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Treas.
HJ
10
.A13P4
v.233

U. S. Dept. of the Treasury.
T. PRESS RELEASES

LIBRARY
AUG 41982
ROOM 500 I
"RcASURY DEPARTMENT

DATE:

ll/3/^Q

13-WEEK
TODAY:

/3. ? W %

2 6-WEEK
/3 . Z£>9 /.

LAST WEEK: /P. 33/ % I2.%%¥%>

HIGHEST SINCE:

i//?/?o
LOWEST SINCE:

/3.f>F% A3. SV?£

&L2L3!

bpartmentoftheTREASURY
ASHINGTON,D.C. 20220

TELEPHONE 566-2041

llll

/789

FOR IMMEDIATE RELEASE

November 3, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $3,901 million of 13-week bills and for $ 3,900 million of
26-week bills, both to be issued on November 6, 1980, were accepted today,
26-week bills
13-week bills
maturing May 7, 1981
maturing February 5, 1981
Discount Investment
Discount Investment
Rate 1/
Rate 1/
Price
Rate
Price
Rate
>a/
96.663^' 13.201%
13.85%
14.38%
g s ^ i i ^ 13.231%
96.613
13.399% 14.06%
14.46%
93.273
13.306%
96.627
13.344%
14.00%
14.42%
93.292
13.269%
3 tenders totaling $1,880,000
2 tenders totaling $1,095,000
at the low price for the 13-week bills were allotted 81%.
at the low price for the 26-week bills were allotted 47%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)

RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average
a/ Excepting
b/ Excepting
Tenders
Tenders
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
ury
TALS

Received
$
69,995
5,917,625
38,795
73,300
50,340
58,585
378,655
24,835
13,555
48,915
28,970
432,375
153,785

Accepted
Received
$
53,995 " $
99,095
3,124,855 . 6,337,910
38,795
26,445
73,300
64,605
48,340
82,735
57,935 •
54,655
136,755
529,990
24,835
30,910
13,555
11,675
48,915
43,865
28,970 :
11,890
97,375
422,215
153,785
173,720

Accepted
$
54,095
3,146,955
26,445
39,605
60,535
54,155
149,990
30,910
10,675
43,865
11,880
97,215
173,720

$7,289,730

$3,901,410

$7,889,710

$3,900,045

$4,492,460
971,590

$1,404,140
971,590

: $5,300,905
:
838,145

$1,511,240
838,145

$5,464,050

$2,375,730

1,070,830

770,830

. 754,850

754,850

$7,289,730

$3,901,410

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

$6,139,050
965,000

$2,349,385
765,000

785,660

: $7,889,710

$3,900,045

An additional $ 93,330 thousand of 13-week bills and .an additional $ 92,840 thous.
of 26-week bills will be issued to foreign official institutions for new cash.
1/Equivalent coupon-issue yield.

M-726

TOR IMMEDIATE RELEASE

November 7, 1980

RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF NOVEMBER FINANCING
The Department of the Treasury has accepted $2,000 million of $3,819
million of tenders received from the public for the 30-year bonds auctioned
today.
The interest coupon rate on the bonds will be 12-3/4Z. The range of
accepted competitive bids, and the corresponding prices at the 12-3/4Z
coupon rate are as follows:
Bids Prices
Lowest yield
12769X1/
100.461
Highest yield
12.87*
99.090
Average yield
12.811
99.543
1/ Excepting 1 tender of $2,000.
Tenders at the high yield were allotted 47Z.
TENDERS RECEIVED AND ACCEPTED Cln thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

Received
$
12,517
3,389,091

Totals

Accepted
$
517
1,793,571

112

13,567
21,273
13,120
143,759
36,611
2,034
1,395
2,024
183,389

12,037
15,743
9,855
83,109
34,111
2,034
1,395
1,524
46,389

$3,818,920

$2,000,425

The $2,000 million of accepted tenders includes $142 million of
noncompetitive tenders and $1,859 million of competitive tenders from
private investors.
In addition to the $2,000 million of tenders accepted in the auction
process, $159 million of tenders were accepted at the average price from
Government accounts and Federal Reserve Banks for their own account in exchange
for maturing securities.
SUMMARY RESULTS OF NOVEMBER FINANCING
Through the sale of the three issues offered in the November financing,
the Treasury raised approximately $3.3 billion of new money and refunded
$6.3 billion of securities maturing November 15, 1980. The following table
summarizes the results:
New Issues
13-1/4% 13Z
12-3/4Z
NonmarNotes
Notes
Bonds
ketable
Maturing
5-15-84 11-15-90 11-15-05- Special
Securities
2010 Issues Total
Held
Public
$3.8
$2.3
$2.0
$ $8.0
$4.9
Government Accounts
and Federal Reserve
Banks
0.5
0.2
0.2
0.5
1.4
1.4
Foreign Accounts for
Cash
I_
0.2
-_
-_
0.2
-_
TOTAL

$4,3

$2.7

$2.2

Details may not add to total due to rounding.

M-731

$0.5

$9.6

$6.3

Net
New
Money
Raised
$3.1

0.2
$3.3

epartmentoftheTREASURY
November 7, 1980

FOR IMMEDIATE RELEASE

RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
AND SUMMARY RESULTS OF NOVEMBER FINANCING
The Department of the Treasury has accepted $2,000 million of $3,819
million of tenders received from the public for the 30-year bonds auctioned
today.
The Interest coupon rate on the bonds will be 12-3/4Z. The range of
accepted competitive bids, and the corresponding prices at the 12-3/4Z
coupon rate are as follows:
Prices
Bids
100.461
Lowest yield
12763Z 1/
12.87Z
99.090
Highest yield
Average yield
12.81Z
99.543
1/ Excepting 1 tender of $2,000.
Tenders at the high yield were allotted 47Z.
TENDERS RECEIVED AND ACCEPTED Cln thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
Totals

Received
$
12,517
3,389,091

Accepted
$
517
1,793,571

112

13,567
21,273
13,120
143,759
36,611
2,034
1,395
2,024
183,389

12,037
15,743
9,855
83,109
34,111
2,034
1,395
1,524
46,389

$3,818,920

$2,000,425

The $2,000 million of accepted tenders includes $142 million of
noncompetitive tenders and $1,859 million of competitive tenders from
private Investors.

l^A%...TREASURY

BONDS OF 2005-2010

DATE: H-7-80
HIGHEST SINCE: ££M»MY/S',

LOWEST SINCE:

LAST ISSUE: Ad6>U<Tr /S^/^0

TODAY:

1U1AU

Details mav not add to total due to rounding.

M-731

FOR RELEASE AT 12:00 NOON

November 7, 1980

TREASURY OFFERS $4,000 MILLION OF 44-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,000 million of 44-day
Treasury bills to be issued November 17, 1980, and to mature
December 31, 1980
(CUSIP No. 912793 7E 0 ) . 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,
Wednesday, November 12, 1980. 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 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
" 732

-2Government 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, November 17,
1980.
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, 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.

IMMEDIATE RELEASE
November 10, 1980

CONTACT: Robert Don Levine
Phone: (202) 566-5158

CHRYSLER LOAN BOARD ISSUES SECOND SEMIANNUAL REPORT TO CONGRESS
The Chrysler Corporation Loan Guarantee Board today
submitted its second semi-annual report to Congress as required
under the Chrysler Loan Guarantee Act.
The report covers the period from April 1, 19 80 to
September 30, 19 80 during which Chrysler Corporation met
requirements for drawing a total of $800 million of the $1.5
billion in Federally guaranteed loans available under the Act.
The report said that during the April-September period
"Chrysler has continued to make progress toward the accomplishment of the Act's goals". These goals include the company's
continuation as a going concern without further Federal financial assistance after 1983.
The Board consists of Treasury Secretary G. William Miller,
Chairman, Comptroller General Elmer Staats and Federal Reserve
Board Chairman Paul Volcker. The report is being sent to the
House and Senate Banking Committees.
#

FOR IMMEDIATE RELEASE

November 6, 1980

RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $2,251 million of
$4,359 million of tenders received from the public for the 10-year notes,
Series B-1990, auctioned today.
The interest coupon rate on the notes will be 13%. The range of
accepted competitive bids, and the corresponding prices at the 13%
coupon rate are as follows:
Bids Prices
Lowest yield
Highest yield
Average yield

12.95%
13.12%
13.07%

100.276
99.342
99.616

Tenders at the high yield were allotted 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
Totals

Received
$
25,788
3,775,341
1,444
70,044
14,204
9,903
232,142
38,884
1,920
16,793
2,384
169,490

Accepted
3,768
$
2,023,441
1,444
49,844
13,184
8,403
63,582
36,884
1,920
16,793
2,384
28,470

627

$4,358,964

$2,250,744

The $2,251 million of accepted tenders includes $170 million of
noncompetitive tenders and $2,080 million of competitive tenders from
private investors.
In addition to the $2,251 million of tenders accepted in the auction
process, $220 million of tenders were accepted at the average price from
Government accounts and Federal Reserve Banks for their own account in exchange
for maturing securities, and $190 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-730

/Z*7.

TREASURY NOTES OF SERIES B-1990

DATE: / A b ~ Q<>
SINCE;
HIGHEST-SINCE;
TT.

p-* ,o^^

Afs-r»t,rr

LOWEST SINCE: TODAY:

LAST
liiwi ISSUE:
X^L»UJJ. °Q
(
/f
/

rs,

erf

/o-l/*/ Z (A VGr. /.° • %'

FOR RELEASE AT 4:00 P.M.

November 4, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000- million, to be issued November 13, 1980.
This offering will"provide $450 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,545 million, including $l,884million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,649 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 $4,000
million, representing an additional amount of bills dated
August 14, 1980,
and to mature February 12, 1981(CUSIP No.
912793 6F 8 ) , currently outstanding in the amount of $3,927 million,
the additional and original bills to be freely interchangeable.
182-cay bills for approximately $4,000 million to be dated
November 13, 1980,
and to mature May 14, 1981
(CUSI? No.
912793 6R 2 ) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing November 13, 1980.
Tenders
from Federal Reserve" Banks for themselves and as agents'of
foreign and international monetary authorities will be accepted
a.z the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
3anks, 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 oayable 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
3ranches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up-to 1:30 p."m., Eastern Standard time, Monday,
November 10, 1980.
Form PD 4632-2 (for 26-week series)
or Form PD 4632-3 (for 13-week series) should be used to submit
tend«*-s 'or bills to be maintained on the book-entry records of
the Department of the Treasury.
M-727

-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 $ 5 0 0 , 0 0 Q,...o r less without stated price from any one
bidder will be accepted in full at the weighted average price
(in three decimals) of accepted competitive bids for the
respective issues.

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on November 13, 1980, in cash or other immediately available
funds or in Treasury bills maturing November 13, 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.

FOR IMMEDIATE RELEASE

November 5, 1980

RESULTS OF AUCTION OF 3-1/2-YEAR NOTES
The Department of the Treasury has accepted $3,752 million of
$6,451 million of tenders received from the public for the 3-1/2-year
notes, Series G-1984, auctioned today.
The range of accepted competitive bids was as follows:
Lowest yield 13.09% U
Highest yield
Average yield

13.40%
13.31%

The interest rate on the notes will be 13-1/4%. At the 13-1/4%rate,
the above yields result in the following prices:
Low-yield price 100.438
High-yield price
Average-yield price

99.592
99.837

The $3,752 million of accepted tenders includes $606 million of
noncompetitive tenders and $2,691 million of competitive tenders from
private investors, including 70% of the amount of notes bid for at the
high yield. It also includes$455 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
process, $500
from Government
in exchange for

the $3,752 million of tenders accepted in the auction
million of tenders were accepted at the average price
accounts and Federal Reserve Banks for their own account
maturing securities.

y Excepting 2 tenders totaling $130,000.

M-728

J 3 " '<

TREASURY NOTES OF SERIES

"1984

DATE: tf/s/gO

HIGHEST SINCE:

LOWEST SINCE:

LAST ISSUE:

TODAY:

',3-/tf'4

l3.3fe/s//£J-£

r^i
f 1

ederal financing bank

^ '
, ^^•v)
IK-fSJ

WASHINGTON, D.C 20220

FOR IMMEDIATE RELEASE

November 6, 1980

FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank
(FFB), announced the following activity for September 1980.
FFB holdings on September 30, 1980 totalled $82.6
billion, an increase of $2.5 billion over August 31. FFB
increased its holdings of agency-guaranteed loans by $882.1
million, its holdings of agency debt by $733.3 million and
its holdings of agency assets by $919.6 million. FFB made a
total of 160 disbursements during the period.
Attached to this release is a table detailing FFB loan
activity during September, a table summarizing FFB holdings
as of September 30, and a table outlining new FFB commitments
to lend during September.
# 0 #

M-729

.!= VO
3 CM

.E to

W) CM

a) o

£~

FEDERAL FINANCING BANK HOLDINGS
(in millions of dollars)
Program

September 30, 1980

August 31, 1980

$ 8,935.0
10,066.9
89.9

$ 8,720.0
9,557.9
80.7

1,520.0
481.8

-0-0-

37,961.0
103.2
156.0
31.5
1,912.3
79.1

37,403.0
100.4
156.0
31.5
1,552.3
80.5

558.0
2.9
-0-0360.0
-1.3

62.2
158.6
6,860.0
-0397.5
36.0
33.5
-036.4
385.2
520.4
8,232.8
649.2
465.7
2,295.0
30.2
177.0
$80,023.6*

-04.3
342.8
1.1
2.0
-0-0118.5
3.6
113.0
6.4
35.8
192.2
12.4
50.0
-0-

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility

Net Change-FY 80
(10/1/79-9/30/80)

Net Change
(9/1/80-9/30/80)
215.0
509.0
9.3

$ 1,810.0
2,114.0
89.9

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association

67.0
36.0

Agency Assets
Farmers Home Administration
DHEW-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
DOE-Hybrid Vehicles
General Services Administration
Guam Power Authority
DHUD-New Communities Admin.
DHUD-Public Housing Notes
DHUD-Community Block Grant Notes
Nat'l. Railroad Passenger Corp.(AMTRAK)
Space Communications Co. (NASA)
Rural Electrification Administration
Seven States Energy Corp. (TVA)
Small Business Investment Companies
Student Loan Marketing Association
Virgin Islands
WMATA
TOTALS
Federal Financing Bank

62.2
162.9
7,202.8
1.1
399.5
36.0
33.5
118.5
40.0
498.2
526.8
8,425.0
685.0
478.1
2,345.0
30.2
177.0
$82,558.5

6,881.0
25.9
-4.2
-4.3
689.1
-15.3

24.8
70.3
1,931.9
1.1
3'9.8
-0-5.0
118.
34.
65.
106.
2,498.
685.0
141.7
1,070.0
8.7
$18,347.5*
-0-

12,534.9*
at

October 28, 1980

*Totals do not add due to rounding.

FEDERAL FINANCING BANK
September 1980 Activity

BORROWER

.
.
: DATE :

AMOUNT
OF ADVANCE

:INTEREST:
: MATURITY : RATE :

(other than s/a)

DEPARTMENT OF DEFENSE
Korea #11
Philippines #4
Egypt #1
Israel #8
Tunisia #6
Egypt #1
Peru #4
Korea #11
Uruguay #2
Colombia #3
Greece #11
Sudan #1
Colombia #3
Colombia #4
Egypt #1
Uruguay #2
Morocco #7
Thailand #2
Thailand #3
Thailand #6
Thailand #7
Jordan #3
Jordan #4
Korea #11
Egypt #1
Greece #11
Greece #12
Kenya #8
Philippines #4
Tunisia #6
Turkey #6
Colombia #2
Colombia #3
Jordan #4
Turkey #2
Turkey #4
Turkey #6
Turkey #7
Sudan #1
Israel #8
Colombia #4
Ecuador #3
Egypt #1
Greece #11
Korea #11
Oman #1
Spain #2
Spain #3
Spain #4
Taiwan #9
Honduras #,5
Liberia #4
Liberia #5
Philippines #5

INTEREST
PAYABLE

9/2

9/10
9/11
9/11
9/11
9/12
9/15
9/15
9/15
9/15
9/17
9/17
9/17
9/18
9/18
9/18
9/18
9/18
9/18
9/18
9/19
9/22
9/22
9/22
9/22
9/22
9/22
9/23
9/25
9/26
9/26
9/26
9/26
9/26
9/26
9/26
9/26
9/26
9/30
9/30
9/30
9/30
9/30

146,580.00
180,875.10
43,000,000.00
425,600.00
128,229.20
1,269,411.00
225,137.31
39,168.00
261,795.00
869,783.67
300,000.00
29,259.00
70,629.00
79,152.50
6,481,217.07
625,553.00
1,561,170.00
83,526.00
51,355.45
350,083.00
386,074.00
13,359,129.35
825,257.65
1,515,000.00
235,725,310.90
2,508,000.00
6,408,800.00
2,033,889.00
4,412.86
5,872,349.00
192,000.00
140,152.58
685,717.60
2,517,486.75
72,628.82
317,002.00
3,068,726.90
22,942,558.23
253,748.00
6,375,407.00
226,472.90
264,800.00
3,317,141.00
2,481,930.00
9,402,358.17
12,707,923.00
116,825.00
47,252.98
5,235,600.00
3,500,000.00
109,784.00
13,681.85
956,015.00
282,183.21

12/31/88
9/12/83
9/1/09
9/1/09
5/5/87
9/1/09
4/10/85
12/31/88
12/31/84
9/20/85
5/10/89
5/15/89
9/20/85
7/10/86
9/1/09
12/31/84
7/21/88
6/30/83
9/20/84
9/20/85
8/25/86
12/31/87
3/15/88
12/31/88
9/1/09
5/10/89
6/3/10
3/3/92
9/12/83
5/5/87
6/3/88
9/20/84
9/20/85
3/15/88
10/1/86
10/1/87
6/3/88
6/3/91
5/15/89
9/1/09
7/10/86
8/1/85
9/1/09
5/10/89
12/31/88
7/20/88
9/15/88
9/20/89
4/25/90
7/1/86
4/25/90
10/30/84
1/21/8$
9/12/84

9/29

1,125,000.00

10/1/90

9/2
9/3
9/3
9/3
9/4
9/4
9/4
9/5
9/9
9/9
9/9

11.719%
11.481%
11.355%
11.355%
11.420%
11.172%
10.954%
11.166%
11.006%
11.285%
11.376%
11.376%
11.267%
11.236%
11.270%
11.291%
11.460%
11.498%
11.521%
11.525%
11.527%
11.753%
11.748%
11.742%
11.651%
11.816%
11.645%
11.765%
11.918%
11.857%
11.832%
11.910%
11.641%
11.614%
11.636%
11.622%
11.607%
11.543%
11.987%
11.783%
12.203%
12.226%
11.921%
12.141%
12.145%
12.160%
12.153%
12.135%
12.123%
12.399%
12.276%
12.476%
12.422%
12.486%

DEPARTMENT OF ENERGY
Hybrid Vehicle Program
Jet Industries

12.113% s/a

11.935% qtr.

EXPORT-IMPORT BANK

Note #27
Note #28

9/2
9/2

634,014,000.00
230,186,000.00

9/1/90 11.513% s/a 11.352% qtr.
9/1/90 11.675% s/a 11.509% qtr.

FEDERAL FINANCING BANK
September 1980 Activity
Page 2
BORROWER

DATE :

ANOINT
OF ADVANCE

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

FARMERS HOME ADMINISTRATION
Certificates of Benificial Ownership
9/9
9/9
9/9

162,000,000.00
319,000,000.00
77,000,000.00

9/9/85
9/9/95
9/9/00

11.425%
11.545%
11.395%

973,223.03
73,482.17
996,565.30

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

11.317%
11.409%
12.084%

11.751% an.
11.878% "
11.720% "

GENERAL SERVICES ADMINISTRATION
Series M-064
L-071
K-037

9/9
9/12
9/29

DEPARTMENT OF HEALTH & HUMAN SERVICES
Health Maintenance Organizations
Block #11 9/25

6,553,472.55

11.869%

118,524,316.96

11.198%

11 511% an

12 .124% an
11 .815% "

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Public Housing Authority Project Notes
Sale #1

9/12

COMMUNITY DEVELOPMENT BLOCK GRANT GUARANTEES
*Detroit, Michigan
•Philadelphia Housing Dev. Auth.
Indianapolis, Indiana
Taccroa, Washington
San Diego, California

9/1
9/1
9/4
9/22
9/26

24,861,519.18
90,000.00
500,000.00
685,714.60
2,640,000.00

9/1/86
9/1/82
10/31/80
9/22/85
3/1/81

11.777%
11.485%
10.218%
11.641%
11.885%

9/4
9/4
9/4
9/4
9/10
9/12

2,100,000.00
2,300,000.00
2,300,000.00
2,550,000.00
600,000.00
10,750,000.00

9/4/81
9/8/82
9/6/83
9/4/84
12/9/80
12/11/80

10.725%
10.855%
10.895%
11.055%
10.537%
10.641%

9/2
9/2
9/3
9/3
9/3
9/3
9/3
9/4
9/4
9/4
9/6
9/7
9/8
9/10
9/10
9/10
9/10
9/10
9/10
9/11
9/11
9/12
9/15
9/15

3,324 ,000.00
7.484 ,000.00
2,831 ,000.00
2,888 ,000.00
7,041 ,000.00
6,412 ,000.00
1,041 ,000.00
2,739 ,000.00
9,661 ,000.00
391 ,000.00
5,600,000.00
866,000.00
7,500 ,000.00
1,090 ,000.00
330 ,000.00
100 ,000.00
267 ,000.00
4,584 ,000.00
2,261 ,000.00
516 ,000.00
2,049 ,000.00
305 ,000.00
7,280 ,000.00
75,063 ,000.00

9/2/82
8/15/87
9/3/82
9/3/82
9/15/84
9/15/84
12/31/14
9/4/82
9/4/82
12/31/14
9/6/82
9/7/82
9/8/82
9/10/82
9/10/82
9/10/82
9/10/82
9/30/82
12/31/14
12/31/14
12/31/14
9/12/82
9/15/82
9/15/82

11.485%
11.755%
11.175%
11.175%
11.395%
11.395%
11.252%
10.855%
10.855%
11.099%
11.235%
11.235%
11.235%
11.255%
11.255%
11.255%
11.255%
11.255%
11.219%
11.186%
11.186%
11.395%
11.525%
11.525%

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note
Note
Note
Note
*Note
*Note

#35
#36
#37
#38
#39
#40

RURAL ELECTRIFICATION ADMINISTRATION
Arkansas Electric #142
Tri-State G & T #89
Brazos Electric Power #188
Brazos Electric Power #144
Oglethorpe Power #150
Oglethorpe Power #74
Chugach Electric #82
Soyland Power #105
Soyland Power #165
South Carolina Telephone #12
* San Miguel Electric #110
* Brookville Telephone #53
•United Pcwer #122
United Power #86
United Power #122
Northern Michigan Electric #101
Sho-Me Power #144
Allegheny Electric #93
Wabash Valley Power #104
Sugar Land Telephone #69
Western Illinois Power #162
Gu^fttfeistfHK|f3U \
J^ains Electric G & T 1*158
jMorthern Michigan Electric

11.325% qtr
11.587%
11.023%
11.023%
11.237%
11.237%
11.098%
10.712%
10.712%
10.949^
11.082%
11.082%
11.082%
11.101%
11.101%
11.101%
11.101%
11.101%
11.066%
11.034%
11.034%
11.237%
11.364%
11.364%

FEDERAL FINANCING BANK
September 1980 Activity
Page 3

BORROWER

DATE

RURAL ELECTRIFICATION ADMINISTRATION
* Wolverine Electric #100 9/15 $
Associated Electric #132
Seminole Electric #141
* Big Rivers Electric #58
* Big Rivers Electric #65
* Big Rivers Electric #91
* San Miguel Electric #110
Big Rivers Electric #58
Big Rivers Electric #65
Big Rivers Electric #91
Big Rivers Electric #136
Big Rivers Electric #143
Central Electric #131
Pacific Northwest Gen. #118
Colorado-Ute Electric #96
Corn Belt Power #166
* South Mississippi Electric #3
East Kentucky Power #140
Western Farmers Electric #126
Western Farmers Electric #133
* Southern Illinois Power #38
* South Mississippi Electric #3
* South Mississippi Electric #90
* Basin Electric Power #88
Basin Electric Power #87
Oglethorpe Power Corp. #74
Oglethorpe Power Corp. #150
Southern Illinois Power #38
Tri-State G & T #89
Seminole Electric #141
Big Rivers Electric #91
Allegheny Electric #93
San Miguel Electric #110
Wabash Valley Power #104
SMALL BUSINESS ADMINISTRATION

AMOUNT
OF ADVANCE

INTEREST
MATURITY : RATE

58,736,000.00
31,000,000.00
2,536,000.00
3,827,000.00
12,000.00
1,829,000.00
8,000,000.00
353,000.00
26,000.00
2,804,000.00
329,000.00
10,000.00
250,000.00
1,247,000.00
2,868,000.00
2,900,000.00
6,000,000.00
1,400,000.00
300,000.00
26,300,000.00
2,015,000.00
5,000.00
495,000.00
105,000.00
835,000.00
12,990,000.00
16,204,000.00
200,000.00
8,506,000.00
2,037,000.00
2,758,000.00
5,000,000.00
5,224,000.00
3,481,000.00

9/15/82
9/16/82
9/19/82
9/20/82
9/20/82
9/20/82
9/22/82
9/22/82
9/22/82
9/22/82
9/22/82
9/22/82
9/22/82
12/31/14
9/24/82
9/25/82
9/20/83
9/29/82
9/29/83
9/29/83
9/29/82
9/29/82
9/29/82
9/29/82
9/30/82
10/15/84
10/15/84
9/30/82
9/15/87
9/30/83
9/30/82
9/30/82
9/30/82
12/31/14

11.525%
11.915%
11.965%
11.715%
11.715%
11.715%
11.715%
11.715%
11.715%
11.715%
11.715%
11.715%
11.715%
11.758%
12.125%
12.105%
12.105%
12.525%
12.415%
12.415%
12.525%
12.525%
12.525%
12.525%
12.505%
12.435%
12.435%
12.505%
12.235%
12.445%
12.505%
12.505%
12.505%
12.097%

1,000,000.00
1,000,000.00
200,000.00
250,000.00
500,000.00
900,000.00
202,000.00
500,000.00
300,000.00
500,000.00
1,000,000.00
1,000,000.00
1,000,000.00
300,000.00
500,000.00
300,000.00
1,000,000.00
110,000.00
500,000.00
490,000.00
1,500,000.00
1,000,000.00
1,000,000.00

9/1/83
9/1/83
9/1/83
9/1/85
9/1/85
9/1/85
9/1/85
9/1/85
9/1/85
9/1/87
9/1/87
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90
9/1/90

12.075%
12.075%
12.075%
12.045%
12.045%
12.045%
12.045%
12.045%
12.045%
11.945%
11.945%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%
11.815%

9/9/80
9/16/80
9/23/80
9/30/80
10/7/80,

10.659%
10.591%
10.209%
11.021%

(Cont.)

9/16
9/19
9/20
9/20
9/20
9/22
9/22
9/22
9/22
9/22
9/22
9/22
9/23
9/24
9/25
9/25
9/29
9/29
9/29
9/29
9/29
9/29
9/29
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30
9/30

Small Investment Companies
Advent Capital Corp.
Devenshire Capital Corp.
Tappan Zee Capital Corp.
Beneficial Capital Corp.
Edwards Capital Corp.
Fluid Capital Corp.
Monmouth Capital Corp.
Round Table Capital Corp.
Tappan Zee Capital Corp.
Doan Resources Corp.
Pioneer Investors Corp.
Bohlen Capital Corp.
Dixie Business Investment Co.
First Idaho Venture Capital Corp.
Intercapco West, Inc.
Manufacturers SBIC, Inc.
Mercantile Dallas Corp.
Metropolitan Capital Corp.
Red River Ventures, Inc.
Retailers Growth Fund, Inc.
SBIC of Panama City, Florida
Van Rietschoten Capital Corp.
Western Financial Capital Corp.

9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24
9/24

STUDENT LOAN MARKETING ASSOCIATION
Note #265
"
#266
"
#267
"
#268
#269
•maturity extension

9/2
9/9
9/16
9/23
9/30

2,295,000,000.00
2,315,000,000.00
2,335,000,000.00
2,345,000,000.00
2,345,000,000.00

U.1MI

INTEREST
PAYABLE
(other than s/a)
11.364%
11.743%
11.791%
11.548%
11.548%
11.548%
11.548%
11.548%
11.548%
11.548%
11.548%
11.548%
11.548%
11.590%
11.947%
11.927%
11.927%
12.333%
12.228%
12.228%
12.335%
12.335%
12.335%
12.335%
12.315%
12.247%
12.247%
12.315%
12.053%
12.257%
12.315%
12.315%
12.315%
11.919%

qtr.
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"

FEDERAL FINANCING BANK
September 1980 Activity
Page 4
BORROWER

DATE :

AMOUNT
OF ADVANCE

INTEREST:
: MATURITY : RATE :

TENNESSEE VALLEY AUTHORITY
Note #154
"
#158

9/5
9/30

775,000,000.00
135,000,000.00

11/4/80
11/4/80

10.292%
12.164%

9/30

113,293,801.66

12/31/80

12.164%

1,878,551.00
1,583,074.00
830,000.00

5/1/92
1/1/94
6/30/06

11.325%
11.331%
11.603%

9/11
9/16
9/18
9/23
9/29
9/30

10,000,000.00
10,000,000.00
14,000,000.00
5,000,000.00
6,000,000.00
6,000,000.00
14,000,000.00
40,000,000.00

10/1/80
10/1/80
10/1/80
10/2/80
10/2/80
10/2/80
10/2/80
10/2/80

10.659%
10.238%
10.431%
11.209%
10.869%
11.021%
11.351%
12.164%

9/2
9/22

5,420,000.00
995,000.00

10/1/90
10/1/90

11.711%
11.558%

INTEREST
PAYABLE
(other than

Seven States Energy Corporation

DEPARTMENT OF TRANSPORTATION
Section 511

9/8
9/8

Chicago & North Western #3
Milwaukee Road #3
Milwaukee Road #2

9/17

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

9/2
9/8

#25
#25
#25
#21
#21
#21
#21
#21

SPACEOTMMUOTCATIONS,INC.
12.054% an.
11.892% "

FEDERAL FINANCING BANK
September 1980 Commitments
BORROWER

AMOUNT

Cameroon
$ 1,,000,,000,.00
Ecuador
3,,000,,000,.00
Greece
103,,100,,000,.00
Jordan
50,,000,,000,.00
Korea
14,,000,,000,.00
Lebanon
22,,000,,000,.00
Liberia
1,r070,,000,.00
Malaysia
7,,000,,000,.00
Philippines
50,,000,,000,.00
Somalia
20,,000,,000..00
Sudan
25,,000,,000..00
Thailand
36,,000,,000.,00
Tunisia
5,,000,,000.,00
Turkey
2,,900,,000..00
Zaire
6,,100,,000..00
Jet Industries
(Hybrid Vehicles) 3,,000,,000.,00
Public Housing Notes open
Los Angeles, CA
795,,000.,00
San Diego, CA
7,,134,,000.,00
*REA Guaranteed
Loans
29,500,,000,,000.,00
*REA Certificates of
Beneficial Ownership
4,000,,000,,000..00

GUARANTOR

COMMITMENT
EXPIRES

MATURITY

DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD
DOD

9/21/82
7/23/82
9/21/82
9/20/82
6/29/82
7/9/82
9/20/82
9/9/82
9/9/82
8/31/82
6/2/82
8/9/82
10/1/82
10/1/82
9/21/82

DOE
HUD
HUD
HUD

open
9/30/82
12/31/80
3/1/81

10/1/90
various
12/31/80
3/1/81

REA

9/30/81

various

REA

10/1/82

various

•Increased amount of an existing commitment

9/22/86
7/25/87
9/22/90
9/21/92
12/31/88
7/25/87
3/21/86
9/10/87
9/10/87
9/1/92
6/3/10
10/10/90
10/1/88
10/5/92
9/22/92

Chrysler Corporation Loan Guarantee Board
Report to Congress
April 1 - September 30, 1980

Introduction
Section 14(a) of the "Chrysler Corporation Loan Guarantee
Act of 1979," (the "Act") requires the Chrysler Corporation Loan
Guarantee Board (the "Board") to report on its activities to the
Congress semi-annually in fiscal years 1980 and 1981, and annually
every fiscal year thereafter in which there are outstanding guaranteed loans or commitments issued by the Board. This, the second
of the Board's reports, covers the period from April 1, 1980, to
September 30, 1980.
Since the last report, Chrysler has undergone a series of
major changes. The company has successfully completed what is
regarded as one of the most complex financing negotiations in
U.S. history, it has embarked on a fundamental product changeover, and it is in the process of a total reorganization of its
operations. This process, which began with the divestiture of overseas operations last year, is leading to a North American-based
company which will concentrate on the final assembly of smaller,
fuel-efficient vehicles. Chrysler's efforts, in part, reflect
its response to the changes occurring in the whole domestic

- 2 auto industry. American manufacturers, for example, are expected
to spend about $80 billion, in 1980 dollars, by 1985 for the
changeover to predominantly front-wheel-drive, fuel efficient
vehicles.
Although many significant risks remain, Chrysler has continued
to make progress toward the accomplishment of the Act's goals.

Chrysler's future viability depends in large measure on the longterm success of its K-car program and continued moderate sales
of its other vehicles over the shorter term.
This report is divided into six sections with discussions of:
° how the Board is organized to implement the Act;
• the previous report to Congress, which covered the period
from enactment on January 7 through March 31, 1980?
0

the issuance of $500 million of loan guarantees on
June 24, 1980, the first under the Act;
*

•

the second issuance of $300 million of loan guarantees
on July 31, 1980;
activities of the Board since July 31, 1980; and

• a summary of Chrysler's performance for the first
nine months of 1980.
Organization of the Board
The Act established a five-member Board. It is comprised
of three voting members: the Secretary of the Treasury, as

- 3 Chairperson, the Comptroller General of the United States, and
the Chairman of the Board of Governors of the Federal Reserve
System; and two non-voting members: the Secretaries of Labor and
Transportation.
The Act authorized the Board to guarantee the principal
amount of up to $1.5 billion in loans (plus interest thereon)

for the benefit of the Chrysler Corporation if certain conditions
were met. Some of the more significant conditions the Board
is required to find by the Act include the following:
° Chrysler's Operating Plan demonstrates that the company
can continue as a going concern through 1983 within the
limits of the guaranteed loans, that it can continue
to do so thereafter without additional Federal assistance,
and that this plan is reasonable and feasible.
° The company's Financing Plan meets the needs of the
Operating Plan, and is reasonable and feasible. This
plan must include at least $1.43 billion from lender
assistance, sales of assets and other unguaranteed
financial assistance.
° The labor unions that represent Chrysler's employees
must provide at least $462.5 million in wage concessions
for the period September 14, 1979, to September 14,
1982; and Chrysler must adopt a program for achieving
at least $125 million in concessions from its nonunionized employees.
0
The collateral received by the Government for its
guarantees, together with Chrysler's prospective
earning power, must furnish a reasonable assurance of
repayment of the guaranteed loans.
° Employee stock ownership is provided through establishment of an employee stock ownership plan, totalling
at least $162.5 million by the end of 1984.
Summary of the Previous Report
In the last report, submitted to the Congress on
April 8, 1980, the organization of the Board and its staff

- 4 -

was discussed.

That structure has not changed.

Also discussed

was the ability of Chrysler to obtain interim financing during
the first quarter of calendar year 1980 without Federal
financial assistance. Chrysler was then in the process of
meeting the requirements of the Act. Discussed were such
items as drafting an energy savings plan, a productivity
improvement plan, an employee stock ownership plan, and a
number of other reporting requirements.
On February 25, Chrysler submitted a "Preliminary Operating
Plan", which contained various changes and improvements from the
October 17, 1979, Operating Plan which formed the basis for the
Act. This plan projected a 1980 loss of $500 million, and a
return to profitability in 1981. It also outlined an accelerated
introduction of small, fuel-efficient cars and trucks, beginning
*

with the K-car for model year 1981.

Chrysler was then planning to

be a totally front-wheel drive car producer, but only by 1985.
Variable and fixed cost reductions contemplated in this plan
were projected to be higher than those in the October 17
Plan, resulting in a declining breakeven level of production.
Total capital spending for 1979-1985 would be reduced by
almost $1 billion from the earlier plan.
Chrysler also submitted a "Preliminary Financing Plan"
on February 27, 1980. That plan projected a need for
government guaranteed debt of $200 million in 1980 assuming
that the loss for that year did not exceed $500 million and
that identified sources of unguaranteed financing would be

- 5 -

fully realized.
The company also proposed to raise the non-federally
guaranteed financing in a manner somewhat different from
the statutory targets. The Board was asked to modify the targets
within the $1.43 billion total to accommodate these changes.
Under the Act, the Board had the authority to make modifications.
The Board concluded that the February Operating and Financing
Plans represented a first step for Chrysler's return to longterm commercial viability and that the company was showing progress
in meetina the terms of the Act; however, the Board made it
clear that substantial adjustments to these plans were necessary
before any guarantees could be issued. Major recommended
changes by the Board were recognition of the prospect of higher
1980 losses, a smaller au"o market during the plan periods,
and reduced performance levels in some areas. The Board also
concluded that Chrysler had significantly underestimated the
need for Federal financial assistance.
Agreement to Guarantee, and the First Issuance of Loan Guarantees,
June 24, 1980
During April and May, Chrysler assembled the components of
its nonguaranteed financing. It conducted intensive negotiations
with over 450 banks, various state governments, and federal and
provincial governments of the Dominion of Canada to make the
multitude of arrangements the proposed nonguaranteed financing

- 6 arrangement required. Members of the Board staff participated

in these negotiations to preserve the Federal Government's interes
with regard to a probable loan guarantee.
The first major event after the Board's last report was
Chrysler's submission of revised Operating and Financing Plans
on April 28. The new plans provided for further downsizing of
the company and for accelerated introduction of new small,
fuel-efficient cars in the years after 1980. Distinct vehicle
lines (or "platforms") would be reduced from five to three,
providing for increased interchangeability of parts, and reducing
expenditures on the car programs. In addition, this reduced
capital expenditures by $1.5 billion below the estimates in the

February 25 Plan, from $12.7 billion to $11.2 billion. Projections
of fixee costs were reduced by $122 million, from $3,753 to
$3,633 million for 1980, and cost reductions due to variable
margin improvements were scaled back. The need for federally-

guaranteed financing was estimated to reach a total of $700 millio
during the third quarter of 1980, and fall to $500 million
by the end of the year.
On May 10, the Board conditionally approved a commitment to
issue the $500 million of loan guarantees based on the following
major conclusions:
0

A shutdown of the Chrysler Corporation would have
significant and far-reaching economic impact on the
Detroit, Michigan, metropolitan area, and other areas
of the country where Chrysler facilities are located,
although a limited number of such facilities could
be attractive to other firms.
° The Operating Plan was judged to be realistic and feasible.
Chrysler was also judged to be capable of being a "going
concern" after December 31, 1983, without additional loan

- 7 guarantees. This judgment was based on its "Base Case I"
forecast, a profitability analysis of the Chrysler Corporation
which was used as the basis for the determinations required
by the Act. This forecast allowed for some deviations of
sales volume and cost recovery from that presented by
Chrysler.
• The Financing Plan was judged to be satisfactory, based on
the information then available. However, at the time of
the application, $227 million of the required non-guaranteed
financing was not in place. The Board informed Chrysler
that until the company could give adequate assurances
concerning the remaining portion of non-guaranteed financing,
a guarantee would not be forthcoming.
0
As a new product, the K-car to be introduced in the fall
seemed to be targeted to the segment of the market with the
highest projected demand.
In addition, a Department of Transportation study issued
under a requirement of the Act stated doubts about the auto
industry's future ability to sell rear-wheel-drive vehicles at
volumes anywhere near the then-projected production capacities.
However, it noteu that Chrysler's move to be a 100% front-wheel-drive
auto manufacturer by 1985 would enhance its ability to be a going
concern under these conditions.
On June 24, Chrysler submitted a revised request for
$500 million in loan guarantees. The Loan Guarantee Board
reaffirmed its earlier May 10 findings, approved the loan guarantee,
and executed the Agreement to Guarantee at its meeting of June 24.
The Board made the following determinations at that session:
In spite of then-recent developments between early May
and June 24—such as projected lower auto industry
sales, Chrysler's estimate of a greater loss in 1980
($1.0-1.1 billion), and a reduced market share—Chrysler
was still judged to be potentially a viable concern
and the situation did not require a reversal of the May 10
finding that the April 28 Operating and Financing Plans
satisfied the requirements of the Act. However, the Board's
staff analysis emphasized that the judgment was a
close one.

- 8 0

The possibility of Chrysler's remaining viable, and the
collateral pledged to the U.S. Government, furnished
a reasonable assurance that the guaranteed loans would
be repaid.

Chrysler had achieved its financing objectives with
$2.03 billion of nonguaranteed assistance, which exceeded
the statutory targets, and opened the way for Chrysler to
be eligible for the loan guarantees.

° The Act required Chrysler to have in place an amount of
non-guaranteed financing at least equal to the amount of
total loans outstanding. Chrysler had accrued $676 million
in non-guaranteed assistance for this takedown.
° Chrysler had met the requirements of certain other provisions
of the Act, such as waiver of default by existing creditors,
no conversion of unguaranteed loans to guaranteed loans,
the approval of an employee stock ownership plan (ESOP),
and the approval of certain covenants between Chrysler
and the Board.
On June 24, Chrysler issued $500 million in guaranteed notes
with a final maturity date of June 1, 1990, and an offering yield
of 10.35 percent, and callable in three years. This first issue
was sold to an underwriting syndicate at 76 basis points above
10-year Treasury securities. The company also agreed to pay a
one percent guarantee fee payable quarterly to the Treasury.
The Second Issuance of $300 Million of Loan Guarantees—July 31, 1980
On July 10, 1980, Chrysler submitted to the Board a
guarantee request, followed by an amended and restated request
dated July 14, 1980, for an additional $300 million in loan
guarantees. With its request, Chrysler submitted new Operating
and Financing Plans dated July 10, 1980, which incorporated the
following major modifications to the April 28 Operating and
Financing Plans:
0

Chrysler increased its projected 1980 loss to
$1,039 billion (from $746 million), and it lowered its

- 9 projected profits in future years, more closely reflecting
the projections for the auto market incorporated in the
Board staff's independent Base Case analysis.
° Chrysler accelerated its K-car production schedule by
two weeks, and made a preliminary decision to accelerate
production at a third K-car plant.
° A number of facilities were written off, resulting in
non-cash losses of $51 million in 1980.
0

Pension costs were reduced by $16 million.

° The Financing Plan was not materially changed except to
account for lower interest costs associated with lower interest
rates and Chrysler's final debt restructuring plan, which
was completed on June 24, 1980, and which was slightly more
favorable than earlier anticipated. Interest cost reductions
lowered 1980 losses a net of $57 million but interest expense
projections were forecast to reduce earnings modestly
in later years.
The Board approved the request for a loan guarantee
of $300 million on July 31, 1980, after making the following
key findings:
° The July 10 Operating and Financing Plans were judged to
satisfy the requirements of the Act, but the judgment was
"now a much closer and more marginal one". Certain risks
previously identified had materialized, additional risks
were identified, and projected earnings and financial reserves
had decreased.
° Industry auto sales volumes were judged to be below
Chrysler estimates by about 10 percent for all of 1980.
0

Market demand for Chrysler's Omni-Horizon line had
weakened. April and May sales had dropped to below
60 percent of sales levels in the first quarter.

Cash reserves available to Chrysler remained adequate
to support a viability finding, but were narrower.
However, since Chrysler's period of greatest exposure
to risk was the third quarter of 1980 and the first
quarter of 1981, the reduced reserves were still adequate
for the remaining period of risk exposure.

° According to the staff's revised Base Case analysis
(Base Case II), Chrysler would suffer additional
volume declines, an after-tax loss of $1,224 million

-10in 1980, and a modest after-tax profit of $136 million
in 1981.
On July 31, Chrysler issued an additional $300 million
in guaranteed notes with a final maturity date of July 15, 1990.
The offering yield was 11.40 percent plus the additional
one percent guarantee fee payable to the Treasury. The offering
was priced at 125 basis points above 10-year Treasury securities.

Activities of the Chrysler Loan Guarantee Board since July 31, 198
Since July 31, the Board reviewed and consented to Chrysler's
sales of certain assets and entry into contracts under Sections
11(b) and 11(c) of the Act and under the provisions of the
Agreement to Guarantee. Examples of important sales and contracts
to which the Board consented were:
° Purchase of four-cylinder engines from Peugeot.
° Extensions of XM-1 and M60 tank production contract
agreements.
0

Sale of vacant land in the Borough of Manhattan,
New York City.

Sale of the equipment used at the Eight Mile/Outer Drive
stamping plant in Detroit.

In addition, the Board has reviewed the formation of a whollyowned subsidiary, Chrysler Defense Incorporated.
The Board staff has established procedures to monitor
Chrysler's performance against its plans and to ensure that
the company meets its debt obligations under the Act and as
outlined in its various debt agreements.
A Memorandum of Operating and Financing Plan Procedures
and Requirements, which outlines the continuing relationship

- 11 between Chrysler and the Board, is in effect. The Board staff
also keeps track of Chrysler's operations on a day-to-day
basis, conducts assessments of its performance, and informs
Board members and their staffs of ongoing developments.
Major areas of concern are manufacturing, sales and marketing,
and financial analysis.
To keep the Board informed, a Calendar of Document
Submissions has been prepared which lists the report submissions
Chrysler must make as required by the Act and the Agreement
to Guarantee.
Chrysler has also established a Loan Guarantee Act Compliance
Office at its corporate headquarters to administer the
ongoing requirements of the Act and to engender a SITU oth
working relationship between Chrysler and the Loan Guarantee
Board.
The Board and its staff have been working with Chrysler
to improve the monitoring system to simplify the reporting
and adjust the terms of requirements for routine reports to
meet Chrysler's planning cycle better. Further work is expected
in this regard.
Summary of Chrysler's Performance
In accordance with Section 5(a)(7) of the Act, Chrysler
submitted to the Board its 1981-1984 Operating and Financing
Plans on September 4, 1980, copies of which were also delivered
to the staffs of the banking committees. Key elements of
these plans, which update the July Plans, are highlighted below:

- 12 -

• For 1980, Chrysler revised its projected after-tax
loss to about $1.3 billion due to a number of non-recurring
expenses and due to continued weaknesses in demand
for rear-wheel-drive vehicles in the North American
automobile market.
0
Chrysler presented a general outline for a proposed
reorganization of its corporate structure and operations.
0
As first projected in Chrysler's July Plans, federallyguaranteed financing of an additional $200 million
was projected during the fourth quarter of 1980.
This would bring the company to a peak level of $1 billion
in guaranteed loans during 1980. The company projected
that no additional guarantees would be needed thereafter,
and that the federally-guaranteed loans would be
repaid by the end of 1985.
Chrysler's financial performance this year has closely
tracked the Base Case II analysis prepared as part of the July 31
1980, findings required for the issuance of $300 million in
guarantees. The independent staff forecast was based upon
the average of independent economic forecasts of the automobile
market which was smaller than the plans. It also assumed
delayed achievement of some of the savings goals in the July
Plans. While Chrysler's July 10 forecast projected an after-tax
loss in 1980 of $1,079 billion before any non-cash write-offs
of obsolete facilities, the Base Case II analysis of the Board
staff projected an after-tax loss of $1,224 billion on the
same basis for the year, with a $1.4 billion cumulative loss
assumed through September 30, 1980.
Chrysler's actual, cumulative nine-month after-tax loss of
$1,475 billion is greater than the Base Case II analysis for
the same period due largely to the non-cash write-offs of

- 13 obsolete facilities and the recognition of additional reserves
for prior years' warranty costs. Neither item was fully
reflected in the Base Case II forecast.
Chrysler's loss is not unique. The entire automotive
industry suffered substantial pre-tax losses during the second
and third quarters of 1980 as the result of depressed sales
due to the recession and due to the shortage of fuel-efficient
cars. Nine-month, after-tax losses were more than $3.5 billion
for the industry (including more than $1 billion in earnings
improvements from tax-loss carry-backs). This magnitude of loss
had not been expected at the beginning of the year.
Automobile production is measured on a model year basis,
which runs from August 1 of the previous year to July 31 of
the nominal year. Chrysler has produced over 130,000 cars and
trucks for the 1981 model year through September 30, as * shown
below:
Production by Model Year
1980 1981
Cars 742,575 100,098
Trucks

(8/1/79 to 7/31/80)

(8/1/80 to 9/30/80)

179,416

30,212

Total 921,991 130,310
Chrysler's calendar year 1980 sales through September 30
were 583,959 cars and 204,446 trucks, a drop of 31 percent for
cars and 34 percent for trucks from the previous year-to-date.
However, with the fall introduction of 1981 models, Chrysler's
sales are expected to pick up significantly due to the K-car
introduction.

- 14 The Board's staff is currently in the process of analyzing

the September Plans relative to actual performance, previous Chrysl
forecasts, and the staff's earlier base case projections. Although
the analysis has not been completed, some preliminary observations
concerning Chrysler's 1980 performance can be made.
On an overall basis, the staff's preliminary review indicates
that the level of risk in Chrysler's September 4 Operating and

Financing Plans is somewhat smaller than some earlier plans because
• The September 4 Plans are more consistent with independent
forecasters' assessments of industry sales and the economy.
° The company is more cognizant of the risks identified
in the past, and is taking steps to insulate itself
from them.
° Financial and operating projections contained within
the plan are more conservative and conform to the staff's
Base Case II projections much more closely than in the
past. Greater allowances have also been made for possible
adverse economic impacts.
,
The staff's current analyses project that Chrysler's 1980

loss is likely to be somewhat greater than the level assumed in the
September Plans, depending upon actual sales levels during
November and December. The projection incorporates the following
adjustments, which were not fully included in Chrysler's September

4 full year loss estimate of $1.3 billion, but which were reflected
in Chrysler's actual nine-month after-tax loss of $1,475 billion:
° $50 million extraordinary write-off for a foundry
scheduled to close and tool amortization adjustments;
0

$60 million in prior model year warranty costs; and

° $40 million of additional expense for launch and preproduction
costs of 1981 models.

- 15 Once such write-offs are incorporated in the fourth-quarter
projections, and with the current sales forecasts available
for rear-wheel-drive vehicles, the staff analysis suggests
that Chrysler is unlikely to achieve its profit projections for
the fourth quarter of 1980. Nevertheless, Chrysler's financial
performance is expected to be substantially better than the
comparable quarter of 1979 (a $376 million loss) and earlier
quarters of 1980. Even if a fourth quarter sales decline
causes Chrysler's total 1980 loss to exceed its September 4
plan levels, sufficient financial reserves still appear to
be available to the company over the near term.
The Board made its July viability findings for Chrysler based
upon its own independent projections of the company's likely cash
flows through 1983 and, over the long term, the company's
profitability. During the short term, the Board had to determine
whether or not Chrysler possessed a sufficient cash flow with

other financial reserves to develop and produce new fuel-efficient
cars to meet the market's demands. During this period, net
income measures are distorted with high product development
and launch costs and with non-cash write-offs of obsolete
facilities and many other non-cash charges, such as: amortization
and depreciation, pension payments which the union has agreed
to allow to be deferred, and interest on restructured debt,
which is payable in deferred interest notes which, in turn,
may be converted into preferred stock at Chrysler's option
provided that certain conditions are satisfied. In 1980,

- 16 for example, the Base Case II forecast of a $1,224 billion
loss assumed that $770 million of that amount would be in
non-cash charges.
An improving economy coupled with new product introductions could help the entire American auto industry, but
it is expected to help Chrysler particularly since such a
large proportion of its 1981 model sales (about 80%) are
anticipated to be front-wheel-drive, fuel efficient cars,
priced competitively with other domestic auto-makers.
To date, Chrysler is on schedule to satisfy a key feature
of the debt restructuring which will enhance Chrysler's
ability to achieve long-term viability. Specifically, Chrysler
has the option to convert up to $750 million of deferred
interest notes into preferred stock provided that it passes
*

the following two tests:
— at least 350,000 K-cars are manufactured and sold
during model year 1981, and
— Chrysler's cumulative net income excluding extraordinary write-offs of obsolete facilities do
not exceed a $500 million cumulative loss from
July 1, 1981 through December 31, 1983.
The new front-wheel-drive K-car was introduced under the
Plymouth Reliant and Dodge Aries nameplates in the first
week of October and dealers have been submitting large numbers
of orders for it. Chrysler had some initial difficulty keeping
to its production schedules for this new fuel-efficient car

due to assembly plant start-up delays. However, K-car production
rates are now substantially at planned levels, so continued
production shortfalls are not anticipated. Total production

- 17 of the K-car through September 30 was 20,488 units, which is
included in the above number for actual 1981 production.
The Board staff is continuing to monitor the K-car through
weekly reports submitted by Chrysler on such things as sales,
production, and dealer order status.
In its July findings, the Board concluded, along with
Chrysler's consultants Booz-Allen & Hamilton, that substantial
risks to Chrysler's sales and market share could be foreseen
through 1981. A necessary step by the company to prepare
for the risks was to develop a corporate restructuring
plan to reduce fixed costs. Chrysler's Chairman Lee A. Iacocca
confirmed Chrysler's intention to conduct the study in a letter
to the Board on July 14, 1980. Chrysler is now making a
long-term evaluation of ivs manufacturing facilities and
a

operations for the purpose of reducing its fixed costs and,
hence, its exposure to declining volumes. The company is
exploring the prospect of purchasing certain automobile
parts rather than manufacturing them in-house. This represents
the first comprehensive examination of every facility at one
time. The Board's staff understands that in this evaluation
Chrysler is examining the possibility of selling some plants,

closing others, and consolidating operations in those remaining.
Chrysler has informed the Board staff that the study is
long-term, with periodic, gradual impacts on the company.
So far, only those actions decided upon before this study
began have been announced. They are: the closing of the
Lynch Road assembly plant, the Eight Mile/Outer Drive stamping

- lfl -

plant, the Huber Avenue Foundry (all in the Detroit area), and the
Cape Canaveral wiring harness plant in Florida. Other probable
actions are still under study and management has yet to make
a decision.
The company has also discussed with the Board staff
possible alternatives available to the company to respond to
potential risks in the September Plans. The Memorandum of
Operating and Financing Plan Procedures and Requirements
also requires Chrysler to submit an Operating Budget and
Financing Budget on a detailed, quarterly basis on December 1
(and December 1 of every year loan guarantees are outstanding).
These plans, when taken together with everything provided since
Septembv r, will constitute Chrysler's official 1981-1984
submission to the Board, and will be evaluated by the Bqard
as a whole.
As stated earlier, Chrysler must accrue a level of
non-federally guaranteed assistance to qualify for an equal

amount of additional Federal loan guarantees. As of September 30,
Chrysler has accrued a total of $910.5 million in non-federal
assistance. The break-down of accruals is as follows:

- 19 -

Accrual of Non-Federal Assistance
(Dollars in Millions)
7/31/80
Findings

9/30/80

$ 50.7

72.9

186.3

18.7

23.6

Asset Sales

223.6

261.9

Pension Fund Deferral2

182.3

203.0

Employee Concessions

139.0

162.8

=?800.6

$910.5

Lender AssistancesState & Local Government
Suppliers & Dealers

Total
Loan Guarantees Available
1

$110.5

Daily accrual; $5.6 million of directly related restructuring
costs excluded at outset.
2 Daily accrual; excludes $114 million PBGC line of credit and
related impute 3 interest on a pro-rata basis over 1980-1983.

at
FOR RELEASE AT 4:00 P.M.

November 10, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000 million, to be issued November 20, 1980.
This offering will provide $ 675 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,329 million, including $ 1,923 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities, and $1,474 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 $4,000
million, representing an additional amount of bills dated
August 21, 1980, , and to mature February 19, 1981 (CUSIP No.
912793 6G 6 ) , currently outstanding in the amount of $3,818
million, the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) for approximately $4,000
million, representing an additional amount of bills dated
May 27, 1980,
, and to mature May 21, 1981
(CUSIP No.
912793 6 B 7 ) , currently outstanding in the amount of $4,005
million, the additional and original bills to be freely
interchangeable.
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing November 20, 1980.
Tenders from
Federal Reserve Banks for themselves and as agents for 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 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. 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 17, 1980.
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-733

-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
3ank 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 will be accepted in full at the weighted average price
(in three decimals) of accepted competitive bids for the
respective issues.

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on November 20, 1980, in cash or other immediately available
funds or in Treasury bills maturing November 20, 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.

Chrysler Corporation Loan Guarantee Board
Report to Congress
April 1 - September 30, 1980

Introduction
Section 14(a) of the "Chrysler Corporation Loan Guarantee
Act of 1979r" (the "Act") requires the Chrysler Corporation Loan
Guarantee Board (the "Board") to report on its activities to the
Congress semi-annually in fiscal years 1980 and 1981, and annually
every fiscal year thereafter in which there are outstanding guaranteed loans or commitments issued by the Board.

This, the second

of the Board's reports, covers the period from April 1, 1980, to
September 30, 1980.
Since the last report, Chrysler has undergone a series of
major chanqes. The company has successfully completed what is
reqarded as one of the most complex financing negotiations in
U.S. history, it has embarked on a fundamental product changeover, and it is in the process of a total reorganization of its
operations.

This process, which began with the divestiture of over

seas operations last year, is leadinq to a North American-based
company which will concentrate on the final assembly of smaller,
fuel-efficient vehicles.

Chrysler's efforts, in part, reflect

its response to the changes occurring in the whole domestic

- 2 auto industry. American manufacturers, for example, are expected
to spend about $80 billion, in 1980 dollars, by 19 85 for the
chanqeover to predominantly front-wheel-drive, fuel efficient
vehicles.
Although many significant risks remain, Chrysler has continued
to make progress toward the accomplishment of the Act's goals.

Chrysler's future viability depends in larqe measure on the longterm success of its K-car program and continued moderate sales
of its other vehicles over the shorter term.
This report is divided into six sections with discussions of:
° how the Board is organized to implement the Act;
• the previous report to Congress, which covered the period
from enactment on January 7 through March 31, 1980;
• the issuance of $500 million of loan guarantees on
June 24, 1980, the first under the Act;
° the second issuance of $300 million of loan guarantees
on July 31, 1980;
° activities of the Board since July 31, 1980; and
° a summary of Chrysler's performance for the first
nine months of 1980.
Organization of the Board
The Act established a five-member Board. It is comprised
of three voting members: the Secretary of the Treasury, as

- 3 Chairperson, the Comptroller General of the United States, and
the Chairman of the Board of Governors of the Federal Reserve

System; and two non-voting members: the Secretaries of Labor and
Transportation.
The Act authorized the Board to guarantee the principal
amount of up to $1.5 billion in loans (plus interest thereon)

for the benefit of the Chrysler Corporation if certain condition
were met. Some of the more significant conditions the Board
is required to find by the Act include the following:
° Chrysler's Operating Plan demonstrates that the company
can continue as a going concern through 1983 within the
limits of the guaranteed loans, that it can continue
to do so thereafter without additional Federal assistance,
and that this plan is reasonable and feasible.
• The company's Financing Plan meets the needs of the
Operating Plan, and is reasonable and feasible. This
plan must include at least $1.43 billion from lender
assistance, sales of assets and other unguaranteed
financial assistance.
° The labor unions that represent Chrysler's employees
must provide at least $462.5 million in wage concessions
for the period September 14, 1979, to September 14,
1982; and Chrysler must adopt a proqram for achieving
at least $125 million in concessions from its nonunionized employees.
° The collateral received by the Government for its
guarantees, toqether with Chrysler's prospective
earninq power, must furnish a reasonable assurance of
repayment of the guaranteed loans.
• Employee stock ownership is provided through establishment of an employee stock ownership plan, totalling
at least $162.5 million by the end of 1984.
Summary of the Previous Report
In the last report, submitted to the Congress on
April 8, 1980, the organization of the Board and its staff

- 4 -

was discussed.

That structure has not changed.

Also discussed

was the ability of Chrysler to obtain interim financing during
the first quarter of calendar year 1980 without Federal
financial assistance.

Chrysler was then in the process of

meeting the requirements of the Act.

Discussed were such

items as drafting an enerqy savings plan, a productivity
improvement plan, an employee stock ownership plan, and a
number of other reporting requirements.
On February 25, Chrysler submitted a "Preliminary Operating
Plan", which contained various changes and improvements from the
October 17, 1979, Operating Plan which formed the basis for the
Act.

This plan projected a 1980 loss of $500 million, and a

return to profitability in 1981.

It also outlined an accelerated

introduction of small, fuel-efficient cars and trucks, beginning
with the K-car for model year 1981.

Chrysler was then planning to

That plan projected a need for

government guaranteed debt of $200 million in 1980 assuming
that the loss for that year did not exceed $500 million and
that identified sources of unguaranteed financing would be

- 5 -

fully realized.
The company also proposed to raise the non-federally
guaranteed financing in a manner somewhat different from
the statutory targets.

The Board was asked to modify the targets

within the $1.43 billion total to accommodate these changes.
Under the Act, the Board had the authority to make modifications.
The Board concluded that the February Operating and Financing
Plans represented a first step for Chrysler's return to longterm commercial viability and that the company was showing progress
in meeting the terms of the Act; however, the Board made it
clear that substantial adjustments to these plans were necessary
before any guarantees could be issued.

Major recommended

changes by the Board were recognition of the prospect of higher
1980 losses, a smaller auto market during the plan periods,
and reduced performance levels in some areas.

The Board also

concluded that Chrysler had significantly underestimated the
need for Federal financial assistance.
Agreement to Guarantee, and the First Issuance of Loan Guarantees,
June 24, 1980
During April and May, Chrysler assembled the components of
its nonguaranteed financing.

It conducted intensive negotiations

with over 450 banks, various state governments, and federal and
provincial governments of the Dominion of Canada to make the
multitude of arrangements the proposed nonguaranteed financing

- 6 arranqement required.

Members of the Board staff participated

in these negotiations to preserve the Federal Government's interests
with regard to a orobable loan guarantee.
The first major event after the Board's last report was
Chrysler's submission of revised Operating and Financing Plans
on April 28.

The new plans provided for further downsizing of

the company and for accelerated introduction of new small,
fuel-efficient cars in the years after 1980.

Distinct vehicle

lines (or "platforms") would be reduced from five to three,
providing for increased interchangeability of parts, and reducing
expenditures on the car programs.

In addition, this reduced

capital expenditures by $1.5 billion below the estimates in the
February 25 Plan, from $12.7 billion to $11.2 billion.

Projections

of fixed costs were reduced by $122 million, from $3,753 to
$3,633 million for 1980, and cost reductions due to variable
marqin improvements were scaled back.

The need for federally-

guaranteed financing was estimated to reach a total of $700 million
during the third quarter of 1980, and fall to $500 million
by the end of the year.
On May 10, the Board conditionally approved a commitment to
issue the $500 million of loan guarantees based on the following
major conclusions:
°

The Operating Plan was judged to be realistic and feasible.
Chrysler was also judged to be capable of being a "going
concern" after December 31, 1983, without additional loan

However, it noted that Chrysler's move to be a 100% front-wheel-dri
auto manufacturer by 1985 would enhance its ability to be a going
concern under these conditions.
On June 24, Chrysler submitted a revised request for
$500 million in loan guarantees. The Loan Guarantee Board

reaffirmed its earlier May 10 findings, approved the loan guarantee
and executed the Agreement to Guarantee at its meeting of June 24.
The Board made the following determinations at that session:
•

In spite of then-recent developments between early May
and June 24—such as projected lower auto industry
sales, Chrysler's estimate of a greater loss in 1980
($1.0-1.1 billion), and a reduced market share—Chrysler
was still judged to be potentially a viable concern
and the situation did not require a reversal of the May 10
findinq that the April 28 Operating and Financing Plans
satisfied the requirements of the Act. However, the Board's
staff analysis emphasized that the judgment was a
close one.

- 8 •

The possibility of Chrysler's remaining viable, and the
collateral pledged to the U.S. Government, furnished
a reasonable assurance that the guaranteed loans would
be repaid.
• Chrysler had achieved its financing objectives with
$2.03 billion of nonguaranteed assistance, which exceeded
the statutory targets, and opened the way for Chrysler to
be eligible for the loan guarantees.
• The Act required Chrysler to have in place an amount of
non-guaranteed financing at least equal to the amount of
total loans outstanding. Chrysler had accrued $676 million
in non-guaranteed assistance for this takedown.
• Chrysler had met the requirements of certain other provisions
of the Act, such as waiver of default by existing creditors,
no conversion of unguaranteed loans to guaranteed loans,
the approval of an employee stock ownership plan (ESOP),
and the approval of certain covenants between Chrysler
and the Board.
On June 24, Chrysler issued $500 million in guaranteed notes
with a final maturity date of June 1, 1990, and an offering yield
of 10.35 percent, and callable in three years. This first issue
was sold to an underwriting syndicate at 76 basis points above
10-year Treasury securities. The company also agreed to pay a
one percent guarantee fee payable quarterly to the Treasury.
The Second Issuance of $300 Million of Loan Guarantees—July 31, 1980
On July 10, 1980, Chrysler submitted to the Board a
guarantee request, followed by an amended and restated request
dated July 14, 1980, for an additional $300 million in loan
guarantees. With its request, Chrysler submitted new Operating
and Financing Plans dated July 10, 1980, which incorporated the
following major modifications to the April 28 Operating and
Financinq Plans:
• Chrysler increased its projected 1980 loss to
$1,039 billion (from $746 million), and it lowered its

- 9 projected profits in future years, more closely reflecting
the projections for the auto market incorporated in the
Board staff's independent Base Case analysis.
• Chrysler accelerated its K-car production schedule by
two weeks, and made a preliminary decision to accelerate
production at a third K-car plant.
° A number of facilities were written off, resulting in
non-cash losses of $51 million in 1980.
° Pension costs were reduced by $16 million.
° The Financing Plan was not materially changed except to
account for lower interest costs associated with lower interest
rates and Chrysler's final debt restructuring plan, which
was completed on June 24, 1980, and which was slightly more
favorable than earlier anticipated. Interest cost reductions
lowered 1980 losses a net of $57 million but interest expense
projections were forecast to reduce earnings modestly
in later years.
The Board approved the request for a loan guarantee
of $300 million on July 31, 1980, after making the following
key findings:
° The July 10 Operating and Financing Plans were judged to
satisfy the requirements of the Act, but the judgment was
"now a much closer and more marginal one". Certain risks
previously identified had materialized, additional risks
were identified, and projected earnings and financial reserves
had decreased.
° Industry auto sales volumes were judged to be below
Chrysler estimates by about 10 percent for all of 1980.
• Market demand for Chrysler's Omni-Horizon line had
weakened. April and May sales had dropped to below
60 percent of sales levels in the first quarter.
° Cash reserves available to Chrysler remained adequate
to support a viability finding, but were narrower.
However, since Chrysler's period of greatest exposure
to risk was the third quarter of 1980 and the first
quarter of 1981, the reduced reserves were still adequate
for the remaining period of risk exposure.
° According to the staff's revised Base Case analysis
(Base Case II), Chrysler would suffer additional
volume declines, an after-tax loss of $1,224 million

The offering

was priced at 125 basis points above 10-year Treasury securities.
Activities of the Chrysler Loan Guarantee Board since July 31, 1980
Since July 31, the Board reviewed and consented to Chrysler's
sales of certain assets and entry into contracts under Sections
11(b) and 11(c) of the Act and under the provisions of the
Agreement to Guarantee.

Examples of important sales and contracts

to which the Board consented were:
° Purchase of four-cylinder engines from Peugeot.
° Extensions of XM-1 and M60 tank production contract
agreements.
° Sale of vacant land in the Borough of Manhattan,
New York City.
• Sale of the equipment used at the Eight Mile/Outer Drive
stamping plant in Detroit.
In addition, the Board has reviewed the formation of a whollyowned subsidiary, Chrysler Defense Incorporated.
The Board staff has established procedures to monitor
Chrysler's performance against its plans and to ensure that
the company meets its debt obligations under the Act and as
outlined in its various debt agreements.
A Memorandum of Operating and Financing Plan Procedures
and Requirements, which outlines the continuing relationship

- 11 between Chrysler and the Board, is in effect.

The Board staff

also keeps track of Chrysler's operations on a day-to-day
basis, conducts assessments of its performance, and informs
Board members and their staffs of ongoing developments.
Major areas of concern are manufacturing, sales and marketing,
and financial analysis.
To keep the Board informed, a Calendar of Document
Submissions has been prepared which lists the report submissions
Chrysler must make as required by the Act and the Agreement
to Guarantee.
Chrysler has also established a Loan Guarantee Act Compliance
Office at its corporate headquarters to administer the
onqoinq requirements of the Act and to engender a smooth
working relationship between Chrysler and the Loan Guarantee
Board.
The Board and its staff have been working with Chrysler
to improve the monitoring system to simplify the reporting
and adjust the terms of requirements for routine reports to
meet Chrysler's planning cycle better.

Further work is expected

in this regard.
Summary of Chrysler's Performance
In accordance with Section 5(a)(7) of the Act, Chrysler
submitted to the Board its 1981-1984 Operating and Financing
Plans on September 4, 1980, copies of which were also delivered
to the staffs of the banking committees.

Key elements of

these plans, which update the July Plans, are highlighted below:

- 12 -

° For 1980, Chrysler revised its projected after-tax
loss to about $1.3 billion due to a number of non-recurring
expenses and due to continued weaknesses in demand
for rear-wheel-drive vehicles in the North American
automobile market.
• Chrysler presented a general outline for a proposed
reorganization of its corporate structure and operations.
• As first projected in Chrysler's July Plans, federallyguaranteed financing of an additional $200 million
was projected during the fourth quarter of 1980.
This would bring the company to a peak level of $1 billion
in guaranteed loans during 19 80. The company projected
that no additional guarantees would be needed thereafter,
and that the federally-guaranteed loans would be
repaid by the end of 1985.
Chrysler's financial performance this year has closely
tracked the Base Case II analysis prepared as part of the July 31,
1980, findings required for the issuance of $300 million in
guarantees. The independent staff forecast was based upon
the average of independent economic forecasts of the automobile
market which was smaller than the plans.

It also assumed

delaved achievement of some of the savings goals in the July
Plans. While Chrysler's July 10 forecast projected an after-tax
loss in 1980 of $1,079 billion before any non-cash write-offs
of obsolete facilities, the Base Case II analysis of the Board
staff projected an after-tax loss of $1,224 billion on the
same basis for the year, with a $1.4 billion cumulative loss
assumed through September 30, 1980.
Chrysler's actual, cumulative nine-month after-tax loss of
$1,475 billion is greater than the Base Case II analysis for
the same period due largely to the non-cash write-offs of

- 13 obsolete facilities and the recognition of additional reserves
for prior years' warranty costs. Neither item was fully
reflected in the Base Case II forecast.
Chrysler's loss is not unique. The entire automotive
industry suffered substantial pre-tax losses during the second
and third quarters of 1980 as the result of depressed sales
due to the recession and due to the shortage of fuel-efficient
cars. Nine-month, after-tax losses were more than $3.5 billion
for the industry (including more than $1 billion in earnings
improvements from tax-loss carry-backs). This magnitude of loss
had not been expected at the beginning of the year.
Automobile production is measured on a model year basis,
which runs from August 1 of the previous year to July 31 of
the nominal year. Chrysler has produced over 130,000 cars and
trucks for the 1981 model year through September 30, as shown
below:
Production by Model Year
1980 1981
Cars 742,575 100,098
Trucks

(8/1/79 to 7/31/80)

(8/1/80 to 9/30/80)

179,416

30,212

- 14 The Board's staff is currently in the process of analyzing
the September Plans relative to actual performance, previous Chrysler
forecasts, and the staff's earlier base case projections. Although
the analysis has not been completed, some preliminary observations
concerning Chrysler's 1980 performance can be made.
On an overall basis, the staff's preliminary review indicates
that the level of risk in Chrysler's September 4 Operating and
Financing Plans is somewhat smaller than some earlier plans because:
° The September 4 Plans are more consistent with independent
forecasters' assessments of industry sales and the economy.
• The company is more cognizant of the risks identified
in the past, and is taking steps to insulate itself
from them.
° Financial and operating projections contained within
the plan are more conservative and conform to the staff's
Base Case II projections much more closely than in the
past. Greater allowances have also been made for possible
adverse economic impacts.
The staff's current analyses project that Chrysler's 1980
loss is likely to be somewhat greater than the level assumed in the
September Plans, depending upon actual sales levels during
November and December.

The projection incorporates the following

adjustments, which were not fully included in Chrysler's September
4 full-year loss estimate of $1.3 billion, but which were reflected
in Chrysler's actual nine-month after-tax loss of $1,475 billion:
• $50 million extraordinary write-off for a foundry
scheduled to close and tool amortization adjustments;
• $60 million in prior model year warranty costs; and
° $40 million of additional expense for launch and preproduction
costs of 1981 models.

Nevertheless, Chrysler's financial

performance is expected to be substantially better than the
comparable quarter of 1979 (a $376 million loss) and earlier
quarters of 1980.

Even if a fourth quarter sales decline

causes Chrysler's total 1980 loss to exceed its September 4
plan levels, sufficient financial reserves still appear to
be available to the company over the near term.
The Board made its July viability findings for Chrysler based
upon its own independent projections of the company's likely cash
flows through 1983 and, over the long term, the company's
profitability.

During the short term, the Board had to determine

whether or not Chrysler possessed a sufficient cash flow with
other financial reserves to develop and produce new fuel-efficient
cars to meet the market's demands.

During this period, net

income measures are distorted with high product development
and launch costs and with non-cash write-offs of obsolete
facilities and many other non-cash charges, such as:

amortization

and depreciation, pension payments which the union has agreed
to allow to be deferred, and interest on restructured debt,
which is payable in deferred interest notes which, in turn,
may be converted into preferred stock at Chrysler's option
provided that certain conditions are satisfied.

In 1980,

Specifically, Chrysler

has the option to convert up to $750 million of deferred
interest notes into preferred stock provided that it passes
the following two tests:
—

at least 350,000 K-cars are manufactured and sold
during model year 1981, and

—

Chrysler's cumulative net income excluding extraordinary write-offs of obsolete facilities do
not exceed a $500 million cumulative loss from
July 1, 1981 through December 31, 1983.

The new front-wheel-drive K-car was introduced under the
Plymouth Reliant and Dodge Aries nameplates in the first
week of October and dealers have been submitting large numbers
of orders for it.

Chrysler had some initial difficulty keeping

to its production schedules for this new fuel-efficient car
due to assembly plant start-up delays.

However, K-car production

rates are now substantially at planned levels, so continued
production shortfalls are not anticipated.

Total production

A necessary step by the company to prepare

for the risks was to develop a corporate restructuring
plan to reduce fixed costs.

Chrysler's Chairman Lee A. Iacocca

confirmed Chrysler's intention to conduct the study in a letter
to the Board on July 14, 1980.

Chrysler is now making a

long-term evaluation of its manufacturing facilities and
operations for the purpose of reducing its fixed costs and,
hence, its exposure to declining volumes.

The company is

exploring the prospect of purchasing certain automobile
parts rather than manufacturing them in-house.

This represents

the first comprehensive examination of every facility at one
time.

The Board's staff understands that in this evaluation

Chrysler is examining the possibility of selling some plants,
closing others, and consolidating operations in those remaining.
Chrysler has informed the Board staff that the study is
long-term, with periodic, gradual impacts on the company.
So far, only those actions decided upon before this study
beqan have been announced.

They are:

the closing of the

Lynch Road assembly plant, the Eight Mile/Outer Drive stamping

- 18 -

plant, the Huber Avenue Foundry (all in the Detroit area), and the
Cape Canaveral wiring harness plant in Florida.

Other probable

actions are still under study and management has yet to make
a decision.
The company has also discussed with the Board staff
possible alternatives available to the company to respond to
potential risks in the September Plans.

The Memorandum of

Operating and Financing Plan Procedures and Requirements
also requires Chrysler to submit an Operating Budget and
Financing Budget on a detailed, quarterly basis on December 1
(and December 1 of every year loan guarantees are outstanding).
These plans, when taken together with everything provided since
September, will constitute Chrysler's official 1981-1984
submission to the Board, and will be evaluated by the Board
as a whole.
As stated earlier, Chrysler must accrue a level of
non-federally guaranteed assistance to qualify for an equal
amount of additional Federal loan guarantees.

As of September 30,

Chrysler has accrued a total of $910.5 million in non-federal
assistance.

The break-down of accruals is as follows:

- 19 -

Accrual of Non-Federal Assistance
(Dollars in Millions)
7/31/80
Findings

9/30/80

$ 50.7

72.9

186.3

18.7

23.6

Asset Sales

223.6

261.9

Pension Fund Deferral2

182.3

203.0

Employee Concessions

139.0

162.8

$800.6

$910.5

Lender AssistancesState & Local Government
Suppliers & Dealers

Total
Loan Guarantees Available $110.5

1 Daily accrual; $5.6 million of directly related restructuring
costs excluded at outset.
2
Daily accrual; excludes $114 million PBGC line of credit and
related imputed interest on a pro-rata basis over 1980-1983.

artmentoftheTREASURY

TELEPHQN

INGTON,D.C. 20228

FOR IMMEDIATE RELEASE

November 10, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 4,000 million of 13-week bills and for $ 4,000 million of
26-week bills, both to be issued on November 13, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing February 12, 1981
Discount Investment
Price
Rate
Rate 1/

High 96.638 13.300% 13.95%
Low
96.563
13.597%
Average
96.584
13.514%

14.28%
14.19%

26-week bills
maturing May 14, 1981
Discount Investment
Rate 1/
Price
Rate
93.37 8- 13.098%
93.257
13.338%
93.311
13.231%

14.22%
14.50%
14.38%

a/ Excepting 6 tenders totaling $2,680,000
Tenders at the low price for the 13-week bills were allotted 31%.
Tenders at the low price for the 26-week bills were allotted 42%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Boston
New York
Philadelphia
Cleveland J"
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury

Received
Accepted
$
84,390 "$
64,390
5,011,405
3,063,455
42,280
42,280
69,525
69,525
64,935
64,935
59,020
59,020
355,825
200,325
33,745
24,745
18,245
18,245
58,900
58,900
27,865
27,855
372,105
187,105
119,270
119,270

Received
$
81,840
5,145,430
26,735
54,825
55,400
52,435
378,205
30,555
19,895
39,760
14,110
380,005
122,425

TOTALS

$6,317,510

$4,000,050

$6,401,620

$4,000,120

Competitive
Noncompetitive

$3,611,750
956,825

$1,294,290
956,825

$4,214,010
784,410

$1 812,510

Subtotal, Public

$4,568,575 $2,251,115

$4,998,420

$2 ,596,920

Federal Reserve
Foreign Official
Institutions

848,905

800,000

900,030

603,200

TOTALS

$6,317,510

$4,000,050

Accepted
$

61,840
,970,930
26,735
54,825
55,400
52,435
278,205
23,555
19,895
39,760
14,110
280,005
122,425

Type

1/Equivalent coupon-issue yield,

M-734

848,905

$6,401,620

784,410

$4,000,120

DATE:

H-10-80

13-WEEK

26-WEEK

TODAY:
LAST WEEK:

/•?. 3 44 7. /?.j£?%

HIGHEST SINCE:

if, /</ rfo /3. Z> f 7.

LOWEST SINCE:
! v /n

it I'M

FOR IMMEDIATE RELEASE
November 10, 1980

CONTACT:

GEORGE G. ROSS
(202) 566-2356

UNITED STATES AND SWITZERLAND BEGIN
INCOME TAX TREATY NEGOTIATIONS
The Treasury Department today announced that representatives
of the United States and Switzerland recently concluded a first
round of discussions on a new income tax treaty between the two
countries. The new treaty would replace the treaty currently in
force, which was signed in 1951.
Discussions are expected to
continue in March 1981.
The new treaty is expected to follow the pattern of the 1977
U.S. and OECD Model treaties.
The discussions will cover the
full range of issues normally considered in tax treaty
negotiations, including the tax treatment of income from
business, investment, and personal services, and procedures for
administering the treaty.
The United States has asked
specifically to discuss several areas in which the existing
treaty
appears
imperfect.
These
include
"correlative
adjustments" in one country in response to an adjustment made by
the other country to reflect arm's-length pricing principles;
inappropriate use of the treaty by third country residents; and
the narrowness of the existing exchange of information provision.
The application of the treaty to the Swiss forfait tax is also
under consideration.
The Treasury invites persons wishing to submit comments on
any aspect of the proposed treaty, on issues which have arisen
under the present treaty or on U.S.-Swiss tax relations generally
to write, by December 31, 1980, to H. David Rosenbloom,
International Tax Counsel, Department of the Treasury, Room 3064,
Washington, D.C. 20220.
This notice will appear in the Federal Register of
November 14, 1980.
o

^-735

FOR IMMEDIATE RELEASE

November 12, 1980

RESULTS OF TREASURY'S 44-DAY BILL AUCTION
Tenders for $4,002 million of 44-day Treasury bills to be issued
on November 17, 1980, and to mature December 31, 1980, were accepted at
the Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Price
High
Low
Average -

98.320
98.296
98.303

Discount Rate

Investment Rate
(Equivalent Coupon-Issue Yield)

13.745%
13.942%
13.885%

14.17%
14.38%
14.32%

Tenders at the low price were allotted 88%.
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
TOTALS

M-736

Received
$
24,000,000
11,059,000,000

10,000,000
82,000,000
10,000,000
731,000,000
6,000,000
45,000,000
3,000,000

Accepted
$
12,000,000
3,195,200,000

5,000,000
41,400,000
1,000,000
419,000,000
6,000,000
35,000,000

—
—

452,000,000

287,000,000

$12,422,000,000

$4,001,600,000

Immediate Release
November 12, 1980

IRS ISSUES REGULATIONS ON FOREIGN TAX CREDITS

The Treasury Department today announced the issuance by
the Internal Revenue Service of regulations explaining the
standards under which payments by U.S. taxpayers to foreign
countries may be credited against U.S. income tax liability.
The regulations are being issued as temporary regulations effective on their publication in the Federal Register
for taxable years ending after June 15, 1979. They are also
being issued, simultaneously, as proposed regulations. The
proposed regulations will be open for comment for 60 days
after their publication. The IRS has provided an opportunity
for public comment to determine whether there are any
technical difficulties.
The new regulations take into account comments received
on proposed regulations on foreign tax credit standards
issued on June 20, 1979.
The new regulations confirm rulings issued by the
Internal Revenue Service in January 1978 and the proposed
regulations published in June 1979 which made it clear that
payments to foreign oil-producing countries by U.S.
extractors based upon artificial posted prices cannot be
credited against U.S. income taxes.
These regulations establish two circumstances in which
payments by extractors are clearly taxes that may be credited
against U.S. tax liabilities:
1) the foreign country imposes an income tax which
does not treat extractors significantly differently
from other taxpayers; or

M-737

-22)

extractors are subject to a tax which is not the
foreign country's general income tax but the amount
paid is comparable to what would have been paid
under the country's general income tax.
If neither of these conditions is satisfied, the payments are presumed not to be income taxes. That presumption
can be rebutted only if the extractor demonstrates that no
significant part of the amount paid is compensation for the
right to produce the natural resources.
The determination of whether a payment made by an
extractor to a foreign government which owns mineral
resources is an income tax or a payment for the mineral has
important U.S. tax consequences. Royalties are deducted in
computing U.S. taxable income while foreign income tax
payments offset U.S. taxes on foreign-source income dollar
for dollar.
The regulations also provide that a payment to a foreign
government is an income tax that can be credited against U.S.
income tax liability only if the charge is computed on
realized net income. A tax may be considered by the IRS to
be imposed on realized net income even if the provisions of
the foreign law differ substantially from the provisions of
the Internal Revenue Code.
The guidelines on crediting extraction payments and the
rules relating to realized net income differ somewhat from
those included in the June 1979 proposed regulations. Two
other changes made in response to public comments on the June
1979 regulations are:
1) the regulations allow a foreign tax credit, as an
"in lieu" tax, where a liability imposed on a
person under foreign law is comparable to the
income tax burden of persons not receiving an
economic benefit and that liability is satisfied by
payment of a larger amount to the foreign country.
Objections were raised to a provision of the June
1979 regulations that would have denied all foreign
tax credits when a taxpayer pays more to a foreign
country than would have been required under that
country's income tax.
2) The new regulations provide that withholding taxes
may be credited as income taxes when a foreign
country draws a "reasonable line" between income
subject to a tax on gross income and income subject
to a tax on net income- This test avoids a close
matching of United States rules of taxation with
foreign rules.

-3-

The policy of the foreign tax credit is to avoid
international double taxation of income. Because the United
States taxes the worldwide income of its individual citizens
and residents, and domestic corporations, the Internal
Revenue Code provides for credits for foreign income taxes
and foreign taxes imposed "in lieu" of income taxes. The
foreign tax credit is intended to assure that the U.S. tax
system neither encourages nor discourages foreign operations
of U.S. persons. The policy of avoiding double taxation of
income, reflected by the foreign tax credit, maintains the
international neutrality of the U.S. tax system for U.S.
persons. The proposed and temporary regulations have been
drafted with this policy in mind.
Concern has been expressed with respect to the effect of
the regulations on U.S. income tax treaties. The regulations
do not override any tax treaty commitment made by the United
States to give a foreign tax credit for a payment made to a
treaty country. Each tax treaty must be examined, however,
to ascertain whether it contains such a commitment.
The new temporary and proposed regulations apply to
taxable years ending after June 15, 1979. Interpretations of
sections 901 and 903 based on existing case law, revenue
rulings, and regulations will be applied by IRS in disposing
of issues in all prior taxable years not barred by the
statute of limitations unless the taxpayer desires instead to
apply the temporary regulations to such years. Any existing
revenue rulings which are inconsistent with the temporary
regulations are no longer effective for taxable years
beginning after December 31, 1980.
The regulations do not delay the effective dates of
revenue rulings such as Rev. Rul. 76-215, 1976-1 C.E. 194
(concerning production sharing), Rev. Rul. 78-258, 1978-1
C.B. 239 (concerning subsidies), or Rev. Rul. 78-63, 1978-1
C.B. 228 (concerning posted prices). Thus, for taxable years
beginning on or after July 1, 1978, a foreign tax credit is
not available where a posted or artificial price determines
the amount of payments made to
a foreign country. A copy of
oOo
the regulations is attached.

CC:LR-100-78
Br5:DHorowitz
[Final Draft 9-19-80]
[4830-01]
TITLE 26—INTERNAL REVENUE
CHAPTER 1—INTERNAL REVENUE SERVICE
DEPARTMENT OF THE TREASURY
SUBCHAPTER A—INCOME TAX
PART 1—INCOME TAX; TAXABLE YEARS BEGINNING
AFTER DECEMBER 31, 1953
PART 4—TEMPORARY INCOME TAX REGULATIONS RELATING
TO CREDITABILITY OF FOREIGN TAXES
AGENCY: Internal Revenue Service, Treasury.
ACTION: Temporary regulations; Notice of proposed
rulemaking.
SUMMARY: This document contains temporary regulations
setting forth the requirements for the creditability
of foreign taxes against a person's U.S. income tax
liability. In addition, the text of the temporary regulations
set forth in this document also serves as the text of the
proposed regulations cross-referenced in the Notice
of Proposed Rulemaking in the Proposed Rules section of
this issue of the FEDERAL REGISTER.
DATES: The regulations apply to taxable years ending
after June 15, 1979, unless the taxpayer chooses to apply
the regulations to taxable years ending on or before such date.
If a revenue ruling in effect on [insert date immediately
preceding the date of publication of these regulations in

-la-

the Federal Register] is inconsistent with the regulations,
then, notwithstanding the regulations, a taxpayer may
choose to apply such ruling for any taxable year ending
on or before December 31, 1980.

- 2 FOR FURTHER INFORMATION CONTACT:

Daniel Horowitz of the

Legislation and Regulations Division, Office of Chief
Counsel, Internal Revenue Service, Washington, D.C. 20224
Attention:

CC:LR:T, 202-566-3289, not a toll-free call.

SUPPLEMENTARY INFORMATION:
BACKGROUND
This document contains temporary and proposed income
tax regulations under sections 901 and 903 of the Internal
Revenue Code of 1954. The amendments set forth the
requirements for the creditability of foreign taxes against
a person's U.S. income tax liability.

They are issued under

the authority contained in section 7805 of the Internal
Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805).
A notrce of proposed rulemaking relating to the
creditability of foreign taxes under sections 901 and 903
was published in the FEDERAL REGISTER on June 20, 1979
(44 FR 36071).

Many interested parties have commented on

this proposal.

These comments have been taken into

account in the drafting of the temporary and proposed
regulations contained in this document.
EXPLANATION OF PROVISIONS
Section 901 allows to taxpayers a credit against
U.S. income tax liability for "the amount of any income,
war profits, and excess profits taxes paid or accrued
during the taxable year to any foreign country or to any
possession of the United States."

Section 903 provides

- 3 that the term "income, war profits, and excess profits
taxes" includes " a tax paid in lieu of a tax on income, war
profits, or excess profits otherwise generally imposed by
by any foreign country or by any possession of the United States.1*
INCOME TAXES
Under paragraph (a) of section 4.901-2, the standard
for determining whether a foreign charge is an income tax
is the U.S. income tax.

Thus, a foreign charge

is an income tax if and only if: the charge is not
compensation for a specific economic benefit within the
meaning of paragraph (b); the charge is based on realized
net income within the meaning of paragraph (c); and the
charge follows reasonable rules of taxing jurisdiction*
A foreign charge may meet these requirements even if the
provisions of the law of the foreign country imposing the
charge differ substantially from the income tax provisions
of the Internal Revenue Code.

A foreign charge does

not follow reasonable rules of taxing jurisdiction
if liability for the charge is clearly related to
the availability of a credit for the charge against
income tax liability to another country.
Under paragraph (b) (1), a foreign charge imposed
only on persons that do not receive any specific economic
benefit from the foreign country is not compensation for
a specific economic benefit.

A foreign charge imposed on

- 4 persons that receive any specific economic benefit from the
foreign country is presumed to be compensation for a specific
economic benefit.
is rebutted if:

Under paragraph (b) (2), this presumption
the same charge is also imposed on income of

persons that do not receive any specific economic benefit;
the amount of charge paid by persons that receive the
specific economic benefit is not significantly increased
over what this amount would be if such persons were, instead,
subject to an income tax imposed on income of persons
that do not receive the specific economic benefit; or it is
demonstrated that no significant part of the charge is
compensation for the specific economic benefit received.
Under paragraph (b) (3), a person upon which a charge
is imposed receives a specific economic benefit if the
person receives an economic benefit that, in general, is not
being received by persons upon which the charge is not being imposed.
The term "economic benefit" includes a good, a service, a
fee or other payment, or a right to use or extract property
that the government owns or controls.
Under paragraph (c) (1), a foreign charge is computed
on the basis of realized net income if and only if it meets
the realization, gross receipts, and net income requirements.
Under paragraph (c) (2), a foreign charge meets the realization
requirement if it is imposed, without substantial deviation, upon
the occurrence of:

realization events in the U.S. sense; events

subsequent to U.S. realization events; or events that are
the transfer or processing of readily marketable property

- 5 (but only if the foreign country does not impose any
charge with respect to the same amounts upon the occurrence
of another event).

Under paragraph (c) (3), a foreign

charge meets the gross receipts requirement if £t is
imposed, without substantial deviation, on the basis
of:

gross receipts; or, in certain specified

circumstances, gross receipts computed under a method that
is designed to produce

a n a m 0 unt

that is not greater than

fair market'value and that, in fact, produces an amount
that

approximates, or is less than, fair market value.

Under paragraph (c) (4), a foreign charge meets the net
income requirement if the base of the charge is computed,
without substantial deviation, by reducing gross
receipts by the costs attributable, under
reasonable principles, to such gross receipts.

A special

rule is provided for cases in which certain persons subject
to the charge may elect periodically to compute
base of the charge under another method.
certain

portion of

In addition,

gross foreign charges imposed on items of income

specified in section 871 (a) or 881 (a) need not meet the
net income requirement if the foreign country makes a
reasonable distinction between income that is subject to
the gross charge and income that is subject to tax
on a net basis.

the

- 6 IN-LIEU-OF TAXES
Under paragraph (a) of § 4.903-1, a foreign
charge is a tax in lieu of an income tax, and thus is
considered a creditable income tax for purposes of section 901, if and only if:

the charge is not compensation for

a specific economic benefit within the meaning of
§ 4.901-2 (b); the charge follows reasonable rules of taxing
jurisdiction within the meaning of § 4.901-2 (a) (1) (iii);
the charge meets the substitution requirement as set forth
in paragraph (b); and the charge meets the comparability
requirement as set forth in paragraph (c).
Under paragraph (b), a foreign charge meets the substitution
requirement if th

charge is clearly intended, and in fact operates,

as a charge imposed in substitution for, and not in
addition to, an income tax otherwise generally imposed.
Under paragraph (c), a foreign charge meets the comparability
requirement unless it is

reasonably clear that foreign law

imposing the charge is structured, or in fact operates,
so that the amount of liability of persons subject to the
charge will generally be significantly greater, over a
reasonable period of time, than the amount for which such
parsons would be liable if they were subject to the income
tax otherwise generally imposed.

Under paragraph (d),

an income tax is otherwise generally imposed
by a foreign country if the country imposes an income tax

- 7 or a series of separate income taxes (within the meaning
of { 4.901-2) on significant amounts of income
Pursuant to paragraph (e)

(5), a foreign tax credit

may be allowed, under section 903, if payment of a charge
that is compensation for a specific economic benefit discharges a person's liability for an otherwise creditable charge.
AMOUNTS PAID OR ACCRUED BY THE TAXPAYER
A credit is allowed under sections 901 and 903 only
for the amount of income tax (or in-lieu-of tax) that
is paid or accrued by or on behalf of the taxpayer.

Paragraph

(f) of § 4.901-2 provides special paid-or-accrued rules
in the case of refunds, sub:idies, liability for more than
one charge, noncompulsory amounts, contested liability,
interest and penalties, and amounts for which consideration
is received.

Under paragraph (g), income tax is paid

or accrued by or on behalf of a person if foreign law
imposes legal liability for income tax on that person.
Special rules are provided for taxes paid on combined income
and taxes paid by the payor of income.
COMMENTS AND REQUESTS FOR A PUBLIC HEARING
Before adopting as final regulations the temporary
and proposed regulations contained in this document,
consideration will be given to any written comments that
are submitted (preferably six copies) to the Commissioner
of Internal Revenue.

All comments will be available for

public inspection and copying.

A public hearing will be held

- 8 -

upon written request to the Commissioner by
any person who has submitted written comments,

if a public

hearing is held, notice of the time and place will be
published in the FEDERAL REGISTER.

DRAFTING INFORMATION
The principal author of these regulations is
Daniel Horowitz of the Legislation and Regulations
Division of the Office of Chief Counsel, Internal
Revenue Service.

However, personnel from other offices

of the Internal Revenue Service and Treasury Department
participated in developing the regulation* both on matters
of substance and style.
Adoption of regulations.
Accordingly, §§ 1.901-2 and 1.903-1 are deleted,
a new Part 4, Temporary Income Tax Regulations
Relating to the Creditability of Foreign Taxes, is added
to Title 26 of the Code of Federal Regulations, and the
following temporary regulations are adopted:

- 9 -

PART 4—TEMPORARY INCOME TAX REGULATIONS RELATING TO THE
CREDITABILITY OF FOREIGN TAXES
Sec. 4.901-2 Income, war profits, or excess profits taxes
paid or accrued.
Sec. 4.903-1 Taxes in lieu of income taxes.
Authority! Sec. 7805, 68A Stat. 917 (26 U.S.C. 7805).
I 4.901-2

Income, war profits, or excess profits

taxes paid or accrued.
(a)

Definition of income, war profits, or

excess profits tax—(1)

In general.

Section 901

allows a credit for the amount of any ii iome, war
profits, or excess profits tax ("income tax") paid
or accrued by or on behalf of the taxpayer to any
foreign country* Whether a charge imposed by
a foreign country ("foreign charge") is an income
tax is determined independently for each separate
foreign charge.

Each separate foreign charge will

be considered either to be an income tax or not
to be an income tax,' in its entirety, for all persons
subject to the charge.

The standard for determining

whether a foreign charge is an income tax is the
U.S. income tax.

Thus, a foreign charge la an

income tax if and only i f —
(1)

The charge is not compensation for a

specific economic benefit within the meaning of
paragraph (b) of this section; •r-

$ 4.WETT«T(l) (i)

- 10 (ii) The charge is based on realized
net income within the meaning of paragraph (c)
of this section; and
(iii)

The charge follows reasonable

rules regarding source of income, residence,
or other bases for taxing

jurisdiction.

A foreign charge may meet these requirements
even if the provisions of the law of the
foreign country ("foreign law") imposing the
charge differ substantially from the income
tax provisions of the Internal Revenue Code.

A foreign

charge does not follow reasonable rules of taxing
jurisdiction if liability for the charge is
clearly related to the availability of a credit
for the charge against income tax liability to
another country.
(2)

Other rules.

Paragraph (d) of this

section contains rules describing what constitutes
a separate foreign charge.

Paragraphs (f) and (g)

of this section contain rules for determining the
amount of income tax paid or accrued by or on behalf
of the taxpayer.

Paragraph (h) of this section

defines the term "foreign country."

5 4 .901-2 (a) (2)

- 11 (b)

Compensation for a specific economic

benefit—(1)

General rule.

A foreign charge imposed

only on persons that do not receive any specific
economic benefit from the foreign country is not compensatioi
for a specific economic benefit.

A foreign charge

imposed on persons that receive a specific economic
benefit from the foreign country is presumed to be
compensation for a specific economic benefit.

This

presumption is rebutted only as provided in paragraph (b) (2) and (4) of this section.
(2)

Same or similar charges.

A foreign

charge imposed on persons that receive a specific
economic benefit is not compensation for a specific
economic benefit i f —
(i)

The same charge is also imposed on

income of persons that do not receive any specific
economic benefit from the foreign
country;
(ii)

The amount of the charge paid by persons

that receive the specific economic benefit is not
significantly increased over what this amount would
be if such persons were, instead, subject
to an income tax imposed by the foreign country only
on income of persons that do not receive the specific
economic benefit; or
§ 4.901-2 (b) (2) (ii)

- 12 (iii)

It is demonstrated that no significant

part of the charge is compensation for the specific
economic benefit received.
(3)

Definitions--(l)

Specific economic benefit.

A person upon which a charge is imposed receives a
specific economic benefit if and only if the person receives
an economic benefit that, in general, is not being received
by persons upon which the charge is not being imposed.
term "economic benefit" includes a good, a service,
a fee or other payment, a right to use, acquire or
extract resources, patents, or other property
that

the foreign country owns or controls, or a

discharge of a contractual obligation.

The

term

does not include the right or privilege
merely to engage in business generally or to engage in
business in a particular form.
(ii)

Control of property.

A foreign country

controls property to which it does not hold legal
title if the country exhibits substantial indicia
of ownership with respect to the property, for
example

by regulating the quantity of property

that may be extracted • and the price at which it
may be disposed of.

§ 4.901-2 (b) (3) (ii)

The

- 13 (iii)

Receiving a benefit.

A person is

considered to receive a specific economic benefit
from a foreign country if another person receives a
specific economic benefit from the foreign country
and that other person—
(A)

Is owned or controlled, directly or

indirectly, by the same interests that own
or control, directly or indirectly, the first
person; or
(B)

Engages in business transactions

with the first person under terms and conditions
such that the first person receives, directly
or indirectly, some portion of the value
of the specific economic benefit.
(4)
payments.

Pension, unemployment, and disability fund
A foreign charge imposed on individuals to

finance retirement, old-age, death, survivor,
unemployment, illness, or

disability benefits,

or for some similar purpose, is not compensation for
a specific economic benefit if the amount of charge
imposed on each individual is not computed on a
basis reflecting the characteristics of
that individual.

A foreign charge is, however,

not considered an income tax if it is imposed

§ 4.901-2 (b) (4)

- 14 with respect to any period of employment or selfemployment that is covered under the social security
system of the foreign country in accordance with the
terms of an agreement entered into pursuant to section
233 of the Social Security Act.

(c) Realized net income—(1) In general. A
foreign charge is computed on the basis of realized
net income if and only if it meets the realization,
gross receipts^nd net income requirements as set forth
rn paragraph (c) (2), (3), and (4) of this section.
(2)

Realization—(i)

In general.

A foreign

chaige meets the realization requirement if
it is imposed, without substantial deviation, upon
the occurrence of events that—
(A)

Result in the realization of income

under the income tax provisions of the Internal
Revenue Code;
(B)

Occur subsequent to events described

in paragraph (c) (2) (i) (A) of this section; or
(C)

Occur prior to events described in

paragraph (c) (2) (i) (A) of this section, but
only if the events are the transfer or processing

§ 4.901-2 (c) (2) (i) < C )

- 15 of readily marketable property (within the
meaning of paragraph (c) (2) (iii) of this
section).
Paragraph (c) (2) (i) (C) of this section applies
only if the foreign country does not impose any
charge with respect to the same amounts upon
the occurrence of another event (other than
a distribution or a deemed distribution of such amounts).
(ii)

Different taxable entity.

A foreign

charge meets the realization requirement if it is
imposed, but only once, on amounts that meet the
realization requirement with respect to a person
that, under *oreign law, distributes or is deemed
to distribute such amounts.
(iii)

Readily marketable property.

Property

is readily marketable if i t —
(A)

Can be sold on an open market without

further processing; or
(B)

Is exported from the foreign country;

and
is stock in trade or other property of a kind that
properly would be Included in inventory if on hand
at the close of the taxable year, or is held
primarily for sale to customers in the ordinary
course of business.

§ 4.901-2 (c) (2) (iii) (B)

- 16 (3)

Gross receipts.

A foreign charge meets

the gross receipts requirement if it is
imposed, without substantial deviation, on the
basis o f —
(i) Gross receipts; or
(ii)

Gross receipts computed under a

method that is designed to produce an amount
that is not greater than fair market value and
that, in fact, produces an amount that approximates,
or is less than, fair market value, but
only in the case o f —
(A)

Transactions with respect to which it

is reasonable to believe that gross receipts may
not otherwise be clearly reflected; or
(3) Situations to which paragraph (c) (2)
(i) (C) of this section (relating to a transfer or
processing of readily marketable property)
applies.
(4)

Net income—(i)

In general.

A foreign

charge meets the net income requirement if
the base of the charge is computed, without
substantial deviation, by reducing gross receipts
by—
(A)

Expenses and capital

expenditures ("costs") attributable, under
reasonable principles, to such gross receipts; or

§ 4.901-2 (c) (4) (i)

- 17 (B)

Costs computed under a method that

is designed to produce an amount that is not
less than costs attributable, under reasonable
principles, to

such gross receipts and that, in fact,

produces an amount that approximates, or is greater
than, such costs, but only in the case of transactions
with respect to which it is reasonable to believe
that costs may not otherwise be clearly reflected.
(ii)
graph

Formulary base.

Notwithstanding para-

charge meets the gross receipts and net income
requirements if the base of the charge is computed
by .educing gross receipts by costs as described
in paragraph (c) (4) (i) of this section except
that certain persons subject to the charge may
under foreign law, elect periodically to compute
a portion' of the base of the charge under another
method.
(iii)

Charges on fixed or determinable income.

Notwithstanding paragraph (c) (1) of this section,
a foreign charge need not meet the net income
requirement if and only if—•
(A)

It is imposed, without substantial

deviation, on items of gross income specified in
section 871 (a) or 881 (a) (or on such items
of gross income reduced by specified amounts); and

§ 4.901-2 (c) (4) (iii) (A)

- 18 (B)

Foreign law makes a reasonable

distinction, based on the degree of contact that
the foreign country has with the recipient of the
income or with the activities or assets that
generate the income, between items of income that are
subject to the charge and such items of income that
are subject to a charge computed by reducing realized gross
receipts by costs as described in paragraph (c)
(4) (i) of this section.
(d) Separate charges—(1)

In general.

whether separate charges are imposed by a foreign
country depends upon the structure of foreign law.
Charges are separate if they are separately
computed under foreign law

as provided in para-

graph (d) (2\ (3), or (5) of this section,
or if foreign law contains particular industry
provisions described in paragraph (d) (4) of
this section.
(2)

Separate bases.

Foreign law imposes a

separate charge on each separate base if a
separate rate of charge is applied to each
base or a flat rate is applied to bases that
are combined.

If a progressive rate of charge

is applied to bases that are combined, foreign
law imposes a single charge on the aggregate
of the bases.

A separate base may consist of

§ 4.901-2 (d) (2)

- 19 a .particular type of income (such as interest
income or income derived by a particular class
of persons) or nonincome amount (such as wages
paid) identified by foreign law.

Identified

types of income or nonincome amounts constitute
one base only if costs related to one type may
reduce the other-types.

If no deduction for

costs is permitted, each identified type of
income or nonincome amount is a separate base,
regardless of whether the types are aggregated
for purposes of applying a rate of charge.
, x
f
(3) Separate rates. Foreign law imposes
separate charges if separate rates of charge
are applied to the same base.
(4)

Particular industry.

If foreign law

imposing a charge contains provisions that
significantly increase the liability only of
persons engaged in a particular industry or
industries, and if those provisions would prevent
the charge from being an income tax if persons
engaged in the industry or industries were the
only persons subject to the charge, then foreign
law imposes a separate charge on persons engaged
in the industry or industries.

§ 4.901-2 (d) (4)

- 20 (5) Contractual modifications.

If foreign

law imposing a charge is modified by contracts
entered into by the foreign country,then foreign law
imposes a separate charge on persons that are
parties to substantially similar contracts with
the country.
(e) Examples. The following examples
illustrate the application of paragraphs (a), (b),
(c), and (d) of this section.
Example (1). Country X imposes separate
30-pefcent charges on interest, dividends, and
royalties paid by residents of country X to residents
of the United States or of country A, B, C, D, or E,
that are not engaged in trade or business in country X.
Interest, dividends, and royalties paid to residents
of other countries are exempt from tax by country X.
Like the United States, countr. es A, B, C, D, and E
each allows its residents to claim a credit against
the income tax otherwise payable to it for income
taxes paid to other countries. Because the 30-percent
charge is imposed by country X only on residents of
countries which allow a credit for taxes paid to
other countries, liability for the charge is clearly
related to the availability of a credit for the
charge against income tax liability to another
country. As a result, under paragraph (a) (1) (iii)
of this section, the charge does not follow reasonable
rules of taxing jurisdiction and is not an income tax.
Example (2). Country X imposes a 25-percent
charge on royalties. Country X has a patent license
agreement with D, a corporation organized in the
United States. Country X and D agree, as part
of the patent license, that the 25 percent charge
will be imposed on royalties due from country
X to D only to the extent of the amount available
to D as a credit against D's U.S. income tax
liability. Under paragraph (d) (5) of this section,
country X imposes a separate charge on D. The
liability for this charge is clearly related to the
availability of a credit for the charge against income
tax liability to another country.. 5 As
a result,
under (2)
4.901-2
(e) Example
paragraph (a) (1) (iii) of this*section, the charge
does not follow reasonable rules of taxing jurisdiction
and is not-an income tax.

- 21 Example (3). Country X imposes a 55-percent
charge on the realized net income of corporations
owned by nonresidents. These corporations are
engaged in various businesses in country X
including mineral extraction. Country X owns all
mineral resources located within the country and
licenses private persons to extract those minerals."
Country X does not retain a share of the minerals
extracted by licensees or receive a separately
computed royalty from licensees. The law of
country X imposing the 55-percent charge does not
distinguish significantly between persons extracting
minerals and otner persons that do not receive any
specific economic benefit in determining gross
receipts, allowing deductions for expenses ~and recovery of
capital (including depletion), permitting losses
from one activity to offset income from other
activities, applying rates of charge, or in any other
manner. With respect to both licensees and others,
the charge is not compensation for a specific
economic benefit under paragraph (b) (2) (i) of this
section.
Example (4). The facts are the same as in
example (3), except that country X impc ;es different
rates of charge on the realized net income of various
corporations as follows:
Industry . Rate of Charge
Manufacturing 45 percent
Technical services
35 percent
Construction
30 percent
Mineral extraction
45 percent
In addition, country X imposes a 25-percent charge
on interest paid by residents of country X to
corporations not engaged in business in country X.
The 25-percent charge and the charge imposed on
persons engaged in manufacturing are income taxes.
For purposes of paragraph (b) (2) (ii) of this section,
the charge on gross income of porporations not
engaged in business in country.' X cannot be compared
with a charge on corporations engaged in business
in country X. The charge on mineral extraction can,
however, be compared to the charge imposed on corporation
engaged in manufacturing in country X. Thus, the charge
imposed on corporations engaged in mineral extraction
is not compensation for a specific economic
benefit under paragraph (b) (2) (ii) of this section.
§ 4.901-2 leV ExampleH3)

- 22 Example (5). The facts are the same as in
example (3), except that corporations engaged in
a business other than mineral extraction are subject
to a 35-percent charge on realized net income if
they are closely held and to a 55-percent charge
on realized net income if they are widely held.
Both of these charges are income taxes .
Corporations engaged in a business other than
mineral extraction are both widely and closely held.
Corporations engaged in mineral extraction are
subject to a separate 55-percent charge on realized net
income whether they are widely or closely held.
The latter charge is not compensation for a specific
economic benefit under paragraph (b) (2) (ii) of this
section.
Example (6). The facts are the same as in
example (3), except that realized net income in
excess of $1*000,000 is subject to a rate of 70
percent. Most corporations engaged in mineral
extraction in country X have realized net income significantly
in excess of $1,000,000. Other corporations never
have an amount of realized net income significantly
in excess of $1,000,000. The charge imposed on
corporations engaged in mineral extraction, whi^h varies
from 55 to 70 percent, is a separate charge under paragraph (d) (4) of this section because the 70-percent rate
significantly increases the liability only of
persons engaged in mineral extraction. This
charge is presumed to be compensation for a
specific economic benefit under paragraph (b) (1).
This presumption is rebutted only if it is
demonstrated that no significant part of the charge
is compensation for the specific economic benefit received
by corporations engaged in mineral extraction.
Example (7). Country X imposes a 45-percent
charge on the realized net income of all corporations
doing business in country X. Corporations engaged in
the extraction of mineral resources owned
by 'country X pay an additional charge of
40 percent of the same base as the 45-percent
charge. In computing the base of each of these
charges, no deduction is allowed for the amount
of the other charge. The fact that no such
deduction is allowed significantly increases
the amount of each charge paid by corporations
engaged in mineral extraction over what this
amount would be if such corporations were
4.901-2
subject to the 45-percent charge on (the
basis (e) Example (7)
of realized net income (that is, if a deduction
for 40-percent
tne imposed
40-percent
charge
allowed).
The
charge
on
charge
corporations
and were
the 45-percent
engaged in mineral

- 23 extraction are separate charges under paragraph (d) (3) and (4), respectively, of this section.
Each is presumed to be compensation for a
specific economic benefit under paragraph (b) (]).
This presumption is rebutted only if it is
demonstrated that no significant part of the
charge is compensation for the specific economic
benefit received by corporations engaged in
mineral extraction. The 45-percent charge imposed
on other corporations is a separate charge that
may be an income tax.
Example (8). Country X imposes a 40-percent
Corporate Tax on the realized net income of foreign
corporations engaged in the extraction of minerals
owned by country X. These corporations are also
subject to a Branch Profits Tax of 10 percent
imposed on the same base as the 40-percent charge.
Other foreign corporations are subject to the Corporate
Tax at a rate of 30 percent and to the Branch
Profits Tax at a rate of 20 percent,. The .20-oercent
charge and the 30-percent charge, are income taxes.
Because the overall burden on corporations engaged
in mineral extraction is the same as that on
other foreign corporations, neither of the charges
imposed on corporations engaged in mineral
extraction is compensation for a specific
economic benefit under paragraph (b) (2) (ii) of
this section.
Example (9). Country X imposes an 80-percent
charge on the realized net income of corporations
engaged in the extraction of mineral resources
owned by country X and on several other corporations.
Country X also imposes a 40-percent charge on the
realized net income of all corporations engaged
in business in the country that are not subject
to the 80-percent charge. Most corporations
engaged in mineral extraction in country X
have realized net income in excess of $10,000,000.
The other corporations subject to the 80-percent
charge generally haye less than $100,000 of realized net
income. Paragraph (b) (2) (i) or this section does
not apply because the income of corporations not
engaged in mineral extraction that are subject
to the 80-percent charge is so insignificant that
no meaningful comparison can be made between the
amount of charge imposed on such persons and the
amount of charge imposed on persons engaged in
mineral extraction. The 80-pe*cent
cnarge is
§ 4.901-2
fetannjteS.9)
presumed to be compensation for a specific economic
benefit under paragraph (b) (1) of this section.

- 24 This presumption is rebutted only if it is
demonstrated that no significant part of the
charge is compensation for the specific economic
benefit received by corporations engaged in
mineral extraction.
Example (10). Country X imposes a 46-percent
charge on the realized net income of corporations
engaged in the extraction of minerals owned by
country X. Country X imposes no income tax on
other persons. The 46-percent charge
is presumed to be compensation for a specific
economic beueCic under paragraph (b) (1) of this
section. This presumption is rebutted only if it
is demonstrated that no significant part of the
charge is compensation for the specific economic
received by corporations engaged in mineral
extraction.
Example (11). Country X owns ail the subsoil
mineral resources within country X and retains
privately owned corporations to provide the services of
extracting and marketing such minerals for country
X in return for a fee. Country X generally imposes
a 30-percent charge on realized net income of
corporations. The rate of charge for mineral
service corporations is, however, 60 percent. Under
paragraph (b) (3) (i) of this section, the fee paid
to the mineral service corporations is a specific economic
benefit provided by country X to these corporations.
The charge imposed on these corporations is presumed
to be compensation for a specific economic benefit
under paragraph (b) (1) of this section.
Example (12). Country X allows resident
individuals to deposit amounts of earned income
in a "retirement savings account" ("RSA") and
claim a deduction for the deposit in computing
taxable income under its income tax. When amounts
are paid out of a RSA, country X subjects those
amounts to a separate charge of 20 percent. The
RSA does not meet the standards of an Individual
Retirement Account set forth in section 408 (a)
and no deduction would be allowed under section 219 (a) (1) for the deposits. Because
the charge is imposed only on the occurrence of
an event (withdrawal) that occurs subsequent to
an event thac results in realization under the
§ 4.901-2 (e) Example (12)
income tax provisions of the Internal Revenue Code,
the charge meets the realization requirement under
paragraph (a) (2*) of this section.

- 25 Example (13). Country X imposes on all individuals
a charge tnat is similar to the individual income
tax provisions of the Internal Revenue Code except
that taxable income is defined to include imputed
rental income from owner-occupied housing and
unrealized appreciation of investment property. The
charge meets the realization requirement under
paragraph (c) (2) of this section because the charge
is imposed, without substantial deviation, upon the
occurrence of events described in paragraph (c) (2)
(i) (A).
Example (14). Country X imposes on all individuals
a charge that is similar to the individual income
tax provisions of the Internal Revenue Code. In
addition, country X imposes a separate charge on
imputed rental income from owner-occupied housing.
No other amounts are included in the base on which
the latter charge is imposed. The latter charge does
not meet the realization requirement because it is
not imposed, without substantial deviation, upon the
occurrence of events described in paragraph (c) (2) (i)
of this section.
Example (15). Country X imposes a separate
charge on corporations engaged in the extraction
and processing of petroleum. The base of the charge
is "gross proceeds" reduced by costs. "Gross
proceeds" is defined as actual gross receipts from
sales plus the value (determined on an arbitrary
basis) of petroleum "used" by the corporation.
Petroleum is "used" by the corporation if the
petroleum is consumed in powering the vehicles or
machines employed by the corporation in extracting
or processing petroleum. In country X, "used" petroleum
is likely to be an insignificant portion of total
extracted petroleum. Despite the" fact that the base
of the charge includes "used" petroleum valued
on an arbitrary basis, the charge meets the
realization and gross receipts requirements under
paragraph (c) (2) and (3) of this section because it
is computed, without substantial deviation, on the
basis of realized actual gross receipts.
Example (16). Country X imposes a separate
charge on petroleum extraction income. The base
of the charge is "gross proceeds" reduced by costs.
"Gross proceeds" is defined as gross income
from sales of extracted petroleum plus the fair
§ 4.901-2
(,e) Example (lc\
market value of unsold petroleum
transported
from the well-head and delivered for processing.
The charge meets the realization requirement under
paragraph (c) (2) (i) (A) and (C) of this section because

- 26 it is imposed upon the occurrence of sales
and transfers (transport) and the transported
petroleum is readily marketable property.
In addition, the charge meets the gross receipts
requirement under paragraph (c) (3) (i) and (ii)
(B) of this section.
Example (17). Country X imposes a separate
charge on the excess of fair market value over costs
of readily marketable minerals removed from a mine.
Country X imposes another separate charge on realized
net income of corporations. Included in the base*
of this charge are proceeds from sales of minerals,
including minerals subject to the former charge.
The former charge does not satisfy the realization
requirement under p..r.-graph (c) (2) (i) of this
section because country X imposes a charge
with respect to the same income upon the
disposition of the same minerals.
Example (18). Country X imposes.a
Corporate Tax on realized net income. Country
X also imposes a tax on dividends paid to
shareholders resident outside of country X by
corporations organized in country X, and a
Branch Profits Tax on corporations organized
unuer the law of another country. The Branch
Profits Tax is imposed when realized net income is
remitted to home offices outside of country
X. The Branch Profits Tax meets the realization
requirement under paragraph (c) (2) (ii) of
this section.
Example (19) * Country X imposes a
charge on tne net gain of petroleum
companies and another charge on the
net gain of other companies. Net gain of
petroleum companies is determined when petroleum
is sold or exported, whichever occurs first.
Country X's Tax Board uses a set price in
determining net gain derived from both sales
and exports of petroleum. The set price is a weighted
average based on reported prices for arm'slength sales of country X petroleum and comparable
petroleum from other countries under long
and short term contracts and on the "spot market."
The set price takes into account * transportation costs,
delivery time, payment time and prices for
petroleum products. The set price is determined
§ 4.901-2
(e)Board
Example (19)
retroactively every 4 months
by the Tax
and is applied to sales and exports that took
place during that period. The set price is

- 27 -

in fact nearly equal to the fair market value
of substantially all the petroleum.sold and exported by
companies subject to the -chargeo With respect
to companies other than petroleum companies,
country xuses actual gross receipts in computing
net gain. It uses the set price for petroleum
companies because the Tax Board believes that
the gross receipts of petroleum companies are
not otherwise clearly reflected. Since the
exported petroleum is readily marketable property,
the realization requirement under paragraph
(c) (2) of this section is met. In addition,
the charge meets the gross receipts
requirement under paragraph (c) (3) (ii)
(A) and (B) of this section.
Example (20). Country X imposes a charge
on the "value" of exported petroleum. The
"value" of such petroleum is deemed to be the
"spot-market" price although a significant
portion of exported petroleum is sold to related
and unrelated^ persons under long term contracts
at arm's-length prices substantially below the
"spot market" price. The charge does not meet the
gross receipts requirement under paragraph (c) (3)
of this rection because the "value" of petroleum
used by .country X is an amount determined under
a method that is not designed to produce an amount
that is not greater than fair market value.
Example (21). Country X uses a set price in
imposing a charge on the net gain of petroleum
companies. The set price is equal to 102 percent
of the fair market value of the petroleum. The
charge does not meet the gross receipts requirements
under paragraph (c) (3) of this section because
it is computed under a method that is not designed
to produce an amount that is not greater than fair
market value.
Example (22). Country X imposes a charge on
business income which is computed by deducting
costs from realized gross receipts. However,
country X limits the amount of costs which may
be deducted to 80 percent of gross receipts.
Costs incurred in deriving gross receipts in
country X frequently exceed 80 percent of such
receipts. The charge does
not meet
net income
§ 4.901-2
(e)the
Exajnnla.
(221
requirement under paragraph (c) (4) of this section.

- 28 Example (23). Country X imposes a charge on
realized gross business receipts. The legislative
history of the charge indicates that the rate was
reduced to make up for the fact that deductions
were not allowed. The charge does not meet the
net income requirement under paragraph (c) (4)
of this section.
Example (24). Country X imposes a charge on
the realized gross receipts, less allowed
deductions, derived by domestic and foreign
persons from business activities conducted within country x. Country X allows deductions for
all costs except royalties paid to a-related
person, interest exceeding certain limits paid to
a related person by a person other than a financial
institution, social security tax payments to
other countries, and general administrative
costs incurred by home offices outside country
X. Despite the disallowance of the costs
described above, country X's charge satisfies
the net income requirement under paragraph (c)
(4) (i) of this section because it is computed,
without substantial deviation," by reducing gross
receipts by costs.
Example ( 25). Country X imposes a 40-percent
charge on realized net income of all corporations
that have offices in country X, including corporations
that maintain a headquarters office to provide
management services for related corporations.
Country X allows a person subject to this charge to
elect every 2 years to calculate its realized net
income from headquarters management services by way
of a formula rather than by subtracting costs from
gross receipts. The formula provides that realized
net income from such services is deemed to be a
specified.multiple of the costs ot providing tne services.
This"amount is added to the amount of any other
realized net income and the 40-percent rate of charge
is applied to the sum of the amounts. The charge
imposed by country X meets the gross receipts and
net income requirements pursuant to paragraph (c)
(.41 (ii) of this section.
Example (26). Country X imposes a charge on
the realized net income of individual residents of
the country. A resident§ individual
does (26)
not
4.901-2 (e)that
Example
engage in commercial activity within country X aav

- 29 elect annually to calculate his income from
sources without country X either by
reducing realized gross receipts by costs
or under a formula. The formula provides thattaxable income is deemed to be a specified multiple
of the rental value*of the individual's residence.
This amount is added to his income from sources
within country X and the rate of charge is applied
to the sum of the amounts. The charge imposed
by country X meets the gross receipts and net
income requirements pursuant to paragraph (c) (4)
(ii) of this section.
Example ( 27). Country X imposes an income tax
on income derived from manufacturing operations in
Country X. Province A of country X imposes a charge
on gross receipts, less deductions, derived
from manufacturing operations in province A. No
deduction is allowed in computing the province A
charge for the country X income tax. Notwithstanding
the failure to allow a deduction for the portion
of the income tax that is attributable to manufacturing
operations without province A, the province A charge
may meet the net income requirement under paragraph (c)
(4) of this section because this portion is not a
cost attributable to gross recrtpts subject to the
province A charge. Notwithstanding the failure to
allow a deduction for the portion of the country X
income tax attributable to manufacturing operations
within province A, the charge may meet the net income
requirement because the failure of a charge to allow
the deduction of an income tax imposed on the same
gross receipts is not a substantial deviation within
the meaning oi paragraph (c) (4) (i).
Example (28). Country X imposes a 25-percent
rate of charge on interest, dividends, and
royalties paid by residents of country X to persons
that are neither residents of, nor, in the case
of foreign persons,"established" in, country
X. The law of country X allows nonresident financial
institutions to operate in the country only through
"representative offices." The functions of a
"representative office " are limited by law to solicitation of customers for its home office or branches
outside country X, advertising for its home
office, performance of credit analyses on
prospective borrowers, and the transmission of
information between prospective borrowers and the
§ 4.901-2 (e) Example (28)
home office. Deposits from residents
of country X may not be accepted by such representative
offices. A representative office cannot legally bine
the nonresident financial institution. Loans must

- 30 be recorded outside the country. Nonresident
financial institutions doing business in country X
through representative offices are not considered
to be "established" in country X and interest paid
to them by residents of country X is subject to the
25-percent charge. Interest paid to resident
financial institutions is subject to a 50-percent
charge on realized gross receipts reduced by costs*
The 25-percent rate of charge as applied to interest is a
separate charge under paragraph (d) (2) of this
section and need not meet the net income requirement
pursuant to paragraph (c) (4) (iii).
Example (29). The facts are the same as in
example (28)* except that certain nonresident financial
institutions have been granted the right to open
branches in country X and to perform all normal
banking activities within country X. Financial .
institutions that exercise this right are considered
"established" in country. X and are subiect to the
50-percent charge on realized net income attributable,
under reasonable principles, to the establishment. The
interest received by such financial institutions that is
not attributable to such an establishment is subject
to the.25-p rcent gross charge. The 25-percent
charge need not meet the net income requirement
pursuant to paragraph (c) (4) (iii) of this section.
Example (30). The law of country X requires that
loans made to residents of country X by nonresidents
be recorded and executed outside the country. There
are no other restrictions on the activities that
nonresidents can perform within country X. A
separate charge of 25 percent is imposed on gross
interest paid by residents of country X to
nonresidents. The 25-percent charge is not excused
from the net income requirement of paragraph (c) (4)
of this section by paragraph (c) (4) (iii)
because country X does not make a reasonable
distinction, based on the degree of contact of the
recipients of the interest or the activities
or assets that generate the interest, between
interest income that is subject to the 25-percent
charge and interest income that is subject to
a charge on realized gross receipts reduced
by costs. The 25-percent charge does not meet the
net income requirement because the base of the
§ 4.901-2
(e) Example (30)
charge is not computed, without
substantial
deviation, by reducing gross receipts by costs
that may be incurred by lenders.

- 31 Example (31). Country X imposes a charge
computed on the basis of realized gross receipts
reduced by costs on residents of country X and on
nonresidents that have a permanent establishment
within country X. Country X also imposes a 20-percent
charge on the gross amount of fees paid by residents
of country X for technical services performed within
or without the country by nonresidents that have
_no permanent establishment within country X. A
nonresident has a permanent establishment within country X if it has a place of business in
the country for a period of more than 1 year. Pursuant
to paragraph (a) (1) (iii) of this section, tne iO-percei
charge may be an income tax notwithstanding the fact
that country X determines the source of personal
services income on the basis of the residence of the
payor. Pursuant to paragraph (c) (4) (iii) of this
section, the 20-percent charge need not meet the net
income requirement.
Example (32). Country X imposes a 50-percent
charge on the "net gain" of corporations engaged in
a trade or business in country X. In calculating "net
gain," deductions are allowed for all business
expenses. In addition, corporations subject to
the charge are permitted to amortize capital
expenditures over a reasonable period. Country X
does not permit related corporations to file
consolidated returns. It does, however, permit
a carryover of losses from the period
in which the losses are incurred to other
periodsc Country X requires that each oil well
within the country be operated by a separate
corporation. Otherwise country X imposes no
restrictions on whether businesses may operate
as a single corporation. As a result, foreign
persons wishing to engage in the extraction
oF'oTl within country'X typically form several
corporations, each of which operates a different

5 4.901-2 (e) Example

(32)

- 32 well. Country X does not own or control the petroleum
resources in country X. The provision of foreign
law precluding the filing of consolidated returns
significantly increases the liability only of
corporations engaged in the extraction of oil
because country X requires each oil well to be
incorporated separately and it can reasonably be
expected that oil wells will frequently not be
profitable. Extraction corporations that incur
costs with respect to an oil well that does not
produce revenues will never be able to recover
those costs. Therefore, the 50-percent charge
as it applies to corporations engaged in the
extraction of oil is considered a separate charge
under paragraph (d) (4) of this section. That
charge does not satisfy the net. income
requirement under paragraph (c) (4) (i) of this
section because it is likely that the aggregate
of the bases of the charge imposed on the profitable
members of a group of related corporations engaged
in the extraction of oil will frequently be
significantly greater, over a reasonable period
of time, than the excess of the aggregate gross receipts
of the entire group of related corporations over
tne costs attributable., under reasonable principles,
to those gross receipts. The 50-percent charge,
as it applies to other industries, is a separate
charge and may be an income tax with respect to
other corporations that are subject to it.
Example (33 ). The facts are the same as in
example (32 ), except that country X does not require
that each oil well within the country be operated
by a separate corporation. Instead, it requires
that persons engaged in unrelated lines of business
conduct each line of business through a separate
corporation. Thus, a person wishing to engage
in the extraction of oil within country X and to
invest in a resort hotel in country X is required to
conduct each activity through a separate corporation.
Even though country X does not permit the filing of
consolidated returns by related corporations,
country X's charge meets the net income requirement
under paragraph (c) (4) (i) of this section.
§ 4.901-2 (e) Example

(33)

- 33 Example (34). Country X generally imposes a
45-percent charge on the realized net income of
corporations doing business in country X. However,
the law of country X provides that in the case of a
corporation engaged in mining operations, a separate
35-percent charge is instead imposed on the
excess of the gross receipts over costs attributable
to each specified ore body. Thus, losses from one
specified ore body may not offset gains from another
specified ore body or from other activities and
losses from other activities may not offset gains
from specified ore bodies. Losses attributable to
one taxable year may be carried forward and used in
subsequent taxable years • Country X owns the mineral
resources in country X. Corporations engaged in
mining operations often also are engaged, in country X,
in related activities such as processing or refining.
The realized net income from these activities is
subject to the 45-percent charge. It is demonstrated
that it is likely that these related activities are
profitable over a reasonable period of time. It is
also demonstrated that due to the nature of the
expenses involved in mining ore in country X, the
scope of the mining areas encompassed w. thin ore bodies,
the value of country X ore, and the prospects for the
recovery of ore, the aggregate of the bases of the
separate charges imposed with respect to each profitable
specified ore body will rarely, if ever, be significantly
greater, over a reasonable period of time, than the
excess of the aggregate of gross receipts from all
specified ore bodies over all costs attributable,
under reasonable principles, to those gross receipts.
The charge imposed with respect to each specified ore
body satisfies the net income requirement under
paragraph (c) (4) (i) of this section.
Example ( 35). A charge imposed by the
law of country X is not based on realized net
income. A, a U.S. person, represents to the
Internal Revenue Service that the law
of "country X is administered with respect to A., in a
manner such that in practice tne cnarge is based/
on realized net income. Notwithstanding this
representation, the charge is not an income tax
because it does not meet the standard set forth
in paragraph (a) (1) (ii) of t h i s section under
§ 4.931-2 (e) Exifcple
the law as well as in practice.

- 34 Example (361* Country X imposes a charge on
all interest paid by residents of country X to
lenders, regardless of whether the lenders are
commercial or whether they are residents of, or
operate within, country X. Country X1s law does
not specifically identify separate classes of
taxpayers or types of interest. Under paragraph (d) (2) of this section, country X imposes
one charge on interest income. The charge does not
meet the net income requirement of paragraph (c) (4)
(i) of this section. It is not excused from
meeting this requirement by paragraph (c) (4) (iii)
because no interest is subject to a charge
computed by reducing realized gross interest by
costs as described in paragraph (c) (4) (i).
Example (37) . The facts are the same as in
example (36) except that country XT s law does
specifically identify residents and nonresidents
as separate classes. Under paragraph (d)(2) of this
section country X imposes separate charges on interest paid
to residents and nonresidents. However, the charge
on nonresidents is not excused from meeting the
net income requirement by paragraph (c) (4) (iii)
of this section because interest paid to residents is
not subject to a charge computed by reducing realized
gross interest by costs as described in paragraph (c) (4) (i).
Example (38).„ Country X imposes a single
rate of charge on the sum of an individual's
wages and gross business income. The wage income
and the business income each constitute a separate
base under paragraph (d) (2) of this section
because these amounts are identified by
foreign law and no deductions are allowed tor
costs • Since a flat rate of charge" is'applied, to the
sum of the bases, the charge on each base is a
separate charge. Accordingly, under paragraph (a)
(1) of this section, the determination of whether
the charge on gross business income is an income
tax is made independently of the determination of
whether the charge on wages is an income tax.
Example (39). Country X requires persons to
pay an amount equal to 25 percent
of a specified
§ 4.901-2
(e) Example (39)
base and another amount equal to 15 percent of the
same base. Country X imposes two separate charges
under paragraph (d) (3) of this section.

- 35 Example (40 ) . The facts are the same
as in example (39 ) , except that the 15-percent rate
is applied to the specified base reduced by the
amount of the first charge. Country X imposes two
separate charges under paragraph (d) (2) of this
section.
l
Example (6.1 \ Country X imposes a charge
on realized net income except that no deduction
or other allowance is granted for mineral
royalties paid or accrued. The disallowance
of a mineral royalty deduction significantly
increases the liability only of persons engaged
in mineral extraction. If such persons were
the only persons subject to the charge, the
charge would not be an income tax because it
would not satisfy the net income requirement
under paragraph (c) (4) of this section.
Country X imposes a separate charge on persons
engaged in mineral extraction under paragraph (d) (4) of this section.
Example (42) . The facts are the same as in
exampTii (41),, except that the deduction disallowance
applies only to royalties paid or accrued for the
right to extract gold ore. Country X imposes a
separate charge on persons engaged in gold ore
extraction under paragraph (d) (4) of this section.
(f) Amount of income tax paid or
accrued—(1) In general. A credit is allowed
tax (within
§ 4.901-2
(a) (1)) that is
under
section the
901meaning
for theofamount
of income
paid or accrued to a foreign country , subject to the
provisions of this paragraph (f). The amount of
income tax paid or accrued is determined separately
for each taxpayer.

§ 4.901-2 (f) (1)

- 36 (2) Refunds.

An amount is not income tax

paid or accrued to a foreign country to the extent
that it is reasonably certain that the amount will
be refunded.

It is not reasonably certain that

an amount will be refunded if the amount is a
reasonable approximation of final income tax
liability to the foreign country.
(3)

Subsidies—(i)

General rule.

amount is not income tax paid or accrued to a forei
country to the extent that—
(A)

The amount is used directly or

indirectly by the country to provide a subsidy
by any means (such as through a refund or credit)
to the taxpayer; and
(3)

The subsidy is determined directly or

indirectly by reference to the amount of income
tax, or the base used to compute the income tax,
imposed by the country on the taxpayer.
(ii)

Indirect subsidies.

A foreign

country is considered to provide a subsidy to a
person if the country provides a subsidy to
another person that—
(A)

Is owned or controlled, directly or

indirectly, by the same interests that own or
control, directly or indirectly, the first
person; or

§ 4.901-2 (£) (3) ( U

- 37 (B)

Engages in a business transaction with

the first person, but only if the subsidy
received by such other person is determined
directly or indirectly by reference to the amount
of income tax, or the base used to compute the
income tax, imposed by the country on the first
person with respect to such transaction.
(4)

Multiple charges—(i)

General rule.

a person or one or more related persons are
liable to a foreign country for one or
more charges that are not income taxes in addition
to an income tax, an amount is income tax paid or
accrued to a foreign country only to the extent that
the total of all amounts paid or accrued to
the country exceeds the amount for which the person or persons
would have been liable to the country if the person "or persons
were not liable for any income tax.

This para-

graph (f) (4) applies even if liability for the
income tax and liability for the charges that are
not income taxes are attributable to different
taxable years.
(ii)

Offsetting charges.

If under foreign

law—
(A)

Liability for an income tax can

be reduced by the amount of a charge that
is not an income tax;

§ 4.901-2 (f) (4) (ii) (A)

- 38 (B) Liability for a charge that is
not an income tax can be reduced by the
amount of an income tax; or
(C) The total amount of liability is the
greater of the amount of an income tax or
the amount of a charge that is not an income
tax;
then an amount is income tax paid or accrued to a
foreign country only to the extent that the income tax .
exceeds the other charge.
(iii)

Simultaneously determined amounts.

liability for an income tax and liability for
one or more charges that are not income taxes
are. computed so that their sum cannot be less
than a third amount that is not an income tax, then
an amount is income tax paid or accrued to a foreign
country only to the extent that the income tax
exceeds the third amount.
(iv)

Advance corporation taxes.

If, pursuant

to foreign law that partially or fully integrates
corporate and shareholder taxation, liability of a
corporation for an amount, imposed with respect to a
distribution of the corporation's profits
("advance amount"), reduces liability of the
corporation, or a related corporation, for
an income tax imposed on corporate profits, whether

§ 4.901-2 (f) (4) (iv)

- 39 or not distributed, then the corporate income tax
is paid or accrued in the taxable year for which
it is imposed and the

advance amount is not paid

or accrued to the extent such amount reduces the
corporate income tax.

The amount of corporate

income tax paid or accrued is reduced to the
extent the advance amount is paid or credited to
shareholders of the distributing corporation.
(5)

Noncompulsory amounts.

An amount is

not income tax paid or accrued to a foreign
country to the extent that the amount exceeds
liability under foreign law for income tax.

amount does not exceed such liability i f —
(i.

The amount of such liability

is determined; and
(ii)

All effective and practical

remedies are exhausted;
in a manner that is consistent with a reasonable
interpretation and application of the substantive
and procedural provisions of foreign law (including
applicable tax

conventions) so as to reduce, over

a reasonable period of time, such liability.

interpretation or application of foreign law is
not reasonable if there is .actual or constructive
notice that the interpretation or application is
likely to be erroneous.

A remedy is effective

§ 4.901<-2 (f)(5) (ii)

- 40 and practical only if it is reasonable to believe
that the potential reduction in liability would justify
the expenses of pursuing the remedy.

A person need

not alter its form of doing business or its business
conduct to reduce its liability under foreign law
for income tax.
(6)

Contested amounts.

An amount may be

income tax paid or accrued to a foreign country
notwithstanding the fact that liability
for the amount is contested.
(7)

Interest and penalties.

An amount is

not income tax paid or accrued to a foreign country
to the extent that the amount discharges a liability
for interest, fines, penalties, or any similar
obligation.

§ 4.901-2 (f) (7)

- 41 (8)

Consideration.

An amount is not

income tax paid or accrued to a foreign country
to the extent of the fair market value of
consideration received explicitly in exchange for
the amount. Unless it is demonstrated otherwise,
the fair market value of the consideration will
be considered to be equal to the amount exchanged
for the consideration.
(9 ) Examples. The following examples
illustrate the application of this paragraph (f).
Example (1). The law of country X provides
that 25 percent of the amount of a person's
"income tax liability" to that country will be
refunded to that person after 5 years. The amount
to be refunded is not income trx paid or accrued
under paragraph (f) (1) and (2) of this section.
Example (2). The law of country X requires
a resident of country X that pays interest to a
nonresident to withhold and pay over to country X
25 percent of such interest. A tax convention between
the United States and country X provides that
interest paid by a resident of country X to aresident of the United States is subject to a
maximum rate of charge of 10 percent and that such
charge is an income tax. The excess over the
10-percent rate is refunded to the U.S.
resident after the end of the taxable year.
Under paragraph (f) (1) and (2) of this section, the
excess of the amount withheld over the 10-percent
rate is not income tax paid or accrued.

§ 4.901-2 (f) (9) Example (2)

- 42 Example (3). Country X imposes a 30-percent
charge on interest paid by its residents to
nonresident lenders. This charge is withheld by
resident borrowers and paid over to country X.
Country X refunds to borrowers a subsidy equal to
20 percent of the interest paid. Because the subsidy is
based on the interest pai**, it is determined by
reference to the base used to compute the income
tax imposed on the nonresident lender . Under
paragraph (f) (3) (ii) (B) of this section, the
subsidy is considered to be provided to the
nonresident lender since it is provided to a person
(the borrower) that engaged in a business transaction with the lender and is based on the amount
of income' tax imposed on the lender with respect to
this transaction. Therefore, two-thirds (20
percent/30 percent) of the amount withheld by a
resident borrower from interest payments to a
nonresident lender is not income tax paid or
accrued under paragraph (f) (3) (i) of this section.
Example (4). Country X grants a "rebate" to
each province of country X of a specified percentage
of the income tax paid in the prior year to country X
by the electric company in the province. Each
province may decide the manner in which it will use
the rebate. Province A uses the rebate to pay an
allowance to each person that is a customer of
the electric company in province A during the
year the allowance is paid. The allowance is based
on the amount of electricity used by the customer
in that year. Country X regulates electric utility
rates and does not vary them to reflect the allowance
paid to customers. Country X is not considered to
provide a subsidy to the electric company in
province A under paragraph (f) (3) of this section
because the allowance paid to a customer is not
based on the amount of income tax imposed on the
electric company with respect to its transaction
with that customer.
§ 4.901-2 (f) (9) ExampLe

- 42a Example (5). A is an accrual basis U.S.
corporation doing business in country X. The general
law of country X provides that income tax due to
country X for any taxable year must be paid by
the end of the next taxable year. Country X
and A agree by contract that A is not required to
pay the income tax due for calendar year 1980
until December 31, 1984. A is not required to pay
interest to country X on the unpaid income tax.
The fair market value of the use by A in 1982, 1983,
and 1984 of the amount of A's 1980 income tax liability
is a subsidy determined by reference to the amount
of income tax imposed on A by country X. Under
paragraph (f) (3) (i) of this section, the amount
of income tax otherwise accrued by A for 1980 is
reduced by the amount of this subsidy. No additional
amount of income tax is paid or accrued when the
amount due is paid.

§ 4.901-2 (£) (9) Example Q )

- 43 Example (6). Country X imposes an income
tax on persons engaged in a trade or business in
country X. In addition, country X requires
petroleum companies to pay a royalty. Petroleum
companies are allowed to deduct the amount of
the royalty in computing net income subject to the income
tax. The tax is then determined by applying
the generally applicable tax rules and rates
in country X. The amount of royalty imposed by
country X is determined in such a way that the sum
of the royalty and the amount of the net income tax
on petroleum companies equals an amount which is
based on a percentage of the gross value of
petroleum production. Under paragraph (f) (4) (iii)
of this section, the amount of the income tax
paid or accrued is zero.
Example (7). Country X owns all mineral
resources within country X and licenses
corporation A to extract such minerals. Corporation
A is permitted to sell the minerals to B a related
corporation at fair market value. Corporation B
is required under the law of country X to sell the
same minerals within country X. Country X imposes
an income tax on A's realized ntt income under the
generally applied rates and provisions of its
corporate income tax. Country X imposes a separate
charge on B that is not an income tax. This charge
is computed so that the sum of the amount of
income tax imposed on A and the amount of charge
imposed on B equals an amount based on a percentage
of* the gross value of the minerals sold by B.
Under paragraph (f) (4) (i) and (iii) of this
section, the amount of income tax paid or accrued
by A is zero.
Example f 8> 1 The tax system of country X
grants individuals that receive a dividend from
a country X corporation a credit for a portion
of the income tax paid by the corporation. When a
country X corporation pays a dividend, it is
required to make an advance payment equal to a specified
percentage of tne" amount of the"dividend. The advance
payment, under the law of country X, may offset the
country X income tax liability of the distributing
corporation or related country X corporations.
§ 4.901-2 (f) (9) Example {7)
In 1973, A, a country X corporation, pays a dividend
to B, its U.S. parent corporation, and also
makes the associated advance payment. Neither A nor any
of its related corporations is liable for any
country X corporate income tax for 1973.
In 1974

- 44 pursuant to country X law, the entire advance
payment made by A in 1973 reduces the liability
of C, a related corporation, for the country X
corporate income tax for 1974. The advance payment,,
is not income tax .paid or
accrued by A. Instead, the corporate
_
income tax for 1974 is paid or accrued by C ~
under paragraph (f) (4) (iv) of this section.
"Example f 9*)). A, a corporation organized and
doing business solely in the United States, owns
all of the stock in B, a corporation organized in
country X. A and B deal extensively with each
other. A reasonable interpretation of country
X's income tax provisions requiring that transactions
between related persons be at arm's length
would allocate $100,000 of income to B and $100,000
to A in 1978. Instead^ A and B allocate $10,00(3 of income
to A and $190,000 to Bl This allocation is
not consistent with a reasonable interpretation
of che law of country X. The Internal Revenue
Service does not audit the 1978 tax return of A.
The amount paid or accrued to country X
by B that is attributable to the imprope rly allocated
$90,000 exceeds legal liability and is not income tax
paid or accrued under paragraph (f) (5) of this section.
Example (10). A, a corporation organized and
doing business solely in the United States, owns
all of the stock in B, a corporation organized
in country X. Country X has in force a tax convention
with the United States. The convention provides
that the profits of related persons shall be determined
as if the persons were not related. A and B deal
extensively with each other. A and B, with respect
to a transaction between them, allocate $30,000
of income to A and $70,000 of income to B.
Subsequently, the Internal Revenue Service reallocates
$20,000 of income from B to A under the authority of
section 482 and the convention. This reallocation
constitutes notice that the interpretation
of country X's law and the tax treaty is likely to
be erroneous. B does not seek a refund from country
X and does not establish that its liability to
country X was determined in a manner consistent
with a reasonable interpretation of country X's
law and the tax convention. The amount paid
§ 4.901-2 (£)
(9) Example\^)
to country X by B that is attributable
to the
reallocated $20,000 exceeds legal liability and is
not income tax paid or accrued under paragraph (f) (5) of this section.

- 45 -

Example (11). C, a U.S. corporation doing business
in country X, pays an income tax consistent with
what appears to be a reasonable interpretation of
the law of country X. A court in country X
subsequently holds that corporations organized outside country X are entitled to a deduction not
claimed by C. The statute of limitations of
country X has not expired. C does not follow
the procedural provisions of the law of country X
allowing it to claim a refund in a country X emirg.
although the_. expenses of doing so are small _
..
_
in relation to tne potentlal"country" X tax savings'".
An amount equal to the refund that C could have received
from country X exceeds legal liability and is not
income tax paid or accrued under paragraph (f) (5)
of this section.
Example ( 12). D, a U.S. person doing business in
country X, is subject to the country X income tax.
D determines its 1977 country X income tax liability
in a manner that is consistent with a reasonable
interpretation and application of the law of
country X. After D files its country X return for
1977 and pays to country X the amount shown as due
thereon, D files a claim for refund for 1977 in crder
to claim a deduction for certain additional business
expenses on its return. Under the law of country X
it is not clear that the deductions claimed by D
in requesting the refund are allowable. Under
paragraph (r) (5) and (6) of this section, the
original income tax payment made by D to country X
may be income tax paid or accrued notwithstanding
the fact that D has filed a refund claim. However,
if D obtains a refund, D must, pursuant to
§ 1.905-3 (a), immediately notify the Internal
Renenue Service of the refund.
Example (13.), A is a U.S. person doing
business in country X. In computing its income
tax liability to country X, A calculates its
depreciation on the basis of a reasonable asset
lite that is longer than the shortest life
permitted by country X. Under paragraph (f)
(5 ) of this section, the use of such asset life by A
f ? e t n ? ^ result in a payment in excess of legal
liability for the income tax since the use of
a shorter asset life would not reduce, over
§ 4.901-2
(f) Example
(12)
?, r e ??? n a b l e Period of time,
A's income
tax
liability to country X.

- 46 Example (14). A is a citizen of the United
States and a resident of country X. Country x
imposes no tax on gains from the sale of investment
property. A travels to country Y, which imposes a
10-percent charge on such gains, to sell investment
property. A had no significant purpose for'doing
so other than to avoid the rule of section 904 (b)
(3) (C). Under paragraph (f) (5) of this.
section, the amount paid by A to country Y is not
income tax paid or accrued because A has altered his
conduct to incur unnecessary liability to
country Y.
Example (15). Country X imposes an income
tax on all individual residents of the country.
Such a resident may elect, 3 months after the
close of the taxable year, to calculate his
income from sources without country X either by
reducing realized gross receipts by costs or
under a formula. A and B are U.S. citizens
resident in country X. A elects to calculate
his income from sources without country X by
reducing gross receipts by costs even though
the use of the formula would produce a lesser
amount of income. B elects to calculate such
income under the formula even though the use of
realized gross receipts reduced by costs would
produce a lesser amount of income. The amount
paid or accrued to country X by A and B that results
from their electing to use the method that
produces a greater amount of income exceeds
legal liability and is not income tax paid
or accrued under paragraph (f) (5) of this section.
(§) Taxpayer—(1) In general. Income
tax is paid or accrued by or on behalf of a
person if foreign law imposes legal liability
for income tax on that person- and income
tax is paid or accrued under paragraph (f) of
this section.

§ 4.901-2 (f) (1)

- 47 (2) Taxes paid on combined income.

In the

case of an income tax imposed on the combined
income of two or more related persons (for example,
a husband and wife

or a corporation and its

subsidiaries) that are jointly and severally
liable for the income tax under foreign law, foreign law
is considered to impose legal liability on each
such person for the amount of the income tax attributable
to its portion of the base of the tax under foreign law,
regardless of which person actually pays the tax.
(3) Taxes paid by payor of income.

Foreign law is

considered to impose legal liability on a person
that realizes an item of income specified in section 871 (a) or 881 (a) for an income tax paid or
accrued by or on behalf of the payor of such
income i f —
(i)

The payor has the right

under foreign law to withhold the amount of the
tax from such income;
(ii)

The payor does not have the right

under foreign law to reduce by part or
all of the amount of the tax withheld
any other liability imposed on the payor by
foreign law; and
(iii)

The person

that realizes such income

does not have the right under foreign law to
recover from the payor the amount of the tax
withheld.
§ 4.901-2 (g) (3) (iii)

- 48 (h)

Definition of "foreign country."

For

purposes of this section, the term "foreign country"
includes any foreign state or possession of the
United States, or political subdivision or agency
or instrumentality thereof.

The term "possession

of the United States" includes Guam, Puerto Rico,
and the Virgin Islands.
(i) Effective date. This section shall apply
to taxable years ending after June 15, 1979, unless
the taxpayer chooses to apply this section to taxable years
ending on or before such date.

If a revenue ruling

in effect on [insert date immediately preceding
the date of publication of these regulations in the
Federal Register] is inconsistent with this section,
then, notwithstanding this section, a taxpayer may
choose to apply such ruling for any taxable year ending
on or before December 31, 1980.
§ 4.903-1

Taxes in lieu of income

taxes.
(a)

In general.

Section 903 provides that

the term "income, war profits, and excess profits
taxes" shall include a tax paid in lieu of a tax
on income, war profits, or excess profits ("income
tax") otherwise generally imposed by any foreign
country or any possession of the United States.
A charge is a tax in lieu of an income
tax if and only i f —
§ 4.903-1 (a)

- 49 (1) The charge is not compensation for
a specific economic benefit within the meaning
of § 4.901-2 (b);
(2) The charge meets the substitution
requirement as set forth in paragraph (b)
of this section;
(3)

The charge meets the comparability

requirement as set forth in paragraph (c) of this
section; and
(4)

The charge follows reasonable rules

of taxing jurisdiction within the meaning of
§ 4.901-2 (a) (1) (iii).
The amount of a tax in lieu of an income tax that
is paid or accrued by or on behalf of the taxpayer
is determined under § 4.901-2 (f) and (g) by treating
the tax in lieu of an income tax
(b)

Substitution.

as an income tax.

A foreign charge meets

the substitution requirement if the charge is
clearly intended, and in fact operates, as a
charge imposed in substitution for, and not
in addition to, an income tax otherwise generally
imposed.

§ 4.903-1 (b)

- 50 (c)

Comparability.

A foreign charge meets

the comparability requirement unless it is
reasonably clear that foreign law Imposing the
charge is structured, or in fact operates, so that
the amount of liability of persons subject to the
charge will generally be significantly greater,
over a reasonable period of time, than
the amount for which such persons would liable if
they were subject to the income tax otherwise generally
imposed.
(d)

Otherwise generally imposed.

An income

tax is otherwise generally imposed if the country
imposes an income tax or a series of separate
income taxes (within the meaning of § 4.901-2)
on significant amounts of income.

§ 4.903-1 (d)

- 51 (e)

Rules of application.

For purposes of

applying paragraph (a) of this section the
following rules apply.
(1)

The charge need not be imposed because

of administrative difficulty in determining
the base of the income tax otherwise generally
imposed.
(2) All the income derived by persons
subject to the charge need not be exempt from
the income tax.
(3) The base of the charge may be gross
income, gross receipts or

sales, or the number

of units produced or exported; the base of the
charge need not bear any relation to
realized net income.
(4)

Paragraph (a) of this section is applied

independently to each separate charge (within the
meaning of § 4.901-2 (d)) imposed by the foreign
country (within the meaning of § 4.901-2 (h)).
Each separate foreign charge will be considered either
to be a tax in lieu of an income tax
to be such a tax

or not

in its entirety for all persons

subject to the charge.

§ 4.903-1 (e) (4;

- 51a (5)

If—
(i)

Payment of a charge (including the

"third amount" referred to in § 4.901-2 (f) (4) (iii))
that is compensation for a specific economic benefit
discharges a person's liability for—
(A)

An income tax imposed on significant

amounts of income of persons to which this
paragraph (e) (5) does not apply; or
(B)

A tax in lieu of such an ii.come tax;

and
(ii)

Foreign law requires the income tax or

the tax it? lieu of the income tax to be separately
stated and computed;
then, subject to § 4.901-2 (f) (other than
§ 4.901-2 (f) (4) (i), (ii), and (iii)) and (g),
the person pays or accrues an amount of tax in lieu
of an income tax equal to the amount of liability
referred to in paragraph (e) (5) (i) (A) or (B) of
this section.

- 52 (f)

Examples.

The following examples illustrate

the application of this section.
Example (1). Country X imposes an income
tax on significant amounts of business, investment,
and personal services income derived from within
country X by foreign persons and corporations owned
by foreign persons. Country X does not impose an
income tax on nationals of country X or
corporations owned by such nationals even though
those persons also derive significant amounts of
business, investment, and .personal services income
from within country X. Under paragraph (d)
of this section, the income tax of country X is
otherwise generally imposed,.
Example (2). Country X imposes separate
income taxes on income from: investments (30
percent rate of tax); business activities (45
percent rate of tax); and personal services (40
percent rate of tax). Under paragraph Kd) of
this section, the separate income taxes constitute
an income tax otherwise generally imposed.
Example (3). Country X imposes sepirate
charges, at different rates, on significant
amounts of realized net income from investments,
petroleum operations, and other business
activities. The rate applicable with respect to
petroleum operations is substantially in excess
of the rates applicable to investments and other
business activities. Those engaged in petroleum
operations are extracting oil owned by country X.
The charges on other business activities and
investment are income taxes. Country X enters
into a contract with D, a domestic corporation, to
substitute a charge on gross petroleum income
for the otherwise applicable charge on realized
net petroleum income. The charge on gross petroleum
income will, over a reasonable period of time,
approximate in amount the charge imposed on
realized net income from petroleum operations.
Under paragraph (d) of this section, Country X
has an income tax otherwise generally imposed. However, under paragraph (a) (1) of this section and
§ 4.903-1 (f) Example (3)

- 53 § 4.901-2 (b), the charges on gross petroleum
income and on realized net income from petroleum
operations are each presumed to be compensation
for a specific economic benefit. Therefore, the
charge paid by D is presumed not to be a tax
in lieu of an income tax.
Example (4). Country X imposes a 40-percent
tax on realized net income of persons doing
business in country X. Persons in the insurance
business may elect instead to be subject to a
5-percent charge on a formulary base. The 5-percent
charge does not meet the net income requirement
under § 4.901-2 (c) (4) (i) or, because it is a
charge separate from the 40-percent tax on realized
net income, under § 4.901-2 (c) (4) (ii), and
thus is not an income tax. However, the 5-percent
charge meets the substitution requirement under
paragraph (b) of this section*
Example (5). Country X imposes a tax on
realized net income of all persons engaged in
business in country X other than persons engaged
in the banking business. Country X also imposes
a gross receipts c arge (deductible from realized
net income) on persons engaged in business in
country X including persons engaged in the
banking business. The gross receipts charge
does not meet the substitution requirement under
paragraph (b) of this section because it is
imposed in addition to, and not in substitution
for, the tax on realized net income.
Example (6). Country X imposes a 30-percent tax
on significant^amounts of realized net business income.
Persons engage'd in the shipping business are
required to pay the greater of this income tax or
8 percent of gross receipts. The gross receipts charge
does not meet the substitution requirement under
paragraph (b) of this section because it is_imposed
in addition to, and not in substitution for,
the income tax. Thus, the gross receipts charge
is not a tax in lieu of an income tax.

§ 4.903-1 (f) Example (6)

- 54 Example (7). Country X imposes an individual
income tax and a corporate income tax. Persons
subject to the individual income tax are also
liable for a minimum charge equal to a stated percentage
of the rental value of their residence. The minimum
charge does not meet the substitution requirement
under paragraph (b) of this section because it is
imposed in addition to,' and not in. substitution
for, the individual income tax and because it is
not clearly intended as a charge imposed in
substitution for the corporate, income tax.
Example (8). Substantially all business
income, other than income derived by insurance
companies, is subject to
one of several separate income taxes. Insurance
companies are subject to a charge on gross premiums.
Income derived by insurance companies is not specifically
exempted from the application of any of the income
taxes although none, by its terms, applies to such
income. The charge on gross premiums meets thesubstitution requirement under paragraph (b) of this
section because it is clearly intended , and in fact
operates, as a charge imposed in substitution for,
and*not in addition to, the income taxes.
Example (9). A significant portion of the business
income derived within country X is subject to one
of several separate income taxes. Insurance companies
are subject to a charge on gross premuims. Income
derived by insurance companies is not specifically
exempted from the application of any of the income
taxes although none, by its terms, applies to such
income. Income derived by insurance companies was
subject to an income tax by country X until that income
tax was repealed by the legislation that enacted
the charge on gross premiums. The charge on gross
premiums meet the substitution requirement under
paragraph (b) of this section because it is clearly
intended, and in fact operates, as a charge imposed
in substitution for, and not in addition to,
the income taxes.

§ 4.903-1 (f) Example (9)

- 55 -

Example (10). Country X imposes a 40-percent
charge on the realized net income of corporations
engaged in various businesses in country X
including mineral extraction. Country X owns all mineral
resources located within the country and licenses
private persons to extract those minerals. Country X
imposes an 80-percent charge on the "posted price"
of minerals sold by a licensee. Posted price is
equal to 105 percent of the amount realized on the
sale. A licensee's liability for the 80-percent charge
is reduced by the amount of the 40-percent charge.
The law of country X imposing the 40-percent charge
does not distinguish significantly between persons
extracting minerals and other persons that derive
significant amounts of income and do not receive any
specific economic benefit in determining gross
receipts, allowing deductions for expenses and
recovery of capital (including depletion), permitting
losses from one activity to offset income from other
activities, applying rates of charge, or in any other
manner. The excess of the 80-percent charge
over the 40-percent charge is allowed as a
deduction in computing the 40-percent charge by the
law of country X. That is, the amount of the 40-percent charge
imposed on a licensee is always equal to (G - C - K) (R)/l-R
'R' is the rate of the charge (.40) imposed on persons
that derive significant amounts of income and do
not receive any specific economic benefit. fG' is
the gross receipts of the licensee. 'C is the costs
attributable to those gross receipts. 'K' is the
amount of the 80-percent charge imposed on the
licensee. The 80-percent charge is presumed not to
be an income.tax or a tax in'lieu of an income tax
pursuant to § 4-901-2 (b) (1). The 40-percent charge
is an income tax under § 4.901-2 (a) (1), but is not
considered paid or accrued by a licensee under
§ 4.901-2 (f) (4). Under paragraph (e) (5) of this
section, a licensee pays or accrues an amount of tax
in lieu of an income tax equal to the amount of the
40-percent charge imposed on the licensee (subject
to § 4.901-2 (f) (other than § 4.901-2 (f) (4) (i),
(ii)} and (iii)) and (g).
§ 4.9C3-1 (f) Example (10)

- 56 Example (11). The facts are the same as in
example (10) except that the 80-percent charge is
imposed on realized net income and the excess of the
80-percent charge over the 40-percent charge is not
allowed as a deduction in computing the 40-percent
charge imposed on persons engaged in mineral extraction.
Thus, the amount of this 40-percent charge is one-half
of the amount of the 80-percent charge. If the excess
were allowed as a deduction, the amount of this
40-percent charge would be only approximately one-sixth
of the amount of the 80-percent charge. Under
§ 4.901-2 (d) (4) and (b) (1), the 40-percent charge
imposed on licensees is presumed to be a separate charge
that is compensation for a specific economic benefit
because the failure to allow the excess (a cost of
extracting minerals that is not an income tax) as a
deduction significantly increases the amount of the
40-percent charge paid by licensees over what this
amount would be if they were subject to the 40-percent
charge imposed on others, which charge allows the
deduction of costs of doing business. Thus, the
40-percent charge imposed on licensees is presumed
not to be an income tax or a tax in lieu of an income
tax. Therefore, unless the presumption is rebutted,
pursuant to § 4.901-2 (a) (1) and paragraphs (a) and
(e) (5) of this section, no tax in lieu of an income
tax is paid or accrued by any licensee.
Example 0.2 ). The facts are the same as in example
(10) except that the law of country X does not require
the 40-percent charge to be separately computed and
stated. The law of country X does state that the
80-percent charge is, to an unspecified extent, in
lieu of the 40-percent charge imposed on persons
that are not engaged in mineral extraction. Pursuant
to paragraphs (a) and (e) (5) of this section, no
tax in lieu of an income tax is paid or accrued by
any licensee.

§ 4.903-1 (f) Example (12)

- 57 Example (13). The facts are the same as in
example (12) except that, in computing the 40-percent
charge, a person that is not engaged in mineral
extraction qualifies for an additional deduction equal
to one-third of its realized net income. Licensees
do not qualify for this deduction. Under § 4.901-2
(4) and (b) (1), the 40-percent charge imposed on
licensees is presumed to be a separate charge that is
compensation for a specific economic benefit, because
the failure to qualify for the additional deduction
significantly increases the amount of the 40-percent
charge paid by licensees over what this amount would
be if they were subject to the 40-percent charge imposed
on others• Thus, the 40-percent charge Imposed on
licensees is presumed not to be an income tax or a
tax in lieu of an income tax. Therefore, unless the
presumption is rebutted, pursuant to § 4.901-2 (a)
(1) and paragraphs (a) and (e) (2) of this section,
no tax in lieu of an income tax is paid or accrued
by any licensee.
Example (14). The facts are the same as in
example (13), except that licensees do qualify for the
additional deduction. Licensee A, however, does not
claim this deduction in computing its liability for,
and payment of, the 40-percent charge. A receives
no refund, subsidy or consideration within the
meaning of § 4.S01-2 (f) (2), (3), or (8) and
discharges no liability for interest, fines or any
similar obligations within the meaning of § 4.901-2 (f) (7).
Under paragraph (e) (5) of this section, A pays an amount
of tax in lieu of an income tax equal to the amount of
the 40-percent charge imposed on A reduced, pursuant
to § 4.901-2 (f) (5) by the amount of the
40-percent charge that is attributable to the
additional deduction that A did not claim.
Example (15). Country X imposes an income tax
on corporations engaged in business in country X
other than corporations engaged in mineral extraction.
Country X owns all mineral resources located within
the country. Corporations engaged in mineral extraction
are subject to two charges neither of which is an
income tax. Each charge, considered separately, may meet
the requirements of paragraph (a) of this section.
However, if the aggregate of the two charges were
considered to be a single charge, the aggregate charge
would not meet the requirement of § 4.901-2 (b) (2) (ii)
or paragraph (c) of this section.
A taxpayer
§ 4.903-1
('f) Example (15]
may establish which of the two charges is the
tax in lieu of an income tax and may only claim a
foreign tax credit for that charge.

- 58 (g)

Effective date.

This section shall apply

to taxable years ending after June 15, 1979, unless
the taxpayer chooses to apply this section to taxable years
ending on or before such date.

If a revenue ruling

- 58a in effect on [insert date immediately preceding
the date of publication of these regulations in
the Federal Register] is inconsistent with this
i

section, then, notwithstanding this section, a
taxpayer may choose to apply such ruling for any
taxable year ending on or before December 31, 1980.

There is a need for immediate guidance with
respect to the provisions contained in this Treasury
decision.. For this reason, it is found impracticable
to issue it with notice and public*procedure under
subsection (b) of section 553 of Title 5 of the
United States Code or subject to the effective date
limitation of subsection (d) of that section.

This Treasury decision is issued under the
authority contained in section 7805 of the Internal
Revenue Code of 1954 (68A Stat. 917; 26 U.S.C. 7805).

Commissioner of Internal Revenue
Approved:

Assistant Secretary of the Treasury

partmentoftheTREASURY
{HINGTQN, D.C. 2022

TELEPHONE 566-2041

?QR IMMEDIATE RELEASE
November 13, 1980

CONTACT:

George G. Ross
(202) 566-2356

Proposed Tax Shelter Advisory Committee
The Treasury Department today invited public comment on the
desirability of establishing an advisory committee on issues
concerning tax shelter opinions.
Proposed amendments to the regulations governing practice
before the Internal Revenue Service for the purpose of setting
standards for opinions used in tax shelter promotions were published
in the Federal Register of September 4, 1980.
Treasury is considering the establishment of a committee to
advise the Director of Practice on issues arising in the review
-of tax shelter opinions for compliance with the standards contained
in the regulations. The committee would be established under the
Federal Advisory Committee Act and would comprise a representative
cross-section of individuals outside the government who are conversant with the tax shelter area.
Persons wishing to submit comments on the desirability of
such an advisory committee and suggestions as to the scope of
its duties, and any other relevant matters for the Treasury's
consideration, are invited to write in triplicate, by December 19,
1980, to the Director of Practice, Department of the Treasury,
Washington, D.C.
20220.

M-738

OR IMMEDIATE RELEASE
lovember 13, 1980

CONTACT:

GEORGE G. ROSS
(202) 566-2356

UNITED STATES AND PEOPLE'S REPUBLIC OF
BANGLADESH SIGN INCOME TAX TREATY
The Treasury Department today announced the signing of an
income tax treaty between the United States and the People's
Republic of Bangladesh in Dacca, Bangladesh, on October 6, 1980.
There is presently no such agreement in force between the two
countries.
The treaty will be submitted to the Senate for its
advice and consent to ratification.
The primary objective of the treaty is to promote economic
relations between the two countries and to remove tax barriers to
the flow of goods, investment, and technology and the movement of
businessmen, technicians, and scholars.
The treaty establishes
rules for the taxation of business, personal service, and investment income earned by residents of one country from sources in the
other. It also provides for non-discriminatory tax treatment and
reciprocal administrative cooperation to avoid double taxation and
prevent fiscal evasion.
The proposed treaty with Bangladesh is similar in most
essential aspects to other recent United States income tax
treaties.
There are, however, several variations which, in
general, either reflect Bangladesh's status as a developing
country or are designed to accommodate particular features of
Bangladesh law.
The treaty will enter into force upon the exchange of
instruments of ratification. Its provisions will take effect, in
respect of tax withheld at the source, for amounts paid or
credited on or after the first day of the second month following
the date of entry into force; and in respect of other taxes, for
taxable periods beginning on or after the first day of January of
the year following that in which the treaty enters into force.
Copies of the new treaty are available from the Treasury Press
Office, Room 2313, U.S. Treasury, Washington, D.C. 20220, phone
202-566-2041.
o

M-739

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED
STATES OF AMERICA AND THE GOVERNMENT OF THE
PEOPLES REPUBLIC OF BANGLADESH FOR THE AVOIDANCE
OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL
EVASION WITH RESPECT TO TAXES ON INCOME
THE GOVERNMENT OF THE UNITED STATES
OF AMERICA
AND
THE GOVERNMENT OF THE PEOPLE'S REPUBLIC
OF BANGLADESH,
Desiring to conclude a convention for the avoidance of double taxation and the
prevention offiscalevasion with respect to taxes on income have agreed as
follows:

2
Article 1

PERSONAL SCOPE
I. Except as otherwise provided in this Convention, this Convention
*r>a)l apply to persons w h o are residents of one or both of the Contracting States.
2. Notwithstanding any provision of this Convention except paragraph
.i of this Article, a Contracting State m a y tax its residents (as determined under
Article 4 (Fiscal Domicile)), and by reason of citizenship m a y tax its citizens, as
if this Convention had not come into effect. For this purpose the term "citizen"
shall include a former citizen whose loss of citizenship had as one of its principal
purposes the avoidance of income tax, but only for a period of 10 years following
vnch loss.
3. The provisions of paragraph 2 shall not affect:
a) the benefits conferred by a Contracting State under paragraphs! b )
and 4 of Article 18 (Pensions, etc.). Articles 22 (Relief F r o m
Double Taxation). 23 (Non-Discrimination), and 24 (Mutual
Agreement Procedure); and
b ) the benefits conferred by a Contracting State under Articles 19
(Government Service). 20 (Teachers, Students and Trainees) and
26 (Effect of Convention on Diplomatic Agents and Consular
Officers. Domestic laws, and Other Treaties), upon individuals
w h o are neither citizens of. nor have immigrant status in. that State.

3
Article 2
TAXES COVERED
1. This Convention shall apply to taxes on income imposed on behalf
of a Contracting State.
2. The existing taxes to which this Convention shall apply are:
a) In the United States: the Federal income taxes imposed by the
Internal Revenue Code and the tax on insurance premiums paid
to foreign insurers (but only to the extent that the relevant risk
is not reinsured, directly or indirectly, with a person not entitled to
relief from such tax), but excluding the accumulated earnings tax
and the personal holding company tax.
b) In Bangladesh: the income tax and the super tax.
3. The Convention shall apply also to any identical or substantially
similar taxes which are imposed by a Contracting State after the date of signature
of this Convention in addition to, or in place of, the existing taxes. The
competent authorities of the Contracting States shall notify each other of any
changes which have been made in their respective taxation laws and shall notify
each other of any official published material concerning the application of this
Convention, including explanations, regulations, rulings, or judicial decisions.

4
Article 3

GENERAL DEFINITIONS
1. For the purpose of this Convention, unless the context otherwise
squires:
a) the term "person" includes an individual, a partnership, a company,
an estate, a trust, and any other body of persons;
b) the term "company" means any body corporate or any entity which
is treated as a body corporate for tax purposes;
c) the terms "enterprise of a Contracting State" and "enterprise of the
other Contracting State" m e a n respectively an enterprise carried
on by a resident of a Contracting State and an enterprise carried
on bv a resident of the other Contracting State;
d) the term "international traffic" means any transport by a ship or
aircraft, except where such transport is solely between places in the
other Contracting State:
e) the term "competent authority" means:
(i) in the United States: the Secretary of the Treasury or his
delegate, and
(ii) in Bangladesh: the National Board of Revenue or their
authorized representative;
f) the term "United States" means the United State of America, but
does not include Puerto Rico, the Virgin Islands, G u a m or any
other United States possession or territory:
g) the term "Bangladesh" means the People's Republic of Bangladesh;
h) The term "national" means:
(i) in relation to Bangladesh all individuals possessing the
nationality of Bangladesh and all legal persons, partnerships
and associations deriving their status as such from the laws
in force in Bangladesh; and
(ii) in relation to the United States all individuals possessing the
citizenship of the United States of America and all legal
persons, partnerships and associations deriving their status
as such from the laws in force in the United States.
2. As regards the application of this Convention by a Contracting State
atay term not defined herein shall, unless the context otherwise requires, have
the meaning which it has under the laws of that State concerning the taxes to
which this Convention applies.

5
Article 4

FISCAL DOMICILE
1. For purposes of this Convention, the term "resident of a Contracting
State" means any person who, under the laws of that State, is liable to tax
therein by reason of his domicile, residence, citizenship, place of management,
place of incorporation, or any other criterion of a similar nature, provided,
however, that:
a) this term does not include any person w h o is liable to tax in that
State in respect only of income from sources in that State; and
b ) in the case of income derived or paid by a partnership, estate, or
trust, this term applies only -to the extent that the income derived
by such partnership, estate or trust is subject to tax as the income
of a resident of that State, either in its hands or in the hands of
its partners or beneficiaries.
2. Where by reason of the provisions of paragraph 1 an individual is a
resident of both Contracting States, then his or her status shall be determined
as follows:
a) The individual shall be deemed to be a resident of the State in
which he or she has a permanent h o m e available; if such individual
has a permanent h o m e available in both States, or in neither State.
he or she shall be deemed to be a resident of the State with which
his or her personal and economic relation* are closer (center of
vital interests):
b) If the State in which the individual's center of vital interest cannot
be determined, he or she shall be deemed to be a resident of the
State in which he or she has an habitual abode:
c) If the individual has an habitual abode in both States or in neither
of them, he or she shall be deemed to be a resident of the State of
which he or she is a national:
d ) If the individual is a national of both States or of neither of them.
the competent authorities of the Contracting States shall settle the
question by mutual agreement.
3. Where by reason of the provisions of paragraph I a company is a
resident of both Contracting States, then if it is created or organized under the
1,-iws of a Contracting State or a political subdivision thereof, it shall be treated
as .i resident of that State.
4. Where by reason of the provisions of paragraph I a person other
than an individual or a company is a resident of both Contracting States, the
competent authorities of the Contracting States shall by mutual agreement
endeavour to settle the question and to determine the m o d e of application of
the Convention to such person.
5. Where under any provision of this Convention income arising in one
of the Contracting States is relieved from tax in that Contracting State and.
under the law in force in the other Contracting State i person, in respect of ,he
said income, is subject to tax by reference to the amount thereof which is
remitted to or received in that other Contracting State and not by reference to
the full amount thereof, then the relief to be allowed under this Convention in
the first-mentioned Contracting State shall apply only to so m u c h of the income
as is remittefrto or received in the other Contracting State during the year such
income accruesN

6
Article 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business through which the business of
an enterprise is wholly or partly carried on.
2. The term "permanent establishment" shall include especially:
a ) a place of management;
b ) a branch;
c) an office;
d ) a factory;
e) a workshop;
f) a store or other sales outlet;
g) a warehouse; and
h ) a mine, an oil or gas well, a quarry, or any other place of extraction
of natural resources.
3. A building site or construction or installation project, or an installation
oi drilling rig used for the exploration or development of natural resources.
constitutes a permanent establishment only if it lasts more than 183 days.
4. Notwithstanding the preceding provisions of this Article, the term
"permanent establishment" shall be deemed not to include:
a) the use of facilities solely for the purpose of storage or display of
goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to
the enterprise solely for the purpose of storage or display;
c) the maintenance of a stock of goods or merchandise belonging to
the enterprise solely for the purpose of processing by
enterprise;

another

d) the maintenance of a fixed place of business solely for the purpose
of purchasing goods or merchandise, or of collecting information.
for the enterprise:
e) the maintenance of a fixed place of business solely for the purpose
of carrying on, for the enterprise, any other activity of a preparatory
or auxiliary character;
f) the maintenance of a fixed place of business solely for any
combination of activities mentioned in subparagraphs a) to e)
provided that the overall activity of the fixed place of business
resulting from this combination is of a preparatory or auxiliary
character.
5. Notwithstanding the preceding provisions of this Article, the term
"permanent establishment" shall be deemed not to include the use of facilities
or the maintenance of a stock of goods or merchandise belonging to thf rnlnTiflffc
for the purpose of occasional delivery of such goods or merchandise.

7
6. A person acting in a Contracting State on behalf of an enterprise of
the other Contracting State—other than an agent of an independent status to
w h o m paragraph 7 of this Article applies—shall be deemed to be a permanent
establishment in the first-mentioned State if:
a) he has, and habitually exercises, in the first-mentioned State, a
general authority to conclude contracts on behalf of the enterprise,
unless his activities are limited to those described in either paragraph
4 or paragraph 5; or
b ) he has no such authority, but habitually maintains in the firstmentioned State a stock of goods or merchandise belonging to the
enterprise from which he regularlyfillsorders or makes deliveries
on behalf of the enterprise and additional activities conducted in
that State on behalf of the enterprise have contributed to the
conclusion of the sale of such goods or merchandise.
7. An enterprise shall not be deemed to have a permanent establishment
in a Contracting State merely because it carries on business in that State through
a broker, general commission agent or any other agent of an independent status.
provided that such persons are acting in the ordinary course of their business.
8. The fact that a company which is a resident of a Contracting State
controls or is controlled by a company which is a resident of the other
Contracting State, or which carries on business in that other State (whether
through a permanent establishment or otherwise), shall not of itself constitute
either company a permanent establishment of the other.

8
Article 6
INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)

1. Income derived by a resident of a Contracting State from immo
(real) property (including income from agriculture or forestry) situated in
the other Contracting State m a y be taxed in that other State.
2. The term "immovable property" shall have the meaning which it has
under the law of the Contracting State in which the property in question is
situated. The term shall in any case include property accessory to immovable
property, livestock and equipment used in agriculture, forestry and fishery,
rights to which the provisions of general law respecting landed property apply.
usufruct of immovable property and rights to variable or fixed payments as
consideration for the working of, or the right to work, mineral deposits, sources
and other natural resources; ships, boats and aircraft shall not be regarded
as immovable property.
3. The provisions of paragraph 1 shall apply to income derived from
the direct use. letting, or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income
from immovable property of an enterprise and to income from immovable
property used for the performance of indepedent personal services.

9
Article 7

BUSINESS PROFITS
1. The business profits of an enterprise of a Contracting State shall be
taxable only in that State unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated therein. If the
enterprise carries on business as aforesaid, the business profits of the enterprise m a y be taxed in that other State but only so m u c h of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a
Contracting State carries on business in the other Contracting State through
a permanent establishment situated therein, there shall in each Contracting
State be attributed to that permanent establishment the business profits which
it might be expected to m a k e if it were a distinct and independent enterprise
engaged in the same or similar activities under the same or similar conditions.
?. In determining the business profits of a permanent establishment.
there shall be allowed as deductions those expenses which are incurred for
the purposes of the permanent establishment, including a reasonable allocation
of executive and general administrative expenses, research and development
expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or ihe part thereof which includes the permanent establishment!, whether incurred in the State in which the permanent establishment is
situated or elsewhere.
4. No business profits shall be attributed to a permanent establishment
by reason of the mere purchase by that permanent establishment of goods or
merchandise for the enterprise.
5. For the purposes of the preceding paragraphs, the business profits
to br attributed to the permanent establishment shall be determined by the same
method year by year unless there is good and sufficient reason to the contrary.
6. Where business profits include items of income which are dealt with
separately in other Articles of this Convention, then the provisions of those
Articles shall not be affected by the provisions of this Article.
7. Tor the purposes of this Convention, "business profits" means income
deri\cd from any trade or business whether carried on by an individual.
company or any other peison, or group of persons, including the rental o!
tangible personal (movable) property.
8. The United States tax on insurance premiums paid to foreign
insurers shall not be imposed on insurance or reinsurance premiums which are
the Teccipts of a business of insurance carried on by a resident of Bangladesh
whether or not that business is carried on through a permanent establishment
in the United States (but only to the extent that the relevant risk iv not
reinsured, directly or indirectly, with a person not entitled to relief from such
tax).

10
Article 8
SHIPPING AND AIR TRANSPORT
1. Profits of an enterprise of a Contracting State from the operation
in international traffic of aircraft shall be taxable only in that State.
2. For purposes of this Article, profits from the operation in international traffic of aircraft include profits derived from the rental on a full or
bareboat basis of aircraft if operated in international traffic by the lessee or
if such rental profits are incidental to other profits described in paragraph 1.
3. The provisions of paragraph 1 shall also apply to profits derived
from the participation in a pool, a joint business or an internationl operating
agency.
4. Subject to the provisions of Article 23 (Non-Discrimination), nothing
in this Convention shall affect the right of a Contracting State to tax, in
accordance with domestic laws, profits derived by a resident of the other
Contracting State from sources within the first-mentioned Contracting State
from the operation of ships in international traffic.

11
Article 9
ASSOCIATED ENTERPRISES
1. Where
a) an enterprise of a Contracting State participates directly or
indirectly in the management, control or capital of an enterprise
of the other Contracting State, or
b ) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State
and an enterprise of the other Contracting State,
and in cither case conditions are made or imposed between the two enterprises
in their commercial or financial relations which differ from those which would
be m a d e between independent enterprises, then any profits which would, but
foi those conditions, have accrued to one of the enterprises, but, by reason of
those conditions, have not so accrued, m a y be included in the profits of that
enterprise and taxed accordingly.
2. Where a Contracting State includes in the profits of an enterprise of
that State, and taxes accordingly, profits on which an enterprise of the other
Contracting State has been charged to tax in that other State, and the profits
so included are profits which would have accrued to the enterprise of the
first-mentioned State if the conditions m a d e between the two enterprises had
been those which would have been m a d e between independent enterprises.
then that other State shall m a k e an appropriate adjustment to the amount of
the tax charged therein on those profits. In determining such adjustment.
due regard shall be had to the other provisions ol this Convention and the
competent authorities of the Contracting States shall if necessary consult each
other
3. The provisions of paragraph 1 shall not limit any provisions of the
lavs of either Contracting State which permit the distribution, apportionment
or allocation of income, deductions, credits, or allowances between persons
owm»d or controlled directly or indirectly by the same interests when necessary
in order to prevent evasion of taxes or clearly to reflect the income of any of
such persons.

12
Article 10

DIVIDENDS
1. Dividends paid by a company which is a resident of a Contracting State
to a resident of the other Contracting State m a y be taxed by both Contracting
States.
2. However, if the beneficial owner of the dividends is a resident of the
other Contracting State, the tax charged in thefirst-mentionedContracting State
shall not exceed :
a) 15 percent of the gross amount of the dividends if the beneficial
owner is a company which owns, directly or indirectly, at least 1 0
percent of the voting stock of the company paying the dividends;
b ) 25 percent of the gross amount of the dividends in all other cases.
The provisions of this paragraph shall not affect the taxation of the company
in respect of the profits out of which the dividends are paid.
3. The term dividends" as used in this Article means income from shares
or other rights, not being debt-claims, participating in profits, as well as income
from other corporate rights which is subjected to the same taxation treatment
as income from shares by the taxation law of the State of which the company
making the distribution is a resident.
4. The provisions of paragraphs 1 and 2 shall not apply if the recipient
of the dividends, being a resident of a Contracting State, carries on business
in the other Contracting State, of which the company paying the dividends is a
resident, through a permanent establishment situated therein, or performs in
that other State independent personal services from a fixed base situated therein.
and the holding in respect of which the dividends are paid is effectively connected
with such permanent establishment or fixed base. In such a case, the provisions
of Article 7 (Business Profits) or Article 14 (Independent Personal Services).
as the case m a y be, shall apply.

13
Article 11

INTEREST
1. Interest derived by a resident of one of the Contracting States from
sources within the other Contracting State m a y be taxed by both Contracting
States.
2. Interest derived and beneficially owned by a resident of one of the
Contracting States from sources within the other Contracting State shall not
be taxed by the other Contracting State at a rate in excess of 15 percent of
the gross amount of such interest.
3. Notwithstanding the provisions of paragraphs 1 and 2 interest
deri\ jd by one of the Contracting States, or an instrumentality thereof (including
the Bangladesh Bank, the Federal Reserve Banks of the United States, the
Export-Import Bank of the United States, the Overseas Private Investment
Corporation of the United States, and such other institutions of either Contracting State as the competent authorities of both Contracting States m a y determine by mutual agreement) shall be exempt from tax by the other Contracting
State.
4. The provisions of paragraphs 2 and 3 shall not apply if the
recipient of interest from sources within one of the Contracting States, being
a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein
or performs in that other State independent personal services from a fixed base
situated therein and the debt-claim in respect of which the interest is paid is
effectively connected with such permanent establishment or fixed base. In such
a case, the provisions of Article 7 (Business Profits) or Article 14 (Independent
Per-onal Services), as the case m a y be. shall apply.
5. Where an amount is paid to a related person and would be treated
as interest but for the fact that it exceeds an amount which would have been
paid to an unrelated person, the provisions of this Article shall apply only
to so m u c h of the amount as would nave been paid to an unrelated person.
In such a case, the excess amount m a y be taxed by each Contracting State
according to its o w n law. including the provisions of this Convention where
applicable.
6. The term "interest" as used in this Convention means income from
debt-claims of every kind, whether or not secured by mortgage, and whether
or not carrying a right to participate in the debtor's profits, and in particular.
income from government securities and income from bonds or debentures.
including premiums and prizes attaching to such securities, bonds or debentures.
as well as income assimilated to income from m o n e y lent by the taxation law
of the Contracting State in which the income arises, including interest on
deferred pnjrmenrsales.

14
Article 12

ROYALTIES
I. Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State m a y be taxed by both Contracting States.
2. Royalties derived and beneficially owned by a resident of one of the
Contracting States from sources within the other Contracting State shall not
be taxed by the other Contracting State at a rate in excess of:
a) In the case of royalties described in subparagraph a ) of paragraph 3 of this Article. 10 percent of the gross amount of such
royalties: and
b ) 15 percent of the gross amount of the royalties in all other cases.
3. The term "royalties" as used in this Article means payments of any
kind received as a consideration for the use of, or the right to use:
a) any copyright of literary, artistic or scientific work including
cinematographic films or films or tapes used for radio or television
broadcasting: and
b ) any patent, trade mark, design or model, plan, secret formula or
process, or other like right or property, or for information concerning industrial, commercial or scientific experience.
The term "royalities" as described in subparagraphs a) or b) also includes
gains derived from the alienation of any such right or property which are
contingent on the productivity, use. or disposition thereof. However, the
term "royalties" does not include any payments in consideration for the
working of. or the right to work, mineral deposits, sources and other natural
resources.
4. The provisions of paragraphs 1 and 2 shall not apply if the
recipient of the royalties from sources within one of the Contracting States,
being a resident of the other Contracting State, carries on business in the
first-mentioned Contracting State through a permanent establishment situated
therein, or perform in that other State independent personal services from a
fixed base situated therein, and the right or property in respect of which the
royalties are paid is effectively connected with such permanent establishment
or fixed base. In such a case the provisions of Article 7 (Business Profits)
or Article 14 (Independent Personal Services), as the case m a y be, shall
apply.
5. Where, an amount is paid to a related person and would be treated
as a royalty but for the fact that it exceeds an amount which would have been
paid to an unrelated person, the provisions of this Article shall apply only
to so m u c h of the amount as would have been paid to an unrelated person.
In such case, the excess amount m a y be taxed by each Contracting State
according to its o w n law. including the provisions of this Convention where
applicable.

15
Article 13
CAPITAL GAINS
1. Gains derived by a resident of a Contracting State from the alienation
of immovable property referred to in Article 6 (Income From Immovable Property (Real Property)) and situated in the other Contracting State and of shares
of the capital stock of a company the property of which consists principally of
such immovable property situated in the other Contracting State m a y be taxed
in that other State.
2. Gains from the alienation of movable property forming part of the
business property of a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State or of movable property
pertaining to a fixed base available to a resident of a Contracting State in the
other Contracting State for the purpose of performing independent personal
services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, m a y be taxed
in that other State.
3. Gains derived by an enterprise of a Contracting State from the alienation
of ships, aircraft or containers operated by such enterprise in international traffic
shall be taxable only in that State, and gains described in Article 12 (Royalties)
shall be taxable only in accordance with the provisions of Article 12.

16
Article 14

INDEPENDENT PERSONAL SERVICES
Income derived by an individual who is a resident of a Contracting State
from the performance of personal services in an independent capacity shall be
taxable only in that State unless such services are performed in the other
Contracting State and
a) the individual is present in that other State for a period or periods
aggregating more than 90 days in the taxable year concerned, or
h) the individual has a fixed base regularly available to him in that
other State for the purpose of performing his activities, but only so
m u c h of the income as is attributable to that fixed base m a y be
taxed in such other State.

17
Article 15

DEPENDENT PERSONAL SERVICES
1. Subject to the provisions of Articles 18 (Pensions, Etc.) and 19
(Government Service), salaries, wages and other similar remuneration derived
by a resident of a Contracting State in respect of an employment shall be taxable
only in that State unless the employment is exercised in the other Contracting
State. If the employment is so exercised, such remuneration as is derived therefrom m a y be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived
by a resident of a Contracting State in respect of an employment exercised in
the other Contracting State shall be taxable only in thefirst-mentionedState if :
a) the recipient is present in the other State for a period or periods
not exceeding in the aggregate 183 days in the taxable year
concerned.
b ) the remuneration is paid by, or on behalf of. an employer w h o is
not a resident of the other State, and
c) the remuneration is not borne by a permanent establishment or a
fixed base which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment as a m e m b e r of the regular complement of a ship or aircraft operated by an enterprise of a Contracting State in
international traffic m a y be taxed only in that Contracting State.
4. Notwithstanding the other provisions of this Article and Article 14.
where a director's fee is paid by a company which is a resident of a Contracting
State to an individual w h o is a resident of the other Contracting State and is a
shareholder of the company, and such fee is in excess of the amount which
would have been paid for such services to an individual w h o is not a shareholder
of the company, such excess amount m a y be taxed by the first-mentioned
Contracting State at a rate not in excess of 25 percent.

18
Article 16

INVESTMENT OR HOLDING COMPANIES
II 25 percent or more of the capital of a company which is a resident of a
Contracting State is owned directly or indirectly by individuals w h o are not
residents of that Slate, and if by reason of special measures the tax imposed by
that State on that company with respect to dividends, interest or royalties arising
in the other Contracting State is substantially less than the tax generally imposed
by the first-mentioned State on corporate business profits, then, notwithstanding
the provisions of Articles 10 (Dividends). 11 (Interest), or 12 (Royalties), that
other State m a y tax such dividends, interest or royalties under the provisions of its
internal law. For the purposes of this Article, the source of dividends, interest
or royalties shall be determined in accordance with paragraph 3 a ) . b ) or c)
ol Article 22 (Relief from Double Taxation).

19
Article 17

ARTISTES AND ATHLETES
1. Notwithstanding the provisions of Articles 14 (Independent Personal
Services) and 15 (Dependent Personal Services), income derived by public
entertainers such as theater, motion picture, radio or television artistes, and
musicians, and by athletes, from their personal activities as such m a y be
taxed in the Contracting State in which these activities are exercised provided
that—
a) such income exceeds 100 United States dollars or its equivalent in
Bangladesh taka per day. or
b) such income exceeds in the aggregate 3,000 United States dollars
or its equivalent in Bangladesh taka during the taxable year.
Provided further that such income shall not be taxable in such Contracting
State if the visit of the public entertainers or athletes to that State is within
the scope of a cultural or sports exchange program agreed to by both the
Contracting States.
2. Where income in respect of activities exercised by an entertainer or
an athlete in his or her capacity as such accrues not to that entertainer or athlete
but to another person, that income may. notwithstanding the provisions of
Articles 7 (Business Profits), 14 (Independent Personal Services), and
15 'Dependent Personal Services), be taxed in the Contracting State in
which the activities of the entertainer or athlete are exercised. For purposes
of the preceding sentence, income of an entertainer or athlete shall be deemed
not to accrue to another person if it is established that neither the entertainer
or .ithlete. nor persons related thereto, participate directly or indirectly in the
orolits of such other person in any manner, including the receipt of deferred
remuneration, bonuses, fees, dividends, partnership distributions or other distri
butions

20
Article 18
PENSIONS, ETC.
1. Subject to the provisions of paragraph 2 of Article 19 (Government
Service):
a) pensions and other similar remuneration beneficially derived by a
resident of a Contracting State in consideration of past employment shall be taxable only in that State, and
b ) social security payments and other public pensions paid by a
Contracting State to an individual w h o is a resident of the other
Contracting State or a citizen of the United States shall be taxable
only in the first-mentioned Contracting State.
2. Annuities beneficially derived by a resident of a Contracting State
shall be taxable only in that State. T h e term "annuities" as used in this paragraph means a stated sum paid periodically at stated times during life or during
a specified number of years, under an obligation to m a k e the payments in return
for adequate and full consideration (other than services rendered).
3. Alimony paid to a resident of a Contracting State by a resident of
the other Contracting State shall be exempt from tax in the other Contracting
State T h e term "alimony" as used in this paragraph means periodic payments
m a d e pursuant to a written separation agreement or a decree of divorce, separate
maintenance, or compulsory support, which payments are taxable to the recipient under the laws of the State of which he is a resident.
4. Periodic payments for the support of a minor child made pursuant
to a written separation agreement or a decree of divorce, separate maintenance.
or compulsory support, paid by a resident of one of the Contracting States
to a resident of the other Contracting State, shall be exempt from tax in both
Contracting States.

21
Article 19
GOVERNMENT SERVICE
1. a) Remuneration, other than a pension, paid by a Contracting State
or a political subdivision or a local authority thereof to any individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
b ) However, such remuneration shall be taxable only in the other
Contracting State if the services are rendered in that State and the
individual is a resident of and a national of that State.
2. a) Any pension paid by, or out of funds created by, a Contracting State
or a political subdivision or authority to an individual in respect
of services rendered to that State or subdivision or authority shall
be taxable only in that State.
b ) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of. and a national of, that
State.
3. The provisions of Articles 14 (Independent Personal Services). 15
(Dependent Personal Services), 17 (Artistes and Athletes), and 18 (Pensions,
etc.). as the case m a y be, shall apply to remuneration and pensions in respect
of services rendered in connection with a business carried on by a Contracting
State or a political subdivision or a local authority thereof.

22
Article 20
TEACHERS, STUDENTS AND TRAINEES
I. Remuneration which a professor or teacher who was a resident of a
Contracting State immediately before visiting the other Contractng State and
is temporarily present in that other State for the purpose of teaching or research
in a university, college, school, or other recognized educational institution
receives for such work shall not be taxed in that other State for a period not
exceeding two years, in respect of that remuneration.
2. An individual who was a resident of a Contracting State immediately
before visiting the other Contracting State and is temporarily present in that
other State for the primary purpose o f —
a) studying at a university, college, school or other recognized educational institution in that other State, or
b) securing training as a business or technical apprentice, or
c) studying or doing research as a recipient of a grant allowance or
award from a governmental, religious, charitable, or educational
organization,

shall, Irom the date of his or her first arrival in that other State in connect
with that visit, be exempt from tax in that other State with respect t o —
d) all remittances from abroad for purposes of his or her maintenance.
education or training;
e) the grant, allowance, or award, and
f) any remuneration for personal services rendered in that other
Contracting State with a view to supplementing the resources available to him or her for such purposes in an amount not in excess of
4500 United States dollars or its equivalent in Bangladesh taka
for any taxable year.
In the case of an individual described in subparagraph b), this exemption from
tax shall apply for a period not exceeding two years from the date of the individual'sfirstarrival in the other State.

23
Article 21
OTHER INCOME
1. Items of income of a resident of a Contracting State, wherever arising.
not dealt with in the foregoing Articles of this Convention shall be taxable
only in that State.
2. Notwithstanding paragraph 1. items of income of a resident of a
Contracting State not dealt with in the foregoing Articles of this Convention
and arising in the other Contracting State m a y be taxed in that other State.

24
Article 22
RELIEF FROM DOUBLE TAXATION
1. In the case of the United States, double taxation shall be avoided as
lollows
In accordance with the provisions and subject to the limitations of
the law of the United Slates (as it m a y be amended from time to time without
changing the general principle hereof), the United States shall allow to a
resident or citizen of the United States as a credit against the United States
tax the appropriate amount of tax paid to Bangladesh; and, in the case of a
United Stales compan> owning at least 10 percent of the voting stock of a
company which is a resident of Bangladesh from which it receives dividends
in any taxable vear, the United States shall allow credit for the appropriate
amount of tax pa d to Bangladesh by that company with respect to the profits
out of which such dividends are paid. Such appropriate amount shall be
based upon the amount of tax paid to Bangladesh, but the credit shall not
exceed the limitations (for the purpose of limiting the credit to the United
States tax on income from sources outside of the United States) provided by
United Stales law for the taxable year. For purposes of applying the United
States credit in relation to tax paid to Bangladesh the taxes referred to in
paragraphs 2 b) and 3 of Article 2 (Taxes Covered) shall be considered to be
income taxes.
2. In the case of Bangladesh, double taxation shall be avoided as
follows: !n accordance vvith the provisions and subject io the limitations ol
the law ol Bangladesh (as it ma> be amended irom time to time without
changing the general principle hereof). Bangladesh shall allow to a resident
of Bangladesh as a credit against the Bangladesh tax the appropriate amount
of tax paid to the United States: and. in the case of a Bangladesh compan\
owning at least 10 percent of the voting stock of a company which is a resident
of the United States from which it received dividends in any taxable year.
Bangladesh shall allow credit for the appropriate amount of tax paid to the
United States by that company with respect to the profits out of which such
dividends are paid. Such appropriate amount shall be based upon the amount
of tax paid to the United States, but the credit shall not exceed the limitations
(for the purpose of limiting the credit to the Bangladesh tax on income from
sources outside of Bangladesh) provided by Bangladesh law for the taxable
year. For purposes of applying the Bangladesh credit in relation to tax paid
to the United States the taxes referred to in paragraphs 2 a) and 3 of Article 2
(Taxes Covered) shall be considered to be income taxes.
3. For the purposes of the preceding paragraphs of this Article, the
source of income or profits shall be determined in accordance with the following
rules:
a) Dividends, as defined in paragraph 3 of Article 10 (Dividends).
shall be deemed to arise in a Contracting State if paid by a
c o m p a n y which is a resident of that State.
b ) Interest, as defined in paragraph 6 of Article 11 (Interest), shall
be deemed to arise in a Contracting State when the payer is that
State itself, a political subdivision, a local authority or a resident
of that State. Where, however, the person paying the interest,
whether he is a resident of a Contracting State or not. has in a
Contracting State a permanent establishment or a fixed base m
connection with which the indebtedness on which the interest £
paid was incurred, and such interest is borne by such permanent
/

25
establishment or fixed base, then such interest shall be deemed to
arise in the State in which the permanent establishment or fixed
base is situated.
c) Royalties, as defined in paragraph 3 of Article 12 (Royalties),
shall be deemed to arise in a Contracting State to the extent that
such royalties are with respect to the use of, or the right to use.
rights or property within that State.
d ) Except for income or profits referred to in subparagraphs a ) .
b ) , or c ) , and except for income or profits taxed by the United
States solely by reason of citizenship in accordance with paragraph 2 of Article 1 (Personal Scope) and income described in
paragraph 2 of Article 21 (Other Income), income or profits
derived by a resident of a Contracting Stale which m a y be taxed
in the other Contracting State in accordance with this Convention
shall be deemed to arise in that other Contracting State.

26
Article 23
NON-DISCRIMINATION
I. Nationals of a Contracting State shall not be subjected in the other
State to any taxation or any requirement connected therewith, which is other
or more burdensome than the taxation and connected requirements to which.
nationals of that other State in the same circumstances are or m a y be subjected.
For purposes of United States taxation. United States nationals w h o are not
resident in the United States are not in the same circumstances as Bangladesh
nationals w h o are not resident in the United States. This provision shall, notwithstanding the provisions of Article 1 (Personal Scope), also apply to persons
w h o are not tesidents of either Contracting State.
2. The taxation on a permanent establishment which an enterprise of a
Contracting State has in the other Contracting State shall not be less favourably
levied in that other State than the taxation levied on enterprises of that other
State carrying on the same activities.
3. Except where the provisions of paragraph 1 of Article 9 (Associated
Enterprises), paragraph 5 of Article 11 (Interest), or paragraph 5 of Article 12
(Royalties) apply, interest, royalties and other disbursements paid by an enterprise ol a Contracting State to a resident of the other Contracting State shall,
for the purpose of determining the taxable profits of such enterprise, be deductible under the same condition as if they had been paid to a resident of the
first-mentioned State. T h e provisions of this paragraph shall not affect the
application of the law of Bangladesh requiring the deduction of tax at source.
from interest, royalties and other disbursements as a condition for deduction.
4. Enterprises of a Contracting State, the capital of which is wholly or
partly owned or controlled, directly or indirectly, by one or more residents of
the other Contracting State, shall not be subjected in the first-mentioned State
to any taxation or any requirement connected therewith which is other or more
burdensome than the taxation and connected requirements to which other similar
enterprises of the first-mentioned State are or m a y be subjected.
5. Nothing in this Article shall be construed as obliging a Contracting
State to grant to residents of the other Contracting State any personal allowances.
reliefs and reductions for taxation purposes, which it grants to its o w n residents.
6. The provisions of this Article shall apply to taxes of every kind and
description imposed by a Contracting State or a political subdivision or local
authority thereof.

27
Article 24
MUTUAL AGREEMENT PROCEDURE
1. Where a person considers that the actions of one or both of the
Contracting States result or will result for him or her in taxation not in
accordance with the provisions of this Convention, he or she may, irrespective
of the remedies provided by the domestic law of those States, present his or
her case to the competent authority of the Contracting State of which he or
she is a resident or national.
2. The competent authority shall endeavor, if the objection appears to
it to be justified and if it is not itself able to arrive at a satisfactory solution,
to resolve the case by mutual agreement with the competent authority of the
other Contracting State, with a view to the avoidance of taxation which is not
in accordance with the Convention. If an agreement is reached, it shall be
implemented notwithstanding any time limits in the domestic law of the
Contracting States.
3. The competent authorities of the Contracting States shall endeavor
to resolve by mutual agreement any difficulties or doubts arising as to the
interpretation or application of the Convention. In particular the competent
authorities of the Contracting States m a y agree:
a) to the same attribution of income, deductions, credits, or allowances of an enterprise of a Contracting State to its permanent
establishment situated in the other Contracting State;
b ) to the same allocation of income, deductions, credits, or allowances between persons, including a uniform position on the
application of the requirements of paragraph 2 of Article 23
(Non-Discrimination);
c) to the same characterization of particular items of income;
d ) to the same application of source rules with respect iO particular
items of income; and
e) to a c o m m o n meaning of a term.
They may also consult together for the elimination of double taxation in cases
not provided for in the Convention.
4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the
sense of the preceding paragraphs.
5. In cases where this Convention specifies a dollar amount, the
competent authorities m a y agree to a higher dollar amount.

28
Article 25
EXCHANGE OI INFORMATION AND ADMINISTRATIVE ASSISTANCE
1. The competent authorities of the Contracting States shall exchange
such information as is necessary for carrying out the provisions of this
Convention or of the domestic laws of the Contracting States concerning
taxes covered by the Convention insofar as the taxation thereunder is not
contrary to the Convention. T h e exchange of information is not restricted
by Article 1 (Personal Scope). A n y information received by a Contracting
State shall be treated as secret in the same manner as information obtained
under the domestic laws of that State and shall be disclosed only to persons
or authorities (including courts and administrative bodies) involved in the
assessment or collection of, the enforcement or prosecution in respect of, or
the determination of appeals in relation to, the taxes covered by the Convention. Such persons or authorities shall use the information only for such
purposes. They m a y disclose the information for such purposes in public
court proceedings or in judicial decisions.
2. In no case shall the provisions of paragraph i be construed so as
to impose on a Contracting State the obligation:
a) to carry out administrative measures at variance with the laws
and administrative practice of that or of the other Contracting
State;
b) to supply information which is not obtainable under the laws or
in normal course of the administration of that or of the other
Contracting State:
c) to supply information which would disclose any trade, business.
industrial, commercial or professional secret or trade process, or
information, the disclosure of which would be contrary to public
policy (ordre public).

29
Article 2 b

EFFECT OF CONVENTION ON DIPLOMATIC AGENTS AND CONSU
LAR OFFICERS, DOMESTIC LAWS, AND OTHER TREATIES.
1. Nothing in this Convention shall affect the fiscal privileges of diplomatic agents or consular officers under the general rules of international law
or under the provisions of special agreements.
2. This Convention shall not restrict in any manner any exclusion.
exemption, deduction, credit, or other allowance n o w or hereafter accorded—
a) by the laws of either Contracting State, or
b ) by any other agreement between the Contracting States.

30
Article 27

ENTRY INTO FORCE
1. This Convention shall be subject to ratification in accordance with the
applicable procedures of each Contracting State and instruments of ratification
*nall be exchanged at Washington as soon as possible.
2. The Convention shall enter into force upon the exchange of instruments of ratification and its provisions shall have effect :
a) in respect of tax withheld at the source, to amounts paid or credited
on or after the first day of the second month next following the
date on which this Convention enters into force.
b) in respect of other taxes, to taxable periods in the United States
and income years in Bangladesh beginning on or after thefirstday
of January next following the date on which this Convention enters
into force.

31
Article 28
TERMINATION
I. This Convention shall remain in force until terminated by one of
the Contracting States Either Contracting State may terminate the Convention at any time after 5 years from the date on which this Convention enters
into force provided that at least 6 months' prior notice of termination has
been given through diplomatic channels. In such event, the Convention shall
icase to have effect:
a) In respect of tax withheld at the source, to amounts paid or
credited on or after thefirstday of January next following the
expiration of the 6 months' period;
b) In respect of other taxes, to taxable periods in the United States
and income years in Bangladesh beginning on or after the first
da> of January next following the expiration of the 6 months'
period.
DONE at Dacca in duplicate, this ?.'.*..* day of

p^v.ol'T.

^CUQIOUV

For the Government of the
United States of America :

p2;lu|

For the Government of the People's
Republic of Bangladesh

32
Dacca, Bangladesh.
October 6, 1980
His Excellency
M r . A . K. Azizul H u q
Secretary
Internal Resources Division
Ministry of Finance
Dacca
Excellency:
I have the honor to refer to the Convention between the Government of the United
States of America and the Government of the People's Republic of Bangladesh for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes
on Income which was signed today. The following understandings were reached between
our two Governments.
1. During the course of negotiations leading to the conclusion of the Convention signed
today, representatives of Bangladesh stressed the need for increased flows of capital to
Bangladesh and asked that special measures be included in the Convention to foster such
capital flows from the United States.
The United States delegation, though expressing understanding of this position
was unable to agree to the inclusion of such a provision. I wish to assure you, however.
that m y Government recognizes the importance which your Government places on increased
investment in Bangladesh. Accordingly, when circumstances permit, m y Government will
be prepared to resume discussions with a view to incorporating provisions into this Convention
that will minimize the interference of the United States tax system with incentives offered by
the Government of the People's Republic of Bangladesh and that will be consistent with the
income tax policies of the United States regarding the least developed countries.
2. It is our mutual understanding, that in applying Article 7 (Business Profits) to
any case where the correct amount of profits attributable to a permanent establishment is
incapable of precise determination or the ascertaining thereof presents exceptional difficulties.
the profits properly attributable to the permanent establishment m a y be determined on a
reasonable basis.
If this is in accordance with your understanding. I would appreciate an acknowledgement
from you to that effect.
Accept, Excellency, the renewed assurances of my highest consideration.

Sincerely yours.
David T. Schneider
Ambassador of the United
States of America in
Bangladesh.

33
Dacca. Bangladesh.
October 6. 1980
His Excelleuc) Mr. David T. Schneider.
Ambassador of the United States of America
in Bangladesh
Excellency:
I have the honour to acknowledge the receipt of your Excellency's Note of today's date
which reads as follows:
"I have the honour to refer to the Convention between the Government of the United
States of America and the Government of the People's Republic of Bangladesh for
Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to
Taxes on Income which was signed today. The following understandings were reached
between our two Governments.
1. During the course of negotiations leading to the conclusion of the Convention
signed today, representatives of Bangladesh stressed the need for increased flows of
capital to Bangladesh and asked that special measures be included in the Convention
to foster such capital flows from the United States.
The United States delegation, though expressing understanding of this position
was unable to agree to the inclusion of such a provision. I wish to assure you, however,
that m y Government recognizes the importance which your Government places on
increased investment in Bangladesh. Accordingly, when circumstances permit, m y
Government will be prepared to resume discussions with a view to incorporating
provisions into this Convention that will minimize the interference of the United States
tax system with incentives offered by the Government of the People's Republic of
Bangladesh and that will be consistent with the income tax policies of the United States
regarding the least developed countries.
2. It is our mutual understanding, thai in applying Article 7 (Business Profits) to
any case where the correct amount of profits attributable to a permanent establishment
is incapable of precise determination or the ascertaining thereof presents exceptional
difficulties, the profits properly attributable to the permanent establishment m a y be
determined on a reasonable basis.
If this is in accordance with your understanding. I would appreciate an
acknowledgment from you to that effect.
Accept, Excellency, the renewed assurances of m> highest consideration.".
2. 1 have the honour to confirm the above mentioned understanding on behalf of the
Government of the People's Republic of Bangladesh
3. Please accept, Excellency, the assurances of my highest consideration

A. K. Azizul H u q
Secretary.
Internal Resources Division.
Ministry of Finance.
Government of the People's
Republic of Bangladesh.

FOR IMMEDIATE RELEASE
November 14, 19 80

Contact: Alvin Hattal
Telephone: 202/566-8381

LIMITS RAISED ON SALES OF GOLD MEDALLIONS AND
ORDER PERIOD EXTENDED UNTIL FEBRUARY 28, 19 81

The Treasury Department will increase the limit on the
purchase of American Arts Gold Medallions to 25 medallions per
transaction and make them available until the end of
February 1981. The change will be effective on Tuesday/ Nov. 18.
Delivery time of the medallions will be reduced to
approximately five weeks from the date orders are received at
the San Francisco Mint, which is half the time previously
required.
The present limit of three medallions of each size per
person has been in effect since sale of the medallions began
on July 15, 19 80. The limit is being raised to accommodate
larger-quantity purchasers as well as the individual investor.
As of November 11, 829,000 of the Marian Anderson
half-ounce and 305,000 of the Grant Wood one-ounce medallions
remained available for sale.
Official order forms must be used for all mail orders and
are available at each of the nation's 35,000 post offices.
Toll free numbers are listed on the order forms for use in
determining the daily prices of the medallions. Payment by
U.S. Postal money order, certified check, or cashier's check
is required. Medallions will be mailed first class registered
mail.
#

M-740

epartmentoftheTREASURY
TELEPHONE 566-2041

IINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

November 17, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4,001 million of 13-week bills and for $ 4,000 million of
26-week bills, both to be issued on November 20, 1980, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average
a/ Excepting
b/ Excepting
Tenders
Tenders

13-week bills
maturing February 19, 1981
Discount Investment
Price
Rate
Rate 1/

96.41196.411-'/ 14.198% 14.93%
96.374
14.345% 15.09%
96.383
14.309% 15.05%
2 tenders totaling $3,225,000.
2 tenders totaling $760,000.
at the low price for the 13-week
at the low price for the 26-week

26-week bills
maturing May 21, 1981
Discount Investment
Price
Rate 1/
Rate
:
:

9 3 . 0 0 ^ 13.830%
13.979%
92.933
13.917%
92.964

15.08%
15.25%
15.18%

bills were allotted 59%.
bills were allotted 73%.

TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location Received Accepted Received
61,815
$
78,315 $
Boston
3,298,205
6,937,555
New York
35,895
35,895
Philadelphia
79,725
91,295
Cleveland
48,475
74,475
Richmond
56,745
56,745
Atlanta
89,510
394,510
Chicago
20,710
30,710
St. Louis
7,960
7,960
Minneapolis
49,350
49,350
Kansas City
22,095
22,095
Dallas
122,305
435,805
San Francisco
108,035
108,035
Treasury

$ 110,695
6,810,905
24,295
83,880
35,950
61,625
470,120
33,870
10,675
64,535
13,895
502,365
112,810

Accepted
$
53,195
3,111,405
24,295
58,880
34,950
51,525
186,920
22,870
10,675
54,285
13,895
264,365
112,810

$8,322,745

$4,000,825

$8,335,620

$4,000,070

Competitive
Noncompetitive

$5,733,260
869,505

$1,411,340
869,505

$5,969,150
689,120

$1,633,600
689,120

Subtotal, Public

$6,602,765 $2,280,845

$6,658,270

$2,322,720

Federal Reserve
Foreign Official
Institutions

739,165

735,000

980,815

942,350

TOTALS

$8,322,745

$4,000,825

$8,335,620

$4,000,070

TOTALS
Type

An additional $ 8,395 thousand of 13-week bills and an additional $8,650
of 26-week bills will be issued to foreign official institutions for new cash.
^/Equivalent coupon-issue yield.

W-7A1

thousand

bOeen
/// / &

/•

/3a f/7%

n.S)4 7<

73,23/ P/o

14.101

v/7 l?°
V

ict

y/v/zo
Wfj&tfy

TREASURY'S WEEKLY BILL OFFERING

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000 million, to be issued November 28, 1980.
This offering will provide $ 425 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,582 million, including $2,105million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,608 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
90-day bills (to maturity date) for approximately $4,000
million, representing an additional amount of bills dated
March 4, 1980,
and to mature February 26, 1981 (CUSIP No.
912793 5Y 8 ) , currently outstanding in the amount of $ 7,951 million,
the additional and original bills to be freely interchangeable.
181-cay bills for approximately $4,000 million to be dated
November 28, 1980,
ana to mature May 28, 1981
(CUSIP No.
912793 6S 0).
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing November 28, 1980.
Tenders
frc::. Federal Reserve Banks for themselves and as agents of
fcreign ar.c international monetary authorities will be accepted
=.z the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
3anks, 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,
November 24, 1980.
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 r>i
H'7U2_
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
stated
price
from
anyprice
one
respective
bidder
(in three
will
decimals)
issues.
be accepted
of less
accepted
in without
full at
competitive
the weighted
bids average
for the

-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 28, 1980, in cash or other immediately available
funds or in Treasury bills maturing November 28, 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
ASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

November 18, 1980

TREASURY TO AUCTION $4,500 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $4,500
million of 2-year notes to refund $2,830 million of notes
maturing November 30, 1980, and to raise $1,670 million new
cash. The $2,830 million of maturing notes are those held by
the public, including $629 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
$365 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

(over)
M-743

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED DECEMBER 1, 1980
November 18, 1980
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date November 30, 1982
Call date
Interest coupon rate

$4,500 million
2-year notes
Series Y-1982
(CUSIP No. 912827 LG 5)

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
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Payment by non-institutional
investors
Full payment to be submitted
with tender
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, November 25, 1980,
by 1:30 p.m., EST
Settlement date (final payment due
from institutions)
Delivery
dateor
for
coupon funds
secarities. Monday,
Friday, December 12,
1980
a) cash
Federal
1, 1980
b) readily collectible check... Friday, November 28, 1980

For Release Upon Delivery
Expected at 2:00 p.m.
STATEMENT OF
DANIEL I. HALPERIN
DEPUTY ASSISTANT SECRETARY (TAX LEGISATION)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON
TAXATION AND DEBT MANAGEMENT
OF THE SENATE COMMITTEE ON FINANCE
November 19, 1980
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to appear today to
present the views of the Treasury Department on S. 3082,
S. 3094, and H.R. 6806.
S. 3082 and S. 3094
Both S. 3082 and S. 3094 would overturn Revenue Ruling
77-85. That ruling dealt with so-called "investment
annuities," through which individuals sought to shield
investment income from current tax while retaining the right
to select their personal investments. The Treasury opposes
these bills. They would sanction the use of paper
transactions to defer the imposition of income tax on
portfolio income. If such deferral is desired, it should be
permitted directly, rather than by artificial means, and by
specific legislation, rather than through a prohibition on a
Revenue Ruling. Enactment of legislation in the form of
S. 3032 or S. 3094 would irresponsibly avoid facing the
issues.

M-744

-2To put the issue raised by these bills in perspective it
is useful to review some basic features of our income tax
system. Sections 61(a)(4) and 61(a)(7) of the Internal
Revenue Code specifically provide that gross income includes
income from "interest" and from "dividends."
This general rule is subject to limited exceptions.
Before the Windfall Profit Tax Act of 1979, section 116 of
the Code allowed each individual to exclude from gross income
up to $100 of dividends received. With the Windfall Profit
Tax Act of 1979, Congress specifically reconsidered the
treatment of dividends and interest. As a result, Congress
enacted a temporary revision to section 116 which raised the
exclusion from $100 to $200 and revised it to cover interest
as well as dividends. Dividends and interest in excess of
this amount remains taxable.
There have been a number of attempts to defer taxation
of interest. For example, during the 1960's a number of
corporations took to issuing debt securities at a discount.
Although the increase in value of such securities as maturity
approached was tantamount to interest, no income was realized
until sale or surrender of the security. Congress responded
in the Tax Reform Act of 1969. It required a ratable portion
of the discount to be included in the investor's income as
ordinary income during each month the instrument was
outstanding.
As this example suggests, Congress generally has been
unwilling to sanction artificial arrangements designed to
defer current taxation of interest (or dividend) income.
There exists one major anomaly — the treatment of what are
known as "deferred annuities." Under a deferred annuity an
individual pays money to a life insurance company in exchange
for a contract which at some future time may be converted
into an annuity. Generally the contract holder may elect to
receive benefits in one of a variety of forms, including
guaranteed payments for a fixed number of years or for life.
In addition, annuity contracts generally permit the contract
holder to surrender the contract in return for a lump sum in
cash.
The period until the contract is surrendered or
converted into an annuity is referred to as the "accumulation
period." During that period the insurance company credits
interest to the contract. Section 72 specifically provides
that, during this accumulation period the contract holder
will not be taxed on interest credited to the contract.
Section 72 also provides that amounts actually withdrawn

-3during the accumulation period will not be includible in
gross income unless such amounts exceed the amounts
previously paid for the contract. The tax treatment of
deferred annuities cannot be reconciled with the general
treatment of interest and dividends.
Thus, this Administration is on record as favoring
legislative change. Absent legislation, however, the rules
governing annuities remain in effect, and neither Revenue
Ruling 77-85 nor subsequent developments suggests that the
rules of section 72 can be altered by administrative action.
Rather, Revenue Ruling 77-85 simply responds to an attempt to
take artificial advantage of section 72. An investor would
pay "premiums" to purchase an investment "annuity," and the
proceeds of the premium would be invested in various
financial assets. The contract purchaser was furnished with
a list of investment securities that were approved by the
life insurance company, and each purchaser could select just
which investments he wished to make and how much should be
invested in each selection.
What the promoters of the "investment annuity" sought to
do was permit a contract purchaser to make investments using
a life insurance company as a conduit. The investor directs
the life insurance company to make, on the purchaser's
behalf, exactly the same investments the purchaser otherwise
would have made directly. However, by claiming that an
"annuity" had been purchased, current taxation of the
interest and dividend income was claimed to have been
avoided. While the Internal Revenue Service issued several
private ruling letters that tended to sanction this device,
Revenue Ruling 77-85 properly reached a contrary conclusion.
Specifically, Revenue Ruling 77-85 held that the purchaser of
a so-called "investment annuity" was, for federal income tax
purposes, the owner of the underlying investment assets; and,
as with other financial assets, that the income from the
assets was currently taxable to the purchaser. In so doing
Revenue Ruling 77-85 revoked, prospectively only, the
previously issued private ruling letters.
The issues raised by Revenue Ruling 77-85 and this
legislation are not complicated. In the case of the
investment annuity the purchaser did not rely on interest at
rates guaranteed by the issuing life insurance, and did not,
as with a traditional "variable annuity," look to the
investment expertise of the life insurance company in
managing a diversified portfolio of assets. Instead,
purchasers simply contributed cash to a life insurance
company and then selected precisely which investments they

-4wished to make. In substance, the life insurance company was
offering the investor nothing more than a piece of paper that
said the investor had purchased an annuity and could
therefore claim to be free of current taxation on interest or
dividends from those investments. Under those circumstances
Revenue Ruling 77-85 held that the investor had, in effect,
purchased the assets directly and should be taxed in exactly
the same fashion as if he had. We believe that the
conclusion reached in Revenue Ruling 77-85 was correct. The
special tax treatment of annuities cannot be permitted to
engulf the general rules for taxation of interest and
dividend income.
The Treasury therefore opposes S. 3084 and S. 3092.
H.R. 6806
H.R. 6806 involves the complicated provisions of the
Internal Revenue Code which require that the investment
credit, and the tax savings attributable to accelerated
depreciation, be "normalized" for public utility ratemaking
purposes. While the provisions are complicated the basic
thrust of the normalization requirements is to prohibit these
tax benefits; which are in effect subsidies to capital
investment delivered through the tax system, from being
"flowed through" to current ratepayers as a reduction in
current cost of service. Under the Code the penalty for
violation of these requirements is the loss of the tax
benefits.
There is a long history of dispute over the
normalization provisions, especially in the State of
California. The California regulatory authorities have
o
entered orders which violate the normalization requirements
of the Code, and, under existing law, the penalty to the
affected utilities is the loss of investment credit and
accelerated depreciation for the years for which California
adopted flow-through ratemaking. H.R. 6806 would absolve
those taxpayers that were subject to ratemaking orders in
California from the loss of substantial tax benefits. The
principal beneficiaries of the bill are Pacific Telephone
Company, a subsidiary of the Bell System; General Telephone
of California, a subsidiary of General Telephone and
Electronics, and the Southern California Gas Company.
In addition, H.R. 6806 would amend the statute in an
attempt to make clear that imaginative schemes to violate the
normalization provisions will not be countenanced in the
future.

-5On April 15, 1980, the Treasury testified in detail on
H.R. 6806 before the Committee on Ways and Means. A copy of
our April 15 testimony is attached. Vie there testified that
we did not think there was generally any policy to be served
by collecting some $2 billion in back taxes from three
utilities in California. On the other hand, the severe
penalties that flow from violation of the normalization
requirements are there for the express purpose of
discouraging such violations. Thus, we expressed the view
that H.R. 6806 would appear to be an appropriate measure of
relief if one could be reasonably confident (1) that further
disputes would not arise in California, and (2) that
providing relief in this instance would not encourage other
states to test the Congress' will with respect to the
normalization provisions.
It is still not clear to us that passage of H.R. 6806
will in fact end controversy in California. The affected
taxpayers fervently hope that it will. Similarly, it is
difficult for the Treasury to maintain that passage of H.R.
6806 will encourage other states to violate the normalization
requirements, when regulated public utilities located in 49
other states, who stand to suffer the greatest damage if that
should occur as the result of H.R. 6806, appear not to object
to the bill.
On balance, then, and although the future is far from
certain, the Treasury will not stand in the way of passage of
o
0
o
this legislation.

For Release Upon Delivery
Expected at 10:00 a.m.
Statement of
Daniel I. Halperin
Deputy Assistant Secretary (Tax Legislation)
Before the
House Committee on Ways and Means
April 15, 1980
Kr. Chairman and Members of this Committee:
I am pleased to have the opportunity to appear before
this Committee to discuss H.R. 6806 and H.R. 3165. Both
bills deal with aspects of the rules of the Internal Revenue
Code that require the investment credit and the tax deferral
attributable to accelerated depreciation to be "normalized"
in establishing rates for regulated public utilities. Last
year the Treasury presented extensive testimony on this
subject before the Committee's Oversight Subcommittee. For
the record of these hearings I am attaching a copy of our
previous testimony, which I will not reiterate in detail.
As we testified last year, the Treasury regards the
investment credit, and the tax deferral attributable to the
excess of accelerated over economic depreciation, as
subsidies to investment that are delivered through the tax
system. As we also testified at those hearings, the Treasury
has concluded that it is appropriate for these tax subsidies
to be made available to regulated public utilities, which are
among the most capital-intensive industries in the country;
but that, as long as these benefits are available to
regulated public utilities, they should be treated as
subsidies to investment rather than as simple tax reductions.
This point should be underscored. We would not be here
today if the cash equivalent of the investment credit and the
loan equivalent cf the tax deferral attributable to
accelerated depreciation were delivered directly rather than
through the tax system. We do not believe that accounting
for comparable, but appropriated, subsidies would be

-2controversial. The fact that they are cleared through the
tax system does not change — and should not be permitted to
obscure — their essential character. Thus, in regulated
ratemaking, they should be treated in the same manner as any
comparable appropriated capital subsidy. Neither should be
considered to reduce current regulated tax expense. The
investment credit should be treated as a 10 percent reduction
in the price paid for equipment, and the tax deferral
attributable to accelerated depreciation as an interest-free
loan. We believe that this treatment — "normalization" —
is unquestionably the correct method of accounting for these
subsidies; and that, in the long run, such treatment is in
the interests of ratepayers as well as owners of equity in
regulated utilities. On balance, we also concluded last year
that the normalization requirements of the Internal Revenue
Code constitute an appropriate means to ensure proper
accounting for these subsidies.
Quite obviously there are those who do not share our
point of view. Specifically, the regulatory authorities in
the state of California have accounted for the subsidies in a
manner that is the equivalent of their being "flowed through"
to income (i.e., as a reduction of current tax expense), a
result that does not comport with the rules of the Code. Eut
we recognize that the forces that have led to the existing
situation in California are both complex and politically
charged. Consequently, while we believe the method of
regulatory accounting adopted by California unquestionably
violates the applicable provisions of the Code and
regulations, the Treasury is willing to offer its cooperation
in attempting to arrive at a solution to this difficult
situation. But we must insist that one can expect as part of
any legislative solution a reduction, if not the elimination,
of further major disputes about the operation of these rules.
It is with that point of view that we approach H.R.
6806. H.R. 6806, as. we understand it, has two objectives.
First, under existing law, failure to normalize results in a
loss of the benefits of the investment credit and accelerated
depreciation. Sections 3 and 4 of H.R. 6806 would operate to
absolve those companies, which have been required by
California to flow through improperly the investment credit
and the tax deferral attributable to accelerated
depreciation, from the loss of those benefits. Second,
recognizing that the improper flow-through stemmed primarily
from an estimating procedure adopted by the California Public
Utilities Commission, sections 1 and 2 of H.R. 6806 would
amend the investment credit and accelerated depreciation
rules to state specifically in the statute that such
procedures are impermissible.
We believe that the statutory clarifications of sections
1 and 2 of H.R. 6806 are consistent with existing law and,
therefore, are appropriate. The balance of H.R. 6806 we view

-3with reservation. Regulated public utilities are among the
most capital-intensive industries and therefore are among the
most significant recipients of capital subsidies delivered
through the tax system. Consequently, retroactive
disallowance of these subsidies exposes the companies subject
to the California rate orders to tax deficiencies that by any
measure are substantial. If, by reason of legislation, the
difficult circumstances as they have developed in California
could be defused and the normalization rules made to operate
properly there as elsewhere, we see no policy that would be
served by collecting such deficiencies.
The difficult question is whether H.R. 6806 can achieve
this goal, which both we and its sponsors seek. In our
judgment, legislative relief for past violations would be
preferable if it preserved some measure of sanction short of
collecting the full tax deficiencies or insisting on complete
abatement of the rate refunds that already have been ordeVed
by California. Such legislation might serve to defuse the
existing situation while making clear that the normalization
rules cannot be disregarded with impunity.
But the Treasury is not unalterably opposed to H.R.
6806. I_f, as the result of its enactment, the situation in
California cculd be defused and the California authorities
persuaded to accept normalization; and i£ it was considered
unlikely that other state regulatory authorities would be
induced to start down the road taken by California; and if,
finally, this Committee and the Congress were to make it
clear that attempts to circumvent these rules in the future
would meet with no sympathy on the part of the Congress, then
a measure such as H.R. 6806 could be desirable.
Whether it is realistic to have such expectations —
which, Mr. Chairman, I emphasize are in our judgment
essential to the Treasury's acquiescing in this legislation
— it is not yet possible to say. If the California
authorities, and those public lawyers whose intervention in
the California rate proceedings has been an essential feature
of this controversy, were prepared to accept normalization
for the future, that action would go far toward alleviating
our concerns. We say this recognizing that the Supreme Court
of California, which we assume cannot speak to the question
outside the confines of a judicial proceeding, also has
played an essential role in California. But we also point
out that, in considering the wisdom of H.R. 6806, this
Committee must also reach a judgment about the possibility
that its enactment would induce other state regulatory
authorities to follow California's lead. We are not in a
position to express an independent judgment on the likelihood
that this will happen. Ferhaps the Committee will hear from
witnesses, subject to regulation by states other than
California, who will make their views on this subject known.

-4We must point out, however, that if H.R. 6806 were
enacted, and if, contrary to the Committee's expectations,
California persevered in the course that it has staked out,
or other public utility commissions were persuaded to fellow
California's lead, the consequences could be quite serious.
Our testimony last year to the effect that retention of the
normalization rules was appropriate rested on several
fundumental premises, among them that the subsidies provided
by the investment credit and accelerated depreciation were
appropriate for regulated public utilities as long as they
were properly accounted for through normalization; that, in
general, the tax normalization rules seemed to operate
properly; and that, absent such rules, benefits that are
intended as subsidies to investment well might be converted
into rate subsidies. But we also pointed out that these
rules do not operate well when they are the focus of
controversy. If, either as the result of California's
continued pursuit of flow-through or because of efforts byother public utility commissions to follow suit, the
normalization rules prove to be a source of even further
controversy, the Treasury might feel constrained to recommend
a review of Congressional policy toward the prevision of
these investment subsidies to regulated public utilities. It
might prove necessary to re-examine the wisdom of retaining
the normalization rules. Or, recognizing that flow-through
operates to convert investment subsidies into direct rate
subsidies, the inability to achieve normalization accounting
might warrant reconsideration of allowing these tax subsidies
to regulated utilities. We do not mean to suggest that the
time for such reconsideration has arrived; only that, if
these rules cannot be made to work properly, the underlying
policy may have to be reconsidered.
As I mentioned at the outset, Mr. Chairman, the Treasury
is prepared to work with this Committee and other interested
parties in an attempt to remedy this difficult situation. At
this moment we are not confident that H.R. 680 6 will provide
a solution. We look forward to seeing how the situation
develops, and in particular to the views to be expressed
before this Committee in the balance of its hearings today.
The other bill dealt with in this hearing, H.R. 3165,
addresses the appropriate technique of normalizing the
investment credit. It is the Treasury's view that the
investment credit was intended to stimulate investment in
productive capital by reducing the cost of capital goods.
Such a reduction means that investments will become feasible
at a lower level of expected returns than would be the case
in the absence of the credit. Thus, we believe that proper
normalization of the credit would result in its being
accounted for in regulated ratemaking in exactly the same wav
as any other 10 percent reduction in capital costs. First,
the regulated taxpayer's "rate base," to which its "fair rate
of return" is applied in determining the allowable return to

-5equity investors, would be reduced by the amount of the
credit. This would reflect the fact that a portion of the
taxpayer's investment had been financed by the government.
Second, the base for determining regulated depreciation
expense would also be reduced by 10 percent (to reflect the
actual cost of the investment), thus reducing annual
depreciation charges (and, hence, regulated "cost of
service") by 10 percent as well.
In its current form, section 4 6(f) may not quite
accomplish this goal. It provides two alternative methods of
normalizing the investment credit, neither of which
unambiguously permits both a rate base reduction and a
reduction in regulated depreciation base. Under one method
— section 46(f)(1) — the regulatory body establishing rates
may require the regulated taxpayer's rate base to be reduced
by the amount of the credit. However, under section
46(f)(1), it is not clear that any other reduction, for
example a reduction in depreciation expense, is permitted in
the taxpayer's regulated cost of service. Under the
alternative — section 46(f)(2) — regulated "cost of
service" may be reduced by a ratable portion of the credit
earned each year (the equivalent of reducing the taxpayer's
base for computing regulated depreciation expense), but the
taxpayer's rate base may not be reduced. Consequently,
section 46(f)(2) permits the regulated taxpayer to earn a
return on the portion of its investment that is paid for by
the government through the credit. Most regulated utilities
elect section 46(f)(2).
As we testified last year, we believe that the correct
technique by which to normalize the investment credit
involves a combination of the two existing methods, under
which, through reduced depreciation, the regulated taxpayer's
cost of service is reduced by a ratable portion of the credit
each year; while, simultaneously, the taxpayer's rate base is
reduced (to exclude the government's contribution) by the
amount of the allowable credit. This treatment would
recognize the investment credit as providing a 1C percent
reduction in capital costs.
We are convinced that the arguments in support of
retaining section 46(f)(2) are based on a misunderstanding of
the way in which the investment credit was intended to
operate. Many of those who have considered this issue agree
that conceptually we are correct, but attempt to justify
section 46(f)(2) on other grounds. Specifically, it has been
said that allowing a regulated utility to preserve the
investment credit in its rate base, as permitted by section
46(f)(2), to some extent mitigates the consequences of
"regulatory lag" (i.e., the inability of current ratemaking
orders to keep up with financial demands on a regulated
utility), a phenomenon that is aggravated by high rates of
inflation. We believe that it simply is improper tc justify

-6improFer normalization of the investment credit as an
antedote to deficiencies in the ratemaking process. Those
deficiencies, if they exist, should be remedied by the
regulators.
In sum, Mr. Chairman, H.R. 2615 attempts to correct what
we regard as a deficiency in the existing investment credit
normalization rules. While we have some technical
reservations, the Treasury supports the objective of B.K.
3 615 and would be happy to cooperate with the Committee or
its staff to work out suitable revisions.
o

FOR RELEASE AT 12:00 NOON

November 21, 1980

TREASURY'S 5 2-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,500 million, of 364-day
Treasury bills to be dated December 4, 1980, and to mature
December 3, 1981 (CUSIP No. 912793 7B 6). This issue will
provide about $350 million new cash for the Treasury as the
maturing 52-week bill was originally issued in the amount of
$4,133 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing December 4, 1980. In addition to the
maturing 52-week bills, there are $7,635 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next
week. Federal Reserve Banks as agents for foreign and international monetary authorities currently hold $2,538 million, and
Federal Reserve Banks for their own account hold $3,199 million
of the maturing bills. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
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. For purposes of determining such
additional amounts, foreign and international monetary
authorities are considered to hold $1,118 million of the original
52-week issue.
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 26, 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 competimay
M-74S
100,
tivenot
with
tenders,
be not
usedmore
the price
than offered
three decimals,
must be expressed
e.g., 99.925.
on the
Fractions
basis of

-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 4, 1980,
in cash or other immediately available
funds or in Treasury bills maturing December 4, 1980. Cash
adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the
new bills.

-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.

?H.v

epartmentoftheTREASURY
T&ffWONE 566-2041 " ^ ^ S ^ S

/•ffif^

November 24, 1980

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 4,000 million of 13-week bills and for $4,001 million of
26-week bills, both to be issued on November 28, 1980, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing February 26, 1981
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing May 28, 1981
Discount Investment
Rate 1/
Price
Rate

96.430 14.280% 15.01%
96.395
14.420%
15.17%
96.404
14.384%
15.13%

92.968
92.936
92.946

13.936%
14.050%
14.030%

15.25%
15.33%
15.30%

Tenders at the low price for the 13-week bills were allotted 89%.
Tenders at the low price- for the 26-week bills were allotted 41%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
$
68,670
$
44,255 49,365
$
6,870,930
3,386,845 :
7,136,915
34,310
33,110 .
18,265
38,225 •
40,485
49,005
40,150 .
64,050
75,935
56,260
58,110
53,940
446,760
70,340
471,120
35,270
23,270
32,225
8,370
20,485
22,645
55,710
47,760
43,880
27,325
22,325
18,155
436,170
116,585
347,220
112,670
112,670
75,030

Accepted
$
39,365
3,476,690
17,765
49,005
36,100
36,875
115,470
19,725
8,645
39,795
18,155
68,220
75,030

$8,282,830

$4,000,165

$8,381,815

$4,000,840

Competitive
Noncompetitive

$5,833,450
853,990

$1,550,785
853^990

$5,635,830
628,085

$1,254,855
628,085

Subtotal, Public

$6,687,440 $2,404,775

$6,263,915

$1,882,940

Federal Reserve
Foreign Official
Institutions

808,440 808,440

800,000

786,950

1,317,900

TOTALS

$8,282,830

$4,000,165

$8,381,815

$4,000,840

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

Tyje

1/Equivalent coupon-issue yield.

M-74&

DATE

Nov. 24, 1980

13-WEEK

TODAY:

A< 3JV %

2 6-WEEK

W>03>0 '<b

LAST WEEK: f^.loj % /3*9/? %

HIGHEST SINCE:

4/i/no
LOWEST SINCE

' A<W^% / V , ^ %

epartmentoftheTREASURY
tfHINGTON, D.C. 20220

TELEPHONE 566-2041

November 24, 1980

FOR RELEASE AT 4:00 P.M.

TREASURY TO AUCTION $3,000 MILLION
OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury will auction $3,000
million of 5-year 2-month 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.

0O0

(over)

-747

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED DECEMBER 8, 1980
November 24, 1980
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date February 15, 1986
Call date
Interest coupon rate

$3,000 million
5-year 2-month notes
Series C-1986
(CUSIP No. 912827 LH 3)

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 (fir;
payment on August 15, 1981)
Minimum denomination available
$1,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Payment by non-institutional
investors
Full payment to be submitted
with tender
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Wednesday, December 3, 1980,
by 1:30 p.m., EST
Settlement date (final payment due
from institutions)
a) cash or Federal funds
Monday, December 8, 1980
b)
readily
collectible
check...
Delivery date for coupon securities. Friday, December 5,
19,1980
1980

M - 7-48 Missing

epartmentoftheTREASURY
^SHINGTON, D.C. 20220

TELEPHONE 566-2041

OFFICE OF PUBLIC AFFAIRS""

Contact: i Carolyn Johnston
(202) 634-5377

FOR IMMEDIATE RELEASE December 1, 1980
—_—-__—______—._______________________

TREASURY SECRETARY MILLER NAMES JOHN G. REDLINE
SAVINGS BONDS CHAIRMAN FOR WEST VIRGINIA
•t

John G. Redline, President, Weirton Steel Division of National
Steel Corporation, has been appointed Chairman of the West Virginia
Savings Bonds Committee by Secretary of the Treasury G. William Miller.
He heads a volunteer committee of business, financial, labor, media,
and governmental leaders who — in cooperation with the U.S. Savings
Bonds Division — assist in promoting the sale of Savings Bonds.
A native of Delaware, Mr. Redline received a bachelor of science
degree from Lehigh University and attended the University of
Pennsylvania. During World War Two he was a captain in the U.S.
Air Force.
Mr. Redline joined National Steel Corporation in August 1959
as assistant superintendent of the cold reduction and finishing
department of the Midwest Steel Division, Portage, Indiana. In 1961,
he was named assistant general superintendent, was elevated to the
position of vice president in 1965 and, in the following year, assumed
the duties of general manager.
In June 1966 he was transferred to the Weirton Steel Division
as executive vice president, and in June 1967 was named president.
On June 1, 1972 he was transferred to Great Lakes Steel Division,

M-749

( over )

- 2 -

Detroit, as president and on February 24, 1977 returned to Weirton
Steel Division as president.
Mr. Redline is President of the Weirton United Way, Inc., member
of the Boards of Directors of the Salvation Army, Junior Achievement,
Bank of Weirton and the People's Bank of Weirton, member of the executive
board of the Fort Steuben Area Council, Boy Scouts of America, the
Board of Trustees of Bethany College, and member-at-large of the
Board of Directors of the National Safety Council.

He belongs to

the American Legion, VFW, Elks Lodge, Weirton Hospital Company, American
Iron and Steel Institute, Association of Iron and Steel Engineers,
and Ducks Unlimited.
He and his wife, Joan, reside at 3505 Riverview Drive, Weirton
and are the parents of a son and a daughter.

FOR RELEASE AT 4:00 P.M.

November 25, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000 million, to be issued December 4, 1980.
This offering will provide $375 million of new cash for the
Treasury as the maturing bills were originally issued in the
amount of $7,635 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $4,000
million, representing an additional amount of bills dated
September 4, 1980, and to mature March 5, 1981 (CUSIP No. 912793
6H4), currently outstanding in the amount of $3,832 million, the
additional and original bills to be freely interchangeable.
182-day bills for approximately $4,000 million, to be dated
December 4, 1980, and to mature June 4, 1981 (CUSIP No. 912793 6T8).
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing December 4, 1980. In addition to the
maturing 13-week and 26-week bills, there are $4,133 million of
maturing 52-week bills. The disposition of this latter amount
was announced last week. Federal Reserve Banks, as agents for
foreign and international monetary authorities, currently hold
$2,538 million, and Federal Reserve Banks for their own account
hold $3,199 million of the maturing bills. These amounts
represent the combined holdings of such accounts for the three
issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as
agents for 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 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. For purposes of determining such
additional amounts, foreign and international monetary
authorities are considered to hold $1,420 million of the original
13-week and 26-week issues.
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.

yk-i^o

-2Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20226, up to 1:30 p.m., Eastern Standard time, Monday,
December 1, 1980. Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000. Tenders over
$10,000 must be in multiples of $5,000. In the case of
competitive tenders the price offered must be expressed on the
basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve
Bank of New York their positions in and 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.

-3Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on December 4, 1980, in cash or other immediately available funds
or in Treasury bills maturing December 4, 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.

FOR IMMEDIATE RELEASE

November 25, 1980

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $4,502 million of
$9,257 million of tenders received from the public for the 2-year notes,
Series Y-1982, auctioned today.
The interest coupon rate on the notes will be 13-7/8%. The range of
accepted competitive bids, and the corresponding prices at the 13-7/8%
coupon rate are as follows:
Bids Prices
Lowest yield
Highest yield
Average yield

13.91% 1/
14.02%
13.99%

99.941
99.755
99.805

Tenders at the high yield were allotted 4%.
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
$ 130,865
7,203,630
143,565
204,325
156,310
133,745
479,925
124,930
95,600
132,100
75,000
366,420
10,110

Accepted
$
95,865
3,140,925
129,765
155,225
132,685
127,285
225,740
111,790
87,600
128,460
70,980
85,280
10,110

$9,256,525

$4,501,710

The $4,502 million of accepted tenders includes $1,457million of
noncompetitive tenders and $2,655 million of competitive tenders from
private investors. It also includes $390
million of tenders at the
average price from Federal Reserve Banks as agents for foreign and
international authorities in exchange for maturing securities.
In addition to the $4,502 million of tenders accepted in the
auction process, $365 million of tenders were accepted at.the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for maturing securities.
1/ Excepting 1 tender of $75,000.

M-751

11 ^[l_t-rmsm

/7<fv
SOIES <W SEMIS

W.\pb^

"zsiS*-'™+?-

HIGHEST SINCE:

IV-

SX»CE: V ^

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/ ^ . _ /J. ff %)

artmentoftheTREASURY
INGTON, D.C. 20220

TELEPHONE 566-2041

November 26, 1980

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $ 4,501 million of 52-week bills to be issued December 4, 1980,
and to mature December 3, 1981, were accepted today. The details are as
follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

Price
High
Low
Average -

Discount Rate

86.623 13.230%
86.556
13.296%
86.592
13.261%

Investment Rate
(Equivalent Coupon-issue Yield)
14.93%
15.01%
14.97%

Tenders at the low price were allotted 15%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location

Received

Accepted
$ 19,000
3,947,555
15,725
39,075
66,315
30,810
97,990
21,630
12,220
23,375
5,405
197,765
24,290

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

$ 44,000
6,463,805

TOTALS

$7,673,755

$4,501,155

$6,040,390

$2,867,790
243,365

15,725
57,075
73,315
30,810
366,340
24,630
12,220
30,375
15,405
515,765
24,290

Type
Competitive
Noncompetitive

243,365

Subtotal, Public $6,283,755
1,200,000
Federal
Reserve
Foreign Official
190,000
Institutions
TOTALS ^ $7,673,755
M-752

$3,111,155
1,200,000
190,000
$4,501,155

FOR IMMEDIATE RELEASE

NOVEMBER 26, 1980

AMENDED RESULTS OF TREASURY'S
26-WEEK BILL AUCTION
The announcement results for the 26-week bill auction
of Monday, November 24 understated the amount accepted by
$201 million. As a result of correcting this understatement
the total amount of competitive tenders from the public is
changed from $1,255 million to $1,456 million and the total
amount accepted is changed from $4,001 million to $4,202
million. All other particulars in the announcement remain
the same.

M-753

INGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 10:00 A. M.

November 28, 1980

TREASURY OFFERS $3,000 MILLION OF 141-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $3,000 million of 141-day
Treasury bills to be issued December 3, 1980, representing an
additional amount of bills dated April 29, 1980, maturing
April 23, 1981 (CUSIP No. 912793 6A 9 ) . 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,
Tuesday, December 2, 1980. Wire and telephone tenders may be
received at the discretion of each Federal Reserve Bank or Branch.
Each tender for the issue must be f,or 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.
renders 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 make primary markets in

K-754

-2Government 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 Wednesday,
December 3, 1980.
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, 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.

artmentoftheTREASURY
TELEPHONE 566-2041

iNGTON, D.C. 20220

December 1, 1980

FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $4,000 million of 13-week bills and for $ 4,000 million of
26-week bills, both to be issued on December 4, 1980, were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:

26-week bills
maturing June 4, 1981
Discount Investment
Rate
Rate 1/
Price

13-week bills
maturing March 5, 1981
Discount Investment
Price
Rate
Rate 1/

a/ 14.582%
High
96.314
15.35%
Low
96.284
14.701%
15.48%
Average
96.297
14.649%
15.42%
a/ Excepting 3 tenders totaling $1,535,000

92.695
92.623
92.642

14.449%
14.592%
14.554%

15.80%
15.97%
15.93%

Tenders at the low price for the 13-week bills were allotted 91%.
Tenders at the low price for the 26-week bills were allotted 77%.
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
Accepted
57,800
$
97,800 $
3,227,420
5,588,985
31,130
31,130
49,680
49,465
40,255
51,275
50,435
50,435
183,150
393,150
22,635
23,635
6,825
6,825
49,370
49,415
18,725
18,725
150,020
497,520
112,985
112,985

:
:
:
:

Received
$
79,295
5,743,185
22,015
105,470
41,050
47,575
561,585
18,590
7,255
65,705
15,240
412,130
94,630

Accepted
$
39,295
3,232,185
20,015
95,470
34,450
36,560
187,055
17,590
7,255
45,300
15,240
175,030
94,630

TOTALS

$6,971,560

$4,000,215

$7,213,725

$4,000,075

Competitive
Noncompetitive

$4,419,370
786,705

$1,448,025
786,705

:
:

$4,955,930
603,995

$1,742,280
603,995

Subtotal, Public

$5,206,075

$2,234,730

$5,559,925

$2,346,275

Federal Reserve
Foreign Official
Institutions

899,285

1,100,000

866,200

553,800

$6,971,560

$4,000,215

$7,213,725

$4,000,075

:
:
:
:
:

Type

TOTALS

An additional $ 512,700 thousand of 13-week bills and an additional $314,600 thousand
of 26-week bills will be issued to foreign official institutions for new cash.
1/Equivalent coupon-issue yield

M-755'

DATE: Dec. 1, 1980

13-WEEK

2 6-WEEK,

TODAY: / 4.L^f 7° W. '''^ %
LAST WEEK: /V, 3 JV %> J^/jOlt^d

HIGHEST SINCE:

3-31-SC
LOWEST SINCE:

/^o37%

November 1980

BIOGRAPHICAL NOTES
CHARLES SCHOTTA
DEPUTY ASSISTANT SECRETARY
FOR COMMODITIES AND NATURAL RESOURCES
Charles Schotta was appointed Deputy Assistant Secretary for
Commodities and Natural Resources on December 19, 1979, after
having held that position on an Acting basis from May 4, 1979.
In this capacity, he is responsible for the formulation and
execution of Treasury Department policy in the commodity, energy
and natural resources areas.
A career member of the Senior Executive Service, Mr. Schotta
joined Treasury in 1971 as Chief of the Econometrics Group in the
Office of the Assistant Secretary for International Affairs.
From 1973 to 1975, he was Director of the Office of International
Financial Analysis; from 1975 to 1977, he was Director of the
Office of Energy Policy Analysis; and in 1977, he was appointed
Director of the Office of International Energy Policy where he
served until assuming his present position.
Prior to joining the Treasury Department, Mr. Schotta was
Associate Professor of Economics at Virginia Polytechnic Institute
and State University. He has also served on the faculties of
the University of California, Davis and the University of Texas,
El Paso. In addition to authoring numerous articles on a wide
range of economic and monetary subjects, he has consulted widely
in the banking, insurance, public utility, and anti-trust
fields for both Government and business.
Mr. Schotta holds a B.A. degree in Economics from Texas
Christain University and a M.A. in Economics from Brown University
where he also completed all requirements except dissertation
for the Ph.D. degree.
Born in Kansas City, Missouri on February 27, 1935,
Mr. Schotta grew up in Fort Worth, Texas. He has been married
to Dr. Sarita Gattis Schotta since 1960.
o 0 o

M-756

FOR RELEASE ON DELIVERY
EXPECTED AT 10:00 a.m.
December 2, 1980

STATEMENT OF THE HONORABLE G. WILLIAM MILLER
SECRETARY OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of the Committee:
My purpose here today is to advise you of the need for
legislation, before Congress adjourns, to increase the public
debt limit.
The present temporary debt limit of $925 billion will
expire on February 28, 1981, and the debt limit will then
revert to the permanent ceiling of $400 billion. Enactment
of debt limit legislation prior to February 28 will thus be
necessary to permit the Treasury to borrow to refund maturing
securities and to pay the Government's other legal obligations.
Moreover, based on our present estimates, the existing limit
of $925 billion will clearly not be enough to meet the Treasury's
financing needs in February.
Our current estimates of the debt subject to limit, with
our usual assumption of a constant $15 billion cash balance,
but without any provision for contingencies, are as follows:
December 31, 1980 $928 billion
January 31, 1981
February 28, 1931

M-757

923
943

-2-

Based on these estimates, the present $925 billion limit would
need to be increased by $18 billion, to $943 billion through
February. Also, to stay within the present debt limit in December
and January the Treasury will need to reduce its cash balances
below optimum levels and postpone borrowings until Congress acts
on new debt limit legislation. Such postponements of borrowings
could be very costly, since our cash balances are generally
invested at interest rates equal to or higher than the rates
paid on our borrowings and since postponed borrowings will result
in later congestion in financial markets and possibly higher
financing costs to the government. In view of the current highly
volatile conditions in financial markets, we should make every
effort to avoid adding to market uncertainties and to conduct
the Government's financing activities in an orderly manner and
with minimum market impact.
In addition, the Treasury, and the market, will need to
begin planning in the middle of January for the Treasury's
scheduled announcement on January 28 of the new Administration's
first major quarterly refunding operation. The note and bond
issues announced on January 28 would normally be auctioned
in the first week of February so the securities may be
issued by the refunding date of February 15. Consequently,
even if the Treasury manages to stay with the present debt
limit in January, the debt limit must be increased in January
to permit the Treasury to conduct an efficient refunding
operation at the lowest possible cost to the taxpayer.

-3The present $925 billion limit through February 28, 1981,
was enacted by Congress on June 28, 1980, based on estimates
provided by the Congressional 3udget Office which were consistent
with the First Budget Resolution for FY 1981, adopted by Congress
on June 12, 1980. That resolution contained a recommended debt
limit of $935.1 billion through September 30, 1981. However,
the Second Budget Resolution, adopted by Congress on November
20, 1980, contained a recommended debt limit through September
30, 1981, of S978.6 billion, an increase of $43.5 billion
from the debt estimate in the First Budget Resolution. While
we have serious doubts as to whether the $978.6 billion limit
will be adequate to accommodate proposed .tax cuts, spending
increases, and changes in economic conditions through September,
we believe that our estimated S18 billion increase in the debt
subject"to limit for the first five months of the fiscal year
is reasonably consistent with the $43.5 billion increase
recommended by Congress ir. the Budget Resolution for the entire
fiscal year.
In view of the current rapid growth ir. Federal dect and the
difficulties in estimating debt levels, I would suggest that
future deDt limit legislation provide larger allowances for
contingencies. As you know, the Treasury's debt limit requests
to your Subcommittee have for many years included a standard
allowance for contingencies of only S3 billion, so our current
estimate of a $942 billion debt subject to limit on February
25, 1981, would normally be presented to your Subcommittee

-4-

as a debt limit request of $946 billion.

Yet, for example,

the recent court settlement of the Penn Central payment, which
was not anticipated in the FY 1981 Budget, was $2.1 billion.
I believe the contingency allowance should be at least $6
billion under current circumstances, so a reasonable estimate
of our February debt limit need would be $949 billion.
While the President's revised budget and debt limit
recommendations for the fiscal year 1981 will not be available
until January, it is recommended that the Senate agree to
House Joint Resolution 636, which passed the House on November
21, 1980. This Resolution provides for an increase in the
debt limit to $978.6 billion through September 30, 1981.
Senate approval of this measure will avoid the need for
further Congressional action during this session of Congress
and will avoid the need for emergency action by Congress on
debt limit legislation early next year.
A principal objective of this Administration is to help
assure an orderly transition in January as the new Administration
takes office. An essential part of that orderly transition
is to assure that the finances of the government are in order
as the new Administration assumes its responsibilities. It
would be inappropriate, in my view, to expect the incoming
Administration to appear before Congress in late January or

- 5 early February to request emergency debt limit legislation based
on the budget estimates submitted in January by the outgoing
Administration.

The new Administration should be permitted

sufficient time to prepare its own budget and debt recommendations
and to appear before Congress on that basis.
Also, if our current debt estimates through February turn
out to be too low, for example, because of lower than expected
economic growth and thus lower tax receipts, the new Congress
might be required to act in January on emergency debt limit
legislation to avoid a default on obligations of the United States.
In the circumstances, I urge your subcommittee's support
for House Joint Resolution 636.

OoO

partmentoftheTREASURY
HINGTON, D.C. 20220

TELEPHONE 566-2

FOR RELEASE AT 4:00 P.M.

December 2, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000 million, to be issued December 11, 1980.
This offering will provide $l,350million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
S 6,642 million, including $1,399 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,756 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 $4,000
million, representing an additional amount of bills dated
September 11," 1980,
and to mature March 12, 1981 (CUSIP No.
912793 6J 0 ) , currently outstanding in the amount of $ 3,853 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $4,000 million to be dated
December 11, 1980,
and to mature
June 11, 1981
(CUSIP No.
912793 6U 5 ) .
3oth series of bills will be issued for cash and in
exchange for Treasury bills maturing December 11, 1980.
Tenders
frcm 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.
Ace itional amounts of the bills may be issued to Federal Reserve
3anks, 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
3ranches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, December 8, 1980.
Form PD 4632-2 (for 26-week series)
or Form PD 4632-3 (for 13-week series) should be used to submit
t e n e t s fsr bii'irs to be maintained on the book-entry records of
the Deportment of the Treasury.
4-758

-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 at
competitive
stated
the weighted
price
bidsaverage
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 11, 1980, in cash or other immediately available
funds or in Treasury bills maturing December 11, 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 3ank or Branch, or from the Bureau of the Public

FOR IMMEDIATE RELEASE
December 2, 1980

Contact:

Robert Nipp
566-5328

FOREIGN BANK REPRESENTATIVE OFFICES
IN THE UNITED STATES
The Department of the Treasury today released a list of
representative offices operating in the U.S. on behalf of foreign banks. Foreign banks are required to report these
offices by Section 10 of the International Banking Act of 1978.
This list is based on the registration statements submitted by
foreign banks and contains information received from March 17,
1979 to October 31, 19 80. Inclusion on this list implies no
judgment concerning the bank or its activities and specifically
does not indicate that any institution has been approved by the
Treasury to function as a representative office in any state.
Two hundred forty-nine representative offices are currently
registered with the Treasury. They represent 192 banks from
4 8 foreign countries. Almost half of the offices are located
in New York. The rest are distributed over 16 states, with
the greatest concentration in Texas (50), California (25), and
Illinois (24).
Because most of the major foreign banks maintain branches
or agencies in New York, relatively few among them have representative offices there. Most of the New York representative
offices consequently belong to the smaller foreign banks, for
many of which the New York office is, in fact, their only
presence in the United States. In contrast, the larger foreign
banks tend to have several representative offices, most frequently located outside New York. The most popular locations
are Texas, California, and Illinois, reflecting the growing
international banking activity in these areas.
The 192 banks reporting representative offices in the
United States come largely from Western Europe (95), principally from Britain (25), Italy (15), and France (13). In
addition, Japanese banks maintain 13 representative offices
in the United States.
M-75Q

-2Eighteen representative offices have closed during the
one and one-half years since the registration provisions went
into effect. Of these, ten were replaced by branches or
agencies, reflecting the typical pattern in which a foreign
bank first sets up a representative office to establish an
initial presence in the United States and then, as its business
expands, establishes an agency or branch to engage in a wider
range of banking activity.
The activity most frequently cited as a function of representative offices is liaison with the foreign banks' U.S.
correspondent banks. This generally includes following the
flow of transactions and helping resolve operational problems.
In a few cases, it extends to monitoring the quality and cost
of services provided by American correspondent banks and
ensuring that rates quoted are representative of the terms
generally available in the market. In addition, representative
offices provide information on market conditions and assess
significant developments in the United States. Representative
offices also serve as a point of contact with American subsidiaries of the banks' home-country customers, as well as
helping to develop new business with American firms, especially
those engaged in trade with the banks' home country.

CALIFORNIA

Banco di Roma
c/o AMOI
2049 Century Park East
13th Floor
Los Angeles, CA 90067
Bank Julius 3aer, International
Bank Julius Baer & Co., Ltd. Zurich
235 Montgomery Street
Suite 939
San Francisco, CA 94104

Jugobanka
707 Wilshire Boulevard
Suite 4380
Los Angeles, CA 90017
The Mercantile Bank of Canada
515 South Flower Street
Los Angeles, CA 90017
National Westminster Bank, Ltd.
555 South Flower Street
Los Angeles, CA 90071

Bank of New South Wales
1 California Street
Suite 3100
San Francisco, CA 94111

National Westminster Bank, Ltd.
44 Montgomery Street
San Francisco, CA 94104

The Bank of Nova Scotia
Suite 837
523 Wast Sixth Street
Los Angeles, CA 90027

The Nippon Credit Bank, Ltd.
800 Wilshire Boulevard
Suite' 1460
Los Angeles, CA 90017

The Bank of Nova Scotia
315 California Street
San Francisco, CA 94104

Pierson, Heldring & Pierson, N.V.
1 Post Street
Crocker Plaza
Suite 1925
San Francisco, CA 94104

The Bank of Scotland
Suite 440
707 Wilshire Boulevard
Los Angeles, CA 90017
Canadian Imperial Bank of Oommerce
Suite 204
700 South Flower Street
Los Angeles, CA 90017
Canadian Imperial Bank of Gommerce
340 Pine Street
San Francisco, CA 94104

The Royal Bank of Canada
Suite 215
510 West Sixth Street
Los Angeles, CA 90014
Rural Bank of New South Wales
Suite 2250
2049 Century Park East
Los Angeles, CA 90067

Central Trust of China
604 Commercial Street
San Francisco, CA 94111

The Royal Bank of Scotland, Ltd.
Pacific Financial Center
Suite 920
800 West Sixth Street
Los Angeles, CA 90017

Credit Suisse
50 California Street
San Francisco, CA 94111

The Royal Bank of Scotland, Ltd.
600 Montgomery Street
San Francisco, CA 94111

The Export-Import Bank of Korea
707 Wilshire Boulevard
Suite 4640
Los Angeles, CA 90017

The Royal Trust Gompany
18115 Viceroy Drive
San Francisco, CA 92128

2
Swiss Bank Corporation
800 West Sixth Street
Suite 1220
Los Angeles, CA 90017

Union Bank of Switzerland
One Embarcadero Center
Suite 3805
San Francisco, CA 94111

The Toronto Dominion Bank
9430 Wilshire Boulevard
Beverly Hills, CA 90212
COLORADO
The Royal Bank of Canada
Suite 2260
410 17th Street
Denver, CO 80202
CONNECTICUT
Equator Bank, Ltd.
777 Main Street
Hartford, CT 06115

Banco Gomercial Anhogueno
c/o Richard W. Hastings
48 Greenwich Avenue
Greenwich, CT 06830
DISTRICT OF COLUMBIA

Banco do Brazil, S.A.
2020 K Street, N.W.
Suite 450
Washington, DC 20006

The Hong Kong and Shanghai Banking Corp.
Saudi British Bank
Suite 711
1828 L Street, N.W.
Washington, DC 20036

Banco do Brasil, S.A.
1919 Pennsylvania Avenue, N.W.
Suite 401
Washington, DC 20006

Nacional Financiera, S.A.
1120 Connecticut Avenue, N.W.
Washington, DC 20036

Ihe Bank of Tokyo, Ltd.
1735 I Street, N.W.
Room 506, 507 Paramount Building
Washington, DC 20006

State Bank of India
1735 I Street, N.W.
Suites 616 and 617
Washington, DC 20006
FLORIDA

Tne Bank of Tokyo, Ltd.
2121 Ponce de Leon Boulevard
Suite 420
Coral Gables, FL 33134

The Bank of Nova Scotia
One Biscayne Tower
16th Floor
Miami, FL 33131
GEORGIA

Banca Nazionale del Lavoro
225 Peachtree Street, N.E.
Suite 2003
Atlanta, GA 30303

Banco do Brasil, S.A.
230 Peachtree Street, N.E.
Suite 800
Atlanta, GA 30303

The Bank of Tokyo, Ltd.
235 Peachtree Street, N.E.
Suite 1001
Atlanta, GA 30303
Bayerische Vereinsbank
Suite 2125
2 Peachtree Street, N.W.
Atlanta, GA 30303

Kredietbank
2936 First-National 3ank Tower
2 Peachtree Street
Atlanta, GA 30303

The Bank of Nova Scotia
2 Peachtree Street, N.W.
Suite 309
Atlanta, GA 30303

Credit Suisse
2 Peachtree Street
1601 First National Bank Tower
Atlanta, GA 30303
ILLINOIS
Banca Nazionale del Lavoro
Equitable Building
401 North Michigan Avenue
Chicago, IL 60611
Banco do Brasil, S.A.
33 North Dearborn Street
P 0 Box A-3933
Chicago, IL 60602
Bank of Ireland
135 South LaSalle Street
Suite 4004
Chicago, IL 60603

Credit Suisse
200 East Randolph Drive
Chicago, IL 60601
Credito Italiano
33 North Dearborn Street
Chicago, IL 60602
The Dai-Ichi Kangyo Bank, Ltd.
c/o The First Pacific Bank of Chicago
Mid-Continental Plaza
Wabash at Adams
Chicago, IL 60603

The Bank of Montreal
Two First National Plaza
Chicago, IL 60603

The Hokkaido Takushoku Bank, Ltd.
One First National Plaza
Suite 2750
Chicago, IL 60603

The Bank of Nova Scotia
Suite 2182
141 West Jackson Boulevard
Chicago, IL 60604

Jugobanka
875 North Michigan Avenue
Room 3012
Chicago, IL 60611

The Bank of Tokyo, Ltd.
69 West Washington Street
Roam 1430
Chicago, IL 60603

Kleinwort, Benson, Ltd.
1 First National Plaza
Chicago, IL 60603

Canadian Imperial Bank of Gommerce
Suite 4100
135 South LaSalle Street
Chicago, IL 60603
Ihe Commercial Bank of Korea, Ltd.
208 South LaSalle Street
Zhicaqo, IL 60604

The Kyowa Bank, Ltd.
Suite 2260
115 South LaSalle Street
Chicago, IL 60603
The Mitsui Bank, Ltd.
135 South LaSalle Street
Chicago, IL 60603

4
National Westminster Bank, Ltd.
33 North Dearborn Street
Chicago, IL 60602

The Taiyo Kobe Bank, Ltd.
115 South LaSalle Street
Chicago, IL 60603

The Royal Bank of Canada
Room 1215
33 North Dearborn Street
Chicago, IL 60602

The Tokai Bank, Ltd.
Suite 2795
115 South LaSalle Street
Chicago, IL 60603

The Royal Bank of Scotland, Ltd.
135 South LaSalle Street
Chicago, IL 60603

The Toronto Dominion Bank
One First National Plaza
Suite 2790
Chicago, IL 60603

The Saitama Bank, Ltd.
115 South LaSalle Street
Chicago, IL 60603
INDIANA
Stepanska Banka Skopje
5857 Broadway
Gary, IN 46410
MASSACHUSETTS

The Bank of Nova Scotia
111 Franklin Street
Boston, MA 02110
MICHIGAN

Stepanska Banka Skopje
8033 East Ten Mile Road, #114
Ganter Line
Detroit, MI 48015
NEW YORK

Akbank T.A.S.
400 Park Avenue
New York, NY 10022

Andelsbanken A/S
9 West 57th Street
New York, NY 10019

Algemene Bank Nederland, N.V.
84 William Street
9th Floor
New York, NY 10038

Arab African International Bank
Suite 1800
645 Fifth Avenue
New York, NY 10022

ATSterdam-Rotterdam Bank, N.V.
430 Park Avenue
New York, NY 10022

Austrian Landerbank
11 Broadway
New York, NY 10004

Banca Nazionale dell'Agricoltura
100 Wall Street
New York, NY 10005
Banco Ambrosiano
450 Park Avenue
New York, NY 10022
Banco de Chile
70 Pine Street
Suite 3909
New York, NY 10005
Banco de la Construccion
117 East 57th Street
New York, NY 10022
Banco De Credito Argentino
Banco Espanol Del Rio De La Plata
Banco De Galicia
Banco Ganadero Argentino
c/o Argentine Banking Corporation
630 Fifth Avenue
Suite 514
New York, NY 10020

Banco Exterior de Espana
645 Fifth Avenue
11th Floor
New York, NY 10022
Banco Financiera Hondurena, S.A.
c/o Yves C. van den Branden
1165 Fifth Avenue
New York, NY 10029
Banco Hipotecario y de Fomento de Chile
70 Pine Street
Suite 3909
New York, NY 10005
Banco Industrial de Cataluna
9 West 57th Street
New York, NY 10019
Banco Internacional, S.A. (Argentina)
277 Park Avenue
New York, NY 10017
Banco Internacional, S.A. (Mexico)
One Wall Street
New York, NY 10005

Banco de Credito del Peru
280 Park Avenue
20th Floor
New York, NY 10017

Banco de Italia y Rio de la Plata
450 Park Avenue
New York, NY 10022

Banco de Credit e Hipotecario
19 Rector Street
New York, NY 10006

Banco Mercantil y Agricola, CA.
410 Park Avenue
New York, NY 10022

Banco Economico, S.A.
450 Park Avenue
Suite 2002
New York, NY 10022

Banco Mexicano Somex, S.A.
44 Wall Street
New York, NY 10005

Banco Espanol de Credito
375 Park Avenue
Room 2506
tew York, NY 10022
3anco del Estado
510 East 85th Street
department 5D
flew York, NY 10028
3anco Do Estado do Rio de Janeiro, S.A.
tooms 1202-3
>80 Fifth Avenue
lew York, NY 10019

Banco Nacional de Descuento
516 Fifth Avenue
Suite 201
New York, NY 10036
Banco di Napoli
277 Park Avenue
New York, NY 10017
Banco Pan de Azucar
277 Park Avenue
New York, NY 10017

6
Banco Popolare di Milano
One Citicorp Center
153 East 53rd Street
New York, NY 10022

The Bank of Scotland
200 Park Avenue
Suite 2416
New York, NY 10017

Banco Popolare di Novara
430 Park Avenue
New York, NY 10022

Banque Bruxelles Lambert, S.A.
630 Fifth Avenue
28th Floor
New York, NY 10020

Banco de la Republica Oriental del Uruguay
1270 Avenue of the Americas
New York, NY 10020
Banco Rio de la Plata
650 Fifth Avenue
New York, NY 10019
Banco Rio de la Plata (Panama)
Second Floor
645 Madison Avenue
New York, NY 10022
Banco di Roma
100 Wall Street
New York, NY 10005
Banco de Santiago
645 Fifth Avenue
Fifth Floor
New York, NY 10022
Bank of Credit & Gommerce, Int'l., Ltd.
Bank of Credit & Commerce (Overseas), Ltd.
375 Park Avenue
New York, NY 10022
Bank Ekspor Impor Indonesia
Bank Negara Indonesia 1946
100 Wall Street
New York, NY 10005
Bank Leu, Ltd.
50 Rockefeller Plaza
Suite 1215
New York, NY 10020
The Bank of Nova Scotia
67 Wall Street
New York, NY 10005
The Bank of Pusan
375 Park Avenue
New York, NY 10022

3anque Francaise Du Gommerce Exterieur
645 Fifth Avenue
New York, NY 10022
Banque de l'Indochine et de Suez
1270 Avenue of the Americas
New York, NY 10020
Banque Internationale a Luxembourg, S.A.
630 Fifth Avenue
28th Floor
New York, NY 10020
Banque Nationale de Paris
40 Wall Street
New York, NY 10005
Banque de Paris et des Pays-Bas
(Suisse), S.A.
400 Park Avenue
New York, NY 10022

Banque de la Societe Financiere Europeenne
Suite 2707
375 Park Avenue
New York, NY 10022
Banque Sudameris
c/o Yves M. Jahan
280 Park Avenue
New York, NY 10017
Banque Worms
37th Floor
919 Third Avenue
New York, NY 10022
Baring Brothers & Company, Ltd.
24th Floor
450 Park Avenue
New York, NY 10022
Bayerische Landesbank Girozentrale
Suite 3407
375 Park Avenue
New York, NY 10022

Bayerische Vereinsbank
430 Park Avenue
New York, NY 10022
Berliner Handels-und Frankfurter Bank
450 Park Avenue
New York, NY 10022
The British Bank of the Middle East
Five World Trade Center
New York, NY 10048
N. T. Butterfield & Son
One Rockefeller Plaza
New York, NY 10020
Caisse Centrale des Banques Populaires
430 Park Avenue
New York, NY 10022
Cassa Di RLsparmio de Firenze
36th Floor
375 Park Avenue
New York, NY 10022
Cassa Di Risparmio de Genova E Imperia
36th Floor
375 Park Avenue
New York, NY 10022
Cassa Di Risparmio Di Torino
36th Floor
375 Park Avenue
New York, NY 10022
Cassa Di Risparmio Di Verona Vicenza E
Belluno
36th Floor
375 Park Avenue
New York, NY 10022
Oassa di Risparmio delle Provincie
Lombarde
650 Fifth Avenue
New York, NY 10019
Central Trust of China
One World Trade Center
Suite 2273
New York, NY 10048

Charterhouse Group International, Inc.
(Charter House Japhet, Ltd.)
477 Madison Avenue
New York, NY 10022
Christiana Bank og Kreditcasse
375 Park Avenue
Suite 1705
New York, NY 10022
Gompagnie de Banque et d'Investissements
Suite 1505
630 Fifth Avenue
New York, NY 10020
Country Bank, Ltd.
100 Wall Street
New York, NY 10005
Credit Agricole
153' East 53rd Street
New York, NY 10022
Credit General, S.A. de Banque
450 Park Avenue
New York, NY 10022
Credit Industriel et Commercial Group
22nd Floor, West Building
280 Park Avenue
New York, NY 10017
Credit Lyonnais
95 Wall Street
New York, NY 10005
Credit du Nord
450 Park Avenue
New York, NY 10022
Daegu Bank, Ltd.
650 Fifth Avenue
New York, NY 10019
Den Danske 3ank
375 Park Avenue
Suite 1705
New York, NY 10022

8
Deutsche Genossenschaftsbank
630 Fifth Avenue
New York, NY 10020

Kleinwort, Benson, Ltd.
100 Wall Street
New York, NY 10005

The Export-Import Bank of Korea
460 Park Avenue
20th Floor
New York, NY 10022

The Korea Development Bank
460 Park Avenue
New York, NY 10022

First Curacao International Bank, N.V.
Suite 1900
645 Fifth Avenue
New York, NY 10022
The First International Bank of Israel,
Ltd.
4 East 39th Street
New York, NY 10016
Genossenschaftliche Zentralbank, A.G.
630 Fifth Avenue
New York, NY 10022
Hambros Bank, Ltd.
c/o Hambro America Inc.
17 East 71st Street
New York, NY 10021
Hessische Landesbank Girozentrale
c/o Helaba American Corp.
280 Park Avenue
West Building
New York, NY 10017
Hill Samuel, Inc.
375 Park Avenue
New York, NY 10022
The Hokuriku Bank, Ltd.
Suite 5213
One World Trade Center
New York, NY 10048
The Hong Kong & Shanghai Banking Gorp.
375 Park Avenue
New York, NY ' 10022
Jugobanka
500 Fifth Avenue
Room 3026
New York, NY 10036

Kredietbank, N.V.
Kredietbank, S.A. (Luxembourg)
450 Park Avenue
New York, NY 10022
Libra Bank, Ltd.
70 Pine Street
32nd Floor
New York, NY 10005
Ljubljanska Banka
Suite 3502
375 Park Avenue
New York, NY 10022
Merrill Lynch International Bank,
Inc.
165 Broadway
49th Floor
New York, NY 10080
Midland and International Banks,
Ltd.
24th Floor
345 Park Avenue
New York, NY 10022
Monte dei Paschi di Siena
Suites 1703-1974
375 Park Avenue
New York, NY 10022
Morgan Grenfell & Company, Ltd.
375 Park Avenue
New York, NY 10022
Nacional Financiera, S.A.
450 Park Avenue
Suite 401
New York, NY 10022
National Bank of Greece
960 Avenue of the Americas
New York, NY 10001

The National Bank of New Zealand, Ltd.
95 Wall Street
New York, NY 10005

Scandinavian Bank, Ltd.
245 Park Avenue
New York, NY 10017

National Westminster Bank, Ltd.
100 Wall Street
New York, NY 10005

The Small and Medium Industry Bank
375 Park Avenue
New York, NY 10022

Nedbank Limited
342 Madison Avenue
Room 1006
New York, NY 10017

Societe Generale de Banque
10 Hanover Square
New York, NY 10015

Nederlandsche Middenstandsbank, N.V.
450 Park Avenue
New York, NY 10022
Orion Bank, Ltd.
70 Pine Street
New York, NY 10005
Post-och Kreditbanken
375 Park Avenue
Suite 1705
New York, NY 10022
Privredna Banka Sarajevo
200 East 42nd Street
New York, NY 10017

Societe Industrielle de Banque
600 Third Avenue
New York, NY 10016
Stepanska Banka Skopje
350 Fifth Avenue
Room 4194
New York, NY 10001
Udruzena Beogrodska Banka
635 Madison Avenue
10th Floor
Suite 1000
New York, NY 10022
Ulster Investment Bank, Ltd.
100 Wall Street
New York, NY 10005

Rea Brothers, Ltd.
50 Broad Street
Suite 1737
New York, NY 10004

United Mizarahi Bank, Ltd.
630 Fifth Avenue
New York, NY 10020

Romanian Bank for Foreign Trade
573-577 Third Avenue
New York, NY 10016

Vereins-und Westbank AG
375 Park Avenue
36th Floor
New York, NY 10022

The Royal Bank of Scotland, Ltd.
63 Wall Street
New York, NY 10005
Rural Bank of New South Wales
New .South Wales Government Center
Sixth Floor
7 West 51st Street
New York, NY 10019

Vojvodjanska Banka-Udruzena Banka
866 United Nations Plaza
New York, NY 10017
Westdeutsche Landesbank Girozentrale
450 Park Avenue
New York, NY 10022

10 .

Williams & Glyn's Bank, Ltd.
63 Wall Street
New York, NY 10005

T. C. Ziraat Bankasi
153 East 53rd Street
44th Floor
New York, NY 10028

Yapi ve Kredi Bankasi A.S.
645 Fifth Avenue
Suite 902
New York, NY 10022
OHIO

The Bank of Nova Scotia
Suite 1006
Bond Court Building
1300 East Ninth Street
Cleveland, Ohio 44114

Bayerische Vereinsbank
Penton Plaza
Suite 610
1111 Chester Avenue
Cleveland, Ohio 44115
OREGON

Bank of Nova Scotia
56 S.W. Salmon Street
Portland, OR 97204
PENNSYLVANIA

Charterhouse Group International, Inc.
1529 Walnut Street
Philadelphia, PA 19102

The Toronto Dominion Bank
Suite 1958
Two Oliver Plaza
Pittsburgh, PA 15222

The Royal Bank of Canada
Suite 4644
600 Grant Street
Pittsburgh, PA 15219
TEXAS

Algemene Bank Nederland, N.V.
Pennzoil Place
Zapata Tower
Suite 1780
Houston, Texas 77002

Banco do Brazil, S.A.
Two Allen Center
Suite 2340
1200 Smith Street
Houston, TX 77002

Banca Nazionale del Lavoro
One Allen Center
Houston, TX 77002

Banco do Estado de Sao Paulo, S.A.
First International Plaza
1100 Louisiana Street
Suite 3930
Houston, TX 77002

Banco do Brasil, S.A.
First International Building
Suite 3825
1201 Elm Street
Dallas, TX 75270

Banco di Roma
1100 Milam Street
Suite 3790
Houston, TX 77002

Canadian Imperial Bank of Commerce
Suite 818
One Main Place
Dallas, TX 75250

The Bank of Montreal
One Houston Center
Houston, TX 77002

Charterhouse Japhet, Ltd.
c/o Charterhouse Japhet Texas, Inc.
1100 Milam Street
Suite 3477
Houston, TX 77002

The Bank of Nova Scotia
Suite 2430
2 Shell Plaza
Houston, TX 77002
The Bank of Scotland
Two Allen Center
Suite 2660
1200 Smith Street
Houston, TX 77002
The Bank of Tokyo, Ltd.
Two Houston Center
Suite 1104
Houston, TX 77002

The Cho-Beung Bank, Ltd.
1221 McKinney Lane
Houston Centre
Suite 1882
Houston, TX 77002
Clydesdale Bank, Ltd.
3701 Kirby Drive
Suite 990
Houston, TX 77098
Credit Lyonnais Southwest
One Allen Center
Houston, TX 77002

Banque Francaise Du Commerce Exterieur
One Allen Center
Suite 1000
Houston, TX 77002

Credit Suisse
601 Jefferson Street
Houston, TX 77002

Banque de l'Indochine et de Suez
Two Allen Center
Suite 2960
Houston, TX 77002

Credito Italiano
Two Houston Center
Suite 608
909 Fannin Street
Houston, TX 77002

Banque Nationale de Paris
One Houston Center
Suite 1700
Houston, TX 77002

The Dai-Ichi Kangyo Bank, Ltd.
1100 Milam Street
Suite 4660
Houston, TX 77002

Banque de Paris et des Pays-Bas
Two Allen Center
Suite 3100
1200 Smith Street
Houston, TX 77002

The Daiwa Bank, Ltd.
One Houston Center
Suite 2510
Houston, TX 77002

Barclays Bank International, Ltd.
Houston Club Building
Suite 1630
Houston, TX 77002

Den Norske Creditbank
1100 Milam Street
Suite 2770
Houston, TX 77002

Dresdner Bank, AG
1100 Milam 3uilding
Houston, TX 77002
James Finlay Corporation, Ltd.
1100 Milam Street
Suite 2285
Houston, TX 77002
The Fuji Bank, Ltd.
One Houston Center
Suite 1820
Houston, TX 77002

The Mitsubishi Bank, Ltd.
One Houston Center
Suite 1830
Houston, TX 77002
The Mitsui Bank, Ltd.
47th Floor
One Shell Plaza
910 Louisiana Street
Houston, TX 77002
National Westminster Bank, Ltd.
1100 Milam Building
Houston, TX 77002

Hill Samuel & Company, Ltd.
P 0 Box 2557
First City National Bank Building
1001 Main
Houston, TX 77001

Philippine Commercial and Industrial Bank
One Allen Center
10th Floor, Room 143
Houston, TX 77002

The Hokkaido Takushoku Bank, Ltd.
One Houston Center
Suite 1708
Houston, TX 77002

The Royal Bank of Canada
Suite 2128
333 North St. Paul Street
Dallas, TX 75201

The Hong Kong Bank Group
(The Hong Kong & Shanghai Banking Corp.)
(The British Bank of the Middle East)
(Mercantile Bank, Ltd.)
Suite 1515
One Houston Center
1221 McKinney Street
Houston, TX 77002

The Royal Bank of Canada
2330 Two Allen Center
1200 Smith Street
Houston, TX 77002

The Industrial Bank of Japan
Suite 2780
Two Allen Center
Houston, TX 77002

The Sanwa Bank, Ltd.
1200 Milam Street
Suite 2830
Houston, TX 77002

International Commercial Bank of China
1200 Milam Street
Suite 3425
Houston, TX 77002

Societe Generale
1100 Louisiana Street
Houston, TX 77002

Korea Exchange Bank
Suite No. 1102
One Houston Center
Houston, TX 77002
Lloyds Bank International, Ltd.
Suite 3680
601 Jefferson Street
Houston, TX 77002

The Royal Bank of Scotland, Ltd.
1200 Milam Street
Houston, TX 77002

Standard Chartered Bank, Ltd.
Suite 999
Gulf Building Addition
717 Travis
Houston, TX 77002
The Sumitomo Bank, Ltd.
One Houston Center
Suite 1100
1201 McKinney Street
Houston, TX 77002

Swiss Bank Corporation
One Allen Center
Suite .3315
Houston, TX 77002
Taiyo Kobe Bank, Ltd.
333 Clay Street
Suite 1585
Houston, TX 77002
WASHINGTON
The Fuji Bank, Ltd.
Seattle First National Bank Building
Suite 3630
1001 Fourth Avenue
Seattle, WA 98154

The Toronto Dominion Bank
811 Rusk Avenue
Houston, TX 77220
Union Bank of Switzerland
First International Plaza
Floor 51
Houston, TX 77002

Korea Exchange Bank
Suite No. 1435
Bank of California Center
900 Fourth Avenue
Seattle, WA 98164

FOR IMMEDIATE RELEASE
DECEMBER 2, 1980

Contact:

George G. Ross
202/566-2356

TREASURY ANNOUNCES DEPRECIATION SYSTEM CHANGES FOR THE CONSTRUCTION
AND OFFSHORE OIL AND GAS DRILLING INDUSTRIES

The Treasury Department today announced revisions in the
classifications, asset guideline periods, asset depreciation ranges,
and annual repair allowance percentages relating to two types of
property: Assets used in construction and assets used in offshore
oil and gas drilling.
The changes, incorporated in a new Revenue Procedure (Rev. Proc. 80-58)
to be published in Internal Revenue Bulletin No. 1980-52, December 29, 1980,
will be in effect as of that date for the Class Life Asset Depreciation Range
(CLADR) System.
Assets used in construction were formerly included in asset guideline
classes 15.1 (Contract Construction Other Than Marine) and 15.2 (Marine
Contract Construction). Assets used in offshore oil and gas drilling
were also formerly included in class 15.2. Both of these classes are
deleted and the following two new classes established:
— A new class 13.0 for assets used in offshore oil and gas drilling.
The asset guideline period for these assets is reduced from 12 years
to 7.5 years, and the annual asset guideline repair allowance
percentage is reduced from 5 to 3.
— A new class 15.0 for assets used in construction. The asset
guideline period for these assets is increased from 5 to 6 years,
and the annual asset guideline repair allowance percentage is
reduced from 12.5 to 9.

M-760

The asset guideline periods and the annual guideline repair allowance
percentages for the property affected have been changed as follows:

Type of
Property

Asset
Guideline
Classes

Asset Guideline: Periods
and (Ranges) - Years

Old

New

Construction

15.1

15.0

Marine
Construction

15.2

15.0

Offshore
Drilling

15.2

13.0

Annual Asset
Guideline Repair
Allowance Percentages

Old

New

Change

Old

5
(4-6)

6
(5-7)

Longer

12.5

12
(9,.5-14.5)

6
(5-7)

Shorter

12
(9.,5-14.5)

7.5
(6-9)

Shorter

New

Change

Smaller

Larger

Smaller

The changes are the result of a continuing program of study to keep the
classes and depreciation guidelines of the CLADR system current. Descriptions
of the new classes follow:

isset
rtiide- J
tine
:
;IBBK - 1

3.0

Description of Assets Included
Offshore Drilling:
Includes assets used in offshore

drilling for oil and gas such as floating, self-propelled and other drilling
vessels, barges, platforms, and drilling
equipment and support vessels such as
tenders, barges, towboats-and crew
boats. Excludes oil and gas production
assets 6 7.5 9 3

5.0 Construction:
Includes assets used in construction
by general building, special trade,
heavy and marine construction contractors, operative and investment
builders, real estate subdividers and
developers, and others except
railroads «. 5 6 7 9

oOo

Asset Depreciation
:
Range (in years)
:
: Asset :
:
: Guide :
:
' Lover : line
: Dppen;
- 1! Limit : Period : Limit:

Annual
Asset
Guideline
Repair
Allowance
Percentage

artmntomTREASURY
TELEPHONE 566-2041

INGTON, D.C. 20220

FOR IMMEDIATE RELEASE

December 2, 1930

RESULTS OF TREASURY'S 141-DAY BILL AUCTION
Tenders for $3,000 million of 141-day Treasury bills to be issued
on December 3, 1980, and to mature April 23, 1981, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Investment Rate
(Equivalent Coupon-Issue Yield)

Price Discount Rate
High - 94.078 15.120%
Low
- 93.989
Average - 94.027

16.29%
15.347%
15.250%

16.56%
16.44%

Tenders at the low price were allotted 39%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location

Received

Accepted

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

$ 60,000,000
5,462,000,000

$
2,851,450,000

4,000,000
20,000,000
345,000,000
10,000,000

10,000,000
95,000,000
7,000,000

2,000,000

445,000,000

35,000,000

TOTALS

$6,348,000,000

$3,000,450,000

M-761

wtmentoftheTREASURY
TELEPHONE 566-2041

INGTON, D.C. 20220

FOR IMMEDIATE RELEASE

December 3, 1980

RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $3,004 million of
$7,509 million of tenders received from the public for the 5-year
2-month notes, Series C-1986, auctioned today.
The interest coupon rate on the notes will be 13-1/2%. The range
of accepted competitive bids, and the corresponding prices at the 13-1/2%
coupon rate are as follows:
Prices
100.211
99.698
99.771

Bids
13.40%
13.54%
13.52%

Lowest yield
Highest yield
Average yield

Tenders at the high yield were allotted

93%.

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

42,563

Accepted

13,403

6,365,470
11,820
105,536
65,429
50,768
385,863
80,379
25,248
43,958
22,848
306,910
2,597

2,418,256
10,820
39,496
53,149
43,523
137,298
72,844
23,108
43,458
18,798
127,600
2,597

$7,509,389

$3,004,350

The $3,004 million of accepted tenders includes $512
million
of noncompetitive tenders and $2,492 million of competitive tenders
from private investors.
In addition to the $3,004 million of tenders accepted in the
auction process, $170 million of tenders were accepted at the average
price from Federal Reserve Banks as agents for foreign and international
monetary authorities for new cash.

^-762

5-YEAR 2-MONTH TREASURY NOTES OF SERIES C-1986

DATE: Dec. 3, 1980
HIGHEST SINCE: jfy^/fiO

LOWEST SINCE: TODAY:

LAST ISSUE:

^/^7/^C

M - 763 Missing

wtmentoftheJREASURY
IINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE
EXPECTED AT 3:00 P.M., EST
THURSDAY, DECEMBER'4, 1980
REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
3EF0RE THE
WORLD AFFAIRS COUNCIL OF NORTHERN CALIFORNIA
SAN FRANCISCO, CALIFORNIA
The International Economic Policy of the United States:
An Assessment and Agenda for the Future
When President Carter assumed office in January 1977, the
United States — and the world economy as a whole — confronted
a wide range of difficult economic problems:
(1) Stagflation. Both inflation and unemployment
were far too high in virtually all nations.
The outlook for correcting either was uncertain.
(2) Energy. The international community had begun
to finance its way out of the first oil shock,
but had not launched the adjustment essential to
reduce energy use and increase production for the
longer term. The volume of U.S. oil imports was
at an all time high. Our vulnerability was acute.
(3) Monetary Issues. There was widespread concern over
the prospects for recycling the OPEC surpluses.

M-764

2
Some viewed Britain and Italy as ripe for
financial collapse. Huge current account imbalances
were developing among the industrial nations,
resulting in a U.S. deficit of $14 billion and a
Japanese surplus of $11 billion during 1977. As
the year progressed, exchange rate instability
threatened to undermine confidence in the dollar
and cause international financial turmoil.
(4) Trade. The Multilateral Trade Negotiations were
stalemated by the failure of the United States and
the European Community to agree on agricultural
and other issues. Protectionist pressures were
strong, and the new Administration faced proposals
for import controls in several important industries.
(5) North-South. Relations between industrial and
developing countries remained tense. Most North-South
negotiations had stalemated, with major discord
particularly on commodity issues.
The new Administration addressed these problems in a
context which was radically new for the United States. On the
one hand, U.S. economic dependence upon the rest of the world
had increased dramatically. Energy provides the sharpest example,
but so do much broader indicators. The share of merchandise
trade in U.S. GNP more than doubled between 1970 and 1979. The
United States now depends on foreign economies to provide
markets for one of every seven U.S. manufacturing jobs and one

of every three acres of U.S. farmland, and international activities

3
account for nearly one of every three dollars of U.S. corporate
profits.
On the other hand, the United States no longer dominates
the course of global economic developments.

U.S. hegemony has

given way to a pluralism of industrial powers and a growing
number of developing country powers, most notably in OPEC.
Thus the United States confronts a kind of scissors movement

—

growing dependence on the world economy but declining influence,
relative to other nations, to guide that economy.

As a result,

the maintenance of an effective international economic system
is now critical to U.S. economic interests (as well as to its
broad foreign policy interests, as has been the case for many
years).

It is within this framework that we sought to address

the difficult series of international economic challenges of
the past four years.
The Overall Record
On the whole —
speak —

and recognizing the bias with which I

I believe that the Carter Administration has compiled

an outstanding record in the field of international economic
policy.

Before enumerating some of those successes, however,

I would candidly recognize that there are key areas where our
efforts fell short and much more remains to be done:
Unacceptable levels of both inflation and unemployment
remain, and remain fundamental problems for the longer
term.

Although our own economic recovery boosted

global growth in 1977-1978 and our encouragement prodded
Germany and Japan to increase their growth rates a
bit later, the basic problem of stagflation, has been
resolved neither here nor abroad.

If anything, the

situation looks gloomier now than in 1977.
—

The United States and the global community as a whole
remain acutely vulnerable to further energy price
hikes and supply interruptions.

Adjustment has

begun, but we are far from restoring even a modicum
of energy independence.
We have not achieved adequate Congressional support
for essential elements of U.S. participation in the
world economy on such issues as development assistance
and export expansion.

Congress has approved the

multilateral trade agreements, a quadrupling of our
contributions to the multilateral development banks
(MDBs), a seven-fold increase in the budget of the
Export Import Bank and essential energy legislation

—

but must do much more if the United States is to
play its full role in the international economic
process.
Despite these very important shortcomings, my main thesis
today is that U.S. international economic policy and,more important
the international economic system as a whole, have responded
amazingly well to the unprecedented shocks of the 1970s.

Virtually

any observer of the international economic scene in the early
1970s, if asked to contemplate a coming decade in which:

5
unemployment rates would soar to levels unprecedented
since the 1930s,
inflation would reach double digits throughout the
world,
and two external shocks would shift global trade
balances by $50-100 billion annually,
would almost surely have predicted a return to trade wars and
competitive exchange rate devaluation.

But it did not happen.

The reasons include the growing interdependence of all nations
and the resultant prohibitive costs of international economic
conflict, the growing habits and institutionalization of international economic cooperation, and memories of the calamitous results
of such conflict in the 1930s.

But our more recent reforms of

the international monetary system and successful negotiations
on virtually all aspects of international trade were clearly
major factors in maintaining a stable, effective and cooperative
international economic system.
International Monetary Affairs
In the monetary area, a number of key objectives have
been achieved:
(1)

strengthening of the international monetary system
and its central institutions;

(2)

dramatic improvement in the U.S. current account and
fundamental adjustment in the payments positions
of the other key industrialized countries, including
disappearance of the perennial surpluses of Japan and
Germany; and

6
(3) stabilization, of the dollar, and hence of the monetary
system as a whole.
During this period, the international monetary system has
faced unprecedented strains. Some believed that it would be
unable to cope. The record shows, to the contrary, a resiliency
and effectiveness unanticipated even by some of the most ardent
enthusiasts of the system in the past.
First and foremost, the recycling problem has been
handled effectively. Huge imbalances, totaling $50-60 billion
annually after the first oil shock and over $100 billion annually
now, have been channeled smoothly — mainly by the private
sector — from surplus to deficit countries. There has been
no financial collapse, nor will there be.
Beyond the financing, however, fundamental steps have been
required for structural adjustment to this new situation, to
reduce U.S. and global dependence on OPEC energy supplies. The
International Monetary Fund (and, to a lesser but important

extent, the World Bank) are playing a central and so far successful
role in the global community's efforts to meet these challenges.
The Fund and Bank face complementary tasks: the Fund to
encourage a judicious blend of financing and adjustment by
member nations while preserving a stable international monetary
system; the Bank to assist developing countries to restructure
their economies and thereby to enable development to proceed as
rapidly as possible in the vastly changed circumstances of the
1980s.

7
The IMF has forcefully demonstrated its ability to respond
flexibly to changing economic conditions and members' needs.
Over the past few years, with strong U.S. support, the Fund
has taken wide-ranging measures to improve its ability to deal
with balance of payments problems and promote greater monetary
stability:
— Access to IMF resources has been increased sharply;
members may now borrow up to 600 percent of their
quotas as part of a three year adjustment effort, six
times the amount that could be obtained only a few years ago .
— Since present circumstances call for adjustment programs
with a longer term orientation than in the past, the
Fund is now prepared to support efforts covering
three years or more compared to the one year program
normally permitted earlier.
— Greater emphasis is being placed on supply-side
considerations — in coordination with the World Bank's
new structural adjustment lending program — to achieve
the increases in savings, investments, import replacement
and exports required for adjustment to the new energy
realities.
— The resources available to the IMF to help meet balance
of payments financing needs have increased substantially
as a result of expansion of basic IMF quotas in 1978
($13 billion), the establishment in 1979 of the temporary

8
Supplementary Financing Facility ($10 billion), and
just a few days ago, implementation of a further $25
billion quota increase (final Congressional approval
of U.S. participation in this increase will, hopefully,
be given today or tomorrow).
—

The Fund is actively exploring the possibility of
further borrowing to supplement its basic quota
resources in the period ahead, including the possibility
of possible market borrowings.

—

The IMF is gradually strengthening its role in the
management and supervision of the operations of the
international monetary system through implementation
of its surveillance responsibilities.

—

Progress is being made in developing the role of the
SDR as a major monetary instrument, through the
resumption of allocations ($5 billion annually during
1979-1981) and improvements in the financial
characteristics and usability of the SDR.

The new Administration also inherited a series of major
problemsof balance of payments adjustment.

There were

worrisome deficits in Britain and Italy, as well as some key
developing countries, which had produced loose and foolish talk
of "national bankruptcies".

But with key help from the IMF,

Britain and Italy both adjusted successfully.

Indeed, they both

9
moved into surplus quite rapidly and this particular problem
promptly disappeared.
Much more worrisome from a systemic, as well as U.S.,
standpoint was the fact that the U.S. current account had
deteriorated rapidly from a surplus of $18 billion in 1975 to
record deficits of $14 billion in both 1977 and 1978. The
deterioration was due partly to the sharp increase in our oil
import bill caused by the first oil shock.

It was partly

a natural consequence of our own "locomotive" role in leading
the recovery from the global recession of 1974-1975; our strong
economic growth stimulated U.S. imports, without an equivalent
increase in U.S. exports because of slow growth overseas.

also derived from the adverse effect on the U.S. competitive
position of the excessive appreciation of the dollar in 1975-1976.
Whatever the causes, however, the deterioration in the U.S.
position raised serious concerns throughout the world and
stimulated speculation against the dollar.

It was clear that

the deficit had to be reduced.
At the same time, the external positions of Japan and
Germany yielded a combined surplus of $15 billion in 1977.
In 1978, the Japanese surplus alone exceeded our own deficit.
Reducing disparities in economic performance and thus these
imbalances among the major countries was an immediate and central
policy objective of the new Administration, dating from Vice
President Mondale's trip to Europe and Japan only three days
after the inauguration.

10
Starting in late 1977, the German and Japanese economies
shifted toward stronger expansion of domestic demand.
exchange rate changes took place.

Needed

By 1979, imports in both

Germany and Japan increased substantially and their current
account surpluses disappeared.
sizable deficit.

Indeed, both swung into

The adjustment process demonstrably worked,

and both countries contributed enormously to stabilizing the
global economic and financial system.
The United States, for its part, has eliminated its current
account deficit which many observers, as recently as two years
ago, regarded as endemic.

Despite an increase of over $40

billion in U.S. oil import costs since 1978, our overall
current account has improved by almost $15 billion.

The U.S.

current account will be in balance (or better) in 1980 for the
second straight year.
We expect it to be in approximate balance, perhaps in modest
surplus, next year as well.

Indeed, today the U.S. current

account is the strongest among the OECD nations.

Together

with the stabilizing changes in the other key industrial
countries, these developments provide strong testimony that the
adjustment process works.
In November 1978, the United States also moved to more
active intervention in the foreign exchange market to halt
an excessive depreciation of the dollar and maintain orderly
conditions necessary to global confidence.

In retrospect,

I believe that the program of November 1978 marked a watershed

11
in U.S. international monetary policy.

For perhaps the first

time, the U.S. Government recognized that the relationships among
domestic performance, external balances, and exchange markets
are so strong that external factors must on occasion go far to
determine our internal policies. From that date, there was
unanimity within the Administration (and the Federal Reserve)
that fighting inflation had to be the priority objective of U.S.
economic policy — in important part because a failure to do
so would continue the vicious cycle of a weaker dollar abroad
and yet more inflation at home.
As a result of these developments, the dollar has increased
in value by an average of over nine percent in terms of other
major currencies over the last two years. The increases against
the DM and the yen are even greater — about 14 percent and
23 percent, respectively, as of December 2. We expect continued
dollar — and international monetary — stability into the
foreseeable future.
Trade
When the Carter Administration took office, trade issues
stood at a critical juncture:
The U.S. trade balance had experienced an $18 billion
deterioration during the two previous years, from a
$9 billion surplus in 1975 to a $9 billion deficit in
1976. The deficit widened considerably during 1977 —
to S31 billion — as import growth strongly exceeded
the growth of exports.

12
— Protectionist pressures in the United States were
mounting, spurred by high unemployment, increased
import penetration in sensitive industries, and a sense
that foreign industries benefitted from unfair subsidies
and pricing practices. Major escape clause cases were
pending for shoes, television sets and sugar, and it
was widely feared that Congress would override the
President if some form of import restraints was not
adopted.
— The first court decision in the Zenith case was imminent,
with potentially explosive effects on some of the most
basic rules of the international trading system.
— The Multilateral Trade Negotiations, initiated in 1973
to further liberalize international trade and work out
new trading rules, were dead?.ocked, with no prospect for
progress in sight.
The new Administration responded decisively to these
challenges, emphasizing:
(1) efforts to improve U.S. export performance,
(2) further global trade liberalization, and international
cooperation to resolve common trade problems and
reduce government distortions to trade, and
(3) open markets at home.

13
Our current competitive position provides a strong basis
for the future improvement of U.S. exports. Contrary to much
conventional wisdom, the United States has improved its
competitive position in international markets over the past
decade. On the basis of volume data (as distinct from nominal
value shares in dollar terms, which distort market shares due
to exchange rate fluctuations),the U.S. share of industrial
nations' exports rose from a trough of 19.2 percent in 1971 to
20.8 percent in 1979 and 21.1 percent in the first half of 1980.
From 1978 through the first half of 1930, in particular, the
volume of U.S. non-agricultural exports has risen about twice
as fast as world trade — indicating a rapid rise in our share
of world export markets. This development is particularly
encouraging because it is consistent across most industry
categories.
For the future, however, we need to do even better — to pay
for oil imports, maintain a stable dollar and support our domestic
economic objectives. Thus it is crucial to check inflation, improve
U.S. productivity, reduce disincentives to exports, and
increase the export consciousness of both the U.S. business
community as a whole and all parts of the U.S. Government,
building upon the strong trend of the past three years. To
contribute to this effort, the Administration has increased
financial support by the U.S. Export Import Bank for U.S.
exporters seven-fold, prepared a major review of government

14
disincentives to exports, and supported legislation to stimulate
the formation of export trading companies to assist small
businesses in obtaining the capital and expertise necessary for
developing foreign markets.
The successful conclusion of the Multilateral Trade
Negotiations during 1979 achieved an overall reduction in
industrial tariffs of approximately 30 percent, as well as
important new codes on the use of government subsidies, standards,
and procurement, and new dispute resolution procedures.

The new package of agreements should help ensure that international
trade is both more open and fairer for all nations, and it
should further increase U.S. export opportunities.

The new

Subsidies Code is an especially important achievement in
providing vital international discipline over the use of both
domestic and export subsidies.

A number of key developing

countries have joined the codes, and WP hope more will
do so in the future.
The United States and other major trading nations have
also negotiated an International Arrangement on Official Export
Credits as a means of reducing trade distortions due to
subsidized export credits.

Efforts are currently under way

to broaden and update this arrangemetn to address the remaining
problems of export credit competition, whose subsidy costs are
still huge —

estimates for 1979 run as high as $5 billion.

The Venice Summit set a December deadline for completion of
these negotiations.

If they are not successful, the United

15
States will derogate from the current agreement —
primarily by extending much longer maturities on our own export
credits than are permitted under the Arrangement —

to meet

foreign competition and assure a fair shake in international
markets for U.S. exporters.
In East-West relations, the United States has achieved
significant progress in normalizing economic relations with
the Peoples' Republic of China, including a claims/assets
agreement, a.trade agreement, maritime and textile agreements,
and expansion of scientific and technical exchanges.

U.S.-China

trade has virtually quadrupled from $1.2 billion in 1978 to an
estimated $4 billion this year.

China has also joined the IMF

and the World Bank, and can be expected to participate
actively in these key international institutions in the future.
Notwithstanding the necessity for economic sanctions against
the Soviet Union, we have continued to develop bilateral
economic relations with the Eastern European nations.
To avoid mutally disruptive import protectionism,
the United States has supported annual renewals of the OECD
Trade Pledge and the adoption this year of a new permanent
Declaration on Trade by the OECD Ministers, with provision for
annual review and discussion of major trade problems.
Domestically, we have maintained a basically open market, despite
strong pressures for import restrictions.
Administration has:

Specifically, the

16
—

Rejected across-the-board import restraints;

—

Negotiated temporary orderly marketing arrangements
(OMAs) to slow the pace of television and shoe imports
from key suppliers, but rejected more restrictive
import quotas, resisted pressure for OMAs on shoes
with additional suppliers and significantly liberalized
the OMAs for color televisions this year;

—

Adopted a trigger price mechanism for steel to improve
the implementation of our anti-dumping statute,
rather than limit the level of steel imports;

—

Negotiated an international arrangement on sugar with
floor price provisions;

—

appealed and won a reversal of the Zenith court decision
that Japanese rebates of a domestic consumption tax,
acceptable under the General Agreement on Tariffs and
'"rade, constituted

a government bounty that should be

countervailed.
—

Resisted pressure to limit auto imports, and insisted
on waiting for a decision by the U.S. International
Trade Commission on whether auto imports are
causing injury;

—

Added a number of items to the U.S. system of generalized
preferences (GSP) for duty-free imports from
eligible developing countries.

The Administration has adopted limited import restraints
only in response to injurious foreign dumping or subsidies,
or as a temporary response to dramatic surges in imports which

17
threaten U.S. industries.

We have adopted comprehensive

programs to address the problems of the key automobile and
steel industries as they adjust to foreign competition.
Continuing government-business-labor discussions should help
develop mutual efforts to improve productivity and modernization
of these industries for the longer term, obviating the need
to respond at the border.
Energy
When this Administration came into office, the world had
successfully weathered the immediate demands of financing the
dramatic increase in energy prices caused by the oil shock
of 1973-1974. The emphasis on financing, however, deflected
attention from the longer term issue of fundamental economic
adjustment to higher levels of energy costs, which were still
working their way through the global economy.
By 1977, U.S. oil imports hit record levels. There had
been little U.S. adjustment in terms of energy conservation,
reduced oil imports, or increased production of alternative
sources of energy. The United States continued to control
domestic oil prices, thereby cushioning the effect of global
prices and maintaining a continuous source of relatively
inexpensive energy at home — with little incentive to conserve
or increase domestic production. In a similar manner, most

18
developing nations had turned to external finance to maintain
domestic energy consumption and economic growth, rather than
taking initial steps toward longer term adjustment.
The new U.S. Administration therefore faced the very
difficult task of convincing both Congress and the American
public, as well as the international community more broadly,
that such fundamental adjustment was vital.

Largely as a result

of the second oil shock of 1979, all nations now seem convinced
of this necessity.

From a slow start, the United States has

now made substantial progress toward its longer term objectives.
Our energy policy has been two-fold in nature:
(1) to develop a strong domestic program of conservation
and alternative energy production; and
(2) to promote international cooperation among oil-consuming
countries to reduce dependence on imported oil.
A number of measures have now been adopted:
—

The President implemented a program for replacement
cost pricing of domestically priced crude by phased
price decontrol ending October 1, 1981.

A Windfall

Profit Tax was secured to reap for the nation a
fair share of decontrol revenues.
—

The Natural Gas Policy Act of 1978 will phase out price
controls on new natural gas by 1985 and eliminate the
artificial distinction between intra and interstate pricing.

19
—

A Synthetic Fuels Corporation has been authorized

for the purpose of supplying at least 500,000 barrels
per day of synthetic fuels from domestic sources by
1987 and 2 million barrels per day by 1992.
— A Solar Energy and Energy Conservation Bank has been
implemented to assist in encouraging conservation and
solar energy.
As a result of these measures, and others adopted earlier:
— Net oil imports have fallen dramatically from a
peak of 8.5 million barrels per day in 1977 to 6.6
million barrels per day in the first half of 1980 —
a 25 percent decline — and are expected to be even
lower in 1981.
— Oil consumption in the first half of 1980 dropped
8.5 percent below the same period in 1979 and
gasoline consumption dropped by 7.7 percent.
— The ten most energy-intensive industries in the
United States have achieved a 14 percent
improvement in energy efficiency and are now saving
the equivalent of 1.2 million barrels per day compared
to 1972.
— Domestic oil reserves discovered in 1979 totalled
2.2 billion barrels, the best results since 1974.
— The domestic ethyl alcohol program, for use in gasohol,
should result in domestic production of 500 million
gallons of alcohol by the end of 19 81.

•20—

Coal production increased from 599 million tons in

1973 to 776 million tons in 1979. U.S. Coal
production may provide one of our best sources of both
alternative energy production and increased exports to
offset the cost of oil imports in the 1980s.
International cooperation is also taking shape through
the International Energy Agency (IEA) and the Economic Summits.
The May 1980 IEA Ministerial agreed on a system to restrain
demand in the case of a supply emergency. The seven major
industrial nations agreed at the June 1979 Tokyo Summit to
establish individual country import targets for 1980 and 1985;.
similar targets were subsequently adopted by all IEA countries
At the Venice Summit, participants agreed to take additional
measures to conserve in all sectors and to achieve a collective
oil savings of 15-20 million barrels per day by 1990 through
the development of coal, nuclear, synthetic, and renewable
energy sources.
To lessen dependence of developing countries on imported
oil, the World Bank has dramatically stepped up its lending
for energy development projects in oil-importing developing
countries. It projects lending of $14 billion for this purpose
through 1985, with estimated production increases in LDCs
equivalent to 2-2.5 million barrels of oil per day — and thus
an important impact on the world supply/demand balance. The
Bank is now exploring ways to further enhance energy development in its borrowing countries, including the possibility of
creating a new energy facility or affiliate to do so.

21
In less than a decade, the world has undergone a truly
epochal change: from an era of cheap, secure energy to an era
of expensive, insecure energy. No end is yet in sight for
either price escalation or supply instability. Much more
clearly needs to be done. We have only just begun to make
the needed adjustments to a continuing global energy problem.
But the policy changes and results of the past few years
suggest that a major start has been made, with promise for
continued fundamental adjustment in the years ahead.
North-South Relations
When the Carter Administration took office, North-South
relations had begun to emerge from the confrontations of 197374 but were still tenuous at best. It was clear that comprehensive global negotiations (as represented by the experience
with the Conference on International Economic Cooperation)
were not the best forum for developing concrete solutions to
broad economic problems
We therefore adopted a strategy of seeking substantive
progress on specific economic issues in the individual
functional institutions (primarily GATT, the IMF, and the
development banks) responsible for each. Our goal was to
address common problems to the mutual benefit of all countries,

22
industrialized and developing alike.
been major progress as a result —

We believe there has

though one must recognize,

at the same time, that this has proven the most difficult area
in which to generate public and Congressional support for our
efforts.
More than $90 billion in replenishments for the multilateral
development banks (MDBs) have been agreed upon since President
Carter took office.

The United States has supported a capital

increase for the World Bank of $40 billion.

We took the lead

in negotiating a replenishment of almost $10 billion for the
Inter-American Development Bank.

We participated in negotia-

ting a new replenishment of over $2 billion for the Asian
Development Fund, and have agreed to U.S. membership in the
African Development Bank and an increase in its capital of
$4.5 billion.

For IDA, the concessional window of the World

Bank, which is the most important concessional assistance
institution in the world, we contributed 31 percent to the
fifth replenishment of $7.6 billion in 1977 and pledged 27
percent to the sixth replenishment of $12 billion beginning
this year.

U.S. annual appropriations to the MDBs as a whole

increased from $695 million in FY 1976 to $2.5 billion in
FY 1979.
Some of these major steps, however, such as the World
Bank capital increase and IDA VT, remain to be approved by the
Congress.

Moreover, delays in fulfilling our international

commitments, including Congressional failure to act on IDA

23
and cutbacks in the regional banks, present serious problems
in carrying out these accomplishments. This can severely
hamper our own security and economic interests in the developing nations, which provide the largest potential growth markets
for U.S. exports in the 1980s.
On the qualitative side, the World Bank is positioning
itself to provide greater assistance to encourage energy
production in the developing countries, as already noted, and
necessary structural changes in the economies of the
developing countries. The Bank, in a significant departure
from past lending practices, is now providing non-project
structural adjustment loans to member countries. These loans,
coordinated closely with the IMF, can make a major contribution
to the development of recipient countries in the changed
context of today's world economy while also strengthening
the recycling process.
Regarding commodity policy, perhaps the major source of
North-South tensions in the mid-1970s, the Administration
reversed the practice of its immediate predecessors and has
supported the negotiation of commodity stabilization agreements
to reduce price volatility, lessen inflation, and stabilize
resource availability:
An International Sugar Agreement was completed in
1977.
A Natural Rubber Agreement was completed last year,
and has been ratified by Congress.

In early 1980, Congress authorized a U.S. contribution to the International Tin Agreement to
help stabilize the world price; negotiations on
a new agreement are continuing.
Consumers and producers have recently reached an
agreement revising the economic provisions of the
International Coffee Agreement.
— After three years of negotiations, a Common Fund
Agreement was concluded in June 1980.
But we will not participate in arrangements which
are not economically viable. We were not members
of the previous International Cocoa Agreement, and
we are unlikely to join the newly negotiated ICA
because its floor price is far above realistic
levels.
As a result of all these steps, international commodity
arrangements now contribute modestly to fighting world inflation
and commodity issues are no longer a matter of serious contention
in North-South relations.
The Multilateral Trade Negotiations have resulted in a
25 percent cut in developed country tariffs on items of
traditional export interest to the developing nations.
Excluding textiles and apparel, U.S. tariff cuts on LDC
products average even higher, about 35 percent. The new
codes will provide a more open and stable environment for

future LDC trade growth, as well as a permanent legal basis
for special and more favorable treatment of developing
countries

and more liberal rules on trade measures taken

by LDCs for development purposes.

Since opportunities for

trade expansion are probably the single most important feature
of the world economy for most developing nations, the MTN
agreements marked an enormous step forward in North-South
economic relations.
LDCs have also benefitted from a generally open U.S.
market for LDC products.

Despite the fact that the United

States accounts for only about 36 percent of the combined
GNP of the industrial countries, in 1978 the United States
took more than 52 percent of developing country manufactured
exports to all industrial countries.

Nearly 22 percent of

all our manufactured imports in 1978 came from developing
countries; the corresponding figure for all other industrial
countries was less than five percent.
We and other donors have substantially increased concessional assistance to the poorer developing countries.

Between

1970 and 1978, aid receipts by countries with per capita income
under $400 tripled.

Measured in relation to the GNP of the

recipient countries —

which is probably the best overall

indicator of the contribution of aid flows to a recipient's
development —

total official aid to the poor countries has

sharply increased over the past few years.

For the least

developed countries, aid receipts increased from 2.6 percent
of the recipients' combined GNP in 1969-71 to 10.3 percent in

1978.

For all countries with per capita GNP below $400, the

growth was from 3.3 to 4.7 percent.
Finally, the numerous measures in the monetary area
which I have already summarized have special significance
for the developing nations, which are so dependent upon
external resources to tide them over this difficult period.
They can now borrow much more from the IMF, on longer terms,
and with more balanced adjustment programs.

Developing countries

are clearly major beneficiaries of the monetary reforms of the
past few years.
Investment
More than ever before, investment has become an engine of
future economic growth and a key factor influencing future
trade flows.

Increased domestic investment has become a

common objective of all nations to support more jobs, more
exports, more productive capacity to fight inflation, and
new technologies.
Governments frequently adopt measures, however, which can
distort the allocation of investment among nations, reduce the
potential gains from international specialization, and prompt
countermeasures by other governments.

Key problems involve

the use of financial, trade, tax, and other incentives to
attract foreign investment which might otherwise locate
elsewhere, and the imposition of performance requirements

which seek to tilt the economic benefits stemming from
particular investments to one country at the expense of
others.
However, there is at present virtually no international
regulation of government actions in the investment field

—

no guidelines for what is acceptable, no recognized recourse
against harmful actions by others.

This is anomalous in view

of the huge volume of such investment, and in comparison to
the elaborate rules which we have developed in the trade and
monetary areas.

The problems resulting from government inter-

ference in this area are proliferating, and will become even
more troublesome in the decade ahead.
Emulation is especially visible in the auto sector.

The

offer of investment incentives has become a key factor in
winning new auto plants in Canada, France, and the United
States, among others.

Brazil and Mexico require foreign

companies to produce locally up to 100 percent of the
value added as a condition of participation in their automobile
industries —

equivalent to zero

import quotas which are

relaxed only if the companies expand their exports.
During the past four years, the United States has begun
to object strongly to the use of incentives and performance
requirements, recognizing that pressures are building for the
United States to impose similar requirements on foreign
companies which locate here to ensure the use of U.S. parts

28
and labor.

Investment incentives and performance requirements

distort basic investment decisions and subsequent trade flows.
They can have the effect of shifting the location and benefits
of investment across national borders, thereby exporting the
problems of the country using them to others.

By the time

trade flows, irreversible decisions have been made and the
damage is extremely difficult to undo.
International trade mechanisms, such as the new subsidies
code, provide the only existing means to address investment
problems internationally —

but are not sufficient.

We do

not have rules of the game, or even a code, for investment
incentives or performance requirements.

We should.

Even more

basic, but more long-term in nature, we should have a "GATT
for investment" similar to the GATT we now have for trade:
a common body of rights and regulations which defines acceptable
actions and provides recourse for those whose rights are harmed.
Improved international cooperation has become a key
objective of this Administration in the investment area, and
we have made some progress:
The OECD is studying the effect of investment
incentives and disincentives on the international investment
process and international economic relations.
—

An Investment Task Force which I chaired, under the

auspices of the IMF/World Bank Development Committee, has
endorsed the objectives of (1) seeking an international understanding which would limit the adverse effects of investment

incentives and (2) considering what further actions might
need to be taken with regard to performance requirements.
It also laid out in some detail what an arrangement to limit
incentives could look like.
Continuing efforts will be needed in multilateral and
bilateral fora to assure that these beginnings bear fruit
over time. This will undoubtedly be a central area for
international negotiations in the future.
A Look Ahead
In sum, much has been accomplished.

The United States

has balanced its current account and stabilized the dollar.
The international adjustment process has worked effectively.
The international monetary and trading systems have met unprecedented challenges, and been strengthened for the future.
Energy programs are developing which will reduce our dependence
on volatile oil supplies. North-South relations have improved
substantially.
At the same time, as already indicated, many important
international economic problems have not yet been resolved.
Moreover, new issues are arising with disconcerting rapidity.
The agenda for the future remains full, and I will indicate
some of its specifics in a moment.
Beneath the specifics, however, lie three fundamental
questions.
forgotten —
at home.

The first derives from the eternal verity —

often

that our international economic policy begins

The strength of our domestic economy, and the

effectiveness of our "domestic" economic policies, have a
profound effect on our success in achieving U.S. international
economic objectives. High rates of unemployment and a stagnant
economy at home not only weaken the entire world economy; they
generate strong pressures to restrict imports and reduce
domestic support for foreign assistance programs. Inflation
in the United States transmits inflationary pressures to the
rest of the world, weakens our competitive position and
creates doubts about the soundness of our currency — the
world's key currency.
The first key question facing U.S. international economic
policy in the years ahead is thus whether we can get our own
house in better order. The achievements of U.S. international
economic policy over the past few years are particularly
remarkable, in fact, in light of the unsettled state of our
economy. For the future, however, it is essential that the
United States reduce both inflation and unemployment substantially,
and resume rapid productivity growth. Success in doing so
will go far to determine the ability of our nation to resist
protectionism and play its full role in international economic
cooperation, as well as maintain the strength of U.S. exports
and the dollar.
The second question presents what I believe will be the
central strategic issue for U.S. international economic policy
in the 19 80s. Traditionally, the United States has done

31
abroad what it does at home.

This is true for the whole

range of our interactions with the rest of the world: taxation,
antitrust, export finance, morality issues such as human rights
and "corrupt business practices" to name just a few.
The problem is that virtually every other country has
based its international economic policy on an opposite premise.
They do abroad what everyone else (excluding the United States)
does abroad —

on the view that such behavior is essential to

compete effectively.

The United States and the rest of the

world simply operate on very different —

indeed, opposite

—

basic philosophies.
From the U.S. standpoint, such a conflict was of marginal
importance as long as the international component of our
economy was very small or our dominant economic position
assured a strong U.S. influence on others'policies.

Today

neither condition holds.
The United States must therefore seriously ask whether it
can continue to apply a single'standard for behavior both at
home and abroad —

or whether a different standard is necessary

in the international arena, where we cannot unilaterally control
the activities of other nations and may need to match them
on their own terms in order to remain competitive.

Should

we continue to prohibit U.S. firms from activities in the
international market which have no impact on competition at

' 32

home

--or even those which do, if the gains abroad outweigh

the costs at home? Should we let banks invest in export
trading companies as a means of expanding U.S. exports, even
though we won't let them take part in such commercial
activities at home? Should we continue to hamper U.S. trade
on morality grounds such as "corrupt business practices,"
boycotts, and human rights? Should we do so in order to
preserve tax equity between Americans working abroad and
those working at home? Should we insist on financing our
exports at U.S. interest rates rather than those derived
in the global, competitive market place?
A closely related question is whether we should fight or
join the trend toward government intervention by other nations,
which increasingly use the tools of domestic and international
economic policy to tilt the benefits of trade and investment
in their direction. If Europe restricts imports of Japanese
automobiles, diverting further competition to our open market,
should we continue to resist restrictive actions ourselves?
If other nations subsidize official export credits to gain a
competitive edge in world markets, or impose export performance
requirements on those who would invest in their domestic
markets, should we compete on their terms?
The clear preference of the United States, under Administrations of both parties and in the Congress as well, has been

33
to negotiate common rules for the international marketplace —
based largely on our own standards —
opportunities for all parties.

to assure equal competitive

But where other nations refuse

to do so, we may want to counter with equivalent policies of
our own.

Yet we must also recognize that the implications for

our domestic economy of such policy changes could be profound,
and we should carefully weigh the costs as well as the potential
benefits of such an approach before embarking upon it.
Each of the issues I have cited in this context is now
being addressed on its own.

Indeed, in some areas —

export finance and tax policy —

such as

we are already moving toward

a new philosophy, at least to a limited extent, of doing
abroad what others do abroad.

There are even a few historical

cases of such an approach (e.g., the Webb-Pomerene Act regarding
export cartels).

But I believe that the United States needs

to confront directly the issue of whether the fundamental
premise of the past will be relevant for the future —

and

decide its course on specific issues, such as those cited,
in light of the conclusion which is reached.
The third key question asks whether we can support at
home what we are doing abroad.

If we cannot sell to Congress

and the American public the obligations to which we have
committed the United States in international negotiations,
our efforts are not only fruitless but may even undercut
the viability of the international economic system itself.
Passage of our domestic energy legislation was essential

in dealing with the global energy crisis, yet Congress could
not agree on what action to take for years.

Congressional

reluctance to pass key authorizations for development assistance
has meant that we must begin negotiations anew, and our own
ability to deliver on our international commitments will be
further questioned by other nations.
The need to sustain domestic support for a continued
strong U.S. involvement in the world economy is the most
critical item of all on the agenda for the future.

The

United States reaps huge benefits from the global
economy in terms of jobs, markets, stimulus to efficient
production, consumer choice, and GNP. We cannot expect to
continue to reap these benefits —

let alone increase them —

without maintaining strong support at home for our efforts
overseas.

This will be a continuing battle for U.S. policy

officials, but an essential ingredient for an effective
international economic policy for the 1980s.
There is a close relationship among the three issues
cited.

It is likely that a strong, healthy domestic

economy and a more aggressive U.S. competitive stance abroad
would go far to mobilize public support for a constructive
U.S. international economic policy.
ments may be prerequisites for —
components of —

such a policy.

Indeed, such develop-

as well as integral
The success of our nation in

dealing with these issues will, I believe, go far to determine
the nature and success of both the U.S. economy and overall

35
U.S. foreign policy in the decade ahead.
Turning to details, the agenda for the coming years is
already very full, beyond the obvious "domestic" needs
already cited:
Further major efforts are needed in the energy
area, particularly in building a sizable strategic
reserve here at home and achieving proven consumer
cooperation to defend against disruptions in OPEC
oil prices and supplies — with an ultimate
objective of effective producer/consumer negotiations
to assure greater stability on both sides of the
market.
Orderly evolution of the international monetary
system is needed both to achieve greater stability
in exchange markets and to accommodate the growing
use of a number of national currencies in international finance, including a greater role for the
IMF in guiding the system and for the SDR as the
principal reserve asset.
The IMF and the multilateral development banks need
to have adequate resources to meet the demands of
continued payments and development problems,
particularly to assure continued effective international response to the recycling problem.

—

The time has come to create a "GATT for investment":
new international rules to discipline government
activities in the investment field, similar to
those we now have for trade and monetary relations.

—

And defensive actions must be maintained to resist
protectionist trade barriers for domestic industries,
and to preserve effective world economic management
by insisting that North-South economic relations
progress through functional fora rather than grand
political schemes for "a new international economic
order."

The international economic agenda for the 1980s is
extensive, and will be crucial to both the United States and
the global economy.

Support for a constructive U.S. inter-

national economic policy has always been bipartisan in nature.
The task for the period ahead will be to assure that we keep
it that way.

FOR IMMEDIATE RELEASE
December 8 , 1980

CONTACT:

GEORGE G. ROSS
(202) 566-2356

UNITED STATES "MODEL" ESTATE AND
GIFT TAX TREATY AND TECHNICAL EXPLANATION
The Treasury Department today released a revised "model"
estate and gift tax treaty. The model, which represents the
Treasury's basic negotiating position, replaces the similar
model published by the Treasury Department on July 27, 1979,
and applies to the Federal taxes on transfers of estates and
gifts and on generation-skipping transfers. The major
changes from the previous model are: deletion of articles on
ships and aircraft and on partnerships, inclusion of a partnership and trust paragraph in the property not expressly
mentioned article, and a new marital deduction provision.
The general principle underlying the model is to grant
to the country of domicile the right to tax estates and
transfers on a worldwide basis. The model provides rules
for resolving cases of dual domicile. Transfers of real
property and certain business assets are taxable also in the
country where they are situated. To avoid double taxation,
the treaty provides for a credit by the country of domicile
for tax paid to the other country with respect to property
taxed on a situs basis. The model also allows the country
of citizenship the right to tax the estate or transfers of a
decedent or transferor, but requires it to allow a credit
for tax paid to the other State.
The Treasury Department released simultaneously a
technical explanation which serves as a guide to the model.
The Treasury Department welcomes comments on the model
and technical explanation. Comments should be sent in
writing to H. David Rosenbloom, International Tax Counsel,
U.S. Treasury Department, Washington, D.C. 20220.
A copy of the model and technical explanation is
attached. This notice appears in the Federal Register of
December 11, 1980.
o 0 o
M-765

MODEL OF NOVEMBER 20, 1980

CONVENTION BETWEEN THE GOVERNMENT OF THE
UNITED STATES OF AMERICA AND THE GOVERNMENT OF
FOR THE AVOIDANCE OF
DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON ESTATES, INHERITANCES, GIFTS,
AND GENERATION-SKIPPING TRANSFERS
The Government of the United States of America and the
Government of , desiring to conclude
a Convention for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on
estate;, inheritances, gifts, and generation-skipping
transfers, have agreed as follows:

-2November 20, 1980

Article 1
SCOPE

1. Except as otherwise provided in this Convention, this
Convention shall apply to:
a)

transfers of estates of individuals whose
domicile at their death was in one or both of
the Contracting States;

transfers of property by gift of individuals
whose domicile at the time of gift was in one
or both of the Contracting States; and

generation-skipping transfers of deemed
transferors whose domicile at the time of
deemed transfer was in one or both of the
Contracting States.

The Convention shall not restrict in any manner any

exclusion, exemption, deduction, credit, or other allowance
now or hereafter accorded:
a)

by the laws of either Contracting State; or

by any other agreement between the Contracting
States.

-3Article 1
November 20, 1980

3. Notwithstanding any provision of the Convention except
paragraph 4 of this Article, a Contracting State may tax
transfers and deemed transfers of its domiciliaries (as
determined in accordance with Article 4 (Fiscal Domicile)),
and by reason of citizenship may tax transfers and deemed
transfers of its citizens, as if the Convention had not come
into effect.

For this purpose the term "citizen" shall

include a former citizen whose loss of citizenship had as
one of its principal purposes the avoidance of tax
(including, for this purpose, income tax), but only for a
period of 10 years follo\ ing such loss.
4.

The provisions of paragraph 3 shall not affect:
a)

the benefits conferred by a Contracting State
under paragraph 3 of Article 8 (Deductions and
Exemptions) or under Articles 9 (Relief from
Double Taxation), 10 (Non-Discrimination), and
11 (Mutual Agreement Procedure); and

the benefits conferred by a Contracting State
under paragraph 1 of Article 13 (Diplomatic
Agents and Consular Officers) upon individuals
who are neither citizens of, nor have immigrant
status in, that State.

-4November 20, 1980

Article 2
TAXES COVERED

1. The existing taxes to which this Convention shall apply
are:
a)

in the United States:

the Federal estate tax, the

Federal gift tax, and the Federal tax on generationskipping transfers;
b)

The Convention shall apply also to any identical or sub-

stantially similar taxes which are imposed by a Contracting
State after the date of signature of the Convention in addition
to, or in place of, the existing taxes.

The competent author-

ities of the Contracting States shall notify each other of any
changes which have been made in their respective taxation laws
and shall notify each other of any official published material
concerning the application of the Convention, including explanations, regulations, rulings, and judicial decisions.
3.

For the purposes of Article 10 (Non-Discrimination), the

Convention shall apply to taxes of every kind and description
imposed by a Contracting State or a political subdivision or
local authority thereof.

For the purpose of Article 12

(Exchange of Information), the Convention shall apply to taxes
of every kind imposed by a Contracting State.

-5November 20, 1980

Article 3
GENERAL DEFINITIONS

1. For the purposes of this Convention, unless the context
otherwise requires:
a)

the term "United States" means the United
States of America, but does not include Puerto
Rico, the Virgin Islands, Guam, or any other
United States possession or territory;

the term "

" means ___________________

the terms "Contracting State" and "the other

;

Contracting State" mean the United States or
_____________
d)

,as the context requires; and

the term "competent authority" means:
i)

in the United States, the Secretary of the
Treasury or his delegate, and

ii)
2.

As regards the application of the Convention by a

Contracting State, any term not defined therein shall,
unless the context otherwise requires and subject to the
provisions of Article 11 (Mutual Agreement Procedure^i have
the meaning which it has under the laws of that State
concerning the taxes to which the Convention applies.

-6November 20, 1980

Article 4
FISCAL DOMICILE

1. For the purposes of this Convention, an individual has a
domicile:
a)

in the United States, if he is a resident or
citizen thereof under United States law;

b)
2.

, if

Where by reason of the provisions of paragraph 1 an

individual was domiciled in both Contracting States, then,
subject to the provisions of paragraph 3, his status shall
be determined as follows:
a)

the individual shall be deemed to have been
domiciled in the Contracting State in which he
had a permanent home available; if such
individual had a permanent home available in
both Contracting States, he shall be deemed to
have been domiciled in the Contracting State
with which his personal and economic relations
were closer (center of vital interests);

-7Article 4
November 20, 1980

b) if the Contracting State in which the
individual had his center of vital interests
cannot be determined, or if he had no permanent
home available in either Contracting State, he
shall be deemed to have been domiciled in the
Contracting State in which he had an habitual
abode;
c)

if the individual had an habitual abode in both
Contracting States or in neither of them, his
domicile shall be deemed to be in the
Contracting State of which he was a citizen;

if the individual was a citizen of both
Contracting States or of neither of them, the
competent authorities of the Contracting States
shall settle the question by mutual agreement.

Where an individual was:
a)

a citizen of one Contracting State, but not the
other Contracting State,

within the meaning of paragraph 1 domiciled in
both Contracting States, and

-8Article 4
November 20, 1980

c) within the meaning of paragraph 1 domiciled in
the other Contracting State in the aggregate
less than 7 years (including periods of
temporary absence) during the preceding 10-year
period,
then his domicile shall be deemed, notwithstanding the
provisions of paragraph 2, to have been in the
Contracting State of which he was a citizen.
4.

An individual who, at the time of his death or the

making of a gift or deemed transfer, was a resident of a
possession of the United States and who had become a citizen
of the United States solely by reason of (a) being a citizen
of a possession, or (b) birth or residence within a possession, shall be considered as having been neither domiciled
in nor a citizen of the United States at that time for the
purposes of the Convention.

-9November 20, 1980

Article 5
REAL PROPERTY

1. Transfers and deemed transfers by an individual
domiciled in a Contracting State of real property which is
situated in the other Contracting State may be taxed in that
other State.
2.

The term "real property" shall have the meaning which it

has under the law of the State in which the property in
question is situated.

The term shall in any case include

property accessory to real property, livestock and equipment
used in agriculture and forestry, rights to which the
provisions of general law respecting landed property apply,
usufruct of real property, and rights to variable or fixed
payments as consideration for the working of, or the right
to work, mineral deposits, sources, and other natural
resources; ships, boats, and aircraft shall not be regarded
as real property.

-10November 20, 1980

Article 6
BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT
AND ASSETS PERTAINING TO A FIXED BASE USED FOR THE
PERFORMANCE OF INDEPENDENT PERSONAL SERVICES

1. Except for real property as defined in paragraph 2 of
Article 5 (Real Property), transfers and deemed transfers by
an individual domiciled in a Contracting State of assets
(other than ships, aircraft, and movable property, including
containers, pertaining to the operation of such ships and
aircraft), forming part of the business property of a
permanent establishment situated in the other Contracting
State niay be taxed in that other State.
2.

For the purposes of this Convention, the term "permanent

establishment" means a fixed place of business through which
the business of an enterprise is wholly or partly carried
on.
3.

The term "permanent establishment" shall include

especially:
a)

a branch;

an office;

-11Article 6
November 20, 1980

c) a factory;
d)

a workshop; and

a mine, oil or gas well, quarry, or any other place
of extraction of natural resources.

A building site or construction or installation project,

or an installation or drilling rig or ship being used for
the exploration or development of natural resources,
constitutes a permanent establishment in a Contracting State
only if it has remained in that State more than 24 months.
5.

Notwithstanding the preceding provisions of this

Article, the term "permanent establishment" shall be deemed
not to include:
a)

the use of facilities solely for the purpose
of storage, display, or delivery of goods or
merchandise belonging to an enterprise;

the maintenance of a stock of goods or
merchandise belonging to an enterprise solely
for the purpose of storage, display, or
delivery;

the maintenance of a stock of goods or
merchandise belonging to an enterprise solely
for the purpose of processing by another
enterprise;

-12Article 6
November 20, 1980

d) the maintenance of a fixed place of business
solely for the purpose of purchasing goods or
merchandise, or of collecting information,
for an enterprise;
e)

the maintenance of a fixed place of business
solely for the purpose of carrying on, for
an enterprise, any other activity of a
preparatory or auxiliary character;

the maintenance of a fixed place of business
solely for any combination of the activities
mentioned in subparagraphs a) to e)•

Except for real property as defined in paragraph 2 of

Article 5 (Real Property), transfers and deemed transfers of
assets by an individual domiciled in a Contracting State
pertaining to a fixed base situated in the other Contracting
State and used for the performance of independent personal
services, may be taxed in that other State.

-13November 20, 1980

Article 7
PROPERTY NOT EXPRESSLY MENTIONED

1. Transfers and deemed transfers by an individual
domiciled in a Contracting State of property other than
property referred to in Articles 5 (Real Property) and 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of
Independent Personal Services) shall be taxable only in that
State.
2.

If the law of a Contracting State treats a property

right «.s property described in Article 5 (Real Property) or
6 (Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of
Independent Personal Services) , but the law of the other
Contracting State treats that right as an interest in a
partnership or trust governed by paragraph 1 of this
Article, the nature of that right shall be determined by the
law of the Contracting State in which the transferor or
deemed transferor is not domiciled.

-14November 20, 1980

Article 8
DEDUCTIONS AND EXEMPTIONS

1. Debts deductible according to the domestic law of a
Contracting State shall be deducted from the gross value of
property the transfer of which may be taxed by that State in
the proportion that such gross value bears to the gross
value of the entire transferred property wherever situated.
2.

The value of property transferred which may be taxed by

a Contracting State shall be reduced by an allocable or
apportionable amount of any debts of the transferor or
deemed transferor assumed by the transferee or deemed
transferee, or to which the property is subject, other than
debts allowed as a deduction under paragraph 1.
3.

The transfer or deemed transfer of property to or for

the use of a corporation or organization of one Contracting
State organized and operated exclusively for religious,
charitable, scientific, literary, or educational purposes
shall be exempt from tax by the other Contracting State if
and to the extent that such transfer:
a)

is exempt from tax in the first-mentioned
Contracting State; and

-15Article 8
November 20, 1980

b) would be exempt from tax in the other
Contracting State if it were made to a similar
corporation or organization of that other
State.
4.

The tax of a Contracting State with respect to the

transfer of property (other than community property) which
is transferred by an individual domiciled in the other
Contracting State to his or her spouse shall be determined
as follows:
a)

such property shall be included in the taxable
base only to the extent that the value of the
property exceeds 50 percent of the value of all
property (after taking into account any applicable deductions) whose transfer may, under this
Convention, be taxed by the first-mentioned
Contracting State; and

in the case of the United States, the tax shall
be computed by applying the tax rates applicable
to an individual domiciled in the United States.

-16Article 8
November 20, 1980

5. A Contracting State which may tax the transfer of an
estate solely by reason of Article 5 (Real Property) or 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of Independent Personal Services) shall allow a credit against its
tax in an amount no less than $3,600, or shall allow an
equivalent exemption in computing the tax otherwise due.

-17November 20, 1980

Article 9
RELIEF FROM DOUBLE TAXATION

1. Where the United States imposes tax by reason of an
individual's domicile or citizenship, double taxation shall
be avoided in the following manner:
a)

where

imposes tax with respect to

the transfer or deemed transfer of property in
accordance with Article 5 (Real Property) or 6
(Business Property of a Permanent Establishment
and Assets Pertaining to a Fixed Base Used for
the Performance of Independent Personal
Services), the United States shall allow as a
credit against the tax calculated according to
its law with respect to such transfer or deemed
transfer an amount equal to the tax paid to
with respect to such transfer or
deemed transfer;
b)

if the individual was a citizen of the United
States and was domiciled in

the date of his death, gift, or deemed
transfer, then the United States shall allow as
a credit against the tax calculated according

-18Article 9
. November 20, 1980

to its law with respect to the transfer or
deemed transfer of property (other than property
whose transfer or deemed transfer the United
States may tax in accordance with Article 5
(Real Property) or 6 (Business Property of a
Permanent Establishment and Assets Pertaining to
a Fixed Base Used for the Performance of
Independent Personal Services)) an amount equal
to the tax paid to _____________

with respect to

such transfer or deemed transfer.

This sub-

paragraph shall not apply to a former Unite 1
States citizen whose loss of citizenship had as
one of its principal purposes the avoidance of
United States tax (including, for this purpose,
income tax).
2.

Where

imposes tax by reason of an in-

dividual's domicile or citizenship, double taxation shall be
avoided in the following manner:
a)

where the United States imposes tax with
respect to the transfer or deemed transfer of
property in accordance with Article 5 (Real
Property) or 6 (Business Property of a

-19Article 9
November 20, 1980

Permanent Establishment and Assets Pertaining
to a Fixed Base Used for the Performance of
Independent Personal Services) ,

_________________

shall allow as a credit against the tax
calculated according to its law with respect to
such transfer or deemed transfer an amount
equal to the tax paid to the United States with
respect to such transfer or deemed transfer;
b)

if the individual was domiciled in the United
States at the date of his death, gift, or
deemed transfer, then

shall

allow as a credit against the tax calculated
according to its law with respect to the transfer or deemed transfer of property (other than
property which

may tax in

accordance with Article 5 (Real Property) or 6
(Business Property of a Permanent Establishment
and Assets Pertaining to a Fixed Base Used for
the Performance of Independent Personal
Services)) an amount equal to the tax paid to
the United States with respect to such transfer
or deemed transfer.

-20Article 9
November 20, 1980

3. If a Contracting State imposes tax upon the transfer of
an estate, the credit allowed under paragraph 1 or 2 shall
include credit for any tax imposed by the other Contracting
State upon a prior transfer or deemed transfer of property
by the decedent if such property is included in the estate.
4.

The credit allowed by a Contracting State under

paragraph 1 or 2 shall not be reduced by any credit allowed
by the other Contracting State for taxes paid upon prior
transfers or deemed transfers.
5.

The credit allowed by a Contracting State according to

the provisions of paragraphs 1, 2, 3, and 4 shall include
credit for taxes paid to political subdivisions of the other
Contracting State to the extent that such taxes are allowed
as credits by that other State.
6.

Any credit allowed under paragraph 1 or 2 shall not

exceed the part of the tax of a Contracting State, as
computed before the credit is given, which is attributable
to the transfer or deemed transfer of property in respect of
which a credit is allowable under such paragraphs.

-21Article 9
November 20, 1980

7. Any claim for credit or for refund of tax founded on the
provisions of this Article may be made until two years after
the final determination (administrative or judicial) and
payment of tax for which any credit under this Article is
claimed, provided that the determination and payment are
made within ten years of the date of death, gift, or deemed
transfer.

The competent authorities may by mutual agreement

extend the ten-year time limit if circumstances prevent the
determination and payment within such period of the taxes
which are the subject of the claim for credit.

Any refund

based solely on the provisions of this Convention shall be
made without payment of interest on the amount so refunded.

-22November 20, 1980

Article 10
NON-DISCRIMINATION

1. Citizens of a Contracting State, wherever they are
resident, shall not be subjected in the other Contracting
State to any taxation or any requirement connected therewith
which is other or more burdensome than the taxation and
connected requirements to which citizens of that other State
in the same circumstances are or may be subjected.

However,

for purposes of United States taxation, United States
citizens who are not residents of the United States are not
in the same circumstances as citizens of __________________

who

are not residents of the United States.
2.

The taxation with respect to a permanent establishment

which a resident a Contracting State has in the other
Contracting State shall not be less favorably levied in that
other State than the taxation levied with respect to residents of that other State carrying on the same activities.
This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs, and reductions
for taxation purposes on account of civil status or family
responsibilities which it grants to its own residents.

-23Article 10
November 20, 1980
3.

Entities of a Contracting State, the capital of which is

wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting
State, shall not be subjected in the first-mentioned State
to any taxation or any requirement connected therewith which
is other or more burdensome than the taxation and connected
requirements to which other similar entities of the firstmentioned State are or may be subjected.
4.

The provisions of this Article shall apply to taxes of

every kind and description imposed by a Contracting State or
a political subdivision or local authority thereof.

-24November 20, 1980

Article 11
MUTUAL AGREEMENT PROCEDURE

1. Where a person -considers that the actions of one or both
of the Contracting States result or will result for him in
taxation not in accordance with the provisions of this
Convention, he may, irrespective of the remedies provided by
the domestic laws of those States, present his case to the
competent authority of the Contracting State of which he is
a resident or citizen.

Such presentation must be made

within one year after a claim under the Convention for
exemption, credit, or refund has been finally settled or
rejected.
2.

The competent authority to which, a case is presented

shall endeavor, if the objection appears to it to be
justified and if it is not itself able to arrive at a
satisfactory solution, to resolve the case by mutual
agreement with the competent authority of the other
Contracting State, with a view to the avoidance of taxation
not in accordance with the Convention.

Any agreement

reached shall be implemented notwithstanding any time limits
or other procedural limitations in the domestic law of the
Contracting States.

-25Article 11
November 20, 1980

3. The competent authorities of the Contracting States
shall endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention.

They may also consult together for

the elimination of double taxation in cases not provided for
in the Convention.
4.

The competent authorities of the Contracting States may

communicate with each other directly for the purpose of
reaching an agreement in the sense of the preceding
paragraphs.
5.

The competent authorities of the Contracting States may

prescribe rules and regulations to carry out the purposes of
the Convention.

-26November 20, 1980

Article 12
EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States
shall exchange such information as is necessary for carrying
out the provisions of this Convention or of the domestic
laws of the Contracting States concerning the taxes covered
by the Convention insofar as the taxation thereunder is not
contrary to the Convention.

The exchange of information is

not restricted by Article 1 (Scope).

Any information

received by a Contracting State shall be treated as secret
in the same manner as information obtained under the
domestic laws of that State and shall be disclosed only to
persons or authorities (including courts and administrative
bodies) involved in the administratrion, assessment, or
collection of, the enforcement or prosecution in respect of,
or the determination of appeals in relation to, the taxes
covered by the Convention.

Such persons or authorities

shall use the information only for such purposes.

They may

disclose the information in public court proceedings or in
judicial decisions.
2.

In no case shall the provisions of paragraph 1 be

construed so as to impose on a Contracting State the
obligation:

-27Article 12
November 20, 1980

a) to carry out administrative measures at
variance with the laws and administrative
practice of that or of the other Contracting
State;
b)

to supply information which is not obtainable
under the laws or in the normal course of the
administration of that or of the other
Contracting State; or

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

If information is requested by a Contracting State in

accordance with this Article, the other Contracting State
shall obtain the information to which the request relates in
the same manner and to the same extent as if the tax of the
first-mentioned State were the tax of that other State and
were being imposed by that other State.

If specifically

requested by the competent authority of a Contracting State,
the competent authority of the other Contracting State shall
provide information under this Article in the form of

-28Article 12
November 20, 1980

depositions of witnesses and authenticated copies of
unedited original documents (including books, papers, statements, records, accounts, or writings), to the same extent
such depositions and documents can be obtained under the
laws and administrative practices of such other State with
respect to its own taxes.
4.

For the purposes of this Article, the Convention shall

apply to taxes of every kind imposed by a Contracting State.

-29November 20, 1980

Article 13
DIPLOMATIC AGENTS AND CONSULAR OFFICERS

1. Nothing in this Convention shall affect the fiscal
privileges of diplomatic agents or consular officers under
the general rules of international law or under the provisions of special agreements.
2.

The Convention shall not apply to officials of

international organizations or members of a diplomatic or
consular mission of a third State, who were established in a
Contracting State and were not treated as being domiciled in
either Contracting State in respect of taxes on estates,
inheritances, gifts, or generation-skipping transfers as the
case may be.

-30November 20, 1980

Article 14
ENTRY INTO FORCE

1. This Convention shall be subject to ratification in
accordance with the applicable procedures of each
Contracting State and instruments of ratification shall be
exchanged at _____________________
2.

as soon as possible.

The Convention shall enter into force upon the exchange

of instruments of ratification and its provisions shall
apply to transfers of estates of individuals dying, gifts
made, and generation-skipping transfers deemed made on or
after the date of such exchange.

-31November 20, 1980

Article 15
TERMINATION

This Convention shall remain in force until terminated
by a Contracting State.

Either Contracting State may

terminate the Convention at any time after 5 years from the
date on which the Convention enters into force provided that
at least 6 months prior notice of termination has been given
through diplomatic channels.

In such event, the Convention

shall have no effect in respect of transfers of estates of
individuals dying, gifts made, and generation-skipping
transfer deemed made after the December 31 which either is
or next follows the date of termination specified in the
notice of termination.

-32November 20, 1980

DONE at / in duplicate, in
the English and

languages, the two texts having

equal authenticity, this

For the United States of America:

(Seal)

For

(Seal)

day of

, 19

November 20, 1980

TECHNICAL EXPLANATION OF THE UNITED STATES
MODEL ESTATE AND GIFT TAX CONVENTION
Introduction
This technical explanation serves as a guide to the United
States
model estate and
gift tax Convention published

December 8, 1980.
The general purpose of an estate and gift tax Convention is to
avoid the double taxation that can arise when two countries
("States") impose transfer taxes on the basis of domicile or when
one State taxes on the basis of the transferor's domicile or
citizenship while the other taxes on the basis of t' e situs of
property. This purpose is accomplished in the model by providing
that the State of the transferor's domicile may tax transfers of
estates and gifts ("transfers") and generation-skipping transfers
("deemed transfers") on a worldwide basis, but must credit tax
paid to the other State on the basis of the location or situs of
specified types of property, and by establishing reciprocal rules
for determining which State has the right to tax on the basis of
domicile when a decedent or transferor is domiciled, under the
domestic laws of the respective States, in both of them.
Double taxation can also arise if one State taxes on the basis
of the domicile of the transferor and the other, as in an inheritance tax context, taxes on the basis of the domicile of the transferee.
In this situation, the model gives the primary
right to the State of the transferor's domicile.

taxing

-2The model contains a "saving" clause which allows the State of
domicile (as defined by the Convention) or citizenship to tax an
individual's worldwide transfers and deemed transfers, provided it
credits tax paid to the other State.
The model provides that the Convention is subject to ratification by the two governments.
Once ratified, the Convention
enters into force immediately upon the exchange of instruments of
ratification and applies to transfers made or deemed made on or
after that date.
It remains in force indefinitely, but may be
terminated by either State after it has been in force 5 years.
Federal Estate, Gift, and Generation-Skipping Transfer Taxes
The Federal estate, gift, and generation-skipping transfer
taxes are imposed on the transfer of property by death, gift, and
generation-skipping transfer, respectively. A generation-skipping
transfer involves the splitting of benefits between generations
younger than the generation of the transferor or grantor. If, for
example, A transfers property to B for 10 years or for B*s life,
and after 10 years or upon B's death the property passes to C, and
if B and C are in younger generations than A, but different
generations from each other, the United States will impose an
estate or gift tax on the transfer from A and a generationskipping tax on the transfer from B. The generation-skipping tax
is substantially equivalent to the amount of estate or gift tax
that would be due if the property interest had been transferred
outright from each generation to the next.
Citizens or residents of the United States are subject to taxation on the transfer of all their property, wherever located. A
resident of the United States is a domiciliary thereof, i.e., an
individual living in the United States who has the intention to

-3remain in the United States indefinitely or an individual who has
lived in the United States with such an intention and who has not
formed the intention to remain indefinitely in a second country.
The principal U.S. statutory rules for taxing transfers of
citizens or residents allow: (a) deductions for estate tax purposes for funeral and administrative expenses, claims against the
estate, outstanding obligations to which the property is subject
if the value included in the gross estate is undiminished by the
outstanding indebtedness, uncompensated losses of the estate incurred during settlement, limited transfers to a decedent's minor
children who have no known surviving parent, transfers of property
for public, charitable, religious, educational, and similar purposes, and a marital deduction equal to the greater of $250,000 or
one-half the value of the adjusted gross estate, reduced by any
post-1976 gift tax marital deduction in excess of 50 percent of
the value of the lifetime gifts to the spouse after 1976; (b)
deductions for gift tax purposes for transfers of property for
public, charitable, religious, educational, and similar purposes,
a $3,000 exclusion per donee per year, and a marital deduction
equal to the first $100,000 of gifts and 50 percent of the value
of gifts in excess of $200,000; (c) a $250,000 exclusion from the
generation-skipping transfer tax for deemed transfers to the
grandchildren of the grantor from each deemed tranferor (generally, the grantor's child, who is a parent of a grandchild); and
(d) a unified tax credit against estate, gift, and generationskipping taxes of $47,000, as of 1981.
Taxable transfers are
taxed at rates ranging from 18 percent to 70 percent. Credits are
allowed for death taxes paid to a foreign country on property
included in the gross estate which is considered under U.S. rules
to be situated in that foreign country.

-4Nonresidents who are not citizens of the United States
(referred to hereinafter as nonresident aliens) are taxable only
on transfers of property situated within the United States. Tangible personal property and real estate, for example, are situated
within the United States if located in the United States. Corporate stock has a U.S. situs if issued by a corporation organized
in the United States. While such stock is subject to U.S. estate
tax, nonresident aliens are exempt from Federal gift tax on all
transfers of intangible property, including corporate stock.
The U.S. statutory rules for taxing transfers of nonresident
aliens allow:
(a) deductions for estate tax purposes for a portion of the funeral and administrative expenses, claims against
the estate, debts, and losses, based on the proportion of the
decedent's worldwide estate which is located in the United States;
(b) deductions for estate and gift tax purposes for transfers of
property to the United States or any political subdivision or to
domestic organizations for public, charitable, religious, educational, and similar purposes; (c) a $3,000 annual gift tax exclusion per donee; and (d) a $3,600 estate tax credit. Transfers of
taxable estates are taxed at rates ranging from 6 percent to 30
percent. Gifts and generation-skipping transfers by nonresident
aliens are, however, taxed at the normal citizen or resident rates
ranging from 18 percent to 70 percent.

-5Article 1.

SCOPE

This Article defines and limits the coverage of the
Convention. Paragraph 1 provides that the Convention applies to
transfers of estates, gifts, and generation-skipping transfers of
individuals domiciled in one or both of the Contracting States at
the time of transfer or deemed transfer.
Under paragraph 1 of
Article 4 (Fiscal Domicile), domicile is determined initially
under the domestic law of each Contracting State. That Article,
however, contains detailed rules for determining a single State of
domicile for purposes of the Convention in cases where the
domestic laws of each Contracting State would consider an
individual to be a domiciliary.
Paragraph 2 states that the Convention does not restrict the
fiscal benefits accorded by the laws of either Contracting State
or by other agreements between the Contracting States. This rule
reflects the principle that a double taxation convention should
not increc.se the tax burden imposed by a Contracting State.
Paragraph 3 allows a Contracting State to tax transfers and
deemed transfers of its domiciliaries, as
determined under
Article 4 (Fiscal Domicile), and of its citizens as if the
Convention did not exist.
This "saving" clause preserves the
right of a Contracting State to tax its domiciliaries and citizens
under its own domestic law. The United States includes this provision in its tax conventions because it imposes tax on a worldwide basis on its citizens, wherever they are domiciled, and
because it generally views a tax convention as affecting its right
to tax domiciliaries of the other State, but not its right to tax
its own citizens or domiciliaries.

-6Paragraph 3 applies only to domiciliaries as determined by the
Convention.
It does not, for example, apply, to an individual,
not a U.S. citizen, who satisfies the U.S. statutory tests for
domicile, but who has a domicile for purposes of the Convention in
the other Contracting State, after application of the rules of
Article 4. In that case, the United States can tax only on the
basis of the situs of certain types of property specified in the
Convention.
The term "citizen" includes, for a 10-year period, a former
citizen who renounced his citizenship primarily for tax avoidance
purposes. This provision of the saving clause parallels sections
2107 and 2501(a)(3) of the Internal Revenue Code, which provide
that certain transfers of this class of expatriates will be
subject to citizen estate and gift tax rates.
Pursuant to the restrictions in paragraph 4, the saving clause
of paragraph 3 does not relieve a Contracting State from certain
obligations under the Convention.
Paragraph 4, for example,
ensures that the saving clause will not override the obligation of
a Contracting State, in accordance with Article 9, to credit taxes
paid to the other Contracting State on either a domiciliary or a
situs basis.
Paragraph 4 also provides that paragraph 3 shall not affect
the benefits conferred by a Contracting State upon its citizens or
domiciliaries under paragraph 3 of Article 8 (Deductions and
Exemptions), relating to deductions for contributions to charitable organizations, or under Article 10 (Non-Discrimination) or
11 (Mutual Agreement Procedure).
Nor does the saving clause
affect the benefits conferred by a State under paragraph 1 of
Article 13 (Diplomatic Agents and Consular Officers) upon individuals who are neither citizens of, nor have immigrant status in,

-7
that State. Without this latter provision, diplomatic agents and
consular officers of the other State might be considered domiciliaries of the United States and thus subject to the saving clause.
In the case of of the United States, "immigrant status" means that
the individual has been admitted to the United States for
permanent residence.
Article 2. TAXES COVERED
Paragraph 1 identifies the taxes existing at the time of
signature and which are covered by the Convention. With respect
to the United States, the Convention applies to the Federal estate
tax, the Federal gift tax, and the Federal tax on generationskipping transfers.
To avoid the necessity of concluding a new convention whenever
the tax laws of the Contracting States are modified, paragraph 2
_. rovides that the Convention also applies to any substantially
similar taxes which are imposed after the date of signature of the
Convention in addition to, or in place of, the existing taxes.
The competent authorities of the Contracting States are to notify
each other of any changes in their respective laws relating to the
taxation of estates, gifts, and deemed transfers, and of any
official published interpretations of the Convention.
Paragraph 3 broadens the coverage of the Convention to
include, for the purpose of Article 10 (Non-Discrimination), all
taxes imposed by a Contracting State or a political subdivision or
local authority thereof and, for the purpose of Article 12
(Exchange of Information), all taxes imposed by a Contracting
State.

-8Article 3.

GENERAL DEFINITIONS

Paragraph 1 defines the terms "United States," "Contracting
State," "the other Contracting State," and "competent authority."
The term "United States" means the United States of America, but
does not include Puerto Rico, the Virgin Islands, Guam, or any
other U.S. possession or territory.
This paragraph does not,
however, contain all the terms defined in the Convention.
"Domicile," for example, is defined in Article 4 (Fiscal
Domicile), "real property" is defined in Article 5 (Real
Property), and "permanent establishment" is defined in Article 6
(Business Property of a Permanent Establishment and Assets
Pertaining to a Fixed Base Used for the Performance of Independent
Personal Services)•
Paragraph 2 provides that any term not otherwise defined in
the Convention shall, unless the context otherwise requires and
subject
o the provisions of Article 11 (Mutual Agreement
Procedure), have the meaning which it has under the tax laws of
the Contracting State whose tax is being determined. Paragraph 3
of Article 11 makes clear that the competent authorities of the
Contracting States may agree on a common meaning of any term used
in the Convention.
Article 4. FISCAL DOMICILE
This Article determines an individual's domicile for purposes
of the Convention and establishes rules for resolving cases of
dual domicile. The determination of a single domicile for purposes of the Convention is important since the State of domicile
has the primary right to tax transfers and deemed transfers of
property wherever located, except property covered by Articles 5

-9(Real Property) and 6 (Business Property of a Permanent Establishment and Assets Pertaining to a Fixed Base Used for the Performance of Independent Personal Services).
This primary right is
not exclusive, however, because the saving clause of paragraph 3
of Article 1 (Scope) allows each Contracting State to tax in all
events on the basis of citizenship.
Under paragraph 1, domicile is determined initially under the
domestic law of each Contracting State.
That law is taken as
given; the Convention does not assess or modify the criteria used
by a Contracting State for its determination of domicile.
An
individual is domiciled in the United States, for purposes of the
Convention, if he is a resident or citizen of the United States.
For this purpose, a resident is an individual living in the United
States who has the intention to remain in the United States
indefinitely or an individual who has lived in the United States
with such an intention and who has not formed the intention to
remain indefinitely in another country. This may be contrasted
with the use of the term "resident" for purposes of the Federal
income tax; an alien present in the United States who is not a
mere transient or sojourner is a resident of the United States for
income tax purposes. Citizens are included in the definition of
domiciliary for purposes of the Convention because the United
States taxes its citizens, as well as its residents, on a worldwide basis, and nonresident U.S. citizens may encounter some of
the same problems of double taxation that face U.S. residents.
Paragraph 2 provides rules for resolving cases where, under
the domestic laws of the respective Contracting States, an
individual is domiciled in both States.
Under paragraph 2, a
single domicile is determined according to the following sequential criteria: (a) the individual will be deemed to be domiciled

-lOin the Contracting State in which he maintained his permanent
home; if he had a permanent home in both Contracting States, his
domicile will be deemed to be in the Contracting State with which
his personal and economic relations were closer (in other words,
the State in which his center of vital interests was located);
(b) if the Contracting State in which the individual's center of
vital interests was located cannot be determined, or if he had no
permanent home available in either State, his domicile will be
deemed to be in the Contracting State in which he had an habitual
abode; (c) if he had an habitual abode in both Contracting States,
or in neither, his domicile will be deemed to be in the
Contracting State of which he was a citizen; and (d) if he was a
citizen of both Contracting States, or neither, the competent
authorities of the Contracting States will settle the issue by
mutual agreement. The determination of a center of vital interests for purposes of subparagraphs 2a) and 2b) is a relative test
between the two Contracting States.
Thus, the center of vital
interests as between two v ontracting States may be identified,
even if an individual has still closer personal a.id economic
relations with a third State.
Paragraph 3 of the Convention contains an important exception
to the tie-breaking rules of paragraph 2.
It applies where an
individual was:
(a) a citizen of one, but not the other,
Contracting State; (b) domiciled at the time of transfer or deemed
transfer in both Contracting States according to the domestic laws
of those States; and (c) domiciled in the Contracting State of
which he was not a citizen less than 7 out of the 10 years prior
to the time of transfer or deemed transfer. If all these conditions are met, the individual is deemed to be domiciled in the
State of which he was a citizen. This rule, which restricts to
situs-basis taxation the right of the other Contracting State to

-11tax the transfers and deemed transfers of a U.S. citizen who has
been domiciled in the other State for less than 7 out of 10 years,
is based on the concept that a Contracting State should not tax
transfers or deemed transfers of an individual on a domiciliary
basis if the individual has not been present in that State for a
significant period of time. If the individual has been domiciled
in the State of which he was not a citizen 7 or more years out of
the relevant 10 year period, he is not necessarily deemed to be
domiciled in that State for purposes of the Convention.
would then be determined under the tie-breaking rules of
paragraph 2.

Domicile

Paragraph 4 provides that an individual who, at the time of
death or the making of a gift or deemed transfer, was a resident
of a U.S. possession and who became a U.S. citizen solely by
reason of citizenship of, or birth or residence in, a possession,
shall not be considered domiciled in or a citizen of the United
States at that time for purposes oi the Convention. This paragraph would not apply to a former resident of a possession who had
acquired U.S. citizenship through birth in a possession, but who
had otherwise established a domicile in one of the Contracting
States at the time of the transfer or deemed transfer; nor would
it apply to an individual who acquired his U.S. citizenship
through birth in a possession, but who was domiciled at death in a
third State.
Article 5. REAL PROPERTY
Paragraph 1 provides that transfers and deemed transfers by an
individual domiciled in a Contracting State of real property situated in the other Contracting State may be taxed by that other
State.
This is a primary, but not exclusive, taxing right.

-12Nothing in the Convention, for example, precludes the United
States from taxing the transfer of foreign-situs real property by
an individual domiciled, for purposes of the Convention, in the
United States, provided the United States allows a credit for the
foreign tax.
According to paragraph 2, the term "real property" is defined
in accordance with the law of the State in which the property is
situated, even if that State is not a Contracting State. The term
generally includes property accessory to real property, livestock,
and equipment used in agriculture and forestry, and rights to
payment for the working of mineral deposits and other natural
resources.
Ships, boats, and aircraft are not considered real
property.
Article 6. BUSINESS PROPERTY OF A PERMANENT ESTABLISHMENT AND
ASSETS PERTAINING TO A FIXED BASE USED FOR THE
PERFORMANCE OF INDEPENDENT PERSONAL SERVICES
Paragraph 1 establishes the primary taxing right for transfers
and deemed transfers of assets forming part of the business property of a permanent establishment. It provides that, except for
real property as defined in paragraph 2 of Article 5 (Real
Property), transfers and deemed transfers of assets by an
individual domiciled in a Contracting State, which assets form
part of the business property of a permanent establishment situated in the other Contracting State, may be taxed in that other
State. Securities, provided they form part of the business property employed in a permanent establishment, are covered by this
Article. Similarly, patents and trademarks owned by an individual, but constituting business property of a permanent establishment, are taxable under this Article.
However, with regard to
real property which is located in a Contracting State and transferred by a resident of that State but which forms part of the

-13business property of a permanent establishment situated in the
other Contracting State, the right to tax is with the firstmentioned State.
Similarly, the United States would have the
primary right to tax real property which is located in a third
State and transferred by a U.S. resident but which forms part of
the business property of a permanent establishment situated in the
other Contracting State. This paragraph does not apply to transfers and deemed transfers of ships and aircraft and of movable
property, including containers, pertaining to the operation of
ships and aircraft.
These transfers are taxed under Article 7
(Property Not Expressly Mentioned).
As with real property, the permanent establishment rule is not
an exclusive taxing right for the situs State. The State of citizenship may also tax the transfer and deemed transfer of business
property on a residual basis, by virtue of the saving clause of
paragraph 3 of Article 1 (Scope).
Paragraph 2 defines the term "permanent establishment" as a
fixed place of business through which the business of an enterprise is wholly or partly carried on.
Illustrations of a permanent establishment are provided in paragraph 3. They include a
branch, an office, a factory, a workshop, and a mine, oil or gas
well, quarry, or any other place of extraction of natural
resources.
Paragraph 4 states that a building site or construction or
installation project or an installation or drilling rig or ship
being used for the exploration or development of natural resources
constitutes a permanent establishment only if it has remained in a
Contracting State for more than 24 months. This 24-month period
begins when work physically commences in the Contracting State,

-14must be fulfilled on a consecutive-month basis, and ends with the
date of transfer.
A series of contracts or projects which are
interdependent commercially is to be treated as a single project
for the purpose of applying the 24-month test. The 24-month test
will not be fulfilled if the assets in questions are transferred
or deemed transferred before the 24 months has elapsed, even if it
appeared, at the time of transfer, that the project would have
lasted more than 24 months.
Paragraph 5 lists examples of activities that will not constitute a permanent establishment, even if conducted through a fixed
place of business. The paragraph provides that a permanent establishment does not include: the use of facilities solely for the
purpose of storage, display, or delivery of goods or merchandise
belonging to an enterprise; the maintenance of a stock of goods or
merchandise belonging to an enterprise solely for the purpose of
storage, display, or delivery; the maintenance of a stock of goods
or merchandise belonging to an enterprise solely for the purpv se
of processing by another enterprise; the maintenance of a fixed
place of business solely for the purpose of purchasing goods or
merchandise, or of collecting information, for an enterprise; or
the maintenance of a fixed place of business solely for the purpose of carrying on, for an enterprise, any other activity of a
preparatory or auxiliary character.
A fixed place of business
used solely for one or more of these purposes will not be
considered a permanent establishment under the Convention.
Paragraph 6 provides that, except for real property as defined
in paragraph 2 of Article 5 (Real Property), transfers and deemed
transfers of assets from an individual domiciled in a Contracting
State pertaining to a fixed base situated in the other Contracting
State and used for the performance of independent personal services may be taxed in that other State. The concept of a "fixed
base" is analogous to that of a "permanent establishment."

-15Article 7.

PROPERTY NOT EXPRESSLY MENTIONED

Paragraph 1 provides that transfers and deemed transfers of
all property not specifically mentioned in the Convention shall be
taxable only in the Contracting State of domicile. Thus, transfers of all property except for that covered by Articles 5 (Real
Property) and 6 (Business Property of a Permanent Establishment
and Assets Pertaining to a Fixed Base Used for the Performance of
Independent Personal Services) may be taxed in the State in which
the transferor was domiciled. Under this paragraph, for example,
the United States surrenders the primary right to tax the transfer
or deemed transfer of shares of stock in a U.S. corporation by an
individual domiciled in the other Contracting State. Under paragraph 3 of Article 1 (Scope), however, the United States still
would be able to tax the transfer or deemed transfer of such
stocks by a U.S. citizen, provided the United States credits the
tax of the other State.
Paragraph 2 applies to the case where one State considers a
property right as covered by Article 5 (Real Property) or 6
(Business Property of a Permanent Establishment and. Assets
Pertaining to a Fixed Base Used for the Performance of Independent
Personal Services), but the other State considers the right as a
partnership or trust interest. This could occur, for example, if
one State treats a partner as transferring a pro rata share of
each of the partnership's assets, but the other State treats the
partner as transferring the partnership interest itself.
Such
cases could result in either double taxation or double exemption.
Paragraph 2 resolves the issue by determining the nature of the
right under the law of the State in which the transferor is not
domiciled.
However, it does not necessarily award the taxing
right to that State. Suppose, for example, that a domiciliary of

-16the other Contracting State transferred an interest in a partnership owning U.S. real property. If the other Contracting State
considered it a transfer of real property and the United States
considered it a transfer of a partnership interest, the transfer
would be determined, under paragraph 2, to be a transfer of a
partnership interest.
Consequently, the other State would have
the sole taxing right under Article 7 (Property Not Expressly
Mentioned).
Article 8. DEDUCTIONS AND EXEMPTIONS
Paragraph 1 provides rules for the allocation of deductions.
Because the saving clause of paragraph 3 of Article 1 (Scope)
overrides paragraphs 1, 2, 4, and 5 of this Article with respect
to citizens and domiciliaries of a Contracting State, these
paragraphs are relevant only for taxation on a situs basis.
Paragraph 1 provides that debts deductible according to the
comestic law of a Contracting State shall be deductible on a
proportionate basis from the property which may be taxed by that
State. This provision conforms to U.S. law. Section 2106(a)(1)
of the Internal Revenue Code accords the estate of a nonresident
alien a deduction for allowable expenses, losses, indebtedness,
and taxes (specified in sections 2053 and 2054) in the proportion
which the value of the decedent's gross estate situated in the
United States bears to the value of the entire gross estate wherever situated.
The term "debts" in paragraph 1 is intended to
encompass all the items that would be deductible, and therefore
apportionable, under those Code sections.
The "indebtedness"
referred to in Section 2106(a)(1) includes outstanding obligations
to which property is subject, provided the value of the property
is included in the gross estate without reduction for the

-17indebtedness. Under U.S. domestic law, if the decedent, or his
estate, is liable for payment of the obligation, the full value of
the property must be included in the gross estate and the amount
of indebtedness may be deductible.
On the other hand, if the
decedent or his estate is not liable for the obligation, the debt
directly reduces the value of the property subject to taxation and
no further deduction is allowed.
Such debts are covered by
paragraph 2 of this Article.
Paragraph 1 does not obligate a Contracting State to allow a
deduction for any debts which would not be deductible under its
domestic law. Since, for example, the law of the United States
does not allow a deduction for debts based upon an agreement not
supported by consideration in money or money's worth, the United
States would not be obligated to allow a proportion of such debt
for the purpose of imposing its tax on property covered by Article
5 (Real Property) or 6 (Business Property of a Permanent
Establishment and Assets Pertaining to a Fixed Base Used for the
Performance of Independent Personal Services)•
Since paragraph 1 does not apply to debts for which the decedent or his estate is not personally liable, paragraph 2 requires
a Contracting State to reduce, for tax purposes, the value of
property which it may tax by the amount of any debts to which the
property is subject.
Thus, the United States is obligated to
reduce the taxable value of U.S. real property in the estate of a
decedent domiciled in the other Contracting State by the full
amount of a nonrecourse mortgage.
Paragraph 2 also requires a
Contracting State to reduce the value of property it may tax by an
allocable or apportionable amount of any debts of the transferor
or deemed transferor assumed by the transferee or deemed transferee. This would most obviously apply in a gift tax context; the

-18transferee's agreement to pay the transferor's gift tax liability
would reduce the amount of the net, taxable gift.
Paragraph 2
would also apply if the transferor gave property taxable on a
situs basis in a Contracting State on the condition that the
transferee assume some debt unrelated to such property.
Paragraph 3 provides that transfers and deemed transfers of
property for religious, charitable, scientific, literary, or
educational purposes that are tax exempt in one Contracting State
shall be exempt from tax in the other Contracting State, provided
the transfer would be tax exempt if made to a similar entity in
that other State. Sections 2055(a)(2) and 2522(a)(2) of the Code
provide U.S. citizens or residents with a deduction for estate and
gift tax purposes for transfers of property to or for the use of a
domestic or foreign corporation organized for such purposes. In
the case of nonresident aliens, however, sections 2106(a)(2) and
2522(b) (2) allow a deduction for estate and gift tax purposes only
for the transfer of property to, or for the use of, domestic corporations organized and operated for these purposes. A deduction
is not allowed for the transfer of property by a nonresident alien
to a foreign corporation organized for religious, charitable,
scientific, literary, or educational purposes. Paragraph 3 of the
Convention would allow such a deduction.
Under this provision the United States would allow a deduction
for the transfer or deemed transfer of property by a domiciliary
of the other State to a corporation or organization of that other
State organized and operated exclusively for such purposes, provided the transfer or deemed transfer is tax exempt in that other
State and that it would be deductible if made to similar a U.S.
corporation or organization.
Since this paragraph, according to
paragraph 4 of Article 1 (Scope), is an exception to the saving

-19clause, it requires the other Contracting State to allow a deduction for a contribution by either its own or a U.S. domiciliary to
a U.S. corporation or organization operated for the specified purposes, provided the contribution would be tax exempt if made to a
similar corporation or organization of the other State. Although
the Internal Revenue Code also allows deductions for transfers and
deemed transfers by nonresident aliens to certain political
entities, fraternal societies operating under the lodge system,
and veterans organizations, paragraph 3 is not intended to affect
U.S. statutory law with respect to transfers and deemed transfers
to organizations of this type.
Paragraph 4 obligates a Contracting State to give a marital
deduction for interspousal transfers of noncommunity property from
domiciliaries of the other Contracting State.
Subparagraph 4a)
provides that such property may be included in the taxable base of
the first-mentioned Contracting State only to the extent its value
.xceeds 50 percent of all the property which may be taxed by that
State. Thus, noncommunity property transferred from a U.S. domiciliary to his or her spouse may be taxed by the other Contracting
State only to the extent it exceeds 50 percent of all property
which may be taxed by that State.
Subparagraph 4b) limits the marital deduction obligation of
the United States provided in subparagraph 4a).
Under the
Internal Revenue Code, nonresident aliens are not allowed a marital deduction, but are entitled to significantly lower rates on
transfers of estates.
Subparagraph 4b) provides that the tax
imposed by the United States on interspousal transfers of noncommunity property by a domiciliary of the other Contracting State
who receives the marital deduction under subparagraph 4a) shall be
computed by applying the tax rates applicable to a domiciliary of

-20the United States. The resulting liability would be compared with
that imposed on a nonresident alien under U.S. statutory law
(taking the other rules of the Convention into account), and the
tax liability would be limited to the lower of the two amounts.
Assume, for example, that a domiciliary of the other
Contracting State dies with a taxable estate of $2,000,000 in noncommunity property.
The entire estate is comprised of property
that may, under the Convention, be taxed by the United States.
All the property is transferred to the decedent's spouse and the
decedent made no lifetime transfers of U.S. property. According
to the Convention, the taxable base is the excess over 50 percent
of all taxable property, or $1,000,000. If the decedent had been
domiciled in the United States, the tax liability on $1,000,000
would be $345,800. This is the maximum U.S. tax liability in this
case and compares favorably with the $384,000 tax liability on the
$2,000,000 estate of the decedent under United States law, apart
from the convention.
If, on the other hand, only $500,000 was transferred to the
decedent's spouse, the taxable base, under the Convention, would
be the $1,500,000 in property not transferred to the spouse. The
tax liability would be $555,800. In this case, the treaty provision does not provide for reduced taxation. The estate would be
better off by simply paying the $384,000 tax liability due under
United States statutory law.
Paragraph 5 obligates the State imposing estate tax solely on
the basis of situs to allow a $3600 credit or equivalent exemption. Section 2102(c)(1) of the Code allows such a credit with
respect to the transfer of an estate of a nonresident alien.

-21Article 9.

RELIEF FROM DOUBLE TAXATION

The purpose of this Article is to describe the mechanics for
avoidance of double taxation.
It establishes rules for determining when a Contracting State will credit the taxes of the other
Contracting State where both States tax transfers or deemed transfers of the same property. This can happen, for example, because
the situs State has the primary, but not exclusive, right to tax
property covered by Articles 5 (Real Property) and 6 (Business
Property of a Permanent Establishment and Assets Pertaining to a
Fixed Base Used for the Performance of Independent Personal
Services), but under the Convention the State of domicile may also
tax this property.
Paragraph 1 applies when the United States imposes tax on the
basis of an individual's domicile (as determined under Article 4
(Fiscal Domicile)) or citizenship.
Under subparagraph la), the
United States will credit tax paid to the other Contracting State
with respect to transfers and deemed transfers of property described in Article 5 (Real Property) or 6 (Business Property of a
Permanent Establishment and Assets Pertaining to a Fixed Base Used
for the Performance of Independent Personal Services). In addition, the United States is required under subparagraph lb), when
it taxes on the basis of citizenship, to credit taxes imposed by
the other State on the basis of the individual's domicile. This
provision obligates the United States, for example, to credit the
tax imposed by the other Contracting State on shares of stock in a
U.S. corporation transferred by a U.S. citizen domiciled in that
other State. This subparagraph does not apply to a former U.S.
citizen who renounced his citizenship primarily for tax avoidance
purposes. The Convention does not obligate the United States to
credit taxes imposed on these individuals on the basis of their
domicile in another State.

-22Paragraph 2 establishes reciprocal credit rules for the other
State. Paragraphs 1 and 2 thus require a Contracting State which
taxes transfers or deemed transfers of an individual domiciled in
that State on a worldwide basis to allow a credit for tax paid to
the United States on the property taxable on a situs basis under
the Convention.
A Contracting State which taxes transfers or
deemed transfers on the basis of citizenship must credit the tax
paid to the United States on a domiciliary basis.
Paragraph 3 provides for the credit of a gift or generationskipping tax against a subsequently-levied estate tax. Consider
the case of a domiciliary of the other Contracting State making a
gift of U.S. real property which is subject to U.S., but not
foreign, gift tax.
If the other Contracting State taxes the
transfer at the time of death, paragraph 3 requires it to credit
the U.S. gift tax. Paragraph 3 does not cover all instances of
potential double taxation based on differences in the timing of
taxable events. It does nov., for example, require the credit of a
situs-based estate tax against a previously levied domicile-based
gift tax. Such instances are difficult to cover comprehensively
in a model convention because they depend on the relationship
between United States and particular foreign laws.
The United
States is prepared, however, to cover such cases more thoroughly
in specific conventions.
Paragraph 4 preserves the credit despite internal relief
allowed by a Contracting State on successive transfers of property. It provides that the credit allowed by a Contracting State
under paragraph 1 or 2 shall not be reduced by any credit allowed
by the other Contracting State for taxes paid on prior transfers
or deemed transfers.
For example, section 2013 of the Code is
intended to prevent diminution of an estate by successive taxes on

-23the same property within a brief period. It provides U.S. citizens or residents with an estate tax credit for Federal estate
taxes paid on the transfer of property to the present decedent
from an individual who died within 10 years before or 2 years
after the present decedent.
The amount of the credit varies
inversely with the length of time between the successive deaths.
It is not necessary that the transferred property be identified in
the present decedent's estate, or even that the property be in
existence at the date of his death. In effect, paragraph 4 requires a Contracting State to acknowledge section 2013-type relief
by crediting the full tax allowed by paragraph 1 or 2, unreduced
by any credit allowed by the other Contracting State for taxes
paid on previous transfers or deemed transfers.
Although Article 2 (Taxes Covered) refers only to Federal
taxes, paragraph 5 of this Article deals with taxes paid to
political subdivisions of a Contracting State. It provides that
the credit allowed by a Contracting State according to paragraphs
1, 2, 3, and 4 of this Article shall include credit for taxes paid
to political subdivisions of the other Contracting State, to the
extent such taxes are allowed as credits by that other State.
Section 2011(a) of the Code allows a credit against the Federal
estate tax for estate and inheritance taxes paid to any state or
the District of Columbia. Section 2011(b) specifies limits on the
credit.
Paragraph 5 effectively requires the other Contracting
State to allow a credit for these sub-Federal taxes, to the extent
they are creditable against the Federal estate tax.
Paragraph 6 limits the credit allowed by paragraphs 1 and 2 to
the tax imposed by a Contracting State on the property in respect
of which a credit is claimed. The purpose of the limitation is to
prevent a credit from eroding the tax imposed by a Contracting

-24State on transfers or deemed transfers of property which may not,
under the Convention, be taxed by the other State. In making this
calculation the tax on the property is determined before the
credit is given.
The paragraph would apply, for example, in the case of a decedent who was a U.S. citizen domiciled in the other Contracting
State, whose estate consisted of U.S. real property with a fair
market value of $20 and assets in the other State with a fair market value of $100. The decedent makes no transfers which would
qualify for either charitable or marital deduction relief under
U.S. law. The entire $120 gross estate is taxable in the United
States on the basis of citizenship and in the other State on the
basis of domicile.
The United States retains primary taxing
jurisdiction over the U.S. real property and the other State over
the other assets.
If the estate tax in the other Contracting
State on the $120 estate were $24 and the U.S. estate tax were $30
before the allowance for any credits under th-vS Article, the other
State would credit $4 of U.S. tax ($20/$120) x ($24). Although $5
represents the portion of the U.S. tax of $30 attributable to U.S.
real property ($20/$120) x ($30), the credit would be limited to
$4, which is the portion of the $24 tax in the other State attributable to the U.S. real property. The United States would credit
the $20 of net tax paid to the other State, which represents the
portion of the $24 in tax that is attributable to property not
located in the United States ($100/$120) x ($24) . The net tax
liability in the other State would be $20 ($24 less $4) and the
U.S. tax liability would be $10 ($30-$20).
Paragraph 7 specifies a time period for claiming the credit
under this Article. Under section 2014(e) of the Code, the credit
for foreign death taxes must be claimed by the later of: 4 years

-25from the filing of the estate tax return; the expiration of any
extension of time for paying the Federal estate tax; or 60 days
after a final decision of the Tax Court on a timely filed petition
for redetermination of a deficiency. Paragraph 7 extends the time
period by providing that any claim for credit or refund based on
this Article may be made until two years after the final determination and payment of tax for which credit is claimed, provided
the determination and payment are made within 10 years of the date
of death, gift, or deemed transfer. The competent authorities may
extend the ten-year time limit if circumstances prevent the determination and payment within such period. Any refund based solely
on the provisions of the Convention will be made without payment
of interest.
Article 10. NON-DISCRIMINATION
Paragraph 1 prohibits discrimination based solely on citizenship.
It states that citizens of a Contracting Sta«_e, wherever
they are resident, shall not be subjected in the other State to
taxation or any requirement connected therewith which is other or
more burdensome than the taxation or connected requirements to
which citizens of the other Contracting State in the same circumstances are or may be subjected. The paragraph recognizes that a
nonresident alien is not in the same circumstances as a U.S.
citizen not resident in the United States. This is because the
United States taxes its citizens on a worldwide basis regardless
of residence, while nonresident aliens are taxed only on a situs
or source basis. Paragraph 1 allows the United States to maintain
this distinction in applying its law to citizens and nonresident
aliens.
Paragraph 2 provides that a permanent establishment which a
resident of one Contracting State has in the other Contracting
State will not be subject in that other State to less favorable

-26taxation than a resident of the other State carrying on the same
activities. This paragraph is designed to prohibit discrimination
based on the residence of the person owning the permanent establishment.
The provision does not mean that a Contracting State
must grant an individual residing in the other Contracting State
any personal allowances, reliefs, and reductions on account of
civil status or family responsibilities which it grants to its own
residents.
Paragraph 3 extends similar protection to an entity of a
Contracting State the capital of which is wholly or partly owned
or controlled by one or more residents of the other Contracting
State. This provision, and the discrimination which it addresses,
relate only to the taxation of entities and not to the persons
owning or controlling their capital.
Its object is to ensure
equal treatment for taxpayers residing in the same State, and not
to subject foreign capital, in the hands of partners or shareholders, to identical treatment to that applied to domestic capital.
Paragraph 2 and 3 will apply frequently to taxes covered,
pursuant to paragraph 4, by this Article, but not generally
covered by the Convention
Paragraph 4 provides that the provisions of this Article apply
to all taxes imposed by a Contracting State or a political subdivision or local authority thereof. Thus, the non-discrimination
provisions are not confined to the taxes generally covered by the
Convention; the Federal estate, gift, and generation-skipping
transfer taxes in the United States and similar taxes in the other
State.
The term "resident" as used in this Article is not defined in
the Convention and, accordingly, is to be interpreted under the
rules set forth in paragraph 2 of Article 3 (General Definitions).

-27Article 11.

MUTUAL AGREEMENT PROCEDURE

This Article specifies a procedure for resolving differences
arising out of the administration and application of the
Convention.
Under paragraph 1, if a person considers that the
actions of one or both of the Contracting States result or will
result in taxation which is not in accordance with the Convention,
he may present his case to the competent authority of the
Contracting State of which he is a resident or citizen. Although
a person need not exhaust other administrative or judicial remedies prior to resorting to the mutual agreement procedure, it is
expected that a person normally will do so. Nor is it required
that the actions concerned already have resulted in taxation not
in accordance with the Convention. The threat of such taxation is
sufficient to justify a presentation to the competent authority.
Such a presentation must be made, however, within one year after a
claim under the Convention for exemption, credit, or refund has
been finally settled or rejected.
Paragraph 2 provides that if the competent authority to which
a case is presented considers an objection justified and cannot by
itself arrive at an appropriate solution, it will attempt to
resolve the case by discussion and agreement with the competent
authority of the other Contracting State.
In cases where the
competent authorities reach an agreement, it will be implemented
notwithstanding any time limits or other procedural limitations in
the domestic laws of the Contracting States. This provision can
only help a taxpayer. It is contemplated that, if required by the
competent authorities' agreement, a refund or credit will be made
notwithstanding any procedural barriers such as the statute of
limitations or any outstanding closing agreement, but no additional tax will be imposed if foreclosed by the statute or closing

-28agreement. In cases where an agreement cannot be reached between
the competent authorities, a Contracting State may provide relief
from double taxation on a unilateral basis, but the Convention
does not establish such a requirement.
Paragraph 3 permits the competent authorities of the
Contracting States to endeavor to resolve difficulties or doubts
regarding the interpretation or application of the Convention,
such as the meaning of terms. The competent authorities may also
consult for the purpose of eliminating instances of double
taxation which are not covered by the Convention.
Under paragraph 4, the competent authorities may communicate
with each other directly and, when advisable, meet together for an
exchange of opinions, for the purpose of reaching an agreement.
It is not necessary to proceed through diplomatic channels.
Paragraph 5 provides that the competent authorities of the
Contracting States may prescribe rules and regulations for
carrying out the purposes of the Convention. This provision makes
explicit the authority which the U.S. competent authority has
under U.S. internal law.
Article 12. EXCHANGE OF INFORMATION
This Article provides for a system of administrative cooperation between the Contracting States.
Paragraph 1 requires the
exchange of information necessary for carrying out the provisions
of the Convention or the domestic laws of the Contracting States
concerning that taxes covered by the Convention.
Such exchange
may be either upon request or on a routine basis not requiring a
specific request. The requirement to exchange information is not

-29restricted by Article 1 (Scope); thus, information may be
exchanged on transfers and deemed transfers by individuals not
domiciled in either Contracting State. The competent authorities
may exchange information in connection with tax compliance generally, as well as information regarding illegal acts or crimes.
Any information received by a Contracting State must be treated as
secret, in the same manner as information obtained under the
domestic laws of that State.
The information may be disclosed
only to persons or authorities (including a court or administrative body) concerned with the administration, assessment, collection, or enforcement of, or the prosecution with respect to, the
taxes which are the subject of the Convention.
Agencies
performing administrative oversight functions, such as the General
Accounting Office, are eligible to participate in the exchange of
information. Persons receiving information shall use the information only for the specified purposes, but they may disclose such
information in public court proceedings or judicial decisions.
Paragraph 2 places limits on the obligations imposed on a
Contracting State by paragraph 1. A Contracting State is not required: to carry out administrative measures at variance with the
laws and administrative practice of either Contracting State or to
supply information unobtainable under the laws or normal administrative practices of either Contracting State.
Thus, a
Contracting State is not bound to go beyond its own laws and practices in making information available to the other State. On the
other hand, it cannot take advantage of the information-gathering
system of the other State if that system is more extensive than
its own. In addition, it need not supply information which would
disclose any trade, business, industrial, commercial, or professional secret or trade process, or information the disclosure of
which would be contrary to public policy.

-30Paragraph 3 prescribes the method for collecting requested
information and the form in which such information is to be provided. A Contracting State shall obtain the information requested
by the other Contracting State in the same manner it would employ
for obtaining information with respect to its own tax.
If
requested by the competent authority of the other Contracting
State, it shall provide information in the form of depositions and
authenticated copies of unedited original documents to the same
extent it can obtain such depositions and documents for the
purpose of imposing its own taxes.
Paragraph 4 states that for the purpose of this Article the
Convention applies to all taxes imposed by a Contracting State and
not solely those covered generally by the Convention. The Article
does not apply, however, to taxes imposed by political subdivisions or local authorities.
Article 13. DIPLOMATIC AGENTS AND CONSULAR OFFICERS
Diplomatic agents and consular officers frequently are
accorded benefits under international laws and agreements.
Paragraph 1 preserves these benefits.
Paragraph 2 makes clear that the Convention does not apply to
officials of international organizations and members of a diplomatic or consular mission of a third State, established in a
Contracting State but not domiciled in either Contracting State.
These individuals usually are covered by a Convention concluded by
the State or international organization which they represent.
Consequently, this paragraph is intended as a safeguard against
undesirable fiscal advantages: to make it clear that these
individuals are not entitled to benefits both of a Convention
arising from their employment status and from a Convention of the

-31Contracting State in which they are established.
The paragraph
states explicitly what can be inferred from paragraph 1 of
Article 1 (Scope); the Convention does not generally apply to
individuals not domiciled in either Contracting State.
Article 14. ENTRY INTO FORCE
This Article specifies the procedure for bringing the
Convention into force. Paragraph 1 provides that the Convention
shall be ratified in accordance with the applicable procedures of
each Contracting State and that instruments of ratification are to
be exchanged as soon as possible after both States have ratified
the Convention.
Paragraph 2 provides that the Convention will enter into force
immediately upon the exchange of instruments of ratification and
will apply to transfers and deemed transfers on or after the date
)f such exchange.
Article 15. TERMINATION
This Article specifies the procedure for terminating the
Convention, which is to remain in force indefinitely until terminated by one of the Contracting States. A Contracting State may
not terminate the Convention until it has been in force at least 5
years. After the initial 5-year period, either Contracting State
may terminate the Convention by providing the other State at least
6 months prior notice through diplomatic channels.
The notice
must specify the date of termination.
If the Convention is
terminated in accordance with these procedures, it will have no
effect with respect to transfers and deemed transfers after the
December 31 which either is the termination date specified in the
notice or which next follows the termination date so specified.

FOR IMMEDIATE RELEASE
December 5, 1980

CONTACT:

Robert Don Levine
202/566-5158

CHRYSLER LOAN GUARANTEE BOARD TO MEET DECEMBER 8
The Chrysler Loan Guarantee Board will meet at 11:00 a.m.
Monday, December 8 with Chrysler Corporation to review the
Company's operating and financing plans.
The Board meeting, in Room 4426, Treasury Building, will
be closed to the public under the provisions of the Government
in the Sunshine Act.
The voting members of the Board are Secretary of the
Treasury G. William Miller, Chairman; Federal Reserve Board
Chairman Paul Volcker and Comptroller General Elmer Staats.
o 0 0

M-766

OR IMMEDIATE RELEASE
December 5, 1980

CONTACT:

GEORGE G. ROSS
( 2 0 2) 566-2356

TREASURY ANNOUNCES PUBLIC MEETING
TO DISCUSS ISSUES IN RENEGOTIATING THE
INCOME TAX TREATY WITH AUSTRALIA
The Treasury Department today announced that it will
hold a public meeting on January 7, 1981, to solicit the
views of interested persons on issues being considered in
the revision of the existing income tax treaty between the
United States and Australia.
The public meeting will be held at the Treasury
Department at 3:00 p.m. in room 4121. Persons interested
in attending are requested to give notice in writing by
January 2, 1981, of their intention to attend. Notices
should be sent to Joel Rabinovitz, Deputy International Tax
Counsel, Department of the Treasury, Room 4013, Washington,
D.C. 20220. Persons unable to attend the meeting are
invited to submit written comments to the same address.
The present treaty, which has been in effect since
January 1, 1953, is being renegotiated to update the
provisions.
This announcement will appear in the Federal Register
of December 10, 1980.

M-767

FOR IMMEDIATE RELEASE
December 5, 1980

CONTACT:

GEORGE G. ROSS
202/566-2356

TREASURY RELEASES SECOND REPORT ON
THE INTERNATIONAL BOYCOTT PROVISIONS OF
THE INTERNAL REVENUE CODE
The Treasury Department today released its second
annual report of the international boycott provisions,
titled "The Operation and Effect of the International
Boycott Provisions of the Internal Revenue Code1.'.
The international boycott provisions, added to the
Code by the Tax Reform Act of 1976, deny certain tax
benefits to persons who participate in or cooperate with
an international boycott. The tax benefits affected by
the international boycott provisions are the foreign tax
credit, the deferral of tax on the earnings of controlled
foreign corporations, and the deferral of tax on the
earnings of Domestic International Sales Corporations.
The international boycott provisions are generally
effective for operations after November 3, 1976.
The Second Report covers the calendar year 1977. It
provides an estimate of the tax benefits lost and information on the number and type of boycott requests received
and agreements entered into.
A limited numbed of copies are available at the
Treasury Press Office, Room 2313, Washington, D.C. 20220,
Phone (202) 566-2041. Additional copies may be purchased
from the Government Printing Office, Washington, D.C. 20402.

M-76 8

FOR IMMEDIATE RELEASE
December 8, 1980

Contact:

George G. Ross
(202) 566-2356

TREASURY ISSUES FOREIGN EXCHANGE DISCUSSION DRAFT
The Treasury Department today issued a discussion draft
presenting a system for taxing foreign exchange gains and
losses, and solicited public comment on the discussion
draft.
The report is based upon the Treasury's own studies and
the public comments received in response to the Treasury
request for comments on April 10, 1980. Treasury expresses
no view as to the extent to which its proposals represent
current law or may require legislation. Moreover, the
positions taken in the discussion draft are tentative and
subject to change in light of the comments being solicited
today and further study.
Persons wishing to submit comments should address them
to H. David Rosenbloom, International Tax Counsel, U.S.
Treasury Department, Washington, D.C. 20220.
This notice will appear in the Federal Register dated
December 11, 1980. A copy of the discussion draft is
attached.
o 0 o

M-769

FOREIGN EXCHANGE GAINS AND LOSSES

General Framework

Set forth below is a suggested approach to U.S. tax
treatment of foreign exchange gains and losses. A foreign
exchange gain or loss arises whenever a transaction (e.g., a
loan, or a forward exchange contract) is denominated in a
foreign currency and the value of the foreign currency
changes between the time the transaction is entered and the
time it is closed, or when transactions are recorded on
books properly kept in a foreign currency and the value of
the currency changes during the period for which the books
are kept. The rules discussed below would apply to foreign
exchange gains and losses arising in a trade or business
(other than a trade or business of dealing in foreign currency, foreign-currency-denominated securities, or forward
exchange contracts) conducted by a corporation, trust or
estate, partnership, or sole proprietor. The tax consequences of foreign exchange gains and losses of an investor
(except in stock in a subsidiary), a dealer, or an employee
are not addressed. No view is expressed as to the extent to
which the approach described here represents current law or
may require legislation. Moreover, the draft does not
necessarily represent positions which may be taken subsequently by the Treasury or the Internal Revenue Service.
The tax consequences of business-related exchange gains
and losses would depend, first, upon identification of a
functional currency for each business entity of a taxpayer.
In general, each "trade or business" under section 446(d) of
the Internal Revenue Code would constitute a separate
"entity."
*
An entity's functional currency would be the primary
currency of the economic environment in which the entity
operates. It is presumed that an entity's functional
currency would be the currency of the country in which the
entity is located and the currency of the country in which
the books of record are maintained. In some instances,
however, a foreign entity's functional currency may not be

-2the currency of the country where the entity is located even
though that currency is used in the books of record;* see,
for instance, Examples 1, 2, and 3 below.
Although the identification of a functional currency
would depend on the facts and circumstances of each specific
entity, consistent criteria for identifying the functional
currencies of entities in different countries conducting
otherwise similar trades or businesses would be required.
Moreover, if in preparing a financial statement mandated by
any Federal agency a taxpayer were required to use essentially the same criteria in specifying the functional currency of an entity, that specification would be a factor in
determining the proper functional currency for income tax
purposes. If in a particular case the facts and circumstances do not clearly require the specification of a particular currency, taxpayers would have discretion in
choosing among the possible alternatives the functional
currency to be used for tax purposes.
The functional currency would play a critical role in
the computation of income or loss for tax purposes. If an
entity's functional currency were the U.S. dollar, but its
books of record were kept in a different currency, net gain
or loss would be computed under a "separate transactions"
method or a "net worth" method structured to approximate the
"separate transactions" result. By contrast, if an entity's
functional currency were a currency other than the U.S.
dollar, income or loss computed in the functional currency
would be translated directly into dollars at an appropriate
exchange rate—i.e., a "profit and loss" method would be
used. Thus, whether net gain or loss is computed under a
"net worth" method or a "profit and loss" method would
depend upon what the functional currency of the entity was.
The statement of these criteria is identical to that of
the Financial Accounting Standards Board, Foreign
Currency Translation, Exposure Draft, August 28, 1980,
paragraph 15. As noted below, however, the functional
currency of an entity for income tax purposes may differ
from that used in preparing any financial statement.
The Treasury recognizes that implementation of a functional currency approach would require more precise
criteria than are stated here. In stating only general
criteria, the Treasury is seeking public comment not
only on the functional currency concept, but also on the
specific criteria that would be required to implement
that approach.

-3Section II provides rules by which exchange gain or loss
on specific transactions denominated in a currency other
than an entity's functional currency (e.g., the foreigncurrency-denominated transactions of an entity using the
U.S. dollar as its functional currency) would be treated.
In summary:
Gain or loss would be recognized on the sale or
exchange of a foreign-currency-denominated financial asset (or upon receipt of repayment in the
case of foreign-currency-denominated indebtedness)
and would be treated as if interest income received
with respect to that asset or indebtedness had been
increased or decreased, respectively, by the amount
of such gain or loss;
Gain or loss on certain designated balances of
foreign currency itself could be accrued by valuing
such balances at current exchange rates;
Gain or loss on the discharge of a foreigncurrency-denominated liability would be recognized
and treated as if the interest expense incurred
with respect to that liability had been decreased
or increased, respectively, by the amount of such
gain or loss;
If a forward exchange contract was hedging a specific foreign-currency-denominated item, gain or loss
on the discharge of the contract would be treated
in the same manner as gain or loss on the hedged
item.
Gain or loss on a forward exchange contract hedging
an accounting exposure arising under generally
accepted accounting standards or hedging stock in a
controlled foreign corporation would be ordinary
and domestic source.
Section III below sets forth rules by which functional
currency amounts would be computed when an entity keeps its
books of record in a currency other than its functional
currency. In summary, the amount of net gain or loss, its
character and source, the amount of foreign income tax paid
or accrued, and all other amounts relevant to the determination of income tax liability would be determined, if practicable, by translating each transaction into functional
currency at the exchange rate for the date the transaction
is recorded for tax purposes. If a "separate transactions"
method were not feasible, a "net worth" method would be used
to approximate a "separate transactions" result.

-4Section IV provides rules with respect to income earned
by an entity which is a part of a U.S. person and which has
properly specified a currency other than the dollar as its
functional currency. In such cases, gain or loss would be
computed by treating the functional currency as "money" in
the hands of the entity and, by implication, treating the
dollar from the entity's standpoint as if it were a foreign
currency. The entity's net gain or loss and other amounts
necessary to compute the U.S. tax liability would be translated from functional currency into dollars at an appropriate exchange rate. In addition, special rules are proposed for recognizing gain or loss on the sale of property
(including the entity's functional currency) remitted by an
entity to its head office. These rules would assure that
the total U.S. dollar amount of profit or loss recognized
over the life of an entity would be the same whatever its
functional currency may have been.
The income and deductions effectively connected with a
U.S. trade or business of a foreign taxpayer would be computed in essentially the same way as those of an entity
which is part of a U.S. person, but which uses a foreign
currency as its functional currency.
Section IV also provides rules for taxing distributions
to U.S. shareholders by foreign corporations whose functional currency is a currency other than the dollar. In
general, the foreign corporation's earnings and profits, its
accumulated profits, and its foreign taxes would be translated from the corporation's functional currency into
dollars at the exchange rate for the date the distribution
is considered to have been received by the U.S. shareholder.
The accounts would then be adjusted to reflect the distribution and translated back into the functional currency at
the same exchange rate as was used to translate the predistribution amounts into dollars. Finally, if a foreign
corporation with previously taxed earnings made a distribution, the tax consequences of the distribution would first
be computed without regard for the previous taxation. Then
the dollar amounts of gross income and deemed-paid foreign
tax credit which would otherwise be recognized by the shareholder would be offset by the dollar amounts of previously
taxed earnings and associated previously claimed credits.
Translating accumulated profits and foreign taxes paid
at the exchange rate for the date a distribution is received
results in a tax benefit if the functional currency of the
foreign corporation has been appreciating against the
dollar, and a tax penalty if the functional currency has
been depreciating against the dollar. These distortions
would be avoided if foreign taxes were translated at the

-5exchange rate for the date they were paid, and the foreign
exchange gain or loss component of any distribution were
ordinary and domestic source. However, translating foreign
taxes paid at the exchange rate for the date of distribution
preserves the historic ratio between foreign taxes and
accumulated profits, minimizes administrative and transitional problems, and appears to be the decided preference of
those commenting on the Treasury's release of April 1980.

-6II. Specific Transactions Denominated in a Currency Other
than the Functional Currency
This section sets forth rules for treating gains and
losses arising on transactions denominated in a currency
other than the entity's functional currency. The rules
apply not only to entities having the U.S. dollar as their
functional currency, but also to entities computing gain or
loss in a currency other than the dollar. For ease of
exposition, in this Section a "foreign" currency means any
currency (including the U.S. dollar) other than the entity's
functional currency.
A. Foreign-Currency-Denominated Financial Assets
Because foreign-currency-denominated items of income
(e.g., receipts from a sale of inventory for foreign currency) and expense are generally translated at the exchange
rate for the date they are recognized for tax purposes, no
foreign exchange gain or loss, as the terms are used here,
arises with respect to such items. However, upon the sale
or exchange of a foreign-currency-denominated financial
asset* or upon receipt of repayment of foreign-currencydenominated indebtedness, foreign exchange gain or loss
would be recognized.** Such gain or loss would have the
*

A foreign-currency-denominated financial asset or
liability is any financial asset or liability (e.g., a
loan) the principal amount of which is determined by the
value of one or more foreign currencies. Such an asset
or liability need not require or even permit repayment
with a foreign currency as long as the principal amount
is determined by reference to one or more such
currencies.
** The foreign exchange gain or loss on a foreign-currencydenominated financial asset or liability equals the
taxpayer's basis in that asset or liability stated in
the foreign currency (not in its functional currency)
multiplied by the appreciation or depreciation, as
appropriate, in the functional currency value of the
foreign currency between the time the asset was acquired
and the time it was sold or exchanged, or the time the
liability was incurred and the time it was discharged —
see Examples 4 and 5. The amount of such gain or loss
is limited, however, to the total gain or loss recognized on disposition of the item — see Example'6.

-7same character and source as a comparable increase or
decrease in interest income received with respect to the
asset* — see Examples 4 and 5.
For ease of exposition, the "source" of a foreign
exchange gain refers not only to its geographic source for
purposes of computing the foreign tax credit limitation, but
also, unless otherwise stated, to all other categories of
gross or net income relevant to the computation of U.S. tax
liability (e.g., foreign oil and gas extraction income,
taxable income attributable to a DISC, taxable income effectively connected with a trade or business within the United
States). The source of a loss or expense means the class of
gross income to which such loss or expense is properly
allocated or apportioned.
These general rules would, however, have two narrow exceptions. First, if an entity received foreign currency**
and immediately proceeded to convert it into its own functional currency (or other property), the gain or loss on the
sale of the foreign currency briefly held by the entity
would be recognized separately, but would be characterized
and sourced in the same fashion as additional gain or loss
on the related transaction — see Example 7.
Second, an entity could elect to accrue gains and losses
on "transactions" or "working" balances of foreign currency
by valuing such balances at year-end foreign exchange rates.
Current market valuation would be limited to those balances
held for use in the entity's trade or business; currency
If such a U.S.-source foreign exchange gain was derived
by a foreign person, but was not effectively connected
with a trade or business within the United States, such
gain would not be considered interest or other fixed and
determinable annual or periodic gain, profit or income
under section 871(a) or 881(a) and would not, therefore,
give rise to a withholding tax liability under section
1441 or 1442.
Foreign currency, as the term is used here, includes not
only coin and currency per se, but also foreign-currency
denominated demand deposits and similar instruments
issued by a bank or other financial institution.

-8held for investment would not qualify. To qualify for this
treatment, foreign currency would have to be earmarked as
such at the time it was acquired.*
B. Foreign-Currency-Denominated Liabilities
Foreign exchange gain or loss would be recognized on the
discharge of a foreign-currency-denominated liability
regardless of whether such a liability was evidenced by a
written instrument. In computing the income tax liability
of the person incurring the foreign-currency-denominated
liability, such a gain or loss would be treated as if the
interest paid with respect to that liability had been reduced or increased, respectively, by the amount of the gain
or loss — see again Examples 4 and 5.
C. Forward Sale and Purchase Contracts
In general, the treatment of gain or loss on a forward
sale or purchase contract** would depend on whether the contract was hedging another foreign-currency-denominated item.
A forward contract hedges a foreign-currency-denominated
item to the extent that the impact of a change in the value
of the foreign currency on the functional currency value of
the forward contract, either alone or in combination with
other such contracts, offsets the impact of that same change
on the functional currency value of the foreign-currencydenominated item. A hedging relationship could be established either by reference to specific facts and circumstances (e.g., the amount of the forward contract, particular currency, initial date, and maturity) clearly indicating
*

This rule would be similar to the present rule allowing
dealers in securities, cotton, grain, and other commodities to value their trade-or-business inventories, but
not similar property held for their own account, at
current market value.
** A forward sale contract is any contract to sell or
exchange foreign currency at a future date under terms
fixed in the contract. A forward purchase contract is
any contract to use functional currency to purchase
foreign currency at a future date under terms set forth
in the contract. A contract to exchange one foreign
currency for another at a future date under terms fixed
in the contract would be considered a forward sale, not
a forward purchase, contract.

-9a hedging motive, or by proper earmarking of a contract.
Procedures would be developed under which the intended
nature of the contract could be established irrevocably at
the time it was entered into. If facts and circumstances
did not clearly compel the result, the presence or absence
of earmarking would be evidence of whether a hedging relationship exists. The tax consequences of gains or losses
arising outside a hedging context are not addressed in this
proposal.
Gain or loss would be recognized on the sale or exchange
of a forward sale or purchase contract itself, on the cancellation with compensation of the contractual rights and
obligations, and on the sale (but not 'the purchase) of
foreign currency under the contract. The character and
source of the gain or loss on a hedging contract would be
the same as those of gain or loss on the item hedged:
1. The gain or loss on a forward sale contract hedging
the principal amount of a specific foreigncurrency-denominated financial asset would be
characterized and sourced in the same manner as an
increase or decrease in interest received with
respect to that asset.
2. The gain or loss on a forward sale contract hedging
an item of income anticipated, but not yet
received, by the taxpayer would be characterized
and sourced in the same manner as an increase or
decrease, respectively, in the amount of that item
of income.*
3. The gain or loss on a forward purchase contract
hedging the principal amount of a specific foreigncurrency-denominated liability would be characterized and sourced in the same manner as interest
paid with respect to that liability.
If a taxpayer enters into a forward contract to hedge
the receipt or payment of foreign currency, and the item
is accrued for tax purposes after entering into the contract, but before the foreign currency is actually received or paid, the taxpayer would choose when it enters
into the contract to apportion the gain or loss on the
contract between its dual functions (hedging first the
anticipated item of income or expense and then the
receivable or payable) or to attribute the entire gain
or loss on the contract to its predominant function.

-104.

The gain or loss on a forward purchase contract
hedging a specific foreign-currency-denominated
expense anticipated, but not yet incurred, would be
characterized and sourced in the same manner as
a decrease or increase in that expense. (Contracts
hedging foreign income taxes paid or accrued are
described in Part D below.)
The gain or loss on a forward contract hedging the
taxpayer's stock in a controlled foreign corporation, or hedging an accounting exposure arising
under generally accepted accounting practices on a
consolidated financial statement which includes the
taxpayer, would be ordinary and domestic source.*
The gain or loss on a forward exchange contract
specifically hedging the gain or loss on another
forward exchange contract would be characterized
and sourced in the same manner as that on such
other contract.
If a forward exchange contract was clearly hedging
one or more foreign-currency-denominated items, but
had not been specifically earmarked and could not
be unambiguously associated with any specific item
or items, the gain or loss would be ordinary and
domestic source.
Amount of Income Tax Available for Credit

In general, the amount of foreign income tax paid or
accrued would be determined by translating the foreigncurrency-denominated amount at the exchange rate for the
date the tax is paid or accrued.
1. Taxes withheld (either by law or under a binding
legal obligation) from gross income would be considered paid on the date the gross income is
recognized.
2. Taxes accrued, but not paid, would have to be
restated upon payment to reflect the exchange rate
for the payment date.

A contract hedging an anticipated distribution from a
foreign corporation would be included in the second
category enumerated above and not in this category.

-11A foreign exchange gain or loss attributable to the
payment of a foreign income tax liability with
appreciated or depreciated foreign currency would
be recognized at the time the tax was paid — see
Examples 8 and 9.
If the taxpayer established that a forward contract
was specifically hedging a foreign income tax
liability, the gain or loss on that contract would
not be recognized as an increase or reduction in
income when the contract was discharged, but would
be reflected in the amount of foreign tax available
for credit — see Example 10.
The treatment of income tax refunds received or
accrued and forward sales contracts specifically
hedging such refunds would be similar to that of
income taxes paid or accrued and forward purchase
contracts hedging such taxes, respectively.
The amount of "deemed paid" credit which would be
allowed to a corporate shareholder in a foreign
corporation whose functional currency was other
than the dollar is described in Section IV below.

-12III.

Entities Using One Currency as Their Functional
Currency and Maintaining Books of Record in Another
Currency

This section sets forth guidelines for translating into
functional currency, if necessary, amounts stated in the
currency in which books of record are maintained. The
objective is to approximate insofar as may be possible the
results that would have been obtained had the books of
record been kept in the functional currency.
A. Net Gain or Loss
It may be feasible to maintain separate books in the
functional currency and translate each and every transaction
at the exchange rate for the date the transaction is
recorded for tax purposes. If practicable, such a "separate
books" or "separate transactions" method would be used.
Otherwise, the amount of net gain or loss would be approximated by a "net worth" method according to the following
rules:
1. A balance sheet conforming substantially with U.S.
tax principles (including those set forth in Section
II above) would be prepared in the currency in which
the entity's books of record are maintained.
2. Each asset would be translated into the functional
currency at the average exchange rate* for the
year** in which it was acquired.

An average exchange rate for the year is a rate which,
if used to translate total gross receipts of an entity
during the year, would produce approximately the same
functional currency amount as would have been obtained
had each and every gross receipt been translated at the
exchange rate for the date the receipt was recorded for
tax purposes. Taxpayers would devise reasonable procedures for constructing an appropriately weighted average
of exchange rates during the year. The same general
procedure would ordinarily be used for different entities of the same taxpayer unless the use of different
methods was shown to result in a clearer determination
of each entity's income. With respect to any particular
entity, the method of determining the average exchange
rate would be considered one element in a method of
accounting and subject to change only with the
permission of the IRS.
** A year means the taxable year, or any portion thereof,
for which net gain or loss, etc., must be calculated.

-133.

Each liability (except for accrued income taxes and
other non-deductible expense items) would be translated into the functional currency at the average
exchange rate for the year in which it was incurred.
4. The increase or decrease in net worth between the
beginning and the end of the year, stated in the
functional currency, would be computed.
5. All non-deductible distributions (e.g., remittances
or dividends, foreign income taxes, non-deductible
expenses, etc.) would be translated into the functional currency at the exchange rate for the date of
distribution or remittance.
6. All non-taxable transfers to the entity would be
translated into the functional currency at the
exchange rate for the date of transfer.
7. Net gain or loss in the functional currency would be
the amount determined at step 4 added to that at
step 5, and reduced by the amount determined at
step 6.
This method is illustrated in Example 11.
E. Character and Source
If total gain or loss can be calculated under a "separate books" or "separate transactions" method, so too would
such gain or loss be characterized and sourced. And even if
net gain or loss must be calculated under a "net worth"
method, transactions giving rise to capital gain or loss or
to special types of gross or net income defined by the Code
may be relatively infrequent. If so, the amount of net gain
or loss in such a category (e.g., capital gain) would be
determined by reference to the specific transactions.
If the amount of gain or loss in any special category
could not practicably be computed under a "separate transactions" method, it would be computed as follows (see again
Example 11):
1. The amount of gain or loss in such category would be
computed by applying U.S. tax principles (including
those set forth in Section II above) to transactions
as stated in the currency in which the books of
record are maintained.

-142.

The amounts determined in step 1 would be translated
into functional currency amounts at the average
exchange rate for the year.

3. The difference between aggregate net gain or loss as
computed under the "net worth" method in Part A
above and the translated net gain or loss calculated
at step 2 would be computed.
4. The difference calculated at step 3 would be apportioned among each category calculated at step 2 on
the basis of gross receipts in each category as
stated in the currency in which the books of record
are kept.
C. Amount of Foreign Income Tax Paid or Accrued
The amount of foreign income tax paid or accrued would
be computed by translating the amount as stated in the currency in which the books of record are kept at the exchange
rate for the date the tax was paid or accrued. If the
exchange rate changed between the time a tax was accrued and
the time it was paid, the amount available for credit would
be restated according to the rules set forth in Part D of
Section II above.

-15-1
IV. Entities Using a Currency Other Than the Dollar as
Their Functional Currency
A.

Branches and Other Entities of U.S. Persons

1. Net Gain or Loss
This section sets forth rules by which the net gain or
loss of an entity with a functional currency other than the
dollar would be translated into dollars for U.S. income tax
purposes. It also provides rules under which gain or loss
would be recognized on the sale or exchange of currency or
other property remitted by an entity to the head office.
These latter rules assure that if an entity is liquidated,
its assets sold and its liabilities discharged, the cumulative gain or loss recognized by the taxpayer over the life
of the entity would be the same whatever its functional
currency.
.7
Specifically:
1. Aggregate gain or loss as computed and recorded in
the functional currency of the entity would be
translated into dollars at the appropriate exchange
rate as computed below:
a. If the entity had a loss in any year, that loss
would be "rolled back" and translated at the
same average exchange rate applied to unremitted
gain from the most recent years for which such
unremitted gain was not offset by another such
loss. That is to say, a last-in-first-out
(LIFO) rule would apply. If the loss exceeds
all previous unremitted gain, the excess would
be translated at the exchange rate for the date
of the most recent transfer of currency or other
property from the head office. Only if the loss
exceeds all previous unremitted gains and all
previous transfers from the head office would
that excess loss be translated at the average
rate for the current year.

•

Although remittances are typically to a head office,
these same rules apply to remittances to any other
entity of the same taxpayer.

-16b. If any loss was translated at the average rate
for the current year, rather than "rolled back,"
then an equal amount of net gain or transfers
from the head office in future years, whichever
occurred first, would be "rolled back" and
translated at the average rate for that earlier
loss year. Net gain in excess of such previous
year's loss would be translated at the average
exchange rate for the current year.
In short, a net gain would typically be translated
at the average exchange rate for "the current year,
whereas a net loss would typically be translated at
the average exchange rate for one ,Qr more earlier
years. The ratio of the U.S. dollar value of the
net gain or loss computed under Ithe translation
rules set forth above to its value.stated inrthe
entity's functional currency is defined to be the
appropriate exchange rate. The computation of the
appropriate exchange rate is illustrated in Example
12.
2. If an entity makes a remittance to the head office,
additional gain or loss would be recognized on the
sale or exchange of the remitted property by the
head office:
a. If an entity remits its own.: functional currency
and the head office immediately converts that
currency into its own functional currency, the
taxpayer would.; recognize a foreign exchange gain
or loss, ordinary and domestic source, equal to
the amount of functional currency remitted multiplied by the appreciation or depreciation in
the value of the entity's functional currency
between the time the gain was considered to have
been earned by the entity or transfers received
from the head office and the time the currency
was remitted and converted. The same,LIFO rule
described above for "rolling back" and translating the entity's losses would' apply in determining which year's gain or which previous
transfer from the head office was considered to
have been remitted. If the entity makes a
remittance in a year in which it has a loss, the
loss would be "rolled back" and translated at
the appropriate rate before the gain or loss
arising on the sale of the remitted, currency was
computed. The computation of such gain or loss
is illustrated in Examples 12, 13 and 17.

-17If the head office does not immediately convert
the functional currency remitted by an entity,
the taxpayer would also recognize on the eventual sale additional gain or loss attributable
to the appreciation or depreciation in the value
of the currency subsequent to its remittance.
Unlike the gain or loss described above, which
would necessarily be ordinary and domestic
source, the treatment of gain or loss accruing
subsequent to the remittance would be determined
by facts and circumstances relating to the sale
or exchange of the remitted currency. For
example, if the functional currency remitted by
the entity was subsequently held by the head
office for use in its own trade or business,
then under the rules set forth in Section II
above, the additional gain or loss would be
treated as if interest received with respect to
that currency had been increased or decreased by
the amount of the gain or loss.
If an entity remits property other than its own
functional currency, the fair market value of
that property as stated in the entity's functional currency may differ from the functional
currency basis in that property. The tax treatment of gain or loss on the sale of property
remitted by an entity would conform to that of
the combined gain or loss recognized on the sale
of similar property by an entity, the immediate
remittance of the functional currency proceeds,
and the conversion of those proceeds by the head
office. The taxpayer's basis in remitted property as stated in the functional currency of
the head office would equal its basis as stated
in the functional currency of the entity translated at a particular exchange rate. The particular exchange rate is that which would have
been applied in computing the gain or loss on a
remittance on the same date as the property was
remitted of an amount of the entity's functional
currency equal to the entity's functional currency basis in the remitted property. In addition, a portion of the total gain or loss recognized by the taxpayer on the sale or exchange of
the remitted property would be ordinary and
domestic source regardless of the facts and circumstances pertaining to the sale or exchange.
That portion would equal the lesser of (1) the
entity's functional currency basis in the
property, or (2) the fair market value of the

-18property on the date of remittance as stated in
the entity's functional currency,* multiplied by
the appreciation or depreciation in the value of
the functional currency between the time gain
represented by the remitted property was derived
by the entity and the time the property was
remitted. These rules are illustrated by
Examples 15, 16 and 19.
d. A remittance of the functional currency of the
head office requires special treatment because
that currency is property in the hands of the
entity and money in the hands of the head
office. To avoid the difficulties of ascertaining when such money is disposed of by the
head office, the remittance itself would be
considered a sale or exchange. Conversely, if
the head office transferred the functional currency of the entity to the entity, the transfer
itself would also be considered a sale or
exchange. This rule is illustrated by Examples
14 and 18.
2. Character and Source
The character and source of profit or loss and any other
amount relevant to the determination of the U.S. income tax
liability with respect to income or loss recorded on the
books of an entity would be determined by first computing
such amount in the functional currency of the entity and
then translating that amount at the appropriate exchange
rate for the year, as defined above.
The amount of ordinary, domestic source gain or loss
would be determined by the lesser of these two amounts,
rather than by the functional currency basis alone, because had the property been sold at a loss prior to any
remittance, the amount of gain available for remittance
would already have been offset by the loss on the sale
of the property. In computing the amount of such gain
or loss, unremitted gain from the current or previous
years would first be reduced by the excess of the basis
in the property over its fair market value.

-193.

Amount of Income Tax Paid or Accrued

The amount of income tax paid or
with respect to income derived by
would be stated in the functional
the appropriate exchange rate for

accrued by an entity
the entity during a year
currency and translated at
that year.

-20B

U.S. Entities of Foreign Persons,

If a non-resident alien individual, a foreign corporation or other foreign person has a taxable entity in the
United States, "the rules set forth above for determining the
amount of gain or loss of a foreign "entity of a U.S. person
would also apply in determining the amount of gain or loss
of a U.S. entity of a foreign person. If a U.S. entity
remitted property which had been used in its U.S. trade or
business, the portion of any gain or loss accruing prior to
a remittance, but realized on the sale or exchange of that
property subsequent to its remittance, would be considered
effectively connected wtih its U.S. trade or business.

-21C.

Distributions from Foreign Corporations

1. Actual Distributions
The earnings and profits, accumulated profits, and
foreign taxes of a foreign corporation would be determined
in the functional currency of that corporation. Upon an
actual distribution of functional currency (or other property) by the foreign corporation, the fair market value of
the distribution, the earnings and profits, the section 902
accumulated profits, and foreign taxes would all be
translated at a common exchange rate:
If functional currency is converted to dollars and
immediately distributed, or vice versa, the common
exchange rate for translation would be the
conversion rate.
If functional currency is distributed and not
immediately sold or exchanged, or if property other
than functional currency is distributed, the common
exchange rate is the exchange rate on the date the
distribution is recognized for tax purposes by the
shareholder.
If a forward sale contract was considered under the
rules set forth in Part C of Section II above to be
specifically hedging an actual dividend from a
foreign corporation, then the common exchange rate
would equal the ratio of the fair market dollar
value of the distribution net of the foreign
exchange gain or loss on the hedging contract to
the amount of the distribution stated in the functional currency of the foreign corporation — see
Example 20.
A shareholder's basis in its stock would be computed in
the shareholder's own functional currency, not in the functional currency of the foreign corporation making the distribution. After the distribution, the undistributed
earnings and profits, undistributed accumulated profits, and
foreign taxes would be translated back into functional currency at the common exchange rate applied to the distribution
2. Deemed Distributions
The determination of whether a U.S. shareholder must
include in its gross income any amounts deemed distributed
by a controlled foreign corporation (e.g., if Subpart F
income exceeds 10 percent of gross income), the amounts so

-22included, the earnings and profits of the controlled foreign
corporation, and the deemed-paid credit under section 960
would all be computed by translating functional-currencydenominated amounts at the average exchange rate (as defined
above) for the year.
:., .
3. Actual Distributions out of Previously Taxed
Earnings and Profits
If a controlled foreign corporation makes an actual distribution out of earnings and profits which were previously
deemed distributed, the amount and character of the actual
distribution received and the amount of the deemed paid
credit would first be computed without regard to the deemed
distribution. The dollar values of gross income and the
deemed-paid credit would then be reduced by the dollar
values of previously taxed earnings and the previously
available deemed-paid credit — see Example 21.
If the exchange rate at which a deemed distribution was
translated is less than that at which an actual distribution
was valued (i.e., if the foreign currency has depreciated in
value), then this procedure would result in a reduction in
the amount of gross income otherwise subject to tax and a
corresponding reduction in the amount of foreign tax otherwise available for credit. In the event that such a reduction in foreign income taxes available^for credit exceeded
all taxes otherwise available for credit, the net deficiency
would be carried back or forward according to the rules
applicable to taxes paid or accrued in excess of the foreign
tax credit limitation.

-23Example 1

(Functional Currency)

A U.S. parent corporation, P, has a wholly owned U.S.
subsidiary, S, whose head office is in the United States,
although its primary activity is extracting natural gas and
oil through a branch in a foreign country. Sales of natural
gas and oil are usually billed in U.S. dollars, and significant liabilities and expenses (e.g., loan principal and
interest) are often denominated in dollars. Although the
foreign country requires the local branch's books to be kept
in the local currency, P and S elect in filing Federally
mandated financial statements to use the dollar, not the
local currency, as the functional currency of the foreign
branch. The criteria for identifying a functional currency
in preparing these financial statements are essentially the
same as those for tax purposes. S's functional currency for
tax purposes would be the dollar.

-24Example 2

(Functional Currency)

A bank incorporated and with its head office in the
United States has a branch in a foreign country. Although
the foreign country requires the branch to keep books in the
local currency, the branch customarily fixes the terms of
its loans to local customers by reference to a contemporary
London Inter-Bank Offered Rate (LIBOR) on dollar deposits
(e.g., the interest rate on outstanding loan principal
equals LIBOR plus 2 percent and outstanding loan principal
is adjusted to reflect changes in the dollar value of the
local currency). Local lending is, in turn, typically
funded with dollar-denominated funds borrowed from the head
office, other branches and subsidiaries.of the same bank,
and independent lenders. The bank elects to use the dollar,
not the local currency, as the functional currency of the
branch for Federally mandated financial reporting purposes.
The criteria for identifying a functional currency in preparing these financial statements are essentially the same
as those for tax purposes. The dollar would also be the
functional currency for tax purposes.

-25Example 3

(Functional Currency)

A U.S. taxpayer incorporates a wholly owned subsidiary
in Switzerland. All books of record are maintained in Swiss
francs, and the Swiss franc is elected as the functional
currency for financial reporting purposes. However, the
Swiss company is primarily a base company selling the
exports of its U.S. parent corporation, and virtually all of
its income is foreign base company sales income within the
meaning of section 954(d). Most of its transactions are
denominated in U.S. dollars or, less frequently, in foreign
currencies other than the Swiss franc. Under these circumstances, the IRS may, for U.S. income tax purposes, require
that the U.S. dollar be substituted for the Swiss franc as
the functional currency of the Swiss company and, thus, that
Swiss franc amounts be translated into U.S. dollars under
the rules set forth in Section III.

-26Example 4

(Foreign-Currency-Denominated Assets and
Liabilities)

A U.S. corporation, A, whose functional currency is the
dollar, issues at par value a two-year note for 1,000,000
francs, which is purchased by a second, unrelated U.S. corporation, B, whose functional currency is also the dollar.
The terms of the note call for semi-annual interest payments
of 50,000 francs and repayment of the full face amount after
two years. At the time the note is issued, the value of the
franc is $.25/franc; at the time the note is retired, the
value of the franc has depreciated to $.20/franc.
Upon retirement of the note, A would recognize a foreign
exchange gain of $50,000 (i.e., its franc basis in the note,
1,000,000 francs, times the $.05/franc depreciation in the
value of the franc). This gain would be treated as if interest paid on the note had been reduced by that amount.
Upon retirement of the note, B would recognize a foreign
exchange loss of $50,000. B's loss would be treated as if
interest received with respect to A's note had been reduced
by that amount.

-27Example 5

(Foreign-Currency-Denominated Assets and
Liabilities)

The facts are as stated in Example 4, except that A
redeems its note after eighteen months for 990,000 francs.
Because the exchange rate on that date is $.21/franc, the
value of the francs given in redemption of the note is
$207,900. Thus, A's total gain on redemption of the note is
$42,100 (i.e., $250,000 minus $207,900).
Of A's total gain of $42,100, $40,000 (i.e., 1,000,000
francs times $.04/franc) would represent foreign exchange
gain, which would be treated as if interest expense had been
reduced by that amount (see Example 4 above). The remaining
$2,100 gain (i.e., $42,100 less $40,000) would be considered
gain from the discharge of indebtedness.
B's total loss, $42,100, would consist of a foreign exchange loss of $40,000, and a loss of $2,100 on the redemption of the note. The $40,000 foreign exchange loss would
be treated as a reduction in interest received with respect
to that note (as in Example 4). The $2,100 loss on the
redemption would be treated in accordance with existing law
applicable to similar losses on the redemption of a dollardenominated note.

-28Example 6

(Foreign-Currehcy-Denominated Assets and
Liabilities)

The facts are the same as in Example 5, except that A
redeems its note for 1,010,000 francs, rather than 990,000.
Because the exchange rate on that date is $.21/franc, the
value of the francs given in redemption of the note is
$212,100. Thus, A's total gain, $37,900 (i.e., $250,000
less $212,100), is less than what would otherwise be its
foreign exchange gain, $40,000 (i.e., 1,000,000 francs
multiplied by the $.04/franc depreciation in the value of
the franc). The total amount, $37,900, would be treated as
a reduction of interest expense to A and a reduction of
interest income to B.

-29Example 7

(Prompt Conversion of Foreign Currency Received)

A taxpayer receives a dividend of 100 francs at a time
when the fair market value of the franc is $*25/franc.
Although the taxpayer moves immediately to convert the
francs to dollars, because the franc is devalued to
$.20/franc before the conversion is effected, the taxpayer
sustains a $5 foreign exchange loss. Although the loss
would be recognized separately from the receipt of the
dividend income, it is treated as a reduction in dividend
income from the same source.

-30Example 8

(Amount of Income Tax Paid)

A U.S. corporate taxpayer with the dollar as its functional currency receives 100 francs income for services.
The taxpayer promptly converts 50 francs at $.25/franc to
$12.50; the remaining 50 francs are deposited in the taxpayer's bank account (which for present purposes is assumed
to be interest-free) in anticipation of a 50 franc foreign
tax liability. The 50 franc tax liability is accrued at the
end of the year, when the exchange rate is $.. 24/f ranc, and
paid six months later when the exchange rate is $.20/franc.
Taxable income would be $25, computed by translating
pre-tax income, 100 francs, at $.25/franc, the exchange rate
on the date the income was received. Foreign income tax of
$12 would be accrued at the end of the year, but would have
to be amended to $10 to reflect the exchange rate when the
foreign tax was paid. The taxpayer would also recognize a
foreign exchange loss of $2.50 in the second year when the
foreign tax liability of $10 was satisfied with foreign
currency in which the taxpayer had a basis of $12.50.

-31Example 9

(Amount of Income Tax Paid or Accrued)

The facts are the same as in Example 8, except that the
taxpayer initially converts the entire 100 francs to $25 and
converts $10 back into 50 francs at the time the tax must
actually be paid.
The consequence is the same as in Example 8, except that
in the second year the taxpayer has not incurred and, thus,
would not recognize any foreign exchange loss on payment of
the foreign tax.

-32Example 10

(Amount of Income Tax Paid)

- "* '

The facts are the same as in Example 9, except that at
the time the income is earned the taxpayer enters into a
forward purchase contract to buy 50 francs at $.22/franc on
the date the tax must be paid. The taxpayer earmarks the
forward exchange contract as specifically hedging its
foreign tax liability.
The taxpayer would accrue in the first year taxable
income of $25 and an income tax liability of $12. When the
tax was paid, the loss on the forward purchase contract
would be treated as an adjustment to the tax paid, causing
the amount of tax available for credit to be amended from
$12 to $11 (not $10) . Because the $1 loss on the forward
exchange contract (attributable to the $.02/franc differential between the exchange rate specified in the forward
contact and the spot rate at the time the contract was
performed) would already be reflected in the first year's
tax paid, no foreign exchange loss would be offset against
gross income in the second year.

-33Example 11

(Computing Functional Currency,Amounts from
Books of Record Kept in Another Currency)

A branch of a U.S. corporation has the dollar as its
functional currency, but keeps its books in francs. The
franc-denominated transactions of the entity are too
numerous to make a "separate transactions" computation of
its net income in dollars practicable. The balance sheet of
the entity at the beginning and the end of the year, together with the average exchange rate for the year in which
various assets were acquired or liabilities were incurred,
are as follows:

Item '
Assets

Start of
Year
(francs)

Average
Exchange Rate
($/franc)

End of
Year
(francs)

Average
Exchange Pate
($/franc)

Receivables 100 .20* 120 .25*
Inventory 100 .18* 110 .23*
Net Plant &
Equipment

100

.15

Liabilities
Payables 50 .20* 60 .25*
Mortgage 50 .15 45 .15

Although receivables and inventory would both be classified
as "current" assets, and "payables" as a current liability, a
portion of each may nonetheless be considered to have been
acquired or incurred prior to the current year, and to that
extent they would be translated at the average exchange rate
for the earlier year.

-34If each asset and liability were translated at the average
exchange rate for the period in which it was acquired or
incurred, the dollar value of net worth would be $35.50 at
the beginning of the year and $47.05 at the end of the year,
an increase of $11.55 during the year.
In addition, in the course of the year the entity remitted 100 francs, which were promptly converted to dollars
at a rate of $.24/franc, and paid foreign taxes of 80 francs
on a date when the exchange rate was $.26/franc. Thus, the
$11.55 increase in net worth would be augmented by the $24
(100 francs x $.24/franc) remittance and the foreign tax
payment of $20.80 (80 francs x $.26/franc), producing net
income of $56.35.
The entity also had numerous transactions giving rise to
short-term capital gain or loss, but calculating the separate gain or loss in dollars for each of these transactions
is impracticable. The profit and loss statement for the
entity, which is prepared in francs but is otherwise in
accordance with U.S. tax principles, indicates the entity
had 220 francs of ordinary income, 30 francs in short-term
capital gains, 50 francs in short-term capital losses, and,
thus, 200 francs in net gain. The average exchange rate for
the year is $.25/franc. If each of these amounts was translated at the average rate, the corresponding dollar amounts
would be $55, $7.50, $12.50 and $50. To compute the dollar
value of ordinary income, short-term capital gains, and
short-term capital losses, however, the $6.35 difference
between net gain calculated under the "net worth" method
($56.35) and net gain as translated from the profit-and-loss
statement ($50) would have to be apportioned among the three
categories based on gross receipts in the currency in which
the books of record are maintained. If gross receipts (not
offset by cost of goods sold) giving rise to ordinary income, short-term capital gains and short-term capital losses
were 2,000 francs, 200 francs and 300 francs, respectively,
the apportionment would be as shown below. (A portion of
the foreign exchange gain — i.e., the difference between
the gain calculated under the "net worth" method and that
calculated under the "profit-and-loss" method — would be
offset against the short-term capital loss on the assumption
that the amount of the loss which would have been calculated
under a separate transactions method, had such been practicable, would have been less than that which was calculated
under the "profit-and-loss" method.)

-35-

Item

Translated
P&L
Statement

Ordinary
Income
Short-term _2
Capital Gains
Short-term
Capital
Losses
Total

$55.00

Gross
Receipts
2,000 f

-_ «. _.
$7.50
200 f

Apportioned Gain
or Loss
20_
^ ._ _ _ nfl
25 x * b - j:) " 5 ' U 0

Total Gain
or Loss
$60.08

<(.

*°-j:>

*- D1

-$12.50

300 f

__3
*,. -_. _ <.7r5> /0
25 x *°- j : >
-

$50.00

2,500 f

$6.35

$8.01

-$11.74
$56. "3 R

-36Example 12

(Translating Functional Currency Amounts into
Dollars)

On December 31, 1984, a U.S. calendar-year taxpayer converts $26 at $.26/franc to 100 francs and transfers them to
an entity using francs as its functional currency. The net
profit or loss of the entity, remittances to the U.S. taxpayer's head office, average exchange rate for the taxable
year, and exchange rates at year-end when remittances are
made and converted are as follows:

Year

Profit
or Loss
(francs)

Year-end
Remittance
(francs)

Average
Rate for Year
($/f ranc)

Year-end
Rate
($/f ranc)

1985

-100

$.25/f

$.24/f

1986

+ 200

$.23/f

$.22/f

1987

-100

$.21/f

$.20/f

1988

+100

$.19/f

$.18/f

1989

150

$.17/f

$.16/f

The tax consequences would be as follows:
1. In 1985, the 100 franc loss would be translated at
$.26/franc, the exchange rate on the date 100 francs were
transferred from the head office, so that a $26 loss would
be recognized for U.S. tax purposes. The appropriate rate
for 1985 would be $.26/franc (i.e., $26/100 francs).
2. In 1986, the 200 franc net gain would be translated
at the average rate for 1986, $.23/franc, for a net gain of
$46. The appropriate rate for 1986 would be $.23/franc
($46/200 francs).
3. In 19b7, the 100 franc loss would be translated at
$.23/franc, the translation rate for the 200 franc unremitted net gain for 1986. Thus, the net loss would be $23,
and the appropriate rate for 1987 would again be $.23/franc
($23/100 francs).

-374. The 100 franc net gain in 1988 would be translated
at the average exchange rate for that year, $.19/franc. The
50 francs remitted and converted at the end of the year were
worth $9 (i.e., 50 francs times $.18/franc). Since those
francs would be considered to have been earned in that year,
the taxpayer would also recognize an ordinary, domesticsource loss of $.50 (i.e., 50 francs multiplied by the
$.01/franc depreciation in the franc between the time the
francs were considered to have been earned and the time they
were remitted and converted).
5. In 1989, the entity has no net profit or loss. Of
the 150 francs remitted, 50 would be deemed to be from the
1988 unremitted net gain of 50, and the balance from the
1986 unremitted gain of 100 francs. If the francs were
converted at an exchange rate of $.16/franc, the head office
would recognize an ordinary, domestic-source loss of $1.50
with respect to the former 50 francs (i.e., 50 francs times
the difference between $.16/franc and $.19/franc) and a
similar loss of $7 with respect to the latter 100 francs
(i.e., 100 francs times the $.07/franc difference between
$.16/franc and $.23/franc).

-38Example 13

(Remittance from a Foreign Branch)

A foreign branch of a U.S. corporation whose head office
has the dollar as its functional currency has properly
elected in its first year of operation to use the franc as
its functional currency. In 1982, _when the average exchange
rate is $.20/franc, the branch earns 100 francs in ordinary,
foreign-source income, which it deposits in a francdenominated bank account. In 1983., ^when the branch
otherwise has no gain or loss, it remits-100 francs. The
head office immediately converts those francs at $.25/franc
to $25.
:-r. The branch profit of 100 francs,would translate to $20
in ordinary, foreign-source income. : On the conversion of
the francs to dollars in=1983, thee taxpayer would recognize
ordinary, domestic-source income of $5 (i.e., 100 francs
times the $.05/franc difference between-the average rate for
the year that the francs were earned 3and.the conversion
rate) .

-:••« -

-39Example 14

(Remittance from a Foreign Branch)

The facts are the same as in Example 13, except that in
1983 the branch converts the 100 francs to $25, which it
remits immediately to the head office.
The branch profit of 100 francs would still be translated to $20. The taxpayer would recognize ordinary,
domestic-source income of $5 on the remittance of the
dollars.

-40Example 15

(Remittance from a Foreign Branch)

The facts are the same as in Example 13, except that the
branch in 1982 converts its 100 francs into 50 marks (a
foreign currency) at the exchange rate of 2 francs/mark. In
1983, the mark depreciates vis a vis the franc to an
exchange rate of 1.6 francs/mark. Because the dollar also
depreciates^against the franc by the same proportion to
$.25/franc, the exchange rate between marks and dollars is
at the same rate in 1983, $.40/mark, as it was in 1982. In
1983, the branch converts its 50 marks to 80 francs, which
it remits to the head office. The head office converts
immediately the 80 francs to $20. The branch engages in no
other transactions in 1983.
The 100 franc profit of the branch in 1982 would still
be translated to $20. In 1933, the branch would record a 20
franc loss on the conversion of marks to francs (i.e., 50
marks times the difference between 2 francs/mark and 1.6
francs/mark). Because there is no offsetting gain in 1983,
that loss would be "rolled back" and translated at the same
rate, $.20/franc, as the prior year's gain, producing a loss
of $4 to the branch. However, a $4 gain would be recorded
by the head office on the conversion of the 80 francs to
dollars (i.e., 80 francs times the difference between
$.20/franc and $.25/franc). The treatment of the $4 loss
recorded by the branch would depend on facts and circumstances relating to the sale of the marks; the $4 gain
recorded by the head office on the conversion of the francs
would be ordinary and domestic source.

-41Example 16

(Remittance from a Foreign Branch)

The facts are the same as in Example 15, except that in
1983 the branch remits the 50 marks to the head office,
which promptly converts them to $20.
Because the taxpayer's basis in the ^marks was 100
francs, and the most recently earned net gain of 100 francs
was derived by the branch in 1982 and translated at
$.20/franc, the taxpayer's basis in the remitted marks as
stated in dollars would be $20. The taxpayer would recognize on the conversion of the marks a $4 gain, ordinary and
domestic source, and a $4 loss, the character and source of
which would depend on the facts and circumstances relating
to the sale of the marks (c_f. the results in Example 15) .
The $4 gain equals 80 francs, the fair market value of the
marks on the date of their remittance (which in this
instance is less than the taxpayer's 100 franc basis in the
marks), multiplied by the $.05/franc appreciation in the
value of the franc between the time the gain was derived and
the time the marks representing that gain were remitted.

-42Example 17

(Remittance from a Foreign Branch)

The facts are the same as in Examples 13 and 15, except
that in 1982 the branch converts its 100 francs to $20,
which it deposits in a bank account. In 1983, the branch
converts its $20 back to 80 francs and remits them to the
head office, where they are converted to $20.
Because the dollar is a "foreign" currency for the
branch, the results would be the same as in Example 15.

-43Example 18

(Remittance from a Foreign Branch)

The facts are the same as in Example 17,.^except that in
1983 the branch simply transfers the $20 from its bank
account to that of the head office.
Because the dollar is a "foreign" currency for the
branch, but not for the head office, the results would be
the same as in Example 16, except that the remittance (and
not the subsequent disposition) of the dollars would be
considered a sale or exchange.

-44Example 19

(Remittance from a Foreign Branch)

In 1982, a branch in its first year of operation with
the franc as its functional currency has a profit of 2,000
francs. The functional currency of the head office is the
dollar, and the average exchange rate for 1982 is
$.20/franc.
In 1983, when the average rate is $.21/franc, the branch
has no profit or loss. It buys for 2,000 francs land, which
is a capital asset.
In 1984, when the average rate is $.22/franc the branch
has a profit of 1,000 francs.
In 1985, the branch transfers ownership of the land to
its head office; the land continues to be a capital asset in
the hands of the head office. On the date of the transfer,
the fair market value of the land is 3,000 francs. The
branch has no profit or loss in that year. The exchange
rate on the date of transfer is $.23/franc; the average
exchange rate for the year is $.235/franc.
In 1986, the branch has no profit or loss. The average
rate for the year is $.245/franc. The head office sells the
land for $960 on a date when the exchange rate is
$.24/franc.
Under these assumptions, the profits in 1982 and 1984
would be translated at the appropriate (which in this case
equals the average) exchange rates for those years,
$.20/franc and $.22/franc. Thus, the dollar value of
profits would be $400 and $220, respectively.
The taxpayer's basis in the land as stated in dollars
would equal its basis as stated in the functional currency,
2,000 francs, translated at the same exchange rates as its
most recent unremitted gain was translated. Thus, 1,000
francs would be translated at $.22/franc, the average
exchange rate for 1984, to $220, and the remaining 1,000
francs would be translated at $.20/franc, the average
exchange rate for 1982, to $200. The taxable basis in the
land would, therefore, be $420.
When the land is sold for $960 in 1986, the taxpayer
would recognize gain of $540 (i.e., $960 less $420). Of
that gain, $40 would be considered ordinary and domestic
source. The $40 equals 2,000 francs, the lesser of the fair
market value (3,000 francs) and the taxable basis (2,000

-45francs) of the land on the date of its remittance, multiplied by the $.02/franc average appreciation in the value of
the franc between the time the gain represented by 2,000
francs was considered to have been earned and the time the
land was transferred. (The $.02/franc appreciation equals
the difference between $.23/franc, the exchange rate on the
date of the transfer, and $.21/franc, the average exchange
rate based on the 1,000 francs earned in 1984 and translated
at $.22/franc, and the 1,000 francs earned in 1982 and
translated at $.20/franc.)
The remaining $500 (i.e., $540 less $40) would be longterm capital gain, the source of which would be determined
by reference to the rules relating to the source of gain on
the sale of a capital asset.

-46Example 20

(Distribution from a Foreign Corporation)

In 1982, a foreign corporation, all the shares of which
are owned by a U.S. corporation, ,.in its first year of
operation with the franc as its functional currency earns a
profit of 100 francs and pays a-tax on that profit of 40
francs. Earnings and profits-at the end.of the year and
accumulated profits in excess of foreign taxes for the year
both equal 60 francs. In June 1982, the U.S. parent corporation enters into a forward exchange contract to sell 30
francs on December 31, 1982 at a rate of $.25/franc. The
contract is earmarked as specifically hedging an anticipated
dividend of that amount from the subsidiary. On December 31,
a dividend of 30 francs is, in fact, declared by the subsidiary and paid to the parent. The exchange rate on that date
is $.20/franc. Rather than selling the 30 francs to the
opposite party to the forward sale contract, the parent
sells the 30 francs received as a dividend on the spot
market for $6, and receives compensation of $1.50 from the
opposite party for cancellation of the contract. (The $1.50
equals the 30 francs times the $.05/franc difference between
the contract and the spot rates on the date of cancellation).
The $1.50 would be treated for all purposes as if the
distribution from the foreign corporation were increased by
that amount. Consequently, the common exchange rate for
translating earnings and profits and the three elements of
the "deemed paid" credit formula would be $.25/franc (i.e.,
the ratio of $6.00 + $1.50 = $7.50 to 30 francs). The
distribution would be considered a dividend because the fair
30 francs
„ , times
r.n £
n c /francs
c
cc
market
value ofx $.25/franc
the distribution,
$7.50 c(30
40
Tn—£
1
oc/r
[
francs
x
$.25/franc
=
$.25/franc), was less than earnings and profits, $15 (60$5
60 francs
x $.25/franc The "deemed paid" credit would
francs
times $.25/franc).
After
equal: the dividend, the remaining earnings and profits,
$7.50, would be translated back to 30 francs at the common
exchange rate, $.25/franc, and a comparable amount would be
restored to the accumulated profits account available for
future dividends.

-47Example 21

(Distribution from a Foreign Corporation)
.. o
In 1982, a controlled foreign corporation in its first
year of operation has 100 francs of profit before foreign
tax and pays 40 francs in foreign taxes., After-tax profits
include subpart F income net of taxes and other deductions
of 30 francs, which is a deemed dividend under section 951.
The average exchange rate for 1982 is $.25/franc.
In 1983, the corporation once again earns 100 francs,
none of which is subpart F income, pays 40 francs in foreign
income taxes, and actually distributes 100 francs to its
U.S. shareholder. The U.S. shareholder immediately converts
the 100 francs at $.20/franc to $20.
For U.S. tax purposes, the earnings and profits of the
corporation for 1982 are $15 (60 francs times $.25/franc),
of which $7.50 are deemed distributed (30 francs times
$.25/franc). The deemed dividend would have an associated
deemed paid foreign tax credit of, and would be grossed up
by, $5:
30 francs x $.25/franc
«s ~c /JZ
,
«sc
r.n £
rr, c
[40 francs x $.25/francJ = $5
c oc/g
60 francs x $.25/franc
In 1983, the 100 franc distribution has a fair market
value of $20 (i.e., 100 francs times $.20/franc). Since
earnings and profits calculated without regard to the 1982
deemed distribution would equal 120 francs, which would be
translated at $.20/franc to $24 at the time of the distribution, the $20 distribution would be considered a dividend in
full. However, $7.50 of that dividend would be excluded as
previously taxed earnings under section 959.
The deemed-paid credit and gross-up would equal $5.33
attributable to 1982 profits:
40 francs x $.20/franc
res c
g ,n/. ,w.
60 francs x $.20/franc

<-„„„„
i
cc ->->
rAn
c orw.c
[40 francs x $.20/franc] = $5.33

plus $8 attributable to 1983 profits:
60 francs x $.20/franc
60 francs x $.20/franc

r . n ,._,,_,_., „ c on /^
[4
francs x

i
<*Q ™
$.20/franc] = $8.00

-48reduced by the $5 in credit previously claimed with respect
to previously taxed income. Thus, the net credit and grossup with respect to the 1983 distribution would be $8.33
($5.33 plus $8 less $5), which equals 40 percent of the
grossed-up income, $20.83 (i.e., $12.50 plus $8.33). (That
is to say, the historic foreign rate of taxation, 40
percent, is maintained even though the corporation has made
a distribution out of previously taxed income.)

FOR IMMEDIATE RELEASE
December 8, 1980

CONTACT:

Robert Nipp
(202) 566-5328

Foreign Portfolio Investment Survey Advisory Committee to Meet
The Foreign Portfolio Investment Survey Advisory Committee
will meet publicly on December 16, 1980 at 10 am in room 4121
of the Main Treasury Building, in Washington to consider a
draft report that will be completed and delivered to Congress
by year-end.
The Committee was created in 1979 to provide the Secretary
of the Treasury with views from qualified persons representing
business, organized labor and the academic communities regarding
technical problems and policy issues to be addressed in conducting
surveys of portfolio investment by foreigners in the United States
and of U.S. residents' portfolio investment abroad.
Interested persons may also file a- written statement with
the Committee before, during or within one week after the
meeting.
The Chairman may, as time permits, entertain oral comments
from members of the public attending the meeting. Persons
interested in making oral comments are asked to call (202)
634-2271 before December 15, 1980.
Inquiries may be directed to:
Mr. David S. Curry
Director (Acting)
Foreign Portfolio Investment Survey
Project
U.S. Department of the Treasury
Washington, D.C. 20220
Minutes from the meeting will be available from the
above office.
o

M-770

OepartmentoftheTREASURY
ASHINGTON, D.C. 20220

TELEPHONE 56&

FOR RELEASE UPON DELIVERY
EXPECTED AT 12:00 NOON EST
MONDAY, DECEMBER 8, 1980

REMARKS BY THE HONORABLE C. FRED BERGSTEN
ASSISTANT SECRETARY OF THE TREASURY
FOR INTERNATIONAL AFFAIRS
BEFORE EXIMBANK ANNUAL BANKERS CONFERENCE
WASHINGTON, D, C.

The Export Credit Policy of the United States:
Meeting International Competition Effectively

The strength of U.S. exports during the 1980s will be
critical to the ability of our nation to pay for imports of
oil and other commodities, to maintain the stability of the
dollar in the exchange markets and to achieve key economic
policy objectives such as reasonably full employment.

Indeed,

exports are increasingly important to our economy because:
-- One of every seven U.S. manufacturing jobs and one of
every three acres of U.S. farmland now produce for
export.
-- One of every three dollars of U.S. corporate profit
now derives from the international activities of U.S.
firms, including their investments overseas as well as
exports.

M-771

- 2-- The share of exports in U.S. GNP have doubled within
just the last decade.
It is therefore extremely fortunate that, contrary to the
views expressed by some observers, the underlying competitive
position of the U.S. economy has been improving substantially.
The increase of $40 billion in the U.S. oil import bill since
1977 has obscured the fact that the rest of our trade balance
has improved by an even greater amount, largely because exports
have been doing very well:
-- During the past three years the volume of U.S. nonagricultural exports has grown at a rate double that of
world trade, producing a sharp rise in U.S. market shar*
The United States alone accounted for one-third of the
increased volume of industrial nations' exports during
1978 and 1979, with the growth occurring across all
industry sectors and to most geographic markets.
-- The U.S. volume share of industrial nations' exports
(excluding exports to the United States) now exceeds
21 percent, higher than at any other time during the
past decade.
--In value terms, U.S. exports have doubled since 1976.
-- Our trade surplus on manufactured goods was running at
an annual rate of $18.2 billion during the first ten
months of this year, up from $4.4 billion in 1979
and $3.4 billion in 1970.

- 3 -- Largely as a result, the U.S. current account moved into
balance in 1979 and will almost certainly remain there,
or even in modest surplus, both this year and in 1981:
this gives us the strongest external position in the
entire OECD area, and underpins the rise of almost
10 percent in the trade-weighted exchange rate of the
dollar over the past two years.
The Export-Import Bank has played an important role in this
success story, by again providing export finance

of a level and

nature that support the competitive position of American industry:
-- Its direct export loans have increased seven-fold during
the past four years.
-- It has maintained competitive interest rates in the face
of substantial increases in borrowing costs within the
U.S. market, and thus important costs to its own financial
position.
-- It has taken other measures where necessary to match
foreign competition.
These instances of real progress, however, are no basis for
complacency.

To the contrary, the United States will have to run

hard even to maintain the gains of the recent past--whereas, in
fact, we will need to do even better in the highly competitive
world economy of the 1980s.
In fact,

now stand at a decisive crossroads in terms of

supporting the U.S. competitive position in international markets.
A key measure employed by other nations to increase their exports
is the use of subsidized export credits.

For the past four years,

- 4 the United States has actively pursued a two-track strategy to
counter such policies. On the one hand, we already noted, we
have sharply increased both the quantity and quality of support
provided to U.S. exporters by our own Eximbank.
On the other hand, we have sought to negotiate international
restraints on the subsidy element in official export credits.
We have had some success in establishing minimum interest rates,
and in obtaining prior notification of the credit terms other
official export credit agencies are offering in nearly all
instances--which is highly valuable information as it provides
Eximbank the knowledge of what it should match.
But the level of interest rates is now far too low relative
to actual market rates. The inherent subsidy element due to
differences in the cost of funds to governments--which now exceeds
$5 billion for the OECD countries, taken together--is threatening
to create a mutually disruptive export credit war.

- 5Despite this real danger, the European Community has been
willing only to suggest the adoption of marginal increases in
the interest rate minima. This would leave a larger gap
between export credit rates and market rates than existed
last July when the heads of government at the Venice Summit
committed their countries to move closer to market rates.
We hope that the European Community will change its mind and
join the rest of the world in recognizing the seriousness
of the need to reduce disruptive interest rate subsidization
in the provision of export credits.
In the absence of a negotiated solution to this problem,
we are fully prepared — as already announced — to derogate

from the present International Arrangement as necessary to stand
behind U.S. exporters facing such foreign official competition.
I would like to comment on our export credit policy in some
detail today, and consider where it is going over the months
and years ahead.
The International Arrangement on Official Export Credits
The U.S. Government has led the way in seeking to avoid
the costly foolishness of an export credit war. In July 1976,

it induced the major trading countries — Canada, France, Germany,
Italy, Japan and the United Kingdom' — to agree to reduce the
risks of an export credit war by adopting consensus guidelines
designed to reduce subsidies in government-supported export
credits. That consensus was subsequently adopted by other

- 6member countries of the Organization for Economic Cooperation and
Development. It included two basic components: minimum levels
beneath which interest rates on official export credits should
not be offered, and maximum maturities beyond which such credits
should not extend. Given the structural superiority of the
U.S. capital markets in generating long-term capital, the basic
deal was that the United States would limit its maturities if
the other countries would limit their interest rate subsidies.
In 1977-78, the United States sought to improve the consensus

via an increase in minimum interest rates and other improvements.
However, the only progress made at that time was to convert
the original Understanding into the present, more formal,
International Arrangement on Official Export Credits. The
major weakness of this Arrangement has been that its minimum
interest rates have not reflected market rates of interest for
the different currencies of the exporting nations. It also
fails to cover such undesirable practices as mixed credits and
excessive local cost financing, but we have set those aside from
the negotiations for the moment — while responding to them
ourselves on a case-by-case basis — in an effort to deal first
with the more fundamental aspects of the Arrangement.
Since 1978, there has been increasing international
recognition of the need to provide more discipline in export
credit financing. At the end of 19 79, the OECD-sponsored
"Wallen Report" estimated that the level of export credit

- 7subsidization had risen to $2 billion in 1978 and $5 billion in
1979. To remedy the situation, the Report spelled out ways

to reduce the subsidies without placing any country at a disadvant
It offered two alternatives to accomplish this objective:
a Differentiated Rate System (DRS) and a Moving Uniform Matrix
System (MUM).
The United States preferred the Differentiated Rate System,
which would set different interest rate minimums for each of the
different exporter currencies. It would thus most closely
approximate market conditions. Other countries were less
willing to accept a Differentiated Rate System, however.
As a compromise, the United States indicated that the other
alternative offered by the Wallen Report, the Moving Uniform
Matrix, would also be acceptable. The Moving Uniform Matrix
would involve a weighted average of interest rates in the
participating countries that would determine the new export
credit minimum rate for all countries. This minimum rate
would change as market rates changed, ideally automatically.
And it would clearly represent a marked improvement over the
present system. We would also permit low interest rate countries
to opt for the DRS.
Negotiations on this issue initially came to a head last
summer. At that time, in lieu of the basic reform proposed in the
Wallen Report, the European Community proposed a modest increase
in the minimum interest rates, to be followed by intensive

8
negotiations aimed at bringing interest rates closer to market
conditions. The United States reluctantly accepted this
temporizing, but indicated quite clearly — both privately
and publicly -- that we would have to derogate from the

Arrangement ourselves if fundamental improvements were not agree
soon. At the Venice Summit in July, the major members of the
European Community then agreed with the other participants that

the negotiations should bring export credit rates closer to mark
rates. These negotiations were to be concluded by December 1,
1980 — one week ago today.
The commitments of the Venice Summit have not been met. The
European Community has again offered only to increase interest

rates by a minimal amount (along with a vague reference to furth
discussions throughout 1981 on broader reform of the export
credit rate system). The increase in interest rates offered by
the European Community would bring the minimum interest rate
for credits to the major users of such facilities only to 8.35
percent. Under the Moving Uniform Matrix, the minimum interest

rate would be at least 10-1/2 to 11 percent, much closer to most

financial market rates. Indeed, under the EC proposal, Arrangeme
minimum rates would be farther from market rates than they were

when the heads of state at the Summit committed to close the gap
last July.
It is unconscionable, as well as deeply disappointing, that
such a minority can thwart the efforts of a vast majority of
the international community to achieve needed restraint in this

9
key trade area. In response, the United States has announced
its intention to derogate, on a selective basis, from the terms
of the International Arrangement and to extend credits with

15-20 year (or longer) maturities as a means of meeting foreign
export credit interest rate subsidies. If the interest rate
component of the basic deal on export credits — not to mention
the Summit commitment — cannot be kept by others, it will be

impossible for the United States to keep the maturity component
of the deal.
Moreover, key Republican members of the U.S. Senate —
Senators Garn and Heinz, who between them will shortly become
chairmen of the key committees in the Senate regarding this
issue — have publicly indicated their strong support for our
efforts to make clear that they are being pursued on a
bipartisan basis. The Senate's addition last week of $1 billion
of Exim funding to the Continuing Resolution is of course not
unrelated.
The United States remains ready to negotiate a meaningful
reform of the International Arrangement. We appreciate the
support for our efforts displayed by almost every country
involved in these negotiations. We do not intend to direct
our weapon of longer repayment maturities against those
countries which offer realistic export credit rates.

10
But we are determined to assure competitive financing
for U.S. exports. We prefer to do so by raising export
credit interest rates toward market levels in all countries,
and we will continue to negotiate to that end.

In that

respect, I am particularly pleased that Senator Heinz is
planning to accompany me to the final effort, in Paris,
on December 18-19 to fulfill the pledges made at Venice and
elsewhere.

If the talks fail, however, we will now assure

U.S. competitiveness by extending maturities instead.
The Program of the Export-Import Bank
During the past year, Eximbank has been able to offer
export credits at competitive rates only by drawing from
its longer term earnings stream.

In fact, the Bank has been

lending at rates far below its marginal cost of money —
lately, even below its average costs.

and,

It can no longer

provide such subsidies and hope to be self-sufficient.

it does, we expect the Bank to be in the red for the coming
fiscal years as a result of the necessity to maintain aggressive
lending practices and the likelihood of continuing high borrowing costs.

This could greatly hamper the Bank in supporting

U.S. exports.

Similar situations of course obtain in most other

countries as well, indicating why it is so urgent to buttress
fundamentally the International Arrangement.
From our standpoint, the longer repayment terms offered
under derogations from the Arrangement will enable the Bank to
charge interest rates more in line with market conditions.

Thus

11
they will be very helpful in strengthening the Bank's ability
to remain self-sufficient.
At the same time, however, this action may not be enough
to fully support U.S. exports on competitive financial terms.
The Administration is therefore examining other ways to assure
sufficient as well as competitive Eximbank financing. This is
a critical problem. To meet foreign competition, the Bank has
offered heavily subsidized rates. These rates have eroded the
financial health of the Bank. To restore that health, we must
consider innovative measures to keep Eximbank functioning in
support of U.S. exports.
My personal preference for a solution, and one that the new
Administration should consider, is the creation of a special
fund — perhaps within Treasury, similar to those of France
and the United Kingdom — to subsidize interest rates on
particular Eximbank loans. Such a fund would permit Eximbank
itself to carry out the bulk of its borrowing and lending
operations without subsidy, enabling it to meet most foreign
credit competition without endangering its financial selfsufficiency — and justifying its removal from the current
process of seeking annual budget authority, perhaps in favor
of inclusion in a credit budget for the U.S. Government.
The subsidy fund could be established with a sunset
provision to assure that the United States does not remain

permanently in the business of subsidizing export credits, keye
inter alia to restoration of an effective International

12
Arrangement limiting subsidies for all countries. The U.S.
Government, via Eximbank, would offer interest rate subsidies
from the new fund only as necessary to meet foreign competition.
Conclusion
The area of export credits provides a clear example of
the increasing tendency of foreign governments to seek to
tilt the benefits of international commerce in their direction
through the use of beggar-thy-neighbor policies.

Indeed,

the central strategic issue for U.S. economic policy in the
1980s will be whether we should fight or join this trend.
Our clear preference —

and our traditional instinct —

has been to negotiate common rules for the international
marketplace to assure fair competition for all parties,
and to try to limit government intervention in the process.
We now have an international code governing the use of
most export subsidies, as a result of the recent Multilateral
Trade Negotiations.

In fact, the major trade policy issue

left unresolved at the conclusion of those Negotiations was
export credits.
Until we can achieve more effective rules governing export
finance, however, and as long as some others refuse to compete
fairly, we will have to counter with equivalent policies of
our own.

We have made every effort to achieve a negotiated

solution, and we will continue to do so. We have not yet
succeeded adequately, however, and we have therefore begun

13
to counter with measures of our own.
if necessary and —

We can go much further,

given the importance of exports to U.S.

domestic and international economic policy —

we may have to

do so.
This issue may prove to be the exception to traditional
U.S. practice:

we may have to join the trend toward increased

government intervention, in order to convince other nations
of the critical importance of avoiding an export credit war.
Your support for this effort, and your thoughts on how best
to carry it forward, will be of great importance.

partmentoftheTREASURY
IHINGTON, D.C. 20220

FOR LMMEDIATE RELEASE

December 8, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4,000 million of 13-week bills and for $4,001 million of
26-week bills, both Co be issued on December 11, 1980, were accepted today,
RANGE OF ACCEPTED
13-week bills
COMPETITIVE BIDS:. maturing March 12, 1981
Discount Investment
Price
Rate
Rate 1/

a/
b/

High
Low
Average
Excepting
Excepting
Tenders
Tenders

26-week bills
maturing June 11, 1981
Discount Investment
Price
Rate
Rate 1/

95.908s' 16.188%
92.416^ 15.001%
95.9QBrJ
17.11%
16.46%
92.356
95.844
16.441%
15.120%
17.39%
16.60%
92.382
95.871
16.335%
15.069%
17.27%
16.54%
1 tender of $755,000.
2 tenders totaling $645,000.
at the low price for the 13-week bills were allotted 9%.
at the low price- for the 26-week bills were allotted 97%.

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]
Accepted
Received
Received
$
86,590
$ 116,840 $
76,840
6,148,810
6,693,765
3,054,995
24,355
33,245
33,245 :
85,245
96,505
46,505 .
53,360
50,205
50,205 !
70,550
55,850
55,850
626,925
503,235
282,235 ,
37,415
42,545
34,545
9,125
9,190
9,190
46,645
51,565
51,565
16,045
22,245
22,245
422,275
429,635
139,635
111,195
143,170
143,170

Accepted

61,396

3,234,360
24,355
65,245
44,360
68,550
229,425
25,415
9,125
46,645
16,045
64,775
111,195

$8,247,995

$4,000,225

$7,738,535

$4,001,085

Competitive
Noncompetitive

$6,041,720
890,875

$1,793,950
890,875

i
:

$5,371,880
770,955

$1,634,430
770,955

Subtotal, Public

$6,932,595

$2,684,825

$6,142,835

$2,405,385

880,500

875,000

434,900

434.900

720,700

$8,247,995

$4,000,225

$7,738,535

$4,001,085

Type

Federal Reserve
Foreign Official
Institutions
TOTALS

1/Equivalent coupoa-issue yield.

M-772

DATE:

DEC. 8, 1980
•

13-WEEK

TODAY:
LAST WEEK:

HIGHEST SINCE:

LOWEST SINCE:

26-WEEK |

FOR RELEASE AT 4:00 P.M.

December 9, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000 million, to be issued December 18, 1980.
This offering will provide $275 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,736 million, including $1,769 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities, and $1,978 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 $4,000
million, representing an additional amount of bills dated
September 18,1980, and to mature March 19, 1981
(CUSIP No.
912793 6K 7) , currently outstanding in the amount of $3,839
million, the additional and original bills to be freely
interchangeable.
182-day bills (to maturity date) for approximately $4,000
million, representing an additional amount of bills dated
June 24, 1980
, and to mature June 18, 1981
(CUSIP No.
912793 6C 5 ) , currently outstanding in the amount of $4,091
million, the additional and original bills to be freely
interchangeable.
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing December 18, 1980.
Tenders from
Federal Reserve Banks for themselves and as agents for 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 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. Both series of bills
will be issued entirely in book-entry form in a minimum amount of
S10,0C0 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.
20 2 26, up to 1:30 p.m., Eastern Standard time,
Monday, December ID, 1980.
form ?D 4632-2 (for 26-week
M-773
series)
or Form
?D bills
4632-3 -c
(for
13-week
series)
should
be used to
submit
records tenders
of
the Department
for
of
bethe
maintained
Treasury.
on the
book-en.rv

-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
without
stated
price
from
anyprice
one
respective
bidder
(in three
will
decimals)
issues.
be accepted
of less
accepted
in full
at
competitive
the
weighted
bids average
for the

-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 18, 1980
in cash or other immediately available
funds or in Treasury bills maturing December 18, 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.

FOR RELEASE AT 4:00 P.M.

December 10, 1980

TREASURY TO AUCTION 2-YEAR AND 4-YEAR NOTES
TOTALING $7,750 MILLION
The Department of the Treasury will auction $4,500
million of 2-year notes and $3,250 million of 4-year notes to
refund $5,661 million of notes maturing December 31, 1980, and
to raise $2,089 million new cash. The $5,661 million of
maturing notes are those held by the public, including $724
million of maturing 2-year notes and $352 million of maturing
4-year notes 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 $577
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.
Attachment
oOo

M-774

HIGHLIGHTS OF TREASURY
OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 4-YEAR NOTES
TO BE ISSUED DECEMBER 31, 1980
mount Offered;
To the public
escription 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
Payment by non-institutional
investors
Deposit guarantee by designated
institutions
Key Dates;
Deadline for receipt of tenders...

$4,500 million

$3,250 million

2-year notes
Series Z-1982
(CUSIP No. 912827 LJ 9)

4-year notes
Series H-1984
(CUSIP No. 912827 LK 6)

December 31, 1982
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

December 31, 1984
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
$1,000

Yield Auction

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

Full payment to be submitted
with tender

Acceptable

Tuesday, December 16, 1980,
by Is30 p.m., EST

Thursday, December 18, 1980,
by 1;30 p.m., EST

Settlement date (final payment due
from institutions)
...Wednesday, December 31, 1980
a) cash or Federal funds
...Monday,
December 29, 1980
b) readily collectible check...
Delivery date for coupon securitie

December 10, 1980

...Friday, January 9, 1981

Wednesday, December 31, 1980
Monday, December 29, 1980
Tuesday, January 13, 1981

IMMEDIATE RELEASE
December 15, 1980

CONTACT:

Everard Munsey
(202) 566-8191

CHRYSLER LOAN GUARANTEE BOARD TO MEET TODAY
The Chrysler Corporation Loan Guarantee Board will meet at
5 p.m. today.
The purpose of the meeting is to discuss and evaluate information
about possible future actions by Chrysler that was informally
communicated to the Board's staff last week. However, any Board
action or statements will await formal submission of a new plan and
request for additional guarantees by Chrysler.
The Board meeting, in Room 4426, Main Treasury Building, will
be closed to the public under the provisions of the Government in
the Sunshine Act.
The Voting members of the Board are Secretary of the Treasury
G. William Miller, Chairman; Federal Reserve Board Chairman Paul
A. Volcker and Comptroller General Elmer B. Staats.
#

M-775

pepartmentoftheTREASURY
NGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 15, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 4,001 million of 13-week bills and for $4,001 million of
26-week bills, both to be issued on December 18, 1980,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing March 19, 1981
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing June 18, 1981
Discount Investment
Rate
Rate 1/
Price

95.820 16.536% 17.50%
95.772 16.726%
17.71%
95.787 16.667%
17.64%

92.225
92.192
92.203

15.379%
15.444%
15.423%

16.91%
16.99%
16.96%

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 13%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Accepted
$
50,105
3,309,980
43,305
71,035
45,460
57,480
60,745
20,740
11,125

Received
$
96,065
7,654,505
47,465
51,305
40,630
56,440
555,905
36,170
8,415

48,705
28,180
133,115
120,785

46,785
20,580
551,445
88,790

46,455
14,080
202,445
88,790

$7,970,830

$4,000,760

$9,254,500

$4,000,890

Competitive
Noncompetitive

$5,099,885
940,800

$1,129,815
940,800

$6,751,830
685,575

Subtotal, Public

$6,040,685

$2,070,615

$1,498,220
685,575
$2,183,795

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

Received

*—757570"
6,554,360
49,005
75,350
49,360
61,280
462,420
31,240
11,125
61,440
28,180
390,315
120,785

Accepted
$
48,110
3,388,870
21,965
30,905
39,130
40,440
52,115
19,170
8,415

IZEi

$7,437,405

Federal 910,735
Reserve 1,315,000 1,315,000
910,735
Foreign Official
1,019,410
1,019,410 ': 502,095 502,095
Institutions
TOTALS
$7,970,830
$4,000,760 : $9,254,500 $4,000,890
An additional $ 170,460 thousand of 13-week bills and an additional $79,905
of 26-week bills will be issued to foreign official institutions for new cash.
1/Equivalent coupon-issue yield.

M-776

thousand

DATE:

Dec. 15, 1980

13-WEEK

26-WEEK

TODAY: /£.^?1 IWA3%
LAST WEEK: /^^l^f% J5> O&J %

HIGHEST SINCE:
3/M/$Q

ZvtL J5a 70d %

LOV7EST SINCE:

FOR RELEASE AT 4:00 P.M.

December 15, 1980

TREASURY TO AUCTION $2,500 MILLION
OF 7-YEAR NOTES
The Department of the Treasury will auction $2,500
million of 7-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.
The Treasury also indicated that it expects to
announce later this month in the normal course the terms of
a January bond issue.

oOo

Attachment

M-777

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 7-YEAR NOTES
TO BE ISSUED JANUARY 5, 1981
December 15, 1980
Amount Offered:
To the public

$2,500 million

Description of Security:
Term and type of security
Series and CUSIP designation

7-year notes
Series C-1988
(CUSIP No. 912827 LL 4)

Maturity date January 15, 1988
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
July 15 and January 15 (first
payment on July 15, 1981)
Minimum denomination available
$1,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Payment by non-institutional
investors
Full payment to be submitted
with tender
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Tuesday, December 30, 1980,
by 1:30 p.m., EST
Settlement date (final payment due
from institutions)
a) cash or Federal funds
Monday, January 5, 1981
b) readily collectible check... Friday, January 2, 1981
Delivery date for coupon securities. Wednesday, January 21, 1981

FOR RELEASE AT 4:00 P.M.

December 16, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,000 million, to be issued December 26, 1980.
This offering will-provide $ 675 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,327 million, including $1,450 million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $2,082 million currently held by
Federal Reserve Banks for their own account. The two series
offered are as follows:
o:
t
90-day bills (to maturity date) for approximately $4,000
million, representing an additional amount of bills dated
April 1, 1980,
and to mature March 26, 1981
(CUSIP No.
912793 5Z 5 ) , currently outstanding in the amount of $ 7 ,847 million,
the additional and original bills to be freely interchangeable.
181-cay bills for approximately $4,000 million to be dated
December 26, 1980,
and to mature June 25, 1981
(CUSIP No.
912793 6V 3 ) .
Both series of bills will be issued for cash and in
1 exchange for Treasury bills maturing December 26, 1980.
Tenders
fro- Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
_: the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
3anks, 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, December 2.2, 1980.
Form PD 4632-2 (for 26-week series)
f
or
Form
PD
(for
13-week
series)
should
be usedrecords
to submit
M-778
the
tend*>»-s
Department
or 4632-3
bills~±o
of the
beTreasury.
maintained
on the
book-entry
of

-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
lone position in the bills being offered if such position is in
oxcess 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 booker.try 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
oidder will be accepted in full at the weighted average price
(in three decimals) of accepted competitive
respective 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 December 26, 1980, in cash or other immediately available
funds or in Treasury bills maturing December 26, 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.

federal financing bank
WASHINGTON, D.C. 20220

EWSI1
-^-•••-B_mflB-i_-B-L-B-a

FOR IMMEDIATE RELEASE

December 16, 1980

FEDERAL FINANCING BANK ACTIVITY
Roland H. Cook, Secretary, Federal Financing Bank
(FFB), announced the following activity for October 1980.
FFB holdings on October 31, 1980 totalled $83.9 billion,
an increase of $1.3 billion over September 30. FFB increased
its holdings of agency-guaranteed loans by $634.5 million,
its holdings of agency debt by $205.9 million and its
holdings of agency assets by $504.1 million. FFB made a
total of 138 disbursements during the period.
FFB purchased the first project note, dated October 2,
issued under a Loan Commitment Agreement between FFB and the
Department of Energy (DOE) dated as of September 30, 1980.
DOE and FFB entered into this Agreement pursuant to Title II
of the Geothermal Energy Research, Development and Demonstration Act of 1974. By this Agreement, FFB committed to
purchase project notes totalling $150 million through
September 30, 1990. This first project note is for $45
million and is with the Northern California Municipal Power
Corporation No. Two. No funds have been advanced to date.
On October 30, FFB entered into a Guaranty Agreement
with the Small Business Administration (SBA). FFB agreed to
purchase debentures issued by State or local development
companies and guaranteed by SBA pursuant to Section 503 of
the amended Small Business Investment Act of 1958. To date,
no debentures have been purchased by FFB.
On October 31, the United States Railway Association
(USRA) rolled over Note #20 into a new Note #23. Note #23,
in the amount of $460,042,848.27, allows for further advances
of $25,322,832.67 and matures on April 30, 1981.
Attached to this release is a table detailing FFB loan
activity during October, and a table summarizing FFB holdings
as of October 31.
# 0 #

M-779

FEDERAL FINANCING BANK
October 1980 Activity

BORROWER

DATE

AMOUNT
OF ADVANCE

DEPARTMENT OF DEFENSE
Jordan #4
Israel #8
Indonesia #6
Spain #3
Spain #4
Lebanon #2
Spain #3
Colombia #3
Egypt #1
Spain #1
Spain #3
Spain #4
Colombia #3
Colombia #3
Greece #11
Philippines #4
Turkey #7
Korea #11
Tunisia #6
Turkey #6
Turkey #8
Tunisia #5
Uruguay #2
Jordan #4
Korea #11
Liberia #4
Spain #2
Uruguay #2
Philippines #5
Spain #3
Egypt #1
El Salvador #1
Korea #11
Philippines #4
Turkey #6
Colombia #3
El Salvador #1
Korea #11
Peru #5
Tunisia #6

4,493,256.68
10/2
76,314,977.00
10/2
517,105.00
10/7
$
1,581,185.38
10/7
227,609.00
10/7
11,605,660.00
10/8
17,434,860.00
10/8
305,000.00
10/9
3,453,789.00
10/10
231,000.00
10/10
619,118.00
10/10
8,717,430.00
10/10
1,143,772.75
10/10
528,578.65
10/15
437,000.00
10/16
182,266.87
10/16
61,831.00
10/16
1,171,113.36
10/17
843,960.00
10/17
31,011.05
10/17
2,974,754.00
10/17
2,829,296.00
10/20
763,860.00
10/20
10/22
504,205.00
1,155,270.00
10/22
9,877.42
10/22
5,698,827.48
10/23
52,857.15
10/23
27,041.57
10/23
196,076.00
10/23
4,844,159.00
10/24
12,500.00
10/28
9,282,379.00
10/28
34,714.40
10/28
10/30
144,911.43
1,164,101.86
10/31
521,487.00
10/31
3,377,816.00
10/31
31,300.00
10/31
553,736.00
10/31

INTEREST:
INTEREST
MATURITY : RATE :
PAYABLE
(other than s/a)
3/15/88
9/1/09
3/25/89
9/20/89
4/25/90
4/15/86
9/20/89
9/20/85
9/1/09
6/10/87
9/20/89
4/25/90
9/20/85
9/20/85
5/10/89
9/12/83
6/3/91
12/31/88
5/5/87
6/3/88
6/15/10
6/1/86
12/31/84
3/15/88
12/31/88
10/30/84
9/15/88
12/31/84
9/12/84
9/20/89
9/1/09
6/2/90
12/31/88
9/12/83
6/3/88
9/20/85
6/2/90
12/31/88
3/15/86
5/5/87

11.977%
11.934%
11.492%
11.492%
11.488%
11.585%
11.557%
11.820%
11.503%
11.642%
11.598%
11.580%
11.708%
11.730%
11.552%
11.725%
11.485%
11.674%
11.724%
11.696%
11.533%
11.922%
11.995%
11.994%
11.951%
12.164%
12.201%
12.421%
12.444%
12.163%
11.943%
12.392%
12.463%
12.907%
12.879%
13.083%
12.738%
12.808%
13.025%
12.941%

10/3/85
10/3/95
10/3/00

11.955%
12.075%
11.955%

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

11.541%
11.535%
12.263%

various

11.573%

12.393% an.

8/1/81
7/31/81
8/1/81
10/31/83
11/3/81

12.105%
13.395%
13.395%
13.257%
13.726%

12.393%
13.777%
13.778%
13.696%
14.197%

FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
10/3
10/3
10/3

200,000,000.00
635,000,000.00
170,000,000.00

12.312% an
12.440% "
12.312% "

GENERAL SERVICES ADMINISTRATION
Series M-065
Series L-072
Series K-038

988,817.81
45,492.00
565,710.28

10/8
10/14
10/29

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Public Housing Authority Project Notes
121,715,767.09

Sale #2 10/10

Community Development Block Grant Guarantees
Long Beach, Calif.
Dubuque, Iowa
Long Beach, Calif.
* Indianapolis.-2nd» ^
W^Tfeoreland Co., P a M 2
/Maturity extension

10/6
10/28
10/28
10/31
10/31

166,000.00
278,000.00
1,966,868.00
2,000,000.00
750,000.00

an.
"
"
"
"

FEDERAL FINANCING BANK
October 1980 Activity
Page 2

BORROWER

:
:
: DATE :

AMOUNT
OF ADVANCE

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

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
Note #41
Note #42
Note #43

10/7
10/8
10/16

6,000,000.00
175,000.00
4,000,000.00

11/7/80
1/6/81
1/14/81

11.913%
11.876%
11.457%

42,000.00
3,980,000.00
11,000,000.00
355,000.00
1,369,000.00
2,000,000.00
1,503,000.00
622,000.00
4,245,000.00
14,398,000.00
695,000.00
30,000,000.00
2,445,000.00
5,756,000.00
1,968,000.00
1,559,000.00
60,000.00
12,520,000.00
2,626,000.00
951,000.00
408,000.00
670,000.00
3,352,000.00
15,500,000.00
5,950,000.00
7,000,000.00
61,085,000.00
55,061,000.00
4,407,000.00
1,790,000.00
28,000.00
898,000.00
193,000.00
136,000.00
150,000.00
630,000.00
1,550,000.00
1,000,000.00
1,500,000.00
4,500,000.00
900,000.00
3,800,000.00
58,716,000.00
2,122,000.00
1,813,000.00
1,412,000.00
6,325,000.00
1,272,000.00
19,184,000.00
945,000.00
305,000.00
879,000.00
777,000.00
730,000.00
168,285.00
6,144,000.00
24,210,000.00
500,000.00
2,837,000.00
3,000,000.00

10/1/82
10/1/82
10/2/82
10/2/82
10/2/82
10/3/82
12/31/14
10/6/82
10/6/82
10/7/82
10/9/82
10/9/82
10/31/82
12/31/14
10/10/82
10/10/82
10/14/82
10/15/82
10/15/82
10/15/82
9/30/87
10/15/82
10/16/82
10/17/82
10/17/82
10/31/82
10/19/82
10/19/82
10/20/82
10/20/82
10/20/82
10/20/82
10/20/82
10/20/82
10/21/82
10/21/82
10/21/82
10/21/82
10/22/82
10/22/82
10/22/82
10/20/83
10/24/82
10/24/82
12/31/14
10/25/82
12/31/14
10/29/83
10/30/82
10/30/82
10/30/82
10/30/82
10/31/82
10/31/82
10/31/82
10/15/87
10/31/82
10/31/82
10/31/82
10/31/82

12.255%
12.255%
12.145%
12.145%
12.145%
12.185%
11.831%
11.635%
11.635%
11.535%
11.815%
11.815%
11.725%
11.393%
11.725%
11.725%
11.765%
11.795%
11.795%
11.795%
11.555%
11.795%
11.705%
11.815%
11.815%
11.815%
12.035%
12.035%
12.035%
12.035%
12.035%
12.035%
12.035%
12.035%
12.125%
12.125%
12.125%
12.125%
12.235%
12.235%
12.235%
12.365%
12.435%
12.435%
11.851%
12.375%
12.306%
12.895%
13.105%
13.105%
13.105%
13.105%
13.165%
13.165%
13.165%
12.655%
13.165%
13.165%

RURAL ELECTRIFICATION ADMINISTRATION
Arkansas Electric #97
Arkansas Electric #142
•Alabama Electric #26
*Big Rivers Electric #91
*Big Rivers Electric #58
Dairyland Power #54
Chugach Electric #82
*East Ascension Telephone # 3 9
Western Illinois Power #62
Cajun Electric Power #163
Orange City Telephone #10
Hoosier Energy #107
Allegheny Electric #93
Wabash Valley Power #104
*Nothern Michigan Electric #101
•Wolverine Electric #100
Central Electric Power #131
•Oglethorpe Power #74
Brazos Electric Power #108
Brazos Electric Power #144
Tri-State Gen. & Trans. #79
East Kentucky Power #140
Seminole Electric #141
Associated Electric #132
Plains Electric G & T #158
Cooper Valley Electric #125
•Soyland Power #105
•Western Illinois Power #99
•Big Rivers Electric #58
•Big Rivers Electric #91
Big Rivers Electric #65
Big Rivers Electric #91
Big Rivers Electric #136
Big Rivers Electric #143
Corn Belt Power #166
United Power #86
United Power #139
Sugar Land Telephone #69
United Power #67
United Power #129
Colorado-Ute Electric #78
•South Mississippi Electric #3
Deseret Gen. & Trans. #170
Seminole Electric #141
Pacific Northwest Gen. #118
•Brookville Telephone #53
Chugach Electric #82
•Southern Illinois Power #38
•East Kentucky Power #73
•Big Rivers Electric #58
•Big Rivers Electric #91
Seminole Electric #141
•Basin Electric Power #88
Basin Electric Power #87
Gulf Telephone #50
Tri-State Gen. & Trans. #89
South Mississippi Electric #171
Southern Illinois Power #38
Arkansas Electric #142
San Miguel Electric #110
•maturity extensions

10/1
10/1
10/2
10/2
10/2
10/3
10/3
10/6
10/6
10/7
10/9
10/9
10/10
10/10
10/10
10/10
10/14
10/15
10/15
10/15
10/15
10/15
10/16
10/17
10/17
10/17
10/19
10/19
10/20
10/20
10/20
10/20
10/20
10/20
10/21
10/21
10/21
10/21
10/22
10/22
10/22
10/23
10/24
10/24
10/24
10/25
10/29
10/29
10/30
10/30
10/30
10/30
10/31
10/31
10/31
10/31
10/31
10/31
10/31
10/31

13.14JT
13-. 165%

12.073% qtr
12.073% ••
11.966% "
11.966% 1.
11.966% "
12.005% ti
11.661% "
11.471% 11
11.471% "
11.373% •
11.645% 1
11.645%
11.558%
11.235%
11.558%
11.558%
11.597%
11.626%
11.626%
11.626%
11.393%
11.626%
11.539% '
11.645% '
11.645% '
11.645% '
11.859% '
11.859% '
11.859% '
11.859% '
11.859% '
11.859% '
11.859% '
11.859% '
11.947% '
11.947% *
11.947% '
11.947% '
12.053% '
12.053% '
12.053% '
12.180% '
12.247% '
12.247% '
11.680% '
12.189% '
12.122% "
12.694% '
12.897% '
12.897% '
12.897% '
12.897% '
12.955% '
12.955% '
12.955% '
12.461% '
12.955% '
12.955% '
T7T3J3T*S
12.955% '\

FEDERAL FINANCING BANK
October 1980 Activity
Page 3
BORROWER

DATE

AMOUNT
OF ADVANCE

SMALL BUSINESS ADMINISTRATION

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

Small Business Investment Companies
Greater Wash. Investors, Inc.
Edwards Capital Corp.
Greater Wash. Investors, Inc.
Livingston Capital Limited
Wood River Capital Corp.
Crosspoint Investment Corp.
Greater Wash. Investors, Inc.
Livingston Capital Limited
Atalanta Investment Co., Inc.
Builders Capital Corp.
Greater Wash. Investors, Inc.
Industrial Capital Corp.
Universal Investment Co.
Vega Capital Corporation

10/22 $
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22
10/22

500,000.00
500,000.00
500,000.00
450,000.00
3,000,000.00
360,000.00
500,000.00
500,000.00
2,000,000.00
1,000,000.00
500,000.00
500,000.00
400,000.00
950,000.00

10/1/83
10/1/85
10/1/85
10/1/85
10/1/85
10/1/87
10/1/87
10/1/87
10/1/90
10/1/90
10/1/90
10/1/90
10/1/90
10/1/90

11.995%
11.855%
11.855%
11.855%
11.855%
11.795%
11.795%
11.795%
11.765%
11.765%
11.765%
11.765%
11.765%
11.765%

10/7
10/14
10/21
10/28

2,345,000,000.00
2,355,000,000.00
2,370,000,000.00
2,375,000,000.00

10/14/80
10/21/80
10/28/80
11/4/80

11.913%
11.960%
12.040%
13.029%

10/3
10/8
10/15
10/22
10/31

125,000,000.00
45,000,000.00
25,000,000.00
25,000,000.00
85,000,000.00

1/16/81 12.256%
1/16/81 11.833%
1/16/81 11.779%
1/16/81 12.059%
1/16/81 13.223%

581,745,319.00

1/30/81 13.233%

STUDENT LOAN MARKETING ASSOCIATION
Note #270
Note #271
Note #272
Note #273
TENNESSEE VALLEY AUTHORITY
Note #159
Note #160
Note #161
Note #162
Note #163
Seven States Energy Corporation
Note #12 10/31
DEPARTMENT OF TRANSPORTATION
Section 511
Chicago & North Western #4 10/10
Chicago & North Western #2
Milwaukee Road #2
Milwaukee Road #3

10/15
10/17
10/17

1,670,526.00
954,937.00
980,000.00
953,593.00

5/1/92
5/1/86
6/30/06
1/1/94

11.552%
11.659%
11.528%
11.647%

11.999 an.

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

#21
#25
#21
#21
#21
#21
#21
#21
#21
#21

10/1
10/1
10/2
10/3
10/7
10/8
10/14
10/17
10/20
10/21

15,000,000.00
100,000,000.00
110,000,000.00
5,000,000.00
10,000,000.00
5,000,000.00
10,000,000.00
15,000,000.00
8,000,000.00
6,000,000.00

10/2/80 12.041%
1/2/81 12.041%
1/2/81 12.052%
1/2/81 12.134%
1/2/81 11.913%
1/2/81 11.876%
1/2/81 11.960%
1/2/81 11.540%
1/2/81 11.764%
1/2/81 12.040%

10/24
10/31

630,000.00
750,000.00
460,042,848.27

10/31/80 12.263%
12/26/90 11.945%
4/30/80 13.822%

10/1
10/20
10/31

2,575,000.00
3,190,000.00
4,475,000.00

United States Railway Association
Note #20 10/22
Note #22
Note #23
SPACE CCfrtUNICATIONS COMPANY

•^iturity extensi

10/1/90
10/1/90
10/1/90

12.024%
11.807*
12.744%

12.385% an.
12.156'* "
13.150% "

FEDERAL FINANCING BANK II0LU1NGS
(in millions of dollars)
Program

October 31, 19&0

September 30, 1980

On-Budget Agency Debt
Tennessee Valley Authority
Export-Import Bank
NCUA-Central Liquidity Facility

Net Change-FY 81
(10/1/80-10/31/80)
175.0
-04.2

$ 9,110.0
10,066.9
94.1

$ 8,935.0
10,066.9
89.9

1,520.0
508.5

1,520.0
481.8

-026.7

38,466.0
103.2
156.0
31.5
1,912.3
78.2

37,961.0
103.2
156.0
31.5
1,912.3
79.1

505.0
-0-0-0-0-.9

62.2
162.9
7,202.8
1.1
399.5
36.0
33.5
118.5
40.0
498.2
526.8
8,425.0
685.0
478.1
2,345.0
30.2
177.0

-04.6
132.4
-01.6
-0-0121.7
4.4
74.0
10.2
220.5
23.4
11.7
30.0
-0-0-

Off-Budget Agency Debt
U.S. Postal Service
U.S. Railway Association
Agency Assets
Farmers Home Administration
DHHS-Health Maintenance Org. Loans
DHHS-Medical Facilities Loans
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government-Guaranteed Loans

DOT-Emergency Rail Services Act
62.2
167.5
DOT-Title V, RRRR Act
7,335.2
DOD-Foreign Military Sales
1.1
DOE-Hybrid Vehicles
401.1
General Services Administration
36.0
Guam Power Authority
33.5
DHUD-New Communities Admin.
240.2
DHUD-Public Housing Notes
44.3
DHuTi-Coimiunity Block Grant Notes
572.2
537.1
Nat'l. Railroad Passenger Corp.(AMTRAK)
8,645.5
Space Communications Company (NASA)
7 08.4
Rural Electrification Administration
489.8
Seven States Energy Corp. (TVA)
2,375.0
Small Business Investment Companies
30.2
Student Loan Marketing Association
177.0
Virgin Islands
83,902.9*
t*iATA TOTALS
•totals do not add due to rounding

82,558.5

1344.4^

FOR IMMEDIATE RELEASE

December 16, 1980
RESULTS OF AUCTION OF 2-YEAR NOTES

The Department of the Treasury has accepted $4,507 million of
$10,652 million of tenders received from the public for the 2-year notes,
Series Z-1982, auctioned today.
The interest coupon rate on the notes will be 15-1/8%. The range of
accepted competitive bids, and the corresponding prices at the 15-1/8%
coupon rate are as follows:
Bids Prices
Lowest yield
Highest yield
Average yield

15.13% 1/
15.18%
15.15%

99.992
99.908
99.958

Tenders at the high yield were allotted 2%.
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
127,370
8,639,265
103,515
179,415
112,675
152,825
512,370
128,695
93,565
122,895
53,565
421,135
4,570

Accepted
$
80,350
3,439,410
88,515
83,445
86,715
130,345
143,850
111,695
82,925
118,060
46,060
91,190
4,570

$10,651,860

$4,507,170

The $4,507
million of accepted tenders includes $1,233
million
of noncompetitive tenders and $3,014
million of competitive tenders from
private investors. It also includes $260
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 $4,507 million of tenders accepted in the
auction process, $350
million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for maturing securities.
1/ Excepting 1 tender of $20,000.

M-78*f

Dec. 16, 1981

/J ''/6 '° TREASURY NOTES OF SERIES A^// (f^

DATE:
HIGHEST -fllHgE:

LAST ISSUE:

/3~7/r7<
LOWEST SINCE:

TODAY:

U-'/t%

IMMEDIATE RELEASE
December 17, 1980

Contact: Everard Munsey
Phone: (202) 566-8191

CHRYSLER LOAN GUARANTEE BOARD TO MEET DECEMBER 18
The Chrysler Corporation Loan Guarantee Board will meet at 5:30
p.m. Thursday, December 18 to discuss Chrysler's new Operating and
Financing Plans and related documentation and to consider Chrysler's
need for issuance of additional Federal guarantees (including
consideration of any application for additional guarantees which '
may be filed by Chrysler). The Board does not, however, expect to
take any formal action on any of these matters at the meeting.
The Board meeting, in Room 4426, Main Treasury Building,
will be closed to the public under the provisions of the Government
in the Sunshine Act.
The voting members of the Board are Secretary of the Treasury
G. William Miller, Chairman; Federal Reserve Board Chairman
Paul A. Volcker and Comptroller General Elmer B. Staats.
# # #

M-7S1

FOR RELEASE AT 4:00 P. M.

December 17, 1980

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,500 million, of 363-day
Treasury bills to be dated January 2, 1981, and to mature
December 31, 1981 (CUSIP No. 912793 8F 6 ) . This issue will
provide about $475 million new cash for the Treasury as the
maturing 52-week bill was originally issued in the amount of
$4,018 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing January 2, 1981. In addition to the
maturing 52-week bills, there are $8,107 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next
week. Federal Reserve Banks as agents for foreign and international monetary authorities currently hold $2,497 million, and
Federal Reserve Banks for their own account hold $2,633 million
of the maturing bills. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
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. For purposes of determining such
additional amounts, foreign and international monetary
authorities are considered to hold $657 million of the original
52-week issue.
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, Tuesday,
December 23, 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
M-/82
may not be used.

-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 decimal:;)
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 2, 1981,
in cash or other immediately available
funds or in Treasury bills maturing January 2, 1981. Cash
adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the
new bills.

partmentoftheJREASURY
SHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 18, 1980
RESULTS OF AUCTION OF 4-YEAR NOTES

The Department of the Treasury has accepted $3,253 million of
$8,577
million of tenders received from the public for the 4-year
notes, Series H-1984, auctioned today.
The interest coupon rate on the notes will be 14%. The range
of accepted competitive bids, and the corresponding prices at the 1 4 %
coupon rate are as follows:
Lowest yield
Highest yield
Average yield

Bids
13.93%
14.06%
14.03%

Prices
100.209
99.821
99.910

Tenders at the high yield were allotted 2 9 % .
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
$
46,213
7,095,911
22,207
218,500
61,922
72,936
468,312
121,141
36,291
93,172
31,633
306,189
3,020

Accepted
$
32,213
2,395,149
22,207
171,240
36,922
63,816
153,492
100,141
34,231
88,172
27,583
124,764
3,020

$8,577,447

$3,252,950

The $3,253 million of accepted tenders includes $881
million of
noncompetitive tenders and $2,050 million of competitive tenders from
private investors. It also includes $ 322
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 $3,253 million of tenders accepted in the
auction process, $ 252
million of tenders were accepted at the average
price from Government accounts and Federal Reserve Banks for their own
account in exchange for maturing securities, and $ 63
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^783

TREASURY NOTES OF SERIES H-1984

DATE: 12/18/80
HIGHEST SINCE: 3/?>5/%0

LAST ISSUE:

^/?3/%6

LOWEST SINCE: TODAY:

MYc

ft.OS* x/^d

FOR IMMEDIATE RELEASE

December 19, 1980

DLC3Q'B0
TREASURY OFFERS $4,000 t MILLION-OF,120-DAY
CASH MANAGEMENT BILLSH "
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,000 million of 120-day
Treasury bills to be issued December 31, 1980, representing an
additional amount of bills dated October 30, 1980, maturing
April 30, 1981 (CUSIP No. 912793 6P 6). 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 12:30 p.m., Eastern Standard time,
Tuesday, December 23, 1980. 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 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

M-784

-2Government 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 Wednesday,
December 31, 1980.
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, 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 RELEASE AT 4:00 P.M.

December 22, 1980

TREASURY TO AUCTION $1,500 MILLION OF 20-YEAR 1-MONTH BONDS
The Department of the Treasury will auction $1,500 million o
20-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

M-785
(over)

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 20-YEAR 1-MONTH BONDS
TO BE ISSUED JANUARY 12, 1981
December 22, 1980
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation

$1,500 million
20-year 1-month bonds
Bonds-of 2001
(CUSIP No. 912810 CT 3)

Maturity date February 15 , 2001
Call date
Interest coupon rate.

Acceptable
Tuesday, January 6, 1981,
by 1:30 p.m., EST

Settlement date (final payment due
from institutions)
a) cash or Federal funds
b) readily collectible check...

Monday, January 12, 1981
Friday, January 9, 1981

Delivery date for coupon securities.

Friday, January 23, 1981

Department of theJREASURY
TELEPHONE 566-2041

VASHINGTON, D.C. 20220

•::;:

December 22, 1980

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4,001 million of 13-week bills and for $4,000 million of
26-week bills, both to be issued on December 26, 1980, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

26-week bills
maturing June 25, 1981
Discount Investment
Price
Rate
Rate 1/

13-week bills
maturing March 26, 1981
Discount Investment
Price
Rate
Rate 1/

High
96.275^' 14.900%
Low
96.241
15.036%
Average
96.252
14.992%
a/ Excepting 1 tender of $200,000

15.69%
15.84%
15.79%

93.006
92.835
92.945

13.911%
14.251%
14.032%

15.16%
15.56%
15.31%

Tenders at the low price for the 13-week bills were allotted 92%.
Tenders at the low price for the 26-week bills were allotted 2%.

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
$ 126,240
$
80,740 '
$
35,395
5,097,645
2,965,365
4,322,565
45,160
40,160
16,410
49,900
45,735
29,475
43,380
43,380 .
33,625
65,820
63,220
32,325
661,315
175,765
563,895
33,195
23,195
33,425
8,825
8,825
9,850
43,945
42,335
33,440
21,050
21,050 :
11,030
519,105
385,105
308,950
105,645
105,645
61,220

Accepted
$
35,395
3,086,365
16,410
29,475
33,625
32,310
413,875
33,425
9,850
33,440
11,030
203,950
61,220

TOTALS

$6,821,225

$4,000,520

$5,491,605

$4,000,370

Competitive
Noncompetitive

$4,497,370
843,685

$1,676,665
843,685

$3,373,310
573,040

$1,882,075
573,040

Subtotal, Public

$5,341,055

$2,520,350

$3,946,350

$2,455,115

Federal Reserve
Foreign Official
Institutions

1,040,000 1,040,000

1,041,955

503,300

$5,491,605

$4,000,370

Type

TOTALS

440,170

$6,821,225

$4,000,520

_1/Equivalefif coupo-n-issue yield.
M-7 86

•

ipartment oftheJREASURY
SHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

December 23, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,400 million, to be issued January 2, 1981.
This offering will provide $300 million of new cash for the
Treasury as the maturing bills were originally issued in the
amount of $8,107 million. The two series offered are as follows:
90-day bills (to maturity date) for approximately $4,200
million, representing an additional amount of bills dated
October 2, 1980, and to mature April 2, 1981 (CUSIP No. 912793
6L 5 ) , currently outstanding in the amount of $4,019 million, the
additional and original bills to be freely interchangeable.
181-day bills for approximately $4,200 million, to be dated
January 2, 1981, and to mature July 2, 1981 (CUSIP No. 912793 7K 6 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 2, 1981. In addition to the
maturing 13-week and 26-week bills, there are $4,018 million of
maturing 52-week bills. The disposition of this latter amount
was announced last week. Federal Reserve Banks, as agents for
foreign and international monetary authorities, currently hold
$2,497 million, and Federal Reserve Banks for their own account
hold $2,633 million of the maturing bills. These amounts
represent the combined holdings of such accounts for the three
issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as
agents for 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 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. For purposes of determining such
additional amounts, foreign and international monetary
authorities are considered to hold $1,840 million of the original
13-week and 26-week issues.
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.

M-7-S-X

-2Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20226, up to 1:30 p.m., Eastern Standard time, Monday,
December 29, 1980. Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000. Tenders over
$10,000 must be in multiples of $5,000. In the case of
competitive tenders the price offered must be expressed on the
basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve
Bank of New York their positions in and 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.

-3Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on January 2, 1981, in cash or other immediately available funds
or in Treasury bills maturing January 2, 1981. 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.

kpartmentoftheJREASURY
ASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 23, 1980

RESULTS OF TREASURY'S 120-DAY BILL AUCTION
Tenders for $4,000 million of 120-day Treasury bills to be issued
on December 31, 1980, and to mature April 30, 1981, were accepted at the
Federal Reserve Banks today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:

Price

Discount Rate

High - 95.085 14.745%
Low
- 95.058
14.826%
Average - 95.075
14.775%

Investment Rate
(Equivalent Coupon-Issue Yield)
15.72%
15.81%
15.76%

Tenders at the low price were allotted 6%.
TOTAL TENDERS RECEIVED AND ACCEPTED BY
FEDERAL RESERVE DISTRICTS:
Location

K-788

Received

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

$ 40,000,000
7,384,000,000

TOTALS

$8,227,000,000

Accepted

$
3,937,000,000

100,000,000
37,000,000
337,000,000
40,000,000

35,000,000

1,000,000
288,000,000

28,000,000
$4,000,000,000

FOR IMMEDIATE RELEASE
December 24, 1980

CONTACT: GEORGE G. ROSS
(202) 566-2356

UNITED STATES/FEDERAL REPUBLIC OF GERMANY
ESTATE AND GIFT TAX TREATY SIGNED
The Treasury Department today announced that an estate
and gift tax treaty between the United States and the
Federal Republic of Germany was signed in Bonn, on
December 3, 1980 by Walter J. Stoessel, Jr., U.S. Ambassador
to Germany, and Guenter van Well, State Secretary in the
German Foreign Office. The treaty must be approved by the
U.S. Senate and the German parliament before entering into
effect.
The new treaty is the first of its kind between the two
countries. It is intended to coordinate taxation in the
United States and Germany so as to avoid double taxation of
estates and gifts.
The new treaty applies in the United States to the
federal estate tax, the Federal gift tax, and the federal
tax on generation-skipping transfers. It applies in the
Federal Republic of Germany to the inheritance and gift tax.
The treaty is similar in principle to the U.S. Estate and
Gift Tax Treaty with the United Kingdom, which entered into
force November 11, 1979, and the U.S. Estate and Gift Tax
Treaty with France, which entered into force October 1,
19fa0.
The general principle underlying the United StatesGerman treaty is that the country of domicile may tax
estates and transfers on a worldwide basis, but must credit
tax paid to the other country with respect to certain types
of property located therein. The treaty provides rules for
resolving the issue of domicile.

M-789

-2The treaty is subject to ratification by the two
governments. It will enter into force immediately upon the
exchange of instruments of ratification and its provisions
will apply to estates of persons dying and gifts made on or
after January 1, 1979. In the case of estates of persons
dying between January 1, 1974, and January 1, 1979, the
treaty authorizes consultations for the purpose of
eliminating double taxation.
The treaty shall remain in force indefinitely unless
terminated by one of the contracting states. It may not be
terminated for three years after its entry into force.
A copy of the treaty is attached.
o 0 o

Convention
Between the United States of America
And the Federal Republic of Germany
For the Avoidance of Double Taxation
With Respect to Taxes on Estates, Inheritances, and Gifts
Abkommen
zwischen den Vereinigten Staaten von Amerika
und der Bundesrepublik Deutschland
zur Vermeidung der Doppelbesteuerung
auf dem Gebiet der NachlaB-, Erbschaft- und Schenkungsteuern
The United States of America
and
the Federal Republic of Germany,

Die Vereinigten Staaten von Amerika
und
die Bundesrepublik Deutschland -

desiring to avoid double taxation with respect to taxes on
estates, inheritances, and gifts,

von dem Wunsch geleitet, bei den NachlaB-, Erbschaft- und
Schenkungsteuern die Doppelbesteuerung zu vermeiden -

have agreed as follows:

haben folgendes vereinbart:
Chapter I
Article 1
Scope

This Convention shall apply to
a) Estates of deceased persons whose domicile at their death
w a s in one or both of the Contracting States, and

Abschnitt
Artikel 1
Geltungsbereich
Dieses A b k o m m e n gilt fur

a) Nachlasse von Erblassem, die im Zeitpunkt ihres Todes
einen Wohnsitz in einem Vertragsstaat Oder in beiden Vertragsstaaten hatten, und
b) Gifts of donors whose domicile at the making of a gift was
b) Schenkungen von Schenkern, die im Zeitpunkt der Schenin one or both of the Contracting States.
kung einen Wohnsitz in einem Vertragsstaat Oder in beiden
Vertragsstaaten hatten.
Arttde2

Artikel 2

Taxes Covered

Unter das A b k o m m e n fallende Steuern

1. The existing taxes to which this Convention shall apply
are:
a) In the case of the United States of America: The Federal estate tax and the Federal gift tax, including the tax on generation-skipping transfers; and

(1) Die bestehenden Steuern, fur die das A b k o m m e n gilt,
sind
a) in den Vereinigten Staaten von Amerika: die Bundeserbschaftsteuer (Federal estate tax) und die Bundesschenkungsteuer (Federal gift tax) einschlieBlich der Steuer auf
Ubertragungen, bei denen eine Oder mehrere Generationen
ubersprungen werden;
b) in der Bundesrepublik Deutschland: die Erbschaftsteuer
(Schenkungsteuer).

b) In the case of the Federal Republic of Germany: the inheritance and gift tax (Ertoschaftsteuer und Schenkungsteuer).
2. This Convention shall also apply to any similar taxes on
•states, inheritances, and gifts which are imposed after the
date of signature of the Convention in addition to, or in place
of. the existing taxes.

(2) Dieses Abkommen gilt auch fur alle NachlaB-, Erbschaftund Schenkungsteuern ihnlicher Art. die nach der Unterzeichnung des A b k o m m e n s neben den bestehenden Steuern Oder
an deren Stelle erhoben werden.

Chapter II

Abtchnitt II

Artikel 3
Article 3
Allgemeino
Begriffebestimrnungen
General Definitions
(1) Im Sinne dieses A b k o m m e n s
1. In this Convention:
a)
bedeutet der Ausdruck ..Vereinigte Staaten von Amerika",
a) The term "United States of America" when used in a geoim
geographischen Sinne verwendet, die Bundesstaaten
graphical sense means the states thereof and the District
und
den Distrikt Columbia. Der Ausdruck umfaBt auch das
of Columbia. Such term also includes the territorial sea
Kiistenmeer
der Vereinigten Staaten von Amerika und den
thereof and the seabed and subsoil of the submarine areas
Meeresboden
und Meeresuntergrund der an die Kuste der
adjacent to the coast thereof, but beyond the territorial sea
Vereinigten Staaten von Amerika angrenzenden, aber jenover which the United States of America exercises soverseits des Kustenmeers gelegenen Unterwassergebiete,
eign rights, in accordance with international law, for the
uber die die Vereinigten Staaten von Amerika in Ubereinpurpose of exploration for and exploitation of the natural restimmung mit dem volkerrecht fur die Zwecke der Erforsources of such areas.
schung und Ausbeutung der Naturschatze dieser Gebiete
Hoheitsrechte ausiiben;
b) The term "Federal Republic of Germany" when used in a
b)
bedeutet
der Ausdruck ..Bundesrepublik Deutschland", im
geographical sense means the territory in which the Basic
geographischen
Sinne verwendet, den Geltungsbereich
Law for the Federal Republic of Germany is in force as well
des
Grundgesetzes
fur die Bundesrepublik Deutschland
as any area adjacent to the territorial waters of the Federal
sowie
die
an
die
Hoheitsgewasser
der Bundesrepublik
Republic of Germany designated, in accordance with interDeutschland
angrenzenden
und
in
Ubereinstimmung
mit
national law relating to therightswhich the Federal Redem
Vdlkerrecht
in
bezug
auf
die
Rechte.
welche
die
Bunpublic of Germany may exercise with respect to the seabed
desrepublik Deutschland hinsichtlich des Meeresbodens
and subsoil and their natural resources, as domestic area
und des Meeresuntergrunds sowie ihrer Naturschatze ausfor tax purposes.
iiben darf, steuerrechtlich als Inland bezeichneten Gebiete;
c) The term "enterprise" means an industrial or commercial
c)
bedeutet
der Ausdruck ..Unternehmen" ein gewerbliches
undertaking.
Unternehmen;
d) The term "enterprise of a Contracting State" means an enterprise carried on by a person who is domiciled in a Con- d) bedeutet der Ausdruck ..Unternehmen eines Vertragsstaats" ein Unternehmen. das von einer Person mit Wohntracting State.
sitz
in einem Vertragsstaat betrieben wird;
e) The term "competent authority" means:
e)
bedeutet
der Ausdruck ..zustandige Behorde"
i) In the case of the United States of America, the Secrei)
auf
seiten
der Vereinigten Staaten von Amerika den Fitary of the Treasury or his delegate, and
nanzminister (Secretary of the Treasury) oder seinen
bevollmachtigten Vertreter und
ii) In the case of the Federal Republic of Germany, the Fedii) auf seiten der Bundesrepublik Deutschland den Buneral Minister of Finance.
desminister der Finanzen.
2. As regards the application of the Convention by a Con(2) Bei der Anwendung des Abkommens durch einen Vertracting State, any term not defined therein shall, unless the
tragsstaat hat. wenn der Zusammenhang nichts anderes erforcontext otherwise requires, have the meaning which it has undert, jeder im Abkommen nicht definierte Ausdruck die Bedeuder the law of that Contracting State concerning the taxes to
tung, die ihm nach dem Recht dieses Vertragsstaats uber die
which the Convention applies.
Steuern zukommt, fur die das A b k o m m e n gilt.
Article 4
Artikel 4
Fiscal Domicile
Steueriicher Wohnsitz
1. For the purposes of this Convention, an individual has a (1) Eine naturiiche Person hat im Sinne dieses Abkommens
domicile
einen Wohnsitz
a) In the United States of America, if he is a resident or citizen a) in den Vereinigten Staaten von Amerika, wenn sie dort anthereof;
aftssig ist Oder Staatsangehoriger der Vereinigten Staaten
von Amerika ist;
b) In the Federal Republic of Germany, if he has his domicile,
b) in der Bundesrepublik Deutschland, wenn sie dort ihren
(Wohnsitz) or habitual abode (gewfthnlicher Aufenthalt)*
Wohnsitz oder gewdhnlichen Aufenthalt hat Oder aus andetherein or if he is deemed for other reasons to be subject to
ren Grunden fur die Zwecke der deutschen Erbschaftsteuer
unlimited tax liability for the purposes of the German in(Schenkungsteuer) als unbeschrankt steuerpflichtig gilt.
heritance and gift tax.
2. Where by reason of the provisions of paragraph 1 an in- (2) Hatte nach Absatz 1 eine naturiiche Person in beiden
dividual w a s domiciled in both Contracting States, then, sub- Vertragsstaaten einen Wohnsitz. so gilt vorbehaltlich des Abject to the provisions of paragraph 3, this case shall be deter- satzes 3 folgendes:
mined in accordance with the following rules:
a) He shall be deemed to have been domiciled in the Contract-a) Der Wohnsitz der naturlichen Person gilt als in dem Vertragsstaat gelegen, in d e m sie uber eine standige Wohning State in which he had a permanent home available to
statte verfugte. Verfugte sie in beiden Vertragsstaaten oder
him. If he had a permanent home available to him in both
in
keinem der Vertragsstaaten uber eine standige WohnContracting States, or in neither Contracting State, the
statte.
so gilt ihr Wohnsitz als in d e m Vertragsstaat geledomicile shall be deemed to be in the Contracting State

with which his personal and economic relations were
closest (center of vital interests);

gen, zu dem sie die engeren personlichen und wirtschaftlichen Beziehungen hatte (Mittelpunkt der Lebensinteressen);
b) tf the Contracting State in which he had his center of vital
b) kann nicht bestimmt werden. in welchem Vertragsstaat die
interests cannot be determined, the domicile shall be
naturiiche Person den Mittelpunkt ihrer Lebensinteressen
deemed to be in the Contracting State in which he had an
hatte, so gilt ihr Wohnsitz als in dem Vertragsstaat gelegen,
habitual abode:
in dem sie ihren gewohnlichen Aufenthalt hatte;
c) If he had an habitual abode in both Contracting States or in
c) hatte die naturiiche Person ihren gewohnlichen Aufenthalt
neither of them, the domicile shall be deemed to be in the
in beiden Vertragsstaaten oder in keinem der VertragsContracting State of which he was a citizen;
staaten. so gilt ihr Wohnsitz als in dem Vertragsstaat gelegen,
dessen Staatsangehoriger sie war;
d) If he was a citizen of both Contracting States or of neither
d) war die Person Staatsangehdriger beider Vertragsstaaten
of them, the competent authorities of the Contracting
Oder keines der Vertragsstaaten, so regeln die zustandigen
States shall settle the question by mutual agreement.
Beh6rden der Vertragsstaaten die Frage in gegenseitigem
3. Where an individual, at his death or at the making of a gift, Einvemehmen.
was
(3) War eine naturiiche Person im Zeitpunkt ihres Todes
a) a citizen of one Contracting State, and not also a citizen of oder der Schenkung
a) Staatsangehdriger eines Vertragsstaats, ohne gleichzeitig
the other Contracting State, and
Staatsangehdriger des anderen Vertragsstaats zu sein,
b) by reason of the provisions of paragraph 1 domiciled in both und
Contracting States, and
b) hatte sie aufgrund des Absatzes 1 einen Wohnsitz in beiden Vertragsstaaten und
c) by reason of the provisions of paragraph 1 domiciled in the
c) hatte sie im anderen Vertragsstaat ihren Wohnsitz aufother Contracting State for not more than five years,
grund des Absatzes 1 fur die Dauer von nicht mehr als funf
then the domicile of that individual and of the members of his Jahren gehabt,
family forming part of his household and fulfilling the same so gilt der Wohnsitz dieser Person und der zu ihrem Haushalt
requirements shall be deemed, notwithstanding the provisions gehdrenden Familienmitglieder, bei denen die gleichen Vorof paragraph 2, to be inVContracting State of which they aussetzungen vorliegen, ungeachtet des Absatzes 2 als in
were citizens.
dem Vertragsstaat gelegen, dessen Staatsangehorige sie wa4. An individual who, at his death or at the making of a gift, ren.
was a resident of a possession of the United States of America
(4) Eine naturiiche Person, die im Zeitpunkt ihres Todes
and who became a citizen of the United States of America
Oder der Schenkung in einer Besitzung der Vereinigten Staasolely by reason of
ten von Amerika ansassig war und nur deshalb Staatsangehoi
riger der Vereinigten Staaten von Amerika wurde, weil sie
a) his being a citizen of eweh a possession, or
a)
Staatsburger einer solchen Besitzung war oder
b) birth or residence within euefe a possession,
b)
in
einer solchen Besitzung geboren wurde Oder dort anshall be considered as having been neither domiciled in nor a
sdssig
war,
citizen of the United States of America at that time for purwird
fiir
die
Zwecke dieses Abkommens so behandelt, als habe
poses of this Convention.
sie in dem genannten Zeitpunkt keinen Wohnsitz in den Vereinigten Staaten von Amerika gehabt und als sei sie in d e m ge5. For the purposes of this Convention the question whether nannten Zeitpunkt kein Staatsangehdriger der Vereinigten
a person other than an individual was domiciled in a Contract- Staaten von Amerika gewesen.
ing State shall be determined according to the law of that
(5) Fur die Zwecke dieses Abkommens wird die Frage, ob
State. Where such person is domiciled in both Contracting
eine andere als eine naturiiche Person ihren Wohnsitz in eiStates, the competent authorities of the Contracting States nem Vertragsstaat hatte, nach dem Recht dieses Staates beshall settle the case by mutual agreement.
stimmt. Hat diese Person ihren Wohnsitz in beiden Vertragsstaaten, so regeln die zustandigen Behdrden der VertragsAbschnitt III
Chapter III
staaten den Fall in gegenseitigem Envemehmen.
Article 5

Artikel 5

Immovable Property
1. Immovable property which forms part of the estate of or of
a gift m a d e by a person domiciled in a Contracting State and
which is situated in the other Contracting State may be taxed
in that other State.
2. The term "immovable property" shall have the meaning
which it has under the law of the Contracting State in which the
property in question is situated. The term shall in any case include property accessory to immovable property, livestock and
equipment used in agriculture and forestry,rightsto which the
provisions of general law respecting landed property apply.
usufruct of immovable property, and rights to variable or fixed
payments at consideration for the working of. or therightto

Unbewegliches Vermogen
(1) Unbewegliches Vermogen, das Teil des Nachlasses
oder einer Schenkung einer Person mit Wohnsitz in einem Vertragsstaat ist und das im anderen Vertragsstaat liegt, kann im
anderen Staat besteuert werden.
(2) Der Ausdruck ..unbewegliches Vermogen" hat die Bedeutung, die ihm nach d e m Recht des Vertragsstaats zukommt, in d e m das Vermogen liegt. Der Ausdruck umfaBt in jed e m Fall das Zubehdr zum unbeweglichen Vermogen, das lebende und tote Inventar land- und forstwirtschaftlicher Betriebe, die Rechte, fur die die Vorschriften des Privatrechts uber
Grundstucke gelten, Nutzungsrechte an unbeweglichem Vermogen sowie Rechte auf veranderiiche Oder teste Vergutun-

work, mineral deposits, sources, and other natural resources;
ships, boats, and aircraft shall not be regarded as immovable
property.

gen fur die Auabeutung oder das Recht auf Ausbeutung von
Mineralvorkommen. Quellen und anderen Bodentchatzen;
Schiffe und Luftfahrzeuge gelten nicht als unbewegliches Vermdgen.

3. The provisions of paragraphs 1 and 2 shall also apply to (3) Die Absatze 1 und 2 gelten auch fur unbewegliches Vermogen eines Unternehmens und fur unbewegliches Vermdimmovable property of an enterprise and to immovable propgen, das der Ausubung einer selbstandigen Arbeit dient.
erty used for the performance of independent personal services.

Article 6

Artikel 6

Business Property of a Permanent Establishment
and Assets Pertaining to a Fixed Base Used
for the Performance of Independent Personal Services
1. Except for assets referred to in Articles 5 and 7, assets of
an enterprise which form part of the estate of or a gift made by
a person domiciled in a Contracting State and forming part of
the business property of a permanent establishment situated
in the other Contracting State may be taxed in that other State.

Vermogen einer Betriebstfitte und Vermogen
einer der Ausiibung einer selbstandigen Arbeit
dienenden festen Einrichtung
(1) Vermdgen eines Unternehmens, das Teil des Nachlasses Oder einer Schenkung einer Person mit Wohnsitz in einem
Vertragsstaat ist und das Betriebsvermdgen einer im anderen
Vertragsstaat gelegenen Betriebstatte darstellt - ausgenomm e n das nach den Artikeln 5 und 7 zu behandelnde Vermdgen - kann im anderen Staat besteuert werden.
(2) a) Der Ausdruck ..Betriebstatte" bedeutet eine feste
GeschSftseinrichtung, in der die Tatigkeit eines Unternehmens
eines Vertragsstaats ganz Oder teilweise ausgeubt wird.
b) Der Ausdruck ..Betriebstatte" umfaBt insbesondere

2. a) The term "permanent establishment" means a fixed
place of business through which the business of an enterprise
of a Contracting State is wholly or partly carried on.
b) A permanent establishment shall include especially:
a place of management;
a branch;
an office;
a store or other sales outlet;
a factory;
a workshop;
a mine, quarry, or other place of extraction of natural resources;
a buildung site or construction or assembly project which
exists for more than twelve months.
c) Notwithstanding subparagraph a) of this paragraph, a
permanent establishment shall be deemed not to include one
or more of the following activities:
the use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the enterprise;
the maintenance of a stock of goods or merchandise belonging
to the enterprise for the purpose of storage, display, or delivery;
the maintenance of a stock of goods or merchandise belonging
to the enterprise for the purpose of processing by another enterprise;
the maintenance of a fixed place of business for the purpose
of purchasing goods or merchandise, or collecting information,
for the enterprise;
the maintenance of a fixed place of business for the purpose
of advertising, for the supply of information, for scientific research, or for similar activities, if they have a preparatory or
auxiliary character, for the enterprise.

einen Ort der Leitung,
eine Zweigniederlassung,
eine Geschaftsstetle,
ein Ladengeschaft Oder eine andere Verkaufseinrichtung,
eine Fabrikationsstatte,
eine Werkstatte,
ein Bergwerk, einen Steinbruch Oder eine andere Statte der
Ausbeutung von Bodenschatzen,
eine Bauausfuhrung oder Montage, deren Dauer zwdlf Monate
uberschreitet.
c) Ungeachtet des Buchstabens a begriinden eine oder
mehrere der folgenden Tatigkeiten keine Betriebstatte:
das Benutzen von Einrichtungen zur Lagerung, Ausstellung
oder Auslieferung von Gutern oder Waren des Unternehmens;
das Unterhalten eines Bestands von Gutern oder Waren des
Unternehmens zur Lagerung, Ausstellung Oder Auslieferung;
das Unterhalten eines Bestands von Gutern oder Waren des
Unternehmens zu d e m Zweck, sie durch ein anderes Unternehmen bearbeiten oder verarbeiten zu lassen;
das Unterhalten einer festen Geschaftseinrichtung zu dem
Zweck, fur das Unternehmen Guter oder Waren einzukaufen
Oder Informationen zu beschaffen;
das Unterhalten einer festen Gesch&ftseinrichtung zu dem
Zweck, fur das Unternehmen zu werben, Informationen zu erteilen, wissenschaftliche Forschung zu betreiben Oder ahnliche Tatigkeiten auszuuben, w e n n sie vorbereitender Art sind
Oder eine Hilfstatigkeit darstellen.
d) Hat ein Unternehmen eines Vertragsstaats im anderen Staat keine Betriebstatte im Sinne der Buchstaben a bis c,
so wird es dennoch so behandelt, als habe es im letztgenannten Staat eine Betriebstatte. w e n n es in diesem Staat durch
einen Vertreter gewerblich tatig ist. der eine Vollmacht besitzt,
im N a m e n des Unternehmens Vertrage abzuschlieBen, und die
Vollmacht in diesem Staat regelmaBig ausubt, es sei denn, daB
sich die Ausubung der Vollmacht auf den Einkauf von Gutern
oder Waren fur das Unternehmen beschrankt.

d) Even if an enterprise of a Contracting State does not
have a permanent establishment in the other State under subparagraphs a) to c) of this paragraph, nevertheless it shall be
d e e m e d to have a permanent establishment in the latter State
if it is engaged in trade or business in that State through an
agent w h o has an authority to conclude contracts in the name
of the enterprise and regularly exercises that authority in that
State, unless the exercise of authority is limited to the purchase of goods or merchandise for the account of the enterprise.
e) An enterprise of a Contracting State shall not be
e) Ein Unternehmen eines Vertragsstaats wird nicht
d e e m e d to have a permanent establishment in the other State
schon deshalb so behandelt. als habe es eine Betriebstatte im '
merely because it is engaged in trade or business in that other anderen Staat. weil es dort seine gewerbiiche Tatigkeit durch

State through a broker, general commission agent, or any
other agent of an independent status, where such person is
acting in the ordinary course of business.
f) The fact that a resident or a corporation of one of the
Contracting States controls, is controlled by. or is under comm o n control with
i) a corporation of the other State or

einen Makler, Kommissionar Oder einen anderen unabhangigen Vertreter ausubt. sofern diese Person im R a h m e n ihrer ordentlichen Geschaftstatigkeit handelt.
f) Der Umstand, daB eine in einem der Vertragsstaaten
ansassige Person oder eine Kdrperschaft eines der Vertragsstaaten
i) eine Kdrperschaft des anderen Staates beherrscht. von ihr
beherrscht wird Oder mit ihr gemeinsam beherrscht wird
Oder
ii) a corporation which is engaged in trade or business in that ii) eine Kdrperschaft beherrscht. von ihr beherrscht wird oder
other State (whether through a permanent establishment
mit ihr gemeinsam beherrscht wird. die im anderen Staat
or otherwise)
(entweder durch eine Betriebstatte Oder auf andere Weise)
gewerblich tatig ist.
shall not be taken into account in determining whether such wird bei der Feststellung, ob diese Person oder Kdrperschaft
resident or corporation has a permanent establishment in that
eine Betriebstatte im anderen Staat hat, nicht berucksichtigt.
other State.
3. Except for assets referred to in Article 5, assets which
(3) Vermogen, das Teil des Nachlasses Oder einer Schenform part of the estate of or of a gift m a d e by a person domiciled kung einer Person mit Wohnsitz in einem Vertragsstaat ist und
in a Contracting State and pertaining to a fixed base situated
das zu einer der Ausubung einer selbstandigen Arbeit dienenin the other Contracting State used for the performance of in- den festen Einrichtung im anderen Vertragsstaat gehdrt- ausdependent personal services m a y be taxed in that other State. genommen das unter Artikel 5 fallende Vermogen - kann im
anderen Staat besteuert werden.
Article 7
8hips and Aircraft
Ships and aircraft operated in international traffic and belonging to an enterprise which form part of the estate of or of
a gift m a d e by a person domiciled in a Contracting State, and
movable property pertaining to the operation of such ships and
aircraft, m a y be taxed only in that State.

Article 8

Artikel 7
Schiffe und Luftfahrzeuge
Seeschiffe und Luftfahrzeuge eines Unternehmens, die Teil
des Nachlasses Oder einer Schenkung einer Person mit W o h n sitz in einem Vertragsstaat sind und die im internationalen
Verkehr betrieben werden, sowie bewegliches Vermogen, das
d e m Betrieb dieser Schiffe und Luftfahrzeuge dient, kdnnen
nur in diesem Staat besteuert werden.
Artikel 8

Interests in Partnerships

Beteiligungen an Personengesellschaften

An interest in a partnership which forms part of the estate of
or of a gift m a d e by a person domiciled in a Contracting State,
which partnership owns property described in Article 5 or 6,
m a y be taxed by the State in which such property is situated.
but only to the extent that the value of such interest is attributable to such property.

Ist eine Beteiligung an einer Personengesellschaft Teil des
Nachlasses Oder einer Schenkung einer Person mit Wohnsitz
in einem Vertragsstaat und gehdrt der Personengesellschaft
unter Artikel 5 Oder 6 fallendes Vermdgen, so kann die Beteiligung in dem Staat besteuert werden, in d e m das betreffende
Vermdgen liegt, jedoch nur mit d e m diesem Teil des Vermdgens zuzurechnenden Teil ihres Wertes.
Artikel 0

Article 9
Property Not Expressly Mentioned

Nicht ausdrticklich erwihntes Vermogen

Property which forms part of the estate of or of a gift m a d e
by a person domiciled in a Contracting State, wherever situated, and not dealt with in Article 5,6.7. or 8 shall, subject to
paragraph 1 of Article 11, be taxable only in that State.

Vermdgen, das Teil des Nachlasses Oder einer Schenkung
einer Person mit Wohnsitz in einem Vertragsstaat ist und nicht
unter<e*e-Artikel 5, 6. 7 Oder 8 fallt, kann ohne Rucksicht auf
seine Belegenheit nur in diesem Staat besteuert werden;
Artikel 11 Absatz 1 bleibt unberuhrt.
Artikel 10

Article 10
Deductions and Exemptions
1. In the case of property which forms part of an estate or gift
subject to taxation by a Contracting State solely in accordance
with Article 5,6, or 8, debts shall be allowed as reductions of,
or deductions from, the value of such property in an amount no
less than:

a) in the case of property referred to in Article 5, debts incurred for purposes of the acquisition, repair, or upkeep of
that property;

Abztige und Befreiungen
(1) Bei Vermdgen, das Teil eines Nachlasses oder einer
Schenkung ist und das lediglich in Ubereinstimmung -nit Son
Artikel* 5, 6 Oder 8 in einem Vertragsstaat der Besteuerung
unteriiegt. sind Schulden mindestens in Hdhe der nachstehend vorgesehenen Betrage bei der Wertermittlung mindernd
zu berucksichtigen oder als Abziige v o m Vermdgenswert zuzulassen:
a) bei dem in Artikel 5 genannten Vermdgen die Schulden, die
fur den Erwerb. die Instandsetzung oder die Instandhaltung
des Vermdgens aufgenommen wurden;

b) in the case of property referred to in Article 6, debts in- b) bei d e m in Artikel 6 g^nannten Vermdgen die Schulden, die
kn Zusammenhang mit d e m Betrieb einer Betriebstatte
curred in connection with the operation of the permanent
oder
einer festen Bnrichtung aufgenommen wurden, und
establishment or fixed base; and
c)
bei
der
in Artikel 8 genannten Beteiligung an einer Persoc) in the case of an interest in a partnership referred to in Arnengesellschaft
die Schulden, auf die Buchstabe a oder
ticle 8, debts to which subparagraphs a) or b) of this paraBuchstabe
b
Anwendung
fande, wenn das in dem erwahngraph would apply if the property owned by a partnership
ten
Artikel
genannte
Vermdgen
einer Personengesellreferred to in that Article were owned directly by the deschaft
dem
ErWasser
oder
Schenker
unmittelbar gehdrte.
cedent or donor.
(2)
Vermdgen,
das
einer
Kdrperschaft
Oder
Organisation ei2. Property transferred to or for the use of a corporation or
nes
Vertragsstaats.
die
ausschlieBlich
religidsen,
mildtatigen,
organization of a Contracting State organized and operated
wissenschaftlichen,
erzieherischen
oder
offentlichen
Zwecken
exclusively for religious, charitable, scientific, educational, or
dient,
oder
einer
offentlichen
Bnrichtung
eines
Vertragsstaats
public purposes, or to a public body of a Contracting State to
zur Verwendung fur diese Zwecke oder zur Nutzung ubertrabe used for such purposes, shall be exempt from tax by the
other Contracting State, if and to the extent that such transfer gen wurde, ist von der Steuer des anderen Vertragsstaats befreit, wenn und soweit die Ubertragung des Vermdgens an die
of property to such corporation, organization, or public body
Kdrperschaft, Organisation oder Bnrichtung
a) is exempt from tax in the first-mentioned Contracting State
a)
im erstgenannten Vertragsstaat steuerbefreit ist und
and
b)
im
anderen Vertragsstaat steuerbefreit ware, wenn sie an
b) would be exempt from tax in the other Contracting State if
eine
ahnliche Kdrperschaft, Organisation oder dffentliche
it were made to a similar corporation, organization, or public
Bnrichtung dieses anderen Staates vorgenommen worden
body of that other State.
ware.
The competent authorities of the Contracting States shall by Die zustandigen Behdrden der Vertragsstaaten regeln die Anmutual agreement settle the application of this provision.
wendung dieser Bestimmung in gegenseitigem Einvernehmen.
3. Pensions, annuities, and other amounts payable by a Con- (3) Ruhegehaiter, Renten und andere Betrdge, die von eitracting State, a state, a Land, or their political subdivisions, or nem Vertragsstaat, einem Bundesstaat, einem Land Oder ihren
out of a public fund organized under the public laws thereof, or Gebietskdrperschaften oder aus einer dffentlichen Kasse, die
nach dem dffentlichen Recht des Staates, des Landes Oder der
under a plan maintained by a person resident in that State
Gebietskdrperschaft errichtet worden ist, Oder aufgrund einer
Regelung. die eine in diesem Staat ansassige Person getroffen
hat,
a) under the Social Security laws of that State, or
a) nach dem Sozialversicherungsrecht dieses Staates oder
b) as consideration for services rendered, or
b) als Vergutung fur geleistete Dienste Oder
c) as compensation for injury or damage sustained
c) als Ausgleich erlittener Schaden
shall be exempt from tax by the other Contracting State, to
extent that such pension, annuity, or other amount would be
exempt from tax in the first-mentioned Contracting State if the
decedent were a domiciliary thereof. The amounts so exempted may, however, be offset against the "Versorgungsfreibetrag" according to the provisions of the German inheritance
and gift tax.
4. Property (other than community property) which passes to
the spouse from a decedent or donor who was domiciled in or
a citizen of a Contracting State, and which may be taxed by the
other Contracting State solely in accordance with Article 5,6,
or 8 shall, for the purpose of determining the tax of that other
State, be included in the taxable base only to the extent its
value (after taking into account any applicable deductions)
exceeds 50 per cent of the value of all property included in the
taxable base which may be taxed by that other State. However.
the foregoing sentence shall not result in:
a) an exclusion from the taxable base in the Federal Republic
of Germany of an amount in excess of the general marital
deduction (Freibetrag des Ehegatten) granted with respect
to transfers to spouses subject to unlimited tax liability under the German inheritance and gift tax;

the
gezahlt
werden. sind im anderen Vertragsstaat insoweit steuerbefreit, als sie im erstgenannten Vertragsstaat steuerbefreit
waren, wenn der ErWasser dort seinen Wohnsitz hatte. Die so
steuerbefreiten Betnlge kdnnen jedoch auf den Versorgungsfreibetrag nach d e m deutschen Erbschaftsteuer- und Schenkungsteuerrecht angerechnet werden.

(4) Vermdgen (ausgenommen Gesamtgut), das von einem
Erblasser oder Schenker, der seinen Wohnsitz in einem Vertragsstaat hatte oder Staatsangehdriger dieses Staates ^ar,
auf den Ehegatten ubergeht und das lediglich aufgrund defArtikelp, 6 oder 8 im anderen Vertragsstaat besteuert werden
kann, wird bei der Festsetzung der Steuer dieses anderen
Staates nur insoweit in die Besteuerungsgrundlage einbezogen, als sein Wert (nach Beruckaichtigung der zulissigen Abzuge) S O v o m Hundert des Wertes des gesamten in die Besteuerungsgrundlage einbezogenen Vermdgens Obersteigt,
das von d e m anderen Staat besteuert werden kann. Der vorhergehende Satz dart aber nicht dazu fflhren,
a) daB aus der Besteuerungsgrundlage in der Bundesrepublik
Deutschland ein Betrag ausgenommen wird. der den Freibetrag des Ehegatten Obersteigt, der bei Ubertragungen an
unbeschrankt steuerpflichtige Ehegatten nach dem deutb) a reduction of the tax due in the United States of America schen Eibschaftsteuer- und Schenkungsteuerrecht gewflhrt wird;
below the tax that would be due by applying to the taxable
base determined under that sentence the rates applicable b) daB die in den Vereinigten Staaten von Amerika geschuldete Steuer auf einen Betrag sinkt, der niedriger ist als die
to a person domiciled in the United States of America.
Steuer, die bei Anwendung der fur eine Person mit Wohnsitz in den Vereinigten Staaten von Amerika geltenden
Besteuerungsgrundlage
SteuersAtze auf die nachzud zahlen
e m genannten
wire. Satz ermittelte

Chapter IV

Abschnttt IV

Article 11
Artikel 11
Credits
Anrechnung
1. The provisions of this Convention shall not preclude
(1) Dieses Abkommen schlieBt nicht aus. daB
a) the United States of America from taxing in accordance
a) die Vereinigten Staaten von Amerika den NachlaB (die
with its law the estate of a decedent or the gift of a donor
Schenkung) eines Erblassers (Schenkers), der im Zeitwho was at his death or at the making of a gift a citizen of
punkt seines Todes Oder der Schenkung Staatsangehdrithe United States of America; for this purpose the term
ger der Vereinigten Staaten von Amerika war, nach ihrem
"citizen" shall include a former citizen whose loss of citiRecht besteuern; hierbei umfaBt der Ausdruck ..Staatsanzenship had as one of its principal purposes the avoidance
gehdriger" auch ehemalige Staatsangehdrige, die ihre
of tax (including, for this purpose, income tax), but only for
Staatsangehdrigkeit unter anderem hauptsfichlich wegen
a period of ten years following such loss;
der Umgehung von Steuern (hier auch der Enkommensteuer) verloren haben, jedoch nur fur einen Zeitraum von zehn
b) the Federal Republic of Germany from taxing in accordance
Jahren nach dem Vertust;
with its law an heir, a donee, or another beneficiary who
b) die Bundesrepublik Deutschland einen Erben, Beschenkwas domiciled (within the meaning of Article 4) in the Fedten oder sonstigen Begunstigten, der im Zeitpunkt des Toeral Republic of Germany at the time of the death of the
des des Erblassers Oder der Schenkung seinen Wohnsitz
decedent or the making of the gift.
im Sinne des Artikels 4 in der Bundesrepublik Deutschland
The preceding sentence shall not, however, apply to parahatte, nach ihrem Recht besteuert.
graphs 2,3 and 4 of Article 10, paragraphs 2,3,4 and 5 of this
Artikel 10 Absatze 2.3 und 4, die Absatze 2,3,4 und 5 dieses
Article, and Article 13.
Artikels
und Artikel
13 bleiben Staaten
unberuhrt.
(2) Erheben
die Vereinigten
von Amerika Steuern
2. Where the United States of America imposes tax by reaaufgrund
der
Tatsache,
daB
der
Erblasser
oder Schenker dort
son of the decedent's or the donor's domicile therein or citiseinen
Wohnsitz
hatte
oder
Staatsangehdriger
der Vereinigzenship thereof, double taxation shall be avoided in the followten Staaten von Amerika war, so wird die Doppelbesteuerung
ing manner:
a) Where the Federal Republic of Germany imposes tax with wie folgt vermieden:
respect to property in accordance with Article 5.6, or 8, the a) Besteuert die Bundesrepublik Deutschland Vermdgen aufgrund dqf ArtikeUS, 6 oder 8, so rechnen die Vereinigten
United States of America shall credit against the tax calcuStaaten auf die nach ihrem Recht festgesetzte Steuer von
lated according to its law with respect to such property an
diesem
Vermdgen einen Betrag in Hdhe der in der Bundesamount equal to the tax paid to the Federal Republic of Gerrepublik
Deutschland auf dieses Vermdgen gezahlten
many with respect to such property.
Steuer
an.
b) In addition to any credit allowable under subparagraph a) of
this paragraph, if the decedent or donor was a citizen of the b) War der Erblasser oder Schenker Staatsangehdriger der
Vereinigten Staaten von Amerika und hatte er im Zeitpunkt
United States of America and was domiciled in the Federal
des Todes Oder der Schenkung seinen Wohnsitz in der
Republic of Germany at his death or at the making of a gift,
Bundesrepublik Deutschland, so gewfihren die Vereinigten
then the United States of America shall allow a credit
Staaten von Amerika die Anrechnung der gezahlten deutagainst the tax calculated according to its law with respect
schen
Steuer auf die nach ihrem Recht festgesetzte Steuer
to property other than property which the United States of
uber
Buchstabe
a hinaus fuj die Steuer von allem VermdAmerica may tax in accordance with Article 5, 6, or 8, an
gen,
das
nicht
aufgrund
de) Artikeb5,6 oder 8 in den Veramount equal to the tax paid to the Federal Republic of Gereinigten
Staaten
von
Amerika
besteuert werden kann.
many with respect to such property.
(3)
Erhebt
die
Bundesrepublik
Deutschland
Steuern auf3. Where the Federal Republic of Germany imposes tax by
grund
des
Wohnsitzes
des
Erblassers,
Schenkers,
Erben, Bereason of the domicile therein of the decedent, donor, heir, doschenkten
oder
sonstigen
Begunstigten,
so
wird
die
Doppelnee, or other beneficiary, double taxation shall be avoided in
besteuerung
wie
folgt
vermieden:
the following manner
a) Besteuern die Vereinigten Staaten von Amerika Vermdgen
a) Where the United States of America imposes tax with reaufgrund dejr ArtikeU5,6 oder 8, so rechnet die Bundesrespect to property in accordance with Article 5, 6, or 8, the
publik Deutschland auf die nach ihrem Recht festgesetzte
Federal Republic of Germany shall credit against the tax
Steuer von diesem Vermdgen einen Betrag in Hdhe der in
calculated according to its law with respect to such propden
Vereinigten Staaten von Amerika auf dieses Vermdgen
erty an amount equal to the tax paid to the United States of
gezahlten
Steuer an.
America with respect to such property.
b)
Hatte
der
Erblasser oder Schenker seinen Wohnsitz in den
b) In addition to any credit allowable under subparagraph a) of
Vereinigten
Staaten von Amerika und hatte der Erbe, Bethis paragraph, if the decedent or donor was domiciled in
schenkte
Oder
sonstige Begunstigte im Zeitpunkt des Tothe United States of America and the heir, donee, or other
des
des
Erblassers
oder der Schenkung seinen Wohnsitz in
beneficiary was domiciled in the Federal Republic of Gerder
Bundesrepublik
Deutschland, so gewdhrt die Bundesmany at the time of the death of the decedent or the making
republik
Deutschland
die Anrechnung der gezahlten ameof the gift, then the Federal Republic of Germany shall allow
rikanischen
Steuer
auf
die nach ihrem Recht festgesetzte
a credit against the tax calculated according to its law with
Steuer
uber
Buchstabe
a hinaus tor die Steuer von allem
respect to property other than property which the Federal
Vermdgen,
das
nicht
aufgrund
de/Artikejfe.6 oder 8 in der
Republic of Germany may tax in accordance with Article
Bundesrepublik
Deutschland
besteuert
werden kann.
5, 6, or 8, an amount equal to the tax paid to the United
(4) Bei
Anrechnung
durch
diedieBundesrepublik
Deutsch4. States
according
The credits
of
to America
theallowed
provisions
withbyrespect
of
theparagraph
Federal
to such3Republic
shall
property.
include
of Germany
taxes land
nachderAbsatz
3 werden
auch
Steuern berucksichtigt,

levied by political subdivisions of the United States of America. die von Gebietskdrperschaften der Vereinigten Staaten von
W h e r e a credit is not allowable for such taxes according to the Amerika erhoben worden sind. Kdnnen diese Steuern nach
provisions of paragraph 3, the competent authorities may con- Absatz 3 nicht angerechnet werden, so kdnnen die zustandisult for the purpose of avoiding double taxation pursuant to Ar- gen Behdrden uber die Vermeidung der Doppelbesteuerung
nach Artikel 13 beraten.
ticle 13.
5. In order to avoid double taxation, each Contracting State (5) Zur Vermeidung der Doppelbesteuerung berucksichtigt
shall, in allowing credits under paragraphs 2,3,and 4, take into jeder Vertragsstaat bei der Anrechnung nach den Absatzen 2,
3 und 4 in angemessener Weise
account in an appropriate way:
a) alle Steuern, die der andere Vertragsstaat auf eine fruhere
a) any tax imposed by the other Contracting State upon a prior
vom Erblasser vorgenommene Schenkung von Vermdgen
gift of property m a d e by the decedent, if such property is inerhoben hat, wenn das betreffende Vermdgen zu dem im
cluded in the estate subject to taxation by the first-menerstgenannten Staat steuerpflichtigen NachlaB gehdrt;
tioned State;
b)
alle vom anderen Vertragsstaat angerechneten Erbschaftb) any credit allowed by the other Contracting State for estate
und Schenkungsteuern, die in bezug auf fruhere Steuertator gift taxes paid upon prior taxable events.
bestande gezahlt worden sind.
Schwierigkeiten und Zweifel bei der Anwendung dieser BeDifficulties and doubts arising in the application of this provistimmung werden von den zustandigen Behdrden nach Artision shall be resolved by the competent authorities under Arkel 13 beseitigt.
ticle 13.
(6) Der nach diesem Artikel anzurechnende Betrag darf den
6. Any credits allowed under this Article shall not exceed
the part of the tax of a Contracting State, as computed before Teil der vor der Anrechnung ermittelten Steuer eines Vertragsthe credit is given, which is attributable to the property in re- staats nicht iibersteigen, der auf das Vermdgen entfallt, fiir das
nach diesem Artikel eine Anrechnung gewahrt werden kann.
spect of which a credit is allowable under this Article.
(7) B n Anspruch auf Steueranrechnung oder -erstattung
7. Any claim for credit or for refund of tax founded on the
provisions of this Article may be m a d e until one year after the nach diesem Artikel kann innerhalb eines Jahres nach der
final determination (administrative or judicial) and payment of endgultigen Festsetzung (durch Verwaltungsakt oder auf getax for which any credit under this Article is claimed, provided richtlichem W e g e ) und Zahlung der Steuer, fur die eine Anrechnung nach diesem Artikel beantragt wird, geltend gethat the determination and payment are m a d e within ten years
of the date of death of the decedent or of the date of the making macht werden, vorausgesetzt, daB die Festsetzung und Zahof the gift by the donor. The competent authorities may by mu- lung innerhalb von zehn Jahren nach d e m Tode des Erblassers
tual agreement extend the ten-year time limit if circumstances Oder nach der Schenkung erfolgen. Die zustandigen Behdrden
kdnnen die Zehn-Jahres-Frist in gegenseitigem Bnvernehmen
beyond the control of the taxpayer prevent the determination
verlangern, wenn Umstande, die der Steuerpflichtige nicht zu
within such period of the taxes which are the subject of the
vertreten hat, die Festsetzung der d e m Anspruch auf Anrechclaim for credit or for refund. Any refund based solely on the
nung oder Erstattung zugrundeliegenden Steuer innerhalb
provisions of this Convention shall be m a d e without payment
dieser Frist verhindern. Auf Erstattungen, die iediglich aufof interest on the amount so refunded.
grund dieses A b k o m m e n s vorgenommen werden, werden keine Zinsen gezahlt.
Article 12
Artikel 12
Estates and Trusts
NachlSsse (Estates) und
Treuhandvermdgen (Trusts)
1. The provisions of this Convention shall not preclude
(1) Dieses A b k o m m e n hindert keinen der beiden Vertragseither Contracting State from applying its rules governing the staaten, seine fiir die Anerkennung eines Steuertatbestands
recognition of a taxable event, with respect to transfers of
maBgebenden Bestimmungen auf Vermdgensubertragungen
property to and from an estate or trust.
an einen NachlaB oder ein Treuhandvermdgen oder aus einem
NachlaB oder Treuhandvermdgen anzuwenden.
2. Where differences in the laws of the Contracting States
(2) Ldsen aufgrund von Unterschieden zwischen den Gegive rise to taxation at different times of transfers of property
setzesvorschriften der Vertragsstaaten Vermdgensubertrato and from an estate or trust, the competent authorities m a y gungen an einen NachlaB oder ein Treuhandvermdgen oder
discuss the case under Article 13 with a view to avoiding hardaus einem NachlaB oder Treuhandvermdgen eine Besteueship, provided that the difference in timing of taxation does not rung zu verschiedenen Zeitpunkten aus, so kdnnen die zustanexceed five years.
digen Behdrden den Fall nach Artikel 13 erdrtem, urn Harien zu
vermeiden, vorausgesetzt, daB der zeitliche Unterschied bei
der Besteuerung hdchstens funf Jahre betragt.
3. In a case where a transfer of property to an estate or trust
(3) Fiihrt eine Vermdgensubertragung an einen NachlaB
results in no taxable transfer at such time under the German
oder ein Treuhandvermdgen nach d e m deutschen Erbschaftinheritance and gift tax, the beneficiary of the estate or trust und Schenkungsteuerrecht z u m Zeitpunkt der Ubertragung
m a y elect within five years after such transfer to be subject to
nicht zu einer Besteuerung, so kann der Begunstigte aus dem
all German taxation (including income taxation) as if a taxable NachlaB oder Treuhandvermdgen innerhalb von funf Jahren
transfer had occurred to him at the time of such transfer.
nach der Ubertragung veriangen, daB er zur deutschen Steuer
(einschlieBlich der Einkommensteuer) so herangezogen wird,
als habe im Zeitpunkt der Ubertragung ein steuerpflichtiger
Vorgang stattgefunden.
Article 13
Artikel 13
Mutual Agreement Procedure
Verstindigungsverfahren
1. Any person who considers that the actions of one or both
(1) Ist eine Person der Auffassung, daB die MaBnahmen
of the Contracting States result or will result for him in taxation eines Vertragsstaats oder beider Vertragsstaaten fiir sie zu

not in accordance with this Convention may, notwithstanding
the remedies provided by the laws of those Contracting States,
present his case to the competent authorities of either Contracting State. Such presentation must be made within one
year after a claim for exemption, credit, or refund under this
Convention has been finally settled or rejected.

einer Besteuerung fuhren oder fuhren werden, die diesem Abk o m m e n nicht entspricht. so kann sie unbeschadet der nach
d e m innerstaatlichen Recht dieser Vertragsstaaten vorgesehenen Rechtsmittel ihren Fall der zustandigen Behdrde eines
der beiden Staaten unterbreiten. Der Fall m u B innerhalb eines
Jahres nach der endgOltigen Regelung oder Ablehnung eines
Anspruchs auf Befreiung, Anrechnung oder Bstattung nach
diesem A b k o m m e n unterbreitet werden.
2. The competent authority shall endeavor, if the objection (2) Halt die zustandige Behdrde die Bnwendung fur beappears to it to be justified and if it is not itself able to arrive grOndet und ist sie selbst nicht in der Lage, eine befriedigende
at a satisfactory solution, to resolve the case by mutual agree- Ldsung herbeizufuhren, so wird sie sich bemuhen, den Fall
ment with the competent authority of the other Contracting
durch Verstandigung mit der zustandigen Behdrde des andeState, with a view to the avoidance of taxation not in acren Vertragsstaats so zu regeln, daB eine d e m A b k o m m e n
cordance with the Convention.
nicht entsprechende Besteuerung vermieden wird.
3. The competent authorities of the Contracting States shall(3) Die zustandigen Behdrden der Vertragsstaaten werden
endeavor to resolve by mutual agreement any difficulties or
sich bemuhen, Schwierigkeiten oder Zweifel, die bei der Ausdoubts arising as to the interpretation or application of the
legung oder Anwendung des Abkommens entstehen, in geConvention. They m a y also consult together for the elimination
genseitigem Einvernehmen zu beseitigen. Sie kdnnen auch
of double taxation in cases not provided for in the Convention. gemeinsam dariiber beraten, wie eine Doppelbesteuerung in
Fallen vermieden werden kann, die im A b k o m m e n nicht behandelt sind.
(4) Die zustandigen Behdrden der Vertragsstaaten kdnnen
4. The competent authorities of the Contracting States m a y
communicate with each other directly for the purpose of reach- zur Herbeifuhrung einer Enigung im Sinne dieses Artikels uning an agreement in the sense of this Article. W h e n it seems mittelbar miteinander verkehren. Erscheint es zur Herbeifuhrung der Bnigung zweckmaBig, so kdnnen sich die zustandiadvisable for the purpose of reaching an agreement, the comgen Behdrden zu einem mundlichen Meinimgsaustausch trefpetent authorities m a y meet together for an oral exchange of
fen.
opinions.
5. In the event that the competent authorities reach such an (5) Erzielen die zustandigen Behdrden eine solche Verstandigung, so werden die Vertragsstaaten die Steuern entagreement, taxes shall be imposed and, notwithstanding any
sprechend der Verstandigung erheben und ungeachtet der
procedural rule (including statutes of limitations) applicable
nach ihrem Recht geltenden Verfahrensregelungen (einunder the law of either Contracting State, refund or credit of
schlieBlich Verjahrungsfristen) erstatten oder anrechnen.
taxes shall be allowed by the Contracting States in accordance with such agreement.
Artikel 14

Article 14
Exchange of Information
1. The competent authorities of the Contracting States shall
exchange such information as is necessary for the carrying out
of this Convention or of the domestic laws of the Contracting
States concerning taxes covered by this Convention insofar as
the taxation thereunder is not contrary to this Convention. The
exchange of information is not restricted by Article 1. Any information received by a Contracting State shall be treated as
secret in the same manner as information obtained under the
domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to. the taxes which are the subject of the Convention. Such persons or authorities shall use the information
only for such purposes. These persons or authorities m a y disclose the information in public court proceedings or in judicial
decisions.
2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation:
a) to carry out administrative measures at variance with the
laws and administrative practice of that or of the other Contracting State;
b) to supply particulars which are not obtainable under the
laws or in the normal course of the administration of that or
of the other Contracting State;
c) to supply information which would disclose any trade, business, industrial, commercial, or professional secret or trade
process, or information the disclosure of which would be
contrary to public policy (ordre public).

Informationsaustausch
(1) Die zustandigen Behdrden der Vertragsstaaten tauschen die Informationen aus, die zur Durchfiihrung dieses Abk o m m e n s oder des innerstaatlichen Rechts der Vertragsstaaten betreffend die unter das A b k o m m e n fallenden Steuern erforderlich sind, soweit die diesem Recht entsprechende Besteuerung nicht d e m A b k o m m e n widerspricht. Der Informationsaustausch ist durch Artikel 1 nicht eingeschrdnkt. Alle Informationen, die ein Vertragsstaat erhalten hat, sind ebenso
geheimzuhalten wie die aufgrund des innerstaatlichen Rechts
dieses Staates beschafften Informationen und durfen nur den
Personen Oder Behdrden (einschlieBlich der Gerichte und der
Verwaltungsbehdrden) zuganglich gemacht werden, die mit
der Veranlagung oder Erhebung, der Vollstreckung oder Strafverfolgung Oder mit der Entscheidung von Rechtsmitteln hinsichtlich der unter das A b k o m m e n fallenden Steuern befaBt
sind. Diese Personen oder Behdrden durfen die Informationen
nur fur diese Zwecke verwenden. Sie durfen die Informationen
in einem dffentlichen Gerichtsverfahren oder in einer Gerichtsentscheidung offenlegen.
(2) Absatz 1 ist nicht so auszulegen, als verpflichte er einen
Vertragsstaat,
a) VerwaltungsmaBnahmen durchzufuhren, die von den Gesetzen und der Verwaltungspraxis dieses oder des anderen Vertragsstaats abweichen;
b) Angaben zu Obermitteln, die nach den Gesetzen oder im
Oblichen Verwaltungsverfahren dieses Oder des anderen
Vertragsstaats nicht beschafft werden kdnnen;
c) Informationen zu erteilen, die ein Handels-. Industrie-, Gewerbe- oder Berufsgeheimnis Oder ein Geschattsvertahren
preisgeben wurden oder deren Erteilung der dffentlichen
Ordnung widersprache.

3. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall
obtain the information to which the request relates (including
depositions of witnesses and copies of relevant documents) in
the s a m e manner and to the same extent as if the tax of the requesting State were the tax of the other State and were being
imposed by that other State.
4. H by reason of Article 7 or 9 any property would, without
regard to paragraph 1 of Article 11. be taxable only in the Contracting State in which the decedent or donor w a s domiciled
and tax due in that State is not paid, then the competent
authorities may agree that tax will be imposed with respect
to such property in the other Contracting State notwithstanding Article 7 or 9.

(3) Bei Auskunftsersuchen eines Vertragsstaats aufgrund
dieses Artikels holt der andere Vertragsstaat die entsprechenden Informationen (einschlieBlich Zeugenaussagen und Kopien einschlagiger Unterlagen) auf die gleiche Weise und im
gleichen Umfang ein. als w e n n es sich bei der Steuer des ersuchenden Staates urn die Steuer des anderen Staates handelte und sie von diesem anderen Staat erhoben wurde.
(4) Kann nach-de» Artiketa-7 oder 9 Vermdgen ungeachtet
des Artikels 11 Absatz 1 nur in d e m Vertragsstaat besteuert
werden, in d e m der Schenker oder Erblasser an&assig war,
und wird die in diesem Staat fdllige Steuer nicht gezahlt, so
kdnnen die zustandigen Behdrden vereinbaren, daB dieses
Vermdgen ungeachtet dej^Artikek/7 oder 9 im anderen Vertragsstaat besteuert wird.

Artikel 15

Article 15

Mitglieder diplomatischer Missionen
Members of Diplomatic Missions
und konsularischer Vertretungen
or Consular Posts
(1)
Dieses
A b k o m m e n beruhrt nicht die steuerlichen Vor1. Nothing in this Convention shall affect the fiscal privirechte,
die
den
Mitgliedern diplomatischer Missionen und konleges of members of diplomatic missions or consular posts unsularischer Vertretungen nach den allgemeinen Regeln des
der the general rules of international law or under the proviVdlkerrechts Oder aufgrund besonderer Ubereinkunfte zustesions of special agreements.
hen.
(2) Dieses A b k o m m e n gilt nicht fur Beamte internationaler
2. This Convention shall not apply to officials of internaOrganisationen
oder Mitglieder einer diplomatischen Mission
tional organizations or members of a diplomatic mission or a
consular post of a third State, w h o were established in a Con- Oder konsularischen Vertretung eines dritten Staates, die sich
tracting State and were not treated as being domiciled in either in einem Vertragsstaat befinden und nicht so behandelt werContracting State in respect of taxes on estates, inheritances. den, als hatten sie fur die Zwecke der NachlaB-, ErbschaftOder Schenkungsteuer ihren Wohnsitz in einem der Vertragsor gifts, as the case may be.
staaten.

Article 16
Land Berlin

Artikel 16
Land Berlin

This Convention shall also apply to Land Berlin, provided
that the Government of the Federal Republic of Germany does
not make a contrary declaration to the Government of the
United States of America within three months of the date of
entry into force of this Convention.

Dieses A b k o m m e n gilt auch fur das Land Berlin, sofern nicht
die Regierung der Bundesrepublik Deutschland gegenuber der
Regierung der Vereinigten Staaten von Amerika innerhalb von
drei Monaten nach Inkrafttreten des A b k o m m e n s eine gegenteilige Erklarung abgibt.

Chapter V

Abschnitt V

Article 17

Artikel 17
Entry into Force

Inkrafttreten
1. This Convention shall be subject to ratification in accord-(1) Dieses A b k o m m e n bedarf der Ratifikation nach MaBgabe der geltenden Verfahrensvorschriften jedes Vertragsance with the applicable procedures of each Contracting State
and instruments of ratification shall be exchanged at Washing- staats; die Ratifikationsurkunden werden so bald wie mdglich
in Washington ausgetauscht.
ton as soon as possible.
2. This Convention shall enter into force upon the exchange
(2) Das A b k o m m e n tritt mit d e m Austausch der Ratifikaof instruments of ratification and its provisions shall apply gen- tionsurkunden in Kraft und findet allgemein Anwendung auf
erally to estates of persons dying and gifts m a d e on or after
Nachiasse von Personen, die a m Oder nach dem LJanuar
January 1,1979.
1979 sterben, und auf Schenkungen, die a m oder nach dem
1. Januar 1979 vorgenommen werden.
3. In addition, in the case of estates of persons having died (3) Daruber hinaus kdnnen bei Nachlassen von Personen,
on or after January 1, 1974 and before January 1, 1979, the
die a m oder nach d e m 1. Januar 1974 und vor dem LJanuar
competent authorities of the Contracting States m a y consult
1979 gestorben sind, die zustandigen Behdrden der Vertragstogether with a view to eliminating double taxation not avoided
staaten gemeinsam daruber beraten, wie die durch innerstaatby internal relief measures. To this purpose they may, under
liche Vergunstigungen nicht vermiedene Doppelbesteuerung
the provisions of Article 13, allow taxes of one Contracting
verhindert werden kann. Zu diesem Zweck kdnnen sie im RahState to be credited against taxes of the other Contracting
m a n des Artikels 13 vorsehen, daB Steuern eines VertragsState notwithstanding differences of internal rules regarding
staats ungeachtet der Unterschiede in den innerstaatlichen
situs and domicile.
Rechtsvorschriften uber Belegenheit und Wohnsitz auf die
Steuern des anderen Vertragsstaats angerechnet werden.

Article 18
Artikel 18
Termination
KQndigung
This Convention shall remain in force until terminated by one
Dieses Abkommen Weibt in Kraft, solange es nicht von eiof the Contracting States. Bther Contracting State may ter- nem der Vertragsstaaten gekundigt wird. Jeder Vertragsstaat
minate this Convention, through diplomatic channels, at any kann das Abkommen auf diplomatischem W e g jederzeit nach
time after three years from the date on which this Convention Ablaut von drei Jahren nach Inkrafttreten des Abkommens unenters into force provided that at least six months' prior notice ter Bnhaltung einer Frist von mindestens sechs Monaten kunhas been given. In such event, the Convention will not apply to digen. In diesem Fall findet das Abkommen nicht mehr Anwenestates of persons dying after or gifts made after the Decem- dung auf Nachlasse von Personen, die nach dem 31. Dezember 31 next following the expiration of the six-month period.
ber sterben, der auf den Ablauf der sechsmonatigen Kundigungsfrist folgt, und auf Schenkungen, die nach diesem Zeitpunkt vorgenommen werden.
Done at Bonn, in duplicate, in the English and German IanGeschehen zu Bonn a m *• D e 2 e m b e r 1 9 o O
guages, the two texts having equal authenticity, this t h i r d in zwei Urschriften, jede in englischer und deutscher Sprache,
day of D e c e m b e r 1 9 8 0
wobei jeder Wortlaut gleichermaBen verbindlich ist.

For the United States of America
Fur die Vereinigten Staaten von Amerika

For the Federal Republic of Germany
Fur die Bundesrepublik Deutschland

FOR TMMFnTZvTF PPT.Pacp

December 24, 1980

Contact: Alvin Hattal
Telephone:

202/566-8381

Treasury Sets Limits on Daily Purchases of Gold Medallions

The Treasury Department today limited the purchase of
American Arts Gold Medallions to 125 per day for each size
medallion.
The limit will be applied by limiting each customer to
five transactions per day for the one ounce medallion and
five per day for the half-ounce medallion. The number of
medallions that can be purchased in any single transaction is
already limited to 25.
The action was taken to reduce possibilities for arbitrage
resulting from day-to-day changes in the gold price. The sale
price of the medallions on any given day is based on the
previous day's market price.
The new limits apply to all orders dated after today.

M-790

tpartmentoftheTREASURY
LSHINGTON,

D.C. 20220

TELEPHONE 566-2041

FOR IMMEDIATE RELEASE

December 23, 1980

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $4,500 million of 52-week bills to be issued January 2, 1981,
and to mature December 31, 1981,were accepted today. The details are as
follows:
RANGE OF ACCEPTED COMPETITIVE BIDS: (Excepting 1 tender of $500,000)
Investment Rate
(Equivalent Coupon-issue Yield)

Price Discount Rate
High
- 87.981
Low
- 87.598
Average - 87.825

11.920%
12.300%
12.074%

13.30%
13.76%
13.49%

Tenders at the low price were allotted 38%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location

Received

Accepted

$ 17,420
5,213,625
8,240
12,075
37,430
17,655
335,585
13,310
6,490
30,240
13,220
378,325
27,670

$ 17,420
3,827,345
8,240
12,075
37,430
17,655
170,585
13,310
6,490
30,240
13,220
318,325
27,670

$6,111,285

$4,500,005

$4,344,715
246,570

$2,733,435
246,570

Subtotal, Public $4,591,285

$2,980,005

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

JSpe
Competitive
Noncompetitive

900,000
Federal
Reserve
Foreign Official
620,000
Institutions
TOTALS $6,111,285
M-791

900,000
620,000
$4,500,005

FOR RELEASE AT 12:00 NOON

December 29, 1980

TREASURY OFFERS $2,500 MILLION OF 16-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice, invites
tenders for approximately $2,500 million of 16-day Treasury bills
< to be issued January 6, 1981, representing an additional amount of
bills dated July 24, 1980, maturing January 22, 1981 (CUSIP
No. 912793 6D 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 only at the Federal
Reserve Bank of New York up to 12:30 p.m. Eastern Standard time,
Tuesday, December 30, 1980. Wire and telephone tenders may be
received at the discretion of the Federal Reserve Bank of New York.
Each tender for the issue must be for a minimum amount of
$10,000,000. Tenders over $10,000,000 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, or at any Federal Reserve Bank or Branch other than the
Federal Reserve Bank of New York.
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

M-792

-2bills 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.
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 of New York in
cash or other immediately available funds on Tuesday, January 6,
1981.
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, 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.

Oepamentoith,TREA$Uffl fij
TELEPHONE 566-2041

HINGTON. D.C. 20220

FOR IMMEDIATE RELEASE

December 29, 1980

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 4,200 million of 13-week bills and for $4,200 million of
26-week bills, both to be issued on January 2, 1981
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average
a/ Excepting
b/ Excepting
Tenders
Tenders

13-week bills
maturing April 2, 1981
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing July 2, 1981
Discount Investment
Rate 1/
Price
Rate

,a/

,bA 13.330%
96.668- 13.328%
13.98%
93.29814.49%
96.492
14.032%
14.74%
93.223
13.479%
14.66%
14.61%
96.523
13.908%
93.257
13.411%
14.58%
1 tender of $435,000.
1 tender of $180,000.
at the low price for the 13-week bills were allotted 18%.
at the low price for the 26-week bills were allotted 64%.
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
Accepted
54,330 $
33,330
6,664,860
3 ,418,895
24,740
21,460
33,025
36,705
28,520
28,160
50,460
49,960
124,105
681,660
28,580
17,775
17,510
20,510
39,360
41,405
18,260
25,260
319,395
458,885
78,820
78,820

Received
56,715
5 ,651,960
13,540
33,180
23,885
32,370
532,220
37,215
21,430
33,155
19,050
442,030
105,450

Accepted
$
41,715
3,393,160
13,540
33,180
23,385
30,870
210,220
37,215
21,430
33,095
17,050
240,030
105,450

$8,194,735

$4 ,200,055

$7,002,200

$4,200,340

Competitive
Noncompetitive

$5,726,110
636,365

$1 ,731,430

$4,714,255
486,505

$1,912,395
486,505

Subtotal, Public

$6,362,475

$2 ,367,795

$5,200,760

$2,398,900

Federal Reserve
Foreign Official
Institutions

862,800

870,000

969,460

931,440

$8,194,735

$4,200,055

$7,002,200

$4,200,340

TOTALS
Type

TOTALS

636,365

An additional $56,330 thousand of 13-week bills and an additional $ 54,760 thousand
of 26-week bills will be issued to foreign official institutions for new cash.
^/Equivalent coupon-issoe yield.

M-793

FOR RELEASE AT 4:00 P.M.

December 30, 1980

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,400- million, to be issued January 8, 1981.
This offering will'provide $450 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,954 million, including $i/492million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities and $1,661 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 $4,200
million, representing an additional amount of bills dated
October 9, 1980,
and to mature April 9, 1981
(CUSIP No.
912793 6M 3 ) , currently outstanding in the amount of $3,943 million,
the additional and original bills to be freely interchangeable.
182-cay bills for approximately $4,200 million to be dated
January 8, 1981,
and to mature July 9, 1981
(CUSIP No.
912793 7L 4) .
Both series of bills will be issued for cash and in
exchange for Treasury bills maturing January 8, 1981.
Tenders
from Federal Reserve Banks for themselves and as agents of
foreign and international monetary authorities will be accepted
a: the weighted average prices of accepted competitive tenders.
Additional amounts of the bills may be issued to Federal Reserve
3anks, 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. Bothseries 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 3anks and Branches, or of the Department of the Treasury.
Tenders will be received at Federal Reserve Banks and
3ranches and at the Bureau of the Public Debt, Washington,
D. C. 20226, up to 1:30 p.m., Eastern Standard time,
Monday, January 5, 1981.
Form PD 4632-2 (for 26-week series)
or Form PD 4632-3 (for 13-week series) should be used to submit
tenets for b^lls to be maintained on the book-entry records ~>f
the Department of the Treasury.
•M-794

-zEach 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
3ank 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
cf 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 anv one
bidder will be accepted in full at the weighted averaoV price
(in three decimals) of accepted competitive bids for the
respective issues.

-3Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on January 8, 1981,
in cash or other immediately available
funds or in Treasury bills maturing January 8, 1981.
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.

partmentoftheTREASURY
JHINGTQN, D.C. 20220 "Im

TELEPHONE 566-2041

jM?Sm0-

FOR IMMEDIATE

December 30, 1980

RELEASE

RESULTS OF AUCTION OF $2,500
MILLION
OF 16-DAY TREASURY BILLS
The Treasury has accepted $2,500 million of the
$6,025
million of tenders received at the Federal Reserve
Bank of New York for the 16-day Treasury bills to be
issued January 6, 1981, and to mature January 22, 1981,
auctioned today. The range of accepted bids was as follows:
Price
High

Low
Average

99 .276
99 .225
99 243

Discount Rate

Investment Rate

16 .290%
17. .438%
17. 033%

Tenders at the low price were allotted 100%.

M-795

16 .64%
17 .82%
17 .40%

OepartmentoftheTREASURY
TELEPHONE 566-2041

WASHINGTON, D.C. 20220

December 30, 1980

FOR IMMEDIATE RELEASE

RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $ 2,502 million of
$ 6,309 million of tenders received from the public for the 7-year
notes, Series C-1988, auctioned today.
The interest coupon rate on the notes will be 12-3/8%. The range
of accepted competitive bids, and the corresponding prices at the 12-3/8'
coupon rate are as follows:

Lowest yield
Highest yield
Average yield

Bids
12.38%
12.50%
12.49%

Prices
99.957
99.407
99.453

Tenders at the high yield were allotted 88%.
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
$
26,175
5,400,777
7,582
113,370
24,258
18,086
383,819
51,232
14,828
30,455
1,851
235,609

Accepted
$
9,175
2,029,272
7,582
67,770
4,258
17,086
185,104
44,912
12,828
28,455
1,801
93,039

712

$6,308,754

$2,501,994

The $ 2,502 million of accepted tenders includes $ 344
million
of noncompetitive tenders and $2,158
million of competitive tenders
from private investors.
In addition to the $2,502 million of renders accepted in the
auction process, $ 200
million ot txndei.s wer^ accepted at the average
price from Federal Reserve Ban>:s as agents for foreign and international
monetary authorities for new cash.

M-3W

IMMEDIATE RELEASE
January 2, 1981

Contact: Everard Munsey
Phone: (202) 566-8191

CHRYSLER LOAN GUARANTEE BOARD TO MEET JANUARY 6
The Chrysler Corporation Loan Guarantee Board will meet at 11
a.m. Tuesday, January 6, to continue discussion of Chrysler's new
Operating and Financing Plans and its need for additional loan
guarantees.
The Board expects to meet with representatives of Chrysler
and its advisers and to receive the separate reactions of the United
Auto Workers and Chrysler's lenders to the cost reduction and
other actions contemplated by Chrysler's new Operating and Financing
Plans and related documents. The Board does not, however, expect
to take any formal action on January 6 with respect to Chrysler's
December 23 application for an additional $400 million of guarantees.
The Board meeting, in Room 4426, Main Treasury Building, will
be closed to the public under the provisions of the Government in
the Sunshine Act.
The Board has previously issued $800 million of the $1.5
billion in guarantees authorized by the Chrysler Corporation Loan
Guarantee Act of 1979.
The voting members of the Board are Secretary of the Treasury
G. William Miller, Chairman; Federal Reserve Board Chairman Paul
A. Volcker and Comptroller General Elmer B. Staats.
# # #

M-797

kpartmentoftheTREASURY
ASHINGTON, D.C. 20220

TELEPHONE 566-2

FOR IMMEDIATE RELEASE

January 5, 1981

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $ 4,202 million of 13-week bills and for $4,200 million of
26-week bills, both to be issued on January 8, 1981,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

26-week bills
maturing July 9, 1981
Discount Investment
Price
Rate
Rate 1/

13-week bills
maturing April 9, 1981
Discount Investment
Price
Rate
Rate 1/
96.613
96.527
96.562

13.399%
13.739%
13.601%

14.06%
14.43%
14.28%

93.478
93.278
93.336

12.901%
13.296%
13.182%

13.99%
14.45%
14.32%

Tenders at the low price for the 13-week bills were allotted 65%.
Tenders at the low price for the 26-week bills were allotted 100%.

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

TENDERS RECEIVED AND ACCEPTED
(In Thousands]>
Accepted
Received
Received
$
59,990 $
59,990 !
$
56,195
5,965,215
3,409,215 J
5,292,415
16,830
30,390
30,390
42,165 .
42,165
56,635
40,420
40,420 :
41,865
48,105
48,105
51,450
191,670
417,370
482,990
29,280
29,280
33,080
24,980
24,965
;
22,210
49,410
48,300
47,945
30,935
30,935
19,590
393,840
73,840
454,345
172^845
172,845
165,260

TOTALS

$7,304,945

$4,202,120

$6,740,810

$4,200,215

Competitive
Noncompetitive

$5,045,445
813,650

$1,942,620
813,650

:
-

$4,793,815
651,795

$2,253,220
'651,795

Subtotal, Public

$5,859,095

$2,756,270 ' .

$5,445,610

$2,905,015

Federal Reserve
Foreign Official
Institutions

730,400

931,000

715,450

364,200

$7,304,945

$4,202,120

•

$6,740,810

$4,200,21.5

Accepted
$
46,195
3,267,415
16,830
56,050
41,855
51,450
242,990
33,080
22,210
47,945
19,590
189,345
165,260

Type

TOTALS

jVEquivalent coupoh-'issue yield.

M-7a8

FOR IMMEDIATE RELEASE

CONTACT: ROBERT CHILDERS

January 8, 1981 (202) 634-5248

LOCAL GOVERNMENTS RECEIVE REVENUE SHARING FUNDS

The Department of the Treasury's Office of Revenue Sharing,
(ORS) distributed approximately $927 million in revenue sharing
payments today to nearly 29,000 local governments across the country.
This is the first quarterly payment of the fiscal year under the
recent legislation that extended the revenue sharing program through
the end of Federal fiscal year 1983. The new legislation, referred
to as the State and Local Fiscal Assistance Amendments of 1980,
provides for quarterly revenue sharing payments to local governments
for the duration of the program. However, payments for State
governments were authorized only for fiscal years 1982 and 1983.
The Congress must also appropriate funds for States on an annual
basis .

Nearly 9,000 governments were not paid because they have
not returned the necessary forms on time. However, an additional
payment will be made to accommodate those governments who return
their forms late.

M-799

-2The renewed revenue sharing program changed very little,
with civil rights, audit and public participation requirements
remaining essentially the same. The major differences between
the old and the renewed program pertain to the States, with no
funds being authorized for them for fiscal 1981. To receive funds
in fiscal 1982 and 1983, State governments must give up an equal
amount in categorical grant funds.

OepartmmloltheTREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

January 6, 1981

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approxim ately $8,600 million, to be issued January 15, 1981.
This off ering will provide $625 million of new cash for the
Treasury as the maturing bills are outstanding in the amount of
$7,974 m illion, including $998
million currently held by
Federal Reserve Banks as agents for foreign and international
monetary authorities, and $1,557 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 $4,300
million, representing an additional amount of bills dated
October 16, 1980 , and to mature April 16, 1981
(CUSIP No.
912793 6N 1 ) , currently outstanding in the amount of $3,945
million, the additional and original bills to be freely
interchangeable.
182~day bills (to maturity date) for approximately $4,300
million, representing an additional amount of bills dated
July '22, 1980
, and to mature July 16, 1981
(CUSIP No.
912793 6W 1) , currently outstanding in the amount of $4,005
million, the additional and original bills to be freely
interchangeable.
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 15, 1981.
Tenders from
Federal Reserve Banks for themselves and as agents for 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 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. 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 12, 1981.
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-ent 1 v
recor^g g£ *l'tg figpartment offehe Treasury.
*^8QJQ . _

-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
r
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
zi~ average
from
.z: any
ir-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 January 15, 1981, in cash or other immediately available
funds or in Treasury bills maturing January 15, 1981.
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

January 6, 1981

RESULTS OF AUCTION OF 20-YEAR 1-MONTH TREASURY BONDS
The Department of the Treasury has accepted $1,501 million of
$4,142 million of tenders received from the public for the 20-year
1-month bonds auctioned today.
The interest coupon rate on the bonds will be 11-3/4%. The range
of accepted competitive bids, and the corresponding prices at the 11-3/4%
coupon rate are as follows:
Bids Prices
Lowest yield
Highest yield
Average yield

11.77%
11.84%
11.82%

99.787
99.255
99.407

Tenders at the high yield were allotted 16%.
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
$
27,233
3,575,107

Accepted
$
4,393
1,293,572

288

31,311
29,117
19,847
221,305
31,300
5,289
14,417
5,193
181,918

16,111
24,117
11,487
78,483
29,300
3,289
14,417
3,193
22,158

$4,142,417

$1,500,900

The $1,501
million of accepted tenders includes $232
million of
noncompetitive tenders and $1,269 million of competitive tenders from
private investors.

M-801

OPENING STATEMENT
OF
DONALD T. REGAN
BEFORE THE
SENATE FINANCE COMMITTEE
JANUARY 6, 1981

Mr. Chairman, I am Donald T. Regan. I have been
nominated by the President-Elect to serve as Secretary
of the Treasury. It is an honor for me to be here today
to meet with you and the other members of the Committee for
the purpose of discussing my qualifications to be Secretary
of the Treasury. I hope that I may have the opportunity
to serve the Nation in that post.
During World War II I served this Nation in the U.S.
Marine Corps. This experience taught me many lessons of
character and leadership which have served me well in my
subsequent career with one of the world's leading financial
institutions. This later experience has given me exposure
to many of the same types of problems which the next
Secretary of the Treasury will be facing.

M-ZDl

- 2 -

Despite some evidences of strength, the short term
economic outlook is not bright. While the leading economic
indicators were up again in November, the relationship
between coincident and lagging indicators is seen by many
analysts to be suggesting that the recovery is aborting -led by weaknesses in the housing and automobile industries.
Under current policies and expectations, interest rates,
inflation rates and unemployment rates are all expected to
remain at high levels throughout 1981.
It is important, however, that we not formulate the
problems facing the Nation in terms of short term economic
forecasts and indicators. Such an approach breeds erratic
economic policy — the worst of all policies.
The very serious problems the Nation faces were not
created quickly and will not be solved quickly. It has been
23 years since the U.S. has had balanced budgets two years
in a row. Inflation, as measured by the Consumer Price Index,
averaged about 1.8 percent during the 50's, about 2.9 percent during the 60's and about 7.8 percent during the 70's.
At an accelerating pace inflationary expectations are being
built into business and farm prices as well as the behavior
of America's consumers.
Our economic problem can be summed up in four profoundly
disturbing trends:

- 3 -

America's income —

as measured by real GNP —

is not

growing as fast as it should. GNP has been growing at
a rate well below the long term trend line. This
means we are not producing at the rate we should,
those goods and services that would benefit all Americans,
and still have the wherewithall for a strong national
defense. In fact, in constant dollars the GNP declined
in 1980 and will probably do so again in 1981. Our rate
of growth is heavily influenced by our rate of investment.
America is not investing enough in its future. The level
of investment as a percent of the GNP in the U.S. is
far below that of our major overseas trading partners.
Furthermore, a sizeable portion of that investment is
for unproductive assets mandated by federal regulations.
Greater investment would mean more jobs and greater
productivity. This is of particular importance when our
unemployment rate is at the 7.5 percent level and
forecast to go higher, and when America's productivity
gains have been declining in recent years. Increased
productivity is essential to revitalizing U.S. industry
and stimulating our exports.
The level of investment is depressed by the interaction
of inflationary expectations and erratic fiscal and
monetary policies. Inflation has resulted in massive
tax increases for American taxpayers -- individual and
corporate — without any action by the Congress. This

- 4 -

must be corrected.

Current inflationary expectations

have also resulted in Americans saving less of their
income than they have at any time since 1950. This
in turn means less capital is available for investment.
Inflationary expectations also result in a large
inflation premium being built into interest rates.
This means all kinds of productive investments are
less attractive because they have become much more
costly. Finally, inconsistent fiscal policies and
erratic monetary policies have caused the financial
markets to become extremely volatile and unpredictable,
thereby increasing investment risks.
4. World financial markets have lost confidence in the
Federal government's ability to bring its spending
under control. Lip service has been given to balanced
budgets, but the fact of the matter is that the U.S.
has not had a balanced budget since 1969...the last one
before that was in 19601 In July the Administration
estimated the deficit at $29.8 billion; and now some
are estimating the deficit at well over $60 billion.
The four trends I have just identified are causes for
alarm. They are not causes for panic, because I believe that
through the cooperation of the legislative and executive
branches of government we will adopt the bold measures that
the situation demands. Thus, I do not plan to recommend

- 5 -

to the President that we declare a state of economic emergency
nor that he ask for special emergency powers. We must have
a sense of urgency — not a sense of emergency. We must have
a sense of urgency to:
1. restore confidence in our ability to control spending,
2. hold to steady and consistent fiscal and monetary
policies,
3. lower inflationary expectations, and
4. increase our levels of investment.
We can never successfully come to grips with these
debilitating trends on an ad hoc basis. We must have an
integrated approach consistently applied over a period of
years.
The President-elect will give us the outline of such an
approach. We will be hearing more after he takes office
regarding his economic program. This approach will stimulate
savings, investment, growth and confidence through a single
integrated long-term program. This program will require
tough decisions on spending control and discipline in the
tax area, delaying some needed tax cuts in order to be able
to implement those that are absolutely essential, particularly
the Roth-Kemp proposal and some form of enhanced accelerated
depreciation for business.
While I am not prepared to go into all of the details
of such a program today, if I am confirmed as Secretary of
Treasury, I plan to work closely with this Committee in

- 6 -

developing the kind of program which the President will
announce upon taking office. By working together on the
basis of the President's program I believe we can give the
American people what they have mandated.
I am sorry I have not had the time to meet all of the
members of this Committee personally. However, due to the
holidays and necessary travel this was not possible. But, I
do look forward to working with each of you. At this
time I would be pleased to answer any questions the
Committee may have about my background and qualifications,
or other questions you gentlemen may have.

0O0

DepartmentoftheTREASURY
LC. 20220

TELEPHONE 566-2041

January 12, 1981

FOR IMMEDIATE RELEASE

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4,300 million of 13-week bills and for $4,301 million of
26-week bills, both to be issued on January 15, 1981,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average
a/ Excepting
b/ Excepting
Tenders
Tenders

96.221-' 14.950%
15.75%
96.094
15.452%
16.30%
96.128
15.318%
16.16%
2 tenders totaling $2,330,000
2 tenders totaling $1,680,000
at the low price for the 13-week
at the low price for the 26-week

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

26-week bills
maturing July 16. 1981
Discount Investment
Price
Rate
Rate 1/

13-week bills
maturing April 16, 1981
Discount Investment
Price
Rate
Rate 1/

:
:

92.917—/ 14.010%
92.745
14.351%
92.807
14.228%

15.29%
15.69%
15.54%

bills were allotted 22%.
bills were allotted 72%.

TENDERS RECEIVED AND ACCEPTED
(In Thousands^I
Received
Accepted
Received
? 101,165
$
85,825 :
$
84,920
5,092,520
3,409,520
5,427,550
35,905
35,905
21,260
44,360
44,360
103,765
53,105
51,280
64,895
64,450
64,450
34,745
383,245
228,245
416,990
31,655
30,655
19,645
10,510
10,510 :
12,765
51,130
51,130
51,765
28,925
28,925 :
19,850
448,620
128,620
389,940
130,600
130,600
182,865

Accepted
$
44,920
3,428,540
21,260
92,365
64,895
34,745
159,990
18,645
12,765
51,765
18,450
169,940
182,865

$6,476,190

$4,300,025

$6,830,955

$4,301,145

Competitive
Noncompetitive

$4,267,790
871,045

$2,091,625
871,045

:
:

$4,700,365
719,190

$2,170,555
719,190

Subtotal, Public

$5,138,835

$2,962,670 " :

$5,419,555

$2,889,745

Federal Reserve
Foreign Official
Institutions

766,295

765,000

571,060

646,400

$6,476,190

$4,300,025

$6,830,955

$4,301,145

TOTALS
Type

THTAT Q

/_1/Equivalent coupon-issue yield.

IMMEDIATE RELEASE
January 13, 1981

Contact: Everard Munsey
Phone: (202) 566-8191

CHRYSLER LOAN GUARANTEE BOARD TO MEET TOMORROW
The Chrysler Corporation Loan Guarantee Board will meet at
4 p.m. Wednesday, January 14, to continue discussion of Chrysler's
new Operating and Financing Plans and its request for additional
loan guarantees.
The Board expects to begin considering whether to grant preliminary approval to Chrysler's application for an additional $400
million of guarantees.
The Board meeting, in Room 4121, Main Treasury Building, will
be closed to the public under the provisions of the Government in
the Sunshine Act.
The Board has previously issued $800 million of the $1.5
billion in guarantees authorized by the Chrysler Corporation Loan
Guarantee Act of 1979.
The voting members of the Board are Secretary of the Treasury
G. William Miller, Chairman; Federal Reserve Board Chairman Paul
A. Volcker and Comptroller General Elmer B. Staats.
# # #

M-804

FOR RELEASE AT 4:00 P.M.

January 13, 1981

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$8,600 million, to be issued January 22, 1981. As the regular
13-week and 26-week bill maturities were issued in the amount of
$7,937 million, this offering will provide the Treasury about $675
million new cash above the amount maturing through the regular
issues. The $2,500 million of additional issue 16-day cash
management bills issued January 6 and maturing January 22, 1981,
will be redeemed at maturity.
The $7,937 million of regular maturities includes $2,028
million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities, and $1,066 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 $4,300
million, representing an additional amount of bills dated April 29,
1980, and to mature April 23, 1981 (CUSIP No. 912793 6A 9 ) ,
currently outstanding in the amount of $10,951 million, the
additional and original bills to be freely interchangeable.
182-day bills for approximately $4,300 million to be dated
January 22, 1981, and to mature July 23, 1981 (CUSIP No. 912793
7M 2) .
<.

Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 22, 1981. Tenders from Federal
Reserve Banks for themselves and as agents for 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 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. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and 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 19, 1981.
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-ant;

-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 reflectxpositions
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 3anks 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
resDective
bidder
(in three
will
decimals)
issues.
be accepted
of less
accepted
in without
full at
competitive
the weighted
bids average
for rany
.hp 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 January 22, 1981, in cash or other immediately available
funds or in Treasury bills maturing January 22, 1981.
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.

partmentoftheTREASURY
HINGTON, D.C. 20220

TELEPHONE 566-2041

FOR RELEASE AT 4:00 P.M.

January 14, 1981

TREASURY TO AUCTION $4,500 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $4,500
million of 2-year notes to refund $2,647 million of notes
maturing January 31, 1981, and to raise $1,853 million new
cash. The $2,647 million of maturing notes are those held by
the public, including $455 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 $499
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-806

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED FEBRUARY 2, 1981
January 14, 1981
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date January 31, 1983
Call date
Interest coupon rate

$4,500 million
2-year notes
Series M-1983
(CUSIP No. 912827 LM 2)

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
July 31 and January 31
Minimum denomination available
$5,000
Terms of Sale:
Method of sale
Yield auction
Accrued interest payable by
investor
None
Preferred allotment
Noncompetitive bid for
$1,000,000 or less
Payment by non-institutional
investors
Full payment to be submitted
with tender
Deposit guarantee by designated
institutions
Acceptable
Key Dates:
Deadline for receipt of tenders
Wednesday, January 21, 1981,
by 1:30 p.m., EST
Settlement date (final payment due
from institutions)
a) cash or Federal funds
Monday, February 2, 1981
b) readily
collectible
check... Wednesday,
Friday, January
30, 1981
Delivery
date for
coupon securities.
February
11, 1981

FOR IMMEDIATE RELEASE
January 15, 1981

CONTACT:

GEORGE G. ROSS
(202) 566-2356

UNITED STATES AND BRITISH VIRGIN ISLANDS
INITIAL NEW INCOME TAX TREATY

The Treasury Department today announced that a new
income tax treaty with tne British Virgin Islands was
initialled on January 8, 1981 by Assistant Secretary of the
Treasury Donald C. Lubick for the United States, and by the
Honorable H. L. Stoutt, Chief Minister, for the British
Virgin Islands.
The proposed treaty will follow the general pattern of
the current United States-United Kingdom income tax treaty
and the United States model income tax treaty, with a number
of substantive modifications to reflect the tax relationship
between the United States and the British Virgin "islands.
When ratified, the new treaty will replace the 1946 treaty
with the United Kingdom which was extended to the British
Virgin islands in 1959.
The U.S. believes that it is necessary to have higher
withholding rates at source than is provided in the United
r
States-United Kingdom income tax treaty or in the United
States model income tax treaty because of the potential use
of the British Virgin islands by third country residents for
investment in the United States. The proposed treaty will
therefore provide for a 15 percent tax at source on ail
payments of dividends, interest and royalties from sources
in one jurisdiction to residents of the other.
For this
purpose royalties are defined to include payments for the
use of motion picture films and for the rental of tangible
personal property. The United States will preserve its tax
on payments of dividends and interest by a British Virgin
islands corporation the majority of whose income is derived
from a permanent establishment in the United States.
M-807

-2In a letter sent to Assistant Secretary Lubick by the
Chief Minister at the time of the initialling, the British
Virgin Islands Government agreed in principle that a
provision would be added to the proposea treaty prior to
signature which would permit the competent authority of one
of the jurisdictions, in response to a specific request by
the other competent
authority, to obtain
financial
information necessary to prevent tax evasion.
The British Virgin Islands Government expects to sign
and ratify the new treaty before the end of February, 1981.
In that event, the present treaty will remain in force until
replaced by the new treaty, after ratification by the United
States.
If the new treaty has not been ratified by the
British Virgin Islands by the end of February, 1981, the
United States Government will terminate the present treaty
effective January 1, 1982.
The text of the proposed treaty will be made public when
it is signed.
o

IMMEDIATE RELEASE
January 14, 1981

Contact: Everard Munsey
566-8191

CHRYSLER BOARD SUMMARIZES TERMS FOR LOAN APPROVAL
The Chrysler Corporation Loan Guarantee Board today
summarized the terms and conditions on which it is prepared to
approve Chrysler Corporation's application for up to $400 million
in additional Federal loan guarantees.
Chrysler has informed the Board that it will promptly submit
a revised application incorporating detailed terms based on the
Board's summary.
The Board plans to meet on Friday, January 16 to consider
and act upon the revised application. It requested all parties
with an interest in the application to advise the Eoard of their
position by that time.
The granting of loan guarantees by the Board would be
conditioned on the completion of certain actions to accomplish
agreements contained in the company's application. Ey law,
fifteen days must elapse following Board approval before the
actual issuance of loan guarantees and the sale by Chrysler of
guaranteed securities.
The terms summarized by the Board today call for new
concessions from Chrysler's workers, suppliers and lenders that
would lead to major improvements in the company's earning
prospects and financial position.
Labor. The United Auto Workers would agree to forego current and future cost of living adjustments and other compensation
increases that, together with identical pay policies for the
company's other workers, could reduce Chrysler's costs by about
$783 million through September 1982, when the current union
contract expires.
The concessions by the UAW could amount to about $622
million and savings on other employees compensation to about $161
million.
M-808

-2The UAW would also agree that for.the contract to be
negotiated for years after the present contract, it would take
into consideration the company's financial condition, the
necessity for the company to be economically viable and the
assumptions in the company's operating and financing plans.
Those plans assume wage increases consistent with cost of living
and wage trends generally prevailing at the time.
The company and union would also agree to negotiate during
the next few months a proposal for a profit-sharing plan, contingent on adequate levels of future company performance, to be
submitted for approval of the Loan Guarantee Board.
Lenders. Chrysler and its lenders would agree to convert
half of the company's outstanding debt of about $1 billion to
preferred stock on which dividends would not be paid or cumulated
until the guaranteed loans had been paid off. Almost $68 million
in deferred interest notes would also be converted to preferred
stock. As to the approximately $500 million of remaining debt,
Chrysler would have the option over the coming year to pay it off
at 30 cents on the dollar in installments. The effect of this
would be to cancel about $350 million in remaining debt.
The two actions would eliminate about $1 billion in
corporation debt in exchange for preferred stock and about $150
million in cash.
Suppliers. At the time of final approval of the guarantees,
Chrysler would provide assurances that it had obtained $36
million in additional concessions from suppliers. It would also
commit its best efforts to obtain $36 million more over the
remainder of 1981, for a total of $72 million.
New Capital. Chrysler would agree to commit itself to take
all possible steps to obtain an infusion of new capital through
merger or other means. It has established a committee of its
board of directors to work with Salomon Brothers, a New York city
investment banking firm, toward this objective. The company
would be required to report periodically to the Loan Guarantee
Board on its progress.
oOOo

kpartmentoftheTREASURY
ASHINGTON, D.C. 20220

TELEPHONE 566-2041

CONTACT: Robert Don Levine
Phone:
(202) 566-5158

IMMEDIATE RELEASE
January 15, 1981

CHRYSLER LOAN GUARANTEE BOARD TO MEET TOMORROW
The Chrysler Corporation Loan Guarantee Board will meet at 2:30 p.m.
Friday, January 16, to continue discussion of Chrysler's new Operating and
Financing Plans and its request for additional loan guarantees.
On Wednesday, January 14, the Board approved a summary of the terms on which
it is expected to be able to grant formal approval later in the week. At the
January 16 meeting the Board expects to take formal action on Chrysler's application for up to an additional $400 million of guarantees.
The Board meeting, in Room 4426, Main Treasury Building, will be closed
to the public under the provisions of the Government in the Sunshine Act.
The Board previously issued $800 million of the $1.5 billion in guarantees
authorized by the Chrysler Corporation Loan Guarantee Act of 1979.
The voting members of the Board are Secretary of the Treasury G. William
Miller, Chairman; Federal Reserve Board Chairman Paul A. Volcker and Comptroller
General Elmer B. Staats.
#

M-809

FOR RELEASE AT 12:00 NOON

January 16, 1981

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $4,500 million, of 364-day
Treasury bills to be dated January 29, 1981, and to mature
January 28, 1982 (CUSIP No. 912793 7F 7 ) . This issue will
provide about $500 million new cash for the Treasury as the
maturing 52-week bill was originally issued in the amount of
$3,989 million.
The bills will be issued for cash and in exchange for
Treasury bills maturing January 29, 1981. In addition to the
maturing 52-week bills, there are $7,930 million of maturing
bills which were originally issued as 13-week and 26-week bills.
The disposition of this latter amount will be announced next
week. Federal Reserve Banks as agents for foreign and international monetary authorities currently hold $2,741 million, and
Federal Reserve Banks for their own account hold $2,313 million
of the maturing bills. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
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. For purposes of determining such
additional amounts, foreign and international monetary
authorities are considered to hold $652 million of the original
52-week issue.
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, Thursday,
January 22, 1981. 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-810

-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 January 29, 1981, in cash or other immediately available
funds or in Treasury bills maturing January 29, 1981. Cash
adjustments will be made for differences between the par value of
maturing bills accepted in exchange and the issue price of the
new bills.

FOR IMMEDIATE RELEASE DECEMBER 8, 1980
Secretary of the Treasury G. William Miller
today advised the supervisory agencies for Federally
insured depository institutions that the average
2-1/2 year Treasury yield curve rate during the
five business days ending December 8, was

/Tr« O G

rounded to the nearest 5 points.
This rate is in excess of the ceilings of 12%
for savings institutions and 11-3/4% for commercial
banks, set by the supervisory agencies.

IS
Approved/v; ,<^Wi«>q /^
Roland H. Cook
Director
Office of Market Analysis
and Agency Finance

-3—

Suppliers are being asked to hold January 1, 1981 price
levels throughout the year and give Chrysler a 5 percent
discount on purchases during the first quarter of 1981,
for a cash savings of $72 million.
Employees would forego cost of living, other pay
increases and certain improvements in fringe benefits
through September, 1982 at a savings to Chrysler of $783
million. Of that savings, about $622 million would come
from employees represented by the UAW and $161 million
from other employees of the company.
Chrysler would temporarily defer payments to suppliers
for a cash saving of $340 million.
In addition, the Plan provides that Chrysler and the UAW
would negotiate a proposal for a profit-sharing plan to be
submitted for approval of the Loan Guarantee Board. The Board
stated that it "is concerned that the profit sharing plan...be
contingent on adequate levels of future performance by Chrysler"
and said it feels "no obligation" to approve a plan negotiated by
Chrysler and the UAW that is not contingent on adequate levels of
future-performance by Chrysler. The Plan commits the company to
explore all possible methods of strengthening the company's
financial positions by the infusion of new capital through merger
or other means.
Chrysler's revised Operating Plan also provides for $60
million in cost reductions by eliminating 1,700 jobs and cutting
indirect expenses and cash conversation measures totalling almost
$3 billion: $150 million from extending beyond March 31, 1981
consignment financing of vehicles supplied by Mitsubishi, $65
million from deferral of payments to additional suppliers, $76
million in loans from Illinois, New York, Ohio, and Missouri, up
to $320 million from sale of 51 percent of Chrysler Financing
Corporation, $2 billion from reduction of expenditures on new
models, and $300 million from refinancing of assets.
The main features of the agreements between Chrysler and its
lenders and workers are:
Lenders: The agreement would extend to U.S. banks and
insurance companies and European banks with $1,009,000,000 in
outstanding long-term debt to Chrysler Corporation. A group of
Japanese banks with outstanding debt totalling $156 million will
be offered participation in the agreement.
The lenders would agree to exchange one half of their
outstanding loans to Chrysler, plus about $68 million in notes
issued by Chrysler in lieu of cash interest, for preferred stock.
The exchange would provide stock with a redemption value of 160
percent of the principal amount of the debt converted to stock,
so that for each $2,000 in debt a preferred stock share with a

-4redemption value of $3,200 would be issued. The stock would bear
interest at 8-1/8 percent or $260 per share, but this interest
would not be paid or cumulated until the Federally guaranteed
loans had been paid off. Without participation of the Japanese
banks, $504.5 million in long-term debt would be exchanged for
$807 million in preferred stock.
Half of the conversions to preferred stock would take place
when the new Federal loan guarantees are issued and the remainder
within 105 days or sooner if needed to maintain the company's net
worth at no less than $100 million.
The remaining long-term debt — amounting to $504.5 million
if the Japanese banks do not participate — could, at Chrysler's
option be purchased at 30 cents on the dollar over 380 days after
the issuance of the additional Federal loan guarantees.
This debt would be secured by a lien on the company's assets
that would be subordinated to liens securing the Federally
guaranteed loans and certain other existing liens. If not bought
out by the company, it would bear cash interest at 11 percent on
loans from U.S. banks and insurance companies and at rates
ranging from 11 to over 18 percent during different periods for
loans from European banks. The outstanding debentures held by
the public would share equally in this security to the extent
that the lenders* lien covers Chrysler's domestic automotive
plants.
The amount of debt that the company could buy out at
discount would be reduced by 25 percent of the original total
after 105, 197, 288 and 380 days after the new loan guarantees
are issued. Chrysler is required, before the Board's approval of
issuance of the new loan guarantees, to present a program to use
its option to purchase the debt and to agree not to allow its
option to expire without the Board's consent.
Workers: Chrysler and UAW negotiating committee have agreed
that the current cost of living allowance of $1.15 per hour will
be discontinued after March 1, 1981 and that no further cost of
living increases will be made under the current contract which
expires on September 30, 1982.
The workers will also forego two "improvement factor
increases," which would have amounted to 3 percent of the base
wage. Increases in pensions scheduled for August 1, 1981 will be
deferred to January 1, 1982 and pension increases and improvements scheduled for October 1, 1981 and after January 1, 1982
will be eliminated except for an increase of 50 cents per year of
service scheduled to become effective on October 1, 1981.
All "paid personal holidays" that would have become
available during the remainder of the Agreement will be
eliminated and scheduled increases in paid lunch time and
contributions to paid educational leave wi

-5The company and union agreed to negotiate a profit sharing
plan within 120 days with the understanding that the plan must be
approved by the Loan Guarantee Board, among others.
Chrysler's Operating Plan states that "the International
Union UAW has reviewed with Chrysler the contents of Chrysler's
Operating and Financing Plans dated January 14, 1981, and has
agreed in a letter from its president it will conduct its 1982
collective bargaining negotiations with Chrysler taking due
consideration of the plans and modifications approved by the Loan
Guarantee Board, the mutual interest of Chrysler and its
constituents in Chrysler's long-term viability and Chrysler's
then-existing financial condition and prospects. Based on such
agreement, Chrysler has assumed in its Plans that wage increases
from September 15, 1982 through the end of 1985 would be
consistent with cost of living and wage trends generally
prevailing at the time and would be consistent with its need to
maintain long-term viability. In addition, the new collective
bargaining agreement will be subject to Loan Guarantee Board
review."
The UAW agreed to begin the process of submitting the
agreement to the Chrysler membership for ratification on
January 19, 1981.
Effects on Operating Results and Financial Position
The Loan Board found that Chrysler had met the statutory
requirement that it submit an Operating Plan "for the 1980 fiscal
year and the three next fiscal years demonstrating the ability of
the Corporation to continue as a going concern in the automobile
business, and after December 31, 1983, to continue without
additional guarantees or other Federal assistance..."
The analysis of the Board's staff pointed out that the Act
calls for a reasonable prospect of viability, not that it be
assured or guaranteed. Congress clearly viewed Chrysler as a
turnaround situation, involving a higher degree risk, for which
normal credit standards applicable to the private sector were not
to be used exclusively.
Since the Board's approval of loan guarantees in July, the
domestic auto market has been a little stronger than forecast by
Chrysler, but the company's share of the market has been below
the company's projections. This resulted in much lower sales and
higher demand for cash than originally forecast. The prospect
that this reduced market share will continue created a situation
in which only the most drastic action by Chrysler could provide a
reasonable assurance of the company's long-term viability.
The company's action to obtain concessions from its workers,
suppliers and lenders, to reduce manpower by 3,000 and decrease
planned expenditures during 1981 through 1985 by $1,888 million
provided the basis for the Board's determination that the company

-6has a reasonable prospect of viability. The staff noted that
"they result in a company which looks much different than the
corporation which first approached the U. S. Treasury in
July, 1979."
Chrysler's revised operating plan assumes a 3.5 percent
annual trend rate of growth of real GNP after the first part of
1981. It assumes total car sales of 9.6 million units in 1981
and market growth rising from 10.6 million units in 1982 to 11.8
million units in 1985. Chrysler projects its share of the car
market at 8.9 percent in 1980, 9.1 percent in 1981, 9.7 percent
in both 1982 and 1983, and 9.5 percent in 1984.
Chrysler's plan projects truck sales of 2.5 million units in
both 1980 and 1981 and 3 million units in 1982, rising to 3.8
million by 1985. The company projects its share of the truck
market at 10 percent in 1980, 9 percent in 1981, 9.8 in 1982, 9.7
in 1983 and 12.4 in 1984.
The staff noted that the industry volume projections are
slightly above those of independent forecasters.
The revised Operating Plan also calls for revisions of
Chrysler product plans, including cancellation of a subcompact
that would have replaced the Omni-Horizon series in 1985,
deferral of a premium 2-door version of the K series by six
months to mid-1982, deferral of a sport model based on the K
series and a 4-speed automatic transaxle, and deferral of.plans
for an additional front wheel drive plant. These changes will
reduce expenditures by $670 million in 1981, $603 million in
1982, $441 million in 1983, $354 million in 1984, with an
increase of $180 million in 1985, for a net reduction of $1,888
million in the 1981-85 period.
The Board's staff stated that the revised Financing Plan,
incorporating the new concessions, improves the company's
financial margins and ensures that it can continue its operations
and have reasonable prospects of becoming financially viable over
the long-term.
The cash impact of the new actions included in the revised
January 16 Financing Plan are set forth in the following table:

-7Cash Impact of New Actions Incorporated in
the January 14 Plan Which Were Not Anticipated Previously
($ millions)
Sup-Reduced
Fixed Total Lender
Pliers
Employee
Manpower
New
Capital
Interest
Con_
Conand Other
Conand Product
Concessions cessions Reductions cessions
Expenditures
sions
1 ,130-1,139
97
1981
670
25-34
293
45
1982

603

58-81

490

1 ,186-1,209

1983

441

61-84

—

543-566

1984

354

56-79

—

454-477

56-79

—

(76)-(53)

265

3,237-3,338

1985
(180)
SubTota Is 1,888
Less:

256-357

783

Cash Needed to Purchase Debt at 30 cents on Dollar
(75% in 1981, 25% in 1982)

TOTAL CASH IMPACT OF NEW ACTIONS

(155)-(178)
3,082-3,160

While Chrysler's cash requirements are increased by $106 to
$116 million in 1981 as the result of purchasing half of its
long-term debt at 30 cents on the dollar, the company's need
through 1985 for cash will be reduced by $270 to $365 million as
a result of the debt buy-out. If the debt which previously would
have matured after 1985 is also considered, Chrysler's cash
savings from the buyout would total between $1.1 and over $1.3
billion.
The improvement in net worth from the debt restructuring
exceeds the cash savings, particularly in the period through
1985. Net worth will be improved $931 million to $1,057 billion
in 1981 and by $1,711 billion to $1,931 billion by 1985. A large
portion of this improvement results from the earlier conversion
of debt into equity. After September 30, 1986 (when the June 24
debt restructuring plan contemplated the conversion of $750
million of debt into equity), Chrysler's net worth will be $1.22
billion to $1.48 billion greater than it would have been.
Details concerning the effect of the debt restructuring on
the company's cash position and net worth are shown in the
attached tables 1 and 2.
Under the revised Plans, the company's financial reserves -consisting of cash in excess of $150 million in normal
transaction balances and unused loan guarantees, will rise from
$662 million in 1981 to $3,115 million in 1985 assuming that the
company is able to achieve the results in its plans. In that

-8event, the reserves may be used for future capital expenditures.
In addition, up to $100 million in 1981 and up to $350 million in
1985 could be provided by careful management of working capital.
Forecasts of the company's profit and loss statements and
balance sheets through 1985 based on the staff's analysis of the
revised Operating and Financing Plans are attached as tables 3
and 4.
The forecasts show losses of $1,774 million and $253 million
in 1980 and 1981, respectively, and profits of $319 million in
1982, $587 million in 1983, $1,089 million in 1984 and $1,273
million in 1985. New worth rises from $377 million at
December 31, 1980 to $4,396 million at the end of 1985.
oOOo

Table 1

Financial Impact of Chrysler's January 14 Financial Plan Debt
Restructuring Plan Versus Current Debt Arrangements
($ millions)

1981

1982

• Cash needed to purchase debt

(116)-(133)

(39)-(45)

• Cash Interest Savings

25-34

58 - 81

61-84

° Lost Interest Income on Funds Used
to Purchase Debt

(15)-(17)

(ll)r(14)

Annual Total

(106)-(116)

Cumulative Total

(106)-(116)

1983

1984

1985

Tbtal

196-227

41-49

56-79

256-357

(6)-(9)

0-<3)

5-2

(27M41)

8-22

55-75

56-76

257-308

270-365

(98)-(94)

(43)-(19)

13-57

270-365

Annual Cash Position Increased <Decreased>

• Plus: Debt Repayments Saved After 1985
TOTAL CASH SAVINGS

* Additional interest savings totalling between $100 million and $200 million per year
would be realized beyond 1985 until all $835 to $960 million remaining debt is repaid.

835-960*
1105-1325

Table 2
Financial Impact of Chrysler's January 14 Financial Plan
Debt Restructuring Plan Versus Current Debt Arrangement
($ millions)
1981

1982

1983

1984

1985

Total

25-34

58-81

61-84

56-79

256-357

Annual Increase <Decrease> in Net Worth
° Cash Interest Savings
° Lost Interest Income on Funds Used
to Purchase Debt
° Insurance Company "A" Note Interest
Savings
° Deferred Interest Notes Savings

(15)-(17)

<11)-(14)

(6)-(9)

0-(3)

5-2

<27)-(41)

4
80

4
90

5
101 .

4
141

5
123

22
535

Annual Total Vftiich Affect Earnings

94-101

141-161

161-181

201-221

189-209

786-873

Cumulative Total Which Affect Earnings

94-101

235-262

396-443

597-664

786-873

Plus: "Conversion of Debt into Equity
"Additional Equity from
Repurchase of Debt

572-650

265-306

353-408

Cumulative Total Net Worth Improvement

931-1057

1160-1320

1321-1501

1522-1722

1711-1931

Plus: Additional Deferred Interest
Notes Accrued After 1985

169

.us: Additional Interest Savings in 1986

90-130

ss: September 30, 1986 Conversion
of Debt into Equity in Existing
Debt Agreements •

(750)

Improvement in Net Worth Due to January 10 Proposed
_>t Restructuring Plan through September 30, 1986

1220-1480

Table 3

Base Case III Forecast
Profit and Loss Statements
1979-1985
($ Million)
1979
Net Sales
Equity in Net Earnings
Unconsolidated Subsidiaries
Total Revenues
Costs, Other Than Items
Below
Depreciation & Authorization
Pension Plans
Interest Expenses - Net
Earnings Before Taxes &
Minority Interest

$12,002
2
12,004

$ 9,063 $12,482 $14,929 $18,353 $21,008 $23,252
(62) (6) 2 7 11 13
9,001
12,476

12,224
401
261
215

9,609
512
310
304

$(1,097)

$(1,734)

11,506
501
343
^ 350
$

(224)

14,931

18,360

21,019

23,265

13,257
541
401
383

16,288
616
475
360

18,302
732
526
318

20,336
761
568
165

$ 1,141

$1,435

349

621

40 29 30 3f 52 162

Taxes on Income(Credit) and
Minority Interest
Net Earnings/(Loss)

1980 1981 1982 1983 1984 1985

$(1,097)

$(1,774) $ (253) $ 319 $ 587 $ 1,089 $1,273

January 16, 1981

1979
Cash
Accounts Receivable
Receivable from CFC Sale
Inventories
Other
Total Current Assets

Accounts Payable
Short-Term Debt
Long-Term Debt Due
Within One Year
Other
Total Current Liabilities

4emo: Working Capital
Current Ratio
k

150
487

1,874
162

1,950
171

$ 3,120

$ 2,758

1,184
2,349

180
698

150
750

1985

1984

1983
$

156
850

165
950

2,158
180

2,254
180

2,480
180

2,737
180

$ 3,114

$ 3,216

$ 3,334

$ 3,666

$ 4,032

1,178
2,522

871
2,146

872
2,431

893
2,758

925
2,869

965
3,162

$ 6,653

$ 6,458

$ 6,131

$ 6,519

$ 6,985

$ 7,460

$ 8,159

$ 2,338
601

$ 2,613
35

\ $ 2,536
35

$ 2,608
37

$ 2,789
40

$ 3,135
25

$ 3,462
20

276
17

24
9

34
13

135
13

186
13

128
13

$ 3,232

$ 2,681

$ 2,692

$ 2,977

$ 3,359

$ 3,623

605
992
1,824

630
1,970
800
377

$ 6,653

$ 6,458

$ 6,131

$ 6,519

$ 6,985

$ 7,460

$ 8,159

Other Non-Current Liab.
Long-Term Debt
U.S. Guaranteed loans
Net Worth
Financing Contingency*
TOTAL LIABILITIES &
NET WORTH

162
653
250
1,871
178

Investments & Other
Noncurrent Assets
Property, plant,equipment
TOTAL ASSETS

474
610

Table 4

Base Case III Forecast Balance Sheets
December 31^ 1979-1985
($ Millions)
1980
1982
1981

(112)
.97

77
1.03

20
9'
$ 2,600
682
1,204
1,200
795
(350)

514
1.20

727
1,044
1,200
1,256
(400)

524
1.19

825
1,100
800
1,883
(600)

357
1.12

874
927
450
3,050
(1,200)

307
1.09

940
800
4,396
(1,600)

409
1.11

If the Base Case III forecasts are fully attained in all years, the amounts shown as financing contingencies
would be available as extra cash balances.
January 16, 1980

The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $8,600 million, to be issued January 29, 1981.
This offering will provide $675 million of new cash for the
Treasury as the maturing bills were originally issued in the
amount of $7,930 million. The two series offered are as follows:
91-day bills (to maturity date) for approximately $4,300
million, representing an additional amount of bills dated
October 30, 1980, and to mature April 30, 1981 (CUSIP No. 912793
6P 6 ) , currently outstanding in the amount of $7,923 million, the
additional and original bills to be freely interchangeable.
182-day bills for approximately $4,300 million, to be dated
January 29, 1981, and to mature July 30, 1981 (CUSIP No. 912793
7N 0 ) .
Both series of bills will be issued for cash and in exchange
for Treasury bills maturing January 29, 1981. In addition to the
maturing 13-week and 26-week bills, there are $3,989 million of
maturing 52-week bills. The disposition of this latter amount was
announced last week. Federal Reserve Banks, as agents for foreign
and international monetary authorities, currently hold $2,741
million, and Federal Reserve Banks for their own account hold $2,313
million of the maturing bills. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders from Federal Reserve Banks for themselves and as
agents for 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 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. For purposes of determining such
additional amounts, foreign and international monetary
authorities are considered to hold $2,089 million of the original
13-week and 26-week issues.
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.

Jt-313

-2Tenders will be received at Federal Reserve Banks and
Branches and at the Bureau of the Public Debt, Washington, D. C.
20226, up to 1:30 p.m., Eastern Standard time, Monday,
January 26, 1981. Form PD 4632-2 (for 26-week series) or Form
PD 4632-3 (for 13-week series) should be used to submit tenders
for bills to be maintained on the book-entry records of the
Department of the Treasury.
Each tender must be for a minimum of $10,000. Tenders over
$10,000 must be in multiples of $5,000. In the case of
competitive tenders the price offered must be expressed on the
basis of 100, with not more than three decimals, e.g., 99.925.
Fractions may not be used.
Banking institutions and dealers who make primary markets in
Government securities and report daily to the Federal Reserve
Bank of New York their positions in and 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.

-3Public announcement will be made by the Department of the
Treasury of the amount and price range of accepted bids.
Competitive bidders will be advised of the acceptance or
rejection of their tenders. The Secretary of the Treasury
expressly reserves the right to accept or reject any or all
tenders, in whole or in part, and the Secretary's action
shall be final. Subject to these reservations, noncompetitive
tenders for each issue for $500,000 or less without stated price
from any one bidder will be accepted in full at the weighted
average price (in three decimals) of accepted competitive bids
for the respective issues.
Settlement for accepted tenders for bills to be maintained
on the book-entry records of Federal Reserve Banks and Branches
must be made or completed at the Federal Reserve Bank or Branch
on January 29, 1981, in cash or other immediately available funds
or in Treasury bills maturing January 29, 1981. 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.

Apartment of theTREASURY
WASHINGTON, D.C. 20220

TELEPHONE 566-2041

FOR lflNLDIATE RELEASE

January 19, 1981

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4,300 million of 13-week bills and for $4,300 million of
26-week bills, both to be issued on January 22, 1981
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

High
Low
Average

13-week bills
maturing April 23, 1981
Discount Investment
Price
Rate
Rate 1/

26-week bills
maturing July 23, 1981
Discount Investment
Rate
Rate 1/
Price

96.083
96.037
96.058

92.700
92.669
92.684

15.496%
15.678%
15.595%

16.35%
16.55%
16.46%

14.440%
14.501%
14.471%

15.79%
15.87%
15.83%

Tenders at the low price for the 13-week bills were allotted 52%.
Tenders at the low price for the 26-week bills were allotted 12%.

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

TENDERS RECEIVED AND /.CCEPTED
(In Thousands)
Received
Accepted
Received
:
$ 118,485 $
68,485
$
60,725
6,662,280
3,422,190 :
7,791,555
88,555
38,555 i
17,135
57,955
52,560 '
61,110
69,265
58,265 :
78,225
68,805
68,805
50,540
480,195
193,195 <:
544,235
48,660
39,660
29,120
:
18,190
17,190
16,520
:
60,795
56,645
48,070
5
31,265
26,265
18,395
452,905
111,905
•
477,705
:
146,530
146,530
145,670

$
35,725
3,702,450
16,635
30,670
36,785
43,365
114,945
20,120
8,520
47,995
13,395
83,735
145,670

$8,303,885

$4,300,250

$9,339,005

$4,300,010

$6,343,760
961,975

$2,340,125
961,975

:
:

$7,158,585
691,520

$2,119,590
691,520

$7,305,735

$3,302,100

•

$7,850,105

$2,811,110

530,650

330,000

467,500

1,158,900

$8,303,885

$4,300,250

$9,339,005

$4,300,010

Accepted

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

1/Fquivalent coupon^-issue yield.

M-814-r-

FOR IMMEDIATE RELEASE
January 19, 1981

CONTACT:

GEORGE G. ROSS
(202) 566-2356

TECHNICAL EXPLANATION OF
UNITED STATES - CANADA INCOME TAX TREATY

The Treasury Department today released the technical
explanation of the Convention between the United States and
Canada with respect to Taxes on Income and on Capital signed
on September 26, 1980. The technical explanation is an
official guide to the Convention and will be submitted to the
Senate Foreign Relations Committee.
Any inquiries with respect to the explanation should be
addressed to H. David Rosenbloom, International Tax Counsel,
U.S. Treasury Department, Washington, D.C. 20220.
A copy of the technical explanation is attached. This
notice will appear in the Federal Register on or after
January 26.

o 0 o

M-811

TECHNICAL EXPLANATION OF THE CONVENTION
BETWEEN THE UNITED STATES OF AMERICA
AND CANADA WITH RESPECT TO TAXES ON INCOME
AND ON CAPITAL SIGNED AT WASHINGTON, D.C.
ON SEPTEMBER 26, 1980
INTRODUCTION
In this technical explanation of the Convention between
the United States and Canada signed on September 26, 1980
("the Convention"), references are made to the Convention and
Protocol between Canada and the United States with respect to
Income Taxes signed on March 4, 1942, as amended by the
Convention signed on June 12, 1950, the Convention signed on
August 8, 1956 and the Supplementary Convention signed on
October 25, 1966 (the "1942 Convention"). These references
are intended to put various provisions of the Convention into
context. The technical explanation does not, however,
provide a complete comparison between the Convention and the
1942 Convention. Moreover, neither the Convention nor the
technical explanation is intended to have implications for
the interpretation of the 1942 Convention.
The technical explanation is an official guide to the
Convention. It reflects policies behind particular Convention provisions, as well as understandings reached with
respect to the interpretation and application of the Convention.
Article I. PERSONAL SCOPE
Article I provides that the Convention is generally
applicable to persons who are residents of either Canada or
the United States or both Canada and the United States. The
word "generally" is used because certain provisions of the
Convention apply to persons who are residents of neither
Canada nor the United States.
Article II. TAXES COVERED
Paragraph 1 states that the Convention applies to taxes
"on income and on capital" imposed on behalf of Canada and
the United States, irrespective of the manner in which such
taxes are levied. As of September 26, 1980 neither Canada
nor the United States imposed taxes on capital. Paragraph 1
is not intended either to broaden or to limit paragraph 2,

-2which provides that the Convention shall apply, in the case
of Canada, to the taxes imposed by the Government of Canada
under Parts I, XIII, and XIV of the Income Tax Act and, in
the case of the United States, to the Federal income taxes
imposed by the Internal Revenue Code ("the Code").
National taxes not generally covered by the Convention
include, in the case of the United States, the estate, gift,
and generation-skipping transfer taxes, the Windfall Profits
Tax, Federal unemployment taxes, social security taxes
imposed under sections 1401, 3101, and 3111 of the Code, and
the excise tax on insurance premiums imposed under Code
section 4371. The Convention also does not generally cover
the Canadian excise tax on net insurance premiums paid by
residents of Canada for coverage of a risk situated in
Canada. However, the Convention has the effect of covering
the Canadian sodial security tax in certain respects because
under Canadian domestic tax law no such tax is due if there
is no income subject to tax under the Income Tax Act of
Canada. Taxes imposed by the states of the United States,
and by the provinces of Canada, are not generally covered by
the Convention. However, if such taxes are imposed in
accordance with the provisions of the Convention, a foreign
tax credit is ensured by paragraph 7 of Article XXIV
(Elimination of Double Taxation).
Paragraph 2 contrasts with paragraph 1 of the Protocol
to the 1942 Convention, which refers to "Dominion income
taxes." In addition, unlike the 1942 Convention, the
Convention does not contain a reference to "surtaxes and
excess-profits taxes."
Paragraph 3 provides that the Convention also applies to
any taxes identical or substantially similar to the taxes on
income in existence on September 26, 1980 which are imposed
in addition to or in place of the taxes existing on that
date. Similarly, taxes on capital imposed after that date are
to be covered.
It was agreed that Part I of the Income Tax Act of
Canada would meet the requirements of paragraph 3(a) if
Canada were to enact a low flat rate tax on resource
revenues which would not be deductible in computing income
under Part I. This agreement is not intended to have
implications for any other convention or for the interpretation of Code sections 901 and 903. Further, the flat rate
tax would not be a tax described in paragraphs 2 or 3. After
Canada proposed enactment of an eight percent tax on oil and
gas production revenues, it was confirmed that this tax was
consistent with the understanding reached during the
negotiations.

-3Paragraph 4 provides that, notwithstanding paragraphs 2
and 3, the Convention applies to certain United States taxes
for certain specified purposes: the accumulated earnings tax
and personal holding company tax are covered only to the
extent necessary to implement the provisions of paragraphs 5
and 8 of Article X (Dividends); the excise taxes imposed with
respect to private foundations are covered only to the extent
necessary to implement the provisions of paragraph 4 of
Article XXI (Exempt Organizations); and the social security
taxes imposed under sections 1401, 3101, and 3111 of the Code
are covered only to the extent necessary to implement the
provisions of paragraph 4 of Article XXIX (Miscellaneous
Rules). The pertinent provisions of Articles X, XXI, and
XXIX are described below. Canada has no national taxes
similar to the United States accumulated earnings tax,
personal holding company tax, or excise taxes imposed with
respect to private foundations.
Article II does not specifically refer to interest,
fines and penalties. Thus, each Contracting State may, in
general, impose interest, fines, and penalties or pay
interest pursuant to its domestic laws. Any question whether
such items are being imposed or paid in connection with
covered taxes in a manner consistent with provisions of the
Convention, such as Article XXV (Non-Discrimination), may,
however, be resolved by the competent authorities pursuant to
Article XXVI (Mutual Agreement Procedure). See, however, the
discussion below of the treatment of certain interest under
Articles XXIX (Miscellaneous Rules) and XXX (Entry Into
Force) .
Article III. GENERAL DEFINITIONS
Article III provides definitions and general rules of
interpretation for the Convention. Paragraph 1(a) states
that the term "Canada," when used in a geographical sense,
means the territory of Canada, including any area beyond the
territorial seas of Canada which, under international law and
the laws of Canada, is an area within which Canada may
exercise rights with respect to the seabed and subsoil and
their natural resources. This definition differs only in
form from the definition of Canada in the 1942 Convention;
paragraph 1(a) omits the reference in the 1942 Convention to
"the Provinces, the Territories and Sable Island" as
unnecessary.
Paragraph 1(b)(i) defines the term "United States" to
mean the United States of America. The term does not include
Puerto Rico, the Virgin Islands, Guam, or any other United
States possession or territory.

-4Paragraph 1(b)(ii) states that when the term "United
States" is used in a geographical sense the term also
includes any area beyond the territorial seas of the United
States which, under international law and the laws of the
United States, is an area within which the United States may
exercise rights with respect to the seabed and subsoil and
their natural resources.
Paragraph 1(c) defines the term "Canadian tax" to mean
the taxes imposed by the Government of Canada under Parts I,
XIII, and XIV of the Income Tax Act as in existence on
September 26, 1980 and any identical or substantially similar
.taxes on income imposed by the Government of Canada after
that date and which are in addition to or in place of the
then existing taxes. The term does not extend to capital
taxes, if and when such taxes are ever imposed by Canada.
Paragraph 1(d) defines the term "United States tax" to
mean the Federal income taxes imposed by the Internal Revenue
Code as in existence on September 26, 1980 and any identical
or substantially similar taxes on income imposed by the
United States after that date in addition to or in place of
the then existing taxes. The term does not extend to capital
taxes, nor to the United States taxes identified in paragraph
4 of Article II (Taxes Covered).
Paragraph 1(e) provides that the term "person" includes
an individual, an estate, a trust, a company, and any other
body of persons. Although both the United States and Canada
do not regard partnerships as taxable entities, the
definition in the paragraph is broad enough to include
partnerships where necessary.
Paragraph 1(f) defines the term "company" to mean any
body corporate or any entity which is treated as a body
corporate for tax purposes.
The term "competent authority" is defined in paragraph
K g ) to mean, in the case of Canada, the Minister of National
Revenue or his authorized representative and, in the case of
the United States, the Secretary of the Treasury or his
delegate. The Secretary of the Treasury has delegated the
general authority to act as competent authority to the
Commissioner of the Internal Revenue Service, who has
redelegated such authority to the Assistant Commissioner
(Compliance) with the concurrence, in certain cases, of the
Assistant Commissioner (Technical). The Assistant
Commissioner (Compliance) has redelegated authority to the
Director of International Operations to administer programs
for routine and specific exchanges of information and mutual
assistance in collection and to the Director, Examination
Division, to administer programs for simultaneous and
industrial exchanges of information.

-5-

Paragraph 1(h) defines the term "international traffic"
to mean any voyage of a ship or aircraft to transport
passengers or property, except where the principal purpose of
the voyage is transport between points within a Contracting
State. A voyage of a ship or aircraft that includes stops in
both Contracting States may thus not be international traffic
if the principal purpose of the voyage is to transport
passengers or property within a Contracting State.
Paragraph l(i) defines the term "State" to mean any
national State, whether or not a Contracting State.
Paragraph l(j) establishes "the 1942 Convention" as the
term to be used throughout the Convention for referring to
the pre-existing income tax treaty relationship between the
United States and Canada.
Paragraph 2 provides that, in the case of a term not
defined in the Convention, the domestic tax law of the
Contracting State applying to the Convention shall control,
unless the context in which the term is used requires a
definition independent of domestic tax law or the competent
authorities reach agreement on a meaning pursuant to Article
XXVI (Mutual Agreement Procedure). The term "context" refers
to the purpose and background of the provision in which the
term appears.
Pursuant to the provisions of Article XXVI, the
competent authorities of the Contracting States may resolve
any difficulties or doubts as to the interpretation or
application of the Convention. An agreement by the competent
authorities with respect to the meaning of a term used in the
Convention would supersede conflicting meanings in the
domestic laws of the Contracting States.
Article IV. RESIDENCE
Article IV provides a detailed definition of the term
"resident of a Contracting State." The definition begins
with a person's liability to tax as a resident under the
respective taxation laws of the Contracting States. A person
who, under those laws, is a resident of one Contracting State
and not the other need look no further. However, the
Convention definition is also designed to assign residence to
one State or the other for purposes of the Convention in
circumstances where each of the Contracting States believes a
person to be its resident. The Convention definition is, of
course, exclusively for purposes of the Convention.

-6-

Paragraph 1 provides that the term "resident of a
Contracting State" means any person who, under the laws of
that State, is liable to tax therein by reason of his
domicile, residence, place of management, place of
incorporation, or any other criterion of a similar nature.
The phrase "any other criterion of a similar nature"
includes, for U.S. purposes, an election under the Code to be
treated as a U.S. resident. An estate or trust is, however,
considered to be a resident of a Contracting State only to
the extent that income derived by such estate or trust is
liable to tax in that State either in its hands or in the
hands of its beneficiaries.
To the extent that an estate or
trust is considered a resident of a Contracting State under
this provision, it can be a "beneficial owner" of items of
income specified in other articles of the Convention - e.g.,
paragraph 2 of Article X (Dividends).
Paragraphs 2, 3, and 4 provide rules to determine a
single residence for purposes of the Convention for persons
resident in both Contracting States under the rules set forth
in paragraph 1. Paragraph 2 deals with individuals. A "dual
resident" individual is initially deemed to be a resident of
the Contracting State in which he has a permanent home
available to him. If the individual has a permanent home
available to him in both States or in neither, he is deemed
to be a resident of the Contracting State with which his
personal and economic relations are closer. If the personal
and economic relations of an individual are not closer to one
Contracting State than to the other, the individual is deemed
to be a resident of the Contracting State in which he has an
habitual abode. If he has such an abode in both States or in
neither State, he is deemed to be a resident of the Contracting State of which he is a citizen. If the individual is a
citizen of both States or of neither, the competent authorities are to settle the status of the individual by mutual
agreement.
Paragraph 3 provides that if, under the provisions of
paragraph 1, a company is a resident of both Canada and the
United States, then it shall be deemed to be a resident of
the State under whose laws (including laws of political
subdivisions) it was created. Paragraph 3 does not refer to
the State in which a company is organized, thus making clear
that the tie-breaker rule for a company is controlled by the
State of the company's original creation. Various jurisdictions may allow local incorporation of an entity that is
already organized and incorporated under the laws of another
country. Paragraph 3 provides certainty in both the United
States and Canada with respect to the treatment of such an
entity for purposes of the Convention.

-7-

Paragraph 4 provides that where, by reason of the
provisions of paragraph 1, an estate, trust, or other person,
other than an individual or a company, is a resident of both
Contracting States, the competent authorities of the States
shall by mutual agreement endeavor to settle the question and
determine the mode of application of the Convention to such
person. This delegation of authority to the competent
authorities complements the provisions of Article XXVI
(Mutual Agreement Procedure), which implicitly grant such
authority.
Paragraph 5 provides a special rule for certain
government employees, their spouses, and dependent children.
An individual is deemed to be a resident of a Contracting
State if he is an employee of that State or of a political
subdivision, local authority, or instrumentality of that
State, is rendering services in the discharge of functions of
a governmental nature in any State, and is subjected in the
first-mentioned State to "similar obligations" in respect of
taxes on income as are residents of the first-mentioned
State. Paragraph 5 provides further that a spouse and
dependent children residing with a government employee and
also subject to "similar obligations" in respect of income
taxes as residents of the first-mentioned State are also
deemed to be residents of that State. Paragraph 5 overrides
the normal tie-breaker rule of paragraph 2. A U.S. citizen
or resident who is an employee of the U.S. government in a
foreign country or who is a spouse or dependent of such
employee is considered to be subject in the United States to
"similar obligations" in respect of taxes on income as those
imposed on residents of the United States, notwithstanding
that such person may be entitled to the benefits currently
allowed by sections 911, 912, or 913 of the Code.
Article V. PERMANENT ESTABLISHMENT
Paragraph 1 provides that for the purposes of the
Convention the term "permanent establishment" means a fixed
place of business through which the business of a resident of
a Contracting State is wholly or partly carried on. Article
V does not use the term "enterprise of a Contracting State,"
which appears in the 1942 Convention. Thus, paragraph 1
avoids- introducing an additional term into the Convention.
The omission of the term is not intended to have any implications for the interpretation of the 1942 Convention.
Paragraph 2 provides that the term "permanent
establishment" includes especially a place of management, a
branch, an office, a factory, a workshop, and a mine, oil or
gas well, quarry, or any other place of extraction of natural

-8resources. Paragraph 3 adds that a building site or
construction or installation project constitutes a permanent
establishment if and only if it lasts for more than 12
months. Paragraph 4 provides that a permanent establishment
exists in a Contracting State if the use of a drilling rig or
drilling ship in that State to explore for or exploit natural
resources lasts for more than 3 months in any 12 month
period, but not if such activity exists for a lesser period
of time.
Paragraph 5 provides that a person acting in a
Contracting State on behalf of a resident of the other
Contracting State is deemed to be a permanent establishment
of the resident if such person has and habitually exercises
in the first-mentioned State the authority to conclude
contracts in the name of the resident. This rule does not
apply to an agent of independent status, covered by paragraph
7. Under the provisions of paragraph 5, a permanent establishment may exist even in the absence of a fixed place of
business. If, however, the activities of a person described
in paragraph 5 are limited to the ancillary activities
described in paragraph 6, then a permanent establishment does
not exist solely on account of the person's activities.
There are a number of minor differences between the
provisions of paragraphs 1 through 5 and the analagous
provisions of the 1942 Convention. One important deviation
is elimination of the rule of the 1942 Convention which deems
a permanent establishment to exist in any circumstance where
a resident of one State uses substantial equipment in the
other State for any period of time. The Convention thus
generally raises the threshold for source basis taxation of
activities that involve substantial equipment (and that do
not otherwise constitute a permanent establishment). Another
deviation of some significance is elimination of the rule of
the 1942 Convention that considers a permanent establishment
to exist where a resident of one State carries on business in
the other State through an agent or employee who has a stock
of merchandise from which he regularly fills orders that he
receives. The Convention provides that a person other than
an agent of independent status who is engaged solely in the
maintenance of a stock of goods or merchandise belonging to a
resident of the other State for the purpose of storage,
display or delivery does not constitute a permanent establishment.
Paragraph 6 provides that a fixed place of business used
solely for, or an employee described in paragraph 5 engaged
solely in, certain specified activities is not a permanent
establishment, notwithstanding the provisions of paragraphs
1, 2, and 5. The specified activities are: a) the use of

-9facilities for the purpose of storage, display, or delivery
of goods or merchandise belonging to the resident whose
business is being carried on; b) the maintenance of a stock
of goods or merchandise belonging to the resident for the
purpose of storage, display, or delivery; c) the maintenance
of a stock of goods or merchandise belonging to the resident
for the purpose of processing by another person; d) the
purchase of goods or merchandise, or the collection of
information, for the resident; and e) advertising, the supply
of information, scientific research, or similar activities
which have a preparatory or auxiliary character, for the
resident. Combinations of the specified activities have the
same status as any one of the activities. The reference in
paragraph 6(e) to specific activities does not imply that any
other particular activities — for example, the servicing of
a patent or a know-how contract or the inspection of the
implementation of engineering plans — do not fall within the
scope of paragraph 6(e) provided that, based on the facts and
circumstances, such activities have a preparatory or
auxiliary character.
Paragraph 7 provides that a resident of a Contracting
State is not deemed to have a permanent establishment in the
other Contracting State merely because such resident carries
on business in the other State through a broker, general
commission agent, or any other agent of independent status,
provided, that such persons are acting in the ordinary course
of their business.
Paragraph 8 states that the fact that a company which is
a resident of one Contracting State controls or is controlled
by a company which is either a resident of the other Contracting State or which is carrying on a business in the
other State, whether through a permanent establishment or
otherwise, does not automatically render either company a
permanent establishment of the other.
Paragraph *9 provides that, for purposes of the Convention, the provisions of Article V apply in determining
whether any person has a permanent establishment in any
State. Thus, these provisions would determine whether a
person other than a resident of Canada or the United States
has a permanent establishment in Canada or the United States,
and whether a person resident in Canada or the United States
has a permanent establishment in a third State.
Article VI. INCOME FROM REAL PROPERTY
Paragraph 1 provides that income derived by a resident
of a Contracting State from real property situated in the
other Contracting State may be taxed by that other State.

-10Income from real property includes, for purposes of Article
VI, income from agriculture or forestry. Also, while "income
derived ... from real property" includes income from rights
such as an overriding royalty or a net profits interest in a
natural resource, it does not include income in the form of
rights to explore for or exploit natural resources which a
party receives as compensation for services (e.g., exploration services); the latter income is subject to the provisions of Article VII (Business Profits), XIV (Independent
Personal Services), or XV (Dependent Personal Services), as
the case may be. As provided by paragraph 3, paragraph 1
applies to income derived from the direct use, letting or use
in any other form of real property and to income from the
alienation of such property.
Generally speaking, the term "real property" has the
meaning which it has under the taxation laws of the
Contracting State in which the property in question is
situated, in accordance with paragraph 2. In any case, the
term includes any option or similar right in respect of real
property, the usufruct of real property, and rights to
explore for or to exploit mineral deposits, sources, and
other natural resources. The reference to "rights to explore
for or to exploit mineral deposits, sources and other natural
resources" includes rights generating either variable or
fixed payments. The term "real property" does not include
ships and aircraft.
Unlike Article XIII A of the 1942 Convention, Article VI
does not contain an election to allow a resident of a Contracting State to compute tax on income from real property
situated in the other State on a net basis. Both the
Internal Revenue Code and the Income Tax Act of Canada
generally allow for net basis taxation with respect to real
estate rental income, although Canada does not permit such an
election for natural resource royalties. Also, unlike the
1942 Convention which in Article XI imposes a 15 percent
limitation on the source basis taxation of rental or royalty
income from real property, Article VI of the Convention
allows a Contracting State to impose tax on such income under
its internal law. In Canada the rate of tax on resource
royalties is 25 percent of the gross amount of the royalty,
if the income is not attributable to a permanent establishment in Canada under the Convention.
Article VII. BUSINESS PROFITS
Paragraph 1 provides that business profits of a resident
of a Contracting State are taxable only in that State unless
the resident carries on business in the other Contracting
State through a permanent establishment situated in that
other State. If the resident carries on, or has carried on,
business through such a permanent establishment, the other

-11State may tax such business profits but only so much of them
as are attributable to the permanent establishment. The
reference to a prior permanent establishment ("or has carried
on") makes clear that a Contracting State in which a
permanent establishment existed has the right to tax the
business profits attributable to that permanent establishment, even if there is a delay in the receipt or accrual of
such profits until after the permanent establishment has been
terminated.
Any business profits received or accrued in taxable
years in which the Convention has effect, in accordance with
Article XXX (Entry Into Force), which are attributable to a
permanent establishment that was previously terminated are
subject to tax in the Contracting State in which such
permanent establishment existed under the provisions of
Article VII.
Paragraph 2 provides that where a resident of either
Canada or the United States carries on business in the other
Contracting State through a permanent establishment in that
other State, both Canada and the United States shall
attribute to that permanent establishment business profits
which the permanent establishment might be expected to make
if it were a distinct and separate person engaged in the same
or similar activities under the same or similar conditions
and dealing wholly independently with the resident and with
any other person related to the resident. The term "related
to the resident" is to be interpreted in accordance with
paragraph 2 of Article IX (Related Persons). The reference
to other related persons is intended to make clear that the
test of paragraph 2 is not restricted to independence between
a permanent establishment and a home office.
Paragraph 3 provides that, in determining business
profits of a permanent establishment, there are to be allowed
as deductions those expenses which are incurred for the
purposes of the permanent establishment, including executive
and administrative expenses, whether incurred in the State in
which the permanent establishment is situated or in any other
State. However, nothing in the paragraph requires Canada or
the United States to allow a deduction for any expenditure
which would not generally be allowed as a deduction under its
taxation laws. The language of this provision, differs from
that of paragraph 1 of Article III of the 1942 Convention,
which states that in the determination of net industrial and
commercial profits of a permanent establishment there shall
be allowed as deductions "all expenses, wherever incurred" as
long as such expenses are reasonably allocable to the
permanent establishment. Paragraph 3 of Article VII of the
Convention is not intended to have any implications for

-12interpretation of the 1942 Convention, but is intended to
assure that under the Convention deductions are allowed by a
Contracting State which are generally allowable by that
State.
Paragraph 4 provides that no business profits are to be
attributed to a permanent establishment of a resident of a
Contracting State by reason of the use of the permanent
establishment for merely purchasing goods or merchandise or
merely providing executive, managerial, or administrative
facilities or services for the resident. Thus, if a company
resident in a Contracting State has a permanent establishment
in the other State, and uses the permanent establishment for
the mere performance of stewardship or other managerial
services carried on for the benefit of the resident, this
activity will not result in profits being attributed to the
permanent establishment.
Paragraph 5 provides that business profits are to be
attributed to a permanent establishment by the same method in
every taxable period unless there is good and sufficient
reason to change such method. In the United States, such a
change may be a change in accounting method requiring the
approval of the Internal Revenue Service.
Paragraph 6 explains the relationship between the
provisions of Article VII and other provisions of the
Convention. Where business profits include items of income
which are dealt with separately in other Articles of the
Convention, those other Articles are controlling.
Paragraph 7 provides a definition for the term
"attributable to." Profits "attributable to" a permanent
establishment are those derived from the assets or activities
of the permanent establishment. Paragraph 7 does not
preclude Canada or the United States from using appropriate
domestic tax law rules of attribution. The "attributable to"
definition does not, for example, preclude a taxpayer from
using the rules of section 1.864-4(c)(5) of the Treasury
Regulations to assure for U.S. tax purposes that interest
arising in the United States is attributable to a permanent
establishment in the United States. (Interest arising
outside the United States is attributable to a permanent
establishment in the United States based on the principles of
Regulations sections 1.864-5 and 1.864-6 and Revenue Ruling
75-253, 1975-2 C.B. 203.) Income that would be taxable under
the Code and that is "attributable to" a permanent establishment under paragraph 7 is taxable pursuant to Article VII,
however, even if such income might under the Code be treated
as fixed or determinable annual or periodical gains or income

-13not effectively connected with the conduct of a trade or
business within the United States. The "attributable to"
definition means that the limited "force-of-attraction" rule
of Code section 864(c)(3) does not apply for U.S. tax
purposes under the Convention.
Article VIII. TRANSPORTATION
Paragraph 1 provides that profits derived by a resident
of a Contracting State from the operation of ships or
aircraft in international traffic are exempt from tax in the
other Contracting State, even if, under Article VII (Business
Profits), such profits are attributable to a permanent
establishment. Paragraph 1 also provides that gains derived
by a resident of a Contracting State from the alienation of
ships or aircraft used principally in international traffic
are exempt from tax in the other Contracting State even if,
under Article XIII (Gains), those gains would be taxable in
that other State. These rules differ from Article V of the
1942 Convention, which conditions the exemption in the State
of source on registration of the ship or aircraft in the
other State.
Paragraph 2(a) provides that profits covered by paragraph 1 include profits from the rental of ships or aircraft
operated in international traffic. Such rental profits are
included whether the rental is on a time, voyage, or bareboat
basis, and irrespective of the State of residence of the
operator.
Paragraph 2(b) provides that profits covered by paragraph 1 include.profits derived from the use, maintenance or
rental of containers, including trailers and related equipment for the transport of containers, if such containers are
used in international traffic.
Paragraph 2(c) provides that profits covered by paragraph 1 include profits derived by a resident of a Contracting State from the rental of ships, aircraft, or containers
(including trailers and related equipment for the transport
of containers), even if not operated in international
traffic, as long as such profits are incidental to profits of
such person referred to in paragraphs 1, 2(a), or 2(b).
To the extent that profits described in paragraph 2
would also fall within Article XII (Royalties) (e.g., rent
from the lease of a container), the provisions of Article
VIII are controlling.
Paragraph 3 states that profits derived by a resident of
a Contracting State from a voyage of a ship where the
principal purpose of the voyage is to transport passengers or

-14property between points in the other Contracting State is
taxable in that other State, whether or not the resident
maintains a permanent establishment there. Paragraph 3 overrides the provisions of Article VII. Profits from such a
voyage do not qualify for exemption under Article VIII by
virtue of the definition of "international traffic" in paragraph 1(h) of Article III (General Definitions). However,
profits from a similar voyage by aircraft are taxable in the
Contracting State of source only if the profits are attributable to a permanent establishment maintained in that State.
Paragraph 4 provides that profits derived by a resident
of a Contracting State engaged in the operation of motor
vehicles or a railway as a common carrier or contract
carrier, and attributable to the transportation of passengers
or property between a point outside the other Contracting
State and any other point are exempt from tax in that other
State. In addition, profits of such a person from the rental
of motor vehicles (including trailers) or railway rolling
stock, or from the use, maintenance, or rental of containers
(including trailers and related equipment for the transport
of containers) used to transport passengers or property
between a point outside the other Contracting State and any
other point are exempt from tax in that other State.
Paragraph 5 provides that a resident of a Contracting
State that participates in a pool, a joint business, or an
international operating agency is subject to the provisions
of paragraphs 1, 3, and 4 with respect to the profits or
gains referred to in paragraphs 1, 3, and 4.
Paragraph 6 states that profits derived by a resident of
a Contracting State from the use, maintenance, or rental of
railway rolling stock, motor vehicles, trailers, or containers (including trailers and related equipment for the
transport of containers) used in the other Contracting State
for a period not expected to exceed 183 days in the aggregate
in any 12-month period are exempt from tax in that other
State except to the extent that the profits are attributable
to a permanent establishment, in which case the State of
source has the right to tax under Article VII. The provisions of paragraph 6, unlike the provisions of paragraph 4,
apply whether or not the resident is engaged in the operation
of motor vehicles or a railway as a common carrier or
contract carrier. Paragraph 6 overrides the provisions of
Article XII (Royalties), which would otherwise permit taxation in the State of source in the circumstances described.
Gains from the alienation of motor vehicles and railway
rolling stock derived by a resident of a Contracting State
are not affected by paragraph 4 or 6. Such gains would be

-15taxable in the other Contracting State, however, only if the
motor vehicles or rolling stock formed part of a permanent
establishment maintained there. See paragraphs 2 and 4 of
Article XIII.
Article IX. RELATED PERSONS
Paragraph 1 authorizes Canada and the United States, as
the case may be, to adjust the amount of income, loss, or tax
payable by a person with respect to arrangements between that
person and a related person in the other Contracting State.
Such adjustment may be made when arrangements between related
persons differ from those that would obtain between unrelated
persons. The term "person" encompasses a company resident in
a third State with, for example, a permanent establishment in
a Contracting State.
Paragraph 2 provides that, for the purposes of Article
IX, a person is deemed to be related to another person if
either participates directly or indirectly in the management
or control of the other or if any third person or persons
participate directly or indirectly in the management or
control of both. Thus, if a resident of any State controls
directly or indirectly a company resident in Canada and a
company resident in the United States, such companies are
considered to be related persons for purposes of Article IX.
Article IX and the definition of "related person" in paragraph 2 may encompass situations that would not be covered by
provisions in the domestic laws of the Contracting States.
Nor is the paragraph 2 definition controlling for the
definition of "related person" or similar terms appearing in
other Articles of the Convention. Those terms are defined as
provided in paragraph 2 of Article III (General Definitions).
Paragraph 3 provides that where, pursuant to paragraph
1, an adjustment is made or to be made by a Contracting
State, the other Contracting State shall make a corresponding
adjustment to the income, loss, or tax of the related person
in that other State, provided that the other State agrees
with the adjustment and, within six years from the end of the
taxable year of the person in the first State to which the
adjustment relates, the competent authority of the other
State has been notified in writing of the adjustment. The
reference to an adjustment which "is made or to be made" does
not require a Contracting State to formally propose an
adjustment before paragraph 3 becomes pertinent. The
notification required by paragraph 3 may be made by any of
the related persons involved or by the competent authority of
the State which makes or is to make the initial adjustment.
The notification must give details regarding the adjustment
sufficient to apprise the competent authority receiving the

-L6notification of the nature of the adjustment. If the
requirements of paragraph 3 are complied with, the corresponding adjustment will be made by the other Contracting
State notwithstanding any time or procedural limitations in
the domestic law of that State.
Paragraph 4 provides that in a case where the other
Contracting State has not been notified as provided in
paragraph 3 and if the person whose income, loss, or tax is
being adjusted has not received notification of the adjustment within five and one-half years from the end o£ its
taxable year to which the adjustment relates, such adjustment
shall not be made to the extent that the adjustment would
give rise to double taxation between the United States and
Canada. Again, the notification referred to in this
paragraph need not be a formal adjustment, but it must be in
writing and must contain sufficient details to permit the
taxpayer to give the notification referred to in paragraph 3.
If, for example, the Internal Revenue Service proposes
to make an adjustment to the income of a U.S. company
pursuant to Code section 482, and the adjustment involves an
allocation of income from a related Canadian company, the
competent authority of Canada must receive written notification of the proposed IRS adjustment within six years from
the end of the taxable year of the U.S. company to which the
adjustment relates. If such notification is not received in
a timely fashion and if"the U.S. company does not receive
written notification of the adjustment from the IRS within
5-1/2 years from the end of its relevant taxable year, the
IRS will unilaterally recede on the proposed section 482
adjustment to the extent that this adjustment would otherwise
give rise to double taxation between the United States and
Canada. The Internal Revenue Service will determine whether
and to what extent the adjustment would give rise to double
taxation with respect to income arising in Canada by
examining the relevant facts and circumstances such as the
amount of foreign tax credits attributable to Canadian taxes
paid by the U.S. company, including any carryovers and
credits for deemed paid taxes.
Paragraph 5 provides that neither a corresponding
adjustment described in paragraph 3 nor the cancelling of an
adjustment described in paragraph 4 will be made in any case
of fraud, willful default, neglect, or gross negligence on
the part of the taxpayer or any related person.
Paragraphs 3 and 4 of Article IX are exceptions to the
"saving clause" contained in paragraph 2 of Article XXIX
(Miscellaneous Rules), as provided in paragraph 3(a) of
Article XXIX. Paragraphs 3 and 4 of Article IX apply to

-17adjustments made or to be made with respect to taxable years
for which the Convention has effect as provided in paragraphs
2 and 5 of Article XXX (Entry Into Force).
Article X. DIVIDENDS
Paragraph 1 allows a Contracting State to impose tax on
its residents with respect to dividends paid by a company
which is a resident of the other Contracting State.
Paragraph 2 limits the amount of tax that may be imposed
on such dividends by the Contracting State in which the
company paying the dividends is resident if the beneficial
owner of the dividends is a resident of the other Contracting
State. The limitation is 10 percent of the gross amount of
the dividends if the beneficial owner is a company that owns
10 percent or more of the voting stock of the company paying
the dividends; and 15 percent of the gross amount of the
dividends in all other cases. Paragraph 2 does not impose
any restrictions with respect to taxation of the profits out
of which the dividends are paid.
Paragraph 3 defines the term "dividends," as the term is
used in this Article. Each Contracting State is permitted to
apply its domestic law rules for differentiating dividends
from interest and other disbursements.
Paragraph 4 provides that the limitations of paragraph 2
do not apply if the beneficial owner of the dividends carries
on business in the State in which the company paying the
dividends is a resident through a permanent establishment or
fixed base situated there, and the stockholding in respect of
which the dividends are paid is effectively connected with
such permanent establishment or fixed base. In such a case,
the dividends are taxable pursuant to the provisions of
Article VII (Business Profits) or Article XIV (Independent
Personal Services), as the case may be. Thus, dividends paid
in respect of holdings forming part of the assets of a
permanent establishment or fixed base or which are otherwise
effectively connected with such permanent establishment or
fixed base (i.e., dividends attributable to the permanent
establishment or fixed base) will be taxed on a net basis
using the rates and rules of taxation generally applicable to
residents of the State in which the permanent establishment
or fixed base is situated.
Paragraph 5 imposes limitations on the right of Canada
or the United States, as the case may be, to impose tax on
dividends paid by a company which is a resident of the other
Contracting State. The State in which the company is not
resident may not tax such dividends except insofar as they

-18are paid to a resident of that State or the holding in
respect of which the dividends are paid is effectively
connected with a permanent establishment or fixed base in
that State. In the case of the United States, such dividends
may also be taxed in the hands of a U.S. citizen and certain
former citizens, pursuant to the "saving clause" of paragraph
2 of Article XXIX (Miscellaneous Rules). In addition, the
Contracting State in which the company is not resident may
not subject such company's undistributed profits to any tax.
See, however, paragraphs 6, 7, and 8 which, in certain
circumstances, qualify the rules of paragraph 5. Neither
paragraph 5 nor any other provision of the Convention
restricts the ability of the United States to apply the
provisions of the Code concerning foreign personal holding
companies and controlled foreign corporations.
Paragraph 6 provides that, notwithstanding paragraph 5,
a Contracting State in which is maintained a permanent
establishment or permanent establishments of a company
resident in the other Contracting State may impose tax on
such company's earnings, in addition to the tax that would be
charged on the earnings of a company resident in that State.
The additional tax may not, however, exceed 10 percent of the
amount of the earnings which have not been subjected to such
additional tax in previous taxation years. Thus, Canada,
which has a branch profits tax in force, may impose that tax
up to the 10 percent limitation in the case of a United
States company with one or more permanent establishments in
Canada. This branch profits tax may be imposed notwithstanding other rules of the Convention, including paragraph 6
of Article XXV (Non-Discrimination).
For purposes of paragraph 6, the term "earnings" means
the excess of business profits attributable to all permanent
establishments for a year and previous years over the sum of:
a) business losses attributable to such permanent establishments for such years; b) all taxes on profits, whether or not
covered by the Convention (e.g., provincial taxes on profits
and provincial resource royalties (which Canada considers
"taxes") in excess of the mineral resource allowance provided
for under the law of Canada), other than the additional tax
referred to in paragraph 6; c) profits reinvested in such
State; and d) $500,000 (Canadian, or its equivalent in U.S.
dollars) less any amounts deducted under paragraph 6(d) with
respect to the same or a similar business by the company or
an associated company. The deduction under paragraph 6(d) is
available as of the first year for which the Convention has
effect, regardless of the prior earnings and tax expenses, if
any, of the permanent establishment. The $500,000 deduction
is taken into account after other deductions, and is
permanent. For the purpose of paragraph 6, references to

-19business profits and business losses include gains and losses
from the alienation of property forming part of the business
property of a permanent establishment. The term "associated
company" includes a company which directly or indirectly
controls another company or two companies directly or
indirectly controlled by the same person or persons, as well
as any two companies that deal with each other not at arm's
length. This definition differs from the definition of
"related persons" in paragraph 2 of Article IX (Related
Persons).
Paragraph 7 provides that, notwithstanding paragraph 5,
a Contracting State that does not impose a branch profits tax
as described in paragraph 6 (i.e., under current law, the
United States) may tax a dividend paid by a company which is
a resident of the other Contracting State if at least 50
percent of the company's gross income from all sources was
included in the computation of business profits attributable
to one or more permanent establishments which such company
had in the first-mentioned State. The dividend subject to
such a tax must, however, be attributable to profits earned
by the company in taxable years beginning after September 26,
1980 and the 50 percent test must be met for the three-year
period preceding the taxable year of the company in which the
dividend is declared (including years ending on or before
September 26, 1980) or such shorter period as the company had
been in existence prior to that taxable year. Dividends will
be deemed to be distributed, for purposes of paragraph 7,
first out of profits of the taxation year of the company in
which the distribution is made and then out of the profits of
the preceding year or years of the company. Paragraph 7
provides further that if a resident of the other Contracting
State is the beneficial owner of such dividends, any tax
imposed under paragraph 7 is subject to the 10 or 15 percent
limitation of paragraph 2 or the rules of paragraph 4
(providing for dividends to be taxed as business profits or
income from independent personal services), as the case may
be.
Paragraph 8 provides that, notwithstanding paragraph 5,
a company which is a resident of Canada and which, absent the
provisions of the Convention, has income subject to tax by
the United States may be liable for the United States
accumulated earnings tax and personal holding company tax.
These taxes can be applied, however, only if 50 percent or
more in value of the outstanding voting shares of the company
is owned, directly or indirectly, throughout the last half of
its taxable year by residents of a third State or by citizens
or residents of the United States, other than citizens of
Canada who are resident in the United States but who either
do not have immigrant status in the United States or who have

-20not been resident in the United States for more than three
taxable years. The accumulated earnings tax is applied to
accumulated taxable income calculated without the benefits of
the Convention. Similarly, the personal holding company tax
is applied to undistributed personal holding company income
computed as if the Convention had not come into force.
Article X does not apply to dividends paid by a company
which is not a resident of either Contracting State. Such
dividends, if they are income of a resident of one of the
Contracting States, are subject to tax as provided in Article
XXII (Other Income).
Article XI. INTEREST
Paragraph 1 allows interest arising in Canada or the
United States and paid to a resident of the other State to be
taxed in the latter State. Paragraph 2 provides that such
interest may also be taxed in the Contracting State where it
arises, but if a resident of the other Contracting State is
the beneficial owner, the tax imposed by the State of source
is limited to 15 percent of the gross amount of the interest.
Paragraph 3 provides a number of exceptions to the right
of the source State to impose a 15 percent tax under paragraph 2. The following types of interest beneficially owned
by a resident of a Contracting State are exempt from tax in
the State of source: a) interest beneficially owned by a Contracting State, a political subdivision, or a local authority
thereof, or an instrumentality of such State, subdivision, or
authority, which interest is not subject to tax by such
State; b) interest beneficially owned by a resident of a Contracting State and paid with respect to debt obligations
issued at arm's length which are guaranteed or insured by
such State or a political subdivision thereof, or by an
instrumentality of such State or subdivision (not by a local
authority or an instrumentality thereof), but only if the
guarantor or insurer is not subject to tax by that State; c)
interest paid by a Contracting State, a political subdivision, or a local authority thereof, or by an instrumentality of such State, subdivision, or authority, but only
if the payor is not subject to tax by such State; and d)
interest beneficially owned by a seller of equipment,
merchandise, or services, but only if the interest is paid in
connection with a sale on credit of equipment, merchandise,
or services and the sale was made at arm's length. Whether
such a transaction is made at arm's length'will be determined
in the United States under the facts and circumstances. The
relationship between the parties is a factor, but not the
only factor, taken .into account in making this determination.
Furthermore, interest paid by a company resident in the other

-21Contracting state with respect to an obligation entered into
before September 26, 1980 is exempt from tax in the State of
source (irrespective of the State of residence of the
beneficial owner), provided that such interest would have
been exempt from tax in the Contracting State of source under
Article XII of the 1942 Convention. Thus, interest paid by a
United States corporation whose business is not managed and
controlled in Canada to a recipient not resident in Canada or
to a corporation not managed and controlled in Canada would
be exempt from Canadian tax as long as the debt obligation
was entered into before September 26, 1980. The phrase "not
subject to tax by that . . . State" in paragraph 3(a), (b),
and (c) refers to taxation at the Federal levels of Canada
and the United States.
The phrase "obligation entered into before the date of
signature of this Convention" means: (1) any obligation under
which funds were dispersed prior to September 26, 1980; (2)
any obligation under which funds are dispersed on or after
September 26, 1980, pursuant to a written contract binding
prior to and on such date, and at all times thereafter until
the obligation is satisfied; or (3) any obligation with
respect to which, prior to September 26, 1980, a lender had
taken every action to signify approval under procedures
ordinarily employed by such lender in similar transactions
and had sent or deposited for delivery to the person to whom
the loan is to be made written evidence of such approval in
the form of a document setting forth, or referring to a
document sent by the person to whom the loan is to be made
that sets forth, the principal terms of such loan.
Paragraph 4 defines the term "interest," as used in
Article XI, to include, among other things, debt claims of
every kind as well as income assimilated to income from money
lent by the taxation laws of the Contracting State in which
the income arises. In no event, however, is income dealt
with in Article X (Dividends) to be considered interest.
Paragraph 5 provides that neither the 15 percent limitation on tax in the Contracting State of source provided in
paragraph 2 nor the various exemptions from tax in such State
provided in paragraph 3 apply if the beneficial owner of the
interest is a resident of the other Contracting State carrying on business in the State of source through a permanent
establishment or fixed base, and the debt claim in respect of
which the interest is paid is effectively connected with such
permanent establishment or fixed base (i.e., the interest is
attributable to the permanent establishment or fixed base).
In this case, interest income is to be taxed in the Contracting State of source as business profits — that is, on a net
basis.

-22-

Paragraph 6 establishes the source of interest for
purposes of Article XI. Interest is considered to arise in a
Contracting State if the payer is that State, or a political
subdivision, local authority, or resident of that State.
However, in cases where the person paying the interest,
whether a resident of a Contracting State or of a third
State, has in a State other than that of which he is a
resident a permanent establishment or fixed base in connection with which the indebtedness on which the interest was
paid was incurred, and such interest is borne by the
permanent establishment or fixed base, then such interest is
deemed to arise in the State in which the permanent establishment or fixed base is situated and not in the State of
the payer's residence. Thus, pursuant to paragraphs 6 and 2,
and Article XXII (Other Income), Canadian tax will not be
imposed on interest paid to a U.S. resident by a company
resident in Canada if the indebtedness is incurred in
connection with, and the interest is borne by, a permanent
establishment of the company situated in a third State.
"Borne by" means allowable as a deduction in computing
taxable income.
Paragraph 7 provides that in cases involving special
relationships between persons Article XI does not apply to
amounts in excess of the amount which would have been agreed
upon between persons having no special relationship; any such
excess amount remains taxable according to the laws of Canada
and the United States, consistent with any revelant provisions of the Convention.
Paragraph 8 restricts the right of a Contracting State
to impose tax on interest paid by a resident of the other
Contracting State. The first State may not impose any tax on
such interest except insofar as the interest is paid to a
resident of that State or arises in that State or the debt
claim in respect of which the interest is paid is effectively
connected with a permanent establishment or fixed base
situated in that State. Thus, pursuant to paragraph 8 the
United States has agreed not to impose tax on certain
interest paid by Canadian companies to persons not resident
in the United States, to the extent that such companies would
pay U.S. source interest under Code section 861(a)(1)(C) but
not under the source rule of paragraph 6. It is to be noted
that paragraph 8 is subject to the "saving clause" of
paragraph 2 of Article XXIX (Miscellaneous Rules), so the
United States may in all events impose its tax on interest
received by U.S. citizens.

-23-

Article XII. ROYALTIES
Generally speaking, under the 1942 Convention royalties,
including royalties with respect to motion picture films,
which are derived by a resident of one Contracting State from
sources within the other Contracting State are taxed at a
maximum rate of 15 percent in the latter State; copyright
royalties are exempt from tax in the State of source, if the
resident does not have a permanent establishment in that
State. See Articles II, III, XIII C, and paragraph 1 of
Article XI of the 1942 Convention, and paragraph 6(a) of the
Protocol to the 1942 Convention.
Paragraph 1 of Article XII of the Convention provides
that a Contracting State may tax its residents with respect
to royalties arising in the other Contracting State.
Paragraph 2 provides that such royalties may also be taxed in
the Contracting State in which they arise, but that if a
resident of the other Contracting State is the beneficial
owner of the royalties the tax in the Contracting State of
source is limited to 10 percent of the gross amount of the
royalties. Paragraph 3 provides that, notwithstanding
paragraph 2, copyright royalties and other like payments in
respect of the production or reproduction of any literary,
dramatic, musical, or artistic work, including royalties from
such works on videotape cassettes for private (home) use, if
beneficially owned by a resident of the other Contracting
State, may not be taxed by the Contracting State of source.
This exemption at source does not apply to royalties in
respect of motion picture films and works on film or
videotape for use in connection with television broadcasting.
Such royalties are subject to tax at a maximum rate of 10
percent in the Contracting State in which they arise, as
provided in paragraph 2 (unless the provisions of paragraph
5, described below, apply).
Paragraph 4 defines the term "royalties" for purposes of
Article XII. "Royalties" means payments of any kind received
as consideration for the use of or the right to use any copyright of literary, artistic, or scientific work, including
motion picture films and works on film or videotape for
private (home) use or for use in connection with television
broadcasting, any patent, trademark, design or model, plan,
secret formula or process, or any payment for the use of or
the right to use tangible personal property or for information concerning industrial, commercial, or scientific
experience. The term "royalties" also includes gains from
the alienation of any intangible property or rights described
in paragraph 4 to the extent that such gains are contingent
on the productivity, use, or subsequent disposition of such

-24intangible property or rights. Thus, a guaranteed minimum
payment derived from the alienation of (but not the use of)
any right or property described in paragraph 4 is not a
"royalty." Any amounts deemed contingent on use by reason of
Code section 871(e) are, however, royalties under paragraph 2
of Article III (General Definitions), subject to Article XXVI
(Mutual Agreement Procedure). The term "royalties" does not
encompass management fees, which are covered by the
provisions of Article VII (Business Profits) or XIV
(Independent Personal Services), or payments under a bona
fide cost-sharing arrangement. Technical service fees may be
royalties in cases where the fees are periodic and dependent
upon productivity or a similar measure.
Paragraph 5 provides that the 10 percent limitation on
tax in the Contracting State of source provided by paragraph
2, and the exemption in the Contracting State of source for
certain copyright royalties provided by paragraph 3, do not
a
PPly if t n e beneficial owner of the royalties carries on
business in the State of source through a permanent establishment or fixed base and the right or property in respect
of which the royalties are paid is effectively, connected with
such permanent establishment or fixed base (i.e., the
royalties are attributable to the permanent establishment or
fixed base). In that event, the royalty income would be
taxable under the provisions of Article VII (Business
Profits) or XIV (Independent Personal Services), as the case
may be.
Paragraph 6 establishes rules to determine the source of
royalties for purposes of Article XII. The first rule is
that royalties arise in a Contracting State when the payer is
that State, or a political subdivision, local authority, or
resident of that State. Notwithstanding that rule, royalties
arise not in the State of the payer's residence but in any
State, whether or not a Contracting State, in which is
situated a permanent establishment or fixed base in connection with which the obligation to pay royalties was incurred,
if such royalties are borne by such permanent establishment
or fixed base. Thus, royalties paid to a resident of the
United States by a company resident in Canada for the use of
property in a third State will not be subject to tax in
Canada if the obligation to pay the-royalties is incurred in
connection with, and the royalties are borne by, a permanent
establishment of the company in a third State. "Borne by"
means allowable as a deduction in computing taxable income.
A third rule, which overrides both the residence rule
and the permanent establishment rule just described, provides
that royalties for the use of intangible property or tangible
personal property arise in the Contracting State in which

-25such property is used. Thus, consistent with the provisions
of Code section 861(a)(4), if a resident of a third State
pays royalties to a resident of Canada for the right to use
intangible property in the United States, such royalties are
considered to arise in the United States and are subject to
taxation by the United States consistent with the Convention.
Similarly, if a resident of Canada pays royalties to a
resident of a third State, such royalties are considered to
arise in the United States and are subject to U.S. taxation
if they are for the right to use intangible property in the
United States. The term "intangible property" encompasses
all the items described in paragraph 4, other than tangible
personal property.
Paragraph 7 provides that in cases involving special
relationships between persons the benefits of Article XII do
not apply to amounts in excess of the amount which would have
been agreed upon between persons with no special relationship; any such excess amount remains taxable according to the
laws of Canada and the United States, consistent with any
relevant provisions of the Convention.
Paragraph 8 restricts the right of a Contracting State
to impose tax on royalties paid by a resident of the other
Contracting State. The first State may not impose any tax on
such royalties except insofar as they arise in that State or
they are paid to a resident of that State or the right or
property in respect of which the royalties are paid is
effectively connected with a permanent establishment or fixed
base situated in that State. This rule parallels the rule in
paragraph 8 of Article XI (Interest) and paragraph 5 of
Article X (Dividends). Again, U.S. citizens remain subject
to U.S. taxation on royalties received despite this rule, by
virtue of paragraph 2 of Article XXIX (Miscellaneous Rules).
Article XIII. GAINS
Paragraph 1 provides that Canada and the United States
may each tax gains from the alienation of real property
situated within that State which are derived by a resident of
the other Contracting State. The term "real property" is
defined for this purpose in paragraph 2 of Article VI (Income
From Real Property).
The term "alienation" used in
paragraph 1 and other paragraphs of Article XIII means sales,
exchanges and other dispositions or deemed dispositions
(e.g., change of use, gifts, death) that are taxable events
under the taxation laws of the Contracting State applying the
provisions of the Article.
Paragraph 2 of Article XIII provides that the Contracting State in which a resident of the other Contracting State
"has or had" a permanent establishment or fixed base may tax

-26gains from the alienation of personal property constituting
business property if such gains are attributable to such
permanent establishment or fixed base. Unlike paragraph 1 of
Article VII (Business Profits), paragraph 2 limits the right
of the source State to tax such gains to a twelve-month
period following the termination of the permanent establishment or fixed base.
Paragraph 3 authorizes the Contracting State of source
to tax gains derived from the alienation of certain stock and
other interests, if such interests ultimately reflect value
derived from real property situated in that State. The right
to tax in the State of source applies when there is an
alienation of either shares forming part of a substantial
interest in the capital stock of a company which is not a
resident of the taxpayer's State of residence, or an interest
in a partnership, trust, or estate, but only if the value of
such shares or interest, as the case may be, is derived
principally from real property in the Contracting State of
source. The term "principally" means more than 50 percent.
The right accorded to the State of source depends, however,
on the domestic law in force in the Contracting State of
residence. Thus, if at the time of alienation the latter
State does not, by reason of its domestic law, impose tax
upon gains derived from the alienation of a class of shares
or interests (such as shares in companies which are not
residents of that State), then the State of source may not
impose tax in reciprocal circumstances.
Subparagraph (c) of paragraph 3 provides that the term
"real property" as used in the paragraph, does not include
property — other than mines, oil or gas wells, rental
property, or property used for agriculture or forestry — in
which a business is carried on. The term does include the
shares of a company which derive their value principally from
real property (wherever located) and an interest in a
partnership, trust, or estate the direct disposition of which
would be subject to tax under the paragraph. Thus, taxation
in the Contracting State of source is preserved through
several tiers of entities if the value of the shares or
interest alienated is ultimately dependent principally upon
real property in that State.
A "substantial interest" exists only if, on or after the
effective date of the Convention provided in Article XXX
(Entry Into Force), the resident and any persons related to
him own 10 percent or more of the shares of any class of the
capital stock of a company. It is the intention that once a
"substantial interest" exists, all stock that is part of such
"substantial interest" is covered by paragraph 3, even if the
percentage of ownership declines to less than 10 percent.

-27The term "related persons" is not defined by the rules of
Article- IX (Related Persons); rather, the term is defined
pursuant to paragraph 2 of Article III (General Definitions).
Paragraph 4 reserves to the Contracting State of
residence the sole right to tax gains from the alienation of
any property other than property referred to in paragraphs 1,
2, and 3.
Paragraph 5 states that, despite paragraph 4, a
Contracting State may impose tax on gains derived by an
individual who is a resident of the other Contracting State
if such individual was a resident of the first-mentioned
State for 120 months (whether or not consecutive) during any
period of 20 consecutive years, and was a resident of that
State at any time during the 10-year period immediately
preceding the alienation of the property.
Paragraph 6 provides a rule to coordinate Canadian and
United States taxation of gains from the alienation of a
principal residence situated in Canada. An individual (not a
citizen of the United States) who was a resident of Canada
and becomes a resident of the United States may determine his
liability for U.S. income tax purposes in respect of gain
from the alienation of a principal residence in Canada owned
by him at the time he ceased to be a resident of Canada by
claiming an adjusted basis for such residence in an amount no
less than the fair market value of the residence at that
time. Under paragraph 2(b) of Article XXX, the rule of
paragraph 6 applies to gains realized for U.S. income tax
purposes in taxable years beginning on or after the first day
of January next following the date when instruments of
ratification are exchanged, even if a particular individual
described in paragraph 6 ceased to be a resident of Canada
prior to such date. Paragraph 6 supplements any benefits
available to a taxpayer pursuant to the provisions of Code
section 1034.
Paragraph 7 provides a rule to coordinate U.S. and
Canadian taxation of gains in circumstances where an
individual is subject to tax in both Contracting States and
one Contracting State deems a taxable alienation of property
by such person to have occurred, while the other Contracting
State at that time does not find a realization or recognition
of income and thus defers, but does not forgive, taxation.
In such a case the individual may elect in his annual return
of income for the year of such alienation to be liable to tax
in the latter Contracting State as if he had sold and
repurchased the property for an amount equal to its fair
market value at a time immediately prior to the deemed
alienation. The provision would, for example, apply in the

-28case of a gift by a U.S. citizen or a U.S. resident
individual which Canada deems to be an income producing event
for its tax purposes but with respect to which the United
States defers taxation while assigning the donor's basis to
the donee. The provision would also apply in the case of a
U.S. citizen who, for Canadian tax purposes, is deemed to
recognize income upon his departure from Canada, but not to a
Canadian resident (not a U.S. citizen) who is deemed to
recognize such income. The rule does not apply in the case
of death, although Canada also deems that to be a taxable
event, because the United States in effect forgives income
taxation of economic gains at death. If in one Contracting
State there are losses and gains from deemed alienations of
different properties, then paragraph 7 must be applied consistently in the other Contracting State within the taxable
period with respect to all such properties. Paragraph 7 only
applies, however, if the deemed alienations of the properties
result in a net gain.
Paragraph 8 concerns the coordination of Canadian and
U.S. rules with respect to the recognition of gain on
corporate organizations, reorganizations, amalgamations,
divisions, and similar transactions. Where a resident of a
Contracting State alienates property in such a transaction,
and profit, gain, or income with respect to such alienation
is not recognized for income tax purposes in the Contracting
State of residence, the competent authority of the other
Contracting State may agree, pursuant to paragraph 8, if
requested by the person who acquires the property, to defer
recognition of the profit, gain, or income with respect to
such property for income tax purposes. This deferral shall
be for such time and under such other conditions as are
stipulated between the person who acquires the property and
the competent authority. The agreement of the competent
authority of the State of source is entirely discretionary
and will be granted only to the extent necessary to avoid
double taxation of income. This provision means, for
example, that the United States competent authority may agree
to defer recognition of gain with respect to a transaction if
the alienator would otherwise recognize gain for U.S. tax
purposes and would not recognize gain under Canada's law.
The provision only applies, however, if alienations described
in paragraph 8 result in a net gain. In the absence of
extraordinary circumstances the provisions of the paragraph
must be applied consistently within a taxable period with
respect to alienations described in the paragraph that take
place within that period.
Paragraph 9 provides a transitional rule reflecting the
fact that under Article VIII of the 1942 Convention gains
from the sale or exchange of capital assets are exempt from

-29taxation in the State of source provided the taxpayer had no
permanent establishment in that State. Paragraph 9 applies
to property that on September 26, 1980 was owned by a
resident of the other Contracting if it did not form part of
the business property of a permanent establishment or pertain
to a fixed base in the State of source. Paragraph 9 applies
to deemed dispositions. In addition, paragraph 9 applies to
a gain described in paragraph 1, even though such gain is
also income within the meaning of paragraph 3 of Article VI.
Paragraph 9 provides that where a resident of Canada or
the United States is subject to tax pursuant to Article XIII
in the other Contracting State on g a m s from the alienation
of property, the amount of the gain shall be reduced for tax
purposes in that other State by the amount of the gain
attributable to the period during which the property was held
up to and including December 31 of the year in which the
documents of ratification are exchanged. The gain attributable to such period is normally determined by dividing the
total gain by the number of full calendar months the property
was held by such person, including, in the case of property
having a carryover basis, the number of months in which a
predecessor in interest held the property, and multiplying
such monthly amount by the number of full calendar months
ending on or before December 31 of the year in which the
instruments of ratification are exchanged. In a case
where property with a carryover basis is alienated after
September 26, 1980, paragraph 9 applies to the alienator if
at the time he sells or exchanges the property he is a person
entitled to the benefits of paragraph 9 and his basis in the
property is carried over from that of a person who, on
September 26, 1980, would have been entitled to claim
exemption at source under the 1942 Convention had he sold
the property at that time.
Upon a clear showing, however, a taxpayer may prove that
a greater portion of the gain was attributable to the specified period.
Thus, in the United States the fair market
value of the alienated property at the treaty valuation date
may be established under paragraph 9 in the manner and with
the evidence that is generally required by U.S. Federal
income, estate, and gift tax regulations. For this purpose a
taxpayer may use valid appraisal techniques for valuing real
estate such as the comparable sales approach (see Rev. Proc.
79-24, 1979-1 C.B. 565), and the reproduction cost approach.
If more than one property is alienated in a single transaction each property will be considered individually.
A taxpayer who desires to make this alternate showing
for U.S. tax purposes must so indicate on his U.S. income tax
return for the year of the sale or exchange and must attach

-30to the return a statement describing the relevant evidence.
The U.S. competent authority or his authorized delegate will
determine whether the taxpayer has satisfied the requirements
of paragraph 9.
U.S. residents, citizens and former citizens remain
subject to U.S. taxation on gains as provided by the Code
notwithstanding the provisions of Article XIII, other than
paragraphs 6 and 7. See paragraphs 2 and 3(a) of Article
XXIX (Miscellaneous Rules).
>

Article XIV. INDEPENDENT PERSONAL SERVICES
Article XIV concerns the taxation of income derived by
an individual in respect of the performance of independent
personal services. Such income may be taxed in the Contracting State of which such individual is a resident. It may
also be taxed in the other Contracting State if the
individual has or had a fixed base regularly available to him
in the other State for the purpose of performing his
activities, but only to the extent that the income is
attributable to that fixed base. The use of the term "has or
had" ensures that a Contracting State in which a fixed base
existed has the right to tax income attributable to that
fixed base even if there is a delay between the termination
of the fixed base and the receipt or accrual of such income.
Unlike Article VII of the 1942 Convention, which
provides a limited exemption from tax at source on income
from independent personal services, Article XIV does not
restrict the exemption to persons present in the State of
source for fewer than 184 days. Furthermore, Article XIV
does not allow the $5,000 exemption at source of the 1942
Convention, which was available even if services were
performed through a fixed base. However, Article XIV
provides complete exemption at source if a fixed base does
not exist.
Article XV. DEPENDENT PERSONAL SERVICES
Paragraph 1 provides that, in general, salaries, wages,
and other similar remuneration derived by a resident of a
Contracting State in respect of an employment are taxable
only in that State unless the employment is exercised in the
other Contracting State. If the employment is exercised in
the other Contracting State, the entire remuneration derived
therefrom may be taxed in that other State but only if, as
provided by paragraph 2, the recipient is present in the
other State for a period or periods exceeding 183 days in the
calendar year, or the remuneration is borne by an employer
who is a resident of that other State or by a permanent

-31establishment or fixed base which the employer has in that
other State. However, in all cases where the employee earns
$10,000 or less in the currency of the State of source, such
earnings are exempt from tax in that State. "Borne by" means
allowable as a deduction in computing taxable income. Thus,
if a Canadian resident individual employed at the Canadian
permanent establishment of a U.S. company performs services
in the United States, the income earned by the employee from
such services is not exempt from U.S. tax under paragraph 1
if such income exceeds $10,000 (U.S.) because the U.S.
company is entitled to a deduction for such wages in
computing its taxable income.
Paragraph 3 provides that a resident of a Contracting
State is exempt from tax in the other Contracting State with
respect to remuneration derived in respect of an employment
regularly exercised in more than one State on a ship,
aircraft, motor vehicle, or train operated by a resident of
the taxpayer's State of residence. The word "regularly" is
intended to distinguish crew members from persons occasionally employed on a ship, aircraft, motor vehicle, or
train. Only the Contracting State of which the employee and
operator are resident has the right to tax such remuneration.
However, this provision is subject to the "saving clause" of
paragraph 2 of Article XXIX (Miscellaneous Rules), which
permits the United States to tax its citizens despite
paragraph 3.
Article XV states that its provisions are overridden
by the more specific rules of Article XVIII (Pensions and
Annuities) and Article XIX (Government Services).
Article XVI. ARTISTES AND ATHLETES
Article XVI concerns income derived by a resident of a
Contracting State as an entertainer, such as a theatre,
motion picture, radio, or television artiste, or a musician,
or as an athlete, from his personal activities as such
exercised in the other Contracting State. Article XVI
overrides Articles XIV (Independent Personal Services) and XV
(Dependent personal Services) to allow source basis taxation
of an entertainer or athlete in cases where the latter
Articles would not permit such taxation. Thus, paragraph 1
provides that certain income of an entertainer or athlete may
be taxed in the State of source in all cases where the amount
of gross receipts derived by the entertainer or athlete,
including expenses reimbursed to him or borne on his behalf,
exceeds $15,000 in the currency of that other State for the
calendar year concerned. For example, where a resident of
Canada who is an entertainer derives income from his personal
activities as an entertainer in the United States, he is

-32taxable in the United States on all such income in any case
where his gross receipts are greater than $15,000 for the
calendar year. Article XVI does not restrict the right of
the State of source to apply the provisions of Articles XIV
and XV. Thus, an entertainer or athlete resident in a
Contracting State and earning $14,000 in wages borne by a
permanent establishment in the other State may be taxed in
the other State as provided in Article XV.
Paragraph 2 provides that where income in respect of
personal activities exercised by an entertainer or an athlete
accrues not to the entertainer or athlete himself but to
another person, that income may, notwithstanding the
provisions of Article VII (Business Profits), Article XIV,
and Article XV, be taxed in the Contracting State in which
the activities are exercised. The anti-avoidance rule of
paragraph 2 does not apply if it is established by the
entertainer or athlete that neither he nor persons related to
him participate directly or indirectly in the profits of the
other person in any manner, including the receipt of deferred
remuneration, bonuses, fees, dividends, partnership distributions, or other distributions.
Thus, if an entertainer who is a resident of Canada is
under contract with a company and the arrangement between the
entertainer and the company provides for payments to the
entertainer based on the profits of the company, all of the
income of the company attributable to the performer's U.S.
activities may be taxed in the United States irrespective of
whether the company maintains a permanent establishment in
the United States. Paragraph 2 does not affect the rule of
paragraph 1 that applies to the entertainer or athlete
himself.
Paragraph 3 provides that Article XVI does not apply to
the income of an athlete in respect of an employment with a
team which participates in a league with regularly scheduled
games in both Canada and the United States. Such an athlete
is entitled to the benefits of Article XV (Dependent Personal
Services). Thus, the athlete's remuneration would be exempt
from tax in the Contracting State of source if he is a
resident of the other Contracting State and earns $10,000 or
less in the currency of the State of source, or if he is
present in that State for a period or periods not exceeding
in the aggregate 183 days in the calendar year, and his
remuneration is not borne by a resident of that State or a
permanent establishment or fixed base in that State.
Paragraph 3 does not affect the taxation of the employer of
an athlete covered by the paragraph. The employer is taxable
pursuant to other articles of the Convention, such as Article
VII.

-33Article XVII.

WITHHOLDING OF TAXES IN RESPECT OF INDEPENDENT
PERSONAL SERVICES

Article XVII confirms that a Contracting State may
require withholding of tax on account of tax liability with
respect to remuneration paid to an individual who is a resident of the other Contracting State, including an entertainer
or athlete, in respect of the performance of independent
personal services in the first-mentioned State. However,
withholding with respect to the first $5,000 (in the currency
of the State of source) of such remuneration paid in that
taxable year by each payor shall not exceed 10 percent of
such payment. In the United States, the withholding
described in paragraph 1 relates to withholding with respect
to income tax liability and does not relate to withholding
with respect to other taxes, such as social security taxes.
Nor is the paragraph intended to suggest that withholding in
circumstances not specifically mentioned, such as withholding
with respect to dependent personal services, is precluded by
the Convention.
Paragraph 2 provides that in any case where the
competent authority of Canada or the United States believes
that withholding with respect to remuneration for the
performance of independent personal services is excessive in
relation to the estimated tax liability of an individual to
that State for a taxable year, it may determine that a lesser
amount will be deducted .or withheld. Paragraph 2 may thus
result in a lesser withholding than the maximum authorized by
paragraph 1.
Paragraph 3 states that the provisions of Article XVII
do not affect the liability of a resident of a Contracting
State for taxes imposed by the other Contracting State. The
Article deals only with the method of collecting taxes and
not with substantive tax liability.
Article XVIII A of the 1942 Convention authorizes the
issuance of regulations to specify circumstances under which
residents of the United States temporarily performing
personal services in Canada may be exempted from deduction
and withholding of United States tax. This provision is
omitted from the Convention as unnecessary. The Code and
regulations provide sufficient authority to avoid excessive
withholding of U.S. income tax.
Article XVIII. PENSIONS AND ANNUITIES
Paragraph 1 provides that a resident of a Contracting
State is taxable in that State with respect to pensions and
annuities arising in the other Contracting State. However,

-34the amount of any pension included in such person's income is
not to exceed the amount that would be included if the person
were a resident of the Contracting State in which the pension
arises. Paragraph 1 imposes no such restriction with respect
to the 'amount that may be taxed in the State of residence in
the case of annuities.
Paragraph 2 provides rules with respect to the taxation
of pensions and annuities in the Contracting State in which
they arise. If the beneficial owner of a periodic pension
payment is a resident of the other Contracting State, the tax
imposed in the State of source is limited to 15 percent of
the gross amount of such payment. Thus, the State of source
is not required to allow a deduction or exclusion for a
return of capital to the pensioner, but its tax is limited in
amount in the case of a periodic payment. Other pension
payments may be taxed in the State of source without limit.
In the case of annuities beneficially owned by a
resident of a Contracting State, the Contracting State of
source is limited to a 15 percent tax on the portion of the
payment that is liable to tax in that State under its
taxation laws.
Paragraph 3 defines the term "pensions" for purposes of
the Convention to include any payment under a superannuation,
pension, or retirement plan, Armed-Forces retirement pay, war
veterans pensions and allowances, and amounts paid under a
sickness, accident, or disability plan. Thus, the term
"pension" includes pensions paid by private employers as well
as any pension paid by a Contracting State in respect of
services rendered to that State. A pension for government
service is covered. The term "pensions" does not include
payments under an income averaging annuity contract or
benefits paid under social security legislation. The latter
benefits are taxed, pursuant to paragraph 5, only in the
Contracting State paying the benefit. Income derived from an
income averaging annuity contract is taxable pursuant to the
provisions of Article XXII (Other Income).
Paragraph 4 provides that, for purposes of the Convention, the term "annuities" means a stated sum paid
periodically at stated times during life or during a
specified number of years, under an obligation to make
payments in return for adequate and full consideration other
than services rendered. The term does not include a payment
that is not periodic or any annuity the cost of which was
deductible for tax purposes in the Contracting State where
the annuity was acquired. Items excluded from the definition
of "annuities" are subject to the rules of Article XXII.

-35Paragraph 5 provides that benefits under social security
legislation in Canada or the United States paid to a resident
of the other Contracting State or to a citizen of the United
States are taxable only in the Contracting State paying the
benefit. Paragraph 5 encompasses benefits paid under social
security legislation of a political subdivision, such as a
province of Canada.
Paragraph 6 provides that only the State of which a
person is resident has the right to tax alimony and other
similar amounts (including child support payments) arising in
the other Contracting State and paid to such person.
However, the amount included in income for purposes of
taxation in the State of residence is not to exceed the
amount that would be included in income if the recipient were
a resident of the Contracting State of source. Paragraph 6
does not define the term "alimony"; the term is defined
pursuant to the provisions of paragraph 2 of Article III
(General Definitions).
Article XVIII does not provide rules to determine the
State in which pensions, annuities, alimony, and other
similar amounts arise. The provisions of paragraph 2 of
Article III are used to determine where such amounts arise
for purposes of determining whether a Contracting State has
the right to tax such amounts.
The entirety of Article XVIII is, by reason of paragraph
3(a) of Article XXIX (Miscellaneous Rules), an exception to
the "saving clause." Thus, the rules in this Article change
U.S. taxation of U.S. citizens and residents.
Article XIX. GOVERNMENT SERVICE
Article XIX provides that remuneration, other than a
pension, paid by a Contracting State or politicial subdivision or local authority thereof to a citizen of that
State in respect of services rendered in the discharge of
governmental functions shall be taxable only in that State.
(Pursuant to paragraph 5 of Article IV (Residence), other
income of such a citizen may also be exempt from tax, or
subject to reduced rates of tax, in the State in which he is
performing services, in accordance with other provisions of
the Convention.) However, if the services are rendered in
connection with a trade or business, then the provisions of
Article XIV (Independent Personal Services), Article XV
(Dependent Personal Services), or Article XVI (Artistes and
Athletes), as the case may be, are controlling. Whether
functions are of a governmental nature may be determined by a
comparison with the concept of a governmental function in the
State in which the income arises.

-36Pursuant to paragraph 3(a) of Article XXIX
(Miscellaneous Rules), Article XIX is an exception to the
"saving clause." As a result, a U.S. citizen resident in
Canada and performing services in Canada in the discharge of
functions of a governmental nature for the United States is
taxable only in the United States on remuneration for such
services.
This provision differs from the rules of Article VI of
the 1942 Convention. For example, Article XIX allows the
United States to impose tax on a person other than a citizen
of Canada who earns remuneration paid by Canada in respect of
services rendered in the discharge of governmental functions
in the United States. (Such a person may, however, be
entitled to an exemption from U.S. tax as provided in Code
section 893.) Also, under the provisions of Article XIX
Canada will not impose tax on amounts paid by the United
States in respect of services rendered in the discharge of
governmental functions to a U.S. citizen who is ordinarily
resident in Canada for purposes other than rendering
governmental services. Under paragraph 1 of Article VI of
the 1942 Convention, such amounts would be taxable by Canada.
Article XX. STUDENTS
Article XX provides that a student, apprentice, or
business trainee temporarily present in a Contracting State
for the purpose of his full-time education or training is
exempt from tax in that State with respect to amounts
received from outside that State for the purpose of his
maintenance, education, or training, if the individual is or
was a resident of the other Contracting State immediately
before visiting the first-mentioned State. There is no
limitation on the number of years or the amount of income to
which the exemption applies.
The Convention does not contain provisions relating
specifically to professors and teachers. Teachers are
treated under the Convention pursuant to the rules
established in Articles XIV (Independent Personal Services)
and XV (Dependent Personal Services), in the same manner as
other persons performing services. In Article VIII A of the
1942 Convention there is a 2-year exemption in the
Contracting State of source in the case of a professor or
teacher who is a resident of the other Contracting State.
Article XXI. EXEMPT ORGANIZATIONS
Paragraph 1 provides that a religious, scientific,
literary, educational, or charitable organization resident in
a Contracting State shall be exempt from tax on income

-37arising in the other Contracting State but only to the extent
that such income is exempt from taxation in the Contracting
State in which the organization is resident. Since this
paragraph, and the remainder of Article XXI, deal with
entities that are not normally taxable, the test of "resident
in" is intended to be similar - but cannot be identical - to
the one outlined in paragraph 1 of Article IV (Residence).
Paragraph 3 provides that paragraph 1 does not exempt from
tax income of a trust, company, or other organization from
carrying on a trade or business, or income from a "related
person" other than a person referred to in paragraph 1 or 2.
Paragraph 2 provides that a trust, company, or. other
organization that is resident in a Contracting State and
constituted and operated exclusively to administer or provide
employee benefits or benefits for the self-employed under one
or more funds or plans established to provide pension or
retirement benefits or other employee benefits is exempt from
taxation on dividend and interest income arising in the other
Contracting State, if the income of such organization is
generally exempt from taxation in the Contracting State in
which it is resident. Pursuant to paragraph 3 the exemption
at source provided by paragraph 2 does not apply to dividends
or interest from carrying on a trade or business or from a
"related person," other than a person referred to in paragraph 1 or 2. The term "related person" is not necessarily
defined by paragraph 2 of Article IX (Related Persons).
Paragraph 4 provides an exemption from U.S. excise taxes
on private foundations in the case of a religious,
scientific, literary, educational, or charitable organization
which is resident in Canada but only if such organization has
received substantially all of its support from persons other
than citizens or residents of the United States.
Paragraph 5 provides that contributions by a citizen or
resident of the United States to an organization which is
resident in Canada and is generally exempt from Canadian tax
are treated as charitable contributions, but only if the
organization could qualify in the United States to receive
deductible contributions if it were resident in (i.e.,
organized in) the United States. Paragraph 5 generally
limits the amount of contributions made deductible by the
Convention to the income of the U.S. citizen or resident
arising in Canada, as determined under the Convention. In
the case of contributions to a college or university at which
the U.S. citizen or resident or a member of his family is or
was enrolled, the special limitation to income arising in

-38Canada is not required. The percentage limitations of Code
section 170 in respect of the deductibility of charitable
contributions apply after the limitations established by the
Convention. Any amounts treated as charitable contributions
by paragraph 5 which are in excess of amounts deductible in a
taxable year pursuant to paragraph 5 may be carried over and
deducted in subsequent taxable years, subject to the
limitations of paragraph 5.
Paragraph 6 provides rules for purposes of Canadian
taxation with respect to the deductibility of gifts to a U.S.
resident organization by a resident of Canada. The rules of
paragraph 6 parallel the rules of paragraph 5. The current
limitations in Canadian law provide that deductions for gifts
to charitable organizations may not exceed 20 percent of
income. Excess deductions may be carried forward for one
year.
The term "family" used in paragraphs 5 and 6 is defined
in paragraph 2 of the Exchange of Notes accompanying the
Convention to mean an individual's brothers and sisters
(whether by whole or half-blood, or by adoption), spouse,
ancestors, lineal descendents, and adopted descendents.
Paragraph 2 of the Exchange of Notes also provides that the
competent authorities of Canada and the United States will
review procedures and requirements for organizations to
establish their exempt status under paragraph 1 of Article
XXI or as an eligible recipient of charitable contributions
or gifts under paragraphs 5 and 6 of Article XXI. It is
contemplated that such review will lead to the avoidance of
duplicative administrative efforts in determining such status
and eligibility.
The provisions of paragraph 5 and 6 generally parallel
the rules of Article XIII D of the 1942 Convention. However,
paragraphs 5 and 6 permit greater deductions for certain
contributions to colleges and universities than do the
provisions of the 1942 Convention.
Article XXII. OTHER INCOME
Paragraph 1 provides that a Contracting State of which a
person is a resident has the sole right to tax items of
income, wherever arising, if such income is not dealt with in
the prior Articles of the Convention. If such income arises
in the other Contracting State, however, it may also be taxed
in that State. The determination of where income arises for
this purpose is made under the domestic laws of the respective Contracting States unless the Convention specifies
where the income arises (e.g., paragraph 6 of Article XI
(Interest)) for purposes of determining the right to tax, in
which case the provisions of the Convention control.

-39Paragraph 2 provides that to the extent that income
distributed by an estate or trust resident in one Contracting
State is deemed under the domestic law of that State to be a
separate type of income "arising" within that State, such
income distributed to a beneficiary resident in the other
Contracting State may be taxed in the State of source at a
maximum rate of 15 percent of the gross amount of such
distribution. Such a distribution will, however, be exempt
from tax in the State of source to the extent that the income
distributed by the estate or trust was derived by the estate
or trust from sources outside that State. Thus, in a case
where the law of Canada treats a distribution made by a trust
resident in Canada as a separate type of income arising in
Canada, Canadian tax is limited by paragraph 2 to 15 percent
of the gross amount distributed to a U.S. resident beneficiary. Although the Code imposes tax on certain domestic
trusts (e.g., accumulation trusts) and such trusts are
residents of the United States for purposes of Article IV
(Residence) and paragraph 2 of Article XXII, paragraph 2 does
not apply to distributions by such trusts because, pursuant
to Code sections 667(e) and 662(b), these distributions have
the same character in the hands of a nonresident beneficiary
as they do in the hands of the trust. Thus, a distribution
by a domestic accumulation trust is not a separate type of
income for U.S. purposes. The taxation of such a distribution in the United States is governed by the distribution's
character, the provisions of the Code and the provisions of
the Convention other than the provision in paragraph 2
limiting the tax at source to 15 percent.
Article XXIII. CAPITAL
Although neither Canada nor the United States currently
has national taxes on capital, Article XXIII provides rules
for the eventuality that such taxes might be enacted in the
future. Paragraph 1 provides that capital represented by
real property (as defined in paragraph 2 of Article VI
(Income From Real Property)) owned by a resident of a
Contracting State and situated in the other Contracting State
may be taxed in that other State.
Paragraph 2 provides that capital represented by either
personal property forming part of the business property of a
permanent establishment or personal property pertaining to a
fixed base in a Contracting State may be taxed in that State.
Paragraph 3 provides that capital represented by ships
and aircraft operated by a resident of a Contracting State in
international traffic and by personal- property pertaining to
the operation of such ships and aircraft are taxable only in
the Contracting State of residence.

-40Paragraph 4 provides that all elements of capital other
than those covered by paragraphs 1, 2, and 3 are taxable only
in the Contracting State of residence. Thus, capital
represented by motor vehicles or railway cars, not pertaining
to a permanent establishment or fixed base in a Contracting
State, would be taxable only in the Contracting State of
which the taxpayer is a resident.
Article XXIV. ELIMINATION OF DOUBLE TAXATION
Paragraph 1 provides the general rules that will apply
under the Convention with respect to foreign tax credits for
Canadian taxes paid or accrued. The United States undertakes
to allow to a citizen or resident of the United States, or to
a company electing under Code section 1504(d) to be treated
as a domestic corporation, a credit against the Federal
income taxes imposed by the Code for the "appropriate amount"
of income tax paid or accrued to Canada. In the case of a
company which is a resident of the United States owning 10
percent or more of the voting stock of a company which is a
resident of Canada (which for this purpose does not include a
company electing under Code section 1504(d) to be treated as
a domestic corporation), and from which it receives dividends
in a taxable year, the United States shall allow as a credit
against income taxes imposed by the Code the appropriate
amount of income tax paid or accrued to Canada by the
Canadian company with respect to the profits out of which
such company paid the dividends.
The direct and deemed-paid credits allowed by paragraph
1 are subject to the limitations of the Code as they may be
amended from time to time without changing the general
principle of paragraph 1. Thus, as is generally the case
under U.S. income tax conventions, provisions such as Code
sections 901(c), 904, 905, 907, 908, and 911 apply for
purposes of computing the allowable credit under paragraph 1.
The term "income tax paid or accrued" is defined in
paragraph 7 of Article XXIV to include certain specified
taxes which are paid or accrued. Paragraph 1 provides a
credit for these specified taxes whether or not they qualify
as creditable under Code section 901 or 903. However, if any
portion of the Canadian taxes creditable under the Convention
does not qualify as income taxes or "in lieu" taxes under the
Code, the~amount of direct and deemed-paid credit that may be
claimed under the Convention may not exceed the proportion of
the Federal income taxes imposed by the Code that the
taxpayer's taxable income arising in Canada bears to the
taxpayer's worldwide taxable income. In other words,
Canadian taxes made creditable solely by paragraph 1 are
creditable only to the extent of a per country limitation

-41computed with respect to Canada pursuant to the special
source rules set forth in paragraphs 3 and 6, subject to U.S.
limitation rules (e.g., Code sections 904(b)(2) and 904(f)).
If, after application of these rules, a person has paid or
accrued an amount to Canada in excess of the amount creditable against U.S. tax for a given year, the excess may be
carried over to other years to offset U.S. tax on income
arising in Canada under the Convention.
Any creditable taxes not covered by paragraph 1 (e.g.,
third State taxes) may not offset U.S. tax on income arising
in Canada under the Convention. Thus, if the taxpayer elects
to compute the foreign tax credit for any years using the
special source rules set forth in paragraphs 3 and 6, a
separate limitation is computed for taxes not covered by
paragraph 1 without regard to the source rules of paragraphs
3 and 6, and the credit for such taxes may not exceed such
limitation. The credit allowed under this separate limitation may not exceed the proportion of the Federal income
taxes imposed by the Code that the taxpayer's taxable income
from foreign sources (under the Code) not included in taxable
income arising in Canada (and not in excess of total foreign
source taxable income under the Code) bears to the taxpayer's
worldwide taxable income. In any case the credit for taxes
covered by paragraph 1 and the credit for other foreign taxes
is limited to the amount allowed under an overall limitation
computed by aggregating taxable income arising in Canada and
other foreign source taxable income.
If Canadian taxes claimed as credits are income taxes or
"in lieu" taxes under the Code, and such taxes exceed the
proportion of U.S. tax that taxable income arising in Canada
bears to the entire taxable income, such taxes qualify on the
same basis as other creditable taxes to be absorbed by the
separate limitation computed with respect to other taxes.
In a case where a taxpayer has different types of income
subject to separate limitations under the Code {e.g., section
904(d)(1)(B) DISC dividends, foreign oil related income and
"other" income) the Convention rules just described apply in
the context of each of the separate Code limitations.
A taxpayer may, for any year, claim a credit pursuant to
the rules of the Code. In such case, the taxpayer would be
subject to the limitations established in the Code, and would
forego the rules of the Convention that determine where taxable income arises. In addition, any Canadian taxes covered
by paragraph 1 which are not creditable under the Code would
not be credited. In the event that Canadian taxes creditable
under the Code and other taxes creditable under the Code
exceed the limitation provided in the Code, the credit for

-42Canadian taxes is determined pro rata on the basis of the
proportion that Canadian creditable taxes bear to total
creditable taxes.
The following examples illustrate the application of
Article XXIV:
Example 1. A United States corporate
taxpayer has for the taxable year $100 of taxable
income having a Canadian source under the
Convention but a U.S. source under the Code (see,
for example, paragraph 1 of Article VII (Business
Profits) and paragraph 3(a) of Article XXIV);
$100 of taxable income having a U.S. source under
both the Convention and the Code; $80 of taxable
income having a foreign (non-Canadian) source
under the Code but a U.S. source under the
Convention (see paragraph 3(b) of Article XXIV);
and ($50) of loss having a Canadian source. The
taxpayer pays $50 of foreign (non-Canadian)
income taxes, and $20 of Canadian taxes which are
income taxes under the Code. All the foreign
source income of the taxpayer constitutes "other"
income described in Code section 904(d)(1)(c).
In this case, the Convention provides that there
is $50 of Canadian source taxable income, and
therefore up to $23 of Canadian taxes covered by
the Convention ($50 x $105.80) qualify for the
$230
credit. Since the taxpayer has paid only $20 of
Canadian taxes covered by the Convention, a
credit is allowed in that amount. The limitation
for Canadian taxes under the Convention is not
available to absorb other foreign taxes. The
limitation with respect to other foreign taxes
and foreign non-Canadian income is $13.80
($30 x $105.80), and foreign income taxes in that
amount may be credited in addition to the $20 of
Canadian taxes, for a total credit of $33.80; the
taxpayer has a foreign tax credit carryover of
$36.20 of non-Canadian income taxes.
Example 2. JThe facts are the same as in
Example 1, except that foreign non-Canadian
operations result in a loss of ($30) rather than
net income of $80, and no foreign non-Canadian
income taxes are paid. The Code limitation is
zero, because there is no foreign source taxable
income. The Convention still provides that there
is $50 of Canadian source taxable income but the

-43credit is limited to $9.20 ($20

x $55.20).

The

remaining $10.80 of Canadian taxes covered by the
Convention ($20 - $9.20) are available as a
carryover.
Example 3. The facts are the same as in
Example 1 except that the first $100 of taxable
income mentioned in Example 1 has a Canadian
source under both the Convention and the Code.
The Convention still provides that there is $50
of Canadian source income and $20 of Canadian
taxes covered by the Convention thereby qualify
for credit ($50 x $105.80). The limitation with
T230
respect to foreign non-Canadian taxes is $36.80
($80 x $105.80). In this case, however, if the
$230
Canadian taxes covered by the Convention would
qualify for credit under Code section 901 or 903,
the taxpayer could elect the Code limitation of
$59.80 ($130 x $105.80), which is more
$230
advantageous than the separate limitations computed under the Convention because those
limitations do not permit third State income
taxes to be credited against U.S. tax on income
arising in Canada.
Example 4. The facts are the same as in
Example 3 except that $10 of the $20 Canadian
taxes covered by the Convention would not be
creditable under Code section 901 or 903. If the
taxpayer elects to claim a credit for the
Canadian taxes which are creditable solely by
reason of the Convention, it must use the
Convention rules to compute the credit limitation
($23 + $36.80 = $59.80).
Example 5. The facts are the same as in
Example 1 except that the corporation pays $25 of
Canadian taxes covered by the Convention which
are income taxes under the Code and $12 of
foreign non-Canadian income taxes. The
Convention still provides that there is $50 of
Canadian source taxable income, and $23 of
Canadian taxes covered by the Convention thereby
qualify for credit. In addition, the limitation
of $13.80 with respect to other foreign taxes
permits the crediting of non-Canadian taxes plus
Canadian taxes covered by the Convention. The

„44taxpayer has a foreign tax credit carryover of
$.03 of Canadian taxes and $.17 of other taxes,
which may qualify for credit in carryover years.
The Convention only provides a credit for amounts paid
or accrued. The determination of whether an amount is paid
or accrued is made under the Code.
The rules of paragraph 1 are modified in certain
respects by rules in paragraphs 4 and 5 for income derived by
United states citizens who are residents of Canada.
Paragraph 4 provides two steps for the elimination of double
taxation in such a case. First, paragraph 4(a) provides that
Canada shall allow a deduction from (credit against) Canadian
tax in respect of income tax paid or accrued to the United
States in respect of profits, income, or gains which arise in
the United States (within the meaning of paragraph 3(a)); the
deduction against Canadian tax need not, however, exceed the
amount of income tax that would be paid or accrued to the
United States if the individual were not a U.S. citizen,
after taking into account any relief available under the
Convention.
The second step, as provided in paragraph 4(b), is that
the United States allows as a credit against United States
tax, subject to the rules of paragraph 1, the income tax paid
or accrued to Canada after the Canadian credit for U.S. tax
provided by paragraph 4(a). The credit so allowed by the
United States is not to reduce the portion of the United
States tax that is creditable against Canadian tax in
accordance with paragraph 4(a).
The following example illustrates the application of
paragraph 4.
A United States citizen resides in Canada and
earns $250 of income from the performance of
independent personal services, $100 of which would
be taxable by the United States under the provisions of Article XIV (Independent Personal
Services) if such person were not a citizen of the
United States. Taxable income for U.S. purposes,
taking into account the rules_pf Code section 913,
is $150. By reason of paragraph 3(a), the $100
that may be taxed by the United States arises in
the United States for purposes of Article XXIV.
Assume that the U.S. tax on the $100 of profits
arising in the United States would be $25, if the
taxpayer were not a U.S. citizen; the $100 is the
only income of the taxpayer arising in the United

-45States; and the $150 is his total taxable income
from all sources. Assume further that the
tentative U.S. income tax liability of the
taxpayer, on his worldwide income, is $60; and
that the tentative Canadian tax on the $250 of
income is $100. Canada allows $25 as a credit
against $100, leaving a net Canadian tax of $75.
The U.S. allows as a credit $35 ($60 - $25) of the
$75 Canadian tax. (Pursuant to paragraph 6, which
carries out the objectives of paragraphs 4 and 5
and is discussed in more detail below, a total of
$87.50 of the individual's taxable income arises
in Canada for purposes of the U.S. foreign tax
credit (A
x $60 = $35; A = $87.50). Thus,
$150
paragraph 6 overrides paragraph 3(a) to source an
additional $37.50 of taxable income as arising in
Canada.) The additional $40 of Canadian tax is
allowed as a foreign tax credit carryover, subject
to the limitations of the Convention and the Code.
Paragraph 5 provides special rules for the elimination
of double taxation in the case of dividends, interest, and
royalties earned by a U.S. citizen resident in Canada. These
rules apply notwithstanding the provisions of paragraph 4,
but only as long as the law in Canada allows a deduction in
computing income for the portion of any foreign tax paid in
respect of dividends, interest, or royalties which exceeds 15
percent of the amount of such items of income, and only with
respect to those items of income. The rules of paragraph 4
apply with respect to other.items of income; moreover, if the
law in force in Canada regarding the deduction for foreign
taxes changes, the provisions of paragraph 5 shall not apply
and the U.S. foreign tax credit for Canadian taxes and the
Canadian credit for U.S. taxes will be determined solely
pursuant to the provisions of paragraph 4.
The calculations under paragraph 5 are as follows.
First, the deduction in computing income allowed in Canada
shall be made with respect to U.S. tax on the dividends,
interest, and royalties before any foreign tax credit is
allowed by the United States with respect to income tax paid
or accrued to Canada. Second, Canada shall allow a deduction
from (credit against) Canadian tax for U.S. tax paid or
accrued with respect to the dividends, interest, and
royalties, but such credit need not exceed 15 percent of the
gross amount of. such items of income that have been included
in computing income for Canadian tax purposes. (The credit
may, however, exceed the amount of tax that the United States
would be entitled to levy under the Convention upon a
Canadian resident who is not a U.S. citizen.) Third, for

-46purposes of computing the U.S. tax on such dividends,
interest, and royalties, the United States shall allow as a
credit against the U.S. tax the income tax paid or accrued to
Canada after the 15 percent credit against Canadian tax for
income tax paid or accrued to the United States. The United
States is in no event obliged to give a credit for Canadian
income tax which will reduce the U.S. tax below 15 percent of
the amount of the dividends, interest, and royalties.
The rules of paragraph 5 are illustrated by the
following example.
Example A. A U.S. citizen who is a resident
of Canada receives $200 of income with respect to
personal services performed within Canada and $100
of royalty income arising within the United
States. Taxable income for U.S. purposes, taking
into account the rules of Code section 913, is
$120. U.S. tax (before foreign tax credits) is
$50. The $100 royalty bears U.S. tax (before
foreign tax credits) of $41.67 ($100 x $50).
Under Canadian law a deduction of $26.67 (the
excess of $41.67 over 15 percent of $100) is
allowed in computing income. The Canadian tax on
$273.33 of income is $170. Canada gives a credit
against the $170 for $15, leaving a final Canadian
tax of $155. Of the $155, $41.58 is attributable
to the royalty ($73.33 x ($170 - $15)). Of this
$273.33
amount $26.67 ($41.67 - $15) is creditable against
U.S. tax pursuant to paragraph 5 and $14.91 is a
foreign tax credit carryover for U.S. purposes,
subject to the limitations of paragraph 5. (An
additional $8.33 of Canadian tax with respect to
Canadian source services income is creditable
against U.S. tax pursuant to paragraphs 3 and
4(b).)
The general rule for avoiding double taxation in Canada
is provided in paragraph 2. Pursuant to paragraph 2(a)
Canada undertakes to allow to a resident of Canada a credit
against income taxes imposed under the Income Tax Act for the
appropriate amount of income taxes paid or accrued to the
United States. Paragraph 2(b) provides for the deduction by
a Canadian company, in computing taxable income, of any
dividend received out of the exempt surplus of a U.S. company
which is an affiliate. The provisions of paragraph 2 are
subject to the provisions of the Income Tax Act as they may
be amended from time to time without changing the general
principle of paragraph 2.

-47Paragraph 3 provides source rules for purposes of
applying Article XXIV. Profits, income, or g a m s of a
resident of a Contracting State which may be taxed in the
other Contracting State in accordance with the Convention,
for reasons other than the saving clause of paragraph 2 of
Article XXIX (Miscellaneous Rules) (e.g., pensions and
annuities taxable where arising pursuant to Article XVIII
(Pensions and Annuities)), are deemed to arise in the latter
State. This rule does not, however, apply to gains taxable
under paragraph 5 of Article XIII (Gains) (i.e., gains taxed
by a Contracting State derived from the alienation of
property by a former resident of that State). Gains from
such an alienation arise, pursuant to paragraph 3(b), in the
State of which the alienator is a resident. Thus, if in
accordance with paragraph 5 of Article XIII, Canada imposes
tax on certain gains of a U.S. resident such gains are
deemed, pursuant to paragraphs 2 and 3(b) of Article XXIV, to
arise in the United States for purposes of computing the
deduction against Canadian tax for the U.S. tax on such gain.
Under the Convention such gains arise in the United States
for purposes of the United States foreign tax credit.
Paragraph 3(b) also provides that profits, income, or gains
arise in the Contracting State of which a person is a
resident if they may not be taxed in the other Contracting
State under the provisions of the Convention (e.g., alimony),
other than the "saving clause" of paragraph 2 of Article
XXIX. Paragraph 3 does not affect the source of losses.
The rules of paragraphs 3 and 6 must be utilized by a
person claiming a credit for Canadian taxes solely by reason
of the Convention. A person claiming a credit for Canadian
income taxes pursuant to the Code may, however, use the Code
credit rules exclusively. Furthermore, a person claiming a
credit for income taxes of a third State may not rely upon
the rules of paragraphs 3 and 6 for purposes of treating
income that would otherwise have a U.S. source as having a
foreign source (i.e., in the situation where the rules of the
Convention produce excess limitation after Canadian taxes are
taken into account).
Paragraph 6 is necessary to implement the objectives of
paragraphs 4(b) and 5(c). Paragraph 6 provides that where a
U.S. citizen is a resident of Canada, items of income
referred to in paragraph 4 or 5 are deemed for the purposes
of Article XXIV to arise in Canada to the extent necessary to
avoid double taxation of income by Canada and the United
States consistent with the objectives of paragraphs 4(b) and
5(c). Paragraph 6 can override the source rules of paragraph
3 to permit a limited resourcing of income. The principles
of paragraph 6 have effect, pursuant to paragraph 3(b) of
Article XXX (Entry Into Force), for taxable years beginning
on
after January 1, 1976. See the- discussion of Article
XXX or
below.

-48The application of paragraph 6 is illustrated by the
following example.
Example B. The facts are the same as in
Example A. The United States has undertaken,
pursuant to paragraph 5(c) and paragraph 6, to
credit $26.67 of Canadian taxes on royalty income
that has a U.S. source under both paragraph 3 and
the Code. The credit, however, only reduces the
U.S. tax on the royalty income which exceeds 15
percent of the amount of such income included in
computing U.S. taxable income. Pursuant to
paragraph 6, for purposes of determining the U.S.
foreign tax credit limitation under the Convention
with respect to Canadian taxes $64.08 ($A x $50 »
$120
$26.67; A = $64.08) of taxable income with respect
to the royalties is deemed to arise in Canada.
Paragraph 7 provides that any reference to "income tax
paid or accrued" to Canada or the United States includes
Canadian tax or United States tax, as the case may be. The
terms "Canadian tax" and "United States tax" are defined in
paragraphs 1(c) and 1(d) of Article III (General
Definitions). References to income taxes paid or accrued
also include taxes of general application paid or accrued to
a political subdivision or local authority of Canada or the
United States which are not imposed by such political
subdivision or local authority in a manner inconsistent with
the provisions of the Convention and which are substantially
similar to taxes of Canada or the United States referred to
in paragraphs 2 and 3(a) of Article II (Taxes Covered).
In order for a tax imposed by a political subdivision or
local authority to fall within the scope of paragraph 7, such
tax must apply to individuals, companies, or other persons
generally, and not only to a particular class of individuals
or companies or a particular type of business. The tax must
also be substantially similar to the national taxes referred
to in paragraphs 2 and 3(a) of Article II. Finally, the
political subdivision or local authority must apply its tax
in a manner not inconsistent with the provisions of the
Convention. For example, the political subdivision or local
authority must not impose its tax on a resident of the other_
Contracting State earning business profits within the
political subdivision or local authority but not having a
permanent establishment there.
Paragraph 8 relates to the provisions of Article XXIII
(Capital). It provides that where a resident of a
Contracting State owns capital which, in accordance with the

-49provisions of Article XXIII, may be taxed in the other
Contracting State, the State of residence shall allow as a
deduction from (credit against) its tax on capital an amount
equal to the capital tax paid in the other Contracting State.
The deduction is not, however, to exceed that part of the
capital tax, computed before the deduction, which is
attributable to capital which may be taxed in the other
State.
Article XXV. NON-DISCRIMINATION
Paragraphs 1 and 2 of Article XXV protect individual
citizens of a Contracting State from discrimination by the
other Contracting State in taxation matters. Paragraph 1
provides that a citizen of a Contracting State who is a
resident of the other Contracting State may not be subjected
in that other State to any taxation or requirement connected
with taxation which is other or more burdensome than the
taxation and connected requirements imposed on similarly
situated citizens of the other State.
Paragraph 2 assures protection in a case where a citizen
of a Contracting State is not a resident of the other
Contracting State- Such a citizen may not be subjected in
the other State to any taxation or requirement connected to
taxation which is other or more burdensome than the taxation
and connected requirements to which similarly situated
citizens of any third State are subjected. The reference to
citizens of a third State "in the same circumstances"
includes consideration of the State of residence. Thus,
pursuant to paragraph 2, the Canadian taxation with respect
to a citizen of the United States resident in, for example,
the United Kingdom may not be more burdensome than the
taxation of a U.K. citizen resident in the United Kingdom.
Any benefits available to the U.K. citizen by virtue of an
income tax convention between the United Kingdom and Canada
would be available to the U.S. citizen resident in the United
Kingdom if he is otherwise in the same circumstances as the
U.K. citizen.
Paragraph 3 assures that, in computing taxable income,
an individual resident of a Contracting State will be
entitled to the same deduction for dependents resident in the
other Contracting State that would be allowed if the
dependents were residents of the individual's State of
residence. The term "dependent" is defined in accordance
with the rules set forth in paragraph 2 of Article III
(General Definitions). For U.S. tax purposes, paragraph 3
does not expand the benefits currently available to a
resident of the United States with a dependent resident in
Canada. See Code section 152(b)(3).

-50Paragraph 4 allows a resident of Canada (not a citizen
of the United States) to file a joint return in cases where
such person earns salary, wages, or other similar remuneration as an employee and such income is taxable in the United
States under the Convention. Paragraph 4 does not apply
where the resident of Canada earns wages which are exempt in
the United States under Article XV (Dependent Personal
Services) or earns only income taxable by the United States
under provisions of the Convention other than Article XV.
The benefit provided by paragraph 4 is available
regardless of the residence of the taxpayer's spouse. It is
limited, however, by a formula .designed to ensure that the
benefit is available solely with respect to persons whose
U.S. source income is entirely, or almost entirely, wage
income. The formula limits the United States tax with
respect to wage income to that portion of the total U.S. tax
that would be payable for the taxable year if both the
individual and his spouse were United States citizens as the
individual's taxable income (determined without any of the
benefits made available by paragraph 4, such as the standard
deduction) bears to the total taxable income of the
individual and his spouse. The term "total United States
tax" used in the formula is total United States tax without
regard to any foreign tax credits, as provided in
subparagraph 4(a). (Foreign income taxes may, however, be
claimed as deductions in computing taxable income, to the
extent allowed by the Code.) In determining total taxable
income of the individual and his spouse, the benefits made
available by paragraph 4 are taken into account, but a
deficit of the spouse is not.
The following example illustrates the application of
paragraph 4.
A, a Canadian citizen and resident, is
married to B who is also a Canadian citizen
and resident. A earns $12,000 of wages
taxable in the U.S. under Article XV
(Dependent Personal Services) and $2,000 of
wages taxable only in Canada. B earns $1,000
of U.S. source dividend income, taxed by the
United States at 15 percent pursuant to
Article X (Dividends). B also earns $2,000 of
wages taxable only in Canada. A's taxable
income for U.S. purposes, determined without
regard to paragraph 4, is $11,700 ($12,000 $2,000 (Code sections 151(b) and 873(b)(3)) +
$1,700 (Code section 63)). The U.S. tax (Code
section 1(d)) with respect to such income is
$2,084.50. The total U.S. tax payable by A

-51and B if both were U.S. citizens and all their
income arose in the United States would be
$2,013 under Code section 1(a) on taxable
income of $14,800 ($17,000 - $200 (Code
section 116) - $2,000 (Code section 151)).
Pursuant to paragraph 4, the U.S. tax imposed
on A's wages from U.S. sources is limited to
$1,591.36 ($11,700 x $2,013). B's U.S. tax
$14,800
liability with respect to the U.S. source
dividends remains $150.
The provisions of paragraph 4 may be elected on a yearby-year basis. They are purely computational and do not make
either or both spouses residents of the United States for the
purpose of other U.S. income tax conventions.
Paragraph 5 protects against discrimination in a case
where the capital of a company which is a resident of one
Contracting State is wholly or partly owned or controlled,
directly or indirectly, by one or more residents of the other
Contracting State. Such a company shall not be subjected in
the State of which it is a resident to any taxation or
requirement connected therewith which is other or more
burdensome than the taxation and connected requirements to
which are subjected other similar companies which are residents of that State but whose capital is wholly or partly
owned or controlled, directly or indirectly, by one or more
residents of a third State.
Paragraph 6 protects against discrimination in the case
of a permanent establishment which a resident of one
Contracting State has in the other Contracting State. The
taxation of such a permanent establishment by the other
Contracting State shall not be less favorable than the taxation of residents of that other State carrying on the same
activities. The paragraph specifically overrides the
provisions of Article XXIV (Elimination of Double Taxation),
thus ensuring that permanent establishments will be entitled
to relief from double taxation on a basis comparable to the
relief afforded to similarly situated residents. Paragraph 6
does not oblige a Contracting State to grant to a resident of
the other Contracting State any personal allowances, reliefs,
and reductions for taxation purposes on account of civil
status or family responsibilities which it grants to its own
residents. The principles of paragraph 6 would apply with
respect to a fixed base as well as a permanent establishment.
Paragraph 6 does not, however, override the provisions of
Code section 906.

-52Paragraph 7 concerns the right of a resident of a
Contracting State to claim deductions for purposes of
computing taxable profits in the case of disbursements made
to a resident of the other Contracting State. Such
disbursements shall be deductible under the same conditions
as if they had been made to a resident of the first-mentioned
State. These provisions do not apply to amounts to which
paragraph 1 of Article IX (Related Persons), paragraph 7 of
Article XI (Interest), or paragraph 7 of Article XII
(Royalties) apply. Paragraph 7 of Article XXV also provides
that, for purposes of determining the taxable- capital of a
resident of a Contracting State, any debts of such person to
a resident of the other Contracting State shall be deductible
under the same conditions as if they had been contracted to a
resident of the first-mentioned State. This portion of
paragraph 7 relates to Article XXIII (Capital).
Paragraph 8 provides that, notwithstanding the
provisions of paragraph 7, a Contracting State may enforce
the provisions of its taxation laws relating to the
deductibility of interest, in force on September 26, 1980, or
as modified subsequent to that date in a manner that does not
change the general nature of the provisions in force on
September 26, 1980; or which are adopted after September 26,
1980, and are designed to ensure that nonresidents do not
enjoy a more favorable tax treatment under the taxation laws
of that State than that enjoyed by residents. Thus Canada
may continue to limit the deductions for interest paid to
certain nonresidents as provided in section 18(4) of Part I
of the Income Tax Act.
Paragraph 9 provides that expenses incurred by citizens
or residents of a Contracting State with respect to any
convention, including any seminar, meeting, congress, or
other function of similar nature, held in the other
Contracting State, are deductible for purposes of taxation in
the first-mentioned State to the same extent that such
expenses would be deductible if the convention were held in
that first-mentioned State. Thus, for U.S. income tax
purposes an individual who is a citizen or resident of the
United States and who attends a convention held in Canada may
claim deductions for expenses incurred in connection with
such convention without regard to the provisions of Code
section 274(h). Section 274(h) imposes special restrictions
on the deductibility of expenses incurred in connection with
foreign conventions. A claim for a deduction for such an
expense remains subject, in all events, to the provisions of
U.S. law with respect to the deductibility of convention
expenses generally (e.g., Code sections 162 and 212).
Similarly, in the case of a citizen or resident of Canada
attending a convention in the United States, paragraph 9

-53requires Canada to allow a deduction for expenses relating to
such convention as if the convention had taken place in
Canada.
Paragraph 10 provides that, notwithstanding the
provisions of Article II (Taxes Covered), the provisions of
Article XXV apply in the case of Canada to all taxes imposed
under the Income Tax Act; and, in the case of the United
States, to all taxes imposed under the Code. Article XXV
does not apply to taxes imposed by political subdivisions or
local authorities of Canada or the United States.
Article XXV substantially broadens the protection
against discrimination provided by the 1942 Convention, which
contains only one provision dealing specifically with this
subject. That provision, paragraph 11 of the Protocol to the
1942 Convention, states that citizens of one of the
Contracting States residing within the other Contracting
State are not to be subjected to the payment of more
burdensome taxes than the citizens of the other State.
The benefits of Article XXV may affect the tax liability
of a U.S. citizen or resident with respect to the United
States. See paragraphs 2 and 3 of Article XXIX
(Miscellaneous Rules).
Article XXVI. MUTUAL AGREEMENT PROCEDURE
Paragraph 1 provides that where a person considers that
the actions of one or both of the Contracting States will
result in taxation not in accordance with the Convention, he
may present his case in writing to the competent authority of
the Contracting State of which he is a resident or, if he is
a resident of neither Contracting State, of which he is a
national. Thus, a resident of Canada must present to the
Minister of National Revenue (or his authorized representative) any claim that such resident is being subjected to
taxation contrary to the Convention.
A person who requests
assistance from the competent authority may also avail
himself of any remedies available under domestic laws.
Paragraph 2 provides that the competent authority of the
Contracting State to which the case is presented shall
endeavor to resolve the case by mutual agreement with the
competent authority of the other Contracting State, unless he
believes that the objection is not justified or he is able to
arrive at a satisfactory unilateral solution. Any agreement
reached between the competent authorities of Canada and the
United States shall be implemented notwithstanding any time
or other procedural limitations in the domestic laws of the
Contracting States, except where the special mutual agreement

-54provisions of Article IX (Related Persons) apply, provided
that the competent authority of the Contracting State asked
to waive its domestic time or procedural limitations has
received written notification that such a case exists within
six years from the end of the taxable year in the firstmentioned State to which the case relates. The notification
may be given by the competent authority of the firstmentioned State, the taxpayer who has requested the competent
authority to take action, or a person related to the
taxpayer. Unlike Article IX, Article XXVI does not require
the competent authority of a Contracting State to grant
unilateral relief to avoid double taxation in a case where
timely notification is not given to the competent authority
of the other Contracting State. Such unilateral relief may,
however, be granted by the competent authority in its
discretion pursuant to the provisions of Article XXVI and in
order to achieve the purposes of the Convention. In a case
where the provisions of Article IX apply, the provisions of
paragraphs 3, 4, and 5 of that Article are controlling with
respect to adjustments and corresponding adjustments of
income, loss, or tax and the effect of the Convention upon
time or procedural limitations of domestic law. Thus, if
relief is not available under Article IX because of fraud,
the provisions of paragraph 2 of Article XXVI do not
independently authorize such relief.
Paragraph 3 provides that the competent authorities of
the Contracting States shall endeavor to resolve by mutual
agreement any difficulties or doubts arising as to the
interpretation or application of the Convention. In
particular, the competent authorities may agree to the same
attribution of profits to a resident of a Contracting State
and its permanent establishment in the other Contracting
State; the same allocation of income, deductions, credits, or
allowances between persons; the same determination of the
source of income; the same characterization of particular
items of income; a common meaning of any term used in the
Convention; rules, guidelines, or procedures for the
elimination of double taxation with respect to income
distributed by an estate or trust, or with respect to a
partnership; or to increase any dollar amounts referred to in
the Convention to reflect monetary or economic developments.
The competent authorities may also consult and reach
agreements on rules, guidelines, or procedures for the
elimination of double taxation in cases not provided for in
the Convention.
The list of subjects of potential mutual agreement in
paragraph 3 is not exhaustive; it merely illustrates the
principles set forth in the paragraph. As in the case of
other U.S. tax conventions, agreement can be arrived at in

-55the context of determining the tax liability of a specific
person or in establishing rules, guidelines, and procedures
that will apply generally under the Convention to resolve
issues for classes of taxpayers. It is contemplated that
paragraph 3 could be utilized by the competent authorities,
for example, to resolve conflicts between the domestic laws
of Canada and the United States with respect to the
allocation and apportionment of deductions.
Paragraph 4 provides that each Contracting State will
endeavor to collect on behalf of the other State such amounts
as may be necessary to ensure that relief granted by the
Convention from taxation imposed by the other State does not
enure to the benefit of persons not entitled to such relief.
Paragraph 4 does not oblige either Contracting State to carry
out administrative measures of a different nature from those
that would be used by Canada or the United States in the
collection of its own tax or which would be contrary to its
public policy.
Paragraph 5 confirms that the competent authorities of
Canada and the United States may communicate with each other
directly for the purpose of reaching agreement in the sense
of paragraphs 1 through 4.
Article XXVII., EXCHANGE OF INFORMATION
Paragraph 1 authorizes the competent authorities to
exchange the information necessary for carrying out the
provisions of the Convention or the domestic laws of Canada
and the United States concerning taxes covered by the
Convention, insofar as the taxation under those domestic laws
is not contrary to the Convention. The authority to exchange
information granted by paragraph 1 is not restricted by
Article I (Personal Scope), and thus need not relate solely
to persons otherwise covered by the Convention. It is
contemplated that Article XXVII will be utilized by the
competent authorities to exchange information upon request,
routinely, and spontaneously.
Any information received by a Contracting State pursuant
to the Convention is to be treated as secret in the same
manner as information obtained under the taxation laws of
that State. Such information shall be disclosed only to
persons or authorities, including courts and administrative
bodies, involved in the assessment or collection of, the
administration and enforcement in respect of, or the determination of appeals in relation to the taxes covered by the
Convention, and the information may be used by such persons
only for such purposes. (In accordance with paragraph 4, for
the purposes of this Article the Convention applies to a
broader range of taxes than those covered specifically by
Article II (Taxes Covered).)

-56In specific cases a competent authority providing
information may, pursuant to paragraph 3, impose such other
conditions on the use of information as are necessary.
Although the information received by persons described in
paragraph 1 is to be treated as secret, it may be disclosed
by such persons in public court proceedings or in judicial
decisions.
The provisions of paragraph 1 authorize the U.S.
competent authority to continue to allow the General
Accounting Office to examine tax return information received
from Canada when GAO is engaged in a study of the
administration of U.S. tax laws pursuant to a directive of
Congress. However, the secrecy requirements of paragraph 1
must be met.
If a Contracting Sta.te requests information in
accordance with Article XXVII, the other Contracting State
shall endeavor, pursuant to paragraph 2, to obtain the
information to which the request relates in the same manner
as if its own taxation were involved, notwithstanding the
fact that such State does not need the information. In
addition, the competent authority requested to obtain
information shall endeavor to provide the information in the
particular form requested, such as depositions of witnesses
and copies of unedited original documents, to the same extent
such depositions and documents can be obtained under the laws
or administrative practices of that State with respect to its
own taxes.
Paragraph 3 provides that the provisions of paragraphs 1
and 2 do not impose on Canada or the United States the
obligation to carry out administrative measures at variance
with the laws and administrative practice of either State; to
supply information which is not obtainable under the laws or
in the normal course of the administration of either State;
or to supply information which would disclose any trade,
business, industrial, commercial, or professional secret or
trade process, or information the disclosure of which would
be contrary to public policy. Thus, Article XXVII allows,
but does not obligate, the United States and Canada to obtain
and provide information that would not be available to the
requesting State under its laws or administrative practice or
that in different circumstances would not be available to the
State requested to provide the information. Further, Article
XXVII allows a Contracting State to obtain information for
the other Contracting State even if there is no tax liability
in the State requested to obtain the information. Thus, the
United States will continue to be able to give Canada tax
information even if there is no U.S. tax liability at issue.

-57Paragraph 4 provides that, for the purposes of Article
XXVII, the Convention applies, in the case of Canada, to all
taxes imposed by the Government of Canada on estates and
gifts and under the Income Tax Act and, in the case of the
United States, to all taxes imposed under the Internal
Revenue Code. Article XXVII does not apply to taxes imposed
by political subdivisions or local authorities of the
Contracting States. Paragraph 4 is designed to ensure that
information exchange will extend to most national level taxes
on both sides, and specifically to information gathered for
purposes of Canada's taxes on estates and gifts (not
effective for deaths or gifts after 1971). This provision is
intended to mesh with paragraph 8 of Article XXX (Entry Into
Force), which terminates the existing estate tax convention
between the United States and Canada.
Article XXVIII. DIPLOMATIC AGENTS AND CONSULAR OFFICERS
Article XXVIII states that nothing in the Convention
affects the fiscal privileges of diplomatic agents or
consular officers under the general rules of international
law or under the provisions of special agreements. However,
various provisions of the Convention could apply to such
persons, such as those concerning exchange of information,
mutual agreement, and non-discrimination.
Article XXIX. MISCELLANEOUS RULES
Paragraph 1 states that the provisions of the Convention
do not restrict in any manner any exclusion, exemption,
deduction, credit, or other allowance accorded by the laws of
a Contracting State in the determination of the tax imposed
by that State. Thus, if a deduction would be allowed for an
item in computing the taxable income of a Canadian resident
under the Code, such deduction is available to such person in
computing taxable income under the Convention.
Paragraph 1
does not, however, authorize a taxpayer to make inconsistent
choices between rules of the Code and rules of the
Convention. For example, if a resident of Canada desires to
claim the benefits of the "attributable to" rule of
paragraphs 1 and 7 of Article VII (Business Profits) with
respect to the taxation of business profits of a permanent
establishment, such person must use the "attributable to"
concept consistently for all items of income and deductions
and may not rely upon the "effectively connected" rules of
the Code to avoid U.S. tax on other items of attributable
income. In no event are the rules of the Convention to
increase overall U.S. tax liability from what liability would
be if there were no convention.

-58Paragraph 2 provides a "saving clause" pursuant to which
Canada and the United States may each tax its residents, as
determined under Article IV (Residence), and the United
States may tax its citizens (including any former citizen who
lost his citizenship for the principal purpose of avoiding of
U.S. income tax, but only for a period of 10 years following
such loss) and companies electing under Code section 1504(d)
to be treated as domestic corporations, as if there were no
convention between the United States and Canada with respect
to taxes on income and capital.
Paragraph 3 provides that, notwithstanding paragraph 2,
the United States and Canada must respect certain specified
provisions of the Convention in regard to residents,
citizens, and section 1504(d) companies. Paragraph 3(a)
lists certain paragraphs and Articles of the Convention that
represent exceptions to the "saving clause" in all
situations; paragraph 3(b) provides a limited further
exception for students who have not acquired immigrant status
in the State where they are temporarily present.
Paragraph 4 provides relief with respect to social
security taxes imposed on employers, employees, and
self-employed persons under Code sections 1401, 3101, and
3111. Income from personal services not subject to tax by
the United States under the provisions of the 1942 Convention
is not to be considered wages or net earnings from selfemployment for purposes of the U.S. social security taxes
with respect to taxable years of the taxpayer not barred by
the statute of limitations (under the Code) ending on or
before December 31 of the year in which instruments of
ratification are exchanged. Thus, if instruments of ratification are exchanged in 1981 a resident of Canada earning
income from personal services and such person's employer may
a
PPly for refunds of the employee's and employer's shares of
U.S. social security tax paid attributable to the employee's
income from personal services that is exempt from U.S. tax by
virtue of the 1942 Convention. In this example, the refunds
would be available for social security taxes paid with
respect to taxable years not barred by the statute of
limitations of the Code ending on or before December 31,
1981. For purposes of Code section 6611, the date of
overpayment with respect to refunds of U.S. tax pursuant to
paragraph 4 is the date on which instruments of ratification
of the Convention are exchanged.
Under certain limited circumstances, an employee may,
pursuant to paragraph 5 of Article XXX (Entry Into Force),
claim an exemption from U.S. tax on wages under the 1942
Convention for one year after the Convention comes into
force. The provisions of paragraph 4 would not, however,
provide an exemption from U.S. social security taxes for such
year.

-59Paragraph 4 does not modify existing U.S. statutes
concerning social security benefits or funding. The Social
Security Act requires the general funds of the Treasury to
reimburse the social security trust funds on the basis of the
records of wages and self-employment income maintained by the
Social Security Administration. The Convention does not
alter those records. Thus, any refunds of tax made pursuant
to paragraph 4 would not affect claims for U.S. quarters of
coverage with respect to social security benefits. And such
refunds would be charged to general revenue funds, not social
security trust funds.
Paragraph 5 provides a method to resolve conflicts
between the Canadian and U.S. treatment of individual
retirement accounts. Certain Canadian retirement plans which
are qualified plans for Canadian tax purposes do not meet
Code requirements for qualification. As a result, the
earnings of such a plan are currently included in income, for
U.S. tax purposes, rather than being deferred until actual
distributions are made by the plan. Canada defers current
taxes on the earnings of such a plan but imposes tax on
actual distributions from the plan. Paragraph 5 is designed
to avoid a mismatch of U.S. taxable income and foreign tax
credits attributable to the Canadian tax on such distributions. Under the paragraph a United States citizen who is a
resident of Canada and a beneficiary of a Canadian registered
retirement savings plan may elect to defer U.S. taxation with
respect to any income accrued in the plan but not distributed
by the plan, until such time as a distribution is made from
the plan or any substitute plan. The election is to be made
under rules established by the competent authority of the
United States.
Paragraph 6 provides that if 25 percent or more of the
capital of a company which is a resident of a Contracting
State is owned directly or indirectly by individuals who are
not residents of that State, and if by reason of special
measures the tax imposed in that State on that company with
respect to dividends (other than direct investment dividends
referred to in paragraph 2(a) of Article X (Dividends)),
interest, or royalties arising in the other Contracting State
is substantially less than the tax generally imposed by the
first-mentioned State on corporate business profits, then,
nothwithstanding the provisions of Article X, XI (Interest),
or XII (Royalties), the other State may tax such dividends,
interest, or royalties as if there were no convention between
the United States and Canada with respect to taxes on income
and on capital. Thus, the Contracting State in which
dividends, interest, or royalties arise may substitute its
domestic law rate of tax on such income, which in the United
States is currently 30 percent and in Canada is currently 25
percent,
for range
the maximum
rates
for in the Convention, which
from zero
to provided
15 percent.

-60The phrase "substantially less than" is subject to
definition pursuant to paragraph 2 of Article III (General
Definitions). In any event, the phrase does not include the
situation under Canadian law where a privately owned company
distributes its investment income in the form of dividends
and receives a refund of up to 16-2/3 percent of such a
distribution. The effect of such a refund is not considered
to produce tax "substantially less than" the tax generally
imposed in Canada.
Article XXX. ENTRY" INTO FORCE
Paragraph 1 provides that the Convention is subject to
ratification in accordance with the procedures of Canada and
the United States. The exchange of instruments of ratification is to take place at Ottawa as soon as possible.
Paragraph 2 provides, subject to paragraph 3, that the
Convention shall enter into force upon the exchange of
instruments of ratification. It has effect, with respect to
source State taxation of dividends, interest, royalties,
pensions, annuities, alimony, and child support, for amounts
paid or credited on or after the first day of the second
calendar month after the date on which the instruments of
ratification are exchanged. For other taxes, the Convention
takes effect for taxable years beginning on or after January
1 next following the date when instruments of ratification
are exchanged. In the case of relief from United States
social security taxes provided by paragraph 4 of Article XXIX
(Miscellaneous Rules), the Convention also has effect for
taxable years before the date on which instruments of
ratification are exchanged.
Paragraph 3 provides special effective date rules for
foreign tax credit computations with respect to taxes paid or
accrued to Canada. Paragraph 3(a) provides that the tax on
1971 undistributed income on hand imposed by Part IX of the
Income Tax Act of Canada is considered to be an "income tax"
for distributions made on or after January 1, 1972 and before
January 1, 1979. Any such tax which is paid or accrued under
U.S. standards is considered to be imposed at the time of
distribution and on the recipient of the distribution, in the
proportion that the distribution out of undistributed income
with respect to which__the tax has been paid bears to 85
percent of such undistributed income. A person claiming a
credit for tax pursuant to paragraph 3(a) is obligated to
compute the amount of the credit in accordance with that
paragraph.
Paragraph 3(b) provides that the principles of paragraph
6 of Article XXIV (Elimination of Double Taxation), which
provides for resourcing of certain dividend, interest, and

-61royalty income to eliminate double taxation of U.S. citizens
residing in Canada, have effect for taxable years beginning
on or after January 1, 1976. The paragraph is intended to
grant the competent authorities sufficient flexibility to
address certain practical problems that have arisen under the
1942 Convention. It is anticipated that the competent
authorities will be guided by paragraphs 4 and 5 of Article
XXIV in applying paragraph 3(b) of Article XXX. Any claim
for refund based on the provisions of paragraph 3 may be
filed on or before June 30 of the calendar year following the
year in which instruments of ratification are exchanged,
notwithstanding statutes of limitations or other rules of
domestic law to the contrary. For purposes of Code section
6611, the date of overpayment is the date on which
instruments of ratification are exchanged, with respect to
any refunds of U.S. tax pursuant to paragraph 3.
Paragraph 4 provides that, subject to paragraph 5, the
1942 Convention ceases to have effect for taxes for which the
Convention has effect under the provisions of paragraph 2.
For example, if under paragraph 2 the Convention were to have
effect with respect to taxes withheld at source on dividends
paid as of March 1, 1981, the 1942 Convention will not have
effect with respect to such taxes.
Paragraph 5 modifies the rule of paragraph 4 to allow
all of the provisions of the 1942 Convention to continue to
have effect for the period through the first taxable year
with respect to which the provisions of the Convention would
otherwise have effect under paragraph 2(b), if greater relief
from tax is available under the 1942 Convention than under
the Convention.
Paragraph 6 provides that the 1942 Convention terminates
on the last of the dates on which it has effect in accordance
with the provisions of paragraphs 4 and 5.
Paragraph 7 terminates the Exchange of Notes between the
United States and Canada of August 2 and September 17, 1928
providing for relief from double taxation of shipping
profits. The provisions of the Exchange of Notes no longer
have effect for taxable years beginning on or after January 1
following the exchange of instruments of ratification of the
Convention. The 1942 Convention, in Article V, had suspended
the effectiveness of the Exchange of Notes.
Paragraph 8 terminates the Convention between Canada and
the United States for the Avoidance of Double Taxation with
Respect to Taxes on the Estates of Deceased Persons signed on
February 17, 1961. The provisions of that Convention cease
to have effect with respect to estates of persons deceased on
or after January 1 of the year following the exchange of
instruments of ratification of the Convention.

-62Article XXXI.

TERMINATION

Paragraph 1 provides that the Convention shall remain in
force until terminated by Canada or the United States.
Paragraph 2 provides that either Canada or the United
States may terminate the Convention at any time after 5 years
from the date on which instruments of ratification are
exchanged, provided that notice of termination is given
through diplomatic channels at least 6 months prior to the
date on which the Convention is to terminate.
Paragraph 3 provides a special termination rule in
situations where Canada or the United States changes its
taxation laws and the other Contracting State believes that
such change is significant enough to warrant modification of
the Convention. In such a circumstance, the Canadian
Ministry of Finance and the United States Department of the
Treasury would consult with a view to resolving the matter.
If the matter cannot be satisfactorily resolved, the
Contracting State requesting an accommodation because of the
change in the other Contracting State's taxation laws may
terminate the Convention by giving the 6 months' prior notice
required by paragraph 2, without regard to whether the
Convention has been in force for 5 years.
Paragraph 4 provides that, in the event of termination,
the Convention ceases to have effect for tax withheld at
source under Articles X (Dividends), XI (Interest), XII
(Royalties), and XVIII (Pensions and Annuities), and under
paragraph 2 of Article XXII (Other Income), with respect to
amounts paid or credited on or after the first day of January
following the expiration of the 6 month period referred to in
paragraph 2. In the case of other taxes, the Convention
shall cease to have effect in the event of termination with
respect to taxable years beginning on or after January 1
following the expiration of the 6 month period referred to in
oOo
paragraph 2.

IMMEDIATE RELEASE
January 19, 1981

CONTACT:

Everard Munsey
566-8191

CHRYSLER LOAN BOARD APPROVES
CHRYSLER'S REQUESTS FOR LOAN GUARANTEES
The Chrysler Corporation Loan Guarantee Board today approved
up to $400 million in additional Federal loan guarantees for
Chrysler Corporation.
The Board acted unanimously after receiving a revised
application and revised Operating and Financing Plans from
Chrysler dated January 14, 1981. The revised application and
plans incorporate new agreements reached with the United Auto
Workers negotiating committee and with a representative group of
Chrysler's 150 U.S. and European lenders.
The Board found that Chrysler had met the requirements of
the Chrysler Corporation Loan Guarantee Act and transmitted its
findings to the Senate and House Banking Committees. A statutory
15 day waiting period must elapse before the Board can approve
issuance of the new loan guarantees and actual sale of the
guaranteed securities by Chrysler.
Before the Board approves issuance of the guarantees, it
required that the following conditions must be met:
* ratification by the eligible United Auto Workers
membership of the new wage concessions agreed by the UAW
negotiating committee and implementation by Chrysler of identical
compensation policies with regard to its other employees;
* completion of the debt restructuring agreement
contemplated in Chrysler's agreement with its lenders and
presentation by Chrysler of a program to exercise its option
under the agreement to buy out half its long-term debt at a
discount;
* documentation that Chrysler has obtained at least $36
million in additional supplier concession for 1981 and assurances
that the company will use its best efforts to obtain further
concessions from suppliers in 1981 worth $36 million;
M-812

-2* an amendment, satisfactory to the Board, of the agreement
among the Government of Canada, Chrysler and Chrysler Canada Ltd.
approving Chrysler's new Operating and Financing Plans as they
relate to the Canadian government's commitment to provide up to
$200 million in loan guarantees;
* addition of provisions to Chrysler's agreement with the
United States "to pursue diligently with all deliberate speed a
capital infusion program satisfactory to the Board";
* evidence of satisfactory progress by Chrysler toward
sales of its remaining jet aircraft and of its options to
purchase two more jet planes and acceptance by Chrysler of a
prohibition on owning and operating corporate aircraft.
* compliance with the conditions of Chrysler's agreement
with the Board, including the receipt of all required opinions
and certifications;
By law, the amount of Federal guarantees outstanding at any
time may not exceed the amount of non-guaranteed assistance
accrued by the company. Chrysler expects to have accrued an
additional $400 million in non-guaranteed assistance by the end
of January. The Eoard will review the amount of accruals at the
time it considers approving issuance of the guarantees. The
amount of loan guarantees will be limited to $400 million or any
smaller amount of additional non-guaranteed assistance that the
company has then accrued.
Chrysler intends to sell 10 year notes of $5000 minimum
denomination in an underwritten public offering by a syndicate
led by Salomon Brothers, Merrill Lynch, White Weld Capital
Markets Group, The First Eoston Corporation, E. F. Hutton & Co.,
and Warburg Paribas Becker & Co. The interest rate on the notes
must not exceed 1.5 percentage points above the current average
yield on outstanding Treasury securities of comparable maturity.
The company has set February 2 as the target date for selling the
guaranteed notes.
New Concessions in the Revised Plans
The revised company Operating Plan provides for the
following new concessions from parties with an interest in the
company:
Lenders would convert approximately half of Chrysler's
long-term debt of about $1 billion as well as about $6P
million in deferred interest notes to preferred stock.
The company would have the option to purchase half of
the remaining long-term debt in installments over about
a year at 30 cents on the dollar.

18114949 20 J

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