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Treas.
HJ
10
.A13P4
v.226

U. S. Dept. of the Treasury,
T> PRESS RELEASES. '

* ^O
M%

FOR IMMEDIATE RELEASE
November 1, 1979

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES RESULTS OF GOLD SALE
The Department of the Treasury announced that 1,250,000
troy ounces of fine gold were sold today to 11 successful
bidders at an average price of $372.30 per ounce.
Awards were made in 300 ounce bars whose fine gold content is 89.9 to 91.7 percent at prices ranging from $365.50
to $378.12 per ounce. Bids for this gold were submitted by
12 bidders for a total amount of 1.5 million ounces at prices
ranging from $320.00 to $378.12 per ounce.
Gross proceeds from the sale were $465.4 million. Of
the proceeds, $52.8 million will be used to retire gold
certificates held by Federal Reserve Banks. The remaining
$412.6 million will be deposited into the Treasury as a
miscellaneous receipt.
The list of the successful bidders and the amount
awarded to each is attached. The General Services Administration will release information on the individual bids
made by all bidders, and the details of the individual
awards to successful bidders.
o 0 o

M-164

(over)

Bank Leu
New York NY

29,400

Credit Suisse 161,400
Zurich Switzerland
EF Hutton & Co 15,000
New York NY
Gold Standard Corporation 1,200
Kansas City, MO
Phillip Brothers 90,000
New York NY
Republic National Bank 199,400
New York, NY
Samuel Montagu Inc. 39,000
New York NY
Sharps, Pixley Inc. 28,800
New York, NY
Swiss Bank Corp 295,200
Zurich Switzerland
Union Bank of Switzerland 78,600
Zurich Switzerland
Dresdner Bank AG
New York NY

312,000

FOR RELEASE ON DELIVERY
Expected at 2:00 p.m.
Thursday, November 1, 1979

Testimony of the Honorable Anthony M. Solomon
Under Secretary of the Treasury for Monetary Affairs
before the
Subcommittee on Trade
Committee on Ways and Means
House of Representatives
Mr. Chairman, the Treasury Department joins the other
agencies here today in strongly supporting the Trade Agreement
between the United States and the People's Republic of China.
Under former Secretary Blumenthal's leadership, the Joint
U.S.-China Economic Committee was established earlier this
year to serve as a forum for the resolution of economic
problems between our two nations and to help lay the foundation
for the orderly development of economic and financial ties.
This Committee, now under the chairmanship of Secretary Miller,
will meet in 1980, hopefully in the early part of the year.
This meeting will be the occasion for a visit to the United
States by Chinese Vice Premier Yu Qiuli.

M-165

- 2 Treasury has also led the negotiations which produced
the claims/assets agreement with China, an important first
step toward normalization of our economic relations.

you know, the first Chinese payment under this agreement
in the amount of $30 million was made to the U.S. on
October 1, and Treasury has just this week sent out
vouchers to certified U.S. claimants.

I will be glad to

answer any questions you might have on this agreement.
The U.S.-China Trade Agreement represents an even
more significant step in the overall development of our
commercial and economic relationship with China.

Rather

than an obstacle from the past that had to be overcome -as with

claims/assets -- the Trade Agreement will look to

the future, laying the foundation for the expansion of
our trade and financial ties with significant long-term
benefits for the American economy.
Since Secretary Kreps and Deputy Secretary Christopher
have covered, respectively, the economic aspects and political
context of this Agreement -- and Ambassador Askew will address
the relationship between U.S.-China textile trade and the
Agreement -- I will direct my remarks toward China's overall
international economic position, including trade with other
countries, external financing, and its external debt position.

- 3China's total foreign two-way trade has increased
sharply during the 1970's, from approximately $6 billion
in 1972 to more than $20 billion in 1978, of which
U.S.-China trade accounts for only a small part -- roughly
six percent in 1978. The sharp overall trade increase is
due primarily to China's pursuit of a long-term modernization
program which relies heavily on imported capital goods and
technology.

China's main trading partner during this period

has been Japan, which currently accounts for approximately
25 percent of China's foreign trade, followed by Hong Kong
with 11 percent, and Germany at 6 percent.

Long-term trade

agreements with the United Kingdom, France, Japan, Canada
and Italy should further boost China's foreign trade
during the period ahead.

China's trade with nonraarket

economies constitutes only a relatively small part of its
foreign trade -- 15 percent in 1978.
We expect China's foreign trade to continue to grow
rapidly during the next few years.

Imports for 1979 are

expected to be in the range of $15 billion, up from
$11 billion in 1978.
large as $40 billion.

By 1985, annual imports may be as

- 4 The question arises as to how this trade will be
financed.

In the past, China's imports have been small,

and limited by what foreign exchange China could earn
through its exports.

Imports of capital goods and

services during the period immediately ahead will, however, -because of China's modernization objectives -- exceed its
foreign exchange earnings capability.

China will therefore

need to finance a portion of its imports from foreign
borrowing.
In light of this, China has sought both official and
private lines of credit to meet its financing needs.
Currently, both private and official credit lines totalling
between $23 - $30 billion have been negotiated or are under
discussion.

Private credits -- which account for about

20 - 30 percent of the total -- are primarily syndicated
Eurodollar loans, although there is some project financing
by private investment groups.
The focus of China's effort to secure lines of credit,
however, has been directed toward official government
sources, and these represent the bulk of China's foreign
credit lines.

China has negotiated officially supported

export credits with France for $7 billion, Great Britain

- 5for $5 billion, Canada for $1.9 billion, and Italy for
$1 billion. Other export credit loans are now under
discussion. In addition, Japan and China have agreed
on an untied $2 billion resource development loan, to be
financed by Japan's Export-Import Bank and, most recently,
China has approached Japan for approximately $3-1/2 billion
in aid loans to finance nine development projects.
In order to avoid excessive official credit competition,
official export loans offered China should meet the terms
*

and conditions of the International Arrangement for Export
Credits. It appears that most official creditors are
conforming to the terms and spirit of the International
Arrangement. The Japanese Eximbank credits, which have
low interest rates, are not considered a derogation from
the Arrangement due to the fact that they are not tied to
Japanese exports. The Japanese Government has assured us
that non-Japanese exporters will benefit from this financing.
We would expect, therefore, that some of the Japanese
financing will support U.S. exports.
The role of the United States in financing China's
trade has, of course, been minimal. With regard to private
financing, many foreign banks preceded their U.S. competitors
into the China market. In the past year, however, the U.S.
banking community has moved quickly into this market with
over 30 U.S. banks establishing full U.S. correspondent

relations with the Bank of China.

We are aware of the

negotiation of $28 million in private credit lines
between U.S. banks and China, and understand that
additional credits are under discussion.

In addition,

we understand that the Bank of China -- which currently
has overseas branches in London, Singapore, Hong Kong,
and Luxembourg --is preparing to open branches in
New York and Tokyo in the not too distant future.
I have just noted the substantial official export
credit which China has available from other nations.

U.S. exporters are to be competitive with foreign
exporters -- and establish a foothold in what could
ultimately become an extremely important market for
western exports -- then it is vital that the U.S. Government
also provide appropriate export financing.

As Deputy

Secretary Christopher has mentioned, we are moving forward
in this area.

We are prepared to offer China competitive

export financing from the Export-Import Bank so that U.S.
firms are in a position to compete with foreign exporters
in the China market.

As you know, Vice President Mondale

recently advised the Chinese that we are prepared to make
available a credit arrangement up to a total of $2 billion
over a 5-year period on a case-by-case basis, and are
willing to consider additional credit arrangments as

developments warrant.

The terms and conditions of these

credits will, of course, be consistent with the International
Arrangement on Export Credits.

The approval of the Agreement

before you today is necessary for the extension of Eximbank
financing -- and therefore necessary to ensure that American
exporters can compete effectively in the China market.
The use of balance of payments financing during the
coming years will, of course, increase China's external debt.
China has, however, historically taken a very prudent and
cautious approach in its financial management.

China's

current debt service ratio is very low, approximately
6 percent.

While this will

undoubtedly rise somewhat,

China to date has drawn very little on its new lines of
credit, and we fully expect the Chinese to continue to
take a careful approach to external financing.
In closing, I would like to reiterate that we view
the Trade Agreement between China and the United States
as a critical element in the normalization of our relations
with China.

I join my colleagues here today in strongly

urging you to approve this Agreement in order that we may
lay the foundation for an expansion of our commercial and
financial ties with China in a manner that is in the best
interests of both nations.

tpartmentoftheJREASURY
TELEPHONE 5662041

SHINGTON,D.C. 20220
FOR IMMEDIATE RELEASE

November 1, 1979

RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF NOVEMBER FINANCING
The Department of the Treasury has accepted $2,001 million of
$3,280 million of tenders received from the public for the 30-year
bonds auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 10.39%
Highest yield
Average yield

10.48%
10.44%

The interest rate on the bonds will be 10-3/8%. At the 10-3/8% rate,
the above yields result in the following prices:
Low-yield price 99.863
High-yield price
Average-yield price

99.045
99.407

The $2,001 million of accepted tenders includes $133 million of
noncompetitive tenders and $1,868 million of competitive tenders from
private investors, including 44% of the amount of bonds bid for at the
high yield.
In addition to the $2,001 million of tenders accepted in the auction
process, $ 314 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 November 15, 1979.
SUMMARY RESULTS OF NOVEMBER FINANCING
Through the sale of the three issues offered in the November financing,
the Treasury raised approximately $1.4 billion of new money and refunded
$7.2 billion of securities maturing November 15, 1979. The following table
summarizes the results:
New Issues
11-5/8% 10-3/4% 10-3/8% NonmarNotes
Notes
5-15-83 11-15-89
Public
$2.8
Government Accounts
and Federal Reserve
Banks
0^
TOTAL

$3.6

$2.0

0^4
$2.4

Bonds
11-15-042009
$2.0

(LT3
$2.3

Details may not add to toal due to rounding.

M-166

ketable
Maturing
Net New
Special
Securities Money
Issues Total
Held
Raised
$-

$6.8

$5.4

$1.4

1^8

_-z

$0.3

$8.6

$7.2

$1.4

partmentoftheJREASURY
kSHlNGTON,D.C.

20220

TELEPHONE 5662041

FOR IMMEDIATE RELEASE

November 1, 1979

10.48%
10.44%

The interest rate on the bonds will be 10-3/8%. At the 10-3/8% rate,
the above yields result in the following prices:
Low-yield price 99.863
High-yield price
Average-yield price

99.045
99.407

The $2,001 million of accepted tenders includes $133 million of
noncompetitive tenders and $1,868 million of competitive tenders from
private investors, including 44% of the amount of bonds bid for at the
high yield.
.
.________,_*„__««••/p - 3fe V& TREASURY NOTES &ie$gffl BONDS OF 2004In addition to tt
200i
process, $ 314 million
from Government accoun
in exchange for securi
DATE: Nov. 1, 1979

Through the sale I
the Treasury raised ap]
$7.2 billion of securil
summarizes the results;

UT^HEST

£WA $

TOTAL

$3.

"feifiOiJS ///6,

7'/$16 9«?

M-166

«_<-» n j u u u i n g .

• q yf ~A

y-fi&fi

y/:£tf)

S?
Details may not add to

ft^'j^

TODAY:

11-- LOWEST SINCE:
Note
5-15
Public
$2.
Government Accounts
and Federal Reserve
Banks
0.

LAST ISSUE:

FOR RELEASE AT 4:00 P.M.

November 1, 1979

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $3,890 million, of 359-day
Treasury bills to be dated November 13, 1979, and to mature
November 6, 1980 (CUSIP No. 912793 4R 4). This issue will not
provide new cash for the Treasury as the maturing issue is
outstanding in the amount of $3,896 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing November 13, 1979. The public holds
$1,517 million of the maturing issue and $2,379 million is held
by Federal Reserve Banks for themselves and as agents of foreign
and international monetary authorities. Tenders from Federal
Reserve Banks for themselves and as agents of foreign and international monetary authorities will be accepted at the weighted
average price of accepted competitive tenders. Additional amounts
of the bills may be issued to Federal Reserve Banks, as agents of
foreign and international monetary authorities, to the extent
that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them.
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. This 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 Standard time,
Wednesday, November 7, 1979. 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. 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.
M-167

-2Banking 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. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
at the close of business on the day prior to the auction. Such
positions would include bills acquired through "when issued"
trading, and futures and forward transactions. 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, when submitting tenders for customers, must
submit a separate tender for each customer whose net long
position in the bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
$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.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on November 13, 1979, in cash or other immediately available
funds or in Treasury bills maturing November 13, 1979. Cash
maturing
new
adjustments
bills.
bills
willaccepted
be made in
for
exchange
differences
and the
between
issue the
price
par of
value
the of

-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, 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.

TRANSCRIPT OF PRESS CONFERENCE
THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
WASHINGTON, D.C.
NOVEMBER 1, 1979
SECRETARY MILLER:

Good morning ladies and gentlemen.

Let me start off by announcing the substance of what
we are going to propose today. This morning the Administration is sending to the Congress a proposal for financial
assistance for the Chrysler Corporation. We are proposing
authority for Treasury to issue loan guarantees of $1.5
billion, conditioned upon there being new financing and
concessions of an equal amount of $1.5 billion so that
Chrysler would have the availability of a $3 billion
financing package.
The federal assistance will be in the form of guarantees
for loans. The additional financing will consist of either
new loans or financial credits or from the infusion of additional equity or from the disposal of assets not essential
to the basic automotive business.
Let me give you a little background on how this developed
and some of the factors involved in making this recommendation.
In this room, on August 9, having been in office for three days,
I made a statement about the Administration's willingness to
consider assistance for Chrysler. There were special factors
that made it appropriate for us to consider financial assistance to Chrysler. We expressed willingness to consider it in
the context of a financing and operating plan developed by
Chrysler which would show how it could become a viable
corporation in the future.
On September 15, Chrysler submitted a preliminary plan.
We met here with its Board of Directors that day and reviewed
the plan. After that meeting, it was agreed that further work
was necessary. On October 17 Chrysler presented a revised
plan. We have been working with considerable resources to

M-168

- 2 analyze that plan, to make adjustments which appeared appropriate and to decide whether the plan was the basis for a
proposal along these lines. Our consultants were Ernst & Whinney,
one of the country's leading accounting firms. Their senior
partner, Joe Keller, has been active in supervising this work.
He has assembled a highly qualified team to work on this, some
two dozen of his partners and associates, and their work is
substantially complete. In addition, we retained John Secrest,
a retired financial vice-president of American Motors, and his
views have been most helpful to us. We came to the conclusion
that we have made enough progress in our analysis to put forward
a proposal.
There are several key considerations that led us to
our recommendations: first, the automobile industry is an
important industry. It deserves attention from the federal
government. Should Chrysler be unable to continue, there
could be serious impact on localities around the country—not
only where Chrysler has plants but in places where automotive
suppliers and dealers operate along with others who have
an interest in this business. There is also risk of substantial unemployment and economic distress.
A second consideration is the alternative costs in case
Chrysler should experience difficulty in finding necessary
financing. Alternate costs to the government would include
unemployment compensation, welfare payments, loss of local
taxes and loss of federal revenues arising from curtailment of
economic activities and incomes.
A third consideration is the importance of this industry
to our international position. It is important to us as a
nation to maintain a strong automotive industry. It is a
worldwide business—if we do not produce autos at home, we will
buy them abroad. We must take those steps that most assure
that this industry remains a vital part of our economy.
Fourth, we must also maintain a competitive auto industry.
Without Chrysler, the two remaining major automobile producers
would provide a very narrow U.S. competitive base.
There are several factors since August 9 that have led to
our recommendation for significantly larger aid to Chrysler.
One is the changed outlook for the auto industry. Not only
ourselves, but independent forecasters now project reduced
levels of activity in this industry. This is partially because
of the cost and availability of gasoline and energy supplies,
and also because general economic conditions are more uncertain
now.

- 3 Lastly, there is Chrysler's own situation. Chrysler
reported a third-quarter loss of $460 million yesterday.
Its outlook clearly calls for greater resources than were
apparently required in August. We now have the benefit of
an in-depth analysis of the future outlook of this company,
and based on that, we have greater confidence in the degree
to which assistance will be required. It is apparent to us
that any financial assistance plan should be adequate and
sufficient to accomplish the purpose. We must make sure
Chrysler is able in the future to operate as a viable
company and can operate on its own resources and be a
constructive contributor to our economy in the years
ahead.
Now I would be happy to answer a few questions.
[Q and A portion of Press Conference to come later.]

FOR RELEASE AT 4:00 P.M.

November 1, 1979

52-WEEK BILL DATING CHANGE
The Department of the Treasury announced today that it
is beginning a transition that, when completed, will change
the issue and maturity date of 52-week bills from Tuesdays to
Thursdays. During the one year transition period, the
Department will continue to issue 52-week bills on Tuesdays
but will set a maturity date 359 days later to occur on a
Thursday. In a separate announcement today, the Department
offered the first issue of 52-week bills with this dating
pattern. When the transition cycle is completed, both the
issue and maturity dates will be on Thursdays and the full
364-day maturity period will be resumed.
The Department said that the dating change is being made
to make the 52-week bills mature on the same date as 13- and
26-week bills. The amount of each 52-week bill issue will be
enlarged by subsequent issues of 13- and 26-week bills with
the same maturity date. This will reduce the number of
separate bill issues outstanding, facilitate market trading,
and improve liquidity for the 52-week bills.

oOo

M-169

FOR RELEASE AT 12:00 NOON

November 2, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,200 million, to be issued November 15,1979.
This offering will provide $ 200 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$6,030 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,100
million, representing an additional amount of bills dated
August 16, 1979,
and to mature February 14, 1980 (CUSIP No.
912793 3R 5 ) , originally issued in the amount of $3,014 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,100 million to be dated
November 15, 1979, and to mature May 15, 1980
(CUSIP No.
912793 4E 3 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing November 15, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,642
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. 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 Standard time,
Friday, November 9, 1979.
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.
M-170

-2-

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 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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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 --rr
whole or in part, and the Secretary's action shall be final.
Subject
todecimals)
these
reservations,
tenders
for
each
respective
bidder
issue
(in three
for
will
$500,000
issues.
be accepted
or
of less
accepted
in without
full noncompetitive
at
competitive
stated
the weighted
price
bids
average
from
for the
any
price
one

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on November 15, 1979, in cash or other immediately available
funds or in Treasury bills maturing November 15, 1979.
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, 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 2:30 p.m.
STATEMENT OF
JOHN M. SAMUELS
TAX LEGISLATIVE COUNSEL
U. S. DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE
SENATE FINANCE COMMITTEE
November 2, 1979
Senator Baucus and Members of this Distinguished Subcommittee:
We welcome the opportunity to present the views of the
Treasury Department and the Internal Revenue Service on S.
1691, the Tax Court Improvement Act of 1979. S. 1691 would
significantly change the structure of the Federal court
system by establishing a United States Court of Tax Appeals
that would have exclusive appellate jurisdiction over
decisions of the Tax Court and District Courts in civil tax
controversies.
Summary of Position
While we support the concept of a single appellate
forum for the resolution of civil tax controversies, we do
not support the establishment of such a court without regard
to its composition or jurisdiction. We have two fundamental
objections to the structure of the court that would be
established by S. 1691. First, we believe that, at a minimum,
the chief judge and a majority of the other judges on the
new court should be permanently assigned to the court.
Second, we believe that the decisions of the United States
Court of Claims should be subject to review by the new
court. Because of these objections, we are unable to support
S. 1691 at this time. However, if the bill were amended to
satisfy our concerns, we would be pleased to give it our
M-171
full support.

- 2Present Law
Under present law, a taxpayer may choose to litigate a
dispute over Federal taxes that cannot be resolved administratively in one of three forums — a United States District
Court, the United States Tax Court, or the United States
Court of Claims.
A taxpayer who is unwilling (or unable) to pay a disputed tax may file suit in the United States Tax Court to
contest his or her liability for the disputed amount without
first paying the tax. Alternatively, a taxpayer can first
pay the tax and then file an action for a refund of the
disputed amount in either a United States District Court or
the United States Court of Claims. A trial by jury may be
obtained in a District Court, but not in the Court of Claims
or the Tax Court.
Appeals from the decisions of these courts diverge. A
District Court or Tax Court decision generally may be appealed
to the United States Court of Appeals for the judicial
circuit in which the taxpayer is domiciled. Thus, whether
the taxpayer files suit in a District Court or the Tax
Court, the taxpayer's case would generally be reviewed by
the same Circuit Court of Appeals. On the other hand, a
Court of Claims decision is subject to appellate review only
by the United States Supreme Court by writ of certiorari —
a rather remote possibility.
A decision of a particular Court of Appeals is binding
only with respect to controversies within the jurisdiction
of that Circuit Court. For example, a District Court within
the Fifth Circuit is bound by decisions of the Court of
Appeals for the Fifth Circuit, and is not bound by decisions
of the ten other Circuit Courts of Appeals. Similarly, if a
taxpayer residing in the Second Circuit files suit in the
Tax Court, in making its decision the Tax Court is bound by
the decisions of the Court of Appeals for the Second Circuit,
but not by the decisions of any of the other Circuit Courts
of Appeals. Finally, the Court of Claims is not bound by
decisions of any of the Circuit Courts of Appeals.
Decisions of all three trial courts — the Tax Court,
District Courts and Court of Claims — and the Courts o^
Appeals are bound by the decisions of the United States
c
upreme Court.

- 3Description of the Bill
S. 1691 would establish a new United States Court of
Tax Appeals that would have exclusive appellate jurisdiction
over all decisions of the Tax Court and the District Courts
in civil tax cases (excluding bankruptcy cases). Decisions
of the Court of Tax Appeals would be reviewed by the United
Stages Supreme Court by writ of certiorari. The court would
be an additional court under Article III of the Constitution
at the same level as the existing Federal Circuit Courts of
Appeals.
The Court of Tax Appeals would consist of eleven judges
designated by the Chief Justice of the United States from
among the judges of the Circuit Courts of Appeals. The
Chief Justice would be required to designate one judge from
each of the eleven geographically designated judicial
circuits. Court of Tax Appeals judges would serve threeyear terms, during which they would continue to serve on
their respective circuits and continue to participate in
non-tax cases, if their workload permitted.
The Court of Tax Appeals would have permanent offices
in the District of Columbia, but appeals would be heard in
the judicial circuit in which the taxpayer is domiciled.
The court would normally sit in panels of three or more
judges, and would hear a case en banc at the request of six
judges.
Desirability of a Court of Tax Appeals
The establishment of a single court to review all civil
tax appeals has been the subject of considerable debare in
the legal and academic communities over the past 40 years,
and most of the arguments for and against the creation of
such a court have been fully aired.
The proponents of a court of tax appeals contend that
it would eliminate many problems engendered by the delay
nnder the present system in getting a final decision on tax
issues, and cite a number of good reasons why the sure and
speedy resolution of disputed tax issues is desirable.
First, a national court of tax appeals would save valuable
resources for both the government and taxpayers by greatly
reducing the number of judicial and administrative tax
controversies. The number of cases appealed beyond the
trial court level would decline, since having only one
appellate court would end the current practice — by both
the government and taxpayers — of appealing identical

- 4issues in numerous circuits in the hope of securing a conflict
to serve as a basis for Supreme Court review. In turn,
because decisions of the court would be binding on both the
government and taxpayers, it would relieve a heavy burden on
the administrative process (through which most tax disputes
are settled) by eliminating many issues that are in controversy simply because there has not been an authoritative
resolution of the controverted issue. Second, the earlier
resolution of tax questions that would result from taking
all appeals to the new court would reduce the likelihood
that taxpayers whose circumstances are in all other respects
identical would be treated differently for tax purposes
simply because they are residents of different circuits, and
therefore are controlled by different precedents. Similarly,
prompter settling of the law would reduce the period in
which taxpayers could resolve questions in their favor on
their tax returns, or gamble on the chance of successfully
litigating the matter or working out a settlement based upon
the risks of litigation. Third, speedier resolution of the
issues means that businesses will be confronted with uncertain
tax ]iability in far fewer situations, enabling business
taxpayers to plan their financial affairs with a greater
degree of certainty. Finally, appeals involving tax issues
would be taken to the Supreme Court only if certiorari were
granted, since there would no longer be conflicting decisions
of courts of appeals. Relieved of the necessity of hearing
and deciding tax issues over which the circuits disagree,
the Supreme Court could devote itself to a more limited, but
more consequential, review of tax cases.
On the other hand, those who favor the current system
of appellate review of tax controversies argue that the
benefits to be gained by centralizing tax appeals are more
than offset by the virtues inherent in the present system
that would have to be sacrificed if such a court were established. They argue that good jurisprudence is an evolutionary
process of which reflection and reconsideration are integral
parts. If tax appeals were centralized there would no
longer be the opportunity for reconsideration of an issue
already decided by the appellate court of one circuit by
another appellate court free of the constraints of the
doctrine of stare decisis. The review of the issue in the
first court may have been distorted by the particular
record, the admission of an araument, or simply may have
been
mistaken.
Only
after
thenot
initial
may
thethe
feeling
importance
that
ofthe
the
decision
matter
become
did
apparent
take decision
into
— account
along
with
all

- 5relevant considerations. Recourse to Congress to correct
such decisions would be far from certain, and in the cases
it did occur would be an undesirable burden on the legislative process. They argue the existing practice, affording
multiple anpellate review of contested issues, provides such
reflective consideration and can lead to more reasoned and
thoughtful conclusions.
Opponents of a system, for centralized tax appeals also
stress the problems presented in dealing effectively with
erroneous decisions of a single appellate court. They are
concerned that the sparse opportunities for Supreme Court
review and the uncertainty and delay involved in Congressional
correction can result in extended application of an improper
rule of taxation with its attendant unfairness.
On balance, the Treasury and the Internal Revenue
Service believe that the advantages of a single court of tax
appeals outweigh its disadvantages. We believe a single
court of tax appeals would provide for earlier resolution of
tax issues. thereby mitigating the delay, uncertainty and
disparate treatment that occurs under the present system.
We do not, however, support the creation of such a court
unless its framework is designed to ensure a sound.and capable
court.
Recommended Changes
We believe the Court of Tax Appeals that would be
established under S. 1691 would be such a court if the bill
were changed in two respects. First, we recommend that
S. 169"1 be amended to provide that the chief judge and the
number of other judges necessary to comprise a majority of
the new court be permanently assigned to the court. Second,
we believe a national court of tax appeals should be established only if it has appellate jurisdiction over decisions
of the United States Court of Claims (or any successor to the
Court of Claims).
Composition of the Court. The consideration of a
particular tax issue by the Court of Tax Appeals will be
both the first and most probably the final appellate consideration of that issue. Therefore, we believe it essential that
such a court be composed of judges of sufficient ability and
expertise to develop a sound body of precedent that will be
consistent with Congressional intent and the overall scheme
of the tax law.

- 6S. 1691 provides that the judges on the Court of Tax
Appeals would serve only three^year terms, and would continue
to sit on non-tax cases in their original circuits. We
believe that this short tenure, coupled with their continuing
workload in the circuit courts, does not provide adequate
assurance that the judges on the new court would have the
required exoertise in the tax law — or the time in which to
obtain it. Indeed, the rotation of judges required by
S. 1691 raises the important question of how the Chipf
Justice is to choose the appointees from among the circuit
court judges. Will they tend to be the judges most easily
spared from their own circuits? If so, the heavy responsibility of unifying the tax law may not fall on the shoulders
best able to undertake the task.
We would expect that the opportunity to hear appellate
tax cases could attract outstanding tax practitioners and
academicians to serve on the Court of Tax Appeals. We
believe that a major defect of S. 1691 is that it does not
take advantage of this opportunity.
In our view, the absence of judges with substantial tax
expertise would vitiate the principal benefits to be gained
by a centralized appellate court. We do not agree with the
argument that permanent judges assigned to a court of tax
appeals would deprive the tax law of the benefits of wellrounded judges and attorneys, and would encourage technical
decisions that are out of touch with general principles of
law. The fact that tax lawyers are specialists by no means
suggests they are isolated from other areas of law. Tax
laws cut across so many fields of law that a tax lawyer
inevitably must have considerable familiarity with the legal
principles governing other fields of law. Perhaps
Dean Griswold best expressed this point when he wrote:
"... this argument represents a complete misconception
of the tax field. It is high time the tax lawyers rise
up to defend themselves against the charge that tax
work is narrow and stifling. On the contrary, it seems
difficult to find a field which leads practitioners
more widely through the whole fabric of the lav/ ....
He must be broad in his background and broad in his
outlook, if he is to deal effectively with the manifold
problems which make up the field of modern tax law."
Griswold, "The Need for a Tax Court of Appeals",
57 Harvard Law Review 1153, at 1183-84 ("1944).

- 7In any event, designation of the remainina judges on
the Court of Tax Appeals from among the judges of the Circuit
Courts of Appeals should provide adequate assurance that the
quality of decision making will not suffer as the result of
undue specialization.
We are not alone in recommending that a national court
of tax appeals would be best served by the assignment of a
permanent body of judges. An informal poll of the members
of the Section of Taxation of the American Bar Association
taken in May of 1979 favored the assignment of permanent
judges to a national court of tax appeals by a vote of 105
to 37. Similarly, the Commission on Revision of the Federal
Court Appellate System rejected a rotating panel of judges
from the circuit courts in making its recommendations for a
National Court of Appeals:
"Temporary service on a rotating basis by federal
appellate judges sitting on assignment from their
respective courts would, in the Commission's view,
be even more undesirable. A court so composed would
lack the stability and continuity that are essential
to the development of national law .... We note,
too, the difficulty of devising a satisfactory process
for selecting the judges to be assigned. Finally,
should the rotation be relatively rapid, the circuits
would be asked to bear the burden of vacancies and
other deterrents to the smooth functioning of those
courts." Proposed revision of Appellate System,
Commission on Revision of the Federal Court Appellate
System, 67 F.R.D. 195, at 237-238 (1975).
We also see no reason for the rigid geographical
allocation of judgeships required by ,S. 1691. It is important,
of course, to have a diversity of background and viewpoint
represented on the court. We believe, however, that the
judicial selection process will assure a bench that is both
diverse and of high quality.
Court of Claims. The current system for judicial
resolution of tax disputes allows taxpayers to choose among
three trial forums — the United States District Courts, the
United States Tax Court or the United States Court of
Claims. Decisions by the District Courts and the Tax Court
are subject to intermediate appellate review by the Circuit
Courts of Appeals. On the other hand, cases decided by the
Court of Claims are subject to review only by the United
States Supreme Court by writ of certiorari — a rather rare
occurrence. This limited appellate review of the Court of

- 8Claims means its decisions in effect constitute a separate
body of tax law, enabling taxpayers to avoid adverse precedents
in the Courts of Appeals by litigating in the Court of
Claims.
The Court of Tax Appeals that would be established by
S. 1691 would have exclusive appellate jurisdiction over
decisions of the Tax Court and District Courts, but would
not have any jurisdiction over the tax decisions of the
Court of Claims.* Thus, under S. 1691 well-advised taxpayers
will be able to avoid the effect of decisions of the Court
of Tax Appeals by litigating in the Court of Claims.
We believe that much of the benefit to be derived from
a centralized review of tax cases would be lost if no
intermediate appeals were allowed from the tax decisions of
the Court of Claims, and strongly recommend that S. 1691 be
amended to subject the decisions of the Court of Claims to
review by the Court of Tax Appeals. Otherwise, much of the
delay, uncertainty and disparate treatment that occurs under
present law will not be remedied by S. 1691.
Indeed, we believe that the absence of effective review
of Court of Claims decisions should not be allowed to continue
even if S. 1691 is not enacted.** One solution to this
problem is provided by S. 1477, a companion bill to S. 1691,
which was passed by the Senate on October 30, 1979. S. 1477
would replace the Court of Claims with a new United States
Claims Court and would provide for appellate review of the
tax decisions of that court by the appropriate Circuit
Courts of Appeals. While S. 1477 responds to the need for
* This may be explained by the fact that at the time S. 1691
was reported by the Senate Committee on the Judiciary
a companion bill, S. 1477, replaced the Court of Claims
with a new Claims Court that did not have any jurisdiction
over tax matters. Thus, it was not necessary for S. 1691
to give the new Court of Tax Appeals jurisdiction over
tax issues decided by the new Claims Court. However, S.
1477, as passed by the Senate, has been amended to reinstate
jurisdiction over tax issues in the new Claims Court.
Therefore, the question of appellate review of Claims
Court decisions by the new Court of Tax Appeals must be
addressed.
**We believe it is appropriate to defer consideration of
whether Court of Claims trial jurisdiction over tax issues
should be eliminated until there has been a comprehensive
review of the present system for the trial of ta^ cases.

- 9appellate review of tax cases decided by the new Claims
Court in the absence of a single court of appeals, its
procedure for review of the decisions the new Claims Court
would not be desirable if S. 1691 were enacted. If the
Court of Tax Appeals were established under S. 1691, we
believe it is essential that the decisions of the Court of
Claims (or the new Claims Court) be reviewed by the new
Court of Tax Appeals in the same manner it reviews decisions
of the Tax Court and District Courts.
- 0-

:ederal financing bank
WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

November 2, 1979

FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank (FFB),
announced the following activity for September 1-30, 1979.
Guarantee Programs
During September, FFB entered into foreign military sales
loan agreements with the following governments:
Date Signed

Government

Amount

9/5/79
Panama
1,000,000.00
9/5/79
Thailand
30,000,000.00
9/18/79
Philippines
15,600,000.00
9/19/79
Israel
200,000,000.00
9/22/79
Colombia
12,500,000.00
9/22/79
Spain
120,000,000.00
9/24/79
Kenya
10,000,000.00
9/24/79
Malaysia
7,500,000.00
9/27/79
Peru
5,000,000.00
9/28/79
Morocco
5,000,000.00is
Repayment of advances
made under these loan agreements
guaranteed by the Department of Defense under the Arms Export
Control Act. Also during September, FFB made 33 advances
totalling $174,828,245.76 to 16 governments under existing DODguaranteed foreign military sales loan agreements.
Under notes guaranteed by the Rural Electrification Administration (REA), FFB advanced a total of $172,502,000 to 26
rural electric and telephone systems. Also, as of September 30
REA issued to FFB a 30-year, 9.425% Certificate of Beneficial
Ownership in the amount of $302,225,000.
FFB provided Western Union Space Communications, Inc.,
with $500,000 on September 4 and $7,900,000 on September 20.
These advances mature October 1, 1989, and carry interest rates
of 9.749% and 9.839%, respectively. Interest is payable on
an annual basis. This loan will be repaid by NASA under a
satellite procurement contract with Western Union.
M-172

2 FFB purchased the following General Services Administration
public buildings interim certificates:
Interest
Maturity
Amount
Date
Series
Rate
9 398%
7/31/03
$4,031,203.04
9/11
M-050
9 396 %
11/15/04
203,248.04
9/14
L-058
9.409%
7/31/03
89,748.97
9/26
M-051
9.417%
7/15/04
967,936.70
9/28
K-024
Under the Department of Housing and Urban Development
Section 108 Block Grant Program, FFB advanced funds to the
following cities:
Interest
Maturity
Amount
Date
Rate
Toledo, Ohio
Kansas City, MO

9/13
9/19

$500,000
200,000

7/15/80
6/15/80

11.363?
11.295%

On September 19, FFB purchased a total of $10,570,000 in
debentures issued by 11 small business investment companies.
These debentures are guaranteed by the Small Business Administration, mature in 3, 5, 7 and 10 years, and carry interest rates
of 9.925%, 9.615%, 9.585% and 9.545%, respectively.
Department of Transportation (DOT) Guarantees
FFB provided the following amounts to the National Railroad
Passenger Corporation (Amtrak) under lines of credit maturing
October 1, 1979.
Interest
Date
Note
Amount
Rate
9/6
20
$ 6,000 ,000,,00
10 609%
9/11
20
3,000,,000,,00
11 124%
9/12
20
5,000 ,000 .00
11 016%
9/14
20
5,138 ,364,,00
11 066%
9/14
18
3,861 ,436 .00
11 066%
9/17
18
13,000 ,000,,00
10 933%
9/20
18
5,500 ,000 .00
9/25
18
10 748%
5,000 ,000. 00
9/27
18
3,000 ,000,,00
10 544%
9/28
18
8,000 ,000,,00
10 769%
10 831%
FFB advanced $5 million to the Trustee of the Chicago,
Milwaukee, St. Paul § Pacific Railroad under a $20 million
credit guaranteed by DOT pursuant to Section 3 of the Emergency
Rail Services Act. The advance carries an interest rate of
9.445% and matures September 12, 1994.

- 3Under notes guaranteed by DOT pursuant to Section 511 of
the Railroad Revitalization and Regulatory Reform Act of 1976,
FFB lent funds to the following railroads:
Interest
Date
Amount
Maturity
Rate
Chicago § North Western 511-78-3 9/12 $1,418,527.00 11/1/90 9.464%
Trustee of The Milwaukee Road
9/14
194,888.00
11/15/91
9.777%
FFB lent the United States Railway Association (USRA)
$1,380,000 on September 27 under Note #16. This advance matures
October 31, 1979 and carries an interest rate of 10.769%. Under
Note #13, FFB lent USRA $689,520 on September 28. Note #13,
which matures December 26, 1990, bears a fixed interest rate of
8.125% set in 1978.
Agency Issuers
On September 4, the Export-Import Bank sold FFB a $516
million note which matures September 1, 1989. Interest is
payable quarterly at a rate of 9.419%. This note refunded $410
million in maturing securities, and raised $106 million in new
cash.
FFB advanced $45 million to the Student Loan Marketing
Association (SLMA), a federally chartered private corporation.
FFB holdings of SLMA notes now total $1,275 million.
FFB purchased two Farmers Home Administration Certificates
of Beneficial Ownership during September. Interest is payable
annually.
Interest
Date
Amount
Maturity
Rate
9/7 $735,000,000 9/7/84 9.825%
9/24
400,000,000
9/24/84
9.783%
During September, the Tennessee Valley Authority sold FFB
the following notes:
Interest
Date
Note #
Amount
Maturity
Rate
106
$ 25,000,000
9/17
12/31/79
10.973%
107
620,000,000
9/28
12/31/79
10.844%
108
700,000,000
9/28
1/31/80
10.824%
Of the total $1,345 million borrowed, $195 million raised new
cash and $1,150 million retired maturing securities.

- 4On September 28, the United States Postal Service prepaid
a total of $365 million in principal against their Notes #3,
#7, and #9. On Note #3, $200 million in principal was prepaid
at a discount of $4,149,984.21. On Note #7, $140 million of
principal was prepaid at a discount of $2,922,554.41, while
$25 million in principal was repaid at a discount of $667,740.69
against Note #9.
FFB Holdings
As of September 30, 1979, FFB holdings totalled $64.2
billion. FFB Holdings and Activity Tables are attached.
# 0#

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)

Program

September 30, 1979

August 31, 1979

Net Change
(9/1/79-9/30/79)

Net Change-FY 1979
(10/1/78-9/30/79)

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank

195.0
106.6

$ 1,905.0
1,384.6

1,952.0
443.7

•365.0
2.1

-527.0
89.0

31,080.0
77.3
160.1
35.8
1,223.2
94.4

30,445.0
77.3
160.1
35.8
921.0
95.7

635.0
-0-0-0302.2
-1.3

8,805.0
20.3
-3.6
-4.3
585.2
-17.8

37.4
92.7
5,270.9
359.7
36.0
38.5
5.4
432.3
420.3
5,926.5
336.4
1,275.0
21.6
177.0

32.4
91.0
5,126.5
354.4
36.0
38.5
4.7
368.8
411.9
5,754.0
325.8
1,230.0
21.6
177.0

5.0
1.6
144.4
5.3
-0-00.7
63.5
8.4
172.5
10.6
45.0
-0-0-

19.9
56.9
1,293.0
89.5
-0- 05.4
-102.1
183.8
1,734.9
85.8
530.0
-0.2
-0-

$ 7,125.0
7,952.9

$ 6,930.0
7,846.3

1,587.0
445.7

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Fanners Home Administration
DHEW-Health Maintenance Org. Loans
DHEW-Medical Facility Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government Guaranteed Loans
DOT-Emergency Rail Services Act
DOT-Title V, RRRR Act
DOD-Foreign Military Sales
General Services Administration
Guam Power Authority
DHUD-New Communities Admin.
DHUD-Community Block Grant
K)
Nat11. Railroad Passenger Corp. (AMTRAK)
NASA
Rural Electrification Administration
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
WATA
TOTALS

Federal Financing Bank

$64,211.0*

$62,879.5

$1 ,331.5*

$16,133.4*

October 29, 1979
^"Totals do not add due to rounding.

FEDERAL FINANCING BANK
September 1979 Activity
:

:
: DATE :

BORROWER

AMOUNT
OF ADVANCE

: MATURITY

INTEREST:
RATE :

INTERhSl
PAYABLE
(other than s/a)

Department of Defense
Thailand #2
Thailand #3
Egypt #1
Liberia #4
Jordan #2
Jordan #3
Turkey #7
Jordan #3
Colombia #2
Israel #7
Spain
#1
XT
Spain #2
Turkey #7
Taiwan #9
Tunisia #4
Israel #7
Jordan #2
Jordan #3
Lebanon #2
Liberia #4
Turkey #2
Turkey #4
Turkey #6
Turkey #7
Korea #9
Egypt #1
Greece #10
Greece #11
Thailand #7
Turkey #6
Turkey #7
Honduras #4
Jordan #3

9/10
9/10
9/10
9/11
9/13
9/13
9/13
9/13
9/13
9/14
9/14
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/17
9/20
9/24
9/24
9/24
9/24
9/24
9/24
9/28
9/28

416,885.89
202,524.00
75,100,000.00
3,735.62
1,174,164.00
110,600.00
689,000.00
57,733.20
958,143.68
26,828,664.99
1,193,891.11
8,741,628.79
1,343,751.00
1,900,000.00
4,035,674.48
1,000,000.00
856,808.92
1,134,210.00
2,196,097.00
718,087.00
1,985,914.53
2,815,136.00
4,881,027.94
4,200,000.00
100,000.00
19,678,225.00
2,008,816.07
1,568,595.00
2,695,445.00
109,679.00
2,843,637.00
426,860.00
84,141.30

6/30/83
9/20/84
9/1/09
10/30/84
11/26/85
12/31/86
6/3/91
12/31/86
9/20/84
12/15/08
6/10/87
9/15/88
6/3/91
7/1/86
10/1/85
12/15/08
11/26/85
12/31/86
4/15/86
10/30/84
10/1/86
10/1/87
6/3/88
6/3/91
6/30/87
9/1/09
2/1/89
5/10/89
8/25/86
6/3/88
6/3/91
5/4/84
12/31/86

9/4

516,600,000.00

9/1/89

9/7

735,000,000.00
400,000,000.00

9/13
9/19

9/4
9/4
9/5
9/6

9.862%
9.743%
9.36%
9.842%
9.794%
9.737%
9.536%
9.760%
9.848%
9.385%
9.671%
9.618%
9.492%
9.777%
9.816%
9.369%
9.748%
9.688%
9.666%
9.837%
9.699%
9.656%
9.630%
9.482%
9.673%
9.340%
9.585%
9.565%
9.706%
9.628%
9.465%
10.017%
9.813%

Export-Import Bank

#21

9.53%

9.419% quarterly

9/7/84
9/24/84

9.595%
9.555%

9.825% annually
9.783%

500,000.00
200,000.00

7/15/80
6/15/80

11.095%
11.295%

11.363% annually

9/11
9/14
9/26
9/28

4,031,203.04
203,248,04
89,748.97
967,936.70

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

9.398%
9.396%
9.409%
9.417%

Cert, of Beneficial Ownership

9/30

302,225,000.00

9/30/09

9.425%

United Power #67
United Power #129

9/6

4,100,000.00
3,700,000.00

9/6/81
9/6/81

10.195%
10.195}

Chuoarh

o in

Farmers Home Administration
Certificate of Beneficial
Ownership

9/24

Department of Housing § Urban Development
Section 108 Block Grant
Toledo, Ohio
Kansas City, Missouri

General Services Administration
Series
Series
Series
Series

M-050
L-058
M-051
K-024

Rural Electrification Administratiorl

PI <a<-1"r-i/~ U Q?

9/6

10 /'41 / 1 7 /

10.068% quarter1

MHWf
8 nAQ$\.

FEDERAL FINANCING

BANK

September 1979 Activity
Page 2
MATURITY

INTEREST:
RATE :

2,222,000.00
4,775,000.00
7,330,000.00
2,841,000.00
3,804,000.00
23,000,000.00
3,700,000.00
50,000,000.00
2,184,000.00
250,000.00
7,061,000.00
15,000,000.00
750,000.00
2,742,000.00
228,000.00
1,910,000.00
288,000.00
1,350,000.00
767,000.00
8,623,000.00
250,000.00
1,100,000.00
336,000.00
155,000.00
205,000.00
10,000,000.00
306,000.00
1,100,000.00
869,000.00
150,000.00
7,969,000.00
1,783,000.00

9/10/81
9/10/81
9/30/81
9/10/82
12/31/13
12/31/13
9/12/81
9/14/82
9/14/81
9/17/81
9/18/81
9/18/81
9/18/81
9/20/81
9/20/81
9/20/81
9/20/81
9/20/81
12/31/13
12/31/13
9/25/81
9/26/81
8/31/86
9/28/81
9/28/81
9/27/81
12/31/13
12/31/13
9/28/81
12/31/13
8/31/86
12/31/13

10.275%
10.275%
10.235%
9.865%
9.371%
9.388%
10.175%
9.875%
10.275%
10.195%
10.305%
10.305%
10.305%
10.255%
10.255%
10.255%
10.255%
10.255%
9.356%
9.308%
10.185%
10.185%
9.545%
10.185%
10.185%
10.195%
9.396%
9.396%
10.285%
9.425%
9.635%
9.343%

500,000.00
4,000,000.00
750,000.00
170,000.00
500,000.00
2,000,000.00
400,000.00
375,000.00
375,000.00
500,000.00
500,000.00
500,000.00

9/1/82
9/1/82
9/1/82
9/1/84
9/1/84
9/1/86
9/1/86
9/1/86
9/1/89
9/1/89
9/1/89
9/1/89

9.925%
9.925%
9.925%
9.615%
9.615%
9.585%
9.585%
9.585%
9.545%
9.545%
9.545%
9.545%

9/11
9/18
9/25

1,220,000,000.00
1,250,000,000.00
1,250,000,000.00
1,265,000,000.00

9/11/79
9/18/79
9/25/79
10/2/79

10.40%
11.124%
10.933%
10.544%

9/17
9/28
9/28

25,000,000.00
620,000,000.00
700,000,000.00

BORROWER

AMOUNT
OF ADVANCE

DATE

Rural Electrification Administration
(continued)
Wolverine Electric #100
Dairyland Power #54
Allegheny Electric #93
Northern Michigan Elect. #101
Wabash Valley Power #104
Western Farmers Electric #133
Colorado-Ute Electric #78
Cajun Electric Power #76
Western Illinois Power #99
Somerset Telephone #33
East Kentucky Power #73
Associated Electric #132
Medina Electric #113
Big Rivers Electric #58
Big Rivers Electric #65
Big Rivers Electric #91
Big Rivers Electric #136
United Power Assn. #86
Gulf Telephone #50
Chugach Electric #82
M § A Electric Power #111
East Ascension Telephone #39
Tri-State Gen. § Trans. #79
South Mississippi Elect. #3
South Mississippi Elect. #90
San Miguel Electric #110
Elmore-Coosa Telephone #46
Arizona Electric Power #60
Basin Electric Power #88
Doniphan Telephone #14
Tri-State Gen. § Trans. #89
Wabash Valley Power #104

9/10
9/10
9/10
9/10
9/10
9/11
9/12
9/14
9/14
9/17
9/18
9/18
9/18
9/20
9/20
9/20
9/20
9/20
9/20
9/24
9/25
9/26
9/26
9/26
9/26
9/27
9/27
9/27
9/28
9/28
9/28
9/28

INTEREST
PAYABLE
(other than s/a)

10.146% quarterly
10.146%
10.107%
9.746%
9.264%
9.28%
10.049%
9.756%
10.146%
10.068%
10.176%
10.176%
10.176%
10.127%
10.127%
10.127%
10.127%
10.127%
9.249%
9.202%
10.059%
10.059%
9.434%
10.059%
10.059%
10.068%
9.288%
9.288%
10.156%
9.343%
9.522%
9.221%

Small Business Investment Companies
Capital for Terrebonne, Inc.
First Dallas Capital Corp.
North Star Ventures, Inc.
Northwest Business Invest. Corp.
Southwest Capital Invest. Inc.
Charles River Resources, Inc.
Enervest, Inc.
First Capital Corp.
First Capital Corp.
First Idaho Venture Cap. Corp.
Fundex Capital Corp.
Trans-Am Bancorp, Inc.

9/19
9/19
9/19
9/19
9/19
9/19
9/19
9/19
9/19
9/19
9/19
9/19

Student Loan Marketing Association
Note
Note
Note
Note

#212
#213
#214
#215

9/4

Tennessee Valley Authority
Note #106
Note #107
Note #108

12/31/79 10.973%
12/31/79 10.844%
a/31/80 10.824%

FEDERAL FINANCING

BANK

September 1979 Activity

BORROWER

Page 3
:
:
: DATE :

AMOUNT
OF ADVANCE

Department of Transportation

:
: INTEREST:
INTEREST
: MATURITY : RATE :
PAYABLE
(other than s/a)

Emergency Rail Services Act
7/12/94

9.445%

1,418,527.00
194,888.00

11/1/90
11/15/91

9.464'
9.549^

9/11
9/12
9/14
9/14
9/17
9/20
9/25
9/27
9/28

6,000,000.00
3,000,000.00
5,000,000.00
5,138,364.00
3,861,436.00
13,000,000.00
5,500,000.00
5,000,000.00
3,000,000.00
8,000,000.00

10/1/79
10/1/79
10/1/79
10/1/79
9/28/79
9/28/79
9/28/79
9/28/79
9/28/79
10/1/79

10.609%
11.124%
11.016%
11.066%
11.066%
10.933%
10.748%
10.544%
10.769%
10.831%

9/28

1,380,000.00
689,520.00

10/31/79
12/26/90

10.769%
8.125%

500,000.00
7,900,000.00

10/1/89
10/1/89

9.522%
9.608%

Trustee of The Milwaukee Road #2 9/20 $ 5,000,000.00
Section 511
Chicago $ North Western 511-78-3
Trustee of The Milwaukee Road

9/12
9/14

9.777% annually

National Railroad Passenger Corp.
(Amtrak)
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note

#20
#20
#20
#20
#18
#18
#18
#18
#18
#18

9/6

United States Railway Association
Note #16 9/27
Note #13

Western Union Space Communications, Inc.
(NASA)
"
9/4
9/20

9.749% annually
9.839%

MEMORANDUM TO THE PRESS
Friday, November 2, 1979

For your information, the White House today released
the following statement:
The President applauds the Thursday night Senate action
which would give an important break to small savers. The
bill approved by the Senate contains major recommendations
that the President submitted to Congress in May.
The President proposed and now, under the leadership of
banking committee chairman Senator William Proxmire, the
Senate has agreed that major deregulatory reforms in the
financial area are needed: the phase-out of federally-imposed
deposit interest ceilings that limit the interest that savers
earn on their savings accounts; the reversal of an appellate
court decision that would have prohibited the pro-consumer
automatic transfer system; and the validation nationwide of
pro-consumer NOW accounts and share draft accounts at credit
unions.
"The Senate has taken a significant step," the President
said, "to provide equity for savers in our country and to assist
depository institutions in competing more effectively for funds."
The President urged that the House-Senate conference committee
members "act promptly to return to both houses for final approval
legislation that will provide this critically important relief
to small savers."
#

M-173

parlmentoftheTREASURY
SHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

November 5, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,100 million of 13-week bills and for $3,100 million of
26-week bills, both to be issued on November 8, 1979,
were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing February 7, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing May 8, 1980
Discount Investment
Price
Rate
Rate 1/

96.954
96.930
96.942

93.902
93.886
93.890

12.050%
12.145%
12.098%

12.64%
12.74%
12.69%

12.062%
12.094%
12.086%

13.06%
13.10%
13.09%

Tenders at the low price for the 13-week bills were allotted 2%.
Tenders at the low price for the 26-week bills were allotted 82%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands])
Received
Accepted
Received
$
42,775 $
42,775 ::
$
45,525
3,625,805
2,476,305 :
4,247,680
31,690
31,690 •
18,940
38,960
38,960 :•
24,115
47,745
47,745 :
63,320
44,800
44,790 :
35,025
312,450
171,450 ;
303,490
67,480
35,480 :
46,920
16,945
16,945 •
13,450
39,390
39,390 :•
29,775
:
15,600
15,600 •
12,155
:
225,310
95,410 248,595
43,505
43,505 :
59,850

Accepted
$
40,525
2,653,770
18,860
24,115
33,110
32,525
87,990
14,920
7,450
28,525
12,155
86,415
59,850

$4,552,455

$3,100,045

$3,100,210

$2,709,565
632,570

$1,257,155
632,570

:
:

$3,086,545
489,195

$1,037,915
489,195

$3,342,135

$1,889,725

$3,575,740

$1,527,110

Federal Reserve
and Foreign Official
$1,210,320
Institutions

$1,210,320

$1,573,100

$4,552,455

$3,100,045

•

$5,148,840

$3,100,210

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

$5,148,840

Type
Competitive
Noncompetitive
Subtotal, Public

TOTALS

1/Equivalent coupon-issue^yield,

partmentofthtTREASURY
TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

November 5, 1979

High
Low
Average

13-week bills
maturing February 7, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing May 8, 1980
Discount Investment
Price
Rate
Rate 1/

96.954
96.930
96.942

93.902 12.062% 13.06%
93.886
12.094%
13.10%
93.890
12.086%
13.09%

12.050%
12.145%
12.098%

12.64%
12.74%
12.69%

Tenders at the low price for the 13-week bills were allotted 2%.
Tenders at the low price for the 26-week bills were allotted 82%.
TENDERS RECEIVED AND ACCEPTED
l. X « - Tl • i. •

DATE: November 5, 197 9

Received

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

$
42,775
3,625,805
31,690
38,960
47,745
44,800
312,450
67,480
16,945
39,390
15,600
225,310
43,505

TOTALS

$4,552,455

—

13--WEEK

2 6-WEEK

/z ,o9f%

TODAY:

L A S T TvEEK:

/z.Z^6%

IP, ha -

EIGHEST

SINCE

Type
Competitive
Noncompetitive
Subtotal, Public

$2,709,565
632,570
$3,342,135
LO'wEST S I N C E :

Federal Reserve
and Foreign Official
Institutions
$1,210,320
TOTALS $4,552,455
1/Equivalent coupon^sgue^yield.

/<V/5//7

ll> 7/6
//.?3t,°/t a

For Release on Delivery
Expected Around 1 P.M., EST
Monday, November 5, 1979
REMARKS BY
THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
NATIONAL JOURNAL TAX CONFERENCE
WASHINGTON, D.C.
NOVEMBER 5, 1979
It is a pleasure for me to participate in the National
Journal Tax Conference. This forum offers an important
opportunity to review our tax system, always a useful
exercise. While it would seem premature for me to prescribe
a specific blueprint for tax policy of the 1980,s, it is
timely to suggest a framework for discussion of the critical
tax questions the nation will be facing in the years ahead.
GUIDELINES FOR TAX POLICY
Any thoughtful consideration of the tax system must be
shaped by economic realities. As the 1980's begin, inflation
will continue to be our most pressing domestic concern. Its
impact is felt first hand by all Americans. Inflation
erodes the value of a worker's wages and a business1 profits.
It endangers jobs and impairs investments. Clearly, inflation
poses a serious threat to the quality of life in this
country.
The Administration is firmly committed to waging a
vigorous battle against inflation. But the battle will not
be won quickly or easily. Building up over the past 15
years, inflation has become deeply embedded in the economy.
A successful anti-inflation effort will therefore require a
comprehensive, sustained attack on fundamental causes. Tax
policy can and should play an important role in that effort.
Fiscal discipline is a major weapon in the war against
inflation. An inflation-conscious tax policy must therefore
be developed with a keen eye on the Federal budget. During
the past 3 years, the Federal deficit has been reduced from
4 percent of GNP to 1 percent of GNP. The 1979 deficit of
$27.7 billion is the smallest since fiscal year 1974. Any
proposed tax reduction should be analyzed in terms of its
M-175 on the objective of moving toward a balanced budget.
impact

- 2 Economic progress with price stability is also critically
dependent upon improvement in the rate of savings and
investment in the private sector. Sluggish savings and
investment performance over the past several years has
contributed to a marked slowing of productivity growth — a
trend that has, in turn, contributed to spiraling wage and
price adjustments. Tax policy cannot ignore these developments; it must be shaped to promote job-creating investment
and to restrain business costs.
These tax policy guidelines are demanding. Discipline
in fiscal policy limits the opportunity for a general tax
cut in the immediate future. And, should it become appropriate
to consider more narrowly focused tax reductions, an austere
budget requires that tax proposals be fashioned with extreme
care. The only acceptable tax policy is one that contributes
to our overall economic goals efficiently, fairly and simply.
DISCUSSION OF SPECIFIC PROPOSALS
Specific illustrations may be helpful. Among the items
listed on this conference's agenda are proposals to accelerate
recovery of capital costs, to provide special tax benefits
for individual savers, and to reduce social security taxes.
Each of these proposals has been advanced as a potential
response to the nation's economic needs; each should be
evaluated with reference to the tax policy guidelines just
outlined.
Liberalized Depreciation
Liberalized depreciation is the investment incentive
proposal currently receiving most public attention. An
example is the so-called "10-5-3" bill, which would restructure
the system of tax allowances for capital recovery. Under
this bill, nonresidential buildings could be written off
over a 10-year period, most equipment over a 5-year period,
and a limited amount of expenditures for cars and light
trucks over a 3-year period. Accelerated depreciation
methods would continue to be allowed, and the investment
tax credit would be favorably modified.
There is widespread agreement with the major premises
underlying 10-5-3. The depreciation system should be
simplified so that all businesses, large and small, can
readily comply with tax rules. The present system also
provides too little incentive for capital investment during
periods of high inflation and financial uncertainty; liberalized
depreciation allowances should certainly be given prime
consideration when a tax reduction is appropriate.

- 3 However, in evaluating the specifics of any depreciation proposal, one must not lose sight of the objective
of providing incentives that are as efficient and fair as
possible. Such an assessment reveals some shortcomings in
the 10-5-3 proposal. However, these shortcomings could be
rectified without sacrificing the basic objectives.
Revenue cost is one concern. The tax cut proposed by
10-5-3 is generous. When combined with a full 10 percent
investment credit, the 5-year write off for machinery is
more advantageous than immediate expensing. The budgetary
implications of such a change are troublesome.
Another cause of concern is the effect of 10-5-3 on
various sectors of the economy. The investment tax incentive
would vary widely among industries. For example, based on
Treasury Department projections, the tax reduction per
dollar of investment would be 4.4 percent for the construction
industry, 8 percent for motor vehicle manufacturers, 18.5
percent for the communications industry and 25.7 percent for
gas utilities and pipelines.
There is no discernible relationship between the amount
of tax incentive and the relative need for improved productivity
performance. For example, the communications industry,
which has experienced about 9 percent average annual productivity
growth from 1973 through 1978, would be among the most
favored industries under 10-5-3. The construction industry,
which has experienced an actual decline in economic growth
during that period, would be among the least favored.
The 10-5-3 formula would also provide a fertile ground
for the formation of "tax shelters". High-bracket taxpayers
could be expected to seek investments with the largest tax
writeoffs. This would tend to increase inequities in the
tax system, and at the same time divert investment funds
from industries most in need of capital.
Analysis of capital recovery proposals should also
involve consideration of expenditures mandated by Government,
such as those for pollution control equipment. Recent data.
indicate that about 5 percent of all capital expenditures
are devoted to abatement of pollution. While such expenditures
are necessary for the welfare of the public, they do not add
directly to production.

- 4Some non-productive expenditures are now subsidized by
the Government through special tax provisions. Others are
borne by the consumers of the product, through higher
product costs, and not by taxpayers generally. This allocation issue involves fundamental questions of economic and
social policy — questions that the Treasury Department is
currently addressing in a study, requested by Congress, on
the appropriate tax treatment of mandated expenditures.
Savings Incentive for Individuals
Tax policy for the next decade must be concerned with
the economic decisions of individuals as well as businesses.
Individual Americans are consuming too much and saving too
little. The nation's personal savings rate is now just
over 4 percent of disposable income, the lowest rate in
nearly 3 0 years. This disappointing rate has contributed to
lagging productivity. For this reason, various tax incentives
for savings have been suggested.
However, proposals for such tax incentives must be
approached with caution. A delicate balance of competing
considerations is required. On the one hand, the revenue
loss of any proposal would have to be within reasonable
bounds. On the other hand, an effective savings incentive
would need to be applied broadly enough to provide a real
inducement for increased savings and not merely a windfall
for existing savers.
Consider current Congressional proposals to exempt a
certain level of interest income — ranging generally from
$100 to $500. It is doubtful whether these proposals would
have any appreciable impact on aggregate savings. A tax
reduction would be available to individuals for savings
activities they would already be inclined to perform; at
most, such an incentive might result in an unproductive
reshuffling of existing investments.
Problems of tax equity also weigh heavily in the
consideration of individual tax policy. A tax exemption
creates disparate tax savings, depending upon the particular
rate bracket of the taxpayer. Incentives for individual
savings should be structured to minimize this inequity.
Yet, in the final analysis, the best incentive for
individual savings may not lie within the tax system. Small
savers now receive low interest rates because of deposit

- 5 interest rate ceilings imposed under Federal law. The
Financial Institutions Reform Act proposed by the
Administration would phase out the interest ceilings set
forth in regulation Q. The Senate version passed the
Senate last week. Reliance upon the private market system
to enhance the return on savings would seem to be desirable,
providing incentive without specially tailored tax breaks.
Payroll Tax Reduction
A third proposal — a possible reduction in Federal
payroll taxes — would affect both individuals and businesses.
In 1981, the combined social security tax rate for employers
and employees is scheduled to rise from the current 12.26
percent to 13.30 percent, and the wage base is scheduled to
increase from $22,900 to $29,700. The total tax increases
are estimated at about $]8 billion. Some have recommended
that these scheduled increases be trimmed back or eliminated.
A payroll tax cut does have attractive features. A
reduction for employers would have the effect of reducing costs
and thus prices. It would also be more progressive for
individuals than almost any income tax reduction.
Yet, such a reduction would require alternate funding
for future benefits. A schedule of payroll tax increases
was adopted in 1977 for good reason: to protect the integrity
of the social security trust funds. To allow for a payroll
tax cut and still provide proper financing, one proposed
alternative is a value added tax. Such a tax has farreaching implications that will begin to be explored in
Congressional hearings this week. The hearings should
develop comparisons of the VAT, the income tax and the
social security tax in terms of impact on the economy and on
the equity and simplicity of the tax system.
CONCLUSION
As the discussion of specific tax proposals suggests,
there are many constraints on tax policy decisions. During
the period ahead there must be a special concern for the
efficient use of our limited economic resources. Budgetary
discipline is essential.
One aspect of budget policy has received extensive
public attention. There seems to be a consensus that closer
budgetary control should be exercised over Government
spending. There is a concern that Government resources are
being wasted — and Federal deficits expanded — through
inefficient spending programs.

- 6The same sense of public concern should extend to the
other side of the Federal ledger — to the tax system. The
tax system is now doing much more than just collecting
revenues to pay for spending programs. The Internal Revenue
Code is becoming, in itself, an unwieldy network of Government spending programs.
The Federal Government has two basic means by which it
can carry out its social programs. It can do so directly,
such as by making grants or loans, or it can do so by
reducing liabilities otherwise owed to the Government. The
two methods are economically equivalent; a potential recipient
can be provided the same amount of aid using either method.
When aid is provided through the reduction of tax liabilities,
the special reduction is referred to as a "tax expenditure."
The Congressional Budget Act of 1974 requires a listing
of tax expenditures in the budget. There are now over 90
different tax expenditure programs. For fiscal year 1980,
the aggregate revenue cost attributable to tax expenditures
will exceed $150 billion.
Such a substantial portion of the budget must be subject
to accountability. If the tax system is to be used to
encourage savings and investment, the American public has
the right to demand that the tax cuts be designed to accomplish
the job efficiently. Likewise, housing, welfare, energy,
agriculture, and a myriad of other programs effected through
the tax code must be subjected to budget scrutiny. Where
these tax programs are inefficient, unduly complicated or
inequitable, they should be modified or repealed. Efforts
to eliminate Government waste, reduce budget deficits and
rationalize Federal programs must not end with an examination
of direct Government spending.
The Federal tax system is, in many respects, the envy
of other nations. Government revenues are collected primarily
through a system of self-assessment with a minimum of
Government involvement. The Internal Revenue Service has a
reputation for integrity. The tax burden is generally
imposed fairly in accordance
with ability to pay. But the
O 0 °
system can be improved. In the coming years, the challenge
must be accepted — in the name of good tax policy and of
good budget policy.

entoftheJREASURY
HINGTQN, D.C. 20220

TELEPHONE 566-2041

CONTACT: Charles Arnold
202/566-2041

IMMEDIATE RELEASE
Saturday, November 3

STATEMENT BY SECRETARY OF THE TREASURY
G. WILLIAM MILLER
No one can doubt President Certer's position on the
windfall profits tax. He is determined and has worked
diligently to see that the oil industry does not reap unfair
windfall profits at the public's expense. The President has
stated repeatedly since he proposed the tax that the Congress
should pass a windfall profits tax at levels no lower than
his proposals. The House bill meets that criterion. While
the Senate Finance Committee has recommended a tax which will
produce less revenue, the President has made it clear that
he expects the tax to be strengthened on the Senate floor and
ultimately to be enacted in a form close to his proposals.
I hope Senator Kennedy will work in the Senate to help
us achieve the goal for a windfall profits tax which he
obviously shares with the President.
#

M-176

FOR IMMEDIATE RELEASE
November 5, 1979

Contact:

John P. Plum
202/566-2615

TREASURY ANNOUNCES INTEREST RATES ON DEUTSCHE MARK NOTES
The Department of the Treasury today announced that
the interest rates on its two and one-half year and three
and one-half year notes denominated in Deutsche Mark are
8.55% and 8.50% respectively. The notes are priced at par.
Interest shall be paid annually on the redemption date.
As announced earlier, the Treasury is offering notes
denominated in Deutsche Mark in an aggregate ammount up
to Deutsche Mark 2.0 billion. The notes are being offered
to residents of the Federal Republic of Germany. Subscriptions will be received by the German Bundesbank,
acting as agent on behalf of the United States, until 12:00
noon, Frankfurt time, on Tuesday, November 6.

o 0 o

M-177

FOR RELEASE AT 3:00 P.M.

November 5, 1979

TREASURY OFFERS $2,000 MILLION OF 167-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $2,000 million of 167-day
Treasury bills to be issued November 9, 1979, representing ah
additional amount of bills dated October 25, 1979, maturing
April 24, 1980 (CUSIP No. 912793 4B 9 ) .
Competitive tenders will be received at all Federal
Reserve Banks and Branches up to 12:30 p.m., Eastern Standard
time, Wednesday, November 7, 1979. Wire and telephone tenders
may be received at the discretion of each Federal Reserve Bank
or Branch. Each tender for the issue must be for a minimum w
amount of $1,000,000. Tenders over $1,000,000 must be in
multiples of $1,000,000. The price on tenders offered must be
expressed on the basis of 100, with not more than three
decimals, e.g., 99.925. Fractions may not be used.
Noncompetitive tenders will not be accepted. Tenders
will not be received at the Department of the Treasury,
Washington.
The bills will be issued on a discount* basis under
competitive bidding, and at maturity their par amount will
be payable without interest. The bills will be issued entirely
in book-entry form in a minimum denomination of $10,000 and in
any higher $5,000 multiple, on the records of the Federal
Reserve Banks and Branches.
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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect
positions held at the close of business on the day prior to the
auction. Such positions would include bills acquired through
"when issued" trading, and futures and forward transactions as
well as holdings of outstanding bills with the same maturity
date as the new offering; e.g., bills with three months to
maturity previously offered as six month bills. Dealers, who
M-17S

-2make primary markets in Government securities and report daily
to the Federal Reserve Bank of New York their positions in and
borrowings on such securities, when submitting tenders for
customers, must submit a separate tender for each customer whose
net long position in the bill being offered exceeds $200 million.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized
dealers in investment securities. 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 tenders 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. Settlement for accepted tenders in
accordance with the bids must be made or completed at the
Federal Reserve Bank or Branch in cash or other immediately
available funds on Friday, November 9, 1979.
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 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
may be obtained from any Federal Reserve Bank or Branch.

FOR IMMEDIATE RELEASE
November 5, 1979

Contact: Alvin Hattal
202/566-8381

TREASURY PROPOSES PROCEDURES TO MEASURE OIL IMPORTS
The Treasury Department today announced proposed new
standard procedures developed by the Customs Service to
monitor oil imports into the United States.
-* The new standard procedures were recommended by a special
task force on oil imports established by Commissioner of
Customs R. E. Chasen. The procedures are designed to insure
an Accurate measure of the quantity of oil imported, and will
provide a firm foundation for implementing the President's oil
import quota program.
a
The measurement process proposed by Customs involves
checks of both the amount of oil unloaded from ships and the
amount entering shore tanks or pipelines. The two amounts
cannot vary by more than one percent without an explanation
and possible penalties. In any case where a discrepancy exists,
th& amount determined by the shore tank gauge will be used for
statistical purposes, unless the discrepancy is greater than
one percent and not adequately explained. In that event, the
higher amount will be used.
Measurement of the amount of oil unloaded from ships is
done by ullaging -- determining the amount of oil in a vessel's
storage tank by measuring how much of the tank is empty. This
is done by dropping a plumb bob to the top of the oil in a tank
whose size is known.
Customs proposes that opening ullages be supervised by
a Customs officer. The opening ullage is the measurement which
establishes the content of the vessel and provides a benchmark
against which other measurements are compared. Closing ullages
would be supervised by a Custom officer whenever a vessel has
not completely discharged its cargo.
Ullages may be performed by company employees, ships' crew
members or by employees of firms providing ullaging and gauging
services by contract -- called public gaugers.
The measurement of oil entering shore tanks is performed
by an "opening gauge" of the amount of oil in the tank before

M-179

- 2 a delivery and a "closing gauge" of the amount in the tank
after the receipt of the new oil.
Under the proposal, Customs officers would witness all
shore tank gauges performed by employees of the importing
company or some related party. They would also check from
5 to 10 percent of the shore tank gauges conducted by public
gaugers to verify through this sampling the accuracy of the
public gaugers measurements. On the unusual occasions when
no vessel ullages are taken, Customs officers would witness
all shore tank gauges.
Under the proposal, Customs will step up its supervision
of public gaugers by strengthening its requirements and
conducting periodic audits concerning conflicts of interest,
record-keeping and training. Only the reports of public gaugers
approved by the Customs Service are acceptable by the Service.
Failure to comply with the strengthened requirements may result
in the suspension or revocation of the gauger's Customs approval
and the assessment of monetary or other penalties.
When tankers which are too large to enter U.S. ports unload
their cargoes into lighters, the lighters will be ullaged as y
though.they were vessels from a foreign port.
Exceptions to the ullaging policy will occur only wher
measurements cannot be taken because of safety or technological
considerations. These include the dangers arising from boarding
vessels in severe weather and the safety constraints on ullaging
certain vessels equipped to carry a layer of inert gas in their tanl
The Customs district director may order complete supervision by a Customs officer of measurements.whenever he or she
considers that other procedures are inadequate to insure accurate
data.
Oil entering the United States by pipeline will continue
to be measured by Customs officers taking, opening and closing
meter readings. All pipelines meters must be approved by
the Customs Service and checked periodically to insure that
they are accurately recording the amount of fluid passing through.
In addition, Customs officers will witness the taking of
samples of the incoming oil and Customs laboratories, as necessary
will analyze these samples for water content and specific
gravity. Separately, ullages are routinely adjusted for water
that has settled out of the oil and for variations in oil
temperature.

- 3 Of U.S. petroleum and petroleum product imports in 1978,
approximately 90 percent arrived by vessel through 10 major
areas, 9 percent came by pipeline and 1 percent by rail and
truck.
The proposed new standard policies in general reflect a
codification and standardization of existing practice in most
Customs Districts. A Customs survey begun in July found that
the existing measurement of oil imports was good but that
certain procedures varied from location to location. The
proposal would provide uniformity among the Customs Districts
and tighten control of oil imports through increased supervision of various gauging procedures.
The proposal will be implemented by the issuance of internal
Customs directives and the publication of amendments to the
Customs Regulations. A notice of proposed rulemaking setting
forth the necessary revisions to the Customs Regulations relating
to these procedures will be published for comment in the Federal
Register on November 7. Public comments on the proposal received
during the next 30 days will be considered before final procedures are adopted.

itockpile Information
November 5, 1979
FOR IMMEDIATE RELEASE

GSA #P-2551

The General Services Administration, in consultation with the Department
of the Treasury, today announced the award of a total of 1,250,000 fine troy
ounces of gold from U.S. Treasury stocks. The award consisted of gold of
899-0 to 917.0 fineness in approximately 300 ounce bars.

The sale of this material resulted from the sealed bid offering of
U.S. Treasury gold conducted at 11 a.m., Washington, D.C., time on
November 1. The gold was available from the U.S. Assay Office, New
York, New York.
The acceptable bids are as follows:

Firm
Bank Leu, Ltd.
New York, New York

Credit Suisse
Zurich, Switzerland
Dresdner Bank AG
"Jew York, ITe*r York

Approximat e
Fine Troy Ounces

Price Per
Fine Troy Ounce

1,200
2,1*00
2,^00
1,200
1,200
1,200
2,1+00
1,200
2,1+00
2,1+00
1,200
10,200

$378.12
376.78
375.68
37^-92
373.12
372.88
371.63
371.50
370.13
369-52
368.50
367.70

150,000
11,1+00

37^.00
370.00

39,000
39,000
39,000
39,000
39,000
39,000
39,000
39,000

37^.26
373.88
373.31
372.86
372.1+1
371.99
371.06
370.21

—M 0 R T^—

V \ I N U.S. General Services Administration - Central Office
C7KJK\l8tri & F Sts., N W , Washington, D C 20405 (202) 566-0512

Firm
E. F. Hutton & Co.
New York, New York
Gold Standard Corporation
Kansas City, Missouri

Approximate
Fine Troy Ounces

Price Per
Fine Troy Ounce

15,000

$37^.26

1,200

37^.80

Philipp Brothers
New York, New York

30,000
30,000
30,000

37^.10
373.10
372.10

Republic National Bank of
New York
New York, New York

3,000
3,000
3,000
15,000
15,000
15,000
15,000
15,000
15,000
9,900
15,000
15,000
15,000
9,900
19,800
15,800

376.50
375-75
375-00
37^.00
373.50
372.50
372.00
371.50
370.50
370.00
370.00
369 s50
368.50
368.00
367.50
365.50

Samuel Montagu, Inc.
New York, New York

2,1+00
1,500
3,000
2,1+00
3,000
1,500
2,1+00
3,900
2,1+00
3,900
5,100
7,500

376.50
375.50
375.20
375.00
37^.70
37^.50
371+.00
373.50
373.00
372.50
372.00
371.50

-••: O R E -

3.
Firm
Sharps, Pixley, Inc
New York, New York

Swiss Bank Corporation
Zurich, Switzerland

Approximate
Fine Troy Ounces

Price Per
Fine Troy Ounce

2,1+00
2,1+00
2,1+00
2,1+00
2,1+00
2,1+00
l+,800
l+,800
l+,800

$376.50
375.00
37^.00
373.50
373.00
372.50
372.00
371.50
371.00

10,200
10,200
21,000
10,200
33,000
l+,800
3,900
33,000
10,200
10,200
3,000
33,000
3,900
33,000
3,000
10,200
15,000
10,200
3,900
3,000
10,200
6,000
3,900
10,200

376.25
375.75
375.27
373.87
373.78
373.57
373.50
373.07
372.75
372.68
372.52
372.28
372.00
371.76
371.^7
371.27
370.87
370.75
370.50
369-95
368.75
368.10
368.00
367.75

-M 0 R E-

Approximat e
Fine Troy Ounces

Firm
Union Bank of Switzerland
Zurich, Switzerland

10,800
5,700
l+,800
l+,800
38,100
l+,800
l+,800
l+,800

* # # * * # * # # * * #

Price Per
Fine Troy Ounce
$377-10
37^.10
372.10
371.10
,370.10
369.10
368.10
367.10

FOR IMMEDIATE RELEASE
November 6, 1979

Contact:

John P. Plum
202/566-2615

TREASURY ANNOUNCES RESULTS OF DEUTSCHE MARK NOTE SALE

The Department of the Treasury today announced that
it is accepting a total of DM 2,005 million in subscriptions
for its issues of two and one-half year and three and one-half
year notes denominated in Deutsche marks. A total amount of
DM 3,892 million in subscriptions for these issues was received.
The Treasury accepted DM 8 08 million in subscriptions
for its two and one-half year notes. Total subscriptions
received for this issue were DM 1,548 million. In the case
of the three and one-half year notes, the Treasury accepted
DM 1,197 million in subscriptions. Total subscriptions
received for this issue were DM 2,344 million.
These acceptances represent allocations of 52 percent
of subscriptions for the two and one-half year notes and
51 percent for the three and one-half year maturity. In
each of the two maturities, allocations are being made on
a pro rata basis. Individual subscriptions of DM 100,000
and less are being accepted in full.
o 0 o

M-180

«HINGTON, D.C. 20220

TELEPHONE 566-2041
•n e,\n.u ^ h 34

ttiii3
t

;

ii IvJ

ThL»lw^1''' »-

For Release Upon Delivery
Expected at 10:15 a.m. E.D.T.

STATEMENT OF DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE COMMITTEE ON LABOR AND HUMAN RESOURCES
November 7, 1979

Mr. Chairman and Members of the Committee:
I am pleased to have the opportunity to appear before
you today to discuss S. 1089, "The ERISA Simplification Act
of 1979" introduced by Senator Bentsen.
Treasury supports the continuing effort to reduce the
overall paperwork burdens on plan administrators and
employers, consistent with the purpose of ERISA to provide
participants, beneficiaries and the administering agencies
with adequate information. Although it is imperative that
those responsible for plans not be impeded by excessive or
unnecessary paperwork we believe that ERISA represents a ve

M-181

-2important advance in the protection of the benefits promised
to retired employees and their beneficiaries. In the
structure of rights and remedies there is strong emphasis
placed upon the individual participants's initiative, as well
as the oversight by governmental agencies. Neither the
individual nor the interested agencies can function properly
as intended by ERISA if they have too much of the wrong kind
of information, or too little of the right kind. In either
case the result is counterproductive.
The ERISA agencies are continuing their efforts to seek
the proper balance. As commented on by the Department of
Labor, much has been done in the last year; but we
acknowledge that there is more to be done. We welcome the
recommendations of the Congress and the opportunity to enter
today into a dialogue on this important subject.
Sections 2:

Collection of Premiums by the IRS

Section 2 of the bill provides for the collection of the
Pension Benefit Guaranty Corporation premium through the use
of the plan's annual report, Form 5500, filed with the IRS.
In general, this issue is primarily of concern to PBGC and we
support the conclusions reached by PBGC with regard to the
needs of their program.
I would like to highlight one issue, however. The
intended function of the Internal Revenue Service with
respect to the information reported on the form is not clear.
Because the process of validating the payment of premiums is
of primary concern to the PBGC, we recommend that even if
this provision is adopted, the PBGC should continue to have
full authority to conduct investigations and enforcement
actions with respect to premiums.
Section 3:

Elimination of Summary Annual Report

Section 3 of the bill would eliminate the requirement
that certain statements of the plan's financial condition be
provided annually to all participants. In substitution, the
bill would provide for a summary of that information and the
source for obtaining additional information to be posted at
various work places. Since this area is of primary concern
to the Department of Labor we defer to that Department as to
this section of the bill.

-3-

Section 4:

Filina of forms with income tax returns

Section 4 of the bill provides that "taxpayers shall
have the option to file any forms required by (ERISA) with
the annual income tax forms required by the Internal Revenue
Code...".
This presents certain difficulties. First many plans
are maintained by more than one employer, and the
responsibility for filing the appropriate documents rests
primarily on the plan administrator rather than on the
employers. Thus, there is no single employer's tax return to
coordinate with the plan's filing.
Second, a plan's filing is geared to plan years, while
the employer's income tax return relates to the particular
taxable period used for income tax purposes. The income tax
year and the plan year do not necessarily coincide, even when
there is a single employer maintaining the plan. To the
extent that the plan year ends early in the tax year of the
employer the bill would permit an extension of the filing of
the annual report for several months until the income tax
return is due. At its worst this would result in a delay of
11 months from the time that the annual return for the plan
would otherwise be due. This result would be undesirable
from the standpoint of the agencies whose duty it is to
administer the programs based on these annual reports, as
well as from the standpoint of participants and other
interested individuals looking to the reports for valuable
information.
Under section 6072(b), the income tax filing date for a
corporation is the 15th day of the third month following the
close of the taxable year. The time for filing partnership
and individual tax returns is the 15th day of the fourth
month. Under section 6081 extensions may be granted for
filing income tax returns for periods up to six months.
The plan's return (Form 5500) is required to be filed
not later than the last day of the 7th month following the
close of the plan year, unless an extension of time up to 2
1/2 months is granted by the Service. For this purpose, an
extension of time for filing the employer's income tax return
will automatically be treated as an extension of time to file
the Form 5500 in the case of a single employer plan.
Therefore, for an employer with a conventional single

employer plan and a plan year coinciding with its tax year,
there would be no difficulty in filing the two returns at the
same time.
Further there would be no difficulty for a single
employer to obtain IRS approval for a change of plan year to
coincide with the tax year. Thus, in those situations where
the goal of the bill is attainable - a single employer plan
with identical tax and plan years - legislation is not
necessary to achieve it.
A final comment should be made regarding other forms
required by ERISA but which are not filed on a regular basis.
For example, reports must be made to the Internal Revenue
Service with respect to mergers and consolidations of plans
in order to give the Internal Revenue Service an opportunity
timely to intervene in a transaction. These forms are
unrelated to the particular tax year of the employer and in
most cases are unrelated to a plan year end. This provision
of the bill should not in any event be extended to such
forms.
Civil Enforcement Actions by Treasury Department
The bill provides the Secretary of the Treasury with
authority to bring a civil action to enforce compliance by a
plan or trust with the requirements of the Internal Revenue
Code applicable to so-called qualified plans. Under present
law, the failure to comply with such requirements results in
"disqualification" leading to adverse tax consequences
including possible denial of a tax deduction for the
employer, taxation of the income of the trust and possibly
less favorable tax treatment for employees and their
beneficiaries. The bill is obviously intended to provide
alternative sanctions. The Internal Revenue Service has been
studying the question of alternatives to plan
disqualification and we understand that Committees of the Tax
Section of the American Bar Association have also been
interested in this problem. We welcome the initiative of
this Committee in developing a more widespread dialogue on
this very important issue. However, certain questions must
be faced in considering whether the approach of the bill
should be adopted.
The provisions of the Internal Revenue Code related to
qualified plans can be divided into several parts:

-5-

First, there are the portions of the Internal Revenue
Code which parallel provisions in Title I of ERISA relating
to participation, vesting and funding. With respect to such
provisions the Secretary of Labor already has the authority
under section 502(b) of ERISA to bring injunctive actions to
enforce compliance. The question of the division of
responsibility between Labor and Treasury is being studied in
connection with the President's Reorganization Plan number 4
as to which OMB is required to submit a report to Congress by
January 31. A transfer of civil litigation authority from
the Department of Labor to the Internal Revenue Service, is
among the alternatives presently under study and it seems
appropriate to defer consideration until the study is
completed.
The second set of provisions in the Internal Revenue
Code deal with nondiscrimination requirements. That is, a
qualified plan may not discriminate in favor of higher paid
employees. Under present law an employer has discretion as
to whether or not to establish a plan. Once a plan is
established it must comply with Title I requirements;
however, it need not comply with the nondiscrimination
requirements. The bill suggests that at least once a plan
claims the benefit of qualified status it can be forced to
comply with the requirements of the Internal Revenue Code.
This raises significant questions. Suppose, for example, an
employer establishes a plan for salaried employees which
comprise 10 percent of the employees of the company. If the
Internal Revenue Service finds that the exclusion of hourly
paid employees results in a discriminatory plan will the
employer be required to cover the remaining 90 percent of the
employees?
Third, there are provisions in the Internal Revenue Code
which neither affect discrimination nor are parallel to
provisions in Title I.
As an overall matter, if it is decided that injunctive
relief is appropriate in all or some of these circumstances
we must decide whether it is consistent with the traditional
role of the Internal Revenue Service which up to now, at
least on the surface, has been to determine taxpayer's
appropriate liability from particular activity and not to
enforce any one mode of conduct. It is also necessary to
consider whether injunctive action by either Labor or
the Internal Revenue Service should be in addition to

6possible plan disqualification as it is today or whether in
some circumstances, at least, injunctive relief should
entirely replace plan disqualification as a sanction. It has
been our belief that the self-enforcing aspect of the
Internal Revenue Code would be severly weakened if the
Internal Revenue Service could only require taxpayers to do
what they should have been doing all along.
Bookkeeping Guide for Small Business and IRA Guide
The bill provides for two types of guides to be
published with respect to ERIS^. First, the bill requires
the Department of the Treasury and Labor to publish a booklet
to assist plan sponsors (particularly small businesses), in
developing or revising record keeping systems to simplify
compliance with ERISA. The problems of small business are of
particular concern in connection with the cost of compliance
with ERISA. Because they lack economies of scale the
reporting and compliance burdens lay a particularly heavy
burden on them. Although various aspects of compliance and
reporting have been dealt with in privately published
materials, it would be helpful for the government to provide
in one place a summary of the current thinking on the subject
by both agencies. However, since we have limited resources
available, we would prefer the flexibility to determine how
our resources should be allocated. Naturally we do welcome
suggestions from others, and in particular from Congress.
The second guide provided for by the bill is to be
prepared by the Secretary of the Treasury in the form of a
booklet for taxpayers summarizing the rules concerning
individual retirement accounts. The Internal Revenue Service
has published such a document, Publication 590 entitled "Tax
Information on Individual Retirement Arrangements". The last
publication was dated January 1979, and a revised version of
this publication is currently being worked on with the hope
that it might be available prior to the filing date for the
1979 income tax returns. Because the law and the regulations
affecting IRAs have been in a state of flux, it is difficult
to determine when such a summary type booklet should be
published, since there is always another change just over the
horizon. The Treasury believes in the value of these
booklets and will continue to provide information for the
public on this subject as rapidly as is possible under the
circumstances.
This concludes the formal part of my testimony. I would
be happy to answer any questions you might have. Thank you.

FOR IMMEDIATE RELEASE
November 7, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY DEPARTMENT FINDS SUGARS
AND SYRUPS FROM CANADA ARE SOLD
HERE AT LESS THAN FAIR VALUE
The Treasury Department today said it has determined that sugars and syrups imported from Canada are
being sold in the United States at "less than fair
value."
The case is being referred to the U.S. International Trade Commission, which must decide within 90
days whether a U.S. industry is being, or is likely to
be, injured by these sales.
If the decision of the Commission is affirmative,
dumping duties will be collected on sales found to be
at less than fair value.
Appraisement will be suspended fcr three months,
effective November 8, 19 79. The weighted average
margin of sales at less than fair value in this case
was 19.25 percent, computed on all sales.
Interested persons were offered the opportunity
to present oral and written views before this determination.
(Sales at less than fair value generally occur
when imported merchandise is sold in the United States
for less than in the home market.)
Imports of this merchandise during January-June
19 79 were valued at about $22-million.
Notice of this determination will appear in the
Federal Register of November 8, 19 79.
o
M-182

mtmentoftheTREASURY
TELEPHONE 566-2041

IGTON, D.C. 20220

FOR IMMEDIATE RELEASE

November 7, 1979

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $3,890 million of 52-week bills to be issued November 13, 1979,
and to mature November 6, 1980, were accepted today. The details are as
follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

Price
High
Low
Average -

Discount Rate

88.236 11.797%
88.217
11.816%
88.223
11.810%

Investment Rate
(Equivalent Coupon-issue Yield)
13.17%
13.19%
13.18%

Tenders at the low price were allotted 45%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location

Received

Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

$ 27,440
5,441,110
68,015
7,430
58,935
18,160
277,890
33,970
19,620
10,240
8,390
212,810
11,045

$ 5,640
3,733,400
3,015
7,430
13,935
15,695
43,890
6,970
5,120
10,240
6,390
27,310
11,045

TOTALS

$6,195,055

$3,890,080

$3,775,035
153,390

$1,470,060
153,390

$3,928,425

$1,623,450

Federal Reserve
and Foreign Official
Institutions
$2,266,630

$2,266,630

Type
Competitive
Noncompetitive
Subtotal, Public

TOTALS

$6,195,055

$3,890,080

partmentoftheTREASURY
TELEPHONE 566-2041

IGTON,D.C. 20220

November 7, 1979

FOR IMMEDIATE RELEASE

Price
High
Low
Average -

Discount Rate

88.236 11.797%
88.217
11.816%
88.223
11.810%

Investment Rate
(Equivalent Coupon-issue Yield)
13.17%
13.19%
13.18%

Tenders at the low price were allotted 45%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location

$ 5,640
3,733,400
3,015
7,430
13,935
15,695

$ 27,440
5,441,110
68,015
7,430
58,935
18,160

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Accepted

Received

liLjjEEK BILL RATES

DATE:

November 7,

HIGHEST
LAST MONTH .-

Type
Competitive

Noncompete

_„rm
L0WEST

SINCE

ILHO

Subtotal
Federal Reserve
and Foreign Official
Institutions
$2,266,630
TOTALS

TODAY

$6,195,055

c•A-5
r~i
f

$2,266,630
$3,890,080

FOR RELEASE UPON DELIVERY
Expected at 2:30 P.M. EST
November 7, 1979
STATEMENT OF BRADFORD L. FERGUSON
ASSOCIATE TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE FINANCE COMMITTEE
Mr. Chairman and members of the Subcommittee:
I am pleased to have the opportunity to present the
views of the Treasury Department on three tax bills. The
bulk of my statement will be devoted to H.R. 2797, the
"Technical Corrections Act of 1979." The second bill for
discussion is S. 873, a proposal to waive in limited instances
the foreign residence or physical presence requirement for
certain tax benefits accorded individuals living abroad.
The third bill is S. 1549, which would defer payment of the
excise tax in the case of sport fishing equipment manufacturers.
H.R. 2797 (TECHNICAL CORRECTIONS)
About 1 year ago, in the final days of the 95th Congress,
there was a spate of legislative activity in the tax area.
The conference reports on three major tax bills — the
Revenue Act of 1978, the Energy Tax Act of 1978, and the
Foreign Earned Income Act of 1978 — were adopted on October 15,
1978. The Revenue Act alone comprises about 200 pages of
statutory language and over 100 provisions, with many
significant issues being resolved by the House-Senate
conferees during the waning hours of the session. The
draftsmen performed remarkably well under the severe time
pressures; but as expected, there are some technical problems
that need to be corrected.

M-184

- 2 The purpose of H.R. 2797 is to effect the needed
technical changes. It deals with four tax acts adopted last
Congress: the Revenue Act, the Energy Tax Act, the Foreign
Earned Income Act, and the Black Lung Benefits Revenue Act.
The bill was drafted initially by the staff of the Joint
Committee on Taxation with the aid of comments from Treasury,
the Internal Revenue Service and tax practitioners. A few
additional corrections were added to the bill after hearings
in the Ways and Means Commmittee. But significantly, the
bill has remained free of controversial substantive changes
in the law; H.R. 2797 is simply an effort to reflect more
accurately and clearly the Congressional intent underlying
the four tax measures just mentioned.
The extraordinary time pressures of last fall make
passage of H.R. 2797 especially important; however, the need
for technical corrections is not an isolated phenomenon.
Regardless of the time devoted to consideration and drafting
of statutory language, technical errors are inevitably
discovered in major tax legislation. Problems range from
clerical oversights, to ambiguous wording, to unforeseen and
unintended implications of an amendment. These problems
become apparent as IRS and Treasury begin to prepare
regulations and forms and as taxpayers and practitioners
seek to apply the new provisions to specific fact situations.
Prior to 1977, there was no established mechanism to
correct the errors in tax legislation. Taxpayers and tax
administrators simply had to deal with the statutes as
originally drafted, and to accept many tax results that
Congress did not intend. However, with the introduction of
the Technical Corrections Act of 1977, a formal procedure
was implemented to make technical modifications to the Tax
Reform Act of 1976. The 1977 Corrections Act, like the bill
you are now considering, was drafted initially by the Joint
Committee staff with the cooperation of Treasury, IRS and
taxpayer representatives.
Our experience with the 1977 Corrections Act is instructive.
Once Congress has made a substantive decision on tax policy,
both taxpayers and the Government have a strong interest in
assuring that the policy is implemented by proper statutory
language; the 1977 Act advanced this objective, and I believe
the effort was well received by all individuals concerned
with the tax system. At the same time, the process was
impaired by delay; technical corrections for the Tax Reform
Act of 1978.
1976 were not adopted until passage of the Revenue

- 3The protracted legislative course of the 1977 Corrections
Act created a number of problems. For example, the delay
affected IRS efforts to make timely and accurate changes in
tax forms. A number of changes were made in the 1977 tax
forms on the assumption that the pending 1977 Corrections
Act would be enacted in 1977. When enactment was postponed
until late 1978, the effective date of one of the corrections
relating to community property laws and to the credit for
the elderly was changed from January 1, 1977 to January 1,
1978 — a change that required burdensome corrective action
by the IRS to assure that affected taxpayers did not overpay
their 1977 taxes.
A similar timing problem may arise in connection with
the 1979 Corrections Act. Unless the bill is adopted before
the close of this year, many taxpayers will encounter uncertainty
and confusion in filing their 1979 tax returns. We believe
that such expeditious passage is possible as long as the
bill is not encumbered with substantive tax changes. As now
drafted, H.R. 2797 is truly "technical" legislation. We
hope that controversial provisions will continue to be
excluded during Senate consideration of the bill.
Items already approved by Finance Committee.
In view of the timing problems raised by the impending
tax filing season, the Finance Committee has already approved
a portion of H.R. 2797. On October 2, 1979, the Committee
adopted eight technical corrections that are especially
important for IRS administration. All of these changes are
reflected in the 1979 tax forms and instructions that the
IRS began printing last month.
The provisions already approved by the Committee are
the following:
° The Revenue Act of 1978 includes a new provision for an
alternative minimum tax, payable if it exceeds the sum
of a taxpayer's regular tax and add-on minimum tax
liability. Under the new provision, alternative minimum
taxable income is computed by subtracting all deductions
from gross income and then adding back certain preference
items. H.R. 2797 would permit persons who do not
itemize deductions to use the zero bracket amount
(formerly known as the standard deduction) in computing
the alternative minimum tax.

- 4° As now drafted, the alternative minimum tax provision
permits a new operating loss to provide a double tax
benefit. Through a drafting error, the loss can be
deducted currently in computing the alternative minimum
tax and can also be carried over to reduce the tax
liability of other taxable years. H.R. 2797 would
correct this defect by prohibiting the deduction of a
net operating loss against alternative minimum taxable
income in those instances where the loss can be carried
to another year.
° The alternative minimum tax is imposed to the extent it
exceeds a taxpayer's regular tax (including the add-on
minimum tax). Certain "penalty" taxes are excluded
from the definition of "regular tax" and thereby do not
reduce the alternative minimum tax. The Revenue Act
expressly excluded from the "regular tax" definition
such penalties as the taxes imposed on premature
distributions from certain pension and annuity plans or
from individual retirement accounts. H.R. 2797 would
extend the same treatment to the "penalty" tax imposed
on premature redemptions of retirement bonds.
° Under the alternative minimum tax, one of the tax
preference items is "adjusted itemized deductions."
The preference is deemed to result when certain itemized
deductions exceed 60 percent of adjusted gross income
(with modifications). The literal language of the
Revenue Act requires, in the case of trusts and estates,
that some deductions be counted twice in arriving at
the modified adjusted gross income figure. The effect
is to increase artifically the alternative minimum tax
liability of a trust or estate. H.R. 2797 would
rectify this error.
° Present law permits deductions for state and local
taxes to be excluded in computing the tax preference
for adjusted itemized deductions. Under H.R. 2797, a
deduction for foreign taxes would also be excluded from
the preference.
° The Revenue Act liberalized the rules for computing a
cooperative's investment tax credit and permitted
investment credits unused at the cooperative level to
be flowed-through to its patrons. H.R. 2797 would make
conforming changes so that the new rule would also
apply to computation of the work incentive (WIN) credit
and the jobs tax credit.

- 5 ° The Foreign Earned Income Act eliminated a prior requirement that taxable income be stacked in rate brackets on
top of income excluded (under section 911) by Americans
working abroad. With this change, it is appropriate
for individuals who exclude foreign earned income to
use the tax tables, and H.R. 2797 would so provide.
° Articles sold as supplies for fishing vessels are not
subject to the 4 cents-a-gallon excise tax on fuels or
the 6 cents-a-gallon tax on lubricating oil. However,
a tax-free sale is often not available in the case of
commercial fishing because the producer or supplier
does not know the purpose for which the item is to be
used or the intermediate seller does not want to
perform the necessary paperwork to obtain the tax
benefit. The Energy Tax Act eliminated a prior provision
that permitted the purchaser to obtain a direct refund
of 2 cents-a-gallon with respect to fuels and 6 centsa-gallon with respect to lubricating oil. Since Congress
did not intend to change the excise tax exemptions for
commercial fishing vessels, H.R. 2797 would restore the
2-cent and 6-cent direct refunds where items are used
on a commercial fishing vessel.
Other Provisions in H.R. 2797.
In addition to the eight items considered by the Finance
Committee last month, the Technical Corrections bill contains
71 other amendments, not including changes that are purely
clerical in nature. Detailed descriptions of these provisions
are sent forth in the pamphlet prepared by the Joint Committee
staff. Today, I would like to mention just a few of the
most important of the provisions not yet considered on the
Senate side.
Three amendments are necessary to coordinate properly
the investment credit provisions contained in the Revenue
Act o and the Energy Act.
The Revenue Act was designed to make the investment
credit permanent at a 10-percent rate, rather than
reverting after 1980 to a 7-percent rate as scheduled
under prior law. However, the Energy Act restated the
investment credit provisions of old law and was formally
enacted after the Revenue Act. As a result, the Code
may still technically retain a December 31, 1980
expiration date for the 10-percent credit. H.R. 2797
would clarify Congressional intent to make the 10percent rate permanent.

- 6° Certain equipment may qualify for both the regular 10percent investment credit and an additional 10-percent
credit for energy property acquired after September 30,
1978 and before January 1, 1983. Under the Revenue
Act, only one-half of the otherwise qualified investment
is eligible for the regular investment credit where the
taxpayer uses the special 5-year amortization provision
for pollution control facilities and also finances the
facilities with tax-exempt bonds. Congress intended
also to reduce the special energy investment credit to
5 percent in the case of energy property, including
certain pollution control equipment, financed by taxexempt bonds. But through interaction of the two
provisions, the energy credit is effectively only 2.5
percent with respect to pollution control equipment
subject to the limitations on the regular investment
credit. This result was not intended, and the bill
would amend the Code to provide a 5 percent energy
investment credit to this property.
° The Revenue Act extends the regular investment credit
to certain rehabilitation expenditures attributable to
buildings that are at least 20 years old. To preclude
the claiming of a double regular investment credit, the
credit for rehabilitation expenditures is denied for
property qualifying under other investment credit
rules. As now written, the Code also prohibits a
taxpayer from claiming both the energy investment
credit and the regular investment credit for rehabilitation expenditures that qualify as expenditures for
energy property. The bill would correct this unintended
result.
Under the Revenue Act, no deduction is generally allowed
for expenses incurred with respect to entertainment facilities.
The Act specifically excepts "country club dues" from the
new deduction disallowance rule. Congress did not intend
the exception to be so restricted, and the bill would reflect
the Congressional intent by deleting the word "country" from
the exception for club dues.
The Revenue Act increased the capital gains deduction
from 50 percent to 60 percent for individuals (so that 40
percent of individual capital gains would be subject to tax)
and also reduced the alternative capital gains tax rate for
corporations from 30 percent to 28 percent. H.R. 2797
contains
several
technical
amendments
to
correct
drafting
errors
changes.
and
Among
to clarify
the
technical
the application
corrections
of these
are the
capital
following:
gains

- 7° Prior to the Revenue Act, an individual in high rate
bracket could elect to have the first $50,000 of capital
gains taxed at a 25 percent rate in lieu of deducting
one-half of capital gains from gross income. This
special "alternative tax" for individuals was repealed
for taxable years beginning after December 31, 1978.
Through inadvertence, the rules for calculating the
alternative tax for taxable years prior to repeal were
not altered to reflect the increase in the capital
gains deduction from 50 percent to 60 percent. After
consulting with Treasury staff and the Joint Committee
staff, the Internal Revenue Service prepared its 1978
tax forms and instructions as though the conforming
change were properly made, and the Technical Corrections
bill would now formally correct this oversight in the
Revenue Act.
° The increase in the capital gains deduction for individuals
was made effective for sales or exchanges after October 31,
1978. The reduced alternative capital gains rate for
corporations was made effective for sales or exchanges
after December 31, 1978. Left unclear was the treatment
of payments received after the respective effective
dates for sales or exchanges occurring before the
effective dates. Under H.R. 2797, the capital gains
tax reductions would apply in instances where the
income is properly taken into account by the seller
during a period after October 31, 1978 (in the case of
individuals) or after December 31, 1978 (in the case of
corporations).
Another important change relates to the effective date
of the targeted jobs credit. The Revenue Act was drafted to
make the targeted jobs credit effective for wages paid or
incurred through December 31, 1980. The statement of
conference managers indicates that the expiration date is to
be December 31, 1981. The statement of managers reflects
the correct Congressional intent, and the Technical Corrections
bill would rectify the clerical error in the Act.
Additions to H.R. 2797.
Subsequent to the House adoption of H.R. 2797, numerous
additions and modifications have been proposed. In consultation
with the Finance Committee staff and Treasury staff, the
staff of the Joint Committee on Taxation has compiled a list
of those proposals that appear to fall within the proper
scope of the Technical Corrections bill. A description of
object
the
these
attached
items
to anyis
package
of
attached
these
of items,
amendments
to my statement.
and we
tosupport
the bill.
Treasury
the adoption
does not
of

- 8 S. 873 (AMERICANS ABROAD)
S. 873 would waive in certain cases the foreign residence
or physical presence requirement which otherwise must be met
by individuals living abroad in order to qualify for certain
tax benefits. The Treasury Department does not oppose this
legislation.
Present law provides a deduction for certain excess
living costs incurred by individuals who have been resident
in a foreign country for at least 1 taxable year or who have
been physically present in a foreign country for at least
510 days in an 18-month period. Alternatively, certain
individuals who live in camps and who satisfy this residence
test or physical presence test may elect to exclude a limited
amount of income earned abroad.
In the case of individuals who are required to leave a
foreign country because of war or civil unrest before
qualifying for the deduction or exclusion, subsection (a) of
H.R. 3874 would give the Secretary of the Treasury, after
consultation with the Secretary of State, the authority to
waive the residence or physical presence requirement if the
individual establishes that he could reasonably have been
expected to have met such requirement had not the war or
civil unrest occurred. The bill is intended to provide
relief to American employees who were forced to leave Iran
before qualifying under the residence or physical presence
test, as well as to others in similar circumstances. We
believe that such relief is warranted and that the bill is
suitably tailored to address the narrow circumstances contemplated. Accordingly, the Treasury Department does not
oppose this legislation.
We do have some technical comments, however. Subsection (b)(1) of the bill provides that its relief provisions
shall apply to taxable years beginning after December 31,
1976. Since the bill would amend section 913, its effective
date should not be earlier than the effective date of section
913. Specifically, the amendment to section 913 should
apply to taxable years beginning after December 31, 1977,
or, in the case of taxpayers who made an election pursuant
to section 209(d) of the Foreign Earned Income Act to have
prior law (i.e., section 911 as amended by the Tax Reform
Act of 1976) apply to the 1978 taxable year, to taxable
years beginning after December 31, 1978.

- 9Section 913 generally replaced section 911 and subsection (b)(3) of the bill effectively provides that the
Secretary shall apply analogous rules for the 1978 taxable
year of individuals who made the election under section
209(c) of the Foreign Earned Income Act to have section 911
apply for that year. This raises two additional technical
issues. First, consistent with subsection (b)(1), subsection (b)(3) should apply only with respect to individuals
who, after September 1, 1978, left the foreign country in
which they were resident or physically present. Second,
consideration should be given to allowing taxpayers to
qualify for tax year 1977 despite their premature departure.
Taxpayers who might fail to qualify for 1977 are those who
arrived in Iran late in 1977 and were forced to leave Iran
before completion of an 18-month period or before completion
of a full year's residence in 1978. The suggested change,
which would ensure a partial exclusion for the portion of
the 1977 year during which the individuals were abroad,
could be accomplished by inserting at the beginning of
subsection (b)(3) the language "With respect to the taxable
year of an individual beginning during 1977, or...."
S. 1549 (FISHING EQUIPMENT)
S. 1549 would defer payment of the manufacturers'
excise tax in the case of sport fishing equipment manufacturers. Under present law, payment of the tax is due by the
ninth day following the end of each semimonthly period.
S. 1549 would generally postpone the due date until the end
of the quarter following the quarter in which the taxable
article is shipped; however, existing law would continue to
a
PPly with respect to sales made during the last quarter of
the Federal fiscal year (i.e., July 1 through September 3 0).
This proposal is virtually identical to section 7 of H.R. 5505,
which has recently been passed by the House.
The bill is designed to match payment of the excise tax
with the manufacturers' gross receipts. Apparently, the
seasonal retail sales pattern for sport fishing equipment
leads manufacturers to grant lengthy credit terms to distributors, so that the latter will increase stock during the offseason and enable the manufacturers to produce at a more
even pace. Under present law, the manufacturers thus may
pay the excise tax before they receive payment from their
distributors.

- 10 However, the extended credit terms of the manufacturers
also require them to finance all other expenses (rent,
wages, raw materials, etc.) for some time before receiving
payment from their distributors. S. 1549 would have the
effect of delaying payment of the excise tax more than that
of other expenses of the manufacturers. We do no believe
such a special tax deferral is warranted, and we therefore
oppose S. 1549.
Different trades have different customary credit terms,
which are structured to facilitate operations and to maximize
profits. Since the credit terms of an industry are for the
benefit of the industry, Treasury sees no reason why the
time of payment of excise taxes should be varied for different
industries depending on the usual credit terms in the
industry. If a special rule is fashioned for fishing
equipment, other special rules may have to be given to other
industries which have unique business practices.
CONCLUSION
Mr. Chairman, in closing let me reemphasize the importance
of the Technical Corrections bill. H.R. 2797 — and the
proposed staff amendments — represent an important effort
to relieve confusion and unintended hardship for taxpayers.
To achieve the purpose of the bill, prompt passage is critical.
Therefore, we urge that H.R. 2797 remain technical and that
its consideration not reopen substantive policy debate on
°0°
the scores of tax issues addressed
in 1977 and 1978.

- 1Treatment of Earned Income Credit in AFDC and SSI Programs
(Section 101(a)(2)(A) and (B) of the Technical Corrections
Act and sections 402 and 1612 of the Social Security Act)

The Technical Corrections Act, as passed by the House,
amends the Social Security Act to specify that the earned
income credit — including both the portion received in
advance payments and the portion received as a tax refund —
is to be treated as earned income for the purposes of the
AFDC and SSI programs. The proposed amendment would make it
clear that, if advance payments of the earned income credit
exceed the actual credit so that the individual must return
the difference, the welfare agency would give some reconciling
increase in AFDC or SSI benefits. The procedures for computing
this increase would be provided in regulations by the
Secretary of Health and Human Services.

- 2 ilarification of Effective Dates of Coordination of Investtent Credit Rules for Pollution Control Equipment (Sec:ion 103(a)(2) of the Technical Corrections Act and sec:ions 46(c)(5)(B) and 48U)(1) of the Code)

Section 103(a)(3) of the Technical Corrections Act
leals with coordinating the changes made to the general
.imitation on credits for pollution control equipment (Code
;ection 46(c)(5)(B)) with a specific limitation for purposes
>f the energy credit for energy property, including certain
dilution control equipment (Code section 48(£)(11)). If

>oth limitations apply to pollution control equipment eligible
:

or the energy credit, this credit is reduced to an effective

•ate of 2.5 percent. The Technical Corrections Act, as passed
>y the House, would make the general limitation inapplicable
or purposes of the energy credit. This technical correction
s effective on January 1, 1979.

However, the energy credit became effective 3 months
sarlier, on October 1, 1978, and the interaction of the old
pre-1979) general limitation and the energy credit limitation
ill also cause the effective rate of the energy credit for
ollution control equipment to be only 2.5 percent during
he period from October 1, 1978 through December 31, 1978.

- 3 The proposed amendment would address this problem by
making the effective date for the technical correction as if
it were included in the relevant provision of the Energy Tax
Act of 1978, rather than the Revenue Act of 1978, so that it
would become effective at the same time as the energy credits
on October 1, 1978.

- 4Rules for Work Incentive Credit and Targeted Jobs Credit
for Cooperatives (Section 103(a)(4) of the Technical Corrections Act of 1979 and sections 50B(f), 52(f), and 52(h) of
the Code.

Prior to the Revenue Act of 1978, special rules applied
for purposes of determining the amounts of work incentive
(WIN) credit and general jobs credit which could be used by
cooperatives. These special rules applied the same rules
under which the amount of investment credit for cooperatives
was determined. The Revenue Act of 1978 revised the rules
pertaining to the investment credit for cooperatives. However,
it did not change the rules pertaining to the WIN and jobs
tax credits for cooperatives. The Technical Corrections
Act, as passed by the House, provided that the new rules for
investment credit of cooperatives would also apply to the WIN
ad jobs tax credits. This amendment was accomplished by
adding a cross reference in the WIN credit (Code section
50B(f)) and the jobs tax credit (Code section 52(f)). This
amendment is to be effective for taxable years ending after
October 31, 1978 (the same effective date as the change in
treatment of investment tax credit). However, the provision
now described in section 52(f) of the Code was numbered
section 52(h) of the Code. This renumbering was effective
for wages paid or incurred after December 31, 1978, in

- 5taxable years ending after that date. As a result, the
amendment in the Technical Corrections Act, as passed by the
House, does not cover wages paid or incurred in the period
between October 31, 1978 and December 31, 1978. The proposed
amendment would correct this result so that wages paid or
incurred by a cooperative during the period from October 31,
1978 to December 31, 1978 would qualify for the new treatment.

- 6 Application of Withholding Tax to Medical Reimbursements
(Section 103(a) (10) (A) of the Technical Corrections Act and
section 3401(a)(19) of the Code)

Prior to the Revenue Act of 1978, medical reimbursements
paid to, or on behalf of, an employee under a self-insured
medical reimbursement plan of an employer generally were
excluded from the employee's gross income and were not
subject to withholding tax.

Under the Act, such payments.

may be fully or partly includable in an employee's gross
income for a year if the medical reimbursement plan discriminates
in favor of highly compensated individuals for the year, and
such payments are subject to withholding tax and reporting
if they are includable.

The Technical Corrections Act, as passed by the House,
provides an exclusion from withholding tax for amounts paid
under a medical reimbursement plan for an employee if it is
reasonable to believe that the employee will be allowed to
exclude the payment from gross income under the rules applicable
to such plans. The proposed amendment would provide an
exclusion from withholding tax for all amounts paid under
3uch a plan regardless of whether it was reasonable to
oelieve that such payments would be excludable from gross
income.

However, reporting of taxable payments would continue

to be required.

- 7Clarification of Effective Date for Medical Reimbursement
Plans (Section 103(a)(10)(D) of the Technical Corrections
Act and section 366(b) of the Revenue Act of 1978)

Under the rules provided by the Revenue Act of 1978 for

self-insured medical reimbursement plans, excess reimbursements
made during a plan year are includable in the gross income
of a highly compensated individual for the taxable year in
which (or with which) the plan year ends.

The Technical Corrections Act, as passed by the House,
provides that the medical reimbursement plan rules apply
only to reimbursements paid after December 31, 1979.
However, the legislative history indicates that, in determining
the taxability of reimbursements made under a fiscal year
plan, the employee coverage and benefits provided by a plan
for its entire plan year beginning in 1979 will be taken
into account. The proposed amendment would provide that
payments made in 1979 would not be taken into account in
determining whether payments made after 1979 are taxable.

- 8 Clerical Amendment Relating to Capital Gains Changes
(Section 104(a)(3)(C) of the Technical Corrections Act and
section 593(b)(2)(E)(iv) of the Code)

For purposes of computing the addition to reserves for
bad debts of a thrift institution, taxable income is determined
by excluding the effective amount of net capital gains not
subject to tax.

The Technical Corrections Act, as passed by

the House, would change the computation to conform to the
reduction in the top corporate tax rate and in the alternative
tax rate on corporate capital gains. However, that change
does not take into account the different rates in effect
during a transitional period prescribed in the Revenue Act
of 1978. The proposed amendment would correct this error.

- 9 -

Clarification of Tax Treatment of Cooperative Housing
Corporation Upon Death of Promotor (Section 531 of the
Revenue Act of 1978, section 105(a)(6) of the Technical
Corrections Act, and section 216(b)(6) of the Code)

A tenant-stockholder in a cooperative housing corporation
is entitled to deduct amounts paid to such a corporation to
the extent such amounts represent his or her proportionate
share of allowable real estate taxes and interest relating to
the corporation's land and buildings (section 216). In
general, for a corporation to qualify as a cooperative housing
corporation (which can pass through these deductions to
tenant-shareholders), 80 percent or more of the gross income
of the cooperative housing corporation must be derived from
individual tenant-stockholders.

Under the Revenue Act of 1978, as modified by the House
version of the Technical Corrections Act, if an original
seller (e.g., promoter) acquires stock of a cooperative
housing corporation either from the corporation or, in certain
cases, by foreclosure, the original seller shall be treated
as a tenant-stockholder for a period of not to exceed 3 years
from the date of the acquisition of the stock.

- 10 Neither the 1978 Act nor the Technical Corrections Act,
as passed by the House, indicate the tax treatment of the
corporative housing corporation where the original seller
dies within the 3-year period. The proposed amendment would
allow the estate of the promotor to qualify the cooperative
housing corporation for the same tax treatment as if the
promotor had not died.

- 11 Cash Distributions from Employee Stock Ownership Plans After
December 31, 1978 (Section 101(a)(6)(B) of the bill and
sections 409A(h) and 4975(e)(7) of the Code.

The tax credit employee stock ownership plan provisions
of the Revenue Act of 1978 generally applied with respect to
qualified investment for taxable years beginning after
December 31, 1978. The Technical Corrections Act, as passed
by the House, specifies the effective date of the provisions
with respect to ESOPs. Under the Technical Corrections Act,
the cash distribution option provided in section 409A(h) of
the Code would not apply to ESOPs until after December 31,
1979.

The proposed amendment would provide that cash distributions
made from an ESOP after December 31, 1978 and before July 16,
1979, would be permissible.

- 12 Limitation on Election to Have New Tax Credit Employee Stock
Ownership Plan Rules Apply 1 Year Early

(Section 101(a)(6)(B)

of the bill)

The Technical Corrections Act would allow taxpayers to
elect to have the new tax credit employee stock ownership
plan rules apply to taxable years beginning after December 31,
1977, rather than December 31, 1978. The proposed amendment
would limit this election to plans adopted after December 31,
1978.

-13 Election to have New Put Option Rules Apply in Employee
Stock Ownership Plans (Section 101(a)(6)(B) of the Technical
Corrections Act)

Under the Technical Corrections Act as passed by the
House, ah employer would be permitted to elect to have the
new put option rules apply to all employer securities held
by a tax credit employee stock ownership plan which are not
readily tradable on an established market. The election
could be revoked only with the consent of the Secretary.

The proposed amendment would delete this provision from
the Technical Corrections Act because there is no need for
legislative action. It is understood that the Secretary of
the Treasury, under regulations, can, under present law,
allow such an election (and revocation of election) of the
new put option rules with respect to both tax credit employee
stock ownership plans and employee stock ownership plans.

- 14 Definition of Employer Securities for Employee Stock Ownership
Plans

(Section 101(a)(6)(C) of the Technical Corrections

Act and Section 4975(e)(8) of the Code)

The Technical Corrections Act, as passed by the House,
amends the definition of qualifying employer securities for
purposes of the prohibited transaction loan exemption
available to employee stock ownership plans. The proposed
amendment would make clear that this change in the definition
of qualifying employer securities does not affect the status
of employer securities acquired before December 31, 1979,
which constituted qualifying employer securities as defined
in section 4975(e)(8) of the Code at the time they were
acquired.

- 15 "
Special Effective Date for Certain Deferred Compensation Payments
to Independent Contractors

(Section 133 of the Revenue Act of

1978)

Prior to the Revenue Act of 1978, section 404(a)(5) of the
Code provided that where an employer deferred payment of compensation to an employee pursuant to a nonqualified plan, the employer
could deduct the compensation only in the year in which the
compensation was includable in the employee's gross income.
If the payment was not made pursuant to a qualified plan, but
pursuant to a "method of employer contributions or compensation
[having] the effect of a stock bonus, pension, profit-sharing,
or annuity plan, or similar plan deferring the receipt of
compensation...," the deduction-timing limitations of section 404(a) were also applicable.

Section 133 of the Revenue Act of 1978 added a new Code
section 404(d) which extends the deduction-timing limitation of
section 404(a) to payments of deferred compensation made to
independent contractors.

Section 133 of the Revenue Act of 1978

also amended Code section 404(b) by changing the words "or
similar plan" to read "or other plan."

The provisions apply to

deductions for taxable years beginning after December 31, 1978.

- 16 The proposed amendment would generally provide that the
changes made by section 133 of the Revenue Act of 1978 would

not be effective until taxable years beginning after December 31
1979, in the case of a plan which defers payment of certain
commissions by a title insurance company to its members.

- 17 Employee Stock Ownership Plans Name Change

(Section 141 of

the Revenue Act of 1978 and sections 46, 48, 56, 401, 409A,
415, 4975 and 6699 of the Code)

The Revenue Act of 1978 changed the names given to
employee" stock ownership plans. Under the Act, employee
stock ownership plans were renamed "leveraged employee stock
ownership plans," and TRASOP's were renamed "ESOP's."

The proposed amendment would again change these names.
A leveraged employee stock ownership plan would be called an
"ESOP" (as it was before the 1978 Act). An ESOP (TRASOP, as
it was known before the 1978 Act) would be called a "tax
credit employee stock ownership plan."

18
Amount of Matching Employer Contributions to a Tax Credit
Employee Stock Ownership Plan (Section 141 of the Revenue
Act of 1978 and section 48 (n) (1) (B) (i) of the Code)

The 1978 Revenue Act continued the provision of prior
law which allows a taxpayer to elect an additional one-half
of 1 percent investment tax credit if employer securities (or
cash used to acquire employer securities) are transferred to a
tax credit employee stock ownership plan and are matched by
employee contributions. However, the Code, as amended by
the Revenue Act, does not provide an effective limitation on
the qualified employee matching contributions which must be
matched by the employer in order to obtain the credit. The
proposed amendment would provide that in order for the taxpayer
to be eligible for the additional one-half percent credit, the
taxpayer must transfer securities having an aggregate value
at least equal to the lesser of the sum of qualified matching

employee contributions or one-half of 1 percent of the taxpayer'
qualified investment for the taxable year.

- 19 Time for Contribution of Matching Employer Contributions to
Tax Credit Employee Stock Ownership Plan (Section 141 of
the Revenue Act of 1978 and section 48(n)(1)(C) of the Code)

Prior to the Revenue Act of 1978, employers were generally
required to contribute any matching employer contributions to a
tax credit employee stock ownership plan within 30 days after
the time for filing the corporate income tax return for the

taxable year for which the investment credit was taken. Employees
were given up to 24 months after the close of that taxable year
to make matching employee contributions.

The proposed amendment would clarify the rule relating to
the time for making matching employer contributions to a tax
credit employee stock ownership plan by allowing employers to

make the matching employer contributions at the time the matching
employee contributions are made.

- 20 Voting Rights for Participants in Employee Stock Ownership
Plans

(Section 141 of the Revenue Act of 1978 and section

409A(e) of the Code)

Under the Revenue Act of 1978, employee stock ownership
plans are required to allow participants to direct the trustee
in the manner in which employer securities allocated to the
participants accounts are to be voted.

Full voting direction

is required where the employer has a registration-type class
of securities.

Limited voting direction (i.e., only on major

corporate issues) is required where the employer does not have
a registration-type class of securities.

The amendment would repeal the requirement for limited
direction of voting under an employee stock ownership plan
where the employer does not have a registration-type class of
securities.

However, employee stock ownership plans would

still be subject to the general rule that a defined contribution
plan which is established by an employer whose stock is not
publicly traded and which has more than 10 percent of the plan
assets invested in securities of the employer will be required
to pass through voting rights to employees on major corporate
issues.

- 21 Rules for Time of Establishing a Tax Credit Employee Stock
Ownership Plan (Section 141 of the Revenue Act of 1978 and
section 409A(f) of the Code)

The proposed amendment would clarify section 409A(f) in
two ways. First, it would provide that a tax credit employee
stock ownership plan will not fail to meet the requirements
of Code section 401(a) merely because it is not established
by the close of the employer's first taxable year for which
the employer claims a tax credit for contributions to the
plan. Second, it would provide that a tax credit employee
stock ownership plan will fail to meet the requirements of
section 409A of the Code unless it is established before the
due date for filing the employer's tax return (including
extensions) for the first taxable year for which the employer
claims a tax credit for contributions to the plan.

- 22 Definition of Employer Securities for Employee Stock
Ownership Plan Purposes (Section 141 of the Revenue Act of
1978 and section 409A(£) of the Code)

The Revenue Act of 1978 added to the Code a definition
of employer securities for purposes of tax credit employee
stock ownership plans and ESOP's.

The proposed amendment would make three changes in this
definition.

First, the proposed amendment would make clear that
where an employer has not issued readily tradable common
stock, the term "employer securities" will include common
stock issued by the employer which has a combination of
voting power and dividend rights equal to the class of
common stock with the greatest voting power and the class of
common stock with the greatest dividend rights.

Second, the proposed amendment would provide that,
under regulations to be issued by the Secretary, convertible
preferred stock would be included in the definition of
employer securities where such stock is subject to a call
which would either (1) cause the preferred stock to be

- 23 exchanged for other employer securities, or (2) cash out the
preferred stock subject to the right of the holder of the
preferred stock to convert the preferred stock into common
stock.

Finally, the proposed amendment would make clear that
the definition of employer securities would include preferred
stock which is convertible into common stock which is not
readily tradable.

- 24 Unrealized Appreciation in Employer Securities (Section 142 of the Revenue Act of 1978 and sections 402 and
2039 of the Code)

The proposed amendment would make it clear that in order
for a lump sum distribution from a pension plan to qualify
for the estate tax exclusion, it is not necessary to include
in gross income the net unrealized appreciation in employer
securities received in such distribution.

- 25 -

Integration of Simplified Employee Pensions with Social
Security (Section 152 of the Revenue Act of 1978 and section 408(k) of the Code)

The provisions relating to simplified employee pensions,
as added by section 152 of the Revenue Act of 1978, allow an
employer to take into account contributions or benefits

provided by the employer under the Federal Insurance Contribu
Act, and in certain cases, require an employer to take into
account payments made with respect to the tax on selfemployment income. However, this provision was not intended
to allow an employer to maintain both a conventional pension

plan qualified under section 401(a) of the Code and a simplif
employee pension where each plan is integrated with social
security. Therefore, under the proposed amendment, a SEP
could be integrated with social security only in those
situations where the employer does not maintain any other

tax-qualified plan which provides for integration of employer

contributions or plan benefits with social security contribu
or benefits.

- 26 -

Reporting Requirement for Simplified Employee Pensions
(Section 152(b) of the Revenue Act of 1978 and sections
408(1) and 6693(a) of the Code)

The Revenue Act of 1978 created a new type of retirement
plan, known as a "simplified employee pension" ("SEP"). The
Revenue Act requires an employer who makes contributions on
behalf of an employee to a SEP to provide reports to the
employee with respect to such contributions. However, no
express provision is currently included in the Code to
impose penalties if an employer fails to furnish required
information to an employee.

Unless employers timely report the amount contributed
to the SEP, employees will lack the information required to
take the appropriate deduction on their tax returns. Therefore, the proposed amendment would extend to SEP's the
current penalty relating to failure to provide reports on
individual retirement accounts or annuities. This penalty
is $10 for each failure unless the failure is due to reasonable
cause.

- 27 Aggregation of^Simplified Employee Pensions with Other Plans
(Section 152(g)(3) of the Revenue Act of 1978 and section
415(e)(5) of the Code)

The Code limits the "annual additions" (employer contributions, forfeitures and, in some circumstances, a portion of
employee contributions) that may be allocated to a participant's
account in a defined contribution plan for any year. For
this purpose, an individual retirement account or annuity
("IRA") is aggregated with other defined contribution plans
of an employer if the participant for whom the IRA is
maintained is in "control" of the employer. As drafted, the
Revenue Act treats simplified employee pensions ("SEP's") the
same as IRA's under the aggregation rule, so that a SEP for
the benefit of a participant will be aggregated with the
defined contribution plan of an employer only where the
participant is in "control" of the employer.

A broader aggregation rule was intended with respect to
SEP's. The legislative history of the Revenue Act of 1978
contemplates that employer contributions to a SEP are to be
taken into account as employer contributions to a defined
contribution plan under the "annual addition" limitations in
all cases, without regard to whether the employee is in
control of the employer. The proposed amendment would effect
this change.

- 28 -

Penalty for Failure to File a Partnership Return for Underwritin
Syndicates (Section 211 of the Revenue Act of 1978 and section 6698 of the Code)

The Revenue Act of 1978 imposed a penalty on the failure
to file a partnership return. Historically, partnership returns
have not been filed in the case of syndicates of dealers in
securities formed for the purpose of underwriting, selling
or distributing securities. The proposed amendment would
provide an exception to the penalty for failure to file a
partnership return in such a case.

- 29 Computation of Tax From Foreclosure Property of a Real
Estate Investment Trust (Section 301 of the Revenue Act
of 1978 and section 857(b)(4)(A) of the Code)

Under present law, a tax is imposed on the net income from
foreclosure property of a real estate investment tax. The
tax is determined using the corporate rates with a surtax
exemption of zero. The Revenue Act of 1978 removed the
surtax exemption for corporations and replaced it with a
»

•

graduated rate schedule. The proposed amendment would make
a conforming amendment providing that the tax on net income
from foreclosure property of a real estate investment trust
is to be computed at the highest rate applicable to corporations.

- 30 WIN Credit for Subchapter S Corporations and Estates and
Trusts (Section 322 of the Revenue Act of 1978 and section 50B(d) and (e) of the Code)

The Revenue Act of 1978 provides that an employer's
deduction for wages is reduced by the amount of WIN credit
allowable (Code section 280C(a)). However, for estates,
trusts, and subchapter S corporations, the credit is computed
by individual beneficiaries and shareholders, who are not%
allowed deductions for the wages paid by the estate or
corporation. Thus, the new provision is inconsistent with
the current law method for the computation of the WIN "credit
by beneficiaries and shareholders. The proposed amendment "

would provide that the WIN credit is to be computed by the "*''
estate, trust or subchapter S corporation, rather than by
individual shareholders and beneficiaries. The deduction of
the estate, trust or subchapter S corporation will be reduced
by the amount of WIN credit allowable.

- 31 WIN Credit for Child Care Expenses Between October 1, 1978,
and December 31, 1978 (Section 323 of the Revenue Act of
1978 and section 50B(a)(2)(B) of the Code)

The WIN credit, as in effect before the amendments of
the Revenue Act of 1978, contained a provision denying the
credit in connection with services performed after October 1,
1978, in connection with a child day services program. The
Revenue Act permits a WIN credit for such services performed
after December 31, 1978. The proposed amendment would repeal
the termination date under prior law to avoid a 3-month gap
in WIN credit coverage.

- 32 Correction of Typographical Error (Section 337(a) of the
Revenue Act of 1978)

The proposed amendment would correct a typographical
error in section 337(a) of the Revenue Act of 1978 by changing
"or a refund profit" to "of a refund profit".

- 33 -

Clarification of the Limitation on the Nondeductibility
of Certain Entertainment Facility Expenses Includable in
Income (Section 361 of the Revenue Act of 1978, and section 274(e) of the Code)

Prior to the enactment of the Revenue Act of 1978, expenses
*/

incurred with respect to entertainment facilities—' were
deductible if they were ordinary and necessary, the facility
was used primarily for the furtherance of the taxpayer's
business (i.e., more than 50 percent of the time that it was
used), and the expense in question was related directly to
the active conduct of the taxpayer's business. For this
purpose, entertainment facility expenses included dues or
fees paid to any social, athletic, or sporting club or
organization. Dues or fees paid to professional associations,
civic organizations, or to clubs operated solely to provide
meals under circumstances normally considered to be conducive
to business discussions generally were not considered to be
entertainment facility expenses.

The Revenue Act of 19 78 provided generally that no
deduction was allowable for any entertainment facility
expense. However, the Act retained a number of exceptions
to the general rule that existed under prior law. One of

- 34 -

these relates to expenses treated as employee compensation
which are subject to withholding (section 274(e)(3)). The
proposed amendment provides an exeption from the facility
expense deduction disallowance rule in the case of expenses
for individuals who are not employees if the taxpayer
files an information return with respect to the amount
includable in the individual's gross income (regardless of
the amount involved).

An entertainment facility generally is any item of

personal or real property owned, rented, or used by
a taxpayer during the taxable year for, or in connection
with, an activity normally considered to be of an
entertainment nature.

- 35 Clarification of Treatment of Liabilities of Controlled
Corporation (Section 365(a) of the Revenue Act of 1978 and
section 357(c)(3) of the Code)

THe Revenue Act of 1978 provided that where a cash basis
taxpayer transfers property to a controlled corporation subject
to certain liabilities, then certain "accounts payable"
would not be taken into account in determining the amount of
gain recognized by the transferor on the transfer. The
legislative history indicates that the taxpayer could also
qualify under this provision where he was using a hybrid
method of accounting. The legislative history also indicates
that "accounts payable" would include trade accounts payable
and other liabilities (e.g., interest and taxes) which relate
to the transferred trade or business. Thus, the legislative
history indicates that the scope of the provision is intended
by Congress is broader than the literal language of the
statute would seem to indicate. The proposed amendment
clarifies the statutory language consistent with the intent
of Congress by deleting the requirement that the taxpayer be
using the cash method of accounting and that the liabilities
to be disregarded must be "accounts payable".

- 36 Relationship of the Recapture of the Investment Tax Credit
and WIN Credit and the Alternative Minimum Tax (Section 421(a)
of the Revenue Act of 1978 and section 55(b)(2) of the Code)

The Revenue Act of 1978 imposed a new alternative minimum
tax on individuals. The tax is the amount by which the gross
alternative minimum tax exceeds the "regular tax" on the
taxpayer. In determining the taxpayer's regular tax,
certain penalty taxes are not taken into account. However,
no' adjustment to regular tax is made for the recapture of
investment tax credit or WIN credit. As a result, there is
no additional tax by reason of the recapture of the investment
tax credit or WIN credit in any year where the alternative
minimum tax occurs. The proposed amendment would correct
this problem by excluding recapture of investment tax credit
and WIN credit from the definition of regular tax.

- 37 Allocation of Tax Preference Items in the Case of Trusts
and Estates (Section 421(c) of the Revenue Act of 1978 and
section 58(c) of the Code)

The Revenue Act of 19 78 imposed a new alternative minimum
tax on individuals including trusts and estates. In the case
of a trust or estate, items of tax preference are to be
apportioned between the estate or trust and the beneficiaries
on the basis of income of the estate or trust allocable to
6ach. This rule does not work well in the case of the
preference for adjusted itemized deductions. The proposed
amendment would provide that the allocation of items of tax
preference would be made in accordance with Treasury
regulations.

- 38 Recapture of Depreciation of Certain Subsidized Low-Income
Housing (Section 701(f)(3)(E) of the Revenue Act of 1978
and section 1250(a)(1)(B) of the Code)

The Revenue Act of 1978 added a provision to clarify
that in computing the depreciation recapture under section

1250 of the Code for property on which rehabilitation expenditur
were amortized under Code section 191, the amount of "straight
line" depreciation is to be computed without regard to the
5-year useful life under section 191. This amendment may
inadvertently have caused additional recapture to apply
to certain subsidized low-income housing. The proposed
amendment would negate this inadvertent impact by providing
that subsidized low-income housing remains eligible for the
special phase-out of recapture even though rehabilitation
expenditures for that housing have been amortized under
Code section 191.

- 39 Employee of Grantor or Beneficiary Treated as Related Person
for Purposes of the Tax on Generation Skipping Transfers
(Section 702(n)(2) of the Revenue Act of 1978 and section
2613(e) of the Code)

Under the generation skipping provisions, an individual
is a beneficiary of a trust if he has a present or future power
or interest in it. "Power" means "any power to establish or
alter beneficial enjoyment of the corpus or income of the
trust." A person has an "interest" if the person has either
"a right to receive income or corpus from the trust" or
"is a permissible recipient of such income or corpus." Thus,
one can be a beneficiary by satisfying either or both of the
tests.

The Tax Reform Act of 1976 excluded certain independent
trustees from being treated as beneficiaries solely because of
powers which they held to distribute trust corpus and income.
The original language in section 2613(e) was found too
restrictive and section 702(n)(2) of the Revenue Act of 1978
expanded the categories of individuals to whom independent
trustees could make distributions without being treated as
beneficiaries.

- 40 The 1978 Act excluded from the independent trustees any
person who is an employee of a corporation in which the
stockholdings of the grantor, the trust, and the beneficiaries
of the trust are significant from the viewpoint of voting
control, an employee of a corporation in which the grantor
or any beneficiary of a trust is an executive, an employee of
a corporation in which the grantor or any beneficiary of the
trust is an executive, and an employee of a partnership in

which the grantor or any beneficiary of the trust is a partner.
However, the provision did not exclude a person who is
directly employed by the grantor or any beneficiary of the
trust. The proposed amendment would exclude an employee
of the grantor or any beneficiary of the trust from being
an independent trustee.

- 41 Certain Powers of Independent Trustees Not Treated as a
Power for Purposes of the Tax on Generation-Skipping Transfers
(Section 702(n)(2) of the Revenue Act of 1978 and section
2613(e) of the Code)

Under the generation-skipping provisions, an individual
is a beneficiary of a trust if he has a present or future power
or interest in it. "Power" means "any power to establish or
alter beneficial enjoyment of the corpus or income of the
trust." A person has an "interest" if the person has either
"a right to receive income or corpus from the trust" or "is
a permissible recipient of such income or corpus." Thus,
one can be a beneficiary by satisfying either or both of the
tests.

The Tax Reform Act of 1976 excluded certain independent
trustees from being treated as beneficiaries solely becausse of
powers which they held to distribute trust corpus and income.
The original language in section 2613(e) was found too restrictive
and section 702(n)(2) of the Revenue Act of 1978 expanded the
categories of individuals to whom independent trustees could
make distributions without being treated as beneficiaries.

The statute presently provides that an individual will
not be treated as having a power if such an individual "is a

- 42 trustee who has no interest in the trust" (emphasis added).
Thus, an individual trustee who was the permissible appointee
of trust assets under an unexercised power of appointment
held by another would be deemed to have an interest in the
trust and would therefore be treated as having a power over
the trust. The trustee would be a beneficiary of the trust
and the independent trustee exemption would be negated.

The legislative history of the Revenue Act of 1978
states that an individual trustee will not be treated as a
beneficiary if "he has no interest in the trust other than
as a potential appointee under a power of appointment held
by another." The proposed amendment would adopt this result
by providing that, solely for purposes of the independent
trustee exemption, a trustee will not be treated as having
an interest in the trust if his only interest is as a

permissible appointee under an unexercised power of appointment
held by another.

- 43 Correction of Cross Reference (Section 4(d)(7) of Public
Law 95-227 and section 7454(b) of the Code)

The cross reference in section 7454(b) of the Code to

section 502(c) (21) would be corrected to section 501(c) (21)

- 44 Correction of Cross References in Code Section 401(a)(20)
(Section 4 of Public Law 95-458)

Public Law 95-458 amended Code sections 402(a)(5) and
403(a)(4). Code section 401(a)(20) includes cross references

to sections 402(a)(5) and 403(a)(4), but these cross references
were not amended to reflect the changes made by Public Law
95-458. The proposed amendment would correct the cross
references to reflect these changes.

- 45 Security for Recapture of Estate Tax Reduction from Farm
Valuation Where Property had been Involuntarily Converted
(Section 4 of Public Law 95-472 and section 6324B(c) of the
Code)

The Tax Reform Act of 1976 provided that certain property
used for farming or in a closely held business may be valued
for estate tax purposes at its current use value instead of
its highest and best use value. However, if the property is
disposed of within a 15-year period all or part of the
estate tax benefit is recaptured. A lien is placed on the
property for the amount of the recapture tax. Section 4 of
Public Law 95-472 provides that if an involuntary conversion
of qualified real property takes place, no recapture of the
estate tax benefit will occur if the property is replaced by
other real property of at least equal value acquired for the
same use. However, the property acquired in the involuntary
conversion may be more highly leveraged so that the lien on
the equity interest is insufficient for the recapture of tax
benefits. The proposed amendment would provide that, if at
any time the value of the property subject to the lien is
less than the amount of the potential recapture tax, the
Treasury Deparmtent may require the addition of additonal
property subject to the lien or other security (such as a
bond) which would bring the total amount of the security up
to the amount of the potential recapture tax.

^TREASURY
,D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

November 7, 1979

RESULTS OF TREASURY'S 167-DAY BILL AUCTION
Tenders for $2,002 million of 167-day Treasury bills to be issued
on November 9, 1979, and to mature April 24, 1980, were accepted at
the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

High
Low
Average -

Price

Discount Rate

94.185
94.132
94.163

12.535%
12.650%
12.583%

Investment Rate
(Equivalent Coupon-Issue Yield)
13.53%
13.66%
13.59%

Tenders at the low price were alloted 12%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL

M-185

Received

Accepted
$

2,551,000,000

1,663,600,000

10,000,000
33,000,000

341,000,000
16,000,000
4,000,000

149,000,000
16,000,000
4,000,000

205,000,000

126,000,000

$3,160,000,000

$2,001,600,000

FOR RELEASE UPON DELIVERY
EXPECTED AT 10:00 A.M. EST
THURSDAY, NOVEMBER 8, 1979
TESTIMONY OF THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE THE
HOUSE COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of this distinguished Committee:
It is a pleasure to appear before this Committee to discuss
the important issues raised by H.R. 5665, the "Tax Restructuring
Act of 1979." This bill would result in fundamental changes in
our Federal tax structure.
Income taxes on corporations and
individuals, as well as social security taxes, would be cut by
$130 billion in 1981. A Federal value added tax would offset
this revenue loss.
This testimony will not concentrate on the
specifics of H.R. 5665, but on the basic issue which the bill
raises: whether the United States should replace some of its
income taxes with a consumption tax.
That is, whether the
Federal tax system should weigh more heavily on consumption and
less heavily on saving and investment. Many believe that such a
change would contribute significantly to improved capital formation, higher productivity, and a more competitive position for
American business in world markets. Others express concern that
a consumption tax would have only small effects on investment and
would place an unfair burden on lower income families already
plagued by high prices for energy, food, housing, and other basic
necessities of life.
Higher consumption taxes, they believe,
would mean still higher prices. These hearings will serve the
valuable function of focusing the discussion on these significant
economic and social issues.
An important element in this discussion is the role of a
value added tax in the Federal tax structure. A value added tax
is a multistage tax on consumer goods and services.
Unlike a
retail sales tax, it is collected at each stage in the production
and distribution process. But since it is levied only on the
amount of value added (the difference between sales and purchases) at each stage, rather than on the full selling price, it
avoids the cascade, tax-on-tax, effects of a turnover sales tax.
M-186
A value added tax is similar to a retail sales tax in that the
total tax paid by the consumer is equal to the final price of the
product multiplied by the tax rate.

-2Many European countries have value added taxes. Typically,
they are imposed at a rate of about 15 to 20 percent and generate
about 15 percent of a country's total national and local tax
revenue. In contrast, state and local retail sales taxes raise
about 7 percent of the total Federal, state, and local tax
revenue in the United States. The $130 billion in value added
tax revenue estimated to be raised by H.R. 5665 would be about 14
percent of total Federal, state, and local 1981 tax liabilities,
assuming it is accompanied by the proposed income and social
security tax cuts.
In nearly all cases, the European value added taxes replaced
sales taxes, frequently of the cascade turnover type which,
unlike the value added tax, taxed the full sales price at each
stage, without allowing a credit for tax on previous transactions. The Europeans found the cascade tax objectionable because
it discriminated against nonintegrated firms and because the
export rebate and import tax could not be accurately estimated
for border adjustment purposes. Thus, in the European case, the
adoption of a value added tax was regarded as a reform of an
unwieldy and distortionary system of indirect taxation.
This
characterization does not apply to the present indirect tax
system in the United States. Only the United Kingdom has used
the value added tax to reduce income taxes, as Chairman Ullman is
suggesting for the United States.
The popularity of the value added tax is not universal. The
voters of Switzerland have twice rejected it by referendum. The
latest rejection was based in part on a perceived threat to local
autonomy since a Federal value added tax would have replaced some
of the local Swiss taxes.
Most recently, Japan, largely as a
result of its parliamentary elections, appears to have postponed
the planned introduction of a value added tax.
For the United States, a value added tax raises a number of
important questions. Would it encourage capital formation? What
impact would it have on the price level? Would it improve the
trade balance?
Would it be regressive?
No one is seriously
suggesting the value added tax solely as an additional Federal
tax. Consequently, the answers to these questions, as well as
others, depend upon which taxes the value added tax replaces. By
way of illustration, two of the proposals made by Chairman Ullman
call for reducing the corporate income tax and the social
security taxes.
Capital Formation
Taxes on capital income, such as the corporate income tax and
the individual income tax on interest and dividends, reduce the
after-tax return on savings.
Put another way, an income tax
encourages present, as compared to future, consumption. With no
taxes, a person with $100 of income could choose between buying

-3$100 of consumption goods this year or saving now and buying $110
of consumption goods next year, assuming the interest rate is 10
percent. Thus, a person can consume 10 percent more next year by
saving now. Similarly, with a consumption tax, which exempts the
earnings from capital, a person with $100 of income could consume
$50 this year and pay $50 in tax or, by saving the income this
year, could consume $55 next year and pay $55 in tax. Thus, a
person could still consume 10 percent more next year by saving
now.
If a 50 percent income tax, rather than a consumption tax, is
imposed, however, the individual, after paying the tax, can buy
$50 of consumption goods this year or can save the $50 and, after
paying the tax on the interest earnings, buy $52.50 of consumption goods next year. Because of the income tax, a person can
buy only 5 percent, rather than 10 percent, more consumption
goods next year. Because of this lower return, the individual
may decide to consume now rather than save for future consumption. It is important to recognize, however, that the responsiveness of saving to more favorable taxation is an unsettled
issue. If one concludes that savings will rise in response to
reduced taxation, then substituting a value added tax for the
corporate income tax should encourage saving.
There are other considerations in assessing the mechanism
that leads to an increase in investment. First, an increase in
savings must be channeled into domestic financial markets in
order to lower interest rates and therefore the cost of capital.
Second, producers must respond to the lower cost of capital by
using more capital intensive methods of production.
There
probably will be some response, but its magnitude is open to
discussion. Third, the mix of new investment must be considered;
it may be concentrated in housing, consumer durables, or fixed
business capital. Thus, the substitution of a value added tax
for the corporate income tax will increase capital formation only
if savings increase, the cost of capital falls, and business
responds by investing in the United States.
Finally, it bears noting that the potential of the value
added tax for promoting capital formation may be exaggerated by
an analysis that compares a "pure" consumption tax with a "pure"
income tax levied on all returns to capital. The current income
tax does not apply with full force to all types of saving and
investment.
For example, home ownership, pension reserves, and
assets eligible for the investment tax credit or the asset
depreciation range receive relatively favorable tax treatment.
Similarly, not all forms of consumption would be taxed the same
under any likely value added tax.
In contrast to an income tax, neither the social security tax
nor a value added tax applies directly to the return from saving.
Consequently, substituting a value added tax for the sociai
security tax would be unlikely to affect savings decisions.

-4Price Level Impact
A value added tax, by itself, will probably increase prices,
since the tendency for business to pass the tax on to consumers
is unlikely to be offset by an unduly restrictive monetary
policy.
The result would be a "one-shot" increase, not a
recurrent increase, in the price level, although the subsequent
price effects of adjustments in wage contracts, social security
payments, and other indexed items may occur over time. In this
regard, it is noteworthy that the Thatcher government's program
of increased value added taxation and reduced individual income
taxation has been accompanied by a significant increase in the
consumer price index in the United Kingdom.
The important question, then, is whether the inflationary
impact of the value added tax would be offset by reductions in
other taxes. In the short run, the corporate income tax reduces
the after-tax rate of return to capital, rather than increases
product prices. Accordingly, prices will probably not fall as
corporate income taxes are cut. Thus, substituting a value added
tax for the corporate income tax is likely to increase prices.
This is a serious drawback to the value added tax.
Substituting a value added tax for the social security tax
may be less inflationary. Reducing the employer portion of the
social security tax would tend to reduce business labor costs and
possibly prices.
Reducing the employee portion of the social
security tax, however, would probably have no effect on the price
level.
Thus a value added tax, accompanied by an equivalent
reduction in employer and employee social security taxes, would
result in some increase in the price level.
This would be
particularly distressing to individuals least able to protect
themselves from rising prices.
The impact of a value added tax on prices is largely independent of whether it is hidden in the price of the product or
whether it is quoted separately to consumers. While it is not
customary in Europe to quote the value added tax separately, this
need not be the case in the United States. State retail sales
taxes are quoted separately because the merchants persuaded
legislators to require it, and the same could occur in the case
of a United States value added tax.
Furthermore, nonseparate
quotation of the value added tax might be viewed as an attempt to
hide the tax from public scrutiny.
Balance of Trade
Many have expressed the view that a value added tax would
improve our trade balance. This is based on the observation that
current international rules allow indirect taxes, such as sales
or value added taxes, to be imposed on imports and rebated on
exports.
These adjustments are not allowed for direct taxes,

-5such as the corporate income or social security taxes.
It is
doubtful, however, that the U.S. trade balance would improve
significantly from substituting a value added tax for the
corporate income tax.
The impact of the value added tax on trade is closely related
to what happens to prices.
Quite simply, one must ask the
question: will the substitution of the value added tax for some
other tax increase prices?
It seems likely that the immediate
impact of substituting a general value added tax of 5 percent for
part of .the corporate income tax would be to increase prices by
about 5 percent. Since the new tax would be rebated on exports,
just like our state retail sales and Federal excise taxes,
exports would leave the country tax free. While domestic prices
would be 5 percent higher, export prices would remain unchanged.
Foreign consumers, therefore, would find U.S. products no more
attractive than before; there would be no increase in demand for
U.S. exports.
Since imports would be subject to the value added tax their
prices also would increase by about 5 percent, the same as for
domestic goods and services.
As a consequence, domestic consumers would find imports just as attractive as before; there
would be no incentive to reduce the demand for imports. Thus, on
both the export and import side, there would be little immediate
impact on the U.S. trade balance if a value added tax were substituted for the corporate income tax. There might, of course,
be a positive trade impact in the long run if the substitution
led to an improved investment climate, enhanced capital formation, and a more productive and competitive U.S. economy.
A modest trade balance improvement might result from
replacing the social security tax with a value added tax, if the
price level increased by less than the value added tax. Because
of the price-dampening effect of reducing the employer portion of
the social security tax, this is a possibility.
Regardless of which tax it replaces, many believe that a
value added tax rebate, in itself, will expand exports and that a
value added tax levy will retard imports. This belief might have
a positive effect on trade if it encourages businesses to compete
more vigorously in international markets.
This result would
depend upon the importance of nonprice considerations in
explaining export activity.
It is also important to recognize that other countries could
restructure their own tax systems if they felt the United States
was gaining an unfair trade advantage. Relative to other countries, the United States has a moderately high corporate income
tax, but a low social security tax.
(See Annex A.) Thus, the
possibility exists that other countries might maintain their
competitive position by increasing their existing value added

-6taxes and reducing their corporate income or, especially, their
social security taxes.
This outcome is by no means certain.
After all, a country's tax structure is not determined solely by
international considerations.
Moreover, except for Japan, U.S.
indirect taxes, as a share of gross domestic product, are the
lowest of the major developed countries. (See Chart 1 and Annex
A.) Other countries may believe that the United States should be
allowed to "tilt" its tax structure to reach some "reasonable" or
"average" level of indirect taxation.
This issue has been studied before. Both the President's
Task Force on Business Taxation, in its 1970 review of tax
policy, and the Advisory Commission on Intergovernmental
Relations, in its 1973 value added tax study, considered the
trade issue.
Both expressed doubt over any trade benefits
resulting from substituting a value added tax for the corporate
income tax and both noted the possibility of foreign retaliation.
Distribution of Tax Burden .
Lower income taxpayers, who must spend all their income on
consumption, may find a value added tax burdensome because of its
regressivity. While a value added tax, by itself, is regressive,
one must consider which tax it replaces. The immediate impact of
the corporate income tax is probably progressive since it falls
on income from capital.
Therefore, substituting a value added
tax for the corporate income tax would make the tax structure
less progressive.
The social security tax, on the other hand,
also is regressive because it is limited to the first $22,900 of
wages and applies only to labor income.
Accordingly, substituting a value added tax for the social security tax would not
make the tax system noticeably less progressive. One regressive
tax would be substituted for another. Retired individuals, however, who do not pay social security tax, would be distressed by
having to pay value added tax. They could justifiably say that
they already had paid for their retirement during their working
years and that higher prices and taxes in retirement were unfair.
Their distress might be partially assuaged by the fact that
social security payments are indexed.
One way to illustrate possible distributional effects is to
ask what would happen to tax burdens if a value added tax
completely replaced the individual income and social security
(employee portion) taxes. (See Chart 2.) The combination of the
current income and social security taxes is progressive while a
value added tax, even with necessities excluded, is regressive.
As a share of income, the present individual income and social
security taxes are only 2 percent for families with less than
$5,000 in income, but increase throughout the income range to 33
percent for families with over $100,000 in income.

CHART 1

DIRECT AND INDIRECT TAXES AS A
100PERCENT OF TOTAL TAX REVENUE

f§j Indirect
Direct

i
i

Canada

France

Japan

United Kingdom United States

TAX REVENUESAS A PERCENT
OF GROSS DOMESTIC PRODUCT
40r-

mmm
mmm
Canada

France

Germany

Japan

United Kingdom United States

TAXES AS PERCENT OF INCOME
4«

(Each line reflects equal total tax liabilities at 1 9 7 8 levels of income)

Family Income

and Over

-9This may be contrasted with a value added tax with no exclusions at a 23.2 percent rate, sufficient to equal the revenue
raised by the individual income and employee social security
taxes in 1978.
As a share of income, such a value added tax
would be 35 percent for families with less than $5,000 in income,
but fall to 6 percent for families with over $100,000 in income.
No one, of course, is proposing the complete substitution of
the value added tax for the income and social security taxes. A
more realistic alternative would be to substitute a value added
tax for part of the combined individual income and social security taxes.
One possibility would be to reduce income and
employee social security taxes by $100 billion, keeping the same
degree of progressivity for these taxes as under present law, and
offset the revenue loss with a $100 billion value added tax with
no exclusions. The resulting distribution of tax burdens would
be regressive at the lowest income levels and mildly progressive
elsewhere. As a share of income, families with less than $5,000
in income would pay 17 percent in taxes, families with between
$5,000 and $10,000 in income would pay 14 percent, and taxes
would then increase throughout the income range so that families
with over $100,000 of income would pay 21 percent of their income
in taxes.
The overall distribution is significantly less
progressive than the present combination of income and employee
social security taxes.
The regressivity of the value added tax can be moderated, but
not eliminated, by special measures. One possibility is the use
of exemptions and reduced rates for necessities, as in Chairman
Ullman's proposal and in some European countries. These reduce
the tax burden of the value added tax at the lowest income
levels, but the tax remains regressive. Exemptions and reduced
rates, moreover, create administrative problems. A tax with two,
three, or four rates is more complex than a tax with one rate.
The specially-taxed items must be identified. Does a lower rate
for food, for example, apply to such items as chewing gum, soda
pop, candy, or caviar? Experience with the income tax shows that
even medical services and drugs are not easy to define. Beyond
the definitional problems, total or partial exclusions erode the
value added tax base and its revenue potential. (See Chart 3.)
The regressivity of a value added tax also can be reduced by
a refundable income tax credit for tax paid on a necessary amount
of consumption. This avoids the need to define exempt commodities
and can be implemented at a lower revenue cost than a complete
exemption for certain "essential" commodities.
It can, for
example, be phased out at increased income levels. In effect,
middle and upper income groups would still pay tax on purchases
of food and other necessary items. On the other hand, a refundable credit is effective only if it reaches the roughly 25
million individuals who do not appear on an income tax return.
These tend to be individuals most in need of the credit, mainly

CHART 3

SUBTRACTIONS
FROM VALUE ADDED
TAX BASE
(Percent)

Medical Care

Housing

Clothing

Food

-11recipients of social security benefits and of transfer payments
under social and welfare programs.
Unlike lower rates and
exemptions, if the credit was not paid until the end of the year,
the consumer would have to finance the tax during the year.
Administrative and Design Considerations
Both the European value added taxes and the tax suggested by
Chairman Ullman have certain basic similarities:
they are broad based, applying to services as well as
goods;
tax liability is determined by the credit method with
tax paid on purchases deductible from tax due on
sales;
they are consumption type taxes, any tax paid on
capital
equipment
purchases
is
immediately
deductible; and
they extend through the retail stage.
A value added tax of this type for the United States would
involve about 15 million taxpayers. This number might be reduced
by 5 million if exemptions were provided for very small proprietorships and farming. But under a value added tax, nearly all
transactions are taxed. Even a firm that is tax exempt on its
sales will have paid tax on its purchases. If it is to receive
credit for tax paid on its purchases, -it either would have to
file a return or the credit would have to be made available to
its customers.
Even 10 million taxpayers would add about 30 percent to the
number of returns filed with the Internal Revenue Service,
assuming quarterly returns are required. Since the value added
tax would not totally replace any other tax and would be a new
tax, requiring new returns, new regulations, and a new body of
case law, this would be a net addition to the work of taxpayers,
the Internal Revenue Service, and the courts.
This differs
sharply from the typical European case where the value added tax
completely replaced another sales tax.
Reporting and payment requirements for a value added tax
would be similar to those for Federal excises, which require
liability to be computed on a semimonthly basis with payment due
9 days later. The actual excise tax return is filed quarterly
and is accompanied by the payment of any remaining balance.
Liquor and tobacco excises, however, have slightly different
rules.
A value added tax payment system which would fit more
neatly with ordinary bookkeeping would be a monthly liability
period with payment due at the end of the next month. This would
be similar to that proposed by Chairman Ullman.

-12Other Considerations
A Federal value added tax would raise a number of other
issues.
Forty five states and the District of Columbia impose
general sales taxes, a revenue source which they tend to view as
belonging exclusively to them.
Sales and gross receipts taxes
account for about 30 percent of state tax revenue. In contrast,
excise taxes generate less than 4 percent of Federal tax collections. Nevertheless, while a Federal value added tax may make it
more difficult for the states to raise their sales taxes, it
should not prevent such increases. All levels of government, for
example, impose income taxes.
Moreover, total Federal,, state,
and local sales tax collections are lower in the United States
than in most developed countries.
Because of likely differences in the tax bases, it is doubtful that a Federal value added tax could be coordinated with the
state sales taxes. Separate taxes, admittedly, would mean higher
administrative and compliance costs.
Each level of government
would require a collection and audit capability. Taxpayers would
have to become familiar with separate tax bases and separate
returns.
Revenue departments and taxpayers, however, already
face this problem with Federal and state income taxes. Efforts
aimed at Federal-state cooperation and coordination have not been
successful.
As shown by Chairman Ullman's proposal, even a broad-based
value added tax may not apply to all forms of final consumption.
Practical considerations may require special treatment for many
items.
In the area of housing, for example, homeowners and
tenants should be treated equally.
But if rental payments are
taxed, how should homeowners be taxed?
It may be difficult to
value the so-called "imputed rent" on owner occupied housing.
Taxing the purchase price of a home is one alternative, but this
may aggravate the problems of many families already hard pressed
to cope with high housing prices. The treatment of interest in
the housing area also is troublesome. If it is exempt, what part
of a cental payment should a landlord be allowed to exclude from
the tax base?
These and other problems will require careful
study.
The value added tax is a very potent revenue source. At 1979
levels of consumption, a value added tax would raise roughly $10
billion in revenue for each percentage point. Thus, a 7 percent
value added tax would raise about as much revenue as the corporate income tax and a 12 percent value added tax would raise as
much revenue as the social security taxes. With such a powerful
instrument for raising revenue, many are concerned that the value
added tax eventually will be used to add to the total Federal tax
burden.

-13Conclusion
Mr. Chairman, you are to be commended for initiating an
examination of the very important, but complex, issues of how the
Federal tax structure affects our national well being. This is a
time of great change.
It is also a time of troublesome and
unfamiliar economic conditions. The combination of high inflation, slow growth, and persistent trade deficits must make us
wonder if the traditional economic remedies still work. In this
sense, your decision to study a broad range of new initiatives
could not come at a better time.
But changes of such major
consequences require careful and deliberate study.
We welcome
the opportunity to participate with you in that study.

ANNEX A
Federal, State and Local Tax Revenues for Selected Countries as Percent of Gross Domestic Product, by Type of Taw, 1975
(Country Rankings ln Parentheses)
Indirect
Taxes

Direct Taxes
Social Security 2/

Country
Belgium
Canada
Denmark
France
Germany (Fed Rep)
Italy
Japan
Luxembourg
Netherlands
Sweden
Switzerland
United Kingdom
United States

JLaUtL

Sales and
Excise 1/

11.13(5)
33-98(9)
13-05(1)
36.90(6)
35.22(8)
32.3M10)
20.23(13)
16.7M2)
16.90(1)
15.96(3)
29.19(12)
36.77(7)
30.3KH)

10.87(6)
10.91(1)
11.71(1)
12.11(2)
9.37(8)
9.3K9)
3.67(13)
9.72(7)
10.9K5)
11.18(3)
5.90(11)
9.21(10)
5.19(12)

Employee and
Total
13.1K5)
3.22(12)
0.18(13)
11.72(3)
12.03(6)
11.83(2)
5.09(11)
11.05(1)
17.99(1)
8.89(7)
8.19(8)
6.7K10)
7.12(9)

Employer
8.11(1)
n.a.
0.3K12)
10.61(2)
6.60(7)
11.92(1)
2.63(11)
7.80(6)
8.10(5)
8.17(3)
3-05(10)
3.75(9)
1.18(8)

Self Employed
1.70(5)
n.a.
0.17(12)
1.11(6)
5.13(D
2.9K9)
2.16(10)
6.25(2)
9.59(1)
0.12(11)
5.11(3)
2.96(8)
3.21(7)

Corporate
Income
3.07(6)
1.67(2)
1.37(13)
2.00(9)
1.56(12)
2.01(8)
3-13(1)
7.22(1)
3.61(3)
1.99(10)
2.16(7)
1.92(11)
3.29(5)

Noncorporate
Income \/
13.21(1)
11.32(7)
23.86(1)
1.58(13)
10.60(8)
1.95(12)
5.07(11)
12.78(5)
12.66(6)
21.17(2)
10.5K9)
11.29(3)
9.98(10)

Office of the Secretary of the Treasury
Office of Tax Analysis

Property 1/

Other 5/

1.01(12)
3.13(3)
2.57(1)
1.16(9)
1.09(11)
1.17(10)
1.9K7)
2.3K5)
1.18(8)
0.5K13)
2.13(6)
1.51(1)
1.13(2)
'

0.10(8)
0.70(1)
0.06(10)
1.70(2)
0.57(6)
0.01(11)
1.03(3)
0.63(5)
0.25(7)
1.92(1)
0.07(9)

Total Direct
Taxes 6/
30.56(1)
23.01(11)
28.3K5)
21.16(9)
25.85(7)
23.00(12)
16.56(13)
37.02(1)
35.99(2)
31.18(3)
23.59(10)
27.53(6)
21.82(8)

Source: Revenue Statistics of QECD Member Countries. 1965-1Q75.
J/ Includes general sales, value added, and specific excise taxes.
2J Includes contributions of employers, employees, and self employed. Category Is broadly defined to Include all tax payments to Institutions or general
government providing social welTare benefits, provided they are levied as a function of pay or a rixed amount per person. Thus, for the United States
this category Includes contributions to the railroad retirement rund, unemployment Insurance fund, workman's compensation fund, and civil service retirement program ln addition, of course, to the more familiar social security-type payments made pursuant to the Federal Insurance Contributions Act (FICA).
\f Includes Income taxes on individual and unincorporated enterprise, such as proprietorships and partnerships.
it/ Includes taxes on net wealth, Immovable property, estates, and gifts.
57

Includes taxes on employers based on payroll or manpower and miscellaneous taxes which oannot be classified within a specific direct tax category.

£/

Computed by subtracting sales and excises from total.

FOR RELEASE ON DELIVERY
November 8, 1979 — 10:00 a.m.
STATEMENT OF THE HONORABLE ROBERT CARSWELL
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
SENATE APPROPRIATIONS SUBCOMMITTEE ON TREASURY,
POSTAL SERVICE, AND GENERAL GOVERNMENT AND
THE SENATE GOVERNMENTAL AFFAIRS SUBCOMMITTEE
ON CIVIL SERVICE AND GENERAL SERVICES ON
PROTECTION OF FORMER PRESIDENTS AND
THEIR WIDOWS AND OTHER RELATED MATTERS
Mr. Chairman and members of the Subcommittee, I appreciate
the opportunity to testify today in this oversight hearing
and to discuss with you a number of issues involving the protective mission of the Secret Service. In particular, pursuant
to the Committee's request, I will discuss issues related to
the protection of widows of former Presidents, the protection
of former Presidents themselves and the protection of individuals
other than those specifically enumerated in Section 3056 of
Title IS. Accompanying-me today is Richard J. Davis, Assistant
Secretary for Enforcement and Operations and Director H. Stuart
Knight of the Secret Service.
There are two underlying premises which are relevant to
a consideration of these issues. The first is that Secret
Service protection is associated with the Presidency. The
nature of this protection reflects the security risks involved
in having a relation to that office. Thus, under its authorizing statute, Secret Service protection is provided for those
who are or have been President, their family members and those
seeking the office. Similarly,•the statute also provides for
the protection of those who have equivalent positions in
other countries and are subject to similar risks — visiting
heads of state and government.
This concept has more than theoretical significance. It
is in providing this type of all-encompassing protection —
that is, in establishing a secure environment -- where the
expertise of the Secret Service exists. This does not mean
that the Service should use the same techniques and the same

M-187

-2resources in support of all its protectees. Adjustments
should be and are made to reflect the actual security problems
involved in the different situations with which it deals. This
Comprehensive protection is, however, considerably__more complex
than simply providinq a driver and/or bodyguard to"escort
someone from place to place, basic measures in which the
Secret Service has no more expertise than other agencies. Therefore, to the extent that examination of particular issues
shows that assistance of this latter type is all that is genuinely
required, the need for a continuing Secret Service role should
not escape close scrutiny.
Our second underlying premise is that it is important
to maintain a reasonable balance between the protective and
the investigative responsibilities of the Secret Service.
Protection as practiced by the Service is more than a "bodyguard" function. It involves investigation, analysis and
detailed advanced planning. It also involves responsibility
for the safety of our most important leaders. It is, therefore,
important that the Service have available high caliber people
with the training and capability to perform these functions.
If the mission of the Service were solely protection or overly
weighted in that direction, the Department would be concerned
about its ability to attract the type of people needed for
the job. In addition, the ability to rotate people betv/een
permanent protection and criminal investigations assists in
dealing with tedium and other problems sometimes associated
with providing protection on a long term basis.
Protection of Former First Ladies
The protection of former First Ladies was first provided
for in legislation following the assassination of President
John F. Kennedy. When first enacted, the legislation applied
only to Mrs. Kennedy and her children and only authorized protection for two years. In late 1965, however, the wife, widow
and minor children of former Presidents were added to the list
of those entitled to protection under Section 3056. This
authorization continued for a period of four years after the
President left or died in office. This time limit was extended in 1967 to March 1, 1969, for widows and children
receiving protection at the time of enactment. Finally, in
October of 1968, the basic protective authority was again"
amended to provide protection on a permanent basis for spouses
of former Presidents and for a widowed former First Lady until
her death or remarriage and for minor children of a former
President until they reached 16 years of age. An option to

-3decline protection was also included in the amendment.
The question of whether it is necessary to have this
automatic Secret Service "protection for life" for former
Presidents1 widows has been raised at various times since
1972, but it has not produced any changes in the law. We
fully agree that it is worthy of review by the Subcommittee.
As Director Knight indicated in testimony before this
Committee in May of 1979, from a security perspective, there
does not appear to be a need to provide continuous protection
to widows of former Presidents. There simply have not been
frequent threats to or incidents directed at these individuals.
The Department thus is prepared to support legislation which
would terminate Secret Service protection for these individuals
six months after the death of the former President. Any such
legislation should take into account, however, the possibility
that specific threats or other events might create a temporary
need for Secret Service protection. These situations can be
accommodated by providing the Secretary of the Treasury with
the authority to restore such protection if needed in particular
cases.
While elimination of Secret Service protection for these
individuals is justified, other support for them may be
appropriate. As a result of their participation in public
life at the highest level, these individuals have lost a
large measure of their privacy. The Committee thus might
want to consider providing them with a driver and/or some
form of escort. This could be done directly or by providing
an increased expense allowance for this purpose.
Finally, the Department believes that any legislation in this area should be prospective. Its terms should
not apply in any way to those wives or widows of former
Presidents now receiving protection.
Protection of Former Presidents
Authority for the Secret Service's protection of our
former Presidents was first included in Section 3056 in 1962.
The law at that time provided for protection, if requested,
for a "reasonable time" after the President left office.
Protection was extended to a former President's lifetime in
1965. This protection may be declined.

-4Providing Secret Service protection to former Presidents
is appropriate. These individuals have occupied the highest
office in our country; they inevitably have been involved in
numerous controversies; they have become persons about whom
strong feelings are held; and they have lost any prospect
of privacy.
The degree to which there is a security need for this
protection will, of course, vary. Certain individuals are
bound to be more controversial than others. And certainly,
over time, attitudes about individuals change and often become
less intense. As Director Knight noted in his May testimony,
traditionally the number of threats directed at a former
President declines as time passes. Nonetheless, it is
difficult to say that there is a clear time when, as a general
rule, the risks to former Presidents are sufficiently reduced
so as to negate the need for Secret Service protection. The
situation may well vary among individuals. Considering all
these factors, we do not believe new legislation is needed
in this area.
It has also been suggested that statutory limits be
placed on the extent of Secret Service protection by limiting,
for example, the number of trips on which a former President
could receive protection. We do not believe such an approach
should be adopted. Former Presidents are public people and
inevitably will travel. If it is believed that these individuals should have protection, then they should have it
wherever they go without limitation. The protection provided
would simply be of little value, if the person then proceeded
to take a number of trips without it.
Protection for Individuals Not Enumerated in Section 3056
The Secret Service, acting on the President's instructions,
has in numerous situations provided protection for individuals
not within any of the then existing categories of protectees
included in its authorizing statute. Relying on their
constitutional authority as Chief Executive, varying Presidents,
going at least as-far back as President Roosevelt ordered
protection for visiting Heads of State; President Truman
ordered protection on foreign trips by Secretaries of State;
President Johnson ordered protection for Senator Kennedy in
1968; President Nixon ordered protection for former Vice
President Humphrey for six months, for Dr. Kissinger, for
Senator Kennedy in 1972 and for Governor Rockefeller on an
official trip to Latin America; President Ford ordered

-5protection for Vice President-Designate Rockefeller and
Mrs. Carter, Mrs. Dole and Mrs. Mondale prior to the enactment
of legislation; and President Carter ordered protection for
Senator Kennedy in September, 19 79. In addition, at varying
times, the Secretary of the Treasury has received Secret Service
orotection.
While the Presidential power to order this protection
has been exercised by many Presidents over many years, some
have argued that there is no such authority. We do not concur
with this view. Nonetheless, we do feel that it would be
appropriate to develop legislation which would create a formal
statutory mechanism for providing protection to persons not
included in Section 3056.
We look to working with this Committee in determining
how best such legislation can be drafted. In doing so there
are a number of issues which must be addressed. Should this
authority rest with the President or the Secretary of the
Treasury? Should there be a requirement that an advisory
committee, such as that used in candidate protection, be
consulted? Under what circumstances should protection be
authorized? We do not yet have final answers to all these
questions. It is important, however, that any such statute
make clear that this protection should be provided in the
truly exceptional case. It should assure that protection
is provided when, as discussed at the beginning of my testimony, Secret Service type protection is genuinely required.
That concludes my statement and we will be happy to
respond to your questions and those of the other members of
the Subcommittee.

For Release Upon Delivery
Expected at 9:30 a.m.
STATEMENT OF PAUL H. TAYLOR
FISCAL ASSISTANT SECRETARY
OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON
INTERGOVERNMENTAL RELATIONS AND HUMAN RESOURCES
HOUSE OF REPRESENTATIVES
November 8, 1979

Mr. Chairman and members of the Committee:
I am glad to be here today to comment on delivery systems
for Treasury's payments and problems associated with
replacement of lost and stolen checks. The Department welcomes
the Committee's interest in this area.
The total volume of Treasury payments as of the close of
this past fiscal year approached 700 million. This represents
an increase of 15 million over the volume of payments made by
Treasury in Fiscal Year 1978. However, despite the large
increase in volume, the Treasury has made a concerted effort to
insure that payments are made as timely and reliably as
possible.

M-188

-2-

Direct Deposit
A major part of our effort in this area is the direct deposit
program. This is a voluntary program to pay individual
recurring benefits through direct deposits in payee accounts in
financial organizations. The system provides for the rapid
computer-assisted transfers of funds between the Treasury and
the Federal Reserve and financial organizations. For Fiscal
Year 1979, the direct deposit program accounted for about
17 percent of the payments made by the Treasury. This service
is now available to recipients under all major federal benefit
programs and will soon be available to Government employees for
salary payments. It eliminates thefts and forgeries in the
payment operation and assures timely receipt. The dramatic
success of this system is evident from the statistics. Since
Fiscal Year 1976, the annual volume of Treasury's direct
deposits has grown from slightly over 2 million to almost 119
million. For each of these payments a check issuance has been
eliminated and the expense of mailing and handling has been
avoided. For every check issuance eliminated about 12C is
saved. At the present level, that equates to annual savings of
over $14 million. We have an active marketing program to
enhance participation, including extensive use of check inserts
and media messages and we are aiming for a voluntary
participation rate of 30 percent by Fiscal Year 1982.

-3-

Continued Reliance on Checks
While the direct deposit program has many advantages, the
majority of beneficiaries still receive checks. Most payments
are for Social Security, Supplemental Security Income or
similar types of benefits. Many beneficiaries are hesitant to
try something new and continue to receive checks. For example,
in the Supplemental Security Income Program, only 7 percent of
the payees have elected to receive benefits under this method.
As a result, Treasury has continued to emphasize improvements
in the timely issuance of replacement checks when nonreceipt is
claimed.
Although the number of checks is about double the number
issued only twenty years ago, the annual number of checks drawn
on the Treasury Government-wide has leveled off to about 700
million annually and the number issued by Treasury is actually
decreasing.
One step which would reduce the incidence of theft and
reduce peak-load operating problems is the issuance of monthly
recurring benefits on a cycle basis. The Social Security
Administration is presently considering this method of issuance
for new beneficiaries beginning in Fiscal Year 1982. The
cycling of checks throughout the month, rather than issuing all
at one time, would substantially reduce peak-load operating
problems for the Postal Service, commercial banks, the Federal
Reserve System, and Treasury.

-4-

In the meantime, Treasury continues to work toward insuring
that checks are received by payees as timely as possible under
current procedures. It should be noted that 99.9 percent of the
over 700 million checks issued annually are received by the
payees without difficulty, and in those relatively few cases
where a replacement check must be issued we have reduced
processing time by at least a third since January 1977.
However, I do not mean to minimize the problem because even
one tenth of a percent results in almost 600 thousand
replacement checks per year. About half a million of these are
substitute checks. Of those, 75 percent pose no problem for the
Treasury while the remaining 25 percent result in double
payments. After reaching a high of $78 million in August, our
double payment accounts receivable balance was reduced to $68.9
million as of last Friday, November 2. We are working to reduce
these receivables through bank reclamation action in the case
of forgeries, collection from the payees, or chargeback to the
program agency under prior agreement.
Nevertheless, I must emphasize that without an
acceleration of payment data reaching Treasury, the number of
double payments is directly related to the speed with which we
issue replacement checks. The speed itself is a direct result
of litigation and expressed Congressional interest in faster

-5replacement for lost and stolen checks, as well as our own
concern for timelier service. As an example of continuing
Congressional interest, H.R. 4904 would require replacement of
Supplemental Security Income (SSI) benefit checks within two
mail delivery days following the regularly scheduled delivery
day.
Joint Treasury/SSA Project
In this regard, the Treasury and the Social Security
Administration have already worked to jointly develop a system
for rapid replacement action for SSI payments, under this
system, Treasury agreed to replace checks during the month of
issue without first checking the status of the original based
on the presumption that the original checks would not have
flowed through the banking system by the time the claims of
nonreceipt on these checks are received and processed by
Treasury. The result of this system is very timely replacement
action. Claims of non-receipt on these checks received during
the month of issue at a local Social Security district office
are processed and received by the Social Security headquarters
in Baltimore by 6:00 p.m. each day. The claim is then processed
and forwarded to the Treasury's Birmingham Disbursing Center by
1:00 a.m. and a substitute is mailed by 8:00 a*m. the following
morning. Since this rapid system of replacement does result in
a higher number of duplicate payments, it has not been extended
to other classes of beneficiaries.
Other Service Improvements
In addition to our work in connection with the SSI System,
during 1977 and 1978 special efforts were devoted to improving

-6-

the replacement of other types of checks. Among these were
Social Security benefits and tax refund checks. With agencies
submitting claim information on magnetic tape, substitute
checks are being issued in a little over a week after the
Treasury receives the claim. In contrast to the special
procedure for the relatively low volume SSI payments, this
procedure provides for verification that the original check is
unpaid before issuing the substitute. The one week time frame
for replacement is now less than half the time required in
January 1977. While the efforts to provide faster service in
issuing replacement checks have been successful in alleviating
financial hardships, they have, as a consequence, increased the
number of double payments.
Check Truncation System
At the same time that the Treasury was accelerating the
replacement of lost checks, we installed a new check payment
system to accelerate the transmission of payment information on
Government checks to the Treasury. The program provides for
stopping, or truncating, the flow of checks at the Federal

-7-

Reserve Banks where key information is converted to microfilm
and magnetic tape and sent to Treasury for processing. The
objectives were to obtain payment information faster while
reducing the shipping and handling of hundreds of millions of
checks. The check truncation program was implemented this past
year and initial implementation problems were greater than
anticipated. Therefore, the goals for faster recording of
payment data have not yet been fully realized. The combination
of accelerated replacement without a commensurate acceleration
in payment information resulted in increased double payments
and larger work backlogs which temporarily reduced the volume
of referrals to Secret Service and increased account receivable
balances. A substantial effort is now underway to correct these
problems. Mr. Chairman, these improvement efforts are covered
in considerable detail in responses prepared to questions posed
earlier by the Committee. I understand the Treasury responses
will be made a part of the hearing record. However, I will
briefly summarize them at this point.
The Division of Check Claims has added 100 employees
to process collection requests for double payments and refer
those involving forgery to the Secret Service. For the month of
October, referrals were above 6,800. This is the highest volume
for any month in the past year.

-8-

A Departmental Check Claims Task Force has been
established to plan and monitor operational improvements
designed to reduce buildups of work in this area and prevent
future ones.
Management-by-objective Goals have been established to
reduce the accounts receivable balance significantly and clear
backlogged cases by December 1980.
The Bureau of Government Financial Operations internal
audit staff is analyzing the receivable account to estimate the
amount which may ultimately prove to be uncollectible. In
addition, the Bureau has established a project to develop an
automated management information system to monitor and control
all accounts receivable actions associated with claims
operations.
The check truncation system is being carefully
monitored and efforts are being made both in Treasury and the
Federal Reserve Banks to speed the flow of payment data to
Treasury. In addition, a task force has been established in the
Bureau to resolve difficulties associated with obtaining
original checks from storage and to consider other problems
associated with the check payment system.
While the Treasury's primary objective is to provide timely

-9-

service in the replacement of checks, if necessary, we could
consider a temporary cut back in the speed with which we issue
replacement checks in order to slow down the buildup in double
payments. For example, a delay of one week, while affecting
service to the majority of payees, would probably result in
only a moderate reduction in double payments. However, it
should be noted that such a delay would allow a higher
percentage of original checks to be recorded as paid by the
time the claims are fully processed and, in those cases,
claimants would have to wait approximately 8 weeks for
settlement action.
Conclusion
In summary, we feel that substantial improvements have been
made in the delivery of payments to the public. The most
efficient and effective system is the direct deposit of
recurring benefits to payee accounts in financial
organizations. Since no checks are issued, the risk of theft or
loss is completely eliminated. Participation in the direct
deposit program is growing but it is a voluntary program and
there will continue to be a large volume of payments made by
check.

-10-

The issuance of replacement checks has been accelerated
during the past three years but with certain adverse side
effects -- most notably, an increase in the amount of double
payments. This increase, coupled with operational problems in
i the Check Claims area and in implementing the truncation system
resulted in internal workload buildups and a drop in referrals
to the Secret Service. We are making every effort to reduce
current workload buildups and will make additional system
improvements to preclude a recurrence. I can assure you that
these managerial problems are receiving top level attention
within the Department.
This concludes my prepared comments. As you requested, we
have submitted additional information for inclusion in the
hearing record. I will be happy to answer any other questions
you may have.

partmentoftheTREASURY
IHIIWTON, D.C. 20220

TELEPHONE 566-2041

m
u

FOR RELEASE UPON DELIVERY
Expected at 9:30 A.M.

STATEMENT OF
THE HONORABLE DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
OF THE
COMMITTEE ON WAYS AND MEANS
NOVEMBER 9, 1979
Mr. Chairman and Members of the Subcommittee:
I am pleased to present the views of the Treasury
Department on the seven bills being considered by the
Subcommittee today. I have attached to my written statement
an appendix that summarizes our position on each bill.
H.R. 3374—WAIVER OF TIME LIMITS IN FOREIGN RESIDENCE OR
PRESENCE REQUIREMENT FOR AMERICANS WORKING ABROAD
H.R. 3874 would waive in certain cases the foreign
residence or physical presence requirement which otherwise
must be met by individuals living abroad in order to qualify
for certain tax benefits. The Treasury Department does not
oppose this legislation.
Present law provides a deduction for certain excess
living costs incurred by individuals who have been resident
in a foreign country for at least one taxable year or who
have been physically present in a foreign country for at
least 510 days in an 13-month period. Alternatively, certain
individuals who live in camps and who satisfy this residence

M-189

-2test or physical presence test may elect to exclude a limited
amount of income earned abroad.
In the case of individuals who are required to leave a
foreign country because of war or civil unrest before
qualifying for the deduction or exclusion, subsection (a) of
H.R. 3874 would give the Secretary of the Treasury, after
consultation with the Secretary of State, the authority to
waive the residence or physical presence requirement if the
individual establishes that he could reasonably have been
expected to have met such requirement had not the war or
civil unrest occurred. The bill is intended to provide
relief to American employees who were forced to leave Iran
before qualifying under the residence or physical presence
test, as well as to others in similar circumstances. We
believe that such relief is warranted and that the bill is
suitably tailored to provide relief in the narrow
circumstances contemplated. Accordingly, the Treasury
Department does not oppose this legislation.
We do have some technical comments, however. Subsection
(b)(1) of the bill provides that its relief provisions shall
apply to taxable years beginning after December 31, 1976.
Since the bill would amend section 913, its effective date
should not be earlier then the effective date of section 913.
Specifically, the amendment to section 913 should apply to
taxable years beginning after December 31, 1977, or, in the
case of taxpayers who made an election pursuant to section
209(c) of the Foreign Earned Income Act to have prior law
(i.e., section 911 as amended by the Tax Reform Act of 1976)
apply to the 1978 taxable year, to taxable years beginning
after December 31, 1978.
Section 913 generally replaced section 911. Subsection
(b)(3) of the bill effectively provides that the Secretary
shall apply analogous rules for the 1973 taxable year of
individuals who made the election under section 209(c) of the
Foreign Earned Income Act to have section 911 under prior law
apply for that year. This raises two additional technical
issues. First, consistent with subsection (b)(1), subsection
(b)(3) should apply only with respect to individuals who
after September i, 1978, left the foreign country in which
they were resident or physically present.
In addition, consideration should be given to allowing
taxpayers to qualify for tax year 1977 despite their
premature departure. Taxpayers who might fail to qualify for

-31977 are those who arrived in Iran late in 1977 and were
forced to leave Iran before completion of an 18-month period
or before completion of a full year's residence in 1978. The
suggested change, which would ensure a partial exclusion for
the portion of the 1977 year during which the individuals
were abroad, could be accomplished by inserting at the
beginning of subsection (b)(3) the language "With respect to
the taxable year of an individual beginning during 1977, or."
H.R. 41Q3—EFFECTIVE DATE OF BASIS LIMITATION
FOR PLAYER CONTRACTS ACQUIRED IN CONNECTION
WITH THE PURCHASE OF A SPORTS FRANCHISE
This bill is designed to change the effective date of
provisions of the 1976 Tax Reform Act in order to prevent
these provisions from applying to a restructuring of the
Boston Patriots by William H. Sullivan, Jr. For the
following reasons the Treasury Department is not opposed to
this bill.
Section 1056 of the Internal Revenue Code, added by the
Tax Reform Act of 1976, provides that in the case of a sale
or other transfer of a sports franchise after December 31,
1975 the amount allocated to a player contract by the
transferee cannot exceed the adjusted basis of the contract
to the transferor at the time of the transfer plus the gain
(if any) recognized by the transferor on the transfer of the
player contract. Before this provison, a purchaser of a
sports franchise typically would allocate most of the
purchase price to player contracts because the cost of these
contracts could be amortized over the lives of the contracts.
The seller, on the other hand, typically would allocate most
of the sales price to franchise rights in order to recognize
a greater amount of capital gain and a lesser amount of gain
attributable to depreciable assets that might be subject to
recapture as ordinary income. Thus, although the allocation
of the purchase price was to be based on the relative fair
market values of the assets acquired, the purchaser of the
franchise frequently allocated a greater amount to player
contracts than did the seller. To insure consistency, the
Internal Revenue Service would have to contest the
allocations of both the buyer and seller.
In considering this problem, the Ways and Means
Committee indicated on several occasions that it would

- 4 -

propose a provision requiring the buyer and seller of a
sports franchise to treat the transaction consistently; the
amount allocable to player contracts by a purchaser could not
exceed the amount of the sales price allocated to these
contracts by the seller. It was not, however, until October
20, 1975 that the language of Section 1056 was first drafted.
The draft of October 20 did not merely require that the buyer
and seller treat transactions consistently; it specifically
limited the basis of player contracts to the purchaser of a
franchise to the adjusted basis of the contracts in the hands
of the seller plus the gain recognized by the seller on the
transfer. Thus, if the transferor of the contracts does not
recognize gain, the purchaser will have a basis in the
contracts equal to the transferor's basis which may be
negligible. This would be true in some cases even though the
stock of the transferor was sold in a fully taxable
transaction.1/
By October 5, 1975, William H. Sullivan, Jr., had
entered into contracts to acquire the voting stock of the New
England Patriots. These contracts, which obligated Mr.
Sullivan to purchase the stock of the Patriots, were executed
before any indication had been given by the Ways and Means
Committee that anything more than consistency would be
required by the transferor and transferee of a sports
franchise. The acquisitions were consummated on November 7,
1975. Mr. Sullivan subsequently through a related
corporation caused the New England Patriots to be liguidated;
the liquidation which effected the transfer of the franchise
occurred after December 31, 1975, the effective date of
Section 1056.2/
Because a corporation generally does not recognize gain
upon the distribution of property to its shareholders in
connection with its liquidation, the applicability of Section
1056 greatly reduced the amount that otherwise could have
been allocated to the player contracts by the new
corporation. This was true even though the shareholders who
sold their stock to Mr. Sullivan recognized gain upon the
sale. If consistency were the only requirement, the new
corporation would have been entitled to allocate
significantly more to the player contracts. Of course the
tax conseauences of an allocation would have been virtually
meaningless to the old corporation; as a liquidating
corporation it basically recognized gain only to the extent
of any depreciation recapture of which there^was little.2/
Because the acquisition of stock was an integral and
necessary part of the restructuring of the Boston Patriots,

-5and the provision preventing a step-up in basis was not first
proposed until after Mr. Sullivan was legally obligated to
acquire the stock, it is our view that there is an equitable
basis for relief.
In view of the equitable basis for relief present in the
circumstances, the Treasury Department does not oppose
enactment of H.R. 4103.
H.R. 4503—SPECIAL RULE RELATING TO DEBTFINANCED INCOME OF EXEMPT ORGANIZATIONS
H.R. 4503 provides a limited exception to the definition
of "acquisition indebtedness" for purposes of determining
whether the disposition of real property by a tax-exempt
organization gives rise to unrelated debt-financed income
that is taxable to the exempt organization. The Treasury
opposes H.R. 4503.
In general, the income that an exempt organization
receives from investment property is taxable in the
proportion that the property is financed by debt. If the
property is sold, gain on the sale is also taxable in the
proportion that the property is debt-financed. This
proportion is determined by the highest "acquisition
indebtedness" on the property for the twelve-month period
preceding the date of disposition.
The circumstances under which the limited exception of
H.R. 4503 would apply are detailed. Basically, it would
exclude from these rules a sale of real property during 1976
that had been financed before 1965, provided certain other
narrow -requirements are met.
Clearly Congress intended to tax sales of "debt-financed
property." Equally clearly, Congress intended that the test
of whether property was debt-financed at sale was to be
judged by looking at the twelve-month period oreceding the
date of sale. An exempt organization planning to dispose of
income producing property may extinguish the acquisition
indebtedness on the property and sell it without tax only
after a twelve-month waiting period.
These rules were enacted in 1969, and, after a
transitional period, have applied to dispositions of all

-6debt-financed property since 1972. Exempt organizations have
had more than enough time to adjust to this provision in the
years since its enactment, and we have no reason to believe
that they have not done so. We, therefore, consider the
special retroactive exception of H.R. 4503 to be
discriminatory and unwarranted.
H.R. 4611—CHARITABLE DEDUCTION
FOR CERTAIN CONTRIBUTIONS OF REAL PROPERTY
FOR CONSERVATION PURPOSES
H.R. 4611 would create an additional exception to the
general rule prohibiting a charitable deduction for a
contribution of a partial interest in real property and
would also make two existing temporary exceptions, enacted
in 1976 and scheduled to expire in 1981, permanent. As a
matter of tax policy, the Treasury Department does not
necessarily oppose this bill. However, we are concerned
about the difficulty of measuring properly the value of the
charitable contribution and with the potential for abuse of
these exceptions.
We, therefore, believe it would be preferable to defer
consideration of the bill until we have had further
experience with the 1976 provisions. The very purpose of
enacting legislation with a sunset date is to permit the
Congress, the Administration and other interested parties to
give careful consideration to these temporary provisions
before deciding whether to let the legislation lapse, be
extended or made permanent. In the meantime we would hope
to see more information developed as to the type of
transactions intended to be encouraged by H.R. 4611.
Under present law, in general, a charitable deduction
is not allowed for income, estate or gift tax purposes for a
contribution to charity (not in trust) of a partial interest
in property. Two exceptions that permit deductions for
partial interests in real property that are contributed
exclusively for conservation purposes were added as .part of
the historic preservation and conservation tax incentives
enacted with the Tax Reform Act of 1976. Under these
exceptions, a taxpayer may donate, exclusively for
conservation purposes, a lease, option to purchase, or
easement with respect to real property that is granted in
perpetuity, or a remainder interest in real property, and
receive a charitable contribution deduction. 1/ The term
"conservation purposes" is broadly defined to include the
preservation of land areas for public outdoor recreation or
education, or for scenic enjoyment, the preservation of
historically important land areas or structures, or the

-7preservation of natural environmental systems. These two
exceptions, as amended by the Tax Reduction and
Simplification Act of 1977, contain the same sunset feature
as the other historic preservation and conservation tax
incentives enacted in 1976, all of which expire during the
first half of 1981.
H.R. 4611 would amend present law in two respects.
Section 1 of H.R. 4611 would augment the exceptions now in
the Code by permitting a deduction for the contribution of
any interest in real property, where the only interests
retained by the taxpayer are oil, gas, or other mineral
interests, and access thereto, provided that such retained
oil, gas or other minerals may not be extracted or removed
by means of strip mining, open pit mining, contour mining,
area mining, or any other surface extraction method. This
provision is not limited to contributions made exclusively
for conservation purposes; it would apply to contributions
made for any purpose. Section 2 would make permanent the
present exceptions for contributions of partial interests i
real property exclusively for conservation purposes.
There are several reasons why the Internal Revenue Cod
denies a charitable deduction for the contribution of a
partial interest in property. As early as the Revenue Act
of 1964, Congress acted to deny deductions for future
interests in tangible personal property as long as the
intervening interest was owned by the taxpayer or a related
person. 2/ It was felt to be an abuse to allow a current
charitable deduction for a gift of a painting, for example,
which continued to hang in the taxpayer's home and would no
be available for public use until after the taxpayer's
death. In part, the difficulty in allowing a deduction for
transfers of such interests is that, like other partial
interests in property, they were regarded as difficult to
value and therefore amenable to aggressive valuations that
could not always be policed. Moreover, although the
contribution of a remainder interest in property to a
charity might well reduce the value of the property in
private hands, it would not affect the donor's current
enjoyment of the property in any material way. Thus, while
the contribution of a future interest in property might
properly be regarded as giving rise to a charitable
deduction for estate tax purposes, when the donor's
enjoyment of the property ceased, it was regarded as
undesirable to give current recognition to the contribution
of a remainder interest by allowing an income tax deduction
as well.

-8-

In 1969, Congress focused on the difficulty of valuing
the gift of a partial interest, particuarly where the use of
the property after the gift might be such as to favor the
private interest over the charitable income interest. For
example, if a charity were given an income interest in a
trust, the trust assets could then be invested in growth
stocks paying a low current return, leaving a greater
remainder interest to accrue to the non-charitable remainder
beneficiaries. 3/
The provisions that would be amended by H.R. 4611 raise
several of these concerns. First, it may well be difficult
to ascertain the diminution in market value of a parcel of
property resulting from the transfer of less than the
taxpayer's entire interest in the property for conservation
purposes. It is therefore difficult to measure accurately
the proper charitable contribution deduction. While
valuation problems arise under other parts of section 170,
the difficulties with valuing partial interests in real
property may be particularly acute, especially where such
interests have no impact on the donor's current enjoyment of
the property.
Second, for a taxpayer who does not have the present
intention to sell or develop the property, the gift of, for
example, a conservation easement, while perhaps diminishing
the value of the property, does not do so until a later
date; in particular, it may have no material impact on the
continuing enjoyment of the property by the donor of the
easement. Allowing a current charitable deduction to such
taxpayers thus appears inconsistent with the provisions
barring deduction for gifts of future interests in art
works. These problems seem especially likely to arise in
the case of transfers of surface rights to property where
only the mineral and related access rights are retained.
Where the donor's principal interest is in the mineral
rights, and where the ability to exploit those minerals is
not affected by the gift, allowing a current deduction for a
contribution of the surface rights has no greater adverse
impact on the donor's enjoyment of the property than in the
case of an individual who transfers a future interest in a
painting to a museum, retaining the right to enjoyment of
the painting throughout the donor's life.
There also may be instances in which one could question
the charitable nature of such transfers. For example, the

-9-

Treasury understands that statutes in some local
jurisdictions provide taxpayers with a reduction in local
property taxes in return for the grant of conservation
easements; where that occurs it is not clear whether the
contribution should be regarded as truly charitable. Not
only is it somewhat troubling to grant a charitable
deduction in such cases, but, in view of the private benefit
from nondevelopment, the charitable deduction may not be
essential to achieve the public purpose.
Finally, apart from questions such as these, it is not
clear to us whether procedures exist to insure that a
donated partial interest in property, such as a conservation
easement contributed to a private charitable organization,
will continue to be used for conservation purposes and for
the benefit of the general public. Without mechanisms to
insure the continued use of the donated interest for such
purposes, it is not clear that the public interest is being
properly served.
We recognize that the overriding benefits to the public
may be sufficient to overcome these difficulties and to
justify a charitable deduction in some circumstances. We
are keeping an open mind on that issue. Nevertheless, in
light of these concerns, it seems premature to consider H.R.
4611 at this point.
This is especially so in light of the fact that the
rules were changed just three years ago. There has been
insufficient time to gain experience with the new statute.
It has taken charitable organizations time to become
familiar with the new legislation and transactions involving
these provisions have only recently begun to occur. It is
only as transactions have begun to occur that we have
started to become aware of possible abuse. For these
reasons, we believe another year of experience with these
provisions is needed before deciding whether they should
become a permanent feature of the law, or if so, with what
revisions.
For similar reasons, we also believe it would be
premature to act on section (1) of H.R. 4611, which would
permit a deduction for contributions of real property
subject to retained mineral and related access rights.
While it is argued in behalf of this provision that similar
results can be obtained under existing law through the sale
of subsurface mineral rights followed by the transfer of the
a

-10taxpayerfs remaining interest in the land, allowing a
deduction for the contribution of surface rights by a donor
who retains the mineral rights presents more difficult
questions of valuation. Moreover, the transfers that would
be authorized by section (1) are not, as is the case with
other transfers of partial interests permitted by existing
law, restricted to transfers for conservation purposes.
Consequently, we feel the desirability of making such a
revision to the existing provision should be considered in
the context of an overall review of the provisions added
with the Tax Reform Act of 1976.
Finally, we note that the provisions H.R. 4611 would
make permanent were enacted as part of a package that
included several provisions intended to encourage historic
preservation. Those provisions, like the provisions with
which H.R. 4611 is concerned, must also be reauthorized
before June of 1981. In connection with the question of
reauthorization both the Treasury Department and the
Congressional Budget Office have initiated studies of the
benefits, possible abuses and difficulties of administering
these provisions. It seems to us a wiser course to permit
studies of this entire area to be completed before acting on
legislation such
H.R. as
46this.
3 4 —ELECTION TO TREAT INCOME
FROM SPACECRAFT AS FROM U.S. SOURCES
H.R. 4634 pertains to the question of whether income
from spacecraft leasing is from sources within or without
the United States.
Generally, the source of rental income is determined
according to the location where the rental property is used.
Thus, under present sourcing rules rentals received from
leasing of spacecraft are allocated between U.S. and foreign
sources depending upon the actual geographical use of
spacecraft.
H.R. 4634 would allow a lessor of a spacecraft used in
international commerce to elect to treat all income or loss
from the spacecraft, including gain from sale, as income or
loss from sources within the U.S. A similar election is now
available to lessors of certain ships and aircraft. Owners

-11of spacecraft would typically have tax losses generated by
depreciation deductions during the early years of operation.
Thus, if an owner is unable to use these losses or the
investment tax credit because his U.S. tax liability is
extinguished by other tax benefits, the owner would
generally arrange to lease the property from other taxpayers
who could use the depreciation deduction and the investment
tax credit. The lessor normally passes on some of these tax
benefits to the lessee through reduced rental charges.
Under the present source rules, lessors with foreign source
income, which is sufficiently sheltered by foreign tax
credits to preclude U.S. tax on foreign source income, would
not benefit from the depreciation deductions on spacecraft
used outside the U.S. Therefore, the number of available
potential lessors would be substantially reduced.
The Treasury Department sees no reason to tinker with
the present source rules in order to satisfy the desires of
a limited class of taxpayers. We do not believe that the
urgency of this matter has been demonstrated, and we think
it would be difficult to distinguish the circumstances
covered by H.R. 4634 from other leasing cases. In general,
we believe the present source rules for income from leasing
are logical, clear, and consistent. If those rules are to
be changed, moreover, we believe the changes should not be
elective in nature. The source rules are intended to define
primary United States taxing jurisdiction. However those
rules are to be drawn, we see no reason to leave them to the
discretion of particular taxpayers.
H.R.
96 8—NET
OPERATING
LOSS
For these reasons
we 4oppose
H.R.
4634.
CARRYOVER PERIOD FOR TAXPAYERS CEASING TO 3E
A REAL ESTATE INVESTMENT TRUST
H.R. 4968 would affect the net operating loss carryover
period of a real estate investment trust (REIT) or a former
REIT. Although we do not oppose the bill's change in the
treatment of pre-1976 REIT net operating losses, we do
oppose the bill's extension of the carryover period of
losses incurred by a disqualified REIT.
Under current law, if a REIT incurs a net operating
loss in a qualified year after 1975, the loss may be carried
over for eight years. Pre-1976 losses, however, may be
carried over for five years, with an extension of up to

-12three years as long as the REIT has remained continuously
qualified in all years following the year of loss. The bill
would treat pre-1975 losses the same as post-1975 losses,
and would allow an eight-year carryover period for all REIT
losses, regardless of the year the loss is incurred or the
REIT's qualified status in subsequent years.
We do not oppose this change, which affects only those
pre-1976 losses that were incurred by qualified REITs. The
REIT industry suffered its greatest losses in 1973 and 1974.
Recovery has been slow, and many of these large losses will
expire unused, regardless of qualification. Although we are
leery of a change that may encourage trafficking in REIT
losses, there has been no substantial trend in this
direction that would warrant denying the benefit of this
aspect of the bill to the industry as a whole.
We are, however, opposed to the second part of the
bill. A net operating loss can never be carried back to a
year in which a REIT was qualified. If a disqualified REIT
incurs a loss and cannot carry back the loss to any one of
the three preceding years because of its prior REIT status,
the bill would increase the disqualified REIT's net
operating loss carryover period by the number of taxable
years to which the loss is barred as a carryback. The
carryover period could not be increased to more than eight
years.
Once a REIT becomes disqualified, it is taxed as a
normal corporation or trust, as the case may be. We see no
reason to give an advantage to a REIT that has chosen to be
taxed as a normal corporation merely because it once was a
REIT, particularly since many REITs become disqualified so
that they can manage their assets more flexibly, without
being subject to REIT restrictions on their operations. The
situation is analogous to a corporation that has start-up
losses; that corporation is not granted an extended
carryover period because its loss cannot be used as a
carryback.
From an historic point of view, REITs that disqualified
themselves before 1976 expected the same five year carryover
period for operating losses that normal corporations had.
The bill would, in effect, change the effective date of the
extended seven year carryover period introduced by the Tax
Reform Act of 1976 with respect to disqualified REITs,
without a similar benefit for normal corporations. In

-13-.
addition, the bill could add an extra year to that seven
year period for losses incurred by disqualified REITs, also
a benefit denied to normal corporations. We think this
unjustified. We therefore oppose that part of the bill that
extends the net operating loss carryover period of a
disqualified REIT.
H.R. 5391—SECOND TIER EXCISE TAX
ON PROHIBITED ACTS OF CERTAIN TAX-EXEMPT
FOUNDATIONS AND TRUSTS
H.R. 5391, the "Chapter 24 Second Tier Tax Correction
Act of 1979," attempts to remedy a procedural defect in the
current two-tier excise tax system applied to certain acts,
or failures to act, by private foundations, employee
retirement trusts, and Black Lung Benefit Trusts. While we
have some concerns with the bill and suggest a slightly
different approach to the problem, we believe it is most
important to remedy the defect in the statute and we hope to
work with your staff to reach a mutually agreeable position
as soon as possible.
Current Law
Private foundations, employee retirement trusts and
Black Lung Benefit Trusts are subject to certain
restrictions and requirements. The two-tier excise tax
system attempts to enforce these requirements and
restrictions in two ways. First, it seeks to deter
violations by automatically imposing a small excise tax on
the prohibited act or the failure to act. Second, it seeks
to restore the status quo by imposing a substantial
second-tier tax if the prohibited act, or failure to act, is
not corrected. The problem which has arisen and which is
intended to be corrected by H.R. 5391 relates to the
imposition of the second-tier excise tax in certain
circumstances.
The problem may be illustrated by focusing on the
private foundation self-dealing provisions.1/ Under the
Code, any act of self-dealing between a private foundation
and a "disqualified person" (generally, any party with a
substantial interest in the foundation) is prohibited. If
such an act takes place, an excise tax equal to five percent
of the "amount involved" (generally, the greater of the

-14amount of money and the fair market value of the property
(a) given or (b) received) is imposed on the disqualified
person. If the act is not corrected within the "correction
period," an additional second-tier tax (in this case, 200
percent of the amount involved) is imposed. Generally,
correction involves undoing the transaction to the extent
possible, but in any case placing the private foundation in
a financial position not worse than what it would have been
in if the disqualified person had dealt with the foundation
under the "highest fiduciary standards."
Description of Problem
The problem addressed by H.R. 5391 has arisen in
connection with the relationship between imposition of the
second-tier tax and the definition of the correction period.
Under current law, the second-tier tax is not imposed unless
the correction period has expired, but the correction period
does not end until the Tax Court decision becomes final.2/
In recent cases, ^Z the Tax Court has held that, since
the second-tier tax is not "imposed" at the time the
taxpayer's petition is filed with the Tax Court, there is no
deficiency for the Tax Court to consider. Such a result
vitiates the second-tier tax and substantially reduces the
incentive for voluntary compliance with the correction
requirement.
Before addressing the solution to the problem proposed
by H.R. 5391, it is appropriate to review the purposes of
the two-tier excise tax system in order to assure that any
legislative solution to this problem is fashioned in a
manner which best achieves the results intended.
Purposes of System
Before 1970, if a private foundation and a related
person engaged in a prohibited self-dealing transaction, the
penalty imposed was loss of the private foundation's tax
exemption for a minimum of one year and the loss of
charitable contribution deductions under certain
circumstances.
In 1969, Congress developed the approach of imposing
excise taxes for engaging in a prohibited activity rather
than penalizing the foundation directly by loss of its
exempt status.

-15-

In addition to changing the focus of the penalty from
the private foundation to the disqualified person, the
excise tax system was structured to encourage the correction
of prohibited acts or the failure to act so that a private
foundation would be in essentially the same position after
the correction as it would have been if the prohibited act,
or failure to act, had not occurred. This is achieved by
imposing a substantial second-tier tax if the prohibited act
or failure to act is not corrected. As noted above, in the
area of private foundation self-dealing, the second-tier
excise tax is 200 percent of the amount involved. For the
purpose of the second-tier tax the amount involved is the
highest fair market value of the property during the
correction period. (For the first-tier tax the amount
involved is the value at the time of the transaction.)
We believe two significant principles are embodied in
the second-tier tax as originally enacted in 1969. First,
the second-tier tax is intended to be large enough to ensure
correction. The tax itself is not intended to be collected.
Second, in order to avoid manipulation, the risk of market
fluctuation on the value of property obtained from the
private foundation or other organization must be borne by
the disqualified person dealing with the foundation or other
organization.
H.R. 5391
H.R. 5391 would resolve the problem faced by the Tax
Court by treating the tax as being "imposed" if the act or
failure to act is not corrected within txhe "taxable period."
In general, the taxable period would end when the Internal
Revenue Service mails a notice of deficiency for the firsttier tax even though a Tax Court petition is filed.
Under this approach the Tax Court would have
jurisdiction over the assessment of the second-tier tax by
the Internal Revenue Service since the tax would be imposed
as required by the Tax Court jurisdictional standards.
In addition, the bill would continue to allow a
prohibited act or failure to act to be corrected throughout
the period in which the taxpayer may seek Tax Court review
of the determination made by the Internal Revenue Service.

-16-

Treasury Position
We have a number of concerns with H.R. 5391. Our most
substantive concern relates to the allocation, between the
disqualified person and the private foundation, of the risk
of fluctuation in the fair market value of the property.
H.R. 5391 would, in addition to treating the second-tier tax
as being imposed if the transaction was not corrected during
the "taxable period," determine the amount involved for
purposes of the second-tier tax on the basis of the same
period.
H.R. 5391 could permit the self-dealer to profit by the
transaction with the private foundation. The amount
involved, on which the 200 percent tax is based, will be
determined by reference to the highest value of the property
during the "taxable period," which will end when the
Internal Revenue Service mails a notice of deficiency with
respect to the first-tier tax. However, the self-dealer
would still have the opportunity to determine whether to
correct the transaction during the pendency of the Tax Court
proceeding. If the self-dealer holds property which
appreciates sufficiently, the tax would be paid and the
transaction not corrected.
To avoid this potential we would propose a two-notice
approach. This would authorize the issuance of a second
notice of deficiency for second-tier taxes independent of
whether a notice of deficiency is issued for the first-tier
tax. The second notice would be triggered by a
determination of first-tier tax liability and would be
imposed at that time, although the amount of second-tier
liability would not be determined until after the correction
period had ended.
Under this two-notice approach, judicial economy would
be fostered because issues extraneous to the first-tier tax
(e.g., the highest value of the property during the
correction period) would be addressed only after a decision
with respect to the first-tier tax had been made, and not
before.
In addition, we would provide that the correction
period would include any period during which the assessment
of a second-tier tax is under judicial review, including
review by a district court or the court of claims. This

-17would give the parties involved the right to judicial review
of the liability for the first-tier tax before being forced
to correct in order to avoid the second-tier tax. However,
since we would also provide that the amount involved would
include the fair market value of the property during the
correction period as extended by judicial review, the
opportunity to profit from changes of value would be
eliminated. Finally, we would follow the provision in H.R.
5391 which allows the court that made the determination as
to excise tax liability to engage in supplemental
proceedings to determine whether the act or failure to act
had been corrected, and the highest value of the property
involved during the correction period.
We are prepared to discuss other alternatives.
However, at this time, we believe the two-notice approach
with extension of the correction period described above
would both reduce the procedural uncertainties involved in
the area and achieve what we believe are the goals of the
two-tier system.
Finally, we would like to make three technical comments
with respect to the bill.
First, H.R. 5391 would amend the Code to provide in
effect that the second-tier tax would be imposed at the time
the Internal Revenue Service mails a notice of deficiency to
the taxpayer with respect to the first-tier tax. An issue
has arisen with respect to whether this provision could lead
to avoidance of the second-tier tax. For example, assume
that a private foundation makes a section 4945 taxable
expenditure and reports a one time first-tier tax liability
on Form 4720. In this circumstance there would be no
first-tier tax liability and, therefore, on the face of the
statute^ no notice of first-tier tax deficiency to end the
taxable period for second-tier tax. While it would be
possible to provide by regulation, as has been done by the
regulations under sections 4941 and 49*2 (see 5553.4941(e)1(a)(3), 53.4942(a)-!(c)(1)fii)), that the date of payment
in this case shall be treated as the end of the taxable
period, no such interpretation would be in the law until
such regulations are issued. Further, with respect to other
sections of the Code which would be amended by H.R. 5391,
the same problem may arise. Therefore, if the approach
embodied in H.R. 5391 is adopted, we recommend that the
definition of taxable period be revised to deal with the
situation where a notice of deficiency with respect to the
first-tier tax is not mailed.

-18-

Second, the term "section 4942(j)(3 ) operating
foundation" has become a term of art to technicians in the
Internal Revenue Service and in the sectors of the public
concerned with exempt organizations. Section 2(b)(2) of
H.R. 5391 redesignates section 4942(j ) (3 ) as section
4942(j)(2). (In addition, clerical amendments are made to
various sections of the Code reflecting this change.) This
redesignation would require numerous changes in the Internal
Revenue Manual and determination letters issued to
taxpayers, in Forms 990-PF and 1023 and the instructions to
those forms, in Publication 573 and Publication 392, and in
the regulations under section 4942(j)(2) through (5), 170,
6110, and 7423. We recommend that, to avoid this
administrative burden, section 4942(j)(3) remain as
currently designated.
Finally, section 2(b)(5) of H.R. 5391 amends section
4945 to add a definition of taxable period. Although
section 4952, relating to the excise tax on taxable
expenditures by Black Lung Benefit Trusts, is similar to
section 4945, H.R. 5391 does not add a definition of taxable
period to section 4952. We believe such a change to section
4952 is necessary.

-19FOOTNOTES
H.R. 4103
1/ In some cases this problem is alleviated where the
nonrecognition by the seller is by reason of Section 337(a).
2/ The liquidation was effected through a merger of the
original Boston Patriots corporation into the corporation
newly formed by Mr. Sullivan. The franchise was distributed
to the newly-formed corporation which owned all the voting
stock of the original Boston Patriots corporations; cash was
distributed to the nonvoting stockholders. For federal
income tax purposes, the distribution to the newly-formed
corporation and to the non-voting stockholders was a taxable
transaction.
3/ The 1976 Tax Reform Act also changed the rules relating
to depreciation recapture of player contracts. These
changes do not have any practical effect upon transfers of
franchises where the transferor had already fully
depreciated its original player contracts by 1976.
H.R. 4611
1/
We understand that it may be the opinion of the
Solicitor of the Interior Department that section (4) of the
Fish and Wildlife Improvements Act of 1978, as amended, 16
U.S.C. 5341f(b), authorizes deductions for contributions of
partial interests in property to the Fisheries and Wildlife
Service, regardless of whether such interests are eligible
for a deduction under section 170(f)(3)(B) of the Code. If
so, this opinion is incompatible with the Treasury
Department's understanding of that legislation., and the
Department of the Treasury does not consider itself bound by
the opinion.
2/ Now Section 170(a)(3) of the Code.
3/ Section 170(f)(2)(B). Section 170(f)(2)(B) is intended
to preclude the double tax benefit of obtaining a charitable
deduction for foregone income that is never reported on the
taxpayer's return.

-20FOOTNOTES CONTINUED
H.R. 5391

1/ The excise tax technique established for limiting acts
of self dealing (section 4941) has also been extended to a
number of other areas. These include the requirements
regarding income distributions of private foundations
(section 4942), the disposition of excess holdings by a
private foundation in certain businesses (section 4943), the
removal of certain investments that jeopardize the
charitable purposes of the private foundation (section
4944), and the correction of certain private foundation
taxable expenditures (section 4945).
The excise tax approach was further extended in 1974
under the Employee Retirement Income Security Act ("ERISA")
which provides that if an employee retirement plan does not
meet certain minimum funding standards (section 4971), or
engages in a prohibited transaction with a disqualified
person (section 4975), the two-tier excise tax is imposed.
Finally, in 1978 Congress again turned to the excise
tax compliance technique to control acts of self-dealing and
the types of expenditures made by Black Lung Benefit Trusts
(sections 4951 and 4952).
2/ The correction period is defined as beginning on the
date of the act of self-dealing and ending 90 days after the
IRS mails a notice of deficiency with respect to the
second-tier tax, extended by any period during which "a
deficiency cannot be assessed." Under the rules of section
6213(a) of the Code, if a taxpayer files a timely petition
with the U.S. Tax Court, a deficiency cannot be assessed
until the decision of the Tax Court becomes final.
2/ Adams v. Commissioner, 72 T.C. Mo. 8 (1979) (no
second-tier tax under section 4941, relating to private
foundation self-dealing); Larchmont v. Commissioner, 72 T.C.
No. 12 (1979) (following Adams as to section 4945, relating
to private foundation taxable expenditures); and H. Fort
Flowers Foundation v. Commissioner, 72 T.C. No. 38 (1979)
(following Adams as to section 4942, relating to private
foundation's failure to distribute income).

-21-

APPENDIX — SUMMARY OF TREASURY
DEPARTMENT'S VIEWS
H.R. 3874 —

Not opposed.

H.R. 4103 — Not opposed.
H.R. 4503 — Opposes.
H.R. 4611 — Recommends that consideration of the bill be
deferred until Treasury Department and
Congressional Budget Office studies have been
completed.
H.R. 4634 — Opposes.
H.R. 4968 — Does not oppose that part of the bill that would
extend the carryover period for pre-1976 net
operating losses of qualified REITs; opposes
that part of the bill that would extend the
carryover period for net operating losses of
disqualified REITs by the number of years the
loss could not be carried back because of prior
REIT status.
H.R. 5391 — Recommends an alternative approach, and is
willing to work with staff to reach a mutually
agreeable position.

FOR IMMEDIATE RELEASE
November 9, 1979

Contact:

George G- Ross
202/566-2356

TREASURY ANNOUNCES TENTATIVELY THAT
MELAMINE IN CRYSTAL FORM FROM THE
NETHERLANDS IS NOT BEING DUMPED
The Treasury Department today announced its
preliminary determination that melamine in crystal
form from The Netherlands is not beinq sold in the
United States at less than fair value.
("Sales at less than fair value" generally occur
when imported merchandise is sold here for less than
in the home market or to third countries.)
A final Treasury decision in this case must be
made by March 17, 1980. If Treasury determines that
sales at less than fair value are occurring, the case
would be referred to the U. S. International Trade
Commission (ITC) to determine whether these sales are
injuring or likely to injure an American industry.
An affirmative ITC decision would require the imposition of dumping duties.
Notice of this action will appear in the Federal
Register of November 13, 1979.
Imports of this merchandise amounted to $2.3million during November 19 78-March 19 79.
o 0 o

M-190

FOR IMMEDIATE RELEASE
November 9, 1979

Contact: George G. Ross
202/566-2356

TREASURY WITHHOLDS APPRAISEMENT
ON MELAMINE IN CRYSTAL FORM
FROM AUSTRIA AND ITALY
The Treasury Department today said it is withholding appraisement on imports of melamine in crystal form
from Austria and Italy. The withholding action, based
on a tentative determination that they are being sold
in the United States at "less than fair value," will
not exceed six months. A final determination will be
issued no later than March 17, 19 80.
Under the Antidumping Act, the Secretary of the
Treasury is required to withhold appraisement when he
has reason to believe or suspect that sales at less than
fair value are taking place. (Sales at less than fair
value generally occur when imported merchandise is sold
in the United States for less than in the home market or
to third countries.)
Withholding of appraisement means that the valuation for Customs duty purposes of goods imported after
the date of the tentative determination is suspended
until completion of the investigation. This is to
permit assessment of any dumping duties that are
ultimately imposed on those imports.
Cases in which a final determination of sales at
less than fair value is issued are referred to the U.S.
International Trade Commission to determine whether an
American industry is being, or is likely to be, injured
by such sales. Both "sales at less than fair value"
and "injury" must be found to exist before a dumping
finding is reached.
Notice of this action will appear in the Federal
Register of November 13, 19 79.
Imports of this merchandise from Austria from
November 19 78 through March 19 79 were valued at about
$500,000. Imports from Italy for the period November
1978 through April 1979 were also valued at $500,000.
o 0 o
M-191

artmentoflheJREASURY
TELEPHONE 566-2041

||NGT0N,D.C. 20220

November 9, 1979

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,100 million of 13-week bills and for $3,100 million of
26-week bills, both to be issued on November 15, 1979, were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High.
Low
Average

13-week bills
maturing February 14, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing May 15, 1980
Discount Investment
Price
Rate
Rate 1/

96.992 11.900%
96.940 12.105%
96.960 12.026%

94.016
93.938
93.961

12.47%
12.70%
12.61%

11.836%
11.991%
11.945%

12.80%
12.98%
12.92%

Tenders at the low price for the 13-week bills were allotted 14%.
Tenders at the low price for the 26-week bills were allotted 28%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TENDERS ][RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
35,395 $
35,395 :
$
36,040
3,535,450
2,437,450 :
4,220,740
23,510
23,510 :
16,445
27,535
27,535 :
21,325
29,130
29,130 :
29,480
•
45,080
45,080 :;
47,205
316,850
191,850 .•
336,800
44,785
26,485 37,980
11,535
11,535 :
12,245
50,100
50,100 :
26,670
17,150
17,150 •
12,830
:
215,190
170,190
197,450
:
34,860
34,860
59,760
$4,386,570

$3,100,270

$2,699,010
548,545
$3,247,555

Federal Reserve
and Foreign Official
Institutions
$1,139,015

TOTALS

Accepted
$
36,005
2,463,660
16,445
21,325
29,480
45,975
214,300
18,980
12,245
26,670
12,830
142,450
59,760

$5,054,970

$3,100,125

$1,412,710 :
548,545 :

$3,168,180
422,790

$1,213,335
422,790

$1,961,255

$3,590,970

$1,636,125

$1,139,015

' $1,464,000

$1,464,000

$3,100,270

$5,054,970

$3,100,125

Type
Competitive
Noncompetitive
Subtotal, Public

TOTALS

$4,386,570

1 / F n n i v f l l e n t ^ffliiOimpfi>^Pp"B»3Mi&cue
•K*

T 0-3_

yield.

For-Release Upon-Delivery
Expected at 10:00 a.m. E.S.T.
STATEMENT OF
DONALD C. LUBICK
ASSISTANT SECRETARY OF TREASURY FOR TAX POLICY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
OF THE
HOUSE OF REPRESENTATIVES
November 13, 1979
Mr. Chairman and Members of the Committee:

I am pleased to appear before this Committer to discuss the
important income tax question of the appropriate tax treatment of
appreciated property passing at death. H.R. 4694, The Carryover
Basis Simplification Act of 1979, introduced by Mr. Fisher, is a
reasonable solution to all the important problems that have been
raised in the two and a half year debate over the carryover basis
provisions enacted in 1976. Mr. Fisher's bill assures income tax
equity and eliminates income tax avoidance. It relieves the
administrative burdens imposed by the present statute. It
provides generous relief for illiquid estates. No small business
or family farm will have to be sold to raise cash to cay income
taxes attributable to the sale of inherited farm or business
property.
On August 2, 1976, this Committee reported H.R. 14844, The
Estate and Gift Tax Reform Act of 1976, to the full House. The
bulk of H.R. 14344, together with this Committee's Report on the
bill, subsequently became part of the Tax Reform Act of 1976.
H.R. 14344 made major revisions in the estate and gift tax law.
In addition, the bill addressed an income tax issue which
naturally arises in connection with any comprehensive
consideration of property transferred at death and which had
troubled serious analysts of the income tax law for decades. The
issue was how properly to treat, for income tax purposes,
appreciated property owned by a decedent.
M-19 3

-2Before the Tax Reform Act of 1976, the basis of property
acquired from a decedent was its estate tax fair market value.
This rule is commonly called "step-up" in basis. The effect of
step-up is to forgive forever the collection of any income tax on
the increase in value that has accrued in property held by an
individual at death.
This Committee examined the consequences of "step-up." It
decided that the retention of step-up in the income tax law was
wrong and recommended legislation to provide that a decedent's
basis in property would "carry over" to the heir receiving that
property. This rule does not impose currently any new tax burden.
It simply preserves the appreciation in value for imposition of an
income tax upon a later disposition by the heir. This is a
central point.
In reaching its conclusion regarding step-up, the Committee
stated:
[Step-up] results in an unwarranted discrimination
against those persons who sell their property prior
to death as compared with those whose property is
not sold until after death. Where a person sells
appreciated property before death, the resulting
gain is subject to the income tax. However, if the
sale of the property can be postponed until after
the owner's death, all of the appreciation
occurring before death will not be subject to the
income tax.***
In order to eliminate these problems, your
Committee believes that the basis of property
acquired from or passing from a decedent should
have the same basis in the hands of the recipient
as it had in the hands of the decedent, i.e., a
"carryover basis." This will have the effect of
eliminating the unwarranted difference in treatment
between lifetime and deathtime transfers.1/
(Emphasis supplied)
""

1/ House Committee on Ways and Means Report, Estate and Gift Tax
Reform Act of 1976, H. Rep. No. 94-1380, 94th Cong., 2d Sess,,
36-37 (1976).

-3In the almost three years that have passed since Congress
decided to do away with step-up, no one has seriously attempted to
"rebut the basic premise for the change in the law. It is as true
today as then. The litany of objections to carryover basis is
principally a smokescreen behind which special interest groups
continue to seek for themselves and their clientele unjustified
tax advantages.
Administrative and technical problems with the carryover
basis provisions as enacted are, as I shall later discuss, solved
by H.R. 4694, The Carryover Basis Simplification Act of 1979,
introduced by Mr. Fisher. Thus, the real question the Committee
should address is how the permanent and irrevocable forgiveness of
income tax on appreciation accrued in assets held at death can be
justified. Those who would return to step-up must carry the
burden of justification. We do not believe it can be done.
Step-Up Is Indefensible Income Tax Policy
As a matter of income tax policy, step-up is fundamentally
unsound for at least four reasons:
1. Horizontal and Vertical Inequity. The tax equity case
against step-up is overwhelming. It can be demonstrated by a
simple example which by this time may be familiar to many of you.
To make the point most graphically, let us first assume we
live in a world without an estate tax. Now, assume that on the
same day two taxpayers, A and B, each bought shares of stock in
the same corporation for $100,000. A and B decide to sell when
the stock is worth $1,100,000. Each would pay a capital gains tax
of 28 percent on any recognized capital gain. A goes into his
broker's office and sells his shares. He walks out into the
street and meets his friend B, who is about to go into the
broker's office to sell his shares. They engage in animated
conversation about, what each will do with his net after-tax
proceeds of $820,000 and fail to observe a speeding vehicle which
strikes and kills them both.
A sold his shares before he died.2/ He realized a capital
gain of $1,000,000 upon which an income tax of $280,000 is due.
His heir is left with $820,000 after the tax is paid.
Compare B, who has died before he could sell his shares. The
shares pass to his heir with a new basis of $1,100,000. B's heir
can immediately sell the shares for that price and pocket the
entire $1,100,000.
1 7 F o r purposes of illustration the technical question of when a
sale of stock is complete is ignored.

-4Accidental, untimely death has caused A's heir to receive
$820,000 and B's heir to receive $1,100,000. (See Example 1
attached.) The result cannot be justified.
Some assert that the income tax problem so glaringly
highlighted by the example does not really exist because the
appreciation in the shares owned by B is subject to estate tax.
If this assertion is true, the net amount received after payment
of both income and estate tax should be the same for A f s heir and
B's heir.
To test the assertion, assume that the shares or their
proceeds in the estates of A and B are both taxed at a 41 percent
rate. A's estate after payment of income tax has assets of
$820,000. After the further payment of $336,200 in estate tax,
A's heir receives $483,800. On the other hand, B's estate has
assets of $1,100,000. When the shares are sold to pay B's estate
tax liability of $451,000, B's heir receives $649,000, $165y200
more- than- that' of- A. (See Example 2 attached.) The combined
income and estate tax burden on B's heir is reduced by about 27
percent from the burden on A's heir.
Note, however, that in a carryover basis system this
disparity is cured. B's heir will receive an upward basis
adjustment of $410,000 3/ to account for the fact that the shares
were subject to estate tax in B's estate. Thus, if-B's heir sells
the shares for $1,100,000 and his capital gains are taxed at 28
percent, he will incur an income tax liability of $165,200.4/ The
total income and estate tax attributable to the shares sold~by B's
heir is $616,200, the same as the total income and estate tax
attributable to A's shares. (See Example 3 attached.) Both heirs
retain $483,300.
This example makes clear a number of fundamental points.
First, the estate tax and the income tax are two separate tax
systems. The estate tax applies to the transfer of property, the
income tax to the receipt of income. As the example demonstrates,
the estate tax is not a surrogate for the income tax. It applies
to wealth accumulated after payment of income tax as well as to
wealth that was not subject to income tax.
3/ The adjustment, determined by the simplified method contained
~ in H.R. 4694, is equal to the appreciation in the shares times
the estate tax marginal rate or $1,000,000 x .41.
4/ $1,100,000 amount realized - $510,000 basis ($100,000 original
" basis + $410,000 death tax adjustment) = $590,000 gain x .28 =
$165,200.

-5-

Second, the example demonstrates the disparate income tax
treatment which can occur under step-up due solely to the timing
of capital gain recognition. Step-up permits those who are able
to accumulate wealth in the form of unrealized appreciation to
pass on that wealth free of income tax. Those who have recognized
capital gains, as well as salaried individuals, can pass on. only
that which is left after income tax has been paid. This disparate
treatment is unacceptable as an abstract proposition. It is even
more unfair when one recognizes that only the wealthiest of
American taxpayers are in a position to live comfortably solely on
dividends, rents and interest derived from appreciating assets
they are rarely forced to sell. There is no tax policy or
economic policy that justifies granting this segment of society an
income tax advantage over the vast majority of the American
people.
The amount of appreciation assumed in the foregoing example
is not in any sense exaggerated for effect. We have derived some
estimates of the magnitude of untaxed appreciated assets from
records of completed sales. We examined the records in the 1973
Sale of Capital Assets Study to identify transactions in which the
sales price exceeded $1,000,000 and was also more than four times
the basis of the asset sold. Table 1 sets forth 40 such examples
and provides information as to the nature of the asset sold as
well as the holding period involved. In fact, we estimate that
over 1,300- transactions reported in 1973 would fulfill the dual
requirements of a selling price over $1,000,000 and a sales price
to basis ratio in excess of four.
These data are relevant to the step-up debate because these
transactions are illustrative of the size of unrealized gains that
taxpayers in otherwise similar circumstances might have
accumulated and that would escape income tax under step-up if the
sales had not occured. In fact, we believe these reported
transactions would tend to understate the ratio of selling price
to basis in unrecognized transactions, since the tendency is to
retain assets with the highest ratio of appreciation to basis.
Several recent court decisions provide additional
confirmation of the magnitude of the problem. In Estate- of- David
Smith, 5/ the court found the value of art works owned and created
by che~decedent to be $2.7 million. Basis was almost zero. Under
step-up, virtually $2.7 million in appreciation passed to the
decedent's heirs free of income tax. In Estate'of-Henry,6/ the
taxpayer
corporate
totalling
5/
57 T.C.made
650 gifts
(1972)of, marketable
aff'd 510 F.2d
479 (2dstocks
Cir. 1975),
cert$6.7
denied 423 U.S. 827
6/ 69 T.C. 665 (1978)

-6-

million with a basis of $115,000. The unrealized appreciation was
almost $6.6 million. In Owen- v. Commissioner,7/ the taxpayer gave
marketable American Express Company stock wortK $5.2 million with
a basis of $1,200. Virtually the entire $5.2 million was
unrealized appreciation. In Bradford v. Commissioner,8/ property
worth $2 million with a basis of $283,000 was the supject of the
gift. Over $1.8 million of unrealized appreciation was
transmitted. In Johnson v. Commissioner,9/ the property given was
worth $500,000; its basis was $10,800. Almost $490,000 of
unrealized appreciation was transmitted.
This phenomenon is not restricted solely to those with
inherited wealth. As noted in an article in Fortune magazine,
"there are dozens — perhaps even hundreds — o f individuals who
have amassed fortunes of $50 million or more in privately held
companies."10/ As the article shows, the initial investment in
these enormously successful enterprises is nominal when compared
to their current worth.
The vertical inequity of step-up occurs because appreciation
rises as a percentage of the gross estate as estates increase in
size. Thus, the larger the estate, the greater the benefit of
step-up. Table 2 tabulates this progression. It also shows that
over 75 percent of unrealized appreciation in. assets other than
personal residences is found in estates of over $175,000, which.
comprise the estates of less than 4 percent of decedents dying
annually.
2. Revenue loss. Step-up results in a significant revenue
loss. Under step-up, an estimated $20 billion in accrued
appreciation passes untaxed annually. The income tax of $833
million under the current carryover basis statute is not just
foregone in the year of a decedent's death. It is permanently and
irrevocably forgiven.
3. Economic distortions. Step-up also creates serious
adverse economic effects. The opportunity entirely to avoid
income tax on appreciated assets by holding those assets until
7/ T.C.M. 1978-51
8/ 70 T.C. 584 (1978)
9/ 495 F. 2d 1079 (6th Cir. 1979)
10/"In Search of the Elusive Big Rich", Fortune, February 12,
1979, 12.

-7-

death distorts capital mobility by inducing individuals to retain
assets solely to obtain this benefit. Any tax practitioner can
recite from his own experience instance after instance of advice
by him to his clients to retain assets that would otherwise be
sold. Retention is advised primarily to secure forgiveness of
income tax at death. The inducement to hold assets to avoid the
payment of income tax is referred to as "lock-in".
It is almost impossible to quantify the amount of wealth that
is "locked-in". This is because "lock-in" is a negative
phenomenon. It occurs when sales otherwise dictated by sound
investment strategies do not occur. Of course, the decision not
to sell may involve other considerations which cannot be separated
from tax-induced "lock-in". Nonetheless, to the extent the income
tax system can be said to cause "lock-in", step-up is a major
source of that "lock-in". Those whose estate planning takes
step-up into account, and plainly this includes many elderly
taxpayers and most taxpayers with large accumulations of
unrealized appreciation, will inevitably find their decision
whether to hold or sell affected by this provision. No matter how
low the capital gains rate, so long as it is above zero step-up is
a "better bargain" with regard to appreciated assets the taxpayer
is in a position to retain.
Congress in 1973 relied upon revenue from higher sales volume
to justify increasing the capital gains exclusion to 60 percent.
The purpose of the reduced capital gains rate was to unlock
capital in the form of unrealized appreciation in assets that were
not being sold because of the allegedly excessive tax burden
imposed on the sales proceeds. This goal will not be met if
taxpayers have the opportunity to avoid income tax entirely by
holding appreciated property until death.
"Lock-in" can best be reduced by treating death as a
recognition event. If unrealized appreciation were taxed at the
current long-term capital gains rates at death, a significant
amount of the "lock-in" effect would be eliminated.
As to "lock-in", carryover basis is a second best approach.
It somewhat reduces the "lock-in" effect for investors concerned
with estate planning, since complete forgiveness is eliminated.
However, if the property continues to appreciate in value, the
capital gains tax would be greater when the heirs consider
selling, and their "lock-in" would be somewhat increased. Thus,
"lock-in" would be decreased for some but increased for others.
The net effect on aggregate "lock-in" cannot be determined fairly,
4. Disparate basis treatment for lifetime-gifts and-accrued
but unpaia income- items. Carryover basis tor property acquired by
lirecime girt has been the law since 1921. Similar treatment has
existed since 1942 in the case of property passing at death that
consists of compensation, pension benefits and unpaid installment
obligations from the disposition of property. Yet, most property

-8acquired by gift at death received a new basis. Lifetime and
deathtime transfers should be treated similarly for income tax
basis purposes.
5. Summary. The case against forgiveness on the grounds of
inequity, revenue loss, adverse economic effects and structural
inconsistency is overwhelming. The problem was resolved in an
acceptable manner through the enactment of the carryover basis
concept. Technical problems that have surfaced since enactment
are cured by H.R. 4694, and, in any event, cannot obscure the fact
that as a policy matter, step-up is indefensible.
The-Arguments* for Step** up-Forgiveness
The 1976 repeal of step-up prompted a large volume of
comment. As I noted earlier, little, if any, of this comment
addressed the fundamental income tax equity issue raised by
step-up. However, the sheer magnitude of these oft-repeated
assertions requires that they be examined critically and exposed
as nonsubstantive, rhetorical attempts to shift the focus of the
debate to issues irrelevant to the question of the appropriate
income tax treatment of unrealized appreciation in assets held at
death.
1. Carryover basis-is inherently unworkable-because proof of
basis- problems- are- insurmountable. Advocates ot income tax
forgiveness assert that carryover basis cannot work because
taxpayers do not keep adequate records of the acquisition cost of
assets during their lives or if they do, those records disappear
at death.
This problem did not deter Congress when it first enacted the
income tax. The basis of property held on March I, 1913 was its
value on that date or historical cost and the income tax system
managed to work. The Canadians adopted a similar basis rule when
they first treated gifts and deathtime transfers as recognition
events. Their system has not posed significant basis
determination questions. Both Canadian government authorities and
private practitioners inform us that the issue of proof of basis
has not even been a matter of public discussion. Moreover,
carryover of basis has not caused significant difficulties for
property transferred by gift or items of income.in respect of a
decedent passing at death. These carryover basis provisions have
existed since 1921 and 1942, respectively.
We do not dispute the assertion that not all taxpayers keep
accurate records and that record keeping, even among the most
conscientious, varies according to the type of asset at issue.
This point is demonstrated by an American Bankers Association
survey, the results of which have been made available to the
Committee and to us. However, the real question is whether
failure to keep records automatically leads to the conclusion that
the income tax on the unrealized appreciation in all assets
passing at death should be forgiven.

-9-

The proposition that record keeping problems should control
whether tax is imposed on an otherwise clearly taxable event
would, if carried to its logical extreme, mean that only "easily
measurable" income should be taxed. It also implies that the
determination whether income is "easily measurable" rests entirely
with the taxpayer. Thus, the taxpayer can, in his own discretion,
control whether sufficient records exist to determine his income
tax liability. If he fails to maintain records, income becomes
hard to measure and hard to measure income is not subject to tax.
Forgetfulness should not be blessed with forgiveness.
In attempting to analyze the scope of the record keeping
problem, several different issues must be considered. First, to
what extent can we expect records to be available because they are
essential to compute depreciation or depletion or to calculate the
income tax consequences of a lifetime sale or other disposition of
property? Second, what special rules are needed for the types of
assets for which it is reasonable to assume taxpayers will not
retain cost records? Third, is special relief needed for
taxpayers who acquired certain assets prior to the effective date
of the new system?
Under our income tax system (and for gift tax reporting
purposes), an individual who acquires property should retain cost
basis information. That information will be necessary to compute
depreciation, depletion or cost of goods sold in the case of
business assets and in all cases where the income tax consequences
of a sale or other disposition is at issue. Even under step-up
forgiveness, records were unnecessary only if a taxpayer knew with
absolute certainty that the particular asset would be held until
death. Since most taxpayers pay for assets they acquire, and all
taxpayers are interested in reducing tax on sale, it is in their
interest to retain or obtain cost records. Otherwise, secondary
evidence will be needed to establish some basis or the entire sale
price will be taxable.
We believe most taxpayers recognize this and do retain cost
records for most investment assets. This has certainly been the
experience of the Internal Revenue Service in auditing income tax
returns. Whether those records are uniformly reliable, readily
acqessible or in a form which could be understood by others is a
different question and one to be examined in the context of
transition relief. However, it is simply not true that the vast
majority of taxpayers of this country fail to keep records as to
the acquisition cost of the great majority of assets they acquire,
especially investment assets held by the wealthiest 2 percent of
taxpayers. In our view, this conclusion is not shaken by the
result of the Bankers' survey. Indeed, as that survey notes,
proof of basis problems generally tended to diminish as estates
il/Resulcs
or American Bankers Association Survey in Difficulties
got
larger.11/
and Cost of Proving Basis, March 28, 1979, 4.

-10-

Records regarding the acquisition cost of closely held
corporate stock may be difficult to find but should be capable of
reconstruction. In the case of partnerships and subchapter S
corporations, past income tax returns will provide basis
information. For those who are engaged in sole proprietorships,
or own depreciable or depletable property, past income tax returns
will show the basis of depreciable assets and inventory.
If acquisition cost records do not exist with regard to
nondepreciable investment real estate, it is usually possible to
recreate or estimate basis by a number of methods. For example,
many deeds state the purchase price of real estate. Transfer tax
stamps or local property tax assessments may also provide
guidance. The basis of marketable securities can be estimated by
reference to market quotations on or about the acquisition date.
We recognize, however, that record keeping problems do exist
with regard to certain types of assets and that it is necessary to
address these problems in designing practical legislation. For
example, as demonstrated by the Bankers' survey, many taxpayers
fail to retain records of the cost of items of tangible personal
property such as furniture, clothing, collections of nominal value
and the like. Many taxpayers also fail to keep accurate records
with regard to improvements to personal residences. H.R. 4694 has
special rules for these cases.
We firmly believe that a distinction must be made between
records for property acquired before and after the effective date
of the repeal of step-up. In previous testimony we have stated
that Congress must assume that any justification for failure to
keep records disappears once taxpayers are on notice that assets
acquired after the effective date are subject to the new statute.
In its August 21, 1979 Analysis of H.R. 4694, the American Bankers
Association takes issue with this, stating "[W]hat reason is there
to live in a dream world contrary to experience and believe that
individuals who do not choose to or for some reason are unable to
maintain cost records for their own purposes during lifetime will
change their habits and do so because such records might be needed
after their deaths?12/
There are several answers. First, we do not believe that for
the estates that would subject to carryover basis if H.R. 4694
were enacted the problems of proof of basis for investment assets
acquired even prior to the effective date are impossible. As one
respondent to the Bankers' survey put it, "I view as futile any
attempt to argue that proof of basis is impossible: there is
12/Amer ican Bankers Association Analysis of H.R. 4694 Introduced
by Representative Joseph Fisher To Amend Carryover Basis, August
21, 1979, 6.

-11-

nothing new in that area, as taxpayers have for years been able to
prove basis in capital gains transactions to the satisfaction of
the income tax examiner." Another said, "[E]ven if proof of basis
were to go into effect, although there may be some administrative
inconvenience, we do not believe that we will be facing an
impossible task."
Second, and more important, we strongly believe that just
because records will be necessary to establish basis for heirs,
taxpayers will indeed take more care. Many of the cases of lost
records cited in the Bankers' survey occured as taxpayers got
older. While those records would still be necessary if property
was sold by those taxpayers, it is also true that those taxpayers
might have relaxed their record keeping. At that time in their
lives, it probably became more clear that much of their
accumulated property would not be sold prior to death and step-up
would eliminate the need for cost records.
Finally, and most important, we return to our original
assertion. Congress must assume that taxpayers will take
reasonable steps to comply with the law so long as that law does
not impose unreasonable requirements. Our experience under the
income tax when originally enacted and the more recent experience
of the Canadians indicates that, despite the fears of the Bankers,
this should not be a serious problem.
The material we have reviewed indicates that the record
keeping problems to be addressed relate to tangible personal
property, personal residences and, in some cases, investment
assets acquired prior to the effective date of carryover basis.
H.R. 4694 addresses each of these issues and provides solutions
which eliminate proof of basis problems for virtually all the
examples cited in the Bankers' survey. In short, the proof of
basis problem has become a red herring.
2. Carryover'basis- will cause- the- forced- sale of family farms
and closely held businesses. Income tax liability will arise in a
carryover system when an estate or heir sells inherited
appreciated property. That is a necessary and intended
consequence of carryover basis. Moreover, it may also be
necessary for an estate to sell additional property to raise funds
to pay the income tax arising from the first sale. This had led
farm and small business groups to assert that the "mushrooming"
income tax, arising from the need to sell appreciated property to
raise funds to pay death taxes, will result in the forced sale of
farms and closely-held businesses.
The liquidity problems which are allegedly "caused" by
carryover basis must be placed in perspective. First, carryover
basis itself does not cause liquidity problems. No tax is due in
a carryover basis system until carryover basis property is sold.
No owner of a family farm faces a tax liability from carryover
basis until the farmland is sold. The same is true of

-12closely-held businesses. If liquidity problems exist, they arise
because of the estate tax.
Second, a large portion of the appreciated property held by
estates is comprised of marketable securities and investment real
estate, in the case of marketable securities there can be no
liquidity problem. In the case of investment real estate, the
estate tax will be imposed on the value of the property net of
indebtedness. To the extent investment real estate is subject to
estate tax, the net equity in the property should in most cases be
sufficient to secure a loan to pay the estate tax.
However, we recognize that close-held business interests and
farms, which represent only 7 percent of the value of assets
reported on estate tax returns, pose a somewhat different problem.
In those cases, it is in fact more probable that the estate tax
liability cannot be satisfied under current law unless some of the
business property is sold. H.R. 4694 addresses this problem
directly.
First, in an effort to reduce the number of situations in
which sales will be necessary, the bill combines into one section
the two provisions of existing law which permit the deferred
payment of estate tax attributable to closely-held businesses and
farms. The new section contains the more generous provisions of
each of the two existing provisions. Thus, in aplicable cases,
payment of estate tax attributable to a qualifying closely-held
business or farm is deferred for five years and the balance may be
paid in up to 10 annual installments commencing in the sixth year
after death. These changes should, in most cases, eliminate
forced sale of property to pay estate taxes.
For those cases in which sales are still required, H.R. 4694
contains a special provision which allows the basis adjustment for
death taxes to be allocated to property equal in value to the sum
of death taxes and administration expenses. In effect, the sale
of property to pay death taxes and administration expenses is
accorded the same income tax treatment as occurred when the basis
of property in the hands of an heir was "stepped-up" to estate tax
value.13/ While there is less aggregate death tax basis
adjustment available for the retained portion of the closely-held
business or farm, this will not cause difficulty because, by
hypothesis, the retained property will not be sold by the heir.
Moreover, this provision provides investment flexibility because
there is no requirement that the sales proceeds actually be used
to pay death taxes or administration expenses.

13/Exampies illustrating the operation of this provision are
attached as Appendix 1.

-13-

3. Carryover basis delays the probate of-estates,
inordinately increases- tne- cost- of- estate aaministration^ and
presents irreconcilaDle fiduciary conflicts. The allegation is
made that carryover basis, solely by introducing a new concept to
be taken into account during estate administration, frustrates
efforts of the probate bar to simplify the administration of
estates. It is true that any departure from step-up introduces
additional complexity. However, if H.R. 4694 is enacted,
complexity will not exist for 1,947,000 of the approximately
2,000,000 estates coming into existence annually. The question is
whether carryover basis unduly affects and delays administration
of the remaining 53,000 estates.
If H.R. 4694 is enacted, much of the anticipated difficulty
and cost of administration of carryover basis is eliminated. The
aggregate cost of compliance will be insignificant compared to the
revenue generated and the increased income tax equity produced.
It is also alleged that carryover basis improperly intrudes
in estate administration by creating an entirely new set of
considerations to be taken into account in distributing assets to
various beneficiaries. While by no means certain under applicable
state law, it is possible that a fiduciary may have to take income
tax basis into account in making distributions.
If this is an assertion that fiduciaries are incapable of
administering estates when they must take tax consequences into
account, it is a curious one. Estate planning and administration
is replete with tax considerations. The tax literature abounds
with learned discussions of various minimization techniques.
Entire books have been written on subjects such as the marital
deduction. Law schools devote entire courses to estate planning
and administration. Many wealthy taxpayers, who also happen to be
those who would be most affected by the repeal of step-up, often
pay substantial legal fees to tailor estate plans to minimize
taxation.
If this argument is premised on the fact that property with
bases different from estate tax value cannot be dealt with by
fiduciaries, it is also rather curious. The real world is
complicated for those administering large estates. Fiduciaries
must already make choices which have both tax consequences and
affect the net amounts received by beneficiaries. They are not
clamoring to have these elections eliminated. For example,
fiduciaries must decide whether to file a joint or separate income
tax return for the year of the decedent's death; whether to claim
expenses as estate or income tax deductions; whether to elect the
alternate valuation date; whether to elect special use valuation;
whether to elect to pay estate tax in installments; whether to
distribute property in cash or in kind; whether to receive
retirement benefits in other than a lump sum? whether to choose a
fiscal year; whether to accumulate or distribute estate income;
which assets to sell and how to reinvest the sales proceeds; when

-14to settle claims and when to terminate administration. Carryover
basis considerations do not materially add to these decisions.
Indeed, in the more sophisticated estate plans, the administration
of formula marital deduction clauses makes the alleged carryover
basis problems pale in significance.
4. If-carryover basis* is- the appropriate-solution-to-the
problem-of•the income tax-treatment of appreciated property held
at' deatn,- it- is unfair- tor- it- to- apply to- only irr percent- or- the
estates coming into existence annually. If H.R. 4694 is enacted,
carryover oasis will apply only to approximately 53,000 of the
estimated 2,000,000 estates coming into existence annually. Some
have attacked H.R. 4694 on the ground that removing 97.3 percent
of all estates from the carryover basis system is nothing more
than an inequitable attempt to "soak the rich."
This allegation is interesting. The same individuals who now
argue the inequity of a $175,000 threshold level of carryover
basis applicability previously argued vociferously that the
$60,000 entry level of existing law was too low because it brought
into the carryover basis system estates for which federal estate
tax returns were not required. One cannot have it both ways.
The real point is this. While it is true that virtually all
decedents own some appreciated property, it is also appropriate to
recognize that administrative considerations lead one toward some
exemption level. The question then becomes what level is
appropriate. We believe it is appropriate to conform the
carryover basis system to the exemption level of the estate tax
system. Therefore, we support H.R. 4694 under which carryover
basis would be inapplicable to those estates containing less than
$175,000 of carryover basis property. Moreover, under H.R. 4694 a
$175,000 minimum basis is available to those estates which are
subject to carryover basis. The net effect, therefore, is to
permit all estates a minimum basis of up to $175,000 and
approximately 75 percent of the unrealized appreciation contained
in the estates of all decedents dying annually is covered by the
carryover basis system.
5. Death is a "tax loophole." The assertion has been made
that those wno favor repeal of step-up view death as a "tax
loophole." The issue is whether property which passes at death
should be treated the same as property which passes inter vivos.
It is not true that the repeal of step-up discriminates against
people who hold property until death. Deferral of taxation aside,
carryover basis simply places those individuals on an equal income
tax footing with those who have not accumulated wealth in the form
of unrealized appreciation and held it until death.
6. Repeal- of- step-up will- result- in- a- new tax. Some assert
that the repeal of step-up constitutes a new tax. This is untrue.
There is no new tax imposed if step-up is repealed; rather,
certain property on which deferred income tax was forgiven now
becomes subject to that tax. This is not a semantic point.

-15Forgiveness results in taxpayers who have sold property before
death being treated differently than those who did not. The
result is unequal application of the laws.
Others contend that while it is appropriate to impose an
income tax on the gain from lifetime sales, because those sales
were voluntary, it is incorrect to subject unrealized appreciation
that has accrued over a decedent's lifetime to income tax when the
property is sold by an heir. There are several difficulties with
this proposition. First, so long as property appreciates in value
and is not sold, the owner is able to defer the payment of income
tax on the appreciation. Second, carryover basis does not impose
an income tax on an involuntary sale any more than the tax law
does for involuntary sales occurring during life.
Rather, an
income tax is imposed on an heir under the same circumstances it
would have been imposed on the decedent; usually when the heir
voluntarily sells the property.
7. The- expectancies- of- those* who- relied' on- step«-ap- mast' be
protected"! It is alleged that the repeal of step-up dashed the
expectations of those who relied on that provision in making
investment decisions. 'The answer to real, and not imagined,
difficulties regarding valid' expectations lies in appropriate
transition rules. The original carryover basis provision in H.R.
14844 contained no transition relief. To protect legitimate
expectations, the transition rule, known as the "fresh start"
adjustment, was added by the Conference Committee. To the extent
that provision does not achieve its intended purpose, it has been
modified by H.R. 4694. It is totally inappropriate to retain
step-up forgiveness because the transition
rule may require
8. Repeal'of-step^ap-results- in-tax-on- inflation-gains only.
adj ustment.
Some assert that step-up should be retained because much oc the
appreciation that would be subject to tax under carryover basis is
attributable to inflation. The amount of appreciation involved in
the examples cited earlier demonstrate that this is not the case.
There is no way that inflation can account for increases in value
of that magnitude. But even if it were true, the simple example
of A and B provides a total response. Each was equally affected
by inflation and yet the heirs of each receive different amounts.
While the effect of inflation is a matter which deserves
attention, it is neutral in this context.
9. Death- is-an- inappropriate- time- to- impose- income- tax. Some
of the comment over repeal of step-up has as its core the notion
that it is inappropriate to treat the involuntary event of death
as an income tax recognition event. This argument does not lead
to the conclusion that forgiveness is correct. Rather, if
accepted, it would lead one to adopt carryover basis. Under
carryover basis no income tax is imposed until an appreciated
asset is sold.

-16-

10. Repeal of step^up is-unnecessary because unrealized
appreciation- is subject to- estate- tax. Some assert that it is not
necessary to subject unrealized appreciation to income tax because
that unrealized appreciation is included in the decedent's estate
and is subject to estate tax. This argument is rebutted by the
simple example of A and B, one of whom sold his assets before
death and the other did not.
It has been suggested that, to the extent the argument
against step-up forgiveness involves concern over the revenue loss
attributable to the $20 billion of unrealized appreciation passing
untaxed annually, the solution is simply to raise estate tax
rates. However, there is nothing like the uniformity in the ratio
of appreciable assets to estate size, between taxpayers having the
same estate size, that would be required before consideration
could be given to substituting an estate tax increase for repeal
of step-up. A simple increase in estate tax will not result in
fairness for income tax purposes between estates of the same size.
If it is believed that carryover results in too great an
overall tax burden, it would be fairer to lower estate tax rates
for all estates than to forgive income tax liability. However,
the question of overall tax burden cannot be permitted to obscure
the basic issue forgiveness raises: the equitable income tax
treatment of those who have realized gain prior to death as
opposed to those who have not.
11. Carryover basis results- in- double- tax-,- subjecting- the same
asset* to ooth estate-and- income- taxation. This assertion is
incorrect. The adjustment to basis for death taxes attributable
to appreciation is the mechanism by which "double taxation" is
avoided. Thus, as demonstrated by the example of A and 3, where
an heir and beneficiary are in the same income tax bracket, the
total estate and income tax will be the same whether the property
is sold before or after death.
12. Carryover basis is-regressive. The death tax basis
adjustment is made to account for tne fact that estate tax has
been paid on property that has been valued without taking into
account the contingent income tax liability on unrealized
appreciation- Because of this basis adjustment the increase in
overall tax for a given amount of appreciation will decline as the
size of the estate increases. This is said to be regressive.
It is, of course, true that for estates in the 70 percent
bracket, forgiveness of income tax only lets the heirs keep 30
cents for each dollar of income tax that is avoided while in the
40 percent estate tax bracket, the advantage of step-up
forgiveness is 60 cents on the dollar. Carryover merely
eliminates the advantage to the extent it exists. There is no
more regressivity here than in the allowance of a deduction for

-17administration expenses- that is worth 70 cents on the dollar to a
very large estate and nothing to a very small estate. Yet the
deduction is necessary to measure the estate transferred. The
death tax adjustment simply assures that the income tax applies to
the correct tax base.
13. Carryover basis is too complex and cannot-be simplified.
The advocates of step-up assert that carryover basis is totally
unworkable due to its inordinate complexity. Indeed, it is solely
on this ground that the Senate Finance Committee justified the
amendment to the Windfall Profits Tax Bill that would repeal the
carryover basis provisions.
Any system without step-up forgiveness is more complicated
than a system with step-up. There is no question that forgiveness
is simple. There is no need to determine basis and so long as an
individual does not sell an asset, inaccurate or nonexistent
records present no problems.
However, this argument proves too much. Nontaxation is
always the simplest system and an argument as to simplicity can be
made with regard to almost any taxing provision, including
deductions or credits.
Carryover basis is an acceptable solution to the forgiveness
problem. However, we agree experience has shown that the 197 6 Act
statutory structure could be improved. As many of you know, over
the past two years Treasury has made a major effort to meet with
interested professional groups and individuals to learn of their
specific concerns and their suggestions for change. We have
received valuable assistance from the American Institute of
Certified Public Accountants, the Trusts and Estates Law Section
of the New York State Bar Association and individual members of
the Special Carryover Basis Committee of the Tax Section of the
American 3ar Association, to name just a few. We assessed their
recommendations and in testimony before the Senate Finance
Subcommittee on Taxation and Debt Management on March 12, 1979,
proposed a number of specific changes we believed would eliminate
the technical and administrative difficulties which arise under
the existing statute.
Representative Fisher consulted with us and developed a
package of simplification proposals which were incorporated in
H.R. 4694. When H.R. 4694 was introduced on June 29, 1979, it was
accompanied by an extensive General and Technical Explanation
which explained the reasons for and the operation of the proposed
changes." In light of this comprehensive explanation, I will not
attempt to go through the bill in detail. I have, however,
appended to this statement as Appendix 2 a summary of the problems
addressed by H.R. 4694, the proposed solutions to those problems,
and our assessment of the effect of the Fisher proposals.

-18-

In our view, H.R. 4694 addresses adequately all the
legitimate complaints that have been raised since the enactment of
carryover basis. If that bill is enacted, we believe there can be
no question but that carryover basis can be administered. The
bill does contain compromise solutions to difficult problems and,
in some cases, does increase the responsibilities placed upon
fiduciaries. But where this occurs, it is to give fiduciaries the
flexibility they have previously claimed was necessary to mitigate
the difficulties they would face under a less flexible system.
The point is that in assessing comments on H.R. 4694 we must
remember that there is no way to satisfy all of the parties with
an interest in this issue on all aspects of the solution. Any
simple legislative solution to a complex problem necessarily
involves balancing a number of competing interests. Carryover
basis is no exception. Compromise is inevitable because the
affected groups do not have identical interests.
Conclusion
The issue before this Committee is the fairness of an income
tax system which forgives income tax on appreciated assets passing
at death. Forgiveness is indefensible income tax policy. Those
who would return to step-up must justify that step. They cannot
justify return to step-up on tax policy grounds and they cannot
use technical complexity as a rationale. Technical problems are
solved by H.R. 4694.
It is the Administration's firm position that unrealized
appreciation in property held at death cannot be permitted to
escape income taxation. Carryover basis is an acceptable
solution.

EXAMPLE 1

Income Tax Consequences of a Sale Before and After Death,
Assuming Prior Law
(No Estate Tax)

B
Sale Before
Death
Sales Price

$1,100,000

Basis

100,000

Gain

1,000,000

Income Tax (28%)

280,000

Net Amount Received
Difference

Sale After
Death
$1,100,000
1,100,000^

820,000

1,100,000
$280,000

1/ Assumes steo-up basis from $100,000 to $1,100,000.

EXAMPLE 2

Estate Tax Consequences of a Sale Before and After Death,
Assuming Prior Law

A B
Sale Before
Death
Asset in Gross Estate $820,000 $1,100,000
Estate Tax (41%) 336,200 451,000
Net Amount Received 483,800 649,000
Difference $165,200

Sale After
Death

EXAMPLE 3

Combined Income and Estate Tax Consequences
of a Sale Before and After Death,
Assuming Carryover Basis
B
Sale After
Death

Sale Before
Death
Income Tax
Sales Price
Basis
Gain

Estate Tax
$1,100,000

Asset in
Gross Estate $1,100,000

100,000
1,000,000
$280,000

Income Tax (28%)

Estate Tax (41%)

$451,000

Income Tax

Estate Tax

Estate Tax (41%)

Sales Price
1,100,000,,,
Basis
510,000-'
590,000
Gain
336,200 Income Tax (28%) 165,200

Total Tax

616,200

Asset in
Gross Estate

820,000

1/ Assumes basis equal to .41 (marginal estate tax rate)
~" x $1,000,000 (appreciation) + $100,000 (decedent's basis)

616,200

TABLE 1
Cxsspies of Capital Gains Transaction*
with Leree Gains and lien Jtatio of Sailing Fries to Basis, 1173

frifi.ctlofl

it
ti Sales
'•' Price

i
i
i

Cost or
Other saoia

i
t
t

Bat
Gain

t
t
t

Ratio of
Sales Pries
to Basia

i
i
:

Yeart
Asset
laid

t
c
i

*YP«
of
Asset

1.168,tf8

126.183

1,042,805

9.3

3.527,460

200.030

3,327,450

17.6

2,055,769

261,1*4

1,793.875

. ?.8

Corporate Stocx

1.029,137

960

1.821,177

1C72.0

Corporate Stock

1,189,600

109.4*5

1.060,105

10.9

Corporate Stock

4,000,000

56.899

3,941,101

67.9

Corporate Stock

3,607,500

11.212

3,596,288

Business Property

1.700,200

68.317

1,631,683

24.9

Corporats Stock

1.281.062

32,005

1.249.056

40.0

Corporate Stock

1C.

1,556,466

15.361

1.541,098

101.3

Corporats Stock

1,140,000

123.032

1.016,968

9.3

Depreciable Property

12.

1,330,071

90.54)9

1.239,562

14.7

•

lusinass Property

13.

1.389,468

67,100

1,321,668

20.5

Corporats Stock

14.

3,934.729

53.693

3,180,636

73.0

15.

2,681,497

1S.38C

2.666,111

174.3

16.

1,241,500

12.735

1.228.765

97.5

17.

3,225.000

18.338

3,206,662

175.9

18.

1,686,922

40.201

1,646,021

42.0

19.

2,300,900

154.500

2,145,500

14.9

20.

1.500,000

221.460

1,278,540

6.8

21.

1.041,682

3.000

1.038,682

347.2

28
.

Corporate Stock

321.3

Corporate Stock
Business or Rental Buildings

Business Property
Business Buildings
Corporate Stock
Installment Sale
Corporate Stock
Corporate Stock
Depreciable Property
Business Property

22.

2,335,602

4.3.600

2,791,802

64.7

23.

1,109,000

100.too

1,000,000

11.3

Corporate Stock

24.

1,399,005

70.350

1.328,655

19.9

Corporate Stock

25.

2,838,250

25,1*5

2,813,085

112.1

Corporate Stock

26.

7,134.130

1.169,691

5,944.439

6.1

Business Property

27 .

1,333,285

1.264,903

13.5

Corporate Stock

68. 38*:

28.

12.446,135

271,192

12,176,243

45.3

29.

1.161,000

13,455

1,147,545

86.3

Corporate Stock

30.

1,029,636

21,210

1,000,428

35,2

Corporate Stock

31.

2.227,348

392

2.226,956

5662.0

Corporate Stock

32.

4.392,259

10,904

4,381,355

402.1

Corporate Stock

33.

1,731,482

5,000

1,726,482

346.3

Corporate Stock

34.

3,250,000

300,000

2,950,000

10.8

luamesa

35.

3,717.398

75,755

3,711.643

50.0

Corporate Stock

36.

1.727,623

4,967

1,722,656

347.1

Corporate ftock

i".

1.703,277

102.343

1,600,934

16.6

32.

1,369,473

66,260

1.923.213

30.0

Corporate Stock

3i.

21,775,276

755.244

21,020,034

28.1

Corporate Stock

1,113,427

1.961,909

6.921,518

4.5

Corporate Stock

Oft.z* oi the Secretary of tbe Treasury
Office of Tax Analysis

Business Property

Property

Corporate Stock

April 19, 197?

TABLE 2

APPRECIATION AS A PERCENT OF GROSS ESTATE
BY. SIZE OF GROSS ESTATE
(1979 Levels)

Size of
gross estate

Under 175

Appreciation excluding
Appreciation including
personal residence
personal residence
Gross
As a
As a
Average
Average
Amount
percent
estate
Amount
percent
per
of gross
per
of gross
return
estate
return
estate
(..$ millions ..) (. ..Z...) (dollars) ($mil.) (. ..Z...) (dollars)

$25,183

$ 4,386

17.4Z

18,000

$ 3,242

12.9%

13,300

175

200

3,291

633

19.2

35,900

479

14.6

27,200

200

300

9,037

1,800

19.9

48,200

1,375

15.2

36,800

300

500

9,215

2,013

21.8

83,000

1,609

17.5

66,300

500

1,000

9,774

2,280

23.3

158,500

1,888

19.3

131,300

1,000

2,000

7,082

1,739

24.6

335,100

1,459

20.6

281,110

2,000

3,000

3,179

821

25.8

622,400

722

22.7

547,400

3,000

5,000

3,101

812

26.2

990,200

708

22.8

863,400

5,000

10,000

3,057

833

27.2

1,876,100

752

24.6

1,693,700

10,000 and over

3,365

1T153

34.3

7,161,500

1,114

33.1

6,919,300

$76,284

$16,470

47,700

$13,347

Total

21.6Z

Office of che Secretary of the Treasury
Office of Tax Analysis

17.52

38,600

March 8, 1979

APPENDIX 1

EXAMPLES ILLUSTRATING OPERATION
OF THE LIQUIDITY RELIEF PROVISIONS OF H.R. 4694, THE
CARRYOVFR BASIS SIMPLIFICATION ACT OF 1979
The overall purpose of the liquidity relief provisions is
to prevent the forced sale of closely-held businesses and farms
which a decedent's heirs desire to continue to own and operate.
The provision permitting deferred payment of estate tax
attributable to closely-held businesses and farms allows an
adequate time period over which estate tax liability may be
paid from earnings generated by the business. The following
examples illustrate that the allowance of a 15 year time period
over which to pay the estate tax attributable to the closelyheld business or farm will, in most cases, prove adequate.
Nonetheless, there may be situations where either this
relief is insufficient, or, particularly in the case of closelyheld stock, it is necessary or desirable to redeem some portion
of the stock. As the examples illustrate, a sale or redemption
may be made without income tax consequences if the executor
elects to allocate a sufficient amount of the death tax basis
adjustment to the property sold or redeemed. In effect, the
sale of property to pay death taxes and administration expenses
is accorded the same income tax treatment as occurred when
the basis of property in the hands of an heir was ""stepped up"
to estate tax value. While there is less aggregate basis
adjustment available for the retained portion of the closelyheld business, this will not cause difficulty because, by
hypothesis, the retained property will not be sold by the heir.

- 2 EXAMPLE 1
X, a widower, dies on December 31, 1990 with the following
assets (all acquired after December 31, 1976) and liabilities.
For purposes of illustration, administration expenses are
ignored and it is assumed that the farm does not qualify for
special use valuation.
Asset/Liability
Fair Market Value
Basis
$200,000
50,000
5,000
10,000
12,000
N/A

Farm real property $900,000
75,000
Farm machinery
5,000
Cash
10,000
Life insurance
20,000
Stocks & bonds
200,000
Debts associated
with farm
I. Calculation of Estate Tax Due
Gross Estate
Farm real property
Farm machinery
Cash
Life insurance
Stocks « bonds
Less
Debts associated with
farm

$900,000
75,000
5,000
10,000
20,000

$1,010,000

200,000

Taxable Estate
Estate Tax Before Unified Credit
Unified Credit
Estate Tax Payable

200,000
810,000
271,700
47,000
224,700

- 3 -

II.

Estate Tax Liquidity Relief—Deferred Estate Tax Payment

The estate of X qualifies for the deferred estate tax
payment privilege under proposed section 6166(a)(1)(A) because
the value of the farm real property and machinery (net of
debts) exceeds 65 percent of X's adjusted gross estate. Thus,
the estate of X may elect to pay the estate tax attributable
to the farm real property and machinery in up to 10 annual
installments commencing in the sixth year after X's death at
a 4 percent interest rate. The estate tax attributable to
the farm real property and machinery is equal to the estate
tax due X
closely-held business amount _ $224,700 775,000
x
adjusted gross estate
~
'
810,000
- $214,991
If the executor of the estate of X so elects, $9,709 will
be payable at the time the estate tax return is due, interest
of $8,600 will be payable annually for five years on the
deferred estate tax of $214,991 and that deferred amount may
be paid in 10 annual installments of $21,499 (plus interest)
commencing in year 6.
This 15 year payout period, at a modest 4 percent interest
rate, should itself permit the estate to pay the deferred estate
tax from funds generated from the farm operation. However,
should it be necessary or advisable to sell property additional
liquidity relief is provided by proposed section 1023(f).
III. Income Tax Liquidity Relief—Allocation of Death Tax
Basis Adjustment
Because X's estate qualifies for the deferred estate tax
payment privilege, the executor of X's estate may elect to
apportion the death tax adjustment to any carryover basis
assets with an aggregate fair market value not in excess of
$224,700.
The maximum amount of the death tax adjustment equals,
in general, the highest applicable marginal estate tax rate
times the net appreciation in all carryover basis assets

4 -

included in the estate. In this example, the applicable
marginal estate tax rate is 39 percent and the net appreciation in all carryover basis properties is $733,000. The
aggregate death tax adjustment is $285,870.
If the executor of X's estate allocated $8,000 of the
aggregate death tax adjustment to the $20,000 of stocks and
bonds and $159,211 to farm real property worth $204,700, those
assets could be sold without recognition of gain because the
fair market value of each asset equalled basis. Moreover,
under the facts in this example, the sale would not cause an
acceleration of the deferred estate tax. Thus, the executor
would have $224,700 in cash to invest while retaining the
privilege of paying $214, 991 in installments at 4 percent
interest.
The balance of the death tax adjustment, $118,659, would
be available for allocation by the executor to any other
carryover basis assets, subject only to the limitation that
the per asset adjustment could not exceed .39 times the
appreciation in each asset.

- 5 -

EXAMPLE 2
Y, a widower, dies on December 31, 19 90 with the
following assets (all acquired after December 31, 1976).
For purposes of illustration, administration expenses and
debts are ignored.
Asset/Liability

Fair Market Value

Basis
$200,000
80,000
25,000
50,000
40,000

Closely-held stock
$600,000
Residence
250,000
Cash
25,000
Life insurance
50,000
Marketable stocks
75,000
and bonds
I. Calculation of Estate Tax Due
Gross Estate
Closely-held stock
Residence
Cash
Life insurance
Marketable stocks
and bonds

$600,000
250,000
25,000
50,000
75,000

Taxable Estate
Estate Tax 3efore Unified Credit
Unified Credit
Estate Tax Payable
II.

$1,000,000
1,000,000
345,800
47,000
298,800

Estate Tax Liauiditv Relief--Deferred Estate Tax Payment

The estate of Y qualifies for the deferred estate tax
payment privilege under proposed section 6166(a)(1)(B) and
(C) because the value of the closely-held stock exceeds 35
percent of Y's gross estate and 50 percent of Y's taxable
estate. Thus, the estate of Y may elect to pay the estate
tax attributable to the closely-held stock in up to 10 annual

- 6 -

installments commencing in the sixth year after Y's death at
the statutory interest rate, currently 6 percent. The estate
tax attributable to the closely-held stock is equal to the
estate tax due X
closely-held, business amount _ $298 800 X 600 rOOO
adjusted gross estate
"
'
1,000,000
s

$179,280

If the executor of the estate of Y so elects, $119,520
will be payable at the time the estate tax return is due,
interest of $10,757 will be payable annually for five years on
the deferred estate tax of $179,280 and that deferred amount
may be paid in 10 annual installments of $17,928 (plus interest)
commencing in year 6.
This 15 year payout period should itself permit the estate
to pay the deferred estate tax from funds generated by the•
business. However, should it be necessary or advisable to sell
property additional liquidity relief is provided by proposed
section 1023(f).
III. Income Tax Liquidity Relief—Allocation of Death Tax
Basis Adjustment
Because Y's estate qualifies for the deferred estate tax
payment privilege, the executor of Y's estate may elect to
apportion the death tax adjustment to any carryover basis assets
with an aggregate fair market value-not in excess of $298,800.
The maximum amount of the death tax adjustment equals,
in general, the highest applicable marginal estate tax rate
times the net appreciation in all carryover' basis assets
included in the estate. In this example, the applicable
marginal estate tax rate is 39 percent and the net appreciation
in all carryover basis properties is $605,000. The aggregate
death tax adjustment is $235,950.
If the executor of Y's estate allocated $35,000 of the
aggregate death tax adjustment to the $75,000 of marketable
stocks and bonds and $149,200 to closely-held stock worth

- 7 -

$223,800, the marketable stocks and bonds could be sold and
the closely-held business stock sold or redeemed without
recognition of gain because the fair market vlaue of each
asset equalled basis and the redemption qualifies as a sale
or exchange under section 30 3. Indeed, the executor could
elect to allocate $199,200 of the death tax adjustment to
closely-held stock worth $298,800 and have that amount redeemed
under section 303 without income tax consequences. Moreover,
under the facts in this example, the sale of this amount of
closely-held stock would not cause an acceleration of the
deferred estate tax. Thus, the executor would have $298,800
in cash proceeds from the sale of carryover basis assets and
$75,000 in cash from Y»s savings and life insurance. Estate
tax of $119,520 would be due with Y's estate tax return,
leaving the executor with $254,28Q~to invest while retaining
the privilege of paying $179,280 in installments at 6 percent
interest.
The balance of the death tax adjustment, $51,750 or
$36,750 under the above alternatives, would be available for
allocation by the executor to any other carryover basis assets,
subject only to the limitation that the per asset adjustment
could not exceed .39 times the appreciation in each asset.

APPENDIX 2

Summary of•H;R; 4694 Solutions
to-Carryover-Basis-Problems

Problem:

Carryover basis creates administrative
burdens for estates not required to file
estate tax returns.

Solation: Exclude from the operation of carryover basis
virtually all estates for which estate tax
returns are not required.
Effect: - When combined with other changes, more
than 97 percent of estates coming into
existence annually are excluded from the
carryover basis system.
2. Problem: The $60,000 minimum basis is too low, its
applicability cannot be determined until
after complicated death .tax adjustments have
been made and the formula by which it is
allocated is complex.
Solution: Increase the minimum basis from $60,000 to
$175,000 and apply it before the death tax
adjustment is made. The minimum basis would
be allocated in the discretion of the
executor.
Effect: - Assures up to $175,000 of basis for all
estates;
Dovetails carryover basis system with
nonfilers;
Reduces computational complexity and
uncertainty of allocations due to possible
estate tax audit changes;
Provides a floor for death tax basis
adjustment rather than a limitation as is the
case presently;
Discretionary allocation provides limited
liquidity relief.

-2-

Problem:

The amount of the "personal and household
effects" exclusion is too small and the term
is ambiguous.

Solution: Permit the executor to elect to exclude up to
$25,000 of tangible personal property which
was a capital asset in the hands of the
decedent.
Effect: - Definitional problems associated with the
term "personal and household effects" are
eliminated;
Proof of basis problems are eliminated for
those assets for which basis is most
difficult to prove;
- Many collections are removed from the
carryover basis system.
4. Problem: The present death tax adjustments are unduly
complicated, are computed by reference to an
incorrect rate and require recomputation for
all assets if the value of one asset is
changed on audit.
Solution: The death tax adjustment is now a single
computation. First, an overall amount
available to be apportioned is computed.
That amount is equal to the highest marginal
tax rate applicable to the estate multiplied
by the aggregate appreciation of all
appreciated carryover basis properties,
subject to the limitation that the amount of
appreciation so determined cannot exceed the
greater of $175,000 or, in general, the
taxable estate. If less than $50,000 of the
estate is taxable at the highest rate, the
next lower rate will apply. The aggregate
amount may be apportioned by the executor in
his discretion among the estate's carryover
basis properties subject to the limitation,
in general, that the adjustment for any
particular property cannot exceed the
marginal rate times the appreciation in that
property.
Effect: - Is enormous simplification (as illustrated
by attached example) and responsive to
criticism regarding computational complexity.

-3-

Reduces the number of calculations
necessary to determine the basis of any
particular asset.
— Assures that in almost all cases, an
audit change will require the recomputation
of the basis of only the affected asset.
— Removes "suspended basis" problems
arising from present law requirement that
only property "subject to tax" is eligible
for basis adjustment.
$50,000 rule assures that a significant
portion of the estate is subject to tax at
the marginal rate to be applied to the
appreciation.
Rule is generous—particularly for small
estates.
— Estate for which returns are required
but which do not pay federal estate tax
still get a generous basis adjustment to
compensate for any state death taxes.
- Cannot harm those whose assets at date of
death had a basis in excess of estate tax
value because the adjustment applies only to
appreciation existing at that time.
— Effect therefore is only to decrease
gain on appreciated assets.
- Adjustment is automatically provided for
state and foreign death taxes not in excess
of the federal credit.
5. Problem: The sale of appreciated property to raise
funds to pay estate tax will result in income
tax liability. Additional property may have
to be sold to raise funds to pay the income
tax from the first sale. This income tax
liability may result in the forced sale of
farms and closely held businesses.
Solution: Where an estate qualifies for estate tax
deferral on account of closely held business
interests, the executor is permitted to elect

-4to allocate the death tax adjustment to any
asset without regard to the general
limitation of the marginal tax rate times
appreciation. Thus, the executor can
allocate the death tax adjustment to property
sold to pay tax without incurring any income
tax liability. The fair market value of
properties eligible for this privilege is
limited to the sum of the death taxes and
funeral and administration expenses.
However, there is no requirement that the
proceeds from the sale of the assets
benefiting from the special basis allocation
be used to pay death taxes or administration
expenses.
Effect: - Property sold to pay death taxes
effectively receives "step-up" in basis
treatment. No income tax will arise on its
sale.
Provision allows generous liquidity relief
because the proceeds of sale need not be used
to pay death taxes.
6. Problem: It is unduly burdensome and time consuming to
require the death tax adjustment to be
computed separately for each asset in the
decedent's estate.
Solation: Permit the executor to elect to average the
basis of similar items of property acquired
at different times.
Effect: - Substantially reduces the number of
computations necessary to determine the death
tax adjustment for items such as mutual fund
dividend reinvestment shares and shares of
stock in the same corporation acquired at
different times.
Provides the same basis for all items of
similar property.
7. Problem:
Problem:People do not keep track of the cost of home
improvements.
Permit
an annual $250 addition to basis to
Solution:
account for improvements unless a larger
amount can be substantiated in any year.
Recordkeeping
Effect: problems for minor home
improvements are eliminated.

-5-

Problem:

The present reporting requirements are unduly
burdensome.

Solution: Require basis information reporting only from
those subject to carryover basis and assess
penalties pursuant to a negligence standard
only.
Effect: - Basis information will be required only
from executors of the less than 3 percent of
the estates subject to carryover basis.
9. Problem: The basis of carryover basis property
remains uncertain until thst property is
disposed of in a transaction in which basis
becomes relevant.
Solution: A procedure is created whereby executors may
request the Internal Revenue Service to audit
the basis of carryover basis assets, permits
executors to utilize the administrative
procedures of the Internal Revenue Service to
resolve basis disputes, and creates
declaratory judgment jurisdiction in the Tax
Court to deal with those problems which
cannot be settled administratively. Basis
determinations which are agreed upon by the
Service and the taxpayer or adjudicated will
become binding on both the Service and the
recipient of the property. If the Service
fails to audit a return where the executor
has requested a basis audit, the amount shown
on the return will be binding unless an heir
is able to prove a different basis at the
time of the later sale or disposition of the
property.
Effect: - Basis uncertainties are resolved at a time
when records are most likely to be available.
Heirs will not be subject to basis
uncertainties.
10. Problem: The present fresh start rule for nonmarketable securities will not work because
the acquisition date and/or cost of the
property is unknown.
Solution: The discount back rule of the Revenue Act of
1978 would be applied at a rate of 6 percent
to determine the fresh start basis for all
property held on December 31, 1976 other than
marketable bonds and securities, with a floor
of 25 percent of estate tax value.

-6-

Effeet:

- Historical data is not necessary to
determine the fresh start basis for any
property.

Combination of this rule, liberalized
tangible personal property exclusion and use
of fresh start basis for both gain and loss
effectively eliminates proof of basis
problems for assets acquired prior to
effective date.
11. Problem: The fresh start adjustment unfairly
discriminates against certain types of
nonmarketable property.
Solution: Property the value of which was readily
determinable on December 31, 1976 without
regard to appraisals will be given a fresh
start basis equal to the value determined by
reference to the appropriate valuation
method•
Effect: - Gives nonparticipating ,• nonconvertible
preferred stock a fresh start basis equal to
its redemption price.
Fresh start value of property subject to a
binding buy-sell agreement will equal the
price determined by reference to the
agreement.
12. Problem: The unavailability of the fresh start
adjustment for purposes of determining loss
makes historical cost data important and that
data does not exist.
Solution: Allow fresh start basis to be used for
computing both gain and loss.
Effect: - The importance of cost data is reduced.
It is only relevant if it exceeds the fresh
start basis and usually that can be
determined easily.
Fiduciary duties are reduced.

EXAMPLE COMPARING THE OPERATION
OF THE SINGLE DFA1H TAX ADJUSTMENT
OF H.R.' 4694 WITH PRESENT LAW
ASSETS:

$590,000 (All assets acquired after December 31, 1976)
Fair Market
Value at Death

Basis
$167,000

Principal Residence

$180,000

Life Insurance

75,000

Marketable Security X

50,000

20,000

Marketable Security Y

70,000

40,000

Closely-Held Security 2

200,000

160,000

Tangible Personal Property

15,000

Unknown

$590,000
DE3TS AND EXPENSES:

$387,000

$20,000

DATE OF DEATH: January 1, 19 81
STATE EST ATE TAX: $12,800
STATE INHERITANCE TAX ON RECIPIENT OF 2:

$10,000

COMPUTATION OF ESTATE TAX
Gross Estate
Less: Debts and Expenses*
Taxable Estate

$590,000
20,000
$570,000

Gross Tax ($155,800+ 37% of $70,000)

$181,700

Less: Unified Credit $47,000
State Death Tax Credit
($10,000 + 4% of $70,000)
Estate Tax

12,800

•Assumes no marital or charitable deduction.

59,800
$121,900

COMI'U'IAJ ION OF CAKUYOVUi HAS IS OF ASSET " 2 "

H.R. 4694

1976 Act
Computation of Federal Eetate Tax Adjuatutente
$200,000
1. Eetate tax value ot "Z"
160,000
2. Raala of "Z" ln hande of decedent
40.000
3. Nat appreciation In "Z" ( 1 2 )
4. Pair market value of all property aubject
590,000
tu federal catate tan
5. Ratio of net appreciation ln "I" to fair
market value of all propcity aubject to
.068
federal eetate tax O t 4)
6. Federal eaiate tax attributable to net
8.289
appreciation In "Z" (5 x $121,900)
1. Reele of "Z" after federal eetate tax
adjuatnent (2 + 6)
11

Computation of State Eetate Tex Adjuatnent
8 Eetate tax value of "Z"
M
9. Raala of Z " after federal eetate tax
adjuatnent
10. Remaining net appreciation (8 - 9)
11. Fair narket value of
groaa eetate
$590,000
12. Property not aubject to etate
eetate tax (realdence)
180,000
11. Fair narket value of all property
aubject to atate eaiate tax (11 - 12)
14. Ratio of reouilnlng net appreciation to
fair narket value of all property aubject
to atate eetate tax (10 t 13)
13. State eatate tax attributable to remaining
net appreciation (14 x $12,800)
16. Raala of "Z" after federal and atate eatate
tax adjuatnenta (9 * IS)

III.

1. Eetate tax value of "Z"
2. Raala of "Z" ln tiende of
decedent
3. Net appreciation In "Z"
(2 - 1)
4. Illgheat marginal federal
aetata tax bracket of " Z V
eatate*
5. Adjuatnent for death taxaa
(4 x 3)
6. Raala of "Z" ln handa of
rcclpleut (5 + 2)
$168,289

Computation of State Inheritance Tax Adjuatnent
17. Eetate tax value of "Z M
16. Raala of "Z" after federal and atate eatate
tax adjuatnenta
19. Remaining net appreciation (17 - 18)
20. Ratio of remaining net appreciation to fair
narket value of all property acquired by
by recipient of "Z" (19 4 1?)
21. State Inheritance tax attributable to
remaining net appreciation
(20 x $10,000)
22. Raala of "2" after all adjuatnenta (21 t IB)

$200,000
168,289
31.711

410.000

.077
986
169.275
$200,000
169.275
30.725

.154

1,540
$170,815

$200,000
160.000
$ 40.000

.37
14.800
$174,600

toWeTREASURY
SHINGTON,D.C. 20220

TELEPHONE 566-2041

FOR P.M. RELEASE
TUESDAY, NOVEMBER 13, 1979
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE THE
BOSTON WORLD AFFAIRS COUNCIL
"THE INTERNATIONAL MONETARY SYSTEM:
AND FUTURE PROSPECTS"

CURRENT SITUATION

Just over a year ago, the United States dramatically
adopted a series of measures to strengthen the dollar in the
exchange markets. Over the last month, we have taken a series
of further steps that complement and strengthen these efforts.
It is therefore useful to review the international monetary
events of the past twelve months, with three key questions in mind:
-- Has greater exchange rate stability been achieved?
-- Is fundamental adjustment of the underlying imbalances
taking,place?
-- Is the international monetary system working well enough,
or are further improvements needed in its functioning?
_ There have certainly been disappointments during this period,
which have set back our effort. Inflation has accelerated.
The oil situation is having a major impact on prices, growth
and payments imbalances here and abroad.
But I believe that major progress has also been made,
and that too little attention has been paid to that progress:
-- The dollar has strengthened, and exchange
markets disorders have been curbed.
— The balance of payments adjustment process has
operated almost precisely as the textbooks predict.

M-194

-2—

Indeed, the impact of the oil price and supply
situation has tended to mask the successful
adjustment of the large imbalances of the United States,
Germany and Japan which had been the principal sources
of exchange market instability in recent years.
— It is thus clear that the monetary system is working
effectively, though we have during this period also seen
the need for its further evolution — and begun to move
in that direction.
Exchange Market Developments
It may be useful to begin the review by recalling the
exchange market situation last fall. Although the United
States had already begun to make progress in reducing its
record trade and current account deficits, confidence
in our ability to achieve a sustainable position was being
eroded by rising inflation and delays in implementing
an energy program. Severe and persistent exchange market
disorders developed which led to an excessive decline
of the dollar. In the month of October, the dollar fell
sharply against virtually all major currencies.
This excessive decline of the dollar added needlessly
to inflation in our own economy. Because the dollar remains
the world's key currency, this decline also threatened the stability
of the entire international financial system. This, in turn,
threatened our own economy — because one of every eight
manufacturing jobs in this country and one of every three
acres of farm land produce for export, and because
almost one of every three dollars of U.S. corporate profits derives
from the international activities (investments as well as
exports) of American firms.
Forceful, direct action was therefore required to break
the psychological atmosphere, restore confidence and establish
a basis for greater international financial stability. Our
measures began in August 1978 with an intensified effort
to control inflation; they included a series of steps
on monetary policy and adoption of the wage/price guidelines.
However, the individual steps, looked at in isolation, were seen
as insufficient and even intensified the negative atmosphere.
On November 1, the United States announced a package
of measures to strengthen the dollar at home and abroad.
The package included a then unprecedented one percent
increase in the discount rate and other measures to tighten

-3monetary policy, expanded gold sales to improve the
trade position and the mobilization of up to $30 billion
in foreign currency resources to finance the U.S. share
of joint intervention operations —with Germany, Switzerland
and Japan — in the foreign exchange market to restore
stable conditions.
After an initial period of testing official intentions,
the exchange markets calmed and the dollar experienced
increasing demand throughout the first half of the year.
Leads and lags returned to normal. Large net capital
inflows to the United States developed as short positions
were closed out.
However, despite the measures adopted in late 1978,
our inflation rate continued to rise. .As a result, market sentiment
again turned bearish on the dollar. The concerns mounted irregularly
but with rising force in September, and some movement occurred
in the rates. Not all attention centered on the dollar,
however. The German mark exhibited growing strength within
the European Monetary System, which led to speculation on a
realignment of rates there, but which also put additional pressure
on the dollar.'
Three factors helped bring this episode to a close — an
EMS realignment, the October 6 actions by the Federal Reserve
and subsequent actions by the Treasury. Despite the
periods of pressure, the dollar now stands substantially
above the levels of last October. In terms of a trade-weighted
average against the currencies of other major industrial
countries, the dollar has increased in value by about
8 percent, including 35 percent against the Japanese
yen and 3 percent in terms of the German mark.
The dollar is also about 8-12 percent higher in terms of the
major currencies needed to pay for OPEC imports. (The precise
figure depends on the averaging technique used.) Contrary to
the widespread impression that it has weakened substantially
since mid-year, the dollar has strengthened by more than 2 percent
in terms of an average of other major currencies since the June
OPEC meeting. This point is extremely important, since
a "weaker dollar" is sometimes cited as justification for
increased oil prices. The reality is to the contrary.
The renewed strength of the dollar derives from a variety
of sources. Clearly the measures of November 1, 1978
and our subsequent actions have demonstrated forcefully
our determination to deal with exchange market disorders.
We will continue to intervene actively in the foreign
exchange market when conditions require, and have ample
resources for this purpose. In this connection, Treasury

-4has recently issued $1.1 billion equivalent of securities
denominated in Deutsche Marks and plans a further offering
of up to DM 2 billion in January.
We have also adopted a more flexible gold sales program
to help deter the speculative disturbances in the gold
market which have caused instability in other commodity
markets and the exchange markets. In the future, sales
of Treasury gold will be subject to variations in amounts
and dates of offering, thereby increasing the uncertainties and
risks associated with gold speculation. In accordance
with this approach, 1.25 million ounces of gold were sold
on November 1.
The Adjustment Process
Exchange market intervention, and other efforts to deal
with market forces directly, can of course succeed only if
they rest on a solid underlying position. Indeed, we were
able to move boldly in November 1978 because we were confident
that the fundamental trends were moving in the right direction —
and hindsight reveals that we were right, in that the U.S.
external position had already begun to improve markedly after
the first quarter of that year.
Indeed, substantial improvement has now been recorded in
the U.S. current account position. Last November, we were
projecting a halving of the U.S. current account deficit from
$14 billion in 1978 to the $6-8 billion range in 1979,
assuming no further increase in oil prices. In fact, oil
prices have risen by more than 60 percent — a development
which no one expected, and which has raised our 1979 oil bill
by about $16 billion.
Nevertheless, our current account deficit during the
first half of this year was only $1 billion. For the year
as a whole, it is expected to run a few billion dollars at
most. In 1980, we expect the United States to be in fairly
substantial current account surplus, assuming oil prices rise
no more than prices of other goods. Indeed, we expect the
United States to have by far the largest current account surplus
outside the OPEC group.
The improved U.S. performance derives from two key
developments. First, the trade deficit in the first three
quarters of 1979 is running at a $6 billion annual rate
below the $34 billion deficit in 1978 despite the rise of
$16 billion in oil imports. Our non-oil trade balance has,
in fact, improved by a whopping $44 billion annual rate over
the past six quarters.

-5In the year through September, the volume of non-agricultural
exports is estimated to be more than 20 percent higher than
the same period in 1978. At the same time, the volume of
non-oil imports rose by only about 2 percent. Since the volume
of world.trade as a whole has been growing by 5-6 percent,
it is apparent that both our export and import-competing
industries-have made major gains in market share. The lagged
effects of competitive,, gains from past exchange rate changes,
and shifts in relative-growth rates, have produced this substantial
improvement•> in the competitive position of the United States.
In 1980, these factors will produce continued improvement in
our overall trade balance even though oil import costs will rise
another $10 billion or so, even on the basis of current prices.
Second, the United States surplus on services transactions
is also growing rapidly. It is presently running about $7
billion;higher than the $20 billion surplus achieved in 1978.
Receipts from U.S. direct investment abroad have been especially
strong, reflecting the improved profitability of foreign operations
as growth overseas picked up and the translation effects of
past exchange rate movements. In 1980, further gains in this
area should result in an even larger services surplus.
It is worth noting that, at the present level of our
services surplus, the United States can run a merchandise
trade deficit of almost $30 billion and still be in surplus on
current account -- the Dest single indicator of a country's
international economic position. And our services surplus
continues to rise rapidly each year. The structure of our
current account is thus very different from that of Japan and
Germany, each of which runs a sizable services deficit and
thus must run a sizable surplus on merchandise trade to achieve
overall current account balance.
In addition to the U.S. improvement, we are also
witnessing a very significant adjustment in the positions
of other major industrial countries. In particular, the
Japanese position has reversed dramatically. A sizable Japanese
deficit is expected for 1979, perhaps on the order of
$7-8 billdon, in contrast to a $16.5 billion surplus
in 1978. Thus the Japanese position will swing by $20-25
billion in one year alone. Moreover, Japan is likely
to continue in deficit in 1980. The German surplus --which amounted.to about $9 billion in 1978 — has been
nearly eliminated this year, and a small deficit is
likely next year.

-6These developments provide clear evidence that the
international adjustment process works. To be sure, as
we have known all along, there is a considerable
delay between changes in relative prices and growth rates,
on the one hand, and trade flows on the other. However,
the results are now plain for all to see — just as they
were, incidentally, after the exchange-rate realignments
of the early 1970s. These adjustments will provide a
pattern of payments balances among the major countries
over the next year or so which will be a major factor
for greater exchange market stability.
At the same time, it is obvious that even balanced
current account positions are not enough to stabilize
exchange markets unless there is a reasonable degree
of confidence in the adequacy of economic policies
in the major countries, and especially in the determination
of the authorities in the United States to stand their
ground until inflation is brought under control.
Food and energy prices have temporarily driven the
increase in U.S. price indices into the double-digit
range. In coming months, this pressure will recede
as food prices moderate in the wake of good harvests
and the OPEC actions work their way fully through the
economy — provided, of course, that there is no new
surge in oil prices.
But the underlying inflation rate is still much
too high and must be brought under control. The broad
array of U.S. policies is directed at that objective.
The recent Federal Reserve Board measures to restrain money
supply growth are strong medicine and will be maintained.
A disciplined fiscal policy will complement the Fed's
efforts; indeed, the high employment budget has already
swung more than $30 billion toward restraint over the past
two years. The National Accord between the Administration
and labor provides a basis for a more effective program of
private sector wage/price moderation. But inflation has become
deeply embedded in our economic structure, and will take a
prolonged period of austerity to root out.
The Evolution of the International Monetary System
The economic problems of the past decade have brought
home forcefully to the United States the pervasive interdependence of national economies. Our autonomy in dealing
with these problems is much less than many realize. Our
real economic sovereignty is far less than our nominal

-7sovereignty. The success of our efforts to bring inflation
under control, achieve satisfactory growth and maintain
a strong, stable dollar will be affected significantly
by the actions of others.
The economic realities of interdependence have, however,
. out-paced the institutional mechanisms for dealing with them.
Despite the progress cited above in adjusting national
balance-of-payments positions, we are all too aware of the
periodic outbreaks of instability in the monetary system and
the frequent delays in initiating effective adjustment actions.
We are still in the very early stages of the system of flexible
exchange rates, and further improvements in its functioning
are needed. The agenda for the 1980's must be directed toward
developing a framework for ensuring that the international
dimensions of economic policies are adequately reflected in
national policy decisions.
The IMF Articles of Agreement provide a useful
starting point in the critical areas of multilateral
management of the global economy and international liquidity.
While the new Articles provide wide leeway for members
in the choice of exchange rate arrangements, they impose
an obligation to foster economic stability and avoid
unfair competitive exchange rate practices — which , in
a world of high inflation, may comprehend efforts to
keep exchange rates artificially high just as a world
preoccupied with excessive levels of unemployment faced
periodic national efforts to keep exchange rates artificially
low.
The IMF has been given enhanced responsibility
for surveillance over the operation of the system to
ensure that members fulfill these obligations. In the
area of surveillance, the Fund has adopted principles
for the guidance of members in conducting exchange rate
policy, and procedures and criteria for assessing members'
policies. The guidelines, and IMF practice, recognize
that surveillance must encompass the broad range of
economic policies affecting balance of payments adjustment
as well as exchange rate practices themselves.
The surveillance role constitutes a potentially major
strengthening of the IMF's ability to promote a sound global
economy. In the past, the Fund's ability to advise members
and encourage appropriate policies was limited primarily to
cases in which severe payments problems required a country

-8to borrow from the Fund. The new provisions extend the
Fund's mandate to countries which do not use its resources,
including those in surplus or with alternative sources of
financing. This more symmetrical approach should enhance
the IMF's effectiveness.
The IMF has been understandably cautious in implementing this authority. But the time has come for it to
take a more active role. Consequently, the United States
has proposed several steps to strengthen IMF surveillance.
These include procedures for measuring individual country
performance against agreed global standards; requiring
countries with large imbalances, surplus or deficit, to
submit for IMF review an analysis of how they propose to
deal with the imbalances; a more active role for the IMF
Managing Director in initiating consultations with
members; and establishment of a Governors Council with
decision-making powers to replace the advisory Interim
Committee. These steps could be an important start
in developing an effective IMF role in managing
the balance of payments adjustment process.
With greater interdependence among nations has also come
a greater balance in terms of economic size. While the dollar
remains the central currency for international reserves and
liquidity, other currencies have an enhanced capacity for
an international role. The development of a multiple
currency system, however, would have an undesirable
long-term potential for instability and disruption —
as the opportunities for switching among currencies
become even greater than today. Consequently,
there is increased interest in multilateral efforts
to manage global liquidity.
Interest has centered on efforts to promote the role
of the SDR. The SDR was created in 1969 as a supplementary
source of liquidity which did not rely on gold or payments
deficits of the reserve currency country. The instabilities
of the 1970's, with the rapid expansion of currency based
liquidity, retarded the full development of the SDR. However,
the new IMF Articles establish the objective of making the
SDR the principal reserve asset in the monetary system.
A number of important steps have been taken to promote
the SDR. It has replaced gold as the central unit for the
IMF, serving as the numeraire for the system and the unit
of account and vehicle for many IMF transactions. Allocations
of SDR's have been resumed, with SDR 4 billion being distributed

-9annually during the 1979-81 period. The interest rate on
the SDR has been brought more in line with market rates
and the number of transactions in which SDR may be used have
been expanded, thus improving the SDR's ability to compete
with other reserve assets.
The IMF is now considering the establishment of a
substitution account under which dollars and possibly other
currencies could be exchanged for SDR denominated assets.
The Interim Committee, at its recent meeting in Belgrade,
concluded that a properly designed account could contribute to improving the system and promoting the role
of the SDR, and requested a further report from the Fund's
Executive Board next April.
The United States believes that the development of
a substitution account could offer a number of attractions
for the international community in general. The SDR is a
diversified instrument, inherently involving less exchange
risk than holdings of a single national crrrency. A substitution account could provide an internationally sanctioned,
non-disruptive means for countries to achieve a desired
reserve portfolio composition without having to hold a
number of national currencies. Implementation of an
account would constitute a significant step toward
wider use of the SDR and to its longer term development
as the principal reserve asset.
There are, however, many difficult questions in the
construction of such an account and on sharing the costs
associated with operating it. For example, questions must
be answered concerning the interest rate and liquidity of
the assets issued by the account, the investment of the
dollar deposits and the amount and use of interest earnings,
and measures to maintain the capital position of the account.
These are exceedingly complex issues and we cannot be
certain when, or whether, satisfactory answers will be found.
Nevertheless, the United States considers the effort worthwhile
and is participating in a cooperative, constructive fashion.
Conclusion
I draw the following conclusions from this assessment of
international monetary developments over the past year, and
of the current situation:
— First, a key source of the exchange market pressures
and instabilities of recent years — the large U.S.
deficit and the large German and Japanese
surpluses — has disappeared. The pattern of
payments balances among the major countries
provides a sound basis for exchange market stability.

-10-- Second, these changes demonstrate that the
international adjustment process works.
To improve the functioning of the process still
further, however, it is essential to initiate
corrective measures at an early stage before
problems become self-reinforcing and require
severe action — and the IMF may have a much
larger role to play in that regard.
-- Third, we should not be surprised — nor disturbed •
if the relative role of the dollar in international
finance tends to diminish over time. In lieu of a
multiple currency system, which could be
quite unstable, we might well see the gradual
emergence of the SDR as a major factor in
international finance.
Finally, it is clear that all solutions to our current
problems require international responses. The mechanisms
for cooperative action must be strengthened to provide
for effective global management of the balance of payments
adjustment process and the provision of international
liquidity. We are living in an interdependent world, and
our policies and institutions must be based on that
reality.

INGTON, D.C. 20220

TELEPHONE 566-2041

ROOM 5004

U 15*19
FOR IMMEDIATE RELEASE
November 13, 1979

1REA

SECRETARY MILLER TO VISIT MIDDLE EAST
Secretary of the Treasury G. William Miller in late
November will visit Saudi Arabia, the United Arab Emirates
and Kuwait to establish and strengthen personal relationships with economic and financial leaders in these countries
and to discuss financial, economic and energy matters. In
Riyadh, the Secretary will sign a renewal of the Technical
Cooperation Agreement which authorizes the extensive program
activities of the U.S.-Saudi Arabian Joint Commission on
Economic Cooperation.
The Secretary and his party depart Washington Thursday,
November 22, and will return Thursday, November 29.
o 0 o

M-195

FOR RELEASE AT 4:00 P.M.

November 13, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,200 million, to be issued November 23, 1979.
This offering will provide $ 300 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,922 million. The two series offered are as follows:
90-day bills (to maturity date) for approximately $3,100
million, representing an additional amount of bills dated
August 23, 1979,
and to mature February 21, 1980 (CUSIP No.
912793 3S 3), originally issued in the amount of $3,017 million,
the additional and original bills to be freely interchangeable.
181-day bills for approximately $3,100 million to be dated
November 23, 19 79, and to mature May 22, 1980
(CUSIP No.
912793 4F 0) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing November 23, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,810
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. 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 Standard time,
Monday, November 19, 1979.
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.
M-196

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
stated
price
from
one
bidder
respective
(in three
willdecimals)
issues.
be accepted
of less
accepted
in without
full at
competitive
the weighted
bids average
for any
the price

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on November 23, 1979, in cash or other immediately available
funds or in Treasury bills maturing November 23, 1979.
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, 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.

TREASURY DEPARTMENT
IMMEDIATE RELEASE
November 13, 1979

CONTACT: Alvin Hattal
202/566-8381

SECRET SERVICE BEGINS PROTECTION OF RONALD REAGAN
The Treasury Department today announced that effective
November 13, 1979, the Secret Service will provide protection
to Ronald Reagan as a major Presidential candidate.
The protection was ordered after consultation with the
Candidate Nominee Advisory Committee concerning a request
by Mr. Reagan that protection be provided on this date. The
request was made on October 12, 1979.
The Committee has recommended to the Secretary of the
Treasury that Secret Service protection be offered to eligible
candidates, starting January 11, 1980. On October 29, the
Advisory Committee released formal guidelines for determining
the major candidates who should be recommended to the Secretary
of the Treasury for Secret Service protection.

M-197

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 A.M.
November 14, 1979

STATEMENT OF THE HONORABLE ROGER C. ALTMAN
ASSISTANT SECRETARY OF THE TREASURY (DOMESTIC FINANCE)
BEFORE THE TASK FORCE ON BUDGET PROCESS OF
THE HOUSE BUDGET COMMITTEE

Mr. Chairman and Members of the Committee:
I welcome this opportunity to discuss the Administration's
proposal for a system to control Federal credit programs, which
President Carter proposed in his January Budget Message. The
new system will improve legislative and executive controls over
credit programs and will make more clear the overall financing
requirements involved and their effects on credit markets.
The Administration proposes that annual limits on new
lending under direct and guaranteed loan programs be established
in the regular budget and appropriations process. An overall
annual limit would be proposed in the President's budget as
well as a limit on each program. Legally binding limitations
for each individual budget account would be set in regular
annual appropriation acts.
To implement this proposal, the Office of Management and
Budget is requiring Federal credit program agencies to include
in their fiscal year 1981 appropriation requests limits on new
commitments for both direct and guaranteed loans. Pending
legislative proposals, such as the bill sponsored by
Chairman Mineta (H.R. 5683), would support these Administration
efforts by requiring Congress to include targets and ceilings
on direct and guaranteed loan programs in the Congressional
budget resolutions.
M-198

- 2 The major impact of the new system will be on loan
guarantee programs. Concerning direct loans, opportunity
now exists for review and control of them in the regular
budget and appropriations process, since most direct loan
programs are included in the budget totals. Loan guarantee
programs, however, largely escape the budget process because
the loan guarantees do not result in budget outlays, except
in cases of default or where explicit subsidy payments are
provided.
•
The new control system would not apply to Governmentsponsored enterprises such as the Federal National Mortgage
Association, the Farm Credit System, and the Federal Home
Loan Bank System. These agencies are entirely privatelyowned and are largely self-supporting. Thus, they differ
significantly from Federal loan guarantee programs which are
administered by Federally-owned agencies and are effectively
backed by the credit of the U.S. Treasury. However, even
though the Government-sponsored enterprises would be excluded
from the new control system, their activities should be taken
into account in determining the overall Federal impact on total
credit demands and on the allocation of credit to particular
sectors of the economy.
Mr. Chairman, you have requested that I specifically
address the following questions:
— Is the total volume of credit in our national
economy limited? If so, what kind of effects
do Federal credit programs have?
— Do Federal credit programs affect the cost of
Federal borrowing?
-- What factors should the Congress consider in
setting targets and ceilings on the aggregate
levels of Federal credit programs?
The total volume of credit in our economy at any time is
limited by a number of constraints, including the flow of
savings and investment and the constraints of monetary policy
and the level of interest rates. Federal credit programs
change the allocation of this volume by increasing the availability or lowering the cost of credit to preferred borrowers.
Indeed, that is their purpose. These programs reflect
determinations by Congress that the credit markets in their
normal functioning do not provide the right mix of credit since
they do not supply adequate credit to the class of borrowers
covered by the programs.

- 3 The limited supply of credit available in the economy
means that the increased demands of Federal credit programs
add to pressures on interest rates and tend to raise interest
costs for all borrowers, including the Federal Government.
It is difficult to measure their effects, but total Federal
and Federally-assisted borrowings clearly have substantial
impacts. As indicated in the attached table, Federal and
Federally-assisted borrowing from the public is currently
estimated at $81 billion in fiscal year 1980. Furthermore,
the total of such debt outstanding at the end of fiscal 1980
is estimated at $1,067 billion.
This brings me to y :>ur third question — factors to be
considered in setting targets and ceilings on the aggregate
levels of Federal credit programs. We would suggest two
guiding principles: First, in setting these targets and
ceilings. Federal credit programs should not be considered
in isolation, but must be viewed in the context of total
Federal demands on financial markets, including direct
Treasury borrowings and those of Federally-sponsored credit
agencies. As you know, these borrowings vary substantially
from year to year as economic conditions vary.
Second, we advise against adopting as a target or
ceiling any fixed percentage of the supply of credit estimated
to be available in the economy. On the one hand, during times
of economic slack, the share of credit taken by Federal and
Federally-assisted borrowings may rise without putting undue
pressure on interest rates, as private demands for credit fall.
Also, Federal borrowing may rise in these periods if budget
deficits increase due to reduced tax receipts and increased
unemployment-related expenditures. Also, some credit programs
can be operated in a counter-cyclical fashion, and it may be
appropriate to set higher targets for these programs during
times of economic slack. On the other hand, during periods
of high economic activity, Federal demands on the credit
markets should be reduced, to avoid putting upward pressure
on interest rates and to make room for higher private credit
demands.
For a target to be effective, it should control the
agency which deals with the public and should not concern
itself with inter-agency lending. For example, the Treasury
Department lends to several agencies to provide funds for
direct loans to the public or to backstop guarantees of
borrowings by private borrowers. Thus the Treasury is in

- 4 a relatively passive role, as in its check-writing function,
of providing funds which are actually controlled by other
program agencies of the Government. Similarly, the Federal
Financing Bank lends to other Federal agencies and purchases
guaranteed obligations from them, but the FFB cannot provide
funds for any purposes other than programs for which Congress
has already authorized the required financing.
Also, in attempting to implement a system of control
over guaranteed loans, it is essential at the outset to
define guaranteed loans. In the Federal Financing Bank Act
of 1973 the Congress defined "guarantee" to mean "any guarantee,
insurance,, or other pledge with respect to the payment of all
or part of the principal or interest on any obligation..."
In keeping with this definition, the FFB has 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 and then
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 interpret the FFB Act
definition of guaranteed obligations as including obligations
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. The broad
definition of guaranteed loans in the Federal Financing Bank
Act of 197 3 is also the approach taken in the tabulation and
analysis of guaranteed loans in Special Analysis F of the
President's Budget. Unless the definition of "guarantee"
used in the credit program control system is sufficiently
broad to encompass the wide variety of contractual arrangements
which provide support equivalent to outright guarantees, there
will be a budget incentive for outright guarantee programs to
be replaced by equivalent programs in order to escape the
control system.
Growth in Federal Loan Guarantees
The sharp growth of loan guarantees in recent years has
been the principal focus of the Congressional committees
interested in credit program controls. The table attached
to my statement shows an estimated $333 billion of guaranteed
loans outstanding at the end of FY 1980, an increase of
$37.4 billion over the 1979 level. Thus, the net demands on
financial markets this year from Government loan guarantee
programs will total $37.4 billion. These demands have
increased rapidly in recent years, from $16.2 billion in
FY 1976 to $20.5 billion in FY 1977, $25.1 billion in FY 1978,
and an estimated $32.8 billion in FY 1979.

- 5 By comparison, the net demands on financial markets to
finance the Federal budget deficits during this period have
been declining. They fell from $66.4 billion in FY 1976,
to $45.0 billion in FY 1977, $48.8 billion in FY 1978,
$27.7 billion in FY 1979, and an estimated $29.4 billion in
FY 1980. Thus, while budget deficit financing is expected
to be cut by more than half in this 4-year period, the net
off-budget financing required for loan guarantee programs
will more than double.
A major reason for the proliferation of guarantees is
the common misconception that they are cheaper and less
risky to the Federal Government than direct loans. There
is, however, no inherent difference, from the Federal viewpoint, between the costs and financial market effects of
these two forms of credit.
The argument favoring guarantees relies primarily on
experience with the largest and best known guarantee program —
the FHA's single family mortgage insurance program. This
successful program, enacted during the great depression of
the 1930's, assured private lenders that they could safely
make long term, low down payment mortgage loans at reasonable
interest rates, thus filling an important credit gap. Today,
the FHA program's objectives are being achieved increasingly
by private financial institutions without the need for
Government intervention.
Unfortunately, FHA insurance has been the exception.
A review of the programs covered in Special Analysis F of
the Budget belies the argument that most guaranteed loan
programs pose minimal costs to the Federal Government.
Indeed, most involve substantial subsidies to borrowers
and direct costs to the Treasury and, ultimately, the
taxpayer.
Let me list some of these subsidies:
—Principal subsidies. In some cases, the Federal
Government has extended loan guarantees with the expectation
of paying part or all of the principal amount of the loan.
The guaranteed loan is equivalent, therefore, to an outright
grant of taxpayer funds. An extreme case is the public housing
program, involving $15 billion of public housing note and bond
guarantees (debt service contracts) outstanding. It is unlikely
that public housing projects will generate sufficient revenues
to service any of this debt. As a result, the Federal Government
probably will make all interest and principal payments on this
$15 billion.

- 6 --Interest subsidies. Other guaranteed loan programs
involve direct interest subsidies — for example, rural
community facilities, and subsidized private housing — in
addition to the subsidy implicit in the guarantee itself.
—Default costs. Beyond these principal and interest
subsidies, all guaranteed loans obviously involve Federal
assumption of credit risks and thus potential costs to the
Federal taxpayer in the event of unanticipated default.
Let me make a final comparison between direct loans
and guaranteed loans. All loans involve three basic
functions -- assuming risk, supplying funds, and processing
the loan.
Some argue that guarantees involve the Government only
in risk assumption, and that the private sector supplies the
funds and handles the paperwork. Yet another examination of
the types of guarantees outstanding indicates that certain
agencies issuing guarantees perform all three of these
functions.
Specifically, several agencies, including HUD, HEW and
Agriculture, make direct loans but then convert them into
guarantees. In making the direct loans, they assume the
risk, supply the funds and handle the processing. They
then can sell the loans to private parties, however,
continuing to guarantee them. A second example involves
HUD's urban renewal program, which provides direct loan
authority. Here, a commitment to make a direct loan is
treated as a guarantee and sold by borrowers into the market.
Another misconception is that guaranteed loans are
still largely financed by local lending institutions, with
minimal Government involvement, and thus have little net
impact on the securities markets. In fact, the $37.4 billion
net financing requirements for loan guarantees in FY 1980
will be largely financed directly in the securities markets:
An estimated $10.8 billion will be financed through the
Federal Financing Bank, and thus by the Treasury; $10.5
billion will be financed by GNMA mortgage-backed securities;
$3.1 billion by public housing bonds and notes; and additional
amounts of securities market financing will be required for
certain other guarantee programs such as the SBA, Farmers
Home Administration, and the Maritime Administration.

- 7 Improved Standards For Federal Credit Programs
Better control over Federal credit programs, also can
be achieved by improving the standards under which credit
assistance authority is provided by Congress in the first
place.
Program agencies should be given more specific guidelines
on the circumstances under which credit assistance is to be
provided and the related terms and conditions of them. Giving
these agencies broad assistance authority and then expecting
them to resist the inevitable demands for assistance unavoidably
leads to Serious problems of control over credit assistance
totals and general misallocation of our limited credit resources.
Let me discuss the basic circumstances in which credit
assistance is issued and make some suggestions for tightened
lending standards and how they would help with the broader
problem of controlling credit programs.
Credit need test. Most credit 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 credit program agency to
certify that 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 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 higher rates 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.
Guarantees of tax-exempt bonds. The Treasury opposes
Federal guarantees of tax-exempt municipal bonds. They
create a class of securities which is stronger than the
Federal Government's own securities. Like Treasury securities,
they would be backed by the full Federal credit but, unlike
Treasuries, they would be exempt from Federal taxes. In
addition, such guarantees would convey the benefits of both
the Federal credit and the tax exemption to high income
taxpayers — the principal buyers of tax-exempt securities.
Also, tax-exempt guarantees are an ineffective means of
delivering Federal aid to local governments, since much of
the benefit goes to high income investors and since the
financing of Federal programs in the municipal market competes
directly with other State and local bond issues for essential
local public facilities and increases the cost of financing
the facilities. For these reasons, we believe that municipal
bonds should only be guaranteed if they are taxable securities.
Fixed interest rates. Another example of poor program
structure, which leads to program control problems, involves
loan programs where borrowers pay a fixed interest rate, and
the Federal agency pays the difference between that rate and
the market rate. Thus, as interest rates rise, there is an
automatic increase in the Federal subsidy and in the demands
on the Federal budget. The benefits to the assisted borrower
are thus determined by fluctuations in the market rather than
by changes in the borrower's real needs. As an example of
these perverse effects, take the Rural Electrification
Administration program of 2 percent, 35 year loans to rural
electric cooperatives. At the time the 2 percent rate was
written into law in 1944, it was slightly higher than
prevailing Treasury borrowing costs. As market rates of
interest have risen, this program which was self-supporting
in 1944 has become a program in which the subsidy element
predominates. Under current market conditions with Treasury
borrowing costs of about 10 percent, the cost to the Government
of making $100 million of these loans is the same as providing
a grant of $61 million and requiring the remaining $39 million
to be repaid with interest at 10 percent.

- 9 Excessive financing costs. Also to be avoided are
guarantee programs which are financed directly in the
securities markets at disproportionately high costs because
of the small size or poor timing of the issue, tho lack of
investor familiarity with the program, or other special
marketing factors. Many of these problems have been cured
by financing such guaranteed obligations through the Federal
Financing Bank.
Eguitv participation. Many credit programs involve
circumstances where borrowers could take equity positions
in the projects being financed, and these programs should
encourage them to do so. Requiring borrowers to have such
a stake would help avoid excessive demands for credit,
help assure more efficient projects, and help protect the
interests of the Federal Government as lender or guarantor.
Other loan terms and conditions. Demands for credit
assistance will also be excessive if the authorizing legislation does not contain specific restrictions on such terms
and conditions as maximum maturities, guarantee fees,
reasonable assurance of repayment, and default procedures.
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 Federal credit programs can be accomplished
by adopting standards which build that control into the
structure of each program. I recognize that this is not
an easy task, particularly since there are more than 100
different loan 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 credit assistance legislation. Within Congress,
however, it may be unrealistic for each interested subcommittee
to develop the intense focus on credit program 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.
I would be happy to answer any questions.
oOo

IfcH Incrsaae Infederalend Federally Assisted
Borrowing from the Public
(fiscal yearsi billions of dollars)

¥sar

t
Federally assisted barrowing from tha public
I ftedcrali borrowing frci the public
I
i
i Sponsored
«
•
i
i
i Other
^__ 'w i Off-budgst w i __of
| Total .1/fe/i Guaranteed i agency
i Deduct to avoid
i
i Buiijet
i dpticit i deficit i/ i financing 2/ t
i obiigatlona lobllgations i/i double counting 5/ %

i
•
Total i
i

total Federal and
federally assisted
borrowing from
the public

11.5

16.9

3.4

14.2

33.7

4.6

19.2

39.6

15.2

- .7

24.7

44.0

3.0

10.1

4.0

21.0

24.1

-2.4

SO.9

16.4

14.4

13.9

64.7

7.3

9.2

92.9

16.2

6.5

15.0

97.9

13.0

1.9

3.3

19.0

2.7

3.3

1.1

19.1

1977

45.0

9.7

- .1

53.5

20.5

2.0

25.5

76.9

1979

49.9

10.3

- .1

59.1

25.1

13.9

35.4

94.5

1979 e

27.7

12.4

-6.5

33.6

32.9

12.7

33.4

67.0

1960s

29.4

11.6

-2.0

39.0

37.4

12.4

41.9

80.9

1st Chang* 344.2
970-90

61.7

-2.2

403.5

217.7

121

92.0

256.9

660.3

683.4

333.4

146

96.4

383.5

1066.9

1970

2.9

2.6

9.4

6.4

1*71

21.0

-3.6

19.4

16.1

1972

21.4

-J.9

19.4

19.9

197)

14.9

•1

4.4

19.3

1974

4.7

1.4

-3.1

1975

45.2

9.1

197*

96.4

>uts t and lng
9/10/90

if floe of tha Secretary of tha Treasury
Offlos of Govenudeat Financing

5.6

November 6, 1979

lource:

Special Analysis E of the Fiscal Year 1980 Budget: FY 1979 Final Monthly Treasury Statement of Receipts
and Outlays.
7 Deficit of off-budget Federal entities. Consists largely of Federal Financing Bank borrowings to finance offbudget programs.
\l Consists largely of changes in Treasury cash balances.
[/ Consists of borrowing by Treasury and minor amounts by other Federal agencies.
\l Consists largely of Federal National Mortgage Association and the Federal home loan bank and farm credit systems.
\l Largely Federal and sponsored agency purchases of guaranteed obligations.
t/ 1976 figure excludes retroactive reclassification of $471 million of Export—Import Bank asset sales to debt .

FOR IMMEDIATE RELEASE
Wednesday, November 14, 1979

CONTACT: George G. Ross
202/566-2356

TREASURY ISSUES ADDITIONAL BOYCOTT GUIDELINES
The Treasury Department today issued eight additional
guidelines, consisting of questions and answers, relating to
the provisions of the Tax Reform Act of 1976 which deny certain
tax benefits for participation in or cooperation with international boycotts.
All of these guidelines, with the exception of guideline
H-17, are additions to those issued on January 20, 1978
(Treasury News Release B-653). They address a variety of
factual situations not previously addressed.
The additions to the "M" series of guidelines, M-10 through
m-13, address commonly used shipping and insurance certificates.
These guidelines penalize agreements to give such certificates
in the absence of an explanation by the country from which the
request originates indicating that the certificates relate to
considerations other than the boycott. Such an explanation
has been received from Saudi Arabia.
A copy of the attached notice will appear in the Federal
Register on November 19, 1979.

M-199

-2-

For purposes of applying the rules in guidelines
M-12 and M-13, an explanation offered by Country X is
deemed to retroactively interpret and be effective for
shipping and insurance certificates required by Country
X prior to the date on which the official explanation is
given. The Kingdom of Saudi Arabia has offered such an
explanation.

All of the guidelines issued today elaborate on
principles reflected in the guidelines issued on January
20, 1978. Nonetheless, guidelines M-10 and M-ll are
made effective prospectively to avoid a hardship on
taxpayers who have misunderstood the applicability of
existing guidelines to the facts of guidelines M-10 and
M-ll. •

The principal author of these guidelines was
Leonard E. Santos of the Office of the Secretary of the
Treasury. /I

-1D-6

Partnership P.

Company C is a partner in foreign or domestic
The total partnership interest in Partnership

P h*ld directly, indirectly, or constructively by

1. Company C,

2. all members of the controlled group of
corporations of which Company C is a member, and

3. all persons that control (within the meaning
of section 304(c)) Company C or a member of the
controlled group of corporations of which Company
C is a member

is equal to or less than 50 percent. Partnership P enters
into an agreement that constitutes participation in or
cooperation with an international boycott.

Will that

agreement trigger the application of the sanctions of
sections 908(a), 952(a)(3), and 995(b)(1)(F) to Company C and
the other members of Partnership P?

Will that agreement give

rise to the presumption that all the operations in boycotting
countries of Company C, of each person that controls or is
controlled by (within the meaning of section 304(c)) Company
C, and of each member of the controlled group of corporations
of which Company C is a member, are operations in connection
with which there is participation in or cooperation with an
international boycott?

-2-

The sanctions of sections 908(a), 952(a)(3),

and 995(b)(1)(F) will apply to Company C and each member of
Partnership P.

However, Partnership P*s agreement will not

give rise to the presumption that all the operations in
boycotting countries of Company C and of each person that
controls or is controlled by (within the meaning of section
304 (c)) Company C are operations in connection with which
there is participation in or cooperation with an international boycott.

Nor will Partnership P's agreement give

rise to the presumption that all the operations in boycotting
countries of each member of the controlled group of corporations of which Company C is a member are operations in connection with which there is participation in or cooperation
with an international boycott.

The answers in the first two

sentences would be the same if Company C were an individual
and the partnership interest held directly, indirectly, or
constructively by the individual did not exceed 50 percent.

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 matters:

whether it does business with Country Y

and whether it does business with any United States person
engaged in trade in Country Y.

Company C furnishes the

requested information to Country X.

Later, Company C signs a

contract with Country X to export goods to Country X.

Does

-3Company C's action constitute an agreement under section
999(b)(3)?

A: No. 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).

The answer would be the same if Company C had

furnished the information in the form of a certificate, and
if the certificate instead stated that neither Company C nor
companies from which it purchased goods were blacklisted.
See also Answer H-32.

However, the furnishing of boycott-

related information in response to a prior commitment which
is not contemporaneous with the furnishing of the information
would constitute an agreement within the meaning of section
999(b)(3).

Information (in a certificate or otherwise) will

be considered to be furnished in response to a commitment
that is not contemporaneous if, between the time of the
commitment and the delivery of the information, conduct to
which the information relates could be altered to conform to
that information.

See Answer H-35.

An agreement under section 999(b)(3) could be inferred
from an overall course of conduct that includes the furnishing of information that is not in response to a prior commitment in addition to other factors.

An example of another

factor which could give rise to such an inference is any
concomitant termination or lessening in Company C's rela-

4tionships with Country Y or with U.S. persons engaged in
trade with Country Y, for no valid business reason.

On the

other hand, the repeated furnishing of such information would
not give rise to such an inference.

H-35. Q: Company C signs a contract with Country X to
export goods manufactured by Company C to Country X.

The

contract provides that Company C will provide Country X with
a certificate at the time the goods are shipped indicating
that the goods were not manufactured by a blacklisted
company.

Does Company C's action constitute participation in

or cooperation with an international boycott under section
999(b)(3)?

A: Yes. Company C's contract requiring the
presentation of the blacklist certificate constitutes an
agreement by Company C to refrain from engaging in activities
which will lead to the blacklisting of Company C (with the
result that Company C cannot present the requisite certificate) .

See Answer H-17.

The answer would be the same

whether the blacklist certificate given by Company C concerns
its blacklist status only or the blacklist status of those
trading with Company C, and whether Company C itself executes
the certificate or transmits a certificate executed by those
with whom it trades.

The answer would also be the same if

the certificate were instead required by the terms of a
letter of credit by which payment to Company C is to be made.

-5See Answer H-8.

H-36. Q: Company C signs a contract with Country X to
export goods to Country X.

The contract provides that

Company C will provide Country X with a certificate in
connection with the shipment of goods indicating the country
or countries in which the goods originated and the name(s) of
the manufacturer(s) of the goods.

Company C complies with

this requirement and provides the certificate.

Does Company

C's action constitute participation in or cooperation with an
international boycott under section 999(b)(3)?

A: No. Company C's agreement to provide a
certificate identifying the origin and manufacturer of goods
exported does not constitute an agreement by Company C to
refrain from doing business with any person.
M-9.

See guideline

However, an overall course of conduct which includes

providing such certificates in addition to other factors
could give rise to such an inference.

Repeatedly furnishing

such certificates does not constitute such a course of
conduct.

M-10. Q: Company C signs a contract to export goods to
Country X.

The contract requires that Company C provide

Country X with a certificate stating that the vessel on which
the goods are shipped is eligible to enter into the ports of
Country X in conformity with the laws^ and regulations of

- 6Country X.

The laws and regulations of Country X prohibit,

intfcr alia, blacklisted vessels from calling at its ports.
Does Company C's action constitute participation in or
cooperation with an international boycott under section
999(b)(3)?

A: Yes. In the absence of additional
circumstances, Company C's contract is deemed to be an
agreement to provide a certificate stating that the vessel on
which the goods are shipped is not blacklisted.

See Answers

H-35, M-l, and M-7. The answer is the same whether the
shipowner makes the certification which Company C transmits
to Country X or Company C makes the certification on behalf
of the shipowner.

The answer would be the same if the

certificate were instead required by the terms of a letter of
credit by which Company C is to receive payment.

M-ll. Q: The facts are the same as in Question M-10,
except that Company C's contract with Country X requires a
certificate stating that the insurer of the goods has a duly
qualified and appointed agent or representative in Country X.
Country X's laws and regulations prohibit, inter alia,
blacklisted insurance companies from qualifying or appointing
an agent in Country X.

Does Company C's action constitute

participation in or cooperation with an international boycott
under section 999(b)(3)?

-7-

Yes.

In the absence of

additional

circumstances, Company C's contract is deemed to be an
agreement to certify that the insurance company insuring the
goods is not blacklisted.

See Answers H-35, M-l and M-7. The

answer is the same whether the insurance company provides the
certificate which Company C transmits to Country X or Company
C makes the certification on behalf of the insurance company.
The answer would be the same if the certificate were instead
required by the terms of a letter of credit by which Company
C is to receive payment.

M-12. Q: Company C signs a contract to export goods to
Country X.

The contract requires that Company C provide

Country X with the certificate described in guideline M-10.
In an explanation of this shipping certificate, Country X
states that eligibility, in the context of the certificate,
relates to maritime matters such as the age and condition of
the ship.

Country X's explanation notes that, in addition,

Country X applies a number of laws and regulations to the
entry of ships into its ports.

Does Company C's action

constitute participation in or cooperation with an
international boycott under section 999(b)(3)?

A: No. Country X's explanation of the general
language contained in the certificate indicates that the
certificate relates to matters other than the boycott.

-8Accordingly Company C's contractual obligation to provide the
shipping certificate does not place Company C in the position
of certifying to the non-blacklisted status of ships which it
uses, or of selecting ships on the basis of their owners'
ability to certify that the ships are not blacklisted.

The

answer would be the same if the certificate were instead
required by the terms of a letter of credit by which Company
C is to receive payment.

M-13. Q: Company C signs a contract to export goods to
Country X.

The contract requires that Company C provide

Country X with the certificate described in guideline M-ll.
In an explanation of this insurance certificate, Country X
states that the insurance certification is required to
facilitate dealings with insurers by Country X importers in
the event of damage to insured goods.

Country X's Vexplana-

tion notes that, in addition, Country X applies a number of
laws and regulations to the appointment by companies of
agents or representatives in Country X.

Does Company C's

action constitute participation in or cooperation with an
international boycott under section 999(b)(3)?

A: No. Country X's explanation of the general
language contained in the insurance certificate indicates
that the certificate relates to matters other than the
boycott.

Accordingly, Company C's contractual obligation to

provide the insurance certificate does not place Company C in

-9the position of certifying to the non-blacklisted status of
its insurers, or of selecting insurers on the basis of the
insurers' ability to certify that they are not blacklisted.
The answer would be the same if the certificate were instead
required by the terms of a letter of credit by which Company
C is to receive payment.

DEPARTMENT OF THE TREASURY
Office of the Secretary
ISSUANCE OF ADDITIONAL BOYCOTT GUIDELINES

November 14, 1979

The Treasury Department today issued additional
guidelines, consisting of questions and answers,
relating to the provisions of the Tax Reform Act of 1976
which deny certain tax benefits for participation in or
cooperation with international boycotts.

Guideline H-17 is a revision of the existing
guideline while the other guidelines are additions to
those issued on January 20, 1978 (Treasury News Release
B-653). The guidelines issued today generally are
effective for operations occurring after, reguests
received' after, and agreements made after November 3,
1976. However, guidelines M-1C and M-ll are effective
for operations occurring after, requests: received after,
and agreements made after November 23, 1979. In addition, in the case of binding contracts entered into
before November 24, 1979, guidelines M-10 and M-ll will
not be effective until January 1, 1980.

prtmentoftheTREASURY
JHINGTON, D.C. 20220

TELEPHON

RARY

How ZO f19
TREASURY DEPARTMENT
November 13, 1979

FOR RELEASE AT 4:00 P.M.

TREASURY TO AUCTION $4,300 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $4,300
million of 2-year notes to refund approximately the same
amount of notes maturing November 30, 1979. The $4,289
million of maturing notes are those held by the public,
including $1,403 million currently held by Federal Reserve
Banks as agents for foreign and international monetary
authorities.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold
$'502 million of the maturing securities that may be refunded
by issuing additional amounts of the new notes at the
average price of accepted competitive tenders. Additional
amounts of the new security may also be issued at the
average price to Federal Reserve Banks, as agents for
foreign and international monetary authorities, to the
extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing securities
held by them.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

M-200

(Over)

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED NOVEMBER 30, 1979
November 13, 1979
•\'i

Jnount Offered:
To the public.
)escription of Security:
Term and type of security
Series and CUSIP designation

$4,300 million
2-year notes
Series Z-1981
(CUSIP No. 912827 KD 3)

Maturity date November 30, 1981
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
May 31 and November 30
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Accrued interest payable by
investor
Preferred allotment
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Key Dates:
Deadline for receipt of tenders
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
submitted
Delivery date for coupon securities.

Yield auction
None
Noncompetitive bid for
$1,000,000 or less

Acceptable
Wednesday, November 21, 1979,
by 1:30 p.m., EST
Friday, November 30, 1979

Tuesday, November 27, 1979

Monday, November 26, 1979
Thursday, December 6, 1979

yamenl'thefflEASllRY
HINGTON.D.C. 20220

TELEPHONE 566-2041

ROOM 5004
16, 1979

FOR IMMEDIATE RELEASE

PARTHEMT

N. JEROLD COHEN TAKE!:§R^^W
CHIEF COUNSEL OF INTERNAL REVENUE SERVICE

Secretary of the Treasury G. William Miller today administered the oath of Office as Assistant General Counsel of the
Treasury Department and Chief Counsel of the Internal Revenue
Service to N. Jerold Cohen of Georgia.
President Carter announced Mr. Cohen's appointment on
October 17, and the U. S. Senate confirmed the appointment on
November 7. Mr. Cohen succeeds Stuart E. Seigel who resigned
on May 31, 1979.
Mr. Cohen, 44, has been a partner since 1968 in the law
firm of Sutherland, Asbill and Brennan in Atlanta, Ga., and
Washington, D. C , which firm he joined in 1965. Prior to that,
Mr. Cohen practiced with the New York City law firm of Cleary,
Gottlieb, Steen and Hamilton from 1961-1965.
A native of Pine Bluff, Ark., Mr. Cohen received the B.B.A.
degree from Tulane University in 19 57. In 19 61 he received his
law degree magna cum laude from Harvard Law School, where he
was book review editor of the Harvard Law Review.
Mr. Cohen is author of articles on taxation and has been
a frequent lecturer on tax matters. During 1967-1976, he was
an adjunct professor of law at Emory University School of Law
in Atlanta. A member of the Georgia, New York, and District of
Columbia bars, Mr. Cohen is a member of the Georgia, Atlanta
and American Bar Associations, and has served on several committees of the American Bar Association.
Active in community affairs, Mr. Cohen was Chairman of the
Atlanta Community Relations Commission. He is a former member
of the Board of Directors of the American Civil Liberties
Union, and past President of the Georgia ACLU. Mr. Cohen resides in the District of Columbia.
0
M-201

Pi f «f

WBm

eseBB^s^se^eee^^^^ee

mtmentofthefREASURY (
TELEPHONE 566-2041

;WNGT0N,D.C2022

FOR IMMEDIATE RELEASE

November 19, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,101 million of 13-week bills and for $3,101 million of
26-week bills, both to be issued on November 23, 1979, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing February 21, 1980
Discount Investment
Price
Rate
Rate 1/
97.026
97.005
97.014

11.896%
11.980%
11.944%

26-week bills
maturing May 22, 1980
Discount Investment
Price
Rate
Rate 1/

12.46%
12.56%
12.52%

93.959^ 12.015%
93.940
12.053%
93.949
12.035%

13.00%
13.04%
13.02%

a/ Excepting 1 tender of $525,000
Tenders at the low price for the 13-week bills were allotted 62%.
Tenders at the low price for the 26-week bills were allotted 72%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Received
Accepted
31,225
$
$
37,945 $
37,945
4, 256,810
4,154,135
2,587,425
18,690
41,935
41,905
22,650
34,015
34,015
31,645
32,330
32,330
26,700
40,430
40,420
387,510
271,825
103,925
44,505
48,290
20,290
6,485
7,375
7,375
37,610
35,205
35,205
10,705
19,215
19,215
275,150
282,450
95,175
58,405
45,690
45,690

Accepted
$
30,995
2,607,380
18,640
22,650
29,645
26,700
172,730
22,505
6,485
30,020
10,705
64,020
58,405

TOTALS

$5,050,840

$3,100,915

$5,208,090

$3,100,880

$3,176,675
610,730

$1,226,750
610,730

$3,219,065
459,225

$1,111,855
459,225

$3,787,405

$1,837,480

$3,678,290

$1,571,080

Federal Reserve
and Foreign Official
Institutions
$1,263,435

$1,263,435

$1,529,800

$3,100,915

$5,208,090

$3,100,880

Type
Competitive
Noncompetitive
Subtotal, Public

TOTALS

J/Equiva;

$5,050,840
m-issue yield.

:
:

Immediate Release
November 19, 1979

Contact:

Ev Munsey
566-8191

TREASURY ESTIMATES IRANIAN BLOCKED ASSETS
AT MORE THAN $8 BILLION
The Treasury Department said today it estimates that
Iranian assets blocked by President Carter's November 14
action include over $6 billion in bank deposits and total
assets of more than $8 billion.
This is comprised of $1.8 billion in the Federal Reserve
Bank of New York—consisting of $1.2 billion principally in
U.S. Government securities and $600 million in gold valued
at the current market price, $400 million deposited with
Treasury for use by the Department of Defense, over $1 billion
of deposits in domestic commercial banks, over $500 million
with private non-bank companies in the United States, and
more than $4 billion of deposits in foreign branches and
subsidiaries of U.S. banks.

(V^>3

FOR IMMEDIATE RELEASE
November 20, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES FINAL DETERMINATION
IN COUNTERVAILING DUTY INVESTIGATION
OF PIG IRON FROM BRAZIL
The Treasury Department today announced a final affirmative determination under the Countervailing Duty Law that
imported pig iron from Brazil is being subsidized. The case
is now being referred to the U.S. International Trade Commission for an injury determination.
The Countervailing Duty Law requires the Secretary of
the Treasury to collect an additional duty that equals the
net amount of any subsidy paid on merchandise exported to
the United States if the International Trade Commission has
found that a U.S. industry is being injured by the subsidized
imports. The injury test currently applies only to imports
that are free of duty. Pig iron is a duty-free item.
As a result of its investigation, Treasury found that
Brazilian manufacturers of this merchandise received benefits which are considered bounties or grants. These include
excessive rebates of sales taxes (the "IPI" credit) and
preferential, short-term financing provided by the Government of Brazil at terms more favorable than those available
commercially.
The average subsidy received by the 16 companies investigated was approximately 24 percent ad valorem, with most
of the large firms receiving benefits falling in that range.
One firm received a subsidy of over 30 percent.
Notice of this action will appear in the Federal
Register of November 26, 1979. Under the transition provision of the 19 79 Trade Act, the International Trade
Commission must reach its injury determination by March 15,
1980,
Imports of Brazilian pig iron during 1978 were $20.4million.
o

M-204

FOR RELEASE AT 4:00 P.M.

November 20, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,400 million, to be issued November 29, 1979.
This offering will provide $500
million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,917 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $3,200
million, representing an additional amount of bills dated
August 30, 1979,
and to mature February 28, 1980 (CUSIP No.
912793 3T 1 ) , originally issued in the amount of $3,009 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
November 29, 1979, and to mature May 29, 1980
(CUSIP No.
912793 4G 8) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing November 29, 1979.
Federal Reserve Banks, for themselves and as agents of foreign
and international monetary authorities, presently hold $2,477
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. 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 Standard time,
Monday, November 26, 1979.
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,
M-206

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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.
respective
bidder
Subject
issue
(in three
for
will
todecimals)
$500,000
issues.
these
be accepted
reservations,
or
of less
accepted
in without
full noncompetitive
at
competitive
stated
the weighted
price
bids
tenders
average
from
for the
any
for
price
one
each

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on November 29, 1979, in cash or other immediately available
funds or in Treasury bills maturing November 29, 1979.
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, 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 AT 4:00 P.M.

November 20, 1979

TREASURY TO AUCTION $2,500 MILLION OF 5-1/2-YEAR NOTES
The Department of the Treasury will auction $2,500
million of 5-1/2-year notes to raise new cash. Additional
amounts of the notes may be issued to Federal Reserve Banks
as agents for foreign and international monetary authorities
at the average price of accepted competitive tenders.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

M-207
(over)

$2,500 million
5-1/2-year notes
Series C-1985
(CUSIP No. 912827 KE 1)
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
May 15 and November 15 (first
payment on May 15, 1980)
$1,000
Yield auction

None
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, November 27, 1979,
by 1:30 p.m., EST
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
submitted
Delivery date for coupon securities.

Tuesday, December 4, 1979

Friday, November 30, 1979

Friday, November 30, 1979
Tuesday, December 11, 1979

FOR IMMEDIATE RELEASE

November 21, 1979

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $4,301 million of
$7,556 million of tenders received from the public for the 2-year
notes, Series Z-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 12.18%—
Highest yield
Average yield

12.26%
12.24%

The interest rate on the notes will be 12-1/8%. At the 12-1/8% rate,
the above yields result in the following prices:
Low-yield price 99.905
High-yield price
Average-yield price

99.767
99.801

The $4,301 million of accepted tenders includes $1,042 million of
noncompetitive tenders and $2,634 million of competitive tenders from
private investors, including 70% of the amount of notes bid for at
the high yield. It also includes $625 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 to the $4,301 million of tenders accepted in the
auction process, $502 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 November 30, 1979.
1/ Excepting 5 tenders totaling $35,000

M-208

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-1/2-YEAR NOTES
TO BE ISSUED DECEMBER 4, 1979
November 20, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date May 15, 1985
Call date
Interest coupon rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Accrued interest payable by
investor
Preferred allotment
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Key Dates:
Deadline for receipt of tenders
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
submitted
Delivery date for coupon securities.

Acceptable
Tuesday, November 27, 1979,
by 1:30 p.m., EST
Tuesday, December 4, 1979

Friday, November 30, 1979

Friday, November 30, 1979
Tuesday, December 11, 1979

toftheTREASURy
,D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

November 21, 1979

12,18%^
12.26%
12.24%

The interest rate on the notes will be 12-1/8%.
the above yields result in the following prices:
Low-yield price 99.905
High-yield price
Average-yield price

At the 12-1/8% rate,

99.767
99.801

The $4,301 million of accepted tenders includes $1,042 million of
noncompetitive tenders and $2,634 million of competitive tenders from
private investors, including 70% of the amount of notes bid for at
the high yield. It also includes $625 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 to the » /%
auction process, $502 m J(A_
price from Government a|
account in exchange for

-ill

1/ Excepting 5 tenders j

HIGHEST SINCE:

TREASURY NOTES OF SERIES

Z-1981

DATE: 11-21-79

LAST ISSUE:

,„-„?

I? s/fi % IA&*
LOWEST SINCE:

TODAY:

tt'Ysty 12 J1 %

M-208

FOR RELEASE AT 12:00 NOON

November 21, 1979

TREASURY OFFERS $3,000 MILLION OF 143-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $3,000 million of 143-day
Treasury bills to be issued December 3, 1979, representing an
additional amount of bills dated October 25, 1979, maturing
April 24, 1980 (CUSIP No. 912793 4B 9 ) .
Competitive and noncompetitive 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
Standard time, Wednesday, November 28, 1979. Form 4632-2
(modified) should be used to submit tenders for bills to be
maintained on the book-entry records of the Department of the
Treasury. Each tender for the issue must be for a minimum
amount of $10,000. Tenders over $10,000 must be in multiples of
$5,000. The price offered on competitive tenders must be
expressed on the basis of 100, with not more than three
decimals, e.g., 99.925. Fractions may not be used.
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. The bills will be
issued entirely in book-entry form in a minimum denomination 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.
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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect
positions held at the close of business on the day prior to the
auction. Such positions would include bills acquired through
"when issued" trading, and futures and forward transactions as
well as holdings of outstanding bills with the same maturity
date as the new offering; e.g., bills with three months to
maturity previously offered as six month bills. Dealers, who
make primary markets in Government securities and report daily
M-ZQ£«
to
the Federal Reserve Bank of New York their positions in and

-2.ings on such securities, when submitting tenders for
tiers, must submit a separate tender for each customer whose
^ong position in the bill being offered exceeds $200 million.
Payment for the full par amount of the bills applied for
it accompany all tenders submitted for bills to be
:
.ntained on the book-entry records of the Department of the
reasury. A cash adjustment will be made on all accepted
°nders for the difference between the par payment submitted
d 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. 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 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 $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.
Settlement for accepted tenders for bills to be
maintained on the book-entry records of Federal Reserve Banks
and Branches must be made or completed at the Federal Reserve
Bank or Branch on Monday, December 3, 1979, in cash or other
immediately available funds.
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 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
theorconditions
of
their
Copies
of the
circulars
or
and Branch
tender
forms
from may
the be
Bureau
obtained
of issue.
the
fromPublic
any
Federal
Debt.
Reserve
Bank

TREASURY
TELEPHONE 566-2041

,D.C. 20220

FOR IMMEDIATE RELEASE

November 26, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,200 million of 13-week bills and for $3,200 million of
26-week bills, both to be issued on November 29, 1979, were accepted today.
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing February 28, 1980
Discount Investment
Price
Rate
Rate 1/
High 97,258 10.847% 11.34%
Low
97.168 11,204%
Average
97.215 11.018%

11.72%
11.52%

26-week bills
maturing May 29, 1980
Discount Investment
Price
Rate
Rate 1/
a/
94.465- 10.948%
94.379
11.118%
94.428
11.022%

11.78%
11.98%
11.87%

a/ Excepting 2 tenders totaling $1,050,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Receii
D A T E : November 26, 1979
$
21,i
3,036,
20,
32,a
13-WEEK
26-WEEK
25,7
37,6
266,9
24,3 T O D A Y :
16,8
33,6
13,1 L A S T WEEK:
168,51
36,3(

TOTALS

$3,734,43

lype
Competitive
Noncompetitive
Subtotal, Public

HIGHEST
$2,260,65
467,81
$2,728,46

Federal Reserve
LOWEST
and Foreign Official
Institutions
$1,005,97(
TOTALS

SINCE:

~JTA M / ^

^/Equivalent coupon-issue vield.

lojsiy. /o. 6sx %

-2.ings on such securities, when submitting tenders for
tiers, must submit a separate tender for each customer whose
^ong position in the bill being offered exceeds $200 million.
Payment for the full par amount of the bills applied for
it accompany all tenders submitted for bills to be
:
.ntained on the book-entry records of the Department of the
jeasury. A cash adjustment will be made on all accepted
°nders for the difference between the par payment submitted
d 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. 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 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 Secretary1s
action 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
weighted average price (in three decimals) of accepted
competitive bids.
Settlement for accepted tenders for bills to be
maintained on the book-entry records of Federal Reserve Banks
and Branches must be made or completed at the Federal Reserve
Bank or Branch on Monday, December 3, 1979, in cash or other
immediately available funds.
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 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
or
and Branch
tender orforms
from may
the be
Bureau
obtained
of the
from
Public
any Federal
Debt. Reserve Bank

mmrttfihejREASURY
TELEPHONE 566-2041

IASHINGT0N,D.C. 20220

FOR IMMEDIATE RELEASE

November 26, 1979

High
Low
Average

13-week bills
maturing February 28, 1980
Discount Investment
Price
Rate
Rate 1/
97.258
97.168
97.215

10.847%
11,204%
11.018%

11.34%
11.72%
11.52%

26-week bills
maturing May 29, 1980
Discount Investment
Price
Rate
Rate 1/
a/
94.465- 10.948%
94.379
11.118%
94.428
11.022%

11.78%
11.98%
11.87%

a/ Excepting 2 tenders totaling $1,050,000
Tenders at the low price for the 13-week bills were allotted
Tenders at the low price for the 26-week bills were allotted 53%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TENDERS RECEIVED AND ACCEPTED
(In Thousands )
Received
Accepted
Received
$
21,580 " $
21,580
$
27,485
3,036,075
2,622,075
3,621,055
20,655
20,655
13,295
32,850
32,850
29,655
25,790
25,790
21,200
37,625
37,625
23,475
266,950
216,950
252,555
24,355
24,355
27,070
16,870
16,870
15,970
33,690
33,690
22,695
13,195
13,195
12,075
168,500
98,500
201,725
36,300
36,300
41,280

Accepted
$
27,485
2,760,980
13,295
19,655
21,200
23,475
137,555
23,070
15,970
22,695
12,075
81,725
41,280

TOTALS

$3,734,435

$3,200,435

$4,309,535

$3,200,460

$2,260,650
467,815

$1,726,650
467,815

$2,712,185
353,050

$1,603,110
353,050

$2,728,465

$2,194,465

$3,065,235

$1,956,160

Federal Reserve
and Foreign Official
Institutions
$1,005,970

$1,005,970

$1,244,300

$4,309,535

$3,200,460

Type
Competitive
Noncompetitive
Subtotal, Public

T0TALS

$3,734,435 $3,200,435

^/Equivalent couDon-issue

VIPIH.

FOR IMMEDIATE RELEASE
Monday, November 26, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY TO START ANTIDUMPING
INVESTIGATION ON RAIL PASSENGER CARS AND
ORIGINAL PARTS FROM JAPAN AND ITALY
The Treasury Department today said it will start an
antidumping investigation of imports from Japan and Italy of
rail passenger cars and parts thereof intended for use as
original equipment in the United States.
Treasuryfs announcement followed summary investigations
conducted by the U.S. Customs Service after receipt of a
petition filed by the Budd Co. alleging that firms in Japan
and Italy are dumping these products in the United States.
The petition alleges that such imports are being sold in
the United States at "less than fair value." (Sales at less
than fair value generally occur when imported merchandise is
sold in the United States for less than in the home market.)
The Customs Service will investigate the matter and make a
tentative determination by May 20, 1980.
If sales at less than fair value are determined by Treasury,
the U.S. International Trade Commission will subsequently decide whether they are injuring or likely to injure a domestic
industry. (Both sales at less than fair value and injury must
be determined before a dumping finding is reached. If dumping
is found, a special antidumping duty is imposed equal to the
difference between the price of the merchandise at home or in
third countries and the price to the United States.)
Notice of the start of this investigation will appear in
the Federal Register of 11/27/79.
Contracts for the importation on rail passenger cars and
original parts from Japan and Italy concluded in 1978 and 1979
were valued at $58 million and $108 million, respectively.
o 0 o

M-211

Nov 28 f 79
TREASURY DEPARTMENT
FOR IMMEDIATE RELEASE
November 26, 1979

CONTACT:George Ross
202/566-2356

U.S.-SAUDI ARABIA TECHNICAL COOPERATION AGREEMENT EXTENDED
Treasury Secretary G. William Miller and Minister of
Finance and National Economy Muhammad Abalkhail Sunday signed
an agreement to extend, for an additional five years, the
Technical Cooperation Agreement (TCA) between the United
States and Saudi Arabian Governments. The Agreement makes
possible technical cooperation programs between the two countries
under the auspices of the United States-Saudi Arabian Joint
Commission on Economic Cooperation.
Secretary Miller and Minister Abalkhail serve as the
co-chairman of the Joint Commission which was established in
June 1974.
At the signing ceremony in Riyadh, Secretary Miller and
Minister Abalkhail expressed their satisfaction with the
technical cooperation taking place through the programs of the
Joint Commission. The two governments also noted the contribution of the Joint Commission to increased understanding and
to strengthening the relationship between the United States
and Saudi Arabia. The signing of the extension of the Agreement
will make it possible for the cooperative programs to run until
at least February 13, 1985There are currently more than twenty programs ranging
from vocational training and solar energy to electrification
and desalination research taking place in Saudi Arabia under
the auspices of the Joint Commission. Additional programs are
expected to be developed under the Joint Commission in the
coming year. Attached is the text of the extension of the TCA
agreement and a list of current Joint Commission projects.

M-212

Twenty-major technical cooperation projects have been
signed to provide assistance in the following areas:
1. Statistical Assistance and Data Processing.
2. Specialist Assistance in the Agricultural and
Water Resources.
3. Electrical Equipment Procruement.
4. Kingdom-Wide Electric Power System Plan.
5. Formation and Operation of Saudi Arabian National
Center for Science and Technology.
6. Assistance to the Nasseriah Power Station.
7. Vocational Training and Facilities Construction.
8. Establishment of a Kingdom National Park.
9. Procurement of Electrical Power Equipment for the
Eastern Province.
10. Desalination.
11. Consumer Protection Services.
12. Financial Information Services.
13. Highway Transportation.
14. Solar Energy.
15. Audit Services.
16. Customs Administration and Training.
17. Centralized Procurement.
18. Agricultural Bank Management and Training.
19. Executive Management Development.
20. Transportation.

Extension of the Technical Cooperation Agreement
between the Government of the United States of ~
America and the Government of the Kingdom of Saudi
Arabia
The Government of the United States of America
and the Government of the Kingdom of Saudi Arabia,
Noting with satisfaction that the Technical
Cooperation Agreement (the Agreement) between the
two Governments which was signed on February 13, 1975,
and which expires on February 13, 1980 has provided
a framework for a broad and varied program of technical cooperation being carried out under the auspices
of the United States-Saudi Arabian Joint Commission
on Economic Cooperation (the Commission),
Considering that the programs under the Commission have also contributed to increased understanding
and to a strengthened relationship between the two
countries,
Desiring to continue this important cooperative
effort, the Government of the United States of America
and the Government of the Kingdom of Saudi Arabia hereby agree:
(a) to extend the Agreement for a five-year period
beginning on February 13, 1980;
(b) to continue their cooperation within the Commission under the co-chairmanship of the United States
Secretary of the Treasury and the Saudi Arabian Ministe
of Finance and National Economy; and
• (c) to review annually the status and progress of
cooperative projects carried out under the auspices of
the Commission, and to identify new areas for cooperation between the two countries.
Signed this

day of November, 1979.

For -the Government of the
United States of America

For the Government of the
Kingdom of Saudi Arabia

G. William Miller

Muhairaned Aba al Khail

FOR IMMEDIATE RELEASE
November 26, 1979

CONTACT:George Ross
202/566-2356

UNITED STATES AND SAUDI ARABIA AGREE
TO COOPERATIVE RESEARCH AND INSTRUCTION PROGRAM
Secretary of the Treasury G. William Miller and Saudi
Arabian Minister of Finance and National Economy Mohammad
Abalkhail announced today that the Government of Saudi Arabia
and the United States have signed an agreement for cooperation
between the Institute of Meteorology and Arid Land Studies at
King Abdulaziz University and a consortium of American
Universities in a program of instruction and research. They
said the project would provide significant benefits to both
countries.
The agreement, signed by Secretary Miller, Minister
Abalkhail and the Rector of KAU, Dr. Abdullah Al-Nassir, establishes the newest cooperative project to be implemented under
the Saudi Arabian-U.S. Joint Commission on Economic Cooperation.
It is also the first project agreement with a Saudi Arabian
University.
Under the terms of this project the American Consortium
for International Development representing a group of universities, will provide faculty in the fields of meteorology, arid
land studies, and environmental protection. The experts will
work with the Institute in developing curriculum, teaching
courses and conducting research. The members of the consortium
are Colorado State University, Texas Tech, New Mexico State,
University of Arizona, University of California (Riverside),
Cal State Polytechnic University, Oregon State, Washington State,
University of Idaho, Montana State and Utah State.
The first of the faculty members are expected to arrive
in time for the second term of the current academic year. The
first-year funding for this project is approximately 4-million
Saudi Riyals (U.S. $1.2 million) and will include purchase of
specialized equipment for research in arid land studies.
#

M-213

WeTREASURY
TELEPHONE 566-2041

,D.C. 20220

IBRARY
5004

Nov 23 *7fl
FOR RELEASE AT 4:00

P.M.

TREASURY Dc

r 2 7 , 1979

(CUSIP N o .

Both series of bills will be issued for cash and in
exchange for T r e a s u r y bills maturing December 6, 1979.
Federal Reserve B a n k s , for themselves and as agents of foreign
and international monetary a u t h o r i t i e s , presently hold $2,462
million of the maturing b i l l s . These accounts may exchange
bills they hold for the bills now being offered at the weighted
average prices of accepted competitive t e n d e r s .
The bills will be issued on a discount basis under competitive
and noncompetitive b i d d i n g , and at maturity their par amount will
Both series of b i l l s will be issued
be payable without interest
entirely in book-entry form in a m i n i m u m amount of $10,000 and in
any higher $5,000 m u l t i p l e , on the records either of the Federal
Reserve Banks and B r a n c h e s , or of the D e p a r t m e n t of the T r e a s u r y .
Tenders will be received at Federal R e s e r v e B a n k s and
Branches and at the Bureau of the P u b l i c D e b t , W a s h i n g t o n ,
D. C. 2 0 2 2 6 , up to 1:30 p . m . , Eastern Standard time,
Monday, December 3, 1979.
Form PD 4632-2 (for 26-week series)
or Form PD 4632-3 (for 13-week s e r i e s ) should be used to submit
tenders for bills to be maintained on the b o o k - e n t r y records of
the Department of the T r e a s u r y .
M-214

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
respective
bidder
issue
(in three
for
will
decimals)
$500,000
issues.
be accepted
or
of less
accepted
in without
full competitive
at stated
the weighted
price
bids average
from
for the
anyprice
one

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 6, 1979,
in cash or other immediately available
funds or in Treasury bills maturing December 6, 1979.
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 tot 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, 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

November 27, 1979

RESULTS OF AUCTION OF 5-1/2-YEAR TREASURY NOTES
The Department of the Treasury has accepted $2,501 million of
$3,512 million of tenders received from the public for the 5-1/2-year
notes, Series C-1985, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 10.28%
Highest yield
Average yield

10.49%
10.40%

The interest rate on the notes will be 10-3/8%. At the 10-3/8% rate,
the above yields result in the following prices:
Low-yield price 100.389
High-yield price
Average-yield price

99.532
99.898

The $2,501 million of accepted tenders includes $620 million of
noncompetitive tenders and $1,881 million of competitive tenders from
private investors, including 17% of the amount of notes bid for at
the high yield.
In addition to the $2,501 million of tenders accepted in the
auction process, $5 million of tenders were accepted at the average
price from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash.

M-215

artmentoftheTREASURY
TELEPHONE 566-2041

IINGTON,D.C. 20220

FOR IMMEDIATE RELEASE

November 27, 1979

10.28%
10.49%
10.40%

The interest rate on the notes will be 10-3/8%.
the above yields result in the following prices:
Low-yield price
High-yield price
Average-yield price

At the 10-3/8% rate,

100.389
99.532
99.898

The $2,501 million of accepted tenders includes $620 million of
~ - - -- ~ — «-P A
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TREASURY NOTES OF SERIES C - 1 9 8 5
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DATE: Nov. 27, 1979

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M-215

Nov 28 '79
Cont

FOR IMMEDIATE RELEASE
Wednesday, November 28, 1979

i^feBuR?^PA^SA' ui:n
"202/566-2615

INTEREST RATE BASE FOR NEW SMALL SAVER CERTIFICATE
Secretary of the Treasury G. William Miller, today
advised the supervisory agencies for Federally insured depository institutions that the average 4-year Treasury
yield curve rate during the five business days ending
November 27 was 10.85%, rounded to the nearest 5 basis
points.
(This rate will be used by the agencies in determining
the maximum interest payable in December on time certificates
issued in denominations of less than $100,000 and maturities
of four years or more.
The report of the Treasury yield curve average is announced three business days prior to the first day of each
month for determination of ceilings for new variable rate
savings certificates which are adjusted on the first calendar day of each month.
The commercial bank ceiling for the certificate is one
and one-quarter percentage points below the yield on the
four-year Treasury securities. The ceiling for thrift institutions is one percentage point below the yield on fouryear Treasury securities.)
o 0 o

M-216

FOR RELEASE ON DELIVERY
November 29, 1979
STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT AND OPERATIONS)
BEFORE THE
SUBCOMMITTEE ON GENERAL OVERSIGHT AND RENEGOTIATION
OF THE
COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
HOUSE OF REPRESENTATIVES
Mr. Chairman and members of the Subcommittee,
Thank you for the opportunity to testify concerning currency
transactions and their relationship to the narcotics traffic and
to describe some of the things that the Treasury Department is
doing in this area. As the Subcommittee suggested, I plan to
review our proposal to amend the Treasury regulations (31 CFR Part
103) requiring the reporting of large currency transactions, to
discuss our recent report on the currency transactions in the
Federal Reserve System, and to comment on other actions that we
believe would improve the effectiveness of the regulations and be
helpful in drug enforcement efforts.
The Bank Secrecy Act
Since our official interest in currency flows and currency
transactions stems from our responsibility for the implementation
of the Bank Secrecy Act which was passed as part of Public Law
91-508, I would like to begin this statement with a few remarks
about the background of the Act and its purpose. The Congressional
hearings which preceded the passage of the Act in 1970 documented
the need for this legislation. Representatives of major Federal
law enforcement agencies testified concerning the problems they
encountered in investigating the financial activities of criminals
especially when foreign transactions were involved. Witnesses
described how foreign accounts are used in tax evasion, bribery,
securities violations, black marketing, and smuggling. One of the
more sensational cases cited was a drug violation. It involved
heroin smuggled into the United States from Europe disguised as
canned food and a circuitous method of payment. The payment,
amounting to $950,000, which was intended to be deposited in a
European bank account of a Latin American shell company known as
the "Me Too Corporation", required several financial transactions.
Couriers delivered $800,000 in currency to two foreign exchange
firms
M-217 in New York. From there, the funds were transferred to the

-2European bank account. The other $150,000 in currency was deposited
with a large New York bank for the account of a South American
brokerage firm. Those funds were later transferred by check to the
same European bank.
The purpose of the Bank Secrecy Act was to make such transactions easier to detect and document. The Act contains two types
of provisions to help Federal law enforcement officials investigate
the financial aspects of crime. First, it calls for recordkeeping
requirements for a wide variety of financial institutions. Congress
recognized that many criminals use legitimate financial institutions
to carry on their activities and included the recordkeeping provisions to ensure the maintenance of records for criminal, tax, and
regulatory investigations. Second, it requires reports by financial
institutions and others of certain types of financial transactions.
The reporting provisions include reports of foreign financial
accounts, of the international transportation of monetary instruments, and of "unusual" currency transactions.
The reporting requirements authorized by the Act are interrelated. This is especially true of the requirement that banks
report currency transactions and travellers report the international
transportation of currency. They complement each other. For example
if banks were not required to report currency transactions, there
would be little need for criminals to smuggle money out of the
country. Currency simply could be taken into a bank and the funds
transferred abroad to a secret bank account without disclosing the
identities of the persons directing the transfer or receiving the
funds. Conversely, without reports of the import or export of
currency, the requirement that banks report large currency transactions would be much less meaningful.
Cash Flow Patterns
The Treasury Department recently released a study of the
currency transactions in the Federal Reserve bank offices. This
study was undertaken "to gather information which would be useful
in assessing the effectiveness of the existing reporting requirements
and in identifying areas that appear to merit further study or investigation." It was based mainly on statistics related to the amount
of Federal Reserve notes placed into circulation or withdrawn from
circulation by each Federal Reserve office. The data covered the
period 1970 through 1978 and showed a constantly increasing supply
of currency in circulation. In 1978, for example, an additional
$10.2 billion was put into circulation. In our review of the available statistics, we detected at least two patterns which we believe
merit additional investigation. The first related to the Federal
Reserve offices in Florida. In 1970, when the Jacksonville office
served the entire state, it received $1.6 billion and paid out $1
billion. Its net receipts were about $600 million. In 1971, the
Federal Reserve opened an office in Miami; and in 1978, the two

-3-

offices in Florida received $6.1 billion in deposits and paid out
$2.9 billion, their net receipts amounted to almost $3.3 billion,
which was more than six times the surplus in 1970. The most
startling change has occurred since the end of 1974. The net
receipts (surplus) has grown during that period from $921 million
in 1974 to $3.3 billion in 1978. It has already exceeded $4
billion this year.
While certainly a variety of factors contribute to this surplus, it is clear that a substantial amount is related to the
trafficking of marijuana and other narcotics in Florida. We have
determined that a large number of the currency transaction reports
filed in Florida appear to be related to drug trafficking. In
Fiscal Year 1979, alone, we provided the Drug Enforcement Administration (DEA) with 2,135 reports (IRS Form 4789) reflecting $228
million in transactions. The vast majority of them pertain to transactions in Florida. In addition, other information stemming from a
variety of sources, including the Customs Service, DEA, and Congressional hearings also indicates that there has been a tremendous
influx of drug related money in Florida.
A second pattern warranting more attention involves the increase
in $100 bills in circulation. During the 1970 to 1978 period, $100
bills have accounted for an increasingly large part of the annual
increase in the nation's supply of currency. In 1978, $5.4 billion,
more than 50% of the additional currency in circulation, was in
$100s. This represents a 410% increase over the $1 billion added
to circulation in 1970. Our analysis shows that the New York
Federal Reserve office has accounted for a large part of the additional $100s that are being put into circulation. This has been
particularly noticeable since 1974. In 1978, for example, when the
increase in $100s was about $5.5 billion, New York was responsible
for almost half of it, $2.6 billion. These figures are especially
significant because some analysts believe that the increase in $100s
may be related to the growth of the subterranean economy.
The report on the currency flows, which has been made available
to the Subcommittee, points out other patterns and figures that may
be of interest to you. For example, the Federal Reserve bank offices
in San Antonio and El Paso also reported sizeable surpluses of
receipts while Chicago and Detroit reported relatively large net
pay outs of currency.
One reason that the patterns of currency transactions in Florida
and New York are of particular interest to us is that the analysis
of the currency transaction reports required to be filed with the
Treasury Department under the provisions of the Bank Secrecy Act do
not appear, in themselves, to account for the large amounts of currenc
flowing in and out of those offices.

-4The Department has already taken steps to gather additional
information about the New York and Florida activities. Aside from
working with the Federal Reserve officials to obtain more detailed
information concerning the transactions in those areas, we will
also conduct appropriate follow-up investigations.
Regulatory Proposals
An analysis of the results of the cash flow study also contributed to our decision to propose modifications to existing
regulations under the Bank Secrecy Act. The current Treasury regulations require financial institutions to report currency transactions in excess of $10,000 unless the transaction is with other
financial institutions. They may, however, exempt the transactions
of established depositors if the transactions do not exceed amounts
which the bank may reasonably conclude are commensurate with the
customary conduct of the customer's business. Obviously, this
provision was intended to eliminate the reporting of legitimate
business transactions that would be of little or no interest to
law enforcement officials. Banks were given this authority because
it was thought that due to their knowledge of their customers'
financial activities, they would be able to identify such transactions without difficulty. The regulations provide, however,
that the Treasury Department can request a bank to supply us with
a list of the depositors it has exempted from the reporting requirement.
We have already asked approximately 600 banks in Florida to
provide us with such a list. In addition, requests for lists have
also been sent to banks in New York, California, and Illinois. Our
review of the lists of exempted customers that we have received
from those banks confirm our previous view that there has been a
great lack of understanding of the purpose of the exemption provision and of how it should be used. Bank officials have exempted
foreign nationals and other individuals from the reporting requirement
solely on the basis that they have customarily brought in large
amounts of currency. The bankers frequently had no knowledge of
how that currency was accumulated. This situation made it apparent
that the governing regulations need to be amended.
The proposed amendments to the currency reporting requirements, which were published in September, would:
(1) Require that the report be filed within 15 days
after the day on which a transaction occurred instead of
45 days under the currency regulations — financial institutions are expected to have little difficulty in meeting
this deadline, and the increased promptness should substantially increase the value of the information to law enforcement agencies.

-5(2) Require financial institutions to retain a copy
of each Currency Transaction Report for a period of five
years — while it is our understanding that many banks
routinely retain copies of the reports, the requirement
would ensure that copies would be available for the use of
the bank supervisory agencies that have the responsibility
for examining financial institutions for compliance with
the reporting requirement.
(3) Refine the requirements for the identification of
a customer for whose account currency transaction is to be
effected, and of his agent in such transactions, to specify
the documents that will be acceptable for identification
of aliens and citizens and require that the method of identification used be included in the report.
(4) Require banks to report transactions with, or
originated by, financial institutions or foreign banks —
such transactions are currently exempt from the reporting
requirement. The revision would limit this exemption to
transactions with other domestic banks. Banks would be
required to report large currency transactions with
securities dealers, foreign banks, and miscellaneous financial institutions, such as exchange dealers, persons in the
business of transferring funds for others, and money order
issuers. The additional information concerning the currency
transactions with foreign banks and non-bank financial institutions will substantially improve the Treasury Department's
ability to obtain overall compliance with the regulations
and alert the Department to unusual transnational movements
of currency.
Since Treasury presently does not receive reports of
currency transactions between domestic and foreign banks, it
is not possible to develop information concerning normal
international flows or to identify unusual movements of
currency involving particular institutions or classes of
institutions which might provide insights into possible
criminal activities. The proposed requirement would correct
this deficiency.
The proposed requirement that banks report transactions
with securities brokers/dealers and other miscellaneous financial institutions would provide an effective and badly needed
check on the compliance of such institutions with the regulations. Such institutions are much more difficult to recognize
and catalogue than are banks. Therefore, it is not surprising
that there are indications that many of them have not been
identified or inspected for compliance. By requiring banks to
report large currency transactions with such firms, the opportunity to identify those that are dealing in significant amounts
of currency will be greatly increased. Once identified, they
can be scheduled for compliance checks.

-6(5) Formalize the procedure for exempting other transactions from the reporting requirements — banks are exempted
from the reporting of currency transactions with an established customer maintaining a deposit relationship with the
bank, in amounts which the bank may reasonably conclude do
not exceed amounts commensurate with the customary conduct of
the business, industry or profession of the customer concerned.
This requires the bank to exercise its professional judgment
in determining whether or not a currency transaction report
should be filed. The proposed revision would require a
record of the exemption to be made at the time it is granted
and would limit the exemption to an established customer who
operates a retail type of establishment within the United
States. If the customer is located in a contiguous or
neighboring country, or if the business is not a retail
establishment, a currency transaction report would be required.
The exemption would be limited to businesses, that would
normally generate large amounts of currency, such as a finance
company, a race track, a department store, a theater, a supermarket, sports arena, etc.
(6) Provide additional assurance that this exemption
is judiciously employed by the bank — a report listing the
customers whose currency transactions are not reported
because of the exemption is now required to be made to the
Secretary of the Treasury or his delegate upon demand. The
revision would: (1) specify that such report shall include
the name, street address, nature of the business, taxpayer
identification number, and deposit account number of the
customer whose transactions have been exempted under this
provision; (2) elaborate on the Secretary's authority to
require the filing of the Form 4789 reports for any customer
listed and (3) require the report to be submitted within 15
days following receipt of the demand for the report. These
proposed amendments would provide the information Treasury
needs in order to review the exemptions to ensure that they
are appropriate.
We believe that the proposed changes, possibly with some
modifications that have been suggested by the public, will greatly
improve the usefulness of the currency transaction reporting
requirement.
We recognize that in addition to drafting sound reporting
regulations it is essential to have an effective means of assuring
compliance with them, and we believe that we have made significant
progress in this area. Early this year, after consulting with the
Federal Reserve System, the Federal Deposit Insurance Corporation,
we recommended a uniform examination procedure which would result
in a more rigorous review of the banking industry's compliance

-7with the reporting requirements. Our recommendation currently is
being reviewed by the Federal Financial Institutions Examination
Council, and we hope that it will be adopted in the near future.
We have also conducted a review of the training given to bank
examiners, which we expect will bring about a substantial improvement in bank examiners' knowledge of the regulations.
Statutory Amendments
Certain needed improvements in our administration of the
Bank Secrecy Act require statutory changes. Three bills, already
introduced — H.R. 4071, 4072, and 4073, would accomplish these
changes. H.R. 4071 would add a new section to the Act to permit
the payment to an informant of a 25% share of any recovery realized
by the United States, when the actual recovery by the Government
exceeds $50,000. The informant's share would in any event be
limited to a maximum of $250,000. H.R. 4072 would amend Section
231(a) of the Act by making it illegal to attempt to transport
currency into or out of the United States without filing the
required report. H.R. 4073 would amend Section 235 of the Act
to authorize a Customs officer to search for currency at the border
when he has a reasonable cause of suspect (the same search standard
that Customs officers presently have to enforce the Customs laws)
that an amount in excess of $5,000 is being transported into or out
of the United States.
Although we have good reason to believe that, at a minimum,
hundreds of millions of dollars were carried or shipped out of
the United States during Fiscal Year 1979 to purchase illegal
drugs, our records indicate that only $46 million has been
reported to us as the amount of currency that left the United
States in that same period. While one can never expect that all
who are transporting currency will file reports, it is obvious that
we are not receiving all the reports that should be filed. These
amendments are needed to deal with this problem.
The best way to illustrate the problems we encounter in
enforcing this aspect of the Act is to compare the situation we
face when an individual enters the United States to the situation
when he leaves.
Imagine an individual arriving by plane from abroad with
$10,000 in cash in his luggage. As he approaches the U.S. Customs
inspector for routine inspection and clearance, he is notified
of his legal obligation to file the Customs Form 4790 (Report of
the International Transportation of Currency and Other Monetary
Instruments) because a specific question concerning this obligation appears on the baggage declaration form given to him on the
airplane. In addition, signs notifying travellers of this requirement are posted at ports of entry and verbal notice of the requirement may also be given by Customs personnel. Should he attempt to

-8•

avoid filing this form, it is conceivable that the currency would
be discovered by the Customs inspector in the course of the routine
inspection. If the individual declines to file the report after
being specifically advised of his obligation to do so, and the
currency is discovered, there is no question that a violation of
the Act has occurred. The individual has clearly transported the
currency into the United States without filing a report, and the
Customs inspector clearly had the authority to search his baggage.
This violation can easily be expanded through investigation by
Customs agents to determine whether the funds were transported in
furtherance of a violation of another Federal law. This is the easy
case.
Imagine, however, a private airstrip in Florida, where a small
private jet has taxied out on the runway as an impeccably dressed
man, carrying an attache case, walks out to meet the plane. A
Customs officer, on the scene only because he had just received an
anonymous phone call that someone was leaving for South America
from that airport with $250,000 in cash, stops the well-dressed
man and asks where he is going. After the man indicates that he is
going to Colombia, the Customs officer asks if he is carrying more
than $5,000 in currency or monetary instruments, and if so, states
that a report must be filed. The man responds in the negative, at
which time the Customs officer opens the attache case and discovers
that it is filled with $50 bills. This individual could very well
escape prosecution.
In this situation, the individual had not yet departed from
the United States when the Customs officer stopped him. Although
there is little doubt that within the next five minutes he would
have been airborne, on a southerly course, transporting the
$250,000 without having filed the required report, and beyond the
reach of Federal law enforcement authorites, some courts have held
that it is not a violation of the Act to attempt to transport
currency out of the United States without filing the report and/or
the actual violation does not occur until the individual has left
the United States and is therefore beyond our jurisdiction.
This incident also dramatizes the limitation on the scope of
the Customs authority to verify the individual's negative response
by opening the attache case. In this instance, the facts leading
to the search very likely do not constitute probable cause, the
search standard in the Act. Thus, even if there is a violation of
the Act, the evidence may be suppressed. It is evident that under
existing statutes the Customs inspector has much greater authority
to examine an incoming individual's luggage, which gives him a good
opportunity to discover a violation of the reporting requirement.
Customs is, however, virtually powerless to enforce the Act with
respect to departing travellers.

-9Another problem is providing coverage at the place of departure.
Customs personnel are not generally stationed at smaller airports or
even major departure ports, as they are at points of entry. There
is no routine screening of individuals as they leave the United
States. Therefore, to a very large degree we must rely on prior
information to alert us to future departures. In this case, the
officer had received a phone call which proved to be reliable.
However, with our present resources, we must be selective and thus
may not always be able to respond to every anonymous tip. We must
develop sources of information concerning the financial operations
of organized narcotics traffickers. To encourage people who have
this sensitive information to contact the law enforcement community,
it is, unfortunately, necessary to offer something valuable in
return. Without this, the potential informant will have little
motivation to come forward, particularly considering the dangers
involved for those who do. The reward provisions in H.R. 4071
would be valuable in meeting this need.
In sum, we believe that the problems we are currently facing
in enforcing the Act with respect to departing travellers would be
greatly alleviated if H.R. 4071, 4072 and 4073 were enacted.
Case Examples
I would also like to take this opportunity to tell you about
some of the successes we have recently achieved in the implementation
of the Act. Beginning in 1977, the Treasury Department began to
collect and correlate the reports required under the Act in a
systematized way. Initially, the Customs Service entered the data
from the Forms 4790 into the Treasury Enforcement Communications
System (TECS). In 1978, Customs was formally delegated the responsibility to consolidate the data from all three reports into one center
- the Reports Analysis Unit. During 1978 and 1979, the program
design was completed and the system was built; and by September, the
mammoth task of computerizing all three forms was completed.
Treasury has established three methods to be used by the Reports
Analysis Unit in disseminating the financial reports to interested
Federal law enforcement and regulatory agencies. First, the data
is analyzed together with other computerized indices such as TECS
and NADDIS to discern what particular pieces of information would be
of value to the Federal law enforcement community for use in their
investigations of narcotics trafficking, tax evasion, corruption,
and organized crime. Second, the Unit prepares responses to specific
requests from these agencies. Finally, the Unit cooperates with
these agencies to develop criteria to be used in selecting reports
for referral to them.
We have also formally alerted all interested Federal agencies
of the Reports Analysis Unit's capabilities and its potential for
assisting them with their enforcement or regulatory functions. As a
result, the Narcotics Section of the Department of Justice has begun

-10holding seminars for U.S. Attorneys to educate them not only about
the Act and how it may be utilized in narcotics investigations, but
also to advise them of the services and information which the
Reports Analysis Unit can provide. In Fiscal Year 1979, 64 specific
requests involving 2,650 names were processed. These requests have
come from DEA, FBI, Justice, SEC, Secret Service, and the Office of
Foreign Assets Control.
As one example of how the Bank Secrecy Act and the information
it generates can be extremely useful to a successful and broadranging Federal investigation and prosecution, I would like to
briefly discuss a recent case involving a large Mexican heroin
smuggling organization.
The case was initiated by a Customs Investigations field office
in Southern California following the receipt and analysis of a number
of IRS Forms 4789 in 1977 which reflected frequent cash deposits
between $200,000 and $800,000 each in a local bank. The investigation quickly revealed that a bank account in a fictitious name was
being used to conceal the true depositors. The account served as a
conduit to funnel proceeds from the sale of narcotics to secret
bank accounts in Mexico. The key figures were ultimately identified
as Mexican nationals residing in the United States and Mexico. It
is believed that the organization, headed by Jaime Araujo-Avila, was
responsible for the importation and distribution of approximately
300 pounds of heroin per month with monthly proceeds of approximately $1 million.
The organization used two methods to transmit their narcotics
proceeds, each involving the conversion of the currency to monetary
instruments and the use of one domestic and two foreign banks. By
the first method, a bank account was opened in a fictitious name at
a domestic bank close to the Mexican border. A courier then
retrieved the currency from the storage location and made deposits
into the domestic account. On the date of the deposit, prior to
the next retrieval, the courier entered the United States from
Mexico with personal checks drawn against the domestic account.
These checks were normally in excess of $100,000 and, in a further
effort to conceal identities of members, the checks were made payable
to "Cash" or "Bearer". The courier presented these checks to the
domestic bank and used them to purchase cashier's checks which were
then transported back to Mexico and deposited into accounts maintained under the control of the violators. By way of illustration,
39 currency deposits were made to the U.S. bank account during a
19-month period totaling approximately $15.5 million.
By the second method, the group would transport the funds by
vehicle from Los Angeles across the international border and into
the Mexican bank accounts controlled by the violator. An additional
$16 million was deposited directly to the Mexican bank accounts
during a 3-year period. Thus, over this 3-year period, transactions
involving a total of $31.5 million occurred.

-11Based on this 2-year investigation, a Federal Grand Jury
indicted 21 members of the criminal enterprise. Of these violators,
16, incuding the 5 key ranking members, were charged with felony
currency conspiracy (31 U.S.C. 1059 and 18 U.S.C. 371). Other charges
included narcotics trafficking (21 U.S.C. 846), RICO (18 U.S.C. 1962)
and tax evasion (26 U.S.C. 7201).
Just last week, the organization's leader Jaime Araujo-Avila,
was sentenced to 35 years' imprisonment for currency and income tax
violations as well as a concurrent 15-year sentence for narcotic
violations, and assessed $1.2 million in fines. Six other individuals have been sentenced already, and two others are scheduled for
sentencing next week. Forfeiture actions against various properties
and businesses purchased with the proceeds are pending.
This investigation and prosecution is an exemplary illustration of the results that can be achieved from the proper utilization of the Bank Secrecy Act and a combined Federal law enforcement
effort.

artmentoftheTREASURY
TELEPHONE 566-2041

TON, D.C. 20220

0 0 j7
^ [ S R ^ A U m b e r 28, 1979
H
°0H 5004

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S 143-DAY CASH MANAGEMENT BILL AUCTION
Tenders for $3,000 million of 143-day TreasUr^4&f?| to be issued
on December 3, 1979, and to mature April 2^c^Q^^ywere accepted today.
UliP
The details are as follows:
^TMEHT
RANGE OF ACCEPTED COMPETITIVE BIDS:

High
Low
Average -

Price

Discount Rate

95.405
95.357
95.374

11.568%
11.689%
11.646%

Investment Rate
(Equivalent Coupon-Issue Yield)
12.33%
12.46%
12.41%

Tenders at the low price were alloted 45%.
TOTAL TENDERS RECEIVED AND ACCEPTED
(In thousands)
Location

Received

Accepted

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

$
12,685
4,664,510
210
10,365
10,390
175
649,960
2,310
10,135
180
30
270,575
185

$
7,685
2,694,260
210
365
390
175
167,960
310
8,035
180
30
120,575
185

TOTAL

$5,631,710

$3,000,360

$5,125,100
6,610

$2,493,750
6,610

$5,131,710

$2,500,360

500,000

$5,631,710

$3,000,360

Type
Competitive
Noncompetitive
Subtotal, Public
Foreign Official
Institutions
TOTALS

M-21S

FOR RELEASE AT 4:00 P.M.

November 29, 1979

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,030 million, of 359-day
Treasury bills to be dated December 11, 1979, and to mature
December 4, 1980
(CUSIP No. 912793 4S 2 ) . This issue will not
provide new cash for the Treasury as the maturing issue is
outstanding in the amount of $4,029 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 11, 1979. The public holds
$1,575 million of the maturing issue and $2,454 million is held
by Federal Reserve Banks for themselves and as agents of foreign
and international monetary authorities. Tenders from Federal
Reserve Banks for themselves and as agents of foreign and international monetary authorities will be accepted at the weighted
average price of accepted competitive tenders. Additional amounts
of the bills may be issued to Federal Reserve Banks, as agents of
foreign and international monetary authorities, to the extent
that the aggregate amount of tenders for such accounts exceeds
the aggregate amount of maturing bills held by them.
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. This 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 Standard time,
Wednesday, December 5, 1979. 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. 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.
M-219

-2Banking 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. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
at the close of business on the day prior to the auction. Such
positions would include bills acquired through "when issued"
trading, and futures and forward transactions. 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, when submitting tenders for customers, must
submit a separate tender for each customer whose net long
position in the bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
$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.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 11, 1979, in cash or other immediately available
funds or in Treasury bills maturing December 11, 1979.Cash
maturing
adjustments
new bills.
bills
willaccepted
be made in
for
exchange
differences
and the
between
issue the
price
par of
value
the of

partmtntoftheTREASURY
;HINGTQN,D.C. 20220

TELEPHONE 566-2041

R00M500 4

FOR IMMEDIATE RELEASE
November 29, 197 9

D^CcAitact: Everard Munsey
TREASURY DEPARTMENT202/566-8191

TREASURY ISSUES ADDITIONAL REGULATIONS
ON IRANIAN ASSETS

The Treasury Department today announced additional
regulations implementing the freeze on Iranian assets and
a policy of issuing licenses for payment in hardship cases
to small exporters to Iran.
The new regulations:
1. Provide for specific licenses allowing payments out of
blocked funds to U.S. exporters who held unconfirmed letters
of credit issued before the freeze and who shipped their goods
to Iran before the freeze. Payments under this provision are
limited to $500,000 for any single exporter. The regulations
already permit payment out of blocked funds to exporters
holding letters of credit that were issued and confirmed by
a U.S. bank prior to the freeze.
2. Allow U.S. businesses with standby letters of credit
or performance bonds in favor of an Iranian entity to apply
for a license to establish a blocked account on their own
books in the name of the Iranian entity, within five days after
demand is made for payment. Without such license, the bank
issuing or confirming the letter of credit would pay into a
blocked Iranian account and be reimbursed by the U.S. company,
resulting in a shift of funds from the company to the blocked
Iranian account.
3. Authorize banks to make payments they are obligated
to make on letters of credit and accepted drafts drawn on
Iranian entities and in favor of non-Iranians, but not out of
blocked funds. Payments made under this provision result in
the bank, rather than the beneficiary of the letter of credit,
holding a claim on Iran. The regulation prohibits the bank
from setting off the claim against any Iranian deposits it
may hold.
4. Answer various questions involving letter of credit
in favor of Iranian entities.
M-220

- 2In addition, the Treasury today licensed the Iranian
Bank Melli in New York, to bring in $20 million in unblocked
funds for payments to Iranian students in the United States.
Treasury's intention to take this action had been announced
previously as had the licensing of $7 million in Iranian
Embassy funds for use, in part, to pay students.

Title 31 - MONEY AND PINANCE: Treasury
Chapter V - Foreign Assets Control
Department of the Treasury

* .

Part 535 - Iranian Assets Control Regulations
AGENCY: Office of Foreign Assets Control
ACTION:

Final Rule

SUMMARY:

The Office of Foreign Assets Control is amending the

Iranian Assets Control Regulations.

The purpose of the amendments

is to clarify the effect of the Regulations on various types of
letters of credit in which Iran or an Iranian entity has an
interest.

The need for the amendments is to set forth interpre-

tations and licensing policies with respect to letter of credit
problems.

The effect of the amendment will be that there will

be available to interested parties an explanation of the effect
of the Regulations on letters of credit in which Iran or an
Iranian entity has an interest and the licensing policies of the
Office with respect to various letter of credit problems.
EFFECTIVE DATE:

November 28, 1979

FOR FURTHER INFORMATION CONTACT:
Dennis M. O'Connell
Chief Counsel
Office of Foreign Assets Control
Department of the Treasury
Washington, D.C. 20220
(202) 376-0236

- 2 SUPPLEMENTARY INFORMATION:

Since the regulations iiivolve a

foreign affairs function, the provisions of the Administrative
Procedure Act, 5 U.S.C. 553, requiring notice of proposed rule
making, opportunity for public participation and delay in
effective date are inapplicable.
31 CFR, Part 535 is amended as follows:

S535.416 Letters of credit.
(a) Q

Prior to the effective date, a bank

subject to the jurisdiction of the United States has issued
or confirmed a documentary letter of credit for a non-Iranian
account party in favor of an Iranian entity.

Can payment be

made upon presentation of documentary drafts?
A

Yes, provided payment is made into a blocked

account in a domestic bank.
(b) Q

Prior to the effective date, a domestic

branch of a bank organized or incorporated under the laws of
the United States has issued or confirmed a documentary letter
of credit for a non-Iranian account party in favor of an
Iranian entity.

Payment is to be made through a foreign

branch of the bank.

Can payment be made upon presentation

of documentary drafts?
A

Yes, provided payment is made into a blocked

account in a domestic bank.
(c) Q

Prior to the effective date, a foreign

bank confirms a documentary letter of credit issued by its
U.S. agency or branch for a non-Iranian account party in favor
of an Iranian entity.

Can the U.S. agency or branch of the

foreign bank transfer funds to the foreign bank in connection
with that foreign bank's payment under the letter of credit?
A

No, the U.S. agencyfs payment is blocked, unless

the foreign bank made payment to the Iranian entity prior to
the effective date.

- 2 (d) Q.

Prior to the effective date, a bank subject to the

jurisdiction of the United States has issued or confirmed a
documentary letter of credit for a non-Iranian account party
in favor of an Iranian entity.

The Iranian entity presents

documentary drafts which are deficient in some detail. May
the non-Iranian account party waive the documentary deficiency
and make payment?
A. Yes, provided payment is made into a blocked account
in a domestic bank.

However, the non-Iranian account party

is not obligated by these Regulations to exercise a waiver of
documentary deficiencies.

In cases where such a waiver is not

exercised, the amount of the payment held by the account party
is blocked.
(e) Q If the facts are the same as in the preceding
question except that the Iranian entity permits the letter of
credit to expire, does the bank hold a blocked asset?
*A

No, but depending on the facts, the account party

ay hold a blocked obligation to the Iranian entity.
(f) £

A bank subject to the jurisdiction of the United

States has issued a letter of credit for a U.S. account party
in favor of an Iranian entity.
confirmed by a foreign bank.

The letter of credit is

Prior to or after the effective

date, the Iranian entity presents documents to the U.S. issuing
bank.

Payment is deferred. After the effective date, the

- 3Iranian entity requests that the issuing bank eittter return
the documents to the Iranian entity or transfer them to the
confirming bank. Can the issuing bank do so?
A

No. The U.S. issuing bank can neither return nor

transfer the documents without a license. .The documents
constitute blocked property under the Regulations.

S535.417
(a)

Payment of Accepted Drafts and Other Obligations
A banking institution as its own obligation may make

payment to the beneficiary of a letter of credit issued by
it or on a draft accepted by it, which letter of credit or
draft is in favor of a non-Iranian person subject to the
jurisdiction of the United States and which was issued on
behalf of Iran or an Iranian entity or was accepted prior to
the effective date provided that notwithstanding the provisions
of §535.902, no blocked account may at any time be debited in
connection with such a payment.
(b) A payment under paragraph (a) shall give the
banking institution making payment no special priority or
other right to blocked accounts it holds in the event that
such blocked accounts are vested or otherwise lawfully
used in connection with a settlement of claims.
(c)

Nothing in this section prevents payment being

made to the beneficiary of any draft or letter of credit
or to any banking institution pursuant to 5535.904.

$535,567 Payments under Advised Letters of Credit
Specific licenses may be issued for presentation, acceptance,
or payment of documentary drafts under a letter of credit opened
by an Iranian entity and advised by a domestic bank, Provided,
that:
(a) The letter of credit was advised prior to the effective
date;
(b) The property which is the subject of the payment under
the letter of credit was not in the possession or control of the
exporter on or after the effective date;
(c) The beneficiary is a person subject to the jurisdiction
of the United States.
As a general matter, licenses will not be issued if the
amount to be paid to a single payee exceeds $500,000.

$535,568
(a)

Certain Standby Letters of Credit and Performance Bonds
Notwithstanding the provisions of S535.508, an issuing

or confirming bank may not make payment into a blocked account in
a domestic bank under a standby letter of credit in favor of an
Iranian entity if a specific license has been issued pursuant to
the provisions of paragraph (b) hereof.
(b)

Whenever an issuing or confirming bank shall receive

such demand for payment under a standby letter of credit, it
shall promptly notify the person for whose account the credit
was opened.

Such person may then apply within 5 days for a

specific license authorizing the account party to establish
a blocked account on its books in the name of the Iranian entity
in the amount payable under the credit, in lieu of payment by
the issuing or confirming bank into a blocked account and
reimbursement therefor by the account party.
(c)

If necessary to assure the availability of the funds

blocked, the Secretary may at any time require the payment of
the amounts due under any letter of credit described in paragraph
(a) into a blocked account in a domestic bank or the supplying
of any form of security deemed necessary.
(d)

Nothing in this section precludes any person for whose

account a standby letter of credit was opened or any other person
from at any time contesting the legality of the demand from the
Iranian entity or from raising any other legal defense to payment
under the standby letter of credit.

- 2 (e) This section does not affect the obligations of the
various parties to the instruments covered by this section if
the instruments and payments thereunder are subsequently
unblocked.
(f) For the purposes of this section, the term "standby
letter of credit" shall mean a letter of credit securing perfor
mance of, or repayment of, any advance payments or deposits,
under a contract with Iran or an Iranian entity, or any similar
obligation in the nature of a performance bond.
(g) The regulations do not authorize any person subject
to the jurisdiction of the United States to reimburse a
non-U.S. bank for payment to Iran or an Iranian entity under
a standby letter of credit, except by payment into a blocked
account in accordance with Section 535.508 or paragraph (b)
of this section.

Dated:

NOV 2 8 1979

t&fr
Stanley L ^ STommerfi
Director
•
Foreign Assets Control

Approved:
Ricnara J. uarvis
Assistant Secretary
[AUTHORITY: Sees. 201-207, 91 Stat. 1626; 50U.S.C. 1701 - 1706;
E.O. No. 12170, 44 FR 65729.]

RELEASE ON DELIVERY
Expected 8:30 p.m. EST

Q^(j |Jf19
TREASURY DEPARTMENT

REMARKS OF THE HONORABLE
G. WILLIAM KILLER
SECRETARY OF THE TREASURY
BEFORE THE NEW ENGLAND COUNCIL
AT THE NEW ENGLANDER OF- THE YEAR AWARDS
BOSTON, MASSACHUSETTS
NOVEMBER 29, 1979

DINNER

It is a special honor for me to receive the Council's New
Englander of the Year Award.
In my many years as a New England
businessman, I was always an admirer and supporter of the New
England Council.
The Council has a distinguished history of
service, promoting New England's economic d e v e l o p m e n t .
You have
also been an important force in developing an understanding of
how national economic policies affect this a r e a .
In the energy
field, for example, the Council was one of the first
organizations to look carefully at the issue of natural gas
pricing and to demonstrate that deregulation was to New England's
economic a d v a n t a g e .
Also, by the turn of fortune, it is very special circumstances that bring me here tonight.
I have just returned from
visiting Saudi Arabia, the United Arab E m i r a t e s , and K u w a i t .
It
is appropriate that Boston be my first stop upon returning home.
No section of the country relies more on petroleum than New
England.
No region is more affected by changes in the price and
availability of o i l .
Energy and inflation are the dominant economic issues of our
time.
It is absolutely vital that we develop a broader public
understanding of what must be done with respect to these crucial
matters.
In order to bring about a lasting reduction in inflation it
is essential that we have effective programs for diminishing our
dependence on imported o i l .
My d i s c u s s i o n s with the leaders of
the Arabian Gulf oil producing nations have reinforced my
conviction that we must continue to move ahead forcefully on this
score if we are to avoid highly u n f a v o r a b l e impacts on our
economy.
This evening I would like to talk about our programs to
accomplish t h i s .

M- 9 91

-2-

Our p r o b l e m s with energy and inflation did not develop
o v e r n i g h t , nor will they be solved quickly or e a s i l y .
Inflation
has built up over the past 15 years and has now become deeply
e m b e d d e d in our e c o n o m i c s t r u c t u r e .
The Administration has, therefore, been marshalling a broad
r a n g e of p o l i c i e s to deal with inflation's fundamental causes,
not just its s y m p t o m s .
We have already put into place a
c o m p r e h e n s i v e a n t i - i n f l a t i o n program including monetary and
fiscal r e s t r a i n t , v o l u n t a r y price and pay m o d e r a t i o n , balance in
i n t e r n a t i o n a l p a y m e n t s , s t a b i l i t y for the d o l l a r , and major
r e d i r e c t i o n of energy p o l i c i e s .
Taken together, these policies made up a sound strategy for
defeating inflation.
h o w e v e r , just as this strategy was becoming
e f f e c t i v e , it was o v e r t a k e n by events in the energy area.
The
d r a m a t i c i n c r e a s e in energy prices following the cutback in
Iran's oil p r o d u c t i o n earlier this year is a primary cause of
the c u r r e n t a c c e l e r a t i o n in i n f l a t i o n .
THE IMPACT OF ENERGY OK INFLATION
Energy has been a c c o u n t i n g directly for about 3-1/2
Its
percentage points in our present 13 percent inflation rate.
indirect impact may be another 1 or 2 p e r c e n t .
The energy
component of the CPI has increased at an annual rate of 43
percent so far this y e a r .
Since D e c e m b e r , gasoline prices have
risen at a 57 percent annual r a t e ; fuel oil, so important to New
E n g l a n d , has increased at a 67 percent annual r a t e .
Fortunately,
there was some indication last month that the rate of increase in
energy prices had begun to slow.
While it is essential that we have in place all of our other
p r o g r a m s to defeat i n f l a t i o n , they cannot be successful over the
long run if we remain v u l n e r a b l e to continued shocks from
dramatic i n c r e a s e s in oil p r i c e s .
Over the longer run, the war
against inflation will be won or lost on the energy i s s u e .
The
danger is that another round of sharp i n c r e a s e s in oil prices, or
shortfalls in oil supply could bring higher u n e m p l o y m e n t , higher
inflation and a possible w o r l d - w i d e r e c e s s i o n .
For these
reasons, it is of the utmost urgency that we take all steps
necessary now to diminish our d e p e n d e n c e on imported oil.
RESTORING ORDLh TO WORLD OIL MARKETS
The reduction in world oil production of 2 m i l l i o n barrels
per day caused by events in Iran earlier this year was followed
by speculative purchases and inventory b u i l d i n g .
This combination of events left world oil markets in perilously close
balance.
As a result, producers have been able to increase
prices almost at w i l l .
In some cases they have done this by
abrogating long-term c o n t r a c t s and selling a larger proportion of

-3output in the spot market where prices have sometimes reach $45
per barrel.
In the absence of effective efforts to conserve on energy
usage, the outlook is for oil markets to remain tight next year.
Free world demand for oil could still be about 51 million barrels
a day in 1980. Most experts expect supply to be very close to
this level. This forecast leaves little margin for comfort. A
significant cutback in production by any of the major
oil exporting countries would result in serious economic
disruptions. We do not expect this to happen. But as events of
recent weeks indicate we must be prepared for the unexpected.
Returning order to world energy markets will require
sacrifice on the part of both consumers and producers. We have
already made a start.
In the International Energy Agency (IEA),
and at the Tokyo Summit,
the major oil consuming nations made
commitments to control consumption and reduce oil imports.
However, much more must be done. In the IEA, we are now working
on an accelerated timetable to develop new and stronger
commitments for increased reductions by member countries. If we
are prepared to make the necessary sacrifices to achieve a
significant reduction in oil use, the principal Arabian Gulf oil
producing countries have indicated that they are prepared to
respond by producing a stable oil supply.
By much cooperation
between consuming countries and producing countries, we should be
able to restore order to the world oil market.
The United States has made more progress than most countries
in cutting back on oil imports. So far this year, we have
reduced our total oil consumption by about 2.4 percent from the
same period of 1978. The extent of this reduction has increased
in each quarter, reaching 4.4 percent in the third quarter,
despite the resumption of positive growth in our economy.
Moreover, we have cut our consumption of imported oil by about 5
percent over the same period in 1978. Since the oil boycott in
1973, we have reduced by 7-1/2 percent the amount of energy used
to produce a unit of national output.
While our progress to
date has been good, we must do more.
BOW WE BECAME DEPENDENT ON IMPORTED OIL
While the U. S. produces 22 percent of world economic output
and has only 5 pe rcent of world population, we account for 29
percent of world energy consumption.
Not only do we consume too
much energy, we a lso consume the wrong mix of energy.
Ten years
ago, oil provided about 44 percent of all of our energy.
Now it
provides about 50 percent.
Furthermore, an increasing share of
the petroleum we use is imported.
In 1969, we used about 14
million barrels a day of oil, of which about one-fifth was
imported.
In 197 3, we were using about 17 million barrels a day,
of which about a third was imported.
This year we will use about
19 million barrel s a day, of which more than 40 percent will be
imported.

-4-

The principal reason that we adopted this pattern of energy
consumption is that domestic oil was cheap relative to other
energy forms. For example, between 1967 % and 1972 the real price
of gasoline decreased by about 13 percent.
Another factor behind oil's increased share in our total
energy consumption is that there were price controls on
interstate sales of natural gas until they were removed last year
by enactment of the Natural Gas Act.
Price controls diminished
the incentives for new exploration and production of natural gas.
New supplies of natural gas were increasingly reserved for the
unregulated intrastate market.
As a result, natural gas declined
from one third of U.S. energy use in 1970 to one quarter in 1976.
The oil embargo in 1973 and the subsequent quadrupling of
the price of oil signaled the end of the era of cheap energy.
This should have served as a warning of the necessity of reducing
our dependence on foreign oil. Instead, we failed to respond
adequately to our changed circumstances.
Since the oil shock of
1973/74, two American presidents chose to impose arbitrary price
controls to keep domestic oil prices below world levels. This
action has helped give the American people the false impression
that oil is still plentiful and inexpensive.
It is neither.
While President Carter has faced the issue courageously and
squarely, there are still those who fail to understand this
economic reality.
Price controls encouraged the wasteful consumption of
energy.
They subsidized the use of domestic oil. Controls also
diminished the incentive to develop domestic oil or alternate
sources of energy. As a result, our total oil imports increased
dramatically from 5 million barrels a day in 1973 to 8.5 million
barrels a day in 1977. We have now been able to turn the tide so
that in 1979 we expect to import 8 million or less barrels a day
-- bettering the target set by President Carter on July 15 and
coming in well under the commitment made at the Tokyo Summit.
But we must do even more if we are to reduce our vulnerability to
interruptions in the availability of foreign oil with all its
implications.
Removing price controls will mean somewhat higher energy
prices in the short run. However, over the longer run, pricing
energy at its replacement value is essential if we are to regain
control of our own destiny.
That is why President Carter made
the courageous decision to implement phased decontrol of domestic
crude prices.
We must face economic reality. Anyone who advocates
reimposing controls, and implies that we can have cheap oil, will
be misleading the American people. He will simply be ignoring
the consequences and the inevitable increased reliance on
imported oil. Reimposing price controls on oil would place us
once more on a dangerous road.

-5-

Decontrol must be an essential part
energy security; but it is only a part.

of any

program

for

U.S.

The Administration has proposed a comprehensive program to
enable us to have less dependence on imported o i l .
It will
require sacrifice and some change in our life style, but it must
be done if we are to avoid even greater d i f f i c u l t i e s in the years
ahead .
The Administration's program entails more vigorous
conservation, and increased development of conventional energy,
renewable energy sources and synthetic f u e l s .
Without this
program, which we have V.-en putting in place since 1977, we
estimate that the United States would have needed to import about
14 million barrels a day of oil by 1990.
Measures already
adopted have cut that estimate to 8-9 million barrels a day.
When the President's latest proposals are enacted and
implemented, we will need to import between 4 and 5 million
barrels a day in 1990 -- about half our current l e v e l .
CONSERVATION
Conservation is the first priority in our national energy
program.
Conservation is the surest, cleanest, cheapest
reduce our reliance on imported o i l .

way

Higher oil prices in themselves will encourage more
efficient use of energy.
In addition, we have a wide ranging
array of tax c r e d i t s , g r a n t s , financing subsidies and other
incentives to promote energy saving i n v e s t m e n t s .
While some of
The
these are just being proposed, others are already in p l a c e .
Internal Revenue Service has calculated that about 6 million 1976
tax returns claimed residential energy conservation credits
totaling $596 m i l l i o n .
One area in which we must do more to promote conservation is
gasoline use.
Forty percent of our petroleum consumption is for
motor gasoline.
We have established statutory r e q u i r e m e n t s
requiring new cars to be more fuel e f f i c i e n t .
We are also
undertaking ambitious research programs to develop more fuel
efficient a u t o m o b i l e s .
In addition, we have proposed expanded
assistance for public t r a n s i t .
We hope that these e f f o r t s , along with voluntary
conservation by the American people, will result in a significant
reduction in gasoline u s a g e .
If gasoline consumption does not
decline significantly, we may have to consider new, more forceful
action .

-6-

INCREASED DEVELOPMENT OF CONVENTIONAL

ENERGY

The second priority of our energy program is increased
development of domestic sources of conventional energy.
The
Natural Gas Act enacted last year provided for the phased removal
of controls on the wellhead price of natural gas. That action in
combination with oil decontrol has substantially increased the
incentive for domestic exploration and production of oil and gas.
Coal is one form of energy we have in great abundance. We
are actively promoting its industrial and utility use. The
National Energy Act of 1978 prohibits the use of gas or oil in
new electric utility generating facilities or new industrial
boilers. We are also setting targets for reduced use of oil and
gas by utilities already using these fuels. We have proposed
grants to help utilities make these conversions.
New England utilities, traditionally the most dependent on
imported oil, are leading the way in converting to coal. Just
last week the New England Electric Company announced the
conversion of its Somerset, Massachusetts plant to coal. Major
coal conversions are also being considered for plants in Salem
and tot. Tom. boston Edison is also exploring the possibility of
building a new, 800 megawatt coal-fired plant in Weymouth,
Massachusetts.
Nuclear energy is, of course, another highly important
energy source for many of our utilities, particularly in New
England.
The incident at Three Mile Island has demonstrated the
potential perils associated with nuclear power.
However, at this
point, it would be unwise for us to forego the opportunities
offered by the safe use of nuclear energy.
The Kemeny Commission
has just made important recommendations as to how nuclear energy
can be made safer through more effective supervision and better
training .
RENEWABLE ENERGY SOURCES
The first stage of our country's industrial development
began in New England powered not by fossil fuels, but by water,
wind and wood.
The third priority in our energy program is
increased reliance on such renewable energy sources, including
solar, biomass, and alcohol. While none of these sources by
itself is likely to account immediately for a substantial share
of our energy, together they c^n begin to play a very significant
role today and they will be even more important in the future.
Unlike fossil fuels, renewable sources will always be available
and will not pose threats to human safety or to our environment.
Gasohol, produced by mixing methanol or alcohol with
gasoline, could enable us to reduce consumption of gasoline
significantly.
We have proposed tax incentives for alcohol used
in the production of gasohol.

-7-

One of the most promising sources of energy for the future
is the sun. We are funding ambitious research efforts to develop
more efficient solar devices. We also have an extensive set of
incentives to encourage greater use of solar energy now,
including financial assistance for the large front end
investments that are sometimes required. ln addition, we also
have programs to encourage the use of low head hydro electric
power. Here again, New England is a leader and already has a
number of projects underway.
SYNTHETIC FUELS
while the United States is running short of inexpensive,
conventional oil and gas, we do have tremendous untapped
resources in shale oil, unconventional natural gas and coal.
Much of this energy, however, is not in a form that can be
readily used. The fourth priority in our energy program is the
development of synthetic fuels from these resources.
Over time the United States has become heavily dependent on
conventional liquid fuels for transportation, heat, and
power generation. However, we can no longer be sure how long we
can rely on overseas suppliers to meet our needs for this form of
energy. Synthetic fuels are essential as the long term safety
net to protect our economy from interruptions in the supply of
imported oil.
The development of synthetic fuels will take time and
require enormous financial resources. In many cases, the
financial commitments required and the risks involved are greater
than most private firms could assume on their own. For this
reason, we have proposed an Energy Security Corporation to work
with the private sector in the development of synthetic fuels.
To enable it to operate with the flexibility and efficiency which
this task will require, the ESC will be an independent government
agency.
IHE ENERGY MOBILIZATION BOARD
The regulatory requirements of Federal, state and local
governments have sometimes delayed or even acted as a deterent to
the development of important new energy sources. We cannot
afford unnecessary delays in our efforts to achieve energy
security. We have, therefore, proposed an Energy Mobilization
Board to help shorten the time^ required to obtain permits for newenergy projects. The Energy Mobilization Board will work with
state and local governments and other regulatory parties to
expedite projects that are in our common interest.
THE WINDFALL PROFITS TAX
The dramatic increases in world oil prices have already led
to substantial increases in oil company earnings, particularly

-8for those companies who have access to Saudi Arabian oil which
has been priced at $18 per barrel -- below other OPEC oil, and
far below prevailing spot prices. This lower price has not been
passed on to U.S. consumers.
Decontrol will generate further
increases in oil company earnings. Much of this is a pure
windfall, and not the result of any new economic activity on the
part of the oil companies.
The windfall profits tax would use an equitable portion of
the increase in oil company earnings to finance many
of the energy programs so essential to our nation's future. The
tax is also essential to help pay for financial assistance to
those least able to bear the burden of higher energy costs. The
tax is carefully designed so that oil companies will be left with
ample funds and ample incentive for the exploration and
development of new energy.
The House has already passed a responsible windfall profits
tax bill which meets the President's objectives and the nation's
needs. The Senate Finance Committee bill, now on the Senate
floor, provides the appropriate framework, but needs to be
further strengthened.
However, the Senate in action this week has further weakened
the windfall profits tax by providing that each independent oil
producer can exempt up to $11 million of annual production from
the tax. This exemption will cost about $10 billion over the
next ten years while having very little impact on production.
CONCLUSION
Recent events dramatically demonstrate the importance of
immediately implementing President Carter's energy program. We
must understand that time is running out. Continued reliance on
imported oil leaves us vulnerable to serious economic disruptions
and threatens our freedom.
We must also understand that the current levels of
production are not considered by OPEC nations to be in their own
self-interest.
Thus, they are looking to us to exercise the
discipline and self-control necessary to implement our own energy
policies. If we do, I believe that we can count on their
continued cooperation and constructive policies.
The greatest danger is that we do too little. We must
undertake an ambitious program now.
If there should be a
favorable change in circumstances in the future, we can always
scale back our efforts.
If we proceed too timidly, we may loose
forever the opportunity to reestablish American energy security.
Once the American people understand the issues involved, I
am confident they will have the will to curtail dramatically
their use of imported oil. The last few weeks have been
frustrating and anguishing for most Americans.
The most
important message we can send the world right now is that we are
willing to bear whatever burden, and accept whatever sacrifice is
necessary to recapture control of our own destiny^

tofthe
D.C. 20220

TELEPHONE 566-2041

IMMEDIATE RELEASE
November 30, 1979

CONTACT: Everard Munsey
202/566-8191

TREASURY ISSUES ADDITIONAL REGULATION
ON IRANIAN ASSETS
The Treasury Department today announced a regulation
that would allow it to prevent the attachment of Iranian
assets which are free from blocking because of special
licenses issued under the Iranian Asset Control Regulations.
Suits to attach Iranian property in the United States
are permitted under the Iranian Asset Control Regulations,
but no judgment can be entered for payment under an attachment
from any blocked asset.
This regulation authorizes the inclusion in special
licenses of a provision that the money being unblocked is
not subject to attachment.

M-222

Title 31 - MONEY AND FINANCE: Treasury
Chapter V - Foreign Assets Control
Department of the Treasury

Part 535 - Iranian Assets Control Regulations
AGENCY: Office of Foreign Assets Control
ACTION:

Final Rule

SUMMARY:

The Office of Foreign Assets Control is amending the

Iranian Assets Control Regulations.

The purpose of the

amendment is to add new paragraph (d) to §535.504.

That section

authorizes certain judicial proceedings with respect to property
of Iran or Iranian entities.

The need for the amendment is to

exclude from that authorization any pre-judgment attachment of
certain types of property of Iran and Iranian entities brought
into the United States under specific license from the Office of
Foreign Assets Control.

The effect of the amendment is that

attachments are not authorized with respect to such specifically
licensed Iranian property.
EFFECTIVE DATE: November 29, 1979
FOR FURTHER INFORMATION CONTACT:
Dennis M. O'Connell
Chief Counsel
Office of Foreign Assets Control
Department of the Treasury
Washington, D.C. 20220
(202) 376-0236
SUPPLEMENTARY INFORMATION: Since the regulations involve a foreign
affairs function, the provisions of the Administrative Procedure
Act, 5 U.S.C. 553, requiring notice of proposed rule making,
opportunity for public participation and delay in effective date
are inapplicable.

TV 2 r

31 CFR, Part 535 is amended by the addition of paragraph
(d) to §535.504, as follows:
§535.504

Certain judicial proceedings with respect to

property of Iran or Iranian entities.
*

(d)

Property transferred into or held in the United

States by Iran or an Iranian entity under a specific license
which by its terms withdraws the authorization for pre-judgment
attachment with respect to such property is excluded from the
privileges of paragraph (a) hereof.

Dated:

NOV 29 1979
i

f,. en _

Stanley L//SommeWieia
Director

Lu.,. u rj

Approved
Richard J.^Davis
>avis
Assistant Secretary
[AUTHORITY: Sees 201-207, 91 Stat. 1626; 50 U.S.C. 1701-1706;
E.O. No. 12170, 44 FR 65729]

FOR IMMEDIATE RELEASE

December 3, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,201 million of 13-week bills and for $3,200 million of
26-week bills, both to be issued on December 6, 1979,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing March 6, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing June 5, 1980
Discount Investment
Price
Rate
Rate 1/

a/
97.014-' 11.813%
96.966
12.003%
96.985
11.927%

94.080
94.037
94.051

12.38%
12.58%
12.50%
a/ Excepting 2 tenders totaling $865,000

11.710%
11.795%
11.767%

12.65%
12.75%
12.72%

Tenders at the low price for the 13-week bills were allotted 35%.
Tenders at the low price for the 26-week bills were allotted 49%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TENDERS RECEIVED AND ACCEPTED
(In Thousands])
Received
Accepted
Received
1
$
41,030 $
41,030 s
$
30,765
3,997,860
2,484,100 :J
3,849,750
32,555
32,555 :
12-, 750
:
54,235
54,235 J
53,980
:;
28,400
28,400
56,825
38,020
38,020 ;J
39,415
344,855
219,855 J:
535,415
39,270
16,970 !
J
36,230
6,315
6,315 •
13,820
28,300
28,290 ••
23,710
14,635
14,635 •
9,840
289,175
199,175 *
232,325
37,900
37,900 •
61,920

Accepted
$
30,765
2,656,975
12,750
43,880
41,225
24,415
203,915
13,230
4,820
23,710
8,840
73,825
61,920

TOTALS

$4,952,550

$3,201,480 :

$4,956,745

$3,200,270

Competitive
Noncompetitive

$3,325,225
465,185

$1,574,155 •
465,185 J

$3,305,185
401,960

$1,548,710
401,960

Subtotal, Public

$3,790,410

$2,039,340 !

$3,707,145

$1,950,670

Federal Reserveand Foreign Official
Institutions
$1,162,140

$1,162,140 :

$1,249,600

$4,956,745

$3,200,270

Type

TOTALS

$4,952,550

$3,201,480

JVEquivalent coupon-issue yield.

<-. 2 -

31 CFR, Part 535 is amended by the addition of paragraph
(d) to §535.504, as follows:
§535.504 Certain judicial proceedings with respect to
property of Iran or Iranian entities.
* * * *

(d) Property transferred into or held in the United
States by Iran or an Iranian entity under a specific license
which by its terms withdraws the authorization for pre-judgment
attachment with respect to such property is excluded from the
privileges of paragraph (a) hereof.

Dated:

NOV 29 1979
r } /

;

.f<\ ea _ .'^'i«-<*;/(<&

Stanley L / y S o m m e W i e i a
Director

Approved:

hJUAA^i^^ y\) faj~~
Richard J.^*Davi:
J.^*Davis
Assistant Secretary

[AUTHORITY: Sees. 201-207, 91 Stat. 1626; 50 U.S.C. 1701-1706£•0. No. 12170, 44 FR 65729]

^tmntottheJREASURY
TELEPHONE 566-2041

,HGT0N,D.C.2Q220

FOR IMMEDIATE RELEASE

December 3, 1979

RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS: maturing March 6, 1980
Discount Investment
Price
Rate
Rate 1/
High
Low
Average

91.0U96.966
96.985

11.813%
12.003%
11.927%

12.38%
12.58%
12.50%

94.080
94.037
94.051

11.710%
11.795%
11.767%

12.65%
12.75%
12.72%

a/ Excepting 2 tenders totaling $865,000
Tenders at the low price for the 13-week bills were allotted 35%.
Tenders at the low price for the 26-week bills were allotted 49%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
$
41,03C
3,997,860
32,555
54,235
28,400
38,020
344,855
39,270 TODAY
6,315
28,300
14,635
LAST WEEK
289,175
37,90C

HIGHEST

Competitive
Noncompetitive

$3,325,22!
465,18!

Subtotal, Public

$3,790,41(

T0TALS

'Bin

13-WEEK

26-WEEK

//. f>7 %

JL212

$4,952,55C

Type

Federal Reserveand Foreign Official
Institutions

II II

DATE: December 3, 1979

SINCE:

n fight

/f.ftyf' J2.01S''

LOWEST SINCE:
$1,162,14C

$4,952,55d

^/Equivalent coupon-issue yield.

OTKMMVDH££S4CftQ213£fig

FOR RELEASE AT 12:00 NOON

December 3, 1979

TREASURY OFFERS $2,000 MILLION OF 157-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $2,000 million of 157-day
Treasury bills to be issued December 10, 1979, representing an
additional amount of bills dated November 15, 1979, maturing
May 15, 1980 (CUSIP No. 912793 4E 3 ) . Additional amounts of the
bills may be issued to Federal Reserve Banks as agents for
foreign and international monetary authorities at the average
price of accepted competitive tenders.
Competitive tenders will be received at all Federal Reserve
Banks and Branches up to 1:30 p.m., Eastern Standard time,
Thursday, December 6, 1979. Wire and telephone tenders may be
received at the discretion of each Federal Reserve Bank,or
Branch. Each tender for the issue must be for a minimum amount
of $1,000,000. Tenders over $1,000,000 must be in multiples of
$1,000,000. The price on tenders offered must be expressed on
the basis of 100, with not more than three decimals, e.g.,
99.925. Fractions may not be used.
Noncompetitive tenders from the public will not be
accepted. Tenders will not be received at the Department of the
Treasury, Washington.
The bills will be issued on a discount basis under
competitive bidding, and at maturity their par amount will
be payable without interest. The bills will be issued entirely
in book-entry form in a minimum denomination of $10,000 and in
any higher $5,000 multiple, on the records of the Federal
Reserve Banks and Branches.
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 arre
furnished. Others are only permitted to submit tenders for
their own account. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect
positions held at the close of business on the day prior to the
auction. Such positions would include bills acquired through
M-224

-2"when issued" trading, and futures and forward transactions as
well as holdings of outstanding bills with the same maturity
date as the new offering; e.g., bills with three months to
maturity previously offered as six month bills. 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, when submitting tenders for
customers, must submit a separate tender for each customer whose
net long position in the bill being offered exceeds $200 million.
No deposit need accompany tenders from incorporated banks
and trust companies and from responsible and recognized
dealers in investment securities. 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 tenders 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. Settlement for accepted tenders in
accordance with the bids must be made or completed at the
Federal Reserve Bank or Branch in cash or other immediately
available funds on Monday, December 10, 1979.
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 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
may be obtained from any Federal Reserve Bank or Branch.

RJTV A T U
•ROOM 5004

FOR RELEASE AT 4:00 P.M.

December 4, 1979

TREASURY'S WEEKLY BILL OFFERING
TREASURY OtPARTMENT
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,400 million, to be issued December 13, 1979.
This offering will provide $400 million of new cash for the
I\COC:I.VC:

J_>CIHJ\.O

ayciiLo

I.KJL

LULCiyn

anu

liacLiiaLiuiiai

muucuaL'y

authorities and $1,780 million currently held by Federal Reserve
Banks for their own account. The two series offered are as
follows:
91-day bills (to maturity date) for approximately $3,200
million, representing an additional amount of bills dated
September 13, 1979, and to mature March 13, 1980 (CUSIP No.
912793 3V 6 ) , originally issued in the amount of $3,132 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
December 13, 1979, and to mature June 12, 1980 (CUSIP No.
912793 4J 2) .
Both series of bills will be issued for cash and in
exchange for Tre asury bills maturing December 13, 1979. Tenders
from Federal Res erve Banks for themselves and as agents of
foreign and inte rnational monetary authorities will be accepted
at the weighted average prices of accepted competitive tenders.
Additional amoun ts of the bills may be issued to Federal Reserve
Banks, as agents of foreign and international monetary
authorities, to the extent that the aggregate amount of tenders
for such account s exceeds the aggregate amount of maturing bills
held by
The them.
bills will be issued on a discount basis under
competitive and noncompetitive bidding, and at maturity their par
amount will be payable without interest. 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 Standard time, Monday,
December JO, 1979. Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 ifor 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.
/

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
bidder
respective
issue
(in three
for
will
decimals)
$500,000
issues.
be accepted
or
of less
accepted
in without
full at
competitive
stated
the weighted
price
bids average
from
for the
anyprice
one

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 13, 1979, in cash "or other immediately available
funds or in Treasury bills maturing December 13, 1979.
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, 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

December 5, 1979

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $4,033 million of 52-week bills to be issued December 11, 1979,
and to mature December 4, 1980 , were accepted today. The details are as
follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $665,000)
Price
High
Low
Average -

Discount Rate

89.258
89.198
89.212

Investment Rate
(Equivalent Coupon-issue Yield)

10.772%
10.832%
10.818%

11.92%
11.99%
11.98%

Tenders at the low price were allotted 84%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
$

31,045
6,628,265
45,770
88,970
148,995
44,415
488,830
53,100
26,975
13,200
3,710
519,750
11,655

Accepted
$

8,545
3 ,490,185
15,770
12,380
137,995
19,415
155,530
9,940
26,975
13,200
2,710
128,750
11,655

$8 ,104,680

$4 ,033,050

$5 ,548,045
152,100

$1 ,476,415
152,100

$5 ,700,145

$1 ,628,515

2,404,535

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve and
Foreign Official
Institutions

TOTALS $8,104,680 $4,033,050
An additional $ 91
million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

M-227

yartmentofthtTREASURY
SHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 5

1979

(Excepting 1 tender of $665,000)
Investment Rate
(Equivalent Coupon-issue Yield)

Price Discount Rate
High
Low
Average -

89.258
89.198
89.212

10.772%
10.832%
10.818%
Tenders at the low price were allotted 84%.

11.92%
11.99%
11.98%

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

Accepted

Received
$ 31,045
6,628,265
45,770
88,970
148,995
44,415
488,830
53,100
26,975
13,200

$ 8,545
3,490,185
15,770
12,380
137,995
19,415
155,530
9,940
26,975
13

-2nn

52-WEEK BILL RATES

TOTALS

DATE: December 5, 1919

Type
Competitive
Noncompetitive

HIGHEST SINCE

Subtotal, Pub
Federal Reserve a
Foreign Officia LOWEST SINCE if/Slf
Institutions
TOTALS

LAST MONTH

//. f/o %
TODAY

/o.f/j 7c

An additional $ 91
million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

M-227

FOR IMMEDIATE RELEASE
December 6, 1979

REMARKS BY JOHN R. KARLIK, DEPUTY ASSISTANT SECRETARY
OF THE TREASURY FOR INTERNATIONAL ECONOMIC ANALYSIS
BEFORE THE
CONFERENCE BOARD, NEW YORK CITY
DECEMBER 6, 1979
TRENDS IN U.S. INTERNATIONAL 'ECONOMIC POLICY
The last month of 1979 offers a good vantage point from
which to review changes in U.S. international economic policy
during the 1970s and to anticipate problems decision makers
are likely to be confronting during the 1980s. Even fleeting
reflection on this subject immediately brings to mind several
major shifts to policy that have occurred over the past
decade. I shall attempt to review the more important of these
changes systematically, if briefly. As one would expect,
some of these trends are encouraging, and even gratifying,
considering the circumstances. Others are disturbing in that
no national consensus has been achieved regarding problems that
will continue in the 1980s.
In surveying international economic policy trends one can
review the spectrum along functional lines, such as monetary,
trade, investment, and aid policy, or geographically in terms
of U.S. relations with specific countries or groups of nations.
I shall do some of both, but concentrate primarily on money,
trade, and investment policies, since these are apparently the
chief interests of this audience.
Having indicated this framework, I'd like to emphasize
initially as the context for all of my remarks that increasingly
the distinction between U.S. international and domestic
economic policies is artificial. During the past year it has
become dramatically evident that whenever the Federal Reserve
resolves to pursue a particular monetary policy,the Executive
a specific budgetary and fiscal policy, or the Treasury a
given approach to a financially beleaguered municipality or
manufacturing corporation, these decisions have major international economic consequences•
M-229

- 2-

Indeed, at times the pressure of international economic
problems has forced modification of what a decade ago would
generally have been viewed as exclusively domestic economic
policies — policies to be determined solely according to the
internal condition of U.S. economy. I am, of course, referring
to the increases in Federal Reserve discount rates introduced
on November 1, 1978 and October 6, 1979. Only a few years ago
a mild suggestion in an IMF Annual Report that monetary policy
in the U.S. should be somewhat tighter brought howls from Capitol
Hill protesting such interventionism. Another example is the
extent to which concern over relative international standings
in terms of productivity growth, efficiency of energy use, savings and investment rates, technological innovation, and living
standards are stimulating a thorough review of all U.S. economic
policies. The object of this review, which is being conducted
simultaneously in government, board rooms, union halls, and in
the financial press, is to evaluate the appropriateness of these
policies for the 1980s.
The growth of pressures to lay aside nationalism in the
formulation of virtually all U.S. economic policy is the most
fundamental change that has occurred in the 1970s, and a trend
that is sure to intensify during the 1980s. Domestic and international economic policy formulation are now inextricably
intertwined.
Let me now turn to some of the specific ways U.S. international economic policy has changed during the 1970s and to a
few trends that we can anticipate for the 1980s.
Exchange Rate and Monetary Policy
The world entered the 1970s with the adjustable peg exchange
rate system established at Bretton Woods. Admittedly, the system
had shown occasional strains for almost a decade, but official
institutiohs were keeping their flag nailed to the fixed rate
mast. Canada, in May 1970, was the first major country to adopt,
in this case once again, a flexible exchange rate determined
essentially by the interaction of market supply and demand.
Germany was next, about a year later, and the United States followed in August 1971. There was an attempt to return to fixed
rates resulting from the December 1971 Smithsonian monetary
agreement, but this collapsed in February 1973.
Agreement" on amending the IMF Articles to give members
latitude of choice in selecting the exchange rate regime each
desired to follow was reached at the January 1976 Jamaica
meeting. These amendments were finally ratified a little more
than two years later. Since the collapse of the Bretton Woods
currencies
global
system, trade
foreign
monies.
numerous
tomoves
that
Nevertheless,
smaller
of
across
a major
countries
pegged
trading
today
exchanges.
have
less
partner
chosen
thanor
20
toto
percent
peg
basket
their
of
of

-3But these are global developments, and my concern is chiefly
with U.S. economic policy. Changes in U. S. policy attitudes on
monetary issues have occurred regarding three important questions:
the nth country problem, the appropriate amount of official intervention, and relations with the IMF.
The nth country problem arises because, for example, if in
a world of a hundred countries, 99 decide individually their
dollar exchange rate, then the value of the dollar in terms of
all other currencies is fully determined. The United States has
no latitude for maneuver,
whether or not that exchange rate
structure seems appropriate from the U.S. point of view. The
most enthusiastic early advocates of a shift to flexible exchange
rates believed that if the reserve-currency system, under which
all other IMF members pegged to the United States and only the
dollar was convertible into gold, were dissolved by suspending
gold convertibility, the United States would gain the freedom to
let an over-valued dollar depreciate. The advocates believed
furthermore that after an initial period of learning about and
adjusting to the changed regime, the markets would establish and
would efficiently and relatively smoothly maintain an exchange
rate structure leading to balance-of-payments equilibrium among
the countries primarily responsible for international trade and
investment.
The dollar did depreciate, and appropriately so, but chiefly
between May 1970 and March 1973. With respect to a trade-weighted
average of the other OECD currencies, as of the end of November 1979
the value of the dollar was virtually the same as in"March 1973,
but 17 percent below its May 1970 Level. Of course, the dollar
has fluctuated since March 1973; it appreciated until September
1977, then depreciated through 1978,- and in 1979
has appreciated.
From March 1973 through most of 1977, U.S. intervention in
exchange markets was minimal. But exchange markets have not
demonstrated a capacity to maintain equilibrium exchange rates
through smooth changes and without over-shooting or excessive
volatility. Thus, intervention is required. In the last two
years there has been a gradual shift in U.S. official attitudes
toward more intervention — a shift sustained by a similar change
in attitudes within the academic community regarding the stability
of exchange markets and the utility of official intervention.
There is no disposition on the part of U.S. monetary authorities
to return to a par value for the dollar or to hold the dollar within a specified range
of values with respect to a given
standard. It is also recognized that exchange rates must change
in response to differences among countries in rates of inflation
and in the growth of productivity and output.

-4The 1970s demonstrated that the United States cannot escape
the nth country constraint simply by leaving the determination
of exchange rates to the unalloyed workings of the market.
Formerly this constraint was believed to stem largely from the
dollar's link to gold and, hence, its reserve-asset function.
But flexible rates have brought no diminution in the dollar's
reserve-asset role. In fact, the proportion of dollars in
total reserve has remained at about 80 percent. Given the tripling
of global reserves in the 1970s, from 79 billion SDR in 1969
to over 280 billion SDR this year, as opposed to the 38 percent
increase in the 1960s — an acceleration of reserve growth that
was not supposed to have occurred with flexible exchange rates —
the virtually constant proportion accounted for by dollars
implied a huge absolute increase in dollar reserves.
From these developments it is evident that the U.S. role in
the international monetary system stems from this country's
size and its integration into the structure of international
trade and investment, rather than from the particulars of how
exchange rates are determined and managed. Also from these realities stems the determination on the part of U.S. authorities,
articulated initially on November 1, 1978, and since reiterated,
to have available and to use as necessary a substantially
increased volume of resources for intervention in exchange markets
to maintain order and resist excessive fluctuations.
The amendments to the IMF Articles I referred to previously
charged the Fund with responsibility for exercising surveillance
over the policies of members that affect their international payments positions and exchange rates.
IMF surveillance embodies a major opportunity for closer
coordination of economic policies among the leading industrial
nations towards mutually agreed goals. Certainly disagreement
will occur occasionally between the IMF staff and U.S. policy
makers, and these differences should be resolved at the Board
level. But if disparities in analytical approaches and in policy
recommendations did not occur occasionally, the surveillance
exercise would be useless. The United States strongly endorses
an expansion of IMF surveillance activities in the 1980s.
This country has proposed several steps to strengthen IMF
surveillance. These include procedures for measuring individual
country performance against agreed global standards; requiring
countries with large imbalances, surplus or deficit, to submit
for IMF review an analysis of how they propose to deal with the
imbalances; a more active role for the IMF Managing Director in
initiating consultations with members; and establishment of a
Governors
advisory
balance-of-payments
start in developing
Interim
Council Committee.
with
an
adjustment
effective
decision-making
These
process.
IMF
steps
role
powers
could
in managing
to
bereplace
an important
the
the

-5The recent amendments also committed the Fund membership to
working towards establishment of the Special Drawing Right, or
SDR, as the chief international reserve asset. A number of
important steps have been taken to promote the SDR. It has
replaced gold as the central unit for the IMF, serving as the
numeraire for the system and the unit of account and vehicle for
many IMF transactions. Allocations of SDR's have been resumed,
with SDR 4 billion being distributed annually during the 1979-81
period. The interest rate on the SDR has been brought more in
line with market rates and the number of transactions in which
SDR may be used have been expanded, thus improving the SDRjs
ability to compete with other reserve assets.
The IMF is now considering the establishment of a substitution account under which dollars and possibly other currencies
could be exchanged for SDR-denominated assets. The Interim
Committee, at its recent meeting in Belgrade, concluded that a
properly designed account could contribute to improving the system
and promoting the role of the SDR, and requested a further report
from the Fund's Executive Board next April.
The United States believes that the development of a substitution account could offer a number of attractions for the
international community in general. The SDR is a diversified
instrument, inherently involving less exchange risk than holdings
of a single national currency. A substitution account could
provide an internationally sanctioned, non-disruptive means for
countries to achieve a desired reserve portfolio composition
without having to hold a number of national currencies. Implementation of an account would constitute a significant step
toward wider use of the SDR and to its longer term development
as the principal reserve asset.
There are, however, many difficult questions in the construction of such an account and on sharing the costs associated
with operating it. For example, questions must be answered
concerning the interest rate and liquidity of the assets issued
by the account, the investment of the dollar deposits and the
amount and use of interest earnings, and measures to maintain
the capital position of the account. These are exceedingly
complex issues, and we cannot be certain when, or whether,
satisfactory answers will be found. Nevertheless, the United
States considers the effort worthwhile ahd is participating in a
cooperative, constructive fashion.
Capital Flows and Investment
During the 1960s the concern about chronic payment deficits,
calculated first on a liquidity and later on an official settlements basis, led to the introduction of a phalanx of restrictions

-6on capital outflows. At the beginning of this decade in place
were the Office of Foreign Direct Investment in the Commerce
Department, charged with assuring that direct investment abroad
by U.S. firms was financed in foreign capital markets, the
Voluntary Credit Restraint Program administered by the Federal
Reserve, which attempted to insure that bank lending to foreigners
was for the purpose of financing U.S. exports, and the Interest
Equalization Tax, designed to raise the cost to foreigners of
borrowing in the United States sufficiently to eliminate any
differential between the lower interest rates here and those
abroad•
All of these constraints have been eliminated. Moreover,
at the beginning of this Administration a review of U.S. policy
towards both inward and outward investment produced a reiteration of the traditional U.S. stance of not inhibiting international capital flows in either direction, and of neither
encouraging nor discouraging investment by Americans abroad and
by foreigners in the United States. Throughout the vicissitudes
of the dollar since September 1977, the Treasury position has
consistently been that any deviation from freedom of international
capital flows would be counterproductive and injurious to the
economic interests of. the United States.
The benefits of freedom of capital flows have, in my
opinion, demonstrated during the last decade the soundness of
this policy. The fears of 1974 that OPEC would buy out the
New York Stock Exchange have proved groundless. Instead, banks
in the United States, Europe and Japan have provided an essential
service towards maintaining global economic growth by recycling
OPEC deposits to countries with temporary balance-of-payments
financing needs. In addition, partly as a consequence of the
depreciation of the dollar since mid-1977 with respect to the
German mark and the Japanese yen, but also attracted by growth
and stability in the U.S. economy, annual foreign direct investment inflows have grown from $1.5 billion in 1970, and less in
1971 and 1972, to $6.3 billion in 1978. Such direct investment
tends to bolster the dollar in exchange markets and brings the
benefits of additional employment, modern technology, and
managerial innovations to the United States.
The rapid growth of the Euro-currency market and the international credit flows it has financed have been a subject of
concern to officials for several years, and will continue to
be such in the future. The question here is not one of introducing controls over international flows of liquid assets; rather
the issue is whether authorities should and can regulate the
growth of credit provided by the Euro-currency market through the
introduction of reserve requirements, mandatory asset-to-capital
ratios, or much closer coordination of monetary policy.

-7The Euro-currency banks played a critical role in assisting
small OECD and developing nations in adjusting to the sharp
1973-74 increases in oil prices. But it is also possible, even
though the precise extent of the impact is virtually impossible
to determine, that more recent expansion of Euro-currency lending
to non-bank borrowers has aggravated inflation throughout the
world. Research into the impact of the Eurocurrency markets will
continue, as well as discussions among monetary authorities
about the likely feasibility and consequences of various methods
that have been proposed for regulating the growth of Eurocurrency lending.
International Trade
The premier achievements during the 1970s in the area of
trade policy were the successful avoidance of the restrictions
that would have been imposed by the legislation Representative
Burke and Senator Hartke sponsored at the beginning of the
decade, the introduction of the Generalized System of
Preferences to open the U.S. market to selected imports from
developing countries, and the successful conclusion of the
Tokyo Round of multilateral trade negotiations.
You may be thinking that there is nothing particularly new
in U.S. trade liberalization, since this was a policy course
we have been following since the mid-1930s. In response I would
suggest comparison with the U.S. reaction to similar strains in
the early 1930s. At no time in this century, at least, has
the United States persisted in reducing tariffs and removing
other obstacles to trade in the face of such massive obstacles —the sharpest and deepest recession since the Great Depression
and successive multiplication of oil prices. The depreciation
of the dollar through 1973 and the resulting strengthening of
the U.S. international competitive position contributed
importantly to the defeat of the Burke-Hartke initiative.
Successful recycling of OPEC revenues and the relatively rapid
rebound in the United States from the 1974-75 recession helped
avoid the retreat into protectionism that could have overwhelmed
the multilateral trade negotiations.
The substance of trade liberalization has also changed significantly since the 1960s. Tariffs for most industrial
products have been reduced to such a low level that they are
generally no longer significant obstacles to trade. Thus, there
was a major shift in emphasis during this last round of negotiations toward attempts to eliminate non-tariff impediments to
trade. The new codes on subsidies and countervailing duties,
government procurement, standards, customs valuation and licensing represent major steps forward in regulating government
intervention in these important areas of trade. More work has
yet to be done, especially in the related areas of official
export
credits,
where the current
needs
to be further
strengthened,
and inInternational
governments' Arrangement
use of investment

-8incentives and performance requirements, which can directly affect
both the location of production and flow of trade. Without
improved international agreements in these areas, competition
among governments, to our mutual disadvantage, is bound to
increase. We also need to reach a common understanding regulating
the use of safeguard actions to pro ect domestic industries from
rapid surges in imports, i.e., "protection against protectionism."
The relative competitive position of the United States is
likely to be a focus of concern during the next decade, for
at least three reasons. First, as a consequence of rising
energy prices and, hence, slow growth in the industrial world,
competition for export markets is likely to intensify generally.
Competition for sales to OPEC is likely to be particularly
intense. Second, the advanced developing countries — Brazil,
Mexico, Singapore, Hong Kong, Taiwan and South Korea are the
prime examples — made great strides in the 1970s, including
adjustment to high energy costs. In the 1980s they can be
expected to maintain above average rates of productivity
growth, as well as to expand further into the export of sophisticated products designed for the huge U.S. market. Of course,
these countries will also be growing markets for imports of
machinery and other capital goods. But again, competition among
industrial countries for export sales will be intense. Third,
the United States has relied heavily during the 1970s on
relative price changes via dollar depreciation to bolster its
sagging international competitive position. But the adverse
consequences of dollar depreciation in terms of boosting domestic
inflation and impairing Americans' real incomes, both relatively
and absolutely, are progressively becoming more evident.
Difficult choices face the United States, choices that our
democratic processes have only begun to struggle with. Some
other societies, partly as a consequence of closer cooperation
than in the United States among government, industry and labor,
are manifestly out-performing this country in improving the
life styles of their populations and in adjusting to traumas
of international economic reality. There is widespread
domestic dissatisfaction with our productivity growth relative
both to other countries and to our own performance in the 1960s.
Among the pains of combating inflation by maintaining restrictive
fiscal and monetary policies, in addition to unemployment, is
also the negative impact on investment and productivity.
There are fears that the United States is ad hoc slipping
into a policy of retrenchment when a conscious unified effort
to select the evolution of our economy would produce a far more
preferable outcome. Government, industry, and labor in the United
States do not readily accept the inevitability of change as an

-9opportunity to be used advantageously. Clinging to past successes
has led to present weaknesses in, for example, steel and autos.
The degree of mistrust and even overt hostility among government, industry and labor in the United States is in marked
contrast both to the ability of Japan to agree upon and realize
its national goals and to the participation of German labor in
the management of that country's largest firms.
Certainly there are major enduring differences between the
United States and Germany and Japan due both to geography and
to political and economic history. But failure to develop more
effective communication and cooperation among government, industry
and labor in the 1980s would mean further impairment of the
relative U.S. position. Only with general agreement on the need
to bolster U.S. global economic leadership can incentives to
save and invest, to generate product innovations, to shift
employment into growth industries, and to export, yield maximum
benefits.
International Energy Policy
The external aspects of U.S. energy policy are the outgrowth
of domestic decisions, even though the need to restructure
domestic energy policy is the direct consequence of higher OPEC
petroleum prices and reduced availability. The principal
dimensions of U.S. energy policy — the 8.5 mb/day maximum import
quota, gradual price decontrol, production of alternative
synthetic fuels, and windfall profits tax — are all familiar to
you, and I will not attempt to discuss them further. The need
to adjust will continue into the 1980s and beyond. The United
States is making good progress, after a delayed start, towards
this restructuring of our economy. Indeed, during 1979 the
United States is the only one of the major industrial countries
that has reduced its petroleum consumption.
Geographical Shifts in the Emphasis of U.S. Policy
While in no way ignoring Europe, and while wishing the
European Communities every success in deepening integration
among their national economies and in establishing the European
Monetary System, during the 1970s the attention of American
economic policy makers expanded to take account of Japan's emergence
as the second largest market economy and to acknowledge the growing importance of the Pacific Basin more generally. It is the
area of most dynamic economic growth and one to which the United
States will be obliged to devote increasing attention as we move
into the '80s. Some of the Pacific advanced developing countries
may even graduate to industrial status during the next decade.
They, in turn, as well as Brazil and Mexico, will provide both
examples and markets for the less developed countries in that
group's continuing upward striving.

-10While reducing its relative role in the multilateral development banks, the United States remains the largest contributor
and should continue to do so throughout the 1980s. Research in
Treasury indicates that participation in the multilateral development banks is not only a sound investment in future global prosperity
and reduced political conflict, but participation also brings
important benefits to the United States. For every dollar tho
U.S. contributes to the banks, our exports increase between $2 and $3.
Thus, it is vitally important that we maintain our funding at
internationally acceptable levels.
United States International Economic Leadership
During the last decade the United States helped stabilize
the world and insure an environment in which economic growth
could occur by bearing major responsibilities for the mutual
defense of the market economies. These expenses are hardly
trivial, especially if viewed in terms of what contribution an
equivalent amount of investment in modern industry could make
towards improving U.S. efficiency and our international competitive position.
Following the 1973/74 oil price shock, the United Stated
helped stabilize the global economy by encouraging commercial
bank recycling of OPEC revenues and by promoting a rapid
recovery from our sharp recession.
In recent years U.S. monetary authorities have moved to
acquire an expanded volume of resources and use them as necessary
for stabilizing exchange markets. In addition, we look to
surveillance by the IMF as a major initiative in promoting macroeconomic policy coordination among the leading industrial
countries.
The United States maintained and expanded the course of
trade liberalization and eliminated restraints on international capital flows. We intend to adhere to both of these
policy directions.
To deal with high energy prices and questionable availability
of petroleum in the 1980s, the United States has introduced an
import quota, is freeing energy prices, and in the current year
has cut petroleum consumption.
While the United States is sometimes faulted for dilatory
and inconstant leadership, we can be proud of this record.
In lookingr forward to the '80s, our main tasks are to bring
inflation under control, to continue the shift to domestically

-11produced fossil, synthetic, and renewable energy resources, and
to gird the U.S. international competitive position with higher
rates of savings and investment, aggressive innovation, and a
willigness on the part of all aspects of American society to
work together towards maintaining the economic primacy that is
essential to our military and political leadership.

FOR IMMEDIATE RELEASE

December 6, 1979

RESULTS OF TREASURY'S 157-DAY BILL AUCTION
Tenders for $2,005 million of 157-day Treasury bills to be issued
on December 10, 1979, and to mature May 15, 1980, were accepted at
the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Investment Rate
Price

Discount Rate

(Equivalent Coupon-Issue Yield)

High - 94.885 11.729% 12.57%
Low
94.872
11.758%
Average 94.881
11.738%

12.60%
12.58%

Tenders at the low price were allotted 19%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTAL

Received

Accepted
$

4,805,000,000

1,712,100,000

55,000,000
29,000,000
25,000,000
680,000,000
23,000,000
16,000,000

5,700,000
3,800,000
5,000,000
69,500,000

633,000,000

208,800,000

$ 6,266,000,000

$2,004,900,000

An additional $320 million of the bills will be issued to Federal
Reserve Banks as agents of foreign and international monetary authorities
for new cash.

M-230

FOR IMMEDIATE RELEASE
December 7, 1979
•

CONTACT: Charles Arnold
202/566-2041

STATEMENT BY TREASURY SECRETARY G. WILLIAM MILLER
ON CHRYSLER CORPORATION LEGISLATION
Secretary of the Treasury G. William Miller today expressed
his strong conviction that the Chrysler legislation in the form
reported by the Senate Banking Committee last week is "unworkable."
Secretary Miller stated: "Under the proposed bill efforts
to aid Chrysler would fail, because the conditions of the bill
simply could not be met. The terms of the bill would substantially impair the operations of the Chrysler Corporation, risk
loss to the company of many of its most able employees, and
seriously damage thfe morale and productivity of the workers
essential to the company's future success.
"In addition, the bill reported by the Senate Banking
Committee imposes a disproportionate financing burden on the
workers of the company. It asks them to provide approximately
half of the unguaranteed financing needed by the company, while
financial institutions, State and local governments, dealers
and suppliers all make much smaller contributions."
Secretary Miller added:
"The Administration has always maintained that
parties, including labor, must make substantial
contributions if the Chrysler Corporation is to
feel strongly, however, that these efforts must
among all parties."

M-231

all interested
concessions and
survive. We
be shared fairly

•

jortmentoftheTREASURY
TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 10, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,203 million of 13-week bills and for $3,201 million of
26-week bills, both to be issued on December 13, 1979, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing March 13, 1980
Discount Investment
Price
Rate
Rate 1/
a/
96.958 12.034%
12.62%
96.951 12.062%
12.65%
96.953 12.054%
12.64%

26-week bills
maturing June 12. 1980
Discount Investment
Price
Rate 1/
Rate
12.69%
12.74%
12.72%

94.065 11.740%
94.041 11.787%
94.050 11.769%

a/ Excepting 1 tender of $700,000
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 93%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In ThousandsJ)
Accepted
Received
Received
$
47,740 $
34,140 :
$
32,990
5,581,300
2,726,075 :
4,421,490
26,635
24,475 J:
4,170
65,080
37,550 ::
75,895
49,980
27,925 ::
83,910
40,160
38,845 ,:
29,775
418,960
43,460 ;:
378,685
65,290
35,890 :
37,790
5,630
5,630 :
7,325
60,725
49,795 .:
27,205
16,930
16,930 :
10,995
308,280
109,615 :
263,350
52,200
52,200 :
63,540

Accepted
$
32,990
2,685,490
4,170
65,885
73,910
28,565
37,185
13,790
7,325
25,425
10,995
151,650
63,540

$6,738,910

$3,202,530 :

$5,437,120

$3,200,920

$5,010,890
593,860

$1,474,510 :
593,860 :

$3,541,555
419,905

$1,305,355
419,905

$5,604,750

$2,068,370 :

$3,961,460

$1,725,260

888,760

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

890,000
$

244,160

$6,738,910

J/Equivalent coupon-issue^ yield

890,000
$

244,160 :

$3,202,530 :

. 586,900

$5,437,120

586,900

$3,200,920

TELEPHONE 566-2041

, D.C. 20220

FOR IMMEDIATE RELEASE

December 10, 1979

High
Low
Average

13-week bills
maturing March 13, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing June 12. 1980
Discount Investment
Price
Rate
Rate 1/

a/
96.958-12.034%
96.951 12.062%
96.953 12.054%

94.065
94.041
94.050

12.62%
12.65%
12.64%

11.740%
11.787%
11.769%

12.
12.74%
12.72%

a/ Excepting 1 tender of $700,000
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 93%.
TENDERS RECEIVED AND ACCEPTED
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Rece
$
4
5,58
2
6
4
4
41
6

1
30

December 10, 1979

13-WEEK

26-WEEK

TODAY:

/v. o J4 % Jjri£3Jtf

LAST TvEEK

H.1>1 Z 11*76 7%

3
$6,7J
HIGHEST

Type
Competitive
Noncompetitive

Subtotal, Public

$5,6^

Federal Reserve
Foreign Official
Institutions

TOTALS

DATE-

SINCE:

////f/^
/f/f/7?
LOWEST

SINCE:

$ 2
y O , / _ / v j , _/j_vy

1/Equivalent coupon-issue^ yield.

Y-'J

\J t- • ^ »r w

12,035 %
IV.oV&J,

HINGTQN, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE ON DELIVERY
December 11, 1979
Expected at 9:Q0 A.M.

STATEMENT OF THE HONORABLE RICHARD J. DAVIS
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT AND OPERATIONS)
BEFORE THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
OF THE
COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee,
I appreciate this opportunity to testify during these hearings
on the profits of the illegal drug traffic and impediments to their
investigation. My statement will be concerned principally with the
Treasury Department's implementation of the (Foreign) Bank Secrecy
Act and certain of Customs' activities related to drug enforcement.
We believe that the Act has been playing an increasingly important
role in drug enforcement as well as in other Federal investigations. First, however, I would like to review some of the history
of the Act.
The Bank Secrecy Act
The Bank Secrecy Act was introduced in 1969 after law enforcement officials expressed concern about the difficulties in investigating and documenting the financial aspects of transnational
crimes. During extensive hearings in both the House and Senate,
witnesses described how foreign accounts are used in tax evasion,
bribery, securities violations, black marketing, and drug violations.
One of the more illustrative cases cited was a drug investigation
that involved the use of a Latin American shell company, a European
bank, a New York bank, two New York foreign exchange firms, and a
South American brokerage firm in a complex scheme to make drug
related payments totalling $950,000.
The Act was designed to make such transactions easier to detect
and document. There are two types of provisions to help law enforcement officials investigate the financial aspects of crime. The Act
provides for recordkeeping standards for banks, savings and loan
associations, and a wide variety of other financial institutions.
Congress recognized that many major criminals use legitimate
financial institutions to conduct their business transactions.
In addition, the Act requires reports of certain types of financial
transactions. They include reports of foreign financial accounts,
M-2T1
reports
of unusual currency transactions, and reports of the international transportation of monetary instruments.

-2The reports were intended to serve two purposes. First, to
provide leads and intelligence as to possible violations of law and,
second, to provide added criminal sanctions for, and thereby, an
additional deterrent to illegal activity. This intent is clear
in the following quote from the Senate report on the bill:
"Reports are not a foolproof method of preventing
organized crime from sending currency out of the
country. Obviously, a criminal who is already
breaking the law could just as easily ignore the
reporting requirement. The significance of requiring
reports is that it provides the Justice Department
with another means of obtaining a conviction. The
mere failure to file a report would constitute a
criminal violation much easier to establish compared
to proving the funds transported were illegally
acquired or were to be used for an illegal purpose.
Those who fail to report would be subject to a
criminal penalty of a year in prison, a $1,000 fine,
or both. If the failure to report was committed in
furtherance of the commission of any other violation
of Federal law, or as part of a pattern of illegal
activity involving transactions exceeding $100,000
a year, the person who fails to file a report is
subject to a much stiffer criminal penalty - 5 years
in jail or a $500,000 fine, or both. Finally, any
unreported currency is subject to seizure and forfeiture to the United States and those who fail to
make required reports are liable for a civil penalty
equal to the amount of currency transported less any
amount already seized and forfeited."
"It is believed that these penalties will constitute
a significant deterrent to organized crime. At the
same time, the Secretary has broad discretionary
authority to return seized currency or waive the civil
penalties which he could use to prevent ordinary citizens
or businessmen from being unduly penalized for an inadvertent violation."
The reporting requirements authorized by the Act are interrelated. They complement each other. For example, if banks were
not required to report currency transactions, there would be little
need for criminals to smuggle money out of the country. Currency
simply could be taken into a bank and the funds transferred abroad
to a secret bank account without disclosing the identities of the
persons directing the transfer or receiving the funds. Conversely,
without reports of the import or export of currency, the requirement that banks report large currency transactions would be much
less meaningful.

-3Implementing Regulations
The Act gives the Secretary wide discretion in its implementation; however, the stated purpose of the Act is that only records
and reports that "have a high degree of usefulness in criminal, tax,
or regulatory investigations or proceedings" should be required.
With that background, in 1972, the Treasury Department issued regulations which require banks to maintain certain basic records,
including the following:
— cancelled checks and debits over $100
— signature cards
— statements of account
— extensions of credit in excess of $5,000
— records of international transfers of more
than $10,000
The regulations also provide for the following reports:
— IRS Form 4789 (Report of Currency Transactions).
All financial institutions are required to report
to the IRS any unusual currency transaction in excess
of $10,000. Although this is only a modification of
a similar requirement that was in effect for more
than 25 years, this requirement was challenged in
the courts. The Secretary was prohibited from
enforcing it until May, 1974, after the U.S. Supreme
Court upheld the constitutionality of the Bank Secrecy
Act and the implementing regulations.
— Customs Form 4790 (Report of the International Transportation of Currency or Other Monetary Instruments).
Except for certain shipments made by banks, the international transportation of currency and certain other
monetary instruments in excess of $5,000 are required
to be reported to the Customs Service. As a result of
the litigation previously referred to, Treasury was
prohibited from enforcing this provision until October,
1972.
— Treasury Department Form 90-22.1 (Report of Foreign
Bank and Financial Accounts). The Act provides
specific legal authority to require reports of foreign
bank accounts. The IRS, however, put the foreign bank
account question on the income tax returns for 1970
and issued IRS Form 4683, the predecessor of Form
90-22.1, on the basis of its authority under the
Internal Revenue Code. Consequently, the first reports

-4of foreign financial accounts were filed with the IRS
in 1971 even before the Treasury regulations requiring
such reports were issued in 1972. The disclosure that
a Form 4683 had been filed was, in effect, a disclosure
of the fact that an income tax return had been filed.
There was thus concern, with the passage of the Tax
Reform Act of 1976, that dissemination of these reports
outside IRS was prohibited. Therefore, in 1977, we
decided to separate the foreign bank account report
from the tax return and to have it filed directly
with the Office of the Secretary. The change was made
to permit the information to be made available to other
agencies as the Bank Secrecy Act intended. At that
time, the form was changed to Treasury Department
Form 90-22.1.
Monitoring Financial Institutions Compliance
In accordance with the intent of the Act, the Treasury
Department's implementing regulations delegated responsibility
for assuring compliance with the regulations to existing Federal
bank supervisory agencies to the extent that was feasible. The
delegation is as follows:
(1) To the Comptroller of the Currency, with respect to
national banks and banks in the District of Columbia;
(2) To the Board of Governors of the Federal Reserve
System, with respect to State bank members of the
Federal Reserve System;
(3) To the Federal Home Loan Bank Board, with respect to
insured building and loan associations, insured
savings and loan associations, and insured institutions as defined in Section 401 of the National
Housing Act;
(4) To the Administrator of the National Credit Union
Administration, with respect to Federal credit
unions;
(5) To the Federal Deposit Insurance Corporation, with
respect to all other banks except agents of foreign
banks which agents are not supervised by State or
Federal bank supervisory authorities. The exception
pertains to persons who represent foreign banks in
this country but do so surreptitiously or in such a
manner that they are not regulated by State or
Federal authorities. Responsibility for this group
has the
been
delegated and
to Exchange
the IRS. Commission, with respect
(6) To
Securities
to brokers and dealers in securities;

-5(7) To the Commissioner of Customs with respect to
reports of the transportation of currency or monetary
instruments. The regulations give him the authority
to seize currency and monetary instruments which
have not been properly reported.
(8) To the Commissioner of Internal Revenue except as
otherwise specified in this section.
Overall responsibility for coordinating the procedures and
efforts of the agencies listed above and for administering the
regulations was delegated to the Office of the Assistant Secretary
(Enforcement and Operations).
In 1973 the bank supervisory agencies generally began to check
the compliance of the banks that they would normally examine. They
used a uniform examiners' check sheet and operated under uniform
guidelines which were developed with Treasury's assistance. In
1978, however, my office in cooperation with the Federal bank
supervisory agencies, developed additional, more detailed guidelines,
to be used by bank examiners in checking for compliance with the
currency transaction requirement. And, earlier this year, we
also recommended a uniform examination procedure which would result
in an even more rigorous review of the banking industry's compliance
with the reporting requirements. Our recommendation currently is
being reviewed by the Federal Financial Institutions Examination
Council, and we hope that it will be adopted in the near future.
We have also conducted a review of the training given to bank
examiners, which we expect will bring about substantial improvement
in bank examiners' knowledge of the regulations.
One area to which we have devoted substantial attention is
the compliance of uninsured foreign banks operating in the United
States. These are among the most important banks whose compliance
should be monitored, yet at one time, because no Federal banking
agency had general jurisdiction over them, their activities in
this area were not being inspected. To correct this, we made
arrangements with the Federal Deposit Insurance Corporation to
inspect the uninsured foreign banks operating in the U.S. in
order to ensure their compliance with both the reporting and
recordkeeping requirements of the Act. In this regard, we sent
letters to approximately 300 of these institutions informing them
that the FDIC would inspect them for compliance with the requirements of the Bank Secrecy Act. These inspections are largely
completed.
In addition, since 1978 we have required the bank supervisory
agencies to provide us with the name of every bank that is not
complying with the currency reporting provisions of the regulations
and not just statistical summaries. In many of these cases we now
ask the reported institution to provide us with a list of depositors

-6whose transactions it has exempted from the reporting requirements.
By receiving the specific names of institutions where there has
been some non-compliance, we can request the bank supervisory
agencies to provide additional information about repeat violators
and to make recommendations concerning possible civil penalties.
One reason that we began to insist on the names of noncomplying banks is that we had not been receiving recommendations
for penalties. While this may be because in the cases involved
the violations were committed by employees who were unfamiliar
with the regulations and involved a relatively limited number of
transactions, we intend to monitor this situation closely.
Obviously it is most important to make certain that the lack of
compliance does not appear to be related to other violations of
law.
In addition, the IRS has independently identified instances
of non-compliance and requested authority to initiate the necessary
investigation in cooperation with a Federal prosecutor. The
Chemical Bank case, which was concluded in 1977, was the most
publicized of the IRS cases. It included allegations that a number
of bank employees were involved in laundering drug money by
exchanging small bills for $50s and $100s. This year there were
two more convictions. One involved the United Americas Bank in
New York City, and the other a senior official of the Ridglea
State Bank in Texas.
In the United Americas Bank case the bank pled guilty to
12 counts of the failure to file the required currency transaction
reports (Forms 4789) . It entered into a consent decree with the
Government and was fined $12,000.
In the Ridglea State Bank case, the official was convicted of
failing to report the disbursement of $45,000 in currency in
connection with a loan he made to a cocaine dealer. The banker
was aware that he was financing a drug transaction. The principal witness was the cocaine dealer. The judge imposed a sizeable
fine, as well as a prison sentence, and commented on the serious
nature of the offense.
There are currently a number of other IRS investigations
focusing on the failure of banks to file the required currency
transaction reports. Since, to our knowledge, they are active,
we are unable to make any further comment regarding them.
The IRS has also recommended civil penalties in several
cases involving secondary financial institutions. Some of those
recommendations are still under consideration; for the most part,
however, the cases involve relatively small amounts of money and
isolated instances of non-compliance rather than generalized
attempts to conceal questionable transactions.

-7Dissemination
In 1977, we took action to establish an analysis unit to
act as a focal point for the computerization, analysis and
dissemination of data obtained from all the reports required
to be filed in compliance with the Bank Secrecy Act. That unit
has been fully operational since July, 1978. Initially, this
unit was located in my office and included Treasury, Customs
and IRS personnel. To provide the unit with a permanent home, we
transferred it to the Customs Service in 1978 where it could
obtain needed resources, including data processing support. This
change was consistent with the fact that Customs already had
important enforcement responsibilities under the Act. An IRS
agent is still, however, participating in the unit and my office
continues to actively work with it.
To date the Unit has developed computerized indices for both the
currency transaction reports and the reports of foreign financial
accounts. The new indices are similar to those that Customs
established for the Forms 4790 in 1976. For the first time, the
Department is able to identify all of the reports pertaining to a
specific person or entity in a matter of seconds. This has greatly
improved our ability to analyze the reports and to service requests
from the Congress and Federal law enforcement agencies. This information is, of course, readily available to other Treasury bureaus.
Since May, 1977, we have provided DEA, alone, with more than
3,000 currency transaction reports totalling more than $400 million.
Nearly 2,100 of those currency transaction reports reflecting
bank transactions totalling $228 million were provided in Fiscal
Year 1979 alone. Several hundred reports of international transportation of currency have also been supplied to them. DEA has
acknowledged that some major investigations have been initiated,
in part, as a result of information provided by the reports.
Similarly, these reports have been used in various Congressional
and Justice Department investigations.
In addition, to improve utilization of these reports:
— Arrangements have been formalized for the dissemination of material to the Department of Justice
including the Federal Bureau of Investigation and
the Drug Enforcement Administration, the SEC, as
well as other agencies.
— Letters were sent to senior officials of
appropriate Federal departments and agencies to
make them aware of the data available to them
pursuant to the Bank Secrecy Act.
— Formal guidelines and safeguards for the utilization of report information by user agencies have
been established in order to provide appropriate
safeguards, for the privacy of individuals.

-8The Bank Secrecy Act directs the Secretary to make any information contained in the reports filed pursuant to the Act available
to other Federal departments or agencies upon request by the head
of a department or agency. We have implemented that provision by
requiring the head of the agency or department to write to the
Secretary requesting such information and designating a small number
of high level officials of his agency or department to make requests
on a specific name basis, and to establish criteria for the selection
and referral of report information likely to pertain to activities
under the jurisdiction of the agency or department. In addition,
information will be volunteered to other agencies where it appears
relevant to violations within their jurisdiction. This procedure
is designed to facilitate the dissemination of information to the
agencies that need it while at the same time protecting the privacy
of law-abiding members of the public.
Cash Flow Study
As part of our continuing efforts to improve the implementation
of the Bank Secrecy Act, this year the Treasury Department initiated
a study of currency transactions at Federal Reserve offices throughout the United States. As the recent report of our findings indicates,
it was undertaken "to gather information which would be useful in
assessing the effectiveness of the existing reporting requirements
and in identifying areas that appear to merit further study or
investigation." The data covered the period 1970 through 1978 and
showed a constantly increasing supply of currency in circulation.
In 1978, for example, an additional $10.2 billion was placed into
circulation. Our analysis of the data highlighted at least two
patterns which we believe warrant additional investigation.
One of them, related to the currency transactions in Florida,
would appear to be especially pertinent to the subject of these
hearings. The Federal Reserve offices in Florida have consistently
received more currency in deposits than they have placed into
circulation, contrary to the national pattern. Since the end of
1974, however, there has been a startling acceleration in the amount
of this surplus. The net receipts (surplus) has grown from $921
million in 1974 to $3.3 billion in 1978. It is almost certain to
exceed $4.5 billion this year.
Although a variety of factors have contributed to this surplus,
it is clear that a substantial amount is related to the trafficking
of marijuana, cocaine and other drugs in Florida. Information
received from Customs, DEA, and other Government sources also
indicates that there has been a tremendous influx of drug money
in Florida.
A second pattern warranting more attention involves the
increase in $100 bills in circulation. During the 1970 to 1978
period, $100 bills have accounted for an increasingly large part
of the annual increase in the nation's supply of currency. In
1978, $5.4 billion,
than
50%represents
of the additional
currency over
in
circulation,
was in more
$100s.
This
a 410% increase

-9the $1 billion added to circulation in 1970. Our analysis shows
that the New York Federal Reserve office has accounted for a large
part of the additional $100s that are being put into circulation.
This has been particularly noticeable since 1974. In 1978, for
example, when the increase in $100s was about $5.4 billion, New
York was responsible for almost half of it, $2.6 billion. These
figures are especially significant because some analysts believe
that the increase in $100s may be related to the growth of the
subterranean economy.
We are currently working with Federal Reserve officials to
obtain additional information about the situations in New York
and Florida. All banks in Florida have been requested to provide
with lists of the customers whose currency transactions they have
exempted from the reporting requirements. Appropriate follow-up
investigations will be conducted.
Regulatory Changes
Regulatory changes have also been initiated to strengthen
compliance with the Act. The proposed amendments, which were
published in September, would:
(1) Require that the report be filed within 15 days
after the day on which a transaction occurred instead of
45 days under the current regulations.
(2) Require financial institutions to retain a copy
of each Currency Transaction Report for a period of five
years — while it is our understanding that many banks
routinely retain copies of the reports, the requirement
would ensure that copies would be available for the use of
the bank supervisory agencies that have the responsibility
for examining financial institutions for compliance with
the reporting requirement.
(3) Refine the requirements for the identification of
a customer for whose account currency transaction is to be
effected, and of his agent in such transactions, to specify
the documents that will be acceptable for identification
of aliens and citizens and require that the method of identification used be included in the report.
(4) Require banks to report transactions with, or
originated by, financial institutions or foreign banks —
Such transactions are currently exempt from the reporting
requirement. The revision would limit this exemption to
transactions with other domestic banks. Banks would be
required to report large currency transactions with
securities dealers, foreign banks, and miscellaneous financial institutions, such as exchange dealers, persons in the
business of transferring funds for others, and money order

-10issuers. The additional information concerning the currency
transactions with foreign banks and non-bank financial institutions will substantially improve the Treasury Department's
ability to obtain overall compliance with the regulations
and alert the Department to unusual transnational movements
of currency.
Since Treasury presently does not receive reports of
currency transactions between domestic and foreign banks, it
is not possible to identify unusual movements of currency
involving particular institutions or classes of institutions
which might provide insights into possible criminal activities.
The proposed requirement would correct this deficiency.
The proposed requirement that banks report transactions
with securities brokers/dealers and other miscellaneous financial institutions would also provide an effective and badly
needed check on the compliance of such institutions with the
regulations. Such institutions — particularly those in the
"miscellaneous" category — are much more difficult to recognize
and catalogue than are banks. Therefore, it is not surprising
that there are indications that many of them have not been
identified or inspected for compliance. By requiring banks to
report large currency transactions with such firms, the opportunity to identify those that are dealing in significant amounts
of currency will be greatly increased. Once identified, they
can be scheduled for compliance checks.
(5) Formalize the procedure for exempting other transactions from the reporting requirements — Banks are currently
exempted from the reporting of currency transactions with an
established customer maintaining a deposit relationship with
the bank, in amounts which the bank may reasonably conclude do
not exceed amounts commensurate with the customary conduct of
the business, industry or profession of the customer concerned.
This requires the bank to exercise its professional judgment
in determining whether or not a currency transaction report
should be filed. The proposed revision would require a
record of the exemption to be made at the time it is granted
and would limit the exemption to an established customer who
operates a retail type of establishment within the United
States. If the customer is located in a contiguous or
neighboring country, or if the business is not a retail
establishment, a currency transaction report would be required.
The exemption would be limited to businesses, that would
normally generate large amounts of currency, such as a finance
company, a race track, a department store, a theater, a supermarket, sports arena, etc.
(6) Provide additional assurance that this exemption
is judiciously employed by the bank — A report listing the
customers whose currency transactions are not reported
Secretary
because of ofthethe
exemption
Treasury is
or now
his required
delegate toupon
be made
demand.
to the
The

-11revision would: (1) specify that such report shall include
the name, street address, nature of the business, taxpayer
identification number, and deposit account number of the
customer whose transactions have been exempted under this
provision; (2) elaborate on the Secretary's authority to
require the filing of the Form 4789 reports for any customer
listed and (3) require the report to be submitted within 15
days following receipt of the demand for the report. These
proposed amendments would provide the information Treasury
needs in order to review the exemptions to ensure that they
are appropriate.
The proposed changes relating to exemptions are particularly
important. Obviously, exemptions are necessary to eliminate the
reporting of legitimate business transactions that would be of
little or no interest to law enforcement officials. Banks were
given this authority because it was thought that due to their
knowledge of their customers' financial activities, they would
be able to identify such transactions without difficulty.
We have already asked over 600 banks in Florida, New York,
California, and Illinois to provide us with their exemption lists.
Our review of the lists of exempted customers that we have received
from those banks confirm our previous view that there has been a
great lack of understanding of the purpose of the exemption provision and of how it should be used. Bank officials have exempted
foreign nationals and other individuals from the reporting requirements solely on the basis that they have customarily brought in
large amounts of currency. The bankers frequently had no knowledge
of how that currency was accumulated. Our proposed amendments are
designed to deal with this problem.
Customs Enforcement
The Customs Service, which has the responsibility for enforcing
compliance with the requirement to report the international transportation of currency or monetary instruments in excess of $5,000,
has greatly expanded its activities in this area in recent years.
To emphasize the importance of currency reporting investigations,
in 1977, Customs created the Currency Investigations Division.
We believe that the wisdom of this action is reflected in their
enforcement statistics. In Fiscal Year 1979, there were 1,173
currency seizures involving $19,830,000 as compared with Fiscal
Year 1977 when there were 462 seizures involving $7,353,000.
There were also 44 convictions resulting from criminal investigations conducted by Customs agents. Some of this activity was
directly related to drug traffic and was undertaken in cooperation
with DEA and other enforcement agencies.
Although I understand that other witnesses have testified
regarding the Araujo case, I would like to cite it as an outstanding
example of how the Bank Secrecy Act should be used in drug investigations.

-12The case was initiated by a Customs Investigations field office
in Southern California following the receipt and analysis of a number
of IRS Forms 4789 in 1977 which reflected frequent cash deposits
between $200,000 and $800,000 each in a local bank. The investigation quickly revealed that a bank account in a fictitious name was
being used to conceal the true depositors. The account served as a
conduit to funnel proceeds from the sale of narcotics to secret
bank accounts in Mexico. The key figures were ultimately identified
as Mexican nationals residing in the United States and Mexico. It
is believed that the organization, headed by Jaime Araujo-Avila, was
responsible for the importation and distribution of approximately
300 pounds of heroin per month with monthly proceeds of approximately $1 million.
The organization used two methods to transmit their narcotics
proceeds, each involving the conversion of the currency to monetary
instruments and the use of one domestic and two foreign banks. By
the first method, a bank account was opened in a fictitious name at
a domestic bank close to the Mexican border. A courier then
retrieved the currency from the storage location and made deposits
into the domestic account. On the date of the deposit, the courier
entered the United States from Mexico with personal checks drawn
against the domestic account. These checks were normally in excess
of $100,000 and, in a further effort to conceal identities of
members, the checks were made payable to "Cash" or "Bearer". The
courier presented these checks to the domestic bank and used them
to purchase cashier's checks which were then transported back to
Mexico and deposited into accounts maintained under the control
of the violators. The investigation disclosed that 39 currency
deposits totalling approximately $15.5 million were made to the
U.S. bank account during a 19-month period.
By the second method, the group would transport the funds by
vehicle from Los Angeles across the international border and into
the Mexican bank accounts controlled by the violator. An additional
$16 million was deposited directly to the Mexican bank accounts
during a 3-year period. Thus, over this 3-year period, transactions
involving a total of $31.5 million occurred.
Based on this 2-year investigation, a Federal Grand Jury
indicted 21 members of the criminal enterprise. Of these violators,
16, including the 5 key ranking members, were charged with felony
currency conspiracy (31 U.S.C. 1059 and 18 U.S.C. 371). Other charges
included narcotics trafficking (21 U.S.C. 846), RICO (18 U.S.C. 1962)
and tax evasion (26 U.S.C. 7201).
Just last month, the organization's leader Jaime Araujo-Avila,
was sentenced to 35 years' imprisonment for currency and income tax
violations as well as a concurrent 15-year sentence for narcotic
violations, and assessed $1.2 million in fines. Six other individuals have been sentenced already, and two others are scheduled for
sentencing. purchased
businesses
Forfeiture
withactions
the proceeds
against are
various
pending.
properties and

-13This investigation and prosecution is an exemplary illustration of the results that can be achieved from the proper utilization of the Bank Secrecy Act and a combined Federal law enforcement
effort.
Remedial Legislation Needed
Certain statutory changes in the Bank Secrecy Act, however,
are needed to improve Customs' effectiveness in combatting the
unreported international transportation of currency by drug
traffickers and other criminals. H.R. 5961, which was introduced
November 27, 1979, combines the provisions of H.R. 4071, 4072, and
4073 and contains the necessary changes. It would:
— amend Section 231(a) of the Act to make it illegal to
attempt to transport currency into or out of the United
States without filing the required report.
— amend Section 235 of the Act to authorize a Customs officer
to search for currency at the border when he has reasonable
suspicion (the same search standard generally observed
in enforcing the Customs laws) that an amount in excess of
$5,000 is being transported into or out of the United
States and thereby remove inhibitions in enforcing this
statute which are not constitutionally required.
— add a new section to the Act to authorize the payment to an
informant of a 25% share of any seizure or penalties when the
amount exceeds $50,000. The informant's payment in any event
would not exceed $250,000.
Although we have good reason to believe that, at a minimum,
hundreds of millions of dollars were carried or shipped out of the
United States during Fiscal Year 1979 to purchase illegal drugs,
our records indicate that only $46 million has been reported to us
as the amount of currency that left the United states in that same
period. While one can never expect that all who are transporting
currency will file reports, it is obvious that we are not receiving
all the reports that should be filed. These amendments are needed to
deal with this problem.
Customs Interdiction
Although I have emphasized Customs efforts to enforce the Bank
Secrecy Act and support to Federal drug enforcement activities,
we cannot, of course, overlook Customs interdiction activities
which also obviously affect drug profits. These activities
include land, air and sea patrol. During Fiscal Year 1979, the
Customs Service made more than 20,000 seizures involving drugs
valued at almost $3 billion. The details are as follows:
NARCOTICS SEIZURES - FY 1979
Heroin Number of Seizures 173
Quantity Seized (Lbs)
123
Value
$75,386,700

-14Cocaine

Number of Seizures
Quantity Seized (Lbs)
Value

1,259
1,438
$424,353,800

Hashish Number of Seizures 4,379
Quantity Seized (Lbs)
Value

50,849
$198,056,855

Marijuana Number of Seizures 12,323
Quantity Seized (Lbs)
Value

3,583,556
$2,164,467,824

Other Drugs, Number of Seizures 3,130
Barbiturates
Quantity Seized (Tablets) 15,912,218
and LSD
Value
$44,235,966
Through interdiction efforts and continued use of the Bank
Secrecy Act, Treasury is determined to continue its support of
the fight against major drug trafficking. This completes my
testimony. I will be happy to answer any questions you may have.

w.mentoftheTREA$UR)[ 0
|NGTQN,D.C. 20220

TELEPHONE 566-2041
| f Dp A D V
w i w \ vrvi \ |

ROOM 5004
December 11, 1979

FOR RELEASE AT 4:00 P.M.

DEC 13*79
TREASURY DEPARTMENT
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,400 million, to be issued December 20, 1979.
This offering will provide $500 million of n< w c<i.sh for the
Treasury as the maturing bills are outstanding in the amount of
$5,924 million, including $684 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,018 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,200
million, representing an additional amount of bills dated
September 20, 1979, and to mature March 20, 1980 (CUSIP No.
912793 3W 4), originally issued in the amount of $3,129 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
December 20, 1979, and to mature
June 19, 1980 (CUSIP No.
912793 4K 9).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing December 20, 1979. Tenders
from Fede ral Reserve Banks for themselves and as agents of
foreign a nd international monetary authorities will be accepted
at the we ighted average prices of accepted competitive tenders.
Additiona 1 amounts of the bills may be issued to Federal Reserve
Banks, as agents of foreign and international monetary authorities,
to the ex tent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held by them
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. 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 Standard time,
Monday, December 17, 1979.
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.
%

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
respective
bidder
(in three
will
decimals)
issues.
be accepted
of accepted
in full at
competitive
the weighted
bids average
for the price

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 20, 1979, in cash or other immediately available
funds or in Treasury bills maturing December 20, 1979.
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, 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 -

The past year's oil price increases have also had a dramatic
effect on global payments patterns. Even with no further increase
in the real price of oil during the next year, the OPEC countries
are likely to have an aggregate current account surplus substantially higher than the $60 billion or so they will experience
in 1979, and in striking contrast to the near balance they
recorded in 1978. Nearly all non-OPEC countries are likely
to be in current account deficit in 1980. The OECD nations
as a group will experience a deficit of perhaps $30 billion
in 1979, following a surplus of some $8 billion in 1978. The
LDC group will also record a deficit of about $30 billion,
after official transfers, representing a deterioration of about
$10 billion. There is likely to be further deterioration in
both areas in 1980.
There has, however, been a significant improvement of
current account patterns within the OECD group in 1979. Despite
an increase of $17 billion in oil imports, the U.S. will be
in approximate balance, following a $14 billion current account
deficit in 1978. The large Japanese surplus, $17 billion in
1978, has disappeared, and Japan is now in substantial deficit.
Germany is in near balance, in contrast to a surplus of about
$8 bilion in 1978. Although the position of the OECD group
as a whole has deteriorated sharply, much of that change has
taken place in countries that have experienced large surpluses
in recent years, and the improved pattern among the major
countries should be a source of greater exchange market stability in the period ahead.
Similarly, the deterioration in the position of the non-oil
LDC group — perhaps $20-25 billion in total over 1979 and
1980 — is likely to be highly concentrated in a few relatively
advanced countries, most having access to private capital and
relatively comfortable reserve positions. For the great majority
of developing countries — those relying on official financing
— the current account deterioration will be comparable to
anticipated increases in official financing. Nonetheless, the
real effects of the deterioration in the non-oil LDC position
will be serious. In large part, they will be paying for higher
priced oil instead of needed capital imports. This will mortgage
future growth and development prospects, and will be of no help
in expanding their future debt service capacity.

- 4 -

This outlook is not happy. It assumes sustained oil production at roughly present levels and relative moderation in
pricing decisions by the OPEC nations. These are major
uncertainties. We do not know what production and pricing
decisions OPEC will reach next week, nor do we know whether any
decision will hold for long. But we do know that — whatever
the decision — our future economic security will depend in large
part on the ability of major countries, especially the U.S., to
restrain oil imports, to become more energy efficient, and to
increase alternative supplies of energy. It has become increasingly
clear that developments in the supply and price of oil will be
a — if not the — dominant factor in determining both the growth
of the world economy and the severity of inflation over
the next few years. We must all move as rapidly as possible
to reduce our dependence on foreign sources of oil.
The Iranian situation is a forceful reminder of our vulnerability to production and price decisions by the oil producers.
A half a decade ago, actions by a single producer could be
countered fairly easily by other producers. But in today's
energy market, the balance between demand and potential supply
is very delicate. Sudden shifts in either the demand for or
supply of oil are reflected quickly in sharp price movements.
Blocking of Iranian Government Assets
Your letter asked about United States blocking of deposits
in the overseas branches and subsidiaries of United States banks.
The blocking action was taken pursuant to the International
Emergency Economic Powers Act, which authorizes the President,
in a national emergency, to regulate or prohibLt transfers of
the assets of a foreign country such as Iran "by any person...
subject to the jurisdiction of the United States." Foreign
branches and subsidiaries of U.S. banks have traditionally
been viewed as persons subject to the jurisdiction of the
United States.
As the Committee knows, litigation has been commenced in
London seeking to test whether the British courts will give
effect to the blocking order as it applies to branches of
United States banks there. There is similar litigation in
France relating to the subsidiary of a United States bank. In
light of that litigation I think it would be inappropriate for
me to comment on the substantive issues which will ultimately
be addressed in those cases.

SHINGTQN, D.C. 20220

TELEPHONE 566-2041

IBRARY
0M1004
4 1 ml f

FOR RELEASE UPON D E L I V E R Y
"(Approximately 10:00 A . M . )
December 1 2 , 1979

TREASURY DEPARTMENT

STATEMENT OF THE HONORABLE ANTHONY M. SOLOMON
U N D E R SECRETARY OF THE TREASURY
FOR MONETARY A F F A I R S
BEFORE THE SUBCOMMITTEE ON INTERNATIONAL FINANCE
OF THE COMMITTEE ON
BANKING, HOUSING AND URBAN AFFAIRS
UNITED STATES SENATE-

Mr. C h a i r m a n , it is a p l e a s u r e to appear again before your
Subcommittee.
T h e s e hearings raise a broad range of general
issues — the Euro-ma r k e t s , international debt, the economic
effects of oil price increases and the evolution of the international monetary sys tem — which can be usefully addressed in
the framework of the current world economic environment and outlook, and which I wil 1 cover in my statement today.
Supplementary
responses to a number of the more specific questions raised in
your letter inviting me to testify are being submitted for
the record.
Global Economic Outlook
Mr. Chairman, the world economic situation is sobering.
It is heavily influenced by recent oil d e v e l o p m e n t s , and
decisions on oil p r o d u c t i o n and pricing to be taken shortly
will have a critical bearing on the future. W h e n we last met
here in early May, I noted that oil price increases — which
had amounted to some 24 percent during the early m o n t h s of 1979
— would create additional inflationary p r e s s u r e s and some
slowing of growth, and would increase external payments
imbalances. At that time we did not expect that oil prices
would end 1979 d r a m a t i c a l l y above the level of last December.
Nor did we anticipate the major u n c e r t a i n t i e s about oil supply
that now face the world. W i t h i n the next week we will know

- 2 -

the results of OPECfs December meeting, as it affects oil
pricing and production policies for 1980, policies that will
significantly affect, confidence and economic performance in
the oil importing countries during the next year and beyond.
Oil prices have moved up very rapidly this past year. The
average official price for OPEC crude oil is now about $21.50,
in comparison to $12.93 last December — an increase of 66 percent. In addition, spot market prices remain substantially
above official prices, and significant amounts of oil are
moving through the spot markets. On average, we estimate that
prices actually being paid for oil from all sources are now
more than 80 percent above levels of last December.
Even with the major increase in oil prices that has taken
place this year, real growth in the developed countries has
remained stronger than many expected, and will probably amount
to about 3 percent for the OECD group as a whole. A slowing
of U.S. growth to the two percent range has been compensated
by strong German and Japanese domestic expansion, and growth
outside the U.S. has been faster than anticipated, averaging
around 4 percent.
If further large increases in oil prices are avoided, the
OECD countries should record growth on the order of one percent
in 1980 — not good, but still on the positive side. Outside
the U.S., the figure for real growth in the OECD could be in
the 2-3 percent range. Provided external finance is available,
growth in the non-oil exporting LDCs may stay near the 5 percent
range.
Inflation remains a very serious problem. Cost of living
increases in the developed countries accelerated sharply during
the six month period ending in September, spurred significantly
by energy price increases. For the industrial countries as a
whole, we now expect cost of living increases of around 9 percent
in 1980, slightly more than the increase for the full year 1979.
This will occur even though economic growth will be less than
in 1979. Inflationary expectations have become more entrenched,
consumers and investors less confident about the basic ability
of governments to control inflation. This year's sharp upturn
in inflation rates in almost all OECD countries has eroded
earlier gains in reducing inflation and in rebuilding consumer
and business confidence.

- 5 -

Your letter also asked whether our blocking regulations
allow United States banks to use blocked Iranian assets to
offset loans to the Iranian government. Section 535.902 of
the blocking regulations licenses branches and subsidiaries
in foreign countries to offset claims against the government
of Iran or entities controlled by it against assets held by
them for those entities. The effectiveness of such offsets
are not governed by the blocking regulation but by the usual
laws applicable to offsets (which could be state law or the
law of a foreign country). The validity of such offsets will
likely also be tested in the litigation to which I have
referred.
The U.S. action to block the assets of the Iranian
government and controlled entities was taken in the context
actions which put at grave risk the personal safety of U.S.
citizens and the lawful claims of U.S. citizens and entities
against the Government of Iran, and which constitute an
extraordinary threat to the national security and foreign
policy of the United States. In the absence of action by
the United States, U.S. institutions would have been left
with a large exposure to losses on claims to Iran, given
the hostility and unpredictability of the present Iranian
regime. The reasons for the U.S. action appear to have
been understood generally, and with the exception of Iran
itself, there have been no indications of efforts to shift
investment portfolios. The increase in international tension
growing out of the Iranian situation has led to caution and
some nervousness in the foreign exchange market. The dollar
trended downward for several days, but then strengthened
significantly. We are, of course, continuing to consult
with the authorities of other major countries to ensure
a cooperative response if pressure should develop.
External Financing and Debt
The large payments imbalances in prospect will create substantial demands for external financing by oil importing countries.
Total net external financing requirements of countries in current
account deficit averaged roughly $77 billion per year from 1974
to 1978. In the absence of the 1979 oil price increases, total
world financing needs would have fallen sharply, with greater
balance among major industrial countries. But it now appears
that the figure will rise to about $85 billion in 1979 and
substantially more in 1980.

- 6 -

External debt burdens have risen sharply in nominal
terms over the past several years. Although world wide data
on international debt are sketchy at best, the fact that
aggregate current account deficits totalled $385 billion
between 1974 and 1978 is indicative of the global trend.
For the non-OPEC developing countries, the growth in foreign
debt has been much more rapid than in earlier periods. Specifically, the external public debt of 79 of these countries which
have borrowed from the IBRD rose from about $50 billion at the
end of 1972 to more than $175 billion at the end of 1978 —
an average annual increase of 18 percent over this six-year
period.
While total debt service requirements have increased
since 1972, the export earnings of these countries increased
rapidly, and the debt service burden has remained manageable
in aggregate terms. The aggregate "debt-service ratio" for the
non-OPEC developing countries was somewhat higher at the end
of 1978 than at the end of 1972. However, the distribution
of the debt suggests that it is falling most heavily on those
countries that have the greatest capacity to bear it. Since
1972, only eleven of the non-OPEC developing countries have
had to obtain debt relief through multilateral negotiations
with their official creditors, a record that compares favorably
with earlier periods. Even so, with the large deficits
expected in the years ahead, debt burdens could cause problems
for some countries.
Financing Needs and IMF Quotas
At the Annual Meeting of the IMF and IBRD in 1978, the
IMF's Interim Committee agreed to recommend a 50 percent
general increase in quotas, raising total quotas from about
SDR 39 billion (or $50 billion) to about SDR 58 billion (or
$75 billion). A resolution proposing this increase was
adopted formally by the IMF Board of Governors last December.
At the time of that decision, the world financing outlook
was becoming somewhat brighter, as a result of steep reduction
in the OPEC surplus and improvement of payments patterns among
the major industrial countries. The size of the IMF, and its
capacity to meet balance of payments financing needs, had nonetheless fallen sharply in terms of world economic aggregates
and the scale of international transactions. Despite quota
increases on four occasions during the IMF's history, quotas

- 7 -

had fallen to roughly 4 percent of world imports, in comparison
to 10-14 percent during the first decade of IMF operations.
And it had become clear from the experience of the 1970's that
the size and pattern of world payments imbalances could change
abruptly, leading to heavy demands on the IMF. These general
considerations argued strongly for a substantial increase in
quotas, to ensure that the IMF would remain capable of meeting
demands for financing and fulfilling its responsibilities for
promoting world monetary stability. The quota increase ultimately
recommended would do little more than maintain the relative
size of the IMF over the next five years, the period until the
next regular review of quotas.
Developments since the IMF decision to recommend the quota
increase have sharply altered the world balance of payments
situation and outlook. Even in the absence of further major
oil price increases, it must now be anticipated that payments
imbalances and consequent financing needs during the next
several years will be much larger than expected earlier.
Moreover, countries' efforts to adjust their imbalances will
be made more difficult by a world environment of slower growth,
continued inflationary pressures, and energy supply constraints.
It is critically important to the health of the world economy
that the system as a whole be able to meet financing needs;
and that the IMF be adequately equipped to help members implement
orderly and cooperative programs to deal with their payments
problems.
Private financial markets provided the bulk of global
financing required in the wake of the 1973-74 oil price
increases, and the private markets will again be required
to meet the bulk of expanded financing demands in the period
ahead. It is expected that flows of official development
assistance will continue to rise, helping to offset the deterioration in current account position for a large number
of developing countries. But, particularly in light of the
very large amounts of financing provided in the last several
years, it must be anticipated that some individual countries
— developed and developing — will encounter difficulties in
obtaining needed financing from traditional sources in adequate
amounts and on acceptable terms, and will need to undertake
efforts to restore stability to their domestic economies and
bring their external positions into line with sustainable flows
of financing. By providing official financing in support of

- 8 -

deliberate and appropriately phased programs of balance of payments adjustment, the IMF can play a key role in maintaining
the health and stability not only of the individual economies
concerned but of the world economy as a whole. The United States,
with a major role in — and dependence on — the international
economic and financial system has a large, direct interest
in assuring that the IMF remains capable of fulfilling its
responsibilities.
The quota increase proposed for the United States amounts
to SDR 4,202.5 million, raising the U.S. quota from SDR 8,405
million to SDR 12,607.5 million, an increase of 50 percent. This
maintains the U.S. share of quotas intact at about 21-1/2 percent
of the total. The IMF is unique in that members seek to
maximize rather than minimize their share of the total. They
do so because quotas determine voting power and important
rights in the IMF — including the right to obtain financing
when in need — as well as obligations to provide financing
to others. Also, members recognize that when they do provide
financing to the IMF, they receive a liquid monetary asset
that can be included in their monetary reserves.
Pursuant to the Board of Governors resolution, quotas are
to become effective not later than November 1, 1980, provided
that members having 75 percent of total quotas have consented
to their increases by that time.
Prior Congressional approval for an increase in the U.S.
quota is required by the Bretton Woods Agreements Act, as
amended. On November 21, the Treasury Department transmitted
to the Congress proposed authorizing legislation for U.S.
consent to its quota increase. The bill would authorize the
U.S. Governor of the Fund to consent to the proposed increase
in the U.S. quota, to such extent or in such amounts as are
provided in appropriations acts. This language, which would
submit the quota increase to the appropriations process, is
designed to provide the Administration and the Congress flexibility in determining the appropriate budget and appropriations
treatment for these transactions with the IMF. We have been
working closely with interested committees at staff level to
develop an acceptable approach, and we hope this effort can
be completed shortly.

- 9 -

A report of the National Advisory Committee on International Monetary and Financial Policies, providing further
detail and background on the proposed guota increase, has
been transmitted to the Subcommittee. The Subcommittee is
fully aware of the central role of the IMF in U.S. policies
to maintain a strong, open and cooperative world economic
and monetary system, and that the United States itself has
drawn on the IMF a number of times, most recently when we
obtained $3 billion of German marks and Japanese yen in
connection with the program of operations to stabilize
exchange markets announced on November 1, 1978.
The resources of the IMF have not kept pace with the
expansion of the world economy and global financing requirements. Very large balance of payments financing needs are in
prospect and the world economy is undergoing a period of pronounced uncertainty and change. It is essential that the IMF
remain in a position to meet the official balance of payments
financing requirements that may arise, and to provide confidence
that the official underpinnings of the system are strong. When
the IMF quota legislation comes before you, Mr. Chairman, I
urge that the Subcommittee report the bill promptly and
favorably.
IMF Surveillance
The IMF's efforts to promote a sound world economy have
in the past focused most directly on countries using the
Fund's resources via the policy conditions associated with IMF
financing. The proposed quota increase will ensure the Fund's
ability to continue to meet the needs of countries in deficit.
But the new IMF Articles of Agreement also provide the Fund
with enhanced authority and responsibility for surveillance
over all members' exchange rate policies and the balance of
payments adjustment process. The surveillance provisions
increase the ability of the IMF to advise not only countries
in balance of payments deficit, but also those in surplus, on
the international implications of their policies and on the
approaches they might appropriately follow to correct their
payments imbalances.
In the one and one-half years since the amended Articles
took effect, the IMF has made progress in implementing its
new surveillance responsibilities, adopting principles for the
guidance of members in conducting exchange rate policy, and
implementing procedures and criteria for assessing those
policies. The guidelines, and IMF practice, reflect the new

- 10 -

orientation of the Fund's exchange rate provisions that exchange
rate stability can be achieved only by directing economic and
financial policies toward fostering orderly economic growth
with reasonable price stability. Consequently, the Fund's
examination goes beyond narrowly defined exchange rate policy
to encompass the broad range of economic policies affecting
balance of payments adjustment.
The IMF has begun to implement the new surveillance
arrangements in a cautious and prudent manner. Consultations
under the new surveillance provisions of the IMF articles have
been conducted with 137 countries, including special consultations with the United States following the November 1, 1978
program. These consultations have provided a useful foundation,
by giving the Fund and members experience under the new procedures
and by beginning the development of case history that will guide
the future development of surveillance.
With this foundation of recent experience, we believe the
time has come for the IMF to take more vigorous action in
advancing its surveillance role. At the IMF annual meetings
in Belgrade, the United States proposed consideration of
several steps to strengthen the process of surveillance.
These include procedures for measuring individual country
performance against agreed global standards; requiring countries
with large payments imbalances, surplus or deficit, to submit
for IMF review an analysis of how they propose to deal with
the imbalances; a more active role for the IMF Managing Director
in initiating consultations with members; and establishment
of a Governors Council with decision-making powers to replace
the advisory Interim Committee. While these proposals are
largely procedural in nature, they could play an important
role in making the Fund a stronger force for encouraging
member nations to follow sound and internationally responsible
policies and ensuring a sound monetary system.
International Liquidity
Mr. Chairman, you have asked for comments on a number of
questions in the area of international liquidity — the Euromarkets, reserve diversification, the substitution account,
SDRs, gold and the EMS. Complementing efforts to strengthen
IMF surveillance procedures to improve the functioning of the
adjustment process, there has also been a renewal of interest
in achieving greater official influence over international

- 11 -

liquidity and reserves. This interest has centered on two
main areas — the Euro-markets and the role of the SDR in the
international monetary system.
As indicated above, world financing requirements will
remain very large in the period ahead, and the international
banking system will continue to play a major role in meeting
financing needs. The bulk of international bank lending
continues to take place in Euro-currencies, funded by Eurocurrency deposits which may pass through several banks before
settling in the bank which lends them to an end-user. The
lending occurs through these markets rather than through
national markets because they have competitive advantages
which permit them to operate more efficiently than national
markets. National monetary authorities have limited control
over their operations, and this has led to a variety of
concerns.
The major concern for the U.S. is the way in which these
markets complicate the task of the Federal Reserve in managing
the growth of money and credit in the U.S. The central banks
of the leading countries are conducting an examination of whether
measures are needed to control the growth of these markets and,
if so, what measures might be taken. The possibility of reserve
requirements on Euro-currency deposits is being given special
study. This work is still underway. The Federal Reserve
is actively involved in this effort, with our full support.
At the same time, there has been a renewal of interest
in promoting the role of the Special Drawing Right in the
international monetary system. With the development of greater
economic interdependence among nations has also come development of a greater balance in economic size and capacity to play
a role in international finance. In many respects, a larger
role for other countries and markets in the provision of international credit would be not only appropriate but welcome. At
the same time, it is widely felt that the stability of the
system would be well served by increasing reliance on a single,
internationally created and managed, reserve asset, in preference
to a full scale multiple currency system. It is impossible to
know in advance all of the implications of movement toward a
single reserve asset. But the pressures of the past few years
are reminders of the problems that can be caused if there are
substantial shifts among various reserve currencies — not only
in terms of the exchange markets but also in terms of domestic
monetary and economic circumstances in the countries concerned.

- 12 -

With the existence of large international financing needs
and in the absence of practical alternatives, the scale of
reserve holdings in the form of currencies has grown enormously.
There is little reason to expect that situation to change unless
conscious steps are taken to make it change. An increasing role
for the SDR, holding potential for more active management of
international liquidity through the IMF over the longer-term,
would be an important complement to enhanced IMF influence
over balance of payments adjustment through its surveillance
provisions.
The objective of making the SDR the world's principal
reserve asset was incorporated into the amendment of the IMF
Articles of Agreement that took effect last year. That amendment also established the SDR as the IMF's unit of account
in place of gold, and enhanced the use of the SDR both in
transactions with the IMF and between members. Since the
amendment, additional steps have been taken to expand
the role of the SDR. We have agreed to resume allocations;
have taken action to bring the SDR interest rate more closely
into line with market interest rates; and have increased in
a number of ways the uses that may be made of SDR's. Most
recently, the IMF has been examining the possibility of
establishing a Substitution Account, which could accept
deposits of dollars and perhaps other currencies in exchange
for SDR-denominated claims on the Account.
The Interim Committee, at its recent meeting in Belgrade,
concluded that a properly designed account could contribute
to an improvement of the system and promote the role of the SDR,
and identified a number of main characteristics of such an account.
The Committee is to receive a further report from the IMF
Executive Board at its meeting next April. The United States
supports this examination by the Fund, and is participating
actively in the effort. We believe that such an account,
appropriately designed, could offer a number of attractions
for the international community in general. The SDR is a
diversified instrument, involving less exchange risk than
holdings of any national currency. The existence of a
Substitution Account would thus provide an internationally
sanctioned, non-disruptive means for countries to achieve a
more diversified and stable reserve position without having
to hold a number of international currencies. Implementation of an account could give important direction for the
future as a concrete move toward reliance on a fully international asset — the SDR — and away from an unregulated
multiple currency system.

- 13 -

Designing an account that meets these objectives and
incorporates an equitable sharing of any costs is not
easy. There are difficult and complex questions regarding
the yield and liquidity of the SDR claims on the Account,
the investment of the Account's assets, and the Account's
capital value. We can not be certain when or whether a
satisfactory resolution of these issues will be found. But
we feel that the effort is well worthwhile, and we will maintain an active and constructive role as these discussions
progress.
On related points, your letter asked about the future
role of gold in the international monetary system and about
the implications of the European Monetary System for the
dollar and the SDR. Gold remains a significant part of the
reserves of many central banks, available for use in times
of balance of payments need. This is likely to continue to
be the case for the foreseeable future. But the more important
features of gold's former role in the system — use of gold as
common denominator and unit of account, gold convertibility,
and the central role of gold in the IMF — have all been
effectively eliminated. It seems very unlikely that they will
reemerge in the future.
The EMS is an integral part of European efforts to achieve
economic unification and, in the context of closer harmonization of European economic policies and performance, achieve
greater exchange rate stability among European currencies.
This effort can contribute to greater stability for the system
as a whole, and we wish the EC every success. How the operations
of the EMS will specifically affect the dollar and the SDR is
not possible to predict. At this early stage, greater emphasis
is being placed on the use of European currencies for intra-EC
intervention purposes, a step that could in some circumstances
help avoid movements in dollar exchange markets that are unrelated
to developments in the U.S. external position.
For the longer term, the second phase of the EMS envisages
the institutionalization of the ECU as the key instrument in
intra-EC settlements. It is clear that the ECU can strengthen
and help solidify the European regional arrangement, but there
is a question whether the EMS participants will permit, and
perhaps encourage, a wider role for the ECU. Many have sought
to discourage a reserve role for their own national currencies.
The ECU may provide an alternative that could facilitate a greater

- 14 -

European role in meeting world credit needs without at the same
time moving the reserve system toward still greater reliance
on national currencies. Although such a development could
constitute a forward step, it would not, of course, provide
like the SDR a full answer to the ultimate goal of establishing
a single international reserve asset, subject to decisions of
the international community as a whole.
Conclusion
Mr. Chairman, the world faces difficult economic
problems, major uncertainties and potential financial strains
We must insure that our international system is able to meet
demands placed upon it. The proposed increase in IMF
quotas is an important and immediate part of that effort.
Surveillance over the system and the balance of payments
adjustment process, and work in the IMF and in other
bodies to improve the international liquidity and reserve
system, are important longer range efforts to help assure
monetary stability. These efforts must be pursued. But the
critical lesson — the lesson we must acknowledge and act
on — is the overriding need to reduce our dependence
on imported oil. That dependence is the basic source of
the world's economic problems today. Our efforts in the
monetary area can help ameliorate the effects of those
problems.
But the "system" cannot cure them. Only we can
do that.

MtmentoftheJREASURY
SHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00

P.M.

December 12, 1979

TREASURY TO AUCTION 2-YEAR AND 4-YEAR NOTES
TOTALING $6,000 MILLION
The Department of the Treasury will auction $3,500
million o f 2-year notes and $2,500 million of 4-year notes
to refund $5,199 million of notes maturing December 31, 1979,
and to ra ise $801 million new cash. The $5,199 million of
maturing notes are those held by the public, including
$806 mill ion of maturing 2-year notes and $235 million of
maturing 4-year notes currently held by Federal Reserve Banks
as agents for foreign and international monetary
authoriti es.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold
$727 million of the maturing notes that may be refunded by
issuing additional amounts of the new notes at the average
prices of accepted competitive tenders. Additional amounts
of the new securities may also be issued at the average
prices to Federal Reserve Banks, as agents for foreign and
international monetary authorities, to the extent that their
aggregate tenders for each of the new notes exceed their
aggregate holdings of each of the maturing notes.
Details about the new securities are given in the
attached highlights of the offering and in the official
offering circulars.

oOo

Attachment
)0ver)

M-236

HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 4-YEAR NOTES

TO BE ISSUED DECEMBER 31, 1979
December 12, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation..
Maturity date
Call date
Interest coupon rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Accrued interest payable by
investor
Preferred allotment
Deposit requirement
Deposit guarantee by designated
institutions
Key Dates:
Deadline for receipt of tenders

$3,500 million

$2,500 million

2-year notes
Series AB-1981
(CUSIP No. 912827 KF 8)
December 31, 1981
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
June 30 and December 31
$5,000

4-year notes
Series H-1983
(CUSIP No. 912827 KG 6)
December 31, 1983
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after aucti
June 30 and December 31
$1,000
Yield Auction

Yield Auction

None
Noncompetitive bid for
$1,000,000 or less
5% of face amount
Acceptable

None
Noncompetitive bid for
$1,000,000 or less
5% of face amount
Acceptable
Wednesday, December 19, 1979,
by 1:30 p.m., EST

Settlement date (final payment due)
a) cash or Federal funds
Monday, December 31, 1979
b) check drawn on bank within
FRB district where submitted....Thursday, December 27, 1979
Delivery
date
for on
coupon
January 7, 1980
c) check
drawn
bank securities...Monday,
outside
FRB district where submitted....Thursday, December 27, 1979

Thursday, December 20, 1979,
by 1:30 p.m., EST
Monday, December 31, 1979
Thursday, December 27, 1979
Thursday, December 27, 1979
Monday, January 7, 1980

OFFICE OF PUBLIC AFFAIRS

Contact:

Carolyn Johnston
(202) 634-5377

EMBARGOED FOR RELEASE
2 PM, DECEMBER 12, 1979
CHANGES IN U.S. SAVINGS BONDS ANNOUNCED
The Treasury Department today announced that the
new Series EE savings bonds which go on sale effective
January 1, 1980, will be called United States Energy
Savings Bonds, Series EE, and will receive a 1/2
percent bonus if held to maturity.
The interest rate on U.S. Energy Savings Bonds,
Series EE, will be increased from 6.5 percent to 7
percent for bonds held for the full 11 years to
maturity.

Series I; bonds that have not finally

matured and U.S, Savings Notes ("Freedom Shares") will
also receive the 1/2 percent bonus if they are held
for 11 years from the date of the first semiannual
interest period that begins-^on or after January 1, 1980.
Bonds and notes redeemed earlier will not receive the
bonus.
The redesignation of the bonds as Energy Savings
Bonds is intended to help focus attention on the national
goals of reducing energy consumption and increasing
domestic supplies.

The bonds were known as Defense Bonds

before and after World*War II and as War Bonds from

- 2-

1941 to 1945 reflecting the national concerns of these
times.

The Energy Savings Bonds will assist in financing

the large Federal energy expenditure required in the
coming years,
After June 30, 1980, all U.S. Savings Bonds bought
through payroll savings plans will be Energy Savings
Bonds, Series EE.

Series H and HH Savings Bonds will

not be affected by these changes,

-- USSB --

OFFICE OF PUBLIC AFFAIRS

Contact:

Carolyn Johnston
(202) 634-5377

FOR IMMEDIATE RELEASE December 12, 1979
TREASURY SECRETARY MILLER MEETS WITH CHAIRMAN HAYNES,
U.S. INDUSTRIAL PAYROLL SAVINGS COMMITTEE. KINNEY
NAMED 1980 CHAIRMAN
Members of the U.S. Industrial Payroll Savings Committee
gathered in Washington, D.C. today with Treasury Secretary
G, William Miller to review their 1979 program, to plan
for 1980, and to hear the first announcement of the new
U.S. Energy Savings Bonds, Series EE.
Harold J. Haynes, 1979 Chairman of the Industrial
Payroll Savings Committee, and Chairman of the Board and
CEO of Standard Oil of California, reported on the activities of his Committee and presented several awards.
Treasury Secretary Miller announced the introduction
of the new U.S. Energy Savings Bonds, Series EE, on
January 2, 1980, The new bond was formerly known as the
U,S. Savings Bond, Series EE.
Treasury Secretary Miller presented outgoing Chairman
Haynes with a gold Medal of Merit Award. Silver Medals
of Merit Awards went to all members of ^the 1979 Committee,
along with letters of appreciation from Secretary Miller.
( over )

- 2-

The Committee also installed Mr. E. Robert Kinney as
the 1980 chairman.

Mr. Kinney is Chairman of the Board

and Chief Executive Officer of General Mills, Minneapolis,
Mn.

His Committee includes approximately 60 distinguished

business, industrial or community leaders from across the
nation.
The U.S. Industrial Payroll Savings Committee has held
annual meetings since 1963.

The 1980 members come from

18 major marketing areas and represent 28 major industries.
They encourage the concept of individual savings through
the promotion of savings bonds in payroll savings programs.

-- USSB --

FOR IMMEDIATE RELEASE

December 13, 1979

JOEL RABINOVITZ APPOINTED
DEPUTY INTERNATIONAL TAX COUNSEL
Secretary of the Treasury G. William Miller today
announced the appointment of Joel Rabinovitz as Deputy
International Tax Counsel and Deputy Director of the
Office of International Tax Affairs, effective
December 4, 1979.
Mr. Rabinovitz, who will also serve as Special
Assistant to the Assistant Secretary for Tax Policy, has
been associated with the Treasury Office of Tax Policy
since May 1979. He is on leave of absence from the
University of California, Los Angeles, where he is
Professor of Law.
As Deputy International Tax Counsel, Mr. Rabinovitz
will assist the International Tax Counsel, H. David
Rosenbloom, in advising the Assistant Secretary for Tax
Policy on the development of policy, legislation, and
regulations on international tax matters.
As Deputy Director of the Office of International
Tax Affairs, Mr. Rabinovitz will share responsibility
for the Treasury Department's income and estate tax
treaty programs and for the participation of the Treasury
Department in the activities of the Committee on Fiscal
Affairs of the Organization for Economic Cooperation and
Development (OECD).
Mr, Rabinovitz is author of articles on taxation and
has been a frequent lecturer on tax matters. A native
of New York City, Mr. Rabinovitz, 40, was graduated from
Cornell University in 1960, and from Harvard Law School
in 1963, He is a member of the New York bar. Mr.
Rabinovitz and his wife, the former Gayle M. Grimsrud of
Milwaukee, Wisconsin,
o reside
0 inothe District of Columbia.

M-237

FOR RELEASE AT 12:00 NOON

December 14, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,400 million, to be issued December 27, 1979.
This offering will provide $500 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,918 million, including $722 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,782 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,200
million, representing an additional amount of bills dated
September 27, 1979, and to mature March 27, 1980 (CUSIP No.
912793 3X 2 ) , originally issued in the amount of $3,020 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
December 27, 1979, and to mature June 26, 1980
(CUSIP No.
'912793 4L 7 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing December 27, 1979. Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents of foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held by them.
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. 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 Standard time,
Friday, December 21, 1979.
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.
^M.9^ft

-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. Each tender must state the amount of any net
long position in the bills being offnrod if r.n^h position i s in
excess of $200 million. This inluMiuLioii shouM LCLIUCI. p<>:.; M i-.n.
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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
willdecimals)
be accepted
in full at
the weighted
respective
(in three
issues.
of accepted
competitive
bids average
for the price

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 27, 1979, in cash or other immediately available
funds or in Treasury bills maturing December 27, 1979.
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, 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
December 14, 197 9
DEPUTY TREASURY SECRETARY CARSWELL
EN ROUTE TO TOKYO FOR IRAN TALKS
Robert Carswell,Deputy Secretary of the Treasury, is
leaving Saturday for Tokyo to meet with senior Japanese
officials for further consultations in connection with the
U.S. blocking of Iranian government assets and other international economic and financial matters.
The trip is a continuation of the consultations conducted
in Europe the past week, when Deputy Secretary Carswell,
together with Richard Cooper, Under Secretary of State for
Economic Affairs, met with Japanese Foreign Affairs Minister
Saburo Okita in Paris last Sunday. Secretary of State Cyrus
Vance also met with Minister Okita this week.
Over the past 10 days, the President has sent special
emissaries to consult with senior officials of various countries
about the situation in Iran, and Deputy Secretary Carswell's
trip is a part of this process. He is expected to return to
Washington on Tuesday.
*

M-239

IMMEDIATE RELEASE
December 14, 1979

STATEMENT BY THE TREASURY DEPARTMENT
The Treasury supports the actions taken by the bank
regulatory authorities to provide a new and more attractive
savings instrument for the small saver and, at the same time,
a new source of funds for depository institutions.
Treasury hopes the Congress will approve early next year
the President's proposal for an orderly phase out of Regulation
Q. Today's action by the regulators illustrates the continuing need for that legislation.

M-240

mrtmentoftheTREASURY
ELEPHONE 566-2041

IASHINGTGN, D.C. 202

FOR IMMEDIATE RELEASE

December 17, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,200 million of 13-week bills and for $3,200 million of
26-week bills, both to be issued on December 20, 1979, were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing March 20, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing June 19, 1980
Discount Investment
Price
Rate
Rate 1/

96.931
96.900
96.909

93.953
93.919
93.934

12.141%
12.264%
12.228%

12.73%
12.87%
12.83%

11.961%
12.028%
11.999%

12.
13.
12.

Tenders at the low price for the 13-week bills were allotted 42%.
Tenders at the low price for the 26-week bills were allotted 59%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
-i
i_
nReceivf"

—i-

DATE:

5571

4,232,
28,
50,|
29,
37,1
475,i
43,

December 17, 1979

13-WEEK

26-WEEK
/

/V.VV6 fo

TODAY:
28,(
15,
215,' LAST
51,(

WEEK:

iv.oJ¥7>

'/• 76'•

$5,264,

Type

HIGHEST

SINCE

Competitive
Noncompetitive

$3,460,(
548,2

Subtotal, Public

$4,008,:

Federal Reserve
Foreign Official
Institutions

$1,030,0
LOWEST SINCE:
225,7

TOTALS

?,0 3$ \'f

fofyf/71

5,264,1

^/Equivalent coupon-isfcue yield.
M-24I

/v.vft>!o

FOR IMMEDIATE RELEASE

December 17, 1979

High
Low
Average

13-week bills
maturing March 20, 1980
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing June 19, 1980
Discount Investment
Price
Rate
Rate 1/

96.931
96.900
96.909

93.953 11.961%
12.94%
93.919
12.028%
13.02%
93.934
11.999%
12.99%

12.141%
12.264%
12.228%

12.73%
12.87%
12.83%

Tenders at the low price for the 13-week bills were allotted 42%.
Tenders at the low price for the 26-week bills were allotted 59%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

TENDERS RECEIVED AND ACCEPTED
(In Thousands )
Received
Received
Accepted
$
26,640
46,600
$ 46,600 $
4,389,770
2,576,055
4,232,755
11,755
28,355
28,355
48,620
40,990
50,990
32,020
29,735
29,735
37,425
37,860
37,860
628,915
245,645
475,645
37,025
21,725
43,725
5,880
6,915
6,915
24,235
28,675
28,675
10,910
15,770
15,770
245,930
70,450
215,450
45,650
51,655
51,655

Accepted
$
26,640
2,486,270
11,755
48,620
24,020
32,425
374,815
13,205
5,880
24,235
10,910
95,930
45,650

TOTALS

$5,264,130

$3,200,430 :

$5,544,775

$3,200,355

Competitive
Noncompetitive

$3,460,090
548,280

$1,396,390 :
548,280 :

$3,840,060
348,450

$1,495,640
348,450

Subtotal, Public

$4,008,370

$1,944,670 :

$4,188,510

$1,844,090

Federal Reserve
Foreign Official
Institutions

$1,030,000

$1,031,765

225,760

225,760 :

324,500

$5,544,775

$3,200,355

Type

TOTALS

5,264,130

JVEquivalent coupon-is/jfeue yield,
tyr r>i diir-i—

•'

3,200,430 :

^TREASURY
TELEPHONE 566-2041

INGTON,D.C. 20220

IMMEDIATE RELEASE
December 17, 1979

CONTACT: Everard Munsey
202/566-8191

TREASURY REVOKES PROHIBITIONS ON
TRANSACTIONS WITH RHODESIA
In keeping with President Carter's Executive Order
terminating U.S. sanctions against Rhodesia, the Treasury
today revoked all prohibitions on transactions with Rhodesia
under the Rhodesian Sanctions Regulations. Sections of
the regulations related to recordkeeping, reporting and
penalties remain in effect. Today's revocation has no effect
on any violations that occurred while the Regulations were
in force.

M-242

FOR IMMEDIATE RELEASE
December 18, 1979

Contact:

George G. Ross
202/566-2356

TREASURY ANNOUNCES CHANGE IN REPAIR ALLOWANCE
FOR RAILROAD MACHINERY AND EQUIPMENT
The Treasury Department today announced a change
in the annual asset guideline repair allowance percentage for Class Life Asset Depreciation Range (CLADR)
System assets in Asset Guideline Class (AGC) 40.1,
Railroad Machinery and Equipment.
The effect of the change will be to increase the
annual assets guideline repair allowance.
The change in the percentage from 10.5 to 16.5 is
incorporated in Revenue Procedure 79-64, to be published
in the Internal Revenue Bulletin No. 1979-53 of December
31, 1979, and it will be effective for taxable years
ending on or after December 31, 19 79. The AGC 40.1
description of assets included, asset guideline period,
and asset depreciation range remain unchanged.
The change in the repair allowance percentage is
the result of a Treasury study of increasing repair
ratios in the class. The study found that the industry
is experiencing increases in repair costs due to rising
real costs as well as the impact of inflation.
o

M-243

FOR IMMEDIATE RELEASE
December 18, 1979

Contact:

George G. Ross
202/566-2356

TREASURY ANNOUNCES DEPRECIATION CHANGES FOR
ELECTRICAL, ELECTRONIC, AND INSTRUMENTATION INDUSTRIES
The Treasury Department today announced revisions in the
classification, asset guideline periods, asset depreciation
ranges, and annual repair allowance percentages, relating to
three types of property: assets used in plants makinq (1)
electrical and non-electrical machinery and other Mr. ••!•••<. w:.H
products; (2) electronic components, products and systems; and
(3) instruments, medical and dental equipment, appliances and
supplies, photographic equipment, and watches and clocks.
The effect of the changes generally will be to shorten
most asset guideline periods, except those in special tools
classes which will be lengthened. In addition, the annual
asset quideline repair allowance percentages will be increased.
The changes are incorporated in a new Revenue Procedure
79-65, to be published in the Internal Revenue Bulletin No.
1979-53 of December 31, 1979, and are to be effective for
assets placed in service during a taxpayer's first taxable
year ending on or after December 31, 1979.
The new Revenue Procedure 79-65 modifies and revises related material published in Revenue Procedure 77-10 (1977-1
C.B. 548), Revenue Procedure 78-4 (1978-1 C.B. 555), and Revenue
Procedure 79-35 (1979-29 I.R.B. 13), as follows:
— Asset Guideline Classes 35.0, Manufacture of Machinery;
36.1, Manufacture of Electrical Equipment; 36.11 Manufacture of Electrical Equipment-Special Tools; 36.2, Manufacture
of Electronic Products; and 38.0, Manufacture of Professional, Scientific, and Controlling Instruments, are all
deleted.
— A new Asset Guideline Class 35.0, Manufacture of
Electrical and non-Electrical Machinery and Other Mechanical Products is prescribed—which includes assets used
to manufacture machinery formerly included in class 35,
assets,used to manufacture electrical equipment formerly
included in class 36.1 and 36.11, and assets used to
manufacture instruments, medical and dental equipment
and appliances, photographic equipment, and ophthalmic
goods formerly included in class 38.0.

M-244

- 2 — A new Asset Guideline Class 36, Manufacture of Electronic
Components, Products and Systems, is prescribed—which
includes assets used to manufacture electronic products,
components and accessories formerly included in classes
36.1 and 36.11, electronic products formerly included in
class 36.2, and electronic instruments, watches and clocks
formerly included in class 38.0.
— Asset Guideline Class 22.3, Manufacture of Carpets, and
Dyeing, Finishing and Packaging of Textile Products, is
revised to include assets used to manufacture medical and
dental supplies.
The asset guideline periods and the annual guideline repair
allowance percentages for the property affected have been
changed as follows:

- 3-

Asset
Guideline
Classes
OLD
NEW

Asset Guideline
Period
OLD NEK EFFECT
(Years)

Annual Asset
Guideline Repair
Allowance Percentage
OLD
NEW
EFFECT
(Percent)

No Change

5.5

Increased

Shorter

5.5

Increased

Longer

Increased

Longer

Increased

36.2 36.0

Shorter

7.5

Increased

Mechanical and Electrical Instruments,
Medical and Dental
Equipment & Appliances,
Photographic Equipment,
Ophthalmic Goods, and
Watches & Clocks Plants

38.0 35.0

Shorter

5.5

Increased

Electronic Instruments
and Watches and Clocks
Plants

38.0 36.0

Shorter

5.5

Increased

Medical and Dental
Supplies Plants

38.0 22.3

Shorter

5.5

Increased

10 10 No Change

Machinery Plants

35.0

Electrical
Equipment Plants

36.1

35.0

Shorter

Electronic Components &
Accessories Assembled
From Purchased Components

36.1

36.0

36.11 35.0

36.11 36.0

Electronic Products
Plants

Special Tools (Subclass
of 36.1):
—Electrical Equipment
-Electronic Components
and Accessories Assembled from Purchased
Components

The changes are the result of a continuing program of study and
updating of the classes and depreciation guidelines under the Class
-ife Asset Depreciation Range (CLADR) System. The CLADR System
-lasses affected by these changes are attached.

A-

set J

•

ide- j!

ne
ass
.3

.
•

_;•; Asset Depreciation
: Annual
:
i. Range (in years)
:Asset
:.( :,'
: Asset :
, Guideline
:!:
: '
: Guide-i J
: Repair
i
Upper
s
{.Lower : line
:
: Allov/ance
:
Limit
i Limit : Period' :
: Percentage

;

i
i

Description of Assets Included
Manufacture of Carpets, and Dyeing, Finishing, and
Packaging of Textile Products and Manufacture of,
Medical and Dental Supplies.

Includes assets used in the production of carpets,
rugs, mats, woven carpet'backing, chenille, and other
tufted products, and assets used in the joining together of,1
backing with carpet yarn or fabric. Includes assets used ,;
in washing, scouring, bleaching, dyeing, printing, drying, '!;'
and similar finishing processes applied to textile fabrics/,
yarns, threads, and other textile goods. Includes assets ;;
used in the production and packaging of textile products,
other than apparel, by creasing, forming, trimming, cutting,
and sewing, such as the preparation of carpet and fabric
samples, or similar joining together processes (other than
the production of scrim reinforced paper products and laminated paper products) such as the sewing and folding of
hosiery and panty hose, and the creasing, folding, trimming,
and cutting of fabrics to produce nonwoven products, such
as disposable diapers and sanitary products. Also includes
assets used in the production of medical and dental supplies
other than drugs and medicines. Assets used in the manufacture
of nonwoven carpet backing, and hard surface floor covering
such as tile, rubber, and cork, are elsewhere classified*;

jsset
|uide«
ine
Class

Description of Assets Included

Asset Depreciation
Range (in years)
Asset
GuideLower
line
Limit
Period

Manufacture of Electrical and Non-Electrical Machinery
and Other Mechanical Products:
;
Includes assets used to manufacture or rebuild finished machinery and equipment and replacement parts thereof such as machine tools, general industrial and special
industry machinery, electrical power generation, transmission, and distribution systems, space heating, cooling, and refrigeration systems, commercial and home
appliances, farm and garden machinery, construction
machinery, mining and oil field machinery, internal combustion engines (except those elsewhere classified),
turbines (except those that power airborne vehicles),
batteries, lamps and lighting fixtures, carbon and graphite products, and electromechanical and mechanical products including
business machines, instruments, watches and clocks, yending and amusement
machines, photographic equipment, medical and dental
equipment and appliancesfand ophthalmic goods. Includes
assets used by manufacturers or rebuilders of such finished;
machinery and equipment in activities elsewhere classified :
such as the manufacture of castings, forgings, rubber and
plastic products, electronic subassemblies or other manufacturing activities if the interim products are used by
the same manufacturer primarily in'the manufacture,
metals,
equipment.
used
assembly,
in assets
the
ormanufacture
Does
rebuilding
included
not include
of
in primary
guideline
such
assets
finished
ferrous
used
class
machinery
inand
00.11
mining,
non-ferrous
through
and
assets

Annual
Asset
Guideline
Repair
Allowance
Percentage

- c -

;

et
de-

1
i

Description of Assets Included

:.
:,
5
.
•
;
.
A
s
s
e
t
j
i
J
: !
Guide;:
i.^ Lower : line ' : Upper
:
*I Limit t Period : Limit ';:
: Asset Depreciation
:: J Range (in years)

Annual
Ar.not
Guideline
Repair
iAllowance
Percentage

Manufacture of Electronic Components, Products,and Systems:
Includes assets used in the manufacture of electronic communication, computation, instrumentation and
control systems, including airborne applications; also
includes assets used in the manufacture of electronic
products such as frequency and amplitude modulated
transmitters and receivers, electronic switching stations, television cameras, video recorders, record players
and tape recorders, computers and computer peripheral
machines, and electronic instruments,
watches, and
clocks; also includes assets used in the manufacture of
components, provided their primary use is in products
and systems defined above such as semiconductors, electron
tubes, capacitors, coils, resistors, printed circuit substrates, switches, harness cables, lasers, fiber optic
devices,and magnetic media devices. Specifically excludes assets used to manufacture electronic products
and components, photocopiers, typewriters, postage meters and other electromechanical and mechanical business
machines and instruments that are elsewhere classified.

ntoftheTREASURY
TELEPHONE 566-2041

SHINGTON, D.C. 20220

IMMEDIATE RELEASE
December 17, 1979

i
CONTACT: Everard Munsey
202/566-8191

TREASURY LICENSES ADDITIONAL FUNDS FOR
IRANIAN STUDENTS
The Treasury Department today announced the issuance
of licenses allowing two Iranian banks to bring in new funds
for payments to Iranian students in the United States.
The licenses allow Bank Sepah in New York to bring in
$20 million and Bank Melli (San Francisco) to bring in $10
million. The funds may not be attached by U.S. creditors
of Iran.
Previously Treasury had licensed Bank Melli (New York)
to bring in $20 million in new funds for payments to Iranian
students and had unblocked four accounts of the Iranian Embassy,
totalling $7 million, to be used in part for continuing payments
to students that had been made from Embassy funds.
Remittances to students from Iran can also be made through
Iranian correspondent accounts in non-American banks in lieu
of payment through Iranian correspondent accounts in American
banks which remain blocked.

M-245

FOR IMMEDIATE RELEASE

December 19, 1979

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $3,509 million of
$8,204 million of tenders received from the public for the 2-year
notes, Series AB-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 11.42%
Highest yield
Average yield

11.44%
11.43%

The interest rate on the notes will be 11-3/8%. At the 11-3/8% rate,
the above yields result in the following prices:
Low-yield price 99.922
High-yield price
Average-yield price

99.887
99.904

The $3,509 million of accepted tenders includes $ 864 million of
noncompetitive tenders and $1,864 million of competitive tenders from
private investors, including 68% of the amount of notes bid for at
the high yield. It also includes $781 million of tenders at the
average price from Federal Reserve Banks as agents of foreign and
international monetary authorities in exchange for maturing securities.
In addition to the $3,509 million of tenders accepted in the
auction process, $571 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 December 31, 1979, and
$134 million of tenders were accepted at the average price from
Federal Reserve Banks as agents for foreign and international monetary
authorities for new cash.

M-2jj£

WASHINGTON, DX. 20220

December 19, 1979

FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 2-YEAR NOTES

The Department of the Treasury has accepted $3,509 million of
$8,204 million of tenders received from the public for the 2-year
notes, Series AB-1981, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield
Highest yield
Average yield

11.42%
11.44%
11.43%

The interest rate on the notes will be 11-3/8%
the above yields result in the following prices:
Low-yield price 99.922
High-yield price
Average-yield price

At the 11-3/8% rate,

99.887
99.904

In addition t
auction process, $
price from Governm
account in exchang
$ 134 million of
Federal Reserve Bai
authorities for ne\

TREASURY NOTES OF SERIES

DATE:

Dec. 19, 1979

LAST ISSUE:
HIGHEST SINCE:
^v

, /

/urdL
TODAY:
LOWEST SINCE:
•

XCkl'Oi^
H-244

&,
sZL*^

IO-?l%

For Release Upon Delivery
December 19, 1979 9:00 AM EST
Statement of John Copeland, Treasury Department
Office of Tax Policy
On S. 1913 before the Subcommittee on Taxation
and Debt Management of the Senate Finance Committee
December 19, 1979
Mr. Chairman and Members of the Subcommittee, I
appreciate the opportunity of presenting the Treasury
Department's views on S.1913.
S.1913 would amend a provision relating to the tax on
distilled spirits which was enacted as part of the Distilled
Spirits Tax Revision Act of 1979. This in turn, is part of
the Trade Agreements Act of 1979. The Department sent a
report on the bill to the Committee on Finance on December 6.
The report opposed enactment of the bill because it would be
contrary to what we consider a desirable reform in the method
of taxing distilled spirits. We also pointed out a number of
administrative problems.
While we customarily speak of the tax on distilled
spirits products as being $10-50 a proof gallon, this was not
exactly the case under prior law. Tax-paid wine and
alcoholic flavoring materials could be added to tax-paid
domestic distilled spirits within specified limits. The
mixing was subject to a rectification tax of 30 cents a proof
gallon, but the net result was that the product, even though
sold as distilled spirits, bore a lower tax than $10.50 a
proof gallon. Some domestic cordials and liqueurs containing
a large amount of table wine thus had an effective tax rate
as low as $6.50 a proof gallon.

M-247

-2Imported distilled spirits products were taxed solely on
their proof content, or wine gallonage if below 100 proof.
If below proof, the tax was greater than $10.50 a proof
gallon.
The recent legislation equalized excise taxation for
both domestic and imported distilled spirits products.
Irrespective of wine or flavoring content, or proof in the
case of imports, the tax is to be $10.50 a proof gallon of
the final product as of January 1, 1980. The 30 cent
rectification tax is repealed.
It must be emphasized that the change in the law did not
change the low rate of tax on wine sold as wine.
We believe the change is only fair and reasonable. All^
products, domestic and imported, will be taxed on their
~
alcoholic content at the same rate without regard to whether9
the alcohol is derived from grain or grapes. Consumers of
liqueurs, cordials, and so-called specialities no longer will
obtain the alcohol at a lesser tax rate than highball
consumers. Of course the tax will cause some increase in
prices of products formerly taxed at less than $10.50 a proof
gallon, but this is a necessary result of the desired
Q
objective.
j7
S. 1913 seeks to reverse the change to a straight proof^
gallon tax for distilled spirits products when wine is used L
in the product by allowing a credit to the distilled spirits0
producer (or importer) for the excess of $10.50 over the tax
that would be levied on the wine if it were taxed as wine.
In the case of table wine which is taxed at 17 cents per wine
gallon, the credit for wine of 14 percent of alcohol by
volume would be $2.77 a wine gallon. As noted, the credit
also would be available for imported products in keeping with
the trade agreement.
The significance of the changes in the law for the
domestic wine industry would seem to be d£ minimus. Wine is
not used in distilled products merely to save on the excise
tax. Many products contain wine as a basic flavoring
ingredient. If the producers do not want to have to educate
their customers to a new taste, they will continue to use the
same, or approximately the same, amount of wine. There are
some products, of course, where wine is heavily used to
minimize tax. These formulas might well be changed somewhat
under the new law. But whatever the change, it can hardly

-3loom large for the wine industry. Furthermore, since wine
consumption is growing, any such decrease in use would merely
be a very minor temporary slowing of such growth.
According to the statistics of the Bureau of Alcohol,
Tobacco and Firearms, only 831,000 proof gallons of wines and
vermouth were used in domestic distilled spirits plants in
the fiscal year 1978. But 243,000 proof gallons of this
imput were merely further processed in a fashion that left
the final product classified as a wine or vermouth. This
processing took a form that was considered rectification
which under prior law could be carried out only in a
distilled spirits plant. Under the new law, this
"rectification" can be carried out in a bonded wine celler.
The net amount of 588,000 proof gallons of wines and
vermouth that was used in distilled spirits products
represented slightly more than 2 million wine gallons. In
the same 1978 fiscal year, withdrawals of domestic still
wine, both taxable and tax-free, were 375 million gallons.
Use of wines in distilled spirits products thus was less than
six tenths of 1 percent of total withdrawals.
The proposel of S.1913 does not represent a great deal
of^revenue when measured against distilled tax receipts of
over $3.5 billion. We do not have an estimate of how much
the revenue loss would be for imported products. As for
domestic products, the revenue loss appears to be about $6
million based on past practice of the industry. Our
objection to the bill goes beyond the particular revenue
figure. The change in the law that resulted in the taxation
of distilled spirits products containing wine on a proof
gallon basis also equalized the tax on domestic products
containing alcoholic flavoring materials and products
imported at below 100 proof. We consider this equalization
as a major step forward. The return to an unequal level of
taxation as proposed by S.1913 would represent a step, pehaps
the first step, back to a system that was less than
equitable.

IMMEDIATE RELEASE
December 18, 1979

CONTACT: Everard Munsey
202/566-8191

TREASURY ISSUES TECHNICAL AMENDMENTS TO
IRANIAN ASSET CONTROL REGULATIONS
The Treasury today issued a series of technical and
clarifying amendments to the Iranian Asset Control Regulations
and extended the period for payment of certain checks and
drafts issued before the November 14 freeze of Iranian official
assets until January 14, 198 0.
The amendments also raise the limit on the amount of
prefreeze checks that may be paid from blocked funds from
$500 to $3000. Checks of up to $50,000 in process of collection before the freeze can be paid from blocked funds through
January 14, 19 80. However any payment to Iran or an Iranian
entity must be into a blocked account.
Other amendments:
*Give notice that applications for licenses for payments
under irrevocable letters of credit issued or confirmed before
the freeze will be considered on a case by case basis, without
commitment, if submitted before January 10, 1980. General
authority for payments under irrevocable letters of credit confirmed by a domestic bank before the freeze expired December 14.
*Give notice that Treasury will consider, without commitment, applications submitted prior to January 10, 1980 for
payments by domestic banks under unconfirmed letters of credit
to persons not subject to the jurisdiction of the United States.
Previously published regulations authorized such payments to
U.S. residents. Such payments must be made by a bank as its
own obligation, not from blocked funds.
*Makes clear that the Asset Control Regulations do not
authorize any payment or delivery of blocked property under
pre-judgment attachments and that Treasury's policy is not
to license such payments.
^Reiterates and makes explicit in the Regulations Treasury's
intent that specific licenses for payments to U.S. exporters

M-248

- 2 holding unconfirmed letters of credit will be issued only
in hardship cases. The amount of such payments has been
limited to $500,000 under existing regulations.
*Provides that no payment may be made under a standby
letter of credit or performance bond in favor of Iran unle
eight business days have passed to allow the American firm
of whom payment is being demanded to apply for a license
allowing it to make such payment by maintaininq a blocked
account on its own books.
*Clarifies certain issues related to documentation
provided under letters of credit.

FOR IMMEDIATE RELEASE
December 19, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES FINAL DETERMINATION
IN COUNTERVAILING DUTY INVESTIGATION ON
DEXTRINES AND SOLUBLE OR CHEMICALLY TREATED
STARCHES DERIVED FROM POTATO STARCH FROM
THE EUROPEAN COMMUNITY
The Treasury Department today announced a final
determination that the European Community is subsidizing exports of dextrines and soluble or chemically
treated starches derived from potato starch to the
United States.
The Countervailing Duty Law requires the Secretary
of the Treasury to collect an additional duty equal to
the subsidy paid on merchandise exported to the United
States.
As a result of its investigation, Treasury found
that manufacturers of this merchandise received subsidies
consisting of production refund payments and export
restitution payments. It was further determined that the
Government of the Netherlands paid an additional benefit
to Dutch producers of this merchandise.
The amount of the subsidy has been determined to be
34.4 percent ad valorem (36 percent for imports from the
Netherlands)•
Notice of this action appears in the Federal Register
of December 19, 1979.
Imports of this merchandise in 19 7 8 amounted to about
$4.4-miilion, including $3.8-million from the Netherlands.
o

M-249

FOR IMMEDIATE RELEASE
December 19, 1979

Contact:

Alvin M. Hattal
202/566-8381

TREASURY ANNOUNCES WITHHOLDING OF
APPRAISEMENT ON SPUN ACRYLIC
YARN FROM ITALY
The Treasury Department today said it has determined that
spun acrylic yarn from Italy is being sold in the United States
at "less than fair value."
The case is being referred to the U.S. International Trade
Commission, which must decide within 90 days whether a U.S.
industry is being, or is likely to be, injured by these sales.
If the Commission's decision is affirmative, dumping
duties will be collected on sales found to be at less than
fair value. (Sales at less than fair value generally occur
when imported merchandise is sold in the United States for
less than in the home market or to third countries.)
Appraisement in this case will be withheld for three
months beginning December 20, 1979. The weighted-average
margins of sales at less than fair value in this case were
48.05 percent.
Interested persons were offered the opportunity to present
oral and written views before this determination.
Imports of spun acrylic yarn from Italy during 19 78 were
valued at about $3.4-million.
Under the Antidumping Act, the Secretary of the Treasury
is required to withhold appraisement when he has reason to
believe that sales at less than fair value are occurring.
(Withholding of appraisement means that the valuation for
Customs duty purposes of goods imported is suspended. This is
to permit the assessment of any dumping duties as appropriately
determined on those imports.)
Notice of this determination will appear in the Federal
Register of December 20, 1979.
o

M-25Q,

department of theJREASURY
fASHINGTON,D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 20, 1979

RESULTS OF AUCTION OF 4-YEAR NOTES
The Department of the Treasury has accepted $2,501 million of
$4,118 million of tenders received from the public for the 4-year
notes, Series H-1983, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 10.39%
Highest yield
Average yield

10.60^
10.52%

The interest rate on the notes will be 10-1/2%. At the 10-1/2% rate,
the above yields result in the following prices:
Low-yield price 100.353
Highr-yield price
Average-yield price

99.681
99.936

The $2,501 million of accepted tenders includes $441 million of
noncompetitive tenders and $1,980 million of competitive tenders from
private investors,, including 21% of the amount of notes bid for at
the high yield. It aaii
• // £j
~
"
TREASURY
NOTES
OF
SERIES
H-1983
average price from Fe<
international monetar
In addition to tl
auction process, $156
price from Government
account in exchange f<

DATE:12-20-79

HIGHEST SSSGg:

LAST ISSUE:

'°&f?f
LOWEST SINCE:

TODAY:

/)vZM6,£ y'£W /£?&%

M-251

FOR IMMEDIATE RELEASE

December 20, 1979

10.60^
10.52%

The interest rate on the notes will be 10-1/2%. At the 10-1/2% rate,
the above yields result in the following prices:
Low-yield price 100.353
High-yield price
Average-yield price

99.681
99.936

The $2,501 million of accepted tenders includes $441 million of
noncompetitive tenders and $1,980 million of competitive tenders from
private investors,, including 21% of the amount of notes bid for at
the high yield. It also includes $80
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 to the $2,501 million of tenders accepted in the
auction process, $156 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 December 31, 197 9.

M-251

FOR IMMEDIATE RELEASE
Thursday, Dec. 20, 1979

Contact:

Robert E. Nipp
202/566-5328

TREASURY ANNOUNCES CONTRACT FOR SOLAR ELECTRIC SYSTEM
The Solar Energy Research Institute today signed on
behalf of the U.S.-Saudi Arabian joint solar energy program
a $16.4 million contract with the Martin-Marietta Corporation to design and construct the world's largest solar powered
photovoltaic electrical system. The 350 kilowatt photovoltaic
system will be located between two villages about 30 miles
northwest of Riyadh, the capital of Saudi Arabia.
This jointly funded project is the first of several to
be initiated in the field of solar energy research under the
United States-Saudi Arabian Joint Commission on Economic
Cooperation. Other projects under this cooperative effort
will be carried out in the' United States as well as Saudi
Arabia.
The U.S. Departments of Energy and Treasury and the Saudi
Arabian National Center for Science and Technology and the
Ministry of Finance and National Economy are parties to the
five-year, $100 million agreement. Each government will make
matching contributions of $50 million over the life of the
program.
The photovoltaic system is to be in operation by June
1981.
The Secretary of the Treasury G. William Miller and the
Minister of Finance Muhammad Abalkhail serve as the co-chairmen of the Joint Commission. The SERI serves as the operating
agent for the solar energy program.

M-252

wtmentoftheTREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 20, 19 79

STATEMENT BY SECRETARY OF THE TREASURY G. WILLIAM MILLER
ON STATEMENTS MADE BY SENATOR EDWARD M. KENNEDY
IN DOVER, NEW HAMPSHIRE

Today, Senator Kennedy's campaign rhetoric in
New Hampshire went beyond the bounds of responsible
comment. His statement that the Secretary of the
Treasury has been "busy asking OPEC to raise prices"
is an outright fabrication. The fact is that I have
recently returned from a visit to Saudi Arabia, the
United Arab Emirates, and Kuwait, where I strongly
urged price restraint and moderation at the highest
levels of Government in those countries.
What is particularly beyond understanding is Senator
Kennedy's statement that the Administration is not ort the
firing line in the energy war. This comes from a Senator
who missed more than half of the critical votes on the
vital Windfall Profits Tax, which passed the Senate last
Saturday, and who was not present for the most critical
votes where he could have helped his President assure
equitable results for the American people. The Senator's
attitude is unfair to those mai>y Senators and members
of the Administration who stayed here in Washington to
carry on the fight.

M-253

federal financing bank

(/)

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

December 21, 1979

FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank (FFB),
announced the following activity for October 1-31, 1979.
Guarantee Programs
During October, FFB made 22 advances totalling
$125,970,748.33 to 11 governments under the Department of
Defense-guaranteed foreign military sales agreements.
Under notes guaranteed by the Rural Electrification
Administration, FFB advanced a total of $230,507,000.00 to
31 rural electric and telephone cooperatives.
FFB provided Western Union Space Communications, Inc.,
with the following amounts during October. These advances
mature October 1, 1989, wi-th interest payable on an annual
basis.
Date
Interest Rate
Amount
10/1
10/22
10/24

$1,150,000
6,900,000
2,175,000

9.942%
11.497%
11.87%

FFB purchased the following General Services Administration
public buildings interim certificates.
Interest
Date
Series
Amount
Maturity
Rate
10/1
$ 179,798.79
11/15/04
y . 52*
o & "o
L-059
9.652%
10/10
4,277,613.03
7/31/03
M-052
10.135%
10/15
350,527.82
11/15/04
L-060
10.515%
10/30
1,121,562.23
7/15/04
K-025
On October 24, FFB purchased a total of $10,700,000.00
in debentures issued by small business investment companies
These debentures are guaranteed by the Small Business
Administration, mature in 3, 5, 7 and 10 years, and carry
interest rates of 12.115%, 11.575%, 11.345% and 11.135%,
respectively.
M-254

Under the Department of Housing and Urban Development
Section 108 Block Grant Program, FFB advanced funds to the
following cities:
Interest
Date
Amount
Maturity
Rate
11.415%
6/15/80
$1,100,000
10/5
Kansas City, Mo.
14.064% an
7/15/80
450,000
10/25
Toledo, Ohio
13.405%
6/15/80
450,000
12/31
Kansas City, Mo.
On October 25, FFB pur chased the first note under a new
program between FFB and the National Credit Union Association's
Central Liquidity Facility (CLF). Note #1, in the amount of
$1 million, matures Novembe r 24, 1979, and carries an interest
rate of 13.454%. FFB purch ased Note #2 on October 31, which is
in the amount of $1.5 milli on, matures January 29, 1980, and
carries a rate of 12.983%. CLF borrowings from FFB are for
the benefit of member credi t unions of the CLF and are used
by the members to meet thei r liquidity needs.
Department of Transportation (DOT) Guarantees
FFB provided the following amounts to the National Rail
road Passenger Corporation (Amtrak) under their line of
credit Note #21, which matures December 31, 1979.
Date

Amount

Interest Rate

$47,,000 ,000
10. 891%
10/1
3,,500 ,000
10. 891%
10/2
,000
5
,000
10. 930%
10/3
3,
,500
,000
11. 422%
10/9
9,,000 ,000
12. 48%
10/10
8,,000 ,000
12. 529%
10/16
7 ,000 ,000
12. 512%
10/17
5 ,289 ,464
4,,500 ,000
12. 329%
10/18
3 ,000 ,000
12. 713%
10/19
5 ,500 ,000
13. 717%
10/22
4 ,500 ,000
13. 717%
10/23
7,
,500 ,000
12. 983%
10/30
12. 772%
10/31 1, Amtrak issued Note #22, in the amount
On October
of $350
million, to the FFB. Note #22 matures October 1, 1980 and
carries a rate of 11.155%. This note refinances previous
Amtrak borrowings from FFB.
FFB advanced $5 million to the Trustee of the Chicago,
Milwaukee, St. Paul and Pacific Railroad under a $20 million
credit guaranteed by DOT pursuant to Section 3 of the Emergency
Rail Services Act. The advance carries an interest rate of
9.625% and matures September 12, 1994. This is the final
advance under this agreement.

- 3Under notes guaranteed by DOT pursuant to Section 511 of
the Railroad Revitalization and Regulatory Reform Act of 1976,
FFB lent funds to the following railroads:
Interest
Date
Amount
Maturity
Rate
10/5 $2,323,367.00 11/15/96 9.579% qt
Missouri-Kansas-Texas Railroad
10/10
930,150.00 11/15/91 10.48% an
Trustee of The Milwaukee Road
990,150.00
5/1/86 10.91% an
Chicago $ North Western 511-78-2 10/11
Chicago § North Western 511-78-3 10/11 1,306,589.00 11/1/90 10.447%
On October 30, the United States Railway Association
refinanced principal and accrued interest totalling
$410,329,606.03 that was outstanding under its Note #16 into
a new Note #17, which matures April 29, 1980. Note #17 carries
an interest rate of 13.335%.
Agency Issuers
During October, the Tennessee Valley Authority (TVA) sold
FFB the following notes, totalling $215 million, which mature
January 31, 1980.
Date

Note #

10/5
10/15
10/22

109
110
111

. Amount

Interest Rate

$95,000,000
45,000,000
75,000,000

10.846%
12.126%
13.047%

TVA issued FFB a $400 million Power Bond on October 31.
This bond will mature October 31, 2004, and carries an
interest rate of 10.545%.
On October 31, FFB entered into a $2 billion nuclear
fuel lease credit with TVA and Seven States Energy, a California
corporation. Note #1 under this agreement was signed on
October 31, for $490,576,575.90. This note matures
January 31, 1980, and carries a rate of 12.983%.
FFB advanced $60 million to the Student Loan Marketing
Association (SLMA), a federally chartered private corporation.
FFB holdings of SLMA debt now totals $1,335 million.
FFB purchased two Farmers Home Administration Certificates
of Beneficial Ownership during October. Interest is payable
annually.
Interest
Date
Amount
Maturity
Rate
10/4
$790,000,000
10/4/84
9.961%
10/24
300,000,000
10/24/84
11.995%

- 4FFB Holdings
As of October 31, 1979, FFB holdings totalled $65.6
billion. FFB Holdings and Activity Tables are attached.
# 0 #
Note:

An. denotes annual interest payments and qtr. denotes
quarterly interest payments. Where not noted, interest
is payable semiannually.

FEDERAL FINANCING RANK HOLDINGS
(in millions of dollars)
Program

October 31. 1979

September 30. 1979

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility

Net Change
(10/1/79-10/31/79)

$ 6,945.0
7,952.9
2.5

$ 7,125.0
7,952.9
-0-

$ -180.0
-02.5

1,587.0
455.4

1,587.0
445.7

09.6

31,670.0
77.3
160.1
35.8
1,223.2
92.2

31,080.0
77.3
160.1
35.8
1,223.2
94.4

590.0
-0-0-0-0-2.2

42.4
98.2
5,367.0
365.6
36.0
33.5
7.4
474.6
430.6
6,157.0
490.6
343.7
1,335.0
21.6
177.0
$65,582.5*

37.4
92.7
5,270.9
359.7
36.0
38.5
5.4
432.3
420.3
5,926.5
-0336.4
1,275.0
21.6
177.0

5.0
5.6
96.2
5.9
-0-5.0
2.0
42.3
10.2
230.5
490.6
7.3
60.0
-0-0-

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Farmers Home Administration
DIIEW-Health Maintenance Org. Loans
DHEW-Medical Facilities Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government Guaranteed Loans
DOT-Emergency Rail Services Act
DOT-Title V, RRRR Act
DOD-Foreign Military Sales
General Services Administration
Guam Power Authority
DHUD-New Communities Admin.
DHUD-Community Block Grant
Nat'l. Railroad Passenger Corp. (A*4TRAK)
NASA
Rural Electrification Administration
Seven States Energy Corp. (TVA)
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
WM/VTA
TOTALS
Federal Financing Bank

$64,211.0*

$1,371.5*

December 13, 1979
*totals do not add due to rounding

FEDERAL FINANCING

BANK

October 1979 Activity

BORROWER

MATURITY

INTEREST:
RATE :

81,996.00
384,482.39
67,346.14
50,308.61
69,294.24
266,226.00
4,787,488.12
4,607,617.60
404,293.09
592,960.00
923,134.48
386,378.00
71,618.40
7,859,527.55
2,699,999.45
793,512.29
97,620,426.00
97,200.00
485,140.00
399,947.80
2,587,303.25
635,548.92

9/20/85
9/12/83
8/25/84
11/26/85
6/30/83
9/20/84
12/15/08
9/20/84
12/31/87
6/3/91
9/20/85
11/26/85
12/31/86
10/1/88
6/15/89
9/12/83
9/1/09
12/31/87
3/15/88
5/5/87
12/31/86
6/1/86

9.873%
10.131%
9.995%
9.898%
10.159%
9.994%
9.536%
10.009%
9.786%
9.770%
10.860%
10.976%
10.848%
10.715%
10.642%
12.469%
10.577%
11.523%
11.332%
11.407%
11.589%
11.542%

10/4
10/24

790,000,000.00
300,000,000.00

10/4/84
10/24/84

9.725%
11.655%

10/1
10/10
10/15
10/30

179,798.79
4,277,613.03
350,527.82
1,121,562.23

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

9.520%
9.652%
10.135%
10.515%

10/5
10/25
10/31

1,100,000.00
450,000.00
450,000.00

6/15/80
7/15/80
6/15/80

11.415%
13.745%
13.405%

10/25
10/31

1,000,000.00
1,500,000.00

11/24/79
1/29/80

13.454%
12.983%

10/1
10/1
10/1
10/1
10/1
10/1
10/1
10/1
10/1

260 ,000.00
2,420 ,000.00
1,236 ,000.00
123 ,Q00.00
3,336 ,000.00
2,231 ,000.00
3,739 ,000.00
21 ,000.00
3,789 ,000.00
848 ,000.00

10/1/81
10/1/81
10/1/81
10/1/81
10/31/81
10/1/82
9/30/85
12/31/13
12/31/13
12/31/13

10.275% 10.146% quarterly
10.275% 10.146%
10.275% 10.146%
10.275% 10.146%
10.235% 10.107%
9.935%
9.815%
9.635%
9.522%
9.456%
9.347%
9.456%
9.347%
9 rtSfi? 0 Wll

DATE

AMOUNT
OF ADVANCE

INTEREST
PAYABLE
(other than s/a}

DEPARTMENT OF DEFENSE
10/1
$
10/2
10/3
10/3
10/3
10/3
10/3
10/4
10/4
10/5
10/15
10/17
10/18
10/18
10/18
10/24
10/25
10/25
10/29
10/29
10/30
10/31

Thailand #6
Philippines #4
Ecuador #2
Jordan #2
Thailand #2
Thailand #3
Israel #7
Colombia #2
Korea #10
Turkey #7
Colombia #3
Jordan #2
Jordan #3
Kenya #6
Kenya #7
Philippines #4
Egypt #1
Korea #10
Jordan #4
Tunisia #6
Jordan #3
Tunisia #5
FARMERS HOME ADMINISTRATION
Certificates of Beneficial
Ownership

9.961% annually
11.995% annually

GENERAL SERVICES ADMINISTRATION
Series L-059
Series M-052
Series L-060
Series K-025

\N DEVELOPMENT
Section 108 Block Grant
Kansas City, Missouri
Toledo, Ohio
Kansas City, Missouri

14.064% annually

NATIONAL CREDIT UNION ASSOCIATION
Central Liquidity Facility
Note #1
Note #2

RURAL ELECTRIFICATION ADMINISTRATION
Corn Belt Power #94 10/1
Big Rivers Electric #58
Big Rivers Electric #91
Big Rivers Electric #136
Allegheny Electric #93
Northern Michigan Electric #101
Tri-State Gen. $ Trans. #89
Arkansas Electric #77
Arkansas Electric #97
Pacific Northwest Gen. #118

FEDERAL FINANCING BANK
October 1979 Activity
Page 2

BORROWER

AMOUNT
OF ADVANCE

DATE

RURAL ELECTRIF::CATI0N ADMINISTRATION
(cont.)
Hoosier Energy #107
United Power Assn. #67
United Power Assn. #129
Florence Telephone Co. #40
Corn Belt Power #55
Wolverine Electric #100
Soyland Power #105
Sierra Telephone #59
Tri-State Gen. § Trans. #37
Tri-State Gen. $ Trans. #79
Wolverine Electric #100
Allegheny Electric #93
San Miguel Electric #110
#101
Northern Michigan Elect.
Wabash Valley Power #104
Cooperative Power #5
Colorado-Ute Electric #78
Sugar Land Telephone #69
Gulf Telephone #50
East Kentucky Power #73
Associated Electric #132
Western Illinois Power #99
Big Rivers Electric #58
Big Rivers Electric #91
Big Rivers Electric #136
#3
Chugach Electric #82
South Mississippi Elect. #90
South Mississippi Elect.
Southern Illinois Power #38
Tri-State Gen. § Trans.
Pacific Northwest Gen. #118
Basin Electric Power #137
Doniphan Telephone #14
Ponderosa Telephone #35
Chugach Electric #82
#89
Big Rivers Electric #91
Tri-State Gen. § Trans.
North West Telephone #62
SMALL BUSINESS INVESTMENT COMPANIES
Devonshire Capital Corp. 10/24
First Southern Capital Corp.
Advent Capital Corp.
Vicksburg SBIC
Inv=>itment Capital Inc.
Builders Capital Corp.
Fifty-Third Street Ventures, Inc.
First Texas Investment Co.
Florists' Capital Corp.
Investment Capital Corp.
Venture Cap. Corp. of New Mexico

:
:INTEREST:
INTEREST
: MATURITY : RATE : PAYABLE
(other than s/a]

10/2
$
10/4
10/4
10/4
10/5
10/5
10/5
10/9
10/9
10/9
10/10
10/10
10/10
10/10
10/10
10/11
10/11
10/12
10/12
10/15
10/18
10/19
10/22
10/22
10/22'
10/22
10/24
10/24
10/25
10/25
10/25
10/26
10/26
10/29
10/30
10/31
10/31
10/31

25,000,000.00
1,200,000.00
7,500,000.00
464,000.00
105,000.00
1,761,000.00
6,900,000.00
14,000.00
50,000.00
1,579,000.00
616,000.00
4,245,000.00
17,824,000.00
786,000.00
5,015,000.00
8,000,000.00
356,000.00
942,000.00
255,000.00
7,909,000.00
9,600,000.00
3,201,000.00
2,497,000.00
5,200,000.00
1,328,000.00
1,010,000.00
236,000.00
382,000.00
650,000.00
35,000.00
1,467,000.00
74,617,000.00
250,000.00
395,000.00
3,287,000.00
8,355,000.00
7,603,000.00
1,870,000.00

10/2/82
10/4/81
10/4/81
12/31/13
10/5/81
10/5/81
10/5/81
10/31/81
9/30/86
9/30/86
10/10/81
10/31/81
10/31/81
10/10/82
12/31/13
10/11/81
10/11/81
10/12/81
12/31/13
10/15/81
10/18/81
10/19/81
10/22/81
10/22/81
10/22/81
12/31/13
10/26/81
10/26/81
10/25/82
9/30/86
12/31/13
10/26/81
12/31/13
10/29/82
12/31/13
10/31/81
9/30/86
12/31/13

9.945%
10.315%
10.315%
9.509%
10.515%
10.515%
10.515%
10.515%
9.845%
9.845%
11.295%
11.235%
11.235%
10.735%
9.832%
11.575%
11.575%
11.435%
10.003%
11.345%
11.575%
11.925%
12.325%
12.325%
12.325%
10.324%
12.805%
12.805%
12.025%
11.215%
10.457%
12.765%
10.569%
11.635%
10.475%
12.295%
11.195%
10.437%

10/24
10/24
10/24
10/24
10/24
10/24
10/24
10/24
10/24
10/24

1,000 ,000.00
500 ,000.00
2,000 ,000.00
200 ,000.00
1,000 ,000.00
1,000 ,000.00
2,000 ,000.00
500 ,000.00
500 ,000.00
1,500 ,000.00
500 ,000.00

10/1/82
10/1/82
10/1/84
10/1/84
10/1/86
10/1/89
10/1/89
10/1/89
10/1/89
10/1/89
10/1/89

12.115%
12.115%
11.575%
11.575%
11.345%
11.135%
11.135%
11.135%
11.135%
11.135%
11.135%

10/2
10/9
10/16
10/23
10/30

1,280,000,000.00
1,290,000,000.00
1,295,000,000.00
1,310,000,000.00
1,325,000,000.00

10/9/79
-10/16/79
10/23/79
10/30/79
11/6/79

10.891%
11.422%
12.529%
13.717%
12.983%

STUDENT LOAN MARKETING ASSOCIATION
Note #216
Note #217
Note #218
Note #219
Note #220

9.842% quarterly
10.185%
10.185%
9.399%
10.38%
10.38%
10.38%
10.38%
9.727%
9.727%
11.14%
11.082%
11.082%
10.595%
9.714%
11.412%
11.412%
11.276%
9.881%
11.189%
11.412%
11.752%
12.141%
12.141%
12.141%
10.194%
12.606%
12.606%
11.849%
11.062%
10.324%
12.568%
10.433%
11.471%
10.341%
12.112%
11.043%
10.304%

FEDERAL FINANCING BANK
October 1979 Activity
Page 3
BORROWER

DATE

AMOUNT
OF ADVANCE

MATURITY

INTEREST:
RATE :

400,000,000.00

10/31/04

10.545%

TENNESSEE VALLEY AUTHORITY
Power Bond

10/31 ir

Note #109
Note #110
Note #111

10/5
10/15
10/22

95,000,000.00
45,000,000.00
75,000,000.00

10/31

490,576,575.90

1/31/80

12.9835

10/4

5,000,000.00

7/12/94

9.625<

10/5
10/10
10/11
10/11

2,323,367.00
930,150.00
990,369.00
1,306,589.00

11/15/96
11/15/91
5/1/86
11/1/90

9.694%
10.219%
10.628%
10.447%

10/1
10/1
10/2
10/3
10/9
10/10
10/16
10/17
10/18
10/19
10/22
10/23
10/30
10/31

350,000,000.00
47,000,000.00
3,500,000.00
5,000,000.00
3,500,000.00
9,000,000.00
8,000,000.00
7,000,000.00
5,289,464.00
4,500,000.00
3,000,000.00
5,500,000.00
4,500,000.00
7,500,000.00

10/1/80
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79
12/31/79

11.155%
10.891%
10.891%
10.930%
11.422%
12.48%
12.529%
12.512%
12.329%
12.713%
13.717%
13.717%
12.983%
12.772%

10/30

410,329,606.03

INTEREST
PAYABLE
(other than s/a]

1/31/80 10.846%
1/31/80 12.126%
1/31/80 13.047%

Seven States Energy Corporation
Note #1

DEPARTMENT OF TRANSPORTATION
Emergency Rail Services Act
Trustee of The Milwaukee Road
Section 511
Missouri-Kansas-Texas Railroad
Trustee of The Milwaukee Road
Chicago $ North Western 511-78-2
Chicago $ North Western 511-78-3

9.579% quarterly
10.48% annually
10.91% annuallv

National Railroad Passenger Corp,
(AMTRAK)
Note #22
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
Note #21
UNITED STATES RAILWAY ASSOCIATION
Note #17

4/29/80 13.335%

WESTERN UNION SPACE COWUNICATIONS. INC.
(NASA)
"
10/1
10/22
10/24

1,150,000.00
6,900,000.00
2,175,000.00

10/1/89
10/1/89
10/1/89

9.706%
11.184%
11.537%

9.942% annuallv
11.497%
11.87%

FOR RELEASE AT 12:00 NOON

December 21, 1979

TREASURYfS WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,400 million, to be issued January 3, 1980.
This offering will provide $500 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,927 million, including $746 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,843 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,200
million, representing an additional amount of bills dated
October 4, 1979,
and to mature April 3, 1980
(CUSIP No.
912793 3Y 0 ) , originally issued in the amount of $3,033 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
January 3, 1980,
and to mature July 3, 1980
(CUSIP No.
912793 4U 7 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing January 3, 1980.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents of foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held by them.
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. 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 Standard time,
Friday, December 28, 1979.
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.
M-9S5

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. A deposit
of 2 percent of the par amount of the bills applied for must
accompanies
the tenders.
accompany tenders
for such bills from others, unless an express
cuaranty
of payment will
by anbeincorporated
or trust
Public
announcement
made by the bank
Department
of company
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
v.nole or in part, and the Secretary's action shall be final.
Subject to these reservations, noncompetitive tenders for each
i.-rue for $500,000 or less without stated price from any one
. loder will be accepted in full at the weighted average price
.in three decimals) of accepted competitive bids for the
.esoective issues.

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on January 3, 1980,
iq c^sh or other immediately available
funds or in Treasury bills maturing January 3, 1980.
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, 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.

kpartmentoftheTREASURY
HINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELE^o^

December 21, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,204 million of 13-week bills and for $3,201 million of
26-week bills, both to be issued on December 27, 1979,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing March 27, 1980
Discount Investment
Price
Rate
Rate 1/
96.956
96.939
96.948

12.042%
12.109%
12.074%

12.63%
12.70%
12.66%

26-week bills
maturing June 26, 1980
Discount Investment
Price
Rate
Rate 1/
94.034
93.984
94.007

11.801%
11.900%
11.854%

12.76%
12.87%
12.82%

Tenders at the low price for the 13-week bills were allotted 1%.
Tenders at the low price for the 26-week bills were allotted 16%.
TENDER

DATEl
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

Receive
$
22,OK
4,941,23.
19,471
29,401
77,47*
36,41!TODAY:
360,611
32,82.
2,92I L A S T r-EZK,
34,36
11,34
265,02
32,52

TOTALS

$5,865,61H-GHEST SXXCE

December 21,T979

13-WEEK

26-WEEK

Type
Conpetitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

$4,288,1*
447,8!
$4,736,0:LOWEST

SINCE

957,9

^r^Vfc _lLl£fL%

17
$5,865,610

JVEquivalent coupon-issue yield.

$3,204,025

$5,019,600

$3,200,545

December 21, 197 9

FOR IMMEDIATE RELEASE

High
Low
Average

26-week bills
maturing June 26, 1980
Discount Investment
Price
Rate
Rate 1/

13-week bills
maturing March 27, 1980.
Discount Investment
Price
Rate
Rate 1/
96.956
96.939
96.948

12.042%
12.109%
12.074%

12.63%
12.70%
12.66%

94.034
93.984
94.007

12.76%
12.87%
12.82%

11.801%
11.900%
11.854%

Tenders at the low price for the 13-week bills were allotted 1%.
Tenders at the low price for the 26-week bills were allotted 16%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands]I
Accepted
Retceived
Received
:
13,365
$
22,010
$
22,010
$
4,941,235 * 2,727,340 :•
4,134,725
8,570
19,470
19,470 •
34,210
29,405
29,405 !
44,410
77,470
74,530 :
23,640
36,415
36,415
360,610
414,575
115,860 .
32,825
44,505
23,825
6,920
2,920
2,920
19,715
34,360
34,360
10,070
11,340
11,340
232,580
265,025
74,025
32,315
32,525
32,525

Accepted
13,365
$
2 ,711,170
8,570
29,210
44,410
23,640
171,075
42,505
6,920
19,715
10,070
87,580
32,315

$5,865,610

$3,204,025

$5,019,600

$3,,200,545

Competitive
Noncompetitive

$4,288,185
447,850

$1,626,600
447,850

$3,411,810
250,690

$1,592,755
250,690

Subtotal, Public

$4,736,035

$2,074,450 ' : $3,662,500

Federal Reserve
Foreign Official
Institutions

957,975

171,600

$5,865,610

$3,204,025

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Type

TOTALS

^/Equivalent coupon-issue yield.

:
:

$1,841,445

950,000

407,100

$5,019,600

$3,200,545

IMMEDIATE RELEASE
December 26, 1979

CONTACT: Everard Munsey
202/566-8191

TREASURY ISSUES INTERPRETATIVE REGULATIONS ON IRAN
The Treasury Department said today its Iranian Asset
Control Regulations prohibit any extension of credit to
Iran by banks or others subject to U.S. jurisdiction.
In an interpretative regulation, Treasury said the
prohibition applies to extensions or renewals of credit
after November 14 in any currency, unless they are authorized
by license. This means that those subject to U.S. jurisdiction may participate in letter of credit transactions only
if 100 percent collateral is received in foreign currencies
or unblocked U.S. dollars.
The new regulation also makes clear that U.S. banks
may transfer blocked Iranian funds from demand deposits to
interest-bearing accounts at the instruction of the Iranian
depositor at any time.

M-257

FOR IMMEDIATE RELEASE
Thursday, December 27, 1979

Contact:

Jack P. Plum
202/566-2615

INTEREST RATE BASE FOR NEW SMALL SAVER CERTIFICATE
Secretary of the Treasury G. William Miller, today
advised the supervisory agencies for Federally insured depository institutions that the average 2-1/2 vear Treasury
yield curve rate during the five business days ending
December 26 was 10.90 percent, rounded to the nearest 5
basis points.
This rate will be used by the agencies in determining
the maximum interest payable in January on time certificates issued in denominations of less than $100,000 and
maturities of two-and-a-half years.
The report of the Treasury yield curve average is
announced three business days prior to the first day of
each month for determination of ceilings for new variable
rate savings certificates which are adjusted on the first
calendar day of each month.
The commercial bank ceiling for the certificate is
three-quarters of one percent below the yield on the twoand-a-half-year Treasury securities. The ceiling for
thrift institutions is one-half of one percent below the
yield on the two-and-a-half-year securities.
o

M-258

FOR RELEASE AT 4:00 P.M.

December 27, 1979

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,000 million, of 360-day
Treasury bills to be dated January 8, 1980, and to mature
January 2, 1981 (CUSIP No. 912793 5W 2). This issue will
provide about $295 million new cash for the Treasury as the
maturing issue is outstanding in the amount of $3,705 million,
including $650
million currently held by Federal Reserve
Banks as agents for foreign and international monetary
authorities and $852
million currently held by Federal
Reserve Banks for their own account.
The bills will be issued for cash and in exchange for
Treasury bills maturing January 8, 1980. Tenders from Federal
Reserve Banks for themselves and as agents for foreign and
international monetary authorities will be accepted at the
weighted average price of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal
Reserve Banks, as agents for foreign and international monetary
authorities, to the extent that the aggregate amount of tenders
for such accounts exceeds the aggregate amount of maturing
bills held by them.
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. This 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 Standard time, Wednesday,
January 2, 1980. 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. 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.
M-259

-2Banking 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. Each tender must state the amount of any net long
position in the bills being offered if such position is in excess
of $200 million. This information should reflect positions held
at the close of business on the day prior to the auction. Such
positions would include bills acquired through "when issued"
trading, and futures and forward transactions. 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, when submitting tenders for customers, must
submit a separate tender for each customer whose net long
position in the bill being offered exceeds $200 million.
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. 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
$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.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on
January
T980,
in
cash
or other
immediately
available
maturing
new
adjustments
funds
bills.
or bills
in8,Treasury
will
accepted
be made
bills
in
for
maturing
exchange
differences
January
and the
between
8,
issue
1980.
the
price
par
Cash
of
value
the of

December 28, 1979

FOR RELEASE AT 12:00 NOON

TREASURY TO AUCTION $1,500 MILLION OF 15-YEAR 1-MONTH BONDS
The Department of the Treasury will auction $1,500
million of 15-year 1-month bonds to raise new cash.
Additional amounts of the bonds may be issued to Federal
Reserve Banks as agents for foreign and international
monetary authorities at the average price of accepted
competitive tenders.
Details about the new security are given in the
attached highlights of the offering and in the official
offering circular.

oOo

Attachment

M-260

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 15-YEAR 1-MONTH BONDS
TO BE ISSUED JANUARY 10, 1980
December 28, 1979
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date. February 15, 1995
Call date
Interest coupon rate

$1,500 million
15-year 1-month bonds
Bonds of 1995
(CUSIP No. 912810 CL 0)
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
August 15 and February 15
(first payment on August 15, 198C
Minimum denomination available $1,000
Terms of Sale:
Method of sale
Accrued interest payable by
investor
Preferred allotment
Deposit requirement 5% of face amount
Deposit guarantee by designated
institutions
Key Dates:
Deadline for receipt of tenders
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
Delivery submitted
date for coupon securities.

Yield auction
None
Noncompetitive bid for
$1,000,000 or less

Acceptable
Thursday, January 3, 1980,
by 1:30 p.m., EST
Thursday, January 10, 1980

Tuesday, January 8, 1980

Monday,
January 7,
Friday, January
18,1980
1980

portmentoftheTREASURY
TELEPHONE 566-2041

WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

December 28, 1979

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,202 million of 13-week bills and for $3,200 million of
26-week bills, both to be issued on January 3, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing April 3, 1980
Discount Investment
Price
Rate
Rate 1/
96.965
96.929
96.940

12.007%
12.149%
12.105%

26^week bills
maturing July 3, 1980
Discount Investment
Price
Rate 1/
Rate

12.59%
12.74%
12.70%

94.015
93.979
93.994

11.838%
11.910%
11.880%

12.80%
12.88%
12.85%

Tenders at the low price for the 13-weak bills were allotted 21%.
Tenders at the low price for the 26-week bills were allotted
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

Received
$
41,850
4,337,060
22,390
31,410
21,275
37,990
475,435
21,065
8,440
26,920
17,735
240,220
34,285

Accepted
$
41,850 ::
2,675,560 :
22,390 j
31,410 :
21,275 :
37,990 .
185,435 .:
14,065 ,.
8,440 ,;
26,920 ,
17,735
84,620
34,285 !

Received
$
20,090
4,631,960
9,115
48,970
17,285
25,480
719,975
21,255
4,620
20,590
12,095
224,585
49,605

Accepted
$
20,090
2,499,965
9,115
43,970
17,285
25,480
429,375
14,255
4,620
20,590
12,095
53,555
49,605

TOTALS

$5,316,075

$3,201,975 :

$5,805,625

$3,200,000

$3,690,705
494,315

$1,576,605 :
494,315 :

$4,019,235
322,410

$1,413,610
322,410

$4,185,020

$2,070,920 :

$4,341,645

$1,736,020

Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

935,000

933,905

196,055

530,075

$5,316,075

$3,201,975

$5,805,625

$3,200,000

An additional $55,465 thousand of 13-week bills and an additional $148,725 thousan
of 26-week bills will be issued to foreign official institutions for new cash.
M-261

FOR RELEASE AT 12:00 NOON

December 31, 1979

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $6,400 million, to be issued January 10, 1980.
This offering will provide $500 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$5,890 million, including $575 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,945 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
91-day bills (to maturity date) for approximately $3,200
million, representing an additional amount of bills dated
October 11, 1979,
and to mature April 10, 1980
(CUSIP No.
912793 3Z 7 ) , originally issued in the amount of $3,036 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $3,200 million to be dated
January 10, 1980, and to mature July 10, 1980
(CUSIP No.
912793 4V 5).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing January 10, 1980.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
at the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
Banks, as agents of foreign and international monetary authorities,
to the extent that the aggregate amount of tenders for such
accounts exceeds the aggregate amount of maturing bills held by them.
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. 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 Standard time,
Monday, January 7, 1980.
Form PD 4632-2 (for 26-week series)
or Form PD 4632-3 (for 13-week series) should be used to submit
renders for bills to be maintained on the book-entry records of
the Department of the Treasury.

-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. Each tender must state the amount of any net
long position in the bills being offered if such position is in
excess of $200 million. This information should reflect positions
held at the close of business on the day prior to the auction.
Such positions would include bills acquired through "when issued"
trading, and futures and forward transactions as well as holdings
of outstanding bills with the same maturity date as the new
offering; e.g., bills with three months to maturity previously
offered as six month bills. 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, when submitting tenders for customers, must submit a
separate tender for each customer whose net long position in the
bill being offered exceeds $200 million.
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 bookentry records of Federal Reserve Banks and Branches. 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.
bidder
respective
Subject
issue
(in three
for
will
todecimals)
$500,000
issues.
these
be accepted
reservations,
or
of less
accepted
in without
full noncompetitive
at
competitive
stated
the weighted
price
bids
tenders
average
from
for the
any
for
price
one
each

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on January 10, 1980, in cash or other immediately available.
funds or in Treasury bills maturing January 10, 1980.
Cash f
adjustments will be made for differences between the par value o
the maturing
bills accepted in exchange and the issue price of
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, 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
December 31, 1979

CONTACT: Alvin Hattal
202/566-8381

TREASURY ANNOUNCES PRELIMINARY COUNTERVAILING
DUTY ACTION ON MALLEABLE PIPE FITTINGS FROM JAPAN
The Treasury Department today announced its preliminary
determination that Japan is subsidizing exports of malleable
pipe fittings to the United States.
This investigation was begun after a petition was received
on June 26, 197 9 on behalf of the American Pipe Fittings Assn.
A final determination in this case must be made by March 17, 1980.
Treasury's preliminary investigation found that the
Government of Japan subsidizes manufacturers and exporters of
their merchandise through (1) financing at a preferential
interest rate and (2) partial tax sheltering of earnings,
The Countervailing Duty Law requires the Treasury Department
to assess an additional customs duty equal to the net amount
of a subsidy paid on imported merchandise.
Since a final determination will be made after the Trade
Agreements Act of 1979 comes into effect, the International
Trade Commission will determine if an industry in the U.S. is
being injured by these imports if the final determination is
affirmative. If the final determination is affirmative and
the ITC finds injury, an additional duty, the countervailing
duty, will be imposed.
In the interim, an estimated duty of 0.6% ad valorem will
be collected in the form of cash deposits, bonds or other
securities.
Notice of this action will appear in the Federal Register
of January 2, 1980.
Imports of this merchandise amounted to about $10.5 million
in 1978".
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M-263

Full text of Press Releases of the United States Department of the Treasury : Volume 226

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