer to
the Committee for their consideration.
Crude Oil Equalization Tax
The importance of the crude oil equalization tax cannot
be overestimated. The tax would insure that by 1980 c o n sumers of oil pay the true replacement cost of their consumption. This is clearly necessary to achieve conservation and
to stem imports.
While promoting conservation, the National Energy Plan
will also encourage the development of domestic oil and qas
resources
This is because newly discovered oil—so-called
new new oil—can be sold, free of the tax, for the world

- 3market price of $13 a barrel, or more. This price factor is
a powerful incentive and provides domestic oil producers a
profit margin that is among the highest in the world for the
production and exploration of new oil.
The bill provides a similar incentive to remove a
higher percentage of oil from existing fields. This results
from allowing oil from stripper wells and oil obtained by
tertiary production to be sold at the world price, without
the payment of any crude oil tax.
These price incentives are fully adequate to encourage
and reward new production. The House wisely rejected all
attempts to give the oil producers part of the crude oil tax
to plow back into oil and gas production. The Administration
strongly opposes a plowback. A plowback would unbalance the
program both economically and in terms of equity. Such a
scheme would defeat the purpose of the crude oil tax, which
is to raise the price of new oil to consumers but at the
same time to reimburse the average consumer for his consequent loss of purchasing power. The prospect of $13 a
barrel oil will bring forth exploration, discovery, and
production of new oil. A plowback provision would simply be
a windfall to producers, who currently have adequate capital
for exploration and development.
The House version of the crude oil tax does need some
improvement. First, it would be better if the tax were
extended beyond 1981; we should not leave producers and
consumers in a state of uncertainty about our long-term
policy in this vital area. Second, the rebate of net proceeds
of the tax should be a permanent feature, rather than
stopping after one year. Finally, it would be better if the
credit system were on a per capita rather than a per taxpayer basis: The tax affects the purchasing power of all
consumers of oil products, not merely those consumers who
pay income tax.
The House credit oil tax is expected to raise $38.9
billion during the period 197 8 through 1982. However for
one year at least, the amount collected under the House bill
will be repaid to the consumers. On a net basis, this
brings the collections down to $27.5 billion. The energy
savings associated with this tax is estimated at about
230,000 barrels of oil per day by 1985.

- 4 Transportation
In the transportation sector, the Administration^
objective is to encourage the shift away from energy inefficient means of transportation. Our major proposal in
this sector was the gas guzzler tax and rebate. We are not
suggesting the restoration of the rebate. We do ask the
Senate to strengthen the House version of the gas guzzler
tax itself. We ask the Committee to consider imposing
somewhat higher taxes than does the House bill.
We believe that a strong gas guzzler tax is the key to
achieving more rational and efficient use of automobiles.
Reducing the number of gas guzzlers on the road will make
the gasoline available for domestic consumption provide more
transportation than is true with our current fleet of
automobiles.
Strengthening the gas guzzler tax is important to our
program, since we believe the current standards will not
achieve the necessary savings. We need to keep the pressure
on gas guzzling automobiles until the national automobile
stock is truly fuel efficient. We also need to apply the
gas guzzler tax to the smaller trucks, which can be inefficient
and contribute to the problem along with gas guzzling
automobiles.
In the transportation area, the House added several
provisions. It extended the current 4-cents per gallon
excise tax on gasoline beyond 197 9, repealed the personal
deduction for state and local gasoline taxes, repealed the
excises on buses and bus parts, revised the tax on motor
boat fuels, removed the discriminatory tax on new oil used
in rerefined lubricating oil and provided a credit for the
purchase of electric cars. We consider these reasonable
measures to promote more efficient modes of transportation
and better use of oil.
The energy saving for these provisions is estimated at
275,000 barrels of oil per day. The total revenue gain of
the various transportation proposals is $29.5 billion for
the period 1978 to 1985. However, $21.2 billion of this
amount merely represents an extension of the present 4-cent
tax on gasoline scheduled to be reduced 1-1/2 cents in
1979. Presently, this is a source of revenue for the
Highway Trust Fund.

- 5Tax on Business Use of Oil and Gas
The oil and gas use tax on industry and the utilities
was designed to achieve energy conservation and conversion
to
energy sources other than oil and gas. Industries and
utilities consume oil and gas in many activities where coal
and other nonfossil fuels could be used. The House use tax,
while providing incentives for conversion and conservation,
falls short of the use tax we would like to see enacted.
The level of use tax on oil passed by the House varies
depending upon whether the industrial process has conversion
potential, conservation potential or is a utility.
The gas tax passed by the House is a variable tax based
on the difference between the user's acquisition price and
the cost of a Btu equivalent amount of distillate oil. For
utilities, however, the gas tax would be a flat tax such
that the price of gas to a utility including the tax cannot
exceed the price of residual oil.
To encourage conversion to coal and other fuels, a
rebate of this tax up to the annual user tax liability is
allowed for qualified expenditures in boilers, burners and
other equipment which do not use oil or gas. In lieu of the
rebate, an additional 10-percent investment tax credit would
be allowed.
Where a utility elects to use the rebate option, a
state utility commission could require a utility to pass the
benefit of this rebate on immediately to consumers. On the
other hand, if the utility elects the investment credit, the
benefit of the credit can be passed on to the consumer only
over the life of the asset.
There are several areas where the use tax passed by the
House should be improved. First, all industrial gas should
be taxed at a rate which makes the price of gas in all cases
equivalent on a Btu basis to distillate fuel oil, without
exemptions. When applied in this fashion, the use tax works
as a pricing mechanism, which makes industrial users pay the
replacement cost of gas rather than an artificially low
price, which encourages excessive use'. This tax should
apply to all users without any exceptions except for the
small user (50,000 barrels of oil equivalent per year)
exemption.

- 6 Second, we believe that a rebate of the utility tax
should be conditioned on the benefit of the rebate not being
passed on to the consumer any faster than ratably over the
life of the asset. This would make the treatment consistent
with the treatment provided for the investment credit, which
the utilities at their option may take in place of the
rebate.
Third, in place of the industrial oil use tax proposed
by the House, we suggest a simplified single tier tax on
boilers, turbines and kilns, incorporating the House's tax
schedule, which starts at 30 cents a barrel and in 1985 goes
up to $3 a barrel. The only special exemption would be for
current facilities unable to convert for environmental
reasons.
The House bill on a net basis—after the rebate—would
collect $2.9 billion over the period 1979 to 1985. There
would also be a revenue pickup from the denial of the
regular investment credit on that financed out of the
rebate. Finally, it is estimated the bill will save 1.0 to
1.4 million barrels of oil equivalent per day by 1985.
Residential Energy Credit
The residential energy credit provides incentives for
homeowners and renters to buy energy conservation equipment
and solar and wind energy equipment.
The President has set a goal of insulating by 1985 90
percent of the homes that presently have insufficient
insulation. The credit provided by the House bill goes a
long way toward the fulfillment of this objective. Expenditures for insulation, storm doors and windows, clock thermostats, exterior caulking and weatherstripping and certain
modifications to furnaces qualify for the credit.
The solar and wind credit is designed to interest more
homeowners in alternative energy sources. Both the solar
and wind energy industries are in their infancy. The
potential benefits to all Americans from developing use of
solar and wind devices are great and justify a temporary tax
incentive. The present cost of solar and wind energy
installations is high because demand is currently low. This
tax incentive will encourage more Americans to turn to these
inexhaustible energy sources and will help these industries
develop to the point where government incentives are no
longer necessary.

- 7The cumulative cost for the residential credits will
amount to $4.8 billion for the period 1978 through 1985. It
is projected that these proposals will save about 500,000
barrels of oil per day by 1985.
Business Energy Tax Credits
The House also approved a series of business energy tax
credits. These credits are designed to promote the use of
energy efficient insulation, to encourage commercial and
industrial use of solar and other alternative resources, and
to promote recycling and cogeneration. Expenditures in
these areas will qualify for an additional 10-percent
investment tax credit above the credit for which they
otherwise qualify. The House also conserved energy at the
same time it also reduced the revenue loss by denying
accelerated depreciation and the investment tax credit to
air conditioners, space heaters and boilers fueled by
natural gas or oil. We endorse these House initiatives.
The expected net revenue cost of these credits is $2.5
billion from 1978 through 1985. The energy savings is about
350,000 barrels of oil equivalent per day.
Supply Incentives
The House adopted two proposals in the National Energy
Plan relating to the supply of energy resources. First, the
House accepted a proposal to make permanent a provision that
applies the minimum tax to intangible drilling costs for oil
and gas only to the extent that such costs exceed the sum of
the taxpayer's income from oil and gas production plus the
result of 10-year amortization of these costs.
The second provision allows the expensing of geothermal
intangible drilling costs, which extends to geothermal
resources the treatment accorded oil and gas. Also, the
House provided percentage depletion for geothermal resources
but only at a 10-percent rate, and only to the extent of
basis in the property.
Together these provisions will cost $600 million
through 198 5. The geothermal provisions should save 60,000
to 110,000 barrels of oil per day.

- 8 Conclusion
Mr. Chairman, the National Energy Plan is in large
measure a tax program. There are non-tax aspects also, but
the Plan relies crucially on a battery of net taxes and new
tax credits to move our economy away from its present,
dangerous position of over-consumption of oil and gas.
As you know, I am generally opposed to using the tax
code to further non-tax objectives. In the not too distant
future, I will be back before you to urge a major simplification of the income tax code. But in the case of energy,
the basic problems are so urgent and the alternative solutions
so unsatisfactory, that resort to tax incentives is clearly
proper, indeed essential.
We could have relied entirely on market incentives
coupled with total deregulation of oil and natural gas
prices. But, given the present distortion of world markets,
this approach would have created enormous and unjust windfalls
throughout our economy. The American people, with justification, would have rejected such an approach out of hand.
The other alternative was to rely solely on physical controls,
directives, and regulations. But this would have created a
giant bureaucracy and injected the heavy hand of government
regulation into every facet of the economy.
Thus, the only reasonable, fair, and effective solution
lies with the tax system. The Administration and the
American people are now looking to this Committee, with its
wellknown expertise, experience, and sense of responsibility
in matters of taxation, for a solution to the most serious
problem facing the nation. I hope to work closely with you
in dealing with this challenge.
Thank you.
o 0 o

Crude Oil and Natural Gas Liquids Equalization Tax Under Title II
of H.R. 8444, the "National Energy Act"
as Passed by the House of Representatives:
Relationship of the Gross Tax to Amounts Available for
Credits and Payments
($ millions)
Fiscal Years
1978
Gross crude oil equalization tax
collections

1,897

'

1979

' 1980

6,349

11,294

'

19781982

1981

" 1982

14,596

4,802

38,938

Reduced refiners' income tax -305 -971 -1,720 -1,944 -900 -5,840
Refund for oil used to produce
natural gas liquids at refineries

-29

-97

-168

-211

-68

-573

Refund for heating oil:
Homes
Hospitals

-82
-9

-476
-54

-688
-80

-793
-91

-181
-20

-2,220
-254

1,819
-1,819

-780

--

..

. .

-2,599

--

—

Per taxpayer credits

Net receipts effect -347 3,971 8,638 11,557 3,633 27,452
Special payments to qualified
recipients

--

-866

--

-866

Net budget effect -347 3,105 8,638 11,557 3,633 26,586
Office of the Secretary of the Treasury
Office of Tax Analysis

August 8, 1977

Excise Tax on Business Use of Oil and Natural Gas
Under Title II of H.R. 8444, the "National Energy Act,"
As Passed by the House of Representatives: 1/
Relationship of Tax without Investment Rebate to Final Tax
($ millions)
~~ : Fiscal Years : 1979: 1979 : 1980 : 1981 : 1982 : 1983 : 1984 : 1985 : 1985
Tax without rebate for qualified
investment

-

1734

2796

3642

4678

7574

8524 28,948

Qualified investment rebate - -1298 -2686 -3421 -3990 -6651 -7506 -25,552
2/
Reduced industry income tax-'

-25

-38

-22

-57

Net effect on receipts -25 398 88 164 592 813 878 2908
Office of the Secretary of the Treasury August 6, 1977
Office of Tax Analysis

1/

Industry and utility taxes.

27 Results from less than full pass-through of tax to prices.

-96

-110

-140

-488

Estimated Receipts Effects of Title II of H.R. 8444, the "National Energy Act,"
as Passed by the House of Representatives
($ millions)
Fiscal Years
1978

"

1979

'

1980

"

1981

"

1982

*

1983

'

1984

' 1985

19781985

Part I. Residential energy tax credits:
Credit tor insulation and other
energy-conserving components
Credit for solar and wind energy
expenditures
".
Total, Part I

-361

-466

-491

-518

-546

-576

-608

-541

-4,107

^26
-387

__54
-520

^62
-553

__71
-589

__87
-633

-HI
-637

-140
-748

-169
-710

-720
-4,827

150

160

170

915

Part II. Transportation tax provisions:
Gas guzzler tax -- 100 100 100 135
Repeal of deduction for state and
local tax on gasoline
Extension of existing tax rate on
gasoline and other motor fuels ....
Amendment of motorboat fuel provisions
Repeal of excise tax on buses
Repeal of excise tax on bus parts ...
Removal of excise tax on certain
items used in connection with buses
Credit for qualified electric motor
vehicles
Total, Part II
Part III. Crude oil equalization and
natural gas liquids tax: 1/..

859

944

1,039

1,143

1,,257

1,383

7,520

3,404
4
-9
-3

3,496
4
-9
-3

3,585

21,236

4
-9
-3

3 ,677
4
-9
-3

3,772

-9
-3

3,302
4
-9
-3

4
-9
-3

29
-76
-24

-13

-13

-13

-13

-13

-13

-13

-13

-104

*
87

*
859

-1
4,239

-1
4,426

-2
4,647

-4
4,853

__
5 ,073

5,304

29,488

-347

3,971

8,638

11,557

3,633

_,_,

__.

__

27,452

-25

398

88

164

592
..
592

715

784

2,716

98
813

94
87&

2,90e

261

298

345

34
295

73
371

69
414

115

780

-1
-13
-3

—
4

__

-8

Business use of oil and natural gas
Parts IV, V: Excise tax on business
use of oil and natural gas: 2'
Industry

—

Total, Parts iv] V*........ — ^25 398 ~88 "l64
Part VI, Denial of investment credit
or. property financed with credit:
Industry

23g

m

Ut

i^,*par;-:r:::::::::::::::: -^ ^ ^ ^ ^

192

1,614
176
1,790

Total business use of oil and _ — — — j^j£ 1,292 4,695
natural gas
business credits. Part VI. excluding
denial of ir.vesrrer.t credit on
pr.-pertv financed «< fh credit:
Alternative conservation and nev
technology credits
Investment credit denied, and depreciation li=ited to straight-line
or oil cr gas burning equipment,
and air-conditioning and apace
heaters
Total business credits
Part VII. Miscellaneous provisions:
Treatment of intangible drilling costs
for purposes of tLiniTrus. tax
Option to deduct intangible drilling
costs on geotherrzal deposits
10 Percent depletion in case of
geother___l deposits
Rerefmed lubricating oil
Total, Part VII
7 VT
Total receipts effects, Parts I-WI

_?89

_491

3>293

"40y

ui:>

-22
-316

±i±
-30-

^
J*>

.559

.586

99
-392

_93
93

_88
88

822
-2,471

^

^_

_4_

-48

-56

-65

-74

-354

^

_n

-20

-20

-32

-54

-179

^
_2
Tjg

_2
-3
.^s

-2
-3
-73

-2
-3
-81

-2
-3
-102

-2
-3
-133

-13
-24
-570

12,453

15,093

7,283

4 ,580

5,500

5,841

53,770

103

"5
"
_1"*
-072
"97Z

^
,
-j-r
*
T~992
>,"<•

Office of the Secretary of the Treasury Office of Tax Analysis
*Less than S500 thousand. after per taxpayer credits.
1/ Tax re- of business income tax offse. ana re.u
2/ Tax net of income tax offset and rebates.

0

1 c\n~)

SUMMARY OF TAX PROVISIONS OF H.R. 8444
A. Residential Energy Credit
!• General provisions
A nonrefundable Federal income tax credit is provided
for individuals who make certain energy-related expenditures.
The credit is available for installations of qualified
property made from April 20, 1977 through December 31, 1984.
Qualifying installations may be made only with respect to the
principal residence of the taxpayer and only if that
residence is located in the United States. Thus,
installations made with respect to vacation homes will not
qualify. if less than 80 percent of the use of a residence
is solely for residential purposes, a proportionate
allocation of expenditures must be made to the nonresidential
use. The amount of expenditures eligible for the credit must
be reduced by any prior expenditures taken into account in
determining the credit.
Owners (including co-op and condominium owners) as well
as renters are eligible for the credit. A change of
principal residence restarts the amount of qualified
expenditures eligible for the credit. The credit must be
allocated where a single principal residence is jointly
occupied. For administrative convenience, no credit of less
than $10 per return will be allowed.
All eligible property
must meet performance and quality standards prescribed by the
Secretary of the Treasury which are in effect at the time of
acquisition. The original use of the property must commence
with the taxpayer. To the extent that the tax basis of the
residence is increased by the qualifying expenditures, the
basis must be reduced by the amount of any credit allowed.
2. Energy conservation credit.
This portion of the credit is available only for
residences substantially completed before April 20, 1977.
The amount of the credit is equal to 20 percent of the first
$2,000 of qualified expenditures on insulation and other
energy-conserving components (including original installation
thereof) for a maximum credit of $400. Insulation means any
item that is specifically and primarily designed to reduce
the heat loss or gain of the residence or a water heater
therein, and which may reasonably be expected to remain
operation for at least 3 years. This would include attic,
floor, and wall insulation made of fiberglass, rock wool,
cellulose or styrofoam. Energy-conserving components include
a replacement burner for a furnace that provides increased
combustion efficiency, devices to modify flue openings,
furnace ignition systems that replace a gas pilot light,
exterior storm or thermal doors or windows, clock

2
thermostats, and exterior caulking or weatherstripping of
windows and doors. The Secretary of the Treasury may odd to
the list of energy-conserving items other items that are
designed to increase energy efficiency.
3. Solar and wind energy credits.
This portion of the credit is available for new as well
as existing residences. The amount of the credit is equal to
30 percent of the first $1,500 and 20 percent of the next
$8,500 (for a maximum total credit of $2,150) o£ qualified
expenditures on solar and wind energy equipment, includinq
certain labor costs allocable thereto. Expenditures on new
and reconstructed dwellings are treated as having been made
when original use begins. Eligible property must reasonably
be expected to remain in operation for at least 5 years.
Qualified solar energy property uses solar energy for
the purpose of heating or cooling the residence or providing
hot water for use therein. Qualified wind energy property
uses wind energy for any nonbusiness residential purpose.
Back-up systems of conventional heating or cooling equipment
and expenditures properly allocable to swimming pools are not
included in this credit.
B. Transportation
1. Gas guzzler tax.
A manufacturer's excise tax is imposed upon the sal? of
new automobiles based upon their EPA-certified fuel
efficiencies. The tax first applies to 1979 model year
automobiles with fuel efficiencies of less than 15 miles pet
gallon. The minimum fuel efficiency above which no tax is
imposed increases each year so that, for model years 1985 uh\
thereafter, the tax applies to automobiles whose fuel
efficiency is less than 23.5 miles per gallon. (These
threshold levels range from 3 to 5.5 miles per gallon below
the fleetwide average standards imposed under the Energy
Policy and Conservation Act.) The tax applies to automobiles
with gross vehicle weights of not more than 6,000 pounds, but
^°nnnn0t a £ p l y t 0 t r U C k s w i t h a c a r 9 ° capacity of at least
J
1,000 pounds.
inrrJcl^ ^ automobiles with a given fuel efficiency
increases each year. For example, the tax on a
14-mile-per-gallon automobile starts at $339 for the 1979
furthere?o'S^««TS \° $428 the next **«' and -Ureases

maxima rate of , f ° r ^

and later m o d e l

Y**™- The

maximum rate of tax applies to automobiles with less than 13
?or the m l ' S o ^ ?
efficiencies, and ranges from $553
the 1979 model year to $3,856 for the 1985 model year.
to their moderPyearS an^H •"* ^ im?0^e6 cars, according
moaei year, and is imposed on the importer. Where

3
automobiles are leased by the manufacturer, the first lease
is treated as a sale subject to the tax. The amount of the
gas guzzler tax may not be included in the owner's tax basis
for the automobile for any purpose. Thus, no income tax
benefit may be derived from payment of the gas guzzler tax,
thereby excluding investment tax credit and depreciation
benefits.
All gas guzzler tax revenues are to be deposited into a
Public Debt Retirement Trust Fund, the proceeds of which are
to be used to retire obligations of the United States that
are included in the national debt.
2. Repeal of personal deduction for State and local
taxes on gasoline and other motor fuels.
Effective after December 31, 1977, the personal
deduction for State and local taxes on gasoline and other
motor fuels is repealed.
3. Extension of excise tax on gasoline and other motor
fuels.
The Federal excise tax of 4 cents per gallon on gasoline
and other motor fuels will be continued at that rate through
September 30, 1985. This tax is currently scheduled to be
reduced to 1-1/2 cents per gallon after September 30, 1979.
The Committee took no action with respect to the Highway
Trust Fund, which is scheduled to be phased out after
September 30, 1979. Accordingly, after that date, gasoline
tax receipts will be paid over into the general fund of the
Treasury.
4. Amendment of motorboat fuel provisions.
The Act repeals the 2-cents-per-gallon refund payment to
the purchaser of gasoline and special motor fuels used in a
motorboat. The motorboat fuel payment is presently made
because this is a nonhighway use of gasoline. The Act
conforms the tax on motorboat use of fuel to the tax on
highway use. Following the treatment accorded to the current
2-cents-per-gallon tax, the increased tax on motorboat fuel
will also go into the Land and Water Conservation Fund.
5. Repeal of excise tax on buses and bus parts.
The 10-percent excise tax on sales of buses and the
8-percent excise tax on sales of bus parts and accessories
will be repealed. Floor stocks refunds (as of the date of
enactment) and consumer refunds (as of April 20, 1977) are
provided where the 10-percent excise tax has already been
paid. Parts and accessories that may be interchangeable
between trucks and buses will continue to be taxed on sale
unless the purchaser provides an exemption certificate which

4
indicates that the part or accessory is purchased for use on
a bus.
6. Removal of excise taxes on items used with certain
buses.
The Act repeals the excise taxes on tires, inner tubes
and tread rubber, gasoline and other motor fuels, and
lubricating oil sold for use with intercity, local, and
school buses. With respect to these excise taxes, this
action places private transit and private school bus
operators on a par with governmental and nonprofit school bus
operators.
This action applies to an intercity or local bus, and a
school bus. The term "intercity or local bus" means a bus
used predominantly in furnishing passenger land
transportation to the general public for compensation if such
transportation is scheduled and along regular routes or the
passenger seating capacity of the bus is at least 20 adults,
not including the driver. The term "school bus" means a bus
substantially all the use of which is in transporting
students and employees of schools.
7. Tax credit for electric motor vehicles.
New electric cars acquired for personal use after April
20, 1977, and before January 1, 1983, will be eligible for a
Federal income tax credit of the first $300 of the purchase
price. A qualified electric motor vehicle is a four-wheeled
vehicle manufactured primarily for use on public roads that
is powered primarily by an electric motor which draws current
from rechargeable storage batteries or other portable sources
of electric current.
c

*

Crude Oil Equalization Taxes and Rebates

1- Crude oil equalization tax.

In l ^ a n S ' l i ™ * * ? ! ! 9 ^ l n t ° e f f e c t i n t h r e e a n " ^ l ^ages.
nn
„
i
' t h e t a x 1 S lmPosed on lower tier controlled
11979) If the d?ff qUal ' V 0 P e r c e n t ( 1 9 7 8 > o r " 0 percent
tier oil anS%h
? n ° e b e t w e e n the ceiling price of upper
tier oil and the ceiling price of lower tier oil of the same

5
classification. In 1980 and thereafter, the tax applies to
all controlled crude oil, and is equal to the difference
between the controlled price and the world market price for
crude oil of the same classification. The tax terminates
after September 30, 1981. Lower tier oil is the amount of
oil produced on a property, up to the lesser of 1972 or 1975
production, and is now controlled at an average price of
S5.16 per barrel. Upper tier oil is oil produced on a
property in excess of the lower tier production level. Upper
barr l*1 1 S D ° W c o n t r o l l e d a t a n average price of $10.97 per
Crude oil used in the production of crude oil, natural
gas liquids, or natural gas is not subject to the tax. In
addition, the crude oil tax does not apply to the extent
crude oil is refined into products that are in turn used in
the production of crude oil, natural gas liquids, or natural
gas.
A credit or refund of the crude oil tax is also provided
for crude oil that is used as a raw material to produce
natural gas liquids, but only if the refiner demonstrates
that he has not passed on the crude oil tax attributable to
his production of natural gas liquids.
2
« Natural gas liquids equalization tax.
This tax is imposed after December 31, 1977, on sales
for end use (as opposed to first purchases), and on certain
uses where there is no prior sale, of natural gas liquids.
The tax applies to liquids sold or used in the United States,
Puerto Rico and the possessions, and in the related
continental shelf areas. The purpose of this tax is to bring
the price of controlled natural gas liquids up to the price
of energy-equivalent No. 2 distillate oil. Accordingly, the
tax is based upon the difference between the price for No. 2
distillate in the region in which the taxable sale or use
occurred (adjusted for differences in energy content and
seasonal variations in price) and the controlled price of the
natural gas liquid. The tax is brought into effect in three
equal annual stages in 1978, 1979, and 1980. The tax
terminates on September 30, 1981.
Exemptions are provided for agricultural uses, uses in a
residence, hospital, school, or church, and use as a
feedstock in the production of natural gas liquids.
3. Presidential authority to suspend equalization
taxes.
The President is granted authority to suspend all or any
part of an equalization tax increase which would result from
an increase in the world price of oil where such tax increase
will have a substantial adverse economic effect. A tax

6
increase suspension may not exceed a period of 1 year, and is
subject to veto by either house of Congress within 15
legislative days after submission by the President of a plan
implementing such suspension.
4. Crude oil tax credits, special payments, and
refunds.
Tax credits. The net receipts from the crude oil
equalization taxes in 1978 will be allocated to each adult.
Net receipts are equal to gross revenues derived from these
taxes, less: (a) the reduction in Federal income taxes
resulting from the imposition of the crude oil taxes, (b) the
administrative costs related to the tax credit, special
payment, and refund programs, (c) the amount of the heating
oil refund, and (d) the amount of the refund to refiners for
refining crude oil into natural gas liquids.
Single taxpayers and married persons filing separately
will each be entitled to one tax credit. Married persons
filing joint returns and heads of households will be entitled
to two credits. The tax credits are limited to the
taxpayer's tax liability, except for taxpayers entitled to
the earned income credit. Withholding tax schedules for 1978
will be adjusted to reflect these tax credits. Estates,
trusts, and nonresident alien individuals are not entitled to
this credit.
Special payments. Special payments are provided for
adults who are not taxpayers. These payments will be made in
May or June of 1979 to recipients of benefits under Social
Security, Railroad Retirement, and supplemental security
income programs
To the extent not covered under these
programs, individuals may receive payments through State aid
to families with dependent children programs. The amount of
the special payment is equal to the amount of the tax credit
referred to above, reduced by the amount of any crude oil tax
credit claimed by the individual. Adults who do not receive
a tax credit or a special payment may file an appropriate
form with the Secretary of the Treasury in order to receive
the payment.
Lump-sum payments are also authorized for the
S a n r a r e ^ n h ^ ^ ^ ^ R ^ ° an6 t h G Possessions if acceptable
plans are submitted to the Secretary of the Treaqnrv for fho
theSttaxUcreSi?f T™**
™**' P " * ™ " * s i m U a ^ ? f T l h l l l to*
and s ecial
ih!«! f
P
Payment programs described above
ln

and^IpSr^:^?^ ^

'^ <* i n d i v i d u a l SSSIta

7
tax for each gallon sold provided that the amount of the
retund is passed through completely to the customers in the
torm of lower prices.
5. Miscellaneous.
Study of small and independent refiners. The Secretary
of Energy is to conduct a study of the impact of the crude
oil tax on the competitive viability of small and independent
refiners. The Secretary is to report to the Congress not
^ ^
than 90 days a f t e r t h e d a t e o f enactment of the tax
with his findings, together with legislative recommendations.
Natural gas contracts. The crude oil taxes are not to
be taken into account for purposes of determining.or
redetermining natural gas prices under any contract which was
entered into before the date of enactment of the Act.
D
- Tax on Business Use of Oil and Gas and Related Credit
1. Use tax.
In general. An excise tax would be imposed on the use
after December 31, 1978, of oil or natural gas as fuel in a
trade or business. Three different sets of tax rates are
provided: the highest rates (referred to as tier 2) apply
where conversion to a fuel other than oil or gas is feasible;
a lower industrial rate (tier 1) applies where conservation
in fuel consumption is feasible; and a third rate (tier 3)
applies to electric utility use (including production of
steam by an electric utility), certain industrial electric
generating use and use in a qualifying cogeneration facility.
Tier 2 applies generally to uses in a boiler or in a turbine
or other internal combustion engine, except for such uses
classified in tier 3. Tiers 1 and 2 apply to uses in 1979
and thereafter; tier 3 applies to uses in 1983 and
thereafter.
Tax on oil. The tier 2 tax begins at 30 cents per
barrel in 1979, and increases to $3 per barrel in 1985 and
later years. The tier 1 rate begins at 30 cents per barrel
in 1979, and increases to $1 per barrel in 1981 and later
years. Tier 3 uses are taxed at a rate of $1.50 per barrel
in 1983 and later years. Inflation adjustments apply to 1981
and later year rates. Oil subject to the tax includes crude
oil, refined petroleum products, and natural gas liquids
(other than liquids which have an API gravity of 110 or more)
but excludes natural gas, gasoline, and substances that are
not generally marketable for use as a fuel.
Tax on natural gas. A variable tax is imposed, based
upon the difference between a target price and the user's
acquisition cost for natural gas. The purpose of this
variable tax system is gradually to raise the price of

8
natural gas to slightly less than the price of energy
equivalent oil. Accordingly, the target price is based upon
the cost of all No. 2 grade distillate oil sold in the
relevant region, adjusted by a subtraction factor (which
decreases each year, thereby increasing the after-tax price
of natural gas) and for inflation. Tier 3 use of natural gas
is subject to a tax rate beginning at 55 cents per million
Btu in 1983, and reaching 75 cents per million Btu in 1985
and later years. (One thousand cubic feet of natural gas
contains approximately one million Btu.) These rates would
be adjusted for inflation beginning in 1981. The tier 3 tax
rate is limited so that the cost of natural gas never exceeds
the cost of energy equivalent residual oil in the region
where the gas is used. A 10 percent discount is provided for
tier 1 and tier 2 uses subject to interruptible contracts.
Natural gas subject to the tax includes natural gas,
petroleum, or a product of natural gas or petroleum, having
an API gravity of 110 or more. The tax does not apply to
substances that are not generally marketable for use as a
fuel, such as still gas.
Suspension power. The President may suspend the
imposition of part or all of the use tax for a period of up
to one year if he determines that the imposition of such tax
would have an adverse economic effect. A suspension plan
must be submitted to Congress, and would be subject to a veto
by either house of Congress before the end of 15 legislative
days after submission.
Exemptions. Since the tax applies only to use as fuel,
uses of oil and natural gas as raw materials, such as
petrochemical feedstocks, are not subject to tax. An
industrial process use would be exempt from tax where the use
of any fuel other than oil or gas would materially and
adversely affect the manufacturing process or the quality of
the manufactured product, or the use of such alternative fuel
would not be economically and environmentally feasible. Also
exempt are uses in: any residential facility; any vehicle,
aircraft, vessel, or transportation by pipeline; agriculture;
nonmanufacturing commercial buildings; and the exploration,
development and production of oil and gas. An exemption is
provided where use of a fuel other than oil or gas is
precluded by applicable air pollution control laws.
In addition, each taxpayer is provided an annual exempt
amount equal to the energy content of 50,000 barrels of oil.
For this purpose, greater-than-50-percent commonly-controlled
organizations, whether or not incorporated, are considered a
single taxpayer. Where a taxpayer suffers a substantial
regional competitive disadvantage as a result of the use tax,
publish
amounts
additional
the Secretary
the
for exempt
names
individual
of the
of
amounts.
Treasury
taxpayers
plants.may
and
The
provide
plants
Secretary
additional
receiving
is required
* such
exempt
to

9

Reclassifications. The Secretary of the Treasury must
establish a procedure for reclassifying taxable uses to lower
rates of use tax. Reclassification may include complete
exemption from the tax. Reclassifications are to be made
only if the Secretary determines that such action is not
inconsistent with the goal of encouraging the conversion
from, or significant conservation in, the use of oil and gas
as a fuel. The Secretary is not authorized to reclassify a
use to a higher rate of tax.
2. Credit against use tax.
In general. A person subject to the use tax may elect
eeither an additional 10 percent investment tax credit
(discussed below), or a dollar-for-dollar credit against the
use tax, for qualified expenditures made in alternative
energy property. The credit is allowable up to current use
tax liability. Excess credits may be carried forward. In
addition, 1979 and 1980 taxes (including any tax carried
forward from 1979) which are not offset by the credit may be
carried over to 1981. Qualified progress expenditures are
available under rules similar to the investment tax credit
rule. The credit terminates after 1990 except for carryovers
and where construction of alternative energy property began,
or such property was acquired, before the end of that year.
Alternative energy property. Qualified investments
(which generate the use tax credit on a dollar-for-dollar
basis) consist of investments in alternative energy property.
Generally, this is new tangible property used in the
taxpayer's trade or business, which is subject to the
allowance for depreciation (or amortization), which has a
useful life of at least 3 years and which is not used
predominantly outside the United States. The determination
of whether property is "new" depends on the extent to which
it is constructed, or whether it is acquired, on or after
April 20, 1977. The original use of acquired property must
begin with the taxpayer.
Alternative energy property consists of: (a) a boiler
not fueled by oil or gas; (b) a burner for a combustor (other
than a boiler) not fueled by oil or gas; (c) nuclear,
hydroelectric, or geothermal energy equipment; (d) equipment
for producing synthetic gas; (e) pollution control equipment
required in (a), (b), or (d); (f) coal utilization equipment;
and (g) the basis for plans and designs for all of the above
equipment. Alternative energy property does not include
buildings and structural components thereof and property used
in the trade or business of leasing.
Election. A taxpayer must specifically elect to treat
qualified investments as a credit against the use tax.
Otherwise, such investments will be available only for the

10
investment tax credit. This election applies to all the
alternative energy property of the taxpayer. For this
purpose, greater-than-50-percent commonly-controlled
organizations, whether or not incorporated, are considered a
single taxpayer. Where the qualified investment exceeds the
tax liability for a calendar year, the excess may be treated
as eligible for the regular (but not the additional 10
percent) investment tax credit. To the extent such election
is made, the use tax credit is no longer available.
Normally, qualified investments used to offset the use tax
would not be eligible for either the regular or the
additional investment tax credit, but would otherwise be
treated as part of the tax basis for the property.
Special rules. Dispositions of alternative energy
property are subject to recapture rules similar in form to
the rules for the regular investment credit. In addition,
utilities are allowed the credit against the use tax for
investment in new boilers only to the extent that old oil or
gas boilers are replaced or phased down. For this purpose,
phase-down is based upon less than 1500 hours of use per
year. Special penalties and recapture rules apply to
phased-down boilers that are subsequently used for more than
1500 hours per year.
Property which is financed by industrial development
bonds is eligible for only a 50-percent use tax credit. No
Federal income tax deduction is allowed with respect to any
portion of the use tax offset by the use tax credit.
E. Business Energy Tax Credit and Special Investment Credit
and Depreciation Changes
1. Business energy credit.
In general. An additional 10 percent investment tax
credit is allowed for business investments in qualifying
property intended to reduce energy consumption in heating or
cooling or in an industrial process. The additional credit
is available for qualifying investments made after April 19,
1977, and before January 1, 1983. In the case of alternative
energy property, the additional credit may offset up to 100
percent of the taxpayer's income tax liability as opposed to
the 50 percent limitation provided under current law. This
additional credit may be elected as an alternative to the
credit against the use tax.
J-a. Qualifying property. Energy property eligible for the
additional investment tax credit consists of: (a)
alternative energy property (as described above in the use
tax credit explanation); (b) the expansion of cogeneration
capacity; (c) advanced technology property; (d) specially
defined energy property; and (e) certain recycling equipment.
Alternative energy property is eligible for a maximum

11
additional investment tax credit of 10 percent, even if
described in another category of energy property. Advanced
technology property uses solar, geothermal, or wind energy to
provide heat, cooling, or electricity in connection with an
existing building and (where applicable) an existing
industrial or commercial process. Specially defined energy
property (such as recuperators, heat wheels and energy
control systems) includes equipment which would recover waste
heat in gases or otherwise reduce energy consumption, and
equipment to modify existing facilities to allow the use of
oil or gas in conjunction with another fuel.
Energy property must be completed or acquired after
April 19, 1977, in conjunction with a building or other
structure located in the United States. Such property must
be subject to the allowance for depreciation (or
amortization) and have a useful life of at least 3 years.
All business energy property (other than alternative energy
property) must meet performance and quality standards which
have been prescribed by the Secretary of the Treasury, and
which are in effect at the time the property is acquired or
construction is begun.
Utilities are subject to a phase-down requirement
similar to the requirement incorporated in the use tax credit
provision. In the case of property financed by industrial
development bonds the additional energy investment tax credit
is 5 percent.
Insulation installed in connection with an existing
building or industrial facility will be made eligible (to the
extent not already eligible) for the regular investment tax
credit through 1982. Insulation must be specifically and
primarily designed to reduce the heat loss or gain of an
existing building or facility. The original use of the
property must begin with the taxpayer. In addition, the
property must reasonably be expected to remain in operation
for at least 3 years, and meet performance and quality
standards prescribed by the Secretary of the Treasury.
2. Denial of investment credit and accelerated
depreciation.
Air conditioning units and boilers fueled by oil or gas
will no longer qualify for any investment tax credit. In
addition, such boilers will be limited to straight-line
depreciation and denied the 20-percent variance from
guideline lives under ADR. If the use of a fuel other than
oil or gas is precluded by applicable air pollution laws or
qualifies as an exempt use under the oil and natural gas
consumption tax, these restrictions on the investment credit
and depreciation will not apply.

12

3.

Accelerated depreciation for phased-down boilers.

If a taxpayer certifies that he plans to replace or
retire a boiler or other combustor which use oil or gas, he
may depreciate the remaining basis of such property over the
phase-down period. Under current law, the taxpayer would
ordinarily deduct the remaining basis when the old equipment
is retired.
F. Miscellaneous Provisions
1. Minimum tax on intangible drilling costs.
The Act makes permanent a provision applicable only for
1977 that applies the minimum tax to intangible drilling
costs for oil and gas only to the extent that such costs
exceed the sum of the taxpayer's income from oil and gas
production plus the result of 10-year amortization of the
intangible drilling costs.
2. Tax treatment of geothermal expenses.
The expensing of intangible drilling cost treatment now
provided for oil and gas will be extended to the exploration
and development costs of geothermal resources. Such
intangible drilling costs will be subject to the same minimum
tax treatment described above for oil and gas, except that
oil and gas properties will be treated separately from
geothermal properties for purposes of determining income.
The recapture rules and at risk rules applicable to oil and
gas are extended to geothermal properties.
Percentage depletion is provided at a 10-percent rate
for geothermal deposits, subject to the limitation that the
total amount of depletion may not exceed the taxpayer's
adjusted basis in the property.
3. Rerefined lubricating oil.
New lubricating oil would be exempt from the
6-cents-per-gallon excise tax if such oil is combined with
rerefined oil and the new oil makes up not more than 55
percent of the mixture. If the new oil in the mixture
exceeds 55 percent, the exemption would apply only to the new
oil that would make up 55 percent of the mixture. In any
rpr^inoS ^tur\must
contain at least 25 percent waste or
rerefined lubricating oil in order to qualify for the
exemption.
4. Annual report by the PrPsiHpnf
Beginning in August 1978, the President will reoort each

r n r r g ^ c o n L S i r °!S t h % " ^ u e impact, and'incrSseV""
P^viLSSSSSrSSe°Xc??d P r 0 d U C t l 0 n ^ i „ g from the tax

FOR IMMEDIATE RELEASE

August 9, 1977

TREASURY ANNOUNCES
COUNTERVAILING DUTY INVESTIGATION
ON IMPORTS OF DIURON
FROM ISRAEL
The Treasury Department announced today a formal
notice of investigation under the U.S. Countervailing
Duty Law (19 U.S.C. 1303) with respect to imports of
diuron from Israel. Notice to this effect will be
published in the Federal Register of August 10, 1977.
Diuron is a chemical compound used as a herbicide.

The Countervailing Duty Law requires the Treasury
Secretary to collect an additional customs duty that
equals the size of a "bounty or grant" (subsidy) which
has been found to be paid on imported merchandise.
This action is being taken pursuant to a petition
alleging that imports of diuron from Israel benefit
from several government subsidies upon the production
or exportation of that item. A preliminary determination in this case must be made on or before December
13, 1977 and a final determination by June 13, 1978.
Should the Treasury Department final determination be affirma
tive, the International Trade Commission must determine that a U.S. industry is being, or is likely to
be, injured before countervailing duties can be imposed. The statute requires an injury determination
in the case of duty-free items. Imports of diuron
from Israel are currently entitled to duty-free
treatment under the Generalized System of Preferences
(GSP) of the Trade Act of 1974.
Imports of diuron are classified under a basket
provision of the tariff schedules; imports of that
product from Israel were estimated to be no more than
$500,000 during calendar year 1976.
• * *

B-385

FOR RELEASE AT 4:00 P.M.

August 9, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued August 18, 1977, as
follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
May 19, 1977, and to mature November 17, 1977 (CUSIP No.
912793 L3 8), originally issued in the amount of $3,203
million, the additional and original bills to be freely
interchangeable.
182-day bills for approximately $3,400 million to be
dated August 18, 1977, and to mature February 16, 1978 (CUSIP
No. 912793 N7 7). The 182-day bills, with a limited exception,
will be available in book-entry form only.
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 18, 1977, outstanding
in the amount of $5,707 million, of which Government accounts and
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,857
million. These accounts may exchange bills they hold for the
bills now being offered at the weighted average prices of
accepted competitive tenders.
The bills will be issued on a discount basis under
competitive and noncompetitive bidding, and at maturity
their par amount will be payable without interest. 91-day
bills will be issued in bearer form in denominations of
$10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value), as well as in book-entry form to
designated bidders. Bills in book-entry form will be issued
in a minimum amount of $10,000 and in any higher $5,000
multiple. Except for 182-day bills in the $100,000
denomination, which will be available in definitive form
only to investors who are able to show that they are
required by law or regulation to hold securities in physical
form, the 182-day bills will be issued entirely in
book-entry form on the records either of the Federal Reserve
Banks and Branches, or of the Department of the Treasury.

B-386

-2Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D C
20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, August 15, 1977.
Form PD 4632-2 should be used to
submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
Each tender must be for a minimum of $10,000. Tenders
over $10,000 must be in multiples of $5,U00. 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.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the 182-day bills
applied for must accompany all tenders submitted for such
bills to be maintained on the book-entry records of the
Department of the Treasury. A cash adjustment will be made
on all accepted tenders for the difference between the par
payment submitted and the actual issue price as determined
in the auction.
No deposit need accompany tenders from incorporated
banks and trust companies and from responsible and
recognized dealers in investment securities for the 91-day
bills and 182-day bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches, or for
182-day bills issued in bearer form, where authorized. A
deposit of 2 percent of the par amount of the bills applied
for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated
bank or trust company accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.

-3Settlement for accepted tenders for the 91-day and 182-day
bills to be maintained on the book-entry records of Federal Reserve
Banks and Branches, and 182-day bills issued in bearer form must be
made or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on August 18, 1977,
in cash or other
immediately available funds or in Treasury bills maturing
August 18, 1977.
Cash adjustments will be made for differences
between the par value of the 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 of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

oOo

Department of theJR[/\$URY
WASHINGTON, D.C. 20220

WrQ'i

TELEPHONE 566 2041

Contact:

Alvin M. Hattal
(202)566-8381
August 10, 1977

FOR IMMEDIATE RELEASE

Certification Agreement With Finland

The Department of the Treasury announced today the
conclusion of a formal certification agreement with Finland to permit importation, under the Rhodesian Sanctions
Regulations, of specialty steel products from Finland.
The agreement replaces the interim arrangement which has
been in effect since March 18, 1977.
Under the new agreement the Government of Finland
has full responsibility for administration of the detailed
control measures provided for in the certification agreement.
The Board of Customs of the Government of Finland will
authorize producers of ferrochromium and specialty steel
products to state on the commercial invoice covering products
being exported to the United States that the goods have been
produced under the agreed certification procedures. This
special certification will be presented to Customs at the
time of importation and will serve to establish that specialty steel products from Finland do not contain any chromium
of Rhodesian origin.
oOo

B-387

toftheTREASURY
, D.C. 20220

TELEPHONE 566*2041

FOR RELEASE AT 4:00 P.M.

August 11, 1977

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
$2,953 million, or thereabouts, of 364-day Treasury bills to be dated
August 23, 1977,

and to mature August 22, 1978

(CUSIP No. 912793 R4 0).

The bills, with a limited exception, will be available in book-entry form only,
and will be issued for cash and in exchange for Treasury bills maturing
August 23, 1977.
This issue will not provide new money for the Treasury as the maturing
issue is outstanding in the amount of $2,953 million, of which $1,992 million is
held by the public and $ 961

million is held by Government accounts and the

Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities.

Additional amounts of the bills may be issued to Federal

Reserve Banks as agents of foreign and international monetary authorities.

Tenders

from Government accounts and the Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities will be accepted at the
average price of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest.
Except for definitive bills in the $100,000 denomination, which will be available
only to investors who are able to show that they are required by law or regulation
to hold securities in physical form, this series of bills will be issued entirely
in book-entry form on the records either of the Federal Reserve Banks and Branches,
or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and Branches and at the
Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern
Daylight Saving time, Wednesday, August 17, 1977,

Form PD 4632-1 should be used to

submit tenders for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000.
be in multiples of $5,000.

Tenders over $10,000 must

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.

B-388

Fractions may not be used.
(OVER)

-2Banking institutions and dealers who make primary markets in Government
securities and report dally to the Federal Reserve Bank of New York their positions
with respect to Government securities and borrowings thereon may submit tenders
for account of customers, provided the names of the customers are set forth in
such tenders.

Others will not be permitted to submit tenders except for their

own account.
Payment for the full par amount of the bills applied for must accompany all
tenders submitted for bills to be maintained on the book-entry records of the
Department of the Treasury.

A cash adjustment will be made for the difference

between the par payment submitted and the actual issue price as determined in
the auction.
No deposit need accompany tenders from incorporated banks and trust companies
and from responsible and recognized dealers in investment securities, for bills
to be maintained on the book-entry records of Federal Reserve Banks and Branches,
or for definitive bills, where authorized.

A deposit of 2 percent of the par

amount of the bills applied for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.

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 $500,000 or less without stated
price from any one bidder will be accepted in full at the average price (in
three decimals) of accepted competitive bids.
Settlement for accepted tenders for bills to be maintained on the records
of Federal Reserve Banks and Branches must be made or completed at the Federal
Reserve Bank or Branch on August 23, 1977,

in cash or other immediately avail-

able funds or in Treasury bills maturing August 23, 1977.

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 Code 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 bills (other than life insurance companies) issued hereunder must

-3include in his Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on original issue or
on a subsequent purchase, and the amount actually received either upon sale or
redemption at maturity during the taxable year for which the return is made.
Department of the Treasury Circulars, Public Debt Series - Nos. 26-76 and
27-76, and this notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue.

Copies of the circulars and tender forms may be

obtained from any Federal Reserve Bank or Branch, or from the Bureau of the
Public Debt.

epartmentoftheJREASURY
*SHINGTON, O.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

August 12, 1977

TREASURY TO AUCTION $2,900 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $2,900
million of 2-year notes to refund $1,898 million of notes
held by the public maturing August 31, 1977, and to raise
$1,002 million new cash. Additional amounts of these
notes may be issued at the average price of accepted
tenders to Government accounts and to Federal Reserve
Banks for their own account in exchange for $123 million
maturing notes held by them, and to Federal Reserve Banks
as agents of foreign and international monetary authorities
for new cash only.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.

oOo

Attachment

B-389

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED AUGUST 31, 1977
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation

August 12, 1977

$2,900 million
2-year notes
Series T-1979
(CUSIP No. 912827 GY 2)

Maturity date August 31, 1979
Call date
Interest coupon rate

No provision
To be determined based on
the average of accepted bids
Investment yield To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
February 28 and August 31
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, August 23, 1977,
by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
b) check drawn on bank
within FRB district where
submitted
c) check drawn on bank outside
FRB district where
spitted
nol.
Delivery date for coupon securities.

Wednesday, August 31, 1977

Friday, August 26, 1977

Thursday, August 25, 1977
Friday, September 2, 1977

C O N T A C T : George G. Ross
(202) 566-2356
FOR IMMEDIATE RELEASE August 12, 1977

Treasury Issues New Boycott Guidelines
Invites Public Comments
The Secretary of the Treasury today issued new guidelines, consisting of questions and answers, relating to provisions of the Tax
Reform Act of 1976 which deny certain tax benefits for participation
in or cooperation with international boycotts.
The new guidelines supersede earlier sets of guidelines, also
questions and answers, issued November 4, 1976 (Treasury News
Release WS-1156) and December 30, 1976 (WS-1239) and published
in the Federal Register on November 11, 1976 and January 5, 1977.
The new guidelines issued today generally are effective for operations occurring after, requests received after, and agreements
made after November 3, 1976.
Ebwever, if a particular answer in the new guidelines, when compared with an answer in the guidelines outstanding on August 11, 1977,
results in an increase in the reporting burden or tax liability of a
person, the new answer will be effective only for operations, requests,
and agreements after August 22, 1977. In addition, in the case of
operations that constitute participation in or cooperation with an international boycott under the new guidelines, but do not do so under the
previous guidelines outstanding on August 11, 1977, and that are carried
out in accordance with the terms of a binding contract entered into
before August 23, 1977, such operations will not constitute participation
in or cooperation with an international boycott until after Dscember 31,
1977.
Written comments may be submitted (preferably six copies) to the
Assistant Secretary for Tax Policy, U. S. Treasury Department,
Washington, D. C. 20220. All comments will be available for public
inspection and copying. Thus, a person submitting written comments
should not include any material that is confidential or inappropriate
for disclosure to the public.

B-390

- 2A public hearing will be held upon written request to the
Assistant Secretary for Tax Policy by any person who has submitted a written comment. If a public hearing is held, notice of
the time and place will be published in the Federal Register,
Written comments and requests for a public hearing must be
delivered or mailed by September 30, 1977.
This announcement and the new guidelines will appear in the
Federal Register of August 17, 1977.

oOo

D E P A R T M E N T OF THE TREASURY
GUIDELINES
Boycott Provisions (section 999)
of the Internal Revenue Code
Table of Contents
A. Boycott Reports
B. Definition of "Operations'1
C. Definition of "Reason to Know11 of Official Requirement
of Boycott Participation
D. Definition of "Clearly Separate and Identifiable Operations"
E. Effective Date Provisions
F. International Boycott Factor
G. Determinations
H. Definition of an Agreement to Participate in or Cooperate
with a Boycott (section 999(b)(3))
L Refraining from Doing Business with or in a Boycotted
Country (section 999(b)(3)(A)(i))
J. Refraining from Doing Business with any United States
Person Engaged in Trade in a Boycotted Country (section
999(b)(3)(A)(ii))
K. Refraining from Doing Business with any Company Whose
Ownership or Management is Made Up, in Whole or in Part,
of Individuals of a Particular Nationality, Race or Religion
(section 999(b)(3)(A)(iii))
L. Refraining from Employing Individuals of a Particular
Nationality, Race or Religion (section 999(b)(3)(A)(iv))
M. Asa Condition of the Sale of a Product, Refraining from
Shipping or Insuring that Product on a Carrier Owned,
Leased, or Operated by a Person who does not Participate
in or Cooperate with an International Boycott (section
999(b)(3)(B))
N. Reduction of Foreign Tax Credit

a

Subpart F Income

- 2In the questions and answers:
(a) Company A and Company B are companies organized under
the laws of one of the states of the United States;
(b) Company C and Company D, unless otherwise stated in the
question, are companies organized under the laws of any country,
including the United States;
(c) Country X is a boycotting country, which, inter alia,
boycotts Country Y;
(d) Country Y is a country boycotted by Country X;
(e) Country Z is any country and may be the United States,
a boycotting country or a boycotted country;
(f) All references to "Sections" are to Sections of the Internal
Revenue Code of 1954, as amended;
(g) In parts H-M in instances where the action described in
the question by itself does not, according to the answer, provide
sufficient evidence to support an inference that an agreement under
section 999(b)(3) exists, an overall course of conduct which includes

such action in addition to other actions could support such an inferenc
(h) In many questions in parts H-M, a person deals with either
Country X or the government, a company or a national of Country X.
The result reached in the answer to each of those questions would
be the same irrespective of whether the person is an individual, a
company or any other type of person, and whether the person dealt
with is Country X or the government, a company or a national of
Country X.

A.

Boycott Reports,

A-l. Q: Who must report as required by section 999(a)?
A:

Generally, a United States person (within the meaning

of section 7701(a)<30» is required to report under section 999(a) if it1.

has operations; or

2.

is a m e m b e r of a controlled group, "

a m e m b e r of which has operations; or
3.

is a United States shareholder within

the meaning of section 951(b) of a foreign corporation that has operations, but only if the United States
shareholder owns within the meaning of section 958(a)
stock of that foreign corporation; or
4.

is a partner in a partnership that has

operations; or
5.

is treated under section 671 as the

owner of a trust that has operations
in or related to a boycotting country (or with the government, a company,
or a national of a boycotting country). A person (within the meaning of
section 7701(a)(1)) that is not a United States person is required to
report under section 999(a) if it satisfies any one of the five conditions
specified above and it claims either the benefit of the foreign tax credit
under section 901 or owns stock of a DISC.
If a person controls a corporation within the meaning of section
304(c) and that person is required to report under section 999(a),
then under section 999(e) that person must report whether the corporation participated in or cooperated with the boycott. If the corporation is required to report under section 999(a), then under section

A-2
999(e) the corporation must report whether the person participated
in or cooperated with the boycott.
A boycotting country is
(i)

any country that is on the list maintained by
the Secretary under section 999(a)(3), or

(ii) any country not on the list maintained by the
Secretary under section 999(a)(3), in which
the person required to file the report (or a
m e m b e r of the controlled group that includes
that person) has operations, and which that
person knows or has reason to know requires
any person to participate in or cooperate with
an international boycott that is not excepted
by section 999(b)(4)(A), (B), or (C). Thus,
even if the boycott participation required of
the person reporting the operation is excepted
by section 999(b)(4)(A), (B), or (C), if that
person knows or has reason to know that boycott
participation not excepted by section 999(b)(4)(A),
(B), or (C) is required of any other person, the
country is a boycotting country.
If the person required to file the report (or a m e m b e r of the controlled
group that includes that person) has operations related to a country,
but not operations in that country, that country is not a boycotting
country unless it is on the list maintained by the Secretary under section
999(a)(3). (For the definition of operaticis :.n or related to a country,
see the questions and answers under part B.)

A-3
A-2. Q: Do the reporting requirements of section 999(a) that
refer to "United States shareholders" of foreign corporations require
U.S. minority shareholders to report the operations of such foreign
corporations?
A:

Yes. Under section 951(b) the term "United States

shareholder" includes any United States person who owns (within the
meaning of section 958(a)), or is considered as owning (by the application of the rules of ownership of section 958(b)), 10 percent or more
of the total combined voting power of all classes of stock entitled to
vote of such foreign corporation. The reporting requirement applies
even if the United States shareholder is a minority shareholder and
even if the foreign corporation is not a controlled foreign corporation
within the meaning of section 957(a). However, as stated in Answer
A-l, the reporting requirement applies only to minority shareholders
that actually own some stock within the meaning of section 958(a).
A-3.

Q:

If one m e m b e r of a controlled group of corporations

(within the meaning of section 993(a)(3)) files a report under section
999(a) with respect to the reportable operations of all members of that
group, is this sufficient to discharge the reporting obligation of all
members of the group?
A:

Yes, provided that the common parent (as defined in

the regulations under section 1504) files a consolidated return and the
report on behalf of all members of the controlled group. In the absence
of a consolidated return, each m e m b e r of the controlled group must
individually file the section 999(a) report. If a consolidated return is
filed on behalf of some members of the controlled group, only one report need be filed with respect to those members. However, each

A-4
other m e m b e r must individually file the report.
A-4.

Q:

If one United States shareholder of a foreign cor-

poration files a report under section 999(a) in respect of the reportable operations of the foreign corporation, is this sufficient to discharge the reporting obligations of all United States shareholders
of the foreign corporation in respect of that corporation's operations?
A:

No. Each United States shareholder of a foreign

corporation must file the section 999(a) report in respect of the activities of that corporation. However, if two or more United States
shareholders of a foreign corporation are included in the same consolidated return, only one report need be filed with respect to all
United States shareholders included in the return.
A-5.

Q:

H D W will the reporting requirements under section

999(a), "International Boycott Reports by Taxpayers", be satisfied?
A:

A taxpayer required to file an international boycott

report under section 999(a) will fulfill this requirement by filing a new
IRS Form 5713, "International Boycott Report", and all applicable
supporting schedules and forms contained in the taxpayer's income
tax returns which indicate the amounts and computations of benefits
denied under sections 908(a), 952(a)(3) and 995(b)(1)(F) of the Internal
Revenue Code.
A-6.

Q:

What degree of confidentiality will the international

boycott reports submitted by taxpayers receive?
A:

The reports by taxpayers will be submitted as part

of the income tax return and. therefore, will be accorded the same
degree of confidential treatment under section 6103 as any other
information contained in an income tax return.

A-5
A-7. Q: Where and how should the "international Boycott
Report" be filed ?
A:

The "international Boycott Report", Form 5713, should

be filed in duplicate by all reporting taxpayers. One copy of Form 5713
should be sent to the Internal Revenue Service, 11601 Roosevelt Blvd.,
Philadelphia, Pennsylvania, 19155, and the other copy of Form 5713
should be attached to the taxpayer's income tax return that is filed
with the taxpayer's customary Internal Revenue Service Center.
A-8.

Q:

Do individuals as well as corporations use Form 5713,

"International Boycott Report"?
A:

Yes. All taxpayers required to file a report under

section 999(a) will use IRS Form 5713. However, some parts of the
form apply to corporations only; individual taxpayers can ignore these
parts and complete only the questions relevant to individuals. While
all taxpayers reporting under section 999(a) are required to file Form
5713, the filing of Form 5713 does not necessarily fulfill all of the
reporting requirements under section 999(a). (See Answer A-5.)
A-9.

Q:

Section 999(b)(4) permits a person to agree to comply

with certain laws without being treated as having agreed to participate
in or cooperate with an international boycott. In the course of its
operations in or related to a boycotting country, a person agrees to
comply with a prohibition on importation and exportation that is described
in section 999(b)(4)(B) and section 999(b)(4)(C). Is that person required
to report the operations on Form 5713, the "International Boycott Report"?
A:

Yes, although agreements described in section 999(b)(4)

(B) and (C) do not constitute participation in or cooperation with an

A-6
international boycott, the operations in or related to a boycotting country must be reported on F o r m 5713.
A-10. Q:

Section 999(b)(4)(A) permits a person to meet require-

ments imposed by a foreign country with respect to an international
boycott if United States law or regulations, or an Executive Order, sanctions participation in or cooperation with that .international boycott. If a
person's operations fall within this exception, is the person required
to report such operations ?
A:

No. The reporting requirements with respect to opera-

tions under such international boycott agreements are waived.
A-ll. Q:

Company C sells goods or services to a person other

than a boycotting country, or the government, a company, or a national
of a boycotting country (or does other business with that person) outside
a boycotting country. Company C knows or has reason to know that that
person in turn will either use the goods or services in a boycotting country or sell the goods or services for use in a boycotting country. Is
Company C required to report its sale of goods or services to that person?
A:

Although the sale of the goods or services by Company C

constitutes an operation related to a boycotting country of Company C (see
Answer B - D , the requirement that Company C report the sale is waived,
provided that in connection with the operation Company C does not receive
a request to participate in or cooperate with an international boycott
(within the meaning of section 999(b)(3)), Company C does not participate
in or cooperate with an international boycott, and Company C did not establish its relationship with that person to facilitate participation in or cooperation
with an international boycott.

A-7
A-12. Q. Company A is a U. S. shareholder (within the meaning
of section 951(b)) of Company C. a foreign corporation. Company A
has a taxable year ending January 31, and Company C has a taxable
year ending June 30. Both companies have operations in Country X,
which is on the list maintained pursuant to section 999(a)(3). Who should
file Form 5713 and for what period ?
A:

As indicated in Answer A-l, Company C need not file

Form 5713 unless it claims the benefit of the foreign tax credit under
section 901 or owns stock of a DISC. Company A must file Form 5713
for its taxable year ending January 31, and must report operations of
Company C during Company C's taxable year ending within the period
covered by Company A f s report.
A-l 3. Q:

In the case of an International Boycott Report, Form

5713, filed by a m e m b e r of a controlled group, what period of time
should be reflected in the report, and when should the report to be filed?
A:

Each person described in Answer A-l ("reporting -

ing person") is required to report all reportable operations, requests
and participation or cooperation of each member of the controlled
group for each member's taxable year that ends with or within the
taxable year of the controlled group's common parent that ends
with or within the taxable year of the reporting person.
In addition, each reporting person is required to report all reportable operations, requests and participation or cooperation of each
foreign corporation that has a United States shareholder that is a
m e m b e r of the controlled group. Such operations, requests and

A-8

participation or cooperation of a foreign corporation are reported f
the foreign corporation's taxable year that ends with or within the
taxable year of the United States shareholder that ends with or with_ in the taxable year of the common" parent that ends with or within the
taxable year of the reporting person.
In the event that no c o m m o n parent exists,, the members of the
controlled group are to elect the taxable year of one of the members
to serve as the c o m m o n taxable year of the group. Procedures for
making the taxable year election are specified in the instructions to
the "International Boycott Report, " Form 5713. The taxable year
election is a binding election and is made only once. Approval of
the Secretary of the Treasury or his delegate is required for any
changes in the group taxable year.
Each reporting person will use its normal taxable year for making adjustments required under sections 908(a), 952(a)(3) and 995(b)
(1)(F), and for all purposes other than reporting and computing the
international boycott factor. For example, if the reporting person
uses the international boycott factor, the international boycott factor
will be applied to the reporting person's normal taxable year for
determining the reporting person's adjustments under sections 908(a),
952(a)(3) and 995(b)(1)(F).
More details concerning the time period covered in the international boycott report are contained in the instructions to Form 5713.
Details concerning the time period covered in the international boycott factor are contained in the instructions to Form 5713 and in

A-9
Temp. Regs. §7.999-1 and Proposed Regs. §1.999-1.
As stated in Answer A-7, the reporting person's "international
Boycott Report, " Form 5713, is filed at the time the reporting person files its income tax return.
A-14.

Q:

Company C is either a U. S. corporation or a foreign

corporation and is required to report under section 999(a). Company C
is also a subsidiary or a sister of a foreign corporation that is not required
to report under section 999(a). Is Company C required to report the operations, requests and participation or cooperation of the foreign parent or
sister corporation?
A:

Generally, under section 999(a) and Answer A-l, a per-

son required to report must report the operations, requests and participation or cooperation of all members of the controlled group of which it
is a member.

However, if the foreign parent or sister corporation is not

otherwise required to report, the requirement that Company C report
the operations, requests and participation or cooperation of the foreign
parent or sister corporation will be waived if Company C-1.

is not entitled to any benefits of deferral,
DISC, or the foreign tax credit, or

2.

applies the international boycott factor, and
forfeits all the benefits of deferral, DISC and
the foreign tax credit to which it is entitled
(i. e., applies an international boycott factor
of one under sections 908(a), 952(a)(3), and
995(b)(1)(F)), or

A-10
3.

identifies specifically attributable taxes and
income, and forfeits all the benefits of deferral,
DISC, and the foreign tax credit in respect of
which it is unable to demonstrate that the foreign
taxes paid and the income earned are attributable
to specific operations in which there was no
participation in or cooperation with an international
boycott.

Although the requirement that Company C report the operations, requests
and participation or cooperation of its foreign parent or sister corporations
m a y be waived, Company C must report all operations, requests and
participation or cooperation-i)

of itself, and

ii)

of all domestic members of each controlled group of

which Company C is a member, and
iii) if Company C is a United States company, of all foreign
corporations of which Company C is a United States shareholder within
the meaning of section 951(b), but only if Company C owns within the
meaning of section 958(a) stock of the foreign corporation, or
iv)

if Company C is a foreign company, of all foreign

corporations more than 50 percent of the stock of which is owned,
directly or indirectly, by Company C.
If Company C is required to report on behalf of a foreign corporation
(including itself if Company C is a foreign corporation), it must report
aU operations, requests and participation or cooperation of the foreign
corporation, even if conducted by or received by the foreign corporation
in connection with operations that are not effectively connected with a

A-ll
United States trade or business.
A-l5. Q:

Company C receives from Country X an unsolicited

invitation to tender for a contract for the construction of an industrial
plant in Country X. The tender documents contain a provision stating
that Country X will not enter into the contract unless the successful
tenderer makes an agreement described in section 999(b)(3). Company
C does not respond to the unsolicited invitation. Is Company C required
to report the invitation under section 999(a)(2) as a request to participate
in or cooperate with an international boycott?
A:

No. The section 999(a)(2) reporting requirement will

be waived provided that Company C neither solicited the invitation to
tender nor responded to the invitation.
A-16:

Q:

Before May 13, 1977, Company C received requests

to comply with international boycotts. Company C preserved the requests that were evidenced in writing and preserved the notations
it made concerning the details of oral requests. When Form 5713
was issued on M a y 13, 1977, it required more details concerning
the requests made of Company C than were preserved, and many of
those details can no longer be ascertained. Will Company C's report
under section 999(a)(2) be deemed deficient?
A:

Oi October 4, 1976, Company C was put on notice

that it would be required to document boycott requests received after
November 3, 1976. F o r m 5713 does not require any details that would
not have been preserved by a prudent person having such notice. In
addition, under Answer A-15, the reporting requirements of section

A-12
999(a)(2) have been waived for certain unsolicited boycott requests.
If Company C does not supply the required information with respect
to the remaining requests that were either solicited or responded to,
its report will be deficient.
A-17.

Q:

A United States partnership consisting of 100 United

States partners has operations in a boycotting country. Is each partner
required to file F o r m 5713?
A:

Generally, if a partnership has operations in a boy-

cotting country, each partner is required to file F o r m 5713. However,
if the partnership files F o r m 5713 with its information return and has
no operations for the taxable year that constitute participation in or
cooperation with an international boycott, then the requirement that
each partner file F o r m 5713 will be waived for each partner that has
no operations in or related to a boycotting country, or with the government, a company, or a national of a boycotting country other than
operations that are reported on the F o r m 5713 filed by the partnership.
A-l8. Q:

Company A owns 10 percent or m o r e of the outstanding

stock of Company C. a foreign corporation that has operations in Country X. but Company A does not have effective control over Company C.
Company C participates in or cooperates with an international boycott.
Company A requests information from Company C in order to meet its
reporting obligations under section 999(a). Company C refuses to provide (or is prohibited by local law. regulation, or practice from providing) that information. Will Company A be subject to the section 999(f)
penalites for willful failure to report the activities of C o m p a n y C ?

A-13
A:

Company A must report on the basis of that informa-

tion that is reasonably available to it. For example, in most cases
Company A will be aware that Company C has operations in Country
X. even though Company A is not aware of the operational details.
Company A must report on Form
in Country X.

5713 that Company C has operations

Company A should also describe in a statement attached

to Form 5713 the good faith efforts that it has made to obtain all the
information required under section 999(a). Although each case must
be resolved on the basis of the particular facts and circumstances,
Company A will not be subject to the section 999(f) penalties for willful failure to provide information if it can demonstrate that it made
good faith efforts to obtain the information but was denied the information by Company C.
A-l9. Q:

The facts are the same as in A-18 above except that

Company A owns less than 50 percent of the stock of Company C, and
Company C is not a controlled foreign corporation. What are the tax
sanctions to which Company A will be subject?
A:

Since Company C is neither a controlled foreign cor-

poration nor a DISC, the sanctions of section 952(a)(3) and 995(b)(1)(F)
are not relevant. However, Company A will be subject to the sanctions
of section 908(a). Thus, if Company A applies an international boycott
factor, that factor is applied to Company A's foreign tax credit in
accordance with Answers F-5. N-l and N-2. If Company A identifies
specifically attributable taxes and income under section 999(c)(2),
Company

A will lose its section 902 indirect foreign tax credit

for the taxes paid by Company C that Company A cannot demonstrate are

A-14
attributable to specific operations in which there was no boycott particij
tion or cooperation. (To determine whether Company A will lose its
section 901 direct foreign tax credit for income tax withheld by Country
X on dividends paid by Company C to Company A, see Answer N-3.)
A-20. Q :

Individual G is a national of Country X, which is on

the list maintained by the Secretary. G engages in an operation with
C o m p a n y C. For example, if Company C were a bank, the operation
might involve a deposit by G, or, if Company C were an automobile
dealer, the operation might involve the purchase of a car, or, if
Company C were a stockbroker, the operation might involve the purchase or sale of a security, or if Company C were a hotel, the operation might involve the letting of a room. Irrespective of the specific
nature of the operation, the agreement under which the operation is
consummated is the s a m e agreement that Company C requires of all
other customers. Company C is aware of G's nationality, but participation in or cooperation with an international boycott is neither contemplated nor required as a condition of G's willingness to enter into
the operation with Company C. Under section 999(a), what are the
reporting obligations of Company C with respect to these operations ?
A:

In m a n y business operations, there will be incidental

contacts between the nationals or business enterprises of boycotting
countries and persons from other countries. Company C's obligation to
report these incidental contacts under section 999(a) will be waived
provided that the contacts satisfy the following criteria:

A-15
1.

all aspects of the operation contemplated by
the parties are carried on outside a boycotting
country; and

2.

the operation does not contemplate any agreement which would constitute participation in
or cooperation with an international boycott; and

3.

no request for such an agreement is actually
m a d e or received by any party to the operation;
and

4.

there is no such agreement in connection with
the operation; and

5.

a.

the operation does not involve the importation of property, funds or services from or
produced in a boycotting country and Country C does not know or have reason to know
that the property, funds or services will
be used, consumed or disposed of in a
boycotting country, or

b.

the value of the property, funds or
services furnished or obtained in the
operation does not exceed $5,000.

The answer to the question would be the same if Company C were an
individual or if G were a corporation.
A-21. Q :

Individual G, a U.S. citizen, owns 15 percent of the

stock of C o m p a n y A. Company A has operations in Country X . Is
Individual G required to report the operations of Company A ?

A-16
A: An individual generally is not required to report
the operations of a domestic corporation of which the individual is
a shareholder. However, if Individual G controls (within the meaning
of section 304(c)) Company A and if Individual G is required to report
under section 999(a), then under section 999(e) Individual G must
report whether Company A participated in or.cooperated with an international boycott.
A-22. Q:

Companies A, B and C are all U.S. corporations re-

porting on a calendar year basis. Companies A, B and C each had
operations in Country X during the calendar year. From January 1 to
June 1, Company A owned more than 50 percent of the stock of Company
B.

On June 1, Company C acquired more than 50 percent of the stock

of Company B. What operations must be reflected in the Forms 5713
filed by Companies A, B and C for the calendar year ?
A:

The F o r m 5713 filed by Company A must reflect the

operations of Company A for the entire calendar year and the operations
of Company B for the period January 1-May 31. The Form 5713 filed
by Company C must reflect the operations of Company C for the entire
calendar year and the operations of Company B for the period June 1December 31. The F o r m 5713 filed by Company B must reflect the
operations of Company B for the entire calendar year, the operations
of Company A for the period January 1-May 31 and the operations of
Company C for the period June 1-December 31. If the sale of stock had
occurred during the first 30 days of the calendar year, the requirement
that Company A report the operations of Company B and that Company B
report the operations of Company A for the period of 30 days or less

A-17
would be waived unless under Reg. §1.1502-76(b)(5) Company B is
included in the consolidated return filed by Company A for that period.
The requirement that Company B report the operations of Company C,
and that Company C report the operations of Company B, for that
period of 30 days or less, would also be waived unless under Reg.
§1.1502-76(b)(5) Company B is included in the consolidated return filed
by Company C for that period. Similarly, if the sale of stock had occurred
during the last 30 days of the calendar year, the requirement that Company A report the operations of Company B and that Company B report
the operations of Company A for the period of 30 days or less would be
waived unless under Reg. §1.1502-76(b)(5) Company B is included in
the consolidated return filed by Company A for that period, and the
requirement that Company B report the operations of Company C and
that Company C report the operations of Company B for the period of
30 days or less would be waived unless under Reg. §1.1502-76(b)(5)
Company B is included in the consolidated return filed by Company C
for that period.
A-23.

Q:

In 1977, Company A owns more than 50 percent of the

stock of Company C, a foreign corporation that has operations in Country X that constitute participation in or cooperation with an international
boycott. Companies A and C both report on a calendar year basis.
Company C pays no dividend in 1977, but pays a dividend in 1978, a year
in which neither Company A nor Company C has operations in any boycotting country.

Company A claims a foreign tax credit under section

902 in 1978 in respect of the taxes paid by Company C. For which year,
1977 or 1978, must Company A report the operations of Company C;

A-18
for which year are Company C's operations reflected in Company A's

international boycott factor; and for which year is the sanction of se
tion 908(a) applicable?
A: Company C's operations are reported by Company A

and are reflected in Company A's international boycott factor for 1977
The operations of Company C during 1977 will not be reflected in Company A's Form 5713 or international boycott factor for 1978. However,

if in 1978 Company A chooses to determine its loss of tax benefits usi

the specifically attributable taxes and income method described in se

tion 999(c)(2), in 1978 Company A will lose that portion of the sectio
902 foreign tax credit specifically attributable to Company C's 1977
boycott operations. In this case, even though in 1978 Company A
and Company C have no operations that are required to be reported by
Company A on Form 5713, Company A must nevertheless file Form 5713
in 1978 (which will show no operations) and complete Schedules B and
C to Form 5713, on which Company A will show the loss of the section
902 foreign tax credit attributable to Company C's boycott operations
for 1977.

B.

DBfinitionof "Operations".

B-l. Q: Under what circumstances does a person have operations in. or related to. a boycotting country (or with the government,
a company, or a national of that country)?
A:

A person has operations in, or related to, a boycotting

country (or with the government, a company, or a national of that
country) if the operation in which it engages:
1.

is carried on in whole or part in a boycotting
country ("in a country");

2.

is carried on outside a boycotting country
either for or with the government, a company,
or a national of a boycotting country ("with
the government, a company, or a national of
a country"); or

3.

is carried on outside a boycotting country for
the government, a company, or a national of
a non-boycotting country if the person having
the operation knows or has reason to know that
the specific goods, services or funds produced
by the operation are intended for use in a boycotting country or for the government, a company, or
a national of a boycotting country ("related to a country").

The term "operation" encompasses all forms of business or commercial
activites whether or not productive of income, including, but not limited
to, selling; purchasing; leasing; licensing; banking, financing and similar
activities; extracting; processing; manufacturing; producing; constructing;
transporting; performing activities ancillary to the foregoing (e. g., contract

B-2

negotiating, advertising, site selecting, etc.); and performing service
whether or not ancillary to the foregoing.
Operations described in principles 2 and 3 are illustrated in the
following two examples:
(a)

Company C engages in a joint venture manufac-

turing operation in a non-boycotting country with Company D,
a company incorporated under the laws of Country X.

Company

C has operations "with" a company of a boycotting country.
(b)

D, a national of a non-boycotting country has a

contract to construct a dam in Country X. D subcontracts to
Company C for the manufacture of a generator for the dam.
Tne contract between D and Company C and the generator
specifications indicate that the generator is for use in Country
X.

Tne contract specifies delivery of the generator to D f. o. b.

New York. Company C has operations "related to" a boycotting
country.
B-2.

Q:

Individual G is a U. S. citizen living in Country X.

G

is retired. G receives social security payments and a pension, but
has no business activities. Does G have "operations" in, or related
to. Country X ?
A:

No. G is not engaged in any business or commercial

Q:

Individual H is a U. S. citizen living in Country X and

activities.
B-3.

working there as an employee.

H earns a salary and has passive in-

vestment income, but has no business income. Does H have "operations"
in or related to Country X ?

B-3
A: No. The performance of personal services as an employee does not constitute an "operation. "

C.

Definition of "Reason To Know" Requirement of Boycott
Participation.

C-l. Q: Under what circumstances, in the absence of a
Treasury listing of a country under section 999(a)(3), will it be deemed
under section 999 (a)(1)(B) that a person knows or has reason to know
that participation in or cooperation with an international boycott is
required as a condition of doing business within such country or with
the government, a company, or a national of such country?
A:

A person will be deemed to know or have reason to

know that a country requires participation in or cooperation with an
international boycott as a condition of doing business within a country
or with the government, a company, or a national of a country, if that
person receives what could be interpreted as an official request of that
country to participate in or cooperate with an international boycott or if
that person knows that others have received such requests. Whether a
request could be interpreted as an official request of a country depends
on an analysis of the facts and circumstances surrounding the request.
However, the request need not be made directly by a government official
or representative in order to be interpreted as an official request. Thus,
for example, assume that Company C has a contract with the government
of a boycotting country to build a dam in that country and is required
under the contract to require its subcontractors to agree to participate
in or cooperate with the boycott. Assume further that Company C requires Subcontractor D to make such an agreement as a condition of receiving the subcontract to build a generator for the dam.

Subcontractor

D will be deemed to have reason to know that participation in or cooperation with an international boycott is a condition of doing business within

C-2
the boycotting country or with the government, a company, or a national
of such country.

D

-

Definition of

D-l. Q: If

a

"Clearly Separate and Identifiable O n ^ ^ o "

person or a member of a controlled group (within

the meaning of section 993(r)(3)) enters into an agreement that constitutes participation in or cooperation with an international boycott
(within the meaning of section 999(b)(3)), what operations of that person
or group will be considered to be operations in connection with which
such participation or cooperation occurred?
A:

All operations of that person or any m e m b e r of that

(a)

the country in connection with which the

group in

agreement is made; and
(b)

any other country that requires participation

in or cooperation with the boycott with respect to which
the agreement is m a d e
will be presumed to be operations in connection with which there was
participation in or cooperation with an international boycott. (See,
however. Answer D-4 for an exception to the presumption in the case
of agreements that are unintentional and unauthorized and that relate
to a minor aspect of an operation.)
This presumption m a y be rebutted, however, if the person (or,
if applicable, the U.S. shareholder of a foreign corporation) or m e m b e r
of the group clearly demonstrates that a particular operation is a
clearly separate and identifiable operation from the operation in connection with which the agreement was made, and that no agreement
constituting participation in or cooperation with an international boycott was m a d e in connection with such separate and identifiable operation,

D-2
The presumption of participation in or cooperation with the boycott
will not apply with respect to operations outside the countries described
in (a) and (b) above, but such operations will be considered to be operations
in connection with which there was participation in or cooperation with
an international boycott if so warranted by the facts.
D-2.

Q:

W h o has the burden of proof of clearly demonstrating

that a particular operation is a "clearly separate and identifiable
operation" and that there was no participation in or cooperation with
an international boycott in connection with that operation?
A:

If a person or a m e m b e r of a controlled group has

participated in or cooperated with an international boycott in connection
with one or m o r e of its operations, that person (or, if applicable,
the U.S. shareholder of a foreign corporation) or that group bears
the burden of proof of clearly demonstrating that any other operation is
clearly separate and identifiable from the operation in connection with
which such participation or cooperation occurred and that no such participation or cooperation occurred in connection with the separate and
identifiable operation.
D-3.

Q:

H o w can a taxpayer determine what constitutes a

"clearly separate and identifiable operation"?
A:

The determination whether an operation constitutes

a clearly separate and identifiable operation must be based on an examination of all the facts and circumstances. The following factors are
a m o n g those that m a y be considered in determining whether an operation
is clearly separate and identifiable from an operation in connection

D-3
with which participation in or cooperation with an international boyc ott
occurred:
1.

W e r e the two operations conducted by different
corporations, partnerships, or other business
entities ?

2.

W e r e the operations, whether conducted
by separate entities or not, supervised by
different m a n a g e m e n t personnel?

3.

Did the operations involve distinctly different
products or services ?

4.

W e r e the operations undertaken pursuant to
separate and distinct contracts?

5.

If business operations in the countries conducting the international boycott in question
w e r e not continuous over time, w a s each
transaction separately negotiated and
performed?

T h e factors listed above are not intended to represent all the factors that will be considered in determining whether an operation is a
clearly separate and identifiable operation. Additional factors will
be considered if so warranted by the facts. N o relative weight is
assigned to any specific factor; instead, the weight to be given to
any factor will depend on the facts and circumstances of each individual
case. In addition, a positive answer to all the listed factors will not
necessarily result in a determination that an operation is a clearly
separate and identifiable operation if other facts and circumstances

D-4
suggest that the operation is not clearly separate and identifiable.
D-4 Q: Company C has operations in or related to Country
X. In connection with a minor aspect of that operation, an employee
of Company C enters into an unintentional and unauthorized boycott
agreement. For example, a clerk of Company C signs an invoice
for office supplies. On the reverse side of the invoice, a boycott
clause is printed in fine print or in a foreign language. Will that
agreement give rise to the presumption that all the operations of
Company C in or related to a boycotting country are operations in
connection with which there is participation in or cooperation with
international boycott?
A: No. An agreement to participate in or cooperate with

an international boycott made in connection with a minor aspect of an

operation will not taint the operations of Company C in or related to
a boycotting country if the agreement was unintentional, Company C

has not authorized the employee to agree to participate in or cooper

with the international boycott and Company C does not comply with the
terms of the unauthorized boycott clause.

E.

Effective Date Provisions.

E-l. Q: What are the effective dates of the reporting requirements and sanctions of the international boycott provisions?
A:

Generally, the reporting requirements and the

sanctions of the international boycott provisions apply to agreements
to participate in or cooperate with an international boycott made after
November 3, 1976, and to agreements made on or before November 3,
1976, that continue in effect thereafter. However, there are two exceptions to this general rule. First, the reporting requirements of
section 999(a) apply to operations referred to in section 999(*)(1) or
(2) after November 3, 1976, whether or not there has been an agreement to participate in or cooperate with an international boycott, and
whether or not the operations are carried out in accordance with the
terms of a binding contract entered into before September 2, 1976.
Operations on or before November 3, 1976, are reportable if there has
been participation in or cooperation with the boycott during the taxable
year after November 3, 1976 (see Answer E-2). Second, in the case of
operations carried out in accordance with the terms of a binding contract
entered into before September 2, 1976, the sanctions of the international
boycott provisions apply only to agreements to participate in or cooperate
with an international boycott made on or after September 2, 1976, and to
agreements made before that date that continue in effect after December
31, 1977. More details concerning reporting requirements and the
application of sanctions for years affected by the effective date of the
international boycott provisions are contained in the instructions to
F o r m 5713, in Temp. Regs. §7. 999-1 and in Proposed Regs. §1.999-1.

E-2

E-2. Q: If a person who reports tax liability on a calendar
year basis m a k e s an agreement on November 20, 1976, to participate
in or cooperate with an international boycott, which of that person's
operations conducted during the taxable year are reportable, which
operations are included in the international boycott factor calculations,
and how are the sanctions applied?
A:

All operations of the person during the entire 1976

taxable year (including pre-November 20, 1976, operations) in or
related to a boycotting country or with the government, a company,
or a national of such country must be reported under section 999(a)
and will be considered in calculating the international boycott factor
(or the amount of taxes or income specifically attributable to operations in which there w a s participation in or cooperation with an international boycott) for the taxable year.

However, under section 999(c)

(1), operations for which the presumption of participation in or cooperation with the boycott has been rebutted need not be reflected in the
numerator of the international boycott factor (or under section 999(c)(2),
the tax benefits specifically attributable to specific operations for which
that presumption has been rebutted will not be denied). See also Temp.
Regs. §7.999-1 and Proposed Regs. §1.999-1.
The sanctions are applied to the year 1976 on a pro rata basis.
If a person uses the international boycott factor for 1976, the factor
is applied under sections 908(a), 952(a)(3), and 995(b)(1)(F) after it
has been multiplied by the fraction 58/366, representing the number of
days after the November 3, 1976 effective date remaining during the
calendar year.

If a person identifies specifically attributable taxes

E-3
and income, the tax benefits denied under sections 908(a), 952(a)(3), and
995(b)(1)(F) are computed by first ascertaining the tax benefits of the
foreign tax credit, deferral, and DISC, respectively, for the taxable
year attributable to operations for which the presumption of boycott participation has not been rebutted, and then multiplying those amounts by 58/366.
E-3.

Q:

If a person having a July 1-June 30 taxable year carries

out operations in accordance with the terms of a binding contract entered
into before September 2, 1976, and, in furtherance of that contract,
m a k e s an agreement on February 15, 1978, to participate in or cooperate
with an international boycott, which of the person's operations conducted
during the taxable year July 1, 1977-June 30, 1978 are reportable, which
operations are included in the international boycott factor calculations,
and how are the sanctions applied?
A:

All operations of the person during the entire July 1,

1977-June 30, 1978 taxable year (including pre-February 15, 1978 operations) in or related to a boycotting country or with the government, a
company, or a national of such country, must be reported under section
999(a) and will be considered in calculating the international boycott
factor (or the amount of taxes or income specifically attributable to
operations in which there was participation in or cooperation with an
international boycott) for the taxable year. However, under section
999(c)(1), operations for which the presumption of participation in or
cooperation with the boycott has been rebutted need not be reflected
in the numerator of the international boycott factor, and, under section
999(c)(2), the tax benefits specifically attributable to specific operations
for which that presumption has been rebutted will not be denied.

E-4
The sanctions are applied to the July 1, 1977-June 30, 1978 taxable
year on a pro rata basis. If a person uses the international boycott
factor for the taxable year, the factor is applied under sections 908(a),
952(a)(3), and 995(b)(1)(F) after it has been multiplied by the fraction
181/365, representing the number of days after the December 31, 1977
effective date remaining during the taxpayer's taxable year. (See also
Temp. Regs. §7. 999-1 and Proposed Regs. §1. 999-1.) If a person
identifies specifically attributable taxes and income, the benefits to
be denied under section 908(a), 952(a)(3), and 995(b)(1)(F) are computed
by first ascertaining the tax benefits of the foreign tax credit, deferral,
and DISC, respectively, for the taxable year attributable to operations
for which the presumption of boycott participation has not been rebutted
and then multiplying those amounts by 181/365.
E-4.

Q:

What is a binding contract for purposes of the binding

contract rule ?
A:

A binding contract with respect to a person, a member

of a controlled group that includes that person, or a foreign corporation of which that person is a United States shareholder is a contract
that was, on September 1, 1976, and is at all times thereafter,
binding on that person, foreign corporation or member, and under which
all material terms are fixed or are ascertainable with reference to an
objectively determinable standard.
E-5.

Q:

If, under a binding contract existing before September

2, 1976, a person made an agreement described in section 999(b)(3),
will operations under the contract be subject to the international boycott
provisions in years after 1977?

E-5
A: Yes, unless the person establishes that, before
December 31, 1977, the agreement to participate in or cooperate with
the boycott was renounced, the renunciation was communicated to
the government or person with which the agreement was made, and
the agreement was not reaffirmed after 1977.
E-6.

Q:

If, under a contract made in 1979, a person who reports

tax liability on a calendar year basis makes an agreement described
in section 999(b)(3), but does not comply with the agreement after 1980,
will operations under the contract be subject to the international boycott
provisions in years after 1980?
A:

Yes, unless the person establishes that, before

December 30, 1980, the agreement to participate in or cooperate with
the boycott was renounced, the renunciation was communicated to
the government or person with which the agreement was made, and the
agreement was not reaffirmed after 1980.
E-7.

Q:

If. under a contract made after January 1, 1977, a

person makes an agreement described in section 999(b)(3), and later
renounces the agreement and communicates such renunciation to the
government or person with which the agreement was made, which
operations of such person during the taxable year of the renunciation
are reportable, which operations are included in the international boycott
factor calculations, and how are the sanctions to be applied?
A:

All operations of the person during the entire taxable

year within which the agreement was renounced (including post-renunciation operations) in or related to a boycotting country or with the
government, a company, or a national of such country must be reported

E-6
under section 999(a) and will be considered in calculating the international
boycott factor (or the amount of taxes or income specifically attributable
to operations in which there was participation in or cooperation with an
international boycott) for the taxable year. However, under section
999(c)(1), operations for which the presumption of participation in
or cooperation with the boycott has been rebutted need not be reflected
in the numerator of the international boycott factor, and the tax benefits specifically attributable to specific operations for which such presumption has been rebutted will not be denied. There is no proration
between the pre-renunciation and post-renunciation portions of the
taxable year of either the boycott factor or the specifically attributable
taxes and income.
E-8.

Q:

Before September 2, 1976, C o m p a n y A entered into

a binding contract that did not contain an agreement to boycott or by
itself support an inference of the existence of an agreement to boycott.
However, C o m p a n y A's course of conduct in carrying out operations in
accordance with the terms of the contract evidences that there is an
implied agreement that constitutes participation in or cooperation with
an international bpycott. Will the sanctions of sections 908(a), 952(a)(3),
and 995(b)(1)(F) be applied to such participation or cooperation that
takes place prior to January 1, 1978 (see section 1066(a) of the Tax
Reform Act of 1976)?
A:

If the course of conduct from which the existence of the

implied agreement was inferred took place before September 2, 1976,
then the sanctions of sections 908(a), 952(a)(3), and 995(b)(1)(F) will
not be applied to such participation in or cooperation with an international

E-7
boycott that takes place prior to January 1, 1978. However, if
the inference of the existence of the implied agreement would depend
on conduct on or after September 2, 1976, then those sanctions will
be applied to participation in or cooperation with the international
boycott after November 3, 1976 (see section 1066(a)(1) of the Tax
Reform Act of 1976).
E-9.

Q:

Company C entered into a binding contract prior to

September 2, 1976 to manufacture and deliver equipment to a customer
located in Country X. The contract requires Company C to use no components that are manufactured by blacklisted United States companies.
The contract also requires that the vessel on which the equipment is
shipped not be blacklisted. On January 15, 1977, Company C is able
to have the contract amended to eliminate the requirement regarding
components, but is unable to secure any change regarding vessels.
Will the amendment regarding components remove the binding contract
protection otherwise afforded until December 31, 1977 that Company C
has regarding vessels?
A:

No. Since Company C could have waited to abrogate

or renegotiate its contract until the end of 1977 and since it is in accord
with the legislative purpose for Company C to accelerate elimination
of the provision regarding components, it will remain protected until
December 31, 1977 from the consequences of its continuing to refrain
from shipping the goods on blacklisted vessels.
E-10. Q:

If before December 31, 1977 a person carries out

several different operations in boycotting countries and the only operation of that person that constitutes participation in or cooperation with

E-8
an international boycott is carried out in accordance with the terms of
a binding contract entered into before September 2. 1976, will the
existence of that one boycotting operation trigger the section 999(b)(1)
presumption that the other operations of that person in boycotting
countries are also operations in connection with which boycott participation or cooperation occurred?
A:

No. Operations carried out before December 31,

1977, in accordance with the terms of a binding contract entered into
before September 2, 1976, will not trigger the section 999(b)(1)
presumption.
E-ll. Q:

Are operations of a person that constitute partici-

pation in or cooperation with an international boycott factor reflected
in the numerator of a person's international boycott factor before
December 31, 1977 if those operations are carried out in accordance
with the terms of a binding contract entered into before September
2, 1976?
A:

No. Boycotting operations carried out before

December 31, 1977 in accordance with the terms of a binding contract
entered into before September 2, 1976 are not reflected in the numerator of the international boycott factor. They are reflected in the denominator, however.

See Temp. Regs. §7.999-1 and Proposed

Regs. §1.999-1.
E-12. Q:

Oi June 30, 1976, Company A, a domestic corporation

that reports its operations on a calendar basis, disposed of all of its
stock in Company C, a foreign corporation. Will Company A be required
to report any operations, requests or participation or cooperation of

E-9
Company C for calendar year 1976? Will the operations of Company C
be included in Company A's international boycott factor for 1976?
A:

No. Since Company A did not own any stock of

Company C after the effective date of the boycott provisions, Company
A is not required to report any operations, requests or participation
or cooperation of Company C in 1976 and will-exclude Company C's
operations from its international boycott factor computations.
E-13. Q:

Are operations, requests or participation in or coopera-

tion with an international boycott of a person for that person's taxable
year that ends before November 4, 1976 required to be reported, either
by that person or by any other person?
A:

No, operations, requests and participation in or coopera-

tion with an international boycott of a person for that person's taxable
year that ends before November 4, 1976 need not be reported by any
person. However, as stated in Answers E-l and E-2, operations, requests and participation in or cooperation with an international boycott
occurring or received before November 4, 1976 during a taxable year
that ends on or after that date are reportable if there has been participation
in or cooperation with an international boycott during that taxable year
but on or after that date.

F.

International Boycott Factor.

F-l. Q: How is the international boycott factor computed?
A:

Section 999(c)(1) provides that the international boy-

cott factor is determined under regulations prescribed by the Secretary.
The international boycott factor is a fraction, the numerator of which
reflects the boycotting operations of a person (or group) in or related
to countries associated in carrying out the international boycott and
the denominator of which reflects the person's (or group's) worldwide
foreign operations. Temporary and proposed regulations setting forth
the method of determining the international boycott factor were issued
in February, 1977. See Temp. Regs. §7.999-1 and Proposed Regs.
§1.999-1.
F-2.

Q:

In the case of a controlled group (within the meaning

of section 993(a)(3)) is a single international boycott factor computed
for the entire group ?
A:

Yes. All members of a controlled group share a

single, c o m m o n international boycott factor which reflects the operations of all m e m b e r s of the controlled group.
F-3.

Q:

Once an international boycott factor has been computed

for a controlled group (within the meaning of section 993(a)(3)), how is
the factor applied to individual members of the group?
A:

The international boycott factor of a controlled group

is applied separately under sections 908(a), 952(a)(3), and 995(b)(1)(F)
to each individual m e m b e r of the controlled group.
F-4.

Q:

If a person applies the international boycott factor

to some operations during the taxable year, must the factor be applied
to all operations of that person for the taxable year?

F-2
A:

Yes. If a person applies the international boycott

factor to one operation during the taxable year, the factor must be
applied to all operations during the taxable year under each of sections
908(a), 952(a)(3), and 995(b)(1)(F). If a person identifies specifically
attributable taxes and income under section 999(c)(2), that method
must be applied to all operations during the taxable year and must be
applied under each of sections 908(a), 952(a)(3), and 995(b)(1)(F).
F-5.

Q:

In the case of a controlled group (within the meaning

of section 993(a)(3)), m a y one m e m b e r use the international boycott
factor under section 999(c)(1) and another member identify specifically
attributable taxes and income under section 999(c)(2)?
A:

Yes. Each m e m b e r may independently choose either

to apply the international boycott factor under section 999(c)(1) or to
identify specifically attributable taxes and income under section 999
(c)(2). The method chosen by each member for determining the loss
of tax benefits must be applied consistently to determine all loss of
tax benefits of that member.

For example, if one member of a con-

trolled group. Company A, chooses to use the international boycott
factor, then it must apply the international boycott factor to determine
its loss of the section 902 indirect foreign tax credit in respect of a
dividend paid to it by another member of the controlled group, Company
C, even if Company C determines its loss of tax benefits by identifying
specifically attributable taxes and income. Company A would also
determine the amount deemed distributed to it under sections 995(b)
(1)(F) and 952(a)(3) by applying its international boycott factor to the
otherwise deferrable earnings of its DlSCs or controlled foreign

F-3
corporations. In addition, if an affiliated group of corporations files
a consolidated return, then the affiliated group must determine its
loss of tax benefits either by applying the international boycott factor
to the consolidated return, or by having each m e m b e r determine its
loss of tax benefits by identifying specifically attributable taxes and
income.
F-6.

Q:

If a person chooses to determine its loss of tax

benefits by applying the specifically attributable taxes and income
method set forth in section 999(c)(2), m a y it demonstrate the amount
of foreign taxes paid and income earned attributable to the specific
operations by applying an overall effective rate of foreign taxes and
an overall profit margin to each operation?
A:

N o . A person must clearly demonstrate foreign

taxes paid and income earned attributable to specific operations by performing an in-depth analysis of the profit and loss data of each separate
and identifiable operation.

The principles of Regs. §1.861-8 are

applicable in determining income and taxes attributable to specific
operations.
F-7.

Q:

A United States partnership has operations in a boy-

cotting country. Is the international boycott factor computed at the
partnership level?
A:

No.

The international boycott factor is computed sepa-

rately by each partner based on information submitted by the partnership and on other activities of that partner. Of course, if the partner
can meet the conditions of section 999(c)(2) of the Code, he need not
use the international boycott factor.

F-4
F-8.

Q:

A person desires to determine its loss of tax

benefits by applying the specifically attributable taxes and income
method set forth in section 999(c)(2).

That person is able to clearly

demonstrate that a specified portion of its operations in or related
to a boycotting country constitute clearly separate and identifiable operations in connection with which there was no participation in or cooperation with an international boycott. That person is also able to clearly
demonstrate the taxes and income attributable to those operations.
With respect to the remainder of its operations in or related to a
boycotting country, that person is either unable to clearly demonstrate
clearly separate and identifiable operations in connection with which
there w a s no participation in or cooperation with an international boycott
or to identify taxes and income specifically attributable to operations
in connection with which there was such participation or cooperation.
Under these facts, will that person be required to determine its loss
of tax benefits by applying the international boycott factor?
A:

N o . That person m a y compute its loss of tax benefits

by applying the specifically attributable taxes and income method if it
forfeits the benefits of deferral, DISC and the foreign tax credit attributable to:
L

the portion of its operations for which it can determine
taxes and income specifically attributable to separate and
identifiable operations in connection with which there was
participation in or cooperation with an international boycott,
and

F-5
2. the remaining portion of its operations for which it cannot
demonstrate that the taxes and income are specifically
attributable to separate and identifiable operations in connection
with which there was no participation in or cooperation with
an international boycott.
F-9.

Q:

If a person choses to compute its loss of tax benefits

in one year by applying the international boycott factor, may that person
compute its loss of tax benefits in another year using the specifically
attributable taxes and income method?
A:

Yes. The election to use the international boycott

factor or the specifically attributable taxes and income method is an
annual election. The election is made by completing the appropriate
Schedule A or B to F o r m 5713.
F-10. Q:

In 1978 a person computes its loss of tax benefits

using the international boycott factor. On audit, it is determined that
adjustments are to be made to the international boycott factor. May
that person then recompute its loss of tax benefits for 1978 using the
specifically attributable taxes and income method?
A:

Yes. A person may change its method of computing

loss of tax benefits under the international boycott provisions at any
time for any open taxable year.

G.

Determinations.

G-l. Q: What degree of confidentiality will determinations,
and requests for determinations, under section 999(d) receive?
A: A determination under section 999(d) will be
treated as a "written determination" within the meaning of section
6110(b)(1). Therefore the determination and any background file
document related thereto will be subject to public inspection in
accordance with the rules set forth in section 6110, and subject
to the deletions set forth in section 6110(c).
G-2. Q: What procedures are applicable to requests for, and
the issuance of, determinations under section 999(d)?
A: The procedures applicable to requests for, and

the issuance of, determinations under section 999(d) are set forth i
Revenue Procedure 77-9, 1977-10 IRB 12.

H.

Definition of an Agreement to Participate in or Cooperate
with a Boycott (section 999(b)(3)).
H-l.

Q:

Company C, a trading company, signs a contract

with Country X to export goods to Country X.

The contract contains

a clause requiring Company C not to obtain any of the goods from any
person blacklisted by Country X. Does Company C's entering into the
contract constitute an agreement according to section 999(b)(3)?
A:

Generally, entering into a written or oral agreement

that includes a provision requiring a person to refrain from doing business with a person blacklisted by Country X (or by a group of countries
associated with Country X in carrying out an international boycott directed
against Country Y) constitutes participation in or cooperation with an
international boycott within the meaning of section 999(b)(3). Blacklists
are normally maintained to provide a convenient list of persons that
engage in business with Country Y or engage in other activities that
are inconsistent with the boycott. Thus, reference in an agreement to
a "blacklist" can normally be assumed to be to such a list.
However, entering into the agreement does not constitute participation in or cooperation with an international boycott if it is established
that the blacklist is maintained for reasons other than furtherance of
the boycott or if it is established that no person on the blacklist is
either (1) blacklisted because it is the government, a company or a
national of Country Y or because its ownership, management or directors
is made up of individuals of a particular nationality, race or religion
or (2) a U. S. person blacklisted because it is engaged in trade with
Country Y or with the government, a company or a national of Country
Y.

H-2
H-2. Q: During the course of negotiations concerning a
contract for the export of goods to Country X. Company C, a trading
company, and Country X agree orally that Company C will not purchase
any of the goods from any company included on a blacklist shown to
-Company C's representatives. They also agree that this agreement

will not be reflected in the written contract for the export of the go
or in any other writing. Does the oral understanding between Company

C and Country X constitute an agreement according to section 999(b)(3)
A: Generally, yes. See Answer H-l.
H-3. Q: Company C signs a contract with Country X to construct an industrial plant in Country X. The contract states that the

laws, regulations, requirements or administrative practices of Country
X will apply to Company C's performance of the contract in Country X.

The laws, regulations, requirements or administrative practices of Coun

try X prohibit the importation into Country X of goods manufactured by
any company engaged in trade in Country Y or with the government,

companies or nationals of Country Y. Does Company C's action constitut
an agreement according to section 999(b)(3)?
A: No. The existence of an agreement will not be inferred solely from the inclusion in a contract of a provision stating
that the laws, regulations, requirements or administrative practices

will apply to the performance of the contract in that country. However

a course of conduct of complying with such laws, regulations, requirements or administrative practices may evidence such an agreement.

H-3
H-4. Q: The facts are the same as those in Question H-3,
except that the contract states that Company C will comply with the
laws, regulations, requirements or administrative practices of Country X in its performance of the contract in Country X. Does Company
C's action constitute an agreement according to section 999(b)(3)?
A:

Yes. Entering into a contract that requires com-

pliance with the laws, regulations, requirements or administrative
practices of Country X constitutes an agreement according to section
999(b)(3), if some of those laws prohibit the importation into Country
X of goods manufactured by any company engaged in trade in Country
Y or with the government, companies or nationals of Country Y.
H-5.

Q:

Company C, a trading company, signs a contract

with Country X to export goods to Country X. The contract contains
no clause concerning a boycott, nor does it require Company C to
comply with the laws, regulations, requirements or administrative
practices of Country X, which, among other things, prohibit the
importation into Country X of goods manufactured by persons engaged
in trade in Country Y. Company C does not purchase any goods with
which to fulfill its obligations under the contract from any U.S. company
engaged in trade in Country Y or with the government, companies or
nationals of Country Y. Does Company C's action constitute an agreement according to section 999(b)(3)?
A:

Where there is no express agreement, the existence

of an agreement will not be inferred solely from the fact that Company
C has not, consistent with the laws, regulations, requirements or
administrative practices of Country X, purchased goods with which to

H-4
fulfill its obligations under the contract from any-U. a company
engaged in trade in Country Y or with the government, companies or
nationals of Country Y. However, the fact that Company C has not
purchased goods manufactured by persons engaged in trade in Country
Y suggests that Company C has entered into such an agreement.
Thus, Company C's course of conduct pursuant to its contract with
Country X is evidence that, together with other evidence, could be
sufficient to establish an implied agreement unless Company A could
show to the contrary. An example of other sufficient evidence is proof
that Company C had in the past purchased goods from persons engaged
in trade in Country Y but such purchases were reduced in volume or
brought to a halt following the execution of the contract. An example
of proof to the contrary is proof that the reduction in purchases from
persons engaged in trade in Country Y was attributable to valid business
reasons apart from the boycott.
H-6.

Q:

Questions and Answers H-l, H-2, H-4, and H-5 all

involve contracts for the export of goods by Company C to Country X
and either an explicit agreement, or an inferred agreement, by
Company C to refrain from doing business with companies that are
blacklisted by Country X. The issue of whether an agreement exists
for purposes of section 999(b)(3) would be resolved in the same way
as in each of the answers above were the contract for (a) the supply
of services to Country X or (b) a construction project in Country X.
H-7.

Q:

(a)

Company C incorporates a subsidiary in Country

X. In the documents submitted by Company A relating to the incorporation of the subsidiary there is a general acknowledgement that the

H-5
subsidiary is subject to the laws, regulations, requirements and
administrative practices of Country X.
(b)

Company C establishes a branch in Country X.

In the documents relating to its registration of the branch there is a
general acknowledgement that the laws, regulations, requirements
and administrative practices of Country X apply to the branch.
Included in the laws, regulations, requirements or administrative practices of Country X is a requirement that companies incorporated in Country X and branches registered in Country X refrain
from doing business with any person engaged in trade in Country Y.
Does either the acknowledgement of the subsidiary or the undertaking
of the branch constitute an agreement by Company C for purposes of
section 999(b)(3)?
A:

The mere acknowledgement in incorporation or regis-

tration documents of the general applicability of the laws of a boycotting
country will not support the inference of the existence of an agreement
under section 999(b)(3). However, a course of conduct of complying
with such laws, regulations, requirements or administrative practices
m a y evidence such an agreement. In addition, if the incorporation or
registration documents state that the subsidiary or branch will comply
with the laws, rules, regulations, requirements or administrative
practices, there is an agreement according to section 999(b)(3).
H-8.

Q:

Company C, a trading company, signs a contract

with Country X to export goods to Country X. The contract contains
no clause concerning a boycott, nor does it require the contract to
be carried out in accordance with the laws, regulations, requirements

H-6
or administrative practices of Country X. which prohibit the importation into Country X of goods manufactured by persons engaged in
trade with Country Y. Payment is made by means of a letter of credit
that requires, as a condition of payment, that Company C provide
Bank D with a certificate that the goods were not manufactured by a
person blacklisted by Country X. Company C provides the required

certificate to Bank D. Does Company C's action constitute an agreement
according to section 999(b)(3)?
A: Generally, yes. See Answer H-l. The terms of the
letter of credit are part of the agreement entered into by Company C.
H-9. Q: Company C signs a contract with Country X to carry
out a construction project in Country X. The contract says nothing
about the nationality, race or religion of the individuals who are to
employed to carry out the contract within Country X. However, Company
C is aware that the laws, regulations, requirements or administrative
practices of Country X may prohibit the issuance of visas by Country
X to individuals of religion R to work on projects in that country.
Company C excludes from consideration for employment individuals

of that religion to work on the project in Country X. Does Company C's
action constitute an agreement according to section 999(b)(3)?
A: In the absence of an express agreement, the existence
of an agreement normally will not be inferred solely from the fact

that a person's action is apparently consistent with the boycott requ
ments of Country X, although such action may evidence the existence
of an agreement. However, since Company C's action in excluding from

H-7
employment consideration individuals of religion R violates other

statutes and since it is highly unlikely that there are valid busine
reasons for such action, an agreement under section 999(b)(3) will
be inferred unless Company C can establish that such action was not
related to the boycott requirements. It would be unusual if Company

C were able to establish that such action were not related to the boy
cott requirements.
H-10. Q: Company C signs a contract for a construction project

with Country X. The contract says nothing about the nationality, rac

or religion of the individuals who are to be employed to carry out th
contract within Country X. However, Company C is aware that the
laws, regulations, requirements or administrative practices of Coun-

try X may prohibit the issuance of visas to individuals of religion R

Company C, in recruiting people for the project, informs all applica

that if they cannot obtain a visa to enter Country X, their employmen
will be terminated. It employs several individuals of religion R who
are unsuccessful in obtaining visas and whose employment is subsequently terminated. Does Company C's action constitute an agreement
according to section 999(b)(3)?
A: No. Company C has not refrained from employing

individuals of religion R for the project. The existence of an agreement to refrain from employing individuals of religion R will not be
inferred from Company C's action.
H-ll. Q: The facts are the same as those in Question H-10,
except that Company C makes its employment contracts with all indi-

viduals for work on the project subject to the condition that they o

H-8
visas from Country X that will permit them to work in Country X.
Few, if any, individuals of religion R to whom Company C offers
employment in Country X are successful in obtaining visas. Does
such action by Company C constitute an agreement according to section
999(b)(3)?
A:

No. Company C has offered employment to all indi-

viduals who are able to obtain visas. If an individual is unable to obtain
a visa, it is due to the requirements of Country X. The existence of an
agreement by Company C will not be inferred from Company C's action.
H-12. Q:

The facts are the same as those in Question H-10,

except that no individuals of religion R are willing to accept employment on the terms offered by Company C. Does such action by Company
C constitute an agreement according to section 999(b)(3)?
A:
H-13. Q:

No, for the reasons given in Answer H-10.
Company C signs a contract with Country X to carry

out a construction project in Country X. The contract says nothing
about who may or may not be a subcontractor to do certain work in
Country X other than that Country X has the right to prior approval
of any subcontractors. Does Company C's action constitute an agreement according to section 999(b)(3)?
A:

The contract provision giving the project owner a right

of prior approval does not itself constitute an agreement according to
section 999(b)(3). However, the provision m a y be evidence which, together
with other evidence, could be sufficient to establish the existence of an
implied agreement, unless Company C could show to the contrary. There
may be valid business reasons for the provision apart from the boycott.

H-9
On the other hand, the provision m a y be merely a subterfuge for
Company C's cooperation in the exclusion of subcontractors that are
engaged in trade in Country Y.
H-14. Q: Company C signs a contract with Country X to carry
out a construction project in Country X. The contract specifies a
number of permissible subcontractors. All the subcontractors, in

the view of Company C, are capable of carrying out the work, but non

of them appears on a list of companies that are blacklisted by Count

X. Company C has previously done business with each of the specified

companies, but it has also done business with certain of the blackli

companies with which it has had satisfactory relations. Does Company
C's action constitute an agreement according to section 999(b)(3)?
A: By entering into a contract that on its face indicates

a pattern of exclusion of certain companies, including companies wit

which Company C has no particular reason not to do business, it woul

appear that Company C has agreed to refrain from doing business with
the boycotted companies, unless Company C is able to show that the
boycotted companies were not included on the list for reasons not
related to the boycott. See Answer H-l.
H-15. Q: Company C signs a contract with Country X.to carry
out a construction project in Country X. The contract provides that

Country X is to engage all the subcontractors that are to be engaged
from outside Country X but that are to perform all or part of their
services in Country X. Company C, however, is given the right to
disapprove any company that Country X proposes to engage for a
subcontract. While the contract is being carried out, none of the

H-10
companies that Country X proposes to prequalify or invite to bid are

included on a list of companies blacklisted by Country X. Does Compan
C's action constitute an agreement according to section 999(b)(3)?
A: Under the language of the contract, Company C has
not agreed to refrain from doing business with companies that are
on the blacklist. The contract moreover does not give Company C

the right to select subcontractors other than those nominated by Cou
X. Therefore, Company C's action does not constitute an agreement
according to section 999(b)(3). Nevertheless, an agreement may be

inferred if Company C cooperates in the exclusion of blacklisted subcontractors. See Answer H-13.
H-16. Q: Company C signs a contract for a construction project
with Country X. The contract states that any disputes arising under
the contract will be resolved in accordance with Country X's laws.
The laws of Country X contain boycott provisions. Does Company C's
action constitute an agreement according to section 999(b)(3)?
A: No. The provision that disputes will be resolved
in accordance with Country X's laws does not constitute Company C's
agreement to comply with Country X's boycott laws with respect to
the carrying out of the contract.
H-17. Q: Company C receives an inquiry from Country X
about certain goods that Company C manufactures. The inquiry also

requests Company C to furnish information about the following matter
whether it does business with Country Y and whether it does business
with any United States person engaged in trade in Country Y. Company

H-ll
C furnishes the requested information to Country X. Later Company
C signs a contract with Country X to export goods to Country X. Does
Company C's action constitute an agreement according to section
999(b)(3)?
A:

By furnishing such information Company C has not

agreed to take any action, as a condition of doing business with Country X, that is described in section 999(b)(3). Nevertheless, the
furnishing of such information is suspect and, when combined with
a course of conduct that is consistent with an agreement to participate
in or cooperate with an international boycott, will support an inference
that such an agreement exists.
H-18. Q:

Company C, a trading company, signs a contract with

Country X to export goods to Country X.

The contract contains a

clause requiring Company C not to obtain any of the goods from any
company blacklisted by Country X. Company C, however, purchases
some of the goods from one of the listed companies. Does Company
C's entering into this contract constitute an agreement according to
section 999(b)(3)?
A:

Generally, entering into a written contract that includes

a provision requiring Company C to refrain from doing business with a
person blacklisted by Country X constitutes participation in or cooperation with an international boycott within the meaning of section 999(b)(3),
even if Company C, fully or partially, does not abide by the boycott
provisions. See Answer H-l.
H-19. Q:

Company C signs a contract with Country X to export

goods to Country X. Included in the contract is a provision that Company

H-12
C will refrain from doing business with Country Y. Company C has
done considerable business with Country Y in the past, but soon after
it concludes that contract with Country X its distributor in Country
Y, learning of the contract with Country X. refuses to continue to
handle Company C's products and Company C tries but is unable to

conclude any other satisfactory distribution arrangement in Country Y
Does Company C's entering into this contract constitute an agreement
according to section 999(b)(3)?
A: Yes. Entering into an agreement to refrain from doing

business with a boycotted country constitutes participation in or coo

tion with an international boycott within the meaning of section 999(

(3)(A)(i). even if Company C does not abide by, or intend to abide by,
the terms of the agreement.
H-20. Q: Company C has been unable to do business with Country X because Company C has been on a blacklist of companies maintained by an organization of countries to which Country X belongs.
Company A agrees, as a condition of being removed from the list.
to refrain from doing business with Country Y. Does Company C's
agreement constitute an agreement according to section 999(b)(3)?
A: Yes. Even though Company C has not yet entered

into a contract to do business with any boycotting country, it has ag

as a condition for being in a position to do business with one or more

of the countries maintaining the blacklist, to refrain from doing bus
with Country Y. This action constitutes an agreement according to
section 999(b)(3)(A)(i).

H-13
H-21. Q:

The facts are the same as those in Question H-20,

except that Company C does several different types of business with

Country Y. It is requested to, and agrees to, refrain from doing only o
of those types of business with Country Y, and in fact continues to do
the other types of business with Country Y. Does Company C's agreement constitute an agreement according to section 999(b)(3)?
A: Yes. An agreement to refrain from some, but not
all, business with a boycotted country constitutes an agreement
according to section 999(b)(3)(A)(i). Answer H-20 is also relevant to
this context.
H-22. Q: Company C is doing business in Country X. It contracts with Company D, which is not related to Company C, for Company
D to build an office building for Company C's use in Country X. In
the course of constructing the building. Company D participates in or
cooperates with an international boycott imposed by Country X. Does

Company C's actions constitute an agreement according to section 999(b
A: Unless Company C directs or requires Company D

to take action that constitutes participation in or cooperation with th
boycott by Company D, or unless Company C's relationship with Company

D is established to facilitate participation in or cooperation with the

boycott, Company D's action will not be attributable to Company C under

section 999(b)(3), and Company C will not be deemed to be participating
in or cooperating with an international boycott.
H-23. Q: Company C signs a contract with Country X for the export
of goods to Country X. The contract does not contain any provisions

as to which ships should be y^.ei••/•.-.• -..hipping the goods to Count

H-14
which insurance companies should be used. The laws, regulations,
requirements, or administrative practices of Country X do not permit
the importation of goods carried on a ship owned by, or insured by,
companies that trade in Country Y. Company C is aware of this

requirement and ships the goods on the ships of a company, and insures
the goods with a company, that does not trade in Country Y. Does
Company C's action constitute an agreement according to section
999(b)(3)?
A: As indicated by Answer H-5, the existence of an agree-

ment will not be inferred solely from the fact that Company C ships it
goods on ships of, or insures the goods with, a company that does not

trade in Country Y. However, those facts, together with additional fa
may be sufficient to establish that such an agreement exists.
H-24. Q: Company C is competing for an industrial plant
construction contract for which Country X is inviting international
tenders. The tender documents contain a provision to the effect
that Country X will not enter into the contract unless the successful
tenderer certifies that in carrying out the contract it will refrain
from doing business with companies blacklisted by Country X. Company C does not win the tendering, but in its tender it has indicated

that it will sign a contract, in the form indicated in the tender doc
and has given Country X a tender bond to that effect. Does Company
C's action constitute an agreement according to section 999(b)(3)?
A: Since its offer was not accepted. Company C has not
entered into any agreement to refrain from doing business with the
blacklisted companies that would constitute participation in or

H-15
cooperation with an international boycott.

Nevertheless, Company C's

stated willingness to cooperate with Country X's boycott will be contributing factor in establishing a course of conduct from which to infer
the existence of an agreement in other transactions between Company
C and Country X.
H-25. Q: Company C successfully prequalifies to tender for a
contract for the construction of an industrial plant that will be owned
by Country X. At the time it attempts to prequalify, Company C is
required to state that it understands that the successful tenderer for
the contract will have to agree not to do business in connection with the
project with any company blacklisted by Country X or with the government,
companies or nationals of Country Y. After it prequalifies, Company C
decides not to tender for the contract. Does Company C's action
constitute an agreement according to section 999(b)(3)?
A: Since Company C did not tender, it did not enter into
an agreement to refrain from doing business with the blacklisted companies. Thus, there was no agreement that would constitute participation
in or cooperation with an international boycott. Nevertheless, Company
C's stated willingness to cooperate with Country X's boycott will be
a contributing factor in establishing a course of conduct from which
to infer the existence of an agreement in other transactions between
Company C and Country X.
H-26. Q: Company C competes for an industrial plant construction contract for which Country X is inviting international tenders. The
tender documents contain a provision to the effect that Country X will
not enter into a contract unless the successful tenderer certifies that

H-16
in carrying out the contract it will refrain from doing business with any
company blacklisted by Country X. Company C wins the tender and
successfully convinces Country X that the boycott clause should be
deleted from the final contract. Does Company C's action constitute
an agreement according to section 999(b)(3)?
A: No. Company C's success in deleting the boycott
clause from the final contract refutes the provision of the tender
documents that would have required Company C to agree to participate
in or cooperate with an international boycott according to section
999(b)(3). However, if the deletion of the boycott clause is not
accomplished in good faith or is a subterfuge to mask an unstated

understanding to participate in or cooperate with an international bo
cott, the existence of an agreement will be inferred.
H-27. Q: Company A charters a vessel to Company C to be
used by Company C in carrying its goods to Country X. Company C,
at the request of Company A, agrees in the charter agreement not to
take any action with respect to, or issue any orders to, the vessel

that would result in limiting the vessel's ability to call at ports in
Country X or subject the vessel to arrest or confiscation in Country
X. Does the action of Company C constitute participation in or co-

operation with an international boycott according to section 999(b)(3
A: No. In the agreement, Company C has not agreed

to refrain from taking any of the actions enumerated in section 999(b

as a condition of doing business directly or indirectly within a boyc

country or with the government, a company, or a national of a boycott
country.

H-17
H-28. Q:

Company A charters a vessel to Company C to be used

by Company C in carrying its goods to or from specifically named ports

or a range of ports within a specified geographical area. Company A an

Company C agree on a charter agreement which would, in effect, preclud

that vessel from calling at a number of countries, including Country Y

Does the action of Company C constitute participation in or cooperatio
with an international boycott under section 999(b)(3)?
A: No. In the agreement, Company C has not agreed to

refrain from taking any of the actions enumerated in section 999(b)(3)

as a condition of doing business directly or indirectly within a boyco

country or with the government, a company or a national of a boycottin
country.
H-29. Q: Company A signs a contract with Country X for
the export of goods to Country X. The contract provides that Company
A will not trade in Country Y, and that payment will be made by means
of a letter of credit confirmed by Bank C in the United States. The

letter of credit requires Company A to provide to Bank C a certificate
that it has not engaged in trade with Country Y before it can be paid
by Bank C. Bank C confirms the letter of credit and later makes payment to Company A after determining that all documents, including the
boycott certificate, are in order. Does Bank C's action constitute
participation in or cooperation with an international boycott under
section 999(b)(3)?

H-18
A:

Yes. Bank C's action constitutes an agreement by

it to refrain from doing business with a United States person (Company
A) engaged in trade with Country Y. Therefore Bank Os action con-

stitutes participation in or cooperation with an international boycott

according to section 999(b)(3)(A)(ii). (Company A's action constitutes

participation in or cooperation with an international boycott by Comp
A according to section 999(b) (3)(A)(i). )
H-30. Q: Company C signs a contract with Country X for the
supply of goods. The contract provides that Company C will not trade
with Country Y, and that payment will be made by means of a letter
of credit confirmed by Bank D in the United States provided that Bank
D certifies to Country X that it will not confirm letters of credit

relating to the export of goods to Country Y. Bank D confirms the lett

of credit, after issuing the requested certificate. Does Bank D's act

constitute participation in or cooperation with an international boyc
under section 999(b)(3)?
A: Yes. Bank D has agreed to refrain from doing business with or in Country Y, or with the government, companies or

nationals of Country Y, and with U. S. persons engaged in trade in Cou
try Y or with the government, companies or nationals of Country Y.

This action constitutes participation in or cooperation with an inter
boycott according to section 999(b) (3)(A)(i) and (ii).

H-19
H-31. Q:

Company C signs a contract with Country X for

the export of goods to Country X. The contract, consistent with the
laws of Country X, provides that the goods may not be produced in
whole or in part in Country Y or contain any parts, raw materials
or labor originating in Country Y. The contract also provides that
payment will be made by means of a letter of credit confirmed by
Bank D. The letter of credit requires Company C to provide to Bank
D a certificate that the goods were not produced in whole or in part
in Country Y and contain no parts, raw materials or labor originating
in Country Y before it can be paid by Bank D. Bank D confirms the

letter of credit and later makes payment to Company C after determinin

that all documents, including the certificate, are in order. Does Bank

D's action constitute a participation in or cooperation with an intern
boycott under section 999(b)(3)?
A: No. Bank D's action constitutes an agreement to
comply with a prohibition on the importation of goods produced in
whole or in part in a country that is the object of an international

boycott. Therefore Bank D's action, according to section 999(b)(4)(B),

does not constitute participation in or cooperation with an internatio
boycott. (Similarly, Company Os action does not constitute participation in or cooperation with an international boycott. See Answer 1-1.
H-32. Q: Company C, a trading company, signs a contract
with Country X to export goods to Country X. The contract contains
no clause concerning a boycott, nor does it require the contract to
be carried out in accordance with the laws, regulations, requirements or administrative pracL- .- , ->i Country X, which prohibit the

H-20
importation into Country X of goods manufactured by persons engaged
in trade with Country Y and which require import licenses. In order

to obtain an import license. Company C provides a certificate indica

ing that the goods were not manufactured by a person engaged in trad

in Country Y or with the government, companies or nationals of Country Y. Does Company C's action constitute an agreement according
to section 999(b)(3)?
A: No. The signing (at the time of import) of a certi-

fication as to content, which is required to obtain an import licens
does not by itself constitute an agreement. However, a course of

conduct of providing such certificates may, along with other factors
be evidence of the existence of an agreement according to section
999(b)(3)(A)(ii).

L

Refraining from Doing Business with or in a Boycotted

Country (section 999(b)(3)(A)(i)).
1-1. Q: Company C signs a contract with Country X for the
export of certain goods to Country X. In that contract, consistent
with the laws of Country X, there is a provision that none of the goods
to be provided thereunder shall be produced in whole or in part in Country
Y or contain any parts, raw materials or labor from Country Y. Does
Company C's action constitute participation in or cooperation with an
international boycott under section 999(b)(3)(A)(i)?
A: No. Company C in entering into such a contract is
complying with the prohibition by Country X on the importation of
goods produced in whole or in part in any country which is the object
of an international boycott. Such action, according to section 999(b)
(4)(B), does not constitute participation in or cooperation with an
international boycott.
1-2. Q: Company C owns a number of ships. It understands
that if one of its ships visits Country Y, that ship will thereafter be
unable to visit Country X. Company C has some ships which visit
Country Y but not Country X and other ships which visit Country X
but not Country Y. Does Company Cls action constitute participation
in or cooperation with an international boycott under section 999(b)
(3)(A)(i)?
A: ND. Company C has not agreed to refrain from doing
business with Country Y. Therefore Company C's action does not constitute participation in or cooperation with an international boycott
according to section 999(b)(3)(A)(i).

1-2
1-3.

Q:

Company C signs a contract with Country X, licensing

a company in Country X to use certain of its patents and trademarks
in Country X. The contract provides that Company C will not enter
into an agreement with any national of Country Y with respect to the
use in Country Y of patents and trademarks. Does Company C's
action constitute participation in or cooperation with an international
boycott under section 999(b)(3)(A)(i)?
A:

Yes. Company C has agreed to refrain from doing

business with any national of Country Y and such action constitutes
participation in or cooperation with an international boycott according
to section 999(b)(3)(A)(i).
1-4.

Q:

The facts are the same as in Question 1-3, except

that Company C has a number of other licensing agreements with
Country Y and enters into still more such agreements after it signs
the contract with Country X. Does Company C's action constitute
participation in or cooperation with an international boycott under
section 999(b)(3)(A)(i)?
A:

Yes, for the same reasons as stated in Answer 1-3

above. Answer H-18 is relevant in this context.
1-5.

Q:

Company C signs a contract with Country X to export

some products from Country X. The contract, consistent with the laws
of Country X, requires Company C to certify that the goods will not be
sent to Country Y. Company A so certifies. Does Company C's action
constitute participation in or cooperation with an international boycott
under section 999(b)(3)(A)(i)?
A:

No. Company C's compliance with Country X's pro-

hibition on the exportation of products of Country X to Country Y does

1-3
not constitute participation in or cooperation with an international
cott, according to section 999(b)(4)(C).
1-6. Q: Company C signs a contract with Country X for the
export of goods to Country X. In the contract there is a provision
that no capita!of Country Y origin will be used in the production or
manufacturing of the goods. Does Company C's action constitute
participation in or cooperation with an international boycott under
section 999(b)(3)(A)(i)?
A: Yes. Under the terms of the agreement Company
C has agreed to refrain from doing business with the government, a
company or a national of Country Y.
1-7. Q: Company C enters into a contract with Country

X for the manufacture and sale of goods and the provision of customer
support services. The contract provides that Company C may assign
its rights and obligations under the contract. The contract further

provides that the rights and obligations cannot be assigned to a comp

incorporated under the laws of Country Y without the express approval

of Country X. There is no similar requirement with respect to compani
incorporated under the laws of other countries. Does Company C's

action constitute participation in or cooperation with an internation
boycott under section 999(b)(3)(A)(i)?
A: The contract provision requiring Company C to obtain
the approval of Country X prior to an assignment of the rights and
obligations to a company incorporated under the laws of Country Y

does not itself constitute an agreement under section 999(b)(3)(A)(i)

1-4
However, the provision is strong evidence that, and is sufficient to
create a presumption that. Company C has an implied agreement to
refrain from doing business with a company of Country Y. Company
C may overcome this presumption by establishing the existence of
valid business reasons for this provision apart from the boycott or
by establishing that Country X approves, as a matter of course,

assignments of rights and obligations under the contract to compani
in Country Y.

J.

Refraining from Doing Business with any United States

Person Engaged in Trade in a Boycotted Country (section
999(b)(3)(A)(ii)).
J-l. Q: Company C signs a contract with Country X for
the turn-key construction of an industrial plant. The contract provides that Company C will not use as subcontractors a number of
named U. S. firms whose past performance on contracts in Country
X has been unsatisfactory, according to Country X, for reasons unrelated to the boycott. Does Company C's action constitute participation in or cooperation with an international boycott under section
999(b)(3)(A)(ii)?
A: No. The exclusion of subcontractors based on their
performance is not covered by section 999(b)(3).
J-2. Q: Company C enters into a contract with Country X
to export certain goods to Country X. The contract provides that
Company C shall not use any goods manufactured by Company A in
performing the contract since Company A is blacklisted by Country X even though Company A does not engage in any kind of trade

in a country which is the object of the boycott or with the government
companies, or nationals of that country. Does Company C's action

constitute participation in or cooperation with an international boyc
under section 999(b)(3)(A)(ii)?
A: Generally, entering into a written or oral agreement

that includes a provision requiring a person to refrain from doing bus

ness with a person blacklisted*by Country X (or by a group of countrie

associated with Country X in carrying out an international boycott di

against Country Y) constitutes participation in or cooperation with an

J-2
international boycott within the meaning of section 999(b)(3). If
Company C can establish that Company A is not engaged in trade in
Country Y or with the government, companies or nationals of Country
Y, Company C's agreement to refrain from doing business with Company A does not come within the scope of section 999(b)(3)(A)(ii).
However, Company C's action may constitute an agreement under section 999(b)(3)(A)(iii) unless Company C can establish that Company A

is not blacklisted because of the nationality, race or religion of its
owners, management or directors. Answer H-l is relevant in this
context.
J-3. Q: Company C competes for an industrial plant construc-

tion contract for which Company P of Country W is inviting internatio
tenders. The contract is to be financed by Country X, which maintains

a blacklist of companies. Country X requires contracts which it finan
to state that the contractor is required to refrain from making any

purchases for the project from any of the blacklisted companies. Coun
W does not boycott those companies. Company C wins the tender and
signs the contract with Company P with the blacklist provision. Does
Company C's action constitute participation in or cooperation with an
international boycott according to section 999(b)(3)(A)(ii)?
A: Generally, yes. See Answer H-l. Although the boycott
is not implemented by Country W, but by Country X, and the project
is being carried out in Country W, Company C may have agreed not

to do business with blacklisted U.S. companies as a condition of doing
business indirectly with Country X.

J-3
J-4.

Q:

Company C signs a contract with Country X to export

certain goods to Country X. The contract provides that Company C
will not do business with any company blacklisted by Country X. Company
C establishes that although a number of the blacklisted companies are
foreign subsidiaries of U. S. companies, no U. S. companies are on the
list. Does Company C's action constitute participation in or cooperation with an international boycott under section 999(b)(3)(A)(ii)?
A: No. According to section 999(b)(3)(A)(ii), refraining
from doing business with any United States person engaged in trade in a
boycotted country constitutes participation in or cooperation with an international boycott. For purposes of this particular section "United States
^ person" does not include foreign subsidiaries of a United States person.
However, Company C's action may constitute an agreement under section
999(b)(3)(A)(i) or (iii). Answer H-l is relevant in this context.
J-5. Q: Bank C advises Country X on its investments in
the United States. Country X instructs Bank C not to recommend for
investment any shares of certain companies that are blacklisted by
Country X. Bank C follows these instructions. Does Bank C's action
constitute participation in or cooperation with an international boycott
according to section 999(b)(3)(A)(ii)?
A: No. The recommendation of shares of certain companies by Bank C does not constitute "doing business" with those companies. Therefore Bank C's action does not constitute participation
in or cooperation with an international boycott according to section
999(b)(3)(A)(ii). Nor does Bank C's action constitute an agreement
under section 999(b)(3)(A)(i) or (iii).

J-4
J-6A.

Q:

Bank C manages Country X's investment portfolio

in the United States. Bank C has been given certain powers to act
for Country X, pursuant to instructions that, among other things,
require Bank C not to invest Country X's funds in stocks and bonds
issued by certain blacklisted United States companies. Bank C is
authorized by Country X to purchase and sell stocks and bonds only
through recognized exchanges. Does Bank C's action constitute participation in or cooperation with an international boycott according to
section 999 (b)(3)(A)(ii)?
A: No. Since purchasing stocks or bonds issued by a
company, through recognized exchanges, does not constitute "doing
business" with that company, an agreement to refrain from purchasing
stocks or bonds issued by a company does not constitute an agreement
to refrain from doing business with that company. Accordingly, Bank
C's action does not constitute participation in or cooperation with an
international boycott, according to section 999(b)(3)(A)(ii). Nor does
Bank C's action constitute an agreement under section 999(b)(3)(A)(i)
or (iii).
J-6B. Q: Tne facts are the same as in Question J-6A, except
that Bank C is also authorized to purchase original issues of stocks
and bonds directly from the issuing company. Does Bank C's action
constitute participation in or cooperation with an international boycott
according to section 999(b)(3)(A)(ii)?
A: Generally, yes. An agreement not to purchase original
issues of stocks or bonds from a company blacklisted by Country X may

J-5
constitute-participation in or cooperation with an international boycott

according to section 999(b)(3)(A)(ii). In addition, the agreement may

constitute participation in or cooperation with an international boyc

according to section 999(b)(3)(A)(i) and (iii). Answer H-l is relevant
in this context.
J-7. Q: Company C signs a contract with Country X to con-

struct an industrial plant in Country X. The laws, regulations, requi

ments or administrative practices of Country X prohibit the entry int
Country X of goods produced by blacklisted companies. The contract

states that the laws and regulations of Country X will apply to Compa

C's performance of the contract in Country X. In carrying out the project, Company C invites bids to furnish all goods and equipment on a
delivered-in-Country X basis. No company on the blacklist maintained
by Country X bids. Does Company C's action, as described in this

question, constitute participation in or cooperation with an internat
boycott under section 999(b)(3)(A)(ii) ?
A: No. By the terms of the agreement Company C has
not agreed to refrain from doing business with any of the blacklisted
companies. The fact that blacklisted companies are unable to meet
the conditions that Company C establishes is not due to any agreement
by Company C with Country X, but is due to Country X's laws, regulations, requirements or administrative practices.
J-8. Q: The facts are the same as those in Question J-7,
except that Company C's purchase contracts require vendors to reimburse Company C for the purchase price and transportation costs, plus
interest, of any goods that Company C cannot import into Country

J-6
X because of Country X's import restrictions. In this case, does
Company C's action constitute participation in or cooperation with an
international boycott under section 999(b)(3)(A)(ii)?
A: No, for the reasons given in Answer J-7.
J-9. Q: Company C signs a contract with Country X to produce goods in Country X for export. The contract requires Company
C to certify that, consistent with the laws of Country X, the goods
will not be sent to Country Y and that Company C will require any
purchaser of the products to certify that the goods will not be sent

to Country Y if they are substantially unaltered at the time of the res
by the purchaser. Company C thereafter sells these goods to Company
A, requiring the certification. Does Company C's action constitute

participation in or cooperation with an international boycott under se
999(b)(3)(A)(ii)?
A: No. Company C's agreement to refrain, and to require
Company A in the resale to refrain, from sending Country X's unaltered
products to Country Y. according to section 999(b)(4)(C), does not

constitute participation in or cooperation with an international boyco
J-10. Q: Company C, a trading company, signs a contract with
Country X for the export of goods to Country X. The contract requires

that the goods be produced by Company A and that a certain component in

the goods be produced by Company B. The laws, regulations, requirements
or administrative practices of Country X prohibit the importation into

Country X of goods manufactured by any company blacklisted by Country X
Company A and Company B are not blacklisted by Country X. Does Company
Cls action constitute an agreement,

CLCCOJ

uiig to section 999(b)(3)(A)(i

J-7
A:

No. The existence of an agreement to refrain from

doing business with a person blacklisted by Country X will not be
inferred solely from the inclusion of a requirement in a contract that
the goods or components be produced by a specific company that does
not in fact appear on the blacklist. Accordingly. Company C's action
does not constitute an agreement under section 999(b)(3)(A)(i), (ii) or
(iii).

K.

Refraining from Doing Business with any C o m p a n y Whose

Ownership or Management is Made up, in Whole or in Part,
of Individuals of a Particular Nationality, Race or Religion
(section 999(b)(3)(A)(iii)).
K-l. Q: Company C signs a contract with Country X for the
export of certain goods to Country X. In the contract it is provided
that the goods shall not bear any mark symbolizing Country Y or religion
R. Does Company C's action constitute participation in or cooperation
with an international boycott under section 999(b)(3)(A)(iii) ?
A: No. Section 999(b)(3)(A)(iii) prohibits agreements to
refrain from doing business on the basis of the nationality, race or religion of the owners or management of the organization and to refrain
from selecting (or to remove) directors of a particular nationality,
race or religion. It does not prohibit agreements not to import goods
bearing certain marks into a country. No part of section 999(b)(3)
concerns refusals to purchase goods bearing marks symbolizing a certain
country or religion.
K-2. Q: As a condition of doing business in Country X, Company
C's subsidiary in Country X agrees that the board of directors of the
subsidiary must consist of a specified number of nationals of Country
X. Does such action constitute participation in or cooperation with an
international boycott according to section 999(b)(3)(A)(iii)?
A: No. Such action will not be deemed to constitute an
agreement to participate in or cooperate with an international boycott
according to section 999(b)(3)(A)(iii).
K-3. Q: Company C is the leader of a syndicate of U. S. and
foreign banks that is underwriting a public bond issue of Country X.

K-2
Company D is a member of that syndicate. Daring the loan negotiations,
Country X indicates that Company E, which is not a U. S. company,

should be excluded from the syndicate because of the religion of some
of its directors. Company C and Company D did not contemplate
that Company E would be a member of the syndicate in any event and
they agree to comply with the request of Country X. Does the action

of Company C and Company D constitute participation in or cooperation
with an international boycott under section 999(b)(3)(A)(iii)?
A: Yes. The action of Company C and Company D is
an agreement to refrain from doing business with a company whose
management are individuals of a particular religion. According to

section 999(b)(3)(A)(iii) this constitutes participation in or cooper
with an international boycott.
K-4. Q: The facts are the same as in Question K-3, except
that Country X indicates that Company E may be included only if it
removes several of its directors who are of nationality Y. Does the
action of Company C and Company D constitute participation in or

cooperation with an international boycott under section 999(b)(3)(A)(
A: Yes. The action of Company C and Company D is an

agreement to obtain the removal of corporate directors of a particula
nationality as a condition of including Company E. This constitutes
an agreement under section 999(b)(3)(A)(iii).

L.

Refraining from Employing Individuals of a Particular

Nationality, Race or Religion (section 999(b)(3)(A)(iv)).
L-l. Q: Company C signs a construction contract with Country
X that provides that Company C is not to employ individuals of religion
R to work on the project in Country X. Does such action constitute
participation in or cooperation with an international boycott under section 999(b)(3)(A)(iv)?
A: Yes. Company C has clearly agreed to refrain from
employing individuals of religion R. Section 999(b)(3)(A)(iv) defines an
agreement, made as a condition of doing business with the government
of a country, to refrain from employing individuals of a particular religion, as participation in or cooperation with an international boycott.
L-2. Q: Company C signs a contract with Country X for a construction project in Country X. The contract specifies that only individuals who are nationals of the United States or Country X will be
allowed to work on the project. Does Company C's action constitute
participation in or cooperation with an international boycott under section 999(b)(3)(A)(iv)?
A: No. There is no evidence of an attempt to specifically
exclude persons of a particular nationality. Persons of a number of
different nationalities, including those from both friendly and unfriendly
countries, have been evenhandedly excluded.
L-3. Q: As a condition of doing business in Country X. Company
C agrees to employ a specified percentage of nationals of Country X or
to employ increasing numbers of nationals of Country X. Does such
action constitute participation in or cooperation with an international
boycott according to section 999(b)(3)(A)(iv)?

L-2
A:

No. Such action does not constitute an agreement

to participate in or cooperate with an international boycott under section
999(b)(3)(A)(iv).
L-4. Q: Company C, incorporated under the laws of Country
Z, signs a contract with Country X for the engineering and construction
of an industrial plant in Country X. The contract excludes from working
in Country X nationals of Country Z who are also nationals of Country
Y or who were formerly nationals of Country Y. Does Company C's
action constitute participation in or cooperation with an international
boycott according to section 999(b)(3)(A)(iv)?
A: Yes. Any agreement to differentiate among citizens
of Country Z on the basis of dual nationality or national origin for employment on a project constitutes participation in or cooperation with an
international boycott, according to section 999(b)(3)(A)(iv).
L-5. Q: Company C signs a contract with Country X for the
engineering and construction of an industrial plant in Country X. The
contract provides that Company C is not to employ in its home office
any individuals who are nationals of Country Y to work on the design
of the plant. Does Company C's action constitute participation in or
cooperation with an international boycott according to section 999(b)
(3)(A)(iv)?
A: Yes. Company C has agreed to refrain from employing
individuals who are nationals of Country Y, and such agreement constitutes participation in or cooperation with an international boycott
according to section 999(b)(3)(A)(iv).

M . As a Condition of the S?le of a Product, Refraining from
Shipping or Insuring That Product on a Carrier Owned,
Leased, or Operated by a Person Who Does Not Participate
In or Cooperate with an International Boycott (section
999(b)(3)(B)).
M-l. Q: Company C enters into a c.i.f. contract for the export

of goods to Country X. The contract states that the goods are not to b

shipped on a ship blacklisted by Country X. The blacklist contains the
names of vessels that have called at ports in Country Y, vessels that
are owned, leased or operated by the government, a company or a
national of Country Y, and vessels that are owned, leased or operated
by persons who engage in activities that are inconsistent with the
boycott. Does Company C's action constitute an agreement described
in section 999(b)(3)?
A: Yes. Company C has entered into an agreement

described in section 999(b)(3)(A)(i), (ii) and (iii) and section 999(b
M-2. Q: Company C enters into a f. a.s. Port of New York
contract with Country X for the sale of goods to Country X. While no

overseas shipping or insurance provisions are contained in the contra
Company C has reason to believe that arrangements will be made by
Country X to see that the goods are not shipped on a carrier owned,

leased, or operated by a person who does not participate in or cooper
with Country X's boycott of Country Y. Does Company C's action con-

stitute participation in or cooperation with an international boycott
according to section 999(b)(3)(B)?
A: No. Company C has not agreed as a condition of
sale to refrain from shipping on a carrier owned, leased or operated

M-2
by a person who does not participate in or cooperate with an international boycott. It has not agreed to any shipping or insurance
arrangements. Its action thus does not constitute participation in or
cooperation with an international boycott according to section 999(b)
(3)(B).
M-3. Q: Company C, having its place of business in Country Z,

is requested by Country X to enter into a c. i. f. contract for the ex

of goods to Country X. However, to avoid participating in or cooperati

with a international boycott, Company C successfully convinces Country

X that the contract should specify shipment f. a.s. port of Country Z.
The remainder of the circumstances are as described in Question M-2

above. Does Company C's action constitute participation in or cooperat
with an international boycott according to section 999(b)(3)(B)?
A: No, for the reasons given in Answer M-2.
M-4. Q: Company C, a freight forwarding company having its

place of business in Country Z, has a contract with Country X to make,
as an agent of Country X, shipping and insurance arrangements for
goods which Country X purchases in Country Z on a f.a.s. port of
Country Z basis. The contract provides that no shipments will be
made on a carrier owned, leased, or operated by a person who does

not participate in or cooperate with an international boycott. Company
C then makes shipping and insurance arrangements on that basis. Does
Company C's action constitute participation in or cooperation with
an international boycott according to section 999(b)(3)(B)?
A: Company C's agreement not to make shipping arrange-

ments on a carrier of a person who does not participate in Country X's

M-3
boycott of Country Y is not made as a condition of the sale of a product
that is to be shipped to Country X. Therefore, Company C's action
does not constitute participation in or cooperation with an international
boycott according to section 999(b)(3)(B). However, Company C's agreement would constitute participation in or cooperation with an international
boycott pursuant to section 999(b)(3)(A)(i), (ii) or (iii).
M-5.

Q:

Company C enters into a contract with Country X for the

export of goods to Country X. As a precaution to protect against war risk
or confiscation, the contract requires Company C not to ship the goods on
a Country Y flag vessel or on a ship which during the voyage calls at
Country & enroute to Country X. Does Company C's action constitute
participation in or cooperation with an international boycott?
A:

No. The requirement in the contract is not a restric-

tive boycott practice. Rather, the requirement arises from the need
to protect goods from damage or loss.
M-6.

Q:

Company C enters into a contract with Country X for

the export of goods to Country X. The contract requires Company C
to ship the goods only on a ship registered in Country X. Does Company
C's action constitute participation in or cooperation with an international
boycott, according to section 999(b)(3)(B)?

M-4
A:

No. An agreement to ship the goods only on a ship

registered in Country X does not constitute an agreement to refrain
from shipping or insuring those goods on a carrier owned, leased,
or operated by a person who does not participate in or cooperate with
an international boycott. Therefore, Company C's action does not

constitute participation in or cooperation with an international boyc
according to section 999(b)(3)(B).
M-7. Q: Company A signs a contract with Country X for the
export of goods to Country X. The contract provides that the goods
may not be shipped on a vessel that has been blacklisted by Country
X because it has called at Country Y in the past. Does Company C's

action constitute participation in or cooperation with an internation
boycott according to section 999(b)(3)(B)?
A: Yes. The reason for those vessels being blacklisted
was that at some time in the past the owner, lessor or operator of
the vessel did not comply with the requirement of Country X that the
vessel not call at Country Y. Therefore, Company C's signing the

contract constitutes participation in or cooperation with an internat
boycott, according to section 999(b)(3)(B).
M-8. Q: Company C signs a contract with Country X for the
export of goods to Country X. The contract contains no requirement
that the seller refrain from shipping the goods on a vessel that has
been blacklisted by Country X. Company C does not ship the goods

on a blacklisted vessel. Does Company C's action constitute participa
in or cooperation with an international boycott according to section
999(b)(3)(B)?

M-5
A:

Nc, an agreement to participate in or cooperate

with an international boycott, according to section 999(b)(3)(B),
will not be inferred from Company C's action.
M-9. Q: Company C signs a c.i.f. contract with Country X

for the export of goods to Country X to be paid for by means of a let
of credit. The letter of credit for this transaction requires, as a
condition of payment, Company C to certify as to the identity of the
vessel and the identity of the insurer. Company C provides such a
certificate to the paying bank. Does Company C's action constitute
participation in or cooperation with an international boycott?
A: The existence of an agreement to participate in or
cooperate with an international boycott will not be inferred solely

the basis of Company C's certification. However, repetitive certific

tion by Company C identifying vessels and insurers that are not blac
listed by Country X may suggest that Company C chooses its shippers
and insurers on the basis of Country X's blacklist (in anticipation
Country X's certification request). Such a course of conduct may be

a sufficient basis from which to infer the existence of an agreement.

N.

Reduction of Foreign Tax Credit.

N-l. Q: How is the reduction of the foreign tax credit for
participation in or cooperation with an international boycott computed
under section 908(a)?
A: . The method of computation of the reduction of the
foreign tax credit under section 908(a) differs depending on whether the
person applying section 908(a) applies the international boycott factor
under section 999(c)(1) or identifies specifically attributable taxes and
income under section 999(c)(2).
If the person chooses to identify specifically attributable taxes and
income, the person reduces the amount of foreign taxes paid (before the
determination of the section 904 limitation) by the sum of the foreign
taxes paid that the person has not clearly demonstrated are attributable
to specific operations in which there has been no participation in or
cooperation with an international boycott.
If the person applies the international boycott factor, the reduction
of the foreign tax credit under section 908(a) is computed by first determining the foreign tax credit that would be allowed under section 901
for the taxable year if section 908(a) had not been enacted. The amount
of credit allowed under 901 would, of course, reflect the credits allowable under sections 902 and 960, and would also reflect the limitations
of both sections 904 and 907. The credit allowed under section 901 would
then be reduced by the product of the section 901 credit (before the
application of the section 908(a) reduction) multiplied by the international
«

boycott factor.

N-2
N-2.

Q:

After the reduction of credit has been determined

in accordance with the process described in Answer N-l, the
taxes denied creditability may be deductible under section 908(b).
If the taxes are deducted, is a new section 904 limitation, a new
section 901 amount and a new section 908(0 reduction of credit computed based on the income reduced by the taxes deducted?
A:

No. The process described in Answer N-l is

applied only once and the reduction of credit is determined as a
result of that single application. If the taxes denied creditability
are deducted, no further adjustment is made under sections 904, 901
or 908(a) as a result of the deduction.
N-3. . Q:

Company A owns 20 percent of the stock of Company

C, a corporation organized under the laws of Country Z, a foreign
country. Company C participates in an international boycott in connection with all its operations. Company C pays a dividend to Company A
and Country Z withholds income tax on the dividend paid to Company
A. Company A computes its loss of tax benefits by identifying specifically attributable taxes and income under section 999(c)(2). Will C o m pany A be denied its section 901 direct foreign tax credit in respect of
the income tax withheld by Country Z on the dividend paid by Company C?
A:

If Company A can clearly demonstrate that its invest-

ment in Company C is a clearly separate and identifiable operation in
connection with which Company A did not participate in or cooperate with
an international boycott, Company A will not be denied its section 901 direct
foreign tax credit in respect of the withholding tax on the dividend paid by
Company C. Qi the other hand, even if Company C does not participate

N-3
in an international boycott, if Company A agreed to participate in or
cooperate with an international boycott in connection with its investment
in Company C, C o m p a n y A will lose its foreign tax credit in respect
of the withholding tax on the dividend. Thus, whether Company C
participates in an international boycott is not relevant to the determination
of Company A's loss of foreign tax credit under the facts of this question.
(To determine the denial of the section 902 indirect foreign tax credit
for foreign income taxes paid by C o m p a n y C, see Answer A-l9.)
N-4.

Q:

A s a result of participation in or cooperation with an

international boycott and the application of section 908(a), Company
A loses a portion of its foreign tax credit under both sections 901
and 902. Are the foreign taxes denied creditability under both
sections 901 and 902 deductible under section 908(b)?
A:

The section 901 taxes denied creditability by reason

of section 908(a) are deductible, but the section 902 taxes are not.
Section 908(b) merely renders sections 275(a)(4) and 78 inapplicable
to taxes denied creditability under section 908(a). Since section 902
taxes are not otherwise deductible under the Code, and since no section 78 gross-up is required in respect of section 902 taxes denied
creditability, no deduction is allowed for those section 902 taxes.
N-5.

Q:

C o m p a n y A has foreign tax credits under both sections

901 and 902. C o m p a n y A applies the international boycott factor to
determine its loss of foreign tax credits under section 908(a). What
portion of the taxes denied creditability will be deductible under section
908(b)?

N-4
A:

Since the section 901 taxes denied creditability under

section 908(a) are deductible but the section 902 taxes are not, C o m p a n y
A m a y deduct that portion of the total taxes denied creditability under
section 908(a) that the total section 901 taxes (before application of
section 908(a)) bear to the total section 901 and 902 taxes (before
application of section 908(a)).

O.

Subpart F Income

O-l. Q: In determining the amount of subpart F income included

in gross income by reason of section 952(a)(3), may any deductions be
taken into account?
A: Yes. In computing subpart F income included in gross
income under section 952(a)(3), a reasonable allowance may be made
for deductions properly allocable to that income.

Dated:

August

1977.
W. Michael Blumenthal
Secretary

FOR IMMEDIATE RELEASE

Contact: Charles Arnold
566-2041
August 15, 1977

TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT LESS THAN FAIR VALUE ON
RAILWAY TRACK MAINTENANCE EQUIPMENT
FROM AUSTRIA
The Treasury Department announced today that
railway track maintenance equipment from Austria is
being sold at less than fair value within the meaning
of the Antidumping Act. Sales at less than fair
value generally occur when the price of the merchandise sold for export to the United States is less
than the price of comparable merchandise sold in the
home market or to countries other than the U.S.
Interested persons were offered the opportunity to
present oral and written views prior to this
determination.
The case, under the Antidumping Act, has been
referred to the U.S. International Trade Commission
which must determine within three months whether a
U.S. industry is being, or is likely to be, injured
by the imports. Dumping occurs only when both sales
at less than fair value and injury have been
determined.
If the Commission finds injury, a "Finding of
Dumping" will be issued and dumping duties will be
assessed on an entry-by-entry basis.
Imports of this merchandise from Austria
during calendar year 1976 were valued at roughly
$4.5 millionNotice of this action will be published in the
Federal Register of August 16, 1977.
* * *

B-391

department of theTREASURY
ASHINGTON,D.C. 20220

TELEPHONE 566-2041

August 15, 1977

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,301 million of 13-week Treasury bills and for $3,402 million
of 26-week Treasury bills, both series to be issued on August 18, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing November 17, 1977
Price

High
Low
Average

Discount
Rate

98.593
98.561
98.567

5.566%
5.693%
5.669%

26-week bills
maturing February 16, 1978

Investment
Rate 1/

Discount Investment
Price
Rate
Rate 1/

5.
5.
5.

97.000 a/5.934%
96.973 5.987%
96.978 5.978%

6.20%
6.26%
6.25%

a./ Excepting one tender of $865,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted 78%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

Received

Accepted
$ 7,130,000
2,966,710,000
33,280,000
14,550,000
21,330,000
17,465,000
122,890,000
12,945,000
8,450,000
20,755,000
8,895,000
167,360,000

$
20,305,000
Boston
3,146,170,000
New York
23,460,000
Philadelphia
35,750,000
Cleveland
19,390,000
Richmond
22,800,000
Atlanta
262,525,000
Chicago
42,295,000
St. Louis
5,380,000
Minneapolis
67,485,000
Kansas City
17,230,000
Dallas
370,050,000
San Francisco

$
20,305,000
1,733,920,000
23,460,000
35,750,000
19,390,000
22,800,000
145,525,000
28,295,000
5,380,000
67,485,000
16,230,000
182,500,000

$
27,130,000
4,458,710,000
33,280,000
26,050,000
30,550,000
17,465,000
406,890,000
28,945,000
15,450,000
20,755,000
9,895,000
582,460,000

245,000

245,000

95,000

Treasury
TOTALS

$4,033,085,000

$2,301,285,000 b/: $5,657,675,000

b/Includes $ 329,985,000 noncompetitive tenders from the public.
£/Includes $ 140,025,000 noncompetitive tenders from the public.
^/Equivalent coupon-issue yield.
B-392

95,000

$3,401,855,OOOc

Contact:

Robert Nipp
566-5328

August 15, 1977
FOR A.M. RELEASE, TUESDAY, AUGUfT 16
U.S. AND JAPAN AGREE ON NEW ARRANGEMENTS FOR
ACQUISITION OF JAPANESE YEN
The Governments of the United States and Japan today
announced agreement on new arrangements for the acquisition
of Japanese yen by the U.S. to meet official Government needs.
The change is designed to bring yen acquisition procedures
into conformity with the normal commercial procedures in use
for U.S. Government purchases of other foreign currencies to
meet official requirements.
Currently, official U.S. Government requirements are met
by direct purchases of yen from the Government of Japan.
Under the new arrangements, the U.S. will acquire the currency
through purchases in the foreign exchange market. Procedures
for such market purchases of yen are being developed and are
expected to go into effect in the near future.
In 1976, the U.S. requirements for yen amounted to about
$700 million, largely to meet the needs of the U.S. military
forces.
oOo

B-393

FOR IMMEDIATE RELEASE

Contact:

Alvin M. Hattal
566-8381
August 16, 1977

TREASURY DEPARTMENT ANNOUNCES
A MODIFICATION IN THE FOREIGN BANK ACCOUNT
REPORTING REQUIREMENTS OF THE BANK SECRECY
ACT
Under Secretary Bette B. Anderson and Commissioner of
Internal Revenue Jerome Kurtz today announced that persons
having a financial interest in 25 or more foreign financial
accounts who are required to file a Form 468 3 (Information
Return on Foreign Bank, Securities and Other Financial
Accounts) with their federal income tax returns in 1977
will be permitted to follow a modified filing procedure.
A person who has a financial interest in 25 or more
foreign financial accounts need only note that fact on
Part II of the Form 468 3 that he files; he is not required
to provide the information requested in Part II of the form.
He is, however, still subject to the provisions in instruction
K, which require him, when requested by the Internal Revenue
Service, to provide such information concerning each account
as may be necessary to determine his federal income tax
liability.
Form 4683 was revised in November, 1976, to reflect
changes made by the Tax Reform Act of 19 76 and other
legislation. The Act altered only the reporting requirements
for transfers of money or property to a foreign trust after
May 21, 1974. The new Form 4683 reflects this revision.
In addition, however, Form 468 3 was changed by
eliminating the provision that if the taxpayer had a
"financial interest" in 25 or more foreign accounts, detailed
information concerning those accounts was not to be attached
but should be available for audit. The revised form requires
that the detailed information be filed with the tax return
if the taxpayer had a "financial interest" in one or more
foreign accounts, and the total maximum value of those
accounts exceeded $10,000 in the taxable year.
(OVER)
B-394

- 2 Although Form 4683 was revised in November, 1976, the
first public announcement by Internal Revenue Service was
in March, 1977 (Announcement 77-34, IRB 1977-11, 36,
March 14, 1977). This was too late to provide for orderly
data gathering by many taxpayers for returns filed in 1977.
A large corporation which does business in several foreign
countries may have a large number of foreign financial
accounts to report. Requiring detailed information on all
such accounts to be filed with the return would entail a
considerable burden on those taxpayers. Therefore, the
above procedure may be used for returns filed in 1977. It
is expected that Form 46 83 will be revised before it is
time to file returns due in 197 8.
oOo

FOR RELEASE AT 4:00 P.M.

August 16, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued August 25, 1977, as
follows:
92-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
May 26, 1977, and to mature November 25, 1977 (CUSIP No.
912793 L4 6 ) , originally issued in the amount of $3,201
million, the additional and original bills to be freely
interchangeable.
182-day .bills for approximately $3,400 million to oe
dated August 25, 1977, and to mature February 23, 1978 (CUSIP
No. 912793 N8 5 ) . The 182-day bills, with a limited exception,
will be available in book-entry form only.
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing August 25, 1977,
outstanding in the amount of $5,704 million, of which
Government accounts and Federal Reserve Banks, for themselves
and as agents of foreign and international monetary
authorities, presently hold $2,654 million. These accounts may
exchange bills they hold for the bills now being offered at the
weighted average prices of accepted competitive tenders.
The bills will be issued on a discount basis under
competitive and noncompetitive bidding, and at maturity
their par amount will be payable without interest. 92-day
bills will be issued in bearer form in denominations of
$10,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000
(maturity value), as well as in book-entry form to
designated bidders. Bills in book-entry form will be issued
in a minimum amount of $10,000 and in any higher $5,000
multiple. Except for 132-day bills in the $100,000
denomination, which will be available in definitive form
only to investors who are able to show that they are
required by law or regulation to hold securities in pnysical
form, the 182-day bills will oe issued entirely in
book-entry form on the records either of the Federal Reserve
Banks
B-395 and Branches, or of the Department of the Treasury.

-2Tendors will be it'ircivod at Federal Heser ve ll<mkH and
Blanches and at the I U I M M U ot the Public Debt, Washington,
1). C.
20226, up to 1 z 30 p.m., Kant e m Daylight Having time,
Monday, Aim us I -•-•, I (>7 7.
Foi in 1M) 4612-2 should be u.ied to
submit tenders loi bills to be maintained on the book-entry
records ol the Department ol the Treasury.
F.ach tender nui:;t be lot a minimum ol $10,000. Tenders
over $10,000 must be in multiples ot $fj,U00. In the case of
competitive tender..; the pi ice offered must be expressed on
the basis ot 100, with not more than three dec hua I s, e.g.,
S^.S-V).
Fi act ions may not be used.
Hank i nt) inst itut ions ^i\(\ dealers who make pi imary
markets in Government secur it ies and report daily to the
Feaeial Kesei ve Hank ot New York their positions in and
borrowings on such socur it ies may submit tenders for account
ot customers, it t he names ot t tit* customers and the amount
tor each customer are furnished. Others are only permitted
to submit tenders tor their own account.
Payment tor the full par amount of the 182-day bills
applied tor must accompany all tenders submitted for such
biJ1s to be maintained on the book-entry records of the
Department ot the Treasury. A cash adjustment will be made
on all accepted tenders tor the difference between the par
payment submitted and the actual issue pi ice as determined
in t he auct ion.
No deposit need accompany tenders from incorporated
hanks and trust companies and from responsible and
recognized dealers in investment securities lor the 92-day
Dills and 182-day bills to be maintained on the book-entry
records of Federal Reserve Banks ana Branches, or for
182-oay bills issued in bearer form, where authorized. A
deposit of 2 percent ot the par amount of the bills applied
toi must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated
bank or trust company accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one Didder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.

-3Settlement for accepted tenders for the 92-day and 182-day
bills to be maintained on the book-entry records of Federal Reserve
Banks and Branches, and 182-day billB issued In bearer form must be
made or completed at the Federal Reserve Bank or Branch or at the
Buieau of the Public Debt on August 25, 1977,
in cash or other
immediately available funds or in Treasury bills maturing
August 25, 1977.
Cash adjustments will be made for differences
between the par value of the maturing bills accepted in exchange and
the issue price ot the new bills.
Unuer Sections 454(b) ana 1221(5) of the Internal Revenue
Coile ot 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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 tor which the return is made.
Department of the Treasury Circulars, No. 41b (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

wtmentoftheJREASURY
KINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

August 16, 1977

TREASURY DEPARTMENT ANNOUNCES
TWO ACTIONS UNDER THE ANTIDUMPING ACT
The Treasury Department announced today that it will
issue a "Notice of Modification or Revocation of Dumping
Finding" with respect to potassium chloride, otherwise
known as muriate of potash, from two Canadian firms.
The Treasury will also issue a "Tentative Determination
to Modify or Revoke Dumping Finding" with respect to
roller chains, other than bicycle, from two Japanese
firms. Notice of both actions will appear in the Federal
Register of August 17, 1977.
In the case of potassium chloride from Canada, a
"Finding of Dumping" was published in the Federal Register
of December 19, 1969, and subsequent modifications excluding 10 Canadian potash firms have been issued. A
"Notice of Tentative Determination to Modify or Revoke
Dumping Finding" with respect to two Canadian firms,
Amax Potash, Ltd. and Duval Corporation of Canada, was
published in the Federal Register of February 11, 1977,
after it had been determined that the two companies had
met the statutory requirements for such action. The
decision to issue a final modification or revocation was
made after an allowance for oral and written presentations.
Before a tentative modification or revocation of dumping finding can be issued, Treasury requires that the finding
have been in effect for at least two years, that there
be established a two-year period of no sales at less than
fair value subsequent to the finding, and that price
assurances be submitted. After an allowance for oral and
written presentations, Treasury then considers whether to
issue a final modification or revocation.
During calendar year 1976, imports of potash produced
by Duval and Amax were valued at $19.2 million and
$17.1 million, respectively.
B-396

-2In the case of roller chains, other than bicycle, from
Japan, a finding of dumping was publsihed in the Federal
Register of April 12, 1973. The Treasury Department has now
determined that the above criteria for issuance of a
"Tentative Determination to Modify or Revoke Dumping Finding" with respect to that chain produced and sold by Honda
Motor Company, Ltd., and Enuma Chain Manufacturing Company,
Ltd., have been met and the tentative determination will
be published and an allowance for oral or written views will
be made.
Imports of roller chain, other than bicycle, from Japan
were valued at approximately $17 million during calendar
year 1976.
*

*

*

*

FOR IMMEDIATE RELEASE

August 17, 1977

TREASURY DEPARTMENT ANNOUNCES TENTATIVE DETERMINATION
TO MODIFY OR REVOKE DUMPING FINDING WITH RESPECT TO
CLEAR SHEET GLASS, WEIGHING OVER 28 OUNCES
PER SQUARE FOOT, FROM FRANCE
The Treasury Department announced today that it
will issue a "Tentative Determination to Modify or
Revoke Dumping Finding" with respect to clear sheet
glass, weighing over 28 ounces per square foot, from
France, produced by Saint-Gobain Industries. Notice
of this action will appear in the Federal Register of
August 18, 1977.
The "Finding of Dumping" in this case was published
in the Federal Register of December 9, 1971. Information presently available indicates that Saint-Gobain has
not exported the subject glass to the United States since
1972, and the company has given assurances that it does
not intend to resume shipments of such glass in the future.
Before a tentative modification or revocation of a
dumping finding can be issued, Treasury generally requires that the finding have been in effect for at least
two years, that there be established a two-year period
of no sales at less than fair value subsequent to the
finding, and that price assurances be submitted. This
criteria having been met, interested persons are invited
to comment on this action and, after an allowance for
oral and written presentations, Treasury will consider
whether to issue a final modification or revocation.
There have been no imports of clear sheet glass of
any dimension from France since 1972.
* * *

B-397

FOR IMMEDIATE RELEASE

August 17, 1977

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2,954 million of 52-week Treasury bills to be dated
August 23, 1977, and to mature August 22, 1978, were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $75,000)
Investment Rate
Price

Discount Rate

High - 93.834 6.098% 6.48%
Low
93.822
Average 93.827

(Equivalent Coupon-Issue Yield)

6.110%
6.105%

6.50%
6.49%

Tenders at the low price were allotted 73%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

Received

Accepted

$
33,630,000
4,590,200,000
321,350,000
133,875,000
24,195,000
57,925,000
460,740,000
30,425,000
16,640,000
8,820,000
7,215,000
408,920,000

$
8,280,000
2,592,385,000
1,350,000
45,335,000
14,195,000
2,925,000
105,980,000
7,225,000
1,640,000
8,820,000
2,215,000
163,415,000

Treasury

20,000

20,000

TOTAL

$6,093,955,000

$2,953,785,000

The $2,954 million of accepted tenders includes $ 70 million of
noncompetitive tenders from the public and $716
million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and
international monetary authorities accepted at the average price.
An additional $ 50 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.
.
B-398

FOR IMMEDIATE RELEASE

August 19, 1977

TREASURY DEPARTMENT ANNOUNCES
INITIATION OF ANTIDUMPING INVESTIGATION
ON SORBATES FROM JAPAN
The Treasury Department announced today that it
would begin an antidumping investigation of sorbates
from Japan. Notice of this action will appear in the
Federal Register of August 23, 1977.
The Treasury Department's announcement followed a
summary investigation conducted by the U.S. Customs
Service after receipt of a petition alleging that sorbates from Japan were being dumped in the United States.
The information received indicates that the prices of
sorbates from Japan, exported to the United States,
are less than the prices of sorbates sold in the home
market. The petition includes information indicating
that establishment of a U.S. industry is being prevented
by reason of the alleged "less than fair value" imports.
If sales at less than fair value are determined by
Treasury, the injury question would be subsequently
decided by the U.S. International Trade Commission.
Sorbic acid and potassium sorbate, referred to
as "sorbates," are widely used antimicrobial food
preservatives.
Imports of this merchandise from Japan during
calendar year 1976 were valued at approximately
$11 million.
* * *

B-399

Contact:

Jack Plum
566-2615

FOR IMMEDIATE RELEASE August 19, 1977
USE OF ENGRAVED CERTIFICATES TO BE DISCONTINUED
FOR 13-WEEK TREASURY BILLS
The third and final phase of the program to eliminate the
use of engraved certificates for new offerings of Treasury
bills will begin with the September 1 issue of 13-week bills.
That issue, and all subsequent 13-week issues, will be in
book-entry form only. The Treasury will announce the terms
of the September 1 issue on Tuesday, August 23, and auction
the bills on Monday, August 29.
Under the book-entry system, the securities are recorded
in the accounts of the Treasury or a Federal Reserve Bank, or
in the accounts of banks or other financial institutions acting
as custodians for investors. Instead of an engraved certificate,
the purchaser is given a receipt as evidence of the purchase.
The program to issue Treasury bills only in book-entry
form began with the 52-week bill issue of December 14, 197 6.
In the second phase of the program, the system was extended
to 26-week bills, beginning with the June 2, 1977, issue.
The conversion of 13-week bills will complete the transition
of all regular Treasury bill issues to the total book-entry
system.
A limited exception to the offering of Treasury bills
only in book-entry form will be continued for those
institutional investors required by law or regulation to
hold securities in definitive form. Definitive bills in the
$100,000 denomination will be available to such investors
for all issues through December 1978.
It is anticipated that the program will be extended to
selected new offerings of other Treasury marketable securities
during the latter part of 1978.

oOo

B-400

FOR RELEASE AT 4:00 P.M.

August 19, 1977

TREASURY TO AUCTION $2,500 MILLION OF 4-YEAR 1-MONTH NOTES
The Department of the Treasury will auction $2,500 million
of 4-year 1-month notes to raise new cash. Additional amounts
of the notes may be issued to Federal Reserve Banks as agents
of foreign and international monetary authorities at the
average price of accepted tenders.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.
oOo
Attachment

B-401

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 4-YEAR 1-MONTH NOTES
TO BE ISSUED SEPTEMBER 7, 1977
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date September 30, 1981
Call date
Interest coupon rate

August 19, 1977

$2,500 million
4-year 1-month notes
Series K-19bl
(CUSIP No. 912827 GZ 9)
No provision
To be determined oased on
tne average ot accepted bids

Investment yield To be determined at auction
Premium or discount
To be determined after auction
Interest payment dates
March 31 and September 30
(first payment on March 31, i97tf]
Minimum denomination <t\/<i i. 1 .-i'o"J e
^>1,0 00
Terms of Sale:
Method of sale
Yieid auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,U00,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by desijnaU-jd
j ii.--.i-. i. N a t i o n s
Acceptable
Key Dates:
Deadline tor receipt of tenders

Tuesday, August 30, 1977,
by 1:30 p.m., EDST

Settlement date (final payment due)
a) cash or federal funds
Wednesday, September 7, 1977
b) check drawn on bank
within FRB district where
submitted
Friday, September 2, 1977
c) check drawn on bank outside
FRft district where
submitted..
Thursday, September 1, 19 77
Delivery date for coupon securities. Tuesday, September 13, 1977

CONTACT:

George G. Ross
202-566-2356

FOR IMMEDIATE RELEASE August 19, 1977
Treasury Revises Effective Dates
of Certain New Boycott Guidelines
The Treasury Department today announced a delay in
the effective dates of answers H-8 and H-29 of the new
boycott guidelines released on August 12, 1977 (Treasury
News Release B-390). These answers relate to letters of
credit. The effective dates for the remainder of the new
guidelines were left unchanged.
The guidelines relate to the provisions of the Tax
Reform Act of 1976 which deny certain tax benefits for
participation in or cooperation with international boycotts.
The new guidelines superseded earlier sets of guidelines
issued by the Treasury on November 4, 1976, and December
30, 1976.
Answers H-8 and H-29 of the new guidelines will be
effective only for operations, requests, and agreements
after September 21, 1977. In addition, in the case of
operations carried out in accordance with the terms of a
binding contract entered into before September 22, 1977,
answers H-8 and H-29 will not be effective until after
June 30, 1978.
This announcement will appear in the Federal Register
at a future date.

B-402
oOo

partmentoflheTREASURY
SHINGTON, OX. 2Q220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

August 22, 1977

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,300 million of 13-week Treasury bills and for $3,403 million
of 26-week Treasury bills, both series to be issued on August 25, 1977,
/ere accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing November 25, 1977
Price

Discount
Rate

98.604
98.571
98.581

5.463%
5.592%
5.553%

Investment
Rate 1/
5.
5.75%
5.71%

26-week bills
maturing February 23, 1978
Price

Discount
Rate

Investment
Rate 1/

97.033a/ 5.869% 6.13%
97.015
5.904%
6.17%
97.022
5.891%
6.16%

a/ Excepting 2 tenders totaling $600,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
-.ocation

Received

Boston
$
26,290,000
tew York
3,210,275,000
18,790,000
Philadelphia
26,970,000
Cleveland
24,210,000
Richmond
21,830,000
Vtl^nta
374,575,000
Chicago
36,790,000
St. Louis
10,960,000
linneapolis
21,205,000
Cansas City
17,485,000
)allas
239,615,000
>an Francisco
110,000
treasury
TOTALS

$4,029,105,000

Accepted
$
26,290,000
1,788,675,000
18,790,000
26,970,000
24,210,000
21,830,000
179,575,000
34,310,000
10,960,000
21,205,000
17,485,000
129,615,000
110,000

Received

Accepted

$
45,335,000
4,656,065,000
39,845,000
99,135,000
22,755,000
70,435,000
818,970,000
31,980,000
8,900,000
32,150,000
10,540,000
526,535,000
30,000

$
30,335,000
2,565,065,000
29,845,000
94,065,000
11,755,000
70,435,000
272,970,000
15,260,000
8,900,000
32,150,000
10,540,000
261,535,000,
30,000

$2,300,025,000 b/ $6,362,675,000

.ncludes $ 306,480,000 noncompetitive tenders from the public.
.ncludes $158,475,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
03

$3,402,885,000c/

FOR RELEASE AT 4:00 P.M.

August 23, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,600 million, to be issued September 1, 1977.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,606 million.
The two series offered are as follows:
$F 91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
June 2, 1977, and to mature December 1, 1977 (CUSIP No.
912793 L5- 3), originally issued in the amount of $3,102 million,
the additional and original bills to be freely interchangeable.
*#•• 182-day bills for approximately $3,300 million to be dated
September 1, 1977, and to mature March 2, 1978 (CUSIP No.
912793 N9 3).
t Both series of bills will be issued for cash and in exchange
for Treasury bills maturing September 1, 1977. Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently hold $2,615 million of the
maturing bills. These accounts may exchange bills they hold for
the bills now being offered at the weighted average prices of
accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.

B-404

-2Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, August 29, 1977. Form PD 4632-2 (for 26-week series)
or form PD 4632-3 (for 13-week series) should be used to submit
tenders for bills to be maintained on the book-entry records of
the Department of the Treasury.
Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary -^
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and it
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to oe maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.

-3Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 1, 1977, in cash or
other immediately available funds or in Treasury bills maturing
September 1, 1977. Cash adjustments will be made for
differences between the par value of the 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 of 1954 the amount of discount at which these bills 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 the
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on
original issue or on subsequent purchase, and the amount actual
received either upon sale or redemption at maturity during the
taxable year for which the return is made.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

oOo

FOR IMMEDIATE RELEASE

August 23, 1977

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $2,913 million of
$6,966 million of tenders received from the public for the 2-year notes,
Series T-1979, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.65% 1/
Highest yield
Average yield

6.68%
6.68%

The interest rate on the notes will be 6-5/8%- At the 6-5/8% rate,
the above yields result in the following prices:
Low-yield price 99.954
High-yield price
99.899
Average-yield price 99.899
The $2,913 million of accepted tenders includes $379 million of
noncompetitive tenders and $2,419 million of competitive tenders
(including 84% of the amount of notes bid for at the high yield) from
private investors. It also includes $115 million of tenders at the
average price from Federal Reserve Banks as agents for foreign and
international monetary authorities in exchange for maturing securities.
In addition, $559 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing August 31, 1977, ($123 million)
and from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash ($436 million).

1/ Excepting 4 tenders totaling $25,000

B-405

Contact: Alvin M. Hattal
566-8381
FOR IMMEDIATE RELEASE August 25, 1977
TREASURY DEPARTMENT REMOVES TWO CANADIAN
FIRMS FROM "FINDING OF DUMPING" POTASH IN
THE UNITED STATES
The Treasury Department announced today that two
Canadian firms were removed from a dumping finding against
potash from Canada. Accordingly, a "Notice of Modification
or Revocation of Dumping Finding" appeared in the August 17,
1977, Federal Register.
As a result of the revocation, the companies, Amax
Potash, Ltd. and Duval Corporation, are no longer subject
to the assessment of dumping duties.
A "Finding of Dumping" of potassium chloride, otherwise known as muriate of potash, was published in the
Federal Register of December 19, 1969. Since then, the
United States has also revoked its finding against 10
other Canadian firms that had been subject to the finding of
dumping. One major firm remains subject to the finding.
The Treasury Department said it has now determined
that the two named companies are not dumping their products
in the United States market. Technically, that means they
have not done so for at least two years and have submitted
assurances that they will not do so in the future.
During calendar year 1976, imports of potash produced
by Duval and Amax were valued at $19.2-million and $17.1million, respectively.
oOo

B-406

Contact: Alvin M. Hattal
566-8381
FOR IMMEDIATE RELEASE August 25, 1977
TREASURY DEPARTMENT ISSUES SHOW-CAUSE NOTICE
IN EQUAL-EMPLOYMENT INVESTIGATION
The Treasury Department notified the Harris Trust
and Savings Bank of Chicago yesterday to show cause why
a complaint should not be issued charging discrimination
against female employees of the bank.
The notice cited the bank's repeated failure to provide an adequate response to the Treasury Department's
findings in an investigation to determine whether the
bank has discriminated against a class of employees and
whether it has adopted an adequate Affirmative Action
Plan as required under Executive Order 11246.
The show-cause notice could lead to the first enforcement action by the Treasury Department against a bank in
a case involving alleged discrimination against a class
of employees. The bank has 30 days in which to respond.
William J. Beckham, Jr., Assistant Secretary of the
Treasury for Administration, said, "This step reflects the
determination of the Treasury Department to take vigorous
action to ensure equal opportunity and the elimination
of discrimination in the nation's banks."
Banks that serve as federal depositories for public
funds or act as issuing and paying agents of U.S. Savings
Bonds and Notes are subject to Executive Order 11246 as
federal contractors. The Executive Order bars employment
discrimination by federal contractors and requires them
to develop Affirmative Action Plans to ensure equal employment opportunity. Failure to comply with the Order can
result in the loss of all federal or federally assisted
contracts.
(over)
B-407

- 2 -

The Treasury Department's investigation resulted
from a routine review of the bank's compliance with the
Executive Order. In its show-cause notice, the Treasury
Department stated its readiness to advise and assist the
bank in "resolving deficiencies and developing an acceptable program."
oOo

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WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

August 25, 1977

SUMMARY OF FEDERAL FINANCING BANK HOLDINGS
July 1-July 31, 1977
Federal Financing Bank activity for the month of July,
1977 was announced as follows by Roland H. Cook, Secretary:
On July 1, the National Rail Passenger Service (Amtrak)
repurchased the following principal amounts:
Note #
11
13

Face
Amount

Repurchase
Price

Effective
Rate

$54,417,699.00
58,000,000.00

$54,432,644.48
57,992,360.33

5.114%
5.114%

Amtrak also made the following drawdowns guaranteed by
the Department of Transportation:
Interest
Date
Note #
Amount
Maturity
Rate
7/18
$10,000,000.00
11
9/12/77
5.444%
7/21
7,000,000.00
11
9/12/77
5.488%
7/26
6,000,000.00
11
9/12/77
5.415%
On July 5, the FFB advanced $144,423 to the Chicago,
Rock Island and Pacific Railroad at a rate of 7.515%. The
note matures on June 21, 1991 and is guaranteed by the Depart
ment of Transportation.
The Bank purchased the following notes from the Student
Loan Marketing Association (SLMA):
Interest
Date
Amount
Maturity
Rate
5.305%
7/5
10/04/77
$25,000,000.00
7/12
20,000,000.00
10/11/77
5.428%
7/19
15,000,000.00
10/18/77
5.482%
7/26
10/25/77
5.429%
15,000,000.00

B-408

2 -

The FFB purchased the following notes from utility
companies guaranteed by the Rural Electrification Administration:
Amount

Maturity

Interest
Rate

$ 6,870 000

12/31/11

7.66»

000

12/31/11

7.6755

7/8 Continental Telephone
Corp.

1,105 118

12/31/11

7.700!

7/11 Murraysville Telephone
Co.

1,025 000

12/31/11

7.719!

7/18 Cooperative Power Assn. 15,000

000

12/31/11

7.7165

7/19 Big River Elect. Corp. 3,193

000

12/31/11

Date

Borrower

7/1 Oglethorpe Elect. Membership
7/5 United Power Assn. . 10,600

7/20 South Mississippi Elect.
Power

28 000

7/25 East Kentucky Power Corp. 7,422

000

7/23/79
12/31/11

6.433!
.ay
7.717'
Si

7/25 Tri-State Generation $
Transmission Assn.

4,070 000

12/31/11

9". 717!

000

12/31/11

7-f:708!

7/29/79

6.5715

12/31/11

7.7695

7/26 Arizona Elect. Power Coop. 9,362
7/29 Southern Illinios Power
Coop.

3,100 000

7/29 Arkansas Elect. Coop. Corp. 1,958

000

Interest payments on the above notes are made on a quarterly
basis.
The Bank purchased the following notes from the Secretary
of the Treasury pursuant to the New York City Seasonal Financing
Act of 1975
FFB
Purchase
Face
Face
Purchase
Date Note #
Price
Amount
Rate Maturity
Rate
(millions)
$301,987,543.55 5.775^
$300
4/20/78
17
6.65%
7/5
5.925<
100,639,856.68
100
4/20/78
18
6.80%
7/18
5.975!
151,057,632.06
150
5/20/78
19
6.85%
7/18
6.055!
201,217,045.46
200
4/20/78
20
6.93%
7/29

- 3 The Federal- Financing Bank made advances to the following
foreign governments under loans guaranteed by the Department
of Defense:
Interest
Amount
Borrower
Maturity
Date
Rate
Argentina

7/6
;7/22

$

18,135.00
370,000.00

4/30/83
6/30/83

6.709%
6.885%

Bolivia

7/18

2,137,500.00

6/30/83

6.821%

China

7/28

1,941,809.71

12/31/82

6.870%

Columbia

7/12

2,070,420.00

6/30/83

Ecuador

Israel

7/6
7/15
7/21
7/26 '
7/15

229,401.50
17,880.00
7,689.75
36,950.00
52,992,863.41

6/30/83
6/30/83
6/30/83
; 6/30/83
5/12/07

6.727%
6.751%
6.858%
6.841%
7.726%

Korea

7/28

2,077,038.07

6/30/84

7.023%

Malaysia »

7/20

128,180.80

12/31/52

6.783,%

Thailand

7/22

108,160.47

6/30/83

6.808% '

6.886% .

On July 5, the Bank purchased a $200 million 15-year
Certificate of Beneficial Ownership from the Farmers Home
Administration. The maturity is July 5, 1992 and the interest
rate is 7.70% on an annual basis. On July 25, the Bank also
purchased-Certificates as follows:
Interest
~" Amount
Maturity
Rate
$125,000,000 7/25/82 - 7.18%
150,000,000
7/25/87
7.64%
175*000,000
7/25/92
7.76%
100,000,000
7/25/97
7.92%
Interest payments on the above Certificates are made on
an annual basis.
On July 6,- the Bank advanced $1,551,835 to the Missouri,
Kansas, Texas Railroad (KATY) at an interest rate of 7*565%.
The note, under which the advance was made, was signed on
June 15, 1977 in the amount of $12 million with a final maturity of November 15, 1997. All KATY borrowings from the Bank
are guaranteed by.the Department of Transportation.

- 4 The FFB purchased participation certificates from the
General Services Administration in the following amounts:
v

.* <

Date

Series

7/7
7/12
7/18

M
L
L

Amount
$5,362,032.52
1,438,809.84
1,855,666.77

Maturity

Interest
Rate

7/31/03
11/15/04
11/15/04

7.7501
7.7601
7.7501

The U.S. Railway Association (USRA) made the following
borrowings against Note #8 guaranteed by the Department of
Transportation:
Interest
Date
Amount
Maturity
Rate
* 7/11 $ 347,700 4/30/79 6.29£)%
.7/15
1,391,200
4/30/79
6.3''"'
"7/26
8,435,000
4/30/79
6.38|t
7/29
12,191,750
4/30/79
6.5 ~
On July 12, the Department of Health, Education an|
Welfare (HEW) made the third drawdown of $3,645,553.13 <|n a
block of Health Maintenance Organization notes sold to ffjf
FFB on April 29, 1977. The notes mature July 1, 1996 a$$
were sold to the FFB at a price to yield 7.53%. The notgs
are guaranteed by HEW.
On July 20, the Bank purchased $12.9 million of del^ntures from Small Business Investment Companies. The amqynts
are guaranteed by the Small Business Administration.
•e

Interest
Amount
$ 550,000 7/01/84 7.295%
12,350,000

Maturity
7/01/87

Rate
7.515%

On July 20, the FFB advanced $6,550,000 to the Western
Union Space Communications at a rate of 7.502% on an annual
basis. The Note, under which the advance was made, matures
on October 1, 1989 and is guaranteed by the National Aeronautics and Space Administration.
On July 29, the Tennessee Valley Authority issued
a short-term note in the amount of $80 million to the Bank.
The note matures on October 31, 1977 and bears interest at
a rate of 5.612%.
Federal Financing Bank holdings on July 31, 1977
totalled $32.4 billion.
# 0 #

STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY FOR MONETARY AFFAIRS
U.S. DEPARTMENT OF THE TREASURY
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE
AUGUST 29, 1977
The Subcommittee is performing a valuable service by
providing this opportunity for public discussion of the rapid
growth of international debt in recent yearsf and the questions
this may raise for world monetary stability.
The structure of international debt in large measure reflects the structure of the international balance of payments.
Thus, a description of the pattern of world payments sets the
proper framework for considering the questions which the Subcommittee is addressing•
The five-fold increase in oil prices in 1973-74 not only
transformed profoundly the pattern of world payments, it also
altered traditional attitudes toward payments deficits and surpluses. With OPEC countries suddenly accumulating export
revenues far beyond their capacity to spend, it became obvious
that the oil importing countries had to accrue large and unprecedented deficits as the counterpart. The industrial nations
as a group had to accustom themselves to running payments deficits
and borrowing capital, in contrast to their usual role of running
surpluses and lending capital, while the developing nations had
to adapt themselves to much larger deficits and much larger
borrowing than they had previously experiencedIn the initial phases of these wrenching changes in the
world payments pattern, there were deep-rooted fears that the oil
importing nations, trying individually to balance their own payments positions, would all harm each other by external restrictions and excessive domestic retrenchment, as they tried to
eliminate deficits which as the counterpart of the OPEC surplus
were collectively irreducible. Recognizing these dangers, the
IMF membership agreed in January 1974 in the Rome Communique to
forswear such self-defeating actions.
B-409

-2Accordingly, in the early aftermath of the oil price increases, emphasis was placed — and appropriately placed — on
assuring the adequacy of resources for financing the balance of
payments costs of higher oil prices. Nations were encouraged,
at least temporarily, to ''accept" the oil deficit and finance
it, rather than to try individually to eliminate their deficits
at the expense of other oil importing countries. To facilitate
the financing, the IMF established a temporary "Oil Facility,"
which channeled nearly $8 billion to member nations, allocated
largely in relation to the increase in oil import costs, and
with much less than the usual emphasis on the IMF's traditional
requirement that its financing be linked to carefully negotiated
adjustment programs on the part of the borrowers.
In the circumstances, nations therefore borrowed very
heavily in the years 1974-76 to finance large payments deficits deficits swollen not only by high oil costs but also by severe
world inflation and recession, by inappropriate domestic policies
in some cases, and by a variety of other factors. The borrowing
took many forms. While official financing through the IMF during
this period was far above historical levels, private markets
provided about three-quarters of total financing during the three
year period.
Conditions on the supply side of the market were also conducive to a rapid growth in private financing during that period.
Huge OPEC surpluses, of course, brought large deposits and placements to the banks and other financial intermediaries, and
greatly expanded the liquiditv of those institutions. In addition, the period was one of rapid secular expansion of the
international banking system. Many institutions were competing
eagerly for new customers, as they sought to establish themselves
in new activities and new geographic areas, and endeavored to
broaden their scope of operations so as to spread risks and
diversify portfolios at a time when domestic loan demand was less
buoyant than in immediately preceding years.
Using such data as are available — unreliable, inexact
and incomplete — we can sketch out a pattern of world payments
in the period 1974 through 1976 with roughly the following
dimensions:
— The cumulative current account deficits financed
equaled about $225 billion or so (after the receipt
of grant aid), representing the counterpart of the
lendable surpluses of OPEC plus those of certain
industrial countries registering surpluses during the
period.

-3— About $15 billion of these deficits, or 7% of the
total, was financed through the IMF, the bulk of it
through the temporary "Oil Facility11 and the "Compensatory
Finance Facility," both of which provide financing
largely on the basis of "need" with relatively little
emphasis on "conditionality" or the adoption of corrective adjustment measures by the borrower.
— About $40 billion of the deficits, or 18% of the total,
was financed through a variety of other official sources —
development lending by industrial countries and OPEC,
by the IBRD and regional development banks, and other
sources.
— The remaining current account deficits, some $170
billion, plus about $40 billion of debt repayments,
were financed largely through market-oriented
borrowing. Most of these funds were obtained through
banks and securities markets. Some came from governments seeking investment outlets for their surpluses
or as export financing.
As these numbers suggest, the accumulations of debt,
especially debt owed to private lenders, have been large, by
historical standards extremely large. While the above estimates extend only through 1976, the pattern has probably
continued this year.
It is the purpose of these hearings to examine whether
this rapid and unprecedented enlargement of lending activity
and debt has reached a danger point for the monetary system —
either in the sense that large numbers of countries have
borrowed beyond their capacity to service debt, or in the sense
that our banks and other institutions are overextended.
My own assessment is that the system is not in any such
position of danger, either as a result of excessive borrowing
by large numbers of debtor nations — though some have doubtlessly approached or reached the limits of financial prudence —
or as a result of our financial institutions being over-stretched In formulating its judgments on the "burden" of these
debts on borrowers, the Subcommittee should be aware of certain
reasons why the burden may not be as severe as the numbers
suggest. Let me mention several such reasons:
— First, economic growth and expanding trade tend to
increase a nation's capacity to service debt. Some

-4continuing increase in debt can thus be accommodated
without added burden. Some of the debt increase is
simply the increase in trade financing that accompanies
the increase in the value of imports. For instance,
the debt service ratio for developing countries as a
group was no higher at the end of 1976 than it was in
1973.
— Second, inflation has substantially reduced the burden
of previously incurred debt measured in real terms.
Furthermore, in real terms interest rates which
countries are paying on funds they borrow are substantially less than the nominal rates.
— Third, the borrowing is not being undertaken on balance
by the poorer less developed group of nations. IMF
studies show that as a group non-oil developing nations
are borrowing little or no more at present — adjusted
for inflation and real growth — than they borrowed in
the years before the oil price increases of 1973-1974.
The main structural change in world payments since that
time is that the industrial nations, as a group, now
borrow large sums from OPEC — sums which finance both
the current account deficits of the industrial countries
and their exports of capital to the developing nations.
The developing countries now obtain some capital
directly from OPEC while continuing to obtain the bulk
of their credit from industrial nations.
— Fourth, statistics often exaggerate debt servicing
needs, by listing as "short-term" loans for which
there are commitments or understandings to extend or
roll-over. Also, the most commonly used aggregated
data on foreign loans by banks involve a substantial
amount of double counting because they include loans
to other banks in major industrial countries. An
accurate appraisal requires the elimination of most
inter-bank loans.
— Fifth, many of the countries which have increased their
debt have also increased their official reserves.
On the question of whether the banks are getting overextended, you will receive testimony from commercial bankers
and from the Federal Reserve through Governor Wallich. I
will offer only a few comments which might be relevant:
— Historical data on loan losses incurred through
international lending by U.S. banks do not support
the view that such loans jeopardize bank stability.
Various studies indicate that the loan losses from
foreign loans have been considerably less than for
domestic loans in recent years.

-5—

The statistics on the volume of bank credit overstate the extent of bank exposure since some of these
credits are guaranteed either by a government agency
or by a multinational corporation whose head office
in in the lending country,
— Statistics on the maturity structure of international
loans by banks also provide some encouragement. A
high percentage of loans to foreigners represents
self-liquidating trade credits with a maturity of
less than one year.
— In his appearance April 5 before a House Committee
the Acting Comptroller pointed out that the extensive
examinations his agency performs on national banks
engaged in international lending did not reflect cause
for serious concern. He also said that the loan
problems of major banks were concentrated in the real
estate field and in various domestic industries.
— I am encouraged that as our international banking
system grows and evolves, both the institutions
themselves and the government regulators are developing more sophisticated procedures, and gathering more
detailed information, to increase understanding and
to protect depositors, A number of banks are devoting
more care and more resources to analysis of individual
borrowing countries. Both the Comptroller of the
Currency and the Federal Reserve have introduced major
new measures to obtain more timely and more useful
information. These moves will improve and strengthen
the system.
But it is not good enough, clearly not good enough,
simply to assure that debtor nations as a group have not thus
far overborrowed, or that our private credit institutions
as a group are not at present overextended. Combining all
borrowers in a group or all banks in a group can conceal
major differences in individual cases.
The poorer countries which have never had significant
access to the private markets will, no doubt, continue to be
dependent primarily on bilateral aid and loans from international development lending institutions. They will no doubt
have to continue to limit their deficits basically to the
amount of the new flow of funds which they can expect from
these official sources. If the flow of aid increases steadily
as now expected they should be able both to service their
accumulated debt and run somewhat larger current account
deficits.

-6There are other countries — certainly not a large number
but a signficicant number — that have reached or are approaching the limits of their ability to borrow• These are countries
that are beset by economic distortion, that still face large
payments deficits, where the need for corrective measures and
adjustment is compelling.
We must assure ourselves that such countries, and others
which may in future face similar difficulties, are encouraged,
and permitted, to adjust their economies in ways that are
compatible with our liberal trade and payments objectives, in
ways that avoid discrimination against others and disruption
of the world economy. We must assure ourselves that our
monetary system will foster such adjustment, and that it will
be able to cope with new stresses that may arise in the
future.
While our international monetary system is at present
strong and functioning effectively, we do not have in place
all the machinery needed to insure against such future risks.
It is for that reason that the Administration is proposing
that the United States and other strong industrial nations
join with major OPEC creditors to establish within the IMF
a new facility — the Witteveen facility — to fill that
critical need. We will shortly be proposing legislation
to authorize United States participation in this facility,
and I would like to describe its main features today.
The rationale for the Witteveen facility — its formal name
is the IMF Supplementary Financing Facility — rests on three
main premises:
— First, that large payments imbalances will continue
for the next several years. Certainly our expectation
is that the OPEC surplus will diminish only gradually,
in line with the growth of OPEC spending and with the
implementation of effective energy conservation programs
in the United States and elsewhere.
— Secondly, that there will be a need for greater emphasis
on "adjustment" of imbalances, rather than simply
"financing" imbalances, especially by those countries
facing relatively large payments deficits. With the
passage of time, the need for countries to adapt to
higher energy costs and other economic developments
has been increasingly recognized. At the Manila IMF
adjustment
should
be symmetrical
meeting
last fall,
it was
recognized that

-7- deficit countries should shift resources to
the external sector and bring current account
positions into line with sustainable capital
inflows
- countries in strong payments positions should
maintain adequate demand consistent with antiinflationary policies
- exchange rates should play their proper role
in adjustment,
— Third, that the resources of the IMF must be adequate
both to enable it to foster responsible adjustment
policies by members facing severe payments difficulties,
and also to provide confidence that it can cope with any
potential problems that may arise.
There is concern that without additional funds the IMF's
resources may not be adequate to meet demands which may be
placed on it over the next several years. With the relatively
large amount of use in the past three years, the IMF's usable
resources are at present extremely low at about $5 billion.
These usable resources will be increased by about $6 or $7
billion with the coming into effect of the sixth quota review
approved in 1976 and now being ratified, and about $3 billion
remains available under certain conditions through the General
Arrangements to Borrow, Even with those additions, and the
repayments which may be expected, the IMF*s resources look
sparse in a world in which total imports are running at an
annual level of nearly a trillion dollars, and in which OPEC
surpluses are likely to decline only gradually from the current
$40-45 billion level.
In order to provide the added resources, at a meeting in
Paris earlier this month, the United States agreed with six
other industrial countries and seven OPEC countries on an
arrangement which would assure the availability of about $10
billion to the IMF for the proposed Witteveen facility. The
industrial countries would provide $5,2 billion, of which the
U.S. share — subject to Congressional authorization — would
be about $1.7 billion. The OPEC members would provide about
$4.8 billion, or nearly half the total, with Saudi Arabia the
largest single participant at $2.5 billion.
This $10 billion would be used for a special facility in
the IMF. It is a temporary facility — countries could apply
within the next 2 to 3 years, and could draw down funds over
a period of 2 to 3 years, though the total period of disbursements could not exceed 5 years. It would be available for
use by members only in clearly defined circumstances. Specifically, a member drawing under the facility:

-8-

—

Must have a balance of payments financing need that
is large in relation to its IMF quota and exceeds the
amount available to it under the IMF's regular policies;

— Requires a period of adjustment that is longer than
provided for under regular IMF policies;
— Must enter into a standby agreement with the IMF
in which it undertakes to adopt corrective economic
policy measures adequate to deal with its balance of
payments problem.
The facility, in short, is designed to encourage those
countries with particularly severe payments problems to adopt
internationally responsible adjustment programs -~ and to avoid
the unwelcome alternatives of resort to the controls, trade
restrictions, and beggar-thy-neighbor policies which can be
so harmful to world prosperity and so disruptive to our liberal
trade and payments order. It is not a device for augmenting
development assistance. The IMF provides only balance of payments support. The member drawing on the facility receives
more financing than is otherwise available from the IMF: a
longer period of adjustment Ca 2 to 3 year program as compared
with the 1 year normally applicable in the IMF) ; and a longer
period of repayment (3 to 7 year maturity, as compared with
the IMF's normal 3 to 5 year maturity). Since interest on the
financing provided to the Fund is market-related, the borrowing country would also pay a somewhat higher charge.
Participation in the facility is also advantageous to
the United States and others who are providing the financing.
In addition to our interest in assuring a strong and smoothly
functioning international monetary system, we receive in
exchange for our participation a strong, liquid and interestearning monetary asset. Technically, the United States (or
other participant) agrees to provide currency to the IMF
in exchange for an automatic drawing right on the IMF, which
is counted as part of our international reserve assets and
which can be drawn down at any time the United States can sell
or transfer the asset to others if there is agreement to do
so. The interest rate we receive is linked to U.S. Treasury
issues of comparable maturity, so there is no net cost to the
Treasury. As the drawings are repaid by the borrower, the IMF
returns the dollars to the U.S., U,S, reserve assets are reduced, and the transaction is reversed.
The Witteveen facility will make a major contribution
to strengthening the international monetary system against
the problems the Subcommittee is addressing. First, it

-9encourages countries to initiate needed adjustment measures
before their debts become too large for them to handle
or credit is no longer available, and it encourages them
to adjust through sound and internationally responsible
policies. Second, the fact that the facility is available
will improve the creditworthiness of the international
monetary system and confidence in the system. It is not constructed and will not be used to help any banks that may have
lent excessively or unsoundly. It will help countries that
are in need, not financial institutions. Nor will it be used
to take over the private banks' regular lending activities.
For one thing, the amounts involved are far, far below the
levels of private lending — although the IMF may in the
period ahead account for a share of total balance of payments
financing larger than the 7 percent provided in 1974-76, it will
remain small in comparison with the share channeled through
the private market. For another, experience indicates that
after the IMF enters into a standby agreement with a borrowing country, private lending tends to expand rather than
contract. The banks will benefit from the Witteveen facility,
but only indirectly — through an improved international
environment and stronger monetary system that will benefit
all parties, including American industry, workers and farmers.
The Subcommittee has asked whether consideration should
be given to other new forms of cooperation between public and
private institutions to improve assessments of creditworthiness. The Federal Reserve has shown considerable interest
in this question and I know Governor Wallich will want to
discuss it, so I will comment only briefly.
I think we must be receptive to new ideas along these
lines, and be willing to explore the prospects for closer
interaction. The IMF is at present examining its procedures,
and considering whether the provision of more information
about individual economies would be of value to both borrowers
and lenders and thus facilitate the continued flow of private
capital. Looking beyond the question of providing more information, the idea of cooperation between the IMF and private
banks, through joint loans to country borrowers, or IMF
guarantees of private loans, has been mentioned. There is
great reluctance on the part of many IMF members to move in
this direction — which they see as a fundamental shift in
the character of the IMF — and it is not realistic to expect
such moves in the foreseeable future. Nonetheless we must,
as Secretary Blumenthal has said, be prepared to review old
premises and consider innovations, to assure that our institutions grow and adapt, and are used with maximum effectiveness.
A final question raised by the Subcommittee relates to
formalizing procedures for debt reschedulings. Under Secretary

-10Cooper will discuss this issue in greater detail, I merely
want to say that it is not in the interest of either debtors
or creditors to undermine the basic principle that reschedulings should be accepted only in absolutely unavoidable cases.
I think the arrangements by creditor clubs have worked well,
although there is room for some improvement. Presently the
IMF role, in actual creditor club negotiations, is limited to
of a technical observer and supplier of statistical information. I have an open mind as to whether a greater IMF role
in rescheduling than presently exists would be helpful,
but in general I think there is some advantage in keeping
these cases ad hoc and informal,
Conclusion
The conclusions I would like to leave the Subcommittee
with are as follows:
1. Debt is not necessarily bad. As shown by the experience
of the United States in the nineteenth century, and
Canada and others at present, borrowed money, if
productively invested, provides the capacity to service
the underlying debt, and need not represent a serious
burden.
2. The large growth in international debt is a natural
consequence of the pattern of world payments of recent
years, and of the recognized need to finance the
imbalances resulting from the oil price increases,
while we put in place energy policies needed to reduce
the imbalances,
3. There is no evidence that the international monetary
system is presently in danger either from general overborrowing by uncreditworthy countries or general overextension of the banking system. Several countries have
made encouraging progress in their adjustment efforts,
4. Several oil producing countries will continue to run
substantial payments surpluses with some resultant
strain on the world payments system, for some years to
come.
5, A few countries are approaching or have reached the
limits of prudence in borrowing and may experience
considerable difficulties in financing their current
account deficits, The countries experiencing such
difficulties should pursue policies which will reduce
their deficits and preserve their creditworthiness so

-11that private lenders may, without undue risk, continue
to provide the bulk of the needed financing,
6. Adequate conditional financing should be made available
through the IMF to encourage the adoption of stabilization
programs by countries which need to take such steps and
to give such countries the financing needed to permit
them to adjust at a politically tolerable pace by policies
acceptable to the world community, and without an undue
impact on world growth.
7. Bank supervisory agencies should continue to exercise
surveillance over external lending, as they do with
domestic lending, to preserve the soundness of banking
systems,
8. And, finally, countries should resist pressures for
domestic protection and keep their markets open for
international trade,
In sum, Mr, Chairman, the system has performed well under
difficult circumstances. Yet it contains some weaknesses
and we are moving on a number of fronts to strengthen it.
Your Subcommittee will shortly be considering legislation to
authorize U.S. participation in a central aspect of this
effort — the supplemental IMF facility — and I hope you will
give it your strong support.

oOo

FOR RELEASE AT 4:00 P.M.

August 26, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,400 million, to be issued September 8, 1977.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,410 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,200
million, representing an additional amount of bills dated
June 9, 1977, and to mature December 8, 1977 (CUSIP No.
912793 L6 1 ) , originally issued in the amount of $3,002 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
September 8, 1977, and to mature March 9, 1978 (CUSIP No.
912793 P2 6).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing September 8, 1977. Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently hold $2,526 million of the
maturing bills. These accounts may exchange bills they hold for
the bills now being offered at the weighted average prices of
accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of tne Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Friday, September 2, 1977. Form PD 4632-2 (for 26-week series)
or form PD 4632-3 (for 13-week series) should be used to submit
tenders for bills to be maintained on the book-entry records of
tne Department of the Treasury.
B-410

-2Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g • /
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of tne customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on tne
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of tne acceptance or
rejection of their tenders. rThe Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at tne weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public DeDt on September 8, 1977, in cash or
other immediately available funds or in Treasury bills maturing
September
8,exchange
1977. Cash
adjustments
will
be the
made
for
differences
accepted in
between
the
andpar
thevalue
issueof
price
the maturing
of
new
bills
bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

oOp

Contact:
FOR IMMEDIATE RELEASE

Robert Nipp
577-5328
August 26, 19 77

TREASURY ANNOUNCES U.S.-SAUDI ARABIAN
JOINT COMMISSION HIGHWAY DEPARTMENT PROJECT
The Secretary of the Treasury today announced the signing
of a 6-year highway development technical assistance agreement
between the governments of the United States and the Kingdom
of Saudi Arabia. Participating in the agreement for the United
States will be the U.S. Department of Treasury and the U.S.
Department of Transportation's Federal Highway Administration
(FHWA) .
Under the agreement, the FHWA will furnish a 15-member
technical assistance team, 12 of whom will be located in Riyadh,
Saudi Arabia, and three in Washington, D.C., to provide
technical advisory services in the field of highway organization, planning, programming, design, construction, and maintenance. The government of the Kingdom of Saudi Arabia will
reimburse the FHWA for services provided under this agreement,
estimated at $6.3 million.
This agreement will be carried out under the auspices of
the Saudi Arabian - U.S. Joint Commission on Economic Cooperation. Overall coordination of the project with other Joint
Commission activities and provision of certain administrative
facilities and support will be the responsibility of the U.S.
Treasury Department.
The government of the Kingdom of Saudi Arabia has projected
highway development expenditures of about $5 billion during the
next five years.
Deputy Federal Highway Administrator, Karl S. Bowers,
signed the agreement on behalf of the Department of Transportation. This completes the formal signing process which began
in Riyadh on August 16, 1977. At that time, the agreement was
signed by John P. Hummon, Director, U.S. Representation, Joint
Commission on Economic Cooperation, U.S. Department of the
Treasury; Dr. Nasser Al-Salloum, Deputy Minister of Communications and Dr. Mansoor Alturki, Deputy Minister of Finance and
National Economy on behalf of their respective Departments.
In attendance at the Department of Transportation for the
signing ceremony were Dr. Al-Salloum, Deputy Minister of Communications, Chester Davenport, Assistant Secretary for Policy,
Plans and International Affairs, Department of Transportation,
and Lewis
W.Treasury.
Bowden, Deputy for
ment
of the
oOoSaudi Arabian Affairs, Depart-

kpartmentoftheTREASURY
WASHINGTON, O.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

August 29, 1977

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,300 million of 13-week Treasury bills and for $3,304 million
of 26-week Treasury bills, both series to be issued on September 1, 1977,
ere accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing December 1. 1977
Price

Discount
Rate

Investment
Rate 1/

98.599
98.588
98.591

5.542%
5.586%
5.574%

5.70%
5.74%
5.73%

26-week bills
maturing; March 2, 1978
Price

Discount
Rate

97.049a/
97.040
97.043

5.837%
5.855%
5.849%

Investment
Rate 1/
6.10%
6.12%
6.11%

a/ Excepting 1 tender of $530,000
Tenders at the low price for the 13-week bills were allotted 81%.
Tenders at the low price for the 26-week bills were allotted
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

Boston
$
27,265,000
New York
3,789,990,000
Philadelphia
19,905,000
Cleveland
47,820,000
Richmond
30,365,000
Atlanta
28,955,000
Chicago
297,960,000
St. Louis
38,125,000
Minneapolis
16,090,000
Kansas City
47,495,000
Dallas
70,910,000
San Francisco
202,245,000

$
21,315,000
1,846,540,000
19,905,000
27,820,000
28,415,000
28,860,000
95,075,000
23,935,000
12,520,000
42,965,000
70,410,000
82,245,000

Treasury

50,000

TOTALS

50,000
$4,617,175,000

Received
$
41,385,000
5,940,160,000
105,870,000
43,805,000
18,530,000
46,235,000
783,650,000
44,995,000
29,580,000
21,520,000
16,440,000
524,905,000
280,000

$2,300,055,000 b/ $7,617,355,000

Includes $317,645,000 noncompetitive tenders from the public.
Includes $149,615,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
-412

Accepted
$ 21,385,000
2,541,160,000
80,870,000
23,805,000
10,530,000
10,235,000
447,905,000
26,015,000
13,580,000
17,470,000
15,440,000
95,505,000
280,000
$3,304,180,000 c/

FOR IMMEDIATE RELEASE

August 29, 1977

John M. Samuels appointed
Deputy Tax Legislative Counsel at Treasury
Secretary of the Treasury W. Michael Blumenthal today
announced the appointment of John M. Samuels of New York,
New York, as Deputy Tax Legislative Counsel.
Mr. Samuels, 33, has been a special consultant to the
Treasury Department since June 1977. Prior to joining
Treasury, he had been a partner in the New York law firm of
Dewey, Ballantine, Bushby, Palmer & Wood. Mr. Samuels also
was an adjunct professor of law at New York University.
As Deputy Tax Legislative Counsel, Mr. Samuels will
assist the Tax Legislative Counsel, Daniel I. Halperin, in
heading a staff of lawyers and accountants who provide
assistance and advice to the Assistant Secretary of the
Treasury for Tax Policy, Laurence N. Woodworth. The Office
of Tax Legislative Counsel participates in the preparation
of Treasury Department recommendations for Federal tax
legislation and also helps develop and review tax regulations
and rulings.
The Office of Tax Legislative Counsel is one of four
major units under the direction of the Assistant Secretary
for Tax Policy. The other three are the Office of Tax Analysis,
the Office of International Tax Counsel, and the Office of
Industrial Economics.
A native of Hollywood, Florida, Mr. Samuels received a
B.A. degree from Vanderbilt University in 1966 and J.D. degree
from the University of Chicago Law School in 1969. He received
an LL.M. (in Taxation) from New York University School of Law
in 1975.
B-413

oOo

FOR IMMEDIATE RELEASE

CONTACT:

Alvin M. Hattal
(202) 566-8381
September 8, 1977

UNITED STATES-MOROCCO
INCOME TAX TREATY SIGNED
The Treasury Department announced today that an income
tax treaty between the United States and Morocco was signed
in Rabat on August 1, 1977, by U.S. Ambassador Robert Anderson and Finance Minister Abdelkader Benslimane of Morocco.
The treaty must be approved by the U.S. Senate before becoming official.
The U.S.-Morocco income tax treaty is the first such
agreement between the two countries. It is also the first
income tax treaty signed by the United States with a developing country in Africa, although there are in effect some
income tax treaties with African countries that are extensions of treaties originally signed with the United Kingdom
or Belgium.
The U.S.-Morocco treaty follows the basic pattern of
the Model Draft treaty developed by the Fiscal Committee of
the Organization for Economic Co-operation and Development
and other recent U.S. treaties. Thus, it provides rules for
determining which country has the prior right to tax various
types of income, as well as providing for nondiscrimination,
administrative cooperation and relief from double taxation.
The treaty sets reciprocal limits of tax at source of 15 percent on portfolio investment dividends, 10 percent on dividends
from 10 percent-owned subsidiaries, exemption of interest paid
to the other Government, 15 percent on other interest, and 10
percent on royalties.
The treaty is subject to ratification by the two Governments. Once ratified, it will apply to withholding taxes on
income, such as dividends, interest, and royalties, paid after
the first day of the month following exchange of official documents. It will also apply to other taxes on income for taxable years beginning on or after January 1 of the year of ratification.
The treaty will remain in force indefinitely unless terminated. Either country may terminate the treaty after five
years by giving six months written notice through diplomatic
channels before June 30 of # any
year.
##
B-414

CONVENTION BETWEEN THE GOVERNMENT OF
THE UNITED STATES OF AMERICA AND THE
GOVERNMENT OF THE KINGDOM OF MOROCCO
FOR THE AVOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME

The Government of the United States of America and
the Government of the Kingdom of Morocco, desiring to
conclude a convention for the avoidance of double
taxation of income and the prevention of fiscal evasion
have agreed upon the following articles.
Article 1
TAXES COVERED
(1) The taxes which are the subject of this
Convention are:
(a) In the case of the United States, the
Federal income taxes imposed by the Internal Revenue
Code, hereinafter referred to as the "United States
Tax," and
(b) In the case of Morocco the agricultural
tax; the taxes on urban property; the tax on public and
private salaries, emoluments, fees, wages, pensions, and
annuities; the complementary tax; the business profits
tax; and the compulsory loan for investment by the

- 2 -

Moroccan government as provided in Article 37 of Royal
Decree No. 1.010-65 of the 8th of Ramadan 1385
(31 December 1965) containing the Finance Law for the
year 1966, hereinafter referred to as the "Moroccan
tax.11
(2)

This Convention shall also apply to taxes

substantially similar to those covered by paragraph (1)
which are imposed in addition to, or in place of, existing
taxes after the date of signature of this Convention.
(3)

For the purpose of Article 22 (Nondiscrimination)

the taxes covered by this Convention also include taxes
of every kind imposed at the National, State, or local
level.

For the purpose of Article 26 (Exchange of

Information) the taxes covered by this Convention also
include taxes of every kind imposed at the National level.
Article 2
GENERAL DEFINITIONS
(1) In this Convention, unless the context otherwise requires:
(a)

(1)

The term "United States" means the

United States of America; and
(ii)

When used in a geographical sense,

the term "United States" means the states
thereof and the District of Columbia.
term also includes:

Such

- 3-

(A)

The territorial sea thereof,

(B)

The seabed and subsoil of the

and

submarine areas adjacent to the coast
thereof, but beyond the territorial sea,
over which the United States exercises
sovereign rights, in accordance with
international law, for the purpose of
exploration and exploitation of the
natural resources of such areas
(continental shelf), but only to the
extent that the person, property, or
activity to which this Convention is
being applied is connected with such
exploration or exploitation.
(i)

The term "Morocco" means the Kingdom

of Morocco; and
(ii) When used in a geographical sense
the term "Morocco" includes:
(A)

The territorial sea thereof,

(B)

The seabed and subsoil of the

and

submarine areas adjacent to the coast
thereof, but beyond the territorial sea,
over which Morocco exercises sovereign
rights, in accordance with international

M

4M

law, for the purpose of exploration and
exploitation of the natural resources of
such areas (continental shelf), but only
to the extent that the person, property,
or activity to which this Convention is
being applied is connected with such
exploration or exploitation,
(c)

The term "one of the Contracting States"

or "the other Contracting State11 means the United
States or Morocco, as the context requires.
(d)

The term "personn includes an individual,

a partnership, a corporation, an estate, a trust,
or any body of persons.
(e)

(i)

The term "United States corporation"

or "corporation of the United States" means a
corporation which is created or organized under
the laws of the United States or any state
thereof or the District of Columbia or any
unincorporated entity treated as a United States
corporation for United States tax purposes; and
(ii) The term "Moroccan corporation" or
"corporation of Morocco" means any body
corporate or any entity which is treated as
a body corporate under Moroccan tax law and
which is resident within Morocco for Moroccan
tax purposes.

- 5-

(f)

The term "competent authority" means:
(i)

In the case of the United States,

the Secretary of the Treasury or his delegate,
and
(ii)

In the case of Morocco, the Minister

in Charge of Finance or his delegate.
(g)

The term "State" means any National State,

whether or not one of the Contracting States.
(2)

Any other term used in this Convention and not

defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws
of the Contracting State whose tax is being determined.
Article 3
FISCAL RESIDENCE
(1) In this Convention:
(a)

The term "resident of Morocco" means:
(i)
(ii)

A Moroccan corporation, and
Any person (except a corporation or

any entity treated under Moroccan law as a
corporation) resident in Morocco for purposes
of its tax.
(b)

The term "resident of the United States"

means:
(i)
(ii)

A United States corporation, and
Any person (except a corporation or

aiU<ue^tity treated under United States law as

- 6 -

a corporation) resident in the United
States for purposes of its tax, but in the
case of a person acting as a partner or
fiduciary only to the extent that the
income derived by such person in that
capacity is taxed as the income of a
resident.
(2)

Where by reason of the provisions of

paragraph (1) an individual is a resident of both
Contracting States:
(a)

He shall be deemed to be a resident

of that Contracting State in which he maintains
his permanent home.

If he has a permanent home

in both Contracting States or in neither of the
Contracting States, he shall be deemed to be a
resident of that Contracting State with which
his personal and economic relations are closest
(center of vital interests);
(b)

If the Contracting State in which he

has his center of vital irterests cannot be
determined, he shall be deemed to be a resident
of that Contracting State in which he has a
habitual abode;
(c)

If he has a habitual abode in both

Contracting States or in neither of the Contracting
States, he shall be deemed to be a resident of
the Contracting State of which he is a citizen;

- 7-

(d)

If he is a citizen of both Contracting

States or of neither Contracting State the
competent authorities of the Contracting States
shall settle the question by mutual agreement.
For purposes of this paragraph, a permanent home is the
place where an individual dwells with his family.
(5) An individual who is deemed to be a resident
of one of the Contracting States and not a resident of
the other Contracting State by reason of the provisions
of paragraph (2) shall be deemed to be a resident only
of the first-mentioned Contracting State for all purposes
of this Convention, including Article 20 (General Rules
of Taxation).
Article 4
PERMANENT ESTABLISHMENT
(1)

For the purpose of this 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.
(2)

The term "fixed place of business" includes

but is not limited to:
(a)

A seat of management;

(b)

A branch;

(c)

An office;

(d)

A factory;

(e)

A workshop;

(f)

A warehouse;

(g) A store or other sales outlet;

M 8

(h)

M

A mine, quarry, or other place of

extraction of natural resources; and
(i)

A building site or construction or

installation project which exists for more than
six months.
(3)

Notwithstanding paragraphs (1) and (2), a

permanent establishment shall not include a fixed
place of business used only for one or more of the
following:
(a)

The use of facilities for the purpose

of storage, display, or delivery of goods or
merchandise belonging to the resident;
(b)

The maintenance of a stock of goods

or merchandise belonging to the resident for
the purpose of storage, display, or delivery;
(c)

The maintenance of a stock of goods

or merchandise belonging to the resident for
the purpose of processing by another person;
(d)

The maintenance of a fixed place of

business for the purpose of purchasing goods
or merchandise, or for collecting information,
for the resident;
(e)

or

The maintenance of a fixed place of

business for the purpose of advertising, for
the supply of information, for scientific
research, or for similar activities which have
a preparatory or auxiliary character, for the

- 9 -

(4)

Notwithstanding paragraphs (2) and (3), a

resident of one of the Contracting States shall be
deemed to have a permanent establishment in the other
Contracting State if it maintains substantial equipment
for rental within the other Contracting State for a
period of more than six months.
(5) A person acting in one of the Contracting
States on behalf of a resident of the other Contracting
State, other than an agent of an independent status to
whom paragraph (6) applies, shall be deemed to be a
permanent establishment in the first-mentioned Contracting
State if such person has, and habitually exercises in
the first-mentioned Contracting State, an authority to
conclude contracts in the name of that resident, unless
the exercise of such authority is limited to the
purchases of goods or merchandise for that resident.
(6) A resident of one of the Contracting States
shall not be deemed to have a permanent establishment
in the other Contracting State merely because such
resident engages in industrial or commercial activity
in that other Contracting State through a broker,
general commission agent, or any other agent of an
independent status, where such broker or agent is
acting in the ordinary course of his business.
(7)

The fact that a resident of one of the

Contracting States is a related person with respect
to a resident of the other Contracting State or with
respect to a person who engages in industrial or
commercial 'activity in that other Contracting State

- 10 -

(whether through a permanent establishment or otherwise)
shall not be taken into account in determining whether
the resident of the first-mentioned Contracting State
has a permanent establishment in that other Contracting
State.
Article 5
SOURCE OF INCOME
For purposes of this Convention:
(1)

Dividends shall be treated as income from

sources within a Contracting State only if paid by a
corporation of that Contracting State.
(2)

Interest shall be treated as income from

sources within a Contracting State only if paid by
such Contracting State, a political subdivision or a
local authority thereof, or by a resident of that
Contracting State.

Notwithstanding the preceding

sentence -(a)

If the person paying the interest

(whether or not such person is a resident of
one of the Contracting States) has a permanent
establishment in one of the Contracting States
in connection with which the indebtedness on
which the interest is paid was incurred and
such interest is borne by such permanent
establishment, or
(b) If the person paying the interest is
a resident of one of the Contracting States
and has a permanent establishment in a State

- 11 -

with which the indebtedness on which the interest
is paid was incurred and such interest is paid
to a resident of the other Contracting State,
and such interest is borne bv SMC1^ permanent
establishment, such interest shall be deemed to
be from sources within the State in which the
permanent establishment is situated.
(3) Royalties described in paragraph (3) of
Article 12 (Royalties) shall be treated as income
from sources within a Contracting State to the extent
that such royalties (a) are for the use of, or the
right to use, property or rights described in such
paragraph and the performance of accessory services
within that Contracting State or (b) are paid for
technical and economic studies described in paragraph
3(c) thereof.
(4) Income from real property and royalties
from the operation of mines, quarries, or other
natural resources (including gains derived from the
sale of such property or the right giving rise to
such royalties) shall be treated as income from
sources within a Contracting State only if such
property is situated in that Contracting State.
(5) Income from the rental of tangible personal
(movable) property shall be treated as income from
sources within a Contracting State only if such
property is situated in that Contracting State.

- 12 -

(6)

Income received by an individual for his

performance of labor or personal services, whether as
an employee or in an independent capacity, shall be
treated as income from sources within a Contracting
State only to the extent that such services are
performed in that Contracting State. Income from
personal services performed aboard ships or aircraft
operated by a resident of one of the Contracting
States in international traffic shall be treated as
income from sources within that Contracting State if
rendered by a member of the regular complement of the
ship or aircraft. For purposes of this paragraph,
income farom labor or personal services includes
pensions (as defined in paragraph (3) of Article 19
(Private Pensions and Annuities)) paid in respect of
such services. Notwithstanding the preceding provisions
of this paragraph, remuneration described in Article 17
(Governmental Functions) shall be treated as income
from sources within a Contracting State only if paid
by or from the public funds of that Contracting State
or a political subdivision or local authority thereof.
(7) Income from the purchase and sale of
intangible or tangible personal (including movable)
property (other than gains defined as royalties by
paragraph (3) (b) of Article 12 (Royalties))shall be
treated as income from sources within a Contracting
State only if such property is sold in that Contracting

- 13 -

(8)

Notwithstanding paragraphs (1) through (7),

industrial or commercial profits which are attributable
to a permanent establishment which the recipient, a
resident of one of the Contracting States, has in the
other Contracting State, including income derived from
real property and natural resources and dividends,
interest, royalties (as defined in paragraph (3) of
Article 12 (Royalties)), and capital gains, but only
if the property or rights giving rise to such income,
dividends, interest, royalties, or capital gains are
effectively connected with such permanent establishment,
shall be treated as income from sources within that
other Contracting State.
(9) The source of any item of income to which
paragraphs (1) through (8) are not applicable shall
be determined by each of the Contracting States in
accordance with its own law. Notwithstanding the
preceding sentence, if the source of any item of
income under the laws of one Contracting State is
different from the source of such item of income
under the laws of the other Contracting State or if
the source of such income is not readily determinable
under the laws of one of the Contracting States, the
competent authorities of the Contracting States,
may in order to prevent double taxation or further
any other purpose of this Convention, establish a
common source of the item of income for purposes of
this Convention.

- 14 -

Article 6
INCOME FROM REAL PROPERTY
(1) Income from real property, including royalties
in respect of the operation of mines, quarries, or
other natural resources and gains derived from the sale,
exchange, or other disposition of such property or of
the right giving rise to such royalties, is taxable in
the Contracting State in which such real property, mines,
quarries, or other natural resources are situated. For
purposes of this Convention, interest on indebtedness
secured by real property or secured by a right giving
rise to royalties in respect of the operation of mines,
quarries, or other natural resources shall not be
regarded as income from real property.
(2) Paragraph (1) shall apply to income derived
from the usufruct, direct use, letting, or use in any
other form of real property.
Article 7
BUSINESS PROFITS
(1) Industrial or commercial profits of a
resident of one of the Contracting States shall be
exempt from tax by the other Contracting State unless
such resident is engaged in industrial or commercial
activity in that other Contracting State through a
permanent establishment situated therein. If such
resident is so engaged, tax may be imposed by that
other Contracting State on the industrial or commercial

- 15 -

profits of such resident but only on so much of such
profits as are attributable to the permanent establishment.
(2) Where a resident of one of the Contracting
States is engaged in industrial or commercial activity
in the other Contracting State through a permanent
establishment situated therein, there shall in each
Contracting State be attributed to the permanent
establishment the industrial or commercial profits which
would be attributable to such permanent establishment if
such permanent establishment were an independent entity
engaged in the same or similar activities under the same
or similar conditions and dealing wholly independently
with the resident of which it is a permanent establishment.
(3) In the determination of profits of a permanent
establishment, deductions shall be allowed for expenses
incurred for the purposes of the permanent establishment,
including costs and general expenses related to services
rendered for the benefit of the permanent establishment
whether rendered in the state where the permanent
establishment is located or elsewhere.
(4) (a) The term "industrial or commercial
profits of a resident" means income derived from
an industrial, commercial, agricultural or mining
activity, from fishing, from the operation of
ships or aircraft, from the rental of personal
property, and from insurance. It also means
income derived from real property and natural
resources, dividends, interest, royalties (as
described in Article 12), and capital gains,
but only if the property or the rights giving

- 16 -

rise to such income, dividends, interest, royalties
or capital gains are effectively connected with a
permanent establishment which the recipient, being
a resident of one of the Contracting States, has
in the other Contracting State.

It does not

include income received by an individual in the
form of remuneration for services rendered as an
employee or in the exercise of an independent
profession.
(b)

To determine whether property or rights

are effectively connected with a permanent establish'
ment, the factors taken into account shall include
whether the rights or property are used in or held
for use in carrying on industrial or commercial
activity through such permanent establishment and
whether the activities carried on through such
permanent establishment were a material factor in
the realization of the income derived from such
property or rights.

For this purpose, due regard

shall be given to whether or not such property
or rights or such income were accounted for
through such permanent establishment.
(5) Where industrial or commercial profits include
items of income which are dealt with separately in other
articles of this Convention, the provisions of those
articles shall, except as otherwise provided therein,
supersede the provisions of this article.

- 17 ~

Article 8
SHIPPING AND AIR TRANSPORT
(1) Notwithstanding Article 7 (Business Profits)
and Article 13 (Capital Gains), income which a resident
of one of the Contracting States derives from the
operation in international traffic of ships registered
in that Contracting State, and gains which a resident
of one of the Contracting States derives from the sale,
exchange, or other disposition of such ships operated
in international traffic by such resident and registered
in that Contracting State, shall be exempt from tax by
the other Contracting State.
(2) Notwithstanding Article 7 (Business Profits)
and Article 13 (Capital Gains), income which a resident
of one of the Contracting States derives from the
operation in international traffic of aircraft registered
in either Contracting State or in a State with which the
other Contracting State has an income tax convention
exempting such income, and gains which a resident of
one of the Contracting States derives from the sale,
exchange, or other disposition of such aircraft operated
in international traffic by such resident and registered
in either Contracting State or in a State with which the
other Contracting State has an income tax convention
exempting such income and gains, shall be exempt from
tax by the other Contracting State.

- 18 -

Article 9
RELATED PERSONS
(1) Where a resident of one of the Contracting
States and a resident of the other Contracting State are
related and where such related persons make arrangements
or impose conditions between themselves which are
different from those which would be made between
independent persons, any income, deductions, credits, or
allowances which would, but for those arrangements or
conditions, have been taken into account in computing
the income (or loss) of, or the tax payable by, one of
such persons, may be taken into account in computing
the amount of the income subject to tax and the taxes
payable by such person.
(2) A person is related to another person if
either person owns or controls directly or indirectly
the other, or if any third person or persons own or
control directly or indirectly both.

For this purpose,

the term "control" includes any kind of control, whether
or not legally enforceable, and however exercised or
exercisable,,
Article 10
DIVIDENDS
(1) Dividends derived from sources within one of
the Contracting States by a resident of the other
Contracting State may be taxed by both Contracting
States.

- 19 (2)

The rate of tax imposed by one of the

Contracting States on dividends derived from sources
within that Contracting State by a resident of the
other Contracting State shall not exceed -(a) Fifteen per cent of the gross amount
actually distributed; or
(b) When the recipient is a corporation,
ten per cent of the gross amount actually
distributed if -(i) During the part of the paying
corporation's taxable year which precedes
the date of payment of the dividend and
during the whole of its prior taxable year
(if any), at least ten per cent of the
voting shares of the paying corporation
was owned by the recipient corporation, and
(ii) Not more than twenty-five per cent
of the gross income of the paying corporation
for such prior taxable year (if any) consists
of interest or dividends (other than interest
derived from the conduct of a banking,
insurance, or financing business or dividends
or interest received from subsidiary corporations, fifty per cent or more of the
outstanding shares of the voting stock of
which is owned by the paying corporation at
the time such dividends or interest is
received) .

~ 20

(3)

Paragraph (2) shall not apply if the recipient

of the dividends, being a resident of one of the
Contracting States, has a permanent establishment in the
other Contracting State and the shares with respect to
which the dividends are paid are effectively connected
with such permanent establishment.

In such a case, see

paragraph (4)(a) of Article 7 (Business Profits).
(4)

Dividends paid by a corporation of one of the

Contracting States to a person other than a resident of
the other Contracting State (and in the case of dividends
paid by a Moroccan corporation, to a person other than a
citizen of the United States) shall be exempt from tax
by that other Contracting State.

This paragraph shall

not apply if the recipient of the dividends has a
permanent establishment in that other Contracting State
and the shares with respect to which the dividends are
paid are effectively connected with such permanent
establishment.
Article 11
INTEREST
(1) Interest derived from sources within one of
the Contracting States by a resident of the other
Contracting State may be taxed by both Contracting
States.
(2)

The rate of tax imposed by one of the

Contracting States on interest derived from sources
within that Contracting State by a resident of the
other Contracting State shall not excee^ fifteen percent.

- 21 -

(3)

Paragraphs (1) and (2) shall not apply if the

recipient of the interest, being a resident of one of
the Contracting States, has a permanent establishment in
the other Contracting State and the indebtedness giving
rise to the interest is effectively connected with such
permanent establishment. In such a case, the provisions
of Article 7 (Business Profits) shall apply.
(4) The term "interest" as used in this Article
means income from Government securities, bonds, or
debentures, whether or not secured by mortgage and
whether or not carrying a right to participate in
profits, and debt-claims of every kind as well as all
other income assimilated to income from money lent by
the taxation law of the State in which the income has
its source.
(5) Where, owing to a special relationship
between the payer and the recipient or between both of
them and some other person, the amount of the interest
paid, having regard to the debt-claim for which it is
paid, exceeds the amount which would have been agreed
upon by the payer and the recipient in the absence of
such relationship, the provisions of this Article shall
apply only to the last-mentioned amount. In that case,
the excess part of the payments shall remain taxable
according to the laws of each Contracting State, due
regard being had to the other provisions of this
Convention.

- 22 -

(6) Interest received by one of the Contracting
States, or by an instrumentality of that State not
subject to income tax by such State, shall be exempt in
the State in which such interest has its source.
Article 12
ROYALTIES
(1) Royalties derived from sources within one of
the Contracting States by a resident of the other
Contracting State may be taxed by both Contracting
States.
(2)

The rate of tax imposed by a Contracting

State on royalties derived from sources within that
Contracting State by a resident of the other Contracting
State shall not exceed ten percent.
(3)

The term "royalties" as used in this Article

means ~~
(a)

payment of any kind made as consideration

for the use of, or for the right to use, copyrights
of literary, artistic, scientific works, copyrights
of motion picture films or films or tapes used for
radio or television broadcasting, patents, designs
or models, plans, secret processes or formulae,
trademarks, or other like property rights, or
knowledge, experience, or skill (know-how),
including the performance of accessory technical
assistance for the use of such property or rights
to the extent that such assistance is performed
in the Contracting State where the payment for

- 23 -

(b) gains derived from the sale, exchange
or other disposition of other such property or
rights to the extent that the amounts realized
on such sale, exchange or other disposition for
consideration are contingent on the productivity,
use, or disposition of such property, or rights,
and
(c)

remuneration for technical and economic

studies paid for out of public funds of the
Moroccan Government in the discharge of functions
of a governmental nature by the Moroccan Government or a political subdivision or a local
authority thereof.
(4)

Paragraph (2) shall.not apply if the recipient

of the royalty, being a resident of one of the Contracting
States, has in the other Contracting State a permanent
establishment and the property or rights giving rise to
the royalty is effectively connected with such permanent
establishment.

In such a case, see paragraph (4) (a)

of Article 7 (Business Profits).
(5) Where any royalty paid by xa person to any
related person exceeds an amount which would have been
paid to an unrelated person, the provisions of this
article shall apply only to so much of the royalty as
would have been paid to an unrelated person.

In such

a case, the excess payment may be taxed by each
Contracting State according to its own law, including
the provisions of this Convention where applicable.

- 24 -

Article 15
CAPITAL GAINS
(1) A resident of one of the Contracting States
be taxable only in that State on gains from the
or exchange of capital assets.
(2)

Paragraph (1) of this Article shall not apply

(a) The gain is received by a resident of one
of the Contracting States and arises out of the sale
or exchange of property described in Article 6
(Income from Real Property) located within the other
Contracting State or of the sale or exchange of
shares or comparable interests in a real property
cooperative or of a corporation whose assets consist
principally of such property.
(b) The recipient of the gain, being a resident
of one of the Contracting States, has a permanent
establishment in the other Contracting State and the
property giving rise to the gain is effectively
connected with such permanent establishment, or
(c)

The recipient of the gain, being an

individual resident of one of the Contracting States
(i)

Maintains a fixed base in the other

Contracting State and the property giving rise
to such gain is effectively connected to such
fixed base, or
(ii) Is present in the other Contracting
State for a period or periods exceeding in the
aggregate one hundred eighty-three days during
the taxable year.

- 25 (3)

In the case of gains described in paragraph

(2)(b), the provisions of Article 7 shall apply.
Article 14
INDEPENDENT PERSONAL SERVICES
(1) Income derived by an individual who is a
resident of one of the Contracting States from the
performance of personal services in an independent
capacity, may be taxed by that Contracting State.
Except as provided in paragraph (2), such income shall
be exempt from tax by the other Contracting State.
C2)

Income derived by an individual who is a

resident of one of the Contracting States from the
performance of personal services in an independent
capacity in the other Contracting State may be taxed
by that other Contracting State, if:
(a)

The individual is present in that other

Contracting State for a period or periods
aggregating one hundred eighty-three days or more
in the taxable year, or
(b)

The individual maintains a fixed base

in that other Contracting State for a period or
periods aggregating ninety days or more in the
taxable year, but only so much of it as is
attributable to such fixed base, or
(c)

The gross amount of such income exceeds

$5,000 or the equivalent amount in Moroccan dirhams.
(3)

The term "personal services in an independent

capacity" means all the activities—other than commercial,

- 28 -

(3)

The provisions of paragraph (1) do not apply

to income from services performed in a Contracting State
by a non-profit organization of the other Contracting
State or by members of the personnel of such an organization unless the latter are acting for their own account.
Article 17
GOVERNMENTAL FUNCTIONS
Wages, salaries, and similar remuneration,
including pensions or similar benefits, paid by or from
public funds of one of the Contracting States, to a
citizen of that Contracting State for labor or personal
services performed for that Contracting State, or for
any of its political subdivisions or local authorities,
in the discharge of governmental functions shall be
exempt from tax by the other Contracting State.
Article 18
STUDENTS AND TRAINEES
(1) (a) An individual who is a resident of one
of the Contracting States at the time he becomes
temporarily present in the other Contracting State
and who is temporarily present in that other
Contracting State for the primary purpose of -(i)

Studying at a university or other

recognized educational institution in
that other Contracting State, or
(ii)

Securing training required to

qualify him to practice a profession JI

~ 29 -

(iii)

Studying or doing research as a

recipient of a grant, allowance, or award
from a governmental, religious, charitable,
scientific, literary, or educational
organization,
shall be exempt from tax by that other Contracting
State with respect to amounts described in
subparagraph (b) for a period not exceeding five
taxable years from the date of his arrival in
that other Contracting State.
(b) The amounts referred to in subparagraph (a) are -(i) Gifts from abroad for the purpose
of his maintenance, education, study,
research, or training;
(ii) The grant, allowance, or award; and
(iii) Income from personal services
performed in that other Contracting State
in an amount not in excess of 2,000 United
States dollars or its equivalent in Moroccan
dirhams for any taxable year.
Article 19
PRIVATE PENSIONS AND ANNUITIES
(1) Except as provided in Article 17 (Governmental
Functions), pensions and other similar remuneration paid
to an individual who is a resident of one of the Contracting
States in consideration of past employment shall be taxable
only in that Contracting State.

- 30 -

(2)

Alimony and annuities paid to an individual

who is a resident of one of the Contracting States shall
be taxable only in that Contracting State.
(3)

The term "pensions and other similar remuner-

ation," as used in this article, means 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.
(4)

The term "annuities," as used in this article,

means 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).
(5)

The term "alimony," as used in this article,

means periodic payments made pursuant to a decree of
divorce, separate maintenance agreement, or support or
separation agreement which is taxable to the recipient
under the internal laws of the Contracting State of
which he is a resident.
Article 20
GENERAL RULES OF TAXATION
(1) A resident of one of the Contracting States
may be taxed by the other Contracting State on any income
from sources within that other Contracting State and only
on such income, subject to any limitations set forth in
this Convention.

For this purpose, the rules set forth

in Article 5 (Source of Income) shall be applied to

- 31 -

(2)

The provisions of this Convention shall not

be construed to restrict in any manner any exclusion,
exemption, deduction, credit, or other allowance now
or hereafter accorded -(a) By the laws of one of the Contracting
States in the determination of the tax imposed
by that Contracting State, or
(b) By any other agreement between the
Contracting States.
(3) Notwithstanding any provisions of this
Convention except paragraph (4), a Contracting State may
tax a citizen or resident of that Contracting State as
if this Convention had not come into effect.
(4) The provisions of paragraph (3) shall not
affect:
(a) The benefits conferred by a Contracting
State under Articles 21 (Relief from Double
Taxation), 22 (Nondiscrimination), and 25 (Mutual
Agreement Procedure); and
(b) The benefits conferred by a Contracting
State under Articles 18 (Students and Trainees),
and 17 (Governmental Functions), upon individuals
who are neither citizens of, nor have immigrant
status in, that Contracting State.
(5) The United States may impose its personal
holding company tax and accumulated earnings tax as
if this Convention had not come into effect. However:

- 32 -

Ca)

A Moroccan corporation shall be exempt

from the United States personal holding company
tax in any taxable year if all of its stock is
owned by one or more individual residents of
Morocco in their individual capacities for that
entire year.
(b) A Moroccan corporation shall be exempt
from the United States accumulated earnings tax
in any taxable year unless such corporation is
engaged in trade or business in the United States
through a permanent establishment at any time
during such year.
(6) The competent authorities of the two Contracting
States may prescribe regulations necessary to carry out
the provisions of this Convention.
(7) Where, pursuant to any provision of this
Convention, a Contracting State reduces the rate of tax
on, or exempts income of a resident of the other
Contracting State and under the law in force in that
other Contracting State the resident is subject to tax
by that other Contracting State only on that part of such
income which is remitted to or received in that other
Contracting State, then the reduction or exemption shall
apply only to so much of such income as is remitted to
or received in that other Contracting State.

- 33 -

Article 21
RELIEF FROM DOUBLE TAXATION
Double taxation of income shall be avoided in the
following manner:
(1)

The United States shall allow to a citizen or

resident of the United States as a credit against the
United States tax specified in paragraph (1)(a) of
Article 1 the appropriate amount of income taxes paid
to Morocco.

Such appropriate amount shall be based upon

the amount of tax paid to Morocco, but shall not exceed
that portion of the United States tax which such citizen's
or resident's net income from sources within Morocco
bears to his entire net income for the same taxable year.
(2) For purposes of computing the appropriate
amount of taxes paid to Morocco, a citizen or resident
of the United States who receives income or dividends
from Morocco may elect to include in the computation of
Moroccan tax for purposes of paragraph (1) the amount
required to be invested in Moroccan equipment bonds
under Article 37 of the Royal Decree No. 1.010-65 of
the 8th of Ramadan 1385 (December 31, 1965) containing
the Finance Law for the year 1966, in accordance with
regulations issued by the Secretary of the Treasury or
his delegate; provided that the United States citizen
or resident agrees that any repayment by the Moroccan
Government of such bonds shall be treated for purposes
of this Article as a refund of Moroccan tax for the
year of such repayment.
(3) Morocco shall allow to a citizen or resident
of Morocco" as a credit against the Moroccan tax specified

- 34 -

in paragraph (1) (b) of Article 1 the appropriate amount
of income taxes paid to the United States. Such
appropriate amount shall be based upon the amount of tax
paid to the United States but shall not exceed that
portion of the Moroccan tax which such citizen's or
resident's net income from sources within the United
States bears to his entire net income for the same
taxable year.
Article 2 2
NONDISCRIMINATION
(1) A citizen of one of the Contracting States who
is a resident of the other Contracting State shall not
be subjected ,in that other Contracting State to more
burdensome taxes than a citizen of that other Contracting
State who is a resident thereof.
(2) A permanent establishment which a resident of
one of the Contracting States has in the other Contracting
State shall not be subject in that other Contracting State
to more burdensome taxes than a resident of that other
Contracting State carrying on the same activities. This
paragraph shall not be construed as obliging a Contracting
State to grant to individual residents of the other
Contracting State any personal allowances, reliefs, or
deductions for taxation purposes on account of civil
status or family responsibilities which it grants to its
own individual residents.
(3) A corporation of one of the Contracting States,
the capital of which is wholly or partly owned or

- 35 -

controlled, directly or indirectly, by one or more
residents of the other Contracting State, shall not be
subjected in the first-mentioned Contracting State to
any taxation or any requirement connected therewith
which is other or more burdensome than the taxation and
connected requirements to which a Qorporation of the
first-mentioned Contracting State carrying on the same
activities, the capital of which is wholly owned or
controlled by one or more residents of the firstmentioned Contracting State, is or may be subjected.
Article 2 3
DIPLOMATIC AND CONSULAR OFFICERS
Nothing in this Convention shall affect the fiscal
privileges of diplomatic and consular officials under the
general rules of international law or under the provisions
of special agreements.
Article 24
INVESTMENT OR HOLDING COMPANIES
A corporation of one of the Contracting States
deriving dividends, interest, royalties, or capital gains
from sources within the other Contracting State shall not
be entitled to the benefits of Article 10 (Dividends),
11 (Interest), 12 (Royalties), or 13 (Capital Gains) if -(a) By reason of special measures the tax
imposed on such corporation by the first-mentioned
Contracting State with respect to such dividends,
interest, royalties, or capital gains is

- 36 -

substantially less than the tax generally imposed
by such Contracting State on corporate profits, and
Cb) Twenty^five percent or more of the capital
of such corporation is held of record or is otherwise
determined, after consultation between the competent
authorities of the Contracting States, to be owned
directly or indirectly, by one or more persons who
are not individual residents of the first-mentioned
Contracting State Cor, in the case of a Moroccan
corporation, who are citizens of the United States),
Article 25
MUTUAL AGREEMENT PROCEDURE
(1) Where a resident of one of the Contracting
States considers that the action of one or both of the
Contracting States results or will result for him in
taxation not in accordance with this Convention, he may,
notwithstanding the remedies provided by the national
laws of the Contracting States, present his case to the
competent authority of the Contracting State of which
he is a resident. Should the resident's claim be
considered to have merit by the competent authority of
the Contracting State to which the claim is made, it
shall endeavor to come to an agreement with the competent
authority of the other Contracting State with a view to
the avoidance of taxation contrary to the provisions of
this Convention.

- 37 -

(2)

The competent authorities of the Contracting

States shall endeavor to resolve by mutual agreement any
difficulties or doubts arising as to the application of
this Convention.

In particular, the competent authorities

of the Contracting States may agree -(a)

To the same attribution of industrial or

commercial profits to a resident of one of the
Contracting States and its permanent establishment
situated in the other Contracting State;
Cb) To the same allocation of income, deductions,
credits, or allowances between a resident of one of
the Contracting States and any related person;
(c) To the same determination of the source
of particular items of income;

or

(d) To the same meaning of any term used in
this Convention.
(3) The competent authorities of the Contracting
States may communicate Kith each other directly for the
purpose of reaching an agreement in the sense of this
article.

When it seems advisable for the purpose of

reaching agreement, the competent authorities may meet
together for an oral exchange of opinions.
(4)

In the event that the competent authorities

reach such an agreement, taxes shall be imposed on such
income and refund or credit of taxes shall be allowed,
by the Contracting States in accordance with such
agreement.

- 38 -

Article 26
EXCHANGE OF INFORMATION
(1) The competent authorities of the Contracting
States shall exchange such information as is pertinent to
carrying out the provisions of this Convention and of the
domestic laws of the Contracting States concerning taxes
covered by this Convention.

Any information so exchanged

shall be treated as secret and shall not be disclosed to
any persons other than those Concluding a court or
administrative body) concerned with assessment, collection,
enforcement, or prosecution in respect of the taxes which
are the subject of this Convention.
(2)

In no case shall the provisions of paragraph (1)

be construed so as to impose on one of the Contracting
States the obligation -(a)

To carry out administrative measures at

variance with the laws or the administrative
practice of that Contracting State or the other
Contracting State;
(b)

To supply particulars which are not

obtainable under the laws, or in the normal course
of the administration, of that Contracting State
or of the other Contracting State;
(c)

or

To supply information which would disclose

any trade, business, industrial, commercial, or
professional secret or trade process, or information,
the disclosure of which would be contrary to public
policy.

- 39 -

(3)

The exchange of information shall be either

on a routine basis or on request with reference to
particular cases. The competent authorities of the
Contracting States may agree on the list of information
which shall be furnished on a routine basis.
(4) The competent authorities of the Contracting
States shall notify each other of any amendments of the
tax laws referred to in paragraph (1) of Article 1
(Taxes Covered) and of the adoption of any taxes referred
to in paragraph (2) of Article 1 (Taxes Covered) by
transmitting the texts of any amendments or new statutes
at least once a year.
(5) The competent authorities of the Contracting
States shall notify each other of the publication by
their respective Contracting States of any material
concerning the application of this Convention, whether
in the form of regulations, rulings, or judicial
decisions by transmitting the texts of any such materials
at least once a year.
Article 27
EXTENSION TO TERRITORIES
(1)

Either one of the Contracting States may, at

any time while this Convention continues in force, by a
written notification given to the other Contracting
State through diplomatic channels, declare its desire
that the operation of this Convention, either in whole
of m part or with such modifications as may be found
necessary fox. special application in a particular case,

- 40 -

shall extend to all or any of the areas (to which this
Convention is not otherwise applicable) for whose
international relations it is responsible and which
impose taxes substantially similar in character to those
which are the subject of this Convention.

When the other

Contracting State has, by a written communication through
diplomatic channels, signified to the first-mentioned
Contracting State that such notification is accepted in
respect of such area or areas, and the notification and
communication have been ratified and instruments of
ratification exchanged, this Convention, in whole or in
part, or with such modifications as may be found necessary
for special application in a particular case, as specified
in the notification, shall apply to the area or areas
named in the notification and shall enter into force and
effect on and after the date or dates specified therein.
None of the provisions of this Convention shall apply to
any such area in the absence of such acceptance and
exchange of instruments of ratification in respect of
that area.
(2)

At any time after the date of entry into force

of an extension under paragraph (1), either of the
Contracting States may, by six months' prior notice of
termination given to the other Contracting State through
diplomatic channels, terminate the application of this
Convention to any area to which it has been extended
under paragraph CI), and in such event this Convention
shall cease to apply and have force and effect,
beginning on or after the first day of January next

- 41 -

following the expiration of the six month period, to the
area or areas named therein, but without affecting its
continued application to the United States, Morocco, or
to any other area to which it has been extended under
paragraph (1).
(3)

In the application of this Convention in relation

to any area to which it is extended by notification by
the United States or Morocco, reference to the "United
States" or "Morocco" as the case may be, shall be construed
as referring to that area.
(4)

The termination in respect of the United States

or Morocco of this Convention under Article 29 (Termination)
shall, unless otherwise expressly agreed by both Contracting
States, terminate the application of this Convention to any
area to which the Convention has been extended under this
article by the United States or Morocco.
Article 28
ENTRY INTO FORCE
(1) The present Convention shall be ratified and
the instruments of ratification shall be exchanged as
soon as possible thereafter at Washington, D. C.
(2)

The present Convention shall enter into force

upon the exchange of instruments of ratification and
will apply as follows:
(a)

To taxes due at the source on income

payable or paid on and after the first day of the
month following the exchange of instruments of
ratification, and

- 42 -

(b) In the case of other taxes imposed on
income for taxable years beginning on and after the
first of January of the year of ratification.
Article 29
TERMINATION
The present Convention will remain in force
indefinitely; however, each Contracting State may, prior
to the 30th of June in.any calendar year at any time
after five years from the date on which this Convention
enters into force, terminate the Convention in writing
submitted through diplomatic channels to the other
Contracting State. In the event of a termination
before July 1 of any such year, the Convention will
continue to apply for the last time:
(1) To taxes due at the source on income payable
or paid not later than December 31 of the year in which
such termination occurs, and
(2) In the case of other taxes imposed on income
for taxable periods ending not later than December 31
of the same year.
DONE in triplicate, in the English, French and
Arabic languages, the three texts having equal authenticity,
this First day of August , 1977
FOR THE GOVERNMENT OF THE
UNITED STATES OF AMERICA

FOR THE GOVERNMENT OF THE
KINGDOM OF MOROCCO

v\Q\^X y ,
Robert Andersoh
Ambassador of the United
States of America

Abdelkader Benslimane
Minij^l Uf riYHKice

Rabat, August 1 , 1977

His Excellency
Mr. Abdelkader Benslimane
Minister of Finance
Rabat
Excellency:
In your letter of today's date you kindly informed
me of the following:
"During the discussions which were held in both
Rabat and Washington for the purpose of concluding a
convention to avoid double taxation between the United
States and Morocco, the Moroccan delegation emphasized
to the American delegation that the Moroccan Government,
for the purpose of promoting private investment, will
exempt certain profits and interest payments from
taxation.

The Moroccan delegation expressed its hope

that the U.S. Government would accordingly grant citizens
and residents of the United States a 'tax-sparing'
credit against the U.S. tax.

The U.S. delegation

indicated that the Senate has been reluctant to approve
such a provision in other tax conventions.

However, the

U.S. delegation has promised to review its position should
the Senate reconsider its decision on this matter.
"I would be grateful to you if you would confirm
your government's commitment to resume discussions on
this point should the Senate approve a provision of this
kind in the interest of another country."

2

Please accept, Mr. Ambassador, assurances of my
highest esteem.

Abdelkader Benslimane

Rabat, August 1, 1977

The Honorable
Robert Anderson
American Ambassador
Rabat
Dear Mr. Ambassador:
During the discussions which were held in both
Rabat and Washington for the purpose of concluding a
convention to avoid double taxation between the United
States and Morocco, the Moroccan delegation emphasized
to the American delegation that the Moroccan Government,
for the purpose of promoting private investment, will
exempt certain profits and interest payments from
taxation.

The Moroccan delegation expressed its hope

that the U.S. Government would accordingly grant citizens
and residents of the United States a "tax-sparing"
credit against the U.S. tax.

The U.S. delegation

indicated that the Senate has been reluctant to approve
such a provision in other tax conventions.

However,

the U.S. delegation has promised to review its position
should the Senate reconsider its decision on this
matter.
I would be grateful to you if you would confirm
your government's commitment to resume discussions on
this point should the Senate approve a provision of
this kind in the interest of another country.

2

I have the honor to confirm the above-mentioned
commitment.
Please accept, Excellency, the assurances of my
highest consideration.

Robert Anderson

FOR IMMEDIATE RELEASE

August 30, 1977

RESULTS OF AUCTION OF 4-YEAR 1-MONTH TREASURY NOTES
The Department of the Treasury has accepted $2,511 million of
$5,141 million of tenders received from the public for the 4-year 1-month
notes, Series K-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.80% 1/
Highest yield
Average yield

6.85%
6.84%

The interest rate on the notes will be 6-3/4%. At the 6-3/4% rate,
the above yields result in the following prices:
Low-yield price 99.811
High-yield price
Average-yield price

99.636
99.671

The $2,511 million of accepted tenders includes $249 million of
noncompetitive tenders and $2,262 million of competitive tenders
(including 71% of the amount of notes bid for at the high yield) from
private investors.
In addition, $450 million of tenders were accepted at the average
price from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash.

1/ Excepting 2 tenders totaling $35,000

B-415

FOR IMMEDIATE RELEASE

August 31, 19 77

TREASURY OFFERS $1,800 MILLION OF TREASURY BILLS
Tne Department ot the Treasury, by this public notice, invites
tenders tor two series ot Treasury Dills totaling approximately
$1,800 million, to be issued September 6, 1977, as follows:
9-day bills (to maturity date) for approximately $900 million,
representing an adaitional amount of oills dated Marcn 17, 1977, and
to mature September 15, 1977 (CUSIP No. 912793 K2 1), and
16-day bills (to maturity date) for approximately $900 million,
representing an additional amount of bills dated March 24, 1977, and
to mature September 22, 1977 (CUISP No. 912793 K3 9 ) .
Tne oills will be issued on a discount basis under competitive
Didaing, and at maturity their face amount will be payable without
interest. Tney will be issued in bearer form in denominations of
510,000, $15,000, $50,000, $100,000, $500,000 and $1,000,000
[maturity value), and in DooK-entry form to designated bidders.
Tenders will be received at ail Federal Reserve BanKs and
.ranches up to 1:30 p.m., Eastern Daylight Saving time, Thursday,
September 1, 1977. Tenders will not be received at the Department of
:ne Treasury, Washington. Wire and telephone tenders may be received
it the discretion of each Federal Reserve Bank or Branch. bach
:ender for each issue must be for a minimum of $10,000,000. Tenders
)ver $10,000,000 must be in multiples of $1,000,000. The price on
lenders offered must be expressed on the basis of 100, with not more
:nan three decimals, e.g., 99.925. Fractions may not be usea.
Banking institutions and dealers who make primary markets in
Jovernment securities and report daily to the Federal Reserve Bank of
lew York their positions in and borrowings on such securities may
iubmit tenders for account of customers, if the names of the
'ustomers and the amount for each customer are furnished. Others are
>nly permitted to submit tenders for their own account. Tenders will
»e received without deposit from incorporated banks and trust
•ornpanies and from responsible and recognized dealers in investment
ecurities. Tenders from others must be accompanied by payment of 2
•ercent of the face amount of bills applied for, unless the tenders
re accompanied by an express guaranty of payment by an incorporated
ank or trust company.
-416
(OVER)

-2Puolic announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids. Those
submitting tenders will be advised of the acceptance or rejection of
tneir tenders. The Secretary of tne Treasury expressly reserves tne
right to accept or reject any or all tenders, in wnole or in part,
and tne Secretary's action shall be final. Settlement for accepted
tenaers in accordance with the bids must be made or completed at the
Feaeral Reserve Bank or Brancn on September 6, 1977, in immediately
availaole funds.
under Sections 454(D) and 1221(5) of the Internal Revenue Code
ot 1954 the amount of discount at which tnese Dills are sold is
considered to accrue wnen the Dills are sold, redeemed or otherwise
disposed of, and the bills are excluded from consideration as capital
assets. Accordingly, the owner of these bills (other than life
insurance companies) must include in his or ner Federal income tax
return, as ordinary gain or loss, the difference between tne price
paid for the bills, whether on original issue or on subsequent
purchase, and the amount actually received either upon sale or
redemption at maturity auring the taxable year for which the return
is made.
Department of the Treasury Circular No. 4ib (current revision)
and this notice, prescribe tne terms of tne Treasury bills and govern
tne conditions ot their issue. Copies of tne circular may be
obtained from any Federal Reserve Bank or Brancn.
oOo

FOR IMMEDIATE RELEASE

September 1, 1977

RESULTS OF AUCTION OF 9-DAY AND 16-DAY TREASURY BILLS
Tenders for $ 901 million of 9-day Treasury bills and for $ 903
million of 16-day Treasury bills, both series to be issued on September 6,
T977" were accepted at the Federal Reserve Banks today. The details are
as follows:
RANGE OF ACCEPTED
BIDS:

9-day bills
maturing September 15, 1977

Discount Investment
Price
High
Low
Average

99.858
99.855
99.856

Rate
5.680%
5.800%
5.760%

Rate 1/
5.77%
5.89%
5.85%

16-day bills
maturing September 22, 1977
Discount Investment
Price
Rate
Rate 1/
99.747
99.743
99.744

5.693%
5.783%
5.7

5.79%
5.88%
5.

Tenders at the low price for the 9-day bills were allotted 53%.
Tenders at the low price for the 16-day bills were allotted 6o/e.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS:
Location

Received

Accepted

$ 10,000,000
$ 10,000,000
Boston
745,190,000
3,309,000,000
New York
Philadelphia
Cleveland
60,000,000
Richmond
Atlanta
123,250,000
400,000,000
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
22,600,000
537,000,000
San Francisco
TOTALS $4,316,000,000 $901,040,000

1/ Equivalent coupon-issue yield.

B-417

Received
$ 10,000,000
4,158,000,000

Accepted
$

758,000,000

60,000,000
560,000,000
30,000,000
10,000,000
50,000,000
400,000.000
$5,278,000,000

144,800,000

$902,800,000

Department of theTREASURY
TELEPHONE 566-2041

WASHINGTON, D.C. 20220

September 2, 1977

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY1S WEEKLY BILL AUCTIONS
Tenders for $2,202 million of 13-week Treasury bills and for $3,200 million
of 26-week Treasury bills, both series to be issued on September 8, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Discount Investment
Price
High
Low
Average

26-week bills
maturing March 9, 1978

13-week bills
maturing December 8, 1977

98.604
98.593
98.596

Rate
5.523%
5.566%
5.554%

Discount Investment
Price
Rate
Rate 1/

Rate 1/
5.68%
5.72%
5.71%

97.051 a/ 5.833% 6.09%
97.042
5.851%
6.11%
97.045
5.845%
6.11%

a/ Excepting 1 tender of $65,000
Tenders at the low price for the 13-week bills were allotted 81%. "
Tenders at the low price for the 26-week bills were allotted 79%.

_^S^?

TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Boston
$
25,085,000
New York
3,142,060,000
Philadelphia
22,835,000
Cleveland
37,025,000
Richmond
34,565,000
Atlanta
24,370,000
Chicago
328,985,000
St. Louis
33,720,000
Minneapolis
17,395,000
Kansas City
20,315,000
Dallas
23,740,000
San Francisco
300,890,000
Treasury
TOTALS

115,000
$4,011,100,000

Accepted

:. Received

$
24,135,000
1,670,265,000
22,835,000
31,950,000
28,565,000
24,370,000
167,915,000
18,720,000
17,395,000
20,315,000
23,740,000
152,140,000

14,310,000
:$
:: 5,126,155,000
:
6,880,000
:
71,555,000
:
36,415,000
:
26,455,000
687,285,000
29,775,000
17,300,000
16,860,000
27,070,000
«
508,580,000
:

$
4,310,000
2,831,595,000
6,880,000
31,555,000
17,365,000
13,355,000
104,260,000
13,395,000
17,300,000
16,860,000
16,070,000
127,230,000

70,000

70,000

115,000 •

$2,202,460,000 b/$6,568,710,000

]vIncludes $303,920,000 noncompetitive tenders from the public.
c/lncludes $134,170,000 noncompetitive tenders from the public.
^/Equivalent coupon-issue yield.

Accepted

$3,200,245,000 c_/

FOR RELEASE AT 4:00 P.M.

September 6, 1977

TREASURY'S WEEKLY BILL OFFERING
Tne Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,U00 million, to be issued September 15, 1977.
Tnis offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount ot $6,007 million
($901 million of which represent 9-day Dills issued September 6,
1977). The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,500
million, representing an additional amount of bills dated
June 16, 1977, and to mature December 15, 1977 (CCJSIP No.
912793 L7 9), originally issued in the amount of $3,001 million,
tne additional and original bills to be freely interchangeable.
Ib2-day oiils for approximately $3,500 million to be dated
September 15, 1977, and to mature March 16, 1978 (CUSIP No.
912793 P3 4) .
Botn series of bills will be issued for cash ana in exchange
for Treasury oiils maturing September 15, 1977. Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently hold $2,870 million of the
maturing bills. These accounts may exchange Dills they nold for
the bills now being offered at the weighted average prices of
accepted competitive tenders.
Tne bills will be issued on a discount oasis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in tne
$10u,000 denomination, which will oe available only to investors
wno are able to show that they are required oy law or regulation
to hold securities in physical form, Dotn series of bills will be
issued entirely in book-entry form in a minimum amount of $10,u00
and in any higher $5,000 multiple, on tne records either of the
Federal Reserve banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Deot, Washington, D. C.
2U226, up to 1:30 p.m., Eastern Daylight Saving time, Monday,
September 12, 1977. Form PD 4632-2 (for 26-week series) or form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to oe maintained on tne book-entry records of tne
Department ot the Treasury.
B-419

-2Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 15, 1977, in cash or
September
other
differences
accepted
immediately
in
15,between
exchange
1977.available
the
Cash
andpar
the
adjustments
value
funds
issueor
of
price
in
the
will
Treasury
of
maturing
be
the
made
new
bills
bills
for
bills.
maturing

as-

under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

September 6, 1977
MEMORANDUM TO THE PRESS-

Mrs. Azie T. Morton will be sworn in as Treasurer
of the United States on September 12, 1977.

The ceremony

will take place at 6:30 p.m. at the Federal Deposit
Insurance Corporation, 550 17th Street, N.Wf, Penthouse,
Seventh Floor.

oOo

B-420

FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m.
September 7, 1977
STATEMENT OF
DANIEL I. HALPERIN
TAX LEGISLATIVE COUNSEL
BEFORE THE
WAYS AND MEANS
SUBCOMMITTEE ON MISCELLANEOUS REVENUE MEASURES
Mr. Chairman and Members of this Subcommittee:
We welcome the opportunity to present the Treasury
Department's views on the 21 miscellaneous bills to be
considered by your Subcommittee. Because of the broad
application of the tax laws to the diverse personal, charitable and business sectors of our society, it is extremely
important that a vehicle such as this Subcommittee exist to
consider legislative recommendations of both general and
specific concern that might otherwise not be considered by
the Congress. As we have previously stated, in the near
future, we hope to present recommendations of our own for
consideration by your Subcommittee.
The Treasury Department applauds the procedures adopted
by this Subcommittee which provide for a full and fair hearing of opposing views. This is beneficial no matter how
minor or technical a bill might be. We appreciate the
opportunity to comment on the bills presently before your
Subcommittee.
The Treasury Department notes that a number of these
bills create special exceptions presumably designed to improve
the equity of the tax laws. We are not always in agreement
that these changes promote equity but we, of course, recognize
that opinions may differ on such matters. We believe, however,
that more attention needs to be paid to the increased complexity
of the tax law, as these exceptions multiply, particularly if
further refinement is needed to prevent abuse. I am sure we
all agree that these factors - complexity and potential for
abuse - must be weighed against the intended equity gains.
B-421

-2Consistent with these views the Treasury would prefer
a general lowering of the excise tax on private foundations
to an attempt to single out a newly defined special category
of foundations as H.R. 112 would do. Further, while we
appreciate the fairness of allowing a child care credit for
payments to relatives in certain circumstances, we oppose
H.R. 8535 because we believe the potential for abuse outweighs
the equity gains. Last year Congress sought to curb abuse by
allowing the credit only where social security taxes were
required. As the sponsor of H.R. 8535 (Mr. Conable) has
pointed out this leads to inconsistent treatment of apparently
similar cases. Rather than introducing further refinement to
prevent abuse, we believe it is preferable to deny the credit
for all payments to relatives.
The Treasury's specific recommendations and comments on
the miscellaneous bills are summarized below and are more
fully set forth in the attached memorandum. I would like to
refer, at this time, to our statement concerning H.R. 2714
because I believe the bill presents an excellent example of the
difficulty I have attempted to describe.
Under present law an employee is not in general able to
assign his vested benefits under a pension, profit-sharing or
stock bonus plan as collateral for loans from banks or insured
credit unions. The bill would permit a participant in a profitsharing, stock bonus or money purchase pension plan to assign
as collateral for a loan from a bank or credit union, the lesser
of (A) his accrued benefit under the plan derived from his own
contributions, or (B) the total amount of his contributions to
the plan, reduced by his withdrawals and any other outstanding
security interests in those contributions.
In general, the policy of the Employee Retirement Income
Security Act (ERISA) is to insure that amounts set aside will
be available after retirement. ERISA does not fully carry out
this purpose as it allows early withdrawals or loans from the
plan in certain circumstances. H.R. 2714 attempts to be
consistent with these exceptions to retention of benefits until
retirement, and, except for mandatory contributions to money
purchase plans, permits a pledge as security for a loan only
where withdrawal would be allowed.

-3The Treasury, however, believes we should move in the
opposite direction and increase the chances that funds will
remain for retirement. Moreover, the Treasury is concerned
about the tax shelter aspects of the permitted assignments.
The proposed bill would permit a participant to claim
an immediate deduction for interest on the borrowed funds,
while deferring payment of tax on the income earned by his
contributions used as collateral for the loan until such
income is distributed to him. The Treasury Department strongly
believes a taxpayer should not be entitled to a current deduction for interest paid on amounts borrowed to purchase or
carry investments the income from which is not taxed currently.
The bill attempts to defer a deduction for interest if the
loan is used directly or indirectly to finance a contribution
to the plan. There is no reason to complicate the Code by an
effort to draw this distinction. Even if the interest deduction were to be denied in all cases, the carryforward provision
involves additional complexity. The Treasury Department
opposes H.R. 2714.
To summarize, in attempting to limit the possibility of
an unwarranted tax advantage from the opportunity it creates,
the bill develops a huge layer of complexity. The alleged
problem is just not big enough to justify solution if the
only equitable route is as complicated as this. The law may
be best left alone.
I will not take the time to read the rest of the Treasury
statement but would be pleased to answer any questions you may
have concerning our recommendations and comments.
Summary of Treasury Department Positions
Income Taxes
H.R. 3050 (Accounting for sale of magazines) Supports in principle but suggests modifications, p.
H.R. 4089 (Indian Tribes) - Does not oppose, p. 24
H.R. 8535 (Child Care Payments to Relatives) - Opposes.p.
H.R. 8857 (Corporate liquidations) - Supports, p. 40

-4Retirement Income
H.R. 2714 (Security for Loans) - Opposes, p. 9
H.R. 6635 (Retirement Bonds) - Supports if effective
date is changed, p. 30
H.R. 8811 (Tax Court Judges) - Supports, p. 39
Exempt Organizations
H.R. 112 (Foundation Excise Tax) - Not opposed to
general reduction of tax but opposes special
exception, p. 1
H.R. 810 (Foreign Travel - Government Officials) Not opposed in principle. Suggests modifications, p.18
H.R. 3630 (Cooperative Telephone Companies) - Supports
in principle but suggests another approach, p. 19
H.R. 4030 (Foundation Business Holdings) - Opposes, p. 22
H.R. 7003 (Leasing by Private Foundation) - Does not
oppose if bill amended to conform with bill reported
by Senate Finance Committee, p. 33
Excise Taxes
H.R. 1337 (Constructive Sale Price) - Supports. Suggests
clarification, p. 4
H.R. 1920 (Repayment after certain losses) - Opposes, p. 6
H.R. 2028 (Home Production) - No objection, p. 8
H.R. 2852 (Farm Use) - Opposes use tax exemption. Supports
refund to crop sprayer if farmer waives rights in
writing, p. 11
H.R. 2984 (Trailers for Farm Use) - Opposes. p. 14
H.R. 3633 (Ammunition Components) - Does not oppose but
suggests postponement of effective date. p. 21
H.R. 4458 (Distilled Spirits) - No objection, p. 26
H.R. 5103 (Tire Warranty Adjustments) - Not opposed in
principle. Suggests modifications, p. 28
H.R. 6853 (Fishing Equipment) - Opposes, p. 31

-5The Department has been advised by the Office of
Management and Budget that there is no objection from the
standpoint of the Administration's program to the submission
of this report to your Subcommittee.
Attachment

Treasury Department Recommendations
on the 21 Bills to be Considered by the
Subcommittee on Miscellaneous Revenue Measures
1. H.R. 112.
Under present law (section 4940) a 4% excise tax is
imposed on the net investment income of all private foundations,
including operating foundations. The bill would reduce the 4%
excise tax on net investment income to 2% in the case of private
operating foundations that operate long-term care facilities.
The Treasury Department opposes special exceptions to the
tax on investment income because they introduce unwarranted
complexity in an already complex area. We suggest that if the
4% tax on investment income is to be reduced to 2% for private
foundations that operate long-term care facilities, the tax
should also be reduced to 2% for all private foundations. One
of the purposes of the 4% excise tax on investment income was
to provide sufficient revenues to cover the cost of the Internal
Revenue Service's administration of the tax laws pertaining to
private foundations. If the tax imposed by section 4940 were

reduced from 4% to 2% on the net investment income of all private
foundations it is estimated that the revenues raised by the 2%
tax would be $35 million. The cost of auditing all tax-exempt
organizations, including private foundations, is estimated to
be $29 million. Accordingly, reducing the 4% tax on investment
income to 2% for all private foundations would produce more than
sufficient revenues to cover the cost of auditing the entire

-2nonprofit sector.

Treasury would not oppose H.R. 112 if the

4% excise tax imposed on the net investment income of private
foundations were reduced to 2% for all private foundations.

-32.

H.R. 810.

The Tax Reform Act of 1969 added a provision to the
Code (section 4941) which in general prohibits certain transactions between private foundations and certain "disqualified
persons," by imposing a graduated series of excise taxes on
the disqualified person (and in certain circumstances on the
foundation manager). Government officials are "disqualified
persons" for this purpose except for certain specifically set
forth transactions including the payment of expenses of domestic
travel. The bill would provide an additional exception for
payment or reimbursement of foreign travel expenses of a government official by a private foundation.
The Treasury Department recommends that H.R. 810 be amended
so that the amount of allowable foreign travel expenses of a
government official that can be paid or reimbursed by a private
foundation is consistent with the amount of expenses that can
be deducted by taxpayers attending foreign conventions. With
this change permitted reimbursable expenses for any one foreign
trip by a government official would be the lowest coach or
economy air fare charged at the time of travel, such amount not

to exceed $2,500 or the actual cost of the transportation involve
plus an amount for all other traveling expenses not in excess of

100% of the per diem rates allowed Federal employees for governme
trips to the same locations for a maximum of four days. Treasury
would not oppose H.R. 810 if these changes were made.

-43.

H.R. 1337.

Present law provides that for purposes of computing a
manufacturer's excise tax on sales at retail of trucks, buses,
and trailers the taxable price is the lower of (1) the price
for which the article is sold or (2) the highest price at which
competing articles are sold to wholesale distributors in the
ordinary course of trade. In the case of trucks and trailers,

the Internal Revenue Service has ruled that where the manufactur

does not ordinarily sell such articles to wholesale distributors
(and few do), a constructive price for sales at retail is
75% of the manufacturer's retail selling price. However, this
constructive price cannot be less than the manufacturer's cost
where the manufacturer has an established retail price, and cost
plus 10% where (as in the case of custom work) he does not have
an established retail price.
H.R. 1337 would eliminate the use of an individual manufacturer's costs (or cost plus 10%) in determining a constructive

price in the situation where the 75% rule is now applied, i.e. ,

sales at retail where the manufacturer does not sell such articl
to wholesale distributors.
The Treasury Department supports H.R. 1337. The not
less than cost rule produces uncertainty at the time of sale
as to the amount of the manufacturer's excise tax liability.
Computing "costs" is always complicated, especially the problem
of allocating overhead costs. A straight percentage of retail

-5price would greatly simplify matters for the trade and the
Internal Revenue Service.
Even though the not less than cost rule is deleted, it

should be made clear that the rule continues to be available for
use in constructing a taxable price where a person makes and
uses a taxable item (sec. 4218 of the Internal Revenue Code).

Such item may be a specialized unit which is never sold, so that
no market price is available from which to construct a manufacturer's price. In this case, cost of production is the only
realistic tax base.

-64.

H.R. 1920.

The proposed bill would require the Treasury Department
to repay the amount of internal revenue tax paid (or determined)
and customs duty paid on distilled spirits, wine, rectified
products, and beer which are lost, rendered unmarketable, or

condemned by duly authorized officials, by reason of fire, flood,
casualty, or other disaster, or breakage, destruction, or other
damage (excluding theft) resulting from vandalism or malicious
mischief. No reimbursement would be made for tax losses of

less than $250 per occurrence, or for losses covered by insurance
Present law provides for similar payments (without the $250
minimum requirement) , only in the case of a "major disaster" as
declared by the President.
The Treasury Department is opposed to H.R. 1920. The
dollar a business invests in inventory is a dollar of cost
irrespective of the factors going to make up the cost, whether
such factors be raw materials, wages, transportation, or taxes.
Past Congressional policy as to casualty losses has recognized
this fact and, as a consequence, losses by handlers of alcoholic

beverages, except in the case of natural disasters of extraordina
severity, have been treated as ordinary business hazards to be
borne by the holder of the beverages or his insurance company.
H.R. 1920 would provide an exception to this general policy by,
in effect, making the Federal government an insurer. By so

-85. H.R. 2028.
Under present law, the head of any family may, after
registering, produce up to 200 gallons of wine a year for
family use without payment of tax. An individual or married
woman who is not the head of any family is not covered under
this exemption. Existing law has no provision which authorizes
the home production of beer.
H.R. 2028 would permit any duly registered individual
18 years of age or older to produce specified amounts of wine
and beer without payment of tax for personal and family use
and not for sale. The exemption under Federal law would not
serve to authorize the home production of beer contrary to
State law.
The Treasury Department has no objection to the enactment
of H.R. 2028. However, we suggest that the requirement for
registration by producers of wine for personal or family use
be deleted. Registration of producers of wine for personal

or family use has proven of little use to the Bureau of Alcohol
Tobacco and Firearms and is burdensome to the public. However,
for enforcement and revenue protection purposes, registration

is necessary in the case of home brew since the process entails
the production of a mash fit for distillation.

-96. H.R. 2714.
Under present law an employee is not in general able to
assign his vested benefits under a pension, profit-sharing or
stock bonus plan as collateral for loans from banks or insured
credit unions. The bill would permit a participant in a
profit-sharing, stock bonus or money purchase pension plan to
assign as collateral for a loan from a bank or credit union
the lesser of (A) his accrued benefit under the plan derived
from his own contributions, or (B) the total amount of his
contributions to the plan, reduced by his withdrawals and any
other outstanding security interests in those contributions.
In general, the policy of the Employee Retirement Income
Security Act (ERISA) is to insure that amounts set aside will
be available after retirement. ERISA does not fully carry out
this purpose as it allows early withdrawals or loans from the
plan in certain circumstances. H.R. 2714 attempts to be
consistent with these exceptions to retention of benefits
until retirement, and, except for mandatory contributions to
money purchase plans, permits a pledge as security for a loan
only where withdrawal would be allowed.
The Treasury, however, believes we should move in the
opposite direction and increase the chances that funds will
remain for retirement. Moreover, the Treasury is concerned
about the tax shelter aspects of the permitted assignments.

-10The proposed bill would permit a participant to claim
an immediate deduction for interest on the borrowed funds,
while deferring payment of tax on the income earned by his
contributions used as collateral for the loan until such
income is distributed to him. The Treasury Department strongly
believes a taxpayer should not be entitled to a current deduction for interest paid on amounts borrowed to purchase or
carry investments the income from which is not taxed currently.
The bill attempts to defer a deduction for interest if the
loan is used directly or indirectly to finance a contribution
to the plan. There is no reason to complicate the Code by an
effort to draw this distinction. Even if the interest
deduction were to be denied in all cases, the carryforward
provision involves additonal complexity. The Treasury
Department opposes H.R. 2714.

-117.

H.R. 2852.

The bill would exempt from the annual use tax on civil
aircraft, aircraft used primarily for agricultural operation.
The bill also would provide that an aerial crop sprayer would
be entitled to a credit or refund of gasoline and special
fuels excise taxes used in crop dusting on a farm, if the
farmer has waived any rights to that credit or refund.
The. Treasury Department opposes the provision of the
bill that would exempt agricultural aircraft from the use tax.
The argument for exemption of agricultural (and horticultural)
aircraft from the annual use tax is that these planes make
little or no use of facilities and services provided by the
Federal government. Quite often the operators use their own
private fields, fly short distances to and from their work,
and fly below normal flight levels when dusting or seeding.
However, the planes do add to air congestion in some areas
and have the benefit of the airways systems if the operators
need to use it. Furthermore, the Department of Transportation
study of air user charges concluded that general aviation as
a whole greatly underpays its share of airways costs.
The Treasury Department supports the provision of the
bill that would permit aerial crop sprayers to receive credits

-12or refunds of the fuels taxed if the farmers otherwise
eligible for those credits or refunds have waived in writing
their rights in favor of those aerial crop sprayers. The
restriction of the farm fuel tax refund to the owner, tenant
or operator of a farm was intended by the Congress to assure
that the farmer received the benefit of the refund. It was
felt that if the refund were given directly to the custom
operator, the farmer would not benefit through a lower price
for the custom work. Over the years, it has been argued that
the farmer still doesn't get the benefit of the refund for
custom work because the custom operator doesn't give him the
information as to gallons used so that he (the farmer) can
claim the refund.
The instant bill, as we understand it, would attempt to
solve these problems by permitting an aerial applicator doing
custom work to apply for the farm fuel refund himself, but
give the farmer a chance of knowing what was involved in that

the farmer would have to waive in writing his right to a refund.
This approach was taken in a bill ordered reported out by the
Ways and Means Committee in the mid-1960's. That bill,

although approved by Treasury and the Department of Agriculture,
was never enacted.

-13The Treasury Department suggests that H.R. 2852 be
extended to cover all custom work, not just aerial application,
since custom work is also done in plowing and harvesting where
taxable fuel is also used.

-148. H.R. 2984.
The bill would exempt from the 10% manufacturer's excise
tax on trucks, truck trailers, and buses those trailers or
semitrailers which are suitable for use with a towing vehicle
having a gross vehicle weight of 10,000 pounds or less and
which are designed to be used for farming purposes or for
transporting horses or livestock.
The Revenue Act of 1971 (Public Law 92-178) exempted
from the manufacturer's excise tax trucks with a gross vehicle
weight of 10,000 pounds or less and trailers and semitrailers
with a gross vehicle weight of 10,000 pounds or less if
suitable for use with a vehicle having a gross vehicle weight
of 10,000 pounds or less. The proposed bill would remove the
present 10,000 pound limit for the exemption of trailers and

semitrailers provided they were designed to be used for farming
purposes or for transporting horses and other animals.
Because the trailers proposed to be exempted would have
a gross vehicle weight in excess of 10,000 pounds, the exemption would be accorded to trailers with a gross vehicle
weight at which single unit trucks are taxable. The proposed
exemption for trailers thus would constitute an obvious discrimination against single unit trucks in the 10,000 to 20,000
pound class.

-15The bill also would create a dual standard for trailers
over 10,000 pounds gross vehicle weight which are suitable
for use with pickup trucks. Those designed for farming
purposes or the hauling of animals would be exempt, while
trailers of the same capacity designed for hauling general
merchandise, or supplies and equipment for mechanics, would
continue to be taxable.
The Treasury opposes H.R. 2984 because the bill would
discriminate against single unit trucks and non-farm trailers
and semitrailers of the same carrying capacity.

-169- H.R. 3050.
To ensure that retail outlets have an adequate number
of copies of magazines or other periodicals, publishers and
distributors often distribute more copies of the periodical
than it is anticipated the retailer can sell. When the next

issue of the periodical is published and shipped to the retailer
the retailer returns the unsold copies of the earlier issue to
the issuer. The Internal Revenue Service has taken the
position that accrual basis publishers and distributors must
include the sales of the periodicals in income when they are
shipped to the retailers and may exclude from income the
returns only when the periodicals are actually returned by
the retailer during the taxable year.
The bill would allow accrual basis publishers and distributors of magazines or other periodicals to elect to exclude
from income for the year of the sale amounts attributable to
the sale of periodicals for display purposes where the
periodicals are returned no later than the 15th day of the
third month after the close of the taxable year in which the
sale was made.
In order to be equitable to taxpayers who are similarly
situated, the Treasury Department recommends that the bill be
extended to cover two additional industries which experience

-17significant returns, the paperback book industry and the
sound recording industry. The Treasury Department believes
that the special relief provided by the bill should be allowed
only to industries that have substantial returns of goods after
year end attributable to sales during the prior taxable year.
Finally, to prevent an estimated revenue loss of $50 million
in the year of enactment resulting from deductions during that
year for returned items sold in the prior year as well as
returned items sold in the year of enactment, Treasury proposes
that taxpayers electing the new method be required to establish
a suspense account to delay the deduction for goods returned
during the first 2% months of the year the election is made.
The estimated revenue loss of $50 million is based upon
extending the bill to cover the paperback book industry and
the sound recording industry. Requiring a suspense account
is consistent with the prior transitional rules approved by
the Congress to prevent the doubling up of deductions when
the Code has been amended to permit deductions for estimated

expenses that previously had been nondeductible under the accrual
method of accounting. For example, in permitting accrual basis
taxpayers to deduct reserves for certain guaranteed debt
obligations (section 166(f)) and accrued vacation pay (section
463) the Congress has required the establishment of a suspense
account to prevent revenue losses attributable to the doubling
up of deductions. The Treasury Department does not believe

-18accrual basis magazine publishers and distributors should be
treated differently from taxpayers electing to deduct these
estimated expenses.

-1910.

H.R. 3630.

Under present law to qualify for exemption from income
tax cooperative telephone companies must derive at least
85% of their annual income from payments from members (section
501(c) (12)).

Compliance with the 85% requirement is based

on gross income and computed on a yearly accounting period.
The Internal Revenue Service has taken the position that
amounts received by a telephone cooperative from a non-member
telephone company in connection with servicing calls to or
from the cooperative's members constitute non-member income
which, if such income exceeds 15% of the cooperative's gross
income, will prevent the telephone cooperative from qualifying
for exempt treatment.
The bill would provide that amounts or credits received
by a mutual or cooperative telephone company from a non-member
telephone company in connection with the servicing of calls
to or from the cooperative's members shall not enter into the
85% member-income test in determining the telephone cooperative's tax-exempt status.
The Treasury supports the underlying principle of
H.R. 3630 that the receipt of amounts from a non-member
telephone company, in connection with the servicing of calls
to or from a telephone cooperative's members, should not

-20jeopardize the exempt status of the telephone cooperative.
However, Treasury recommends that this result be accomplished
by amending H.R. 3630 (i) to eliminate the requirement of
present law that 85% of the income of the cooperative be
derived from its members, (ii) to treat all income integrally
related to the exempt function of the cooperative as exempt
from tax (such as amounts received from a non-member telephone
company in connection with servicing telephone calls to or
from the cooperative's members), and (iii) to tax the cooperative on all unrelated business income, including passive
investment income. These changes would treat telephone

cooperatives and other entities exempt under section 501(c)(12)
in the same manner as entities exempt under section 501(c)(7)
(social clubs) are treated under present law. The Treasury
Department would support H.R. 3630 if these changes were made.

-2111.

H.R. 3633 (Title II).

Under present law, a 10% excise tax is imposed on sales
by manufacturers and importers of pistols and revolvers and an
11% excise tax is imposed on sales of other types of firearms
and upon shells and cartridges used in firearms. Amounts
equivalent to the receipts from these taxes are covered into the
Wildlife Restoration Fund, from which appropriations are
authorized to the States (on a sharing basis) for use in carrying out wildlife restoration projects and hunter safety projects.
The bill would impose the 11% manufacturer's excise tax
on the sale of component ammunition parts by the manufacturer.
The tax would apply to sales of cartridge cases, primers,
percussion caps, bullets, shots, wads, and powders which
are used by consumers to load or reload their own ammunition
for firearms (including pistols and revolvers).
The Treasury Department opposes the general principle
of "earmarking" revenues. However, if it is considered
important to be consistent and apply the excise tax on shells
and cartridges to ammunition components, the Treasury Department would not oppose H.R. 3633.

The Treasury Department

recommends, however, that the effective date of H.R. 3633
(October 1, 1977) be postponed to the first day of the first
calendar quarter that begins more than 20 days after enactment
of the bill, to give sufficient notice to persons who will be
liable for this tax.

-2212.

H.R. 4030.

The bill would create an exception to the tax on the
excess business holdings of a private foundation in cases
in which a private foundation owned over 50% of the voting
stock of a public utility which had taxable income of less
than $1 million during its first taxable year ending after
May 26, 1969, and which meets certain other conditions.
One of the basic goals of the Tax Reform Act of 1969 was
to eliminate the use of private foundations to maintain control

of business enterprises. Foundation control of business interests
had produced a number of undesirable results: competing businesses owned and operated by taxable entities were placed at a
competitive disadvantage; benefits to charity were deferred
through the accumulation of funds in controlled businesses;

and foundation managers became primarily concerned with business
affairs rather than with the charitable objectives of their
foundations. A provision was added to the Code by Congress in
1969 (section 4943) to limit the involvement of private foundations in business enterprises by imposing a tax of up to 2 00%
on the business holdings of private foundations in excess
of certain prescribed percentages.
The adoption of special exceptions to the excess business
holding provisions would undermine one of the basic goals of
the Tax Reform Act of 1969. While we recognize that an

-23exception to the tax on excess business holdings for business
holdings by a private foundation in a public utility would
not run counter to all of the arguments advanced for the
adoption of the tax on excess business holdings (e.g., a
public utility operates as a regulated monopoly in a certain
area and, therefore, does not "compete" with other businesses)
we are, nevertheless, opposed to creating exceptions on an
ad hoc basis to the limitations imposed by section 4943.
Regardless of the nature of the business controlled by the
foundation and its donor or donors, the mere existence of
foundation control inevitably tends to direct the foundation's
efforts to operating the business and thus to divert attention
from the charitable purposes of the foundation. The Treasury
Department opposes H.R. 4 030.

-2413.

H.R. 4089

The bill would accord to "recognized" Indian tribes the
tax treatment now available to governmental units. For
example, the bill would provide beneficial tax treatment
with respect to retirement income derived from employment
by a recognized Indian tribe, permit a credit for contributions made to those seeking election to a tribal office,
treat interest paid on bonds issued by tribes (including
industrial development bonds) as tax-exempt, exclude from
gross income scholarship and fellowship grants made by
tribes, permit a deduction for real property and income
taxes imposed by tribes, allow deductions for charitable
contributions to tribes, and grant tribes exemption from
certain excise and user taxes accorded other governmental uhits.
The term "recognized Indian tribe" would include any tribe,
band, community, village or group of Indians or Alaskan Natives
which is recognized by the Secretary of the Treasury, after
consultation with the Secretary of the Interior, as performing
substantial governmental functions.
The Treasury Department recommends that the term "Indian
Tribe" be substituted where the term "recognized Indian tribe"
appears in the bill.

The term "recognized" has many connota-

tions associated with the provision of services by the
Department of the Interior.

It would be misleading and in-

appropriate to create a new designation of "recognized" tribes

-25under the auspices of the Secretary of the Treasury when
alternative wording is possible. Treasury would not oppose
H.R. 4089 if this change were made.

-2614.

H.R. 4458.

Section 1 of the bill would amend section 5233(c) of
the Code to eliminate, in the case of gin and vodka for
export, the requirement that the label show the real name
of the distiller in whose name the spirits were produced if
the label contains a trademark. This label requirement now
is applicable to all spirits bottled in bond.
The bottling in bond of gin and vodka is principally
for export purposes. Both gin and vodka are made from neutral
spirits, and several of the principal brands of gin and vodka

are distilled by firms which purchase the neutral spirits from
grain processing plants. These distillers do not desire the
name of the grain processing plant to appear on their brand
labels.
The Treasury Department has no objection to section 1 of
the bill. However, the Treasury Department recommends that
section 1 of the bill be extended so as to delete the requirement of identification of the distiller in all cases, not
merely as to gin and vodka, and whether or not the spirits
are bottled for export. Present law does not require the name
of the actual distiller to be shown on the label of distilled
spirits not bottled in bond. Such requirement for spirits

-27bottled in bond and withdrawn for domestic use serves no
purpose other than to provide a marketing advantage to those

bottlers of bottled in bond products who do their own distilling
Sections 2 through 7 of the bill consist of a series of
administrative amendments to which the Treasury Department
has no objection.

-2815.

H.R. 5103.

The bill would make the following changes in the excise
tax provisions as they relate to warranty adjustments of tires
and tread rubber in recapped tires.
1. The amount of excise tax refunded to the manufacturer
would be in proportion to the adjustment of the sales price of
the original tire. Under current law the adjustment is determined with respect to the sales price of the replacement tire.
2. In computing the amount of excise tax to be refunded
to the manufacturer, where the manufacturer's warranty runs to
the ultimate consumer, or the immediate vendee, the relevant
price adjustment would be the adjustment to the ultimate consumer, or immediate vendee, as the contrast might provide.
In the first case, the manufacturer could receive a refund
even though he made no adjustment to the price which his
immediate vendee paid for the tire, so long as an adjustment
was made in the price which the ultimate consumer paid for
the tire. Under current law, the adjustment is to be computed
on the basis of the refund made by the manufacturer to his
immediate vendee. The Internal Revenue Service announced this
position in rulings in 1933 and 1959.
3. The amount of the excise tax to be refunded could
be computed on an average basis. Under current law the refund
must be computed on a per tire basis. As noted below,

Treasury recommends a clarification of this aspect of the bill.

-294.

The bill would expand the statute of limitations

to permit the filing of a claim for credit or refund of the
tread rubber excise tax within one year after the day on which
the price adjustment is made. Under current law, the statute
of limitations runs either from the date the excise tax is
initially paid or the date it is reported on a tax return.
The Treasury Department does not believe a refund or
credit of excise tax should be allowed where the manufacturer
merely reduces his initial selling price to reflect anticipated
warranty expenses which his vendee may incur. An example of
an arrangement which in effect is an initial price reduction
is set forth in Situation 3 of Rev. Rul. 76-423. The Treasury
Department recommends that the provisions of the bill which
would permit the refund to be computed on an average basis
(lines 9 through 25 on page 2 of the bill) be clarified to
assure that a refund or credit will not be allowed where the

manufacturer in substance has merely reduced his initial selling
price. With this modification the Treasury Department does not
object to the bill.
The Treasury Department notes that the predecessor of this
bill, H.R. 2474 (94th Cong.), contained provisions dealing with
tread rubber. The Treasury Department would not object if the
tread rubber provisions were added to this bill.

-3016.

H.R. 6635.

The bill would amend the Second Liberty Bond Act to
allow the Secretary of the Treasury, with the approval of
the President to increase the investment yield on outstanding
United States retirement plan bonds and individual retirement
bonds for each interest accrual period beginning after
September 30, 1976, so that the investment yield on such bonds
is consistent with the investment yield on Series E savings
bonds.
The Treasury Department recommends that the bill be
amended to permit an increase in the investment yield for
interest accrual periods beginning after September 30, 1977,
rather than for periods beginning after September 30, 1976.
The Treasury Department would support H.R. 6635 if this change
were made. The bill will help to assure that the rate of return
to holders of retirement plan bonds and individual retirement
bonds is maintained at a level commensurate with the rate of
return on Series E savings bonds. It will help maintain the
competitiveness of retirement plan bonds and individual retirement bonds with other investment vehicles and, therefore, will

assist the Treasury in the exercise of its borrowing authority.

-3117.

H.R. 6853.

The bill would permit manufacturers and importers of
fishing equipment to pay the 10% excise tax at the end of
the quarter following the quarter in which the shipment was
made. Under present regulations (the law has no time of payment provision), the Treasury requires payment (deposit) of
all manufacturers' excises within 9 days after the end of
each semimonthly period, if liability of a taxpayer for all
manufacturers, retail and service (telephone, etc.) excises
1/
exceeds $2,000 for any month in the preceding calendar quarter.
The Treasury Department opposes H.R. 6853. Manufacturers
of fishing equipment give lengthy credit terms to encourage
buying by dealers during the "off-season" so that the manufacturers can even out their production process. The apparent
purpose of the bill is to delay tax payment until collection
from the dealer. There is, however, no reason the manufacturers
should be permitted delayed payment of tax merely because they,
for their own advantage, give generous credit terms. The

manufacturers cannot delay paying their employees, the landlord,
the electric company, etc.
-For alcohol and tobacco products payment is required by
the end of the semimonthly period following the semimonthly liability period.

-32It should be noted that the Ways and Means Committee on
July 26, voted to impose a new tax, effective October 1, 1979,
on fuel used in commercial transportation on inland waterways.
Liability would be computed on a quarterly basis with, payment
due the end of the month following the end of the quarter.
The Treasury Department opposed this liberalization as being
inconsistent with the payment rule for other excise taxpayers.

-3318.

H.R. 7003.

The Tax Reform Act of 1969 added a provision to the
Code (section 4941) which in general prohibits certain acts
of "self-dealing" between private foundations and certain
"disqualified persons" by imposing a graduated series of
excise taxes on the self-dealer (and in certain circumstances
on the foundation manager).
H.R. 7003 would exempt permanently from the self-dealing
tax imposed under section 4941 the leasing of property to a
disqualified person by a wholly-owned subsidiary of a private
foundation where (a) the lease is pursuant to a binding contract
in effect on October 9, 1969, (b) the leasing arrangement at
no time constitutes a prohibited transaction under section
503(b), (c) the lease terms are no more favorable to the
disqualified person than such terms would be in an arms-length
transaction, (d) the lessor is not a tax-exempt corporation,
and (e) the disqualified person obtained that status solely
because of contributions made to the private foundation prior
to October 9, 1969. The bill would also extend the grace
period for terminating a pre-existing lease between a private
foundation and a disqualified person (as long as the lease is
not disadvantageous to the foundation) from December 31, 1979
to December 31, 1989. The bill also would extend the deadline

by which property leased by a private foundation to a disqualifie
person may be sold (for at least fair market value) to the disqualified person from December 31, 1977 to December 31, 1989.

-34In addition, the bill would extend the January 1, 1977 deadline by which a private foundation could sell stock to a
disqualified person even though the transition rules of the
1969 Act did not require divesture at that time in order to
avoid the tax on excess business holdings to January 1, 1990.
We understand that Public Welfare Foundation, Inc. owns

all of the stock of three corporations, The Gadsden Times, Inc.,
The Tuscaloosa News, Inc., and the Spartanburg Herald and
Journal, Inc. These three wholly-owned subsidiaries have, for
a substantial period of time, leased all of the assets of three
newspapers to operating companies. Apparently, after the
Internal Revenue Service suggested that the original rentals
specified in the lease agreement were unreasonably high, the
newspaper operators decided to make charitable donations to
the Foundation in exchange for reduced rentals.
Since each of the operators contributed more than $5,000
and more than two percent of the total contributions to the
Foundations as of.October 31, 1969 (the end of the fiscal year
which includes October 9, 1969), each operator is considered to
be a "substantial contributor" to the Foundation, within the
meaning of Code section 4946(a)(1)(A). Therefore, the operators

-35are "disqualified persons" and their leasing arrangements with
the private foundation (through its subsidiaries) fall within
the statutory definition of "self-dealing." However, a
"grandfather" clause in the Tax Reform Act of 1969 defers
application of the self-dealing taxes to these leasing arrangements until taxable years beginning after December 31, 1979.
A charitable organization, whether it be a public charity
or a private foundation, must not operate to the benefit of
private individuals. Prior to passage of the Tax Reform Act
of 1969, this principle was applied to dealings between a

charity and related parties by using the "prohibited transactions
test of Code section 503(b). Generally, this standard demands
that such dealings accord with the type of bargain that would be
struck in an arm's-length transaction.
In enacting the Tax Reform Act of 1969, Congress made the
decision that the subjective arm's length test of section 503(b)

was not satisfactory in the case of private foundations. Congress
chose instead to eliminate completely self-dealing between a
foundation and certain "disqualified persons" through the
adoption of the self-dealing taxes under section 4941. It
apparently believed that the interference with particular
legitimate transactions was outweighed by the elimination of
actual and potential abuse. The statutory self-dealing standards
for private foundations are thus objective, inflexible rules
which imply rejection of a case-by-case analysis.

-36However, like any objective standard, the self-dealing
provisions can apparently lead to harsh results, especially
in view of the fact that an individual furnishing only two
percent of a foundation's contributions is classified as a
"disqualified person." Transactions will run afoul of section
4941 even though a subjective evaluation would suggest that a
particular "disqualified person" had little control over the
foundation's operations and that the transaction involved no
overreaching.
The lessee-operators in this case would appear to be at
the outer spectrum of "disqualified persons" encompassed by
the 1969 Act. Thus, (a) the lessees were not the major contributor to the foundation; (b) the newspaper leases were in
existence long before the lessees made any donation to the
foundation; (c) the "contributions" in this case were
apparently offered by the newspaper operators as substitutes
for rental payments; and (d) the consequences of such a

recharacterization of payments to the foundation were unforeseen
Therefore, the Treasury would not object to special
consideration of this case provided the grant of relief is
drawn more narrowly than H.R. 700 3. The Treasury Department
recommends that the bill be amended to remove from the definition of "substantial contributor" a person who became a
substantial contributor solely because of contributions prior
to October 9, 1969 where such contributions were made to the
private foundation in lieu of rent oricdnallv required by a

-37leasing arrangement.

Treasury believes that this approach

is preferable to a general extension of the various grand-

father clauses, which have already provided generous transition
rules for private foundations. It may also be preferable to
a narrowly defined exception to the grandfather clauses
because it will not set a precedent which would indicate that
in certain cases at least Congress is willing to consider

allowing more time to unravel self-dealing transactions without
any special showing of the inadequacy of the ten-year period
originally granted. The Treasury Department would not oppose
H.R. 7003 if this change were made.

-3819. H.R. 8535.
Under present law, the child care credit is not allowed
for amounts paid to a relative unless (a) neither the taxpayer
nor the taxpayer's spouse is entitled to a dependency personal
exemption deduction with respect to that relative, and (b) the
services provided by the relative constitute "employment" within
the meaning of the Social Security taxes definition.
The bill would allow the child care credit for amounts
paid for child care services performed by relatives of the
taxpayer whether or not such services constitute "employment"
within the meaning of the Social Security taxes definition of
that term, provided neither the taxpayer nor the taxpayer's
spouse is entitled to a dependency personal exemption deduction
with respect to that relative.
Present law is inconsistent in permitting the child care
credit for payments to relatives in certain circumstances and
not in others. To eliminate this inconsistency the Treasury
Department recommends disallowing the credit for amounts paid
to relatives in all cases.

The Treasury Department believes

the potential abuses of permitting the child care credit for
amounts paid to a relative of the taxpayer, including the
splitting of income through gifts to relatives who are in
lower income tax brackets or have incomes below taxable levels,
outweigh the merits of granting the credit for such payments.

-3920.

H.R. 8811.

Under present law if a United States Tax Court judge
elects to come under the Tax Court retirement system, he is
barred from ever receiving any benefits under Civil Service
retirement system for any service performed before or after
his election is made, even though he served as a Tax Court
judge for less than the minimum 10-year period required to
qualify for retired pay under the Tax Court retirement system.
The bill would amend section 7447 to allow a Tax Court
judge to revoke an election to receive retired pay under the
Tax Court retirement system at any time before the first day
on which retired pay would begin to accrue with respect to
that individual. The bill would also provide that no Civil
Service retirement credit would be allowed for any service
as a Tax Court judge, unless with respect to such service the
amount required by the Civil Service retirement laws has been
deposited, with interest, in the Civil Service Retirement and
Disability Fund.
The Treasury Department supports H.R. 8811.

-4021.

H.R. 8857.

Present law (section 337) in general terms provides that
if a corporation adopts a plan of complete liquidation and
within 12 months distributes to its shareholders all of its
assets (less those retained to meet claims), then gain or loss
is not to be recognized to the corporation for tax purposes
with respect to property it sold (not including regular sales
of inventory or similar property) during this 12-month period.
The purpose of this provision (section 337) is to accord the
same tax treatment where a corporation sells its property and
distributes the proceeds to its shareholders as can be obtained
by the corporation first distributing the property in kind to
the shareholders who then sell the property.
The benefit of nonrecognition afforded by section 337 is
not available to a "collapsible corporation" as defined in
section 341(b).
The purpose of the "collapsible corporation" provision
is to prevent the avoidance of gain at the corporate level
and availability of nonrecognition of gain, even though the
liquidation occurs within a 12-month period (section 337),
would frustrate the intent of obtaining an income tax at the
corporate level. As a result, this provision presently
(in section 337(c)(1)(A)) provides that the section is not

-41to apply to a "collapsible corporation."

However, the

sanctions in the case of a "collapsible corporation" are, in
general, only applied for a limited period of time. A
corporation which has owned "purchased assets" for more than
three years is not, as a result of such holdings, defined as
a "collapsible corporation." Therefore, such a corporation
may avail itself of the benefits of nonrecognition in the
case of a 12-month liquidation.
The "collapsible corporation" provision also provides
relief in the case of a corporation which has manufactured,
constructed or produced its assets more than three years ago.
In this case the statute does not exclude such a corporation
from the definition of a "collapsible corporation" but, in
most respects, provides what is the equivalent by providing
that in such a case the sale of stock by the shareholders is
not to give rise to ordinary income (under section 341(a)).
However, since in the case of these manufactured, constructed
or produced assets there is no special provision in the
"collapsible corporation" definition excluding these
corporations, the nonrecognition provision where liquidation
occurs within 12 months is not available because the corporation, even three years after the completion of the manufacture,
construction or production, technically is still a "collapsible
corporation."

-42The fact that corporations with purchased assets and
constructed or produced assets are given the same tax treatment under present law where stock is sold, but different
treatment when there is a distribution in complete liquidation
within a 12-month period, indicates an inequality in treatment
in these two situations where there is a distribution in
liquidation.
H.R. 8857 would amend present law to make available the
nonrecognition of gain provision (section 337) where a liquidation occurs within a 12-month period in the case of a
corporation holding manufactured, constructed or produced
assets if none of the gain on the sale or exchange of the
stock of such corporation would be treated as ordinary income
under section 341(a) by reason of section 341(d)(3) because
the corporation had held the assets manufactured, constructed

or produced by it for more than three years after the completion
of such manufacture, construction or production.
Section 337 expressly provides nonrecognition treatment
at the corporate level with respect to both gains and losses.
However, the judicial acceptance of a so-called "straddle
maneuver" in certain cases has permitted liquidating corporations to circumvent the expressed intention of that section.

-43In such cases the corporation seeks to dispose of its loss
assets prior to the adoption of a plan of liquidation (thus
claiming the right to take losses into account at the corporate
level) and dispose of its gain assets subsequent to the
adoption of a plan of liquidation (thus avoiding any tax at
the corporate level on assets that have appreciated in value).
The Treasury Department regards the prospect of continued
judicial acceptance of the so-called "straddle maneuver" as a
serious problem which undermines the basic purpose of section 3
The bill would deal with the "straddle maneuver" by adding
a new subsection (f) to section 337 that would require a
liquidating corporation to recognize gain on the sale of its
assets within the 12-month period to the extent that losses in
the two years immediately prior to the adoption of the plan
of complete liquidation were treated as ordinary losses and
arose from the sale of property to which this nonrecognition
provision (section 337) would have applied had such sales
occurred after adoption of the plan of liquidation.
The bill also provides that determination of the character
of gain or loss from trade or business properties (section 1231
assets) is to be made in the year of the 12-month liquidation
as if the liquidation has not occurred. This provision of
the bill would prevent what would otherwise be a capital loss
on the sale of trade or business properties (section 1231
assets) from being converted into an ordinary loss because

-44the liquidation precludes the recognition of gain from the
sale of other trade or business properties (section 1231
assets) which, if recognized, would have to be offset against
the loss.
The Treasury Department supports H.R. 8857.

Contact: Alvin Hattal
566-8381
FOR IMMEDIATE RELEASE September 7, 1977
TREASURY DEPARTMENT ANNOUNCES
INITIATION OF ANTIDUMPING INVESTIGATION
ON PORTLAND HYDRAULIC CEMENT FROM CANADA
The Treasury Department announced today that it would
begin an antidumping investigation of portland hydraulic
cement from Canada. Notice of this action will appear in
the Federal Register of September 8, 1977.
The Treasury Department's announcement followed a summary
investigation conducted by the U.S. Customs Service after
receipt of a petition alleging that portland hydraulic cement
from Canada is being dumped in the United States. The information received indicates that the prices of portland hydraulic
cement from Canada, exported to the United States, are less
than the prices of portland hydraulic cement sold in the home
market. The petition includes information indicating that
the domestic U.S. industry may have been injured by reason of
the alleged "less than fair value" imports. If sales at less
than fair value are found by Treasury, the injury question
would be subsequently decided by the U.S. International Trade
Commission.
For purposes of this investigation, the term "portland
hydraulic cement" will refer to portland hydraulic cement,
other than white, non-staining cement.
Imports of this merchandise from Canada during calendar
year 1976 were valued at approximately $26 million.
*

B-422

*

*

Contact:

Alvin Hattal
566-8381
September 7, 1977

FOR IMMEDIATE RELEASE

TREASURY ANNOUNCES COUNTERVAILING DUTY INVESTIGATION
ON IMPORTS OF NON-RUBBER FOOTWEAR FROM URUGUAY
The Treasury Department announced today that it is
investigating under the Countervailing Duty Law whether non-rubber
footwear imports from Uruguay are being subsidized. Nctice
to this effect will be published in the Federal Register of
September 8, 1977.
The Countervailing Duty Law (19 U.S.C. 1303) requires
the Secretary of the Treasury to collect an additional customs
duty that equals the size of a "bounty or grant" (subsidy)
which has been found to be paid on the exportation of merchandise. This action is being taken pursuant to a petition
alleging that the non-rubber footwear industry in Uruguay
receives benefits under several government programs which
subsidize the manufacture/exportation of those products.
Countervailing duty investigations involving these programs
are presently being conducted with respect to the Uruguayan
leather wearing apparel and handbag industries.
A preliminary determination in this case must be made
on or before January 8, 197 8, and a final determination no
later than July 8, 19 78.
Imports of non-rubber footwear from Uruguay during 1976
were valued at approximately $12 million.
*

B-423

*

*

RELEASE ON DELIVERY
10:00 A.M.
E.D.T.
Statement of
Donald C. Lubick
Deputy Assistant Secretary of Treasury for Tax Policy
before the House Ways and Means Committee
on H.R. 6715
Mr. Chairman and Members of the Committee:
We welcome the opportunity to present the Treasury
Department's views on H.R. 6715, the "Technical Corrections
Act of 1977", which would make minor clarifying and conforming
amendments to the Tax Reform Act of 1976 (P.L. 94-455).
The 1976 Act was the product of more than three years of
deliberation on which extensive hearings were held by this
Committee both in 1974 and 1975. The final Act was very
comprehensive. Virtually every taxpayer was affected by at
least one of its more than 190 separate provisions. In the
process of drafting the Act it was unavoidable that technical
errors would appear in certain of its provisions. Our experience
in drafting regulations after every major tax reform effort
has shown the need for legislation to correct similar technical
errors. However, H.R. 6715 marks the first time that a
"clean up bill," making needed technical corrections has
been proposed immediately following a major Act. We support
the procedure innovated by H.R. 6715 as a precedent for
future technical correction of major tax reform legislation.
We are particularly concerned, as is the Committee,
that, for this effort to succeed as a technical perfection
of prior legislation, only minor clarifying and conforming
amendments be included in the bill. We are anxious that the
bill not fail in its purpose of making sorely needed technical
corrections. In our view, the Committee should maintain the
line of demarcation between needed technical legislation and
legislation which requires substantial policy debate and
B-424

- 2 avoid reopening in this bill the carefully considered
policy decisions embodied in the 1976 Act.
The provisions of H.R. 6715 were developed by the staff
of the Joint Committee on Internal Revenue Taxation who
worked closely with the Treasury staff. Since the bill was
introduced by Mr. Ullman in April, we have had the opportunity
to receive comments from interested groups. We welcome the
comments of the American Bar Association, the American
Institute of Certified Public Accountants and other groups
in the professional tax community. We have incorporated
those comments which we deemed appropriate in our recommendations.
Our detailed recommendations with respect to H.R. 6715
are included in the Appendix. They fall into two basic
categories. The first are those which relate to the provisions
of H.R. 6715 as introduced. In most respects these recommendations involve conforming or clarifying changes to language
of the Bill which we believe will implement more clearly the
underlying policy decision embodied in the 1976 Act. For
example, we have recommended an -amendment to section 3(a)(1)
of the Bill to make clear that in the event of a sale or
exchange of section 306 stock issued prior to January 1,
1977 which is carryover basis property in the hands of the
seller, the amount realized will be reduced by the adjusted
basis of the stock on December 31, 1976 plus any "fresh"
start adjustment. As introduced, the Bill was interpreted
by some as technically denying a reduction to the amount
realized unless the pre-1977 section 306 carryover basis
stock was eligible for a fresh start adjustment, as where
there has been no appreciation in the value of the stock.
In the same vein, we have also recommended that section
3(a)(2) of the Bill be amended to provide that section 303
of the Code be specifically applicable to redemption of
section 306 stock. The purpose of section 303 is to relieve
liquidity problems in estates holding large blocks of corporate
stock by providing capital gains treatment for certain
redemptions of that stock where the proceeds of the redemption
are used to pay death taxes and administration expenses.
Section 303, therefore, grants preferential treatment for
redemptions which would otherwise be taxed as dividends. In
this context we see no reason why the prior law treatment
should not be continued rather than restricting section 303
to common stock redemptions.
Our second category of recommendations relates to
remedies
6715. Again,
for technical
we have confined
defects beyond
our recommendations
those included
to in H.R.

- 3 proposals which implement" the expressed intent of Congress.
For example, section 2137 of the 1976 Act allowed mutual
funds to invest in municipal bonds and to pass through taxexempt interest to their" shareholders. The Congress clearly
also meant that such interest should be treated as income
for purposes of the 90 and the 30 percent of gross income
limitations of Code section 851 dealing with sources of
income so that these mutual funds are not inadvertently
disqualified by doing what Congress intended to permit. We
have recommended an amendment to make this clear.
Another example is our recommendation regarding Code
section 644, added by the 1976 Actl In the case of certain
property sold or exchanged within two ye^rs of its transfer
to a trust, section 644 imposes a' tax oil the trust in an
amount not less than the amount which would have been paid
by the transferor of such property had the transferor sold
the property. The tax is imposed oh "includible gain" which
includes in its measure of income gain realized by the trust
on the sale or exchange. Section 644'thus imposes a tax oh r
a realized gain from a nontaxable reorganization. The
problem is the use of the-;Words "realized gain" rather than
"recognized gain." The legislative history of section 644
indicates that only recognized gain was to be subject to
tax. Consequently, we have recommended that section 644 be
limited in application to sales or exchanges in which gain
is recognized by the trust.
We have also recommended an amendment to section 644 to
clarify how the tax attributes of a transferor, such as
capital losses or net operating losses, will be reflected in
the computation of the tax on "includible gain". Under our
proposal, the tax on includible gain will be calculated by
reference to the taxable income of the transferor for the
taxable year of the transferor in which the sale is made by
the trust determined without regard to any tax attributes of
the transferor which have been carried forward into the
relevant taxable year, may be carried back or forward from
that year or which are subsequently carried back into that
year.
Finally the 1976 Act provided that a notice of federal
tax lien had to be filed not only in the office provided by
local law, but also recorded in a special index maintained
by the Service in its district office where the property is
located. The purpose was to overrule a court decision that
a properly filed, but improperly indexed, notice of lien did
not impair the effectiveness of the filing against a purchaser

- 4 who could not find the notice,of lien by an index search.
The 1976 Act thus sought to preclude special treatment for
federal tax liens. The concerned parties have now agreed
upon a simpler, less expensive solution to the problem. We
recommend elimination of the special indexing procedure, and
we recommend with respect to personal property, that filing,
even without proper indexing, is sufficient to give effect
to a notice of tax lien. This is consistent with the
Uniform Commercial Code rule for security interests in
personal property. With respect to real property, we
recommend that indexing be required for an effective filing
in those states which require it for effective recordation
of other instruments affecting real property. As a result,
the federal government will be placed on an equal footing
with other creditors with respect to filing requirements.
In conclusion, the Treasury. Department strongly supports
the concept of technical correction as a positive step in
the legislative process. It is vital, however, to the
integrity of that process that H.R. 6715 not be the mechanism
to review the underlying policy decisions contained in the
o 0 o purpose of technical correction
1976 Act —otherwise the limited
will not be achieved.

Appendix
Treasury Department's Recommendations on
H.R. 6715, the "Technical Corrections Act of 1977"
The Treasury Department makes the following recommendations for clarifying and conforming amendments.
1. Minimum Tax Imposed on Trusts and Estates (Section 2(b)(3)
of the bill and section 57 of the Code)
The bill seeks to clarify the treatment of trusts and
estates under the minimum tax in the case of the preference
for excess itemized deductions. The bill provides that in
the case of wholly charitable trusts under Code section 4947
(a) (1), the charitable contributions deduction is treated as
a deduction in determining adjusted gross income.
We recommend that in the case of charitable trusts under
both Code sections 4947(a)(1) and (2) the deduction for charitable contributions be treated as a deduction in determining
adjusted gross income. However, our recommendation does not
extend to charitable income trusts established after January 1,
1976, the effective date of +.h& m ax Reform Act of 1976.

2

- Exchange Funds (Section 2(i) of the bill and section 368
of the Code)
The bill seeks to close possible loopholes in the taxfree manipulation of investment companies in order to achieve
diversification of investment, and also clarifies the language
of Code section 368(a)(2)(F). The bill provides that no loss
shall be recognized as the result of a reorganization of
investment companies although gains realized in such transactions shall continue to be recognized under Code section
368(a)(2)(F). We recommend that to the extent a reorganization
of investment companies is treated as a taxable transaction
both gains and losses be recognized.

2

The bill makes all its amendments retroactive to the
original effective date of Code section 368(a)(2)(F). We
recommend that the amendments made by section 2(i)(l) not
be applied retroactively, since transactions may have been
effected in reliance on the clear language of Code section
368(a)(2)(F) as originally passed.

3. Certain Grantor Trusts Treated as Permitted Shareholders
of Subchapter S Corporations (Section 2(u) of the bill and
section 1371 of the Code)
The bill provides that any trust all of which is treated,
under Code sections 671-679, as owned by a grantor individual
who is a citizen or resident of the United States will continue
to be an eligible shareholder of a subchapter S corporation for
sixty days after the death of the grantor.
We recommend that such trusts, if included in the gross
estate of the grantor, remain eligible shareholders for two
years after the death of the grantor.
4. Fresh Start Adjustment for Certain Preferred Stock (Section
3(a)(1) of the bill and section 306 of the Code)
The bill seeks to clarify Congressional intent that the
dividend consequences upon a sale by or redemption from a holder
of section 306 stock distributed before January 1, 1977 who has
received such stock from a decedent dying after December 31,
1976 are limited to the difference between the amount received
by the shareholder and the adjusted basis of such stock on
December 31, 1976 plus any Code section 1023(h) "fresh start"
adjustment.
We recommend that: (1) carryover basis be available to
reduce the amount realized whether or not the section 306 stock
was eligible for a "fresh start" basis adjustment; (2) in the
case of redemptions, the proposed Code section 306(a)(3) reduction be available only for transactions which would otherwise
qualify for sale or exchange treatment under Code sections 302;
and (3) Code section 301(c)(3) be amended to make clear
that basis used to reduce the amount realized under Code section
301(a)(2) cannot be used again for the purposes of Code section
301(c).

3

r

5. Redemptions of Certain Preferred Stock to Pay Death Taxes
(Section 3(a)(2) ot the bill and section 303 of the Code)
The bill provides that the provisions of Code section 303,
affording sale or exchange treatment for certain redemptions of
shares of corporate stock, would generally not apply to redemptions of section 306 stock.
We recommend that the provisions of Code section 303 be
specifically applicable to redemptions of section 306 stock.
6.

Fresh Start Adjustment for Certain Carryover Basis Property
(Section 3(c)(1) of the bill and section 1023 of the Code)

The bill seeks to eliminate the difficulty in determining
the "fresh start" basis of tangible property where either or
both the acquisition date and cost of the propery are unknown.
The bill provides a formula to determine a minimum basis;
December 31, 1976 value is determined by reference to date of
death value and an assumed interest rate of eight percent.
We recommend that the provision be limited to tangible
personal property which is not used in a trade or business.
We also recommend that estate tax value" (rather than date of
death value only) be the starting point for the formula
calculation.
7. Only One Fresh Start Adjustment for Carryover Basis Property
(Section 3(c)(3) of the bill and section 102 3 of the Code)
The bill provides that only one fresh start basis adjustment is to be made with respect to any carryover basis property.
To make clear that the fresh start adjustment is to be
made only at the death of the first decedent owning carryover
basis property we recommend that the word "change" replace the
word "increase" in proposed Code section 1023(h)(4).
8

- Adjustment to Carryover Basis Property for State Estate
Taxes (Section 3(c)(5) of the bill and section 1023 of the
Code)

The bill clarifies the circumstances under which the
payment of State estate taxes will result in an adjustment
to the basis of carryover basis property.
We recommend that the words "by the estate" be deleted
from proposed Code section 1023(f) (3) (B) , thus permitting an
adjustment to basis where the State estate tax liability has
been discharged by an entity other than the estate, e.g., a
funded inter vivos trust created by the decedent.

4
9. Gain Recognized on Use of Special Use Valuation Property
to Satisfy Pecuniary Bequest (Section 3(d)(3) of the bill and
section 1040 of the Code)
The bill clarifies the application of Code section 1040
to pecuniary bequests of property subject to special use
valuation under Code section 2D32A. It provides that gain will
be recognized to the extent the fair market value of such
property on the date of distribution exceeds the estate tax
value of such property with both date of distribution and estate
tax values to be determined without regard to Code section 2032A.
Thus, appreciation calculated on the basis of the "highest and
best use" value of such property from the estate tax valuation
date to the date of distribution will be subject to tax under
Code section 1040.
We recommend that taxpayers be given the option to calculate
the Code section 1040 gain by applying either "highest and best
use" values or special use values on the relevant valuation dates.
10. Bond to Relieve Qualified Heir of Personal Liability for
Recapture of Tax Where Special Use Valuation is Utilized (Section 3(d)(5) of the bill and section 2032A of the Code)
The bill provides that a qualified heir may be discharged
from personal liability for payment of the Code section 2032A
recapture tax upon filing a bond in the amount of the maximum
amount of additional tax which could be attributed to such heir's
interest in the property.
We recommend that this provision be extended to all persons
party to the agreement required by Code section 2032A(d)(2).
11. Transfer Within Three Years of Death (Section 3(f) of the
bill and section 2035 of the Code)
The bill seeks to clarify the availability of the exception
to automatic includibility of gifts made within three years of
death for gifts excludable under the $3,000 annual present
interest gift tax exclusion. It provides that the exception
will be available for gifts to a donee made within three years
of death if the donor was not required to file a gift tax return
with respect to gifts made during the calendar year to such
donee.

5
We recommend that (1) Code section 2035(a) and (b) be
repealed; (2) Code section 2035(c) be redesignated section 2035
(a); (3) Code section 2036 be further amended to include in the
gross estate of the transferor transfers within three years of
death of shares of stock in which the transferor retained voting
rights; and (4) Code section 2042 be amended to include in the
gross estate of the transferor any transfer with respect to a
life insurance policy made within three years of the transferor's
death.
12. Coordination of Gift Tax Exclusion and Estate Tax Marital
Deduction (Sections 3(g) (1) and (g)(2) of the bill and section
2056 of the Code)
Section 3(g)(1) of the bill provides that the estate tax
marital deduction will not be reduced under Code section 2056
(c) (1) (B) to the extent inter-spousal gifts of a decedent are
subsequently included in the decedent's estate under Code
section 2035.
Section 3(g)(2) of the bill clarifies the method of
computing the Code section 2056(c) (1) (B) reduction of the
estate tax marital deduction on account of inter-spousal
gifts of a decedent by excluding from the computation of
the reduction any gift not required to be in a gift tax
return.
\

\ We recommend that (1) section 3(g)(1) be amended in a
manner consistent with our recommendation regarding Code
section 2035; and (2) section 3(g)(2) of the bill be deleted
and instead that Code section 2056(c)(1)(B)(ii) be amended
by inserting after the words "percent of" the words "the
excess of the value of such gift over the section 2503(b)
amount, if»any, allowable with respect to such gift."
13
• Split Gifts Made Within Three Years of Death (Section 3(h)
of
the bill and section 2001 of the Code)
The bill clarifies the transfer tax consequences to a
consenting spouse of gifts which were included in the estate
of the donor spouse by reason of Code section 2035. It provides that the portion of such gifts attributable to the
consenting spouse shall not be included in the total of
adjusted taxable gifts of such spouse for estate and generation-skipping tax purposes and that any gift tax treated as
a tax payable by the consenting spouse with respect to such
gifts shall, for estate and generation-skipping tax computation purposes, be deducted from the aggregate amount of
gift tax payable by such spouse.

6
If our recommendation regarding Code section 2035 is
adopted, this provision should be applicable only to transfers
within three years of death of shares of stock with voting
rights retained by the transferor or transfers with respect
to a life insurance policy.
14. Inclusion in Gross Estate of Stock Transferred by the
Decedent Where the Decedent Retained Voting Rights (Section
3(i) of the bill and section 2036(b) of the Code)
The bill clarifies the intended scope of Code section
2036(b) by providing that the section will apply (1) only
where the decedent and his relatives own, or the decedent
possessed the right to vote, at least 20 percent of the combined voting power of the corporation the shares of stock of
which have been transferred, and (2) where a decedent directly
or indirectly retains the voting rights in the transferred
shares.
We recommend that (1) proposed Code section 2036(b)(1)
be amended by deleting the words "with respect to" and substituting the words "in transferred stock of"; (2) the Secretary be granted specific authority to promulgate regulations
regarding the application of the attribution rules of Code
section 318 to proposed Code section 2036(b) (2) in a manner
consistent with the purposes of that section; and (3) proposed
Code section 2036(b) (3) be amended in a manner consistent with
our recommendations regarding Code section 2035.
15. Amendments Relating to Orphan's Exclusion (Section 3(1) (1)
of the bill and section 2057(d) of the Code)
The bill clarifies the scope of the orphan's deduction by
creating a statutory entity, the "qualified minor's trust" to
which a decedent's property may pass and qualify for the orphan's
deduction.
We recommend that section 3(1)(1) be deleted from the bill
and that the Secretary be granted specific authority to promulgate regulations regarding the type of trust to which property
may pass and qualify for the orphan's deduction.

7
16. Disclaimers (Section 3(m) of the bill and section 2518
of the Code)
The bill clarifies Code section 2518(b) (4) by providing
that a disclaimer by any party (including a surviving spouse)
will constitute a qualified disclaimer for purposes of Code
section 2518 where the surviving spouse receives an interest
in the disclaimed property.
We oppose the enactment of section 3(m) of the bill. We
recommend instead that Code section 2518 be amended to make
clear that a qualified disclaimer will not result if, pursuant
to the disclaimer, the disclaimed property passes to a trust
or trust equivalent in which the disclaiming party has an
interest.
17. Termination of Certain Powers of Independent Trustees
Not Subject to Tax on Generation-Skipping Transfers (Section
3(n)(l) of the bill and section 2614 of the Code)
The bill clarifies the situations in which an individual
trustee having discretionary powers to allocate trust income
and principal among beneficiaries will be treated as a beneficiary of such trust by reason of holding such powers. The
bill provides that an individual trustee will not be treated
as having a power in a trust where such individual has no
interest in the trust, is not a related or subordinate trustee,
and has no present or future power in the trust other than the
power to dispose of trust income and corpus among beneficiaries
designated in the trust instrument.
We recommend that the definition of related or subordinate
trustee be expanded to include (1) partners and employees of
the grantor or of any beneficiary and (2) employees of any
partnership in which the partnership interest of any or all of
the grantor, the trust, and the beneficiaries of the trust are
significant from the viewpoint of either or both operating
control and distributive share of partnership income.
18- Alternate Valuation Date in the Case of a GenerationSkipping Trust (Section 3(n)(3) of the bill and section 2602(d)
of the Code)
The bill provides that the alternate valuation date will
be available for taxable terminations postponed beyond the
death of a single deemed transferor because of the existence of
an older generation beneficiary at the death of the deemed
transferor.

8
We recommend that the alternate valuation date be available also where a taxable termination is postponed beyond the
death of a single deemed transferor because of the existence,
at the death of the deemed transferor, of a beneficiary in the
same generation as the deemed transferor.
19. Erroneous Cross-References in Investment Credit (Section
4(a)(4) of the bill and section 48(d)(4)(D) of the Code)

Code section 48(d)(2) permits the investment tax credit
to be apportioned between the lessor and the lessee where
the property meets the requirements of Code section 48(d)(4).
Code section 48(d)(4)(D) provides that the property must not
be leased "subject to a net lease (within the meaning of
section 57(c)(2)." This is an erroneous cross-reference
since this section does not define "net lease", but refers
to multiple leases of a parcel of real property. Section 4
(a)(4) of the bill seeks to correct this cross-reference by
striking out "section 57(c)(2)" and inserting "section 57(c)",
which is the entire subsection defining a net lease.
We recommend that the bill refer only to "section 57(c)
(1) (B) ." The error in cross-reference began with the Revenue
Act of 1971 (P.L. 92-178) when "section 57(c)(2)" was redesignated as "section 57(c)(1)(B)" and the cross-reference in Code
section 48(d)(4)(D) was not changed.
20. Exempt-Interest Dividends of Regulated Investment Companies
(Section 2137 of the Tax Reform Act of 1976 and section 851 of
the Code)
Section 2137 of the Tax Reform Act of 1976 amended Code
section 851 to provide that a regulated investment company
investing at least half of its assets in tax-exempt State and
local governmental obligations may pay "exempt interest dividends" to their shareholders.
Regulated investment companies seeking to qualify under
the new provision may be subject to inadvertent disqualification. Code section 851(b) provides that a corporation will
not be considered a regulated investment company unless at
least 90 percent of its gross income is derived from dividends,
interest, and gains from the sale or other disposition of
stock or securities, and less than 30 percent of its gross
income is derived from the sale or other disposition of
stock or securities held for less than 3 months. Under Code
section 103 gross income does not include interest on obligations of State or local governments. Consequently, a
regulated investment company investing all, or most of, its

9
assets in tax-exempt obligations could encounter a qualification problem if it realized relatively minor amounts of
incidental income from sources not qualifying for the 90
percent test or from gain from the sale or disposition of any
of its assets held for less than 3 months (e.g., if bonds
acquired by it were called by the issuer).
4

We recommend that Code section 851(b) be amended to
provide that for purposes of applying the 90 and 30 percent
limitations the terms "gross income" and "interest" include
interest excludible from gross income under Code section 103.
Also, a shareholder may invest in an open end mutual
fund shortly before the expected declaration of a tax-exempt
dividend and then tender his share for redemption immediately
after receipt of the dividend. Since the fund's assets will
have been depleted by the amount of the dividend distribution,
the shareholder will generally recognize under present law
a short term capital loss on the redemption in an amount
approximately equal to the dividend. The shareholder thus
can generate an artifical tax loss which is offset economically
by the tax-exempt dividend.
We recommend the solution suggested by Code section 852
(b) (4) which deals with the analogous situation in which a
shareholder purchases stock shortly before the declaration of
a long term capital gains dividend and then tenders his stock
for redemption. Code section 852(b)(4) prevents a disparity
in the treatment of the gain and loss in such circumstances
by providing generally that the loss shall be treated as a
long term capital loss to the extent of the capital gain dividend if the stock is held less than 31 days. In the case of
the tender of the mutual fund shares held less than 31 days,
there should be no recognition of any loss sustained to the
extent of the tax-exempt interest dividend received by such
shareholder.
21
- Disclosure of Returns and Return Information (Section 1202
(a)(1) of the Tax Reform Act of 1976 and Code section 6103(k)(4))
Code section 6103(k)(4) exempts from the general disclosure
rules of Code section 6103 the disclosure of tax return information
to a competent authority of a foreign government "which has an
income tax convention with the United States but only to the extent
provided in . . . such convention." (Emphasis supplied.) The
provision inadvertantly excludes estate and gift tax conventions
and the Swiss Mutual Assistance Treaty, which have tax exchange
of information provisions.
fiin-wi!? reconimend that the exemption provided by Code section
bi03(k)(4) be revised to apply to a foreign government which
a
^ a n l n c o m e t a x o r a n e s t a t e or gift tax convention or treaty
with the United States. Also, the exemption should include a
treaty such as the Swiss Mutual Assistance Treaty.

10
2 2. Declaratory Judgments Regarding Tax-Exempt Status of
Charitable Organizations (Section 1306 of the Tax Reform
Act of 1976 and Code section 7428)
Section 1306 of the Tax Reform Act of 1976 added Code
section 7428, which provides for declaratory judgments
relating to the tax-exempt status or classification of
charitable organizations.
Code section 7428(c) provides that certain contributions
shall remain deductible even though made during the period
that the declaratory judgment litigation with respect to the
revocation of the exempt status of the organization was pending
and even though the court subsequently determines that the
revocation was proper. As presently drafted, this provision
only applies where the District Court or the Court of Claims
decision is adverse to the organization. If the organization
is successful in this Court but is reversed in a subsequent
appeal, no protection is afforded to the donors during any
period after the notification of revocation. However, if the
declaratory judgment proceedings were initiated in the Tax
Court, this is not the result.
We recommend that contributions within the limits of
Code section 7428(c)(2) remain deductible until a declaratory
judgment proceeding instituted in the Tax Court or in the
District Court or the Court of Claims is finally adjudicated,
including the appellate process.
2 3. Gain on Sale of Certain Property Transferred in Trust
(Section 701(e) of the Tax Reform Act of 1976 and section
644 of the Code)
In the case of certain property sold or exchanged within
two years of its transfer to a trust, Code section 644 imposes
a tax on the trust in an amount not less than the amount which
would have been paid by the transferor of such property had
the transferor sold the property. The tax is imposed on
"includible gain" which is the lesser of (1) gain realized
by the trust on the sale or exchange or (2) the excess of the
fair market value of the property at the time the property
was transferred in trust over its adjusted basis at that time.
Thus, tax liability results in all trust transactions in which
gain is realized, notwithstanding the fact that in some circumstances the Code would permit nonrecognition of all or a
part of the realized gain if the sale or exchange had been
made by the transferor.

11
We recommend that, consistent with its legislative history
(see, e.g., S. Rep. No. 94-938, 94th Cong., 2d Sess. 173 (1976)),
Code section 644 be limited in application to sales or exchange
in which gain is recognized by the trust. Property received by
the trust in a nonrecognition transaction would be subject to
Code section 644 within the same time limits applicable to the
original property transferred to the trust.
It is also unclear how, under Code section 644, certain tax
attributes of a transferor, such as capital or net operating losses,
are to be reflected in the computation of the tax on includible
gain. We recommend that the tax on includible gain be calculated
by reference to the taxable income of the transferor for the taxable
year of the transferor within which a sale is made by the trust
determined without regard to any tax attributes of the transferor
which have been carried forward into such year, may be carried back
or forward from such year, or which are subsequently carried back
into that year.
24. Treatment of Certain Amounts Deemed Distributed by Trust
in Preceding Years (Section 701(a) (1) of the Tax Reform Act
of 1976 and section 667 of the Code)
The Tax Reform Act of 1976 changed substantially the
treatment of distributions of income previously accumulated
by a trust. In particular, accumulation distributions, other
than those attributable to tax-exempt interest, do not retain,
in the hands of a beneficiary, the character of the income
(e.g., dividend, taxable interest, royalties, etc.) from
which they were distributed. The failure to retain the
general character of income rules has significant consequences
in the case of distributions of accumulated trust income to
nonresident alien and corporate beneficiaries. Without these
rules it is difficult, if not impossible, to determine:
(1) the source of the accumulation distribution;
(2) whether the accumulation distribution is subject
to withholding and the flat rate of tax as fixed
or determinable, annual or periodical income; and
(3) whether reduced rates of withholding for interest,
dividends and royalties provided in tax treaties
apply.
We recommend that Code section 662(b) be applicable to
determine the character of income included in accumulation
distributions to nonresident beneficiaries of United States
trusts.

12
The Tax Reform Act of 1976 also left open the following
issueswith respect to trusts:
(1) the method of computing the tax liability of a foreign
beneficiary on a distribution from a U.S. trust.
(2) whether a foreign beneficiary must include in gross income
any expenses incurred by the trust and attributable to the income
distributed to the beneficiary.
(3) whether a trustee-withholding agent must withhold tax
on a distribution from a U.S. trust under Code sections 1441 and
1442 if the beneficiary's liability for U.S. tax would be satisfied
by the U.S. taxes imposed on the trust and deemed distributed under
Code section 666.
We recommend that: (1) Code sections 871, 881, 882, 1441 and
14 4 2 be revised to provide that a foreign beneficiary include in
gross income any U.S. taxes attributable to an accumulation distribution and deemed distributed by Code section 666,
and any expenses incurred in the production of income
distributed by a trust and included in the taxpayer's gross income
for U.S. purposes, including any expenses borne by another party
on behalf of the trust (e.g., a "triple net lease" where the
lessee pays taxes, insurance premiums and repair costs); (2) Code
section 1441(c) be amended to provide that a trustee-withholding
agent may withhold less than the applicable statutory or treaty
withholding rate where he can establish that the U.S. taxes paid
by the trust and attributable to the distribution under section 666
will satisfy, in whole or in part, the foreign beneficiary's
U.S. tax liability on the accumulation distribution; and, (3) Code
section 667 be amended to provide that the computation of the
foreign person's tax on an accumulation distribution may be made
without regard to the throwback rules of section 667 if, in the
year in which the beneficiary's takes the accumulation distribution
into income, he is neither engaged in a trade or business in the
U.S. nor is the beneficiary of more than one trust.
25. Inclusion of Certain Generation-Skipping Transfers in
the Gross Estate of a Deemed Transferor for Estate Tax Marital
Deduction Purposes (Section 2006(a) of the Tax Reform Act of
1976 and section 2605(c)(5)(A) of the Code)
Under Code section 2605(c)(5)(A) if a generation-skipping
transfer occurs at, or within nine months of, the death of a
deemed transferor, the amount of the generation-skipping
transfer is included in the gross estate of the deemed transferor for estate tax marital deduction purposes. Thus, the
amount of the marital bequest of a testator whose will or
trust contains a formula marital deduction bequest is automatically increased if that testator is the deemed transferor
of generation-skipping transfer occurring at or within nine
months of death. To avoid the inclusion of such amounts
i

"A

•

13
in a deemed transferor's gross estate, the will or trust of
the deemed transferor must be specifically amended. We believe
that the automatic increase of a marital bequest in these circumstances constitutes a trap for an individual who is unaware
that at his death a generation-skipping transfer of which he
is the deemed transferor may occur.
We recommend that in the case of decedent whose will or
trust contains a formula marital deduction bequest, the presumption of Code section 2602(c)(5)(A) be reversed so that a
generation-skipping transfer of which the decedent is the deemed
transferor will not be included in the decedent's gross estate
for estate tax marital deduction purposes unless a contrary
intention is specifically stated in the decedent's will or trust.
26. Use of Certain Appreciated Carryover Basis Property to
Satisfy Pecuniary Bequest (Section 2005(b) of the Tax Reform
Act of 1976 and section 1040 of the Code)
Code section 1040, added by the Tax Reform Act of 19 76,
provides that where appreciated property is used to satisfy
a pecuniary bequest recognized gain will be limited to the
difference between date of distribution and estate tax values.
The purpose of Code section 1040 is to retain, under present
law, the prior law income tax consequences of funding a
pecuniary bequest with appreciated property.
Two types of pecuniary bequests are commonly used in
connection with funding marital bequests. The first type
directs that the marital share be funded using property the
value of which is determined at date of distribution. The
second directs funding at estate tax values with a proportionate sharing of post-estate tax valuation date appreciation
and depreciation ("Rev. Proc. 64-19 funding"). Under prior
law, only the former type of pecuniary bequest resulted in
gain recognition upon funding with appreciated property.
Under Code section 1040, it is unclear whether Rev. Proc.
64-19 funding with appreciated carryover basis property will
result in gain recognition.
We recommend that Code section 1040 be amended to make
clear that no gain shall be recognized where a pecuniary
bequest is satisfied by the transfer of appreciated carryover
basis property directed by a testator to be valued at federal
estate tax value so long as such funding is determined with
regard to a proportionate sharing of post-estate tax valuation
date appreciation and depreciation.

14
27. Charitable Contribution Deduction for Certain Transfers
of Partial Interests in Property (Section 2124(e)(4) of the
Tax Reform Act of 1976, section 309(b)(2) of the Tax Reduction
and Simplification Act of 1977 and sections 2055(e)(2)(B) and
2522(c) (2) (B) of the Code)
The Tax Reform Act of 1976 amended Code section 170(f) (3)
(B) by adding Code section 170(f) (3) (B) (iii) permitting a deduction for certain contributions of partial interests to be used
exclusively for conservation purposes. Code section 170(f)(3)
(B) (iii) was effective for transfers made between June 14, 1976 and
June 13, 1977. In addition, Code sections 2055(e)(2)(B) and
2522(c)(2)(B) were amended by the 1976 Act to define deductible
contributions of partial interests for estate and gift tax purposes by reference to those interests deductible for income tax
purposes under Code section 170(f)(3)(B). The Tax Reduction and
Simplification Act of 19 77 further amended Code section 170
(f)(3)(B) by revising the types of partial interests donated
exclusively for conservation purposes which would continue to
qualify for an income tax (and by cross-reference, an estate
and gift tax) charitable contribution deduction. The 1977
Act changes are effective for transfers made before June 14,
1981.
It has been suggested that the combination of substantive
changes and effective date provisions of the 1976 and 1977
Acts may result in the loss of a transfer tax charitable contribution deduction for the transfer of a remainder interest
in a personal residence or farm or the transfer of an undivided
portion of a taxpayer's entire interest in property if such
transfer (1) occurred before June 14, 1976 or (2) occurs after
June 13, 19 81. Nothing in the legislative history of either
the 19 76 or 19 77 Act indicates that Congress intended this
result.
We recommend that Code sections 2055(e)(2)(B) and 2522
(c)(2)(B) be amended to make clear that the limited time period
for making transfers of qualified partial interests in property
applies solely to contributions described in Code sections
170(f)(3)(B)(iii) and (iv).

15
28. Recapture in the Case of Satisfaction of a Pecuniary
Bequest with Appreciated Carryover Basis Property (Section
200!)(b) of the Tax Reform Act of 1976 and sections 1040, 1245,
1250 and 1251(a) of the Code)
Code section 1040, added by the Tax Reform Act of 1976,
provides that where appreciated property is used to satisfy
a pecuniary bequest recognized gain will be limited to the
difference between date of distribution and estate tax values.
The purpose of Code section 1040 is to retain, under present
law, the prior law income tax consequences of funding a
pecuniary bequest with appreciated property. However, it is
unclear whether recapture under Code sections 617, 1245, 1250,
1251, 1252 and 1254 is limited by the amount of gain recognized
upon the satisfaction of a pecuniary bequest with appreciated
carryover basis property.
We recommend that Code sections 1245(b), 1250(d), 1251(c),
1252 and .1254 be amended to make clear that recapture income is
limited by the amount of gain recognized where appreciated carryover
basis property is used to satisfy a pecuniary bequest.
29. Transfer to Foreign Trusts and Other Foreign Entities
(Section 1015(a) of the Tax Reform Act of 1976 and section
1491 of the Code)
Under Code section 1491 an excise tax is imposed upon the
transfer of appreciated property to certain foreign entities by
a citizen or resident of the United States, a domestic corporation
or partnership or a trust which is not a foreign trust.
We recommend that Code section 1491 be amended to include
transfers of appreciated property by estates.
30. Indexing of Federal Tax Liens (Section 2008(c) of the
Tax Reform Act of 1976 and section 6323(f)(4) of the Code)
The Tax Reform Act of 1976 amended Code section 6323
(f)(4) to provide that a lien is not treated as meeting the
filing requirements of Code section 6323(f) (1) unless it is
also recorded in a special index maintained at the office of the
district director of the Internal Revenue Service for the
district in which the property is located.
We recommend that separate, special indexing in Internal
Revenue Service district offices be eliminated. With respect
to personal property, we recommend that indexing not be
required. With respect to real property, we recommend that
indexing of federal tax liens be required in those states which
require indexing for the effective recordation of other instruments affecting real property to the extent required for those
instruments.

FOR IMMEDIATE RELEASE

September 8, 1977

ROBERT H. MUNDHEIM SWORN IN
AS GENERAL COUNSEL OF THE TREASURY
Robert H. Mundheim was sworn in today as General Counsel
of the Treasury by Secretary of the Treasury W. Michael
Blumenthal. As General Counsel, Mr. Mundheim is responsible
for all legal work in the Department and serves as senior
legal and policy advisor to the Secretary and other senior
Departmental officials.
He was nominated for the position by President Jimmy
Carter on June 15, 1977 and confirmed by the Senate on
August 2, 1977.
Mr. Mundheim came to the Treasury Department from the
University of Pennsylvania Law School where he was the Fred
Carr Professor of Law and Financial Institutions; Professor
of Finance at the Wharton School; and Director of the University of Pennsylvania Law School Center for Study of Financial
Institutions. He was also a visiting professor of law at
U.C.L.A. Law School in 1976-77; at Harvard Law School in
1968-69; and at Duke Law School in 1963-64.
In 19 62 and 1963 Mr. Mundheim was the Special Counsel to
the Securities and Exchange Commission on Investment Company
Act matters. He was with the New York City law firm of
Shearman & Sterling from 1958 to 1961. He is a member of the
American Bar Association, American Law Institute, and the
American Association of University Professors.
He was born in Hamburg, Germany on February 24, 1933. He
received his B.A. degree from Harvard College in 1954 and an
LL.B degree from Harvard Law School in 1957. He served in the
U.S. Air Force in 1961 and 1962.
Mr. Mundheim and his wife, the former Guna Smitchens,
have a son and daughter. The Mundheim family resides in
Philadelphia.
oOo

B-425

MtmentoftheJREASURY
TELEPHONE 566-2(H1

iSHINGTON. OX. 20220

FOR RELEASE AT 4:00 P.M.

September 8, 1977

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites tenders for
$ 2,917 million, or thereabouts,^of 364-day Treasury bills to be dated
September 20, 1977, and to mature September 19, 1978 (CUSIP No. 912793 R5 7).
The bills, with a limited exception, will be available in book-entry form only,
and will be issued for cash and in exchange for Treasury bills maturing
September 20, 1977.
This issue will not provide new money for the Treasury as the maturing
issue is outstanding in the amount of $2,917 million, of which $1,825 million is
held by the public and $ 1,092 million is held by Government accounts and the
Federal Reserve Banks for themselves and as agents of foreign and international
monetary authorities.

Additional amounts of the bills may be issued to Federal

Reserve Banks as agents of foreign and international monetary authorities.

Tenders

from Government accounts and the Federal Reserve Banks for themselves and as
agents of foreign and international monetary authorities will be accepted at the
average price of accepted tenders.
The bills will be issued on a discount basis under competitive and noncompetitive bidding, and at maturity their par amount will be payable without interest.
Except for definitive bills in the $100,000 denomination, which will be available
only to investors who are able to show that they are required by law or regulation
to hold securities in physical form, this series of bills will be issued entirely
in book-entry form on the records either of the Federal Reserve Banks and Branches,
or of the Department of the TreasuryTenders will be received at Federal Reserve Banks and Branches and at the
Bureau of the Public Debt, Washington, D. C. 20226, up to 1:30 p.m., Eastern
Daylight Saving time, Wednesday, September 14, 1977.

Form PD 4632-1 should be used

to submit tenders for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000.
be in multiples of $5,000.

Tenders over $10,000 must

In the case of competitive tenders, the price

offered must be expressed on the basis of 100, with not more than three decimals,
eg., 99.925.

B-426

Fractions may not be used.
(OVER)

-2Banking institutions and dealers who make primary markets in Government
securities and report daily to the Federal Reserve Bank of New York their positio
with respect to Government securities and borrowings thereon may submit tenders
for account of customers, provided the names of the customers are set forth in
such tenders.

Others will not be permitted to submit tenders except for their

own account.
Payment for the full par amount of the bills applied for must accompany all
tenders submitted for bills to be maintained on the book-entry records of the
Department of the Treasury.

A cash adjustment will be made for the difference

between the par payment submitted and the actual issue price as determined in
the auction.
No deposit need accompany tenders from incorporated banks and trust companies
and from responsible and recognized dealers in investment securities, for bills
to be maintained on the book-entry records of Federal Reserve Banks and Branches,
or for definitive bills, where authorized.

A deposit of 2 percent of the par

amount of the bills applied for must accompany tenders for such bills from others,
unless an express guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the Treasury of the
amount and price range of accepted bids.

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 $500,000 or less without stated
price from any one bidder will be accepted in full at the average price (in
three decimals) of accepted competitive bids.
Settlement for accepted tenders for bills to be maintained on the records
of Federal Reserve Banks and Branches must be made or completed at the Federal
Reserve Bank or Branch on September 20, 1977, in cash or other immediately available funds or in Treasury bills maturing September 20, 1977.

Cash adjustments

wil] 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 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 bills (other than life insurance companies) issued hereunder must

-3include in his Federal income tax return, as ordinary gain or loss, the
difference between the price paid for the bills, whether on original issue or
on a subsequent purchase, and the amount actually received either upon sale or
redemption at maturity during the taxable year for which the return is made.
Department of the Treasury Circulars, Public Debt Series - Nos. 26-76 and
27-76, and this notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue.

Copies of the circulars and tender forms may be

obtained from any Federal Reserve Bank or Branch, or from the Bureau of the
Public Debt.

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:00 A.M. EDT
SEPTEMEBER 8, 1977
STATEMENT OF THE HONORABLE C, FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE'
INTERNATIONAL FINANCE SUBCOMMITTEE
COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
Mr. Chairman and members of the International Finance
Subcommittee. I appreciate this opportunity to testify on
behalf of the Administration to present its views on H.R.
7738, a bill "With respect to the powers of the President
in time of war or national emergency." I shall also comment
on the amendments to that bill introduced by Senator Stevenson
on August 5, 1977. •:_:.-.•.
H.R. 7738 is the product of a cooperative effort between
Congress and the Administration in response to the requirements of the National Emergencies Act enacted in the Fall of
1976. The Act provided that powers exercised pursuant to
existing states of national emergency would terminate within
two years of the date of its enactment. However, it exempted
Section 5(b) of the Trading with the Enemy Act (and several

B-427

- 2 other statutory provisions) from the two-year termination
requirement to afford Congress opportunity for deliberate
consideration of the Section's powers and procedures.
The Administration believes that H.R. 7738 responds to
the principal purpose of the National Emergencies Act: to
place procedural constraints on any future exercise of
national emergency powers by the President.

The Administra-

tion has also worked with Congress to insure that the bil_r*<
satisfies modern needs for congressionally-delegated
Presidential emergency powers.

Accordingly, we support

H.R. 7738.
Our support of these reforms of the emergency powers
conferred by Section 5(b) stems from our recognition that
the Congress has a legitimate role to play in the exercise
of such extraordinary powers.

Furthermore, we are keenly

aware that, on several occasions, Section 5(b) has been
hurriedly broadened during moments of national crisis, in
which little attention was given to procedural safeguards
consonant with the constitutional balance of powers. In
contrast, the reforms of' Section 5(b) contained in H.R. 7738
will have the benefit of calm deliberation which did not
characterize earlier amendments of the Section.

Our support

- 3of this bill is qualified in two respects which I will
explain in the course of my comments.
The bill amends Section 5(b) of the Trading with the
Enemy Act by transferring the non-wartime emergency powers
to a new Act entitled the "International Emergency Economic.
Powers Act," This new Act places the emergency powers
previously available in Section 5(b) under several procedural constraints in addition to those imposed by the
National Emergencies Act. The President is authorized to
continue to exercise Section 5(b) powers invoked as of
July 1, 1977, upon the expiration in September 1978, of
the two-year period following the enactment of the National
Emergencies Act. These extensions, which are authorized
for one-year periods, must be based on Presidential determination that each is in the national interest of the United
States. We believe that it would be desirable to avoid
possible complications from application of the new procedures specified in the "International Emergency Economic
Powers Act" to existing Section 5(b) activities.
In testimony before the House Subcommittee on International Economic Policy and Trade, the Administration supported

reforms in the manner in which Section 5(b) powers are exercised

- 4 Both Assistant Secretary of State Katz and I testified
in support of reforms designed to place certain procedural
constraints on the President's exercise of Section 5(b)
powers, and to insure that the Congress and the public were
kept informed of the activities carried out under this
Section. In addition, I proposed steps to avoid future
emergency actions which rely on unrelated national emergency
declarations. We believe that.the bill before you today
accomplishes all of these purposes.
Nonetheless, we have two objections to this bill. The
first objection relates to the language of Section 203(b),
referring to uncompensated transfers. Since the Act
already sets rather stringent standards for the exiercise
of its emergency powers, the Administration believes that
this additional limitation is undesirable. In addition,
the exemption could permit some dissipation of blocked
assets through uncompensated transfers of blocked assets.
Accordingly, the Administration urges that the amendment
introduced to Senator Stevenson be adopted.
The Stevenson amendment would limit the exemption to
U.S. persons and thus prevent nationals of a blocked country from making any donations or other transfers" out of
blocked assets. It authorizes donations of articles only,
not funds, increasing the likelihood that the donation will

- 5 be used for the intended purpose.

Finally, the President

is authorized to withdraw the exemption where it would
impair his ability to deal with the national emergency. We
think the Stevenson amendment strikes a reasonable balance
between the effectiveness of any future embargo controls
that may be in the national interest and the private convictions of American citizens.
_. -

We also object to the provisions of this bill which
enable Congress to terminate a national emergency declared
by the President, and to disapprove of regulations issued
pursuant to a national emergency, by concurrent resolution.
In view of the numerous reporting requirements and other
procedural constraints which are placed on the President's
power under the Act, we believe the use of concurrent
resolution mechanisms is unnecessary. Furthermore, they
violate constitutional principles of the separation of
powers. The same constitutional considerations which
motivate our support of procedural reforms of Section 5(b)
require that we object to the use of concurrent resolutions
in this manner. We particularly urge the committee to
adopt Senator Stevenson's amendment which would strike out
the Section 206 provision for congressional review and disapproval of regulations issued under the new Act.

- 6 Let me comment on Section 301 of the bill which amends
the Export Administration Act of 1969 by providing the
authority to regulate exports extraterritorially under
that Act, This Administration has already indicated in
its testimony before the House of Representatives that it
intends to apply any new extraterritorial controls sparingly.
I stated before the House Subcommittee on International
Economic Policy and Trade that we will weigh very carefully
the foreign relations costs of extraterritorial extensions
of any new measures pursuant to Section 5(b) (or the new
"International Emergency Economic Powers Act"). Accordingly,
our support of this amendment of the Export Administration
Act should not be taken as an indication that this Administration anticipates using these extraterritorial powers
extensively. Our support of Section 301 simply reflects
our belief that we should improve the administrative mechanism for applying such powers when they are necessary.
Finally, let me add that it is of great importance
that the Government's export control program continue without
interruption or lapse. We would strongly prefer to avoid
having to use the authorities under discussion today for that
purpose. Accordingly, the Administration urges that this
legislative proposal include a provision amending the Export

- 7 Administration Act to make it permanent legislation, as
the Administration-supported draft recommends.

oOo

Contact: Alvin Hattal
566-8381
HOLD FOR RELEASE
UNTIL 6 PM SEPT. 12

September 12, 1977

UNITED STATES TREASURER SWORN IN TODAY

Mrs. Azie Taylor Morton, of Annandale, Va., was
today sworn in as the 36th Treasurer of the United
States and the eighth consecutive woman to hold the
position. She took the oath of office from Treasury
Secretary W. Michael Blumenthal at 6 PM.
In addition to her duties as United States
Treasurer, Mrs. Morton will be the National Director
of the United States Savings Bonds Division.
Mrs. Morton, 41, was born in Dale, Tx. and
educated at Huston-Tillotson College, Austin, Tx.
In 1961 she came to Washington, D. C , where she
worked on President Kennedy's Committee on Equal
Employment Opportunity (1961-63) and the President's
Committee on Equal Opportunity in Housing (1963-66).
In 1966-68 she was with the U. S. Equal Employment
Opportunity Commission in Austin, Tx. and from
1968-71 she was Director of Social Services, Model
Cities Program, Wichita, Ks.
From 1971 to 1976 Mrs. Morton was Special
Assistant to the Chairman, Democratic National Committee. Earlier this year she also worked for
several months with the U. S. House of Representatives
Committee on the District of Columbia.
Mrs. Morton is married to James H. Morton, and
is the mother of two daughters. She is a member of
Alpha Kappa Alpha sorority and is listed in the
current editions of Who's Who Among Women Internationally and Who's Who Among Black Americans.

B-428

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
SEPTEMBER 12, 1977
STATEMENT OF THE HONORABLE ROBERT H. MUNDHEIM
GENERAL COUNSEL OF THE TREASURY DEPARTMENT
BEFORE THE SUBCOMMITTEE ON
GOVERNMENT INFORMATION & INDIVIDUAL RIGHTS
OF THE
HOUSE COMMITTEE ON GOVERNMENT OPERATIONS
WASHINGTON, D.C.
Mr. Chairman and Distinguished Members of this Subcommittee:
I am Robert H. Mundheim, General Counsel for the Treasury
Department. With me today is Robert E. Chasen, Commissioner
of the United States Customs Service. We welcome this
opportunity to appear before you to discuss the current practice
of the Customs Service to open, without a search warrant,
international sealed letter class mail addressed for delivery
within the Customs territory of the United States as it crosses
our nation's border, when a Customs officer has a reasonable
cause to suspect that there is merchandise or contraband in
the envelope.
The problem about which the Committee has manifested concern requires the accommodation of two important interests.
On the one hand, there is the desire to preserve the confidentiality
of correspondence entrusted to the mails. This desire is
embodied in the statutory prohibition against the opening of
domestic first class mail, unless a search warrant has been
obtained. (39 U.S.C. 3623(d)) Protection of the interest in
privacy is one Treasury takes very seriously.
On the other hand, there is the desire not to provide a
secure channel by which prohibited items such as narcotics
or child pornography can enter the country or high value items
such as jewelry or gold coins can be imported without payment
of appropriate duties.
B-429

- 2 In that connection, it is important to note exactly what
is meant by the term "sealed letter class mail." Under the
postal conventions, there are several classes of mail. "LC"
or letter class is the international equivalent of domestic
first class mail.
Customs refers to "LC" mail as sealed letter class mail.
Contrary to popular belief, "LC" mail is not limited to
envelopes containing only business or personal correspondence
or even to envelopes which are like those ordinarily used to
mail business or personal correspondence. "LC" mail may be
up to 24 inches in length, weigh up to 4 pounds or 60 pounds
if it is from Canada, and may include expensive items such as
diamonds or gold if it is registered. "LC" mail which includes
merchandise is required by the Universal Postal Union Convention
to bear a green Customs label, which states that Customs may
open the envelope. Senders frequently mail these items without
the label. The term "first class mail," as used in the Postal
Regulations, is not used in the international conventions.
Thus, "LC" mail affords ample opportunity for smuggling
into the United States contraband and high value items. Even
if we focus on the normal, long thin business type of envelopes,
they can contain (and have contained) small amounts of heroin
and cocaine (which in a pure state are extremely valuable) or
small, high value items such as diamonds and gold jewelry.
How has Customs accommodated the principle of preserving
the individual's right of privacy in the mails, with the
congressionally mandated responsibility to prevent the
importation of prohibited items and to collect prescribed
duties on merchandise?
Since 1789, Customs officers have had broad statutory
authority to search vessels for merchandise and to seize
any merchandise which was concealed to avoid payment of
duties. The statute permitted the search if a Customs
officer had a "reason to suspect" that any goods subject
to duty were concealed.
The main purpose of giving Customs this search authority
was not to uncover criminal violations of law, but to insure
that all dutiable articles were properly declared, that the
appropriate duty was being collected, and that no prohibited
articles would enter the United States. This broad authority
to search items entering at the border is grounded in the
recognized right of the sovereign to control who and what
may enter the country.

- 3 Over the years, as land commerce increased with the
expansion of our boundaries, Congress correspondingly
broadened Customs search authority; for example, legislation enacted in 1815 authorized the search of persons
traveling on foot when the Customs officer "shall suspect
there are goods, wares, or merchandise, which are subject
to duty, or which shall have been introduced into the
United States in any manner contrary to law."
In 1866, Congress extended the authority of Customs
officers to include the search of "any trunk, or envelope,
wherever found." The standard required to conduct such
searches was phrased as "a reasonable cause to suspect
there is merchandise which is imported contrary to law."
This statute, in virtually identical language, is presently
codified in section 482 of title 19 of the United States
Code.
Pursuant to the authority granted in 1866, Customs
began to screen mail including sealed letter class mail.
However, except for a brief period of time in the late
1860's, Customs took the position that it would not open
suspect sealed letter class mail without the consent of
the addressee.
This situation was altered slightly in 1924 when the
Universal Postal Union Convention was modified to permit
for the first time the insertion of certain dutiable articles
into sealed letter class mail. The sender was required to
complete and attach to the envelope a prescribed "green label"
form describing the nature of the contents and their value.
Since the green label specifically stated that Customs could
open the envelope, neither the consent nor the presence of
either the addressee or the sender was necessary or required.
Envelopes without a green label continued to be opened
only with the express consent of the addressee. It was required
that the postmaster send a notice to the addressee that his mail
was suspected of containing merchandise, and thus required a
Customs examination. If, after 30 days, the addressee refused
to consent to the opening, or simply ignored the notice, the
mail was returned to the sender.
The inherent weakness of the consent procedure is evident:
the sender simply would continue to mail the item until it escaped
Customs detection.

- 4 In some cases, Customs did obtain warrants when there
was probable cause to believe there was a violation of
18 U.S.C. 545, importation contrary to law. There does not
seem to be any available statistics of the number of warrants
obtained. However, warrants do not seem to have been a
practical device for preventing the mails from becoming
a channel for improperly introducing merchandise into the
country.
During the 1960's, smuggling in international sealed
letter class mail appeared to increase dramatically, especially
in items such as heroin, hashish, gold coins, and diamonds. As
a direct consequence, the Customs and Postal Services proposed
new joint regulations which would subject all sealed letter
class international mail to Customs examination without the
requirement of first obtaining the addressee's consent.
The proposed change was considered in the course of the
1970 congressional debates on the Postal Reorganization Bill.
Amendments were specifically introduced which were designed
to prohibit the broadened Customs inspection which the
Regulations contemplated. These amendments were defeated
and what emerged was a law providing that there shall be
one class of mail "of domestic origin" which may not be
opened except under authority of a search warrant. (39 U.S.C.
3623(d)).
There were some who argued that the inspection procedure
contemplated by Customs was unconstitutional. This issue was
addressed directly by the United States Supreme Court in
United States v. Ramsey, decided on June 6, 1977.
In the Ramsey case, a Customs officer screening a sack of
incoming international mail from Thailand spotted eight bulky
envelopes which he believed might contain merchandise. All of
the envelopes appeared to have been typed on the same typewriter,
were addressed to different locations in Washington, D.C., felt
as if there was something other than plain paper inside, weighed
three to six times the normal weight of a letter, and came from
a country which is a known source of narcotics. Upon inspection,
all the envelopes were discovered to contain heroin.
The Court held that the statute under which the officer
acted (19 U.S.C. 482), whose forerunner was the 1866 statute
to which I referred earlier, was constitutional and that the
circumstances under which the letters were opened provided
the statutorily required "reasonable 'cause to suspect' that
there was merchandise or contraband in the envelopes."

- 5 This decision effectively validated the Customs practice
of opening sealed international letter class mail without a
search warrant so long as there is a reasonable cause to suspect
the presence of merchandise or contraband. The opinion went
further and read the long history of the border search exception
to the full reach of the Fourth Amendment protections as justifying
the search of mail coming over the border. The Court pointed out
that "[I]t was conceded at oral argument that Customs officials
could search, without probable cause and without a warrant,
envelopes carried by an entering traveler, whether in his
luggage or on his person." It further stated: "Surely no
different constitutional standard should apply simply because
the envelopes were mailed, not carried. The critical fact is
that the envelopes cross the border and enter this country,
not that they are brought in by one mode of transportation
rather than another."
The issuance of the Ramsey opinion roughly coincided
with my coming to the Treasury Department. I thought the
case provided an opportune time for Treasury to review and
reevaluate the Customs Regulations and procedures relating
to the opening of sealed international letter class mail.
Because section 145.3 of the Customs Regulations was
silent as to the circumstances under which such mail could
be opened, we thought it wise to set them out specifically.
As I indicated before, the Supreme Court had suggested that
Customs power to open sealed international letter class mail
might constitutionally exceed the limitations contained in
19 U.S.C. 482. We, however, wanted it to be clear that
Customs had no intention to extend its authority beyond
those parameters.
We also wanted to issue a Policy Statement which would
state the basic principles which would govern Customs procedures in its examination of sealed international letter
class mail. These principles include:
a) A prohibition against opening any mail which appears
to contain only correspondence.
b) A flat prohibition against reading (or allowing
anyone else to read) any correspondence without
a search warrant.

- 6 c) A prohibition on seizure of correspondence without
a warrant. This prohibition would prevail even if
merchandise has been seized, and even though the
correspondence would be considered as additional
evidence or as an instrumentality of the crime.
Under accepted rules of criminal procedure, such
correspondence could lawfully be seized and read
without a warrant.
d) A prohibition against referral of correspondence
to any other agency without a search warrant.
Commissioner Chasen in his statement will talk about
the enforcement of these guidelines.
A key concept governing Customs mail opening procedures
is that there must be reasonable cause to suspect that merchandise
or contraband is contained in sealed international letter class
mail before it may be opened. The proposed Policy Statement
attempts to give guidance on the meaning of this concept by
spelling out certain fact situations which would provide
reasonable cause to suspect. Let me mention two examples:
1) a positive reaction by detector dogs;
2) the weight, shape or feel of the envelope may indicate
the presence of merchandise.
We also wanted to set out a few examples of circumstances
which, standing alone, would not provide reasonable cause to
suspect. For example, the mere fact that letters are sent
from a country which is a known source of heroin would not
alone be a basis for opening them.
The proposed change to the regulations was published in
the Federal Register as required by law.
We also published our proposed Policy Statement in the
Federal Register so that we could receive public comments on
it. This is the first time to my knowledge that the Treasury
Department has published such a Policy Statement in the Federal
Register, and underscores our desire to get as much help as
possible in assuring that we achieve the proper accommodation
between the interests of privacy and control of goods entering
this country. As of yet, we have received no substantive
comments on our proposed changes to the regulations or on
our proposed Policy Statement. However, 16 days remain in
the comment period.

- 7We welcome the comments and questions which the hearings
being conducted by this Committee will elicit as an aid to our
review of the proposed regulations and Policy Statements.

0O0

partmentoftheTREMURY
TELEPHONE 566-2041

MNGTON,D.C. 20220

FOR IMMEDIATE RELEASE

September 12, 1977

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 2,500 million of 13-week Treasury bills and for $3,501 million
of 26-week Treasury bills, both series to be issued on September 15, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing December 15, 1977
Price

High
Low
Average

Discount
Rate

98.524a/ 5.839%
98.502
5.926%
98.512
5.887%

26-week bills
maturing March 16, 1978

Investment
Rate 1/

Discount Investment
Price
Rate
Rate 1/

6.01%
6.10%
6.06%

96.933 6.067% 6.35%
96.908
6.116%
6.40%
96.917
6.098%
6.38%

/ Excepting 1 tender of $300,000
Tenders at the low price for the 13-week bills were allotted 72%.
Tenders at the low price for the 26-week bills were allotted 28%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Boston
$
21,875,000
New York
3,280,920,000
Philadelphia
17,355,000
Cleveland
34,235,000
Richmond
17,745,000
Atlanta
24,820,000
Chicago
322,720,000
St. Louis
42,000,000
Minneapolis
18,285,000
Kansas City
35,420,000
Dallas
15,560,000
San Francisco
237,305,000
120,000
Treasury
TOTALS

$4,068,360,000

Accepted

Received

Accepted

120,000

$
28,175,000
4,863,000,000
5,105,000
46,155,000
14,955,000
32,430,000
764,405,000
35,635,000
36,650,000
23,865,000
14,245,000
273,690,000
350,000

$
23,175,000
2,859,800,000
5,105,000
46,155,000
11,955,000
32,430,000
342,805,000
23,635,000
36,650,000
23,865,000
14,245,000
80,69d;000
350,000

$2,500,360,000b/

$6,138,660,000

$3,500,860,000c/

$
21,875,000
2,017,920,000
17,355,000
34,235,000
17,745,000
24,820,000
197,720,000
38,000,000
18,285,000
35,420,000
15,560,000
61,305,000

Includes $308,370,000 noncompetitive tenders from the public.
Includes $ 168,535,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
430

FOR RELEASE AT 4:00 P.M.

September 13, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department or tne Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,U0U million, to oe issued September 22, 1977.
TAis offering will not provide new cash tor tne Treasury as the
maturing bills are outstanding in the amount of $6,007 million
($903 million of which represent 16-day bills issued September 6,
1977). The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,500
million, representing an additional amount of bills dated
June 23, 1977, and to mature December 22, 1977 (CUSIP No.
912793 L8 7), originally issued in tne amount of $3,001 million,
the additional ana original bills to be freely interchangeable.
182-day bills for approximately $3,500 million to be dated
September 22, 1977, and to mature Marcn 23, 1978 (CUSIP No.
912793 P4 2) .
Both series of bills will be issued for cash and in exchange
for Treasury Dills maturing September 22, 1977. Federal Reserve
Banks, for themselves and as agents of foreign and international
monetary authorities, presently nold $2,612 million of the
maturing bills. These accounts may exchange bills they hold for
tne bills now being offered at tne weignted average prices of
accepted competitive tenders.
Tne bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payaole without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to snow that they are required by law or regulation
to nold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on tne records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve BanKs and
Branches and at the Bureau of tne Public Debt, Washington, D. C.
2U226, up to 1:30 p.m., Eastern Daylignt Saving time, Monday,
September 19, 1977. Form PD 4632-2 (for 26-weeK series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
tor bills to be maintained on tne oooK-entry records of the
department of the Treasury.
B-431

-2Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New *York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless- an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 22, 1977, in cash or
other immediately available funds or in Treasury bills maturing
differences
accepted
September in
22,.
exchange
between
1977. the
Cash
andpar
the
adjustments
value
issueof
price
the
will
of
maturing
be
the
made
new
bills
for
bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discqunt at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.
oOo

FOR RELEASE AT 4:00 P.M.

September 13, 1977

TREASURY TO AUCTION $3,136 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $3,136 million
of 2-year notes to refund $3,136 million of notes held by the
public maturing September 30, 1977. Additional amounts of
these notes may be issued at the average price of accepted
tenders to Government accounts and to Federal Reserve Banks
for their own account in exchange for $90 million maturing
notes held by them, and to Federal Reserve Banks as agents
of foreign and international monetary authorities for new
cash only.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.
oOo

Attachment

B-432

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED SEPTEMBER 30, 1977
September 13, 1977
Amount Offered:
To the public
Description of Security:
Term and type of security. .,
Series and CUSIP designation
Maturity date September 30, 1979
Call date
Interest coupon rate

$3,136 million
2-year notes
Series U-1979
(CUSIP No. 912827 HA 3)

No provision
To be determined based on ;
the average of accepted bic
Investment yield To be determined at auctior
Premium or discount
To be determined after
auction
Interest payment dates
March 31 and September 30
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Wednesday, September 21,
1977, by 1:30 p.m., EDST
Settlement date (final payment due)
a) cash or Federal funds
Friday, September 30, 19^
b) check drawn on bank
within FRB district where
submitted
Monday, September 26, 1"'
c) check drawn on bank outside
FRB district where
«..
submitted
Friday, September 23, l9'
Delivery date for coupon securities.... Friday, September 30, 19'

wtmentoftheTREASURY
MGTON.D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
SEPTEMBER 14, 1977
STATEMENT BY ARNOLD NACHMANOFF
DEPUTY ASSISTANT SECRETARY OF TREASURY FOR DEVELOPING NATIONS
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL DEVELOPMENT
INSTITUTIONS AND FINANCE OF THE COMMITTEE ON BANKING,
FINANCE AND URBAN AFFAIRS
Mr. Chairman and Members of the Committee, it is an
honor to appear before your today to discuss the subject of
illegal immigration and what the international development
banks can do to help alleviate the problem. In order to
keep our remarks as brief as possible, and facilitate the
discussion, my colleagues and I propose to divide our initial
remarks along the following lines:
My remarks will focus primarily on the nature and causes
of the undocume nted alien problem, and how development
assistance may be helpful. Mr. Arellano will expand on these
subjects as wel 1 as discuss the impact of the problem on our
bilateral relat ions with source countries, with particular
emphasis on Mex ico; the U.S. Executive Directors of the World
Bank and the In ter-American Development Bank, Mr. Fried and
Mr. Dungan, wil 1 address the question of what their respective
institutions ar e doing and what they might be able to do in the
alleviate this problem.
future
to help
1.
Nature
and Causes of the Problem
The roots of the undocumented a lien problem in all source
countries are principally economic i n nature. Income levels
and general li ving conditions for ma ny of the people in these
countries, par ticularly those in rur al areas, are much lower
than those in the United States. Th eir prospects for improvement are relat ively limited in most cases. These conditions
are the factor s which "push" individ uals to leave their home
areas. Many o f them migrate to urban centers in their own
countries, but others migrate across national borders to the
C-433

- 2 United States. Why some migrants go to Mexico City, for
example, and others go to the United States, is not fully
understood. However, the attraction of living in an urban
or industrial environment with its social amenities, services,
and infrastructure combined with the perception of greater
opportunities for employment, a higher standard of living,
and upward mobility seems to "pull" many of these individuals
to the United States.
Our comments will focus primarily on the major source
country, Mexico, since it is estimated that perhaps 60-65
percent of the undocumented aliens in the United States today
originate from Mexico. However, other important source countries
include the Dominican Republic, Haiti, Jamaica, Guatemala,
Peru and Ecuador. Many of the problems which generate migration
from those countries are similar to those of Mexico and therefore
much of our discussion on Mexico will also be applicable to
those countries.
The entry of undocumented aliens into the United States
from Mexico became a noticeable pattern toward the end of the
last century. In many cases it has become an ongoing social
process involving several generations of Mexican workers. The
U.S. Government made several attempts to ameliorate the problem
in previous years but none of the measures taken have had a
lasting effect. In fact, the problem has become more acute,
particularly since 1970. It is now estimated that somewhere
between 300,000 and 600,000 Mexicans cross the border illegally
each year. The long border makes illegal entry relatively easy
and only a small fraction are apprehended by the U.S. Immigration
and Naturalization Service. Many of these individuals are
apprehended only after they have illegally entered the U.S. a
number of times.
2. Where They Come From
Most of the Mexicans who enter the United States illegally
come from the rural areas in the North Central states of Jalisco,
Chihuahua, Michoacan, Zacatecas, Guanajuato, Coahuila, and Durango.
Only two of those states are located along the border.
In contrast to those rural migrants who go to the urban
areas in Mexico with a view toward living and working there
permanently, many of those who came to the United States do so

- 3 with the idea of earning substantially more money than they can
in Mexico and then returning to the areas from where they came to
buy farms or set up small businesses. People in the latter
category frequently have to come to the U.S. several times over
the course of many years before their goals are realized.
3. Population and Jobs
One of the basic causes of the undocumented aliens problem
is the very substantial gap which exists between unemployed
workers and available jobs in Mexico. The Mexican economy
has not been able to generate sufficient employment opportunities
to close that gap. It is estimated that each year there are
600,000 - 800,000 new entrants into the labor force, a labor
force which now consists of 17 million people. Unemployment in
Mexico is estimated at 15-18 percent with perhaps an additional
25 percent underemployed. Even at annual growth rates of 5-8
percent—which Mexico achieved in early 1970's—it is estimated
that only 300,000 new jobs openings are created annually.
With
the growth rate reduced to 2 percent, as it has been in 1976 and
1977, new job opportunities drop to about 200,000 annually. Thus,
new job opportunities have not been sufficient to absorb the
number of new entrants into the labor force, the level of
unemployment has increased, and pressures for outward migration
have continued to mount.
A fundamental factor in the persistance of the problem is
the growth rate and composition of the Mexican population. The
rate of population growth in Mexico is estimated at between 3.2
and 3.6 percent per year, one of the highest in the world. A
high concentration of the population is under 15 years of age.
Even under the most optimistic assumptions, new entrants into
the labor force will continue to grow at a rapid rate for many
years to come.
4. The Role of Development Assistance
While our understanding of the causes and nature of the
undocumented aliens problem is far from perfect, and much work
needs to be done in this area to improve our understanding of
the problem, it is clear that this is a long term problem, the
solution of which will depend largely on the success of domestic
Mexican measures to reduce population growth and to generate
increased investment in the agricultural and industrial sectors
thereby creating more job opportunities.
The Mexican Government is making serious efforts to address
these problems. The GOM has increased public sector spending

- 4 substantially to strengthen the country's capital base and
improve living conditions in the rural areas. These outlays
have helped but public sector revenues have not expanded apace.
For example, the public sector deficit quadrupled between 1972
and 1976. This fueled inflation and also resulted in larger
current account deficits which were among the principal
factors precipitating the economic crisis which came to a
head last year. As a result, the GOM has had to cut back
on the budget deficit and imports as part of its stabilization
program.
External development assistance particularly through the
International Development Lending Institutions, can be helpful
to the Mexican Government in its efforts to strengthen the
economy, create new jobs, and improve living conditions, and
expand its family planning efforts. Development assistance
can contribute to the general growth of the ecomony, both by
directly providing additional resources for investment, but
perhaps more importantly by acting as a catalyst for increased
investment from the private and public sectors. The Mexican
Government and the international development banks are giving
increased attention to the development of rural areas in Mexico.
This includes not only basic agricultural projects but also small
and medium size industry, infrastructure, and social services
in rural areas. Programs to create jobs and improve living
conditions in those areas probably will have the most direct
effect on the undocumented aliens problem. The average cost per
permanent job estimated at $5,000 to $10,000, which is considerably
lower than the $15,000 to $20,000 cost per permanent job estimated
in the industrial sector. Rural projects, moreover, could produce
significant multiplier effects, since the expanded income of lower
income groups would result in increased demand, which in turn would
stimulate other productive activities having secondary employment
and investment implications.
Development assistance can also provide additional support
for the Mexican Government's efforts to slow population growth.
The government has recently initiated a major effort to expand
family planning programs. This, of course, is a sensitive area
involving changes in cultural and social attitudes, and change
cannot be accomplished overnight. Leadership must come from the
Mexican Government; the development banks can provide additional
resources and expertise, however.
Of course, the development and expansion of the Mexican
economy is linked to continued access for its exports to external
markets in developed countries. Given our geographic proximity

- 5 and the size of our economy, Mexico will continue to depend
heavily on the U.S. as an outlet for their products.
In concluding my remarks, I would note that the World Bank
and the Inter-American Development Bank have provided some $4.2
billion in economic assistance to Mexico since the early 1950s.
At the present time, they are lending about $500 million annually
to Mexico. This support for Mexico's economic development undoubtedly
has helped ameliorate the pressure for outward migration. The
increased attention which the Banks are giving to the development
of the rural sector should increase the direct impact of their
programs on the problem. But, as noted before, this is a longterm problem and it would be unrealistic to expect quick solutions.
I will leave it to my colleagues Mr. Fried and Mr. Dungan
to discuss more specifically programs of the international
development banks and what those programs have done or may be
able to do to help ameliorate the problem of undocumented aliens.

FOR IMMEDIATE .RELEASE

September 14, 1977

TREASURY ANNOUNCES FINAL DETERMINATION
OF SALES AT LESS THAN FAIR VALUE
ON SACCHARIN FROM JAPAN AND KOREA
The Treasury Department announced today that saccharin
from Japan (except that produced by Aisan Chemical Co.,
Ltd.) and saccharin from the Republic of Korea, is being sold
at less than fair value within the meaning of the
Antidumping Act.
These cases have been referred to the U.S. International
Trade Commission which must determine within three months
whether a U.S. industry is being, or is likely to be, injured by the imports. Dumping occurs only when both sales
at less than fair value and injury have been determined.
Sales at less than fair value generally occur when the
price of the merchandise sold for export to the United States
is less than the price of comparable merchandise sold in
the home market. Interested persons were offered the opportunity to present oral and written views.
Treasury's tentative decision was that Japanese
saccharin imports are not being sold at less than fair value.
However, further investigation revealed that margins did
exist. Accordingly, a combined "Withholding of Appraisement
Notice and Determination of Sales at Less Than Fair Value"
will be issued.
If the International Trade Commission finds injury, a
"Finding of Dumping" will be issued and dumping duties will
be assessed on an entry-by-entry basis.
Imports of saccharin from Japan were valued at approximately $5.1 million during calendar year 1976, and imports
of saccharin from Korea were valued at approximately $1.2
million for the same period.
Notice of the above actions will be published in the
Federal Register of September 14, 1977.
* * *

B-434

FOR IMMEDIATE RELEASE

September 14, 1977

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $2,918 million of 52-week Treasury bills to be dated
September 20, 1977, and to mature September 19, 1978, were accepted at the
Federal Reserve Banks and Treasury today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $350,000)
Investment Rate
Price

Discount Rate

(Equivalent Coupon-Issue Yield)

High - 93.804 6.128% 6.52%
Low
93.769
6.163%
Average 93.776
6.156%

6.56%
6.55%

Tenders at the low price were allotted 61%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

Received

Accepted

$
30,975,000
4,135,575,000
2,600,000
110,080,000
49,085,000
13,015,000
434,130,000
27,775,000
24,425,000
12,725,000
14,595,000
273,665,000

$
24,475,000
2,554,125,000
2,600,000
12,080,000
32,085,000
5,625,000
155,740,000
3,275,000
19,425,000
10,725,000
4,595,000
92,765,000

Treasury

85,000

85,000

TOTAL

$5,128,730,000

$2,917,600,000

The $2,918 million of accepted tenders includes $ 83 million of
noncompetitive tenders from the public and $959
million of tenders from
Federal Reserve Banks for themselves and as agents of foreign and
international monetary authorities accepted at the average price.
An additional $130 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

B-435

52-WEEK EILL_RATES

DATE:

HIGHEST
HIGHEST SINCE
bhy.

LAST MONTH

LOWEST SINCE

TODAY

9-14-77

L>. i*f<&_jo

FOR RELEASE ON DELIVERY
EXPECTED AT 1:30 P.M.
SEPTEMBER 15, 1977
STATEMENT BY THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
INTERNATIONAL ECONOMIC POLICY AND TRADE SUBCOMMITTEE
OF THE
HOUSE COMMITTEE ON INTERNATIONAL RELATIONS
Mr. Chairman and respected Members, I welcome this
opportunity to discuss with your Subcommittee this Administration's methods of coordinating economic policy and, in
particular, international economic policy.
Of necessity, this is an interim account. The Administration is just eight months old, and we are still in the
testing stage organizationally. For instance, the President's
Reorganization Project only recently began a study of
economic policy agencies outside the Executive Office. We
expect the study to yield new ideas for organizing the
making of international economic policy.
As this Committee knows, the coordinating problems
raised by economic policy have proven resistant to clear and
simple solution for many years. I will not pretend that the
new team has discovered the secret that has eluded all our
predecessors. We have, however, made considerable progress
in building mechanisms well suited to the pace, style, and
objectives of this Administration. Much remains to be done,
however, and I greatly value this opportunity to learn from
your long experience in, and careful study of, this subject.
I will begin by outlining the premises, structure, and
procedures of the Economic Policy Group (EPG), which I
chair, and will then address the several issues raised by
the impending expiration of legislative authority for the
Council on International Economic Policy (CIEP).

B-436

- 2 The Economic Policy Group
A. Organizational Premises
President Carter's transition team and the incoming
Cabinet members thoroughly studied past efforts at coordinating
economic policy generally and international economic policy
in particular. Many of us brought to this study considerable
personal experience with these coordinating problems in past
Administrations. Over the spring and summer, the study
process continued as part of the work of the President's
Reorganization Project on the Executive Office of the
President.
From all these sources, we reached several broad
conclusions:
1. International and domestic economic policies
should not be separated organizationally; Almost
every major economic issue has major domestic and
international dimensions that need to be considered
simultaneously. Creating separate coordinating
structures at the highest level for domestic and
international economics invites friction, delay,
and confusion across the whole range of economic
policy and thus disserves the very idea of coordination,
2. Economic coordination must engage virtually the
entire Cabinet: Economic issues, particularly
international economic issues, cut across departmental
boundaries. On most issues, it is relatively easy
to identify the proper "lead" agency, but that
agency must usually consult extensively with many
others. It would be artificial, divisive, and
wasteful of other agencies' resources to give to
a single agency or small group of agencies the
final and exclusive authority to "make" all
economic policy.
3. Nevertheless, a manageably small, permanent
group of Cabinet level officers should meet
very frequently to monitor and oversee the
Cabinet-wide development of economic policy.
The Cabinet as a whole is much too big, and
its members' time too valuable, for the processes
of economic policy development to be managed
effectively through frequent plenary meetings of
an all-agency group. On the other hand, this
management
entirely
to Congress
tofunction
and
a coordinating
not is
responsible
too important
"staff"
fornot
implementing
toaccountable
be left

- 3 the policies chosen. The best solution is to
create a reasonably small "economic sub-committee"
of the Cabinet to monitor and oversee the many
Cabinet-wide interagency processes necessary to
the development of economic policy.
4. The Treasury Secretary should chair the coordinating
mechanism but, within it, other Cabinet members
should have lead responsibility for particular
issues, and the President's chief domestic policy
and national security policy assistants should be
directly involved in the coordinating process:
These arrangements are essential to give the
coordinating process a correct balance between
centralization and dispersed authority. The
Treasury Secretary has chaired nearly every
broad-based coordinating mechanism devised in the
economic area since the second World War. This is
natural and proper. The Treasury Secretary is
typically the Administration's main spokesman on
• economic policy; in the international economic
sphere especially; Finance Ministers play this
role in nearly every government; Treasury is the
only agency having a broad overview of, and wideranging operational duties in, both the domestic
and international economic arenas; and it is
relatively free of narrow constituency pressures.
On the other hand, Treasury cannot and should
not be the lead agency in developing policies for
which other departments have legislative authority
and specialized expertise. For instance: Within
an Administration-wide mechanism devised to
coordinate economic policy, the inter-agency
development of agriculture policy should be led by
U.S.D.A., trade policy by the Special Trade
Representative, public employment policy by the
Department of Labor, commercial support policy by
the Department of Commerce, and the like. More
broadly, CEA and OMB should both have major input
into many aspects of economic policy formulation.
Finally, the President's chief domestic and
national security policy assistants should play
central roles in economic coordination. Such an
arrangement provides White House guidance and
discipline for the process and helps assure that
economic considerations receive proper attention
at every point in the President's policy making
agenda.
5
« The economic coordinating mechanism should have
only a small staff of its own: The mechanism's

- 4 goal is to marshall the professional resources of
all interested agencies into a cooperative effort
to serve the President and the broad national
interest. For each category of policy, basic
coordination can be assigned to a lead agency,
with a very small staff to monitor the process.
If the coordinating mechanism itself develops a
large, independent staff, the departments will
inevitably grow jealous of that staff's influence
over matters of substance. The result will be
chronic end-running and increased inter-agency
bickering and confusion. By adding staff coordinators, one nearly always obtains less genuine
coordination.
6. Successful coordination cannot be mandated by
statute or executive order: Precisely which
structures and procedures work best will depend
crucially on the working styles of, and working
relations between, the President, his White House
staff, and his department heads. These matters of
style and relationship tend to fluctuate even
within a single Administration. Since the early
1950's, a bewildering parade of formal coordinating
boards, councils, and groups for economic policy
have been created by executive order, legislation,
or reorganization plan. These bodies have rarely
worked, even for a few weeks, in the manner
intended by their designers, and most of them
became hollow bureaucratic shells within a few
months. By contrast, one of the most durable
economic coordinating mechanisms of the post-war
era — the three stage Troika system of the early
and mid-1960's, involving Treasury, OMB, and
CEA — was founded on nothing more than a casual
oral directive by President Kennedy. The lesson
is that coordinating machinery should conform as
closely as possible to the actual operations of an
Administration and should not Le encased in a
legalistic strait jacket.
B. Structures and Procedures
The Economic Policy Group has been structured to
reflect these general conclusions.
The EPG began meeting even before the Inauguration, to
formulate the Stimulus Program, and it has played a central
policy
within
the
Administration
EPG
resembles
trationsrole
in
the
that
old it
Troika
exists
ofbythe
informal
Kennedyever
Presidential
andsince.
Johnson The
directive.
Adminis-

- 5rather than by executive order, statute, or legislative
reorganization plan. However, unlike the Troika, the EPG
coordinates international, as well as domestic, economic
policy and seeks to reflect the Cabinet-wide sweep of
economic issues.
Every Cabinet level officer is a meniber of the Group,
but the operational bodies are of necessity smaller. In
this regard, the EPG has two standing committees at the
level of principals: a Steering Committea and an Executive
Committee, both chaired by the Secretary of the Treasury.
The Steering Committee consists of Secretary of the Treasury,
the Secretary of State, the OMB Director, the CEA Chairman,
and — on an ex officio basis — the Vice President and
the President's Assistants for Domestic Policy and for
National Security Affairs. The Executive Committee is the
Steering Committee plus the Secretaries of Commerce, Labor,
and Housing and Urban Development.
The Steering Committee, which was established in July,
meets at least once a week for the purpose of monitoring and
guiding the many Cabinet-wide, inter-agency processes by
which domestic and international economic policy are made.
It is the Steering Committee's task to assure that economic
problems, issues, and crises are receiving proper and timely
inter-departmental and presidential attention.
The Executive Committee's role has changed in recent
weeks. In the Administration's early months, this Committee
met weekly or twice weekly — often with non-member agencies
also participating — to debate the many major economic
policy decisions that emerge in a rush from the departments
and the budget process to greet a new President. Now, after
eight months, the flood of issues has abated somewhat and
has been guided into regularized channels for inter-agency
scrutiny. This has obviated the need for weekly meetings of
the full Executive Committee, which are vary expensive on
secretarial and staff time.
Accordingly, the Executive Commitee will henceforth
meet less frequently and will concentrate on broad and
continuing macroeconomic issues: employment, inflation,
investment, and growth. To facilitate this development, the
quarterly forecasting exercises, formerly conducted by the
Troika agencies — Treasury, OMB, and CEA — have been
opened to participation as well by the Labor and Commerce
Departments.
Other, more specialized economic questions — e.g.,
trade, agriculture,
housing,
international
monetary
matters,
taxes,
Social Security
financing,
North-South
economic

- 6 relations, and the like — are discussed, and developed for
Presidential decision, through inter-agency meetings and
consultations led by the department having chief line
responsibility for the issue. To assure their fairness and
efficiency, these interagency processes are closely monitored
by the EPG Steering Committee and, according to the issue,
by the President's Assistant for Domestic Policy or for
National Security Affairs, both of whom sit on the Steering
Committee.
The EPG has minimal staff of its own. The Executive
Director of the EPG is employed in and supported by the
Office of the Secretary of the Treasury. He secures staff
and professional support for the EPG's committees and
functions by working directly with the Cabinet officers
involved, their chief staff assistants, and the President's
major policy assistants. The EPG's purpose is not to create
a new layer of staff bureaucracy but to provide a genuinely
cooperative forum for the many agency officers and professionals
already working full time on economic matters within the
Executive Branch.
The EPG has created, or assumed responsibility for,
several sub-cabinet level task forces charged with examining
broad areas of international economic policy. (Appendix)
In addition, the Committee monitors the work of other task
forces, temporary and permanent, that are created under
other auspices and that deal with issues where economic
considerations are present but not predominant. The Administration aims to limit the uncontrolled proliferation of
"permanent" task forces that has marked the Executive
Branch in recent years. In this regard, we are striving to
avoid the parallel creation of EPG, NSC, OMB, White House,
and department-led task forces on the same or related
subjects.
The EPG does not aim to supplant, but merely to monitor
and facilitate, the work of the several economic coordinating
bodies that have been created by statute. For instance, the
Trade Policy Committee, which has statutory responsibility
for formulating our multilateral trade policy, meets regularly
to fulfill its statutory duties. It also occasionally meets
jointly with the EPG Executive Committee, where broader
coordinating issues can be raised. Similarly, the East-West
Foreign Trade Board, which I chair, will fulfill its statutory
mandate but also remain in close contact with the EPG and
with
the Policy Review Committee of the National Security
Council.

- 7 C.

The Administration's Intentions for the EPG

We earnestly hope to maintain the EPG as an informal
entity and not to encase its present form and procedures in
a statute or a reorganization plan, or for that matter, in
an executive order. It may be that experience will change
our views on this. But for the present we see nothing to be
gained by legal formalization. As noted earlier, formalized
coordinating mechanisms have rarely worked well. Presidents
and Cabinet members have used or ignored them on the
basis of the inherent logic, convenience, and utility of the
mechanism. The existence of a formalizing instrument has
rarely been a factor in that decision.
I realize that the Congress often favors legislated
mechanisms of coordination. In the case of specialized
bodies, such as the Trade Policy Committee, this preference
has proved sound. In the case of bodies to coordinate
economic policy generally, however, the record is otherwise.
Too often, the formal mechanism is not in fact used or
is remote from the heart of the Administration's policymaking.
This Administration believes in the propriety and necessity
of congressional oversight of our actual economic coordinating
structures and procedures. The EPG is a coordinating
mechanism of Cabinet-level officers fully accountable to
the Congress. We have bent every effort to avoid a staffdirected coordinating system that would operate outside the
orbit of congressional scrutiny.
The Expiration of CIEP
The authorizing authority for the Council on international Economic Policy expires on September 30, 1977. The
Administration strongly opposes renewing this authority. If
CIEP were to continue at the level of activity originally
planned for 1978, it would require 21 staff positions and
more than $1.45 million annually. There are several reasons
for discontinuing CIEP.
First: The CIEP,1though created with the best of
intentions and after expert study, has not proved a useful
addition to the Executive Branch. Since its creation in
1971, the CIEP has been at best a peripheral, and often a
complicating, factor in the coordination of international
economic policy. The history is well analyzed in the
June 8, 1977 "Report on the Coordination of United States
International Economic Policy," which your full Committee
commissioned from the Congressional Research Service of the
Library of Congress:

- 8 "The CIEP never achieved its lofty objectives: it
has not been effective as the Presidential advisory
group, nor has it become the fulcrum of the executive
branch's international economic policy coordinating
efforts."
* * * *

"Shortly after the CIEP received a statutory base
in August 1972, President Nixon permanently removed
himself as Chairman of the Council. In his place, he
designated Secretary of the Treasury George Shultz as
chairman. From that point on, the CIEP has not had an
independent life. Rather, it has been subordinated to
the various senior White House economic policy coordinating
groups which have been created. Although their names
change, they all have absorbed the CIEP's functions and
professionaLl staff to serve as part of the larger
effort to coordinate all domestic and foreign economic
policies." (Page 16.)
Second: The CIEP was founded on the unworkable premise
that international economic policy should be coordinated
separately from domestic economic policy. This premise
requires top level policymakers to undertake the arbitrary
exercise of assigning economic issues to either the
"international" or the "domestic" category. For many
issues, this is impossible. For instance, agricultural
policy, exchange rate policy, trade restriction policy,
energy pricing, and the like have both domestic and international dimensions of major importance. To allocate these
issues between separate "domestic" and "international"
tracks would ensure that the President received inadequate
or redundant staffing.
Third: The CIEP from its inception has been a heavily
staff-centered operation. As such, it is inconsistent with
President Carter's emphasis on Cabinet government and on a
lean Executive Office. The CIEP staff added a new layer of
bureaucracy, and new potential for empire building and
bureaucratic infighting, to the Executive Office and to the
entire economic domain of the Executive Branch. By adding
low-level staff coordinators to the Executive Office, the
CIEP actually complicated the rapid and frequent communication
between policy officials in the agencies, and between them
and the President, that is the essence of sound economic
coordination.
Fourth:
Theexecute
coordinating
functions
which
the CIEP
aspiredexist
There
to
today,
have
underbeen
the
effectively
EPG umbrella,
assumed
efficient
by the
processes
EPG.

- 9 and networks of consultation, of varying degrees of formality,
between the many agencies concerned with international
economic issues. Reviving the CIEP would disrupt these
patterns and cause great bureaucratic confusion.
The expiration of the CIEP's legislative mandate would
also teminate the annual international economic report which
CIEP now submits to the Congress. The Administration is not
persuaded that these reports have served a useful purpose.
International economic policy is already the subject of
annual reports to Congress by CEA, the Treasury Department,
the National Advisory Council, and other bodies. In addition,
through regular testimony, the relevant committees of the
Congress are kept fully abreast, on a week-by-week basis if
necessary, of the Administration's plans and actions in the
international economic sphere. We remain ready, of course,
to discuss any other arrangements for regular communication
that the Congress might find useful.
In sum: Three different Administrations, both Republican
and Democratic, have either ignored the CIEP or used it
for minor secretariat duties ancillary to other economic
coordinating bodies. We hope the Congress will share our
conclusion that this history amply justifies eliminating the
CIEP.
Conclusion
The effective coordination of economic policy is
perhaps the most difficult and important organizational
challenge facing not only the U.S. government but also the
governments of every industrial democracy. The Carter
Administration has devoted extraordinary time and attention
to this problem. The process of study and experimentation
continues — and should, indeed, be a permanent feature of
any conscientious and self-critical Administration.
Our tentative conclusions, which find reflection in the
structure and procedures of the EPG, are that the economic
coordinating mechanism
- should encompass both international and domestic
economic policies,
- should engage virtually the entire Cabinet,
- should be overseen directly by a small group of
Cabinet-level officers, responsive to Congress,
rather than by a large, independent coordinating
staff,

- 10 - should be chaired by the Treasury Secretary, but
should also reflect leadership by other agency
heads and should fully engage the President's
chief policy assistants,
- and should not be encased in a legalistic structure.
Finding the CIEP to be unnecessary, and fundamentally
inconsistent with these principles, we favor allowing its
founding legislation to expire.
I thank the Sub-Committee for its attention and invite
your observations, criticisms and questions.

0O0

APPENDIX

Name

Lead Agency

Established

Commodities Task
Force

State

June, 1977

Deputies Group on
International Energy
Policy

State/DOE

May, 1977

International
Investment

State/Treasury

March, 1977

Steel

STR

February, 1977

International
Monetary Group

Treasury

mid-1965

U.S. Trade Balance

Treasury

July, 1977

North/South Strategy

Treasury/State

January, 1977

Trade Adjustment

Commerce

March, 1977

lepartmentofthtTREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A . M .
SEPTEMBER 15, 1977
STATEMENT BY T H E H O N O R A B L E R O G E R C . ALTMAN
ASSISTANT SECRETARY OF THE T R E A S U R Y (DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON E C O N O M I C STABILIZATION
OF THE HOUSE BANKING, FINANCE AND URBAN A F F A I R S COMMITTEE
Mr. Chairman and Members of the C o m m i t t e e :
I welcome this opportunity to assist you in your
further efforts to control the financing and growth of
Federal guarantee p r o g r a m s . I r e c a l l favorably y o u r March
hearings o n this subject and commend y o u for continuing y o u r
attention to it.
You asked for our thoughts and recommendations concerning
the means by w h i c h C o n g r e s s i o n a l c o n t r o l o v e r guarantee
programs m i g h t b e improved, i n c l u d i n g the approach taken in
H.R* 7918. You also asked f o r o u r suggestions for implementation
of H.R. 7918, if enacted. The b i l l w o u l d p l a c e the F e d e r a l
Financing Bank (FFB) w i t h i n t h e b u d g e t and w o u l d , in effect,
require that certain loan g u a r a n t e e p r o g r a m s b e financed
through the FFB. This w o u l d m e a n that loan guarantee
programs w h i c h are financed through the FFB w o u l d b e included
in the budget. Guaranteed loans w h i c h are n o t financed
through the FFB would continue to b e excluded from the
budget.
We support the basic objectives of this bill from the
standpoint of Treasury' s debt m a n a g e m e n t i n t e r e s t s . I
~"
have a number of technical suggestions r e l a t i n g to the bill",
which I w i l l discuss later in m y s t a t e m e n t . H.R. 7918 also
raises a number of complex issues from the standpoint of
overall budget policies and p r o c e d u r e s , h o w e v e r , w h i c h are
of concern to the A d m i n i s t r a t i o n .
Mr. Chairman, I would like to turn first to the broad
question you raise regarding c o n t r o l over g u a r a n t e e p r o g r a m s .
Following that, I w i l l discuss the specific provisions of
H.R. 7918.
B-437

- 2 Control over guarantee programs
In testimony before this subcommitte on March 30 of
this year, I discussed the rapid growth of loan guarantees,
their large costs and impacts on credit markets, and the
need for more effective controls. I sugcasted two approaches
to improve control: (1) establishing tighter standards
covering the ways in which guarantees should be used and not
used and (2) setting ceilings on total guarantees. Much
attention has been given to the second approach of setting
ceilings either by including guarantees in the budget or by
other means. Yet, all of us need to focus more on the need
for better standards under which guarantee authority is
provided by Congress in the first place.
It seems to me that program agencies must be given much
more specific guidelines on the circumstances under which
guarantees are to be provided and the related terms and
conditions of them. Giving these agencies broad guarantee
authority and then expecting them to resist the inevitable
demands for guarantees unavoidably leads to serious problems
of control over guarantee totals and general misallocation
of our limited credit resources.
Let me discuss the basic circumstances in which guarantees
are issued and make some suggestions for tightened loan
guarantee standards and how they would help deal with the
broader problem of controlling loan guarantee programs.
Credit need test. Most loan guarantee programs are
intended to facilitate the flow of credit to borrowers who
are unable to obtain credit in the private market. The
needs of more creditworthy borrowers are expected to be met
in the private market without Federal credit aid. To
achieve this purpose more effectively, and to provide a
built-in control over program growth, enabling legislation
should be more specific on requiring evidence that borrowers
cannot obtain credit from conventional lenders. Specifically,
we think that legislation should require the guarantor
agency to certify that, without the guarantee, borrowers
would be unable to obtain credit on reasonable terms and
conditions.
Coinsurance. In addition, guarantee programs are
often intended to induce private lenders to extend loans on
more favorable terms to marginal borrowers. The borrowers
involved generally can obtain loans on their own, but only
on costly and otherwise disadvantageous terms. In these
cases, 100 percent guarantees don't make sense because they
would lower the interest rate below that paid on
unguaranteed loans to creditworthy borrowers for the

- 3 same purposes. Doing so would stimulate a demand for
guaranteed loans by creditworthy borrowers who do not
need Federal credit aid.
To avoid such excessive demand for guarantees, we favor
a much greater use of partial, rather than 100 percent
guarantees. In the future, legislation generally should
limit the guarantees to assume, say, 90 percent of the loan.
Private lenders then would charge a higher rate of interest
commensurate with project risk and with the rates charged on
unguaranteed loans. Such risk-sharing, or coinsurance, by
private lenders would contribute to the development of more
normal borrower-lender relationships, would prompt lenders
to exercise greater surveillance over the loans, and would
stimulate increased conventional lending for the economic
activities involved.
Interest rate ceilings. All of us also should be more
attentive, Mr. Chairman, to the effects of statutory interest
rate ceilings on the problem of controlling guarantee
programs. We oppose fixed interest rates because they
usually are either too high or too low at any particular
moment. On the one hand, if a guaranteed lender is permitted
to charge high rates relative to his risk, then he will seek
guarantees in cases where he might otherwise make loans
without them.
On the other hand, if the interest rate ceiling is
below reasonable market rates, and the Government pays the
difference between the ceiling rate and the higher rate
required by the lender, then demands by both borrowers and
lenders for guaranteed loans will be excessive. For example,
loan guarantee legislation often stipulates that the interest
rate paid by the borrower not exceed a fixed rate of, say,
5 percent. This has the effect of stimulating demand for
guaranteed loans (and Federal interest rate subsidy payments)
as interest rates rise. In cases like this, the amount of
the subsidy fluctuates with interest rate movements, and not
with the needs of the borrowers. Such interest rate provisions
frustrate efforts to control overall program levels and can
also result in an inequitable allocation of credit resources.
To avoid these problems, we think that interest rate ceilings
should float in relation to interest rate movements.
Equity participation. Many guarantee programs involve
circumstances where borrowers could take equity positions in
the projects being financed, and these guarantee programs
should encourage them to do so. Requiring borrowers to have
such a stake would help avoid excessive demands for guarantees,
help assure more efficient projects, and help protect the
interests of the Federal Government as guarantor. This

- 4 could be accomplished by a legislative requirement that the
amount of guaranteed and unguaranteed loans not exceed, say,
90 percent of the value of the project being financed.
Other loan terms and conditions. Demands for guarantees
w i H also be excessive if the legislation does not contain
specific restrictions on such terms and conditions as
maximum maturities, guarantee fees, reasonable assurance of
repayment, default procedures, and other conditions which
are common to commercial loan practice but are often overlooked
or neglected in Federal credit programs.
This is not to say that Federal credit assistance programs
should not contain subsidies — indeed, that is their purpose —
but the legislation should be carefully drafted so that the
subsidies provided are by design, not chance, and are
directed at specific needs.
In short, I believe that more effective Congressional
control over loan guarantee programs can be accomplished by
adopting standards which build that control into the structure
of each guarantee program. I recognize that this is not an
easy task, particularly since there are more than 100
different loan guarantee programs which fall under the
jurisdiction of many different subcommittees of the Congress.
In the Executive Branch, the Office of Management and
Budget and the Treasury Department strive to assure a
uniform application of standards in the process of reviewing
proposed guarantee legislation. Within Congress, however,
it may be unrealistic for each interested subcommittee to
develop the intense focus on guarantee standards which is
essential to this improved control. Accordingly, it may be
worthwhile for such a responsibility to be lodged in one
committee of the Congress. Alternatively, the Congress could
take the approach taken in the Federal Financing Bank Act or
the Government Corporation Control Act and enact omnibus
legislation to establish credit program standards.
In addition to the adoption of more effective standards
for all credit programs, including loan guarantee programs,
Congressional control over loan guarantees could be improved
by requiring that appropriations acts include ceilings on
the total amount of guarantee commitments which can be
issued under the related program, regardless of whether the
program is included or excluded from the budget totals.

- 5 H.R. 7918
I would like to turn now to the provisions of H.R. 7918.
This bill would amend the Federal Financing Bank Act of 1973
to (1) include the receipts and disbursements of the Federal
Financing Bank in the Federal budget totals, (2) limit the
Bank's purchases of obligations in any fiscal year to such
amounts as may be provided in appropriation Acts, and
(3) require guaranteed obligations which would otherwise be
financed in the securities markets to be financed by the
FFB. Thus, the principal effects of the bill would be
(1) to expand the FFB to include the financing of certain
guaranteed securities which are now financed directly in the
securities markets; and (2) to broaden the budget-appropriations
process by including in the budget totals, and subjecting to
the appropriations process, those guarantee programs which
are financed through the FFB.
Budget treatment. Section 11(c) of the FFB Act currently
provides:
(c) Nothing herein shall affect the budget status
of the Federal agencies selling obligations to the Bank
under section 6(a) of the Act, or the method of budget
accounting for their transactions. The receipts and
disbursements of the Bank in the discharge of its
functions shall not be included in the totals of the
budget of the United States Government and shall be
exempt from any general limitation imposed by statue on
expenditures and net lending (budget outlays) of the
United States.
The first section of H.R. 7918 would amend the second
sentence of section 11(c) of the FFB Act to read: "The
receipts and disbursements of the Bank in the discharge of
its functions shall be included in the totals of the budget
of the United States Government."
To our knowledge, this would be the first time that
statutory language has been used to expressly require the
transactions of a particular Federal agency to be included
in the budget totals. For example, the Export-Import Bank
was returned to the budget by simply repealing language in
the Bank's charter act which had excluded its transactions
from the budget, not by enacting a requirement that its
transactions be included in the budget. The intent of this
requirement is not clear.
We presume that the intent is to follow normal budget
accounting whereby transactions between Federal agencies are

- 6 not reflected in the budget totals. Thus, when the Treasury
lends to a Federal agency, the transaction is not reflected
in the budget until the borrowing agency disburses the funds
to the public. If the explicit requirement that FFB transactions
be included in the budget is intended to override this
normal accounting arrangement, then this would cause
double-counting in the budget totals. Specifically, FFB
loans to on-budget Federal agencies such as the ExportImport Bank and TVA would be counted twice in the budget —
thus inducing these agencies to resume their previous
arrangement of borrowing directly in the market — and FFB
purchases of (1) obligations of off-budget agencies such as
the Postal Service and USRA, (2) assets sold by Federal
agencies, and (3) guarantees by Federal agencies would be
counted once.
On the other hand, if the intent of the amendment to
section 11(c) is not to override normal budget accounting
rules, then FFB loans to on-budget and off-budget Federal
agencies and FFB purchases of agency assets would be treated
as intragovernmental transfers and not reflected in the
budget. Only FFB purchases of obligations guaranteed by
Federal agencies would be included in the budget totals.
These totals also would increase by the amount of asset
sales to the FFB, however, since such sales no longer
would be treated as negative outlays. This same effect
could be achieved simply by repealing section 11(c) of the
FFB Act.
Appropriations process. H.R. 7918 would limit FFB
purchases of obligations in any fiscal year "to such extent
as may be provided in appropriations Acts." Yet, situations
may well arise in which the total demand for Bank financing
would exceed the limitation specified in an appropriation
act. There would be a need, therefore, to allocate FFB
credit among competing Federal programs. Furthermore, the
bill would require the Bank to purchase guaranteed obligations,
but would give it discretion concerning purchases of Federal
agency debt. On this basis, when demands for Bank financing
exceeded the appropriations act limit in the bill — which
applies to both agency debt and quaranteed obligations —
there would be pressures for agencies borrowing from the
Bank to shift to borrowing in the market.
The role of credit allocator would not be a proper role
for the FFB. Within the Executive Branch, that function
should be performed by OMB. The original FFB bill sent to
the Congress in 1971 contained provisions which would have
authorized the Secretary of the Treasury, in effect, to
bill
require
also
guarantees
would have
toauthorized
be financedthe
through
President
the Bank.
to limit
That
the

- 7 total amount of guarantees issued in any year, regardless of
whether the guarantees were financed by the Bank or in the
market. The Congress rejected these provisions.
If. H.R. 7918 is enacted, we would expect that each
agency's entitlement to use the FFB would be determined by
the President and by the Congress annually in the normal
budget-appropriations process. Thus, the FFB would continue
to function as an instrument of Treasury debt management,
but neither the FFB nor the Treasury would assume the
function of allocating budget or credit resources.
FFB expansion. H.R. 7918 would effectively require
guaranteed obligations which would otherwise be financed in
the securities markets to be financed by the FFB. This
would be acomplished by adding a new subsection (d) to
section 6 of the Act as follows:
(d)(1) Except as provided in paragraph (2), any
guarantee by a Federal agency of an obligation shall be
subject to the condition that if such obligation is
held by any person or governmental entity, other than
such agency or the Bank, such guarantee shall thereafter
cease to be effective.
(2) Paragraph (1) shall not apply in the case
of any obligation —
(A) which the Secretary of the Treasury determines
is of a type which is not ordinarily bought and sold in
the same markets as investment securities, as defined
in the seventh paragraph of section 5136 of the Revised
Statutes, as amended (12 U.S.C. 24), or
(B) which is issued or sold by the Bank.
Before making any determination under subparagraph (A),
the Secretary of the Treasury shall consult with the
Director of the Office of Management and Budget, the
Comptroller of the Currency, and the Chairman of the
Board of Governors of the Federal Reserve System.
We strongly support the intent of these provisions.
That is, if the FFB is included in the budget, it is essential
to require that certain guaranteed obligations be financed
through the FFB. Otherwise, there would be a budget incentive
to return to the inefficient practice of financing guaranteed
obligations directly in the securities market. This would
undermine the purpose of the FFB Act and would add needlessly
to the program financing costs and to the direct costs to
the Government.

- 8 Yet, we are concerned with one or two adverse, and
perhaps unintended, effects of these provisions. Specifically,
the FFB apparently would be explicitly required to purchase
partially-guaranteed obligations, since H.R. 7918 does not
distinguish between partially- and fully-guaranteed obligations.
This contrasts to the present FFB legislation which authorizes
but does not require purchases of such securities. As you
know, we do not think that the FFB should purchase partially
guaranteed obligations, and the Bank has not done so since
its inception.
Section 3 of the Federal Financing Bank Act defines
"guarantee" as "any guarantee, insurance or other pledge ...
of all or part of the principal or interest." In the past,
the FFB has interpreted this to include, and has thus
purchased, a wide variety of obligations guaranteed or
insured by Federal agencies, including obligations secured
by Federal agency lease payments and obligations acquired
directly by Federal agencies. These have been sold to the
FFB subject to an agreement that the selling agency will
assure repayment to the FFB in the event of default by the
non-Federal borrower.
We also have interpreted this definition of guaranteed
obligations to include those supported by Federal agency
commitments to make debt service grants, e.g., to support
public housing authority bonds, or other commitments such as
price support agreements or commitments by Federal agencies
to make direct "take-out" loans in the event of default on a
private obligation. Yet, Mr. Chairman, the FFB purchases
obligations guaranteed under these various arrangements
only if there is a full guarantee of both principal and
interest.
The Bank has not purchased partially guaranteed obligations,
even though they would technically be eligible for purchase
under the "guarantee" definition, for the following reasons.
By purchasing the non-guaranteed portions of partially
guaranteed obligations, the FFB would be required to make
judgments as to the creditworthiness of borrowers guaranteed
by other Federal agencies and thus duplicate the functions
of the guarantor agencies. Such purchases would also place
the Government at risk more than was contemplated by Congress
in enacting provisions which limit guarantees to less than
total principal and interest.
A second problem with partially guaranteed obligations
concerns the methods of financing them which have developed
in the private market. The loan guarantee programs of SBA
and Farmers Home Administration provide good examples.

- 9 In these programs, where the guarantee is limited to 90 percent
of the loan, practices have developed where the lending
bank will sell the 90 percent guaranteed portion in the
securities market, treating it as 100 percent guaranteed
paper, and retain the 10 percent unguaranteed portion in its
own portfolio, while servicing the entire loan. FFB financing
may be appropriate for the fully-guaranteed securities
market portion of the financing, but FFB financing would not
be appropriate for the unguaranteed portion held by the
originating bank lender.
In other cases, fully-guaranteed obligations such as
small FHA and VA mortgages, are originated and serviced by
mortgage lenders or acquired by Federal agencies and resold
into the mortgage market. Here, FFB financing could have
adverse effects on the mortgage market by having the
Federal Government perform functions which today are well
handled by mortgage lenders. On the other hand, certain of
these mortgage-backed obligations are sold directly into the
securities markets, not in the mortgage market, and FFB
financing might well be appropriate there.
The appropriateness of FFB financing of particular
obligations should thus be determined on the basis of both
the nature of the guarantee and the method of financing the
obligation. We believe that such determinations should be
made by the Secretary of the Treasury in keeping with his
overall responsibilities for both debt management and the
markets for government-backed securities.
We are also concerned with possibly unforeseen and
adverse effects on the financing of a number of programs
under which Federal agencies enter into contracts, rentals,
leasing, billing, and other arrangements which are, in
effect, pledged to secure the repayment of loans made by
private lenders to companies or other private institutions.
These arrangements would generally fall within the definition
of "guarantee" in the FFB Act, but the Bank does not
currently purchase many of the private loans secured by
such commitments. Yet, under H.R. 7918, such new "guarantees"
would not be operative unless the FFB purchased them or the
Secretary of the Treasury determined that these loans were
of a type "not ordinarily bought and sold in the same
market as investment securities." This requirement for a
prior determination by the Secretary could cause serious
administrative problems and could create a cloud of uncertainty
over the legal status of a wide variety of Government
contractual arrangements.
Finally, the provision of proposed subsection 6(d)(2)(B)
of H.R. 7918 may encourage the FFB to resell guaranteed

- 10 obligations it holds, into the securities markets. This
subsection would exempt such reselling from the provisions
of subsection 6(d)(1) which, in effect, removes the guarantee
from other obligations sold into the market. Since these
sales would continue to be treated as negative budget outlays,
pressures to make such sales could become irresistible under
H.R. 7918 and the budget purposes of the Bill could be
defeated.
In summary, Mr. Chairman, we support the basic purpose
of greater Congressional control over loan guarantee
programs. We think that this purpose may be achieved,
to a large extent, by improved standards in credit program
legislation. We also believe that loan guarantee commitments
should be subject to careful review in the regular appropriations
process. If the Federal Financing Bank is included in the
budget, and guaranteed obligations continue to be excluded,
we agree that it is essential to require that certain
guaranteed securities be financed through the Bank. As
I have tried to point out, the specific provisions of
H.R. 7918 raise a number of serious issues, and we hope
to work closely with the committee to clarify these issues.
I would be happy to answer any questions.
Thank you.
oOo

CONTACT:

Alvin M. Hattal
(202) 566-8381

September 16, 1977
FOR IMMEDIATE RELEASE
TREASURY DEPARTMENT ANNOUNCES
INITIATION OF ANTIDUMPING INVESTIGATION
ON METHYL ALCOHOL FROM BRAZIL
The Treasury Department announced today that it would
begin an antidumping investigation on imports of methyl
alcohol from Brazil. Notice of the above appeared in the
Federal Register of September 16, 1977.
The Treasury's announcement followed a summary investigation conducted by the U.S. Customs Service after
receipt of a petition filed on behalf of a U.S. industry,
alleging that imports of methyl alcohol from Brazil will
be dumped in the United States.
The information received tends to indicate that the
prices of the subject merchandise sold for export to the
U.S. are less than the prices of the goods sold for home
consumption.
The summary investigation in this case revealed substantial doubt as to whether a U.S. industry is likely to
be injured by the anticipated imports. In instances where
substantial doubt exists as to the injury, or possible
injury, to a domestic industry, the case is referred to the
U.S. International Trade Commission (ITC) for a preliminary
determination on that aspect of the investigation. Should
the ITC find (within 30 days) that there is no reasonable
indication of injury or likelihood of injury, the investigation will be terminated; otherwise Treasury will continue its
investigation into the question of sales at less than fair
value.
There were no imports of methyl alcohol from Brazil in
1975 or 1976.
* * *

B-438

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
SEPTEMBER 16, 1977
TESTIMONY OF ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
Mr. Chairman and Members of this distinguished Committee:
I appreciate this opportunity to comment on behalf of
the Administration on S.684 and S.711, the two bills before
your Committee today.
S.684
S.684, the Federal Bank Commission Act of 1977, addresses,
as have many previous proposals, the hardy perennial question
of whether Federal bank regulatory agencies should be
reorganized and consolidated. S.684 would reorganize and
consolidate the bank supervisory and regulatory functions of
the three Federal bank regulatory agencies under a new
Federal Bank Commission and make various other changes
complementary to that purpose. It would constitute a major
overhaul of our present system of regulation. In its study
"The Debate on the Structure of Federal Regulation of
Banks," dated April 14, 1977, the General Accounting Office
identified 22 comprehensive proposals (not including this
one) that have addressed this question since 1919. None has
been adopted by the Congress. I think it might be helpful
to consider S.684 in the context of the arguments presented
in these previous efforts and their application to the
situation today.
Relationship to the Dual Banking System
The dual system of commercial bank regulation has been
rooted in our system of federalism at least since 1963. In

B-439

- 2 its present stage of evolution it involves a complex interlock
of regulatory authority of three agencies at the Federal
level: the Office of the Comptroller of the Currency, the
Federal Reserve System and the Federal Deposit Insurance
Corporation.
At the state level, every state has its own bank
regulatory system which permits it to adopt policies that
differ from Federal law in such important areas as branching,
chartering and banking powers. States have traditionally
guarded their prerogatives in this area jealously. Some
coordination has been possible between the Federal and State
agencies, but many areas of overlap continue.
Creation of a single Federal bank regulatory supervisor
has frequently been viewed as the precursor to the eventual
demise of the dual banking system because by its very
monolithic quality it will dominate the scene. S.684 goes
some distance toward meeting this concern by providing
(i) for the automatic grant of Federal insurance to State
banks regulated by State regulatory agencies that meet
Federal standards, and (ii) for Federal funding of bank
examinations by approved State regulatory agencies in some
circumstances. But there will no doubt be those who will
feel that he who holds the power to approve the State
agencies, as well as the purse strings, will also have the
power to control.
The Necessity for Reorganization
The present regulatory system is cumbersome in design.
It is, of course, a product of historical development, not
rational design. Each of the three Federal regulators was
established to meet a particular, pressing need demanded by
the times in which it was launched.
Irrational as the present regulatory structure may be,
however, it works — albeit imperfectly at times. The
ultimate test of the structure is the strength and adaptability
of our Nation's banks, and most commentators have concluded
that the American banking system is among the strongest and
most adaptable in the world. The Nation's banks have
enjoyed the uniterrupted confidence of the American people
for more than 40 years.
During the recent economic downturn, the failure of
four banks of substantial size and a number of smaller ones
raised questions as to the adequacy of the regulatory
structure, but I think it is fair to say today that, in an
overall sense, bank failures have been kept to an acceptable
level. I am sure this Committee realizes that the objective

- 3 of preventing bank failures itself involves tradeoffs.
Tighter regulation would no doubt have reduced the rate of
failure but at the price of preventing innovation and risktaking essential to a growing economy. Despite being one of
our most closely regulated industries, banking has kept
abreast of the Nation's changing economic needs and has
successfully incorporated technological change to meet those
needs. It has been persuasively argued that this record has
in part been achieved because the de facto checks and
balances in the system of regulation have permitted evolution
rather than the stagnation evident in some other requlated
industries.
As you know, very early in this Administration, the
President announced his Reorganization Project. That
Project is focusing on those areas of the Federal Government
that are perceived as most in need of reorganization. The
question of whether reorganization of the bank regulatory
agencies should be included in the Project has been considered
by the staff of the Project and has not been included on its
agenda as an area requiring priority attention.
Overlap, Duplication and Coordination
Over the years, many commentators have correctly
pointed to multiple instances of overlap, duplication and
failures of coordination as justifying reorganization. I
think it is fair to say that in recent years Federal regulators
have acted to minimize overlap of supervision in a number of
areas.
In 1965, the Treasury strongly supported the formation
of the Coordinating Committee, consisting of the three
federal bank regulators, as a means of assuring coordination
at senior levels on a more regular basis in an effort to
develop consistent treatment of common problems. We have
continued to support and participate in its activities. The
Committee originally was a response to a need to resolve
conflicts in the treatment of bank mergers which had developed
among the regulators, but it has gradually expanded the
scope of its activities through the years. The Committee
now includes the three regulators, the Treasury, and the
Federal Home Loan Bank Board. The National Credit Union
Administration has recently been invited to join.
Acting through the Coordinating Committee or less
formally, the regulators have reduced their differences in
recent years. Although the agencies still have distinct
regulatory philosophies resulting from their statutory
obligations, we do not believe that these differences are
sufficiently pronounced to support the view that banks

- 4 engage in Federal regulatory forum shopping. If there once
was a competition in laxity among the agencies, there is
persuasive evidence that it has given way to a spirit of
increased cooperation and coordination, a spirit which
should be encouraged.
There is one exception to this record of progress that
I should note. The system of bank holding company regulation
continues to be plagued by overlapping jurisdiction. Bank
holding companies and their subsidiaries are treated as
distinct entities for supervisory purposes and, except in
the limited case of a holding company whose banking subsidiaries
are State member banks, examined by more than one Federal
agency. Bank holding companies and their bank and non-bank
subsidiaries should be viewed as a single entity at least
for purposes of examination. This issue should be addressed
but it is far from clear that a consolidated agency (as
opposed to an approach along the lines of S.711) is necessary
to address it.
Savings and Cost of Consolidation
Another area that has historically been central to
consideration of the appropriateness of bank regulatory
reorganization has been the possibility of achieving substantial
savings.
Inefficiencies exist in the Federal bank regulatory
system in the duplication of services within each of the
agencies. Each agency has created a staff which looks at
most of the same fundamental questions of banking practice
as are reviewed by the staffs of the other two regulators.
Despite this duplication, replacing three large agencies
with a super agency will not necessarily result in substantial
efficiencies. One management system would replace three,
but that one system would require substantial additional
administrative coordination and the costs associated with
it. There is no established track record for efficient,
effective and responsive super agencies.
Most of the current costs incurred in running the three
agencies, excluding the costs incurred by the Federal
Reserve in fulfilling its obligations as central banker, are
incurred in the bank examination process. The Comptroller
General in his report to your Committee of December 5, 1975,
"Information on Consolidation of Bank Regulatory Agencies,"
identifed cost savings which might result in this area from
consolidation of the agencies. These savings would arise
principally from consolidation and relocation of field
offices, development of a single computer system and unified
recruiting and training of bank examiners.

- 5Consolidation would, however, also impose substantial
short-run costs for the regulators, the banks and the
public. Regulatory efficiency would suffer, and the development
of innovative banking techniques to meet the everchanging
financing needs of the American economy would be inhibited.
Ability to implement new legislation would also be prejudiced.
The energies of the regulator would be distracted from the
reexamination of current practices by the demand of consolidating
the administration of existing law.
On balance, while there is no question that reorganization
would facilitate public understanding of bank regulation and
probably result in some efficiencies, the historical debate
has made it clear that it also involves both unknown costs
and risks. Accordingly we have concluded that prudence
dictates a step by step approach.
S.711
S.711 would establish a Federal Bank Examination
Council to prescribe uniform standards and procedures for
the Federal examination of banks and to make recommendations
to promote uniformity in bank supervision. The Administration
supports this approach as a constructive first step in
addressing the issues raised by the consolidation debate.
The Council could accomplish many of the goals of
consolidation. Coordination would clearly be enhanced.
Troublesome areas such as the overlap of bank holding
company responsibilities and the treatment of problem or
failing banks could be addressed. Many of the potential
cost savings identified by the Comptroller General could be
achieved. These accomplishments could be realized without
the disruptive impact of consolidation.
We also support S.711 because it would establish a
liaison committee of State supervisors to encourage uniformity
between Federal and State bank supervisory agencies, thereby
strengthening the dual banking system. It would also
permit closer review of an area of significant potential
cost savings for Federal regulators through increased
reliance on the States.
We think S.711 could be improved by certain modifications.
It names the Chairman of the Board of Governors of the
Federal Reserve System as the permanent chairman of the
Council. Of the three bank agencies, the Federal Reserve
examines the smallest number of banks, and there is no
particular reason to single it out as the lead agency at
this point in the development of a new system. The Administration
believes that the Council would be better served initially

- 6by a rotating chairmanship (as has been successfully followed
in the Coordinating Committee). We also support the other
changes to S.711 suggested by the Comptroller of the Currency.
In summary the Administration believes S.711 takes a
sensible first step toward improvement of the Federal bank
regulatory structure. This step would have our full support
and would permit us to reassess other aspects of the consolidation
question at a later stage based upon practical experience.

0O0

kpartmentoftheTREASURY
lASHINGTON, OX. 20220

TELEPHONE 566*2041

September 15, 1977

FOR IMMEDIATE RELEASE

AMENDED RESULTS OF TREASURY'S 26-WEEK BILL AUCTION
The announcement of September 12 of the results of the
26-week Treasury bill auction for the bills to be issued
September 15 is corrected below to reflect a decrease in the
total tenders received and accepted. This adjustment
was due to an error in recording competitive bids during the
auction process. This error did not affect the average
price as reported in the September 12 announcement.
Location
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

$
28,175,000
4,863,000,000
5,105,000
46,155,000
14,955,000
32,430,000
639,530,000
35,635,000
36,650,000
23,865,000
14,245,000
273,690,000
350,000
$6,013,785,000

$
23,175,000
2,859,800,000
5,105,000
46,155,000
11,955,000
32,430,000
217,930,000
23,635,000
36,650,000
23,865,000
14,245,000
80,690,000
350,000
$3,375,985,000

All other particulars in the announcement remain the
same.

B-440

FOR RELEASE UPON DELIVERY

(APPROXIMATELY 11:15 A1.to.)
SEPTEMBER 20, 1977
STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
ON LEGISLATION TO AUTHORIZE U.S. PARTICIPATION IN
THE IMF SUPPLEMENTARY FINANCING FACILITY
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL TRADE,
INVESTMENT, AND MONETARY POLICY OF THE COMMITTEE
ON BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I welcome these hearings, and this opportunity to
testify for the Administration in support of legislation
to authorize United States participation in the Supplementary
Financing Facility of the International Monetary Fund.
This new facility is needed, and needed urgently, to
strengthen the International Monetary Fund, and to enable
us through the Fund to deal with certain potentially
serious problems in the international monetary system today.
The establishment of the facility will help to make sure
that our international monetary system continues to function
smoothly, and will foster our objectives of an open and
liberal system of international trade and payments.
United States participation is a pre-requisite to the facility's
establishment. I urge, on behalf of the Administration, that
the Congress act promptly to authorize that participation.
I cannot exaggerate the importance, for international financial
stability, of this facility, and this legislation.
The need for the Supplementary Financing Facility arises
from the drastic changes that have occurred in the pattern
of international payments since 1973. As this Subcommittee
knows, the quintupling of oil prices, the most severe world
recession since the 19130' s, and world inflation unprecedented
in pervasiveness and obstinacy, have all combined to bring
radical changes to many aspects of the international payments
B-441

- 2 -

situation. Thus, in recent years, the pattern of international
payments has dramatically changed, with certain oil exporting
countries accumulating immense current account surpluses,
while the rest of the world accustomed itself to very large
deficits; the attitude toward imbalances has changed, with
recognition that the aggregate oil deficit cannot be eliminated
in the short run; and the magnitude of world-wide financing
requirements has thus increased by a quantum step to multiples
of the levels of earlier years.
The increase in balance of payments financing has indeed
been striking. In the three years 1971 through 1973, the
aggregate deficit of all nations running current account
deficits averaged about $15 billion per year. In the three
years 1974 through 1976 the aggregate deficit averaged about
$75 billion per year, or five times as mucho Understandably,
an increase of this magnitude in financing requirements has
caused strains in the international monetary system.
This large amount of balance of payments financing -about $225 billion over the last three years -- was largely
matched by an increase in debto The rapid growth in financing
and debt came as no surprise. boon after the shock of the
increase in oil prices, it was recognized that with such
price levels and the absorptive capacity constraints of oil
producers, the resulting OPliC payments surpluses -- and
counterpart deficits of the oil importing countries -could not be eliminated in the short run. The oil importing
nations acknowledged that they could all harm each other if
each tried to shift its oil deficit to other countries by
external restrictions and excessive domestic retrenchment„
The IMF membership agreed formally in January 1974 in the
Rome Communique to avoid such self-defeating actions. 'In
the circumstances, it was appropriate that nations were
urged to "accept" the oil deficit, at least temporarily, and
finance it. Efforts were concentrated on assuring that
recycling of OPEC surpluses occurred smoothly and that
adequate financing would be available to all countries to
meet the higher costs of oil imports0 As part of this stress
on "financing" rather than "adjustment," the IMF established
a temporary "Oil Facility," which channeled $8 billion to
member nations, allocated largely in relation to the increase
in oil import costs, and with much less than the usual emphasis

- 3 -

on the IMF's usual requirement that its financing be linked to
carefully negotiated adjustment programs or corrective
measures on the part of the borrowers.
Nations thus borrowed very heavily in the years 1974
through 1976 to finance their large balance of payments
deficits. The borrowing took many forms. While official
financing through the IMF during this period was far above
historic levels, it was the private markets that handled the
bulk of the financing, accounting for about three-quarters
of the total[
rSuch data as are available -- admittedly incomplete -show a pattern of world payments in the period 1974 through
1976 roughly as follows:
-- The cumulative current account deficits financed
equaled about $225 billion or so (after the receipt
of grant aid), representing the counterpart of the
lendable surpluses of OPEC plus those of certain
industrial countries registering surpluses during
the periodo

--About $15 billion of these deficits, or 7 percent of
the total, was .financed through the IMF, the bulk
of it through the temporary "Oil Facility" and tne
"Compensatory Financing Facility," both of which
provided financing largelv on the basis of "need"
with relatively little emphasis on "conditionally"
or the adoption of corrective adjustment measures
by the borrower.
r-- About $4,0 billion of the deficits, or 18 percent of
the total, was financed through a variety of other
official sources -- development lending by industrial
countries and OPEC, by the IBRD and regional development banks, and other sources.
-- The remaining current account deficits, some
$170 billion, plus about $40 billion of debt
repayments, were financed largely through marketoriented borrowing. Most of these funds were
obtained through banks and securities markets.
Some came from governments seeking investment
outlets for their surpluses or as export financing_

- 4Given the private market orientation of the world economy,
it was natural that the bulk of this financing be handled by
private rather than official channels. The private institutions
were in a position to expand the level of their activity.
Huge surpluses, by OPEC and other countries, of course, brought
large deposits and placements to the banks and other financial
intermediaries, and greatly expanded the loanable funds of
those institutionso In addition, the period was one of rapid
institutional expansion in the international banking system.
Many institutions were competing eagerly for new customers,
as they sought to establish themselves in new activities and
new geographic areas, and endeavored to broaden their scope
of operations so as to spread risks and diversify portfolios
at a time when domestic loan demand was less buoyant than in
immediately preceding years.
The question has been raised as to whether this rapid and
unprecedented enlargement of lending activity and debt has reached
a danger point for the monetary system -- either in the sense
that large numbers of countries have borrowed beyond their
capacity to service debt, or in the sense that our banks and
other institutions are overextended_
It is our considered judgment that the system as a whole
is not in any such position of imminent danger, either as a
result of excessive borrowing by large numbers of debtor
nations or as a result of our financial institutions being
over-stretched.
But the fact that the system as a whole has performed
well thus far is no cause for comfort or complacency_ Success
in the past is no guarantee that we are adequately armed for
the future. Much remains to be done0 Structural changes,
domestic and external, must take place in many countries, often
involving major alterations of traditional patterns of
production and consumption_ Such changes will not come easily
and must take place over a number of years if satisfactory
levels of growth and employment -- and an open system of trade
and payments -- are to be maintained. Substantial financing will
continue to be needed by countries in deficit. And, in some
countries, adjustment measures need to be introduced0 The
Supplementary Financing Facility will help to assure that the
financing is available and that the adjustment measures are
adoptedo

- 5 Clearly there are countries -- certainly not a large
number but a significant number -- that have already reached
or are approaching the limits of their ability to borrow
or their prudence in doing so. These are countries that
are beset by internal economic imbalances, that still face
large payments deficits, where the need for corrective
measures and internal and external adjustment is compelling.
Such countries, and others which may in future face
similar difficulties, must be encouraged, and permitted,
to adjust their economies in ways that are compatible with
our liberal trade and payments objectives, in ways that avoid
discrimination against others and disruption of the world
economy. Our monetary system must foster sound adjustment,
internationally responsible adjustment, with programs that
develop underlying economic and financial stability in the
countries undertaking adjustment measures, while avoiding
recourse to trade and payments restrictions that are
destructive of international prosperity. This economic
and financial stability is a pre-requisite to sustainable
expansion and high
employment0 A major function of the
IMF is to induce such adjustment.
Our international monetary system is at present strong
and functioning effectively. But we must eliminate its
vulnerabilities and put in place the machinery needed to insure
fthat it will continue to operate effectively in the future_
Looking ahead, we can make two fairly safe predictions:
-- First, that large payments imbalances will continue for
the next several yearsl The OPEC surplus, the largest
part of the imbalance, will diminish only gradually,
as OPEC spending grows and as effective energy
conservation and production programs are implemented
in the United States and elsewhere.
-- Second, that there will be a need for greater emphasis
on "adjustment" of imbalances, rather than simply
"financing" the imbalances, especially by those
countries facing relatively large payments deficits.
With the passage of time, the need for countries to
adapt to nigher energy costs and other economic
developments has become stronger and is increasingly
recognized. Indeed, at the Manila IMF meeting last^
fall, a basic strategy of adjustment was agreed, which,
among other things, called upon deficit countries to
shift resources to the external sector and bring
current account positions into line with sustainable
capital inflows.

- 6 -

Givsn these expectations, it is essential that the resources
of the IMF be adequate both to enable it to foster responsible "
adjustment policies by members facing severe payments difficulties
and also to provide confidence to the world community that it can
cope with any potential problems that may arise. That,
fundamentally, is why the Supplementary Financing Facility is'
needed.
Without the additional funds of the new facility, the
IMF's resources may not be adequate to meet demands placed
on it over the next several years. With relatively large
use in the past three years, the IMF's usable resources are
at present extremely low at about $5 billion. These usable
resources will be increased by about $6 or $7 billion with
the coming into effect of the sixth quota review approved in
1976 and now being ratified, and about $3 billion remains
available under certain conditions through the General
Arrangements to Borrow. Even with those additions, and the
repayments which may be expected, the IMF's resources look
sparse in a world in which total imports are running at an
annual level of nearly a trillion dollars, and in which'OPEC
surpluses are likely to decline only gradually from the current
$40 billion annual level.
Against this background, the decision was taken to seek to
establish the Supplementary Financing Facility, with financing
of about $10 billion to be provided initially by seven
industrial nations and seven OPEC countries. The industrial
countries would provide $5.2 billion, of which the U.S. share -subject to Congressional authorization -- would be SDR 1.45
billion (about $1.7 billion) approximately 17 percent of the
total. The OPEC members would provide about $4„8 billion,
or nearly half the total, with Saudi Arabia the largest
single participant of either group at $2.5 billion.
The terms relating to the provision of this financine to
the IMF by the participants are presented in detail in the
National Advisory Council Special Report on the Supplementary
Financing Facility presented to the Congress with the legislation.
Under the agreed terms, participation in the facility is
advantageous to the United States and others providing the
financing0 In addition to furthering our interest in
assuring a strong and smoothly functioning international
monetarv system, U0S„ participation in the facility provides
us with a strong, liquid and interest-earning monetary
asset. Under the facility, the United States and other
participants agree to provide currency to the IMF in
These
exchange
claims
for on
a liquid
the IMF,
claim
which
on can
the be
IMFdrawn
of equivalent
down any value.
time

- 7-

there is a balance of payments need to do so,
form part of our international reserve assets. The United
States also can sell or transfer these assets to others by
mutual agreement. Since, in exchange for any dollars we
provide, we receive a fully liquid claim which can be drawn
down any time we have a need to do so, there is no U.S.
budget expenditure involved, but rather an exchange of one
asset for another. This treatment is in keeping with the
budget and accounting practices followed with respect to all
U.S. transactions with the IMF.
The interest rate we receive from the IMF is linked to
U0S. Treasury issues of comparable maturity, so that there
is no net cost to the Treasury from our participation in
the facility. As the drawings are repaid by the borrower, the
IMF returns the dollars to the U.S., U.S. drawing rights on
the IMF correspondingly are reduced, and the transaction is
reversed.
This $10 billion facility would be available to the IMF
for a temporary period. Countries could apply within the next
2 to 3 years, and could draw down funds over a period of 2 to
3 years, though the total period of disbursements could not
exceed 5 years. it would be available for use by IMF members
only under clearly defined criteria. Specifically, a member
drawing under the facility:
-- Must have a balance of payments financing need that
is large in relation to its IMF quota and exceeds the
amount available to it under the IMF's regular
policies.
-- Requires a period of adjustment that is longer than
that provided for under regular IMF policies.
-- Must enter into a stand-by agreement with the IMF in
which it undertakes to adopt corrective economic policy
measures adequate to deal with its balance of payments
problem.
The facility, in short, is designed to encourage those
countries with particularly severe payments problems to adopt
internationally responsible adjustment programs -- and to avoid
the unwelcome alternatives of resort to the controls, trade
restrictions, and beggar-thy-neighbor policies which can be so
harmful to world prosperity and so disruptive to our liberal

- 8 -

trade and payments order. It will, in addition, by fostering
a smoother, more effective process of international balance
of payments adjustment, reinforce confidence in the international
monetary system, and thus facilitate the flow of financing
throughout the system. It is not a device for augmenting development assistance -- the IMF provides only snort to medium term
balance of payments support. The member drawing on the facility
receives more financing than is otherwise available from the
IMF; a longer period of adjustment (a 2- to 3-year program as
compared with the 1 year normally applicable in the IMF); and
a longer period of repayment (3- to 7-year maturity, as
compared with the IMF's normal li- to 5-year maturity). Since
interest on the financing provided to the Fund is marketrelated, the borrowing country would also pay a somewhat
higher change than for normal IMF drawings.
The facility is a cooperative venture, with the surplus
countries of OPEC and the stronger industrial countries joining
together to assure that the needed financing will be available.
The agreement requires that before the facility can begin operations participants must formally commit $9 billion of the full
$10 billion, and the six largest participants must all formally
commit themselves to participate. Thus action by the United
States, and the Congress, is necessary before the facility can
become a reality.
Let me assure you that the Supplementary Financing Facility
is not proposed or represented as a solution to all the world
international financial problems. For one thing, it will not
meet the problems of nations whose real need is for permanent
transfers of resources or long-term development aid. Most
importantly, it cannot eliminate the large imbalance between
the OPEC surplus countries and the oil importing world. We
must work toward the elimination of that imbalance. But that
will come about only through, on the one hand, effective programs
by the United States and others to conserve energy and develop
alternative energy supplies, and, on the other, continued
growth in the capacity of oil exporting nations to absorb
goods and services produced in the oil importing world.
What the Supplementary Financing Facility will do is help
redistribute, as well as reduce, the collective current account
deficits so that the necessary borrowing is undertaken by those
countries whose creditworthiness and economic strength are
adequate to sustain the additional debt. By encouraging
responsible adjustment measures in those countries experiencing
severe
domestic
economic
distortion,
large
payments
deficits
and
shifted
serious
to afinancing
more
sustainable
problems,
world-wide
such deficits
pattern.
are reduced
and

- 9-

With the establishment of the Supplementary Financing
Facility there will continue to be a large amount of borrowing -private as well as publico Concern has been expressed that
continued borrowing in such large amounts, irrespective of who
is borrowing or how •''the credit is used, constitutes a serious
danger for the monetary system. I do not share that view. If
the borrowed funds are properly used to support productive
investment, and strengthen the borrower's current account
position, the debt need not constitute a serious future burden,
as shown by the experience of the United States in the last
century and other countries at present. Excess savings in
surplus OPEC countries can, in effect, finance investment in
the oil importing countries by supplementing domestic savings.
tfut the borrowed funds should be productively invested, in
order* to avoid servicing problems in the future.
This, -then, is the broad strategy within which the
Supplementary Financing Facility fits -- we aim for a
sustainable pattern of payments in which the borrowing is
undertaken by countries commensurate with their creditworthiness; we seek to assure that the borrowed funds are used to
support sound arid effective programs of stabilization and
adjustment; and meanwhile we work toward elimination of the
pil imbalance through ettergy programs and OPEC development.
Let me address three1 questions which have been asked with
respect to this new facility.
First, how can we' be sure that the $lu billion contemplated
for the facility is adequate to do the job but not more than
is needed?
Obviously it is a matter of judgment and no one can beabsolutely sure. ; We cannot predict-with certainty just which
countries will hav<e the particularly large needs for credit
that make them eligible for'this facility, along with the
willingness to adopt the kind of adjustment programs associated
with it-' It is our judgment that this facility plus the amounts
available to the IMF from other sources will enable it to
provide financing over the next 2 or 3 years up to, say, a total
of $25 billion. This is above the levels of IMF financing of
recent years which wer6 already relatively high. To assure
confidence in the monetary system, it is vital that the IMF
always be known to have adequate resources in reserve to
meet whatever urgent problems may arise, even if it turns out
that less than the full amount is actually drawn. Since no
cash transaction occurs until a member country actually draws
from the IMF, there is no interest or other cost whatever -to the IMF, or to the United States and other participants -drawings.
for any portion of the facility not actually utilized for

- 10 A second question is will the facility serve to "bail out"
private banks which have lent unwisely or excessively?
The answer is "no." The facility is not so designed
and will not be so used. It will not bail out either countries
or banks. It will encourage countries to initiate needed
adjustment measures before their debts become too large to
handle or credit is no longer available, and it will provide
transitional financing while the measures take effect. it
will help redistribute deficits to a more sustainable pattern,
and improve nations' creditworthiness and confidence in the
monetary system.
It is not a substitute for bank credit and will not take
over the banks' regular lending activities. While IMF
financing may in the period ahead account for a >share of total
balance of payments financing larger than the 7 percent if
provided in 1974-76, it will remain small in comparison with
the share channeled through private markets. in fact, the.
facility is expected to encourage banks to continue tx> expand:
their foreign lending rather than cut back, by promoting
sound economic policies on the part of borrowers -- and
experience indicates that in fact the banks normallv lend
more to a country after it has entered into a stand-by agreement
with the IMFo . The banks will benefit from the new facility,
but only indirectly -- through the improved international
environment, stronger monetary system and high levels of
trade that will benefit all elements of the American economy....
A third question is why was the ^Supplementary Financing
Facility established rather than the alternative of a permanent
change in IMF quotas.
.
The answer is that this method was chosen for reasons of
timing and practicality. A review of IMF quotas is under way,
but with the complications of negotiation and ratification,
it may not lead to actual quota increase for, ,say, two years
or more. Hopefully the new facility can be put into operation
at an early date, and cover the particular needs until a quota
revision occurs. The facility is also more flexible than a
quota increase, since it is not subject to the same quota
constraints and can be used more selectively to meet the
problems of countries with particularly large needs.

- 11 -

Mr. Chairman, the IMF is a valuable institution, in which
all members contribute, financially and otherwise, to an
effective international monetary system. It has a good record.
The proposal for a Supplementary Financing Facility is a
sensible and realistic way to strengthen it to meet present
problems. The facility is equitable to all parties. It is
needed, and needed soon. The Administration urges that the
Committee report the proposed legislation favorably, and that
the Congress enact it promptly.
I thank you.

oo 00 oo

Contact:

Alvin M. Hattal
(202) 566-8381

September 16, 1977
FOR IMMEDIATE RELEASE
SPECIAL CERTIFICATES FOR IMPORTS OF FERROCHROMIUM
AND CHROMIUM-BEARING STEEL MILL PRODUCTS
FROM THE FEDERAL REPUBLIC OF GERMANY
The Department of the Treasury announced today that
special certificates issued under the certification agreement
between the United States and the Commission of the European
Communities are now available for imports of ferrochromium and
chromium-bearing steel mill products from the Federal Republic
of Germany under the Rhodesian Sanctions Regulations. A Notice
to this effect was published in the Federal Register of September 16, 1977. Materials from the Federal Republic of Germany
shipped after that date may be imported only if a special
certificate is presented to Customs at the time of entry.
Imports of certifiable materials from the Federal Republic
of Germany shipped before the Federal Register Notice appeared
may continue to be made under the interim certificates. However, the entry will not be liquidated until the importer presents a special certificate. Such certificate must be obtained
from the producer and filed by the importer on or before Septem
ber 18, 1977, to complete liquidation. Failure to present the
required special certificate of origin by September 18, 1977,
will result in a demand for redelivery of the goods.
* * *

B-442

FOR RELEASE 10:00 A.M. ESDT, MONDAY, SEPTEMBER 19, 1977
STATEMENT BY HELEN B. JUNZ
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR COMMODITIES AND NATURAL RESOURCES
BEFORE THE
COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION,
AND THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
SUBCOMMITTEE ON ENERGY AND NATURAL RESOURCES
MONDAY, SEPTEMBER 19, 1977 10:00 A.M.
I am very pleased to appear before you today to discuss
the Treasury Department's views on deep seabed mining legislation. We feel, however, that the timing of our discussions
is somewhat unfortunate. As you know, since the end of
the last session of the LOS Conference, the Executive Branch
has undertaken a full review of our posture towards the Law
of the Sea Conference, including also the question of legislation. The LOS review will carefully balance advantages
against disadvantages over the full range of our interests
in this area in order to arrive at decisions that protect
them adequately. While this review will still take several
weeks to complete, we expect to have a decision on legislation
in a matter of days and certainly before this bill goes to
mark up. Therefore, we may have to defer comments on
certain features of this legislation until that time.
You know, from previous testimonies on these matters,
that the Administration feels that the wealth of resources at
the bottom of the sea must not be left to lie idle. Indeed,
we feel that if our aspirations for increased standards of
living worldwide are to be realized, we will need to employ
productively the world's resources wherever they are to be
found.
C-443

- 2 Therefore, it is vitally important that we provide
an international and national climate that will ensure that
deep sea resources are developed productively, efficiently
and to the benefit of the world community. The interest
of the Treasury Department in the current Law of the Sea
negotiations is related to the overall economic goals of
the United States, as is the bill you are asking me to
comment on.
A Legal Regime to Preserve U.S. Economic Interests
In the negotiations, Treasury's attention has been
focused largely on the principles that would govern access
to and exploitation of the deep seabed resources. We share
the Committee's concern that a stable, legal framework for
deep ocean mining is needed. Without such a^framework,^
mining consortia would be unable to make rational decisions
with regard to committing risk capital in seabed mining.
A pre-requisite for any stable, legal framework is the
principle of assured access for seabed mining firms.
Uncertainty with regard to the terms of access can — and
indeed, should —
discourage state and private entities
from assuming the substantial economic risks of exploring
the seabed and of developing the new technology needed to
eventually exploit these new resources for the world market.
The Treasury Department believes that assured access to the
seabeds for states and their nationals will lead to the
most efficient allocation of resources as well as the most
rapid development of the seabed resources to the ultimate
benefits of both the United States and the world economy.
The Administration has hoped that an appropriate
framework for the productive exploitation of deep seabed
resources would be provided by a Law of the Sea Treaty.
As you know, we have not yet been able to achieve acceptable
treaty provisions on this point.
In a press conference following the last Law of the
Sea session, Ambassador Richardson pointed out the major
defects in the text dealing with the economic management of
the seabed resources — the so-called "Engo Text" — and
the process used to draft it. In the view of the Administration, the Engo Text, produced in private and never discussed

- 3 with a representative group of participating nations, was
fundamentally unacceptable because it not only failed to
provide for assured access, but would make deep seabed
mining basically uneconomic. But even the Evensen Texts,
negotiated during the Conference and set-aside by the
Chairman in favor of the Engo Text, would have required a
considerable amount of further negotiation to assure that
national and private enterprises could commit their resources
and energies with the prudence dictated by their responsibilities to their taxpayers and stockholders.
While today's technology points only to the existence
of nodules, there is no telling what lies ahead in the
future. But even with only today's promise, we simply cannot
agree to a regime that would unnecessarily inhibit, and perhaps
even prevent, deep seabed development. To do so would make a
mockery of the principle of the Common Heritage of Mankind
and shut off altogether, or reduce to a pitiful trickle, the
benefits that could otherwise accrue to mankind as a whole,
but in particular to the developing countries.
Mr. Chairman, for some number of months now, we have
been engaged in a dialogue with the developing countries on
their proposals for a New International Economic Order by
which they would achieve participation in world economic
affairs on an equal footing with developed countries. And
the shaping of an economic regime for the deep seabed
forms part of this dialogue. It is clear that any new
international institution, if it is to work, must reflect
the realities of the evolving international system. But
one of the realities of our system is that we cannot force
the commitment of private capital resources or the transfer
of the fruits of private research and patent rights.
Governmental actions can facilitate such flows, but finally
they must be induced by the economic realities. Therefore,
any international institutions we create for the deep seabed
must represent a true accommodation of the interests of both
developing and developed countries, if, indeed, it is to
help tap the resources of the deep seabed to the benefit of
mankind.
What happened at the Sixth Session is therefore
particularly disappointing. We were prepared to agree to a
compromise which would produce maximum benefits to be shared
with the poorer countries while at the same time opening
up the opportunity for the developing world itself to
participate in the effort. Such a compromise would have
seen a major achievement ~ not only for the benefits to be

- 4 attained from resource exploitation as such, but also
as a precedent for future world institutions and the
evolution of our international economic relations. Because
of both the great importance and the complexity of the whole
range of issues pertaining to the establishment of a viable
ocean mining regime and a productive seabed mining industry,
we believe it is vitally important that the Congress and
the Executive Branch work together as closely as possible
on these issues.
U.S. Legislation
With respect to the substance of deep seabed mining
legislation, Ambassador Richardson and officials of several
agencies have on various occasions informed members of
Congress of the Administration's views. It is clear from
the bills now before the Congress that considerable understanding has been shown for the Administration's concerns,
and I would like to express my appreciation for this. I
am confident it augurs well for continuing cooperative
efforts on these matters in the future.
May I briefly review the main elements of Administration
policy before I turn to a discussion of the bill before us.
In our view, legislation:
should be interim in nature, and
eventually superceded by a treaty;
should contain provisions for
harmonizing U.S. regulations with
those of reciprocating states;
should provide for environmental
protection and sound resource
management;
should provide that seabed mining
by U.S. companies produces
financial benefits for the international community;
should not be site-specific with
regard to licensing;

- 5 should not require that processing
plants be located in the United States;
should not offer U.S. mining companies
financial protection against adverse
effects of a treaty concluded subsequent to the passage of legislation
and the commitment of expenditures by
those companies; and
should assure that all provisions of
the legislation leave undisturbed the
concept of freedom of the high seas.
As I indicated a moment ago, some of these views
coincide with provisions contained in S.2053. First, this
bill clearly is designed to be interim legislation pending
the entry into force of an international agreement. Second,
it contains provisions designed to prevent conflict with
designated reciprocating states engaged in deep seabed
mining. Third, it provides for environmental safeguards and
the means to assure timely action to avoid and avert damage
to the ocean atmosphere, although, in our view, strengthening
of enforcement provisions is needed. Finally, there is
provision made for sharing the proceeds of deep seabed
mining with the international community.
On the other hand, some provisions of S.2053 are of
concern to the Administration. Among these, the provisions
on tax treatment and investment guarantees are of special
concern to Treasury and I would like to comment on these
in some detail.
Tax Policy
As a general proposition, the Administration agrees
with the concept that there should be no tax discrimination
between U.S. deep seabed mining and U.S. domestic mining.
However, while this concept can be stated simply, deep
seabed mining does raise a number of complex tax issues,
and we believe that the tax provisions in S.2053 are in
need of further refinement in order to take explicit account
of these questions.

- 6 Among these questions is the treatment of deep seabed
mining activities under present tax law, with respect to
depletion allowances, accelerated depreciation range (ADR),
the investment tax credit, mining exploration expenses and
payments to special funds for possible transfer to the
international community. At this point, I would like to
summarize briefly how present tax laws operate with respect
to these particular areas.
Under the principle of domestic treatment, deep seabed
mining conducted by a U.S. individual or corporation, would
be subject to U.S. tax. However, this mining activity, under
present law, would not be accorded a class life of 20 percent
shorter than the normal guideline life; nor would the investment tax credit be available, because these incentives
generally are limited to fixed assets physically located in
the United States.
Exploration expenses, which currently may be deducted
if incurred with respect to mineral deposits located in
the U.S., must be capitalized and recovered through depletion when the deposits are located outside the United
States. Finally, percentage depletion, if available at all,
would be at the rates prescribed for foreign mineral
deposits (14 percent for manganese, nickel, copper and
cobalt), rather than the higher rates for domestic deposits
(22 percent for manganese, nickel and cobalt and 15 percent
for copper). In this connection, it should be noted that
under present law, depletion is allowed only if the taxpayer
has an "economic interest" in the minerals in place.
Although the concept of an "economic interest" is not well
delineated in the law, it is something akin to an ownership
right in the minerals prior to extraction. Because there
are no clear ownership rights to deposits in the deep
seabed, it is not likely that under present laws deep seabed
mining would have the requisite economic interest to
qualify for depletion allowances. With this background, it
is apparent that non-discriminatory domestic tax treatment
for deep seabed mining cannot be achieved without additional
tax legislation.
Further, the definition of U.S. citizenship in this bill
can lead, under varying circumstances, to inequities in
tax treatment. For example, as we read Section 6(15), a
"U.S. citizen" is defined to include a foreign corporation or
other foreign entity if "controlled" by a single U.S. individual
or other U.S. legal entity. Putting aside the troublesome

- 7 omission of a standard for determining control, this provision can lead to double taxation or tax avoidance. For
example, if control were to be defined as a 51 percent
interest, a joint venture incorporated in France "controlled"
by a U.S. corporation, could be a "U.S. citizen" subject to
full U.S. tax under this bill. As a French corporation, the
joint venture would also be legitimately subject to French
taxation — hence double taxation could result.
Conversely, if the U.S. corporation did not "control"
the joint venture, since it owned say only 49 percent, then
the United States would have no tax jurisdiction. If a
"U.S. citizen" incorporates such a joint venture in a tax
haven area, for example in the Bahamas, it would escape all
tax. Under the provisions of the bill, which requires
control by a single U.S. entity, two U.S. corporations each
owning one-third interest in a Bahamian corporation also would
escape all U.S. tax liability. Thus, the provisions in
S.2053 could produce double taxation in some instances and
tax avoidance in others.
The Administration believes that a policy based on the
following principles would avoid both double taxation and
tax avoidance:
U.S. entities that engage directly or
indirectly in deep seabed mining ventures,
on their own or jointly with non-U.S.
entities, should be treated for U.S. tax
purposes as if they were engaged in
land-based ventures in the United
States.
Non-U.S. entities, that either mine
on their own or participate with
U.S. entities in deep seabed mining,
should not be subject to U.S.
taxation. The tax treatment for payments to
an international seabed authority
or to an escrow fund held by the
U.S. Government should be the same
as that accorded domestic land-based
mining ventures for payments of

- 8 royalties. Thus, such payments would
either be: (1) deductible; or
(2) capitalized and recovered through
depletion.
Treasury has already furnished the House Merchant
Marine and Fisheries Committee with a short paper on "Tax
Policy Considerations Affecting Ocean Mining." I have
attached a copy of this paper as an Appendix to my testimony.
Remaining issues on which Treasury is continuing to
work center on the mechanics for implementing non-discriminatory domestic tax treatment for deep seabed miners according
to the principles set out above. In the coming months,^
Treasury will be conferring with the Committees responsible
for ocean mining legislation as well as with the House Ways
and Means Committee and the Senate Finance Committee in order
to work out the necessary legislation to implement the
Administration's ocean mining tax policy.
Investment Guarantees
Although the Administration believes strongly in the
desirability of developing the mineral resources of the seabed,
an investment guarantee program for such activities is
both undesirable and unnecessary in our view.
Investment guarantees are undesirable because they
imply an obligation on the part of the Government to
indemnify firms for possible adverse consequences of
Government policies. But it is a fact of life that Government decisions often affect an industry's profitability
dramatically. The claim made for seabed mining in favor of
Government guarantees is that it is in a unique situation
because the conclusion of a Treaty may alter its profit
calculations profoundly. However, the Administration has
concluded that the situation of deep seabed raining consortia
is not sufficiently unique to justify institution of a new
guarantee program.
Investment guarantee programs currently in place cover
certain domestic and foreign land-based mineral operations
of U.S. corporations. For example, the Overseas Private
Investment Corporation (OPIC) has programs to insure foreign
investments in the minerals industries in developing countries.

- 9 These programs are now being reviewed, and as Assistant
Secretary Bergsten stated earlier this year, we are now
proposing that OPIC should develop new "risk reducing
coverage for projects in energy and other raw materials."
It would be possible to consider whether there is a role
for OPIC in seabed mining, but to the extent that we are
recommending domestic tax treatment for such operations, it
is not clear that OPIC activities indeed could be extended
to include seabed mining activities without raising questions
about the equity of treatment of domestic versus foreign
investment under Federal laws. Certain domestic programs
reflect national interests either with respect to the
specific industry, for example energy, or to a class of
investors, such as small business. In our view, seabed
mining consortia do not qualify under these counts.
There is no overall national strategic interest sufficient to justify governmental action to reduce risks that are
similar in type to those encountered by both domestic and
foreign investors. Governmental and non-governmental groups
have conducted several studies of the market for the minerals
to be obtained from the seabed and our strategic need for
them. These studies have shown that the adequacy of supply is
reasonably assured. In the absence of a compelling national
interest, the industry ought to compete on equitable terms
with land-based producers.
I want to point out that the investment guarantee
portion of the proposed legislation is based on two presumptions: (1) that the United States Government will negotiate
and the Senate will ratify a Treaty under which the terms
of operation for firms could be arbitrarily and adversely
affected; and (2) that if an equitable Treaty were accepted,
the United States will be unable to prevent later adverse
actions through its representation in the seabed authority's
governing body.
We think these premises are incorrect. As you know,
this Administration has consistently opposed treaty texts
which would subject miners' operations to capricious or
onerous regulation. In fact, the President's Special Representative, Ambassador Richardson, has denounced the current
draft text as "fundamentally unacceptable" to the United
States. Also, we expect the Congress to look askance at any
Treaty that significantly diminishes the value of investments of U.S. firms in the deep seabed. Moreover, the
United States will continue to oppose provisions of
governance which fail to give the United States and

- 10 other ocean-mining countries a major voice in the decisionmaking councils of an International Seabed Authority.
The second point we want to make with regard to the
investment guarantees proposed in this bill, is that we
consider them to be unnecessary. The lending climate for
major investments has changed in recent years. Partly in
response to the tumultuous conditions of the early seventies,
banks are no longer willing to make loans solely on the merits
of specific projects. They now require that specific investments be fully backed by the corporations undertaking them.
Hence, the testimony you may be hearing argues correctly that
banks will not fund projects without corporate guarantees,
but this increasingly applies across the board and not
solely to seabed mining.
Consultations with major U.S. banks and with other
financial agencies in Washington, lead the Treasury to
conclude that funds are available for deep seabed mining
operations without Government guarantees if firms are willing
to assume the risk. The decision whether the reportedly rich
returns from seabed mining justify investment in this new
area — under license by the U.S. Government with assurances
that the Government will do all it can to protect mining
interests — is a decision which we firmly believe is best
left to the companies themselves. If the anticipated returns
justify the risk, the investments will take place. If not,
the capital will be put to more productive uses elsewhere.
In conclusion, it is clear that the U.S. economy will
ultimately benefit from the existence of a viable and
productive seabed mining industry. But we find arguments
in favor of preferential treatment of seabed development
neither convincing nor equitable. Therefore, we could not
support diversion of official financial resources into
Other
Policy
Considerations
seabed Economic
production
and away
from competing claims for Federal
funds.
Treasury is in complete agreement with legislative provisions that would provide benefits for the international
community through the establishment of an escrow account.
(S.2053, Section 204 and H.R.3350, Section 203). Permitting
the Administration time to submit a specific revenue sharing

- 11 proposal after the date of enactment is a particularly
helpful provision in these bills. This will give the United
States time to work out the necessary details and to consult
with other prospective ocean mining countries and reciprocating states. Thus, the Administration will be able to
develop a revenue sharing system that will assure that
U.S. firms are not put at a competitive disadvantage with
the miners of other countries.
With regard to provisions in these bills that require
license holders to locate processing plants in the United
States (S.2053, Section 102 and H.R.3350, Section 103), the
Administration believes that such a provision should not
be a requirement for receiving a U.S. license. By allowing
processing plants to be located at the most economical
sites, the viability of the ocean mining industry will
be increased, and the benefits of ocean mining will be more
widespread as will be support for such activities. For
example, countries where processing plants are located would
be giving implicit recognition to the fact that U.S. miners
are engaged in a legitimate use of the high seas.
Thank you for this opportunity to discuss our views
on U.S. ocean mining policy with you. My staff and I will
be pleased to make available to you what help we can during
the coming months.

o 0 o

ATTACHMENT
TAX POLICY CONSIDERATIONS AFFECTING
DEEP SEABED MINING
BACKGROUND
Five multinational consortia (four of which are led by
U.S. companies) are currently investigating the economic and
technological feasibility of mining deep seabed manganese
nodules containing approximately 1.5% nickel, 1.3% copper,
.25% cobalt and 24.2% manganese. There is thus a need to
determine the nature of U.S. tax treatment of deep seabed
mining.
Deep seabed mining is juridically unlike most other
economic activities. Extraction of nodules will take place
in an area which is not subject to the jurisdiction of any
nation. On the other hand, all but one of the U.S.-led
consortia plan to transport the nodules in chartered vessels
to shore for processing. One consortium plans to process at
sea beyond national jurisdiction.
While many countries, in particular developing
countries, claim the deep seabed is "common property" and
cannot be exploited until an international regime for this
purpose is agreed, the U.S. and other developed countries
maintain it belongs to no one and can be exploited under
customary international law providing for freedom to use the
high seas. The U.S. is, nevertheless, prepared to agree to
the establishment of an international regime and organization (International Seabed Authority) for the administration
of deep seabed mining. We are not, however, prepared to
agree to Authority ownership of or sovereignty over deep
seabed minerals.
The nature of the international regime and organization
for the deep seabed is currently under discussion in the
third UN Conference on Law of the Sea (LOS). It is probable
that any agreed regime will provide, inter alia, for (i)
contracts between the Authority and private entities
sponsored by States to mine specific deep seabed areas, and
(ii) certain payments by these entities to the Authority
(financial arrangements) in recognition of the economic
interest of all countries in deep seabed development.
The current draft treaty texts before the Conference
provide potentially for four types of payments from private
entities to the Authority:

2
1. Payments in kind, upon obtaining from the Authority
a contract to mine the seabed, i.e., banking by the
contractor of mining sites for the Authority's
operating arm, the Enterprise.
2. Fee payable on the award of a contract to mine the
deep seabed.
3. Royalty based on percentage of value of minerals
extracted by the seabed miner.
4. Taxes on the revenues of contractors derived from
their activities in the deep seabed.
The U.S. proposal on this subject dated June 3, 1977,
provides for (i) banking, (ii) a small fee (not to exceed
$500,000), and (iii) profit sharing (15-20% of net proceeds
depending on return on investment) or royalties (10% of the
imputed value of the minerals at the mine site; the mine
value is calculated as 20% of the fair market value of the
processed metals).
In addition to the LOS Conference discussions, three
House Committees (Merchant Marine and Fisheries, Interior
and Insular Affairs and International Relations) are
considering three bills (HR 3350/4582 [Murphy-Breaux], HR
6784 ([McCloskey] and HR 3652 [Fraser] which would authorize
seabed mining by private entities pending agreement on an
international regime. Only HR 6784 (McCloskey) provides for
international payments and deals as such with U.S. tax
treatment. It authorizes a Deep Seabed Resource Development
Revenue Sharing Fund to which payments would be made in
escrow for the international community pending agreement on
a treaty, and states such payments shall be considered as
payments to a foreign government and credited against U.S.
income taxes. For its part, the Administration has
indicated that any U.S. legislation should provide for some
payments into escrow for the benefit of the international
community.
ISSUES
(1) What is the appropriate U.S. tax treatment of deep
seabed mining ventures undertaken by a U.S. entity?
"
(2) What should be the U.S. tax treatment of payments
by U.S. entities to an International Seabed Authority and/or
to a USG escrow fund for such an Authority pending its
establishment?

3
CONCLUSION
U.S. entities that engage in deep seabed mining
ventures should be treated for U.S. tax purposes as if they
were engaged in land-based minincj ventures in the United
States. Non-U.S. entities, who mine either on their own or
in partnership with U.S. entities should not be subjectHbo
U.S. taxation on this activity to the extent it is
undertaken at sea. Payments zo an International^eabed
Authority or to a USG escrow fund will toe either (1)
deductible from U«S. gross income; or (2) capitalized and
recovered through depletion. The tax treatment will be~he
same as that accorded domestic land-based mining ventures on
payments of a similar nature.
DISCUSSION
The policy objective is to assure economic equality of
U.S. tax treatment of U.S. entities as between deep seabed
and land-based mining of the minerals concerned. Meeting
this objective in turn involves consideration of whether the
economic equality should be with (i) mining by U.S. entities
in the U.S., or (ii) mining by U.S. entities in a foreign
country. The entire venture might be considered a purely
"domestic" investment since none of the investment is
located within the jurisdiction of another sovereign nation;
or the venture might be considered a "foreign" investment to
the extent located outside the geographic area of the United
States. (See attachment A for a quantified comparison of these
two treatments.)
The tax treatment of an ocean mining venture will vary
somewhat depending on its treatment as domestic or foreign.
The principal differences currently are the rate of
percentage depletion allowed, the availability of ADR (Asset
Depreciation Range) depreciation and the investment tax
credit, and the deductibility of mine exploration
expenditures.
The rate of percentage depletion allowed for foreign
mineral deposits of manganese, nickel, copper and cobalt is
14 percent. The percentage depletion rates in the case of
U.S. deposits are 22 percent for manganese, nickel and
cobalt and 15 percent for copper. ADR depreciation at a
class life 20 percent shorter than the guideline life and
the investment tax credit are generally limited to fixed
assets located in the United States. Finally, mine
exploration expenditures may be deducted currently if
incurred with respect to deposits located in the United

4
States, but generally must be capitalized and recovered
through depletion when incurred with respect to mineral
deposits located outside the United States. In all other
principal respects the tax treatment of domestic and foreign
hard mineral mining operations is the same.
As a matter of tax policy, the choice between
"domestic" or "foreign" treatment is relatively simple: any
investment by a United States resident should be treated as
"domestic" so long as it is not located within the taxing
jurisdiction of a foreign government. This classification
of investment by a U.S. resident is consistent with national
income accounting concepts. Moreover, inasmuch as
world-wide income of U.S. residents is subject to U.S.
income tax, treating deep seabed mining operations as
"foreign" needlessly creates income "source" issues when no
other sovereign taxing jurisdiction is involved.
Although treatment of ocean mining ventures undertaken
by a U.S. company as purely domestic will require certain
amendments to the Code, such treatment is consistent with
the tax treatment accorded analogous situations. The
investment tax credit is available for communications
satellite and transoceanic cable equipment (Code sections
48(a)(2)(B)(viii) and (ix)), and for certain property used
in ocean mining ventures located in the international waters
of the northern portion of the Western Hemisphere (Code
section 48(a)(2)(B)(x)). Income from transoceanic cable or
telegraph transmission operations is deemed from U.S.
sources to the extent such transmissions originate in the
United States, and income from communication satellites
would presumably be treated in a similar manner. Finally,
tax reform proposals related to international shipping are
not inconsistent with domestic tax treatment of ocean mining
ventures. Proposals to treat international shipping income
as U.S. source to the mid-point of each voyage is roughly
the same as treating all outbound traffic as domestic and
all inbound as foreign.
On the other hand, from the international point of
view, such U.S. tax treatment must make clear that it in no
way implies an assertion of U.S. jurisdiction over the deep
seabed. Amendments to the Internal Revenue Code providing
for such treatment should apply only to U.S. persons and not
to non-U.S. persons. In particular, no attempt should be
made to tax the deep seabed mining income of non-U.S.
persons who are members of U.S.-led consortia engaged in
deep seabed mining. Such non-U.S. persons, of course, would
continue to be subject to U.S. tax on income arising from

5
their activities in the United States, e.g., income from
processing in the U.S. Details of this policy, such as the
taxation of U.S. controlled foreign corporations or the
leasing of equipment to non-U.S. persons, would need to be
worked out in a specific legislative proposal.
The only disadvantage of domestic treatment from the
U.S. companies' point of view is the unavailability of
potential tax credits against U.S. tax for certain of the
payments made to the Authority either directly or in escrow.
The fourth category of payments to the Authority (listed
above on page 2) could be structured so as to be
economically similar to income taxes payable to a foreign
State with respect to revenues derived from activities
within its jurisdiction. Some would argue that such
payments should qualify for a foreign tax credit as if these
payments were income taxes paid to a foreign government.
The issue of domestic or foreign tax treatment aside,
granting a foreign tax credit for payments to the Authority
is undesirable. On the one hand, there has been increasing
concern about granting credit for payments which are not
truly income taxes, (especially in the case of payment by
oil companies to governments which not only impose the tax
but also own the oil.) This has been reflected in recent
rules and legislation, and the tests for a creditable tax
are being more stringently applied than ever. And, on the
other hand, to be creditable the income tax must be paid to
a foreign government. Payments to the International Seabed
Authority would not be creditable because it is not a
foreign country endowed with sovereign taxing powers. To
endow it with sovereignty would be contrary to both our
national security and economic interests. To endow such an
international body with sovereign taxing power would be an
extraordinary precedent and would encourage the Authority to
exercise the monopoly power thus bestowed on it.
While treating deep seabed mining ventures as "foreign"
might result in a "revenue gain" from limiting percentage
depletion and denying the investment tax credit and the
shorter depreciation life, foreign treatment would
constitute an unwarranted bias against certain forms of
investment of U.S. capital (assuming that access to seabed
minerals is assured) and may buttress the arguments of those
desiring to invest the International Seabed Authority with
"tax sovereignty." Accordingly, deep seabed mining ventures
undertaken by U.S. companies should be treated for tax
purposes in a manner identical to domestic land-based mining
ventures.

6
Imports of seabed materials
If the seabed mining is defined as a domestic activity,
then consistent trade policy would dictate that the products
from that activity should be treated as domestic production
and exempt from any duties or other import restrictions.
Currently the duties applied to imports are relatively low
and vary according to the material imported, e.g. specific
ore, metal, or mixed ores.
To assure that these seabed materials are defined as
domestic, the tariff schedule would have to be amended to
specifically define materials from the seabed as exempt from
duties. This exemption would be similar to the treatment
now extended to fish landed by American fishermen. Under
present law it is not mandatory that materials be
transported in U.S. vessels.

Attachment A
Quantification of Differences in Tax
Treatment of Ocean Mining Ventures

From the point of view of a U.S. venturer, we may compute
the value of "domestic" tax treatment as an amount the venturer would be willing to pay for that treatment rather than
"foreign." It is also an amount available to him to pay for
a "license" to mine, either as a "bonus" or "royalty" per ton
of material removed.
To make such calculations, some specification of expenditures related to the mining, transportation, and processing is
required. For this purpose, we rely on a publication of the
Ocean Mining Administration of the Department of the Interior
which summarizes the fragmentary information on this as yet
speculative activity.]./ Based on the published "medium" cost
estimates for a venture which would supply 3 million tons of
nodules pey year to be processed into nickel, copper, and
cobalt,2/ and adding the cost of an alternative site to be provided gratis to the DSA as is presently contemplated, we computed the present value of the minimum gross income from the
sale of the aforementioned metals which would be required to
yield the venturer a 15 percent rate of return after taxes
under two regimes: (1) the entire project is regarded as
"domestic"; (2) the sea-based mining activity is "foreign".
Then, based on these two calculations, we may compute the
maximum "additional take" of DSA if that agency is accorded
sovereign taxing status.3/
1/ Rebecca L. Wright, Ocean Mining: An Economic Evaluation;
May, 1976.
2/ According to Wright, technology for the extraction of manganese in useful form is still not well-enough defined to
permit cost specifications of the on-shore processing.
Moreover, she considers that manganese processing may usefully be considered as processing "tailings" of the nickelcopper-cobalt process. Ibid, Appendix A.
3/ The published data were organized simply to permit computation of an internal rate of return. For our purposes,
and to facilitate reasonably accurate representation of the
critical tax terms, it was necessary to reorganize the basic
information. Miss Barbara Lloyd, who had performed the
original computations kindly provided us with disaggregation
of investment and operating costs, by site. Fortunately,
the cost specifications treat transportation as independently
provided, not as an integrated operation of the venturer.
This is fitting, for ownership and operation of the transport
vessels are of no consequence to the economics of the project
nor its alternative tax treatments.

If the entire project is treated as domestic, the present
value of the "required" total sales over the estimated 20-year
productive life of the project would be just over $830 million.
Of this total value of product, 35 percent would be added by
mining, 9 percent by transportation, and 56 percent by on-shore
processing.4/ If sales values of the minerals finally sold, as
projected by the aforementioned publication, are used as a
reference point, the venturer would be willing to pay the DSA
up to $16 million (in addition to the aforementioned alternative
site) for the license to mine. Alternatively, the venturer
would be willing to pay $3.85 per ton of nodules removed, when
removed.5/
In contrast, if the sea-mining operation is treated as
"foreign", the loss of the investment credit with respect to
that investment, along with somewhat slower depreciation and
a percentage depletion rate of only 14 percent rather than the
weighted average 19 percent for "domestic" mining of the same
minerals, increases the "required" total sales to $855 million,
which is $25 million more than under "domestic" tax treatment.
Given the same projected mineral prices, the venturer could
only pay up to $3 million for the license, or a royalty of only
about 75C per ton of nodules, when removed. While the overall
difference between "domestic" and "foreign" treatment is not
large—a mere 3 percent increase in "required" gross sales
income—it is an 80 percent reduction in the venturer's maximum
biddable bonus or royalty, under the assumed conditions of this
example. This must always be true, because the rental value of
the sea-bed will always be a tiny fraction of the total value
of mineral product.6/ (footnote on page 4)
4/ Addition of manganese processing would greatly increase the
on-shore value added share. Neither the mining nor transport
activities depend on the extent of on-shore processing of
nodules.
5/ The computation of maximum "bonus" takes into account that
the payment will become a part of the venturer's "depletion"
basis whereas the payments of royalties will simply be reductions of gross income for U.S. tax purposes as production occurs.
The reader is cautioned not to take the numerical values in
the text seriously. Given the insubstantial character of the
cost estimates, along with the implicit assumptions about
ultimate mineral recovery, the 15 percent discount rate is
clearly too low to be applied to an estimated income stream
stretching 26 years into the future (6-years' start-up, 20-years
production). Had the "high" cost estimates been used the projected income stream would have been insufficient to justify
making the commitment, without any lease bonus or royalty, to
yield
results
a is
15 percent
to provide
return.
an indication
The soleof
purpose
the relative
of the magnitudes.
numerical

Finally, if "foreign" tax treatment by the United States
is to be accompanied by DSA "taxing power," the U.S. foreign
tax wedge may be "taken" by the DSA without discouraging the
venturer. This foreign tax wedge is equal to at least $75 million,
in present value terms. If this amount is expressed as additional
royalty per ton of nodules, it adds $9.20 to the $0.75 royalty
per ton otherwise payable to DSA under "foreign" tax treatment
only. Alternatively, it affords the venturer the possibility
of paying an additional $39 million bonus.
These calculations may be summariz-ed as follows:
Maximum DSA "take"* expressed as:
-IT

Bonus"

Completely "domestic"
"Foreign" (at sea) 3 0.75
with "creditable" DSA "tax"

$16 million
42

\

"Royalty"
$3.85 per ton
9.95

•Assumes the Wright projections of nickel, copper, and
cobalt prices and projects costs, allow a 15 percent
after-tax rate of return to the venturer.

6/ At best, estimates of the mineral content of the nodules
are not expected to be much over 3 percent for copper, nickel,
and cobalt, all of which are found ashore in ores which are
less expensively processed. Clearly, the price of minerals
will trace the marginal cost of production, and this will
inevitably basically consist in the cost of extraction, transportation, and processing. Only the slight differences in
metal-content of nodules and ores will give rise to rents
for the higher-content mineral sources, and these rents will
be small relative to total value added.

OF

WrtmentoftheJREASURY

I B fc
. 53fc

TELEPHONE 566-2041

WASHINGTON, D.C. 20220

"V

r

-fc,

/789

FOR IMMEDIATE RELEASE

September 19, 1977

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,503 million of 13-week Treasury bills and for $3,501 million
of 26-week Treasury bills, both series to be issued on September 22, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing December 22, 1977

26-week bills
maturing
March 23. 1978

Discount Investment
Price
Rate
Rate 1/

Discount Investment
Price
Rate
Rate 1/

98.525
98.519
98.521

5.835%
5.859%
5.851%

6.00%
6.03%
6.02%

96.997
96.971
96.979

5.940%
5.991%
5.976%

6.21%
6.26%
6.25%

Tenders at the low price for the 13-week bills were allotted 31%.
Tenders at the low price for the 26-week bills were allotted 30%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Boston
$
21,765,000
New York
4,589,175,000
Philadelphia
32,570,000
Cleveland
53,255,000
Richmond
25,750,000
Atlanta
32,625,000
Chicago
621,925,000
St. Louis
56,810,000
11,660,000
Minneapolis
Kansas City
32,520,000
Dallas
14,425,000
San Francisco
181,940,000
Treasury
TOTALS

40,000
$5,674,460,000

Accepted

Received

$

$

16,765,000
2,208,460,000
17,570,000
31,665,000
15,730,000
23,515,000
46,235,000
21,740,000
5,660,000
26,380,000
14,425,000
75,180,000
40,000

41,465,000
4,656,335,000
28,035,000
62,790,000
30,985,000
61,740,000
491,550,000
40,170,000
12,630,000
23,610,000
31,870,000
202,500,000

$
34,465,000
2,880,335,000
28,035,000
62,790,000
26,985,000
61,740,000
136,550,000
18,770,000
12,630,000
23,610,000
31,870,000
183,300,000

80,000

80,000

$2,503,365,000a/ $5,683,760,000

../Includes $309,590,000 noncompetitive tenders from the public.
.•/Includes $159,840,000 noncompetitive tenders from the public.
./Equivalent coupon-issue yield.
B-444

Accepted

$3,501,160,000b/

FOR RELEASE ON DELIVERY
EXPECTED AT 8:30 A.M.
SEPTEMBER 20, 1977
STATEMENT BY THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
OF THE HOUSE WAYS AND MEANS COMMITTEE
Mr. Chairman and Members of the Committee:
I welcome this opportunity to present the views
of the Treasury Department on H.R. 7416. The bill would
place the Federal Financing Bank (FFB) within the - budget and
would, in effect, require that certain loan guarantee
programs be financed through the FFB. This would mean that
loan guarantee programs which are financed through the FFB
would be included in the budget. Guaranteed loans which are
not financed through the FFB would continue to be excluded
from the budget.
We support the basic objectives of this bill from the
standpoint of Treasury's debt management interests. I
have a number of technical suggestions relating to the bill,
which I will discuss later in my statement. H.R. 7416 also
raises a number of complex issues from the standpoint of
overall budget policies and procedures, however, which are
of concern to the Administration.
Mr. Chairman, I would like to turn first to the broader
question of control over guarantee programs. Following
that, I will discuss the specific provisions of H.R. 7416-

B-445

- 2 Control over guarantee programs
In testimony before the House Banking Committee on
March 30 of this year, I discussed the rapid growth of loan
guarantees, their large costs and impacts on credit markets,
and the need for more effective controls. I suggested two
approaches to improve control: (1) establishing tighter
standards covering the ways in which guarantees should be
used and not used and (2) setting ceilings on total guarantees.
Much attention has been given to the second approach of
setting ceilings either by including guarantees in the
budget or by other means. Yet, all of us need to focus more
on the need for better standards under which guarantee
authority is provided by Congress in the first place.
It seems to me that program agencies must be given much
more specific guidelines on the circumstances under which
guarantees are to be provided and the related terms and
conditions of them. Giving these agencies broad guarantee
authority and then expecting them to resist the inevitable
demands for guarantees unavoidably leads to serious problems
of control over guarantee totals and general misallocation
of our limited credit resources.
Let me discuss the basic circumstances in which guarantees
are issued and make some suggestions for tightened loan
guarantee standards and how they would help deal with the
broader problem of controlling loan guarantee programs.
Credit need test. Most loan guarantee programs are
intended to facilitate the flow of credit to borrowers who
are unable to obtain credit in the private market. The
needs of more creditworthy borrowers are expected to be met
in the private market without Federal credit aid. To
achieve this purpose more effectively, and to provide a
built-in control over program growth, enabling legislation
should be more specific on requiring evidence that borrowers
cannot obtain credit from conventional lenders. Specifically,
we think that legislation should require the guarantor
agency to certify that, without the guarantee, borrowers
would be unable to obtain credit on reasonable terms and
conditions.
Coinsurance. In addition, guarantee programs are
often intended to induce private lenders to extend loans on
more favorable terms to marginal borrowers. The borrowers
involved generally can obtain loans on their own, but only
on costly and otherwise disadvantageous terms. In these
cases, 100 percent guarantees don f t make sense because they
would lower the interest rate below that paid on
unguaranteed loans to creditworthy borrowers for the

- 3 same purposes. Doing so would stimulate a demand for
guaranteed loans by creditworthy borrowers who do not
need Federal credit aid.
To avoid such excessive demand for guarantees, we favor
a much greater use of partial, rather than 100 percent
guarantees. In the future, legislation generally should
limit the guarantees to assume, say, 90 percent of the loan.
Private lenders then would charge a higher rate of interest
commensurate with project risk and with the rates charged on
unguaranteed loans. Such risk-sharing, or coinsurance, by
private lenders would contribute to the development of more
normal borrower-lender relationships, would prompt lenders
to exercise greater surveillance over the loans, and would
stimulate increased conventional lending for the economic
activities involved.
Interest rate ceilings. All of us also should be more
attentive, Mr. Chairman, to the effects of statutory interest
rate ceilings on the problem of controlling guarantee
programs. We oppose fixed interest rates because they
usually are either too high or too low at any particular
moment. On the one hand, if a guaranteed lender is permitted
to charge high rates relative to his risk, then he will seek
guarantees in cases where he might otherwise make loans
without them.
On the other hand, if the interest rate ceiling is
below reasonable market rates, and the Government pays the
difference between the ceiling rate and the higher rate
required by the lender, then demands by both borrowers and
lenders for guaranteed loans will be excessive. For example,
loan guarantee legislation often stipulates that the interest
rate paid by the borrower not exceed a fixed rate of, say,
5 percent. This has the effect of stimulating demand for
guaranteed loans (and Federal interest rate subsidy payments)
as interest rates rise. In cases like this, the amount of
the subsidy fluctuates with interest rate mdvements, and not
with the needs of the borrowers. Such interest rate provisions
frustrate efforts to control overall program levels and can
also result in an inequitable allocation of credit resources.
To avoid these problems, we think that interest rate ceilings
should float in relation to interest rate movements.
Equity participation. Many guarantee programs involve
circumstances where borrowers could take equity positions in
the projects being financed, and these guarantee programs
should encourage them to do so. Requiring borrowers to have
such a stake would help avoid excessive demands for guarantees,
help assure more efficient projects, and help protect the
interests of the Federal Government as guarantor. This

- 4could be accomplished by a legislative requirement that the
amount of guaranteed and unguaranteed loans not exceed, say,
90 percent of the value of the project being financed.
Other loan terms and conditions. Demands for guarantees
will also be excessive if the legislation does not contain
specific restrictions on such terms and conditions as
maximum maturities, guarantee fees, reasonable assurance of
repayment, default procedures, and other conditions which
are common to commercial loan practice but are often overlooked
or neglected in Federal credit programs.
This is not to say that Federal credit assistance programs
should not contain subsidies — indeed, that is their purpose —
but the legislation should be carefully drafted so that the
subsidies provided are by design, not chance, and are
directed at specific needs.
In short, I believe that more effective Congressional
control over loan guarantee programs can be accomplished by
adopting standards which build that control into the structure
of each guarantee program. I recognize that this is not an
easy task, particularly since there are more than 100
different loan guarantee programs which fall under the
jurisdiction of many different subcommittees of the Congress.
In the Executive Branch, the Office of Management and
Budget and the Treasury Department strive to assure a
uniform application of standards in the process of reviewing
proposed guarantee legislation. Within Congress, however,
it may be unrealistic for each interested subcommittee to
develop the intense focus on guarantee standards which is
essential to this improved control. Accordingly, it may be
worthwhile for such a responsibility to be lodged in one
committee of the Congress. Alternatively, the Congress could
take the approach taken in the Federal Financing Bank Act or
the Government Corporation Control Act and enact omnibus
legislation to establish credit program standards.
In addition to the adoption of more effective standards
for all credit programs, including loan guarantee programs,
Congressional control over loan guarantees could be improved
by requiring that appropriations acts include ceilings on
the total amount of guarantee commitments which can be
issued under the related program, regardless of whether the
program is included or excluded from the budget totals.

- 5 H.R. 7416
I would like to turn now to the provisions of H.R. 7416.
This bill would amend the Federal Financing Bank Act of 1973
to (1) include the receipts and disbursements of the Federal
Financing Bank in the Federal budget totals, (2) limit the
Bank's purchases of obligations in any fiscal year to such
amounts as may be provided in appropriation Acts, and
(3) require guaranteed obligations which would otherwise be
financed in the securities markets to be financed by the
FFB. Thus, the principal effects of the bill would be
(1) to expand the FFB to include the financing of certain
guaranteed securities which are now financed directly in the
securities markets; and (2) to broaden the budget-appropriations
process by including in the budget totals, and subjecting to
the appropriations process, those guarantee programs which
are financed through the FFB.
Budget treatment. Section 11(c) of the FFB Act currently
provides:
(c) Nothing herein shall affect the budget status
of the Federal agencies selling obligations to the Bank
under section 6(a) of the Act, or the method of budget
accounting for their transactions. The receipts and
disbursements of the Bank in the discharge of its
functions shall not be included in the totals of the
budget of the United States Government and shall be
exempt from any general limitation imposed by statue on
expenditures and net lending (budget outlays) of the
United States.
The first section of H.R. 7416 would amend the second
sentence of section 11(c) of the FFB Act to read: "The
receipts and disbursements of the Bank in the discharge of
its functions shall be included in the totals of the budget
of the United States Government."
To our knowledge, this would be the first time that
statutory language has been used to expressly require the
transactions of a particular Federal agency to be included
in the budget totals. For example, the Export-Import Bank
was returned to the budget by simply repealing language in
the Bank's charter act which had excluded its transactions
from the budget, not by enacting a requirement that its
transactions be included in the budget. The intent of this
requirement is not clear.
We presume that the intent is to follow normal budget
accounting whereby transactions between Federal agencies are

- 6 not reflected in the budget totals. Thus, when the Treasury
lends to a Federal agency, the transaction is not reflected
in the budget until the borrowing agency disburses the funds
to the public. If the explicit requirement that FFB transactions
be included in the budget is intended to override this
normal accounting arrangement, then this would cause
double-counting in the budget totals. Specifically, FFB
loans to on-budget Federal agencies such as the ExportImport Bank and TVA would be counted twice in the budget —
thus inducing these agencies to resume their previous
arrangement of borrowing directly in the market — and FFB
purchases of (1) obligations of off-budget agencies such as
the Postal Service and USRA, (2) assets sold by Federal
agencies, and (3) guarantees by Federal agencies would be
counted once.
On the other hand, if the intent of the amendment to
section 11(c) is not to override normal budget accounting
rules, then FFB loans to on-budget and off-budget Federal
agencies and FFB purchases of agency assets would be treated
as intragovernmental transfers and not reflected in the
budget. Only FFB purchases of obligations guaranteed by
Federal agencies would be included in the budget totals.
These totals also would increase by the amount of asset
sales to the FFB, however, since such sales no longer
would be treated as negative outlays. This same effect
could be achieved simply by repealing section 11(c) of the
FFB Act.
Appropriations process. H.R. 7416 would limit FFB
purchases of obligations in any fiscal year "to such extent
as may be provided in appropriations Acts." Yet, situations
may well arise in which the total demand for Bank financing
would exceed the limitation specified in an appropriation
act. There would be a need, therefore, to allocate FFB
credit among competing Federal programs. Furthermore, the
bill would require the Bank to purchase guaranteed obligations,
but would give it discretion concerning purchases of Federal
agency debt. On this basis, when'demands for Bank financing
exceeded the appropriations act limit in the bill — which
applies to both agency debt and guaranteed obligations —
there would be pressures for agencies borrowing from the
Bank to shift to borrowing in the market.
The role of credit allocator would not be a proper role
for the FFB. Within the Executive Branch, that function
should be performed by OMB. The original FFB bill sent to
the Congress in 1971 contained provisions which would have
authorized the Secretary of the Treasury, in effect, to
require guarantees to be financed through the Bank. That
bill also would have authorized the President to limit the

- 7 total amount of guarantees issued in any year, regardless of
whether the guarantees were financed by the Bank or in the
market. The Congress rejected these provisions.
If H.R. 7416 is enacted, we would expect that each
agency's entitlement to use the FFB would be determined by
the President and by the Congress annually in the normal
budget-appropriations process. Thus, the FFB would continue
to function as an instrument of Treasury debt management,
but neither the FFB nor the Treasury would assume the
function of allocating budget or credit resources.
FFB expansion. H.R. 7416 would effectively require
guaranteed obligations which would otherwise, be financed in
the securities markets to be financed by the FFB. This
would be acomplished by adding a new subsection (d) to
section 6 of the Act as follows:
(d)(1) Except as provided in paragraph (2), any
guarantee by a Federal agency of an obligation shall be
subject to the condition that if such obligation is
held by any person or governmental entity, other than
such agency or the Bank, such guarantee shall thereafter
cease to be effective.
(2) Paragraph (1) shall not apply in the case
of any obligation -(A) which the Secretary of the Treasury determines
is of a type which is not ordinarily bought and sold in
the same markets as investment securities, as defined
in the seventh paragraph of section 5136 of the Revised
Statutes, as amended (12 U.S.C. 24), or
(B) which is issued or sold by the Bank.
Before making any determination under subparagraph (A),
the Secretary of the Treasury shall consult with the
Director of the Office of Management and Budget, the
Comptroller of the Currency, and the Chairman of the
Board of Governors of the Federal Reserve System.
We strongly support the intent of these provisions.
That is, if the FFB is included in the budget, it is essential
to require that certain guaranteed obligations be financed
through the FFB. Otherwise, there would be a budget incentive
to return to the inefficient practice of financing guaranteed
obligations directly in the securities market. This would
undermine the purpose of the FFB Act and would add needlessly
to the program financing costs and to the direct costs to
the Government.

- 8 Yet, we are concerned with one or two adverse, and
perhaps unintended, effects of these provisions. Specifically,
the FFB apparently would be explicitly required to purchase
partially-guaranteed obligations, since H.R. 7416 does not
distinguish between partially- and fully-guaranteed obligations.
This contrasts to the present FFB legislation which authorizes
but does not require purchases of such securities. As you
know, we do not think that the FFB should purchase partially
guaranteed obligations, and the Bank has not done so since
its inception.
Section 3 of the Federal Financing Bank Act defines
"guarantee" as "any guarantee, insurance or other pledge ...
of all or part of the principal or interest." In the past,
the FFB has interpreted this to include, and has thus
purchased, a wide variety of obligations guaranteed or
insured by Federal agencies, including obligations secured
by Federal agency lease payments and obligations acquired
directly by Federal agencies. These have been sold to the
FFB subject to an agreement that the selling agency will
assure repayment to the FFB in the event of default by the
non-Federal borrower.
We also have interpreted this definition of guaranteed
obligations to include those supported by Federal agency
commitments to make debt service grants, e.g., to support
public housing authority bonds, or other commitments such as
price support agreements or commitments by Federal agencies
to make direct "take-out" loans in the event of default on a
private obligation. Yet, Mr. Chairman, the FFB purchases
obligations guaranteed under these various arrangements
only if there is a full guarantee of both principal and
interest.
The Bank has not purchased partially guaranteed obligations,
even though they would technically be eligible for purchase
under the "guarantee" definition, for the following reasons.
By purchasing the non-guaranteed portions of partially
guaranteed obligations, the FFB would be required to make
judgments as to the creditworthiness of borrowers guaranteed
by other Federal agencies and thus duplicate the functions
of the guarantor agencies. Such purchases would also place
the Government at risk more than was contemplated by Congress
in enacting provisions which limit guarantees to less than
total principal and interest.
A second problem with partially guaranteed obligations
concerns the methods of financing them which have developed
in the private market. The loan guarantee programs of SBA
and Farmers Home Administration provide good examples.

- 9 In these programs, where the guarantee is limited to 90 percent
of the loan, practices have developed where the lending
bank will sell the 90 percent guaranteed portion in the
securities market, treating it as 100 percent guaranteed
paper, and retain the 10 percent unguaranteed portion in its
own portfolio, while servicing the entire loan. FFB financing
may be appropriate for the fully-guaranteed securities
market portion of the financing, but FFB financing would not
be appropriate for the unguaranteed portion held by the
originating bank lender.
In other cases, fully-guaranteed obligations such as
small FHA and VA mortgages, are originated and serviced by
mortgage lenders or acquired by Federal agencies and resold
into the mortgage market. Here, FFB financing could have
adverse effects on the mortgage market by having the
Federal Government perform functions which today are well
handled by mortgage lenders. On the other hand, certain of
these mortgage-backed obligations are sold directly into the
securities markets, not in the mortgage market, and FFB
financing might well be appropriate there.
The appropriateness of FFB financing of particular
obligations should thus be determined on the basis of both
the nature of the guarantee and the method of financing the
obligation. We believe that such determinations should be
made by the Secretary of the Treasury in keeping with his
overall responsibilities for both debt management and the
markets for government-backed securities.
We are also concerned with possibly unforeseen and
adverse effects on the financing of a number of programs
under which Federal agencies enter into contracts, rentals,
leasing, billing, and other arrangements which are, in
effect, pledged to secure the repayment of loans made by
private lenders to companies or other private institutions.
These arrangements would generally fall within the definition
of "guarantee" in the FFB Act, but the Bank does not
currently purchase many of the private loans secured by
such commitments. Yet, under H.R. 7416, such new "guarantees"
would not be operative unless the FFB purchased them or the
Secretary of the Treasury determined that these loans were
of a type "not ordinarily bought and sold in the same
market as investment securities." This requirement for a
prior determination by the Secretary could cause serious
administrative problems and could create a cloud of uncertainty
over the legal status of a wide variety of Government
contractual arrangements.
Finally, the provision of proposed subsection 6(d)(2)(B)
of H.R. 7416 may encourage the FFB to resell guaranteed

- 10 obligations it holds, into the securities markets. This
subsection would exempt such reselling from the provisions
of subsection 6(d)(1) which, in effect, removes the guarantee
from other obligations sold into the market. Since these
sales would continue to be treated as negative budget outlays,
pressures to make such sales could become irresistible under
H.R. 7416 and the budget purposes of the Bill could be
defeated.
In summary, Mr. Chairman, we support the basic purpose
of greater Congressional control over loan guarantee
programs. We think that this purpose may be achieved,
to a large extent, by improved standards in credit program
legislation. We also believe that loan guarantee commitments
should be subject to careful review in the regular appropriations
process. If the Federal Financing Bank is included in the
budget, and guaranteed obligations continue to be excluded,
we agree that it is essential to require that certain
guaranteed securities be financed through the Bank. As
I have tried to point out, the specific provisions of
H.R. 7416 raise a number of serious issues, and we hope
to work closely with the committee to clarify these issues.
I would be happy to answer any questions.
Thank you.
oOo

FOR RELEASE ON DELIVERY
EXPECTED AT 9:15 A.M.
SEPTEMBER 20, 1977
STATEMENT OF THE HONORABLE ROBERT H. MUNDHEIM
GENERAL COUNSEL OF THE TREASURY DEPARTMENT
BEFORE THE SUBCOMMITTEE ON TRADE
OF THE
HOUSE COMMITTEE ON WAYS AND MEANS
WASHINGTON, D. C.
Mr. Chairman and Distinguished Members of this Subcommittee:
I am Robert H. Mundheim, General Counsel of the Treasury.
I am pleased to participate in this panel. The Treasury
Department has the responsibility for administering two
important laws designed to prevent unfair practices in international trade: the Antidumping Act and the Countervailing
Duty Law. We are convinced that healthy world trading cannot
exist while artificial trade distortions created by such
unfair trade procedures persist. Therefore, we take very
seriously our responsibility to administer the antidumping
and countervailing duty laws firmly and fairly.
Let me talk first about the Antidumping Act of 1921.
At present we have two pending antidumping investigations
involving steel products. In both of these cases the statute
requires Treasury to make a tentative determination by
September 30, 1977, and you can therefore expect a decision
in those cases shortly. As you know, the Antidumping Act
is aimed at a foreign producer's practice of discriminating
in his prices by selling in our market at prices lower than
those charged at home or in third countries, and thereby
injuring a domestic industry. It is a form of unfair
competition against which we have also adopted purely domestic
legislative prohibitions. The prohibition is soundly premised
on the maxim that "There is no free lunch." The alleged
unfair bargains foreign producers may offer today, supported by
high prices in home or third markets protected from the
competition of others, including our own manufacturers, may
be temporary. It would be foolish to ask our domestic proB-446
ducers to compete against such unfair foreign bargains. The

-2decline of domestic capacity flowing from such unfair competiti
will be translated into harm to our domestic economy when the
unfair bargains are withdrawn and high prices take their place.
Our antidumping law cannot be effective if it cannot
be used to provide prompt relief. Concern has been voiced
about the ability to use the law sufficiently rapidly to
stop dumping before it can create substantial harm to our
domestic industry.
Treasury action in an antidumping matter is triggered
by the filing of a petition by an affected party. It does
take time to put such a petition together in an appropriate
form. The requirement of a properly drawn petition guards
against frivolous complaints against fair competition. Nevertheless, the timing of the petition is entirely within the
control of the affected party.
Once the petition is filed Treasury is bound to act
within the sharply circumscribed time periods set forth in
the Trade Act of 1974. Within 30 days of the filing of the
petition we must decide whether to initiate a proceeding.
If we decide to initiate a proceeding we must make a tentative
determination of dumping within six months of the date of the
initiation of the proceeding. In unusual cases that period
can be extended for an additional three months. We have used
that extension power sparingly. Three months after rendering
the tentative decision we must make our final determination.
Although nine months or a year may seem a long time to
arrive at a final determination, it is the bare minimum needed
to collect, verify and evaluate the vast amount of date which
we must have in order to decide whether sales at less than
fair value have been made. That is particularly true in cases
such as steel where a petition may require us to look not
only at prices but also at each foreign company's cost of
producing the particular item against which a petition has
been filed.
Once a tentative determination of dumping has been made,
all goods entering the United States after that date are
subject to the possible assessment of dumping duties. Although
particular concerns have been voiced about the slowness of
the process of assessing duties after a dumping finding has
been made, the speed of the process does not affect the
liability for dumping duties. We are taking steps to speed
up the assessment process but I do not believe that steel

-3exporters or importers are encouraged to engage in or to
continue dumping from any slowness in the assessment process.
Let me now turn to the Countervailing Duty Law. While
most of the attention in the steel sector is presently focused
on the question of dumping, Treasury has countervailed on
steel products on eight occasions in the past. At present,
we have two pending countervailing duty cases involving steel.
As you know, the law requires Treasury to countervail
against any "bounty" or "grant" made with respect to an
exported item if dutiable and, in the case of duty free
merchandise, when injury is determined.
The vice against which the law is aimed is old and
generally well-understood. But in our modern era it has many
new wrinkles. For it is one thing to say — quite properly —
that foreign governments cannot favor their exporters with
subsidies which operate to distort international trade; it
is quite another to say that any benefit a government bestows
on a producer, even though it has no special impact on exports,
requires the imposition of a responsive countervailing duty.
Some subsidies are obvious to all of us: For example,
access to government export financing at preferential rates.
But there are difficult questions posed by programs that are
often significant to the countries involved. Perhaps the
most important of these involves the remission of indirect
taxes on exports, which the Treasury consistently has ruled
to be not a bounty. That administrative practice, of 80 years'
standing, has recently been upheld in the Zenith case by
the Court of Customs and Patent Appeals. Supreme Court
review may be sought.
In the meantime, to the extent a comparable issue has
been raised with respect to steel exports from the European
Economic Community in a case presently before the Customs
Court, we will adhere to that view.
Another case presently before us involves a steel company,
wholly-owned by an entity that is in turn controlled by
financial institutions which themselves are controlled by a
government. One of the questions we must determine is whether
equity capital made available to such a company is first,
provided by the government and, second, if so, is a bounty
or grant. And if it is a bounty or grant, how should it be
quantified?

-4The questions in this case are suggestive of problems
which would be raised if a petition were filed with respect
to a steel facility directly owned by a government. Assume
such a case involves a facility which produces a variety of
products, only some of which are exported to the United States.
How do we apportion to exported products the value of benefits
the company might have obtained through its favored access
to working capital? Or access to raw materials? Or to
energy? Or to ships or shipping space or to workers trained
at a government facility or relaxations of pollution abatement
controls applicable to other entities within the country? Or
to any of the other myriad ways in which a company can be
favored by a benign government? I suspect that we may be
wrestling with these problems in the months to come.
The Countervailing Duty Law and the Antidumping Act
are extremely important aspects of our international trade
structure. We have the responsibility to administer these
laws vigorously and sensibly. We will do that.
*

*

*

*

FOR RELEASE UPON DELIVERY
EXPECTED AT 2:00 P.M.
SEPTEMBER 20, 1977

STATEMENT OF THE HONORABLE LAURENCE N. WOODWORTH,
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
ON THE
EARNED INCOME TAX CREDIT PROVISIONS
OF THE ADMINISTRATION'S WELFARE PROPOSALS
BEFORE THE
WELFARE REFORM SUBCOMMITTEE OF THE COMMITTEES
ON AGRICULTURE, EDUCATION AND LABOR, AND WAYS AND MEANS

Mr. Chairman and members of this distinguished subcommittee:
It is an honor to make this appearance before you to
testify on the Administration's welfare proposals. My
testimony is directed to those specific provisions which
provide subsidies to wage earners with dependents through the
earned income tax credit.
Description of Current Law
Under current law, there is allowed to eligible
individuals an earned income credit of 10 percent of adjusted
gross income up to $4,000. The amount of the credit is then
reduced by 10 percent of adjusted gross income (or, earned
income, if higher) in excess of $4,000. There are several
conditions which must be met in order for an individual to be
eligible for the credit. The most important of these
conditions are that the individual maintain a household in
the United States and that the household contain a child or
disabled person for whom a deduction for personal exemptions
can be claimed. A married couple eligible for the credit
must file a joint return.
In 1977 under present law, we estimate that
approximately 6.6 million returns will claim the earned
income tax credit at a revenue cost of about $1.3 billion.
B-447

-2-

Table

1

PARTICIPATION AND REVENUE COST OF THE EARNED INCOME
CREDIT
UNDER PRESENT LAW
(1977 levels)
2 Parent Families 1 Parent Families Total
Participation
(in thousands)

3,630

2,950

6,580

Revenue Cost
(in $millions)

710

570

1,280

Description of the Proposal
As a part of the Administration's welfare programs,
the maximum amount of the earned income credit would be
expanded considerably beyond its present level, and,
most importantly, the phase-out of the available credit
would not begin until a household unit is in a higher
income level* Specifically, the credit for an eligible
individual would equal 10 percent of earned income up to
$4,000, plus 5 percent of additional earned income up to
a specified maximum income amount. This maximum income
amount would vary with the number of personal
exemptions. For 2 exemptions, the maximum income amount
would be $6,500 and the maximum credit would be $525.
For each additional exemption — up to a total of 7 —
the maximum income amount would increase by $1,300 and
the maximum credit by $65. For 7 or more exemptions,
the maximum income amount would be $13,000 and the
maximum credit $850. The credits are at 1978 income
levels.

-3-

Table

2

MAXIMUM CREDITS AND MAXIMUM INCOME AMOUNTS
ACCORDING TO NUMBER OF EXEMPTIONS
(1978)
Number of Deductions for
Personal Exemptions

Maximum
C redit

2

$

3
4
5
.6
7 or more

$
$
$
$
$

525
590
655
720
785
850

Maximum Income
Amount
$
$
$
$
$
$

6,,500
7,,800
9,,100
10,,400
11.,700
13,,000

To determine the credits for 1981, the first year
in which the program would become effective, the maximum
income amounts would be adjusted upward by changes in
the consumer price index since 1978. Projecting to
1981, the maximum income amounts would rise by about 5
percent a year, or a little over 16 percent for the
three years, using current inflation forecasts. For a
family of four, the maximum credit for 1981 would be
about $730.
As under current law, the credit would be phased
out by 10 percent of adjusted gross income (or earned
income, if greater) in excess of the maximum income
amount. In effect, once the maximum income amount is
reached, there is an implicit additional marginal tax
rate of 10 percent on income until such point as no
earned income credit is received. Since income taxes
and social security taxes will apply in income ranges
where the credit is being phased out, we do not believe
that the rate of phase-out should rise above 10 percent.
Reasons for Change
The Administration's welfare reform plan has been
designed to provide adequate income to low-income
citizens — both those who work and those who are unable
to work —
while at the same time maintaining strong
incentives to work. Our current programs are deficient

-4in both these respects. A major inadequacy of the
current hodge-podge of welfare programs is that an
insufficient and inequitable amount of total assistance
is directed to the working poor, especially two-parent
families with dependents. Outside of food stamps and
the existing earned income tax credit, there are no
other major assistance programs available to families
with low wages unless they contain aged or disabled
members or are single-parent families.
Under the welfare reform plan, the relationships
established between wages and welfare payments ensure
that families in which someone works will always be
better off financially than families of the same size
and structure in which no one works. This is
accomplished primarily by including the working poor
under the unified cash assistance component of the
welfare plan but also by expansion of the earned income
tax credit.
In addition, as an incentive for workers to take
regular unsubsidized public or private employment,
rather than subsidized public service employment, the
earned income tax credit would apply only to earnings
from unsubsidized jobs. Thus someone with a full-time
private job would be better off than if he took a
full-time subsidized public service job and better off
still than if he took no job at all.
Perhaps the most important reason for expanding the
earned income tax credit is to avoid the combined high
marginal tax rates that can result when the phase out of
various welfare benefits are added to the tax rates of
the income tax system. Most welfare programs phase out
benefits when income rises above a specified level. The
rate at which a welfare program phases out is usually
quite high in order to keep the cost of the program
within reason and to concentrate benefits on those
recipients most in need. Yet these rates of phase out
are equivalent to rates of tax on additional dollars of
earnings. When a household faces a combination of these
rates from more than one assistance program, or from
positive taxes such as the income tax and the social
security tax, the household is given a powerful
disincentive to increase earnings from work.
This combination of tax rates is one of the most
difficult problems in designing a welfare system. For
example, the tax rate implicit in the food stamp
schedule, when combined with phase out of benefits in

-5Aid to Families with Dependent Children, produces about
a 77 percent marginal tax rate on earnings.
The Administration's cash assistance component of
the welfare reform plan would solve some of the problem
of high combined marginal tax rates by consolidating
many existing cash assistance programs into one program.
The marginal rate of tax, or rate of phase out of those
benefits, would be 50 percent.
Nonetheless, if there is state supplementation of
the benefits provided under the minimum Federal level of
benefit, the phase out rate could increase by. as much as
20 percentage points to 70 percent. If the social
security tax is also taken into account, the total
implicit tax rate on earnings can rise to about 76
percent.
If the earned income credit were to be phased out
in the"same income range as cash assistance is phased
out, the rate of tax on earnings would rise by 10
percent, and, in certain income ranges, some worEers
could face a combined marginal tax rate of 86 percent on
earnings? Under current law, the earned income credit
phases out at between $4,000 and $8,000 of adjusted
gross income (or earned income, if higher). That range
overlaps with the range in which cash assistance for
most eligible households also phases out. A marginal
tax rate of 86 percent means that, out of an additional
dollar of earnings, only 14 cents is returned for family
use.
The expanded earned income credit in the
Administration's welfare proposals has been designed to
avoid that 10 percent increase in marginal tax rates on
earnings.
Beyond that, it would actually reduce the
combined implicit tax rate for those households in
income ranges where cash assistance would be phased out.
This is accomplished in two ways. First, the phase out
for the earned income credit is started only after the
phase out for the cash assistance program has been
completed. Secondly, a further credit of 5 percent is
allowed for earned income between $4,000 and the point
of complete phase out for cash assistance. The "maximum
income amount" which I mentioned earlier would be set at
a level a few percent above the Federal break-even point
for cash assistance, i.e., the level at which cash
assistance has already been completely phased out. The
few percent difference is to allow for state
supplementation•

-6The result of this change is that the combined
marginal tax rates would be reduced by 15 percentage
points — in the example given earlier, from 86 percent
to 71 percent. That is, instead of adding 10 percentage
points to the 76 percent combined tax rate from the
basic welfare program, state supplementation, and social
security, the earned income credit would reduce the
combined tax rate by 5 percentage points.
Administrative Aspects of the Earned Income Tax Credit
Permit me to turn now to some administrative
aspects of the proposal. We wish to work closely with
this subcommittee to insure that all eligible
individuals receive the earned income credit, to make
that credit available to eligible individuals throughout
the year, and to minimize its complexity.
A number of efforts are currently made to inform
individuals of their possible eligibility for the
credit. For instance, many potential recipients are
contacted through outreach programs of welfare offices
around the country. In addition, the Internal Revenue
Service prominently provides information on the credit
in the tax forms and in the instructions accompanying
the tax forms. The Internal Revenue Service also
separately notifies many households which fail to claim
the credit that they may be eligible.
In 1975, 1.8
million taxpayers claimed earned income credits of $375
million after being notified by the Internal Revenue
Service of their possible eligibility.
Another means of informing potentially eligible
recipients is contained in the draft of the
Administration's proposal. Because the credit would be
reflected in withholding, employers could become sources
of information whereby employees learn of their possible
eligibility for the credit. It is our belief that this
combination of information sources—information on tax
forms, IRS notification of potential recipients who have
not filed for a credit, outreach through welfare
departments, and communication between employer and
employee—would together insure that practically all
eligible individuals would receive the credit.
Because the credit would be reflected in
withholding, households would receive the credit
thoughout
year rather
than
a lumpreflected
sum whenin
tax
returns arethe
filed.
To have
the in
credit

-7withholding, the employee would furnish to the employer
a withholding exemption certificate stating that he or
she is eligible.for the credit and that the employee or
the spouse of the employee does not have a similar
withholding certificate on file with another employer.
The employer would then withhold tax as set forth in a
withholding table furnished by the Secretary of the
Treasury.
In some cases the amount of credit would exceed the
amount of income tax otherwise to be withheld. In those
cases, the employer would reduce the amount of
withholding for old age, survivors, and disability
insurance to cover the excess of any credit that was due
over income tax otherwise withheld. The Treasury
Department in turn would reimburse the trust funds for
Old Age and Survivors, Disability Insurance, and
Hospital Insurance according to the amount by which
their tax collections had been decreased.
Conclusion
Let me summarize the proposed changes in the earned
income tax credit. Eligibility for the earned income
credit would be restricted so that a person accepting a
private job would be better off than if he accepted a
subsidized public job of equal pay.
Furthermore, to increase incentives for work and to
reduce high marginal rates of tax on earnings, the
maximum amount of the credit would be increased. The
credit would not phase out for most households until any
cash assistance had already been phased out. In
addition, a 5 percent credit would be given for earnings
from $4,000 to a maximum income level set approximately
at the break-even point proposed for the cash assistance
component of the welfare program. This additional 5
percent credit would provide a further work incentive
and would be a partial offset to the implicit tax rate
inherent in the phase out of cash assistance. The net
result would be to reduce the combined marginal tax rate
by 15 percentage points — from levels as high as 86
percent — in income ranges where cash assistance phases
out.
Finally, the administration of the earned income
credit would be improved so that the amount of credit
would be reflected throughout the year in the paychecks

-8of workers. This would not only level out the payment
of the credit over the course of a year, but would also
lead to additional information being provided to
employees about their eligibility for the credit.

FOR RELEASE UPON DELIVERY
(APPROXIMATELY 10:00 A.M.)
SEPTEMBER 21, 1977
STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY OF THE TREASURY FOR MONETARY AFFAIRS
ON LEGISLATION TO AUTHORIZE U.S. PARTICIPATION IN
THE IMF SUPPLEMENTARY FINANCING FACILITY
BEFORE THE SUBCOMMITTEE ON FOREIGN ECONOMIC POLICY
OF THE COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
The legislation before you would authorize United States
participation in the Supplementary Financing Facility of the
International Monetary Fund. I am pleased to give you the
Administration's views on why we strongly support this
vitally important legislation, and ask that you report it
favorably.
The international monetary system at present faces certain
potentially serious problems. The Supplementary Financing
Facility is needed, and urgently needed, to strengthen the
International Monetary Fund, and to enable us to deal with
these problems. The establishment of this facility will help
to make sure that our international monetary system continues
to function smoothly, and it will further in an important way
our objectives of an open and liberal system of interntional
trade and payments. United States participation is a prerequisite
to the facility's entry into force, and I urge, on behalf of
the Administration, that the Congress authorize that participation.
Much of the relative prosperity which the world has enjoyed
over the past thirty years --in contrast to earlier decades -derives from the strength and effectiveness of our international
monetary system, with the IMF as its principal instrument. That
B-443

- 2 system has provided the framework for a growth in world trade
and financial flows unthinkable at the time the IMF was established. No nation has benefited more than the United States.
Our foreign trade amounted to $235 billion last year, nearly
15 percent of our gross national product. Our exports provide
one out of every six manufacturing jobs. Essential imports
are integrated into all phases of our economic life. Our
currency is widely used internationally and widely held, and
our capital markets channel vast sums to investment throughout
the world. Our efforts to promote growth, reduce unemployment
and curb inflation depend on an effective international
monetary system0 Other nations receive similar benefits.
The monetary sphere is one area in which international
cooperation has operated with a high degree of success. We
have on a number of occasions modified and adapted the system
to meet new problems and new circumstances, most recently and
most fundamentally in last year's Jamaica agreements. Similarly,
we have progressively strengthened the IMF in its ability to
fulfill its central role as referee, or keeper of the monetary
"rules of the game," and as principal source of official balanceof-payments financing. The Supplementary Financing Facility is
a further such step, an important step to meet a serious present
need arising out of drastic changes in the pattern of international payments in recent years„
Since 1973, there have been international payments imbalances
of unprecedented size resulting from the massive oil price
increases, deep world recession and rapid inflation. This has
placed serious strains on the system. With the recognition that
these imbalances could not be eliminated in the short run,
emphasis was placed on "financing" the deficits. Both official
and private financing expanded sharply. The increase was
spectacular. In the three years 1971 through 1973, the aggregate
deficit of all nations in current account deficit averaged $15
billion a year. In the three years 1974 through 1976, it was
$75 billion a year, a total of $225 billion for the three years.
Nations borrowed very heavily in the years 1974 through
1976 to finance their large balance of payments deficits. The
borrowing took many forms. While official financing through
the IMF during this period was far above historic levels, it
was the private markets that handled the bulk of the financing,
accounting for about three-quarters of the total.

- 3 -

Such data as are available -- admittedly incomplete -show a pattern of world payments in the period 1974 through
1976 roughly as follows:
-- The cumulative current account deficits financed
equaled about $225 billion or so (after the receipt
of grant aid), representing the counterpart of the
lendable surpluses of OPEC plus those of certain
industrial countries registering surpluses during
the period.
-- About $15 billion of these deficits, or 7 percent of
the total, was financed through the IMF, the bulk
of it through the temporary "Oil Facility" and the
"Compensatory Financing Facility," both of which
provided financing largely on the basis of "need"
with relatively little emphasis on "conditionality"
or the adoption of corrective adjustment measures
by the borrower.
-- About $40 billion of the deficits, or 18 percent of
the total, was financed through a variety of other
official sources -- development lending by industrial
countries and OPEC, by the IBRD and regional development banks, and other sources.
-- The remaining current account deficits, some
$170 billion, plus about $40 billion of debt
repayments, were financed largely through marketoriented borrowing. Most of these funds were
obtained through banks and securities markets.
Some came from governments seeking investment
outlets for their surpluses or as export financing.
Given the private market orientation of the world economy,
it was natural that the bulk of this financing be handled by
private rather than official channels. The private institutions
were in a position to expand the level of their activity.
Huge surpluses, by OPEC and other countries, of course, brought
large deposits and placements to the banks and other financial
intermediaries, and greatly expanded the loanable funds of
those institutions. In addition, the period was one of rapid
institutional expansion in the international banking system.
Many institutions were competing eagerly for new customers,
as they sought to establish themselves in new activities and
new geographic areas, and endeavored to broaden their scope
of operations so as to spread risks and diversify portfolios
at a time when domestic loan demand was less buoyant than in
immediately preceding years.

- 4 The question has been raised as to whether this rapid and
unprecedented enlargement of lending activity and debt has reached
a danger point for the monetary system -- either in the sense
that large numbers of countries have borrowed beyond their
capacity to service debt, or in the sense that our banks and
other institutions are overextended.
It is our considered judgment that the system as a whole
is not in any such position of imminent danger, either as a
result of excessive borrowing by large numbers of debtor
nations or as a result of our financial institutions being
overstretched.
There is a misconception that the increased borrowing is
being undertaken largely by the non-oil exporting developing
nations, and that if there is a danger point in the system, it
is the ability of these nations to service their debts. At
present, these developing nations -- as a group -- are not
running the large deficits and are not the heavy borrowers. The
aggregate current account deficit of the developing nations was
large in the recession period 1974-75, but it has subsequently
declined very considerably, and currently is no larger, adjusted
for inflation, than their deficits prior to the oil price
increase. After counting receipts of grant aid, the non-oil
LDC's aggregate deficit is estimated for 1977 at about $13
billion, or half the level of 1975. This group increased its
reserves last year by $11 billion, and registered a slightly
higher economic growth rate than the industrial world. Of
course, some developing nations are in difficulty -- looking
at the group as a whole can conceal important differences in
individual countries. But it is largely the OECD countries -both the more developed and the non-industrial -- that have
accounted for the bulk of the deficits and the heavy borrowing.
But the fact that the system has --in the financing sense -worked well thus far is no cause for comfort or complacency.
Success in the past is no guarantee that we are adequately
armed for the period ahead. Let me comment on our expectations
for the future and how the Supplementary Financing Facility
fits into the picture.
Nations have approved the broad outlines of a balance-ofpayments adjustment strategy. At the Manila IMF meeting last
fall, it was agreed that:
--adjustment should be symmetrical, reducing both surpluses
and deficits;

- 5 -

--countries in balance of payments difficulty should
shift resources to the external sector and bring current
account positions into line with sustainable capital inflows;
—countries in strong payments positions should maintain
adequate demand, consistent with anti-inflationary policies;
--exchange rates should play their proper role in
adjustment.
Looking ahead, it is nonetheless a safe prediction
that large imbalances will continue for the next several
years. On the surplus side, the present imbalances consist
of two parts: the current account surpluses of several
industrial countries -- in particular Germany, J£pan,
Switzerland and the Netherlands; and more importantly, the
surpluses of certain OPEC countries -- mainly in the Persian
Gulf area.
We expect a reduction in the surpluses of the major
industrial countries, as these nations expand their economies
in line with domestic needs and the agreed adjustment strategy.
But we expect only a gradual decline in the OPEC surplus -which is the largest part of the imbalance -- from the present
level of about $40 billion.
As is clearly pointed out in the Subcommittee's recent
staff report, the OPEC surplus does not lend itself to abrupt
correction. It is structural in nature. The energy needs
of the oil importing nations cannot be suddenly and sharply
cut back, if economic activity is to be maintained at
acceptable levels -- and adequate supplies from alternative
sources do not at present exist. The reduction and elimination
of OPEC surpluses through curtailment of oil imports will take
a period of years. it is important -- critically important -that the United States and other oil importing nations apply
stringent measures to conserve energy use and expand energy
production. President Carter's program will make a major
contribution to an improved energy balance. But our program,
and those of others, cannot yield major reductions in oil
imports overnight.

- 6 Similarly, it is not realistic to expect, in the relatively
small number of OPEC nations in which the surpluses are concentrated, too rapid an increase in purchases of foreign goods
and services. A number of OPEC nations have, in fact, expanded
rapidly their imports of development and consumption goods to
the extent that their surpluses have virtually disappeared. But
the remaining OPEC surpluses are concentrated in nations whose
absorptive capacity for imports is quite limited.
Accordingly, it must be expected that large imbalances
will continue at least for the next few years, while we work
toward their elimination. In the meantime, our efforts must be
directed toward assuring that the collective current account
deficits are distributed, and to the extent possible reduced, so
that the necessary borrowing is undertaken by those countries
whose creditworthiness and economic strength are adequate to
sustain the additional debt. By encouraging responsible adjustment measures in those countries experiencing severe domestic
economic distortion, large payments deficits and serious financing
problems, such deficits are reduced and shifted to a more sustainable worldwide pattern. The Supplementary Financing Facility
is a major element of our strategy for fostering this needed
adjustment, and helping to assure such a sustainable pattern
of payments.
With the establishment of the Supplementary Financing
Facility there will continue to be a large amount of borrowing -private as well as public. Concern has been expressed that
continued borrowing in very large amounts, irrespective of who
is borrowing or how the credit is used, constitutes a serious
danger for the monetary system. I do not share that view. If
the borrowed funds are properly used to support productive
investment and to strengthen the borrower's current account
position, the debt need not constitute a serious future burden,
as shown by the experience of the United States in the last
century and other countries at present. Excess savings in surplus
OPEC countries can, in effect, finance investment in the oil
importing countries by supplementing domestic savings. But the
borrowed funds should be productively invested, in order to avoid
servicing problems in the future.
This, then is the broad strategy within which the Supplementary Financing Facility fits -- we aim for a sustainable
pattern of payments in which the borrowing is undertaken by
countries commensurate with their creditworthiness; we seek to
assure that the borrowed funds are used to support sound and
effective programs of stabilization and adjustment; and meanwhile
we work toward elimination of the oil imbalance through energy
programs and further development of the OPEC nations' capacity
to import.
The Supplementary Financing Facility will thus help to assure
that adopted.
needed
financing
is
available
andtake
that
adjustment
change
are
a rlranpfifir
Much and
adjustment
external,
remains
must
to
beplace
done.in Structural
manymeasures

- 7 countries, often involving major alterations of traditional
patterns of production and consumption. Such changes will not
come easily and must take place over a number of years if
satisfactory levels of growth and employment -- ana an open system
of trade and payments -- are to be maintained. Substantial
financing will continue to be needed by countries in deficit.
And, in some countries, adjustment measures need to be introduced .
Clearly there are countries -- certainly not a large number
but a significant number -- that have already reached or are
approaching the limits of their ability to borrow or their prudence
in doing so. These are countries that are beset by internal
economic imbalances, that still face large payments deficits, where
the need for corrective measures and internal and external adjustment is compelling.
Such countries, and others which may in future face similar
difficulties, must be encouraged, and permitted, to adjust
their economies in ways that are compatible with our liberal
trade and payments objectives, in ways that avoid discrimination
against others and disruption of the world economy. Our monetary
system must foster sound adjustment, internationally responsible
adjustment, with programs that develop underlying economic and
financial stability in the countries undertaking adjustment
measures, while avoiding recourse to trade and payments restrictions that are destructive of international prosperity. This
economic and financial stability is a pre-requisite to sustainable
expansion and high employment. A major function of the IMF is
to induce such adjustment.
Given our expectations, it is essential that the resources
of the IMF be adequate both to enable it to foster responsible
adjustment policies by members facing severe payments difficulties , and also to provide confidence to the world community that
it can cope with any potential problems that may arise.
Without the addiditonal funds of the new facility, the
IMF's resources may not be adequate to meet demands placed on
it over the next several years. With relatively large use in
the past three years, the IMF's usable resources are at present
extremely low at about $5 billion. These usable resources will
be increased by about $6 to $7 billion with the coming into
effect of the sixth quota review approved in 1976 and now being
ratified, and about $3 billion remains available under certain
conditions through the General Arrangements to Borrow. Even with
those additions, and the repayments which may be expected, the
IMF's resources look sparse in a world in which total imports
are running at an annual level of nearly a trillion dollars,
and in which OPEC surpluses are likely to decline only gradually
from the current $40 billion annual level.

-8Against this background, the decision was taken to seek to
establish the Supplementary Financing Facility, with financing
of about $10 billion to be provided initially by seven industrial nations and seven OPEC countries. The industrial
countries would provide $5.2 billion, of which the U.S. share -subject to Congressional authorization -- would be SDR 1.45 billion (about $1.7 billion) approximately 17 percent of the total.
The OPEC members would provide about $4.8 billion, or nearly
half the total, with Saudi Arabia the largest single participant
of either group at $2.5 billion.
The terms relating to the provision of this financing to
the IMF by the participants are presented in detail in the
National Advisory Council Special Report on the Supplementary
Financing Facility presented to the Congress-with the legislation. Under the agreed terms, participation in the facility is
advantageous to the United States and others providing the
financing. In addition to furthering our interest in assuring a
strong and smoothly functioning international monetary system,
U.S. participation in the facility provides us with a strong, liquid
and interest-earning monetary asset. Under the facility, the
United States and other participants agree to provide currency to
the IMF in exchange for a liquid claim on the IMF of equivalent
value. These claims on the IMF, which can be drawn down any time
there is a balance of payments need to do so, form part of our
international reserve assets. The United States can also sell
or transfer these assets to others by mutual agreement. Since,
in exchange for any dollars we provide, we receive a fully
liquid claim which can be drawn down any time we have a need to
do so, there is no U.S. budget expenditure involved, but rather
an exchange of one asset for another. This treatment is in
keeping with the budget and accounting practices followed with
respect to all U.S. transactions with the IMF.
The interest rate we receive from the IMF is linked to
U.S. Treasury issues of comparable maturity, so that there is
no net cost to the Treasury from our participation in the facility.
As the drawings are repaid by the borrower, the IMF returns the
dollars to the U.S., U.S. drawing rights on the IMF correspondingly are reduced, and the transaction is reversed.
This $10 billion facility would be available to the IMF
for a temporary peirod. Countries could apply within the next
2 to 3 years, and could draw down funds over a period of 2 to
3 years, though the total period of disbursements could not
exceed 5 years. It would be available for use by IMF members
only under clearly defined criteria. Specifically, a member
drawing under the facility:
-- Must have a balance of payments financing need that
is large in relation to its IMF quota and exceeds the
amount available to it under the IMF's regular policies.

-9-

Requires a period of adjustment that is longer than
that provided for under regular IMF policies.
-- Must enter into a stand-by agreement with the IMF in
which it undertakes to adopt corrective economic policy
measures adequate to deal with its balance of payments
problem.
The facility, in short, is designed to encourage those
countries with particularly severe payments problems to adopt
internationally responsible adjustment programs -- and to avoid
the unwelcome alternatives of resort to the controls, trade
restirctions, and beggar-thy-neighbor policies which can be so
harmful to world prosperity and so disruptive to our liberal
trade and payments order. It will, in addition, by fostering a
smoother, more effective process of international balance of
payments adjustment, reinforce confidence in the "international
monetary system, and thus facilitate the flow of financing
throughout the system. It is not a device for augmenting development assistance -- the IMF provides only short to medium term
balance of payments support. The member drawing on the facility
receives more financing than is otherwise available from the
IMF; a longer period of adjustment (a 2- to 3-year program as
compared with the 1 year normally applicable in the IMF) ; and
a longer period of repayment (3- to 7-year maturity, as
compared with the IMF's normal 3- to 5-year maturity). Since
interest on the financing provided to the Fund is market-related,
the borrowing country would also pay a somewhat higher charge
than for normal IMF drawings.
The facility is a cooperative venture, with the surplus
countries of OPEC and the stronger industrial countries joining
together to assure that the needed financing will be available.
The agreement requires that before the facility can begin operations^ participants must formally commit $9 billion of the full
$10 billion, and the six largest participants must all formally
commit themselves to participate. Thus action by the United
States, and the Congress, is necessary before the facility can
become a reality.
Let me address three questions which have been asked with
respect to this new facility.
First, how can we be sure that the $10 billion contemplated
for the facility is adequate to do the job but not more than
is needed?
Obviously it is a matter of judgment and no one can be
absolutely sure. We cannot predict with certainty just which
countries will have the particularly large needs for credit
that make them eligible for this facility, along with the
willingness to adopt the kind of adjustment programs associated
with it. It is our judgment that this facility plus the amounts
available to the IMF from other sources will enable it to

- 10 provide financing over the next 2 or 3 years up to, say, a total
of $25 billion. This is above the levels of IMF financing of
recent years; which were already relatively high. To assure
confidence in the monetary system, it is vital that the IMF
always be known to have adequate resources in reserve to meet
whatever urgent problems may arise, even it it turns out that
less than the full amount is actually drawn. Since no cash
transaction occurs until a member country actually draws from
the IMF, there is no interest or other cost whatever -- to the
IMF, or to the United States and other participants -- for any
portion of the facility not actually utilized for drawings.
A second question is will the facility serve to "bail out"
private banks which have lent unwisely or excessively?
The answer is "no." The facility is not so designed and
willnot be so used. It will not bail out either countries or
banks. It will encourage countries to initiate needed adjustment
measures before their debts become too large to handle or credit
is no longer available, and it will provide transitional financing while the measures take effect. It will help redistribute
deficits to a more sustainable pattern, and improve nations'
creditworthiness and confidence in the monetary system.
It is not a substitute for bank credit and will not take
over the bank's regular lending activities. While IMF financing
may in the period ahead account for a share of total balance of
payments financing larger than the 7 percent it provided in
1974-76, it will remain small in comparison with the share
channeled through private markets. In fact, the facility is
expected to encourage banks to continue to expand their foreign
lending rather than cut back, by promoting sound economic policies
on the part of borrowers -- and experience indicates that in fact
the banks normally lend more to a country after it has entered
into a stand-by agreement with the IMF. The banks will benefit
from the new facility, but only indirectly -- through the improved
international environment, stronger monetary system and high
levels of trade that will benefit all elements of the American
economy.
A third question is why was the Supplementary Financing
Facility established rather than the alternative of a permanent
change in IMF quotas.
The answer is that this method was chosen for reasons of
timing and practicality. A review of IMF quotas is under way,
but with the complications of negotiation and ratification, it
may not lead to actual quota increase for, say, two years or more.
Hopefully the new facility can be put into operation at an early
date, and cover the particular needs until a quota revision
occurs.
facility
is to
also
flexible
than
a quota
increase,
particularly
used
sincemore
it The
is
selectively
not
large
subject
needs.
to
meet
themore
the
same
problems
quota constraints
of
countries
and
with
can be

- 11 -

Mr. Chariman, the IMF is a valuable institution, in which
all members contribute, financially and otherwise, to an
effective international monetary system. It has a good record.
The proposal for a Supplementary Financing Facility is a
sensible and realistic way to strengthen it to meet present
problems. The facility is equitable to all parties. It is
needed, and needed soon. The Administration urges that the
Committee report the proposed legislation favorably, and that
the Congress enact it promptly.
I thank you.

oo 00

00

FOR RELEASE AT 4:00 P.M.

September 20, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,500 million, to be issued September 29, 1977.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,508 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,200
million, representing an additional amount of bills dated
June 30, 1977,
and to mature December 29, 1977 (CUSIP No.
912793 L9 5), originally issued in the amount of $3,201 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,300 million to be dated
September 29, 1977, and to mature March 30, 1978
(CUSIP No.
912793 P5 9).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing September 29, 1977.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,383
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, September 26, 1977. Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
-449

-2Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and. the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on September 29, 1977, in cash or
other immediately available funds or in Treasury bills maturing
September 29, 1977. Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

CONTACT:

George G. Ross
202-566-2356

FOR IMMEDIATE RELEASE September 19, 1977

Treasury Announces Public Hearing on Boycott Guidelines
Revises Effective Dates of Certain Boycott Guidelines
Secretary of the Treasury, W. Michael Blumenthal,
today announced that a public hearing will be held on
October 25, 1977 to receive oral comments on the boycott
guidelines published in the Federal Register on August
17, 1977. Those guidelines relate to the provisions of the
Tax Reform Act of 1976 which deny certain tax benefits for
participation in or cooperation with international boycotts.
The hearing will be held at 10 a.m., in the Cash Room
of the Main Treasury Building, 15th and Pennsylvania Avenue,
N.W., Washington, D.C. Persons wishing to present oral
comments at the hearing must give written notice to the
Assistant.Secretary for Tax Policy by October 19, 1977.
The notice must (1) state the name, address, and telephone
number of the person who will make the oral presentation;
(2) outline thee points to be covered in the oral presentation;
and (3) make any suggestions or raise any questions about the
procedures to be followed at the hearing.
All such written notices will be made available for
public inspection and copying.
Although it is hoped that each speaker can be permitted
10 minutes, exclusive of time consumed by questions from a
Treasury panel, it may be necessary to limit further the
length of oral presentations. Persons expecting to present
similar views are encouraged to consulidate their presentations.

B-450

-2An agenda will be prepared setting forth the order of
presentation of oral comments and the time allotted to each
speaker. Copies of the agenda will be available the day
before the hearing and at the hearing itself.
Persons desiring further information should contact
H. David Rosenbloom at 202-566-5992, or at U.S. Treasury
Department, Office of International Tax Counsel, Washington,
D. C. 20220.
In addition, the Secretary of the Treasury also announced
today that answers H-8 and H-29 of the boycott guidelines
published in the Federal Register on-,August 17, 1977 will be
effective only for operations, requests, and agreements after
November 15, 1977. Answers H-8 and H-29 relate to letters of
credit.
In the case of operations carried out in .accordance with
the terms of a binding contract entered into before November
16, 1977. Answers H-8 and H-29 will not be effective until
after June 30, 1978.
The effective dates for other boycott guidelines remain
unchanged.
This announcement will appear in the Federal. Register
of September 21, 1977.
oOo

EMBARGOED FOR RELEASE
UNTIL 2:00 P.M.
E.D.T. OR UPON DELIVERY
Remarks Of
W. Michael Blumenthal
Secretary Of The Treasury
To The
American Institute Of Certified Public Accountants
Cincinnati, Ohio
September 20, 1977
I'm glad to have this chance to talk with you about tax
reform.
As you know, President Carter during his campaign made a
firm commitment to comprehensive reform of our income tax system.
So from the very beginning of this Administration, we made sure
that we worked hard to honor that commitment.
Throughout the spring and summer, we held meetings with
concerned groups of business executives, accountants and tax
attorneys, economists and public interest groups. Also, I
visited various parts of the country for regional meetings and
speech occasions like this.
We held frequent meetings with the President on these
proposals -- going over virtually every detail — with very open
give and take.
And we1re now beginning to make the final decisions, so that %
President Carter can present the reform legislation to Congress
in early October.
As I said, the final decisions have not been made. So it
is still too early to describe in detail what may or may not be
in the tax package.
But I would like to explain what we believe are the problems
— and our broad objectives for tax reform.
We began with the proposition that the tax code is a basic
part of our social fabric. It is a part of a compact among
ourselves and with our government.

^ V-f /

-2Because that compact has been strong, we enjoy the world's
most successful voluntary-compliance tax system.
But despite this compact, the tax code needs repair, even
though there have been several attempts at major tax revision.
Let me outline what this Administration considers the three
most serious shortcomings.
First, the system is far too complex. I know that this may
be the wrong place to talk about reducing the need for
accountants. But as a matter of public policy, tax
simplification is a critical need.
Adam Smith in his Wealth of Nations emphasized that a tax
must be both simple and certain. Every citizen should know what
he owed and why. Any departure from that, he said, would be
inherently arbitrary and unjust.
The income tax code today, to the average American, is a
mystery. About half of all individual returns are prepared by a
professional.
The IRS estimates that Americans spend about $1 billion
annually on tax preparation services. The Commission of Federal
Paperwork estimates that the total cost to all individuals for
filling out forms and keeping records amounts to $4.6 billion a
year.
For virtually every business, tax planning and preparation
is a major expense. For small businesses, tax paperwork costs
over $11 billion, according to the Paperwork Commission.
Obviously, we didn't intend to create this result. Mostly,
we had good intentions — because we wanted to improve tax equity
or to promote various social goals.
Now at a time when citizens feel increasingly alienated from
their government, the mystery of the tax code adds to that
alienation.
And we can no longer accept this complexity as a necessary
price we pay for achieving important social goals. We can —
will — reduce tax complexity because it has become a major
source of inequity — and because tax simplicity is itself a
social good.

and

-3The second major problem we recognize is the unfairness of
our tax system. We have strayed much too far from the basic
premise that people should pay taxes according to their ability
to pay.
Compared to most other countries, of course, we have a
fairly progressive income tax system. Yet as a person moves up
the income ladder, the more chances he has to avoid taxes. And
very often, the source of income — not the amount — determines
how much taxes he pays.
So while we have a rough form of vertical equity — overall,
the code is progressive — we have a serious problem of
horizontal equity among people who earn the same, but from
different sources.
Also, we must recognize the serious inequity in tax rates
because of an individual's marital status — what we now call the
marriage penalty.
Under the present law, working spouses earning $50,000
combined could pay up to $1,910 more in taxes than they would if
they were single and earning the same. At a combined income of
$30,000, the extra tax could be up to $565, and even at a
combined income of $15,000, the extra tax could be $204.
This is clearly an unfair penalty.
The third major problem is those parts of the system that
discourage private investment, both for the short term and long
term.
The fact that the United States relies on an income tax,
rather than a consumption tax, for its basic source of revenue
inhibits investment to some extent.
But the income tax was a basic choice we made decades ago,
to which we will adhere for a long time to come, I am sure.
Within that constraint, there is much we can do.
One of our most important problems is the treatment of
corporations, which we now tax as if they are the final
recipients of income.
The fact is that corporations may write the checks, but the
money comes from elsewhere — consumers, stockholders or
employees. We're not really sure of the exact incidence of the
corporate income tax.

-4But we know that it can discourage investment, especially
when corporate income is taxed doubly — once as corporate
profits, then as personal income to the stockholder.
We are also concerned about a tax code that encourages
investments in some areas, to the neglect of others. Too often
tax implications, not inherent profitability, determine private
investment decisions.
We have strayed far from Adam Smith's warning that taxes
should not interfere with decisions of the marketplace.
Instead, we have wandered into an exotic world of tax
shelters for real estate construction, timber, oil drilling,
equipment leasing and other ventures — a world in which
companies buy other companies that are losing money, just for the
tax benefits.
The result distorts our investment pattern and diverts
needed funds into uneconomic uses.
These are three very tough problems — complexity, inequity
and investment disincentives — and our tax package will address
all three.
Without teasing you with details about a tax package not yet
in final form, I would like to describe how we hope to encourage
investments — and how these tax incentives fit in with our
overall economic recovery strategy.
As you may know, we started out this Administration with the
goals of reduced unemployment, moderating inflation, and a
balanced budget.
These are ambitious goals, and we realize that the key rests
with the business community. Only the private sector can create
lasting, meaningful jobs for American workers. Those jobs will
not come without more incentives for investment.
Our latest survey suggests that real growth of capital
outlays will be 7 or 8 percent in the second half of this year.
But to reach our economic goals by 1981, we need to achieve 9 to
10 percent growth annually.
Moreover, this cautious investments pattern is part of a
long-term trend. The rate of capacity growth in manufacturing
has been dropping — from 4.6 percent between 1948 and 1968, to 4
percent from 1968 to 1973, and to 3 percent from 1973 to 1976.

-5To reverse that trend, this Administration has underway some
major initiatives. Let me describe some of them here:
First, our tax reform package will contain strong incentives
for business to invest, to retain profits and to increase
productivity.
When the tax package goes to Congress next month, you'll
see a significant net reduction of business taxes.
As you've probably read, our package will probably propose a
major change in capital gains treatment, in order to meet our
goals of improved equity and simplification.
But I can assure you that any reduction in capital gains
preferences for individuals and corporations will be more than
offset by other measures.
Among those measures getting the most attention are lower
tax rates to reduce the tax bias against savings and investment
— both by individuals and corporations.
We could include relief from double taxation of corporate
profits, to reduce taxes on dividend income.
We may also consider expanding the investment tax credit for
example, to improve the rate of investment in new production
facilities.
Of course, the final tax decisions have not been made, so it
would not be fair to try to detail what the package will or will
not be.
But you should feel confident that the package will include
a substantial stimulus for productivity and investment — and
that, while there will be tradeoffs, the net effect will be
favorable toward business.
To accomplish tax reform, we will need support from the
business community, and we hope that after you have a chance to
examine the package, you can give us that support.
Our second major initiative will be to get our energy
program through Congress.
The emphasis on energy conservation provides many
opportunities for greater productivity — while we develop new
domestic supplies of energy. Instead of a crash energy
development program — which could disrupt capital markets and
yield only an uncertain payoff — a serious conservation effort
can stretch out our supplies of domestic energy.

-6Moreover, we can increase energy prices to world market
levels predictably and gradually, so that business can plan on
its future costs, and we can eliminate the oil entitlements
program.
But most important, our energy program can buy the time we
need to expand our use of coal, to bring more oil and gas out of
the ground, to resolve nuclear energy problems, to expand
research and development for alternative sources — time, in
other words, for an orderly transition into a new energy era.
In my view, the energy program is a vital first step. In
the longer run, obviously, conservation alone is no final answer.
No matter how successful our conservation efforts, we must
still increase future domestic supplies of energy. We must still
invest huge amounts of capital into these efforts. But at least
now we will have the time to do this rationally and efficiently.
Our third major initiative is to step up efforts to
encourage exports and reduce our trade imbalance.
We are already planning to expand the resources of the
Export-Import Bank, to provide American companies additional
support.
We are continuing to practice responsive economic diplomacy
to encourage other governments to restrain demands for new import
restrictions — while we restrict our own impulses for trade
protectionism.
Most important, we will continue to encourage other
industrial nations to stimulate growth of their domestic
economies. We're just now beginning to see those efforts take
place.
Our fourth major initiative will be to continue holding down
government spending and future deficits. This Administration
remains committed to a balanced budget, as we move toward full
utilization of our resources.
Therefore, we will resist the temptation to begin ambitious
efforts, either for speeded-up economic recovery or new domestic
programs, that cannot be sustained by available budget resources.
As we consider spending proposals, we will look not only at
the next year's impact, but the impact in five years and later.
Defense projects, welfare reform, government reorganization, tax
reform and energy development incentives — all these will affect
the budgets of the 1980's — and every proposal must fit in with
our most urgent priorities, which must include a balanced budget.

-7We cannot afford the trap of spending for recovery or for
new programs at levels higher than absolutely necessary. If our
growth falls below targets, we can then add spending to stimulate
growth.
But as we all know, it's much easier to increase spending or
reduce taxes than it is to restrain spending in programs that are
already underway. Our insistence on budget restraint will give
us maximum flexibility as we face future economic developments.
0ur
fifth major initiative, something that I strongly
believe in, is to reduce unnecessary government interference in
the private sector — to give business the room it needs to do
its job.
Having come from business so recently, I did not need any
new lessons in this area. I intend to pursue this problem
vigorously.
This Administration has already taken steps to loosen
regulation of airline fares, to promote competition.
The President's government reorganization will seek not
simply to move the boxes around — but to consolidate wasteful
programs and rationalize our agency structure.
Along with that will be a serious effort to reduce paperwork
that Federal agencies expect business to maintain — and to
reduce the aggravations of nitpicking, unnecessary and uneconomic
regulations.
We've even managed to bring some common sense to OSHA, where
the new administrator has redirected the agency away from Mickey
Mouse safety rules, concentrating instead on serious health
hazards in high-risk industries.
Moreover, I personally have opposed the current effort
underway to expand job discrimination laws into the area of
mandatory retirement. Despite its desirable goal, I know that
there must be a better way than this new intrusion into business
affairs.
I reject the idea that we need a new government program or a
new set of restrictive rules and regulations for every social
problem that concerns us.
Weil, I could discuss this subject for several more hours.
But I think that I am making my point:
That is, the Carter Administration is committed to reducing
unnecessary government interference in our personal lives and our
business affairs. And I am convinced that we can do this at no
sacrifice to our social and environmental goals. I just don't
think that we tried hard enough in the past.

-8In short, this Administration is relying on a healthy,
growing, productive private sector to move our economy to higher
ground. And as we seek this major tax reform, it will be in that
context.
We are seeking not only to promote greater equity and
simplicity in our tax system — improvements clearly needed if we
are to strengthen our compact with each other.
We are also seeking to overcome the business uncertainty
that so far has inhibited new investment — and to assure the
business community that the causes of that uncertainty are in the
past, not the present.
And once these assurances begin to sink in, I believe that
we can foster the investment needed to increase production and
job opportunities — and to return to the economic prosperity
that has eluded us so far in this decade.

EMBARGOED FOR RELEASE
UNTIL 7:30 P.M.
E.D.T. OR UPON DELIVERY
Remarks of
W. Michael Blumenthal
Secretary Of The Treasury
To The
Association of Primary Dealers in U.S. Government Securities
World Trade Center
New York, New York
September 21, 1977
Tonight I would like to review the Administration's economic
program and the progress we have made in the past eight months.
Any such analysis of goals set and progress made, of
successes and of failures, has to be seen against the background
of the economic events of earlier years -- the economic history
of the early and mid-70s.
Not that any of you are likely to have forgotten this period
with all its problems, ups and downs, its policy shifts and
surprises, both domestic and international.
We had the Arab oil embargo -- followed by a quadrupling of
oil prices — and the realization that the era of cheap and
abundant energy is over.
We had unexpected shortages of basic raw materials, capacity
bottlenecks, a monumental real estate boom and bust cycle.
We had sudden wage and price controls, then an easing, then
the disappearance of controls — all within two years.
We had a sudden devaluation of the dollar, accompanied by an
imports surcharge.
We had a surge in the money supply, followed by a severe
contraction, pushing the prime rate into the 12-percent range.
B-452

-2We saw the stock market reach an all-time peak, then plunge
precipitously, recover briefly, then linger at its present level.
We had wild swings in food prices -- responding to such
unlikely events as coffee crop failures, the disappearance of the
anchovy, and overseas wheat shortages.
To put it milaly, the 1970's have been a very interesting
period in which to run a business. I should know. I was in the
middle of it too.
Many of our headaches were clearly unavoidable, but some of
them came from unsound economic management by government -- when
economic policy shifted unexpectedly from month to month, often
for political expediency -- or when the wrong policy tools were
used to cope with new problems.
The Carter Administration, coming into office on January 20
of this year, was keenly conscious of the implications of all of
these events. Indeed all of us and all of you even today still
have to live- with that legacy -- with the uncertainties of that
period still clearly imprinted in our mines.
In developing our economic program -- to achieve a faster
growth rate in the U.S. economy, to bring inflation under better
control, and to reduce the levels of unemployment -- I believethat we must be guided by five fundamental principles.
First, it is vital to follow policies that are clear-cut and
consistent — policies which avoid surprises wherever possible.
Second, our policies must rely primarily on private
industry. We should avoid injecting more government involvement
into the nation's affairs, and restrain -- if not decrease -- the
percentage of the GNP devoted to government spending.
Third, we must follow policies that are modest and gradual.
The economy cannot stand more risks and more shocks, and a more
cautious approach toward the achievement of our goals is
preferable.
Fourth, we must emphasize responsible management, careful
government budgeting, moving toward a balanced budget within a
reasonable period of time.

-3And

fifth, we must implement these goals without new
restrictions or controls. The emphasis must be on removing undue
regulations which hamper the ability of private industry to grow
and to create the jobs needed to put all Americans to work.
Looking back on what has been accomplished we have made
considerable progress, but there are clearly some areas in which
we have not yet done as well as we should. Let us look at the
positive side of the ledger first.
First, we have made significant progress in the fight
against inflation this year, after an annual rate of increase of
8.b percent in consumer prices in the first half of this year.
Wholesale prices increased only slightly in August. Farm
and food price declines have wiped out the bad record of earlier
this year. Nonagricultural raw materials prices are well below
their peaks, without any major shortages in sight.
The fight to bring inflation down is as important as
anything we can do. Our efforts must continue, and we cannot be
satisfied with what has been accomplished. Nevertheless, the
results so far achieved arc encouraging.
Second, we have reduced the unemployment rate by nearly one
percent this year. This, too, is not enough. But with some two
million more jobs added to our economy this year, the percentage
of our civilian population with jobs is higher than it has been
since 1969, when it was only slightly higher than now.
Third, consumer spending has held up well, probably in
response to moderating prices. Auto sales were very strong in
August, and total retail sales reversed the third-quarter
decline.
Fourth, real GNP growth in the first quarter was at the 7.5
percent rate, despite the severe winter. In the second quarter,
it continued strongly, at 6.2 percent. And with projected third
and fourth quarter growth, the year's average figure will be
close to what we expected.
Fifth, we developed a modest stimulus package of tax cuts
and job-producing programs to add strength to the private
sector recovery underway. This stimulus package in the fourth
quarter alone will add an estimated 300,000 new jobs, as a result
of public works construction and public service jobs programs.

-4Sixth, we reduced the Federal budget deficit, partly by
design and partly by good luck. In the fiscal year ending
September 30, we expect a deficit of about $48.1 billion, down
from $66.5 billion the year before.
And

finally, the dollar has held its value on international
markets, despite larger than expected oil import costs.

Also on the positive side, we can count some of the things
that didn't happen -- because we prevented them from happening.
We held down excessive minimum wage demands, to prevent wage
cost increases from adding to inflationary pressure.
Despite great pressure, we restrained trade protectionism in
key areas, also to keep down inflationary pressures.
And we rejected proposals for wage and price controls,
guidelines or any form of constraints on markets.%
As you know, some problems remain.
Our GNP growth in this quarter has slowed down, somewhat
more than anticipated, causing some nervousness.
The trend, however, is something we expected to happen, and
we expect a significant improvement in the fourth quarter.
Inflation continues to be a serious problem. Our six percent
underlying rate is far too high, despite recent improvement.
But we intend to avoid policies that could either
reaccelerate this rate of inflation or that repeat the past
mistake of attempting to restrain wages and prices through
government controls.
Instead, we must do better in developing new approaches that
rely on the private sector to correct inflation with better
productivity, avoidance of supply and capacity bottlenecks, and
the reliance on market forces.
Unemployment continues to be a problem, despite our recent
success. It is clearly unacceptable to all of us to have seven
million unemployed workers in this country. And especially
troubling are the very high unemployment rates for blacks and
youths.
We must do better here — not through indiscriminate
spending programs that could reignite inflation — but through
jobs programs that target on the most stubborn aspects of hard
core unemployment — and through reliance on cyclical improvement
to provide a broad base for new jobs.

-5Moreover, our adverse trade balance continues to be a
problem, largely because of oil import costs and the slow pace of
domestic economic industrial recovery in other nations.
If you look beyond these negative signs, however, our
fundamental strength is still there. In fact, the speed of the
recovery is just about typical if measured from the bottom of the
recession in March, 1975.
So we expect to continue solid growth through the second
half of this year and into the next.
To help ensure this growth, we will carry out several major
economic initiatives over the coming months. Let me describe
some of them here.
First, we will send to Congress next month a major tax
reform package that will cut business taxes and stimulate
investment.
While in some areas, taxes for business and high-income
individuals will increase, reduction in other areas will more
than offset them.
Among our many options for business tax reductions, getting
the most attention are lower tax rates for individuals and
corporations, relief from double taxation of corporate profits,
and expansion of the investment tax credit.
But

To accomplish tax reform, we will need support from the
business community, and we hope that after you have a chance to
examine the package, you can give us that support.
Our second major initiative will be to get our energy
program through Congress.
The emphasis on energy conservation allows us to stretch out
existing supplies of energy -- to avoid the high costs and
uncertainties of a crash development program — to reduce imports
— while we seek the more certain and economic solutions.
Moreover, we can increase energy prices to world market
levels predictably and gradually, so that business can plan its
future costs, and eliminate the oil entitlements program.

But most important, our energy program can buy the time we
need to expand our use of coal, to bring more oil and gas out of
the ground, to resolve nuclear energy problems, to expand
research and development for alternative sources -- time, in
other words, for an orderly transition into a new energy era.
In my view, the energy program is a vital first step -- but
in the longer run, obviously conservation alone is no final
answer.
No matter how successful our conservation efforts,
still increase future domestic supplies of energy.
invest huge amounts of capital into these efforts.
now we will have the time to do this rationally and

we must
We must still
But at least
efficiently.

Our third major initiative is to step up efforts to
encourage exports and reduce our trade imbalance.
We are already planning to expand the resources of the
Export-Import Bank, to provide American companies additional
support.
We are continuing to practice responsive economic diplomacy
to encourage other governments to restrain demands for new import
restrictions -- while we restrict our own impulses for trade
protectionism.
Most important, we will continue to encourage other
industrial nations to stimulate growth of their domestic
economies. We're just now beginning to see those efforts take
effect.
^ur fourth major initiative will be to continue holding down
government spending and future deficits. This Administration
remains committed to a goal of a balanced budget, as we move
toward full utilization of our resources.
To reach that goal, we will resist the temptation to begin
ambitious efforts, either for an overheated economic recovery or
new domestic programs that exceed our current budget resources.
We cannot afford the trap of spending more than absolutely
necessary — not just this year, but in succeeding years as well.
If our growth rate falls below targets, then we can add spending
to stimulate growth.
But as we all know, it's much easier to increase spending or
reduce taxes than it is to restrain spending in programs that are
already underway. Our insistence on budget restraint will give
us maximum flexibility as we face future economic developments.

-7Our fifth major initiative, something that I strongly
believe in, is to reduce unnecessary government interference in
the private sector — to give people the room they need to do
their jobs.
Having come from business so recently, I did not need any
new lessons in this area. I intend to pursue this problem
vigorously.
This Administration has already taken steps to loosen
regulation of airline fares, to promote competition.
The President's government reorganization will seek to
consolidate wasteful programs and rationalize our agency
structure.
We will make a serious effort to reduce paperwork and the
aggravations of nitpicking, unnecessary and uneconomic
regulations.
We've even managed to bring some common sense to OSHA, where
the new administrator has redirected the agency away from Mickey
Mouse safety rules, concentrating instead on serious health
hazards in high-risk industries.
From these lessons, I hope that we will learn to exercise
more caution about new proposals for government interventionOne very current example is the proposal in Congress to
apply Federal job discrimination laws to mandatory retirement
ages, in effect, banning mandatory retirement.
Rather than proceeding headlong into this new intervention
into business affairs -- a major social change, really — I hope
that we can study both the problem and the possible solutions
more thoroughly.
Ihe goal is a desirable one -- job protection for older
workers -- but we could easily add new costs and new complexities
that far exceed the benefits.
This is only one example of the strong tendency I have seen
in Washington for people to look first to the Federal government
for solutions — no matter how deep-seated, complex or
intractable the problem.
The fact is that government, just like an individual, must
make intelligent choices about where it can best devote its
efforts.

-8Government is a powerful instrument of the people of this
country. Government can do many useful, constructive, necessary
things, and this Administration is on record with a commitment to
deal with our most serious national problems.
Yet government also has its limitations. It cannot be
all things to all people, and it cannot solve all of the problems
that affect our citizens.
By taking on more than it can handle -- or by getting
involved where government solutions are bound to fail — we
diminish the ability of government to solve problems that only it
can solve.
And wnile I cannot lay down a rigid rule about the limits of
government, I car state that we should get involved very
cautiously -- only after we have determined that no better
alternative exists.
Certainly we should examine more deeply the opportunities
that lie in voluntary cooperation and market solutions.
The free market has time and again demonstrated its
abilities for efficient allocation in our society, and to solve
difficult problems.
I also know that we could expand the use of
lebor-management groups to work out voluntary solutions to
economic problems. As we face the challenges of productivity and
growth, we certainly must look for voluntary solutions.
I am not offering tonight any specific suggestions along
these lines. I wanted instead for you to understand my thinking
and the direction in which I would like us to take during this
Administration.
In short, I want to make this point:
That is, I am committed to reducing unnecessary government
interference in our personal lives and our business affairs. I
am convinced that we can do this at no sacrifice to our social
and environmental goals.
Moreover, this Administration is relying on a healthy,
growing, productive private sector to move our economy to higher
ground.
We are seeking to overcome the business uncertainty that so
far has inhibited new investment — and to assure you that the
causes of that uncertainty are in the past, not the present.

-9We realize that this depends on government policies that
understand the needs of business, that have continuity and
stability, that are developed openly with broad consultation, and
that make full use of the voluntary opportunities that lie ahead.
And once these assurances begin to sink in, I believe that
we can foster the investment needed to increase production and
job opportunities — and to achieve the economic prosperity that
has eluded us so far in this troubled decade.

FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M.
September 22, 1977
STATEMENT OF THE HONORABLE W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT OF
THE SENATE COMMITTEE ON FINANCE
»

Mr. Chairman and Members of the Committee:
I am pleased to be here today to assist you in your
consideration of the public debt limit. As you know,
on September 30, 1977, the present temporary debt limit
of $700 billion (enacted on June 30, 1976) will expire
and the debt limit will revert to the permanent ceiling
of $400 billion. Legislative action by September 30 will
be necessary, therefore, to permit the Treasury to borrow
to refund securities maturing after September 30 and to
raise new cash to finance the anticipated deficit in the
fiscal year 1978.
In addition, we are requesting an increase in the
$17 billion limit (also enacted June 30, 1976) on the
amount of bonds which we may issue without regard to the
4-1/4 percent interest rate ceiling on Treasury bond issues.

B-453

- 2 -

Finally, we are requesting authority to permit the
Secretary of the Treasury, with the approval of the President,
to change the interest rate on U.S. Savings Bonds if that
should become necessary to assure a fair rate of return to
savings bond investors.
Debt Limit
Turning first to the debt limit, our estimates of the
amounts of the debt subject to limit outstanding at the end
of each month through the fiscal year 1978 are shown in the
attached table. The table indicates a peak debt subject to
limit of $780 billion on September 30, 1978, assuming a $12
billion cash balance on that date. The usual $3 billion margin

for contingencies would raise this amount to $783 billion, thus

requiring an increase of $83 billion from the present temporary
limit of $700 billion.
This $83 billion increase reflects the Administration's
current estimates of a fiscal 1978 unified budget deficit
of $61.5 billion, a trust fund surplus of $13.1 billion,
and a net financing requirement for off-budget entities of
$8.5 billion. The trust fund surplus must be reflected in the
debt requirement because the surplus is invested in Treasury
securities which are subject to the debt limit.

- 3-

The debt of off-budget entities which affect the
debt limit consists largely of obligations which are issued,
sold or guaranteed by Federal agencies and financed through
the Federal Financing Bank. Since the Federal Financing
Bank borrows from the Treasury, the Treasury is required
to increase its borrowing in the market by a corresponding
»

amount. This, of course, adds to the debt subject to limit.
As indicated in the table, it is assumed that the
Treasury's operating cash balance will be at $12 billion
at the end of each month from September 30, 1977, through
September 30, 1978. On this basis, no net increase in the
debt will be required to finance the cash balance in the
fiscal year 1978. We believe that our $12 billion constant
balance assumption is reasonable in light of current needs
and the actual balances maintained by the Treasury in recent
years. Over the past decade, the Treasury's cash balances
at the end of each fiscal year have been as follows:
1968 $ 5.3 billion
1969
1970
1971
1972
1973
1974
1975
1976
T.Q.

5.9
8.0
8.8
10.1
12.6
9.2
7.6
14.8
17.4

- 4 -

The need to carry larger cash balances in recent years
reflects the overall growth in Government receipts and
expenditures. Also, there is a heavy drain in cash from
Government expenditures in the first half of each month,
and there is a sharp increase in cash from tax receipts
in the second half of the tax payment months. Thus, large
month-end cash balances, which otherwise might be used to
pay off debt, are essential to the efficient management
of the Government's finances.
Our $83 billion estimate of the required increase in
the debt subject to limit through September 30, 1978 is $8
billion higher than the $75 billion increase recommended
by the House Ways and Means Committee in its report of
August 4, 1977. Also, a $75 billion increase was approved
in the second concurrent resolution on the Federal budget
for fiscal year 1978, which was adopted by the Congress
on September 15, 1977.
As indicated in the table attached to my statement,
the $775 billion limit recommended by the House Committee
and approved in the concurrent resolution is expected to
be reached by August 31, 1978. Thus, if our estimates prove
to be correct, the Treasury may have to maintain lower than

- 5-

desirable cash balances in September 1978 to stay within the
$775 billion limit or come back to the Congress to request
that a further increase in the debt limit be enacted perhaps
a few weeks earlier than the proposed September 30, 19 78
expiration date. However, in view of the fact that
Congressional action on the debt limit must be completed
by the end of next week, I urge your Committee to agree to
the $775 billion limit recommended by the House Committee.
Bond Authority
I would like to turn now to our request for an increase
in the Treasury's authority to issue long-term securities
in the market without regard to the 4-1/4 percent statutory
ceiling on the rate of interest which may be paid on such
issues. We are requesting that the Treasury's authority
to issue bonds (securities with maturities over 10 years)
be increased by $10 billion from the current ceiling of $17
billion to $27 billion.
As you know, the 4-1/4 percent ceiling predates World
War II but did not become a serious obstacle to Treasury
issues of new bonds until the mid-1960's. At that time,
market rates of interest rose above 4-1/4 percent, and

- 6 the Treasury was precluded from issuing new bonds.
The Congress first granted relief from the 4-1/4
percent ceiling in 196 7 when it redefined, from 5 to 7 years,
the maximum maturity of Treasury notes. Since Treasury
note issues are not subject to the 4-1/4 percent ceiling
on bonds, this permitted the Treasury to issue securities
in the 5 to 7 year maturity area without regard to the
interest rate ceiling. Then, in the debt limit act of
March 15, 19 76, the maximum maturity on Treasury notes
was increased from 7 to 10 years. Today, therefore, the
4-1/4 percent ceiling applies only to Treasury issues
with maturities in excess of 10 years, and certain amounts
have been exempted from this ceiling. In 19 71, Congress
authorized the Treasury to issue up to $10 billion of
bonds without regard to the 4-1/4 percent ceiling. This
limit was increased to the current level of $17 billion
in the debt limit act of June 30, 1976. As a result of
these actions by the Congress, the Treasury has been able
to achieve a better balance in the maturity structure of
the debt and has re-established the market for long-term
Treasury securities.

- 7Today, however, Treasury has nearly exhausted the
$17 billion authority. The amount of unused authority to
issue bonds is $1 billion. Since the last increase in
this limit on June 30, 1976, the Treasury has offered
$6-2 billion of new bonds in the market. This includes
$2.5 billion issued in the current quarter. While the
timing and amounts of future bond issues will depend on
then current market conditions, a $10 billion increase
in the bond authority (which was recommended by the House
Committee) would permit the Treasury to continue its recent
pattern of bond issues throughout fiscal year 1978. We
believe that such flexibility is essential to efficient
management of the public debt.
Savings Bonds
In recent years, Treasury recommended on several
r

occasions that Congress repeal the 6 percent statutory
ceiling on the rate of interest that the Treasury may
pay on U.S. Savings Bonds. The 6 percent ceiling rate
has been in effect since June 1, 1970. Prior to 1970
the ceiling had been increased many times. As market
rates of interest rose, it became clear that an increase
in the savings bond interest rate was necessary in order

- 8to provide investors in savings bonds with a fair rate of
return.
While we do not feel that an increase in the interest
rate on savings bonds is necessary at this time, we are
concerned that the present requirement for legislation
for each increase in the rate does not provide sufficient
flexibility to adjust the rate in response to changing
market conditions. The delays encountered in the legislative
process could result in inequities to savings bond purchasers
and holders as market interest rates rise on competing
forms of savings. Also, the Treasury has come to rely
on the savings bond program as an important and relatively
stable source of long-term funds, and we are concerned
that participants in the payroll savings plans and other
savings bond purchasers might drop out of the program if
the interest rate were not maintained at a level resonably
competitive with comparable forms of savings.
Any increase in the savings bond interest rate by
the Treasury would continue to be subject to the provision
in existing law which requires approval of the President.
Also, the Treasury would, of course, give very careful
consideration to the effect of any increase in the savings
bond interest rate on the flow of savings to banks and
thrift institutions.

- 9 -

The House Ways and Means Committee deferred to a
later date consideration of our August 1 request to that
Committee that the 6 percent interest rate ceiling on
savings bonds be repealed. In view of the need for
the Congress to complete action on the debt limit next
week, I am not requesting that the House bill be amended
to repeal the interest ceiling on savings bonds. However,
I urge the Congress to consider our request on savings
bonds at an early date.
To sum up, Mr. Chairman, I recommend that the
Senate agree to the House bill, which would increase
the debt limit to $775 billion through September 30,
1978 and would increase to $27 billion the authority
to issue bonds without regard to the 4-1/4 percent
ceiling. I understand that the full House will take
up the bill this week and probably recommend a slightly
lower debt limit than $775 billion. In light of our
timing problem, I urge you to support an increase in
the debt limit of this approximate magnitude.
I will be happy to try to answer any questions
regarding these requests.

OoO

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1977
Based on: Budget Receipts of $358 Billion,
Budget Outlays of $404 Billion,
Unified Budget Deficit of $46 Billion,
Off-Budget Outlays of $10 Billion
( $ Billions)
Operating
Cash
Balance

Public Debt
Subject to
Limit

With $3 Billion
Margin for
Contingencies

-A<stual-

1976

0

$17.4

$635.8

October 29

12.0

638.7

November 30

8.7

645.8

December 31

11.7

654.7

January 31

12.7

655.0

February 28

14.6

664.5

March 31

9.0

670.3

April 29

17.8

672.2

7.0

673.2

June 30

16.3

675.6

July 31

10.2

675.0

August 31

7.1

686.3

September 30

1977

May 31

-EstimatedSeptember 30

12

696

699

PUBLIC DEBT
SUBJECT TO LIMITATION
FISCAL YEAR 1978
Based on: Budget Receipts of $401 Billion,
Budget Outlays of $463 Billion,
Unified Budget Deficit of $62 Billion,
Off-Budget Outlays of $9 Billion
($

Operating
Cash
Balance
1977
September 30

Billions)
Public Debt
Subject to
Limit

With $3 Billion
Ma]rgin for
- Conl
:ingencies

-Es1:imated$12

$696

$699

October 31

12

708

711

November 30

12

716

719

December 30

12

721

724

January 31

12

720

723

February 28

12

733

736

March 31

12

749

752

April 17

12

757

760

April 28

12

745

748

May 31

12

763

766

June 15

12

770

773

June 30

12

758

761

July 31

12

764

767

August 31

12

775

778

September 29

12

780

783

1978

FOR IMMEDIATE RELEASE

September 21, 1977

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $3,140 million of
$5,485 million of tenders received from the public for the 2-year
notes, Series U-1979, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 6.71% 1/
Highest yield
Average yield

6.75%
6.74%

The interest rate on the notes will be 6-5/8%. At the 6-5/8% rate,
the above yields result in the following prices:
Low-yield price 99.843
High-yield price
Average-yield price

99.770
99.788

The $3,140 million of accepted tenders includes $466 million of
noncompetitive tenders and $2,532 million of competitive tenders
(including 36% of the amount of notes bid for at the high yield) from
private investors. It also includes $142 million of tenders at the
average price from Federal Reserve Banks as agents for foreign and
international monetary authorities in exchange for maturing securities.
In addition, $705 million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for securities maturing September 30, 1977,
($90 million) and from Federal Reserve Banks as agents for foreign
and international monetary authorities for new cash ($615 million) .

1/ Excepting 2 tenders totaling $10,000

B-454

FOR IMMEDIATE RELEASE

September 28, 1977

UNITED STATES AND JAMAICA TO DISCUSS
INCOME TAX TREATY
The Treasury Department announced today that
representatives of the United States and Jamaica have
recently concluded exploratory talks in Washington with a
view to determining whether a basis exists for resuming
negotiations on a new income tax treaty between the two
countries. On the basis of these talks, it is expected that
negotiations will resume in Jamaica early in 1978.
The income tax treaty between the United States and the
United Kingdom was extended to Jamaica in 1958, and remains
in force today. The proposed new treaty would replace this
extended U.K. treaty.
The proposed treaty is intended to prevent 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 with procedures for
administering the provisions of the treaty.
The 1977 "model" income tax treaty developed by the
Organization for Economic Cooperation and Development will
be taken into account along with recent U.S. treaties with
other countries, such as the treaties with Korea and The
Philippines, which are currently pending before the Senate
Foreign Relations Committee. Attention is also called to
the current United States "model" income tax treaty, the
text of which was released by the Treasury Department on
May 17, 1977.
The Treasury invites persons wishing to submit comments
concerning the proposed treaty to send them to Dr. Laurence N.
Woodworth, Assistant Secretary of the Treasury, U.S. Treasury
Department, Washington, D.C. 20220, by January 20, 1978.
This announcement appeared in the Federal Register of
Tuesday, September 28, 1977.
B-455

oOo

kpartmentoftheTREASURjr
TELEPHONE 566-2041

(ASHtNGTON, D.C. 20220

September 26, 1977

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,200 million of 13-week Treasury bills and for $3,300 million
of 26-week Treasury bills, both series to be issued on September 29, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

26-week bills
maturing March 30, 1978

13-week bills
maturing December 29, 1977
Price

Discount
Rate

98.496
98.486
98.488

5.950%
5.989%
5.982%

Investment
Rate 1/

Price

6.12%
6.17%
6.16%

96.890
96.868
96.873

Discount
Rate
6.152%
6.195%
6.185%

Investment
Rate 1/
6.44%
6.48%
6.47%

Tenders at the low price for the 13-week bills were allotted 26%.
Tenders at the low price for the 26-week bills were allotted 70%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTSAND TREASURY:
Location

Received

Accepted

Received

Accept-.v

$
23,515,000
4,712,725,000
9,665,000
24,745,000
15,075,000
66,060,000
590,705,000
40,560,000
5,295,000
20,100,000
3,330,000
310,775,000

$ 16,515,000
2,898,725,000
9,665,000
9,745,000
*9,575,000
44,060,000
158,705,000
18,415,000
5,295,000
20,100,000
3,330,000
105,775,000
?nn,nnn

Boston
$
18,495,000
New York
3,674,025,000
Philadelphia
18,140,000
Cleveland
31,810,000
Richmond
16,660,000
Atlanta
44,830,000
Chicago
494,665,000
St. Louis
61,245,000
Minneapolis
7,325,000
Kansas City
35,450,000
Dallas
12,125,000
San Francisco
230,520,000

$
16,495,000
1,906,040,000
17,490,000
30,515,000
16,660,000
28,125,000
54,425,000
36,555,000
7,325,000
26,510,000
12,125,000
48,080,000

Treasury

30,000

30,000

$4,645,320,000

$2,200,375,000 ah $5,822,750,000

TOTALS

2QQ.QQQ
~"

^Includes $330,495,000 noncompetitive tenders from the public.
Includes $162,000,000 noncompetitive tenders from the public.
Equivalent coupon-issue yield.
458

$3,300,105,000 b/
J

'

NATIONAL ADVISORY COUNCIL
ON
INTERNATIONAL MONETARY AND
FINANCIAL POLICIES
SPECIAL REPORT
TO THE PRESIDENT
AND TO THE CONGRESS
ON U.S. PARTICIPATION IN
THE SUPPLEMENTARY FINANCING FACILITY
OF THE
INTERNATIONAL MONETARY FUND

SEPTEMBER 1977

NATIONAL ADVISORY COUNCIL
ON
INTERNATIONAL MONETARY AND
FINANCIAL POLICIES
SPECIAL REPORT
TO THE PRESIDENT
AND TO THE CONGRESS
ON U.S. PARTICIPATION IN
THE SUPPLEMENTARY FINANCING FACILITY
OF THE
INTERNATIONAL MONETARY FUND

SEPTEMBER 1977

TABLE OF CONTENTS
PAGE
Summary 1
The World Balance of Payments Situation 5
and Financing Patterns, 1973-1976
The Need for the Supplementary Financing 10
Facility
Main Provisions of the Supplementary 18
Financing Facility
Proposed Legislation 22
Recommendation 23

Annexes
A. IMF Decision Establishing a Supplementary
Financing Facility
B. IMF Decision on Replenishment in Connection
with Supplementary Financing Facility
C. Relationship Between Supplementary Financing
and Regular IMF Resources

I.

Summary

Since 1973, the pattern of world payments has undergone
profound transformation as a result of massive increases in
oil prices, unprecedented and persistent inflation, deep
recession, and hesitant economic recovery and growth. Dramatic
alterations in the pattern of payments have produced major
strains on the international financial system.
The OPEC 1/ group of countries, after years of approximate balance on current account, registered cumulative current
account surpluses of about $150 billion during the three years
1974 through 1976. The industrial country group, which
historically had run current account surpluses and exported
capital to the rest of the world, has experienced cumulative
current account deficits of unprecedented magnitude — about
$66 billion during the three year period, or about forty
percent of the deficits run by oil importers. The non-oil
exporting developing countries and the non-market economies
of Eastern Europe have sustained deficits and financing
reguirements much larger than they had previously experienced -about $106 billion for the three year period. Broadly similar
patterns are likely in 1977 and beyond.
In the period immediately following the oil price increases
of 1973-74, major emphasis was placed on financing the deficits,
given their magnitude and the long-term structural nature of
adjustment reguired to reduce oil imports. The only other
course of action would have been for oil importing countries
individually to attempt to reduce their own deficits guickly,
by sharply reducing economic growth rates, applying trade and
payments restrictions or manipulating exchange rates —
policies that would have been disruptive of the world economy
and harmful to our objectives of an open, liberal trading system.
Thus initial concerns were directed to ensuring that financing
was available to countries and to avoidance of uncooperative
and ultimately self-defeating actions to improve their own
positions at the expense of others. Even with the emphasis
on financing, the world economy experienced a severe recession
centered in the major industrial countries, while smaller
1/
The Organization
of Petroleum
Exporting
Countries.
nations
borrowed heavily
in an effort
to avoid
harsh curtailment
The
followingThe
countries
areincreases
members: aggravated
Algeria, the
Ecuador,
of growth.
oil price
already
Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.

- 2 serious problems of worldwide inflation, caused
major changes in the relative costs of factor inputs
in production processes, and led to a major shift
in terms of trade against the oil importing nations.
The greatly increased global need for balance of
payments financing has been matched, by and large, by
a general expansion of financing available for that
purpose. The OPEC surpluses, as a matter of necessity,
have been invested predominantly in the oil importing
countries. But the geographic placement of OPEC surplus
funds has not corresponded to the pattern of current
account deficits. Thus, financial intermediation on an
unparalleled scale has been required to redistribute,
or recycle, these huge surpluses. Private capital markets and the international banking system have been
relied upon to meet the bulk of the financial intermediation requirements of the last few years, and have
done so efficiently and successfully.
While private market financing expanded rapidly during the past three years, providing roughly three-quarters
of total balance of payments financing during that period,
official financing has also increased substantially. The
International Monetary Fund (IMF), the primary source of
official balance of payments financing, has channeled
financing to its members at record levels since 1973, primarily through the temporary Oil Facility and the Compensatory Financing Facility. Nevertheless, IMF financing
remained relatively small by comparison with private
financing during this period, meeting approximately seven
percent of total balance of payments financing needs.
The priority that was initially placed on ensuring
that financing was available, generally on a relatively
"unconditional" basis, provided a valuable breathing space.
The oil importing countries were afforded an opportunity
to reassess their domestic and external economic policies
more carefully in light of the profound changes that had
taken place in the world energy balance and in world trade
and payments. Subsequently, many countries did act to
alter their economic policies in order to stabilize their
economies and to bring their external accounts into better
balance -- to bring their current account deficits to positions more compatible with their ability to attract foreign
capital. But while such "adjustment" policies have been
initiated in a number of countries, the process is far from
complete. Structural changes must yet take place in many
economies, often involving significant alteration of tradi-

- 3 tional attitudes and patterns of production and consumption. For many countries, such changes will not come
easily and must take place over a number of years if
satisfactory levels of growth and employment -- and an
open system of trade and payments — are to be maintained.
Over the next several years it must be expected that
large payments imbalances will continue as these adjustments take place in oil importing countries, and — equally
importantly -- as OPEC's capacity to absorb imports continues
to increase. In order to help ensure that adjustment occurs
at an appropriate pace — and with appropriate policies —
substantial financing will continue to be needed by countries in deficit. Private markets can and should continue
to provide the bulk of this financing. But they cannot be
expected to handle all the situations which may arise.
The massive borrowing of the last few years has quite
naturally led to the accumulation of large amounts of external debt. For many countries, large external debt does
not currently constitute a problem since these countries
have maintained — in some cases restored — their creditworthiness in the private market, generally through the
implementation of sound economic policies and productive
utilization of investment. In a relatively few cases,
however, where the need for adjustment is evident but the
willingness or ability to pursue the needed policies has
been lacking, commercial bankers have become more cautious.
Understandably, the banks have become less willing to continue to provide additional balance of payments financing
in cases where debts are substantial but needed adjustment
is not taking place.
In order to help ensure that needed adjustment is
pursued — i n a cooperative and internationally appropriate
manner -- by countries facing balance of payments difficulties, it is important that adequate official financing be
available on the basis of appropriate terms and conditions.
The IMF is the primary official source of "conditional"
financing — that is, financing keyed to the adoption by the
borrower of sound adjustment policies designed to eliminate
the need for such financing and to provide a basis for
repayment. The IMF's record is good and its reputation is
strong, with both borrowers and creditors. But its current supply of usable currencies is extremely low, both by
historical standards and in relation to potential needs for
official financing during the next few years. In the circumstances, the Interim Committee of the IMF concluded in
April 1977, that there was "an urgent need for a supplementary arrangement of a temporary nature that would enable
the Fund to expand its financial assistance to those

- 4 of its members that in the next several years will face
payments imbalances that are large in relation to their
economies."
After further consideration of this issue by the
IMF's Executive Board, IMF Managing Director Johannes
Witteveen approached a number of industrial and oil exporting countries about the possibility of providing additional resources to the IMF on a temporary basis. After extensive negotiations, a meeting was held in Paris
on August 6 of potential "participants" — that is, those
nations that would participate in assuring the financing
of the new facility — and agreement was reached on
the basic terms and conditions of the financing to be
provided, and on amounts of financing commitments to the
Supplementary Financing Facility. Agreement was subsequently reached in the IMF Executive Board on the
final operating details of the new facility. The two
IMF decisions providing for the establishment of this
facility, including the general terms of the agreement
that each participant would sign with the IMF in committing financing to the facility, are presented as
Annexes A and B to this report.
The Supplementary Financing Facility will be a
temporary facility, enabling the IMF to draw upon the
financing commitments of participants over the next
several years in order to provide additional financing
— on a strictly "conditional" basis -- to members with
especially large balance of payments financing needs
and difficult adjustment problems. Borrowing members
will have access to resources under the facility in
amounts larger than would normally be available from
the IMF, and will be able to draw under an arrangement
with the IMF over a period longer than the one year
normally applicable to IMF stand-by arrangements. The
period of repayment will also be longer than the usual
IMF standard of three to five years.
In exchange for the financing provided to the IMF,
participants will receive a liquid financial claim on
the Fund which will pay interest at market-related rates.
Initial participants in the facility include industrial
countries and oil-producing countries, with initial commitments equal to approximately SDR 8.6 billion, about
$10 billion. The proposed U.S. share is SDR 1,450 million
(about $1,700 million), or approximately 17 percent of
the total.2/
The facility will make a major contribution toward
the strengthening of the international monetary system,
2/^^V^f^blVTr^Pa^ge 18. As of September 9, 1977, discussions were underway that were expected to bring the
initial total to at least SDR $8.6 billion.

- 5 and will help ensure that the IMF can cope with potential problems that might arise. By enabling the IMF
to provide additional financing to members, it will
encourage countries to initiate needed adjustment measures in a timely fashion through sound and internationally responsible policies. In doing so, it will improve
the creditworthiness of members, thus helping ensure
continued adequate flows of private market financing,
which must continue to meet the bulk of the world's balance of payments financing needs. Moreover, the facility
will strengthen confidence in the international monetary
system as a whole, promoting adjustment of payments positions toward a more sustainable pattern, and demonstrating that the official community has the capacity to
respond quickly when serious payments problems arise.
It is the unanimous judgment of the National Advisory
Council that the Supplementary Financing Facility is essential to the continued effective functioning of the international financial system and the maintenance of an open,
liberal world trade and payments system. The Council
considers that it is in the vital interest of the United
States to participate in the facility. By the terms of
the decisions establishing the facility, it will not
enter into force until the United States and other major
participants have completed official agreements with the
IMF to participate and to make financing available in the
amounts proposed. Authorization by the Congress is required
for the United States to participate in the facility. The
Council believes that prompt enactment of authorizing legislation will both demonstrate the importance placed by
the United States on a strong and cooperative international
monetary system and serve as a major step to ensure the
maintenance of such a system.
Accordingly, the Council recommends prompt and favorable action by the Congress on legislation to authorize
U.S. participation in the facility.

II.

The World Balance of Payments Situation and Financing
Patterns, 1973-1976

Major economic disturbances in the years 1973 to 1976
brought about large and abrupt changes in the world economy.
The oil price increases of 1973 and 1974 aggravated the inflation that already existed and were a contributing factor
in the worst world recession since the 1930's. These developments combined to cause major changes in the pattern of world
account surplus on the order of $6 billion in 1973, registered

- 6 a surplus of $68 billion in 1974. Their cumulative
surplus for the three years 1974 through 1976 totaled
about $150 billion.
The industrial nations of the Organization for
Economic Cooperation and Development (OECD) suddenly
witnessed an aggregate current account shift from
moderate surplus to large deficit. Instead of being
major suppliers of net capital to the rest of the world,
the OECD group became net capital importers. The historic and widely accepted view that "mature" economies
should be creditors was dramatically rendered obsolete,
as the OPEC surplus countries moved to the position of
generating large amounts of net savings which were used
by the OECD countries and (often after intermediation
through OECD capital markets) by the non-oil exporting
developing countries. In the period 1974 through 1976,
the combined OECD current account position showed a
deficit of $22 billion per year, compared with an average
current account surplus position in excess of $5 billion
in 1971 through 1973. (See Table 1 below.) Within OECD,
a few countries registered surpluses in the 1974-76
period, averaging $15 billion per year, while those OECD
members in deficit saw their combined position deteriorate
from a deficit of $7 billion per year in 1971-73 to a deficit of $37 billion per year in 1974-76.
The position of the non-oil exporting developing nations also changed sharply. During the 1960's and early
1970's these countries had generally maintained carefully
controlled current account deficits. Between 1971 and
1973, the average annual aggregate deficit of the non-oil
exporting LDC's was roughly $4 billion. In the immediate
wake of the oil price increases, their aggregate annual
deficits rose nearly six-fold, to an average of $23 billion per year during 1974-1976.
There has in addition been a dramatic change in the
external balance of the "rest of the world," which includes
Israel, South Africa and the non-market economies of Eastern Europe, the USSR, and the People's Republic of China.
These countries ran near-balanced current account positions
in 1971-73, carefully tailoring import purchases to export
proceeds. The oil crisis and worldwide recession, coupled
with increased demand for consumer goods at home, resulted
in a sharp jump in the current account deficit of these
countries to $12 billion a year in the 1974-1976 period.
The following table demonstrates the shifts in payments patterns for these groups of countries.

- 7 Table 1
World Payments Patterns
Balances on goods, services, and
private and governmental transfers
($ billions)
Average Average
1971-73

1974-76

Surplus Countries ;
OPEC 2.8 49.0
OECD 12.3 15.3
Total Surpluses + 15.1 + 64.3
Deficit Countries
OPEC - 1.4 - 2.0
OECD - 6.7 - 37.3
LDC -4.1

V
Other
- 2.7
Total Deficits - 14.9 - 74.6
2/
Residual

-

0.2

+

10.3

1/ Israel, South Africa, and non-market economies of Eastern
Europe, the USSR, and the People's Republic of China.
2/ Over the past several years the "residual" item has grown
significantly. Recorded exports exceed imports by a
sizable sum for any calendar year due to goods in transit
and inflation. The OECD staff has estimated that $12-14
billion is involved in these factors. These factors would
by themselves make the residual negative rather than positive. Both the IMF and OECD attribute the positive
residual to asymmetries in the reporting of service transac
tions; that is, an over-reporting of service imports,
or under-reporting of service exports.
Source: OECD and U.S. Treasury Department staff estimates.

- 8 In the circumstances, nations borrowed very heavily
in the years 1974-76 to finance their large current account deficits. The borrowing took many forms. While
official financing through the IMF during this period
was far above historical levels, and official development lending increased, private markets provided the
bulk of the financing — about three-quarters of total
balance of payments financing during the three year
period.
In addition to expanded demands for credit, conditions on the supply side of the market were also
conducive to a rapid growth in private financing during
the period. The huge OPEC surpluses, of course, brought
large deposits and placements to recipient banks and
other financial intermediaries, and greatly expanded the
assets of those institutions. In addition, the period
was one of rapid secular expansion of the international
banking system. Particularly with domestic loan demand
less buoyant than in immediately preceding years, many
institutions were competing eagerly for new customers
abroad, as banks sought to establish themselves in new
activities and new geographic areas and endeavored to
broaden their scope of operations so as to spread risks
and diversify portfolios.
Using such data as are available -- and acknowledging
that the picture is incomplete — we can sketch out a pattern of the financing of world payments in the period 1974
through 1976 with roughly the following dimensions:
— Cumulative current account deficits equaled
about $225 billion (after the receipt of
grant aid), representing the counterpart of
the investable surpluses of OPEC countries
plus those of certain industrial countries
registering surpluses during the period.
— About $15 billion of these deficits, or
seven percent of the total, was financed
by the IMF, the bulk of it through the temporary Oil Facility and the Compensatory
Financing Facility, both of which provided
financing largely on the basis of "need"
with relatively little emphasis on "conditionality" or the adoption of corrective
adjustment measures by the borrower.
— About $40 billion of the deficits, or eighteen percent of the total, was financed by a
variety of other official sources — devel-

- 9 opment lending by other industrial and OPEC
countries, and by the IBRD and regional development banks, and other official financing.
— The remaining current account deficits, some
$170 billion, plus about $40 billion of debt
repayments, were financed largely through
market-oriented borrowing. Most of these
funds were obtained through banks and securities markets.
The financing pattern of the past few years reflects
the initial emphasis placed by nations on financing the
imbalances rather than adjusting their economies so
as to reduce or eliminate the large imbalances resulting
from the combined impact of oil price increases and worldwide recession and unprecedented inflation. At the time
of the initial shifts in payments patterns resulting from
the oil price increases, there were serious concerns that
the oil importing nations, trying individually to protect
their own payments positions, would harm each other by
external restrictions and excessive domestic retrenchment,
as they tried to eliminate deficits which -- as the counterpart of the OPEC surplus -- were collectively irreducible.
Recognizing these dangers, the IMF membership agreed in
January 1974 in the Rome Communique to forswear such
self-defeating actions.
Accordingly, in the early aftermath of the oil price
increases, emphasis was appropriately placed on assuring
the adequacy of resources for financing the balance of
payments costs of higher oil prices. Nations were encouraged, at least temporarily, to "accept" the oil deficit
and finance it, rather than to try individually to eliminate
their respective deficits at the expense of other oil
importing countries. Much of the financing made available
— both by private and official sources — was essentially
without conditions or requirements that particlar adjustment policies be implemented.
With the large amount of international financing that
has occured during this period, accumulations of debt, especially debt owed to private institutions, has been large,
by historical standards very large. Complete and accurate
records on the aggregate amount of debt outstanding do not
exist, but the following statistics give some indication of
the present situation:
— The external public or publicly guaranteed indebtedness of 75 non-oil exporting developing
countries has been estimated by the World Bank
at about $171 bililion as of the end of 1976.

- 10 —

The OECD estimates that the aggregate foreign
borrowing undertaken by the OECD deficit countries in the years 1974-1976 amounted to roughly
$98 billion.

— The foreign claims of commercial banks on countries other than the G-10 major industrial countries, Switzerland and the offshore banking centers
totaled $194 billion at the end of 1976, of which
U.S. banks accounted for roughly $82 billion.3/
— The foreign claims of commercial banks on the
G-10 major industrial countries, Switzerland
and offshore centers (which includes inter-bank
lending and thus involves a large amount of
double-counting) were about $354 billion at
the end of 1976, of which U.S. banks accounted for roughly $126 billion.3/
These data are difficult to assess. It might be
noted that, as a rough rule of thumb, the bank claims,
both on G-10 countries and others, approximately doubled during the three years 1974-76. External public debts
of the 75 non-oil developing nations more than doubled
during the same three years. Of course, doubling the absolute size of debt does not mean doubling the "real burden,"
since price increases have reduced the burden in real terms
of previously incurred debt, and since economic growth has
strengthened the debtors' capacity to service debt.

III. The Need for the Supplementary Financing Facility
,

,

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•_-

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i-

ir

i r

•

nr

- r

—

~

—

~~^ " ^

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—

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~*

The availability of financing during the 1974-76
period provided countries with the time and opportunity
to reassess and redirect their overall economic policies
in light of fundamentally altered economic circumstances
-- without having to move hastily to reverse the weakening of their current account positions because of a lack
of financing. There was growing recognition on the part
of many countries that some very basic adjustments in
their economies would ultimately be required -- factors
of production shifted, product mixes altered, alternative
energy sources exploited, new energy-efficient capital
equipment designed and installed, long-standing patterns
of consumption modified, and resources transferred toward
export sectors.
3/ Sources: Bank for International Settlements and Federal
Reserve Board of Governors.

- 11 The process of international adjustment has been
considerably facilitated by the more flexible exchange
rate arrangements which most countries adopted in 1973,
just prior to the sharp increases in oil prices. This
increased flexibility has enabled the system to absorb
shocks of unprecedented severity without the massive
capital flight and traumatic exchange market crises of
earlier periods. Flexible rates cannot, of course,
eliminate the imbalances between OPEC and the oil importing world — no tolerable set of exchange rates
could effect an adjustment of such magnitude. But
flexible exchange rates — where, indeed, flexibility
has been permitted by the authorities -- have helped to
distribute the imbalances toward a more sustainable
geographic pattern, and have allowed the system to
accomodate to the widely diverging inflation rates
that different countries have experienced during this
period.
The oil price increases created dual problems for
oil importing countries: sharp shifts in historic patterns of trade and current account balances; and sudden
alterations of relative factor input costs in production
processes. While some progress has been made in re-establishing a generally sustainable pattern of current account
balances, much domestic restructuring remains to be accomplished. The sharp shifts in relative prices, both
internally and externally, and the terms of trade shifts
against oil importers, have been difficult to adjust to,
and resistance in many countries to the needed adjustment
measures has exacerbated the problems of inflation and
economic management.
The responses of individual countries to the change
in circumstances since 1973 have been varied. In some
countries, policies have been altered effectively to stabilize the economy and bring the current account balance
into a position that is reasonable and sustainable in
light of the country's ability to attract capital. In
others, stabilization programs have only recently been
put into place, or progress on programs implemented
earlier has been slow and difficult to achieve. For these
countries, perserverance — as well as time — will be
needed to restore long-lasting stability and growth. And
there are a significant though not large number of countries which are only now beginning to consider stabilization measures, having reached or approached the limits
of their ability to borrow. These countries are still
beset by economic distortions and still face large

- 12 payments deficits — financing has been used largely to
maintain consumption levels rather than support new investment needed to accomplish economic restructuring. The need
for corrective measures and adjustment in these cases is
compelling.
Large imbalances will continue in 1977, although the
distribution of balances among oil importers will be somewhat altered in 1977. The OPEC surplus is expected to
remain at about $40 billion. Non-oil exporting developing
nations, benefiting from higher commodity prices and important adjustment efforts by a few major countries, will
probably show some reduction in their current account deficits as a group. OECD countries will bear a larger share
of the deficits, although in some of the larger countries
adjustment policies now in place will produce impressive
improvements in the external positions. The Eastern European countries may see some small reduction in their
aggregate deficits.
We have no reason to expect substantial changes in the
current payments pattern among the four major country groupings in the next few years. OPEC surpluses are likely to
diminish, but the pace of decline is expected to be slow.
The aggregate deficit of the non-oil exporting developing
nations will probably remain roughly constant, or perhaps
increase slightly as flows of official development lending
increase and thus enable some countries to run larger deficits.
The financing problems that may arise over the next
few years are not expected to be of an aggregate nature,
directly involving all members of the international monetary system. But there are individual countries which
either already face financing problems or may be expected
to face them in the next two to three years. Some countries need to undertake major efforts to reduce fundamental
imbalances within their economies and restore their external accounts to sustainable positions. Their external
financing needs in some cases will certainly exceed private market willingness to provide funds.
A combination of appropriate adjustment measures and
adequate financing is clearly required during the next
several years if the system is to operate effectively.
Adjustment will become unavoidable for some countries because of their inability to obtain financing from the markets in needed amounts and on acceptable terms. If financing is not available, they may feel compelled to take
recourse to unduly restrictive domestic economic measures,
harsh trade and capital restrictions, or aggressive exchange
rate practices in order to reduce their financing needs.

- 13 Such measures could have serious worldwide repercussions
as well as consequences for the economy of the country
introducing them. In today's interdependent world, the
economic actions and policies of any one country are closely
related to those of other countries and directly affect
their economic prosperity. Trade barriers imposed by one
country, for instance, can abruptly and seriously impair
other countries' trade and payments positions, and lead
them to impose barriers in order to protect their own external position or in retaliation.
The potential for serious disruption of the world
economy as a consequence of such moves is widely understood. The U.S. economy, for example, is heavily dependent on world trade and financial flows. Imported
products, from raw materials to high technology products,
are heavily integrated into all phases of U.S. economic
activity -- production, distribution and consumption.
Export markets constitute a major part of the demand for
U.S. goods and services. U.S. financial markets are a
keystone of international financial transactions. It is
of critical importance to the prosperity of the U.S. economy specifically and the world economy generally that
the structure of the international financial system remain
sound and that the liberal system of world trade and payments be maintained.
Sound adjustment can bring positive advantages to the
world economy, as well as to the countries involved. By
improving underlying stability, adjustment can lead to a
stable economic environment which will encourage productive
investment and foster real growth. While the imposition of
adjustment measures can lead temporarily to a reduction of
output in an overheated economy, it can provide the required
longer-run foundation for sound and sustainable growth, and
strengthen the world economy.
It is expected that private markets will continue to meet
the bulk of balance of payments financing needs during the
period ahead. But there are clear indications that some individual countries will lose their access to private financing
unless they institute effective adjustment measures -- steps
which show promise of restoration of a sound and stable payments position. Over the past several months commercial
banks have become more selective in the provision of capital
to certain deficit countries, where the debts are already
substantial and the absence or inadequacy of adjustment
policies has raised questions about the borrowers'
creditworthiness.
There is a critical need for the system to have

- 14 available adequate official financing to support
carefully-developed, orderly and internationally
appropriate programs of adjustment — as an alternative
to countries facing serious situations and as an incentive
for them to act before their situations become critical.
While our international monetary system is at present
strong and functioning effectively, we do not have in
place everything needed to insure against future risks.
It is for this reason that it is proposed that the United
States join with other strong industrial nations and major
oil exporting nations to establish within the IMF a new
facility — the Supplementary Financing Facility — to
fill that need.
The rationale for the Supplementary Financing Facility rests on three main premises:
— First, that large payments imbalances will
continue for the next several years.
— Second, that there is a need for emphasis
on "adjustment" of imbalances, rather than
simply "finaneing" imbalances, especially by
those countries facing relatively large payments deficits and difficult financing needs.
— Third, that the resources of the IMF must be
adequate not only to enable it to foster responsible adjustment policies by individual
members facing severe payments difficulties,
but also to provide confidence more generally
that it is in a position to deal with problems
that may arise.
The IMF is the principal source of official balance of
payments financing for its member countries. IMF financing
has increased greatly during the last few years as a consequence of the balance of payments developments described
above, and IMF holdings of usable resources are now extremely
low, both by historical standards and in relation to potential
balance of payments financing needs during the next few years.
Current IMF holdings of "usable" currencies 4/ amount to the
equivalent of about SDR 4-5 billion (roughly $4 1/2-5 1/2
billion). It is expected that usable IMF resources will
increase by about SDR 5-6 billion ($6-7 billion) when the
4/ That is, IMF holdings of the currencies of countries that
are considered to be in a strong enough external position
for these currencies to be used by the Fund in extension of
credit to other members.

- 15 quota increase agreed pursuant to the Sixth General Review
of Quotas takes effect (expected to occur by early 1978),
and there remains SDR 2.6 billion ($3 billion) in uncommitted resources under the General Arrangements to Borrow. 5/
The IMF can also expect to receive modest amounts of additional usable resources through its program of monthly
gold sales and through repayments of earlier drawings.
Taking into account all of these sources of funds, IMF
resources nonetheless are quite low in relation to potential demands over the next few years. A further (Seventh)
review of IMF quotas is now in progress, but it is not
anticipated that any increase in quotas that may be
agreed in this review could take effect before late 1979.
In the interim, there is clearly a need for additional IMF
resources.
The Supplementary Financing Facility is designed to
meet this need. It will be a temporary facility, open for
application by members for two years, with a possibility
of extension up to one additional year. Thus the facility
would serve as a "bridge" to a permanent increase in IMF
resources which is expected to be agreed under the
Seventh quota review now in progress. All financing under
this facility will be provided in support of economic
and financial programs adopted by borrowing members to
place their balance of payments positions on a more
sustainable basis and reduce their needs for external
financing. Such programs will take the form of normal
IMF financing arrangements, with specific policy conditions
tailored to the particular problems and circumstances of
each borrowing member.
The payments difficulties faced by some countries are
very large in relation to their economies and their regular
access to IMF resources. In some cases, the relatively small
amounts of financing available through the IMF's regular
facilities have provided insufficient incentive for countries
to borrow from the IMF and to adopt the adjustment programs
required in conjunction with IMF financing. The Supplementary
Financing Facility is thus designed to help correct this
situation by making financing available to members in amounts
larger than are currently available, with the total amount
available to any one member determined by judgment based upon,
5/ This figure represents the remaining uncommitted resources of
among other factors, the size and nature of its payments problems
all GAB participants except U.K. and Italy (also includes the
Swiss association). Actual availability of GAB resources
depends both on drawings by GAB participants and actual
participation in loans by GAB members.

- 16 Adjustment programs adopted by borrowers, and actual
drawdowns of financing, will be phased over periods longer
than the one year generally applied under IMF stand-by
arrangements, and could in some instances extend up to
three years. (In no case, however, could drawings be
made after five years from the date of establishment of
the facility). Repayment of borrowing from the facility
would take place over three to seven years, somewhat
longer than the three-to-five year period that applies
to regular IMF resources. Together, these provisions
would afford members which use the facility somewhat
longer periods of adjustment, consistent with the severity of their problems and the need for sustained and
appropriately paced efforts to correct those problems.
The Supplementary Financing Facility represents a
major cooperative effort on the part of oil exporting
and industrial countries to address current world payments problems. Participation is shared equitably
between the two groups on a near fifty-fifty basis (see
Table 2), reflecting both groups1 interest in and responsibility for a strong and smoothly operating international
monetary system. The facility also represents a global
cooperative approach in that all members of the IMF that
meet the criteria for eligibility (i.e., severity of payments difficulties and willingness to implement corrective
measures) would have access to the facility. This approach
is consistent with and supportive of the principle of uniformity in the IMF's treatment of its members -- a principle
that is fundamental to the IMF's successful performance as
the world's central monetary institution.
The Supplementary Financing Facility is not proposed or
represented as a solution to all the world's international
financial problems. Most importantly, it cannot eliminate
the imbalance between the OPEC surplus countries and the
oil importing world. The elimination of that imbalance can
come about only through effective programs by the United
States and others to conserve energy and develop alternative
energy supplies, and through continued growth in the capacity
of oil exporting nations to absorb goods and services produced
in the oil importing world.
What the Supplementary Financing Facility is designed to
do is to help redistribute, as well as reduce, the collective
current account deficit so that the necessary borrowing is
undertaken by those nations whose creditworthiness and economic strength are adequate to sustain the additional debt.
This
means
encouraging
in those
countries
and
iencing
serious
domestic
problems
economic
inadjustment
financing
distortions,
those
large
deficits.
payments
Itexperdeficits,
means in

- 17 addition encouraging a form of adjustment that is compatible
with maintenance of a liberal system of international trade
and payments.
With the establishment of the Supplementary Financing
Facility, there will continue to be a large amount of international borrowing — private as well as public. In fact,
an important feature of the facility is that it will facilitate continued large-scale borrowing from banks and other
private market sources — by improving the creditworthiness
of countries adopting adjustment measures, and by shifting
a portion of the borrowing to nations more capable of servicing additional debt. Foreign debt is not necessarily bad —
it can be an important positive factor in an economy. As
shown by the experience of the United States in the nineteenth
century, and by Canada and others at present, borrowed money,
if productively invested, can be a major source of economic
growth. Thus the OPEC savings can be transferred to oil
importing countries and used to finance productive investment
in those countries.
The Supplementary Financing Facility is not designed —
nor will it be used — to replace commercial bank lending,
or to "bail out" commercial banks that may have lent excessively or unsoundly. The aim is to provide access to
official balance of payments financing in support of sound
and internationally responsible programs of adjustment by
borrowers, and to encourage them to initiate needed corrective measures before their debts become too large for them
to handle or credit is no longer available. Use of the
facility will improve the general level of creditworthiness
among countries and confidence in the international monetary
system. It is designed to help countries that are in need,
not financial institutions. Nor will it be used to take
over the private banks' regular lending activities. The
amounts involved are far below levels of private lending —
although the IMF may in the period ahead account for a share
of total balance of payments financing somewhat larger than
the share it provided in 1974-76, the IMF's share will remain
small in comparison with the share channeled through the
private market. In addition, experience indicates that after
the IMF enters into a stand-by agreement with a borrowing
country, private lending tends to expand rather than contract.
IMF lending is a complement to private lending, not a substitute
for it. The banks will benefit from the facility, but only
indirectly — through an improved international environment,
stronger monetary system and an expanding world economy
that will benefit all segments of the American economy —
industry, workers, farmers, and consumers.

- 18 IV.

Main Provisions of the Supplementary Financing
Facility

A. Participation and Entry into Force
Initial participants in the facility and the amounts
to be provided are listed in the table below, on the basis
of information available in early September 1977. (Discussions are still underway with a few other countries, and it
is anticipated that initial participation in the facility
will total SDR 8.6 billion ($10 billion) or more). Other
countries would be eligible to participate at a later date,
provided that they had sufficiently strong external positions, and initial participants would be able to increase
the amount of resources they make available should they
choose to do so. Shares in the facility have been determined largely on the basis of relative external economic
positions, as indicated primarily by balance of payments
and reserve positions and ability to provide financing.
The U.S. share would be SDR 1,450 million (approximately
$1.7 billion), about 17 percent of the overall initial total.
Table 2
Supplementary Financing Facility
1/ As Percent
Participants
and(million)
Commitments
Industrial Countries
SDR
$ (million)
of Total
Belgium
Canada
Germany
Japan
Netherlands
Switzerland
United States
Subtotal

1.8

150
200
050
900
100
650
450
4,500

174
232
1,220
1,046
116
755
1,685
5,228

Iran
Qatar
Saudi Arabia
Venezuela
United Arab Emirates
Kuwait
Subtotal

685
100
2,150
450
150
400
3,935

796
116
2,500
523
174
465
4,574

8.1
1.2
25.5
5.3
1.8
4.7
46.6

TOTAL

8,435 2/

9,802

100.0

2.4
12.4
10.7
1.2
7.7
17.2
53.4

Oil Exporting Countries

Based on the SDR/$ rate prevailing September 1, 1977,
1 SDR = $1.16210.
Expected to increase to at least SDR 8.6 billion ($10 billion).
See text above and footnote, page 4.

- 19 The facility will enter into force when a total of
SDR 7.75 billion (approximately $9 billion) has been
effectively made available to the IMF and at least six
participants have each made available SDR 500 million
(approximately $580 million) or more.
B. Terms Relating to Provision of Resources to the
IMF.
Period of Financing. Commitments by participants to
provide financing to the IMF will remain effective for five
years from the date of the facility's entry into force.
Financing actually provided to the facility will be repaid
in eight semi-annual installments beginning 3 1/2 years and
ending 7 years after the date the financing is provided,
equivalent to an average maturity of 5 1/4 years. The IMF
will have the right to make early repayment in certain
circumstances.
Calls for Financing. Calls will be made in broad proportion to the unutilized commitments of participants.
Upon call, funds will be transferred to the IMF for immediate use in providing financing from the facility. A
participant may represent that its balance of payments and
reserve position does not justify a call or any further
calls. If the IMF concurs with the participant's representation, the participant will not be expected to contribute
to any further calls until its balance of payments and reserve
position improves sufficiently.
Interest Rates. Participants will receive interest
equal to the yield on U.S. Treasury securities of comparable maturity, rounded up to the nearest one-eighth of
one percent. The interest rate that will apply until June
30, 1978, is seven percent, based on the interest rates on
U.S. Treasury securities prevailing at the time the facility
was agreed. For each subsequent six month period, the interest rate that will apply will be the average of the daily
yield during that period on actively traded U.S. Government securities of a constant maturity of five years,
rounded up to the nearest one-eighth of one percent. Such
yields are calculated daily by the U.S. Treasury Department
and published weekly by the Federal Reserve Board.
Liquidity of Claims. In exchange for financing provided to the IMF, a participant will receive a liquid reserve claim on the IMF, which can be encashed at any time
upon a representation by the participant of balance of payments need. Claims may also be transferred (sold) to other
participants, other IMF members or other transferees which
may be approved by the IMF.

- 20 Denomination. All commitments to provide financing,
and all financing actually provided to the facility, will
be denominated in Special Drawing Rights. In the event of
a change in the method of valuation of the SDR 6/, a participant would have the right to immediate repayment of its
claims on the IMF and to terminate any remaining commitments.
C. Terms and Conditions of Drawings by Members.
Eligibility. An IMF member will be eligible to use the
facility if the IMF is satisfied:
— that the member's balance of payments
financing need is greater than the amount
remaining available to it under the
credit tranches (i.e., under the regular
IMF resources);
— that the member's balance of payments problem requires a relatively long period of
adjustment and a period of repayment longer
than the period of three ^to five years that
applies to the credit tranches; and
— on the basis of a detailed statement of the
economic and financial policies the member
will follow and the measures it will apply
under a stand-by or extended arrangement,
that the member's program will be adequate
for the solution of its balance of payments
problem and is compatible with the IMF's
policies on the use of its resources in the
upper credit tranches or under the Extended
Fund Facility 7/ (i.e., the IMF's more conditional policies).
Access and Relation to Regular Credit Tranches. Members will be able to apply for use of the facility at any
time within two years after the date the facility enters
into force. This period will be reviewed in conjunction
6/ The SDR is valued on the basis of market exchange rates
of a weighted "basket" of sixteen currencies. The dollar
weight is roughly one-third of the total.
2/ Under this facility, established in September 1974, the I
makes longer-term balance of payments financing available
to countries prepared to undertake and adhere to a comprehensive program of structural reform approved by the
IMF and covering a period of several years.

- 21 with an overall review of the facility 8/, and may be
extended for up to one additional year. Actual drawings
by a member will be phased over a period of two to three
years from the date the member enters into agreement with
the IMF, and will be dependent on satisfactory compliance
by the member with the economic program agreed with the IMF.9/
The amount of IMF financing available to a member under
the facility would be based on a judgment by the IMF, taking
into account the size and nature of the member's payments
problem, its access to alternative sources of financing,
and the availability of resources in the IMF. Supplementary
financing will be made available in parallel with a member's
purchases of regular IMF resources under the credit tranches t
or the Extended Fund Facility. Initially, supplementary
financing roughly equivalent to a member's quota will be
available in conjunction with credit tranche drawings, and
up to 140 percent of quota will be available in conjunction
with Extended Fund Facility drawings. Drawings on the facility
will be apportioned to parallel drawings on the regular credit
tranches or the Extended Fund Facility as described in
Annex C. The amounts available from the facility in
conjunction with drawings on the upper credit tranches
or the Extended Fund Facility would be subject to review
from time to time by the IMF, and could be modified in
light of the availability of supplementary financing and regular
resources. In special circumstances, the IMF could permit
purchases of supplementary financing in amounts above that
available in conjunction with parallel drawings on the regular
resources.
Repayment. Repayment of drawings ("repurchases") under
the Supplementary Financing Facility will take place over a
period somewhat longer than the three to five years that
applies to the regular resources. Repayment will be required in equal semi-annual installments beginning not
later than three and one-half years and completed not
later
seven
years
the not
datelater
of purchase.
A mem8/
Thisthan
review
will
takefrom
place
than two years
after
ber will
be expected
to make
repayment,
the facility
enters
into early
force or
when an however,
increase as
in quotas
pursuant to the Seventh General Review of Quotas becomes
effective.
9/ Drawings will not be permitted beyond five years after
the facility enters into force, consistent with the
maximum period of commitment by participants in the
financing arrangements with the IMF. The effect of
this .limitation is that if the period for applications
is lengthened beyond two years, the maximum period of
drawdown must be shortened from three years to fit with
the five year maximum availability of financing.

- 22 its balance of payments and reserve position improves, and
a member can be required to make early repayment if the
IMF determines that an improvement in the member's position so justifies. Early repayment of a drawing from the
facility must be accompanied by early repayment of any
parallel drawing from the IMF's regular resources.
Charges. Charges to borrowers on drawings from the
facility will be equal to the cost of financing provided
to the facility, plus a small margin of slightly less
than one-quarter of one percent per annum to cover IMF
administrative costs.
V. Proposed Legislation
Prior Congressional approval for United States participation in the Supplementary Financing Facility is required
by Section 5 of the Bretton Woods Agreements Act, as amended. The Council believes that legislation should be
promptly enacted to authorize the Secretary of the Treasury
to take the steps necessary for U.S. participation in the
facility.
The bill proposed for this purpose would authorize the
Secretary of the Treasury to make resources available for
U.S. participation in an amount not to exceed the dollar
equivalent of 1,450 million Special Drawing Rights. The
terms of United States participation in the facility will
be governed by the decisions of the IMF Executive Directors
establishing the facility and authorizing replenishment of
IMF resources for the purposes of the facility (attached
as Annexes A and B ) .
These resources would be made available by the United
States entering into an agreement with the IMF for replenishment of the IMF's resources in accordance with Executive
Board Decision numbered 5509-(77/127) (Annex B ) . In addition, the United States could transfer (sell) to others
its reserve claims on the IMF arising from participation in
the facility and could purchase such claims on the IMF held
by others, under the IMF Executive Board Decision. In no
event would the total amount of currency made available by
the Secretary of the Treasury, net of any amounts received
by the U.S. with respect to its participation in the facility, exceed the equivalent of 1,450 million Special Drawing
Rights.
Transactions arising from U.S. participation in the
facility, like other U.S. transactions with the IMF, are
exchanges of monetary assets, akin to deposits in a bank.

- 23 This accounting and budgetary treatment of U.S. transactions
with the IMF was adopted as a result of the recommendations
in 1967 of the President's Commission on Budget Concepts.
The Congress has concurred since 1975 in the application
in full of the exchange of asset concept to U.S. transactions with the IMF. The Congress has considered appropriations unnecessary both for increases in the United
States quota in the IMF (Congress authorized consent to the
last increase in the United States quota in P.L. 94-564,
without an appropriation), and for payment by the U.S. of
maintenance of value obligations to the IMF.
Similarly, no appropriation is necessary for U.S.
participation in the IMF Supplementary Financing Facility
and none is authorized by the proposed bill. When the
United States provides dollars under the terms of the
facility, the U.S. in exchange will receive a monetary
asset in the form of a liquid reserve claim, of equivalent
SDR value, on the IMF. These claims will increase the
automatic drawing rights of the United States on the IMF
and will be transferable. Consequently, these claims
will form part of the U.S. "reserve position" in the IMF
and so will constitute part of U.S. international reserves.
Since the assets and accounts of the Treasury are
denominated in dollars, while those of the IMF (including
U.S. claims on the IMF acquired through participation in
the facility) are denominated in SDR's, there may, as a
consequence of exchange rate changes, be a net change
in the dollar value of U.S. monetary assets arising from
our participation in the facility. The proposed bill
therefore provides for the Exchange Stabilization Fund,
established by Section 10 of the Gold Reserve Act of
1934, as amended, to account for any such adjustment in
the dollar value of U.S. monetary assets.
VI.

Recommendation

The National Advisory Council strongly recommends to
the President and to the Congress that the United States
participate in the Supplementary Financing Facility of the
International Monetary Fund. The proposed terms and conditions of U.S. participation are set forth in the documents
annexed to this Report. While the international monetary
system has been functioning well, there is a real and

- 24 present need for an increase in the resources of the IMF,
as provided by the proposed Supplementary Financing Facility. The facility will provide a major strengthening to the
international monetary system during this period of strain,
greatly reducing any risk that the system may not be able
to meet the demands placed upon it. The Council believes
that establishment of this facility is of critical importance to the United States, and that participation by the
United States is manifestly in our national interests.
It is therefore strongly recommended that legislation be
promptly enacted authorizing U.S. participation in the
Supplementary Financing Facility Agreement.

ANNEX A
(Page 1 of 5)
DOCUMENT OF THE INTERNATIONAL MONETARY FUND
August 30. 1977

DECISION ESTABLISHING A
SUPPLEMENTARY FINANCING FACILITY

1.
(a) The Fund will be prepared to provide, in accordance with
this Decision, supplementary financing in conjunction with use of the
other resources of the Fund (hereinafter referred to as "ordinary
resources") to members facing serious payments imbalances that are
large in relation to their quotas. Supplementary financing for the
purpose of this Decision means financing that the Fund will provide
under a stand-by or extended arrangement with resources the Fund
obtains by replenishment under Article VII, Section 2 and Decision No.
5509-(77/127), adopted August 29, 1977.
(b) Resources available to members under other policies of the
Fund will remain available in accordance with the terms of those policies.
2. A member contemplating use of the Fund's resources in the three
credit tranches beyond the first credit tranche (hereinafter referred to
as the "upper credit tranches") that would include supplementary financing
shall consult the Managing Director before making a request under this
Decision. A request by a member will be met under this Decision only
if the Fund is satisfied: (i) that the member needs financing from the
Fund that exceeds the amount available to it in the four credit tranches
and its problem requires a relatively long period of adjustment and a
maximum period for repurchase longer than the three to five years under
the credit tranche policies; and (ii), on the basis of a detailed statement of the economic and financial policies the member will follow and
the measures it will apply during the period of the stand-by or extended
arrangement, that the member's program will be adequate for the solution
of its problem and is compatible with the Fund's policies on the use of
its resources in the upper credit tranches or under the Extended Fund
Facility.
3. The Fund may approve a stand-by or extended arrangement that
provides for supplementary financing at any time within two years from
the effective date of this Decision. The Fund will review this period
when conducting a review under 12 below. Any extension of the period
shall not exceed one year.
4* (a) Supplementary financing will be available only if the
program referred to in 2(ii) above is one in support of which the Fund
approves a stand-by arrangement in the upper credit tranches or beyond
or an extended arrangement. The stand-by or extended arrangement will
be in accordance with the Fund's policies, including inter alia its

ANNEX A
(Page 2 of 5)

policies on conditionally, phasing, and performance criteria, provided
however that any right of augmentation exercised by a member in connection
with a repurchase in respect of a purchase made with supplementary
financing shall be subject to the same period of repurchase that
applied to the purchase in respect of which the repurchase was made.
(b) The period of a stand-by arrangement approved under this
Decision will normally exceed one year, and may extend up to three years
in appropriate cases. The period of an extended arrangement will be in
accordance with Decision No. 4377-(74/114), adopted September 13, 1974.
(c) A request for a purchase in accordance with
extended arrangement approved under this Decision
ordinary resources and supplementary financing in
mined under 5 and 6 below when the arrangement is

a stand-by or
will be met from
the proportions deterapproved.

5. The amounts available to a member under a stand-by arrangement
approved under this Decision will be apportioned between ordinary
resources and supplementary financing as follows:
(a) While each credit tranche is 36.25 per cent of quota under
the Fund's policies, supplementary financing will be equivalent to
34 per cent of quota in respect of each of the upper credit tranches.
(b) After each credit tranche becomes 25 per cent of quota
under the Fund's policies, supplementary financing will be equivalent
to 12.5 per cent of quota in respect of the first credit tranche and
30 per cent of quota in respect of the upper credit tranches.
(c) If a member has used all or part of its credit tranches
before a stand-by arrangement is approved under this Decision, the
arrangement approved under this Decision will provide that the amount of
supplementary financing that would have been used under (a) and (b) above
if all earlier purchases in the credit tranches had been made in
conjunction with supplementary financing will be used, subject to 4(a)
above, before purchases are made under (a) or (b) above.
(d) If a purchase in a credit tranche is less than the amount
of a full credit tranche, the supplementary financing to be used in
conjunction with the purchase will be in the same proportion of the
amount of supplementary financing referred to in (a) and (b) above as
the purchase in the credit tranche bears to the amount available in that
tranche when the arrangement was approved.
(e) From time to time, the Fund will review the proportions
of supplementary financing to be used in conjunction with the upper
credit tranches, and may substitute modified proportions for those in
effect pursuant to this Decision. The modified proportions shall apply

ANNEX A
(Page 3 of 5)

only to stand-by arrangements approved after the date of the decision to
modify the proportions, provided that a member that has an existing
stand-by arrangement may request that, subject to 4(a) and 5(c) above,
any increased proportions be made available to it under a new or revised
arrangement.
(f) In special circumstances, a stand-by arrangement may be
approved under this Decision that provides for purchases beyond the
credit tranches and supplementary financing available under (a), (b),
and (c) above. The arrangement will provide that all purchases under it
will be made with supplementary financing. The Fund, taking into account
the criteria in 2 above, will prescribe in each arrangement the amount of
supplementary financing that will be available.
6. (a) Supplementary financing will be available, in combination
with ordinary resources, for purchases under an extended arrangement
approved under this Decision in an amount not exceeding the equivalent
of 140 per cent of quota. Purchases under an extended arrangement
will be made with ordinary resources and with supplementary financing
in the ratio of one to one.
(b) Supplementary financing available to a member in accordance
with the ratio in (a) above will be increased by an amount determined by
the ratio of one to one in respect of that part of the upper credit
tranches that is no longer available to the member as the result of
earlier uses of the Fund's resources. Purchases will be made with
supplementary financing, subject to 4(a) above, to the extent of the
amount of this increase before purchases are made in accordance with
(a) above.
(c) The principles of 5 (e) and (f) shall apply to extended
arrangements approved under this Decision.
7. (a) Repurchases in respect of outstanding purchases under this
Decision will be made in accordance with the terms of the stand-by or
extended arrangement under which the purchases were made.
(b) The terms will include a provision that the member will be
expected to repurchase in respect of purchases, whether made with ordinary
resources or with supplementary financing, as its balance of payments and
reserve position improves, and will make such repurchases if, after
consultation with the member, the Fund represents that repurchase should
be made because of an improvement.
(c) The terms will also provide that with respect to purchases
financed with ordinary resources repurchase will be made in accordance
with the Fund's policies on the credit tranches or under the Extended
Fund Facility; and that with respect to purchases made with supplementary

ANNEX A
(Page 4 of 5)

financing repurchase will be made in equal semi-annual installments
that begin not later than three and one half years and are completed
not later than seven years after the purchase.
(d) A repurchase attributed to a purchase made with supplementary financing in advance of this schedule of equal semi-annual
installments must be accompanied by a repurchase in respect of the
purchase financed with ordinary resources made at the same time if any
part of the latter purchase is still outstanding. The amounts of the
two repurchases will be in the same proportions in which ordinary
resources and supplementary financing were used in the purchases,
provided, however, that the repurchase in respect of the purchase
financed with ordinary resources will not exceed the amount of the
purchase still outstanding.
(e) Repurchases will be made in the media prescribed by the
Articles of Agreement and specified by the Fund at the time of the
repurchase after consultation with members. The Fund will be guided
by a policy of specifying for repurchase the media in which it will
make repayments as a result of the repurchases, and will take this
policy into account in preparing its currency budgets.
8. In order to carry out the purposes of this Decision, the Fund
will be prepared to grant a waiver of the conditions of Article V,
Section 3(a)(iii) (or Article V, Section 3(b)(iii) after the second
amendment of the Articles) that is necessary to permit purchases under
this Decision or to permit purchases under other policies that would raise
the Fund's holdings of a member's currency above the limits referred
to in that provision because of purchases outstanding under this Decision.
9- The Fund will apply its credit tranche policies as if the Fund's
holdings of a member's currency did not include holdings resulting from
purchases outstanding under this Decision that have been made with
supplementary financing. After the effective date of the second amendment
of the Articles of Agreement purchases under this Decision and holdings
resulting from purchases outstanding under this Decision will be excluded
under Article XXX(c).
10. The Fund will state which purchases by a member are made under
this Decision and the amounts of ordinary resources and supplementary
financing used in each purchase.
11. The Fund will levy charges in accordance with the decision of
the Executive board on holdings of a member's currency resulting from
purchases outstanding under this Decision to the extent that they are
made with supplementary financing.

ANNEX A
(Page 5 of 5)

12.
The Fund will review this Decision not later than two years
after its effective date or when the Seventh General Review of Quotas
becomes effective, if that occurs within the two years. One year after
the effective date of this Decision the Fund will report on the use of
the supplementary financing facility. The report will deal also with
other important aspects of the facility.
13. The effective date of this Decision will be the date on which
agreements are completed under Decision No. 5509-(77/127), adopted
August 29, 1977, for a total amount not less than SDSL 7.75 billion,
including at least six agreements each of which provides for an amount
not less than SDR 500 million.
Decision No. 5508-(77/127), adopted
August 29, 1977

ANNEX B
(Page 1 of 2)

DOCUMENT OF THE INTERNATIONAL MONETARY FUND
August 30, 1977
DECISION ON REPLENISHMENT IN CONNECTION WITH
SUPPLEMENTARY FINANCING FACILITY

1.
The International Monetary Fund deems it appropriate in accordance with Article VII of the Articles of Agreement to replenish its
holdings of currencies to the extent that purchases are to be made with
supplementary financing under Executive Board Decision No. 5508-(77/127),
adopted August 29, 1977.
2. A number of members and institutions have expressed their
intention to make resources available to the Fund for the purpose
stated in paragraph 1 above. In order to enable the Fund to replenish
its resources in accordance with these intentions, the draft letter set
out in the Annex to this Decision is adopted as the basis for terms and
conditions to be incorporated in the agreement with each contracting
party under Article VII of the Articles of Agreement. The terms and
conditions will be uniform to the maximum extent possible.
Each letter setting forth the terms and conditions to be proposed will
be submitted to the Executive Directors for their approval.
3. At any time within the period in which the Fund can replenish
its resources in order to provide supplementary financing, it may enter
into agreements for this purpose with the contracting parties referred
to in paragraph 2 above and with any other member or with its national
official financial institutions, provided that the member is in a sufficiently strong balance of payments and reserve position, or with any
institution that performs functions of a central bank for more than
one member. The Fund will consider a member to be in the position referred to above if it is in a net creditor position in the Fund and
if its currency could be used in net sales in the Fund's currency budgets for the foreseeable future, but the Fund may take other circumstances into account in deciding whether to enter into an agreement
with a member or with its national official financial institutions.
4. The amounts to be called by the Fund will be in broad proportion to the unutilized balance under each agreement to the total of unutilized balances under ail agreements, subject to such operational
flexibility as the Fund may find necessary.
5. The Fund will use its best efforts to ensure that the currencies it receives in accordance with this Decision will be transferred
on the same day to purchasers under Executive Board Decision No. 5508(77/127), adopted August 29, 1977, and that amounts corresponding to
repurchases attributed in accordance with Paragraph 5(b)(i) of the

ANNEX B
(Page 2 of 2)

draft letter set out in the Annex to this Decision will be repaid
to contracting parties on the same day as the repurchase is completed,
provided, however, that the Fund will not make such repayment, unless
it decides otherwise, if the repurchase entitles the purchaser to
augmented rights under its stand-by or extended arrangement. If
such repayment has not been made, the Fund will repay promptly on
the expiration of the arrangement an amount equivalent to the amount
of the augmented rights that have not been exercised.

Decision No. 5509-(77/127), adopted
August 29, 1977

ANNEX to ANNEX B
(Page 1 of 5)

A N N E X

[Your Excellency] [Dear Sir]:
In accordance with Article VII of the Articles of Agreement of
the International Monetary Fund, hereinafter referred to as "the
Articles," and pursuant to Executive Board Decision No. 5509-(77/127),
adopted August 29, 1977, and Executive Board Decision No.
[authorizing agreement with individual contracting party, X] adopted
, I have been authorized to propose on behalf of the
International Monetary Fund, hereinafter referred to as "the Fund,"
that [X] agree to make available to the Fund at call during the period
of five years from the effective date of Executive Board Decision No.
5508-(77/127), adopted August 29, 1977, [currency of X] [specified currency or currencies deemed by the Fund to be freely usable] in amounts
that in total do not exceed the equivalent of
million
special drawing rights (SDR
) in exchange for readily repayable claims on the following terms and conditions:
1. All amounts under this agreement shall be expressed in terms of
the special drawing right. For all purposes of this agreement, the
value of a currency in terms of the special drawing right shall be calculated at the rate for the currency as determined by the Fund in
accorance with the Fund's Rules and Regulations in effect when the
calculation is made, subject to Paragraph 7(a).
2. (a) Calls under this agreement shall be made only (i) in respect of purchases to be made with supplementary financing under the
facility established by Executive Board Decision No. 5508-(77/127),
adopted August 29, 1977, which is hereinafter referred to as "the
facility," or (ii) by agreement with [X], in order to enable the
Fund to repay a claim under another agreement connected with the
facility when repayment is made under that agreement because of
a balance of payments need.
(b) The Fund shall give [X] as much advance notice as
possible of the Fund's intention to make calls.
(c) [X] may represent that its balance of payments and
reserve position does not justify calls or further calls under this
agreement. The Fund, in considering the representation, shall give [X]
the overwhelming benefit of any doubt. After consultation with [X],
in which the Fund shall give [X] the overwhelming benefit of any doubt,
the Fund may make calls or further calls at a later date when in the
opinion of the Fund the balance of payments and reserve position of
[X] improves sufficiently to justify calls or further calls.

ANNEX to ANNEX B
(Page 2 of 5)

(d) When a call is made, [X] shall deposit to the Fund's
account with [X] [the Fund's depository for the currency of [X]] [the
Fund's depository for the currency of
] within three
business days after the call an amount of [its currency] [the currency
or currencies specified in the preamble] equivalent to the amount
of the call at the rate for the currency as determined by the Fund
in accordance with the Fund's Rules and Regulations. On request,
[X] shall exchange its currency [if not deemed by the Fund to be freely
usable] when sold by the Fund for a freely usable currency at the rates
for the two currencies as determined by the Fund in accordance with its
Rules and Regulations.
3. The Fund shall issue to [X] on its request an instrument
evidencing the amount, expressed in special drawing rights, that the
Fund is committed to repay under this agreement. Upon repayment of
the amount of any instrument and all accrued interest, the instrument
shall be cancelled. If less than the amount of any such instrument
is repaid, the instrument shall be cancelled and a new instrument for
the remainder of the amount shall be substituted with the same maturity dates as in the old instrument. If all or part of the amount of a
claim is transferred under 8 below, a new instrument or instruments
shall be substituted on request for tne old instrument with the same
maturity dates as in that instrument.
4. (a) The Fund shall pay interest on the amount that the Fund
is committed to repay under this agreement in accordance with the
following provisions:
(i) The initial rate of interest on all outstanding claims
shall be seven per cent per annum. This rate shall apply
until June 30, 1978.
(ii) Six months after June 30, 1978, and at intervals of six
months thereafter, the Fund shall calculate, in the manner
set forth in (iii) below, the rate of interest to be paid
on outstanding claims for the period of six months prior
to the calculation.
(iii) The interest rate on outstanding claims for a period of
six months shall be the average of the daily yields during
that period on actively traded U.S. government securities,
determined on the basis of a constant maturity of five
years, as published each week by the Federal Reserve Board,
Washington, D.C, in statistical release H-15 or any substitute publication, or if such publication shall cease as
certified by the U.S. Treasury, provided that this average
shall be rounded up to the nearest one-eighth of one per
cent.

ANNEX to ANNEX B
(Page 3 of 5)

(iv)

Interest shall be paid promptly after June 30 and
December 31 of each year on the average daily balances
outstanding during the preceding six months of the amounts
the Fund is committed to repay under this agreement.

(b) No other fee, charge, or commission shall be imposed
by [X] with respect to a deposit or an exchange pursuant to a call under
under Paragraph 2(d) or with respect to any other aspect of a call.
5. (a) Subject to the other provisions of this Paragraph 5, the
Fund shall repay [X] an amount equivalent to any deposit pursuant to a
call under Paragraph 2 in [eight] equal serai-annual installments to
commence three and one half years, and to be completed not later than
[seven] years, after the date of the deposit.
(b) The Fund may repay [X] in advance of the repayments
required by Paragraph 5(a) to the extent that: (i) a repurchase is attributed, in accordance with the Fund's practice, to a purchase under the
facility for which the Fund has received resources from [X] under this
agreement, or (ii) [X] agrees to receive repayment.
(c) If at any time [X] represents that there is a balance
of payments need for repayment of part or all of the amount the Fund
is committed to repay under this agreement and requests such repayment,
the Fund, in considering the representation and deciding wnether to
make repayment, shall give [X] the overwhelming benefit of any doubt.
(d) Repayments under Paragraph 5(b) and (c) shall discharge the installments prescribed by Paragraph 5(a) in the order
in which they become due.
6. The Fund shall consult [X] in order to agree with it on
the means in which payments of interest and repayment shall be made,
but, if agreement is not reached, the Fund shall [have the option to]
make payment or repayment in [the currency of [X], or] the currency received by the Fund from [X], [or] [special drawing rights] [or any
currency deemed by the Fund to be freely usable or any currency that
can be exchanged at the time of the payment or repayment for a freely
usable currency at a rate of exchange that would yield value equal in
terms of the special drawing right to payment or repayment in a freely
usable currency,][or any combination of these means of payment or repayment] .
7. (a) If the Fund decides to make a change in the method of
valuation of the special drawing right, [X] shall nave the option to
require immediate repayment of all outstanding claims on the basis of
the. method of valuation in effect before the change.

ANNEX to ANNEX B
(Page 4 of 5)
ANNEX

(b) If [X] exercises its option under Paragraph 7(a), it
shall have the further option to cancel this agreement.
8. (a) For value agreed between transferor and transferee, transfers may be made at any time of all or part of a claim to repayment under
this agreement in accordance with the following provisions:
(i) Transfers may be made to any contracting
party, any member, a member's national official financial institutions (hereinafter
referred to as a member's "institution"),
or any institution that performs functions
of a central bank for more than one member.
(ii) Transfers may be made to transferees other
than those referred to in (i) above with
the prior consent of the Fund and on such
terms and conditions as it may prescribe.
(b) The transferor of a claim shall inform the Fund promptly
of the claim that is being transferred, the transferee, the amount of the
transfer, the agreed value for the transfer, and the value date. The
transfer will be registered by the Fund if it is in accordance with this
agreement. The transfer shall be effective for the purposes of this
agreement as of the value date agreed between the transferor and transferee.
(c) If all or part of a claim is transferred during a period
of six months as described in Paragraph 4, the Fund shall pay interest
on the amount of the claim transferred for the whole of that period to
the transferee.
(d) Subject to (c) and to any terms and conditions prescribed
under (a)(ii), the claim of a transferee shall be the same in all respects
as the claim of the transferor, except that Paragraph 5(c) shall apply
only if, at the time of the transfer, the transferee is a member, or the
institution of a member, that is in a net creditor position in the Fund
and in the opinion of the Fund the member's currency could be used in
net sales in the Fund's currency budgets for the foreseeable future.
(e) If requested, the Fund shall assist in arranging transfers.
9. [If [X] withdraws from the Fund, this agreement shall terminate and the amount that the Fund is committed to repay under this
agreement shall be repaid in accordance with the terms of this agreement, provided that repayment shall be made, at the option of the Fund,
in the currency of [X] [or in a currency deemed by the Fund to be freely
usable], or in such other currency as may be agreed with [X].] [If the

ANNEX to ANNEX
(Page 5 of 5)

member country of which [X] is an institution withdraws from the Fund,
[X's] agreement shall terminate, and the amount that the Fund is
committed to repay under this agreement shall be repaid in accordance
with the terms of this agreement, provided that repayment shall be made,
at the option of the Fund, in the currency of that member [or in a
currency deemed by the Fund to be freely usable], or in such other
currency as may be agreed with [X].]
10. In the event of liquidation of the Fund the amounts the Fund
is committed to repay to [X] shall be immediately due and payable as liabilities of the Fund under the provisions of the Articles on liquidation
of the Fund. For the purposes of these provisions the currency in which
the liability is payable shall be, at the option of the Fund, [the
currency received by the Fund under this agreement] [the currency
of [X] if it differs from that currency], [a currency deemed by the Fund
to be freely usable,] or any other currency agreed with [X].
11. Any question of interpretation that arises under this
agreement that does not fall within the purview of the provisions
of the Articles on interpretation shall be settled to the mutual
satisfaction of [X] and the Fund.
If the foregoing proposal is acceptable to [X], this communication and your duly authenticated reply shall constitute an agreement
between [X] and the Fund, which shall enter into force on the date on
which the Fund receives your reply.

Very truly yours,

H. Johannes Witteveen
Managing Director

ANNEX C
(Page 1 of 3)
Relationship Between Supplementary Financing
and Regular IMF Resources
Tin

-

-

-

-

-

-

-

-

-

-

-

Drawings on the Supplementary Financing Facility
will be available in conjunction with drawings of regular IMF resources under the credit tranches and the
Extended Fund Facility. Amounts initially available
would be as described below.
Drawings Under the Credit Tranches. As part of the
Jamaica agreement on monetary reform in January 1976,
countries' potential access to the credit tranches was
temporarily expanded by 45 percent, so that each credit
tranche is temporarily equal to 36.25 percent of quota.
This expansion will lapse when the amendments to the IMF
Articles of Agreement now in process of ratification take
effect, and each credit tranche will then revert to 25
percent of quota. As long as this temporary expansion is
in effect, drawings of supplementary financing will be
available only in connection with drawings on the upper
(i.e., more conditional) credit tranches, and in an amount
equivalent to 34 percent of quota in conjunction with
drawings on each of the second, third, and fourth credit
tranches.
After the temporary expansion in credit tranches
lapses, drawings of supplementary financing will be permitted in conjunction with drawings on the first credit
tranche, in an amount not to exceed 12 1/2 percent of
quota, and drawings of the equivalent of 30 percent of
quota will be permitted in conjunction with drawings of
each of the three upper credit tranches. No drawings of
supplementary financing will be permitted unless a country has agreed with the IMF on a program extending into
the upper credit tranches. If a member has already used
part or all of its credit tranches before a stand-by
arrangement is approved under the Supplementary Financing
Facility, in addition to the amount of supplementary financing made available in conjunction with drawings on the
remaining credit tranches the member would be entitled to
draw the amount of supplementary financing available in
conjunction with the earlier credit tranche drawings.
These initial relationships between drawings of supplementary financing and credit tranche drawings are
summarized in the table below. The amounts available in
conjunction with drawings on the upper credit tranches
will be subject to review by the Fund from time to time,

ANNEX C
(Page 2 of 3)
and may be modified in light of the relative availability
of supplementary financing and regular IMF resources. In
special circumstances, the Fund may decide to permit drawings
of supplementary financing in amounts beyond the limits
implicit in the ratios mentioned above.
Drawings on Parallel Drawings Available From
Credit Tranches
Supplementary Financing Facility

Before Amendment
of IMF Articles

After Amendment
of IMF Articles

Percent of Quota

Percent of Quota

First Credit Tranche - - 12.5
Second Credit Tranche 34.0 30.0
Third Credit Tranche 34.0 30.0
Fourth Credit Tranche 34.0 30.0
Total

102.0

102.5

Drawings Under the Extended Fund Facility. Drawings
under the Extended Fund Facility can total the equivalent
of 140 percent of quota, subject to a limit of 176.25 percent of quota on combined drawings from the Extended Fund
Facility and the credit tranches (this combined limit will
be reduced to 165 percent of quota when the temporary expansion of credit tranches lapses). Drawings of supplementary financing will be permitted in conjunction with
drawings on the Extended Fund Facility on a one-to-one
basis. If a member has already used part of its access
to resources under the Extended Fund Facility, in addition
to the supplementary financing made available on a oneto-one basis the member will be entitled to draw the amount
of supplementary financing available in conjunction with
the earlier drawings under the Extended Fund Facility.

ANNEX C
(Page 3 of 3)
As with drawings under the credit tranches, the Fund
m a v decide in special circumstances to permit drawings of
S p l e m e n L r y financing in amounts beyond the limits implicit
in the ratios mentioned above.

Department of theTREASURY
WASHINGTON, D.C. 202:

LEPHONE 566-2041

^

/789

CONTACT: Alvin Hattal
566-8381
September 21, 1977

FOR IMMEDIATE RELEASE

SPECIAL CERTIFICATES FOR IMPORTS FROM
FRANCE, THE NETHERLANDS, BELGIUM AND LUXEMBOURG OF
FERROCHROMIUM AND CHROMIUM-BEARING STEEL MILL PRODUCTS
The U.S. Department of the Treasury announced today that
special certificates issued under the Certification Agreement between the United States and the Commission of the
European Communities are available as of September 10,
1977, for imports of ferrochromium and chromium-bearing
steel mill products from the following Member States: France,
the Netherlands, Belgium and Luxembourg. Materials from these
countries shipped after the publication date of this notice may
be imported only if a special certificate is presented to Customs
at the time of entry.
Imports of certifiable materials from France, the Netherlands, Belgium and Luxembourg shipped before the publication
date of this notice may continue to be made under the interim
certificates. However, the entry will not be liquidated until
the importer presents a special certificate. Such certificate
must be obtained from the producer and filed by the importer on
or before October 10, 1977, to complete liquidation. Importers
are reminded that failure to present the required special certificate by October 10, 1977, will result in a demand for redelivery of the goods.
*

B-456

*

*

FOR RELEASE ON DELIVERY
EXPECTED AT 3:00 P.M.
SEPTEMBER 22, 1977
STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF TREASURY (DOMESTIC FINANCE)
BEFORE THE
SUBCOMMITTEE ON INDIAN AFFAIRS AND PUBLIC LANDS
AND THE
SUBCOMMITTEE ON ENERGY AND POWER
Mr. Chairmen and Members of the Committees:
I am pleased to have this opportunity to assist you in
your consideration of the President's Decision on an Alaska
Natural Gas Transportation System, and, in particular, the
financing aspects of the Decision.
The Treasury Department has participated in the Alaskan
gas decision process from its initial stages. Among other
activities, the Department led an interagency task force,
which on July 1, 1977, delivered a public Report to the
President on financing a transportation system.
The President has designated the Alcan system to transport Alaskan gas across Canada for delivery to consumers in
the lower forty-eight states. The President's Report
discussing the reasons for that decision was forwarded to
Congress. It included a detailed discussion of the financing
issues. Let me begin, Mr. Chairmen, by summarizing the
discussion of financing contained in that Report.
The President observes that "the Alcan project will be
one of the largest — if not the largest — privately
financed international business ventures of all time."
Obviously, the amount of financing required for such an
undertaking is enormous and raising it is a complex task.
Indeed, certain financing issues still remain unresolved.

B-457

- 2My central conclusion, however, is that the Alcan project
can be privately financed, assuming equitable participation
of those parties who will benefit directly from its construction.
Federal Regulation
The Treasury Department has consistently argued that an
Alaska Natural Gas Transportation System could be privately
financed given a proper Federal regulatory climate. The
President's Decision, with the accompanying Terms and Conditions,
would eliminate much of the potential uncertainty of Federal
regulation and ensure that such regulation will be conducive
to both an efficient project and a private financing.
To be specific, the President has recommended a modified
form of incremental pricing for Alaskan Gas to assure
marketability to consumers. He has recommended the creation
of an Alaska Natural Gas Office directed by an appointed
Federal Inspector to coordinate the government's involvement
in construction of the project and to ensure the project
proceeds efficiently. He has prepared an Agreement with the
government of Canada which largely eliminates binational
regulatory problems. The President has recommended establishing
a rate of return on equity which discourages cost overruns.
He has discouraged the use of new and controversial tariff
arrangements that would be subject to time-consuming litigation
with uncertain results. Finally, the President has recommended
that the field price to the producers of Alaskan gas be
established in accordance with his National Energy Plan,
thus eliminating a lengthy price proceeding before the
Federal Energy Regulatory Commission and subsequent litigation.
By adopting these recommendations, the Carter Administration expects to resolve much of the uncertainty which
earlier characterized the Federal regulatory environment for
this project. This should eliminate what had been perceived
to be a major risk of the project. In effect, the President's
recommendations go far to encourage an economically viable
Alaskan gas project, which is the key to a private financing.
One of the issues mentioned above, the form of the
tariff paid by gas consumers, is particularly central to
financing the project privately. The project applicants
originally requested a novel form of tariff referred to as
the "all events, full cost of service" tariff. This tariff
would have reimbursed the project company for its costs,
including the return on and of equity, under any and all
possible
circumstances,
It was
private
argued such
lending
a tariff
for this
was including
project.
necessary non-completion.
to induce sufficient

- 3Alcan's financial advisors have recently concluded that
such a tariff will not be necessary. Alcan is prepared,
instead, to finance its project with a more conventional
tariff commencing only after the project has been completed.
Such a tariff would assure that the project's debt would be
serviced upon completion and should satiLfy lenders that
principal and interest payments on the project's debt will
be met.
Essentially, our anticipation of an economically
viable project coupled with this assurance of debt service
leads me to believe that the Alcan project can be financed
in the private sector.
Alcan Financing Plan
Alcan's financing plan, which is included in the President's
Report, estimates the total capital requirements of the
project at $9.7 billion in escalated dollars, most of which
is to be raised over a three year period beginning in 19 80.
Of this total, 22 percent will represent equity investments
and 78 percent will be in the form of debt capital. Alcan
expects approximately 82 percent of this $9.7 billion total
($7.9 billion) to be raised in the U.S., and the remaining
18 percent ($1.8 billion) to be raised in Canada.
The U.S. and Canada private capital markets combined
represent the largest and most resilient capital markets in
the world and have the inherent capacity to supply these
amounts. As an example, Alcan plans to raise approximately
$5.5 billion during three years in the U.S. corporate longterm debt market. Overall long-term borrowing by nonfinancial
corporations in that market is projected to reach $300 billion
this year. In 19 82, the final year of Alcan's borrowing, it
is projected to increase to $466 billion. Alcan's borrowings
would represent only 1.2 percent of this total.
The Alcan financing plan should be viewed as tentative
because several important issues must be resolved before
funds will be committed to it. These currently unresolved
issues include:
1. the final determination of the field price of
Alaskan gas;
2. the completion of sales contracts for the gas;
3. the final determination of the rate of return that
will be allowed on the equity investment in the
project.

- 4 A small group of the largest U.S. insurance companies
will provide the bulk of the U.S. debt capital required.
Accordingly, their perceptions of the risks will be critical.
At this initial stage, we cannot be sure how these key
lenders will assess the risks or even which risks they will
perceive as dominate, e.g., the risks of marketability and
non-completion. It will take more than a year before we
will know with certainty whether the financing can be
arranged.
Participants in a Private Financing
One important aspect of our conclusion on the private
financing is that the parties who benefit from the project
can and should participate in its financing. The major
and direct beneficiaries of this project are natural gas
transmission corporations, the producers of North Slope
natural gas, and the State of Alaska. Their participation
will increase the overall private financeability by reducing
the amounts which must be raised on the strength of the
project's credit alone. I will discuss each of these
parties briefly.
Natural Gas Transmission and Distribution Corporations
Natural gas transmission and distribution corporations
comprise the Alcan consortium and they must provide the
necessary equity for the project as well as the equity
portion of any cost overrun financing. The strength of this
sponsoring consortium, therefore, is a key element of the
financing. Our analysis shows that the firms currently
involved in the Alcan project have the capacity to provide
these required equity investments. Furthermore, we expect
that the consortium will continue to expand and eventually
will include a large portion of the entire natural gas
transportation industry. In addition, the Alcan project has
the advantage of the substantial equity investment of
Canadian transmission corporations, which will total at
least $800 million.
Producers of Alaskan Natural Gas
The owners and producers of Alaskan natural gas are
major U.S. energy companies. This group is primarily
composed of Exxon, Atlantic Richfield, and the Standard Oil
Company of Ohio. These companies will benefit substantially
from the sale of their natural gas reserves, and obviously
require a transportation system to sell them.
These three companies had total assets of $51 billion
in 1976 and net income in excess of $3 billion. They

- 5 clearly have the capacity to participate in the financing of
a transportation system, especially as full returns from
their North Slope oil and related pipeline investments are
realized. These companies have demonstrated varying degrees
of interest and have not yet agreed to participate in the
project. It seems in their interest, however, and they
should be encouraged to do so. We think that financial
participation by the producing companies can be structured
so as to avoid anticompetitive practices, a continuing
concern of the Department of Justice. This issue is specifically
addressed in the Report which has been forwarded to you with
President Carter's Decision.
The State of Alaska
The State of Alaska will realize substantial revenue in
the form of royalty payments and taxes from the sale of
North Slope gas. The State will also benefit from use of
the pipeline for natural gas distribution and resulting
commercial development within the State.
The State of Alaska can use a portion of its revenues
from the sale of Alaskan oil to assist in the financing of
this project. Originally, the State offered to assist in
the financing of the El Paso project by guaranteeing $900 million
of project debt. Similar State of Alaska support for the
Alcan project is considered advantageous and is encouraged.
Federal Government Financial Assistance
Possible Federal government support to the project,
viz., loan guarantees or insurance, has been evaluated
intensively by the Treasury Department because certain
parties earlier claimed that it was necessary. These
parties asserted that Federal financing support was necessary
to finance the project in the uncertain regulatory environment which then existed. They argued that only such assistance
would assure lenders of repayment in the event the project
was not economically viable and only this would assure their
participation. In particular, the Arctic Gas consortium,
which withdrew earlier, claimed that financing assistance by
both the Canadian and U.S. governments was required for the
financing of their project. In addition, the El Paso
proposal incorporated approximately $1.5 billion in loan
guarantees under the existing Maritime Administration
Shipbuilding program. On the other hand, no Federal financial
assistance has been requested for the Alcan project.
Alcan's investment banking advisors do not believe that
Federal financing assistance is necessary for the Alcan
project. The Administration shares this conclusion. In

- 6addition, the Administration believes that Federal assistance
to this project would be undesirable for several important
reasons.
1) Federal financial support substitutes the government for private lenders in the critical risk assessment
function normally performed by the private lenders.
2) Financial assistance also reduces incentive for
efficient management of the project.
3) Serious questions of equity would result from the
transfer of project risks to taxpayers, many of whom are not
gas consumers or will not receive additional gas supplies as
a result of the Alaskan project.
4) A subsidy in the form of lower interest rates
yields an artificially low price for the gas.
5) Other large energy projects might not be undertaken without similar Federal assistance.
The Government of Canada also opposes Canadian governmental
financial assistance to a binational project.
Transfer of Financial Risks to Consumers
The issue of a new mechanism by which gas consumers
bear some or all of the financial risks of this project also
has received careful study by the Executive Branch. The
most frequently discussed mechanism for consumer support
would entail a consumer financial guarantee by means of an
all events tariff with non-completion arrangements. The
non-completion features would provide for a consumer guarantee
of at least debt service in the event of non-completion.
The Alcan sponsors and financial advisors have stated
that the Alcan project can be financed without such a
consumer guarantee prior to completion and without Federal
financial assistance. The Administration has concluded that
the bearing of financial risks by consumers prior to completion
is unnecessary for this project. Furthermore, the Administration
believes that consumer guarantees are undesirable for many
of the same reasons that Federal financing assistance is
undesirable.
Conclusion
The Alcan project is the largest construction project
ever contemplated by private enterprise. The requisite
financing is uniquely large, complex and most difficult.

- 5clearly have the capacity to participate in the financing of
a transportation system, especially as full returns from
their North Slope oil and related pipeline investments are
realized. These companies have demonstrated varying degrees
of interest and have not yet agreed to participate in the
project. It seems in their interest, however, and they
should be encouraged to do so. We think that financial
participation by the producing companies can be structured
so as to avoid anticompetitive practices, a continuing
concern of the Department of Justice. This issue is specifically
addressed in the Report which has been forwarded to you with
President Carter's Decision.
The State of Alaska
The State of Alaska will realize substantial revenue in
the form of royalty payments and taxes from the sale of
North Slope gas. The State will also benefit from use of
the pipeline for natural gas distribution and resulting
commercial development within the State.
The State of Alaska can use a portion of its revenues
from the sale of Alaskan oil to assist in the financing of
this project. Originally, the State offered to assist in
the financing of the El Paso project by guaranteeing $900 million
of project debt. Similar State of Alaska support for the
Alcan project is considered advantageous and is encouraged.
Federal Government Financial Assistance
Possible Federal government support to the project,
viz., loan guarantees or insurance, has been evaluated
intensively by the Treasury Department because certain
parties earlier claimed that it was necessary. These
parties asserted that Federal financing support was necessary
to finance the project in the uncertain regulatory environment which then existed. They argued that only such assistance
would assure lenders of repayment in the event the project
was not economically viable and only this would assure their
participation. In particular, the Arctic Gas consortium,
which withdrew earlier, claimed that financing assistance by
both the Canadian and U.S. governments was required for the
financing of their project. In addition, the El Paso
proposal incorporated approximately $1.5 billion in loan
guarantees under the existing Maritime Administration
Shipbuilding program. On the other hand, no Federal financial
assistance has been requested for the Alcan project.
Alcan's investment banking advisors do not believe that
Federal financing assistance is necessary for the Alcan
project. The Administration shares this conclusion. In

- 6 addition, the Administration believes that Federal assistance
to this project would be undesirable for several important
reasons.
1) Federal financial support substitutes the government for private lenders in the critical risk assessment
function normally performed by the private lenders.
2) Financial assistance also reduces incentive for
efficient management of the project.
3) Serious questions of equity would result from the
transfer of project risks to taxpayers, many of whom are not
gas consumers or will not receive additional gas supplies as
a result of the Alaskan project.
4) A subsidy in the form of lower interest rates
yields an artificially low price for the gas.
5) Other large energy projects might not be undertaken without similar Federal assistance.
The Government of Canada also opposes Canadian governmental
financial assistance to a binational project.
Transfer of Financial Risks to Consumers
The issue of a new mechanism by which gas consumers
bear some or all of the financial risks of this project also
has received careful study by the Executive Branch. The
most frequently discussed mechanism for consumer support
would entail a consumer financial guarantee by means of an
all events tariff with non-completion arrangements. The
non-completion features would provide for a consumer guarantee
of at least debt service in the event of non-completion.
The Alcan sponsors and financial advisors have stated
that the Alcan project can be financed without such a
consumer guarantee prior to completion and without Federal
financial assistance. The Administration has concluded that
the bearing of financial risks by consumers prior to completion
is unnecessary for this project. Furthermore, the Administration
believes that consumer guarantees are undesirable for many
of the same reasons that Federal financing assistance is
undesirable.
Conclusion
The Alcan project is the largest construction project
ever contemplated by private enterprise. The requisite
financing is uniquely large, complex and most difficult.

JkpartmentoftheTREASURT |{
TELEPHONE 566-2041

WASHINGTON, OX. 20220

FOR IMMEDIATE RELEASE

September 26t 1977

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $2,200 million of 13-week Treasury bills and for $3,300 million
of 26-week Treasury bills, both series to be issued on September 29, 1977,
were accepted at the Federal Reserve Banks and Treasury today. The details are
as follows:
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing December 29, 1977
Price

High
Low
Average

Discount
Rate

98.496
98.486
98.488

5.950%
5.989%
5.982%

26-week bills
maturing March 30, 1978

Investment
Rate 1/

Price

6.12%
6.17%
6.16%

96.890 6.152%
6.195%
96.868
96.873
6.185%

Discount
Rate

Investment
Rate 1/
6.44%
6.48%
6.47%

Tenders at the low price for the 13-week bills were allotted 26%.
Tenders at the low price for the 26-week bills were allotted 70%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS AND TREASURY:
Location

Received

Accepted

Received

Accepted

$
23,515,000
4,712,725,000
9,665,000
24,745,000
15,075,000
66,060,000
590,705,000
40,560,000
5,295,000
20,100,000
3,330,000
310,775,000

$
16,515,000
2,898,725,000
9,665,000
9,745,000
'9,575,000
44,060,000
158,705,000
18,415,000
5,295,000
20,100,000
3,330,000
105,775,000

200,000

700.000

Boston
$
18,495,000
New York
3,674,025,000
Philadelphia
18,140,000
Cleveland
31,810,000
Richmond
16,660,000
Atlanta
44,830,000
Chicago
494,665,000
St. Louis
61,245,000
Minneapolis
7,325,000
Kansas City
35,450,000
Dallas
12,125,000
San Francisco
230,520,000

$
16,495,000
1,906,040,000
17,490,000
30,515,000
16,660,000
28,125,000
54,425,000
36,555,000
7,325,000
26,510,000
12,125,000
48,080,000

Treasury

30,000

30,000

$4,645,320,000

$2,200,375,000 a}. $5,822,750,000

TOTALS

a/Includes $330,495,000 noncompetitive tenders from the public.
b/Includes $162,000,000 noncompetitive tenders from the public.
UEquivalent coupon-issue yield.

i-458

$3,300,105,000 b/

Department of thefREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

EMBARGOED FOR RELEASE
UNTIL 11 A.M.
E.D.T. OR UPON DELIVERY
Remarks of
W. Michael Blumenthal
Secretary of the Treasury of the United States
to the
Annual Meeting of the International Monetary Fund and World Bank
Sheraton-Park Hotel
Washington, D.C.
September 27, 1977
We meet at a time
future. The legacy of
deep recession of 1974
system of international

of doubt about the world's economic
the oil shocks of 1974, inflation, and the
and 1975 poses questions of whether our
economic cooperation can endure.

The main points I want to make are these:
— t h e world economy has begun to recover from staggerinq
blows^
--we have in place a strategy for sustained recovery, and
that strategy is workings
—and we will succeed—though success takes time—if we
continue to act together and do not lose our nerve.
The effective functioning of the institutions that bring us
together t o d a y — t h e Bank and the F u n d — i s a critical part of that
cooperative effort.
The U.S. Economy
, * wil1 fi*st report to you on the condition of the United
states economy.

Q.

I am pleased that we are continuing to make solid progress.
we nave recorded economic growth of 7.5 percent for the first
quarter and 6.2 percent for the second.
over ?ei/oPeCt t0 meet °ur tar9et f°r real growth during 1977 of
s-i/z percent and we expect continued strong growth in 1978.
B-459

-2We have reduced our unemployment rate by about one
percentage point and so far this year have created more than 2
million new jobs.
Inflationary pressures are diminishing, despite the adverse
effects of an unusually harsh winter. Consumer prices rose at
the rate of more than 8 percent in the first half of the year.
We expect the rate to decline to less than 5 percent in the
second half.
We also have problems—serious ones.
Unemployment is much too high. Creating new jobs to bring
it down is a top priority.
Despite our progress, inflation also remains too high. We
know well how difficult it is to break the inflationary cycle.
Business investment, though increasing, is weaker than it
should be.
Energy consumption and oil imports are excessive.
Our current account deficit is likely to be in the range of
$16 to $20 billion.
In part, the shift in our current account position since
1975 has been caused by our heavy consumption of oil. But it is
also a consequence of the comparatively high rate of economic
growth in the United States and more restrained expansion in many
other countries.
We are determined to correct our problems.
The expansionary effects of new programs for public works
and public service jobs will show up strongly in coming months.
We have undertaken a series of measures to keep inflation
under control and to bring it down.
President Carter will soon present tax proposals that will
include important new incentives to stimulate business and
encourage higher productivity.
We are urging Congress to complete action on legislation
which will encourage energy conservation and increase domestic
energy production. That program will be an important first step.
But more will have to be done to limit demand and, especially, to
develop new domestic energy supplies.

-3We look to countries with payments surpluses to expand their
economies to the maximum extent consistent with the need to
combat inflation. Such moves are essential to a smoothly
functioning international economic system. We are encouraged by
expansionary measures decided on or implemented in recent weeks.
The Strategy of Cooperation
The international economic system is under stress because of
the need to adjust to wide variations in national economic
performance, high energy costs, and large imbalances in
international payments positions.
A broad strategy to facilitate these adjustments has been
agreed in international discussions. The guiding principle of
that strategy is cooperation.
It calls for symmetrical action by both surplus and deficit
countries to eliminate payments imbalances.
It calls on countries in strong payments positions to
achieve adequate demand consistent with the control of inflation.
It calls on countries in payments difficulties to deploy
resources more effectively so as to bring current accounts into
line with sustainable financing.
One point is clear. If this strategy is to succeed, the
oil-exporting countries will have to show restraint in their
pricing. This is an essential element of international
cooperation and is in the interest of the oil-exporting and
oil-importing nations alike.
We also need to resist protectionist pressures. Most
importantly, we must work for the successful completion of the
Tokyo round of the GATT negotiations.
The IMF, with its key role at the center of the
international economic system, must be in a position to help
countries carry out the agreed strategy.
This requires first of all that the Fund have adequate
resources.
The United States has formally consented to the increase in
its quota agreed to in the Sixth Quota Review. We urge others to
act promptly so that the increased quotas can be put into effect
without further delay.

-4We welcome the new Supplementary Financing Facility to
provide an additional $10 billion for nations whose financing
needs are especially large. We intend to press for prompt
legislative authorization of U.S. participation.
A permanent expansion of IMF resources for the longer term
is also needed. We will work for agreement on an adequate
increase in Fund quotas during the Seventh Quota Review.
The second requirement is that the fund use these resources
to foster necessary adjustment. As the Supplementary Financing
Facility recognizes, serious imbalances cannot be financed
indefinitely. Current account positions must be brought into
line with sustainable capital flows. The facility retains the
central principle that IMF financing should support programs that
will correct the payments problems of borrowers, not postpone
their resolution.
In today's circumstances, that process will in some cases
require a longer period of time. Consequently, the United States
supports the provisions in the new Facility that introduce
flexibility in determining the pace of adjustment.
In large measure, this comes down to a question of balance
and judgment in the Fund's operations. The Fund cannot avoid its
responsibilities to press for needed changes*; nor, on the other
hand, can it be rigid and inflexible in requiring adjustments.
The course it must steer is often narrow and difficult.
I believe that, on the whole, the Fund has carried out this
responsibility with skill and sensitivity. I am confident it
will continue to condition the use of its resources in a
reasonable and equitable manner, taking into account the needs
and circumstances of individual countries as well as the
particular conditions in the world economy today. It is not a
matter of whether the Fund attaches conditions, but what kind.
In individual cases, there will be a need to adjust the emphasis
between deflationary measures and policies for the redirection of
resources to productive investment and improvement of external
accounts.
Third, we must bear in mind the influence of the actions of
the Fund on the flow of private capital. It is inevitable and
right that the private capital market will continue to play the
dominant role in financing imbalances.

-5At the same time, banks, in their lending policies, are
increasingly looking to the existence of stand-by arrangements
with the Fund. These arrangements, with their stipulations about
domestic economic and external adjustment policies, can
considerably strengthen nations' creditworthiness.
A greater availabilty of information may also prove useful
and feasible. The Executive Board is currently examining the
question of how the system might be strengthened by greater
private access to factual information produced by the Fund, on a
basis that respects the confidential relationships between the
Fund and its members.
I believe that in general it is important to explore
possible methods to make sure that private and public flows of
capital are compatible with each other. This, too, is a way of
strengthening the international financial system.
The responsibility of the Fund goes beyond its operations in
support of countries in payments difficulty.
The amended Articles give the Fund an important, explicit,
role in overseeing the operations of the system as a whole and in
exercising surveillance over the exchange rate policies of its
member governments.
The principles to guide the Fund in carrying out these
responsibilities reflect widely held views, and a consensus has
also been reached on the procedures to be used. It is underlying
economic and financial factors that should determine exchange
rates. That is recognized.
I believe we all acknowledge that in carrying out these new
provisions the Fund will have to approach its task cautiously.
These are uncharted waters. History is by no means an adequate
guide to the future. Only by experience will it be possible to
test the principles we have established and to modify them where
it is proven necessary. It is evident that the Fund's
effectiveness in this area will depend on the genuine support of
its members for the principles it develops.
I believe the Fund is in an excellent position to undertake
this new role. It is now time for the member countries of the
IMF to act by approving the amended Articles and bringing these
provisions into effect.

-6Problems of Development
Establishing conditions for sustained growth and
strengthening the financial adjustment processes are the most
pressing intermediate-term issues facing the world economy. The
critical long-term problem, however, is to assure economic growth
with equity in the developing world.
President Carter spoke yesterday of the strong commitment of
the United States to help in the effort to meet the basic human
needs of the world's poor. President McNamara gave us a picture
of the magnitude of the task.
Action is required by both industrial and developing
countries.
The most important contribution the industrial countries can
make is to achieve adequate, sustained economic growth in the
context of an open international economic system. In the past
year the oil-importing developing countries have improved their
trade position by $8 billion as a result of the export
opportunities arising from the growth in the U.S. economy. An
acceleration in the economic expansion of other industrial
countries would provide comparable benefits. For such benefits
to be realized in the future markets must be open and
protectionism resisted.
Healthy economic conditions in the industrial world will
also facilitate the flow of capital to meet productive needs in
the developing countries. In this connection we must review our
efforts to assure adequate access to private capital markets.
In addition, specific actions must be taken to facilitate
the growth of developing countries.
A substantial increase in the transfer of official capital
to developing countries is necessary. The United States will do
its share. The Congress has authorized over $5 billion in
contributions to the international development banks and has
supported a sizeable increase in bilateral assistance. We are
prepared to begin formal negotiations in the Board of Directors
of the World Bank leading to a general increase in its capital.
We must work together to strengthen arrangements for
stabilizing earnings from raw material exports.

-7We must also approach the management of international
indebtedness, not as a crisis, but as a short- and medium- term
balance of payments problem. We can draw encouragement from the
fact that the aggregate current account deficit of the
oil-importing developing countries declined in 1976 as the world
economy began to recover. Where individual countries face severe
balance of payments problems, the new Supplementary Financing
Facility will help to facilitate adjustment.
Actions by the industrial countries are only part of the
story. The real payoff lies in the policies adopted by the
developing countries. This is not surprising. Four-fifths of
the investment capital of developing countries is mobilized from
domestic savings. Domestic policies will determine not only how
much savings can be mobilized in the future but also how
efficiently resources are used and how effectively the developing
countries can take advantage of an expanding international
economic environment.
The development partnership requires not only healthy global
economic conditions that will enable the developing economies to
grow, but also efforts by the developing countries to assure that
the benefits of growth are enjoyed by their poorest citizens.
In this connection, my government strongly supports the new
directions charted by the World Bank in financing social and
economic development. The Bank has pioneered in designing new
approaches to alleviate urban poverty and stimulate rural
development. I believe the continued expansion of the activities
of the World Bank Group, more than any other single action, will
contribute to constructive relations between industrial and
developing countries.
In supporting this expansion, the United States will urge:
—more emphasis on food production, expanding employment
opportunities, and other measures to improve the lot of
the world's poorest people.
increased lending to expand energy resources in developing
countries.
using the Bank's resources to facilitate the adoption of
sound economic policies in the developing countries.
I am convinced that foreign assistance will not have the
support of the American people unless they perceive that it is
making a real contribution to improving the lives of the poor.

-8My government also believes that the goals and purposes of
development encompass human rights as well as freedom from
economic privation and want. The United States Congress has
instructed the Administration to seek international agreement on
standards for human rights. We will pursue this mandate.
Looking ahead, the Bank and the Fund have a vital and
expanding role to play in the international economic system.
Their record entitles them to strong support and they shall have
it from the United States.
I must point to a problem, however, that concerns both the
Bank and the Fund. My government's continuted ability to support
these two institutions will depend on their efficient
administration. Most importantly, we must resolve the issue of
proper compensation policies for their staffs and Executive
Directors.
On salaries there is need for restraint. More generally, it
is essential to overhaul the entire compensation system of these
institutions — as well as the systems of other internaitonal
organizations — to meet today's realities. We hope that the
Joint Committee set up to review the situation will enable us to
move to such a new system. We must not permit this issue to
threaten these great institutions.
As I conclude my comments, it is a matter of deep regret to
the United States and to me personally that as the Fund crosses a
threshold into a new era of operations, it will lose the valued
services of its Managing Director, our trusted friend, Johannes
Witteveen. He has guided the Fund with firmness, fairness,
imagination, and good sense.
He deserves a large portion of the credit for the great
progress the Fund has recorded in recent years, and he leaves the
institution strong and fully capable of meeting its new and
challenging responsibilities. I join other Governors in
expressing our thanks.
We have a formidable agenda before us and one that we should
approach with a sense of hope and resolve. The necessary actions
are difficult but the potential gains are immense. Pursuit of
sound economic policies domestically and adherence to open and
cooperative policies internationally will see us into a new
period of economic progress and equity, worldwide.

FOR RELEASE AT 4:00 P.M.

September 27, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,800 million, to be issued October 6, 1977.
This offering will not provide new cash for the Treasury as the
maturing bills are outstanding in the amount of $5,806 million.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
million, representing an additional amount of bills dated
July 7, 1977,
and to mature January 5, 1978
(CUSIP No.
912793 M9 4 ) , originally issued in the amount of $3,305 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,500 million to be dated
October 6, 1977,
and to mature April 6, 1978
(CUSIP No.
912793 P6 7 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing October 6, 1977.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,871
million of the maturing bills. These accounts may exchange bills
they hold for the bills now being offered at the weighted average
prices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Except for definitive bills in the
$100,000 denomination, which will be available only to investors
who are able to show that they are required by law or regulation
to hold securities in physical form, both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington,
0. C
20226, up to 1:30 p.m., Eastern Daylight Saving time,
Monday, October 3, 1977.
Form PD 4632-2 (for 26-week
series) or Form PD 4632-3 (for 13-week series) should be used
to submit tenders for bills to be maintained on the book-entry
records of the Department of the Treasury.
B-460

-2Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and
borrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasthry. A
cash adjustment will be made on all accepted tenders fotHhe
difference between the par payment submitted and the actl&l
lS
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on October 6, 1977,
in cash or
other immediately available funds or in Treasury bills maturing
October 6, 1977.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

3> r-r
.'h sD

.E so

ederaiWASHINGTON,
nnancing
DariK
D.C. 20220
FOR IMMEDIATE RELEASE

£ o

September 27, 1977

SUMMARY OF FEDERAL FINANCING BANK HOLDINGS
August 1-August 31, 1977
Federal Financing Bank activity for the month of August,
1977, was announced as follows by Roland H. Cook, Secretary:'
The National Rail Passenger Service (Amtrak) drew down the
following amounts under notes guaranteed by the Department of
Transportation:
Interest
Date
Note
Amount
Maturity
Rate
11
8/1
$10,000,000
9/12/77
5 621
13
8/1
42,000,000
10/31/77
5 621
8/3
11
5,000,000
9/12/77
5 624%
8/9
13
10,000,000
10/31/77
5 7901
8/15
13
8,000,000
10/31/77
8/17
5 7661
13
8/22
4,000,000
13
10/31/77
5 916%
8,500,000
10/31/77
5 745%
On August 30, Amtrak repurchased $23,322,500.00 in
principal of Note #11. The amount, which was originally to
mature on September 12, 1977, was repurchased at the price of
$23,320,222.72 which reflects the market discount to Amtrak.
The U.S. Railway Association drew down the following amounts
under notes guaranteed by the Department of Transportation:
Interest
Date
Note
Amount
Maturity
Rate
8/2
8
$11,264,580
4/30/79
6 606%
8/5
8
231,650
4/30/79
6 637%
8/8
8
515,000
4/30/79
6 645%
8/11
11
500,000
12/26/90
7 520%
8/15
8
3,982,890
8/29
4/30/79
6 794%
8
735
%
8,736,025
4/30/79
6
On August 3, the Bank advanced $790,318 to the Missouri,
Kansas, Texas Railroad (KATY) at an interest rate of 7.670%
on a quarterly basis. The note under which the advance was
made will mature on November 15, 1997, and is guaranteed by
the Department of Transportation.
B-461

- 2The FFB purchased Rural Electrification Administrationguaranteed notes in the following amounts from utility
companies:
Interest
Date
Borrower
Amount
Maturity
Rate
8/1 United Power Assn. $12,000,000 8/01/79 6.62%
8/1 Cooperative Power Assn. 17,000,000 12/31/11 7.801%
8/1 Oglethorpe Electric
Membership Corp.
8/4 Allied Telephone Co. of
Arkansas

10,582,000

12/31/11

7.801%

200,000

12/31/11

7.779%

8/8 Cooperative Power Assn. 3,000,000 12/31/11 7.781%
8/11 Tri-State Generation $
Transmission Assn.

3,115,000

12/31/11

7.809%

8/11 Colorado-Ute Elect. Assn. 1,961,000 12/31/11 7.809%
8/12 Gulf Telephone Co. 110,000 12/31/11 7.808%
8/13 Big River Elect. Corp. 1,768,000 12/31/11 7.792%
8/22 Sierra Telephone Co. 232,826 9/01/79 6.797%
8/29 Brookville Tele. Co. 1,636,000 8/29/79 6.738%
8/29 Central Iowa Pwr. Coop. 2,553,000 12/31/11 7.731%
8/29 East Ascension Tele. Co. 310,960 12/31/11 7.731%
8/30 Arizona Elect. Pwr. Coop. 16,000,000 12/31/11 7.651%
8/31 East Kentucky Pwr. Coop. 5,984,000 12/31/11 7.659%
8/31

Southern Illinois Pwr.
Coop.

2,225,000

8/31/79

6.689%

Interest on the above notes is paid quarterly.
On August 3, the FFB purchased Series F Notes from the
Department of Health, Education and Welfare in the amount of
$4,205,000. The notes mature July 1, 2001, and bear interest
at a rate of 7.75%. The notes, which are guaranteed by HEW,
were previously acquired by HEW from various public agencies
under the Medical Facilities Loan Program.

- 3The FFB made advances to foreign governments under loans
guaranteed by the Department of Defens e.
InterestMaturity
Date
Amount
Borrower
Rate
Argentina

China

8/9
8/15
8/24
8/26
8/11

$

380,065.98
72,836.01
70,922.05
258,262.34
15,000.00

6/30/83
6/30/83
6/30/83
6/30/83
12/31/82

7.032%
7.134%
7.057%
7.024%
7.047%

Ecuador

8/2
8/17

251,882.84
60,000.00

6/30/83
6/30/83

7.026%
7.163%

Indonesia

8/22

1,962,399.32

6/30/83

7.088%

Israel

8/9

50,000,000.00

5/12/07

7.804%

Jordan

8/3
8/26
8/30

39,370,841.55
2,744,458.20
558,600.00

11/26/85
6/30/85
6/30/85

7.251%
7.154%
7.079%

Malaysia

8/4
8/4
8/26
8/26
8/4

2,350,594.54
703,768.77
1,028,100.00
59,101.73
182,254.40

6/30/84
12/31/83
12/31/83
6/30/84
12/31/82

7.120%'
7.078%
7.058%
7.092%
7.012%

Morrocco

8/15

3,020,800.00

6/30/84

7.215%

Paraguay

8/11

34,581.71

6/30/81

6.886%

Peru

8/23

2,305,792.00

4/01/84

7.158%

Philippines

8/16

733,222.21

6/30/82

7.072%

Tunisia

8/16
8/18

472,664.00
169,095.00

6/30/82
6/30/82

7.073%
7.044%

Uruguay

8/11

137,936.48

6/30/83

7.094%

Ofc

Korea

On August 9, the Bank advanced $713,700 to the Chicago,
Rock Island and Pacific Railroad at a rate of 7.685%. The
note, under which the advance was made, is guaranteed by the
Department of Transportation and will mature on June 21, 1991.
On August 22, the Western Union Space Communications
drew down $6,450,000 at a rate of 7.605% on an annual basis.
The drawdown is guaranteed hy the National Aeronautics and
Space Administration and will mature on October 1, 1989.

- 4 The Student Loan Marketing Association issued notes to
the FFB in the following principal amounts:
Interest
Date
Amount
Maturity
Rate
$ 5,000,000
5,000,000
5,000,000
5,000,000
10,000,000
30,000,000
20,000,000
10,000,000
5,000,000
20,000,000
20,000,000
30,000,000
25,000,000

8/2
8/2
8/2
8/2
8/2
8/2
8/2
8/2
8/2
8/9
8/16
8/23
8/30

9/13/77
9/20/77
9/27/77
10/04/77
10/11/77
11/01/77
11/08/77
11/15/77
12/13/77
11/18/77
11/15/77
11/22/77
11/29/77

5.701%
5.701%
5.701%
5.701%
5.701%
5.701%
5.701%
5.701%
5.701%
5.626%
5.956%
5.836%
5.857%

Sallie Mae borrowings are guaranteed by the Department of
Health, Education and Welfare.
The Federal Financing Bank purchased the following notes
from the Secretary of the Treasury pursuant to the New York
City Seasonal Financing Act of 1975:
Yield
Face
Face
Purchase
To
Date Note #
Amount
Rate Maturity
Price
FFB
(millions)
8/16
8/16

21
22

$ 50
$100

7.36%
7.38%

4/20/78
5/05/78

6.485%
$ 50,283,615.25
$100,600,063.18 . 6.505%

On August 24, the FFB purchased a debenture in the amount
of $720,000 from a small business investment company guaranteed
by the Small Business Administration. The debenture matures on
August 1, 1987, and bears interest at a rate of 7.565%.
On August 24, the Bank purchased the following Certificates
of Beneficial Ownership from the Farmers Home Administration:
Amount

Maturity

Interest
Rate

$100,000,000
675,000,000
40,000,000

8/24/82
8/24/92
8/24/97

7.32%
7.78%
7.94%

Interest payments on the Certificates are made on an annual
basis.

- 5On August 26, the Bank advanced $1,055,760.21 to the
Guam Power Authority, the repayment of which is guaranteed
by the Department of the Interior. The amount matures on
December 31, 1978 and bears interest at a rate of 7.54%.
On August 31, the Bank purchased from the Tennessee
Valley Authority a $170 million note maturing on November 30,
1977 with an interest rate of 5.884%.
Federal Financing Bank holdings on August 31, 1977
totalled $33.8 billion.
# 0#

FOR RELEASE AT 4:00 P.M.

September 27

1977

TREASURY TO AUCTION $2,500 MILLION OF 5-YEAR 1-MONTH NOTES
The Department of the Treasury will auction $2,500
million of 5-year 1-month notes to raise new cash.
Additional amounts of the notes may be issued to Federal
Reserve Banks as agents of foreign and international
monetary authorities at the average price of accepted
tenders.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

Attachment

B-46LZ

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 1-MONTH NOTES
TO BE ISSUED OCTOBER 17, 1977
September 27, 1977
Amount Offered:
To the public

$2,500 million

Description of Security:
Term and type of security
Series and CUSIP designation

5-year 1-month notes
Series F-1982
(CUSIP No. 912827 HB 1)
Maturity date
November 15, 1982
Call date
No provision
Interest coupon rate
To be determined based on
tne average of accepted bids
Investment yield To be determined at auction
Premium or discount
To oe determined after auctioi
Interest payment dates
May 15 and November 15
(first payment on May 15/ 1971
Minimum denomination available
$1,000
Terms of Sale:
Method of sale
•
Yield Auction
Accrued interest payable by
investor
•
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
•
Acceptable
Key Dates:
Deadline for receipt of tenders
Settlement date (final payment due)
a) casn or Federal funds
b) check drawn on bank
within FRB district where
submitted
c) checK drawn on bank outside
FRB district where
submitted
Delivery date for coupon securities.

Wednesday, October 5, 1977,
by 1:30 p.m., EDST
Monday, October 17, 1977

Tnursday, October 13, 1977

Wednesday, October 12, 1*77
Tuesday, October 18, 1977

DEPARTMENT OF THE TREASURY
<BREAKFAST - PRESS CONFERENCE
WITH
W. MICHAEL BLUMENTHAL
SECRETARY OF THE TREASURY OF THE UNITED STATES
^ ON
Remarks to the Annual Meeting of
The International Monetary Fund
and
World Bank

September 27, 1977 /
Shoreham-Americana Hotel
Washington, D.C.
WITH: Under Secretary for Monetary Affairs
Anthony M. Solomon
and
Assistant Secretary for International Affairs
C. Fred Bergsten
and
Assistant Secretary for Public Affairs
Joseph Laitin
8:15 a.m.

-2-

SECRFTARY LAITIN:
with your breakfast?

Ladies and Gentlemen:

All finished

Whatever the Secretary savs here, of course, is embargoed
until 11.6fclock when the Secretary will address the International
Monetary Fund Meeting.
Please restrict vour auestions to matters involvinq the
meeting here — the International Monetary Fund Meeting.
The Secretary will be holding a general Dress conference
at the Treasury at 10:00 a.m., Thursday morning; the dav after
tomorrow. It will be in the Cash Room of the Treasury. Fnter
the building through the front entrance and the Cash Room is at
the entrance.— 10:00 a.m. Thursday — a general Dress conference
of Secretary Blumenthal.
Fe reauest you to restrict vour ouestions todav to the
International Monetary Fund.
Incidentally, copies of the SDeech will be available to
you as you leave here — the text of the 11 o'clock SDeech.
Secretary Blumenthal.
SECRETARY BLUMENTHAL: I would like to use this ODDortunitv
to give you a brief preview — general preview -- of the content
of our remarks which I will be making this morning at anoroximatelv
11 o'clock to the International Monetary Fund meeting.
The Durpose of it is to provide a view of the United States
with regard to the world economic situation and with regard to the
matters under the responsibility of the Fund.
The general emphasis of my remarks will be on the fact that
the world is coming out of a situation in which it reallv received
some staggering economic blows in the Deriod 1974-1975, relating
to the substantial quintupling of the Drice of oil — conseauent
heavy inflation in many countries; deeD recession in many of
these same countries; high levels of unemDloyment, and great
difficulty in adjusting to all of these Droblems.
Looking at what has haDDened since 1974 and 1975, there is
no cause for undue gloom — that, in fact, considerable orogress
had been made with regard to the adjustment process, but that
at the same time, there are serious Droblems along with the
progress that has been made. It is the business of the Fund and
the Bank, and of the principal countries who are members of the
Fund and Bank, to be addressing ourselves to these problems.

-3-

Then, in turning to the
I refer to the fact that there
year in the United States with
in fact, than occurred in most

condition of the United States,
has been solid progress in this
regard to growth in our GNP; more,
other developed nations.

We have been doing relatively better than most, and
similarly, there has been encouraging progress with regard to
unemployment and inflation.
However, clearly, the Carter Administration — the present
American Administration — is not satisfied with the levels reached
with regard to unemDlovment and inflation, and, a lot more work
needs to be done: we find that the rate of business investment is
too low; the general business confidence is not high enough; we
are consuming and importing too much energy and that is an unsatisfactory situation from our point of view.
And, we are experiencing larqe current account and trade
deficits. That is a matter that challenges us for the future.
I refer to the fact that we had very rapid growth in the
first part of this year in GNP. Some satisfying growth is occurring
in the second part of this vear.
We will be meeting or exceeding the targets originallv set
for ourselves, and we are continuing to work toward a tarqet of
about a five percent growth in real terms for next year.
Among the corrective measures that we are undertaking in
order to deal with some of the problems which I have referred to
are, of course, our energy program, which is presentlv being
debated in the Senate of the United States; a modest stimulus
program which was approved by Congress and enacted earlier this
year — and the full effects of which are now being felt; the tax
reform program, which will be presented to the Congress before
its adjournment at the end of next month, and an anti-inflation
strategy which we have been pursuing for some time.
Turning to the international situation, I refer to successes
and problems with international strategy that has been adopted bv
the major countries on the situation that has emerged out of the
period '74-'75
I note that that strategy is still the correct one, and it
is working — althoug, obviously, there is not total success bv
any means.

-4-

Some Droblems remain and we have to redouble our efforts in
order to deal with them. That strategy, of course, is one that
involves programs by strong countries to ensure that their economies
are growing at good rates, while allowing time for the less strong
countries to follow adjustment proorams in order to stabilize their
situation.
Clearly, that strategy of cooperation, which takes time, can
work only in a framework in which there is also restraint bv oilexporting countries in the price of oil — that further significant
increases in the price of oil would make the adjustment process
all that much more difficult.
Turning then to the IMF, I review the considerable contribution which the IMF has made to these activities. We feel strongly
that there should be adequate resources available in IMF to provide
the official resources needed to support stabilization programs in
countries temporarily experiencing difficulty in pursuing such
programs.
We feel that the countries which have not vet ratified the
Sixth Quota increase should do go at the earliest possible opportunity.
We are further encouraged bv the agreement on the Supplemental
Financing Facility — so-called Witteveen facility which will provide almost $10 billion in additional official financing resources
to the IMF. V7e are in agreement that further expansion of permanent
resources will be needed by the IMF and that the Seventh Quota
Review, which should lead eventually to another quota increase
should be pursued in the coming months.
We feel strongly that the use of these resources bv IMF
should be directed towards fostering the necessary adjustments.
In other words, in the borrowing taking place bv countries
to enable them to overcome their problems, a fair degree of flexibility is required in striking the right balance between the need
for adjustment and an understanding of the internally different
economic and political problems that have to be taken into account.
That is a difficult course — but one in which we feel the
Fund has done well.
We fefer, also, to — of course —
vate capital flow has to continue
is a very important aspect of the
resources can only do so much and
cant.

the need that one priat a high level. That reallv
total world situation. Official
private capital is very signifi-

-5-

We look towards an increasingly closer relationship
between the two and an increasing availability of information
which will help a great deal leading to the provision of private
resources in conjunction with the stabilization programs taking
place.
On the question of development, turning to the Bank —
the major, critical problem, as we see it, is to ensure that the
needed growth with equity in the many developing countries of
the world continues.
Obviously, that is very necessarv in order to seek to
lessen the gap between the rich and the poor countries. It is
obviously a problem made more difficult because of the substantial
increases in the price of energy.
Therefore, in the first instance, the best contribution
which the developed countries — the industrial nations — can
make towards the cause of the development of the LDCS is to
ensure that their own growth is adeauate and occurs in an open
international system, a system devoid of protectionism and in
which the developing countries can benefit from the strong
economic situations of developed countries.
So, that is our first responsibility — not onlv to ourselves,
but also to the developing countries.
In addition, there are a number of other measures that can
and should be taken, which we in the United States want to cooperate
in as fully as possible. The first involves the effort to negotiate
arrangements to stabilize raw material prices. We are fullv in
support of these measures. The agreement early-on is that we
would be willing to negotiate some kind of Common Fund arrangement.
That is an example of our flexibility in that area.
Secondly, to improve the management of indebtedness, with
some flexibility, taking into account the particular needs of
individual countries, and third, of course", is the fact that the
Congress of the United States has, in response to a reauest bv this
Administration, authorized a very high level of aid funds.
This is a point to which President Carter referred to
yesterday, that appropriations for IDA V have been approved and
that the debate on the other appropriations requests is now going
forward, and that the Administration is exerting every effort to
see that the outstanding issues are satisfactorily resolved.
In addition to that, we recognize that the World Bank
probably should have a "capital increase" and we are prepared
to begin negotiations for a Bank capital increase.

-6-

It is of course true, and that point requires underlining,
that developing countries on their own reallv have to do a great
deal about furthering their development. In the end, it depends
on their own efforts in mobilization of their own resources and
helping their own poor to bring about needed change.
The second emphasis that we welcome, which the Bank is
engaged in and that we would like to support, deals with urban
poverty and rural development to emphasize projects of resource
development, projects of energy, raw material development, food
production, job opportunities, domestic energy in the context of
establishing traditions of sound economic policy.
Not only do we fully support the World Bank in these efforts,
but we have our own proqram of insurance, the Overseas Private
Investment Corporation, emphasizing these kinds of projects.
In our aid programs and in our work within the World Bank
and the other regional banks, we are concerned, as we have
previously stated, about human rights — which we consider to be
just as important as freedom from economic need.
We feel therefore, we will continue to pursue policies in
which we will take into account the human rights issues. Obviously,
we will do so flexibly and with undestanding —? and without wishing
to impose our standards on others — but do feel it is a consideration that we must and will take into account.
Equally important, we feel that it is essential to maintain
the support of all countries, and that the activities of the Bank
as well as the Fund are conducted not only towards the right ends,
but are conducted efficiently and on the basis of efficient administration and in a constant manner.
Of course, that does relate in particular to the concerns
that we have expressed for some time that some of the administrative
methods, in particular', the compensation arrangements that tend
at times to be excessive and cause a great deal of criticism in
our boundaries.
It, therefore, gives us great difficulty in gettino approval
for substantive programs that we so much want to get. So, it is
a matter that really needs stressing.
Of course, I would be remiss if I did not note with great
regret the decision by Managing Director of the Fund, Mr. Witteveen,
not to put his name up for re-election, but to end his activities
next year at the termination of his present term.

-7-

So, in summary then, this review of the agenda for the Bank
and the Fund lists not only the successes which we think have
been achieved, but also the problems, and states as clearly as
we can the U.S. position with regard to each of these matters.
QUESTIONS AND ANSWERS
QUESTION: Sir, have you retreated from the U.S. position
with regard to power plotting?
SECRETARY BLUMENTHAL: We have not. There has been no
change in our position.
QUESTION: Mr. Secretary, the last time vou talked about
the large U.S. trade deficits, thev went into a tail-spin.
How are you going to prevent that from happening todav?
SECRETARY BLUMENTHAL: Well, I think that it is well
understood around the world that the U.S. economy is strong,
growing — as strong or stronger than virtually any in the world.
We are in a solid position. There is a gread deal of
capital flowing into this country because that is recognized.
The basic situation is very sound and I therefore have everv
expectation that the international stability is pretty well
ensured and that the strength of the dollar will be maintained.
QUESTION: What is the U.S. position about new issues
of SDR?
SECRETARY BLUMENTHAL: New issues of SDR?
I will call on Under Secretary Solomon.
UNDER SECRETARY SOLOMON: Our position is the same as it
was in the Interim Committee in April, when we agreed to participate actively in a study of the role of the FDR, the future role
of SDR, and the characteristics of the SDR.
It should be a broad study in terms of how that would
relate to the workings and the objectives of the International
Monetary Fund, including — but not confined to ~ the objective
of the SDR becoming the principal reserve asset in the lonq run.
We, of course, are working on our own analysis. That
should be ready for the next Interim Committee session.
QUESTION: Do you share the view bv others that countries
recently coming into surplus should now stimulate their economies?

-8-

SECRETARY BLUMENTHAL: Well, I think that really vou have
to look at that on an individual basis, country-bv-countrv.
I don't see too many candidates that fall into that
category. I think that the principal emphasis still has to be
on a continuation of the strategy that we have followed for
some time, and, that really relates to the three strono countries
that have been mentioned: Germany, Japan and the United States.
I don't see too many other candidates who would be well
advised to start stimulating.
QUESTION: Does that include Great Britain, sir?
SECRETARY BLUMENTHAL: I will allow the British to answer
that.
QUESTION: Mr. Secretary, has the Administration put anv
pressure on private United States banks to lend more to undeveloped
countries and, in return, what is the Administration doing to
guarantee these loans in case of default?
Is there going to be anv increased assurance, and do we
expect any further defaults?
SECRETARY BLUMENTHAL: The answer is we have put no pressure
and do not put pressure on private banks. There are no guarantees,
and the answer is no to all other aspects.
QUESTION: Is the United States satisfied with the steps
that the Government of Germany, Federal Republic, has taken to
stimulate the economy?
SECRETARY BLUMENTHAL: We noted with interest that the
Federal Republic has recently announced additional measures and
we will be watching with interest to see whether these will
succeed in meeting the kinds of growth targets that the government
has mentioned.
If these targets are met, we think that would be a
considerable contribution to international stability, but, obviouslv
it is too early to tell.
Yes?
QUESTION: What is the role between private and -- do vou
see any particular combination of IMF and the banks or what do you
see?

-9SECRETARY BLUMENTHAL: I don't think there is any particular
target — a number that you can point to — as being the right
combination of official and private resources.
I think that depends very much on each individual situation.
It is true that the very large portion of total financial resource
at the disposal of individual countries will be private, but it
is difficult to tell exactly what the right proportion ought to
be.
QUESTION: But do you see a closer cooperation or do vou
have a special scheme in mind?
SECRETARY BLUMENTHAL: I think a relatively close
cooperation between the private banks and the IMF would be a
desireable thing.
I talked about that at the International Monetary Conference
in Tokyo earlier this year. I briefly referred to it here in
my opening comments.
Just the availability of information to the banks — of
course, not on confidential matters — will be helpful. It is
helpful when the banks have assurances and understanding that IMF
is working activly on programs with these countries.
This ought-to give them added confidence and enable
them to provide more private resources.
QUESTION: Mr. Secretary, what response are you gettina
from the Japanese in efforts to get them to reduce their current
account surplus?
SECRETARY BLUMENTHAL: The Japanese Government has, at
various times, indicated its understanding and concern with
their very large current account surplus and it is my impression
that the policies that thev are following are intended to
reduce that.
Again, as in the case of the Federal Republic, it

- 10 remains to be seen whether the policies will be successfu.
Q. Mr. Secretary, if Mr. Carter's energy plan emerges
from the Congress perhaps at half or a quarter -- which some
people are suggesting it will -- what is the next long term
alternative for fixing up the U.S. deficit?
SECRETARY BLUMENTHAL: In the first place, I do believe
that Congress will adopt an energy program that will, over time,
have a significant effect toward reducing the cost of energy
imports.
But, we will have to wait the next few weeks to see
what the Congress does.
Secondly, I have no doubt that whatever the program
is that the Congress will adopt, it will not be the last thing
that needs to be done in the energy area.
There will be further measures which should have an
effect on energy imports. It seems to me that the next most
important impact on our U.S. deficit is the rate of growth in
other countries; countries that are now pursuing atabilization
policies. As these policies achieve success these countries
will be able to resume greater growth and that will be of considerable benefit to the United States.
Third: We are actively engaged in promoting our own
exports through a major expansion of the Export-Import Bank and
that will have -- within the next year or two -- some significant
measurable impact on our total trade balance.
So, you have to take some of these measures and others
into account as you look ahead.
Q. Do you still estimate, Mr. Secretary, that the balance
of trade will have a deficit of $25 to $27 billion this year and
the balance of trade will be about $12 billion?
Do you still believe it's possible that it will not be
increased substantially?
SECRETARY BLUMENTHAL: Well, I think that the numbers I
previously mentioned have been between 25 and 30 -- less than
30, but more than 25.
I don't know exactly where the number will turn out to
be on trade balance, and I think that this is what is likely to
happen. The current account deficit is about $10 billion or so
less than that, so should we have 26 on trade we would have 16
on current account. If we had 27, we would have 17.

- 11 That is about the way we think it will come out.
Q. Mr. Secretary, following your reference to human
rights policy, I want to know whether the American members in
the World Bank are taking into account that respect for human
rights in the evaluation of specific countries.
SECRETARY BLUMENTHAL: I don't think I understand the
question.
A. Do the American members of the Board of the World Bank
take into account the human rights respect in the evaluation of
the specific -SECRETARY BLUMENTHAL: In deciding how to deal with each
specific matter on which they have to vote, they clearly
evaluate the total situation.
And the question of human rights is one of those
questions they bear in mind.
Q. Mr. Secretary, did you come across any doubts about
your view on our ability to meet growth targets and, if so, how
are we able to -SECRETARY BLUMENTHAL: Not really. You see, since our
record up to now has been pretty good, there isn't a great deal
of skepticism around.
I think, basically, my colleagues from other countries
look at what we have done this year and agree with us that we have
a good chance of meeting the targets we set.
Q, Mr. Secretary, I would like to take you back to an
earlier comment in which you aid you don't see too many other
candidates that would be well advised to start this stimulus in
a major way.
Yesterday American Treasury officials were suggesting
that perhaps France, the UK — even Italy -- possibly — perhaps
also Switzerland and the Netherlands -- might be candidates for
some modest reflation sometime in the future.
Is there a difference here or were you encompassing
that in your remarks?
SECRETARY BLUMENTHAL: I don't think there is ever any
difference between Treasury officials.
(LAUGHTER.)

- 12 SECRETARY BLUMENTHAL: Clearly, there can be circumstances
in which there is a country in addition to the three I mentioned
who could take additional stimulative measures.
I am not suggesting that may not be advisable. I wanted
to make a point that the United States is not changing its
viewpoint in recommending to a significant number of countries
that they should continue to follow policies of stabilization.
There is no change in our policy in that regard and we
are not recommending it.
Q. Would you agree that there has been a change of mood
this year -- that the recovery will peter out under the threat
of new inflation?
SECRETARY BLUMENTHAL: I would not want to make that kind
of a comparison. I would say there is a mood of some concern
about the future and in general in this country a feeling of a
lack of confidence, a lack of confidence by our business community
about the medium and longer range prospects. We find that lack
of confidence or hesitation seems to be shared by similar groups
in other countries.
SECRETARY LAITIN: We have time for one last question.
Q. Is there any chance of US growth in sales during the
IMF programs?
SECRETARY BLUMENTHAL: We will be following the same
policies.
Q. Recently the French Industrialist Association stated
that: "The conclusion of the U.S. Administration is that
leading growth is necessary to save the dollar. A dollar crash
would be set off in a moment by alliance of certain industrial
countries with OPEC to counter the U.S. decision to stop growth."
What I am interested in knowing is this the kind of
propegation -- is that what you have been desperately
manuvering here to prevent?
SECRETARY BLUMENTHAL: No.
Thank you.
SECRETARY LAITIN: The text of the Secretary's address
will be available as you leave.
(Whereupon at 8:45 a.m. the conference was concluded.)

September 29, 1977
JOINT STATEMENT
BY FORMER SECRETARIES OF THE TREASURY
As former Secretaries of the Treasury, we reaffirm our
belief that United States participation in the international
financial institutions — the World Bank and the regional
development banks — is vital to American economic and
political interests.
Continued U.S. participation in these lending institutions
is now totally dependent on the Congress of the United States.
The Fiscal 1978 Foreign Assistance Appropriations Act is
pending before Congress. The restrictive amendments contained
in the House version of this bill would effectively end U.S.
participation in the Banks. The charters of these multilateral
institutions simply would not permit them to accept funds so
conditioned by individual members.
Such a result would gravely undermine the world economy
and the future well-being of the American people. Indeed, our
contributions of about $2 billion are essential to mobilize
contributions of $5.5 billion —almost three times as much —
from other donor countries.
If the institutions are cut off from these funds, lending that

would benefit hundreds of millions of poor people throughout the worl
would cease. u.S. relations with the poor countries
would be shattered. Our relations with the other donor countries —
our closest allies in Europe, Canada and Japan — would be
disrupted, for they have already decided to contribute their

- 2-

fair share to these institutions on the assumption that
we would contribute ours. As a result, the international
cooperation which is so critical to the stability and growth
of our world economy would be severely jeopardized.
Over the past several decades successive Presidents
of the United States—Truman, Eisenhower, Kennedy, Johnson,
Nixon and Ford—supported with strong bipartisan backing in
the Congress, have encouraged the development and expansion
of the role of the World Bank and the regional development
banks.
As Secretaries of the Treasury during this period
since World War II, we have consistently urged this feature
of our foreign economic policy as an indispensable element
of an effort to engage the other wealthy industrialized
democracies in sharing our burden and responsibility to
assist the poorer, less developed nations in providing
some hope and progress for their peoples. We firmly
believe that these multilateral financial institutions
are essential to peace and prosperity. Continued U.S.
support and participation in a leadership role is vitally

necessary to a continuance of these organizations as effective
instruments for international cooperation.

- 3 Therefore, we hope that the Congress will modify the
restrictive amendments and vote out the appropriations so
that the World Bank and regional development banks can
accept the U.S. subscriptions.

Robert B. Anderson
Joseph W. Barr
John B. Connally
Douglas Dillon
Henry H. Fowler
David M. Kennedy
George P. Shultz
William E. Simon
John W. Snyder

MEMORANDUM TO THE PRESS:

September 27, 1977

Treasury Secretary Blumenthal will hold a general
news conference in the Main Treasury Cash Room at 10 a.m.
Thursday, September 29. The Cash Room is located on the
second floor directly opposite the Pennsylvania Avenue
entrance to the building.

# # #

B-463

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
SEPTEMBER 29, 1977
TESTIMONY OF ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
HOUSE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
SUPERVISION, REGULATION AND INSURANCE
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
Mr. Chairman and Members of this distinguished Committee:
I appreciate this opportunity to comment on behalf of
the Administration on the Safe Banking Act of 1977.
The first four titles of H.R. 9086 are substantially
the same as S. 71, which has passed the Senate and on which
the Acting Comptroller of the Currency testified earlier
this year. The Administration continues to support prompt
passage of the measures set forth in that bill, which is a
product of careful and lengthy consideration.
Some of the remaining titles of H.R. 9086 have also
been represented by other bills; some are new. The issues
with which this bill deals range from technical amendments
to the Federal Deposit Insurance Act, through limitations on
a bank's transactions with bank officers and other insiders,
to the granting of a Federal chartering option for thrift
institutions. Much of this material was added to the bill
only a short time ago. Accordingly, there are some issues
on which we have not had adequate time to come to a considered
judgment. Nonetheless, I will attempt this morning to set
forth the Administration's views on this bill to the fullest
extent possible.
TITLETitle
I — I
SUPERVISORY
AUTHORITY
OVER DEPOSITARY
provides new
civil penalties
and other INSTITUTIONS
enforcement
powers to redress violations of certain provisions of the
national banking laws; it grants the bank regulators the
power to remove or suspend directors under certain circumstances;
B-464

- 2 and it places limits on loans made by a bank to its officers
and directors, each holder of 5 percent of any of its voting
securities, and to any company controlled by such person or
any related political committee. The limitations on loans
to insiders extend to all members of the Federal Reserve
System, and to non-member insured banks.
The Administration supports the provisions of this
title and the goals to which these provisions are addressed.
We would like, however, to direct the Committee's attention
to a potential problem relating to Section 10 4, which deals
with loans to insiders. Under Title I, loans to each
insider and his affiliates are limited to one-half of the
amount that could otherwise be loaned to a single person
under applicable law. This may sharply and perhaps unfairly
limit the amount of credit that can be extended by a small
bank (as distinct from the larger money center banks) to
persons who have a relatively small interest in the bank.
This is particularly so in view of the fact that the prohibition
applies to 5 percent shareholders (a reduction from the
10 percent test contained in S. 71), thus expanding the
coverage of this section. Moreover, for purposes of applying
this test, Section 104 requires the aggregation of all loans
made to the insider, his controlled corporations and his
related political committees. Aggregation is not required
under Section 5200 of the Revised Statutes (12 U.S.C. 84),
which establishes the limit on loans to a single borrower by
a national bank. The effect of this sharp curtailment of
credit may make it more difficult for smaller banks in some
local and rural communities to attract the kind of management
they require. In those communities it may be particularly
difficult to secure local businessmen to serve as directors,
since the effect of aggregation may exclude senior officers
of corporations with significant business borrowings from
. the bank.
S. 71 would have restricted loans to directors (who
are not also officers or substantial shareholders) only
by the requirement that such loans in excess of $25,000
be approved in advance by two-thirds of the entire Board
of Directors, with the interested director abstaining.
S. 71 would also limit loans to officers and 10 percent
stockholders of insured banks, and to companies they control,
to 10 percent of the bank's surplus and capital, or the
applicable limits under state law in the case of state
chartered banks. The bank regulators have indicated that
this approach, including the persons covered, is adequate to
reach abuses of the insider relationship. We, therefore,
support S. 71's approach to limiting loans made to insiders.

- 3 TITLE II —

INTERLOCKING DIRECTORS

Section 203 prohibits any "management official" of a
depository institution or a depository holding company from
acting as a management official of another depository
institution or depository holding company within the same
geographical area. It also bars interlocks between management
officials of depository institutions or holding companies,
regardless of location, with assets exceeding certain
specified levels. The Administration supports these provisions.
Section 203 also would prohibit any common management
officials' between a depository institution or depository
holding company and any insurance company, title company,
company engaged in the business of appraising real property
or company which provides services in connection with the
closing of real estate transactions. The prohibition would
apply regardless of whether the two companies are geographically
adjacent or competitively engaged. This provision was not
present in S. 71, and we believe the need for such a blanket
prohibition has not been demonstrated.
We agree, however, that interlocks between banks and
other corporations with which they compete should be prohibited.
Although we understand the Justice Department is currently
appealing cases in this area, clarification of the law would
be appropriate and relatively simple. Section 8 of the Clayton
Act (15 U.S.C. Sec. 19) could be amended to limit clearly the
exclusion for banks only to interlocks between two banks, bank
holding companies, or other depository institutions. In that
case a common directorship (but not a common officership)
between a bank and another corporation would be. tested by the
same standards as interlocking directorships in the case of
nonbank corporations.
TITLE III — FOREIGN BRANCHING
The Administration supports Title III of the bill,
which, in general, extends to non-member banks the requirement
of prior Federal approval (in this case by the FDIC) of the
establishment of a foreign branch or the acquisition of the
equity securities of a foreign bank. We note that Section 309
of Title III gives the FDIC general rulemaking authority for
the laws which it administers (except where another agency
has exclusive rulemaking authority). This provision was not
incorporated in S. 71. In our view this addition is salutary.
The Federal Home Loan Bank Board already has such
power. Under H.R. 9106 (the Comptroller of the Currency's
"housekeeping amendment" bill), which we support, similar
authority would be granted to the Comptroller. We recommend,

- 4 however, that Section 107 of H.R. 9106 be revised to reflect
the exception, included in Section 309 of H.R. 9086, for
laws as to which another regulator has been granted exclusive
authority to issue regulations.
TITLE IV — CONFLICTS OF INTEREST
Title IV prohibits former members of the Board of the
FDIC, the Federal Reserve and the Federal Home Loan Bank
Board from acting as officers, directors, employees, attorneys,
consultants or agents of any institution formerly subject to
their regulation for a period of two years after they leave
office. During that period they are prohibited from acquiring
any interest in any such institution (or its affiliates) or
from voting any securities of which such an institution is
an issuer. We believe that this prohibition sweeps too
broadly. It will make it increasingly difficult for the
Government to attract people to senior regulatory positions
who have experience in the industry unless they.are on the
verge of retirement or are otherwise prepared to abandon a
career in that industry. Even academics may be deterred
because consulting will be barred to them for two years.
There is also a broader question as to whether public policy
is served, for example, by prohibiting an ex-member of the
FDIC or the Board of Governors of the Federal Reserve System
from acquiring any securities in a formerly regulated bank
after they leave office.
Congress presently has before it S. 555, the
Administration's bill that attempts to deal with the socalled "revolving door" problem more narrowly. We would
suggest that action on this title be deferred until the
Congress has acted on S. 555, as it would be undesirable to
place the various agencies on an unequal basis in this area.
TITLE V — CREDIT UNION RESTRUCTURING
We have reviewed these provisions, which are new in
this piece of legislation. The Administration has no
objection to the substitution of a board for the Administrator
of the National Credit Unions Administration. On the other
hand, my comments with respect to the prohibitions in
Title IV, dealing with subsequent employment by a regulated
institution of a former member of the Board of Governors,
would be equally applicable to subdivision (f) of Section 501f
which contains a parallel prohibition.
The Congress is separately considering in the context
of H.R. 2176 the question of the appropriate scope of an
audit by the General Accounting Office of a bank regulator.
That consideration should be reflected in the final
paragraph (g) of Section 501, which calls for such an audit.

- 5 TITLES VI and VII —

CHANGE IN BANK CONTROL

These provisions of the bill require the advance
approval of the FDIC to any acquisition of control of an
insured bank. "Control" is defined as the power to direct
the management or policies of a bank or to vote more than
25 percent of a bank's outstanding voting stock. The
Comptroller of the Currency and the Federal Reserve Board
are given an additional veto over the transfer of control.
We support in principle the concept of strengthening
bank regulatory oversight of transfers of control of a
banking institution. There has long been recognized a
special need for personal and financial integrity in the
management of depository institutions and, to this end, both
state authorities and the Comptroller of the Currency have
wide discretion in approving the chartering of new banks.
The same considerations that justify that discretion over
chartering suggest that similar (if more limited) discretion
is appropriate as regards transfers of control of a bank.
Indeed, some state banking authorities already have powers
over this issue. Accordingly, we support the general
objectives underlying these provisions.
There are, however, a number of provisions which we
believe require further consideration. Most importantly,
the bank regulators have expressed to us and to this Committee
their concerns as to the workability of requiring prior
approval. Given the importance of developing a system which
gives adequate protection without unnecessarily restricting
the marketability of bank securities, we would suggest that
the Committee await the recommendations of those bank
regulators which are studying a variety of approaches to the
transfer of control issue.
We do also have a few observations on some specific
provisions of this title. For example, it is not clear why
a veto power should be lodged in the FDIC in the case of
institutions that are otherwise primarily regulated by the
Comptroller of the Currency or the Federal Reserve Board.
Also, under what conditions would a proposed acquisition of
a bank be considered unfair to depositors or creditors?
Even more important, we believe that it would be an important
and unwise departure from present practice to make the bank
regulators responsible for the fairness of the transaction
to shareholders of a bank, as would clause (E) of subdivision 8
of proposed Section 7(j) of the Federal Deposit Insurance
Act.
Title VI also makes the stock of all insured banks
subject to the prevailing margin requirements established

- 6 pursuant to Section 7(b) of the Securities Exchange Act of
1934 (15 U.S.C. 78q(b)). Accordingly, the margin rules
would be applicable regardless of whether the stock is
listed or otherwise publicly traded and regardless of
whether it would otherwise be subject to the margin requirements
Margin requirements were adopted and are administered with a
view to their impact on the capital markets. The inclusion
of this provision in Title VI would seem, to the contrary,
to be designed to make it more difficult to acquire the
stock of a bank through the use of leverage. We have not
been able to ascertain thus far the extent to which there
have been material abuses in the use of leverage for the
purchase of bank stocks. Indeed, we understand that the
bank regulatory agencies are currently conducting a review
of that question. If serious abuses do exist, it would
appear preferable to give the regulators powers to approve
changes of control of banks in appropriate circumstances. We
are concerned that applying the margin requirements to all
bank stock would unduly restrict the marketability of those
securities.
TITLE VIII — EXTENSIONS OF CREDIT AND CORRESPONDENT BALANCES
Under Title VIII, if one bank has a correspondent
relationship with another bank, neither bank may extend
credit to any officer, director, or holder of 5 percent or
more of the voting securities of the other bank. By virtue
of the definition of extension of credit in Section 104 of
Title I of the bill, an overdraft would be considered an
extension of credit.
The Administration agrees that correspondent balances
\Should not be used for the benefit of any individual. They
are assets of the bank that maintains the balance and should
be used only in the interests of that bank. Indeed, in the
case where a correspondent balance is maintained directly or
indirectly for the sole purpose of serving the personal
interests of a corporate insider, the breach of fiduciary
obligation is often clear, and present statutes may be
adequate to reach these transactions. On the other hand,
existing law may not be sufficient to reach a situation
where the correspondent relationship is genuine, but the
balance also serves the personal interests of a corporate
insider. Under such circumstances, Title VIII would build
a protective wall around the correspondent relationship that
would insulate it from any possibility of misuse.
We favor protecting the correspondent balance arrangement
from abuse. The approach proposed, however, may well have
collateral effects which place small bankers as a group at a
disadvantage. Take the case of a banker in a smaller

- 7 community who finds that existing rules, the rules proposed
to be enacted by this legislation, or his own bank's policy,
prohibit him from meeting his borrowing needs at his own
bank. He may be understandably reluctant to make a full
disclosure of his financial condition to his competitors in
the same area, particularly if his financial condition is in
turn dependent upon the financial condition of his own bank.
That might well be the case for an officer with substantial
stock ownership. The correspondent bank with which he
maintains a significant business relationship is a logical
and, in most cases, an entirely appropriate, place for him
to turn. .
We simply do not know the full extent of this problem.
The bank regulatory agencies have recently initiated a
survey of loans by correspondent banks and the results will
be available to the Congress after the New Year. I would
suggest that legislative action await the results of these
studies. If, however, Congress deems it important to act
now, it can avoid placing small banks at a potential
disadvantage, while still correcting the abuses toward which
Title VIII was directed, by employing the disclosure mechanism
set forth in Title IX. Under this approach, the terms of
any loan involving an officer of one bank and another bank
with which a true correspondent relationship exists would be
publicly disclosed by the employer bank. This disclosure,
together with vigorous enforcement by the regulatory
authorities, should end any material abuses that may exist.
We have additional concerns about the more technical
aspects of this title. It does not contain, for example, a
definition of a "correspondent account." If that term were
to be construed to include any account maintained by one
bank at another bank, the extent of the prohibition may be
much greater than was intended. In some cases, banks
maintain accounts with one another in order to facilitate
the settlement of transactions.
TITLE IX — DISCLOSURE OF MATERIAL FACTS
The Administration supports this title with two exceptions.
In one case, we go further and would change subdivision (ii)
to require disclosure of the specified information about the
terms of each loan, by name, to each officer, director and
substantial stockholder, rather than treating all such
persons as a group. Moreover, this disclosure should
include loans by all controlling persons of the correspondent
bank as well as the correspondent bank itself. As noted
above, we believe this approach should have the effect of
preventing abuses of the kind to which Title VIII is directed
by bringing these transactions into public scrutiny.

- 8 On the other hand, we think it wholly inappropriate to
disclose the aggregate amount of loans classified as
"substandard, doubtful, and loss" at the last examination of
the bank. Those classifications are created for internal
regulatory purposes, and we believe that their disclosure
could adversely affect public confidence in banks.
TITLE X — FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
The Administration endorses the formation of a council
of Federal regulators, such as the Financial Institutions
Examination Council, to promote uniformity in the examination
and supervision of financial institutions. It has supported
in the Senate legislation similar to Title X. Title X would
enhance coordination among Federal regulators, permit
achievement of substantial cost savings, and encourage
interaction with State regulators. It improves upon its
companion legislation in the Senate, S. 71, by including the
Federal Home Loan Bank Board and the National Credit Union
Administration as Council members, by authorizing the
President to select the Chairman annually and by identifying
particularly troublesome areas of supervision which merit
Council attention.
Nevertheless, we are unable to support Title X in its
present form. By funding the Council through Congressional
appropriations and by authorizing the Council to secure the
records of financial institutions, we believe that Title X
could foster the development of the Council into a new layer
of the Federal regulatory structure which is already cumbersom
in design. At least in the beginning, the role of the
Council should be limited to improving the performance of
the present regulatory structure. If so limited, the
Council could be adequately funded by the regulators without
recourse to the taxpayer and would not need direct access to
the records of financial institutions.
TITLE XI — RIGHT TO FINANCIAL PRIVACY
This title is one of a number of bills that seeks to
require that a bank customer be notified prior to the time
that the records of his bank transactions are examined by a
government official, giving him an opportunity to challenge
the administrative subpoena or other process under which the
examination is to take place. As you know, the Internal
Revenue Service and the Department of Justice have in the
past opposed provisions like these on the ground that theirv
adoption would materially hinder the law enforcement
investigative process. Nevertheless, last year Congress
added Section 7609 (of the Internal Revenue Code) which
contained similar provision dealing with summonses issued by
the Internal Revenue Service.

- 9 We would suggest that action on this Title be deferred
until we are able to report on the effect of Section 7609
through December 31, 1977.
TITLE XII — CHARTERS FOR THRIFT INSTITUTIONS
This title would amend the Home Owners' Loan Act of
1933 to provide a federal chartering option for existing
mutual savings banks. In considering the shape and extent
of its own financial institutions legislation for 1977, the
Administration decided to come to Congress with a relatively
small legislative package: the authorization of nationwide
NOW accounts; the payment by the Federal Reserve System of
interest on reserves; and a two-year extension of the
present legislation relating to deposit interest rate
ceilings. In doing so, we decided not to deal at. this time
with the question of a federal chartering option for mutual
savings banks.
While we continue to be of the same view, I would like
to make it clear that the Administration does not oppose
such an option in principle. There are however, issues
raised by Title XII which we believe require further consideration. For example, Section 5(a) of the Home Owner's
Loan Act, as proposed to be amended, would permit a Federal
mutual savings bank to invest a portion of its assets in
non-mortgage investments determined on the basis of its
actual experience during the 5-year period beginning January 1,
1972. The following section in the bill, however, appears
to eliminate that "grandfathered" investment power ten years
after the issuance of a Federal charter. This provision
seems designed to eliminate, at the Federal level, the
special characteristics of mutual savings banks. We think
that the general question of the investment powers of
Federal mutual savings banks should be considered in the
context of the more general review of the role of thrift
institutions in providing mortgage credit which will take
place during the two year extension of existing legislation
on deposit interest rates ceilings that the Administration
has recommended. In our view, it would be premature to do
otherwise at this time.
TITLE XIII — BANK HOLDING COMPANIES
Many sections of this title parallel similar provisions
in S. 71 and the Administration supports those sections. On
the other hand, some of its sections address far more
fundamental questions in the bank holding company area.
Section 1308, for example, would prohibit any acquisition
that would result in a bank holding company owning more than

- 10 20 percent of the bank assets in a state and Section 1309
would set forth new detailed criteria relating to acquisitions
of non-banking activities.
We commend the Committee for focusing attention on the
importance of bank holding companies in our banking structure,
and we agree that this is an appropriate time for a review
of the role played by bank holding companies and the functioning
of the structure created by the Bank Holding Company Act.
The Department of the Treasury would be prepared to cooperate
with the Committee in its review. The Administration is
not, however, prepared to comment on the specific changes
proposed at this time. We would note, however, that several
of the bank regulators, especially the Federal Reserve in
its role as regulator of bank holding companies, have
expressed significant reservations about the procedures set
forth in this title. It is important that these concerns be
considered carefully.
oOo

ASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE UPON DELIVERY
EXPECTED AT 9:30 A.M.
SEPTEMBER 30, 1977

STATEMENT BY THE HONORABLE ANTHONY M. SOLOMON
UNDER SECRETARY FOR MONETARY AFFAIRS
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE FOREIGN RELATIONS COMMITTEE

I am pleased to be here to discuss the economic
aspects of the Panama Canal Treaty and the economic
arrangements.
You have already heard testimony on the annuity and
royalty payments Panama will receive according to the
new treaty. My understanding is that these payments
represent Panama's share of the benefits from operation
of the Canal: they will be paid out of Canal revenues,
and not out of U.S. tax revenues. These payments provisions will also serve U.S. interests by enlarging
Panama's stake in the secure and efficient operation of
the Canal.
In addition to the payments provisions of the treaty,
we have extended to Panama, as Under Secretary Cooper has
noted, an offer of economic cooperation involving as much
as $295 million in U.S. loans, guarantees, and insurance,
which I will presently discuss in detail.
B-465

- 2 -

The benefits to Panama from the financial provisions
of the treaty and the economic cooperation arrangements
will be significant and timely. In the decade prior to
1974, Panama's GDP increased at an annual average rate of
7.3 percent. In 1974, however, economic growth abruptly
slowed to 2.6 percent, and last year there was no growth.
A major cause of Panama's economic slowdown was uncertainty
over the future of the Canal, resulting in a marked decrease
in private investment (which increased only slightly in
1974 and 1975 and fell by 25 percent in 1976). In addition,
worldwide recession, the increase in the price of oil,
and the recent decrease in sugar prices also contributed
to Panama's large current account deficits.
The Government of Panama attempted to maintain overall
investment levels by increasing public investment to offset
the decline in private investment. As a result, the
central government budget deficit increased from $69 million
in 1973 to $122 million in 1976. This, combined with
borrowings to finance Panama's current account deficits,
caused total public sector debt to rise from $0-6 billion
in 1973 to $1.4 billion in 1976.

- 3-

There is reason, however, for some optimism about
the future of Panama's economy. Panama has negotiated
two stabilization agreements with the IMF (one last year
and one in March 1977), and has taken steps to reduce
the government deficit and limit public sector debt.
World economic recovery will help to narrow Panama's
current account deficit. Above all, the single most
important factor in bringing returned vigor to the
Panamanian economy will be settlement of the Canal issue,
and the resulting restoration of a favorable investment
climate in Panama. We expect that, as a consequence,
foreign and domestic private investment will rise
appreciably, leading to increases in employment, reduced
budgetary pressure on the Panamanian government, and
improvements in its external accounts.
Panama's new economic program and settlement of the
Canal issue are the fundamental requirements for returning
Panama to its former path of economic growth. The payments
provisions of the new treaty and the economic cooperation
arrangements are ancillary to these developments, but we
believe they will provide the extra boost to contribute
to Panama's long-term economic development.

-4-

This is of importance to the United States, in the
sense that economic stability and an improved standard
of living in Panama will strengthen the ability of Panama
to act as our partner in the Canal enterprise, bearing
its share of the responsibilities. We have designed
arrangements for economic cooperation with this goal in
mind, selecting financial assistance programs which are
non-concessional, befitting Panama's stage of development,
and directed at meeting Panama's present economic needs
for low-income housing and a revived private sector.
The U.S. will benefit additionally from these economic
arrangements, through participation by U.S. investors
and business in the Eximbank, OPIC, and housing investment
guarantee programs the arrangements entail.
I would now like to turn to the two aspects of the
treaty effort in which I had a direct role. Treasury
did not directly participate in the treaty negotiations.
My contribution was to recommend economic cooperation
arrangements, and to provide advice on the financing
arrangements for the new Panama Canal Commission.

- 5-

1.

Economic Cooperation Arrangements.

The proposed economic cooperation arrangements consist
of: (1) an offer by the Overseas Private Investment
'.V

Corporation to guarantee up to $20 million in borrowings
in the U.S. capital market by the Panamanian development
bank, (2) an offer by the Export-Import Bank to provide up
to $200 million in loans, loan guarantees and insurance
for individual U.S. export sales over a five-year period;
and (3) a pledge by the Administration to consider providing
up to $75 million in housing investment guarantees over
a five-year period. In addition, we will provide up to
$50 million in guarantees over a ten-year period under
our Foreign Military Sales program.
These particular arrangements were selected not only
for the benefits they are expected to bring to both the
U.S. and Panama, but also for the reasonable level of risk
they present and their compatibility with the financial
assistance programs involved. All of these offers are
subject to compliance with legal and managerial requirements,
and, as necessary, availability of funds.
The housing guarantee aspect of the economic cooperation
arrangements and the FMS offer have been addressed by Under
Secretary Cooper.

- 6 -

As for the offer by Eximbank to provide up to $200
million in loans, guarantees and insurance, I would like
to point out that the portfolio risk to Eximbank as a result
of its offer will be small. With an additional $200
million to Panama over five years, exposure in Panama
will amount to less than 1.37 percent of Eximbank's total
existing portfolio. Project risk will be controlled in
the usual manner, since each transaction will be subject to
normal Eximbank financial, legal and engineering criteria —
including Eximbank's statutory requirement to find a
reasonable assurance of repayment.
Once the Canal issue is settled and investment in
Panama accelerates, Panama will become an expanding market
for U.S. exports. This projected market expansion is
expected to give rise to more applications for Eximbank
support, and Eximbank has indicated that its business in
Panama could well amount to $200 million over the next
five years.
A guarantee by the Overseas Private Investment Corpora-

tion of $20 million in borrowing by the Panamanian development
bank would raise OPIC's exposure in Panama to only 8.5
percent of its total existing portfolio, a reasonable level
of portfolio risk. The risk to OPIC will be further reduced
by a Government of Panama guarantee. OPIC has also stipulated

- 7-

that its offer to Panama depends on terms being negotiated
which are acceptable to the OPIC Board.
This will be the first time OPIC has participated in
financing the expansion of a government-owned development
bank, although OPIC is permitted to do so by long-standing
OPIC Board policy guidelines. The Panamanian development
bank, COFINA, is engaged in supporting the development of
private enterprises in Panama through project lending.
This function is both wholly compatible with OPIC's mission
and in accord with our view that it should help strengthen
the private sector of Panama's economy.
2. Future Financing of the Panama Canal Commission
Turning now to the financial aspects of the Canal
operations, an essential point in negotiating the treaty
was that any new entity established to operate the Canal
must be self-financing over the life of the treaty. Our
negotiators made it clear to the Panamanians that any
arrangements which did not conform to this principle would
not be acceptable to the U.S. I assure you that we will
continue to be guided by that principle. The Administration
will make every possible effort to see that costs of the
Canal operation are contained and that revenues are
sufficient to cover liabilities. However, as a normal

provision for management flexibility, I feel it is appropriat

- 8-

for the Panama Canal Commission to have the authority to
borrow, as does its predecessor agency, the Panama Canal
Company. Thus, the Administration will request a continuation of this authority in the implementing legislation.
I believe the following guidelines should be followed
by the Commission in its borrowings. First, any borrowing
by the Panama Canal Commission should be strictly limited
to an amount sufficient to support the Commission's
operations. The Commission should not have the authority
to borrow for any other purpose, such as the general economic
development of Panama. Second, all borrowing should be at
a rate of interest equal to the cost of money to the U.S.
Treasury for the period of time under consideration.
Third, the repayment schedule should be tailored so that all
borrowings will be fully repaid before the expiration
date of the treaties.

Mr. Chairman, this concludes my formal statement.
I will be happy to answer any questions the Committee may
have.

nun

Contact: George G. Ross
(202) 566-2356
September 27, 1977
FOR IMMEDIATE RELEASE
Philip J. Wiesner Appointed
Assistant Tax Legislative Counsel at Treasury
Secretary of the Treasury W. Michael Blumenthal today
announced the appointment of Philip J. Wiesner of Philadelphia,
Pennsylvania, as Assistant Tax Legislative Counsel.
Mr. Wiesner, 32, has been an attorney-advisor to the
Treasury Department since July 1975. In October 1976 he
received a Sustained Superior Performance Award for his
efforts in connection with the Tax Reform Act of 1976. Prior
to joining Treasury, he had been associated with the Philadelphia law firm of Morgan, Lewis & Bockius.
As Assistant Tax Legislative Counsel, Mr. Wiesner will
assist the Tax Legislative Counsel, Daniel I. Halperin, in
providing assistance and advice to the Assistant Secretary
of the Treasury for Tax Policy, Laurence N. Woodworth. The
Office of Tax Legislative Counsel participates in the preparation of Treasury Department recommendations for Federal tax
legislation and also helps develop and review tax regulations
and rulings.
The Office of Tax Legislative Counsel is one of four
major units under the direction of the Assistant Secretary
for Tax Policy. The other three are the Office of Tax Analysis,
the Office of International Tax Counsel, and the Office of
Industrial Economics.
A native of Rochester, New York, Mr. Wiesner received a
B.S. degree from Seton Hall University in 1966 and J.D. degree
cum laude from the Columbia University Law School in 1969. He
received an LL.M. (in Taxation) from New York University
School of Law in 19 77.
* * *

B-466

vmntoftheTREASURY
WON, D.C. 20220

TELEPHONE 566-20*1

FOR RELEASE AT 4:00 P.M.

September 30, 1977

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $5,700 million, to be issued October 13, 1977.
This offering will not provide new cash for the Treasury as the
naturing bills are outstanding in the amount of $5,706 million.
Phe two series offered are as follows:
91-day bills (to maturity date) for approximately $2,300
nillion, representing an additional amount of bills dated
July 14, 1977,
and to mature January 12, 1978
(CUSIP No.
J12793 N2 8), originally issued in the amount of $3,404 million,
:he additional and original bills to be freely interchangeable.
182-day bills for approximately $3,400 million to be dated
)ctober 13, 1977,
and to mature April 13, 1978
(CUSIP No.
U2793 P7 5).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing October 13, 1977.
p
ederal Reserve Banks, for themselves and as agents of foreign
md international monetary authorities, presently hold $2,931
lillion of the maturing bills. These accounts may exchange bills
:hey hold for the bills now being offered at the weighted average
>rices of accepted competitive tenders.
The bills will be issued on a discount basis under competitive
md noncompetitive bidding, and at maturity their par amount will
je payable without interest. Except for definitive bills in the
;
100,000 denomination, which will be available only to investors
r
ho are able to show that they are required by law or regulation
o hold securities in physical form, both series of bills will be
ssued entirely in book-entry form in a minimum amount of $10,000
nd in any higher $5,000 multiple, on the records either of the
ederal Reserve Banks and Branches, or of the Department of the
reasury.
Tenders will be received at Federal Reserve Banks and
ranches and at the Bureau of the Public Debt, Washington,
•C. 20226, up to 1:30 p.m., Eastern Daylight Saving time,
rid
ay, October 7, 1977.
Form PD 4632-2 (for 26-week
eries) or Form PD 4632-3 (for 13-week series) should be used
o submit tenders for bills to be maintained on the book-entry
ecords of the Department of the Treasury.
-467

-2Each tender must be for a minimum 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 expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Banking institutions and dealers who make primary
markets in Government securities and report daily to the
Federal Reserve Bank of New York their positions in and
oorrowings on such securities may submit tenders for account
of customers, if the names of the customers and the amount
for each customer are furnished. Others are only permitted
to submit tenders for their own account.
Payment for the full par amount of the bills applied for
must accompany all tenders submitted for bills to be maintained
on the book-entry records of the Department of the Treasury. A
cash adjustment will be made on all accepted tenders for the
difference between the par payment submitted and the actual
issue price as determined in the auction.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized dealers
in investment securities for bills to be maintained on the
book-entry records of Federal Reserve Banks and Branches, or for
bills issued in bearer form, where authorized. A deposit of 2
percent of the par amount of the bills applied for must
accompany tenders for such bills from others, unless an express
guaranty of payment by an incorporated bank or trust company
accompanies the tenders.
Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained on the book-entry records of Federal Reserve Banks
and Branches, and bills issued in bearer form must be made
or completed at the Federal Reserve Bank or Branch or at the
Bureau of the Public Debt on October 13, 1977,
in cash or
other immediately available funds or in Treasury bills maturing
October 13, 1977.
Cash adjustments will be made for
differences between the par value of the maturing bills
accepted in exchange and the issue price of the new bills.

-3Under Sections 454(b) and 1221(5) of the Internal Revenue
Code of 1954 the amount of discount at which these bills 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 these
bills (other than life insurance companies) must include in his
or her Federal income tax return, as ordinary gain or loss, the
difference between the price paid 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.
Department of the Treasury Circulars, No. 418 (current
revision), Public Debt Series - Nos. 26-76 and 27-76, and this
notice, prescribe the terms of these Treasury bills and govern
the conditions of their issue. Copies of the circulars and
tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

FOR IMMEDIATE RELEASE

September 30, 1977
Contact:Charles Arnold
566-2041

PETER D. EHRENHAFT NAMED
DEPUTY ASSISTANT SECRETARY (TARIFF AFFAIRS)
Treasury Secretary W. Michael Blumenthal has announced
the appointment of Peter D. Ehrenhaft as Deputy Assistant
Secretary (Tariff Affairs). As such, he will be responsible,
within the Office of General Counsel, for the administration
of the antidumping and countervailing duty laws. In addition,
Mr. Ehrenhaft has been designated by General Counsel Robert
Mundheim as Special Counsel for Tariff Affairs.
Prior to his appointment, Mr. Ehrenhaft was a partner in
the New York and Washington law firm of Fried, Frank, Harris,
Shriver and Kampelman. Previously, Mr. Ehrenhaft had served as
Senior Law Clerk to the Chief Justice of the United States,
Earl Warren, and as a Motions Law Clerk to the United States
Court of Appeals for the District of Columbia Circuit.
Since 1958, Mr. Ehrenhaft has been a Judge Advocate in
the United States Air Force Reserve. From 1958 to 1961, he
served on active duty whereafter he was assigned to Ready
Reserve duty in the Office of the Judge Advocate General, in
Washington, D. C , where he is presently the Reserve Chief
of the International Law Division.
Mr. Ehrenhaft was born in Vienna, Austria on August 16, 1933.
He received an A.B. in Political Science with Honors in 1954
from Columbia College and received his LL.B. and M.I.A. with
with Honors in 1957 from the Columbia University Schools of
Law and International Affairs. Mr. Ehrenhaft was admitted to
the Bar of New York in 1958 and the Bar of the District of
Columbia in 1961. He is a member of the American Law Institute,
American Bar Association, American Society on International Law,
the American Foreign Law Society,the Licensing Executives Society,
and the Association of the Bar of the District of Columbia.
Mr. Ehrenhaft succeeds Peter 0. Suchman, who resigned as
Deputy Assistant Secretary (Tariff Affairs) in August and has
joined the New York and Washington law firm of Sharretts, Paley,
Carter and Blauvelt.
Mr. Ehrenhaft is married to the former Charlotte Kennedy.
They have three children, Elizabeth, James and Daniel.
B-468
oOo

department of theTREASURY

•

#

Q

WASHINGTON, D.C 20220

TELEPHONE 86*20*1

jtf—"vw*/.

FOR IMMEDIATE RELEASE
EXPECTED AT 9:45 A.M. EDT
OCTOBER 3, 1977
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
CHARLES RIVER ASSOCIATES CONFERENCE ON
FUTURE PROBLEMS IN MINERALS
AND ENERGY POLICY
WALDORF ASTORIA HOTEL, NEW YORK CITY
U.S. Commodity Policy: A Progress Report
Introduction
The Carter Administration has adopted a four-fold approach
to international commodity problems:
— Negotiation of international agreements between
producing and consuming countries to reduce price
instability in world commodity markets.
— Support for a common fund, to save money by pooling
the financial resources of such agreements, which is
now under active international negotiation.
— Promotion of increased investment in the production of
key raw materials through increased involvement in such
activities by the World Bank family, the regional
development banks, our own Overseas Private Investment
Corporation in support of the activities of U.S. firms,
and the investment insurance agencies of other
industrialized countries.

- 2 —

Review of existing mechanisms to assure adequate

support for the stabilization of export earnings,
which is now provided globally by the Compensatory
Finance Facility in the International Monetary Fund,
as agreed on September 25 by the Development Committee
of the IMF and World Bank.
The Administration has now been implementing this policy
approach for about six months. Some progress has been made,
and major efforts lie just ahead. Hence it seems appropriate
to take stock of the results to date and provide a basis for
public comment on where we are headed. I greatly welcome
the opportunity to do so before this group. Because of your
focus, and because of the relative importance of developments
in this particular area, I will concentrate today on our
approach to international commodity agreements (ICAs).
The Policy Objectives
The Administration has adopted its comprehensive policy
program, in part, as a way of engaging the developing countries
in constructive and pragmatic efforts - which can result in

gains for both them and us - rather than the senseless ideologica
confrontation which has marked North-South relations in recent
years. But the program has been adopted primarily to promote
some of the key economic interests of the United States - price
stability, smoother economic growth both at home and abroad,
and reduction of international monetary imbalances.

- 3 International commodity agreements can reduce inflation
by reducing fluctuations in commodity prices. This is primarily because part of the transitory increases in commodity
prices tend to lead to permanent increases in the level of
final product prices.
Increases in commodity prices push up final product
prices, which in turn provide justification for increased
wages. These wage increases limit the extent to which
earlier price increases for manufactured and processed goods
can decline once raw material prices have receded, because
wages are asymmetrically sticky in a downward direction.
Through wage increases, then, part of the transitory
increases in commodity prices is built into the level of
final prices. Downward price rigidity in highly concentrated
industries may add to the ratchet effect for a few products.
The available evidence suggests that fluctuations in
commodity prices have at times played a significant role
in U.S. inflation. One study estimates that the direct

and indirect effect of increases in commodity prices, excluding
fuels and construction materials, accounted for 72 percent
of the increase in the industrial components of the U.S.
Wholesale Price Index during 1973. The impact of any
resulting ratchet effect is a less favorable trade-off
between inflation and unemployment.

- 4 In an effort to quantify this effect, Professor Jere
Behrman of the University of Pennsylvania has estimated
that the benefits for the U.S. GNP from stabilizing prices
of ten commodities through international agreements,
thereby reducing inflationary pressures and the resulting

need to tighten macroeconomic policy, could range up to $15
billion in a single year. Behrman ignores the effects of
the buffer stock purchases themselves in his estimation;
a very crude correction for such effects would reduce the
net gain to perhaps $5 billion.
Values in this range are not large, but neither are
they inconsequential for the U.S. economy. They are
fairly large in terms of the costs of the buffer stocks
themselves — suggesting a quite positive cost/benefit
ratio for this particular policy instrument. The key
issue is whether such.gains can be realized in practice.
The Principles of International Commodity Agreements
The United States is now a member of two ICAs, in tin
and coffee* We have been active in negotiations for the
creation of a third, in sugar. Efforts are underway which
could lead to agreements in wheat and natural rubber, and

possibly in copper. There exists an ICA for cocoa, of which

- 5 the United States is not a member at present but where we have
indicated a willingness to participate in a renegotiation.
Producing countries also favor arrangements for tungsten,
jute, tea and hard fibers. Hence, the universe of potential
ICAs ranges from perhaps six to ten.
The interest of the United States differs markedly
among these different commodities. We export wheat. We
are a major producer, but a net importer, of sugar and copper.
We rely totally on imports of tin, coffee and cocoa. We also
import all of our natural rubber, though domestic production
of synthetic rubber provides a close substitute in that case.
U.S. policy toward ICAs must thus comprehend a number of
different situations. It must promote U.S. interests as an
exporter, as an importer and as a producer of different
products. If we were to try to rig the tin agreement to
depress prices of our tin imports, it would be harder to
resist similar efforts by others to depress prices of our
wheat exports. If we were to resort to blatant producer
collaboration in wheat, we could hardly reject efforts by
coffee exporters to use the International Coffee Agreement
as a cover for cartel action. Were we to use a copper agreement to limit the output of foreign producers in periods of
weak prices, we would find it all the more difficult to
resist efforts by producers in the tin agreement to boost
their prices. We would be hard put to seek importer financing

- 6 of wheat stocks if we were unwilling to help finance tin
stocks. Our policy toward international commodity agreements
must be balanced and consistent.
We believe that we have fashioned such a policy, which
can promote price stability in commodity markets. It is
clear in theory that buffer stock operations, through the
purchase of stocks when prices are low and their sale when
prices are high, can work to stabilize prices around market

trends to the benefit of both consumers and producers of particul
products. Floor and ceiling prices can be set sufficiently
apart to permit market forces to determine price during the
vast majority of the time, coming into play only when extreme
rises or declines occur. In addition, the range itself can
be reviewed frequently to avoid its losing touch with market
realities.
Both producers and consumers should also gain from buffer
stock arrangements because they help maintain production at

efficient levels over the longer run, even though demand may decl
temporarily. This in turn also helps induce sustained investment in commodity production, contributing to the adequacy of
future supplies.
The real issue is whether price stabilization agreements
can be negotiated and faithfully implemented in practice.
The United States has very little experience in this regard.

- 7 Hence our current efforts are devoted toward working out ways
to realize the benefits which ICAs can potentially provide.
Price stabilization agreements, if they are to be truly
effective and balanced, must operate to the maximum extent
possible through buffer stocks of sufficient size to defend
against both price surges and price declines. From the
standpoint of .importing countries, buffer stocks which are
large enough to effectively maintain agreed price ceilings

are clearly preferable to small stocks which can become depleted
during periods of rapid price increases.
Supply control mechanisms — export or production quotas —
are, by contrast, less acceptable. They interfere directly
in the production or marketing of commodities. Hence they can
reduce supplies and raise prices, rather than stabilize them.
Production controls and export quotas usually freeze existing
production and market patterns, since they tend to be allocated
on the basis of some past average of market shares and bar
entry for efficient new producers. Production controls can
also lock industry into inefficient patterns of production,
by forcing low-cost producers to cut back along with high-cost
producers.
Our policy is thus to place priority on buffer stocks as
a price stabilizing technique. We will seek sufficient
financial resources for such arrangements, including contributions from the United States and other consuming countries,

- 8 to provide for stocks which are large enough to be effective
in protecting agreed ceiling levels against price surges and
floor levels against price declines.

We will oppose pro-

duction controls, and seek to limit the use of export quotas
to circumstances of extreme downward pressure on prices.
There are, in practice, several types of "international
buffer stock" agreements.

The prototype is the single stock

held by an international organization created for that purpose,
as in tin. Another is internationally coordinated national
stocks, as proposed in the sugar negotiations and discussed
in preparatory talks on a new wheat agreement.

And it is

also possible to consider export quota arrangements like the
1976 coffee agreement, which would promote holdings of
national stocks, to be made available when prices rise, and
would encourage investment in new productive capacity through
frequent reallocation of country quotas.
Progress on Individual Commodities
To implement our approach, we are making efforts both
to improve existing commodity agreements and to develop new
ones.
Tin is the only mineral now covered by an international
agreement of producers and consumers.

The purpose of the

International Tin Agreement (ITA) is to attempt, through
buffer stock operations in the world market, to stabilize
prices within established limits.

The Tin Council, the

- 9 decision-making body for the ITA, also has the authority
to impose export quotas to support buffer stock operations.
The ITA has had limited success in stabilizing tin
prices. A major reason is the relatively small size of the
buffer stock. It has contained only about 22,000 tons, or
cash equivalent, which amounts to roughly 10 percent of
annual tin production and trade. This lack of resources
has forced the Tin Council to resort repeatedly to export
controls to support buffer stock operations.
Since 1956, the buffer stock has been called on to
stem major price declines on four occasions. On each occasion,
the Tin Council decided, after sizable purchases of tin, that
the buffer stock was in danger of being depleted of funds.
It then resorted to export controls. These controls were
successful in protecting the floor. But, in each .case, the
imposition of export controls was quickly followed by cutbacks
in tin production by private producers, who were unwilling to
stockpile excess supplies. The result, once demand recovered,
was tin shortages accompanied by rapid price increases that

sales from the inadequate buffer stock were unable to moderate.
The higher prices led the Council to raise the price range,
thereby ratcheting up the support level which it would later
be forced to defend again through export controls.

- 10 If the buffer stock had been larger on these four
occasions, it might have been successful in absorbing the
surplus production and export controls would have been unnecessary to defend the floor price.

Under such circumstances,

the buffer stock might also have been capable of meeting
later surges in demand for tin, which have repeatedly followed
periods of slack demand.
Treasury simulations of a hypothetical tin buffer stock
suggest that a sufficiently larger stock would have successfully maintained the price of tin within a price band of +10
to +15 percent over the period 1956-1973 without any use of
supply controls.

It was also clear from the simulations that

the ITA buffer stock, coupled of course with heavy sales from
the U.S. stockpile, were successful in significantly dampening
price increases during several years of that 18-year period.
The Administration, however, cannot use the U.S. strategic
stockpile of tin to help reduce price volatility on a continuing basis. Under current legislation, the United States is
unable to purchase tin for the stockpile when tin prices are
low. Sales from the stockpile can be made only after authorization by Congress.

Even at present, despite the seemingly

large excesses in the stockpile and high tin prices, the
General Services Administration has no authority to sell.

- 11 Currently, the market price of tin is about 15 percent
above the ceiling price. The buffer stock is exhausted, and
thus powerless to reduce current high prices. The inability
of the Tin Agreement to moderate price rises has been, to a
large extent, due to the refusal of consuming countries to
contribute to the buffer stock. This is an important reason

why the Carter Administration has decided to seek Congressional
approval for a U.S. contribution of up to 5,000 tons of tin to
the Agreement. This step should be particularly easy for us
to take, because we now have more than 150,000 tons of tin
in the U.S. strategic stockpile which are likely to be

declared in excess of strategic needs following the Administration's current review of stockpile policy.
Other consumers — including Belgium, Canada, Denmark,
France, the Netherlands and the United Kingdom — have also
pledged contributions. Their help should increase the buffer

stock by the cash equivalent of an additional 4,000 tons of tin
Japan has also indicated it is considering a contribution.
It is our hope that, by enlargement of the buffer stock, the
Tin Agreement will become more effective in stabilizing prices
and its reliance on export controls to defend the floor prices
can be greatly reduced.

- 12 There is another problem which has contributed to the
ratcheting up of the price range of the Tin Agreement. This
is the levying of high production and export taxes by producing countries. Despite price rises since 1975 above the
levels reached in the 1973-74 boom, these policies have led
to declining investment and production by taxing away a large
portion of producer revenues and reducing the marginal return
to investment. We have strenuously objected to these domestic
policies, both in quarterly sessions of the Tin Council and
in bilateral consultations with individual producers, and
believe that a key producing country may soon make important
changes in its policies in this regard.

- 13 I have dwelled on tin in some detail because several
valuable lessons have already emerged from our experience
with the Tin Agreement:
—

Small buffer stocks are simply not effective
in moderating rapid price increases.

It is in

the interest of importing countries for buffer
stocks to be larger rather than smaller, and
the United States should contribute substantially
to the stocks of ICAs in which it participates.
—

Resort to export quotas and/or production controls,
as "back-up" measures to stem price declines, may
force producers to cut back output significantly
and drive out marginal producers, thus causing
rapid price rebounds once demand recovers and
destabilizing markets.

These measures are decidedly

inferior to buffer stocks for maintaining agreed
price ranges.
—

It is difficult to reach agreement on "proper"
price ranges.

Beyond the purely intellectual

problems which will always remain in this area,
the interests of producers and consumers will
frequently diverge.

Nevertheless, we believe

that there is now a rough balance of uncertainties
between producers and consumers which will promote

- 14 such agreement —

since both have legitimate

reason to worry about the impact on their own
future interests of developments in the commodity
markets.
— It is far better for the United States to participate
in ICAs than to sit outside them. We have already
succeeded in moderating increases in the price
range of the ITA, and our membership in the
Agreement has enabled us to be much more effective
in bringing pressure on exporting countries to
adopt market-oriented production policies.
The second ICA in which the United States participates
covers coffee. In 1976, the United States signed the Third
International Coffee Agreement, which was to operate on a
system of export quotas to help assure adequate export
earnings for producers without creating shortages or
maintaining high prices. The quota provisions, however,
have never gone into effect and are unlikely to, for at
least another two years, due to the short supplies and
high coffee prices which are largely the result of a
devastating Brazilian frost in 1975.
I might add that the recently high coffee prices may
have been exacerbated by Brazilian operations in world

- 15 coffee markets.

I am referring to Brazil's purchases

from other coffee exporters, the maintenance of high
Brazilian prices in the face of sharply falling world
coffee prices, and Brazilian purchases on the New York
and London terminal markets. These actions may be the
results of a skillful marketing policy and may also be
designed to assure future supplies for consumers, but
they have detracted from the spirit of producer-consumer
cooperation which the 1976 Coffee Agreement represents.
Nevertheless, the features of the Coffee Agreement
bear close examination. It permits the price zones for
quota adjustment to be set by the Coffee Council at the
beginning of each coffee year in light of recent price
trends, providing desirable flexibility for this central
feature of the agreement. This range is to be defended
through increases and decreases in global quotas. Unlike
previous quota arrangements, however, the latest Coffee
Agreement provides incentives for producing countries
to stock production which can be released once prices
begin to rise. They are given credit in quota allocations
for holdings of national stocks. This encourages producing
countries to maintain production, and thus promotes the
interests of importing countries such as the United States
because these stocks are available for the next price surge.

- 16 The 1976 Coffee Agreement was also an improvement
over earlier quota agreements in other respects. The
traditional export quota arrangements for coffee tended
to misallocate resources by basing quota levels on
historical market shares, which could disadvantage the
lowest cost producers and freeze out new market entrants.
The new Agreement, however, provides for a variable
portion of the quota to be based on each producer's share
of world stocks. There is also considerable flexibility
in the quota system, since country quotas are to be reset
and reallocated annually. As a result, the Agreement will
encourage plantings by efficient producers by permitting
them to increase their future market share even though
quotas have been in effect during previous years. This
will also result in a buildup of stocks which can be
exported and thereby benefit consumers if market conditions should suddenly turn tight.
The United States is now actively pursuing the
negotiation of a new International Wheat Agreement. For
this commodity, we have tried to learn from past errors.
The 1967 Grains Agreement, for example, failed because
of the complexity and unworkability of an agreement based
on export and import commitments, tied to specific prices,

- 17 rather than on price-stabilizing stocking operations.
The Agreement finally broke down because this rigid
arrangement could not be preserved in the face of large
world surpluses, which resulted in competitive subsidies
among exporters which shattered the floor price.
We now believe that a system of nationally held,
internationally coordinated wheat reserves — with costs
shared among importing and exporting countries — can be
the first line of defense in achieving the objectives of
price stabilization and greater food security for the
world. There appears to be fairly widespread agreement
among major producers and consumers on this approach,
although discussions have not yet reached the state
where serious drafting of a new agreement can begin.
The United States has already taken major steps
toward meeting its potential international obligations
under any new reserve agreement. The President's
recent decision to set aside some wheat acreage from
current production was accompanied by an announcement
that we would build up our wheat stocks. Thus it fully
anticipated United States acceptance of such obligations.
The role of these stocks will of course depend on the
outcome of the negotiating process. A preparatory

- 18 conference is now in session and another is scheduled
for next month in London, with the negotiations to begin
in early 1978.
Negotiations for a new International Sugar Agreement
began last spring. Those talks ended unsuccessfully,
but were followed in July by a meeting of twenty major
sugar trading nations during which the United States
proposed the establishment of a sugar stabilization fund
to finance the carrying costs associated with reserve
stocks to be held by exporting countries. This proposal
was well received and gave us reason to believe that a
reconvened sugar conference in September could successfully
complete negotiation of an agreement based on nationally
held, internationally coordinated sugar reserves. However,
the most difficult issue in the negotiations has involved
the allocation of export quotas, not stock-holding, and
the outcome is not yet clear.
Since September 1976, there have been a series of
meetings to discuss possible cooperative measures which
might be taken to stabilize international copper markets.
An intergovernmental expert group is currently studying
the economic feasibility of various stabilization schemes,
as well as ways to improve consultation and exchanges of

- 19 views among copper producers and consumers.

The expert

group is to write its report next month, for consideration
at a higher level producer-consumer conference in February
1978.
The expert group will complete by November 1 a
study of the feasibility, and the direct costs and benefits, of
market stabilization schemes with varying types of
economic provisions.

In addition, the group's chairman

will prepare a study of the legal and operational
elements of a producer-consumer forum for copper, on
the basis of submissions of member delegations of the
expert group.
Copper satisfies many of the economic conditions
for a buffer stock arrangement including standardized
grading, open trading, and storeability.

However, we

see a number of practical difficulties in establishing
a copper agreement.

The buffer stock required would be

large and expensive, with cost estimates varying anywhere
from around $1.5 billion to $6 billion, depending upon
the width of the price range and the extent of reliance
on back-up supply controls.

Any imposition of supply

controls would cause legal difficulties for a number of
producing countries, in particular the United States,

- 20 whose laws may prohibit the use of export and/or
production quotas. We are currently reviewing the legal
ramifications for the United States of a copper agreement with supply controls. Hopefully, the feasibility
study currently underway will be useful in clarifying
all of these issues. We also believe that it would be
helpful to establish quickly a producer-consumer forum
for copper, which is now the most important traded
commodity without such an international locus for
producer-consumer discussions.
Of all the commodities for which preparatory discussions are now taking place, the discussion on a possible
price stabilization scheme for natural rubber has been
the most constructive. The United States is encouraged
with the progress at the natural rubber meetings held
so far, and is optimistic about the possibilities.
During January and June of this year, major producers and consumers of natural rubber conducted businesslike discussions on problems in the world natural rubber
industry. They succeeded in identifying excessive price
fluctuations as a key problem facing producers and
consumers, concluded that measures designed to reduce
excessive price volatility would be in the interests of

- 21 both, and began to examine specific measures to alleviate
this problem, focussing particularly on a buffer stock
arrangement proposed by producers.
This arrangement calls for a 400,000 ton stock,
roughly 13 percent of annual trade, which would be
financed jointly by producers and consumers. It also
provides for the imposition of export controls if the
buffer stock should become exhausted through defense of
the floor price. A task force of major producers and
consumers has been established and will meet in October
and December to examine in detail the implications of
this proposal and other aspects of the natural rubber
market. Following completion of this analytical exercise,
it is expected that a decision will be made in February
1978 on whether or not to convene a negotiating conference
for a rubber stabilization scheme.
The United States Government's intensive analysis
of the elements of a possible scheme is not yet complete.
However, preliminary results have indicated that a buffer
stock arrangement may be feasible and could have economic
benefits for the United States. In this case, consumers
would have a particularly strong safeguard in the form
of synthetic rubber, which is a ready substitute for

- 22 natural rubber in a number of applications and thus provides an effective ceiling for the price of natural rubber.
In addition, as in tin, the United States probably
does not have the choice of living in a world without a
price stabilization agreement. The producers have already
agreed to a limited buffer stock arrangement, which could
go into effect before the end of 1977 without consumer
participation. It is also probable that several major
consuming nations would agree to join such an arrangement regardless of the U.S. decision. It is therefore
likely that the United States can best protect its
interests by taking an active role in the design and
operation of a rubber arrangement.
Producer Associations
The possibility of a producers-only agreement for
natural rubber reminds us that the wholesale movement
toward "producer associations" which began during the
1973-1974 commodity boom has not disappeared. Producing
countries have not forgotten the success of OPEC and
the lesser, but significant, success of the International
Bauxite Association. The movement has been blunted for
the moment by the weakness in commodity prices, stemming
from the world recession and current sluggish growth,

- 23 and by the new U.S. willingness to participate in producerconsumer approaches to commodity problems.
Renewed interest in cartels, however, could be stimulated by a failure to negotiate producer-consumer arrangements coupled with a resumption of rapid growth rates in
the industrialized consuming countries. There are only
a few commodities in which cartel, or cartel-like, action
could significantly affect the United States. And the
U.S. Government has made abundantly clear its distaste
for cartels of all types, whether comprised of foreign
governments or of domestic firms. Nevertheless, efforts
by producing countries to form such arrangements could
have adverse effects on U.S. economic and political
interests even if their actual success was limited.
Much will thus depend on our success, in cooperation
with other producers and consumers, in negotiating
rational, effective agreements to mitigate the problems
of instability in world and U.S. commodity markets.
Conclusion
The Carter Administration has adopted a positive
approach toward the negotiation of individual commodity
agreements to stabilize prices around market trends.
We strongly prefer international buffer stocks wherever
they are feasible. We will seek sufficient financial

- 24 resources for those agreements we join, through contributions by producing and consuming countries, to provide
sufficient buffer stocks to protect against both high and
low prices. Where international buffer stocks are
impractical, but greater price stablization nevertheless
appears desirable, the United States could consider
export quota arrangements which promote national stocking
to protect against high prices and encourage investment
through a flexible quota reallocation system. We could
also consider internationally coordinated national stocks
in cases where international buffer stocks are not feasible.
Such arrangements are in the interest of the United
States as a major consumer and producer of a number of
important raw materials and. food products. Hence the
United States is moving forward in international discussions on a number of commodities in efforts to improve
previous or existing agreements, and to determine the
possibilities for new agreements. As we proceed in
these discussions we will undertake a thorough analysis
of the technical and economic aspects of each commodity
in an effort to tailor any agreement to the characteristics
of that particular commodity and to structure the agreement
to assure it is truly effective in stabilizing prices.

- 25 When we conclude that a given commodity meets these tests,
we will sign the agreement and seek Congressional approval
for it. Successful completion of such ventures will
promote both the economic and foreign policy interests
of the United States, and can thus be a useful component
of our international economic policy in the years and
decades ahead.

FOR RELEASE UPON DELIVERY

EXPECTED AT 2:00 P.M.
OCTOBER 4, 1977
STATEMENT OF THE HONORABLE LAURENCE N. WOODWORTH,
ASSISTANT SECRETARY OF THE TREASURY FOR TAX POLICY
BEFORE THE
COMMERCE, CONSUMER, AND M O N E T A R Y AFFAIRS
SUBCOMMITTEE OF THE COMMITTEE ON
GOVERNMENT OPERATIONS
Mr. Chairman and members of this distinguished subcommittee:
The Subcommittee has asked the Treasury Department a number
of questions with respect to the foreign tax credits claimed by U.S.
petroleum companies. Before proceeding to these questions, I would
like to make the following general comments with respect to the
foreign tax credit.
First, Treasury and Internal Revenue Service have, in recent
years, focused rather closely on the parameters of the foreign tax
credit. A revenue ruling issued in 1976 concerning Indonesian production-sharing agreements explains, in the Indonesian context, the
governments views on the distinction between a royalty and a tax.
Later in 1976 the IRS issued a news release outlining the circumstances under which a foreign tax credit would be allowed for a levy
imposed by a foreign government owning minerals extracted by U. S.
taxpayers. The IRS has been working on the creditability issues
raised in other O P E C countries. The Treasury expects to focus
specifically on these issues within the very near future.
In your letter of September 12, 1977, you note that in April of this
year the Subcommittee requested certain information from the Treasury
concerning foreign tax credit issues. Secretary Blumenthal responded
to the Subcommittee in a letter of June 28, which explains our procedures and general rules. W e transmitted to you at that time certain
documents you requested concerning the foreign tax credit. W e were,
however, unable to turn over certain additional documents to the

B-470

-2Subcommittee because they constitute tax return information. The
Chief Counsel of the Internal Revenue Service has given us his opinion
that these additional documents constitute tax return information. The
Chief Counsels analysis was made on a document by document basis.
W e would, of course, turn those documents over to you if the procedures
of section 6103(f) of the Internal Revenue Code were followed. That
section provides that your Committee m a y receive tax return information from the Treasury if it obtains a resolution from the House
or the House and Senate.
I must, regardless of any personal inclination, be cautious in
m y replies to your questions because of the criminal penalties imposed by our law. Code section 7213 provides that the unauthorized
disclosure of tax return information is a felony punishable by a fine
of up to $5, 000 and imprisonment of no more than five years, plus
dismissal from office.
The first question asked by the Subcommittee is with respect to
the revenue losses since 1961 resulting from foreign tax credits claimed
by U. S. petroleum companies. Between 1961 and 1972, the tax liability
of U. S. oil companies would have been $300-$600 million a year higher
if foreign taxes had been deducted rather than credited; of that amount,
between $150 and $400 million is attributable to O P E C countries. (See
table. ) W e do not have data on carryovers, but their use has been virtually
eliminated since the changes made by the Tax Reduction Act of 1975.
Data from 1974 and 1976 shows a much higher effect because
of the jump in oil prices and because of tax credits claimed with respect
to certain non-recurring gains from the disposition of capital assets.
The decrease between 1974 and 1976 is in part due to the effect of the
Tax Reduction Act of 1975. Using SEC data adjusted by Treasury estimates, I would guess that the 1976 figure might be close to $1.2 billion.
I want to emphasize that these figures can only be taken as
estimates of increased revenue to the Treasury if the denial of the
credit would have been accompanied by two rather important changes
in U. S. tax law: (1) the denial of credit for any part of the payments
made to a foreign country on oil income even if that part is unquestionably a tax on net income (and, it is unrealistic to assume
that the countries would not endeavor to meet whatever standards the
U. S. sets for a creditable income tax), and (2) the end of the deferral
of U. S. tax on the foreign income of foreign subsidiaries so that the
U. S. companies could not avoid the U. S. tax by operating abroad
through foreign subsidiaries rather than branches.

-3-

The second question posed by the Subcommittee concerns whether
U.S. tax rulings and policy with respect to multinational petroleum
compa nies have created a preference for foreign versus domestic
operations. This question is complex. It is, of course, our Code,
and not Treasury policy or rulings, which provides that foreign income taxes are creditable against U.S. income tax. There is no
equivalent credit in the domestic context. However, an unintended
advantage would arise with respect to the foreign tax credit if the
foreign government inflates its income tax to include payments which
are really royalty payments in disguise.
I might also note here that potential abuse of the U. S. foreign
tax credit mechanism was substantially reduced by the Tax Reduction
Act of 1975. Among other changes, this Act placed a separate limitation on the U. S. credit for taxes paid with respect to foreign oil
and gas extraction income. For example, those taxes will no longer
be credited against oil company foreign profits on refining, marketing, or shipping petroleum. While we will continue to focus on the
issue of credits for oil company payments to foreign governments,
the cost to the U. S. Treasury of crediting foreign taxes has
been materially reduced by this change in our tax legislation.
The third question asked by the Subcommittee concerns the comparison of U.S. firms with international operations with exclusively
domestic producers. In assessing the competitive advantage of corporations with international operations vis a vis domestic producers,
one must consider not only the creditability of foreign taxes, but also
other tax considerations. For example, domestic investment qualifies
for the 10 percent investment tax credit and for accelerated depreciation, but foreign investment does not. Whether a company with
international operations enjoys a net advantage over a domestic producer is hard to say in the abstract. Some m a y be better off, others
worse off.
The fourth, fifth and ninth questions posed by the Subcommittee
concern Treasury policies with respect to the review of rulings and
Treasury contacts with taxpayers and the IRS concerning foreign tax
credits. The Assistant Secretary for Tax Policy is responsible for
the review of rulings proposed for publication by the Internal Revenue
Service. This review is carried out, in the case of foreign tax credit
rulings, primarily by the International Tax Counsel. In the foreign
tax credit area, as in other areas, proposed revenue rulings are
examined to determine whether the positions taken therein represent
sound tax policy and are consistent with the statute and outstanding
interpretations such as regulations and rulings.

-4As I stated earlier, the Treasury has submitted to the Subcommittee copies of memoranda found in the files concerning the Assistant
Secretary for Tax Policy's evaluation of foreign tax credit rulings
which have arisen since 1955. These memoranda discuss legal and
policy considerations in the context of specific foreign tax credit
situations. You have asked for m y comments on the memorandum
of April 8, 1976 submitted by the Treasury to you in April of this
year. That memorandum makes certain statements with respect
to Treasury's role in a foreign tax credit controversy among the IRS,
a foreign country and a taxpayer. The m e m o r a n d u m goes on to state
that if Treasury cooperated in a particular manner, this would give
the appearance of "secret-dealings with big oil companies to
negotiate a tax credit as was done in the early 1950!s. "
I think the meaning of the memorandum is that some
people believe there were in-secret dealings in the 1950fs between the Treasury Department and the oil companies to negotiate
a tax credit, and that such people might well take a similar view if
the Treasury Department cooperated in any manner in 1976. I
personally have not seen evidence of impropriety in the course of
the issuance of Revenue Ruling 55-296, the Saudi Arabian revenue
ruling to which the memorandum is referring.
With respect to your question concerning Treasury contacts with
private parties since October 1, 1973, we have discussions from
time to time on a number of issues with taxpayers and their representatives. W e believe our actions must be taken on an informed
basis. The Treasury has not maintained a list of such discussions
and therefore we are unable to present you with summaries of all
discussions since October 1, 1973. I can tell you that in August of
1977 the Treasury heard arguments that the concept of O P E C
posted prices fits in with the philosophy of the foreign tax credit as
reflected in judicial decisions.
Your sixth question concerns the issue of what constitutes an
"appropriate royalty." IRS News Release IR 1638, issued on July
14, 1976, requires that where a foreign government owns mineral
resources, there must be a payment of an appropriate royalty before
a foreign tax can be found. The news release does not define the
term "appropriate royalty. "
The Treasury Department has not yet been faced with the problem
of determining under current conditions what amount of royalty payment will be viewed as appropriate. As you can imagine, that will
depend very much on the facts and circumstances just as, for example,
the determination of an arm's-length price under section 482 depends
very much on the nature of the goods being transferred. In cases in
which there are no non-governmental owners of petroleum, it will

-5-

doubtless be very difficult to determine what an appropriate royalty
should be, because in those situations there m a y be no basis for comparison and because there is no economic difference to the foreign
government between a royalty and a tax. However, where there are
non-governmental owners of petroleum in the same country there m a y
be objective standards by which to judge the appropriateness of the
royalty.
Your seventh question concerns whether the income tax in OPEC
countries, Canada, Mexico and Trinidad is calculated separately and
independently of the amount of royalty and of any other tax or charge
imposed by the governments of those countries. Your eighth question
is whether in each of these countries income is determined on the
basis of arm's-length transactions and whether the receipts are
actually realized in a manner consistent with U.S. income tax principles.
The IRS News Release of 1976 lists these issues as being
relevant in determining whether a foreign tax qualifies as an income
tax. Whether a particular country's system of taxation has these
characteristics is largely a question of fact. Procedurally, these
questions would be initially addressed by the IRS in the context
of specific ruling requests or requests for technical advice arising
from audits of taxpayers. In such a context the government has
before it the material necessary to reach a decision: the foreign
statute or statutes, any agreements between the taxpayer and the
foreign government and all other relevant material. The IRS has
stated that it is considering these questions with regard to certain
OPEC countries, and Treasury will, of course, focus on these questions in those specific instances.
Finally, you ask for a discussion of the substance of all communications since January 1, 1971 between Treasury and the IRS regarding
foreign tax credits claimed by U.S. petroleum companies. W e have
already submitted to the Subcommittee copies of memoranda of IRSTreasury communications which we are able to give you without revealing tax return information. Needless to say, there are frequent
oral communications between m y office and the IRS concerning the
foreign tax credit and many other issues. Many of these are quite
informal and are not recorded by the Treasury Department.

U.S. Tax Liability of U.S. Oil Companies, 1975
(billions of dollars)

Total : Domestic : Foreign
Taxable income

38.5

6.6

31.9

Tentative U.S. tax

17.8

2.5

15.3

Credits

15.4

0.6

14.8

Foreign tax credits

14.8

Investment and WIN credits 0.6
Tax after credits

2.4

Office of the Secretary of the Treasury
Office of Tax Analysis
Source:

14.8
0.6
1.9

0.5
October 4, 1977

Preliminary (unaudited) data from 1975 corporate
tax returns.

Estimates of Increased U.S. Tax Liability
If Foreign Oil Taxes Deducted Instead of Credited,
Selected Years
($ millions)

r : jr~
Year

:

All Countries

:

OPEC

$301
$150
406
254
406
253
372
232 1/
352
219 1/
446
309
435
301 2/
591
410 2/
506
427
$2.6 billion 3/
$2.2 billion 4/
$1.2 billion
$1.0 billion 4/
Office of the Secretary of the Treasury October 4, 1977
Office of Tax Analysis
1961
•1962
1964
1965
1966
1968
1969
1970
1972
1974 P/
1976 £/

V Possibly overstated. In the absence of data on foreign
tax credits claimed, it was assumed that there was no
U.S. tax after credits. For some OPEC countries this was
not necessarily the case.
p/ Preliminary
e/ Estimate
1/ Assuming the same ratio to the total as in 1964.
2/ Assuming the same ratio to the total as in 1968.
3/ The estimate is increased by special factors not related to
oil production.
4/ Assuming the same ratio to the total as in 1972.
Sources: 1961-1974: IRS tabulations of forms filed claiming
a foreign tax credit. See attached table for
underlying numbers.
1976: SEC and other company data adjusted by
Treasury.

Foreign Income and Taxes of U.S. Petroleum Companies Operating in OPEC Countries
Selected Years, 1961-1972
($Thousands)

Taxable
Foreign Income 4/

Foreign
Tax 5/

After Tax
Foreign Income

Taxable Foreign
Income Including
"Gross-up" 6/

Credit
Claimed

Increase in
Tax if Deduction
Not Credit

1961
All countries
Middle East 1/
African OPEC 2/
Venezuela
Indonesia
Subtotal, OPEC 3/

,404,776
687,687
n.a.
n.a.
n.a.
n.a.

740,958
400,082
n.a.
n.a .
n .a .
n.a.

663,818
287,605
n.a.
n .a.
n .a.
n.a.

1,404,776

686,298
n.a.
n.a.
n.a.
n.a.
n.a.

301,000
149,555

863,551
382,712
388,815
52,132
14,298
487,957

1,650,590

815,291
n.a.
n.a.
n.a .
n.a.
n.a.

406,030
253,738

1962
All countries
Middle East 1/
African OPEC 2/
Venezuela
Indonesia
Subtotal, OPEC 3/

1,650,590
826,687
43,293 5/
327,901
14,298
1,212,179

787,039
443,975
4,478 5/
275,769
—

724,222

-2-

Taxable
: Foreign
Foreign income 4/; Tax 5/

: Taxable Foreign :
After Tax
: Income Including : Credit
Foreign Income : "Gross-up" 6/
: Claimed

:
Increase in
: Tax if Deduction
:
Not Credit

1964
All countries
Middle East 1/
African OPEC 2/
Venezuela
Indonesia
Subtotal, OPEC 3/

2,006,706
913,319
191,688
319,972
126,516
1,551,495

1,123,370
581,216
108,200
318,137
37,027
1,044,580

883,336
332,103
83,488
1,835
89,489
506,915

2,073,431

1,001.626
n.a.
n.a.
n.a.
n.a.
n.a.

406,579
253,458

2,142,849
n.a.
n.a.
n.a.
n.a.
1,212,179

1,303,447
n.a.
n.a.
n.a.
n.a.
n.a.

839,402
n.a.
n.a.
n.a.
n.a.
n.a.

2,209,239

1,029,049
n.a.
n.a.
n.a.
n.a.
n.a.

371,545

1965
All countries
Middle East 1/
African OPEC 2/
Venezuela
Indonesia
Subtotal, OPEC 3/

: Taxable Foreign
After Tax
: Income Including :
Foreign Income : "Gross-up" 6/
:

Increase in
Credit : Ta x if Deduction
Claimed :
Not Credit

Taxable
Foreign Income 4/

Foreign
Tax 5/

2,278,945
n.a .
n.a .
n.a.
n.a.
n.a.

1 ,479,550
n.a.
n.a.
n.a.
n.a.
n.a.

779,396
n.a.
n.a.
n.a.
n.a.
n.a.

2,402,177

1,131,235
n.a.
n.a.
n.a.
n.a.
n.a.

352,271

All countries
Middle East 1/
African OPEC 2/
Venezuela
Indonesia
Subtotal, OPEC 3/
1969

3,086,017
1,538,798
564,898
452,223
66,496
2,622,415

2,138,701
1,177,646
506,200
353,758
60
2,037,664

947,316
361,152
58,698
98,465
66,436
584,751

3,149,135

1,609,393
n.a.
n.a.
n.a.
n.a.
n.a.

446,833
308,749

All countries
No country detail available

3,374,819

2,457,215

917,604

3,462,698

1,779,254

435,444

3,515,345

2,338,291

1,177,054

3,622,503

1,820,143

590,881 7/

All countries
Middle East 1/
African OPEC 2/
Venezuela
~~
Indonesia
Subtotal, OPEC 3/
1968

1970
All countries
No country detail available

-4-

Taxable
:
Foreign Income 4/:

Foreign
Tax 5/

: Taxable Foreign :
After Tax
: Income Including : Credit
Foreign Income : "Gross-up" 6/
: Claimed

Increase in
Tax if Deduction
Not Credit

1972
All countries
OPEC

6,612,335
5,630,877

4,948,606
4,741,539

1,663,729
889,338

6,760,227

2,952,226
n.a.

505,907
427,882

1974 p/
All countries

32.1 b. 9/

Office of the Secretary of the Treasury
Office of Tax Analysis

26.7 b.

5.4 b.

32.1 b.

15.4 b.

2.6 b. 8/
October 4, 1977

p/ preliminary
Source:

IRS, Statistics of Income, Foreign Income and Taxes Reported on Corporation Income Tax Returns, 1961, 1962, and
1964, and unpublished IRS tabulations.

-51/ For 1961 includes only Saudi Arabia, Iran and Kuwait and includes all mining and manufacturing (presumably almost all
of which was oil extraction and refining). For 1962 and later years, includes some non-OPEC Middle East (e.g.,
Oman, Bahrain, Israel) and covers oil extraction only.
2/ Algeria, Libya, Egypt, Nigeria. Does not include Gabon.
3/ Excluding Ecuador and Gabon and including some non-OPEC as indicated in note 1.
V Excluding "gross-up" of dividends from related foreign corporations where applicable.
5/ Foreign taxes paid or accrued, excluding carryovers and taxes deemed paid.
6/ For years after 1962, U.S. corporations must "gross up" their foreign taxable income by part or all of the foreign
corporate tax on subsidiary dividends for which they could claim a deemed paid credit. With a deduction, neither the
gross up nor the deemed paid credit are relevant; with a credit both are.
7/ This figure is probably overstated. The corporate tax rate for 1970 was 50.4% for January-June and 48% from July
through December, or an average annual rate of 49.2 percent. However, the credit claimed amounts to 50.2 percent of
foreign average income, so it was assumed that there was no U.S. tax after the credit (although there is in most
other years), and the 50.2% rate was applied to after-foreign tax income to estimate the revenue if those taxes were
deducted.
8/ This is an atypical year due to special circumstances in several companies.
9/ Includes gross-up.
Note: The U.S. corporate tax rate was 52% for 1961-63, 50% in 1964, and 48% thereafter, but the 48% was raised to 52.8%
in 1968 and 1969 and to 49.2% in 1970 by surcharges. The potential revenue gain is the excess of the actual rate
times after-tax foreign income over the amount by which the actual rate times column 4 exceeds the credit
claimed.

Foreign Tax Credits Claimed
1972-1975
(billions of dollars)

•

•

•

D /

.

: 1972 : 1973 : 1974 : 1975"
Total

6.3

9.6

20.6

19.8

Petroleum companies
Other

3.0
3.3

5.2
4.4

15.5
5.2

14.8
5.0

Office of the Secretary of the Treasury October 4, 1977
Office of Tax Analysis
p/

Preliminary

Source: IRS tabulations.

FOR IMMEDIATE RELEASE
MONDAY, OCTOBER 3, 1977

CONTACT:

Al Hattal
566-8381

TREASURY DEPARTMENT MAKES DETERMINATIONS IN STEEL CASES
The Treasury Department today announced a tentative determination that carbon steel plate from Japan is being sold in the United
States at "less than fair value."
Importers will be required to post bonds sufficient to cover
estimated dumping duties of about 32 percent on all further Japanese
carbon steel plate imports.
Technically, the steel is subject to a withholding of appraisement under which the assessment of Customs duties is suspended for
up to six months. This allows any dumping duties which are finally
determined to be levied on all imports occurring after the tentative
determination.
A final determination must be made by the Treasury Department
within ninety days. If the final determination confirms sales at
less than fair value, the matter is referred to the International
Trade Commission for its ruling on whether these imports have
injured or threaten injury to domestic industry. The ITC must
make its finding within 90 days of the final determination by the
Treasury Department. If injury is found, dumping duties will be
imposed.
The investigation, initiated on the petition of the Oregon
Steel Mills Division of Gilmore Steel Corporation, involves Nippon
Steel Corporation, Nippon Kokan K. K. , Sumitomo Metal Industries,
Ltd., Kawasaki Steel Corporation, and Kobe Steel, Ltd. These
companies accounted for over 7 0 percent of recent carbon steel
Plate imports from Japan.
In 197 6, imports of carbon steel plate from Japan amounted
to about $174 million.
The Treasury Department investigation found that Japanese
Producers have been marketing steel plate in the United States at
Prices below the cost of production. The average margins of
dumping, which determine the estimated dumping duties, amounted
t0
32 percent. These margins were calculated in most cases by
comparing the purchase price paid by importers not related to the
B-473

producers with the "constructed value" of the merchandise, based
essentially on the Treasury Department's estimated cost of production plus statutory minimum general expense and profit margins.
This case represents the largest volume of trade potentially
affected by the 1974 cost of production amendments to the Antidumping Law.
The Treasury Department also announced actions in two other
cases.
In a case involving welded stainless steel pipe and tubing
from Japan, the Treasury Department determined that there was
inadequate information to reach a tentative determination concerning
sales at less than fair value and extended for 90 days the period
within which the determination must be made. Trade which amounted
to about $10.7 million in 1976 is involved. A previously discontinued anti-dumping proceeding initiated by eight U.S. companies
was reopened at the initiative of the International Trade Commission!
The companies under investigation are Yamoto Industries Co., Ltd.;
Nisshiu Steel Co., Ltd,; Stainless Pipe Industries, Ltd.; Brasinet .
Industries Corp., Ltd. and Toa Seiki Company.
A final negative Determination has been made under the Countervailing Duty Law in a case involving grain oriented silicon steel
from Italy. The Treasury Department determined that there was
insufficient evidence to indicate that the production or exportation of this product was benefiting from government subsidies.
The steel was produced by Terni, a company that is part of
the Finsider Group of which an agency of the Italian Government
owns a majority of the stock. The case was initiated by Armco
Steel Corp.
This grade of steel, which is used in electrical transformers,
was last imported from Italy in 1975 in a volume of about $6.6
million.

APP-2-04-0:D:T

SN/dt

DEPARTMENT OF THE TREASURY
OFFICE OF THE SECRETARY
CARBON STEEL PLATE FROM JAPAN
ANTIDUMPING
WITHHOLDING OF APPRAISEMENT NOTICE
AGENCY: U.S. Treasury Department
ACTION: Withholding of Appraisement
SUMMARY:
v

This notice is to advise the public that an antidumping

investigation has resulted in a preliminary determination that
carbon steel plate from Japan is being sold at less than fair
value. (Sales at less than fair value generally occur when
the price of merchandise sold for exportation to the United
States is less than the price of such or similar merchandise
sold in the home market or to third countries or the constructed value of the merchandise) . Appraisement for the
purpose of determining the proper duties applicable to
entries of this merchandise will be suspended for 6 months.
Interested parties are invited to comment on this action.
EFFECTIVE DATE:
(Date of publication in the FEDERAL REGISTER) .
FOR FURTHER INFORMATION CONTACT:
Mr. Stephen Nyschot, Operations Officer, U.S. Customs Service,
i

Duty Assessment Division, Technical Branch, 1301 Constitution Avenue,
W, Washington, D.C. 20229, telephone (202-566-5492).

-2SUPPLEMENTARY INFORMATION:
On March 8, 19 77/ information was received in proper form
pursuant to sections 153.26 and 153.27, Customs Regulations
(19 CFR 153.26, 153.27), from counsel acting on behalf of
Oregon Steel Mills, Division of Gilmore Steel Corporation,
indicating a possibility that carbon steel plate from Japan
is being, or is likely to be, sold at less than fair value within
the meaning of the Antidumping Act, 1921, as amended
(19 U.S.C. 160 et seq.)(referred to in this notice as "the
Act"). An "Antidumping Proceeding Notice" was published in
the FEDERAL REGISTER on March 30, 1977 (42 F.R. 16883). That
notice indicated that there was evidence on record concerning
injury to or likelihood of injury to, or prevention of establishment of, an industry in the United States.
For purposes of this notice, the term "carbon steel plate"
means hot-rolled carbon steel plate, 0.1875 (3/16) inches or
more in thickness, over 8 inches in width, not in coils, not
pickled, not coated or plated with metal, not clad, and not
cut, pressed or stamped to non-rectangular shape.
TENTATIVE DETERMINATION OF SALES AT LESS THAN FAIR VALUE
On the basis of the information developed in the Customs
Service investigation and for the reasons noted below, pursuant
to section 201(b) of the Act (19 U.S.C. 160(b)), I hereby
determine that there are reasonable,, grounds to believe or suspect that the purchase price or the exporterfs sales price of

-3carbon steel plate from Japan is less, or is likely to be
less, than the fair value of such or similar merchandise.
STATEMENT OF REASONS ON WHICH THIS DETERMINATION IS BASED
a. Scope of the Investigation. It appears
that during the period of investigation covering
October 1, 1976 to March 31, 1977, over 70 percent of the imports of the subject merchandise
from Japan were manufactured by Nippon Steel
Corporation (Nippon Steel), Nippon Kokan K.K.
(NKK), Sumitomo Metal Industries, Ltd. (Sumitomo) , Kawasaki Steel Corporation (Kawasaki),
and Kobe Steel, Ltd. (Kobe). Therefore, the
investigation was limited to these five manufacturers .
b. Basis of Comparison. For the purpose
of considering whether the merchandise in question is being, or is likely to be, sold at less
than fair value within the meaning of the Act,
the proper basis of comparison appears to be
between purchase price and constructed value
on all sales by Nippon Steel, NKK, and Kobe, and
on most sales by Sumitomo and Kawasaki. Purchase
price, as defined in section 203 of the Act
(19 U.S.C. 162), was used since those export sales
were made to unrelated Japanese trading companies.
On the remaining sales by Sumitomo and Kawasaki,
the proper basis of comparison appears to be
between exporterfs sales prices, as defined in
section 204 of the Act (19 U.S.C. 163), and constructed value, since those sales in the United
States are made by importers who are related to
those manufacturers. Constructed value, as defined
in section 206 of the Act (19 U.S.C. 165) was used
pursuant to section 205(b) of the Act (19 U.S.C. 164 {
since on the basis of the best evidence available at
this time sales in the home market which were at not
less than the cost of production appear to be
inadequate as a basis for comparison. As the
exporters declined to provide any information concerning their sales in third countries and no other
information to the contrary was available, it has
been assumed that sales to third countries which were
at not less than the cost of production would also
provide
an inadequate
basis
for>. home
comparison.