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U.S. Dept. of the Treasury.
t ; PRESS RELEASES.

UBRA R Y
pooM 5030

TREASURY NEWS

-204
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

July 22, 1985

Tenders for $7,200 million of 13-week bills and for $7,230 million
of 26-week bills, both to be issued on
July 25, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing October 24, 1985
Discount Investment
Rate '
Rate 1/
Price

26-week bills
maturing January 23, 1986
Discount Investment
Rate
Rate 1/
Price

7.21%
7.24%
7.23%

7.33%
7.36%
7.35%

7.45%
7.48%
7.47%

98.177
98.170
98.172

7.72%
7.75%
7.74%

96.294
96.279
96.284

Tenders at the high discount rate for the 13-week bills were allotted 47%.
Tenders at the high discount rate for the 26-week bills were allotted 52%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Accepted
:
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received

Accepted
$
47,475
6,074,795
24,380
36,840
47,340
42,080
174,285
51,305
26,610
50,055
22,775
273,840
358,010

51,385
16,324,880
42,425
63,150
46,550
55,260
1,290,900
97,715
54,640
69,625
44,055
1,012,760
313,440

$
51,385
6,018,285
36,365
63,045
46,550
47,610
333,220
56,915
54,110
64,615
34,055
80,760
313,440

:
:
:

47,475
17,262,955
24,380
36,840
52,340
50,680
1,104,945
71,305
36,770
54,535
32,775
1,231,400
358,010

$19,466,785

$7,200,355

$20,364,410

$7,229,790

$16,716,095
1,195,985
$17,912,080

$4,449,665
1,195,985
$5,645,650

:
:
:

$17,647,660
1,105,420
$18,753,080

$4,513,040
1,105,420
$5,618,460

1,184,435

1,100,000

370,270

511,330

$19,466,785

$7,200,355

$20,364,410

$7,229,790

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

An additional $35,130 thousand of 13-week bills and an additional $59,070
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.

B-218

TREASURY NEWS

apartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Immediate Release

July 22, 1985

James H. Lokey, Jr.
Associate Tax Legislative Counsel

Assistant Secretary for Tax Policy, Ronald A. Pearlman, today
announced the appointment of James H. Lokey, Jr. as Associate Tax
Legislative Counsel. Mr. Lokey previously served as Acting
Associate Tax Legislative Counsel and as an attorney-advisor in
the Office of Tax Legislative Counsel.
As Associate Tax Legislative Counsel, Mr. Lokey, 32, reviews
and assists in the development of tax regulations, rulings, and
other tax policy matters. In addition, he participates in the
development of the Treasury Department's recommendations for
Federal tax legislation before Congressional Committees.
Prior to joining the Treasury Department, Mr. Lokey was in
private practice with the law firm of Long & Aldridge in Atlanta,
Georgia. Mr. Lokey is a graduate of Vanderbilt Law School, from
which he received the J.D. degree in 1978, and a graduate of
David Lipscomb CoLlege, from which he received a 3.S. degree,
magna cum laude, in 1974. At Vanderbilt he served as an editor
of the Vanderbilt Law Review, was elected to the Order of the
Coif, and received the Founder's Medal for First Honors.
Mr. Lokey, a native of Nashville, Tennessee, is a member of
the State Bar of Georgia (admitted 1978) and the American Bar
Association. He has lectured extensively on a wide variety of
tax matters.

B-219

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Immediate Release

July 22, 1985

David C. Garlock
Associate Tax Legislative Counsel

Assistant Secretary for Tax Policy, Ronald A. Pearlman, today
announced the appointment of David C. Garlock as Associate Tax
Legislative Counsel. Mr. Garlock had served as an AttorneyAdvisor in the Office of Tax Policy since October 1982.
As Associate Tax Legislative Counsel, Mr. Garlock, 32, will
continue to play an active role in matters relating to the time
value of money, the taxation of insurance companies, and the
Federal estate, gift and generation-skipping transfer tax. One
of Mr. Garlock's primary responsibilities will be the review and
development of IRS rulings prior to their publication.
Before joining Treasury, Mr. Garlock was an associate in the
law firm of Roberts & Holland in New York. Mr. Garlock received
the J.D. from Harvard Law School in 1979 and the A.B. from
Harvard College in 1975.
Mr. Garlock is a member of the New York and District of
Columbia Bars. He has authored a number of scholarly articles
and has lectured extensively on a wide variety of tax matters.
Mr. Garlock, a native of Detroit, Michigan, is married to
Barbara A. Schwartz and currently resides in Washington, D.C.

B-220

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Immediate Release

July 22, 1985

Dennis E. Ross
Deputy Tax Legislative Counsel

Assistant Secretary for Tax Policy, Ronald A. Pearlman, today
announced the appointment of Dennis E. Ross as Deputy Tax
Legislative Counsel. Mr. Ross joined the Office of Tax Policy
since in July, 1984 and has been Acting Deputy Tax Legislative
Counsel since September, 1984.
As Deputy Tax Legislative Counsel, Mr. Ross, 34, supervises a
staff of lawyers who review and assist in the development of tax
regulations and rulings and participate in the preparation and
presentation of the Treasury Department's recommendations for
Federal tax legislation before Congressional committees.
Prior to joining Treasury, Mr. Ross was on the Faculty of the
University of Michigan Law School and before that an Associate in
the law firm of Davis Polk & Wardwell in New York. Mr. Ross
received his J.D. from the University of Michigan Law School in
1978 and a B.A. in English from the University of Michigan in
1974.
Mr. Ross is a member of the New York State Bar.
Mr. Ross, a native of Chicago, Illinois, currently resides in
Washington, D.C.

B-221

TREASURY NEWS
»partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

July 23, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued August 1, 1985.
This offering
will provide about $450
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $13,959 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, July 29, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
November 1, 1984,
and to mature October 31, 1985
(CUSIP No.
912794 HN 7 ) , currently outstanding in the amount of $15,324 million,
the'additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
August 1, 1985,
and to mature January 30, 1986
(CUSIP No.
912794 JQ 8 ) .
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing August 1, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,813 million as agents for foreign and international monetary authorities, and $2,243 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
J2-222

PAGE 2

Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041

For Release Upon Delivery
Expected at 9:30 a.m. EDT
Thursday, July 25, 1985
STATEMENT OP RONALD A. PEARLMAN
ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Committee:
I am pleased to appear before you today to discuss the
treatment under the Federal income tax system of amounts paid for
State and local taxes. As you know, the President's tax reform
proposal would generally repeal the existing itemized deduction
for State and local taxes.
Introduction
Current Law
Section 164 of the Internal Revenue Code allows taxpayers
that itemize deductions to deduct four types of State and local
taxes that are not incurred in a trade or business or
income-seeking activity: individual income taxes, real property
taxes, personal property taxes, and general sales taxes. Other
State and local taxes are deductible by individuals only if they
are incurred in carrying on a trade or business or income-seeking
activity. This category includes taxes on gasoline, cigarettes,
tobacco, alcoholic beverages, admission taxes, occupancy taxes
and other miscellaneous taxes.
Taxes incurred in carrying on a trade or business or which
are attributable to property held for production of rents or
royalties (but not other income-producing property) are
deductible in determining adjusted gross income. Thus, these
taxes are deductible by both itemizing and nonitemizing
taxpayers. Taxes incurred in carrying on other income-seeking
activities are deductible only by individuals who itemize
deductions. Examples of these taxes include real property taxes
on
vacant land held for investment and intangible personal
B-223

- 2 property taxes on stocks and bonds. State and local income taxes
are not treated as incurred in carrying on a trade or business or
as attributable to property held for the production of rents or
royalties, and therefore are deductible only by individuals who
itemize deductions.
Administration Proposal .-*
Under the President's Tax Proposals'" to Congress for Fairness,
Growth, and Simplicity, the itemized deduction for State and
local income taxes and other taxes not incurred in carrying on a
trade or business or income-seeking activity would be repealed.
State and local taxes (other than income taxes) which currently
are an itemized deduction but which are incurred in carrying on
an income-seeking activity would be aggregated with certain other
miscellaneous expenses and would be deductible above a threshhold
of one percent of adjusted gross income.
State and local taxes that under current law are deductible
without regard to whether the taxpayer itemizes would not be
affected by the proposal. Thus, for example, real property taxes
on property used in a trade or business or held for rental would
remain deductible. Similarly, the proposal would not affect the
deductibility of State and local taxes paid by corporations.
Reasons for Proposed Repeal
Fairness
Analysis of the deduction for State and local taxes
appropriately begins with the question of its fairness in the
context of the Federal income tax system. The question of
fairness is, in turn, driven by the fact that States and
localities vary significantly in the type and extent of public
services which they choose to provide and thus in the level of
State and local taxes they impose. Because of the deduction,
differences in the level of taxes imposed by State and local
governments translate to differences in the level of Federal
income taxes paid by the residents of particular jurisdictions.
The deduction thus leaves State and local governments with the
ability to affect the Federal income tax liabilities of their
residents through their own tax and spending policies. In net
effect, the deduction causes a shift in Federal income tax
burdens, with taxpayers in high-service, high-tax communities
benefitting at the expense of taxpayers in low-service, low-tax
communities. Put in other t$rms, because of the deduction, two
itemizing taxpayers with equivalent incomes living in communities
with different levels of State and local taxes will pay
correspondingly different shares of the cost of national defense,
interest on the national debt and other Federal programs. This
result is patently unfair.

- 3 -

The unfair distribution of benefits among State and local
jurisdictions as a result of the deduction for State and local
taxes is illustrated by recent tax return data. As shown in
Table 1, tax savings per capita in 1982 as a result of the
deduction varied widely among the States, ranging from a high of
$233 for New York to $20 for South Dakota. The discrepancies are
even greater when the tax savings accruing to itemizers are
compared. For example, in 1982, itemizing taxpayers in New York
received an average tax savings of $1,292 from the deduction,
whereas itemizers in Wyoming on average saved only $257.
Although the data in Table 1 focus on the distribution of the
deduction's benefit among the States, it is important to
recognize that the question of fairness is not simply a matter of
high-tax versus low-tax States, but equally of high-tax versus
low-tax communities within the same State. Thus, the deduction
is of greater benefit to an affluent suburb with high property
taxes, a population of high-income, itemizing taxpayers, and a
high level of home ownership, than to a not far distant inner
city community, where renters predominate and few itemize their
deductions.
Tax return data also contradict those who argue that the
deduction for State and local taxes is a "middle class
deduction." Although a relatively large percentage of returns
claim a deduction for State and local taxes, including 62% of
taxable returns with AGI of between $25,000 and $30,000 (Table
2), the amount and value of the deduction reflects
disproportionate use by high-income taxpayers. Thus, as shown in
Table 3, roughly 75 percent of all taxable returns in 1983 had
AGI of less than $30,000; however, this same group of returns
accounted for only 28 percent of the total deductions taken for
State and local taxes paid, and only 15 percent of the tax
benefits from the deduction. Put another way, the top 25 percent
of all taxable returns by AGI account for 85 percent of the total
benefit from the taxes paid deduction.
A final issue of fairness concerns the effect of the
deduction on State and local tax burdens within particular
communities. Consider the variation in effective tax rates for
three persons facing a 6 percent State sales tax: a nonitemizer,
an itemizer in the 20 percent tax bracket, and an itemizer in the
50 percent bracket. The nonitemizer pays the full 6 percent
sales tax rate, whereas the two itemizers pay effective rates of
4.8 and 3 percent, respectively. Thus, a State and local tax
that is flat or even mildly progressive in form, is transformed
by the deduction to one that is significantly regressive in
effect.
Need to Reduce Marginal Rates
Aside from the issue of fairness, the revenues at stake with
respect to the State and local tax deduction are critically
current
importantlaw,
to our
the deduction
efforts to for
reduce
State
marginal
and local
tax taxes
rates.
is Under
projected

- 4 to result in a revenue loss of approximately $33 billion in 1987,
increasing to $40 billion by 1990. Unless these revenues are
recaptured through a repeal of the State and local tax deduction,
a significant reduction in marginal rates will not be possible
withiri the constraint of revenue neutrality. We should not lose
sight of the fact that lower tax rates are central to tax reform,
and that lower rates will, in and of themselves, do much to
reduce the significance of tax considerations in personal and
commercial decision-making and therefore to promote fairness,
growth, and simplicitly.
•,
Inefficient Subsidy
Many who support the deduction for State and local taxes
concede that it cannot be defended as a matter of tax policy, but
argue instead that it is an appropriate subsidy for State and
local government spending. Even assuming a Federal subsidy for
State and local spending is appropriate, a subsidy provided
through a deduction for State and local taxes fails on grounds
both of efficiency and fairness. On average, State and local
governments gain less than 50 cents for every dollar of Federal
revenue loss because of the deduction. Moreover, a deduction for
taxes does not distinguish between categories of State and local
spending, but is as much a subsidy for spending on recreational
facilities as for public welfare spending. The deduction thus
operates as a general subsidy for State and local government
spending, with
the of
result
that
high-tax States and
Effect
Repeal
onhigh-service,
States and Localities
localities derive a disproportionate benefit.
Effect on Spending

Many of the arguments for retention of the deduction for
State and local taxes reflect concern over the effect of repeal
on the ability of States and localities to raise necessary
revenue. These concerns are understandable, but a hard look at
the facts indicates that the effect of repeal on State and local
spending will be extremely modest. Perhaps the most important
fact to consider is that a relatively small percentage of State
and local expenditures are financed with deductible taxes. As
shown in Table 4, taxes claimed as an itemized deduction
represent about 31 percent of all State and local tax revenues,
and only 20 percent of all State and local revenue sources
exclusive of borrowings.
Even as to State and local revenues derived from deductible
taxes, the effect of repeal should be limited. Since the
President's proposals are revenue neutral, State and local
governments will face no greater competition with the Federal
government for tax dollars. Indeed, among individuals, the only
taxpayers affected by repeal of the State and local tax

- 5 deduction, the President's proposals reduce Federal income taxes,
and thus leave even greater flexibility to State and local
governments. In addition, the other base-broadening provisions
contained in the Administration proposal will actually tend to
increase tax revenue for the thirty-two States (and the District
of Columbia) with income tax systems that utilize Federal
concepts of taxable income. For example, Colorado recently
estimated that, unless it lowered its income tax rates, 1986 tax
revenues would be increased by $50- million as a result of the
base-broadening contained in the Administration proposal. The
proposed base-broadening will also benefit States that impose
corporate income taxes that "piggyback" on .Federal definitions of
taxable income.
Our conclusion that repeal of the State and local tax
deduction will have a very limited effect on State and local
spending is confirmed by recent independent studies. Thus, a
National League of Cities study found that total State and local
spending is about two percent higher because.of the existence of
the deduction for State and local taxes. Similarly, a study by
the Congressional Research Service predicted that total State and
local expenditures would be only 1.5 percent lower if the
deduction were repealed. Assuming that the current seven percent
annual growth rate in State and local spending continues, these
studies indicate that repeal of the deduction would not reduce
the level of State and local spending, but would merely slow its
rate of growth. Moreover, both of the studies assumed that
nonitemizers exert no control over State and local spending and
tax decisions. If the role of nonitemizers in the electoral
process were taken into account, the predicted effect of repeal
on State and local spending would necessarily be lower, perhaps
by a substantial amount. The figures from the studies, of
course, represent averages, and thus the effect on particular
States and localities could be higher or lower.
It must also be recognized that repeal of the State and local
tax deduction will reduce State and local spending only to the
extent taxpayers decide that the services provided by State and
local governments are not worth the taxes paid to provide them.
Moreover, to whatever extent State and local taxpayers make that
decision, the practical effect is not a loss of wealth to State
and local communities, but a shift in resources from public to
private activities. Thus, any loss in State and local government
spending would be matched by an increase either in private goods
or services or in private investment and savings. Such increase
would have positive effects on State and local economies, which
should, in turn, generate additional tax revenue.
Some opponents of repeal have argued that, at a minimum, the
property tax deduction should be retained because of its
importance in financing education expenditures. The argument
ignores that itemized property taxes, the only property taxes
that would of
be affected
by the
proposal,
constitute
only a small
percentage
the revenues
supporting
public
education

- 6 expenditures. Less than half of all State and local direct
expenditures for elementary and secondary education are financea
from property tax revenues. Moreover, less than 35% of all.4.Vl
property taxes paid are claimed as an itemized deduction, witn
the balance either not deducted at all (because paid by
non-itemizers) or deductible by corporations and other businesses
and thus unaffected by repeal. Thus, less than-48% of all State
and local direct expenditures for elementary and secondary
education are financed by property^taxes which are claimed as
itemized deductions.
•f

Effect on Interjurisdictional Tax Competition
Some opponents of repeal have argued that deductibility is
necessary to mute tax competition among different jurisdictions,
and that absent the deduction, State and local governments would
bid destructively to attract taxpayers to their jurisdictions.
Such fears about the adverse effects of tax competition are
greatly overstated. Competition among business firms is
universally heralded as the source of efficiency, innovation, and
cost control; without it, consumers are at the mercy of those who
enjoy monopoly positions. The same line of reasoning is
applicable to competition among the States and among localities.
As long as the Federal government mutes competition by picking up
part of the tab for State and local expenditures, there is less
need for responsive and responsible government. Competition can
be expected to bring more innovative government, greater
efficiency, and lower cost than a system in which State and local
governments operate under the umbrella of Federal deductibility.
It should also be noted that taxes are but one element in the
competition among jurisdictions. Jurisdictions that impose high
taxes also deliver a high level of services. The choice faced by
taxpayers is not simply whether to live in a high-tax or low-tax
jurisdiction, but also whether to live in a jurisdiction with
high or a low level of public services. Moreover, for the clear
majority of taxpayers, those that do not itemize deductions, tax
deductibility
not affect
Opponents does
of repeal
of the interjurisdictional
deduction for State tax
and local
differences.
taxes have advanced a number of arguments in support of their
Response
Against
Repeal are without substance, and
position. toWeArguments
believe these
arguments
I would like to take this opportunity to respond to them.
1. "The Administration proposes repeal simply for tha
money." It has been asserted that the Administration proposes
repeal of the State and local tax deduction simply "for t h e
money." The assertion is not only untrue, it is disingenuous
Even a casual study of the academic literature would reveal that

- 7 economists and legal scholars have for years criticized the
deduction for State and local taxes, and cited its repeal as an
important element of tax reform. Similarly, the two leading tax
reform proposals originated in Congress, one sponsored by
Republicans and the other by Democrats, would each substantially
restrict the State and local tax deduction. Wha£, these and other
studies of tax reform have recognized is that the deduction for
State and local taxes fails the basic test of fairness.
2. "The deduction is part of federalism." Some have argued
that the disproportionate benefits provided to high-tax States by
the deduction for State and local taxes are •- no different than the
wide variety of direct benefits that the Federal government
provides to State and local communities. On this view, the State
and local tax deduction is akin to crop support, disaster relief,
water and mass transit projects, and the other assorted Federal
programs and benefits that are targetted to particular
communities. Although this argument purports to draw on
principles of federalism, it, in fact, confuses Federally
coordinated programs that distribute benefits across the nation
with a locally controlled subsidy for locally determined
purposes. Imagine the response in Congress to a proposed Federal
spending program under which State and local governments, each
acting independent of the other as well as of the Federal
government, were free to determine not only the programs on which
funds were to be spent, but more critically, the actual level of
spending. Such a proposal would surely not be taken seriously,
and yet that is the precise effect of the deduction for State and
local taxes. Unlike crop support, disaster relief and the other
Federal projects that are annually reviewed and approved by
Congress, the subsidy provided by the State and local tax
deduction is controlled in both amount and character by the
individual policies of countless State and local governments.
Federalism is turned on its head if defined as a system under
which taxpayers in low-tax States and localities are required to
finance programs the size and purpose of which is determined
solely by the taxpayers of high-tax States and localities.
3. "High-tax States put more into the Federal system than
they get out." Some who defend the State and local tax deduction
argue that even though high-tax States are disproportionately
benefitted by the deduction, they nevertheless pay more on
average to the Federal treasury in taxes than they receive in
Federal outlays. Thus, so the argument goes, high-tax States are
subsidizing low-tax States, rather than the reverse. This sort
of argument verges on the irresponsibile, for it draws on a
mechanical analysis of where Federal expenditures are made to
support a conclusion about which States benefit from the
expenditures. Consider Federal expenditures for national
defense. Does the fact that an air force base is located in
Colorado mean that the salaries of personnel at the base benefit
no
costState
of the
in the
ships,
Union
planes,
other missiles
than Colorado?
and otherSimilarly,
equipment does
used the
by

- 8 the armed services represent a benefit only to the State i*1 w m c n
they are built? The answer, of course, is no; the benefit °r
Federal expenditures for defense, as with the great bulk of
Federal expenditures generally, extends far beyond the State in
which the expenditures are made.
There are comparable difficulties in allocating Federal tax
receipts, to particular States. Many individuals, particularly in
the urban areas of the Northeast,^work in one State but live in
another. Which State should be credited with their tax payments?
How, moreover, are corporate tax payments to be allocated among
the States? Should they be treated as effectively paid by the
corporation's customers, by"its employees,'by its shareholders,
by all owners of capital, or by some combination thereof? The
fact is that all of the published studies that have attempted to
analyze the source of Federal tax revenues have been forced to
make grossly simplifying assumptions about these and other
questions. They are a slender ground on which to base an
argument that some States pay more to the Federal government than
they receive in benefits.
4. "State and local taxes have been deductible since the
inception of the income taxT" Some opponents of repeal have
cited the fact that a deduction for State and local taxes has
been allowed historically, as though to suggest that
deductibility of State and local taxes is an inviolable tenet of
Federal-State relations. A careful reading of the deduction's
history, however, suggests something quite different. Although
the first Civil War Income Tax Act and the Revenue Act of 1913
each allowed a deduction for State and local taxes, they
similarly allowed a deduction for Federal taxes, including the
Federal income tax itself. Over time, Congress increasingly
narrowed the range of deductible taxes: the deduction for Federal
income taxes was eliminated in 1917; the deduction for Federal
and State inheritance and transfer taxes was eliminated in 1934;
the deduction for certain State and local sales, transfer and
admission taxes was eliminated in 1964; and the deduction for
non-business State gasoline taxes was eliminated in 1978. The
successive restrictions on deductible State and local taxes
contradict any notion that the current deduction rests on a
bedrock principle of federalism. Moreover, the historical
grounds on which certain State and local taxes have remained
deductible are of limited relevance today. For eaample, Congress
in 1964 indicated that continued deductibility of State income
taxes was appropriate because the combined Federal and State tax
rate could otherwise be excessively high. That judgment may have
been correct at a time when the maximum Federal rate was 90
percent, but there is no comparable basis for concern at current
rates. Indeed, the reduction in Federal income tax rates under
the President's proposals would generally reduce the combined
rate of tax on individual and business income.

- 9 It should also be recognized that the early Federal income
tax statutes were written at a time when the relative powers and
responsibilities of the Federal and State governments were viewed
much differently than today. In 1917, the Supreme Court was
preparing to hold unconstitutional a Federal statute attempting
to regulate child labor, Hammer v. Dagenhart, 2*7 U.S. 251
(1918), and was still decades away from*recognizing Federal
powers and responsibilities that are taken for granted today.
This limited, and long since outmoded view of Federal authority
carried over to the tax laws, where Congress originally allowed
not only a deduction for State and local taxes, but also a
complete exemption from tax for the salaries of State and local
government employees. In time, it was recognized that whether
State and local employees should pay Federal income tax was a
question of tax and social policy, and not of Federal versus
State authority. We believe the debate over the deductibility of
State and local taxes should be conducted on the same terms, and
that on those terms, the deduction is revealed as an anachronism
that should be ended.
5. "Tax reform should not be accomplished on the backs of
States and localities." Some opponents of repeal have asserted
that the State and local tax deduction has been unfairly singled
out in the Administration's proposal. Thus, they claim that the
revenue loss from the State and local tax deduction constitutes
only 11 percent of the revenue loss from all "loopholes" in the
system (as measured by the tax expenditure budget), but 67
percent of the revenue necessary to lower marginal rates under
the Administration proposal. At the outset, we would note that
the figure of 67 percent was apparently derived by dividing the
$33.3 billion revenue pickup from repeal of deductibility in
fiscal year 1987 by the $49.5 billion revenue loss from the
proposed change in the rate schedule in the same year. This
analysis overlooks the fact that the- increase in the zero bracket
amount and the increase in the personal exemption are integral
parts of the rate reduction provided in the President's
proposals. When these items are considered, the revenue
generated by repeal of the State and local tax deduction
constitutes about 35 percent of the revenue necessary to revise
the rate structure in fiscal year 1987 and about 31 percent in
fiscal year 1990.
We recognize that absent repeal or reduction of every
preference on the tax expenditure budget, those items that are
repealed or reduced will inevitably generate a disproportionate
share of the revenue necessary for rate reduction. This
mathematical fact should not be permitted, however, to divert
attention from the merits of particular preferences.
In the
context of fundamental tax reform, each preference must be tested
separately for whether it is fair and in the national interest.
We concluded, for example, that a deduction for charitable
contributions
characterize
local
taxes, however,
it
should
as a preference.
be
should
retained,
be judged
The
even deduction
on
though
its many
ownfor
merits.
would
State and
If, as

- 10 we have concluded, it is neither fair nor in the national
interest, it should be repealed.
6. "Repeal of the State and local tax deduction would amount
to'imposing a tax on a tax." We believe this argument is mute
rhetorical than real. lF~is contradicted by the practice of most
States with respect to their own tax systems: 43 States and the
District of Columbia impose a personal income tax, yet 28 of
these Jurisdictions do not permit a deduction for Federal income
tax, and many also allow no deduction for local taxes.
Similarly, of the 46 States that impose a corporate income tax,
39 do not permit a deduction for Federal income taxes.
To the extent the "tax on a tax" argument has substance
beyond its rhetoric, it suggests that amounts paid in state and
local taxes should be exempt from Federal taxation because such
payments are involuntary and because State and local taxpayers
receive nothing in return for their payments. Neither suggestion
is correct. State and local taxpayers receive important personal
benefits in return for their taxes, such as public education,
water and sewer services, and municipal garbage removal.
Moreover, State and local taxpayers have ultimate control over
the taxes they pay through the electoral process and through
their ability to locate in jurisdictions with amenable tax and
fiscal policies.
7. "It's unfair to permit a foreign tax credit but not a
State and local tax deduction." The asserted analogy between
foreign taxes and State and local taxes is unsound. The foreign
tax credit is an integral part of a system of international
taxation in which primary taxing authority is generally ceded to
the country where income is earned. Under this system, U.S.
residents are allowed a foreign tax credit for foreign taxes
paid, just as foreign taxpayers earning income in the U.S. are
generally allowed a credit in their home country for U.S. taxes
paid. In contrast to this international system in which primary
taxing authority is ceded to one country, our federal system of
government necessarily involves different levels of government
applying tax to the same taxpayers and the same income. The
deductibility of taxes paid to overlapping domestic jurisdictions
Conclusion
thus is not an issue of double
taxation but rather of the extent
to which
each
to define
own tax base.
Let
me say
in jurisdiction
closing that is
theable
nation
faces its
an historic
As
indicated
above,
most
States
assert
this
authority
for opportunity to reform the tax system, for the benefit of
themselves and
by denying
a deduction
for Federal
income
taxes. tax
ourselves
of generations
to come.
By reducing
marginal
rates and improving the fairness of the system we can remove
unnecessary restraints on the prosperity of all Americans, we
believe repeal of the deduction for State and local taxes i s a
necessary component of tax reform. Let me emphasize again that
this is not simply a question of revenue, but more fundamental!

- 11 a question of fairness. As has been eloquently stated by
Governor Thornburgh "... what divides the nation is the
unfairness of the present tax structure. If there's anything
that demonstrates the unfairness of the deductibility of State
and local taxes it's the fact that there's such an enormous
difference in viewpoint depending on what State-you're in ....
When you have that kind of difference you've got an unfair tax
system. 1
* * *

This concludes my prepared remarks. I would be happy to
answer any questions that you might have at this time.

Table 1
States Ranked by Per Capita Tax Savings
from Taxes Paid Deduction— 1982
Stat*
«*v T*rk
District '•« Columbia
Maryland
Mow Jorsoy
Delaware
California
Massachusetts
Mlaaesota
Michigan
Wisconsin
Conaecticut
Oregoa
lawall
•node Island
Virginia
Colorado

| Tas Savings
1 »or Capita

| lacoa* Per
1 Caaltt

$233

$12,314

H 7

14,5S<
12,234
1J.0IJ
11,73:
12, SO*
12,OK
'^11,17!
10.934
'
10,77<
13,741
10,33!

ii,<s;
10,72!
11.Of!

12,JO;

O.fl. Average

11,10'

Illinois
Otah
••orgia
••braska
Oklaboaa
Pennsylvania
Oblo
Sanaa*
•ortb Carolina
Arlsona
leva
•eraoat
South Carolina
Main*
Missouri
••« laapahir*
Kentucky
Idaho
Washington
•evada
Indiana
Florida
Alabaaa
Arkansas
Alaska
Texas
•orth Dakota
Montana
Mississippi
••« Mexico
West Virginia
Teaaessee
wyoaing
Louisiana
South Dakota

12,10(
0,07!
9.5*1
10,CI!
11,37<
10,95!
10,07*
11,7C!
10,044
10,172
10,701
9.SO*!

Sourc*:

| Baak of lacoa*
1 tor Capita

o,so:

9.041
10.17C
10,725
0,934
9,02!
11,5CC
11,901
10,021
10,971
• 0,(41
0,471
10,25-!
11,411
10,071
9,S0<
7,771
9,19C
0,70!
0,904
12,371
10,231
9,464

Advisory Coaaissloa on latergoveraaeatal gelations.

j
.-*4

Table 2
Number and Percentage of Returns with Taxes Paid Deduction - 1983
7" : Returns with Taxes Paid Deduction 1/
,
All
* s Taxable^, : ~~
: as percent : as percent
Mjusted Gross
: Returns
: Returns' :
* of All
: of Taxable
Income Class
; (thousands) : (thousands) : (thousands) : Returns
: Returns
t

Total

96,321

81,492

34,794

36.1%

42.7%

Uhder
$ 5,000
$
5,000 - $ 9,999
$
10,000 - $ 14,999
$
15,000 - $ 19,999
$
20,000 - $ 24,999
$
25,000 - $ 29,999
$
30,000 - $ 39,999
$
40,000 - $ 49,999
$
50,000 - $ 74,999
$
75,000 - $ 99,999
$
100,000 - $ 199,999
.$ 200,000 - $ 499,999
$
500,000 - $ 999,999
$ 1,000,000 & over

17,836
16,828
13,878
10.770

538

7,357
10,421
5,148
3,591

5,806
14,615
13.523
10,672
8,802
7,329
10,389
5.136
3,582

1,680
2,621
3,420
4.166
4,591
8,140
4,651
3,393

823
622
162
25
11

821
620
162
25
11

792
607
160
25
11

3.0%
10.0%
18.9%
31.8%
47.1%
62.4%
78.1%
90.3%
94.5%
96.2%
97.6%
98.3%
98.6%
98.5%

9.3%
11.5%
19.4%
32.0%
47.3%
62.6%
78.4%
90.6%
94.7%
96.5%
97.9%
98.5%
98.7%
98.6%

A AAA

Office of the Secretary of the Treasury
Office of Tax Analysis

July 23, 1985

1/ Taxes paid deduction net of State income tax refunds.
Note: Detail may not add to total because of rounding.
Source: Internal Revenue Service, Statistics of Income for 1983 individual
income tax returns.

Table 3
Cumulative Percentages of Taxable Returns, Returns with
Taxes Paid Deductions, Taxes Paid Deduction, and
the Value of the Taxes Paid Deduction
—i983

Ad jus ted Gross

Incorae C l a s s
Hinder
Kinder
Hinder
Hinder
Hinder
(Under
I'nder

5,000
10,000
15,000
20,000
25.000
30,000
40.000
61'nder
50,000
Under
75,000
Hinder
100,000
jfnder
200,000
Under
500,000
fl'nder $1 ,000.000
$
$
$
$
$
$
$
$
$
$
$
$

g.11 R e t u r n s

:
Cumulative
:
: Returns with
: Taxable : Taxes Paid
: Returns :
Deduction
7.12%
25.06%
41.65%
54.75%
65.55%
74.54%
87.29%
93.59%
97.99%
99.00%
99.76%
99.96%
99.99%
100.00%

1.55%
6.38%
13.91%
23.74%
35.71%
48.91%
72.30%
85.67%
95.42%
97.69%
99.44%
99.90%
99.97%
100.00%

Percentages of:
:
Taxes
: Value of
: Taxes Pai
:
Paid
: Deduction 1/ J Deductio
.37%
2.06%
5.25%
10.45%
17.94%
28.04%
50.00%
66.00%
82.02%
87.41%
93.80%
97.18%
98.39%
100.00%

f'ffice of the Secretary of the Treasury
Office of Tax Analysis

.30%
1.43%
3.94%
8.27%
15.16%
33.17%
49.75%
70.14%
78.20%
88.93%
94.93%
97.11%
100.00%
July 24, 1985

/ Taxes paid deduction net of State income tax refunds.
/ The value of the deduction for taxes equals the marginal tax rate times
the lesser of the deduction for taxes (net of State income tax refunds)
or total itemized deductions (net of State income tax refunds) in excess
of the zero bracket amount.
Less than .005 percent.
lote: Detail may not add to total because of rounding.
ource: Internal Revenue Service, Statistics of Income for 1983 individual
income tax returns.

Table 4
Taxes Paid Deductions as Percent of Total State and Local
Government Receipts and Expenditures
Calendar Year 1982
$billions
Total itemized taxes paid deduction $ 88.0
Minus State income tax refunds
Total taxes^paid deductions net of refunds

5.0
83.0

<•>

Total tax revenue of State and local governments 1/ 270.9
— Itemized taxes paid deductions as percent 30.6
Total State and local government expenditures from own
source revenues 2/

325.2

— Itemized taxes paid deductions as percent 25.5
Total State and local government receipts from own
source revenues 3/

358.0

— Itemized taxes paid deductions as percent 23.2
Total State and local government expenditures after
intergovernmental transfers 4/

409.0

— Itemized taxes paid deductions as percent 20.3
Ottice of the Secretary of the Treasury July 22, 1985
Office of Tax Analysis
T7 Fiscal year data converted to calendar year with 3/4 for FY 82 and
"" 1/4 for FY 83.
2/ Excludes the $81.6 billion of Federal aid to State and local
~" governments.
3/ Includes interest earnings, user fees and miscellaneous charges.
4/ Federal aid to State and local governments spent by State and
"" local governments as State and local expenditures.
Source: Statistics of Income Individual Income Tax Returns 1982;
Advisory Commission on Intergovernmental Affairs, Significant
Features of Fiscal Federalism, Tables 1, 2, 3, and 33.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE

July 24, 1985

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $ 9,264 million of
$18,348 million of tenders received from the public for the 2-year
notes, Series X-1987, auctioned today. The notes will be issued
July 31, 1985, and mature July 31, 1987.
The interest rate on the notes will be 8-7/8%. The range of
accepted competitive bids, and the corresponding prices at the 8-7/8%
interest rate are as follows:
Yield
Price
Low
8.94%
99.883
High
9.00%
99.776
Average
8.98%
99.812
Tenders at the high yield were allotted 50%.
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
63,860
15 ,363,445
40,420
200,410
105,390
91,590
1 ,088,505
113,290
68,260
161,900
28,525
1 ,014,580
7,340
$18 ,347,515
$

Accepted
$
62,860
7,639,445
40,420
195,410
102,890
83,090
506,505
95,290
67,260
160,150
28,525
274,580
7,340
$9,263,765

The $9,264 million of accepted tenders includes $1,087 million
of noncompetitive tenders and $8,177 million of competitive tenaers
from the public.
In addition to the $9,264 million of tenders accepted in the
auction process, $330 million of tenders was awarded at the average
price to Federal Reserve Banks as agents tor foreign and international
monetary authorities. An additional $479 million of tenders was also
accepted at the average price from Government accounts and Federal
Reserve Banks for their own account in exchange for maturing securities.

B-224

CD
CD
ID

::ederal financing bank

WASHINGTON, DC. 20220

FOR IMMEDIATE RELEASE

July 25, 1985

FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Rank (FFB), announced the following activity for the
month of June 1985.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $151.6 billion
on June 30, 1985, posting an increase of $2.0 billion
from the level on May 31, 1985. This net change was
the result of increases in holdings of agency assets of
$1.1 billion, holdings of agency-guaranteed debt of
$0.6 billion and holdings of agency debt of $0.3 billion
during the month. FFB made 290 disbursements during
June.
Attached to this release are tables presenting FFB
June loan activity, new FFB commitments entered during
June and FFB holdings as of June 30, 1985.
# 0 #

B-225

CD
CD

<fl m
01

Li.

Page 2 of 8

FEEERAL FINANCING BANC
JUNE 1985 ACTIVITY

DATE

BORROWER

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

6/6/85
6/10/85
6/13/85
6/17/85
6/20/85
6/24/85
6/28/85
7/1/85
7/2/85
7/8/85
7/2/85
7/8/85
7/8/85

7.495%
7.495%
7.265%
8.945%
7.445%
7.025%
7.075%
7.385%
7.385%
7.245%
7.245%
7.165%
7.165%

INTEREST
RATE
(other than
semi-annual)

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance

#473
#474
#475
#476
#477
#478
#479
#480
#481
#482
#483
#484
#485

6/1
6/3
6/6
6/10
6/13
6/17
6/20
6/24
6/24
6/28
6/28
6/29
6/30

$ 299,000,000.00
232,000,000.00
375,000,000.00
358,000,000.00
366,000,000.00
341,000,000.00
365,000,000.00
65,000,000.00
262,000,000.00
200,000,000.00
227,000,000.00
159,000,000.00
92,000,000.00

EXPORT-IMPORT BANK
Note #64

6/3

456,000,000.00

6/1/95

10.405%

5,000,000.00
900,000.00
3,000,000.00
9,850,000.00
20,000,000.00

9/3/85
9/3/85
9/9/85
9/9/85
9/16/85

7.505%
7.505%
7.515%
7.595%
7.115%

10.273% qtr

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Note
+*tote
+*Jote
+Note
+*tote

#332
#333
#334
#335
#336

6/3
6/10
6/10
6/11
6/18

AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership

6/1
6/2
6/17
6/25
6/30
6/30
6/30

20,000,000.00
150,000,000.00
120,000,000.00
50,000,000.00
435,000,000.00
100,000,000.00
120,000,000.00

6/1/05
6/1/95
6/1/95
6/1/95
6/1/95
6/1/00
6/1/05

10.825%
10.405%
10.095%
10.565%
10.375%
10.545%
10.725%

6/3
6/3
6/3
6/4
6/4
6/4
6/5
6/6
6/6
6/7
6/7
6/7
6/7

104,454,462.37
12,330,320.00
747,773.05
1,595,952.96
278,253.85
72,779.49
113,029.76
1,178,803.25
1,685,474.22
1,331,544.00
4,520,000.00
923,741.30
7,612,428.00

7/31/14
6/15/12
6/30/96
4/15/14
7/15/92
9/8/95
9/25/91
7/31/14
3/20/93
6/15/12
6/30/96
6/15/91
7/15/95

10.499%
10.509%
10.275%
10.565%
9.595%
10.175%
9.895%
10.165%
8.806%
•10.095%
9.972%
9.506%
10.015%

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales

Egypt 7
Greece 15
Korea 19
Egypt 6
Philippines 10
Morocco 11
Honduras 7
Egypt 7
Indonesia 10
Greece 15
Korea 19
Spain 5
Spain 7
+rollover

11.118%
10.676%
10.350%
10.844%
10.644%
10.823%
11.013%

arm
ann
ann
ann
ann
ann
ann

Page 3 of 8
FEDERAL FINANCING BANK
JUNE 1985 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
• (semiannual

INTEREST
RATE
(other than
semi-annual)

Foreign Military Sales (Cont'd)
Greece 14
Greece 15
Zaire 2
Spain 5
Spain 7
Spain 8
Turkey 13
Egypt 7
Thailand 10
Thailand 11
Tunisia 16
Korea 19
Egypt 7
Botswana 2
Lebanon 7
Peru 9
Philippines 10
Spain 8
Greece 14
Egypt 6
El Salvador 7
Botswana 4
Morocco 9
Morocco 11
Morocco 12
Morocco 13
Turkey 13
Egypt 7
Greece 15
Ecuador 5
Ecuador 8
Jordan 10
Jordan 11
Korea 19
Philippines 10
Thailand 11
Zaire 1
Zaire 2
Zaire 3

6/10
6/10
6/10
6/11
6/11
6/11
6/11
6/13
6/14
6/14
6/18
6/18
6/18
6/18
6/19
6/19
6/19
6/19
6/20
6/20
6/20
6/21
6/21
6/21
6/21
6/21
6/21
6/24
6/24
6/25
6/25
6/25
6/25
6/27
6/27
6/27
6/28
6/28
6/28

$ 633,520.95
3,056,564.88
4,129,654.00
570,660.70
6,417,255.45
570,400.33
727,158.22
19,042,539.66
3,960,895.88
15,467,395.00
5,268,603.88
1,283,500.00
6,429,078.98
24,600.00
25,230,112.47
75,250.00
2,548,405.93
4,672,351.83
44,446.80
1,129,804.10
804,364.44
15,655.71
260,024.00
1,745.00
•7 ft^rt A C
7,920.05
1,088,577.56
4,446,950.82
20,490,567.77
1,338,035.53
131,290.50
391,185.00
4,140.68
17,270.00
50,426,930.71
131,723.07
11,433,865.00
16,781.03
679,954.00
6,777,925.29

4/30/11
6/15/12
9/22/93
6/15/91
7/15/95
3/25/96
3/24/12
7/31/14
7/10/94
9/10/95
2/4/96
6/30/96
7/31/14
1/15/88
7/25/91
9/15/95
7/15/92
3/25/96
4/30/11
4/15/14
6/10/96
7/25/92
3/31/94
9/8/95
9/21/95
5/31/96
3/24/12
7/31/14
6/15/12
5/25/88
7/31/96
3/10/92
11/15/92
6/30/96
7/15/92
9/10/95
9/22/92
9/22/93
9/15/94

10.725%
10.351%
9.750%
9.885%
10.295%
9.105%
10.665%
10.424%
10.325%
10.229%
10.107%
10.055%
10.264%
7.425%
9.476%
9.805%
9.459%
8.595%
10.585%
10.535%
10.165%
7.525%
10.215%
10.255%
10.245%
9.856%
10.639%
10.699%
10.575%
9.335%
9.877%
7.905%
9.145%
10.648%
10.105%
10.610%
10.395%
10.433%
10.124%

DEPARTMENT OF ENERGY
Synthetic Fuels - Non-Nuclear Act
Great Plains
Gasification Assoc. #136

6/12

5,500,000.00

1/2/86

1,226,488.57
150,572.00
192,000.00
140,560.00
408,767.00
94,150.00
255,000.00
500,000.00
700,000.00
2,150,000.00
3,000,000.00
132,047.05

8/1/86
5/31/86
2/15/86
8/1/85
8/1/85
12/31/85
8/1/85
9/1/03
8/1/86
2/1/86
6/15/90
8/15/85

8.635%

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
Inglewood, CA
Council Bluffs, 10
Newport News, VA
Ponce, PR
Provo, UT
Elizabeth, NJ
Newburgh, NY
Birmingham, AL
Savannah, GA
Louisville, KY
•Kansas City, MD
Lynn, MA

•maturity extension

6/6
6/7
6/11
6/11
6/11
6/12
6/12
6/17
6/17
6/17
6/17
6/18

7.905%
7.835%
7.955%
7.585%
7.585%
7.765%
7.445%
10.214%
7.745%
7.385%
9.077%
7.105%

8.061% ann.
7.985% ann.
8.038% ann.

7.792% ann.
10.475%
7.895%
7.439%
9.283%

ann.
ann.
ann.
ann.

Page 4 of 8
FEDERAL FINANCING BANK
JUNE 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

Community Development (Cont'd)
Long Beach, CA
Dade County, EL

6/18
6/27

$ 31,000.00
145,000.00

8/1/85
7/15/85

7.105%
7.335%

6/6
6/6
6/7
6/7
6/7
6/7
6/7
6/12
6/12
6/27

112,961,000.00
63,200,359.00
54,080,510.74
45,000,000.00
23,290,000.00
2,200,359.00
2,919,489.26
2,330,000.00
5,750,510.74
63,200,359.00

7/15/85
6/27/85
6/12/85
7/15/85
7/15/85
7/15/85
7/15/85
7/15/85
6/13/85
7/9/85

7.265%
7.265%
7.325%
7.325%
7.325%
7.325%
7.325%
7.505%
7.505%
7.335%

5,000 ,000.00
370 ,000.00
3,285 ,000.00
3,945 ,000.00
1,330 ,000.00
3,791 ,000.00
650 ,000.00
600 ,000.00
15,000 ,000.00
7,519 ,000.00
821 ,000.00
15,000 ,000.00
5,559 ,000.00
6,870 ,000.00
2,134 ,000.00
2,796 ,000.00
7,793 ,000.00
893 ,000.00
8,540 ,000.00
1,063 ,000.00
22,000 ,000.00
20,000 ,000.00
5,536 ,000.00
5,170 ,000.00
5,286 ,000.00
7,951 ,000.00
12,500 ,000.00
4,744 ,000.00
4,548 ,000.00
3,329 ,000.00
1,411 ,000.00
3,058 ,000.00
4,627 ,000.00
4,520 ,000.00
1,070 ,000.00
7,379 ,000.00
25,003 ,000.00
73,526 ,000.00
2,115 ,000.00
5,000 ,000.00
4,092 ,000.00
5,800 ,000.00
10,110 ,000.00
15,000 ,000.00

12/31/15
6/30/87
6/30/87
6/30/87
1/2/18
12/31/12
6/4/87
6/4/87
12/3/85
6/6/88
6/6/88
6/7/87
6/10/87
6/10/87
6/10/88
6/10/88
6/10/87
6/10/87
6/10/87
6/30/87
6/13/88
12/31/19
12/31/17
12/31/17
12/31/19
6/15/87
1/3/17
12/31/13
12/31/13
12/31/13
12/31/13
1/2/18
1/2/18
1/2/18
12/31/17
12/31/15
12/31/15
12/31/17
12/31/17
6/17/87
6/20/88
12/31/15
12/31/15
12/31/15

DEPARTMENT OF THE NAVY
Ship Lease Financing
Williams
Williams
•Pless
Buck
Buck
+Bobo Container
+Pless
•Pless Container
+Pless
•Williams

RURAL ELECTRIFICATION ADMINISTRATTON
S. Mississippi Electric #288 6/3
Corn Belt Power #292
6/3
Saluda River Electric #271
6/3
*S. Mississippi Electric #90
6/3
•Kansas Electric #216
6/3
*Minnkota Power #102
6/3
Sho-Me Power #164
6/4
N.W. Electric #176
6/4
Basin Electric #232
6/5
•Wolverine Power #183
6/5
•Wolverine Power #191
6/5
•Sunflower Electric #174
6/7
•Wabash Valley Power #104
6/10
•Wabash Valley Power #206
6/10
•Wolverine Power #182
6/10
•Wolverine Power #183
6/10
•Wolverine Power #233
6/10
•Wolverine Power #234
6/10
•Sunflower Electric #174
6/10
•Colorado Ute Electric #78
6/11
•Cajun Electric #197
6/12
•Cajun Electric #249
6/12
•Plains Electric #158
6/13
•Plains Electric #158
6/13
Tri-State G&T #250
6/14
Deseret G&T #211
6/14
Plains Electric #300
6/17
•Allegheny Electric #93
6/17
•Allegheny Electric #93
6/17
•Allegheny Electric #93
6/17
•Allegheny Electric #93
6/17
•Allegheny Electric #255
6/17
•Allegheny Electric #255
6/17
•Allegheny Electric #255
6/17
•New Hampshire Electric #192
6/17
•Oglethorpe Power #74
6/17
•Oglethorpe Power #150
6/17
•Oglethorpe Power #246
6/17
•Wabash Valley Power #252
6/17
•Cooperative Power #130
6/17
•Wolverine Power #190
6/18
•East Kentucky Power #188
6/18
•East Kentucky Power #188
6/18
Plains Electric #158
6/18
* m £ o M ? £ extension

10.709%
9.065%
9.065%
9.043%
10.718%
10.708%
8.845%
8.845%
7.625%
9.145%
9.145%
8.625%
8.945%
8.945%
9.275%
9.275%
8.945%
8.945%
8.945%
8.995%
9.275%
10.536%
10.587%
10.588%
10.640%
8.885%
10.288%
10.266%
10.266%
10.266%
10.266%
10.431%
10.431%
10.431%
10.431%
10.424%
10.424%
10.431%
10.431%
8.575%
8.995%
10.403%
10.403%
10.403%

10.569% qtr.
8.965% qtr.
8.965% qtr.
8.943% qtr.
10.578% qtr.
10.568% qtr.
8.749% qtr.
8.749% qtr.
7.560% qtr.
9.043% qtr.
9.043% qtr.
8.534% qtr.
8.847% qtr.
8.847% qtr.
9.170% qtr.
9.170% qtr.
8.847% qtr.
8.847% qtr.
8.847% qtr.
8.896% qtr.
9.170% qtr.
10.401% qtr.
10.450% qtr.
10.451% qtr.
10.502% qtr.
8.788% qtr.
10.159% qtr.
10.138% qtr.
10.138% qtr.
10.138% qtr.
10.138% qtr.
10.298% qtr.
10.298% qtr.
10.298% qtr.
10.298% qtr.
10.292% qtr.
10.292% qtr.
10.298% qtr.
10.298% qtr.
8.485% qtr.
8.896% qtr.
10.271% qtr.
10.271% qtr.
10.271% qtr.

Page 5 of 8
FEDERAL FINANCING BANK
JUNE 1985 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

RURAL ELECTRIFTCATION ADMINISTRATION (Cont'd)
Plains Electric #158
Plains Electric #158
Plains Electric #158
Plains Electric #158
Allegheny Electric #255
New Hampshire Electric #270
Kepco #282
Oglethorpe Power #246
Western Farmers Electric #196
Plains Electric #158
•S. Mississippi Electric #3
•S. Mississippi Electric #3
•S. Mississippi Electric #90
•Wabash Valley Power #252
East Kentucky Power #140
East Kentucky Power #291
South Texas Electric #200
Brazos Electric #230
Corn Belt Power #292
•United Power #67
•United Power #129
North Carolina Electric #268
Vermont Electric #259
Kamo Electric #148
Kamo Electric #209
Kamo Electric #266
Basin Electric #232
Basin Electric #272
•Colorado Ute Electric #168
•Colorado Ute Electric #203

6/18
6/18
6/18
6/18
6/19
6/19
6/20
6/21
6/21
6/21
6/24
6/24
6/24
6/24
6/24
6/24
6/24
6/25
6/25
6/25
6/25
6/27
6/28
6/28
6/28
6/28
6/28
6/28
6/28
6/28

$ 16,022,000.00
3,606,000.00
9,826,000.00
9,904,000.00
1,132,000.00
401,000.00
898,000.00
55,179,000.00
589,000.00
47,000,000.00
5,000.00
679,000.00
464,000.00
2,000,000.00
720,000.00
215,000.00
515,000.00
2,826,000.00
306,000.00
600,000.00
15,530,000.00
8,079,000.00
1,833,000.00
548,000.00
2,097,000.00
3,519,000.00
30,000,000.00
579,000.00
868,656.00
1,712,000.00

12/31/15
1/2/18
1/2/18
1/2/18
12/31/19
12/31/17
12/31/15
12/3V19
6/21/87
12/31/15
12/31/10
12/31/12
12/31/12
12/31/16
12/31/19
12/31/15
12/31/19
12/31/19
1/2/18
6/25/88
6/25/88
6/30/87
12/31/19
6/30/87
6/30/87
6/30/87
12/3/85
6/30/87
6/29/87
6/29/87

10.403%
10.408%
10.408%
10.408%
10.363%
10.361%
10.484%
10.577%
8.715%
10.573%
10.578%
10.597%
10.597%
10.734%
10.727%
10.730%
10.727%
10.800%
10.799%
9.385%
9.385%
9.075%
10.706%
8.935%
8.935%
8.924%
7.485%
8.917%
8.935%
8.935%

6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/00
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05

10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.161%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%

SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures

6/5
St. Louis L. D. Company
Scioto Econ. Dev. Corp.
6/5
Mahoning Valley Be. Dev. Corp. 6/5
F.P.S. Dev. Assoc.
6/5
Small Bus. Scvs., Inc.
6/5
St. Louis County L.D.C.
6/5
Chester County S.B.A. Corp.
6/5
Gr. Bakersfield L.D.C.
6/5
Kisatchie Delta RP&D Dis., Inc.6/5
St. Louis County L.D.C.
6/5
Jefferson County L.D.C.
6/5
Community E.D.C. of Colorado 6/5
Urban County Com. Dev. Corp. 6/5
Georgia Mountains R.E.D. Corp. 6/5
Black Hawk County E.D.C, Inc. 6/5
Hamilton County Dev. Co., Inc. 6/5
Southwestern Perm Ec. Dev. Dis1.6/5
St. Louis L.D. Co.
6/5
Red Cedar C. D. C.
6/5
Texas Cert. Dev. Co., Inc.
6/5
Wilmington Ind. Dev., Inc.
6/5
St. Louis Local Dev. Corp.
6/5
Texas Cert. Dev. Co., Inc.
6/5
Mid-Atlantic C.D.C.
6/5
Commonwealth S.B.D. Corp.
6/5
Ec. Dev. Fdn. of Sacramento
6/5
Clay County Dev. Corp.
6/5
Lapeer Dev. Corp.
6/5
Econ Dev Corp of Shasta County 6/5
•maturity extension

17,000.00
24,000.00
67,000.00
67,000.00
69,000.00
105,000.00
116,000.00
116,000.00
119,000.00
142,000.00
145,000.00
273,000.00
286,000.00
329,000.00
500,000.00
500,000.00
500,000.00
45,000.00
45,000.00
49,000.00
57,000.00
63,000.00
63,000.00
76,000.00
84,000.00
85,000.00
95,000.00
103,000.00
104,000.00

10.271%
10.276%
10.276%
10.276%
10.232%
10.230%
10.350%
10.441%
8.622%
10.437%
10.442%
10.460%
10.460%
10.594%
10.587%
10.590%
10.587%
10.658%
10.657%
9.277%
9.277%
8.974%
10.566%
8.837%
8.837%
8.827%
7.427%
8.820%
8.837%
8.837%

qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.
qtr.

Page 6 of 8
FEDERAL FINANCING BANK
JUNE 1985 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

FiNAL
MATURITY

"INTEREST"
INTEREST"
RATE
RATE
(semi(other than
annual)
semi-annual)

State t Local Development Company Debentures (Cont'd)
Altoona Enterprises, Inc.
6/5
Kansas City Corp. of Ind. Dev. 6/5
San Diego County L.D. Corp.
6/5
Saint Paul 503 Dev. Co.
6/5
La Habra L. D. Co., Inc.
6/5
Lewis Clark Ec. Dev. Corp.
6/5
Nine County Dev., Inc.
6/5
Alabama Community Dev. Corp. 6/5
San Diego County L. D. Corp. i 6/5
S.W. Penn. Ec. Dev. District
6/5
East Toledo L. D. Co.
6/5
Hamilton County Dev. Co., Inc. 6/5
Gr. Salt Lake Bus. Dis.
6/5
Coon Rapids Dev. Co.
6/5
Nevada St. Dev. Corp.
6/5
Long Island Dev. Corp.
6/5
West Virginia C. D. Corp.
6/5
Middle Flint Area Dev. Corp. 6/5
Oakland County L. D. Co.
6/5
Cascades West Fin. Srvs., Inc. 6/5
Kansas City Corp. fcr Ind. Dev.6/5
Bay Colony Dev. Corp.
6/5
Gr. Muskegon Ind. Fund, Inc. 6/5
Ocean State B.D.A., Inc.
6/5
Evergreen Com. Dev. Assoc.
6/5
Nine County Dev., inc.
6/5
Gr. Spokane Bus. Dev. Assoc. 6/5
Mahoning Valley Ec. Dev. Corp. 6/5
BEDCO Dev. Corp.
6/5
St. Louis County L. D. Co.
6/5
Phoenix L. D. Corp.
6/5
Gr. S.W. Kansas C D . Co.
6/5
Gr. S.W. Kansas C D . Co.
6/5
Warren Redev. & Plann. Corp. 6/5
Centralina Dev. Corp., Inc.
6/5
Antelope Valley L. D. Corp.
6/5
Mahoning Valley Ec. Dev. Corp. 6/5
Gulf Certoo, Inc.
6/5
Nine County Dev., Inc.
6/5
San Diego County L. D. Corp. 6/5
La Habra L. D. C , Inc.
6/5
Cleveland Area Dev. Fin. Corp. 6/5
Springfield C D. Co.
6/5
San Diego County L. D. Corp. 6/5
Wilmington Ind. Dev., Inc.
6/5
San Diego County L. D. Corp. 6/5
Pee Dee Regional Dev. Corp.
6/5
Southern Nevada C. D. Co.
6/5
South Shore Econ. Dev. Corp. 6/5
C D. C. of Mississippi, Inc. 6/5
Mid-Cumberland Area Dev. Corp. 6/5
Georgia Mountains Reg. E.D.C. 6/5
Areawide Dev. Corp.
6/5
San Diego County L. D. Corp. 6/5
San Diego County L. D. Corp. 6/5
La Habra L. D. Co., Inc.
6/5
Bay Colony Dev. Corp.
6/5
Bay Colony Dev. Corp.
6/5
Bay Area Employment Dev. Co. 6/5
Santa Ana City L. D. Corp.
6/5
Columbus Countywide Dev. Corp. 6/5
Cuaker State C D. Co., Inc. 6/5
BEDCO Development Corp.
6/5

$ 105,000.00
105,000.00
107,000.00
108,000.00
110,000.00
116,000.00
134,000.00
137,000.00
137,000.00
150,000.00
151,000.00
155,000.00
158,000.00
173,000.00
204,000.00
212,000.00
213,000.00
244,000.00
276,000.00
300,000.00
325,000.00
336,000.00
342,000.00
378,000.00
434,000.00
494,000.00
500,000.00
500,000.00
500,000.00
39,000.00
52,000.00
61,000.00
63,000.00
71,000.00
73,000.00
84,000.00
85,000.00
94,000.00
96,000.00
128,000.00
138,000.00
140,000.00
141,000.00
202,000.00
210,000.00
228,000.00
236,000.00
247,000.00
265,000.00
268,000.00
308,000.00
312,000.00
315,000.00
315,000.00
346,000.00
351,000.00
413,000.00
418,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00

6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/05
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10
6/1/10

10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.382%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%
10.491%

Page 7 of 8
FEDERAL FINANCING BANK
JUNE 1985 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

6/1/88
6/1/90
6/1/90
6/1/90
6/1/90
6/1/90
6/1/92
6/1/92
6/1/92
6/1/95
6/1/95
6/1/95
6/1/95
6/1/95
6/1/95
6/1/95
6/1/95
6/1/95
6/1/95

8.975%
9.565%
9.565%
9.565%
9.565%
9.565%
10.035%
10.035%
10.035%
10.095%
10.095%
10.095%
10.095%
10.095%
10.095%
10.095%
10.095%
10.095%
10.095%

571,228,417.48

9/30/85

7.345%

800,000.00

9/14/99

9.922%

INTEREST
RATE
(other than
semi-annual)

Small Business Investment Company Debentures
Advent Industrial Cap. Co., LP
Advent Atlantic Cap. Co., LP
Advent V Capital Co. LP
Advent Industrial Cap. Co., LP
Developers Equity Cap. Corp.
Rand SBIC, Inc.
Rand SBIC, Inc.
Sunwestern Capital Corp.
Super Market Investors, Inc.
Delta Capital, Inc.
Edwards Capital Co.
Enterprise Capital Corp.
North Star Ventures, Inc.
North Star Ventures II, Inc.
Rand SBIC, Inc.
Reedy River Ventures, Ltd.
S.W. Capital Investments, Inc.
Walnut Street Capital Co.
Western Venture Cap. Corp.

6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19
6/19

1,000 ,000.00
2,500 ,000.00
9,000 ,000.00
1,500 ,000.00
500 ,000.00
400 ,000.00
600 ,000.00
500 ,000.00
500 ,000.00
2,150 ,000.00
1,500 ,000.00
2,000 ,000.00
750 ,000.00
2,000 ,000.00
600 ,000.00
1,500 ,000.00
380 ,000.00
350 ,000.00
1,000 ,000.00

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
4Note A-85-09 6/28
DEPARTMENT OF TRANSPORTATION
Section 511—4R Act
MKT Railroad

6/3

9.802% qtr.

+rollover

FEDERAL FINANCING BANK
JUNE 1985 Commitments

BORROWER

GUARANTOR

Gary, IN
Indianapolis, IN
Louisville, KY
Savannah, GA
Springfield, MA
Wilmington Trust Co. (BUCK)
Wilmington Trust Co. (WILLIAMS)

HUD
HUD
HUD
HUD
HUD
DON
DON

AMOUNT
$ 480,000.00
668,500.00
2,150,000.00
700,000.00
3,000,000.00
75,000,000.00
210,000,000.00

OOWITMENT
EXPIRES
9/1/86
2/1/86
2/1/86
8/1/86
8/1/B6
9/7/90
9/6/90

MATURITY
9/1/89
2/1/90
2/1/91
8/1/92
8/1/92
1/15/05
1/15/10

Page 8 of 8

FEDERAL FINANCING BANK HOLDINGS
(in millions)

Program
Cn-Budget Agency Debt
Tennessee Valley Authority $ 14,385.0
Export-Import Bank
NCUA-Central Liquidity Facility
Off-Budget Agency Debt
U.S. Postal Service 720.0
U.S. Railway Association
Agency Assets

June 30, 1985

May 31, 1985

Net Change
6/1/85-6/30/85

Net Chanqe—FY 1985
10/1/84-6/30/85

$ 950.0
38.9
-49.4

15,728.8
219.6

$ 14,154.0
15,689.5
219.6

$ 231.0
39.3
-0.1

73.8

720.0
73.8

-0-0-

61,461.0
112.2
132.0

1,145.0

8.3

-2.2

3,536.7
35.0

-0-

-0.6

-5.6

17,784.1
5,000.0
12.4
1,461.0
262.7
33.5
2,146.2
410.6
35.6
28.3
887.6
924.2

209.2

882.4

-0-05.5
3.8
-0-0-

-06.2

5.1

0.2
-0-

Fanners Home Administration 62,606.0
DHHS-Health Maintenance Org.
112.2
DHHS-Medical Facilities
132.0
O/erseas Private Investment Corp.
6.1
Rural Electrification Admin.-CBO
3,536.7
Small Business Administration
34.5
Government-Guaranteed Lending
DOD-foreign Military Sales 17,993.4
DEd.-Student Loan Marketing Assn.
5,000.0
DOE-Geothermal Loan Guarantees
12.4
DOE-Non-Nuclear Act (Great Plains)
1,466.5
DHUD-Community Dev. Block Grant
266.4
DHUD-New Communities
33.5
DHUD-Public Housing Notes
2,146.2
General Services Administration
408.6
DOI-Guant Power Authority
35.6
DOI-Virgin Islands
28.3
NASA-Space Communications Co.
887.6
DCN-Ship Lease Financing
1,060.8
DOM-Defense Production Act
5.1
Oregon Veteran's Housing
60.0
Rural Electrification Admin.
21,182.5
SBA-Small Business Investment Cos.
974.6
SBA-State/Local Development Cos.
546.0
TVA-Seven States Energy Corp.
1,611.9
DOT-Section 511
153.6
DOT-WMATA
177.0
TOTALS* $ 151,604.5
'riaurea IBaV not total due to rounding
tretLecta adjustment for capitalized Interest

60.0
21,003.4
953.5
527.5
1,589.6
152.8
177.0

$ 149,597.2

-0-0-

-2.0

-0-0-0136.6

179.1
21.1
18.5
22.3

0.8
-0$ 2,007.3

-367.0
22.5t

3,095.0
-3.9

-0-4.8

176.5
58.2

-0-32.3
-4.7
-0.4
-0.4
-67.0
1,060.8

2.0
60.0
595.5
114.3
191.4
56.4
-«.0

-0$ 6,768.4

rREASURY NEWS
lartment of the Treasury • Washington, D.C. • Telephone 566-2041
STATEMENT OF THE HONORABLE MANUEL H. JOHNSON
ASSISTANT SECRETARY (ECONOMIC POLICY)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
JULY 18, 1985
I.

INTRODUCTION

The Treasury Department welcomes this opportunity to present
its views on monetary policy and recent monetary developments.
In general, we agree with the broad outlines of the approach
taken by Chairman Volcker in his July 17 testimony before this
Committee. In particular, the decision to rebase the Ml target
range on the average level of the money supply in the second
quarter would appear to have been correct under the
circumstances. The rebasing exercise removed the threat that the
Federal Reserve might feel obliged to force Ml back within the
original target range — a clearly impractical undertaking. With
the rebasing, successful adherence to the new targets appears to
be a realistic possibility and given some recovery in monetary
velocity should be consistent with a fairly strong second-half
expansion of the economy. While the decision to rebase makes
sense in this short-run context, it will be extremely important
for the Federal Reserve to avoid any sustained period of overly
rapid monetary expansion that would bring inflation back into the
picture. The experience of the last two decades in this country
and a wide range of experience abroad suggests very strongly that
the appropriate time to fight inflation is long before the inflationary process has been allowed to build up momentum.
Granted that the recent modification of the monetary targets
is defensible, the erratic short-run pattern of monetary growth
in recent years — of which this is only the most recent episode
— remains a source of some concern to the Administration. It
would be highly desirable if such wide monetary swings could be
avoided in the future. It must be conceded that the Federal
Reserve has faced a difficult set of circumstances in recent

years. Institutional change has been rapid in the financial
area, monetary velocity has become an increasingly erratic
parameter and the international monetary dimension has been an
additional complicating factor. But it is doubtful that these
and other special factors are sufficient to account for the fact
that since 1980 Ml has been outside the target range much more
frequently than it has been within and that on a 13-week basis Ml
growth has ranged from a high of a 17.7 percent annual rate to a
low of -1.3 percent.
The Administration has consistently supported the Federal
Reserve in its efforts to control inflation and promote growth.
It will continue to do so. But there are some respects in which
the recent record of monetary policy clearly stands in need of
improvement. It may assist in clarifying these issues to state
explicitly some general principles by which the Administration
believes
should
be guided.ON MONETARY POLICY
II. monetary
GENERAL policy
STATEMENT
OF PRINCIPLES
- The Administration desires a steady, moderate rate of growth
in money and counts on the Federal Reserve to carry out that
responsibility. There have, of course, been occasional differences of opinion between the Administration and the Federal
Reserve on specific issues of monetary technique; but there has
been no difference of opinion as to the importance of controlling
the growth of money over the longer run.
Agreement is general within the economics profession that
over the long run inflation is a monetary phenomenon and inflation can persist only when it is accommodated by monetary expansion. This is one of the few theorems in economics which seems
to have been firmly established. Therefore, control over monetary growth is absolutely essential as a long-run proposition if
inflation is to be avoided. This has been a basic guiding principle of the Administration's view of monetary policy and it will
continue to be.
The Administration has also felt that it is highly desirable
for monetary policy to avoid short-run disturbances to the economy and to promote as low a level of interest rates as possible.
It must be conceded, however, that there is far from unanimous
agreement within the economics profession on the extent to which
short-run variations in monetary growth exert predictable effects
upon economic activity and real output. Because the short-run
relationship between money and economic activity is looser and

less exact than the long-run relationship between money and the
price level, the Administration has favored a cautious and
gradualist short-term approach in the monetary area rather than
rigid application of a monetary rule.
The original Administration plan in the monetary area to
deal with double-digit inflation called for a gradual deceleration of monetary growth extending over the period from 1980 to
"1986. Instead, there was an abrupt deceleration of monetary
growth by the Federal Reserve in 1981 which triggered and intensified the 1981-82 recession. Subsequently, there have been a
series of abrupt accelerations and decelerations in monetary
growth as shown in Chart 1. The most recent episode was the
virtual cessation of growth in Ml in the second half of 1984
followed by a burst of double-digit growth in Ml in the first
half of this year which is still continuing to the present time.
This is not a desirable pattern. It tends to force the
economy into a stop-go pattern instead of a phase of steady
expansion. In addition to exerting undesirable effects on output
and employment, a volatile pattern of monetary growth increases
financial market uncertainty and may build an uncertainty premium
inta the entire structure of interest rates. Econometric work by
the Treasury has suggested that this has been an important influence in recent years, holding interest rates at an earlier stage
of the expansion some 200 to 300 basis points higher than they
might have been if the pattern of monetary growth had been
smoother.
A consistent short-run relationship between changes in
monetary growth and subsequent changes in economic activity as
measured by nominal GNP depends upon the existence of some degree
of stability in monetary velocity (the turnover of money). As
shown in Chart 2, the Ml velocity growth trend was positive
throughout the period following World War II. (Monetary velocity
displayed a generally negative trend in the late 19th and early
20th centuries.) A 3 percent annual increase in velocity is frequently taken as a rule of thumb estimate of the postwar trend.
Research at Treasury suggests that the regularity of any stable
trend in velocity is open to question. That point of view has
gained force with the very erratic behavior of velocity in recent
years. The reasons for the instability of velocity are complex
and not yet fully understood.

The break in the velocity trend has also apparently
disrupted shorter-run cyclical patterns in monetary velocity as
shown below.
Changes in Monetary Velocity during
Postwar Expansions
(in percent)
Average of
Previous
Current
Expansions
Expansion
1st four quarters 5.5 0.0
2nd four quarters
3.3
4.1
3rd four quarters
4.2
-5.1
NOTE: Five previous expansions for the first eight
quarters, four for the final four quarters. First half of
1985, which constitutes the ninth and tenth quarters of the
current expansion, is expressed at an annual rate.
The recent instability of velocity has meant that a rigid
and literal adherence to the original monetary targets would have
been unwise. But it would be equally unwise to assume that
monetary velocity will necessarily persist in its recent sluggish
pattern. All that is known with certainty is that during a
period of rapid institutional change in financial markets and
continuing disinflation in commodity markets, velocity has grown
much less than in the past. Rebasing of the monetary targets is
an appropriate step to take under the circumstances, but the
future behavior of velocity will require careful attention. A
cautious approach should be followed since the growth rate of
money will need to be cycled down if it becomes apparent that
velocity is returning to growth rates more consistent with the
postwar trend.
The Administration adheres to the view that the long-run
rate of growth in Ml must be held to moderate proportions since
it is the primary long-run determinant of inflation. In the
6hort run, monetary volatility has been excessive in recent years
and needs to be reduced. The best initial approximation for the
monetary authorities should be as stable a rate of growth in Ml
as they can achieve along the upper band of the rebased target
range•
Monetary policy is an extremely important part of the Administration's overall economic strategy. Properly executed, monetary policy can help provide a non-inflationary environment and
assist in the promotion of economic growth. But monetary policy
is far from the only influence on the economy. There is a clear

need at the present time to get Federal spending under better
control and thereby to move the budget deficit in a downward
direction, it is equally necessary to proceed with tax reform
and similar steps to enhance incentives for private sector
activity. These actions are desirable in their own right and
would also probably increase the ability of the monetary authorities to make a more effective contribution to economic policy.
III.

MONETARY POLICY AND THE RECENT BEHAVIOR OF THE ECONOMY

Economic growth has slowed over the past year after a period
of rapid expansion in the first 18 months of recovery. The rate
of advance of the economy during the early phase of the recovery
was the fastest for any comparable period since the recovery of
1949-50 merged with the economic impact of the Korean War. Monetary policy played a strongly supportive role in the expansion.
Ml growth began to accelerate after mid-1982, after two separate
periods of monetary flatness in 1981 and 1982, and the economy
began to expand by late 1982, approximately six months after the
upturn in money. Ml grew at nearly a 14 percent annual rate from
July 1982 to June 1983 and at about a 7-1/2 percent annual rate
from June 1983 to June 1984.
One of the striking features of this early phase of the
expansion was the rapid advance of interest-sensitive sectors:
o business spending for capital equipment rose at a
21 percent annual rate from late 1982 to mid-1984
o residential construction rebounded at a 30 percent
annual rate during the same period.
The rapid pace of the recovery and the strength of interestsensitive sectors came as a surprise to those who overemphasized
the short-run effects of budget deficits and high real interest
rates. Most standard econometric models consistently underestimated real growth and overestimated inflation during this
period. One reason for the relative failure of these economic
forecasts to predict the strength of the recovery was probably
their underestimation of the directly stimulative effects of
accommodative monetary growth, particularly since it followed a
period of intense monetary restraint and may have been largely
unanticipated. Another factor of equal, if not greater,
importance was the 1981 tax incentives which had powerful effects
on after-tax rates of return and contributed to the stronger than
expected performance of investment during the expansion.

After growing at about a 7 percent annual rate during the
first six quarters of the current expansion, the economy has
slowed to about a 2 percent annual rate of growth over the most
recent four quarters. Employment gains have continued, although
confined to the service sector of the economy, and the civilian
rate of unemployment has -remained stable near 7.3 percent in the
first half of this year. While the overall performance of the
economy has remained satisfactory and inflationary pressures are
"still remarkably subdued, it is understandable that this slower
pace of growth would arouse concerns as to the future path of the
economy and raise questions about the appropriate role of monetary policy.
There is some difference of opinion as to the causes of the
current slowdown. On monetary grounds it might be argued that
the current slowdown has largely been induced by very slow growth
in Ml in the second half of 1984 when Ml was virtually flat from
June to October, and that these effects have not yet been reversed by the rapid expansion of Ml at more than a 10 percent annual
rate since last October. The recent monetary pattern is shown in
Chart 3.
While this monetary view of the slowdown in real economic
growth is the most likely explanation, some questions remain.
The sharp drop in the growth of monetary velocity to a negative
level in the first quarter of this year was probably to be
expected since velocity does typically decline temporarily when
monetary growth accelerates. But the persistence of negative
growth in velocity through the second quarter and the absence of
clear signs of resurgent economic activity have been somewhat
unexpected. It is also disturbing in this connection that on
purely monetary grounds a very weak first quarter was predicted
for the first quarter of 1984 (which turned out to be the
strongest quarter of the current expansion) and a return to high
rates of inflation was predicted for 1984 (which turned out to be
a very good year in terms of inflation performance).
The inherent difficulty of attempting to move from known or
assumed rates of monetary growth over brief periods of time to
resulting rates of growth in real activity can be seen rather
readily from Chart 4. It is reasonable inference that the
prolonged, if somewhat irregular, acceleration of monetary growth
after late 1981 helped pull the economy to higher levels of real
growth by mid-1983. It is equally reasonable to infer that a
prolonged deceleration of money growth from peak levels near a
15 percent annual rate in late 1982 to less than 5 percent by
1984 has been at least partly responsible for the eventual
slowdown of the economy. But it is questionable whether much

more could safely be inferred or whether the timing and extent of
the economy's reaction to the latest burst of monetary growth
could be predicted with very much confidence on purely monetary
growth grounds.
It is generally recognized that the short-run relationship
between monetary growth and economic performance is uncertain at
best. Over the longer haul, however, the experience since World
War II suggests that there is a close association between the
two. Specifically, and without exception, periods of significant
acceleration of monetary growth have been followed by some
increase in the pace of economic activity. For example, the long
steady acceleration in Ml growth in the late 1960's that
accommodated Keynesian-type fiscal policies and the Vietnam war
effort was associated with an upswing in economic activity which
peaked at the end of 1969 — with undesirable consequences in
terms of inflation. More recently, as noted previously, growth
of the money supply picked up sharply in late 1982 and brought
the economy out of the 1982-83 recession. In the same manner,
periods of significant slowdowns in monetary growth have been
followed by deceleration of economic growth, for example, the
1973-1974 slowdown in money growth was followed by a recession
as, more recently, was the slowing of money growth over 19811982.
There has never been a speedup of monetary growth in the
period since World War II of the duration and magnitude that has
taken place since last October without some resulting pickup in
economic activity. It is therefore reasonable to expect that a
recovery in economic growth lies ahead. However, the recent
instability of monetary velocity introduces some additional
uncertainties and leaves the exact timing and extent of any
monetary-induced pickup in the economy somewhat open to question.
In addition to purely monetary influences, the current phase
of slower growth can be viewed as stemming partially from real
factors. Inventory restocking was an important element in the
economy's initial phase of rapid advance. There was a swing from
decumulation in real terms at a $25 billion rate at the recession
trough in late 1982 to accumulation at a $27 billion rate during
the first half of 1984. By the first half of this year,
inventory accumulation had fallen back to about a $12.5 billion
annual rate. Much the same pattern of a cutback in the rate of
inventory accumulation following an early recovery rebound has
emerged at roughly similar stages of earlier expansions, e.g., in
1962 and 1976. As such, this could be construed as a normal
cyclical response to the speed of gains early in the expansion.
With inventory-sales ratios now pulled down to relatively low
levels, the stage may be set for a renewal of cyclical expansion.

Another real factor that may also have a bearing on the
current slowdown is the behavior of the net export component of
GNP. There has been a fairly steady deterioration in net exports
from a surplus in late 1982 of about $25 billion at an annual
rate in real terms to a deficit at nearly a $35 billion annual
rate in real terms by the second quarter of this year. Since
mid-1984 when the current slowdown began, industrial production
has been relatively flat and manufacturing employment has
declined. It is possible that steadily intensifying competition
from imports since that time has been responsible for the current
slowdown, but the case is weakened by the fact that the gap
between changes in Gross Domestic Purchases and Gross National
Product in real terms was actually slightly wider earlier in the
expansion than it has been recently. It seems likely that the
net export effects were masked by the rapid early pace of the
expansion and are now simply more visible as growth in domestic
demand has slowed.
A more mature stage of expansion is normally characterized
by a transition to slower growth. Some of the reasons have been
cited here and there may well be still other influences from the
real side of the economy. However, a good portion of the recent
slowdown in the economy can probably be attributed to last year's
slow growth in money. Because of the looser relation recently
between money and nominal GNP it is not possible to be precise as
to the monetary influence.
Despite this uncertainty as to the proper weight to be given
to real and monetary factors in explaining the recent slowdown in
growth, the near-term economic outlook appears to be generally
favorable. The second quarter rise in real GNP was marked down
to a 1.7 percent annual rate from 3.1 percent in the flash estimate. Paradoxically, however, the composition of the revised set
of figures was more favorable than the higher flash estimate and
seems to point to the likelihood of better economic performance
in the second half of the year.
o The bulk of the markdown from the flash estimate came
in business inventory investment which is now calculated as dropping in real terms from $19 billion in the
first quarter to $6 billion in the second (both figures
in 1972 dollars and at annual rates). As shown in
Chart 5, inventory-sales ratios are currently at relatively low levels, particularly among manufacturing
industries. Thus, the second half could witness a
step-up in production for inventory, which would give a
lift to the economy.

After a small decline in the first quarter, real final
sales (GNP less inventory investment) grew at a
5.1 percent annual rate, according to the latest estimates, just a shade less than had been estimated in the
flash. Greatest strength was in spending for structures, as residential construction, business investment
in structures, and state and local construction all
rose sharply. Real final sales of durable goods also
registered a good gain, boosted by a resumption of
shipments of computers following a hiatus in the first
quarter.
o Indeed, all major components of real GNP turned in
strong showings in the second quarter, with the exception
of inventory investment and the net export balance.
Private economic forecasts generally call for a faster pace
of expansion in the second half of the year and a continuation of
real growth in 1986. Results of some major economic forecasts
are summarized below: Growth in Real GNP
(percent change, annual rate)

Data Resources Inc.
Chase Econometrics
Wharton EFA
Townsend-Greenspan
Blue Chip Consensus

(7/85)
(6/25/85)
(6/26/85)
(5/85)
(7/10/85)

III
2.7
2.9
3.6
4.1
3.9

1985
IV
IV
2.0
3.2
2.9
4.3
3.7

to IV
2.1
2.3
2.4
3.3
2.7

1986
IV to IV
2.5
2.3
2.4
2.1
2.3

The Administration is currently reviewing its own economic
projections which will be released with the Mid-Session Budget
Review. The slower than expected first half will make some dent
in the real growth performance for the year but for the reasons
indicated previously stronger second-half performance seems very
likely. Despite the generally favorable indications, stronger
second half performance cannot simply be taken for granted. The
duration of the current slowdown has been something of a surprise
and economic forecasting is at best an uncertain art. This
argues for prompt legislative action on the budget and tax reform
coupled with reasonably accommodative monetary policy.

IV.

SOME AREAS OF MONETARY UNCERTAINTY

Monetary policy will have to be conducted cautiously during
the remainder of the year. There are risks on both sides. Too
rapid a pace of monetary expansion on the heels of the sharp
monetary growth since last October could sow the seeds of future
inflation. Too restrictive a stance could deepen the current
slowdown, widen the budget deficit and aggravate the
international debt situation.
Currently, the economy is advancing while inflation is still
under good control. But there are some aspects of the monetary
situation which, while perhaps not unique, do seem to depart
significantly from recent experience. There appear to be three
of these major areas of uncertainty which make a cautious
approach to monetary policy almost obligatory. Each may be
clarified by experience during the balance of the year but for
the time being considerable uncertainty remains.
A. The Puzzling Behavior of Monetary Velocity
Reference has already been made to the fact that the postwar
trend in Ml velocity appears to have been interrupted in recent
years. Velocity has behaved very unpredictably in the current
expansion. In the first year of the expansion, velocity did not
rise at all despite the fact that historically it has had a
strong pro-cyclical pattern. That cyclical strength seemed to
emerge — a little behind schedule — in the second year of the
expansion when velocity rose at a 4 percent annual rate. But
velocity has now declined at about a 5 percent annual rate during
the first half of this year. This is simply another way of
saying that the previous relationship has shifted in an
unexpected fashion. There is still a link between money and
nominal GNP but more Ml is needed to support a given level of
economic activity.
In his July 17 statement. Chairman Volcker reviewed recent
velocity experience and concluded that:
"We simply do not have enough experience with the new
institutional framework surrounding Ml (which will be further changed next year under existing law) to specify with
any precision what new trend in velocity may be emerging or
the precise nature of the- relationship between fluctuations
in interest rates and the money supply."

A major difficulty in this connection is separating the
effects upon velocity which might be independently attributable
to changes in interest rates from effects which may reflect much
broader influences. As interest rates decline, the opportunity
cost of holding larger cash balances also declines which may tend
to reduce velocity as more money is held at any given level of
GNP. But if the velocity decline is the driving force in the
sequence, interest rates will decline because the economy is
-declining. While a decline in velocity might be regarded with
relative equanimity in the first sequence it hardly would be in
the second. The difficulty is knowing in advance whether interest rates are moving velocity, or whether velocity and the economy itself are moving interest rates.
Attention has been directed recently to the possibility that
the observed decline in velocity may be due to the growing
importance of interest-sensitive components contained in Ml.
Until 1980, Ml was a fairly pure measure of money held for transactions purposes. Subsequently, payment of interest on NOW and
Super NOW accounts, which are included in Ml, may have drawn into
Ml a large amount of deposits which prior to 1980 would have been
included in M2. The result may be that Ml has become more like
M2 and for a given level of nominal GNP the measured level of
velocity would be lowered. This conforms with the general pattern of below-trend levels of velocity in recent years and may be
a partial explanation of some of the observed behavior of velocity.
It does not, however appear to offer an adequate explanation
for the recent velocity slowdown which has been associated with
slower economic activity this year. Some analysts have attributed the drop in velocity to the rapid growth of interest-bearing
checkable accounts which have become more competitive with other
interest bearing instruments. However, even if these checkables
had grown no faster than noninterest bearing demand deposits,
velocity still would have fallen during the first half of this
year — at about a 2 percent annual rate. Typically in the past
velocity has increased by about 4 percent during the third year
of an expansion.
With velocity behaving so unpredictably, the Federal Reserve
cannot be sure what path of total spending and nominal GNP is
likely to be associated with any given rate of growth in money.
This certainly does not mean that the monetary (and credit) targets can safely be abandoned. Inflation is still a serious
potential threat. But the success of a rigid monetarist approach
depends ultimately on the predictability of velocity. This may
not be too significant where the objective is limited to the long
run control of inflation, but it assumes dominating importance
where a particular short-run relationship is assumed to exist
between money and nominal GNP.

The fact that recent experience is so difficult to interpret
implies a need to continue to give attention to the growth rates
of Ml and the other monetary aggregates, but also watch carefully
other indicators of the economy's performance in order to
determine whether the targets are consistent with maximum
noninflationary real GNP growth.
B.

Growing Importance of the International Dimension

The U.S. situation since 1980 has featured a massive net
capital inflow without parallel in the postwar period. This has
been the driving force in exchange markets. The reasons include
low U.S. inflation, generally good to excellent U.S. economic
performance, and the traditional role of the U.S. money and
capital markets as a safe haven for foreign funds when there are
economic difficulties abroad. Above all, the free-market orientation of the Reagan Administration and the higher prospective
rate of return here on productive investment has acted as a
powerful magnet attracting foreign capital.
Flows of the type, magnitude and duration we have experienced are not induced by fleeting interest rate differentials as
if foreigners were shopping for a better money market fund.
These massive flows have been induced by a generalized perception
that the U.S. economy has found a new direction and offers significantly higher after-tax rates of return on productive investment. Some observers completely reverse these obvious lines of
causation and argue that the U.S. budget deficit has driven up
interest rates and pulled in foreign capital. Surely it must be
obvious that this does not explain five years of dollar appreciation during which time budget deficit projections have risen and
interest rates have fallen. Foreigners invest in the U.S.
despite our budget deficits not because of them. It is true that
our failure now to take effective action to reduce government
spending coupled with overly rapid money growth could drive the
dollar down, but obviously that is a sequence that we must avoid.
Capital inflows and the appreciating dollar are not the only
influence on the U.S. balance of payments by any means. Differential rates of growth here and abroad, trade barriers, changing
patterns of competitive ability, and U.S. export losses associated with the LDC debt situation have all exerted an important
influence from time to time. The list could be lengthened. It
is also important to recognize that there has been a changing

pattern within the capital accounts in the last 18 months or
so. The more recent pattern has been a continuing net capital
inflow to this country because of reduced U.S. outflows, partly
because of reduced bank lending to Latin America.
The strength of the U.S. dollar is a testimonial to the
essential correctness of the policies that the Reagan Administration has introduced. Greater emphasis on incentives to
"work, save and invest — the supply side of the economy — has
been coupled with effective control of inflation — to which the
strong dollar has itself made its own important contribution. As
a result, the U.S. economy has been strong, capital has flowed to
this country and the dollar has been bid up in price. It is
understandable that we do not want to see those successful
policies reversed in an ill-advised effort to bring the dollar
down.
There is considerable evidence which would suggest a fairly
direct linkage between growth in the money supply and the dollar
exchange rate. Because the dollar has appreciated steadily due
to real factors, the monetary influence has not always been
recognized but it surely exists. From October 1980 to July 1982,
sharply slower money growth (4.8 percent annual rate) and lower
inflation led to a rapid climb in the dollar (19.9 percent annual
rate), as confidence in its purchasing power was restored and
people worldwide began trying to rebuild their dollar holdings in
the face of tight supply. Faster money growth from July 1982 to
June 1984 (10.4 percent annual rate) accommodated the worldwide
dollar build-up and slowed the dollar's advance (6.6 percent
annual rate). A renewed slowdown in money growth from June 1984
to December 1984 (4.1 percent annual rate) led to a renewed surge
in the dollar (23.5 percent annual rate). These successive
episodes are shown in Chart 6.
Faster money growth since December 1984 finally caught up
with the dollar in late February, and the dollar has fallen back
from its peak levels. It is to be hoped that a more stable monetary policy and a steadier dollar will benefit hard-pressed
sectors of the U.S. economy. Agriculture and mining have suffered from commodity price declines related to overly tight money
and the strong dollar. Exporters and import-competing industries
have also had difficulty coping with the rapid climb in the
dollar's value.
The risk is that continued rapid monetary growth would begin
seriously to undercut the dollar's value. This, in turn, could
begin to add to inflationary pressures and to reverse the gains
in that area that have been achieved in recent years. The best

course of action is for monetary policy to pursue a neutral, noninflationary course and allow the dollar exchange rate to be
determined on the basis of real factors such as comparative costs
and anticipated real rates of return here and abroad.
C.

The Process of Disinflation

It is clear that a disinflationary process is still continuing here and abroad. In the three months ending in March of this
year, the crude materials component of the U.S. producer (wholesale) price index fell at nearly a 20 percent annual rate and by
about a 10 percent annual rate in the latest three month period
ending in June. When commodity prices slump, or even when commodity futures prices decline sharply, it can be a signal that
the Federal Reserve is moving too rapidly toward disinflation,
and is risking recession.
Some economists feel that the disinflationary process is
proceeding too fast. They argue that the Federal Reserve
concentrates too closely on regulating the growth of the money
supply. In their view, the dollar has been made very scarce both
at home and in international markets. This can be inferred, they
argue, from the appreciation of the dollar since 1980, the fall
in the price of gold from nearly $900 to about $300 and the
persistent weakness in basic commodity prices here and abroad.
Some would even argue that the Federal Reserve should substitute
a price rule for a quantity rule, i.e., seek to stabilize some
index of prices rather than to regulate the growth of the monetary aggregates.
The weight of economic opinion favors a quantity of money
approach and that is where emphasis has been placed. However,
those who have directed attention to the disinflationary process
have performed a useful service. Prices have not responded to
monetary growth as would have been expected on the basis of past
experience. In the last analysis, it is doubtful whether any
permanently rigid rule for monetary policy is likely to deal adequately with the complexities of the economy.
With the disinflationary process still continuing, the risks
of a return to accelerating inflation seem to be low but the
costs of being wrong would be enormous. Not quite fifteen years
ago, wage and price controls were imposed with inflation little
higher than it is now — except in the wholesale price area.
Following that ill-advised experiment, U.S. inflation surged to

double-digit levels and some nominal interest rates reached
record peaks. Those past errors must never be repeated. And,
rapid monetary growth continued long enough has always generated
inflation.
On the other hand, there are signs here and abroad that
inflationary pressures are much reduced. Actual deflation has
.been occurring in some key areas although not, of course, in
terms of general price levels. This suggests that the monetary
authorities will need to follow the disinflationary process by
monitoring a wide range of price and cost indicators. They will
also need to follow the position of the dollar in the foreign
exchange markets as well as the growth of velocity in determining
whether or not a certain target range for money growth is
appropriate. When there is clear evidence of change, the targets
can be rebased but not so frequently as to permit a purely
discretionary policy with the monetary targets serving as stage
scenery. There will be a continuing need for rules in the
execution of monetary policy but they must be applied and
V. changing
CONCLUSION
interpreted in the light of
circumstances.
It would probably be a mistake to draw sweeping conclusions
from recent experience with the conduct of monetary policy. The
Federal Reserve appears to have been doing a reasonable job this
year in dealing with a rather complex situation. The
Administration has been critical of some aspects of monetary
policy in the past and reserves the right of criticism in the
future. But the Federal Reserve is most likely correct now in
deciding to rebase its money supply target for Ml and in
proceeding with caution with respect to the new target. For
example, it would be possible for Ml to grow at a flat or
slightly negative rate for the remainder of 1985 and still be
within its new target range. This kind of swing in Ml growth
would be entirely unacceptable from the Administration's point of
view. However, Ml growth consistent with its upper target band
seems acceptable at this point.
The economy needs the support of an accommodative monetary
policy and would benefit from lower interest rates. The monetary
authorities must also remain closely alert to the needs of the
international situation and — above all — prevent any significant acceleration of inflation. They will need to follow the
course of the economy very closely in the period immediately
ahead•

Chart 1

Mi VERSUS TARGET RANGE*
$Bil.
600
580
560
540
520

Variability of M 1 Growth
since 1980
Oct. '80 to Dec. '80
Dec. '80 to Apr. '81
Apr. '81 to Oct. '81
Oct. '81 to Jan. '82
Jan. '82 to Jul. '82
Jul. '82 to Jun. '83
Jun. '83 to Nov. '83
Nov. '83 to Jun. '84
Jun. '84 to Oct. '84
Oct. '84 to June '85

-2.7%

11.8%
1.7%
13.4%

1.3%
13.9%
7.7%
6.9%
0.5%

11.7%

500
RBriod-to-perlod growth; seasonally adjusted com
pound annual rates based on monthly averages.

480
460
440
420

400
380
1980

1981

1982

1983

1984

' M I data: weekly averages, seasonally adjusted.
Fed target ranges: seasonally adjusted simple annual rates based on quarterly averages.
In 1981 both M1-B and M1-B "shift adjusted" ranges are shown: the M1-B range Is 6—8Vi%; the M1-B "shift adjusted"
range is 3'/t—6%. Monetary bands are also shown for 1985.

1985

July 19.IQBS-A40*

Chart 2

ACTUAL Mi VELOCITY VERSUS TREND VELOCITY
8

Mi Velocity (GNP/Mi)
6
Mi Velocity Trend Line

1959

'61

'63

'65

'81

»83

'85

July 10, 1M5-A418

Chart 3

Mi VERSUS TARGET RANGE*
$Bil.

610
600-

520 J F M A M J

J
1984

A S O N D J F M A M J

J A S O N D
1985

* M 1 data: weekly averages, seasonally adjusted.
Fed target ranges: seasonally adjusted simple annual rates based on quarterly averages.
July 19.

Chart 4

Growth of Real GNP and Money Supply (M1)
(Percent change at annual rates)
20

Ml, five month moving average

15 -

— «

I \

'"•'••

/ \ ^^v
5 -"

A
l

•

•A**-

•

...

..•*

\
%
*

-'* Real GNP

-5 -

-10

1981

. . . 1

1982

1983

1984

1985

Chart 5

Constant-Dollar Inventory-Sales Ratios
2.1

2.0

Manufacturing
1.9
...••*

''•••...•"..#-%,.*\

1.8

"•»»••*••••,»•••*

.•• ••••••••••••

Manufacturing
& Trade*

1.7

1.6 1.5

Retail Trade

1.4
•*...*

/ %

•---

'V/

1.3
1.2

JL_^

1976

1977

1978

1979

1980

Second auarter 1985 is estimated.
•Includes wholesale trade not shown separately.

1981

1982

1983

1984 1985

TRADE-WEIGHTED VALUE OF THE DOLLAR
March 1973 = 100

Index

160-

-160

150-

-150

-140

-130

-120

-110

-100

1972 73

Source: Federal Reserve Board.

July IS. 19BS-A88

For Immediate Release

July 25, 1985

STATEMENT BY HOUSE WAYS AND MEANS COMMITTEE CHAIRMAN DAN
ROSTENKOWSKI, SENATE FINANCE COMMITTEE CHAIRMAN
BOB PACKWOOD, RANKING MINORITY MEMBERS JOHN DUNCAN
AND RUSSELL B. LONG, AND SECRETARY OF THE
TREASURY JAMES A. BAKER, III

We have received the estimates of the Joint Tax Committee staff
concerning the President's tax reform proposals. Much of the
estimated revenue gap is explained by differences in economic and
behavioral assumptions, honest estimating errors and the use of
more'recent tax and economic data not available to the Treasury
Department's estimators when the President's proposals were
announced. All revenue estimates, of course, are subject to
continuing refinement.
While the Joint Tax Committee staff's total estimated shortfall
over five years amounts to less than 1 percent of the total
revenue collected — and differs from the Treasury estimate by an
average of less than $3 billion per year — we are concerned by
its possible perceptual impact on the drive for tax reform.
Therefore, we want to reaffirm that revenue neutrality remains a
firm underpinning of tax reform. We agree that revenue
neutrality is by no means out of reach, and recognize that no
mark-up will begin in the Ways and Means Committee without a
proposal from the Administration that is revenue neutral.
The Administration will work with the Joint Tax Committee
estimators to refine their estimates, and will move quickly to
assure revenue neutrality with further proposals as necessary.
Any such proposals will be made available not later than
September 1, thereby permitting mark-up to begin.
We remain completely committed to passing a tax reform bill that
is revenue neutral. The process is on-schedule, and we remain
confident that a bill will be sent to the President.
# # #

B-226

rREASURY NEWS
lartment of the Treasury • Washington, D.c. • Telephone 566-2041

FOR RELEASE AT 12:00 NOON

July 26, 1985

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $8,750
million of 364-day Treasury bills
to be dated
August 8, 1985,
and to mature August 7, 1986
(CUSIP No. 912794 KP 8). This issue will provide about $275
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,482
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Daylight Saving time, Thursday, August 1, 1985.
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.
The bills will be issued for cash and in exchange for
Treasury bills maturing August 8, 1985.
In addition to the
maturing 52-week bills, there are $14,074 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 currently hold $2,290 million as agents for foreign
and international monetary authorities, and $4,419 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate 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 $365
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
B-227
be submitted on Form PD 4632-1.

Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
STATEMENT OF THE HONORABLE JOHN M. WALKER, JR.
ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
AT THE HEARING OF THE SUBCOMMITTEE ON CRIME,
COMMITTEE ON THE JUDICIARY
U.S. HOUSE OF REPRESENTATIVES
WEDNESDAY, JULY 24, 1985
Treasury's Views on Legislation to Combat
Money Laundering and Organized Crime
I want to thank the Chairman and the Committee for their
continued interest in and support for our government's attack on
money laundering and the illegality that it supports. I also
appreciate this opportunity to testify about the several bills
before the Committee that address the problem of money laundering
and its connections with organized crime in our society. While
all the bills before the Committee have much to commend them, I
am especially pleased to discuss H.R. 2785 and 2786 (identical
bills), the "Money Laundering and Related Crimes Act of 1985,"
which was prepared by the Department of Justice and the Department of the Treasury. Not only would this bill create a new
criminal offense of money laundering, but it would significantly
strengthen Treasury's Bank Secrecy Act enforcement effort.
Another significant benefit of this bill is its removal of
certain impediments to law enforcement posed by the Right to
Financial Privacy Act. It is these aspects of the bill - the
Bank Secrecy Act amendments in section 5 and the Right to
Financial Privacy Act amendments in section 3 - that I will be
most concerned with in my remarks today. The provisions in the
bill amending the criminal code, including the new offense of
money laundering, will be addressed by the Assistant Attorney
General for the Criminal Division.
Before discussing the money laundering initiatives, I
would like to take this opportunity to update the Committee on
Treasury's Bank Secrecy Act enforcement activities since I was
last before the Committee on April 16th.
First, in the wake of the criminal investigation in which the
Bank of Boston pleaded guilty to numerous violations of the Bank
Secrecy Act, it has become apparent that Bank Secrecy Act
compliance is in need of improvement throughout the financial
B-228

-2community. Over forty banks have come forward to Treasury,
mostly on a volunteer basis, to confess Bank Secrecy Act
violations. On June 18, 1985, Treasury announced that civil
penalties ranging from $210,000 to $360,000 had been imposed
on four of these banks - Chase Manhattan Bank, Manufacturers
Hanover Trust, Irving Trust and Chemical Bank. The appropriate
disposition of the cases of many other banks that have come
forward is under review.
In addition, my office has authorized the IRS to conduct
criminal Bank Secrecy Act investigations of financial institutions in approximately 100 cases.
We also have been working with the financial institution
regulatory agencies to strengthen their Bank Secrecy Act audit
procedures. More strenuous audits should lead to discovery
of more violations by financial institutions. Financial
institutions whose violations are unearthed by a regulatory
agency audit will be subject to more stringent civil penalties
than those who have volunteered.
Second, we have strengthened the Treasury Bank Secrecy Act
regulations in several respects: On May 7, 1985, regulations
became effective that designated casinos as financial institutions subject to certain Bank Secrecy Act reporting and recordkeeping requirements. As evidenced by the recent hearings by
the President's Commission on Organized Crime, money laundering
through casinos may be even more widespread than once thought.
The Treasury regulations should foreclose the attractiveness of
the use of casinos for money laundering.
Finally, the "targeting" amendments to the Bank Secrecy
Act regulations were published as a final rule in the Federal
Register on July 8, 1985. These regulations do not themselves
impose any reporting requirements. Under the regulations,
however, Treasury will be able in the future to target a
financial institution or a group of financial institutions for a
defined period of time for reporting of specified international
transactions, including wire transfers. We envision that this
targeting generally will require reporting of transactions with
financial institutions in designated foreign locations that would
produce especially useful information on currency transaction
patterns. As I will discuss later in these remarks, Treasury has
clear legal authority under the Bank Secrecy Act to require
reporting of international transactions without any legislative
amendments.
"*
,^^'J would *ike to turn to H.R. 2785 and 2786. Section 5
a mendmen
in lilil^SIVIZ1
ts to the Bank Secrecy Act provisions
r ,
nit6d States Code that
e f f - t l ™ Ijil
are essential to
e n f
r C e m e n t of the Act
?"H«J
°
by the Secretary of the

-3Most importantly, the Secretary would be given for the first
time summons authority both for financial institution witnesses
and documents in connection with Bank Secrecy Act violations.
This authority was among the legislative recommendations in the
October, 1984 report of the President's Commission on Organized
Crime on money laundering and is also contained in H.R. 1945 and
H.R. 1367.
The Secretary may summon a financial institution officer, or
employee, former officer, former employee or custodian of records
who may have knowledge relating to a violation of a recordkeeping
or reporting violation of the Act and require production of
relevant documents. This authority is essential both to investigate violations and to assess the appropriate level of civil
penalties once a violation is discovered. The purpose of the
summons is limited to civil enforcement of the Bank Secrecy Act.
Under this bill, a summons would be issued only by the
Secretary or by a supervisory level official of an organization
to which the Secretary has delegated Bank Secrecy Act enforcement
authority, e.g., the Internal Revenue Service, the Comptroller of
the Currency or the Customs Service. An agent or bank examiner
in the field could not issue a summons on his or her own
authority.
Section 5(c) contains amendments to 31 U.S.C. § 5321, to
strengthen the civil penalty provision of the Bank Secrecy Act.
Under current law, the civil penalty for willful violations
of BSA reporting requirements under the Act is $10,000 per
violation, with an additional penalty for international transaction reporting violations. H.R. 2785 and 2786 provide for a
new penalty of not more than the amount of the transaction up to
$1,000,000, or $25,000, whichever is greater, for all reporting
violations. For non-reporting violations, the maximum penalty
will continue to be $10,000. These increased penalties will
make clear to financial institutions that proper reporting is
extremely important to law enforcement and that the financial
consequences of non-compliance could be dire.
The bill provides a new penalty for negligent violations
of the recordkeeping and reporting requirements. Negligent
non-filing by banks deprives the Government of important law
enforcement information, but there is some question regarding
the degree of negligence that is required to satisfy the legal
standard of reckless disregard, which is necessary to subject
violators to civil penalties under current law. This provision
would subject violators to a $10,000 civil penalty in cases of
mere negligence.
Section 5(b) revises 31 U.S.C. $ 5319 relating to disclosure
by the Secretary of the Treasury of information reported under
make
The
the amendment
information
Bank
such Secrecy
information
available
clarif-ir^
Act. available
to
Currently,
that
a state
the to
or
Secretary
the
alocal
federal
Secretary
agency
may
agency
also
is
and
required
make
upon
may make
this
request.
to

-4disclosure to any federal agency if he has "reason to believe"
the information would be useful to a matter within the receiving
aaency's jurisdiction, with or without a request. Disclosure may
also be made to the intelligence community for national security
purposes.
Finally, Section 5(f) amends the Bank Secrecy Act definition
of "monetary instrument" to eliminate any possibility that the
current definition could be viewed as a bar to the defining of
the term "monetary instrument" by regulation to include, for
example, cashier's checks and checks drawn to fictitious payees.
Section 3 sets forth several amendments to the Right to
Financial Privacy Act of 1976 (Title XI of Public Law 95-630)
("RFPA"). Many of these amendments are designed to refine the
extent to which financial institutions may cooperate in Federal
law enforcement efforts without risking civil liability under the
RFPA. These amendments would compromise no legitimate privacy
interests. Several of the amendments are variations of recommendations made by the President's Commission on Organized Crime
which appear in H.R. 1367.
In viewing these amendments, it is important to bear in mind
that the Right to Financial Privacy Act does not confer any
rights on the part of an aggrieved customer to recover damages
from a bank for that bank's release of information to state law
enforcement authorities or to private parties. The Act provides
protection only in the case of disclosure to the federal
government. It should not be used as a shield to prevent banks
from voluntarily making timely disclosure of ongoing criminal
activity to federal law enforcement authorities.
In my view the most important amendment is to subsection
1103(c) of the Right to Financial Privacy Act, 12 U.S.C.
S 3403(c). Currently S 3403(c) provides that nothing in the
Act shall preclude a financial institution from notifying a
Government authority that the institution has information which
may be relevant to a possible violation of any statute or
regulation. The provision has created much confusion among
financial institutions regarding how much information relating
to the possible violation of law can be given to a Government
authority without notice to the affected customers and the risk
of civil liability.
For effective enforcement against money laundering, it is
critical that financial institutions be free to divulge enough
information about the nature of the possible violation and
ed
SlJh 1 ! 8 *.™
' 1° t h a t t h e Government authority may proceed
ons
infor^^n
' s u b P ° e n a or search warrant for additional
6 ef re
c
^
J ° : i n o r d e r t 0 alleviate concerns in the
lty
iifSrai2ioST«
' - 8 ? b ? e c t i o n 3 ( c ) m a k e s explicit that the
men? TncJuSJ It**™1*1 inst itution may provide to law enforcement includes the name or names and other identifying information

-5concerning the individuals or account involved, as well as the
nature of the suspected illegal activity. This provision would
not authorize full disclosure of all information and records in
the financial institution's possession.
Another proposed amendment would allow a financial institution to make full disclosure in certain narrowly defined
situations. Subsection 1113 of the Right to Financial Privacy
Act, 12 U.S.C. S 3413, is amended to allow a financial institution to provide the Government, without customer notice or
fear of civil liability, all information and records which
it has reason to believe may be relevant to certain possible
crimes — crimes by or against a financial institution or
financial institution supervisory agency, Bank Secrecy Act
violations or violations of the proposed money laundering
offense, 18 U.S.C. § 1956, or enumerated drug-related crimes.
With respect to the other bills before the Committee,
Treasury opposes two provisions in H.R. 1474. Section 3 of
H.R. 1474 would provide that every Bank Secrecy Act reporting
exemption be approved by the Secretary. Currently under the
regulations, a bank may exempt from reporting certain cash
deposits and withdrawals of accounts of retail businesses in
amounts commensurate with the lawful, customary conduct of such
a business. The bank has a continuing duty to monitor the
qualifications for such exemptions, and it would be unwise, in
our view, to shift the burden of monitoring the eligibility of
bank customers for exemptions away from the bank. The bank is
in the best position to know its customers and changes in their
status. The provision is accordingly overly burdensome to the
government and unnecessary. We are considering instead a
regulation that would provide IRS with copies of all exempt list
applications, the truthfulness of which would be compelled under
the sanction of 18 U.S.C. § 1001.
Section 4 of H.R. 1474 would require that every person,
including every financial institution, report all outgoing
international wire transfers. As discussed above with respect
to Treasury's new targeting regulations, Treasury already has
authority under 31 U.S.C. S 5314 to require reporting of international wire transfers. However, wholesale reporting of
international wire transfers would not be in keeping with the
restriction in § 5314 that Treasury consider the need to "avoid
burdening unreasonably a person making a transaction with a
foreign financial agency." This broad reporting requirement
would create a virtual blizzard of reports, burdening financial
institutions out of all proportion to the utility of the information generated and would bury the Treasury Department in an
avalanche of reporting forms, all but a very few of which would
be unrelated to money laundering.
This concludes my prepared remarks. I would be happy to
answer any questions from the Committee.

rREASURY NEWS
FOR IMMEDIATE RELEASE

July 29, 1985

partment of the Treasury • Washington, D.c. • Telephone
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS

Tenders for $7,204 million of 13-week bills and for $7,201 million
of 26-week bills, both to be issued on August 1, 1985,
were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13--week bills
maturing
Discount
Rate

26-•week bills

October 31 , 1985
Investment
Rate 1/
Price

7.22%
7.24%
7.23%

7.46%
7.48%
7.47%

98.175
98.170
98.172

maturing
Discount
Rate

January 30 , 1986
Investment
Rate 1/
Price

7.38%
7.41%
7.40%

7.77%
7.80%
7.79%

96.269
96.254
96.259

Tenders at the high discount rate for the 13-week bills were allotted 62%,
Tenders at the high discount rate for the 26-week bills were allotted 43%,

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

Accepted

45,440
17,112,875
26,815
34,115
86,615
58,750
1,356,420
68,170
43,705
71,520
34,045
1,355,465
349,005

$ 45,440
5,924,525
26,815
34,115
75,780
50,750
254,480
48,170
43,705
67,670
26,195
254,675
349,005

$7,203,760

$20,642,940

$7,201,325

$16,878,810
1,177,545
$18,056,355

$4,427,655
1,177,545
$5,605,200

$17,746,920
1,099,620
$18,846,540

$4,305,305
1,099,620
$5,404,925

Federal Reserve
Foreign Official
Institutions

1,142,860

1,100,000

455,700

696,400

TOTALS

$19,654,915

$7,203,760

$20,642,940

$7,201,325

45,175
16,157,055
31,235
58,565
79,810
80,240
1,127,835
73,340
36,680
58,145
46,890
1,570,135
289,810

45,175
142,640
31,235
55,265
50,985
48,875
140,130
52,580
27,180
58,145
36,890
224,850
289,810

TOTALS

$19,654,915

Type
Competitive
Noncompetitive
Subtotal, Public

J7 Equivalent coupon-issue yield.

B-229

2041

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
Expected at 10:00 a.m.
July 30, 1985
STATEMENT OF
RONALD A. PEARLMAN
ASSISTANT SECRETARY FOR TAX POLICY
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE COMMITTEE ON FOREIGN RELATIONS
Mr. Chairman and Members of the Committee:
I am pleased to have this opportunity to appear before the
Committee today to express the Administration's support for five
pending income tax treaties — treaties with Barbados, China,
Cyprus, Denmark and Italy. I would first like to extend my
appreciation to the Committee for its willingness to hold
hearings on these treaties at this time.
As this is my first appearance before this Committee, and for
some members of the Committee this is the first opportunity to
consider tax treaties, I would like to spend a few moments
reviewing our tax treaty program and discussing the nature of tax
treaties and their benefits.
General Principles
Tax treaties are bilateral agreements designed to avoid
double taxation of income and prevent evasion and avoidance of
taxes. They are intended to facilitate flows of capital, trade,
technology and personal services between the contracting states.
International income flows are generally subject to tax in
two jurisdictions — the country of the source of the income
(i.e., where the income is generated) and the country of
residence of the income recipient. Tax treaties generally assign
a priority right to tax each class of income (e.g., business
profits, dividends, personal service income, etc.) to one
country, frequently the source country. In the case of passive
income, such as dividends, interest and royalties, however, the
source country's right to tax is usually restricted by providing
a maximum rate at which the income may be taxed. Treaties
provide for relief of double taxation by the residence country,
either by the granting of a credit for the foreign income tax or
B-230

-2by exempting the income which is taxed by the other country. The
United Itates avoids double taxation, both in it. treats, and in
its internal law, by means of a foreign tax credit.
An equally important feature of tax treaties is that they
provide for cooperation between the tax authorities of the two
countries. The competent authorities may exchange such information, including taxpayer information, as may be necessary for
the proper administration of the countries' tax laws. The
competent authorities may also resolve disputes which arise under
the treaty.
In addition to the principles described above, which are
common to all tax treaties, there are certain principles which
are specific to U.S. treaty policy. With minor exceptions, the
United States preserves its right to tax its citizens and
residents under statutory rules, as though the treaty had not
come into force. We view a treaty as a vehicle for granting U.S.
tax benefits to residents of the other country and for granting
the other country's benefits to U.S. residents.
It is also a fundamental aspect of U.S. treaty policy to
limit benefits to those residents of the other country who are
properly entitled to the benefits. The so-called "Limitation on
Benefits" provisions of all current U.S. treaties are designed to
prevent residents of third countries from establishing an entity
in the other country and using it as a vehicle for deriving
income from the United States, thereby receiving unjustified U.S.
treaty benefits. These provisions are tailored in each treaty to
reflect the potential for such abuse in that particular bilateral
relationship, taking into account the interaction of the tax laws
of the two countries and the other provisions of the treaty.
Benefits of Tax Treaties
Tax treaties provide substantial benefits both for the
taxpayers and the tax administrations of the two contracting
states. Taxpayers benefit from the substantive taxing provisions
of the treaty and from those provisions of the treaty which do
not confer a specific tax advantage, but serve to enhance a
favorable investment climate in the partner country.
For example, treaties provide for reciprocal reductions in
tax at source on payments of dividends, interest and royalties.
This reduces foreign taxes paid by U.S. residents and, thus,
increases the likelihood that foreign taxes will be fully
creditable in the United States, or, at least, that excess
credits will be reduced.
ither
de
partner may tax a

-3U.S. enterprise doing business or a U.S. individual performing
personal services there. A treaty partner may tax a U.S.
enterprise on its business profits only to the extent that the
profits are attributable to a permanent establishment in that
country. This provides a way for a U.S. company to get a "foot
in the door" in a country to perform feasibility studies, test
markets, etc., without being subject to the host country's tax
system. Similarly, individuals may visit a country for business
purposes for limited periods of time without being subject to tax
there. Students, government employees and pensioners also
benefit from treaty rules which reduce or eliminate source
country taxation of their income.
In addition to these substantive taxation benefits to U.S.
persons deriving income from the other country, there are many
less specific, but nonetheless beneficial, provisions of tax
treaties. For example, treaties provide some assurances to U.S.
investors that they will not be subject to capricious tax changes
in the other country. They provide for nondiscriminatory
treatment, and, when the need arises, for a mechanism to resolve
disputes.
Tax administrations also benefit from tax treaties. The
principal benefit is through the exchange of information
provisions found in all tax treaties. Under these provisions,
the tax authorities of the two countries can exchange information
regarding taxpayers and their activities which is necessary for
the implementation of the treaty and the proper enforcement of
the countries' tax laws. The Internal Revenue Service receives
information from our treaty partners, generally on a routine
basis, regarding receipts of passive income by U.S. persons. In
addition, information can be requested from our partners relating
to specific taxpayers and transactions.
The treaty benefits granted by the United States to residents
of the partner enhance the attractiveness of the United States as
a location for their investments.
Treaties with Developing Countries
Three of the treaties before you today are with developing
countries — the treaties with Barbados, China and Cyprus. A
special set of considerations, which I would like to discuss
briefly with you, applies with respect to such treaties.
Under the standard model treaties it is the country where
income arises which is called upon to make the principal revenue
sacrifice. In a treaty between two developed countries, where
capital flows in both directions, each country may be the source
of income of residents of the other. In a treaty between a
developed and a developing country, this is generally not the
case. Essentially all of the capital flows to the developing

-4nountrv and all of the income generated by that investment flows
hack to the developed country. The standard model treaties,
therefore, may impose an unreasonably high revenue burden on the
developing country partner. In negotiating treaties with
developing countries, we seek to minimize the partner's revenue
sacrifice while still providing levels of taxation which are not
so high as to inhibit flows of trade and investment. This is
accomplished, for example, by providing lower thresholds for
permanent establishments and personal service income than we
would agree to with a developed country, and by providing for
somewhat higher maximum rates for withholding at source on
passive income.
Developing countries frequently seek compensation for their
revenue losses in a treaty by having the developed country
partner provide an incentive in the treaty for its residents to
invest in the developing country. The incentive generally sought
is a so-called "tax sparing credit", under which the United
States would not only grant a foreign tax credit for the
partner's income taxes actually paid with respect to the U.S.
investor's income, but would also grant a "credit" for the taxes
which would have been paid but for the host country's tax
holidays designed to attract capital. While the United States is
not willing to include such provisions in tax treaties, we are
prepared to be flexible in many other respects in negotiating a
treaty which satisfies the revenue needs of developing countries
while still creating an attractive climate for investment in
these countries. An increasing number of developing countries
have come to recognize that a tax treaty with the United States
is of value even if it contains no specific investment incentive.
Individual Treaties
I would like to turn now to a brief discussion of each of the
treaties before the Committee today.
The treaties take into account the views of the Senate on
specific issues, as expressed in its recent consideration of
other U.S. tax treaties. Thus, for example, the rules for the
taxation of g a m s on real property conform to the provisions of
the Internal Revenue Code. Each treaty deals, in a manner
appropriate to the particular circumstances, with the potential
for abuse of the treaty's benefits. Each treaty also authorizes
r o n n S « r J i ^ounting 0 f f i c e a n d t h e tax writing committees of
3 e fc° o ^ a m access to certain tax information exchanged
tY
bod?L •„
? h l C h i s r e l e v a n t to the function of these
bodies in overseeing the administration of U.S. tax laws.
explanation^1^109 f^the record detailed technical
pre ared h
treaties!
?
Y the Treasury Department, of each of the

-5Italy
The proposed new Treaty with Italy was signed on April 17,
1984. It represents a comprehensive revision of the existing
treaty, which has been in effect since 1955. During that
interval, the income tax laws of both countries have changed
significantly. In addition,, model income tax treaties have been
developed by the United States and the Organization of Economic
Cooperation and Development (OECD). The proposed Treaty is
patterned on those models.
An important feature of the new Treaty is that it covers
Italy's local income tax, whereas the existing Treaty does not.
Thus, when the proposed Treaty limits the tax at source on
royalties to not more than 10 percent, that limitation applies to
the total Italian income tax, whether imposed at the national or
local level.
The proposed Treaty also differs from the existing Treaty in
containing provisions which limit the tax imposed by either
country on interest and capital gains derived by residents of the
other country. The tax at source on interest is limited to 15
percent, with exemption on certain loans issued, guaranteed or
insured by the other government. Capital gains derived by a
resident of one country may be taxed by the other country only if
derived from the alienation of real property (or a real property
interest) situated in that other country or of the assets of a
permanent establishment or fixed base used to carry on business
in that other country.
In the case of dividends, the proposed Treaty retains the 15
percent maximum tax at source on dividends on portfolio holdings.
However, it reduces the qualification for the 5 percent maximum
tax at source to companies owning more than 50 percent of the
voting stock of the company paying the dividend (compared to a 95
percent ownership test in the existing Treaty), and introduces an
intermediate ceiling rate of 10 percent when the company owning
the dividends owns between 10 and 50 percent of the voting stock
of the paying company.
The maximum rates of tax at source on dividends, interest and
royalties allowed under the proposed Treaty are higher in general
than those provided in the U.S. Model treaty for negotiations
with other industrial countries. However, they are comparable to
rates we have agreed to in other cases where, as is the case with
Italy, U.S. investment in the other country is much larger than
investment by residents of the other country in the United
States. Moreover, as I noted earlier, the provisions concerning
dividends, interests, royalties and capital gains are more
favorable to U.S. investors than under the existing Treaty.

-6One unusual feature of the proposed Treaty is that each
country agrees to exempt from tax social security benefits paid
to residents of the other country. The United States will waive
the 15 percent tax on social security benefits paid to
individuals who are residents of Italy, including individuals who
are dual nationals. This is a concession on our part. It was
agreed to because of the great importance of this provision to
Italy, which was especially concerned about the burden of the tax
on many residents who returned to Italy after working for long
periods in the United States and whose benefits are below the
threshold level for taxation in Italy. The Social Security
Administration does not object to this provision, on the understanding that we regard this as an exception to U.S. tax treaty
policy and not as a precedent for other such negotiations, a
position with which we agree. (None of the other treaties under
consideration today includes such a rule.)
China
The proposed tax Treaty with China and the accompanying
protocol were signed by President Reagan on April 30, 1984, the
first U.S. income tax treaty to be signed by a U.S. President.
The proposed Treaty is less detailed than the U.S. Model
Income Tax Treaty, but it is remarkably similar in principle to
the U.S. Model. It also takes into account the model draft
income tax treaty prepared under the auspices of the United
Nations specifically for use in negotiations between developed
and developing countries.
The proposed Treaty provides for a maximum rate of tax at
source of 10 percent on dividends, interest and royalties derived
by residents of the other country. The provisions concerning the
taxation of business income and personal service income are
generally similar to those in other recent U.S. income tax
treaties. However, the Treaty contains somewhat more generous
exemptions for visiting students and teachers, reflecting China's
interest in such programs and the imbalance in flows of physical
capital between the two countries.
The proposed Treaty also contains provisions on exchange of
information, mutual agreement procedure and limitation of
benefits. I would note that, although the Chinese treaty
contains a less comprehensive anti-abuse provision than is
contained in some other recent treaties, we feel that the
provision is more than sufficient.
Despite the fact that China's corporate income tax system is
relatively new and that their economy is in the early stages of
modernizing with the help of foreign investment, the proposed
treaty is quite similar to other U.S. treaties. This is a
tribute to the interest of the Chinese in concluding a tax treaty

-7with the United States. It is our judgment as well as theirs
that the Treaty will contribute to greater economic and cultural
contacts between the two countries as well as improving the
ability of U.S. firms to compete in China's market for both goods
and technology.
Denmark
The proposed new Danish income tax treaty (as modified by the
accompanying Protocol), will replace the Treaty in effect since
1948. The proposed Treaty has previously been approved by the
Committee.
The proposed Treaty is very similar in most respects to the
OECD and U.S. Models. It provides an exemption from income tax
by each country of interest and royalties derived by residents of
the other country. In general, the provisions of the proposed
treaty concerning the taxation of business profits and personal
service income are fully consistent with the objectives of the
U.S. Model Treaty. In addition, the provisions concerning
exchange of information, mutual agreement procedures and nondiscrimination conform to the U.S. Model Treaty and are much
improved from the 1948 Treaty. Further, the Treaty retains fully
the U.S. right to apply its statutory rules under FIRPTA with
respect to the taxation of gains on disposition of U.S. real
property interests.
The proposed Treaty also contains an article limiting its
benefits to residents of the two countries. As I discussed
earlier, these anti-abuse provisions are structured to deal with
the situation under the particular treaty. We believe that the
provision in the Danish Treaty, which is more expansive than
found in our treaties with most countries, is adequate to deal
with abuses of the treaty without interfering with legitimate
business transactions.
One notable feature of the proposed Treaty is Denmark's
agreement to extend to U.S. shareholders part of the dividend tax
credit available to Danish shareholders in Danish corporations.
A U.S. shareholder deriving a dividend from a Danish corporation
will be granted a credit equal to 5 percent of the gross dividend
when the U.S. shareholder owns at least 25 percent of the share
capital of the Danish corporation paying the dividends (direct
investment) and equal to 15 percent of the gross dividend in
other cases (portfolio investment). The net effect of these
credits will be to reduce the Danish tax on dividends paid to
U.S. shareholders to 0.25 percent on direct investments and 2.25
percent on portfolio investments.
In the proposed Treaty the United States agrees to give a
foreign tax credit for Danish income taxes paid by U.S. taxpayers
subject to the hydrocarbon tax imposed in Denmark. The credit is

-8subject to the limitations of U.S. law (under Code sections 904
and 907). It is also subject to a special per-country limitation
imposed by the Treaty.
There has been no ruling on the creditability of Denmark's
hydrocarbon tax, but it is questionable that it would be fully
creditable under U.S. law and regulations. More likely, the U.S.
taxpayer would claim a partial credit under the "splitting"
election provided in the foreign tax credit regulations. That
amount would equal the generally applicable Danish corporate
income tax on a base reduced by the hydrocarbon tax. A taxpayer
electing this approach would compute the credit using the overall
limitation currently provided under U.S. law. Any shortfall of
credits against the U.S. tax on oil extraction income from
Denmark could be offset to the extent of available excess credits
for foreign income taxes paid with respect to oil extraction
income from other countries.
Alternatively, under the Treaty the taxpayer could elect to
credit Danish income taxes paid up to the U.S. tax on Danish oil
extraction income. No spillover would be allowed of excess
Danish credits to income from other countries.
Granting foreign tax credits by treaty where the taxes may
not be creditable under U.S. law is no longer part of U.S. treaty
policy. However, having done so in the cases of the United
Kingdom and Norway, fairness dictates a similar rule for taxes
paid to Denmark with respect to oil extracted from the same North
Sea area. Moreover, the cost in this case is at most modest, in
light of the fact that at least partial credit would be available
under U.S. law, and the very small level of U.S. oil activity in
Denmark. Another important offsetting factor is the tax
treatment by Denmark of U.S. offshore drilling contractors in the
proposed treaty, which is much more favorable than the
corresponding provision in the U.K. and Norway treaties.
Barbados
The proposed Income Tax Treaty with Barbados was signed on
December 31, 1984. Barbados was one of the British overseas
territories to which the U.K. treaty was extended in 1959. When
Barbados gained independence from Great Britain in 1966 the
Treaty remained in force. As the Committee is aware, all of the
?;™<n!!^ 8 iv n |.h re S t -; 8 i * n c i u d i n 9 t h e Tr *aty with Barbados, were
terminated by the United States, effective January 1, 1984
t ^ f n ^ J T ^ ! v 1 " 3 ' ° V h e ^ r i s d ^ t i o n s whose tr4aties'were
terminated to seek a new treaty with the United States. In view

bLinninf nflQLtermi?ati°n °f•th* °ld *"*<* *S Of the
beginning of 1984, certain provisions of the orooosed t-r^hv
those other than the withholding provisions? 5 i U be effective
for taxable years beginning on or after January l, 1 9 ! "

-9There were two basic reasons for the decision to terminate
the extension treaties: they did not properly reflect the nature
of the economic relationship between the United States and these
partners, i.e., the relationship of a developed country with a
developing country; and they did not protect adequately against
treaty abuse. The proposed treaty with Barbados corrects both of
these shortcomings. It follows the pattern of other recent U.S.
treaties with developing countries, such as the 1981 treaty with
Jamaica, by allowing a broader taxing right to the source country
(generally the developing country partner) than would normally be
the case in a treaty with another developed country. The
proposed treaty contains a comprehensive limitation on benefits
provision, which was developed taking into account the special
tax benefits allowed under Barbadian law to entities operating in
Barbados' "offshore sector".
Anti-Abuse Provisions
Barbadian law provides for a very favorable tax regime for
firms engaged in certain activities in the Barbados offshore
sector. These benefits are available for so-called "international business companies", which are generally investment
companies, though such companies may also be engaged in trade or
the provision of non-financial services. Offshore banking
enterprises, insurance companies and shipping companies receive
similar benefits. Great care was taken in negotiating the Treaty
to assure that residents of third countries would not be able to
establish an offshore entity in Barbados, under this legislation,
subject to little or no Barbadian tax, for the purpose of
deriving income from the United States at favored treaty rates.
The Treaty provides that benefits otherwise provided by one
of the Contracting States to a resident of the other under the
treaty will not be granted under certain circumstances. Benefits
will be denied if less than 50 percent of the beneficial interest
in the person deriving the income is owned by residents of
Barbados or the United States, or by U.S. citizens; or if a
substantial part of the income of the person claiming treaty
benefits is used to meet liabilities to persons other than
residents of a Contracting State or U.S. citizens. However, even
if these rules would otherwise operate to deny benefits, benefits
will be granted if the income is derived in connection with, or
is incidental to, an active business conducted in a Contracting
State, other than the business of making or managing investments.
The effect of these rules with respect to the Barbadian offshore
sector is, in general, to deny treaty benefits to Barbadian
offshore companies which are investment companies, insurance
companies, or which are banks (with respect to income from
traditional banking businesses). Other offshore companies, as
well as other Barbadian residents owned by third country
residents, will still have to meet the active business test
described above in order to receive treaty benefits.

-10Exchange of Information
The Treaty includes a very broad exchange of information
provision which will assure the Internal Revenue Service access
to the information which it needs to administer the U.S. tax
laws. In addition, Barbados was the first Caribbean Basin
jurisdiction to enter into an exchange of information agreement
(CBI Agreement) under the provisions of the Caribbean Basin
Recovery Act of 1983. As a result, Barbados is now considered
part of the "North American area" for purposes of the deductibility by U.S. taxpayers of expenses incurred in attending
business conventions in Barbados. By virtue of the CBI
Agreement, Barbados also qualifies as a jurisdiction in which a
Foreign Sales Corporation (FSC) may incorporate under the FSC
provisions of the Tax Reform Act of 1984. The information
currently available under the CBI Agreement is the same in scope
as that which is provided for under the proposed Treaty.
The exchange of information provisions of the Treaty are
essentially the same as those of the U.S. Model Income Tax
Treaty. The Treaty, as well as the CBI agreement, assures that
the Internal Revenue Service will have access to any information
available to the Barbadian tax authorities, including bank
information, relating both to residents of the United States or
Barbados and to third country residents. Information will be
available with respect to those entities in the Barbadian
offshore sector which will not be entitled to treaty benefits.
Other Provisions
Like other U.S. treaties, the proposed Treaty provides
maximum rates of tax at source on dividends, interest and
royalties. The maximum rates on dividends are the same as those
in the U.S. Model, 15 percent in general and 5 percent on
dividends paid by a subsidiary to its parent. On interest and
royalties, the maximum rates are 12.5 percent, somewhat above the
rates in the U.S. Model, reflecting Barbados' status as a
developing country. As an exception to the general rule on
interest, interest received, guaranteed or insured by the
Government of the United States or Barbados, or by an
instrumentality of one of the Governments, is exempt at source.
The Treaty contains rules found in most U.S. tax treaties
concerning the taxation of business profits, personal service
income, transportation income, real property income and capital
gains. The Treaty provides a credit for the avoidance of double
taxation, protection against discriminatory taxation and a
dispute resolution mechanism. As noted above, some of these
rules in the proposed Treaty with Barbados differ from the
comparable rules in the U.S. Model by allowing a somewhat broader
right to the source country to tax. These modifications are
consistent with what has been done in other U.S. treaties with
developing countries.

-11Cyprus
An Income Tax Treaty with Cyprus was signed, along with an
exchange of letters, on March 19, 1984. This Treaty replaces a
Treaty with Cyprus which was signed on March 26, 1980. The
Committee will recall that in 1981 the Administration asked that
the 1980 Treaty not be considered at hearings of this Committee
in September, 1981, so that certain amendments could be made.
The 1980 Treaty was returned by the Senate to the President, in
December 1981, for further negotiation.
The new Treaty incorporates the changes which the
Administration sought and which were endorsed by the Senate in
its action of returning the Treaty to the President. The
amendments relate principally to providing added assurances,
first, that the benefits of the Treaty will not accrue to
residents of third countries who are not properly entitled to
those benefits, and, second, that Cyprus will be able to provide
the information necessary for proper administration of the Treaty
and U.S. tax laws by the Internal Revenue Service. We are now
confident that the concerns which prompted these amendments have
been fully satisfied.
Anti-Abuse Provisions
The proposed Treaty contains several provisions designed to
prevent third country residents from taking unwarranted advantage
of the Treaty by routing income through an entity established for
that purpose in one of the Contracting States. These provisions
stemmed from the fact that Cyprus has favorable internal tax law
provisions which apply to foreign owned entities doing business
in Cyprus and to entities established in Cyprus and doing
business outside of Cyprus. The Treaty provides, in paragraph 6
of Article 4 (General Rules of Taxation), that benefits granted
under the Treaty to an item of income by one of the Contracting
States will not be granted if, under the law of the other State,
that item of income is subject to a substantially lower tax than
the tax which would apply to that item if it were derived from
sources in that other State. A second anti-abuse provision,
found in Article 26 (Limitation on Benefits), denies benefits
under the Treaty to a resident of a Contracting State if (1) 25
percent or more of that person is owned by nonresidents of that
State, or (2) regardless of ownership, that person is used as a
conduit to channel deductible payments to persons who are not
residents of that State. This second denial of benefits rule
will not apply if the establishment, acquisition and maintenance
of that person, and the conduct of its business, did not have the
obtaining of treaty benefits as a principal purpose. Similarly,
payments of income to a trustee in a Contracting State will not
be granted treaty benefits if the income is derived in connection
with a scheme a principal purpose of which is to obtain treaty
benefits.

-12Exchange of Information
«

The exchange of notes accompanying the proposed Convention
clarifies the fact that the Treaty will provide to the Government
of Cyprus the authority necessary to implement fully the comprehensive exchange of information provisions of the Treaty,
including access to bank information, information regarding
corporate stock ownership and information regarding the
beneficial ownership of trusts.
Other Provisions
The proposed Treaty provides for maximum rates of tax at
source on payments of dividends, interest and royalties. With
respect to dividends, the Treaty provides that the United States
tax on dividends to a Cypriot resident may not exceed 15 percent
in the case of portfolio dividends and 5 percent in the case of
direct investment dividends. The rule for Cyprus source
dividends is somewhat different in order to reflect the Cypriot
integrated individual/corporate tax system. The Treaty provides
that Cyprus may not impose any tax on dividends beyond the tax on
the profits of the corporation out of which the dividends are
paid. Moreover, U.S. individual dividend recipients may file for
a refund of any Cyprus tax paid at the corporate level with
respect to dividends received which is in excess of that
individual's liability for Cypriot individual income tax.
The Treaty provides, on a reciprocal basis, for a maximum
rate of tax on interest at source of 10 percent. Certain types
of interest, however, are exempt at source. These include
interest received, guaranteed or insured by the Government of a
Contracting State or an instrumentality of that Government,
interest received by a bank and interest received in connection
with the sale of property or the performance of personal
services. Royalties are reciprocally exempt at source.
The Treaty contains rules found in most U.S. tax treaties
regarding the taxation of business profits, personal service
income, transportation income, real property income and capital
gains. Also included are the normal rules necessary for
administering the Treaty, including rules for the resolution of
disputes under the Treaty and, as noted above, the exchange of
information.
We believe that the treaties with Cyprus and Barbados are
! h ? o h e ^ P n e - ^ ° 5 c ? V ° r t ° f instructive treaty relationship
Ihir-. =L?nited States can have with a country with an "offshore sector. Though both Cyprus and Barbados have such
l n 5 £ S - n ? h ! 6 ^ 0 " ' J h e ? a ^ S O h a v e a n interest in promoting real
nter^t LiLnonr"ld^ts
*" their economies. It is this latter
he f o c u s
advtntfae of Jhi%« .
of both treaties. Persons taking
advantage of the tax haven legislation in these countries will

-13l t a t ^ U y T h ! C n 1 V : "° ^ n e f i t S U n d e r t h e Treafc y f r ° m fche United
States. The United States will, however, have access to whatever
countrles^off ?**' "^ CeSpeCt t0 a=tivities i„ these
countries' offshore sectors.
* * *

I strongly urge prompt and favorable action by this Committee
on the five treaties before you. I would be pleased to answer
any questions which the Committee may have answer

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE
July 30, 1985

CONTACT:

SUSANNE HOWARD
(202) 566-2843

SALE OF U.S. COMMEMORATIVE COINS
TO AID IN THE RESTORATION OF THE
STATUE OF LIBERTY AND ELLIS ISLAND
Washington, D.C. — The President of the United States
signed into law a bill which authorizes the U.S. Department of
the Treasury to mint gold and silver coins commemorating the
centennial of the Statue of Liberty and Ellis Island. U.S.
Treasurer Katherine Ortega and Donna Pope, Director of the U.S.
Mint attended the White House signing ceremony. The
legislation provides that the proceeds from the sale of these
coins will be used to aid in the restoration of the Statue and
Ellis Island and establish an endowment to ensure the continued
maintenance of these monuments.
In making this announcement, Mrs. Ortega said it is the
goal of this Program to raise at least $40 million dollars in
surcharges for the renovation of the Statue of Liberty and
Ellis Island. The renovations should be completed by the
centennial celebration of July 4, 1986.
The Treasury is offering a 198& half dollar which will be
emblematic of the contributions of immigrants to America, a
silver dollar which depicts Ellis Island and its use as a
gateway to America, and a five-dollar gold coin which will
•honor and feature the Statue of Liberty.
Mrs. Pope indicated that this will be the first time the
Statue will be featured on U.S. coinage. All three coins will
be legal tender, and will be offered in proof and uncirculated
condition.
The coins will be available in various set combinations,
priced from $7.50 for the single half dollar, $24.00 for the
silver dollar, and $175.00 for the gold piece. Each coin will
be encapsulated and presented in an attractive presentation
(jewel-type) case.
Mrs. Ortega said, "These coins, will afford all Americans
the opportunity to support this historic effort by purchasing
something which is truly unique and has lasting value."
The bill allows for a "pre-issue discount" on all orders
received prior to the issuance of such coins. It is expected
that coins will begin to be available around the first of
November.
# # # #

B-231

TREASURY NEWS
apartment
of the
Treasury
• Washington, D.c. • Telephone
566-2041
FOR RELEASE
AT 4:00
P.M.
July 30, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued August 8, 1985.
This offering
will provide about $325
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,074 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, August 5, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
May 9, 1985,
and to mature November 7, 1985
(CUSIP No.
912794 JE 5), currently outstanding in the amount of $7,045 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
August 8, 1985,
and to mature February 6, 1986
(CUSIP No.
912794 JR 6).
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing August 8, 1985.
In addition to the maturing
13-week and 26-week bills, there are $8,482
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates 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 $1,808 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $2,173 million as
agents for foreign and international monetary authorities, and $4,419
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 4632-2
B-23226-week series) or Form PD 4632-3 (for 13-week series).
(for

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the

4/85

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

4/85

TREASURY NEWS
pertinent of the Treasury • Washington, D.c. • Telephone 566-2041

FOR IMMEDIATE RELEASE
July 31, 1985

CONTACT: ART SIDDON
(202) 566-2041

TREASURY RELEASES FIFTH REPORT ON
U.S. CORPORATIONS IN PUERTO RICO
The Treasury Department today released its Fifth Report on
The Operation and Effect of the Possessions Corporation System of
Taxation. Possessions corporations are companies incorporated in
one of the fifty States or the District of Columbia that are
generally exempt under section 936 of the Internal Revenue Code
from Federal tax on their income from Puerto Rico, Guam, and
certain other U.S. possessions. These corporations are also
generally exempt under industrial tax incentive programs from all
or a portion of the otherwise applicable income tax imposed by
Puerto Rico and the possessions.
The report released today related to tax year 1982 and the
operations of section 936 under the law as in effect at that
time. Thus, it does not reflect the amendments to section 936
introduced by the Tax Equity and Fiscal Responsibility Act of
1982.
Those changes took effect for tax years beginning on or
after January 1, 1983 and will be reported in the next annual
report.
Since over 99 percent of the income of all possessions corporations is derived from Puerto Rico, the body of the report
deals with the operation and effect of the possessions
corporation system in Puerto Rico.
Among the principal findings of this report are:
The estimated tax savings to U.S. corporations of the
possessions corporation provisions were $1.7 billion in
1982 (Table 4-5).

B-233

-2Possessions corporations in manufacturing industries in
Puerto Rico employed approximately 81,000 persons in
1982. This represented 11 percent of total employment in
Puerto Rico and 60 percent of all employees in Puerto
Rico's manufacturing sector. (Tables 4-6 and 3-3.)
The tax savings per employee in 1982 ranged from about
$3,500 in the textile and apparel industries to $69,000
in the pharmaceutical industry. The average compensation
per employee in those industries was $9,000 and $21,000,
respectively. For all manufacturing sectors, the average
tax saving per employee was $20,656 and the average
compensation $14,070. (Table 4-6).
— The pharmaceutical industry derived one half of the total
tax savings and provided 15 percent of the employment of
possessions manufacturing corporations in 1982.
(Table
4-7.)
In 1982, the net income earned by the possessions
corporations engaged in manufacturing was $4.1 billion.
The average ratio of operating income to operating assets
for these companies was more than five times that ratio
for all mainland corporations engaged in manufacturing.
(Tables 4-5 and 4-3).
Possessions corporations also held over $10 billion of
exempt financial assets in Puerto Rico at yearend 1983.
Although the Puerto Rican Goverment has recently been
successful in holding down the interest rate paid on
those assets, the resulting effect on the level of real
investment in Puerto Rico appears to have been modest.
(Tables 5-1, 5-7, and 5-3).
An appendix to the Report summarizes the possessions corporation system of taxation as it applies to American Samoa and
Guam and describes the tax exemption for U.S. corporations
operating in the Virgin Islands in accordance with section 934(b)
of the Internal Revenue Code.
Copies of the Report are available for purchase from the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20401. When ordering, use Stock No. 481-787.

THE WHITE HOUSE
Office of the Press Secretary
For Immediate Release

July 30, 1985

STATEMENT BY JAMES A. BAKER III
SECRETARY OF THE TREASURY
CHAIRMAN, CABINET COUNCIL ON ECONOMIC POLICY
The President welcomes this as a step in the right
direction, particularly in the area of liberalization of
Japan's capital markets. But it is, of course, only a plan,
and thus can only be judged on the basis of its prompt
implementation and its final result toward the opening of
Japan's markets to the goods of the world.
It is the view of the Cabinet Counil on Economic Policy
that judgment must be reserved until the effect of the
program is realized.
#

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE WHEN AUTHORIZED AT PRESS CONFERENCE

July 31, 1985

TREASURY AUGUST QUARTERLY FINANCING
The Treasury will raise about $9,400 million of new cash and
refund $12,341 million of securities maturing August 15, 1985, by
issuing $8,500 million of 3-year notes, $6,750 million of 10-year
notes, and $6,500 million of 30-year bonds. The $12,341 million
of maturing securities are those held by the public, including
$1,409 million held, as of today, by Federal Reserve Banks as
agents for foreign and international monetary authorities.
The 10-year note and 30-year bond being offered today will
be eligible for exchange in the STRIPS program and, accordingly,
may be divided into their separate Interest and Principal Components and maintained on the book-entry records of the Federal
Reserve Banks and Branches. Once a security is in the STRIPS
form, the components may be maintained and transferred in multiples of $1,000. Financial institutions should consult their
local Federal Reserve Bank or Branch for procedures for requesting securities in STRIPS form.
The three issues totaling $21,750 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
will be added to that amount. Tenders for such accounts will be
accepted at the average prices of accepted competitive tenders.
In addition to the public holdings, Government accounts
and Federal Reserve Banks, for their own accounts, hold $3,275
million of the maturing securities that may be refunded by
issuing additional amounts of the new securities at the average
prices of accepted competitive tenders.
Details about each of the new securities are given in the
attached "highlights" of the offering and in the official offering circulars. The circulars, which include the CUSIP numbers
for components of securities with the STRIPS feature, can be
obtained by contacting the nearest Federal Reserve Bank or
Branch.
oOo
Attachment

B-234

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
AUGUST 1985 FINANCING TO BE ISSUED AUGUST 15, 1985
Amount Offered to the Public
Description of Security;
Terra and type of security.
Series and CUSIP designation

$8,500 million

$6,750 million

3-year notes
Series T-1988
(CUSIP No. 912827 SN 3)
CUSIP Nos. for STRIPS Components..Not applicable

10-year notes
Series C-1995
(CUSIP No. 912827 SP 8)
Listed in Attachment A
of offering circular
Maturity Date.. August 15, 1988
August 15, 1995
Interest Rate
To be determined based on
To be determined based on
the average of accepted bids
the average of accepted bids
Investment yield
To be determined at auction
To be determined at auction
Premium or discount
To be determined after auction To be determined after auction
Interest payment dates............February 15 and August 15
February 15 and August 15
Minimum denomination available....$5,000
$1,000
Amount Required for STRIPS
Not applicable
To be determined after auction
Terms of Sale:
Method of sale
.Yield auction
Yield auction
Competitive tenders
Must be expressed as
Must be expressed as
an annual yield with two
an annual yield with two
decimals, e.g., 7.10%
decimals, e.g., 7.10%
Noncompetitive tenders
.....Accepted in full at the aver- Accepted in full at the average price up to $1,000,000
age price up to $1,000,000
Accrued interest payable
by investor.
None
None
Payment through Treasury Tax
and Loan (TT&L) Note Accounts
Acceptable for TT&L Note
Acceptable for TT&L Note
Option Depositaries
Option Depositaries
Payment by non-institutional
investors
Full payment to be
Full payment to be
submitted with tender
submitted with tender
Deposit guarantee by
designated institutions
Acceptable
Acceptable
Key Dates:
Receipt of tenders
Tuesday, August 6, 1985,
Wednesday, August 7, 1985,
prior to 1:00 p.m., EDST
prior to 1:00 p.m., EDST
Settlement:
a) cash or Federal funds...
b ) readily-collectible check

Thursday, August 15, 1985
Tuesday, August 13, 1985

July 31, 1985
$6,500 million
30-year bonds
Bonds of 2015
(CUSIP No. 912810 DS 4)
Listed in Attachment A
of offering circular
August 15, 2015
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15
$1,000
To be determined after auctior
Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Acceptable for TT&L Note
Option Depositaries
Full payment to be
submitted with tender
Acceptable
Thursday, August 8, 1985,
prior to 1:00 p.m., EDST
Thursday, August 15, 1985
Tuesday, August 13, 1985

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 1, 1985

RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $8,758 million of 52-week bills to be issued
August 8, 1985,
and to mature
August 7, 1986,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount Investment Rate
Rate
(Equivalent Coupon-Issue Yield) Price
8.16%Low
92.336 —
7..58%
High
7..61%
8.19%
92.305
Average 7,.60%
8.18%
92.316
Tenders at the high discount rate were allotted 78%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

B-235

Accepted

$
72,490
17,115,695
7,345
42,085
52,600
40,980
1,111,090
75,215
.8,865
42,340
14,125
1,769,825
103,195
$20,455,850

$
12,490
8,196,995
7,345
19,885
31,720
28,780
83,110
42,995
8,865
41,020
4,125
177,405
103,195
$8,757,930

$18,355,800
400,050
$18,755,850
1,600,000

$6,657,880
400,050
$7,057,930
1,600,000

100,000
$20,455,850

100,000
$8,757,930

TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041

FOR RELEASE UPON DELIVERY
Expected at 2:30 p.m. MDT
4:30 p.m. EDT

Monday, August 5/ 198 5

Remarks by Secretary of Treasury
James A. Baker, III
before the National Governors Association
in Boise, Idaho
Monday, August 5, 1985
Introduction
I am pleased to be here with you today. I am especially
pleased to see the provincial premiers from our next-door
neighbor, Canada, who are here today.
Your participation in this meeting builds on the
meetings in your country last March when President Reagan and
Prime Minister Mulroney reaffirmed the friendship of our
nations and our commitment to keep markets open. We look
forward to listening, learning, and prospering together.
I am well aware of the growing interest in trade among
our nation's governors. Over 30 of your states now have
representation abroad to promote your exports and attract
investment to your states. Such farsighted policies can pay
great dividends in a world economy that is becoming more
mobile and interdependent every day.
With this growing interdependence, it is essential that
we devote our efforts to expanding free markets worldwide.
Only the free flow of goods and services will guarantee that
the abundant resources of this world are put to their most
productive use.
This is not an abstract ivory-tower theory. We are
talking about the living standards of all Americans. Only
open markets will bring the United States the most trade
benefits, give Americans the broadest selection of goods at
the best prices, and provide the most jobs and income.
And for the world at large, trade and economic growth go
hand in hand. In the quarter century from 1948 to 1973,
world trade grew 7 percent annually. At the same time the
world economy grew a remarkable 5 percent each year.
B-236

-2Since then, reflecting their dependence on one another,
both economic and trade growth have generally been slower and
more sporadic.
In the last several years, trade has been a particularly
powerful stimulant to growth. A fast-growing U.S. economy
has boosted the incomes of our trading partners dramatically.
Literally half the growth of European countries in 1983
and 1984 stemmed from our expansion's demand for their
exports. And our imports from the less developed countries
have helped to keep their severe economic problems from
spinning out of control, with possible adverse consequences
for our banking system.
Furthermore, imports have helped keep our level of
inflation at low levels. This recovery is the first one in
many years in which inflation has gone down and stayed down.
The benefits of free trade are real; we must not forget
them as we examine an issue of deep concern — the trade
deficit. You are acutely aware of this issue. Your
committee on International Trade and Foreign Relations speaks
eloquently of its meaning to our economy and our working men
and women.
Some have suggested quick-fix, meat-ax protectionist
solutions that would supposedly solve the trade deficit.
But these measures would be dangerously counterproductive
because they are based on a misunderstanding of the deficit.
As the saying goes, "it's not wise to try to fool Mother
Nature." Nor is it wise to ignore the fundamental forces
behind the trade deficit.
Faster U.S. Growth
A large part of the rising deficit has been caused by
the fact that the United States has grown faster than its
trading partners, something I alluded to earlier. In the
first two years after our recovery began in late 1982, we
grew three times as fast as Europe, and twice as fast as the
rest or the industrialized world.
Such rapid growth increases our demand for imports;
beleaguered foreign economies had little demand for our
exports. Hence, the trade deficit has grown, just as our
economy grew.
LDC Debt
Our trade deficit has also been increased by imports
from less developed countries. In turn, their economies,
beset by problems, have not had as much demand for our

-3exports. Our exports have also lagged because of the
necessary adjustment policies those countries have adopted to
deal with their foreign debt problems.
Strength of the Dollar
Another issue linked to the trade deficit is the
strength of the dollar. Its sharp rise since the early
1980's accounted for between a third to a half of the
increase in the trade balance. It has, in ettect, imposed
quite a "price increase" on our exporters, and a significant
"price cut" on the imports that our producers must compete
with. For many, a fluctuating currency can be a frightening,
random phenomenon that is apparently beyond one's control.
But like the trade deficit, the strong dollar is largely
a result of the vigorous U.S. economy over the last several
years. The dollar has strengthened as U.S. economic
performance has strengthened — relative to previous years,
and relative to other countries. Foreign investors see the
United States as a flexible, resilient economy that has taken
firm steps to reduce taxes, regulation and inflation.
They also see it as a political "safe-haven" for capital
in an insecure world. All this drives up the desirability,
and the price, of the dollar. Once again, you have a seeming
paradox — as our economy went up, so did the dollar, hurting
our exporters and those who compete against imports.
Our Trade Policy: Oppose Market Distortions
The forces behind the U.S. trade deficit and the level
of the dollar are basic market forces. Our trade policy must
take these forces into account and allow them to bring the
highest possible level of prosperity to Americans.
Policies that distort markets — whether for products,
services, investment or currencies — should be avoided.
Distortions are a disservice to all the world's economies.
They create inefficiencies, and inefficiencies inevitably
mean economic well-being is lower than it could, and should,
be.
For these reasons there is little the government can do
to directly influence, i.e. distort, the value of the dollar
in exchange markets. Experience shows that efforts to move
exchange rates contrary to market forces are generally
ineffective and always costly, while contributing
simultaneously to market uncertainty and instability.
Protectionism suffers from the same fatal flaw: it
attempts to violate the law of market forces. Its fond
illusions are like fancy script written on sand.

-4One year the illusion was that domestic content
legislation would save automobile jobs.
This year the illusion written on the sand is a proposed
25 percent import surcharge.
The curious thing about this illusion is that its
supporters believe the surcharge is not protectionist.
You've heard of "nonbank banks."^ Now we have
"nonprotectionist protectionism."
Here you have the assumption that no other country will
react to the surcharge with protectionist threats of its own.
Instead it is naively supposed that our trading partners will
placidly submit to everything we ask, as if we were the only
market in the world open to them.
Whatever they are, the fond illusions of protectionism
are inevitably washed away by the tide of truth.
Protectionist threats all too often turn into harsh reality.
Our Smoot-Hawley tariff, which Congress passed with the
fondest of illusions in 1930, touched off a worldwide trade
war which lasted far too many years.
Double-digit protectionism — the 25 percent surcharge
— could cause a return of double-digit inflation. Our
consumers would be harmed and manufacturers using imports
might well have to lay off workers and suffer severe
inefficiency.
And, here's another reality not often given its due: if
protectionism reduces imports, the dollar could rise, not
fall. Fewer imports would reduce the supply of dollars in
the hands of foreigners and cause the increasingly scarce
dollar to rise in value.
Promote Free Markets And Trade
Protectionism and exchange intervention, therefore, are
not viable solutions to our trade deficit problem. Rather,
we need to continue to pursue a fair, free-market,
growth-oriented policy. We are cooperating with other
nations in an effort to achieve solid economic growth.
And, as United States growth is slowing to a more
moderate pace this year, other economies are converging with
ours. As other countries' economies become more attractive
for foreign investors, downward pressure on the dollar will
build.
At the Bonn Summit earlier this year, the industrialized
nations laid out their goals. The United States committed

-5itself to reducing its budget deficit. The Europeans
promised to take action to strengthen employment and
noninflationary growth.
Japan pledged to open its markets to imports and to
continue the process of liberalizing its capital markets and
internationalizing the yen. Indeed, Prime Minister
Nakasone's statement to this effect last week is a step in
that direction.
The Summit partners agreed that developing nations need
to persevere in adjustment efforts, and that all countries
must resist protectionism. In addition, we must also take
care to reasonably and responsibly enforce our laws to combat
unfair trade practices.
Our Policy Regarding the Dollar
At the same time, we want to improve the functioning of
the international monetary system.
The Group of 10 industrial countries met in Tokyo in
June for this purpose. We agreed that while the basic
structure of the present system remains valid, there is a
clear need to improve its functioning. Exchange market
intervention can play a role, (but only a limited one) in
support of other, more basic policy changes.
We are convinced that true monetary stability can be
attained only if countries cooperate to achieve sound
policies at home and compatible performances internationally.
This is an ambitious agenda, with a long time horizon.
But we firmly believe it is the right approach. The quick
fixes proposed by some will only exacerbate the problem.
We are already beginning to see some progress. The
growth differentials among countries are narrowing. Other
countries are achieving lower rates of inflation. And the
growth prospects of less developed countries are improving,
as they carry out needed adjustment policies.
Since the dollar reached its peak last winter, there has
been a considerable reversal of its previous run-up. Over a
third of its rise against the European currencies and the yen
since 1980 has been reversed. This decline reflects our view
that an orderly decline of the dollar was not a surprising
outcome as our GNP growth slowed to more sustainable levels
and as economic prospects improved abroad.
So, we are satisfied, though hardly complacent, about
the recent performance of the dollar. The decline has been
moderate and not precipitous. Like its earlier rise, the
decline in the dollar was not caused by exchange market
intervention, but by market forces.

-6We don't have a particular target in mind — I don't
think anybody knows what the "right" exchange rate for the
dollar is. I do not expect a precipitous fall in the dollar,
contrary to some fears I've heard expressed. .Yet as our
policy of promoting the convergence of economic growth
continues, I would expect to see further moderate declines in
the dollar.
Trade Negotiations
Finally, the United States has called for a new round of
trade negotiations. Trade negotiations are the proper forum
for fighting protectionism. They are a far better approach
than individual countries taking uncoordinated action by
themselves.
Multinational trade negotiations permit us to
counterbalance powerful groups that benefit from protection
with groups that would benefit from a reduction in trade
barriers and a more stable and comprehensive set of trading
rules. After all if we can hold off the pressures, it is the
public, all consumers, who will gain.
Such negotiations should be broad in scope, since trade
barriers are rapidly becoming more sophisticated and deeply
rooted. All barriers to trade in goods and services and
flows of direct investment should be on the table, whether
such barriers are tariffs or other forms of protection. And
crucial to the success of the negotiations is that both
industrial and developing nations participate equally.
Our trade policy is based on the belief that allowing
the individual, the business, and the nation to buy and sell
freely will guarantee the most prosperity for all Americans.
Freedom is the foundation of this, the greatest economy on
earth. We are committed to preserving that freedom as
America prepares to enter the 21st century.
State And Local Tax Deduction
Now, I don't think I could speak to this group without
at least mentioning one aspect of tax reform that I know is
of concern to you — our tax reform proposal to repeal the
deduction for state and local taxes.
Repealing that deduction is essential to tax reform, so
let me go over a few key points that underscore this case.
Our tax plan promotes fairness, simplicity, and economic
growth by cutting back tax preferences and lowering tax
rates.
Take fairness first: simply put, most of the benefits
from the state and local deduction go only to a well-to-do
few. Repealing a deduction that primarily helps the wealthy
is at the heart of any tax reform.

-7And, I will add parenthetically, that the deduction
works against the progressivity of state taxes and actually
transforms such levies as sales taxes into regressive taxes
that hit hardest at the poor.
Non-itemizers making $10,000 a year must pay the full
sales tax. An itemizer making $100,000 a year in the 50
percent bracket can deduct the sales tax and, in effect, pay
only half of the tax.
Indeed, a full 85 percent of the tax savings from the
state and local tax deduction accrues to only a narrow 25
percent of all tax returns by AGI. This is not only unfair
to the poor, it discriminates against middle-income people in
lower brackets. And it leaves middle-income people with only
a very small share of the benefits of this deduction.
The better way to help middle-income Americans is
through lower rates, higher personal exemptions, and other
direct tax relief.
And, quite frankly, the state and local tax deduction
has other problems. Not only is it a boon for the wealthy
but it also discriminates against people of equal incomes in
different states.
Second, repeal of the state and local tax deduction is
critically important to our efforts to reduce marginal tax
rates. And reducing those rates is essential to making our
economy stronger and more internationally competitive.
If this deduction is not repealed we will see a federal
revenue loss of $33 billion in 1987, and increases to $40
billion in 1990. Without recapturing this amount, a
substantial cut in marginal rates would not be possible.
It reminds me of a story perhaps familiar to some of you
from the Northeast. A city man was driving in a rural area
of New England, and got totally, completely lost in the
middle of nowhere. He stopped to ask a farmer how to get to
a particular town. The farmer replied, "well, you can't get
there from here."
That goes for tax reform. Without eliminating
deductions, you can't get there (cut rates, boost growth)
from here.
A third reason for ending the.state and local tax
deduction and other deductions is to promote simplicity.
Ending the deduction will reduce the number of itemizers and
permit more taxpayers to participate in our return-free
system.

-8Under our plan, over half of all taxpayers will not have
to fill out a tax form — if they don't want to. The IRS
will simply bill them or, much more likely, issue the refund
due them.
This will be a tremendous relief for millions of
Americans. It would perhaps be the most noticeable benefit
of our tax reform.
Finally, let me address your concerns about how repeal
of the deduction will affect your states. While ending the
deduction is crucial to our overall plan, we believe the
impact of this change on individual states and localities
will be extremely modest.
Perhaps the most important fact to consider is that a
relatively small portion of state-and-local spending is
financed by deductible taxes. In 1982, taxes claimed as an
itemized deduction represented only about 20 percent of all
state-and-local tax spending.
In addition, it is frequently overlooked that expanding
the national tax base will also expand the tax base of the 32
states that use the federal base as a reference. That would
send state tax revenues up_. For example, Colorado recently
estimated that our plan would add $50 million to its' revenues
by expanding its tax base.
And, even as to state and local revenues derived from
deductible taxes, the effect of repeal should be minimal.
Since the majority of people would have significant marginal
rate cuts, the states would benefit from more vigorous
economic activity.
Now, this is not just idle talk from one man dedicated
to the principle of tax reform. Recent independent studies
have confirmed the belief that repeal of the deduction would
have at most a very limited effect.
The National League of Cities found that total state and
local spending, now increasing 7 percent annually, is only
? ^ u ^ t w o Percent higher because of the deduction for itlte
and local taxes. Likewise, a study by the Congressional
Research Service predicted that total state and local
spending would be only 1.5 percent lower if the deduction
were repealed.
And even these encouraging studies leave out two major
f£n°I5n°hn?" V2 ?tate budget raakerss First, the more
than $20 billion of bottom-line tax relief our plan would
deliver to individual taxpayers and second the political
impact of the non-itemizing majority.

-9So, this is not the end of Western civilization as we
know it, as our critics would have you believe. They point
to catastrophic consequences on welfare spending, education,
or other vital areas. Their analysis is, simply put, off the
mark. Their alarm, when the overall effect of our proposal
is calculated, is unfounded.
Let me say in closing that we face an historic
opportunity to reform the tax system, for the benefit of
ourselves, and for generations to come. By reducing marginal
tax rates and improving the fairness of the system we can
remove the drag on the prosperity of all Americans. I
believe we owe the American people nothing less.
Thank you very much.

TREASURY NEWS

department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 5, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,236 million of 13-week bills and for $7,228 million
of 26-week bills, both to be issued on August 8, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing November 7, 1985
Discount Investment
Rate
Rate 1/
Price

26-week bills
maturing February 6, 1986
Discount Investment
Rate
Rate 1/
Price

7.29%
7.30%
7.30%

7.51%
7.53%
7.52%

7.53%
7.54%
7.54%

98.157
98.155
98.155

7.92%
7.94%
7,93%

96.203
96.193
96.198

Tenders at the high discount rate for the 13-week bills were allotted 37%.
Tenders at the high discount rate for the 26-week bills were allotted 7%.

Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
48,590
19,579,455
23,420
125,995
86,915
113,265
1,141,415
96,585
47,210
68,295
35,415
1,537,960
382,100

$
48,590
6,050,965
23,420
35,995
52,755
103,265
190,710
56,585
47,210
64,295
25,765
146,540
382,100

$7,235,895

: $23,286,620

$7,228,195

$29,119,340
1,219,920
$30,339,260

$3,898,350
1,219,920
$5,118,270

: $20,232,045
:
1,168,975
: $21,401,020

$4,173,620
1,168,975
$5,342,595

1,439,425

1,400,000

678,200

485,600

$32,456,885

$7,235,895

: $23,286,620

$7,228,195

$
46,700
28,764,510
35,415
110,025
57,745
55,180
1,187,190
91,960
65,670
94,810
41,630
1,584,270
321,780

$
44,700
6,322,040
35,385
57,650
47,745
49,750
107,190
51,960
15,670
64,125
31,630
86,270
321,780

$32,456,885

\J Equivalent coupon-issue yield.

B-237

Accepted

s $
'
:
:

DEPARTMENT OF"ihL I HLAbUTW
WASHINGTON, D.C. 20220
^ SECRETARY

JUL 3 11985

Dear Mr. Chairman:
Enclosed, pursuant to your request, is a detailed analysis of
materials on high income taxpayers presented in summary form in
Secretary Baker's testimony before the Ways and Means Committee
on May 30, 198 5, as well as data we have developed on the growth
of partnerships and the impact of partnership losses on high
income taxpayers.
Our study is based on a computer analysis of all 1983
individual income tax returns, data published by the Internal
Revenue Service as part of its Statistics of Income series, and
data contained in the Registered Offering Statistics file of the
Securities and Exchange Commission.
I hope this information is of assistance to the Subcommittee.
Sincerely,
ft..

Ronald A. Pearlman
Assistant Secretary
(Tax Policy)
The Honorable
J.J. Pickle
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives
Washington, D.C. 20515
Enclosure
cc:

The Honorable Dan Rostenkowski
The Honorable John J. Duncan

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220

TAXES PAID BY HIGH-INCOME TAXPAYERS
AND THE GROWTH OF PARTNERSHIPS
Whether a tax system is judged to be fair depends, in
part, on whether those citizens who are most able to pay
taxes are perceived to pay a fair share of their income in
taxes. Earlier analyses have focused on the extent to which
taxpayers with .high adjusted gross income (AGI) pay little
or no tax. Such analyses are useful primarily in indicating
the extent to which extraordinary itemized ("below-theline") deductions reduce tax liability of high-income
taxpayers. But they do not shed much light on the extent to
which taxpayers with substantial economic income are able to
reduce AGI, and therefore taxable income and tax liability,
with various "above-the-line" losses, including losses from
tax shelters.
A computer analysis of all income tax returns for 1983
filed by high-income individuals provides further information on the tax burden borne by high-income taxpayers and on
the commonly used means of lowering that burden. The
analysis clearly identifies partnership losses as a primary
source of offset to other income and thereby of reduction in
tax liability for these high-income persons. Although the
study does not measure the amount of tax reduction attributable to the specific tax incentives that provide opportunities for tax shelters, recent trends in the partnership
sector suggest the growth and prevalence of tax shelter
activity.
I. Definition of Income
It has long been recognized that losses allowed for tax
purposes are often not real economic losses; frequently they
are merely accounting losses that result from tax shelter
activities. Because tax losses can offset normally taxable
income, it is necessary in analyzing taxes paid by highincome groups to use a measure of income which is relatively
unaffected by accounting losses that may not be real.
The measure of income chosen for this purpose is total
positive income (TPI), which essentially equals the sum of
(1) wages and salaries, (2) interest, (3) dividends, and (4)
income from profitable businesses and investments. Unlike
the more commonly used measure of adjusted gross income, TPI
does not subtract various exclusions or deductions which
reduce AGI, such as IRA and Keogh contributions and the

-260 percent of long-term capital gains that is excluded
from taxable income. TPI also excludes most business and
investment losses which are taken into account in computing
/CGI.
Based on this definition of income, a return was
classified as a high-income return if total positive income
exceeded $250,000. Since TPI excludes real losses as well
as tax-shelter losses, it tends to overstate economic
income; on the other hand, it understates economic income
to the extent that tax shelter losses offset economic gains
within many activities. Nonetheless, most returns with
more than $250,000 of positive income can reasonably be
classified as "high income." In 1983, 260,000 tax returns
(or one-quarter of one percent of all returns) reported TPI
in excess of $250,000; nearly 28,000 tax returns reported
TPI in excess of $1 million.
II. Taxes Paid
Many taxpayers with high positive incomes paid a
substantial share of their income in taxes in 1983;
nearly half (47 percent) owed at least 20 percent of their
TPI in tax.
A significant minority, however, owed very low taxes, in
spite of the current law minimum tax. (See Table 1.)
o Almost 30,000, or 11 percent, of returns with TPI
in excess of $250,000 paid virtually no tax; that
is, taxes paid were less than 5 percent of TPI.
o Nearly twice as many owed no more than 10 percent
of positive income in taxes. Fifty-five thousand,
or 21 percent of all returns with positive incomes
in excess of $250,000, paid 10 percent or less of
positive income in taxes. Fifty-four hundred, or
19 percent, of returns with TPI over $1 million
paid no more than 10 percent of positive income in
taxes.
o Over 3,000, or 11 percent, of returns with TPI in
excess of $1 million paid virtually no tax.
These high-income returns paying less than 5 or 10
percent of TPI in taxes are shouldering lower tax burdens
than typical returns with substantially lower incomes.
o Upper-middle-income returns with TPI of between
$30,000 and $75,000 paid on average about 13
percent of their positive income in taxes.

-3o

Nearly 17,000 of the high-income returns with TPI
exceeding $250,000 owed less than $6,272 in tax,
the amount that a typical four-person family with
*
$45,000 of income owed. Fifteen hundred returns
with TPI in excess of $1 million owed less than
this $6,272.
III. How Taxes Were Reduced
High-income returns with low tax liability relied most
heavily on losses reported in current business activities,
including those conducted in partnership form, to reduce
their tax bills. (See Table 2.)
o Returns with TPI over $250,000 and taxes of less
than 5 percent of TPI reported current business
losses amounting, on average, to 67 percent of TPI.
(Thus, for example, a typical high-income return
showing TPI of $300,000 might show losses of
$200,000 and AGI of $100,000; taxable income would
be even less, after allowance for itemized
deductions and personal exemptions.)
The capital gains exclusion and losses carried over from
previous years also offset large amounts of positive income
for the low-tax returns. Itemized deductions (such
as for state and local taxes, mortgage interest expenses,
and charitable contributions) were much less important in
reducing taxes.
o For the high-income, low-tax returns—those with
taxes less than 5 percent of TPI—the combination
of the capital gains exclusion and losses other
than on current business activities offset
46 percent of TPI. (The combination of this
exclusion and these losses, together with current
business losses, offset more than 100 percent of
TPI, on average, for these returns.) Excess
itemized deductions offset only 18 percent of TPI.
The high-income returns with relatively high tax
liability—those with taxes exceeding 20 percent of positive
income—seem to have more in common with the typical
upper-middle-income return than with the high-income,
low-tax return. .
«

"Above-the-line" offsets to TPI —primarily losses
and the capital gains exclusion—were relatively
unimportant for the high TPI returns with high
taxes and for the upper-middle-income returns with
TPI between $30,000 and $75,000. Current business

Table 1
1983 Returns with Total Positive Income* of $250,000 or More
TPI Over
$250,000

TPI Over
$1 Million

All Returns 260,275 27,796
Returns with Taxes Paid as Percent of TPI:
Less than 5%
29,800
5 - 10%
25,452
10 - 20%
83,173
Over 20%
121,850
Returns with:
Partnership Losses 166,401 19,871
Partnership Losses Exceed
50% of TPI
Partnership Losses Exceed TPI

3,170
2,225
11,307
11,094

12,655

1,600

1,916

306

Office of the Secretary of the Treasury July 31, 1985
Office of Tax Analysis
* Total Positive Income (TPI) measures gross income reported
on tax returns before losses. It primarily equals the sum of
positive amounts of income on the Form 1040, with the
following exceptions: For capital gains, it equals long- and
short-term gains before losses and before exclusions. For
Schedule E, TPI includes the income on rental and royalty
properties with profits, on partnerships, on estates and
trusts, and on small business corporations with gain. TPI
does not subtract various exclusions or deductions which
reduce AGI, such as IRA and Keogh contributions, and the 60
percent exclusion of long-term capital gains.
Source:

Extract from the 1983 IRS Individual Master File of all
tax returns with TPI of at least $250,000.

Table 2
Ways of Reducing Income Subject to Tax
"Below-the-Line"
"Above-the-Line" Offsets to TPI
Offsets to TPI
s
: All Other
: Total,
Excess
: Credits
sCurrent : Losses &
: Losses &
{Business: Cap. Gains : Cap. Gains Itemized : ITC & Tax After
Credits
FTC
(Losses* : Exclusions**: Exclusions Deductions:
(Percentage of TPI)
High TPI
turns

18.,3

23.2 41.5 13.6

Under
TPI

67,.2

45.7

112.8

17.8

1.0

5 .8

10.7

16.5

11.6

30.6

r-Middle- 4 .4
me Returns ***

6.1

10.5

9.9

12.7

Over
% TPI

ce of the Secretary of the Treasury
fice of Tax Analysis

20.2
1.7

July 31, 1985

Current Business Losses include losses on partnerships; net losses from
Schedule C, Subchapter S corporations, rental and royalty properties, and
farms; and net supplemental losses.
"All Other Losses and Capital Gains Exclusions" are primarily the exclu
portion of capital gains plus substantial loss carryovers.
"Upper-Middle-Income Returns" have $30,000 to $75,000 of TPI.

:es: Extract from the 1983 IRS Individual Master File of all tax return
with Total Positive Income of at least $250,000; and the Treasury
Individual Income Tax Model for 1983.

-4losses averaged only 6 percent of TPI for the
high-income, high-tax group and 4 percent of TPI
for the moderate TPI returns. Capital gains
*
exclusions and other losses offset an additional
11 percent and 6 percent of TPI for the two groups,
respectively.
o For both the high-income, high-tax returns
and for the upper-middle-income returns, itemized
deductions—"below-the-line" offsets—were almost
as important as all above-the-line offsets in
reducing tax liability. Itemized deductions
averaged 12 and 10 percent of TPI for the two
groups, respectively.
For the high-income, low-tax returns, some of the
current business losses that offset so much of positive
income undoubtedly represent real economic losses. However,
most of the losses came from partnerships. For some years,
many partnerships have been utilized as vehicles for tax
shelters (defined for purposes of this paper as activities
producing net losses available to offset net income from
other activities), and frequently they have registered
accounting losses when they have incurred no real economic
losses.
o Among the 30,000 taxpayers with TPI of $250,000 or
more who paid virtually no tax (i.e. tax of less
than 5 percent of TPI), partnership losses alone
offset an average of 36 percent of total positive
income.
o Eighty-eight hundred, or 30 percent of taxpayers
with TPI greater than $250,000 and tax liability
below 5 percent of TPI, reported partnership losses
equal to at least half of their positive incomes.
o Approximately 1,900 high-income, low-tax returns
had partnership losses which fully offset positive
income.
IV. The Growth in Partnerships
The growth in tax shelter activity in recent years,
particularly but not exclusively in limited partnerships,
has been well advertised. Some figures help document that
the growth in the partnership sector has been disproportionately concentrated in partnerships registering net tax

Table 3
Partnership Activity, 1965, 1975, and 1982
1965 1975
•Partnership income reported 1/
by individuals (in billions)t
Net Gain
Net Loss
Number of partnerships with and 2/
without net incone
~"

1962

$
$

All industries
Oil and gas drilling
Real estate
Agriculture
Finance
Services
Number of partnerships with profits 2/

11.1
1.3

$
$

18.4
7.6

27.4
28.3

914,215
12,467
192,833
127,782
44,537
168,850

1,073,094
12,974
320,878
123,173
106,595
198,956

1,514,212
50,837
562,575
132,394
147,676
287,529

All industries
684,822
Oil and gas drilling
6,934
118,563
Real estate
92,417
Agriculture
29,195
Finance
137,774
Services
Number of partnerships with losses 2/
All industries
229,393
Oil and gas drilling
5,533
74,270
Real estate
35,365
Agriculture
15,342
Finance
31,076
Services
Total losses reported on partnership
returns (in billions) 2/
All industries
;
1.6
Oil and gas drilling
.1
.6
Real estate
.2
Agriculture
.1
Finance
.2
Services
Numbers of partners 2/
All industries
2,721,899
NA
Oil and gas drilling
674,489
Real estate
322,147
Agriculture
317,187
Finance
448,558
Services

661,134
7,214
161,928
74,143
58,266
138,510

791,117
21,686
242,156
67,928
80,728
180,153

411,960
5,760
158,950
49,030
48,329
60,446

723,095
29,151
320,419
64,466
66,948
107,376

Oxxice or the Secretary of the Treasury
Office of Tax Analysis
I]/* Sourcei
2/

Source:

14.7
1.7
6.5
1.1
1.8
1.9

4,950,634
213,238
1,549,716
351,062
1,422,954
668,858

60.9
13.2
23.0
3.1
7.4
6.8

9,764,667
1,512,328
3,720,805
448,623
1,983,132
1,171,642
July 31. 1955

IRS Statistics of Income, Individual Income Tax Returns,
Selected Years.
IRS Statistics of Income, Business and Partnership Tax Returns,
Selected Years.

-5losses, in limited partnerships which are the form of
business most commonly used to provide tax shelters, and in
industries that are accorded favorable tax treatment such as
the real estate and oil and gas industries. (See Table 3.)
Historically, the partnership sector has been the source
of substantial net income for individuals. For many years,
though, losses reported for tax purposes have been growing
•uch faster than gains, and individuals have recently
reported more partnership losses than gains.
o In 1965, individuals reported almost nine times as
much income from partnerships as they did losses—
$11.1 billion in net profits vs. $1.3 billion in
net losses. By 1975, the ratio of reported income
to reported loss had declined to 2-4 to 1 —
$18.4 billion vs. $7.6 billion. By 1982, though
net partnership income had reached $27.4 billion,
net losses had risen dramatically to $28.3 billion,
actually exceeding net gains.
Growth in the partnership sector in recent years, much
in the form of limited partnerships, has been concentrated
in industries with favorable tax code treatment and therefore with opportunity for tax shelters.
o From 1965 to 1975, the total number of partnerships
in all industries increased by a modest 17 percent,
from some 914 thousand to almost 1.1 million.
Between 1975 and 1982, formation of partnerships
accelerated, with the total number of partnerships
rising by 41 percent from almost 1.1 million to
some 1.5 million.
o By comparison, from 1965 to 1975 the total number
of partnerships in the two major tax-shelter
industries, oil and gas drilling and real estate,
rose by 63 percent, from some 205,000 to almost
334,000 thousand. Partnership formation in these
tax-shelter industries accelerated between 1975 and
1982, with the number of partnerships increasing by
84 percent to a little over 613,000.
o Between 1979 and 1982, 41 percent of the growth in
all partnerships and 74 percent of the growth in
the total number of partners occurred in limited
partnerships.

-6The rapid growth in the number of partnerships reporting
losses would lack a sound business rationale if it were not
for the ability of many taxpayers to use the tax losses
produced by these partnerships to shelter other income from
taxation.
o Between 1965 and 1982, the number of partnerships
with positive net income in all industries rose by
only 16 percent, from 684,000 to 791,000.
o By comparison, the number of loss partnerships more
than tripled during the same period: from 229,000
in 1965 to 723,000 in 1982.
Among partnerships with losses, the growth has been
particularly rapid in two industries.
o Between 1965 and 1982, the number of partnerships
reporting losses in the oil and gas and real estate
industries more than quadrupled. From 80,000 in
1965, the number doubled to 165,000 in 1975, and
then more than doubled again to 350,000 by 1982.
While the statistics cited above indicate that taxshelter activity has been growing rapidly, they say nothing
about the importance of tax shelters in the overall economy
and their distorting effect on the allocation of resources.
Data from the Securities and Exchange Commission document
that "tax shelters" have become a significant factor in the
market for newly issued securities. (Table 4)
o In 1982 public offerings of tax shelter limited
partnerships in oil and gas and in real estate
equaled some $8.1 billion—almost 13 percent of all
cash security offerings, and 31 percent of all cash
equity offerings.
V. Conclusion
Nearly half of the high income taxpayers in 1983 paid a
substantial share of their income in taxes—47 percent paid
taxes of at least 20 percent of their positive income.
These high-income taxpayers made hardly any more use of
special provisions of the tax code for reducing tax
liability than did typical upper-middle-income returns.

Table 4
Limited Partnerships and Publicly Offered Tax Shelters
1979 and 1982

1979

1982

amber of partnerships 1/
All partnerships
Limited partnerships

1,299,593
136,112

1,514,212
225,006

6,594,767
2,352,378

9,764,667
4,710,080

$37.6
$10.4
$ 2.3

$63.7
$26.3
$ 8.1

amber of partners 1/
All partnerships
Limited partnerships
»w public offerings 2/
(in billions)
All cash offerings
Cash equity offerings
Tax shelter limited partnerships 3/
Ifice of the Secretary of the Treasury
Office of Tax Analysis

July 31, 1965

Statistics of Income, Business Income Tax Returns, Selected Years.
Securities and Exchange Commission, Registered Offering Statistics
file.
Public offerings of limited partnership interests in oil and gas
drilling and real estate ventures which, in the opinion of SEC
legal staff, promise significant benefits based on tax savings
to the prospective investor and therefore are classified as tax
shelters by the SEC.

-7A significant minority of the high-income returns,
however, paid virtually no tax. Nearly 30,000 (or 11
percent) of the returns with TPI above $250,000 paid no more
than 5 percent of TPI in taxes. Over 3,000 (or 11 percent)
o€ returns with at least $1 million in TPI paid virtually no
tax. These high-income, low-tax returns look very different
from both those of typical upper-middle-income taxpayers and
those of high-income taxpayers who pay at least 20 percent
of TPI in taxes.
The evidence discussed in this paper supports the
presumption that tax-shelter partnerships are an important
vehicle for high-income individuals to reduce their tax
liabilities. For the high-income returns examined here that
report less than 5 percent of positive income paid in taxes,
losses on current business activities—including Schedule C,
partnerships, rental and royalty properties, and farms—
form the largest offset to positive income. Partnership
losses are by far the largest component of current business
losses.
Office o'f the Secretary of the Treasury
Office of Tax Policy
July 31, 1985

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

August 6, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$ 14,400 million, to be issued August 15, 1985This offering
will provide about $375
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,036 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, August 12, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
May 16, 1985,
and to mature November 14, 1985 (CUSIP No.
912794 JF 2 ) , currently outstanding in the amount of $7,039 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
August 15, 1985,
and to mature February 13, 1986 (CUSIP No.
912794 JS 4 ) .
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing August 15, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,454 million as agents for foreign and international monetary authorities, and $2,889 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B^238

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
jpartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August

^ ^5

RESULTS OF AUCTION OF 3-YEAR NOTES
The Department of the Treasury has accepted $ 8,524 million of
$20,483 million of tenders received from the public for the 3-year
notes, Series T-1968, auctioned today. The notes will be issued
August 15, 1985, and mature August 15, 1988.
The interest rate on the notes will be 9-1/2%.
The range of
accepted competitive bids, and the corresponding prices at the 9-1/2%
interest rate are as follows:
Low
High
Average

Yield
9.51% 1/
9.54%
9.53%

Price
99.974
99.898
99.923

?rs at the high yield were allotted 59 %.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
61,910
$
45,910
New York
17,299,195
7,037,665
Philadelphia
40,305
40,305
Cleveland
133,145
128,865
Richmond
64,880
60,240
Atlanta
119,495
92,165
Chicago
1,125,215
317,865
St. Louis
163,245
140,285
Minneapolis
84,670
79,710
Kansas City
185,390
182,185
Dallas
29,395
27,395
San Francisco
1,171,830
367,390
Treasury
4,005
4,005
Totals
$20,482,680
$8,523,985
The $8,524 million of accepted tenders includes $ 1,255 million
of noncompetitive tenders and $7,269 million of competitive tenders
from the public.
In addition to the $8,524 million of tenders accepted in the
auction process, $460 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $1,825 million of tenders was
also accepted at the average price from Government account's and Federal
Reserve Banks for their own account in exchange for maturing securities
1/ Excepting 1 tender of $165,000.
B-239

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-2
FOR IMMEDIATE RELEASE
August 7, 1985
RESULTS OF AUCTION OF 10-YEAR NOTES
The Department of the Treasury has accepted $ 6,758 million of
$ 15,795 million of tenders received from the public for the 10-year
notes, Series C-1995, auctioned today. The notes will be issued
August 15, 1985, and mature August 15, 1995.
The interest rate on the notes will be 10-1/2%.A' The range
of accepted competitive bids, and the corresponding prices at the
10-1/2% interest rate are as follows:
Price
Yield
99.514
Low
10.58%
99.332
High
10.61%
99.392
Average
10.60%
Tenders at the high yield were allotted 31%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
30,902
$
14,522
New York
13,885,280
6,155,924
Philadelphia
8,510
8,510
Cleveland
138,309
24,509
Richmond
24,500
14,500
Atlanta
20,157
14,467
Chicago
819,748
235,148
St. Louis
138,653
128,653
Minneapolis
33,023
19,223
Kansas City
73,264
72,264
10,295
8,295
Dallas
610,393
60,453
San Francisco
1,631
1,631
Treasury
Totals
$15,794,665
$6,758,099
The $ 6,758 million of accepted tenders includes $686
million
of noncompetitive tenders and $ 6,072 million of competitive tenders
from the public.
In addition to the $ 6,758 million of tenders accepted in
the auction process, $380 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $800 million
of tenders was also accepted at the average price from Government
accounts and Federal Reserve Banks for their own account in
exchange for maturing securities.
1/ The minimum par amount required for STRIPS is $400,000.
Larger amounts must be in multiples of that amount.

B^24Q.

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 6, 1985

RESULTS OF AUCTION OF 30-YEAR TREASURY BONDS
The Department of the Treasury has accepted $6,501 million
of $15,032 million of tenders received from the public for the
30-year bonds auctioned today. The bonds will be issued August 15,
1985, and mature August 15, 2015,
The interest rate on the bonds will be 10-5/8%.i^The range of
accepted competitive bids, and the corresponding prices at the 10-5/8%
interest rate are as follows:
Yield
Price
Low
10.64%
99.865
High
10.68%
99,508
Average
10*66%
99.686
Tenders at the high yield were allotted 91%*
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
$

755
13,519,599
405
91,403
B,459
23,380
653,593
8B,757
14,074
19,226
4,422
607,251

223

•;,uTi;547

w
of accepted

Accepted
$
755
5,996,254

405
37,803
4,459
5,380
217,143
88,757
8,624
19,225
2,422
119,451

223

$6,556,901

The $6,501 million
tenders includes $464
million of noncompetitive tenders and $6,037 million of competitive tenders from the public.
In addition to the $6,501 millior. of tenders accepted in
the auction process, $650 million of tenders was accepted at the
average price from Government accounts and Federal Reserve Banks
for their own account in exchange for maturing securities,
1/ The minimum par amount required for STRIPS is $320,000.
Larger amounts must be in multiples of that amount,
a-941

rREASURY NEWS
partment
of theRELEASE
Treasury • Washington, D.c. • Telephone
566-2041
FOR IMMEDIATE
August 12, 1985
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,212 million of 13-week bills and for $7,306 million
of 26-week bills, both to be issued on August 15, 1985,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-*reek bills
maturing November 14 , 1985
Discount Investment
Rate
Rate 1/
Price

Low
7.12% a/
7.35%
High
7.15%
7.38%
7.14%
7.37%
Average
a/ Excepting 1 tender of $740,000.

98.200
98.193
98.195

26--week bills
maturing February 13 , 1986
Discount Investment
Rate
Rate 1/
Price
:
:

7.36%
7.38%
7.36%

7.75%
7.77%
7.75%

96.279
96.269
96.279

Tenders at the high discount rate for the 13-week bills were allotted 21%,
Tenders at the high discount rate for the 26-week bills were allotted 2%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

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

52,500

6,081,125

Accepted

26,960
50,700
53,180
56,900
122,980
49,990
65,360
66,435
35,435
230,405
319,810

$
44,350
30,026,290
:
29,715
:
50,620
85,545
129,600
1,100,820
101,755
46,215
67,420
:
34,930
:
1,292,590
385,270
:

$18,267,340

$7 ,211,780

: $33,395,120

$7 ,305,525

$14,991,705
1,212,365
$16,204,070

: $30,027,000
:
1,164,375
: $31,191,375

1,513,515

$3 ,936,145
1,212,365
$5 ,148,510
1 ,513,515

549,755

$18,267,340

$7,211,780

52,500
14,829,575
26,960
50,700
53,180
60,850
1,029,380
90,660
65,360
93,235
35,435
1,559,695
319,810

44,350

6 ,326,875
29,715
40,010
69,625
42,825
116,055
55,795
21,715
66,150
25,030
82,110
385,270

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

1,475,000

$3 ,937,405
1,164,375
$5 ,101,780
1,475,000

728,745

$33,395,120

$7,305,525

An additional $54,545 thousand of 13-week bills and an additional $ 87,055
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
\J Equivalent couoon-issue yield.

B^242

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
August 13, 1985

Robert M. KlwLtt
General Counsel

On June 17, 1985 the Senate confirmed President Reagan's nomination of
Robert M. Kimmitt as General Counsel of the Department of the Treasury. As
General Counsel, he is responsible for all the legal work in the Department and
serves as principal legal adviser to the Secretary, Deputy Secretary, and other
senior departmental officials.
Before joining the Treasury Department, Mr. Kimmitt had served at the White
House since 1983 as Deputy Assistant to the President for National Security
Affairs and Executive Secretary and General Counsel of the National Security
Council.
After being commissioned as a regular army officer in 1969 at West Point,
Mr. Kimmitt completed field artillery, airborne, and ranger schools. He served a
17-month combat tour with the 173rd Airborne Brigade in Vietnam (1970-1971) and
was the assigned to the 101st Airborne Division at Ft. Campbell, Kentucky
(1972-1974). He attended Georgetown University Law School from 1974-1977, during
which time he also served as legislative counsel to the Army's Chief of
Legislative Liaison (Summer 1975) and then as a NSC staff member specializing in
arms sales policy (1976-1977). Upon graduation from law school, he served as a
law clerk to Judge Edward Allen Tamm of the U.S. Court of Appeals for the D.C.
Circuit (1977-1978). He returned to NSC staff in 1978, serving both as Legal
Counsel and Arms Sales Policy Officer until early 1982, when he left active
military service to join the senior staff of the NSC. In 1982-1983 he served as
General Counsel and Director of Legislative Affairs and Security Assistance for
the NSC.
Mr. Kimmitt was graduated from the United States Military Academy at West
Point (B.S. 1969) and Georgetown University Law Center (J.D. 1977). He is
married to the former Holly Sutherland, they have four children and reside in
Arlington, Virginia. He was born December 19, 1947 in Logan, Utah.

o 0 o

B-243

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

August 13, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued August 22, 1985.
This offering
will provide about $325
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,081 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, August 19, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
May 23, 1985,
and to mature November 21, 1985
(CUSIP No.
912794 JG 0), currently outstanding in the amount of $7,035 million,
the additional and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
February 21, 1985, and to mature February 20, 1986
(CUSIP No.
912794 JT 2 ) , currently outstanding in the amount of $8,525 million,
the additional and original bills to be freely interchangeable.
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing August 22, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,037 million as agents for foreign and international monetary authorities, and $3,302 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-244

Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
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
Jf"
securities for bills to be maintained on the book-entry
F e d e r a l R e s e r v e Ba
cen? o ? L
*ks and Branches. A deposit of 2 pertenderf
r !**„*????* °J t h e b i l l s applied for must accompany
oav^nt ° S U ? h b U l s f r o m o t h e r s ' ™l*s* an express guaranty of
incor
llrttra *
P ° r a t ^ bank or trust company accompanies the

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

August 14, 1985

TREASURY TO AUCTION $9,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,250 million
of 2-year notes to refund $8,356 million of 2-year notes maturing
August 31, 1985, and to raise about $900 million new cash. The
$8,356 million of maturing 2-year notes are those held by the
public, including $787 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $9,250 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks as agents for foreign
and international monetary authorities will be added to that amount.
Tenders for such accounts will be accepted at the average price
of accepted competitive tenders.
In addition to the public holdings, Government accounts and
Federal Reserve Banks, for their own accounts, hold $717 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.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment

B-245

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED SEPTEMBER 3, 1985
August 14, 1985
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation
Maturity date
Call date
Interest rate
Investment yield
Premium or discount
Interest payment dates
Minimum denomination available
Terms of Sale:
Method of sale
Competitive tenders

Noncompetitive tenders
Accrued interest payable
by investor
Payment by non-institutional
investors
Payment through Treasury Tax and
Loan (TT&L) Note Accounts
Deposit guarantee by
designated institutions
Key Dates:
Receipt of tenders
Settlement (final payment
due from institutions)
a) cash or Federal funds
b) readily collectible check

$9,250 million
2-year notes
Series Y-1987
(CUSIP No. 912827 SQ 6)
August 31, 1987
No provision
To
be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 28 and August 31
$5,000
Yield Auction
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the average price up to $1,000,000
None
Full payment to be
submitted with tender
Acceptable for TT&L Note
Option Depositaries
Acceptable
Wednesday, August 21, 1985
prior to 1:00 p.m., EDST

Tuesday, September 3, 1985
Thursday, August 29, 1985

rREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041

FOR IMMEDIATE RELEASE
August 16, 1985

CONTACT:

Art Siddon
(202) 566-2041

TREASURY DEPARTMENT ISSUES STATEMENT ON
FEDERAL "WATER'S EDGE" LEGISLATION
At its final meeting on May 1, 1984, the Worldwide Unitary
Taxation Working Group agreed on three principles that should
guide state taxation of the income of multinational corporations:
Principle 1: Water's edge unitary combination for both
U.S. and foreign based companies.
Principle 2: Increased federal administrative assistance
and cooperation with the states to promote
full taxpayer disclosure and
accountability.
Principle 3: Competitive balance for U.S. multinationals, foreign multinationals, and
purely domestic businesses.
In a letter transmitting his report to the President as
Chairman of the Working Group on July 31, 1984, then
Treasury Secretary Regan stressed the importance of state
action to limit use of the unitary method to the water's
edge. "If there are not sufficient signs of appreciable
progress by the states in this area by July 31 of next year,
whether by legislation or administration action, I will
recommend to you that the Administration propose federal
legislation that would give effect to a water's edge
limitation...."

B-246

-2The Treasury Department believes that in the past year
there have been positive developments at the state level to
implement the Working Group's recommendations. Specifically, Florida, Colorado, Indiana, Oregon, and Massachusetts
have ceased taxing on a worldwide unitary basis. Utah has
issued regulations that would terminate its use of the
worldwide unitary method upon implementation of the federal
assistance measures recommended by the Working Group. While
California continues to tax on a worldwide unitary basis,
water's edge legislation is currently receiving serious
consideration in California.
On July 8 of this year, the Treasury Department issued
for public comment proposed legislation that would provide
federal administrative assistance to states that do not
employ the worldwide unitary method. The release of this
draft legislation, and the welcome developments that have
occurred at the state level in the last year, indicate that
the problems posed by the worldwide unitary method may be
resolved this year. Accordingly, the Treasury is deferring
consideration of whether to recommend federal water's edge
legislation. In doing so, however, the Treasury Department
acknowledges that important steps remain to be taken by the
states before the unitary taxation problem can be considered
to be satisfactorily resolved. The Treasury continues to
urge that those states still taxing on a worldwide unitary
basis adopt a water's edge limitation patterned after the
Working Group's recommendations.

0O0

rREASURY NEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 19, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,209 million of 13-week bills and for $7,208 million
of 26-week bills, both to be issued on August 22, 1985, were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average
a/ Excepting
b/ Excepting
Tenders
Tenders

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Tyjpe
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions

TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

Accepted

$
40,680
15,511,710
32,355
48,970
57,695
60,550
1,005,995
74,025
37,305
181,005
44,310
1,135,775
311,080

40,680
5,796,010
32,355
48,970
51,875
55,850
360,905
54,025
37,305
134,005
39,310
246,635
311,080

39,685
: $
: 26,425,475
24,425
:
44,545
:
64,680
;
76,045
942,960
:
:
91,075
42,405
s
47,090
J
36,320
:
1,693,220
353,365

$
39,685
6,163,980
23,715
34,345
46,130
40,550
168,210
49,575
17,405
47,055
26,320
197,280
353,365

$18,541,455

$ 7,209,005

: $29,881,290

$7,207,615

$15,451,245
1,139,600
$16,590,845

$ 4,118,795
$ 5,258,395

: $26,743,100
:
1,047,890
: $27,790,990

$4,069,425
1,047,890
$5,117,315

1,652,010

298,600

$18,541,455

$ 7,209,005

U Equivalent coupon-issue yield

B-247

26-week bills
maturing February 20. 1986
Discount Investment
Rate
Rate 1/
Price

7.10%a/
7.33%
98.205 : 7.27%b/
7.65%
96.325
7.15%
7.38%
98.193 : 7.30%
7.69%
96.309
7.14%
7.37%
98.195 : 7.28%
7.66%
96.320
1 tender of $525,000.
1 tender of $50,000.
at the high discount rate for the 13-week bills were allotted 6%.
at the high discount rate for*the 26-week bills were allotted 2§%.

Location

TOTALS

13-week bills
maturing November 21. 1985
Discount Investment
Price
Rate
Rate 1/

1,139,600

1,650,000

:
440,300
: $29,881,290

440,300
$7,207,615

rREASURY NEWS
jartment
of the Treasury
• Washington,
D.c. • Art
Telephone
566-2041
FOR IMMEDIATE
RELEASE
CONTACT:
Siddon
August 19, 1985

(202) 566-2041

PAUL W. BATEMAN APPOINTED
DEPUTY TREASURER OF THE UNITED STATES
Treasury Secretary James A. Baker, III today announced the
appointment of Paul W. Bateman to be Deputy Treasurer of the
United States.
Mr. Bateman formerly was Deputy Assistant Secretary of
Commerce for Economic Development. He has served at the
Department of Commerce since 1982, initially as Executive
Assistant to the Assistant Secretary for Economic Development,
and was appointed Deputy Assistant Secretary in May 1984. From
1981 to 1982, he was employed at the White House as Deputy
Director for Administrative Operations in the Office of
Administration. He joined the White House staff after working
for the Office of the President Elect during the 1980-1981,
Presidential transition.
Prior to joining the Reagan Administration, Mr. Bateman was
an assistant to former President Richard Nixon in San Clemente,
California and later in New York City.
Mr. Bateman received his Bachelor of Arts degree from
Whittier College in 1979. He was born February 28, 1957, and
resides in the District of Columbia.
oOo

B-248

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

August 20, 1985

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued August 29, 1985.
This offering
will provide about $325
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,072 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, August 26, 1985.
The two series offered are as follows:
92-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
November 29, 1984, and to mature November 29, 1985
(CUSIP No.
912794 HP 2), currently outstanding in the amount of $15,556 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
August 29, 1985,
and to mature February 27, 1986 (CUSIP No.
912794 JU 9 ) .
The biils 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.
The bills will be issued for cash and in exchange for Treasury
bills maturing August 29, 1985.
Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,150 million as agents for foreign and international monetary authorities, and $2,720 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-24?

Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained-on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

August 20, 1985

TREASURY TO AUCTION $7,250 MILLION
OF 5-YEAR 2-MONTH NOTESThe Department of the Treasury will auction $7,250 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.
Attachment
oOo

B-250

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED SEPTEMBER 3, 1985
August 20, 1985
Amount Offered:
To the public
Description of Security:
Term and type of security
Series and CUSIP designation

$7,250 million

5-year 2-month notes
Series M-1990
(CUSIP No. 912827 SR 4)
Maturity date
November 15, 1990
Call date
No provision
Interest rate
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 15 and November 15
(first payment on May 15, 1986;
Minimum denomination available.... $1,000
Terms of Sale:
Method of sale
Yield Auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest
payable by investor
None
Payment by non-institutional
investors
F u l l payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts
Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institutions
Acceptable
Key Dates*:
Receipt of tenders
Wednesday, August 28, 1985,
q-n-i*™^*- it- -,
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions)
h! ^H-?r Fe^ral.funds Tuesday, September 3, 1985
b) readily collectible check.... Thursday, August 29, 1985

TREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 21, 1985

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,256 million of
$19,282 million of tenders received from the public for the 2-year
notes, Series Y-1987, auctioned today. The notes will be issued
September 3, 1985, and mature August 31, 1987.
The interest rate on the notes will be 8-7/8%. The range of
accepted competitive bids, and the corresponding prices at the 8-7/8%
interest rate are as follows:
Price
Yield
Low
8..86%
100.027
High
8..91%
99.937
8..89%
Average
99.973
Tenders at the high yieid were allotted 100%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
72,490
$
65,490
New York
16,782,010
7,694,360
Philadelphia
43,100
43,100
Cleveland
111,080
111,080
Richmond
108,355
98,355
Atlanta
93,585
92,535
Chicago
890,665
362,665
St. Louis
146,890
128,890
Minneapolis
52,185
52,185
Kansas City
158,080
157,580
Dallas
34,285
34,285
San Francisco
783,285
409,285
Treasury
6,210
6,210
Totals
$19,282,220
$9,256,020
The $9,256 million of accepted tenders includes $1,107 million
of noncompetitive tenders and $8,149 million of competitive tenders
from the public.
In addition to the $9,256 million of tenders accepted in the
auction process, $345 million of tenders was awarded at the average
price to Federal Reserve Banks as agents for foreign and international
monetary authorities. An additional $717 million of tenders was also
accepted at the average price from Government accounts and Federal
Reserve Banks for their own account in exchange for maturing securities.
B-251

TREASURY NEWS

epartment of the Treasury • Washington, D.c. • Telephone 566-2041

FOR RELEASE AT 12:00 NOON

August 23, 19B5

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $8,750
million of 364-day Treasury bills
to be dated September 5, 1985, and to mature September 4, 1986
(CUSIP No. 912794 KQ 6 ) . This issue will provide about $ 300
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,442
million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau
of the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m.,
Eastern Daylight Saving time, Thursday, August 29, 1985.
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.
The bills will be issued for cash and in exchange for
Treasury bills maturing September 5, 1985.
In addition to the
maturing 52-week bills, there are $14,072 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 currently hold $2,037 million as agents for foreign
and international monetary authorities, and $5,373 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate 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 $235
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 4632-1.
B-253

Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
tenders
*" l n c o r p o r a t e d b a n k or trust company accompanies the

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of• their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
Bpartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 26, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,220 million of 13-week bills and for $7,223 million
of 26-week bills, both to be issued on August 29, 1985,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing November 29, 1985
Discount Investment
Rate
Rate 1/
Price
7.05%
7.08%
7.07%

7.28%
7.31%
7.30%

98.198
98.191
98.193

26-week bills
maturing February 27, 1986
Discount Investment
Rate
Rate 1/
Price
7.20%
7.22%
7.21%

7.58%
7.60%
7.59%

96.360
96.350
96.355

Tenders at the high discount rate for the 13-week bills were allotted 98%.
Tenders at the high discount rate for the 26-week bills were allotted 75%,
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

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

TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public

Accepted

37,675
6,041,780
22,025
53,910
52,135
42,725
198,335
52,875
42,005
87,155
43,175
271,440
275,045

!
63,400
15,772,075
26,625
34,165
59,650
55,590
1,486,930
91,735
40,185
54,900
32,395
2,250,485
336,895

! 39,400
4,731,325
26,625
33,870
52,150
40,090
401,305
55,485
33,935
53,150
26,145
1,392,690
336,895

$19,044,595

$7,220,280

$20,305,030

$7,223,065

$16,338,680
1,054,030
$17,392,710

$4,514,365
1,054,030
$5,568,395

117,291,510
968,520
118,260,030

$4,209,545
968,520
$5,178,065

Federal Reserve
Foreign Official
Institutions

1,373,385

1,350,000

278,500

695,000

TOTALS

$19,044,595

$7,220,280

$20,305,030

$7,223,065

57,675
15,916,250
22,025
53,910
62,135
47,755
1,071,955
72,910
42,025
139,675
48,175
1,235,060
275,045

Equivalent coupon-issue yield

B-253

TREASURY NEWS

iepartment of the Treasury • Washington, D.c. • Telephone 566FOR RELEASE AT 4:00 P.M.
A u g u s t 2?f 1 9 8 5
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued September 5, 1985.
This offering
will provide about $325
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,072 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Tuesday, September 3, 1985.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
June 6, 1985,
and to mature December 5, 1985
(CUSIP No.
912794 JH 8), currently outstanding in the amount of $7,022 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
September 5, 1985, and to mature March 6, 1986
(CUSIP No.
912794 JV 7 ) .
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing September 5, 1985.
in addition to the maturing
13-week and 26-week bills, there are $8,442
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates 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 $1,822 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $2,057 million as
agents for foreign and international monetary authorities, and $5,380
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 4632-2
(for 26-week series) or Form PD 4632-3 (for 13-week series).
B-254

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
August 26, 1985

CONTACT: ART SIDDON
(202) 566-2041

RATIFICATION OF PROTOCOL TO U.S.-FRANCE INCOME TAX TREATY AND
STATUS OF CERTAIN ESTATE AND GIFT TAX TREATIES
The Treasury Department today announced the exchange of
instruments of ratification of the Protocol, signed on January
17, 1984, to the Convention Between the United States of America
and the French Republic With Respect to Taxes on Income and
Property. The original Convention, which was signed in 1967, was
previously amended by two protocols signed in 1970 and 1978.
The exchange of instruments of ratification took place in
Washington on August 23, 1985. The Protocol will enter into
force on October 1, 1985. Its provisions shall apply as follows:
in the case of taxes withheld at source, to amounts payable on or
after October 1, 1985; in the case of other taxes on income, for
taxable years beginning on or after October 1, 1985; and in the
case of the French wealth tax, to capital owned on or any time
after January 1, 1982.
The Treasury Department also announced the status of three
estate and gift tax treaties to respond to frequent inquiries
about them. The exchange of instruments of ratification of the
Convention Between the United States of America and the
Government of Sweden for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion With Respect to Taxes on Estates,
Inheritances, and Gifts, signed on June 13, 1983, took place on
September 5, 1984, and the treaty took effect as of that date.
The ratification procedures of the Convention Between the
Government of the United States of America and the Government of
the Kingdom of Denmark for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion With Respect to Taxes on
Estates, Inheritances, Gifts and Certain Other Transfers, signed
on April 27, 1983, were completed on November 7, 1984, and the
convention entered into force on that day. The exchange of
instruments of ratification of the Convention Between the United
States of America and the Government of the Federal Republic of
Germany for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion With Respect to Taxes on Estates, Inheritances,
and Gifts, signed on December 3, 1980, has not yet taken place.
It is anticipated that the German Government will approve the
exchange of instruments of ratification in the near future.
o 0 o
B-255

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
August 27, 1985

CONTACT: ART SIDDON
(202) 566-2041

TREASURY ANNOUNCES PENALTIES AGAINST CROCKER NATIONAL BANK
The Department of the Treasury today announced that Crocker
National Bank has agreed to pay penalties of $2.25 million for a
series of violations of the Bank Secrecy Act. The violations,
which consisted of failures to file currency transactions reports
for cash transactions exceeding $10,000, as required under the
Act, were discovered following a compliance examination conducted
by the Comptroller of the Currency. These violations, which
totalled in excess of 7800, resulted from failures to report
both international and domestic currency transactions.
In announcing the penalty, John M. Walker, Jr., Assistant
Secretary for Enforcement and Operations, stated: "The penalties
assessed against Crocker National Bank resulted from extensive
noncompliance involving reporting failures at various bank units
and branches going back to 1980. Although there is no evidence
that the bank itself deliberately engaged in money laundering,
Crocker's reporting failures were systemic and pervasive. They
deprived Treasury of potentially important law enforcement leads
that could have been useful in drug, tax, money laundering and
other investigations. This case illustrates why full compliance
with the Bank Secrecy Act is essential to effective law
enforcement."
This is the largest civil penalty Treasury has ever imposed
on a financial institution for Bank Secrecy Act violations.
In June, penalties ranging in amounts of $210,000 to $360,000
were imposed against four New York banks. According to
Mr. Walker, "The extremely serious nature of Crocker's violations
warranted a substantially more severe penalty than in prior
cases."
Mr. Walker added: "The systems failures that led to
Crocker's reporting violations originated prior to the installation of Crocker's present management. After compliance
problems were uncovered by the Comptroller of the Currency,
Crocker's present management cooperated with Treasury in
developing the scope of the bank's liability. Crocker has made
a commitment to full compliance in the future. These elements,
as well as the fact that the bank only recently returned to
profitability
after its well-known financial difficulties of
B-256
recent years, were mitigating factors in the penalty determination."

-2Crocker National Bank is the nation's fifteenth largest bank,
with branches throughout California.
The Bank Secrecy Act requires that financial institutions
report to Treasury within 15 days all currency transactions in
excess of $10,000. These reports are computerized and then used
by Treasury enforcement task forces in financial investigations
directed against organized crime, drug trafficking, money
laundering and tax evasion.
The Act carries civil and criminal penalties. Until the
passage of the Comprehensive Crime Control Act in October, 1984,
the maximum civil penalty was $1,000 per violation and the
maximum criminal penalties were one-year imprisonment and a
$1,000 fine, or both. The 1984 Act increased the criminal
penalties to five years and $250,000 and the civil penalty to
$10,000.

FACT SHEET
The $2.25 million civil penalty Treasury has assessed
against Crocker National Bank is pursuant to the Bank Secrecy
Act. It results from violations of the requirement to file
with the IRS Currency Transaction Reports ("CTRs") for all cash
transactions (e.g., deposits, disbursements, or transfers)
exceeding $10,000, whether domestic or international.
The data included in the CTRs is collated and analyzed at
the Treasury Financial Law Enforcement Center (FLETC) located
at the headquarters of the U.S. Customs Service. The
information generated is vital to the support of ongoing
investigations and to the development of leads for new
investigations into money laundering, tax evasion, and various
organized crime offenses.
The Bank.
Crocker National Bank is the nation's fifteenth largest
bank, with over 400 branches throughout the state of
California. Since May of 1985, Crocker, through its holding
company Crocker National Corporation (CNC), has been wholly
owned by Midland Bank pic, which prior to that time had been a
57% shareholder in CNC. The financial restructuring occurred
in response to a $324 million net loss in 1984, including a
$216 million net loss in the fourth quarter of that year.
Crocker has returned to profitability in 1985, with net income
of $9 million in the first quarter and $10 million in the
second.
Other Recent Penalty Cases Against Banks.
On February 7 of this year, the Bank of Boston agreed to
pay a $500,000 civil penalty for 1163 violations of the Bank
Secrecy Act reporting requirements involving transactions
totalling $1.22 billion. The Bank also pleaded guilty to a
felony charge in connection with the reporting violations.
Last June 18, Treasury announced civil penalties against
four New York banks for failure to report currency transactions
between 1980 and 1984. The four banks, the penalty amounts and
the number of reporting failures were: Chase Manhattan Bank,
$360,000 (1,442 reports); Manufacturers Hanover Trust Company,
$320,000 (1,393 reports); Irving Trust Company, $295,000 (1,242
reports) and Chemical Bank, $210,000 (857 reports).

History of Treasury's Investigations Against Banks.
Since 1975, there have been 38 cases in which banks or
employees of banks have been convicted of violations of
financial reporting requirements. In 25 of these cases, the
bank itself has been convicted; in 15 of them, bank officers
and employees have been convicted.
Currently, there are approximately 100 open cases that have
been referred to IRS for possible criminal prosecution
involving financial institutions.
Since the Bank of Boston case, approximately 60 banks have
come forward to disclose Bank Secrecy Act compliance problems
to Treasury.
Results of the Federal Enforcement Effort Using Bank Secrecy
Information. Treasury has used Bank Secrecy Act reporting
information to destroy nineteen major money laundering
organizations, which had collectively laundered approximately
$3 billion in crime proceeds since 1980. In addition, the
reporting data supports the investigations of the thirteen
Organized Crime Drug Enforcement Task Forces (OCDE). These
task forces, which became fully operational just over two years
ago, have resulted in the indictment of 6316 individuals and
2537 convictions. Treasury's financial investigations,
conducted by agents from IRS and Customs, play a major role in
the work of the OCDE Task Forces.

TREASURY NEWS
>partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.

August 27, 1985

TREASURY OFFERS $3,000 MILLION OF 16-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $3,000 million of 16-day
Treasury bills to be issued September 3, 1985, representing
an additional amount of bills dated March 21, 1985, maturing
September 19, 1985 (CUSIP No. 912794 HZ 0) .
Competitive tenders will be received at all Federal Reserve
Banks and Branches prior to 12:00 noon, Eastern Daylight Saving
time, Thursday, August 29, 1985. 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. Tenders
must show the yield desired, expressed on a bank discount rate basis
with two decimals, e.g., 7.15%. Fractions must 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. 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.
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 ml1lion.
This information should reflect positions held as of 11:30 a.m.,
Eastern time, on the day of the auction. Such positions would
include bills acquired through "when issued" trading, futures,
B-257

- 2 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 yield 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. The calculation
of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
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 Tuesday, September 3, 1985.
In addition, Treasury Tax and Loan Note Option Depositaries may
make payment for allotments of bills for their own accounts and
for account of customers by credit to their Treasury Tax and Loan
Note Accounts on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
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.

rREASURY NEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
August 28, 1985
RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $7,254 million
of $23,389 million of tenders received from the public for the
5-year 2-month notes, Series M-1990, auctioned today. The notes
will be issued September 3, 1985, and mature November 15, 1990.
The interest rate on the notes will be 9-5/8%. The range
of accepted competitive bids, and the corresponding prices at the
9-5/8%
interest rate are as follows:
Yield
Low
9.61%
High
9.63%
Average
9.62%
Tenders at the high yield were allotted 16%.

Price
99.974
99.894
99.934

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
$
66,391
20,095,327
14,500
221,357
95,390
46,701
987,255
139,015
41,043
70,774
12,602
1,595,319
2,845
$23,388,519

Accepted
$
24,711
6,368,423
14,500
85,157
31,330
23,501
209,845
116,015
32,443
68,674
10,922
265,239
2,845
$7,253,605

The $7,254 million of accepted tenders includes $638
million of noncompetitive tenders and $6,616 million of competitive tenders from the public.
In addition to the $7,254 million of tenders accepted in
the auction process, $560 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.

B-258

THE TREASURER OF THE UNITED STATES
WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE CONTACT: Susanne Howard
fao;ust 30, 1985

566-2843

Grey Advertising Awarded Advertising Contract
for Statue of Liberty Commemorative Coins
Washington, D.C.—Grey Advertising, Inc. of New York has
been awarded the U.S. Treasury Department's advertising and
public relations contract to promote the sale of the Statue of
Liberty-Ellis Island Commemorative Coins, it was announced
today by Katherine D. Ortega, Treasurer of the United States.
Under legislation signed by the President on July 9, 1985,
the Treasury Department is authorized to mint and sell three
legal tender coins to commemorate the 100th anniversary of the
Statue of Liberty and to raise funds for the restoration and
preservation of the Statue and Ellis Island. The coins authorized
are a five dollar gold coin, a silver dollar, and a one-half
dollar. The sales price of each coin contains an amount which
goes to the Statue of Liberty-Ellis Island Foundation to assist
with their restoration efforts.
"The goals of this program are to raise the greatest amount
possible to assist with the restoration of two of America's
greatest national monuments, and to provide the opportunity for
all Americans to participate in this great national effort by
purchasing the Statue of Liberty-Ellis Island Commemorative
Coins, " said Mrs. Ortega. "The selection of this advertising
agency will help ensure achievement of these goals."
-moreB-259

-2Grey Advertising, New York's largest advertising agency
was selected after an extensive competitive selection process,
involving many of the largest agencies in the World.
In addition to the development and execution of national
television and print advertising, the promotion campaign will
involve Grey's marketing subsidiaries: Grey Direct, for
direct marketing; Beaumont-Bennett, for sales promotion in
retail outlets; and GreyCom for public relations.
The Treasury Department hopes to raise between $40 and
$50 million in contributions to the Statue of Liberty-Ellis
Island Foundation through the coin program.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE

August 29, 1985

RESULTS OF TREASURY'S AUCTION OF 16-DAY CASH MANAGEMENT BILLS
Tenders for $3,004 million of 16-day Treasury bills to
be issued on September 3, 1985, and to mature September 19,
1985, were accepted at the Federal Reserve Banks today. The
details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount Investment Rate
Rate
(Equivalent Coupon-Issue Yield)
Low 7.28% 7.42% 99.676
High
7.34%
Average
7.31%

7.46%
7.44%

Price
99.674
99.675

Tenders at the high discount rate were allotted 78%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS:
(In Thousands)
Accepted
Received
Location
Boston
$2,704,000
New York
Philadelphia
Cleveland
Richmond
Atlanta
250,000
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
TOTALS

B=260

—

$20,506,000
—
——

10,000
——

2,000,000
——
——
——
——

1,400,000

50,000

$23,916,000

$3,004,000

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

August 29, 1985

RESULTS OP TREASURY'S 52-WEEX BILL AUCTION
Tenders for $8,779 million of 52-week bills to be issued
September 5, 1985, end to mature September 4, 1986, were accepted
today. The details are as followsi
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Investment Rate
Rate
(Equivalent Coupon-Issue Yield) Price
Low
7.35%
7.90%
92,568
High
7.37%
7.92%
92.548
Average 7.36%
7.91%
92.558
Tenders at the high discount rate were allotted 39%.
TENDERS> RECEIVED AND ACCEPTED
(In Thousands)
Accepted
Received
i

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

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

$23,751,285

$
14,385
8,149,960
9,345
75,155
16,760
13,390
175,655
49,070
11,945
28,140
6,855
127,210
101,335
$8,779,205

$21,100,000
416,285
$21,516,285
2,000,000

$6,127,920
416,285
$6,544,205
2,000,000

235,000
$23,751,285

235,000
$8,779,205

$
35,385
20,526,560
9,345
189,655
36,760
70,440
1,252,155
84,070
12,555
33,750
16,855
1,382,420
101,335

An additional $5,000 thousand of the bills will be issued
to foreign official institutions for new cash.
B-261

^
THE SECRETARY OF THE TREASURY

/
Z

WASHINGTON

August 31, 1985

Dear Dan:
On July 25th we issued a joint press release r eaffirming our
collective commitment to revenue neutrality as a firm
underpinning of fundament al tax reform. The S taff of the Joint
Committee on Taxation had on that day released its revenu e
estimates of the Presiden t's Tax Reform Propos als, which showed a
$25.1 billion revenue sho rtfall over the 1986- 1990 period mated by
compared to an $11.6 bill ion shortfall as orig inally esti that
the Treasury Department. The Staff's report a cknowledged ss than
these two estimates are r emarkably close, diff ering by le ($2.8
one-half of one percent o f estimated income ta x receipts imated
trillion during the 5-yea r period), and projec ting an est eceipts.
revenue shortfall of less than one percent of estimated r ach
We have been working with the Joint Committee Staff to re believe
agreement on the amount o f the shortfall, and although we lion, we
thatAdministration
it will be somewhere
$20 billion
and $25 bil
The
remains between
of the view
that a proposal
that
have not
yet reached
fina within
1 agreement.
yields
projected
revenue
one percent of estimated receipts
for the budget period constitutes a revenue neutral proposal,
especially considering the inexactitude of the revenue estimating
process. Thus it is our view that the President's proposals are
"revenue neutral" within a reasonable margin of estimating error,
even using the Joint Committee Staff's $25.1 billion estimate.
Nevertheless, in our July 25th press release we committed to
offer
further
proposals
Committees to perceives
assure
that the
general
public, to
as the
welltax-writing
as the Administration,
the President's proposals as revenue neutral. We recognize that
gain
to many people this means that the estimated revenue loss or
-- ----must be closer to zero than plus-or-minus one percent.
So, in order that the estimated revenue loss be closer to zero,
we would offer three possible modifications to the President's
proposals. We make these suggestions only to comply with what
is, we believe, an artificially exact definition of revenue
neutrality. It is our judgment that the modifications suggested
below, which total $22.9 billion, present the best available
means to meet this requirement.

- 2 1. Eliminate indexation of inventories and retain LIFO
conformity.
1986 1987 1988 1989 1990 1986-90
($ billions)
Joint Committee Staff
revenue estimate

1.7

3.0

3.2

3.3

11.1

2. Repeal Section 401(k) (cash or deferred defined
contribution plans). See the enclosure for explanation.
1986 1987 1988 1989 1990 1986-90
($ billions)
Joint Committee Staff
revenue estimate

2.0

2.3

2.9

3.5

11.6

3. Retain child care credit; withdraw proposal to convert
credit into a deduction.
1986 1987 1988 1989 1990 1986-90
($ billions)
Joint Committee Staff
revenue estimate

* .1 .1

We look forward to working with th e tax-writing Committees to
accomplish fundamental tax reform, which, as yo u know, is a
top priority of the President. We believe that the
President's proposals are the path way to fundam ental reform,
and that deviations from that path should be ma de only for
compelling reasons. Indeed, we ca nnot overstat e the depth of
the President's commitment to the reduction of tax rates
contained in his May 28th proposal s. It is my view that under
no circumstances would he accept t ax rates abov e those
proposed by him. Increasing the r ates he propo sed is not an
appropriate source of revenue to f inance modifi cations to his
original proposals.
Sincerely yours,

Baker, III
The Honorable Dan Rostenkowski
Chairman
House Ways and Means Committee
U.S. House of Representatives
Washington, D.C. 20515
Enclosure

REPEAL CASH OR DEFERRED ARRANGEMENT (CODA) PROVISIONS
General Explanation

Current Law
In general, employees are subject to tax not only on
compensation actually received but also on amounts the receipt of
which is, at the employee's election, deferred until a later
year. A statutory exception to this rule of constructive receipt
is provided for so-called cash or deferred arrangements (CODAs),
under which an employee may elect to defer the receipt of cash
compensation and have the deferred amount contributed as an
employer contribution to a qualified profit-sharing or stock
bonus plan. If the CODA meets certain qualification
requirements, the employee is not currently taxable on the
deferred amount. Contributions to CODAs are subject to the
limits that apply generally to defined contribution plans. Thus,
if allowed under the special nondiscrimination test for CODAs,
the maximum amount that may be contributed to a CODA on behalf of
any individual is the lesser of $30,000 (indexed beginning in
1988) or 25 percent of the individual's compensation.
A CODA is qualified only if the deferred amounts (1) are
wholly nonforfeitable, (2) may not be distributed to the employee
before the earlier of age 59-1/2, separation from service,
retirement, hardship, disability, or death, and (3) satisfy the
"actual deferral percentage test" (the ADP test). In general,
the ADP test is satisfied if the average percentage of
compensation deferred for "highly compensated employees" does not
exceed 150 percent of the average percentage deferred for other
employees.
Deductible contributions to an individual retirement account
(IRA) are currently limited to the lesser of $2,000 ($2,250 for a
spousal IRA) or 100 percent of compensation. Individual
contributions to an IRA receive the same tax-deferral advantages
as deferred compensation under a CODA. Thus, subject to certain
limits, an individual receives a deduction for contributions to
an IRA, and is taxable on such amounts only as they are withdrawn
from the IRA. Amounts withdrawn from an IRA prior to the
individual's death, disability or reaching age 59 1/2 are subject
to a 10 percent penalty.
Reasons for Change
The Federal government promotes individual retirement
security both through direct outlays, such as those for 6ocial
security, and, increasingly, through indirect outlays, in the
form of tax-favored treatment for income saved for retirement

- 2 purposes. The revenues dedicated to the tax component of these
Federal programs have grown significantly over time, with the
revenue loss attributable to CODAs alone projected to double in
the next four years. These lost revenues necessitate higher
rates of tax on other income, which, in turn, create
disincentives for savings and investment throughout the economy.
Despite the substantial revenue costs attributable to the tax
incentives provided for retirement savings, a broad political and
policy consensus supports their continuation. The
Administration's tax reform proposals reflect this support, and
would not alter the basic structure under which certain income
set aside for retirement purposes is exempt from tax until
distributed. At the same time, there is legitimate concern over
the growth in savings plans that receive tax advantages and the
consequent erosion of the tax base. Ultimately, continued
support for tax-favored retirement savings will depend on how
efficiently the available tax incentives promote individual
retirement security. The long-terra viability of tax-favored
retirement savings thus requires that tax incentives be targeted
at plans that most directly serve retirement policy objectives.
Although CODAs are, perhaps, the fastest growing form of
tax-favored savings plan, they are a relatively poor retirement
savings vehicle. Because CODA contributions are elective with
employees, CODAs tend to be viewed as an alternate form of
savings account, which may be drawn upon for nonretirement
purposes, just as with other voluntary savings. Current law
encourages this perception by permitting employees to withdraw
CODA amounts prior to retirement in the event of financial need.
Although the penalties currently applicable to pre-retirement IRA
distributions might be extended to CODAs, there would be
inevitable pressures to provide exceptions. It is illustrative
that a number of bills are pending in Congress that would permit
penalty-free withdrawals from IRAs for purposes such as the
purchase of a first residence or to pay the costs of a child's
education. Such proposals undermine the retirement policy
objectives of tax-favored savings plans, and, indeed, reflect the
Perception that discretionary savings plans, such as an IRA or
'ODA, are not strictly retirement savings vehicles.
CODAs are also less effective than other retirement savings
'lans in ensuring broad employee coverage. Since each employee
ust decide whether and how much to contribute, CODAs inevitably
*sult in uneven levels of retirement savings, and no savings at
11 for some employees. Moreover, the problem of uneven coverage
8
not eliminated simply by tightening the existing CODA
^discrimination rules. Nondiscrimination rules for
*scretionary savings plans are necessarily based on average
filiation levels, which may reflect maximum utilization by some
nployees and minimal or no utilization by others.
The defects in CODAs as retirement savings vehicles are in
lf
t responsible for the rapid growth in their availability and

- 3 use. Employees unwilling to defer salary until retirement may
contribute to a CODA, knowing that the money is available if
needed. Some would thus argue that CODAs should be encouraged
because they result in additional savings by employees. This
argument ignores, however, that tax advantages are extended to
savings plans in order to advance retirement policy objectives.
Given their revenue costs, CODAs cannot be justified as a general
purpose savings vehicle. Moreover, to the extent it is
appropriate to provide tax incentives for discretionary savings
accounts, IRAs provide a vehicle that is available on a broader
and more equitable basis.
Proposals
The provisions of the tax law authorizing CODAs would be
repealed.
Effective Date
Repeal would be effective for contributions to a CODA on or
after January 1, 1986.
Analysis
After repeal of the CODA provisions, the general constructive
receipt rules of current law would apply with respect to employee
cash or deferred elections. Thus, if an employee has the right
to defer the receipt of some or all of his or her cash
compensation and to have the deferred amount contributed to a
tax-favored retirement plan, the employee would be treated as
having received the deferred amounts. This would be the case
without regard to whether the employee's election was before or
after the period in which the employee earned the compensation
subject to the election. Thus, the deferred amount would be
included in the employee's gross income and the contributions
would be treated as after-tax contributions to the plan. Of
course, such after-tax contributions may be deductible subject to
the generally applicable IRA deduction limits.

THE SECRETARY OF THE TREASURY
WASHINGTON

August 31, 1985

Dear Bob:
On July 25th we issued a joint press release reaffirming our
collective commitment to revenue neutrality as a firm
underpinning of fundamental tax reform. The Staff of the Joint
Committee on Taxation had on that day released its revenue
estimates of the President's Tax Reform Proposals, which showed a
$25.1 billion revenue shortfall over the 1986-1990 period,
compared to an $11.6 billion shortfall as originally estimated by
the Treasury Department. The Staff's report acknowledged that
these two estimates are remarkably close, differing by less than
one-half of one percent of estimated income tax receipts ($2.8
trillion during the 5-year period), and projecting an estimated
revenue shortfall of less than one percent of estimated receipts.
We have been working with the Joint Committee Staff to reach
agreement on the amount of the shortfall, and although we believe
that it will be somewhere between $20 billion and $25 billion, we
have not yet reached final agreement.
The Administration remains of the view that a proposal that
yields projected revenue within one percent of estimated receipts
for the budget period constitutes a revenue neutral proposal,
especially considering the inexactitude of the revenue estimating
process. Thus it is our view that the President's proposals are
"revenue neutral" within a reasonable margin of estimating error,
even using the Joint Committee Staff's $25.1 billion estimate.
Nevertheless, in our July 25th press release we committed to
offer further proposals to the tax-writing Committees to assure
that the general public, as well as the Administration, perceives
the President's proposals as revenue neutral. We recognize that
to many people this means that the estimated revenue loss or gain
must be closer to zero than plus-or-minus one percent.
So, in order that the estimated revenue loss be closer to zero,
we would offer three possible modifications to the President's
proposals. We make these suggestions only to comply with what
is, we believe, an artificially exact definition of revenue
neutrality. It is our judgment that the modifications suggested
below, which total $22.9 billion, present the best available
means to meet this requirement.

- 2 1. Eliminate indexation of inventories and retain LIFO
conformity.
1986
joint Committee Staff
revenue estimate

1987

1988 1989 1990
($ bilTTons)

1986-90

1.7

3.0

11.1

3.2

3.3

I. Repeal Section 401(k) (cash or deferred defined
contribution plans). See the enclosure for explanation.
1986 1987 1988 1989 1990 1986-90
($ billions)
Joint Committee Staff
revenue estimate

2.0

2 .3

2.9

3 .5

11.6

3. Retain child care credit; withdraw proposal to convert
credit into a deduction.
1986

1987

1988 1989 1990
($ billions)

Joint Committee Staff
revenue estimate

1986-90

We look forward to working with the tax-writing Committees to
accomplish fundamental tax reform, which, as you know, is a
top priority of the President. We believe that the
President's proposals are the pathway to fundamental reform,
and that deviations from that path should be made only for
compelling reasons. Indeed, we cannot overstate the depth of
the President's commitment to the reduction of tax rates
contained in his May 2 8th proposals. It is my view that under
no circumstances would he accept tax rates above those
proposed by him. Increasing the rates he proposed is not an
appropriate source of revenue to finance modifications to his
original proposals.
Sincerely vours,

A. Baker, III
The Honorable Bob Packwood
Cn^j rman
Senate Finance Committee
United States Senate
Washington, D.C. 20510
Enclosure

REPEAL CASH OR DEFERRED ARRANGEMENT (CODA) PROVISIONS
General Explanation

Current Law
In general, employees are subject to tax not only on
compensation actually received but also on amounts the receipt of
which is, at the employee's election, deferred until a later
year. A statutory exception to this rule of constructive receipt
is provided for so-called cash or deferred arrangements (CODAs),
under which an employee may elect to defer the receipt of cash
compensation and have the deferred amount contributed as an
employer contribution to a qualified profit-sharing or stock
bonus plan. If the CODA meets certain qualification
requirements, the employee is not currently taxable on the
deferred amount. Contributions to CODAs are subject to the
limits that apply generally to defined contribution plans. Thus,
if allowed under the special nondiscrimination test for CODAs,
the maximum amount that may be contributed to a CODA on behalf of
any individual is the lesser of $30,000 (indexed beginning in
1988) or 25 percent of the individual's compensation.
A CODA is qualified only if the deferred amounts (1) are
wholly nonforfeitable, (2) may not be distributed to the employee
before the earlier of age 59-1/2, separation from service,
retirement, hardship, disability, or death, and (3) satisfy the
"actual deferral percentage test" (the ADP test). In general,
the ADP test is satisfied if the average percentage of
compensation deferred for "highly compensated employees" does not
exceed 150 percent of the average percentage deferred for other
employees.
Deductible contributions to an individual retirement account
(IRA) are currently limited to the lesser of $2,000 ($2,250 for a
spousal IRA) or 100 percent of compensation. Individual
contributions to an IRA receive the same tax-deferral advantages
»s deferred compensation under a CODA. Thus, subject to certain
limits, an individual receives a deduction for contributions to
»n IRA, and is taxable on such amounts only as they are withdrawn
from the IRA. Amounts withdrawn from an IRA prior to the
individual's death, disability or reaching age 59 1/2 are subject
•o a 10 percent penalty.
teasons for Change
The Federal government promotes individual retirement
ecurity both through direct outlays, such as those for social
Purity, and, increasingly, through indirect outlays, in the
orm of tax-favored treatment for income saved for retirement

2 purposes. The revenues dedicated to the tax component of these
Federal programs have grown significantly over time, with the
revenue loss attributable to CODAs alone projected to double in
the next four years. These lost revenues necessitate higher
rates of tax on other income, which, in turn, create
disincentives for savings and investment throughout the economy.
Despite the substantial revenue costs attributable to the tax
incentives provided for retirement savings, a broad political and
policy consensus supports their continuation. The
Administration's tax reform proposals reflect this support, and
would not alter the basic structure under which certain income
set aside for retirement purposes is exempt from tax until
distributed. At the sane time, there is legitimate concern over
the growth in savings plans that receive tax advantages and the
consequent erosion of the tax base. Ultimately, continued
support for tax-favored retirement savings will depend on how
efficiently the available tax incentives promote individual
retirement security. The long-term viability of tax-favored
retirement savings thus requires that tax incentives be targeted
at plans that most directly serve retirement policy objectives.
Although CODAs are, perhaps, the fastest growing form of
tax-favored savings plan, they are a relatively poor retirement
savings vehicle. Because CODA contributions are elective with
employees, CODAs tend to be viewed as an alternate form of
savings account, which may be drawn upon for nonretirement
purposes, just as with other voluntary savings. Current law
encourages this perception by permitting employees to withdraw
CODA amounts prior to retirement in the event of financial need.
Although the penalties currently applicable to pre-retirement IRA
distributions might be extended to CODAs, there would be
inevitable pressures to provide exceptions. It is illustrative
that a number of bills are pending in Congress that would permit
penalty-free withdrawals from IRAs for purposes such as the
purchase of a first residence or to pay the costs of a child's
education. Such proposals undermine the retirement policy
objectives of tax-favored savings plans, and, indeed, reflect the
perception that discretionary savings plans, such as an IRA or
CODA, are not strictly retirement savings vehicles.
CODAs are also less effective than other retirement savings
plans in ensuring broad employee coverage. Since each employee
»ust decide whether and how much to contribute, CODAs inevitably
result in uneven levels of retirement savings, and no savings at
HI for some employees. Moreover, the problem of uneven coverage
l« not eliminated simply by tightening the existing CODA
^discrimination rules. Nondiscrimination rules for
Uscretionary savings plans are necessarily based on average
"tilization levels, which may reflect maximum utilization by some
!n
»Ployees and minimal or no utilization by others.
The defects in CODAs as retirement savings vehicles are in
*rt responsible for the rapid growth in their availability and

- 3 use. Employees unwilling to defer salary until retirement may
contribute to a CODA, Knowing that the money is available if
needed. Some would thus argue that CODAs should be encouraged
because they result in additional savings by employees. This
argument Ignores, however, that tax advantages are extended to
savings plans in order to advance retirement policy objectives.
Given their revenue costs, CODAs cannot be justified as a general
purpose savings vehicle. Moreover, to the extent it is
appropriate to provide tax incentives for discretionary savings
accounts, IRAs provide a vehicle that is available on a broader
and more equitable basis.
Proposals
The provisions of the tax law authorizing CODAs would be
repealed.
Effective Date
Repeal would be effective for contributions to a CODA on or
after January 1, 1986.
Analysis
After repeal of the CODA provisions, the general constructive
receipt rules of current law would apply with respect to employee
cash or deferred elections. Thus, if an employee has the right
to defer the receipt of some or all of his or her cash
compensation and to have the deferred amount contributed to a
tax-favored retirement plan, the employee would be treated as
having received the deferred amounts. This would be the case
without regard to whether the employee's election was before or
after the period in which the employee earned the compensation
subject to the election. Thus, the deferred amount would be
included in the employee's gross income and the contributions
would be treated as after-tax contributions to the plan. Of
course, such after-tax contributions may be deductible subject to
the generally applicable IRA deduction limits.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

September 3, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,208 million of 13-week bills and for $7,217 million
of 26-veek bills, both to be issued on September 5, 1985, were Accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-veek bills
maturing December 5, 1985
Discount Investment
Rate
Rate 1/
Price

26-week bills
maturing March 6. 1986
Discount Investment
Rate
Rate 1/
Price

7.09W
7.14%"*
7.12Z

7.29Z
7.31*
7.30Z

7.322
7.37*
7.35*

98.208
98.195
98.200

7.672
7.701
7.69Z

96.315
96.304
96.309

a/ Excepting 1 tender of $1,000,000.
Tenders at the high discount rate for the 13-veek bills were allotted 39Z.
Tenders at the high discount rate for the 26-week bills were allotted 44Z.

Location

TENDERS RECEIVED AND ACCEPTED
(In Thousand•)
:
Received
Received
Accepted

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

$ 69,340 $ 49,340
14,194,960
5.965,730
24,055
24,055
47,735
47,735
49,595
49,595
40,160
39,160
859,245
180,945
74,605
54,605
40,140
40,140
162,290
162,290
42,080
39,030
1,871,505
236,325
318,895
316,895

TOTALS

$17,794,605 $7,207,845

Type
Competitive
Noncompetitive
Subtotal, Public

$14,876,225
1.131.480
$16,007,705
1,776,100

i $ 70,720
17,299,625
20,845
288,145
72,910
60,620
961,700
92,905
48,350
61,535
36,175
2,157,415
368.745

$ 50,720
5,975,060
20,845
137,145
65,110
43,260
143,060
52.905
34,350
61,535
28,375
235,815
368,745

$21,539,690

$7,216,925

$4,289,465
1,131,480
$5,420,945

$18,043,205
1.085.285
$19,128,490

$3,720,440
1.085,285
$4,805,725

1,776,100

1,750,000

1,750.000

Federal Reserve
Poreign Official
Institutions

10,800

TOTALS

$17,794,605

$7,207,845

1/ Equivalent coupon-issue yield.

B-262

Accepted

661,200
:

$21,539,690

661,200
$7,216,925

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
POR RELEASE AT 4:10 P.M.

September 3, 1985

TREASURY'S WEEKLY BILL OFPERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued September 12, 1985. This offering
will provide about $300
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,112 million.
Tenders will be received at Federal Reserve Banks and Branches and
at the Bureau of the Public Debt, Washington, D. C. 20239, prior to
1:00 p.m., Eastern Daylight Saving time, Monday, September 9, 1985.
The two series offered are as follows t
91-day bills (to maturity date) for approximately $?,200
million, representing an additional amount of bills dated
June 13, 1985,
and to mature December 12, 1985
(CUSIP No.
912794 JJ 4 ) , currently outstanding in the amount of $7,035 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
September 12, 1985, and to mature March 13, 1986
(CUSIP No.
912794 JW 5 ) .
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing September 12, 1985. Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates of accepted competitive tenders. Additional amounts of the bills may be issued to Pederal 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. Federal Reserve
Banks currently hold $1,079 million as agents for foreign and international monetary authorities, and $3,548 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
RD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-263

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of the auction. Such positions woul,1 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 repoft 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the

4/85

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

4/85

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE
September 5, 1985

Contact:
Phone:

Art Siddon
(202) 566-5252

Secretary James A. Baker, III
Announces Sherrie M. Cooksey as Executive Secretary
for the Department of the Treasury
Secretary Baker today announced the appointment of Sherrie M. Cooksey
to be Executive Secretary for the Department of the Treasury.
Mrs. Cooksey previously served as an Associate Counsel to the President.
Prior to that position, she served as Special Assistant to the President for
Legislative Affairs. Before joining the White House staff she worked at the
Federal Elections Commission as Executive Assistant to the Commissioner and
Chairman, Max L. Friedersdorf (1979-1981), and as an attorney in the Office of
the General Counsel from 1977-1978. From 1978-1979 she was Minority
(Republican) Counsel for Elections to the Senate Committee on Rules and
Administration. During that same year, she served as a consultant to the
Republican Senatorial campaigns of Senator John Warner of Virginia and former
Senator Robert Griffin of Michigan.
Mrs. Gooksey graduated from the University of North Carolina (B.A., 1974),
and from the University of North Carolina School of Law (J.D., 1977). She is
married and resides in Alexandria, Virginia.

B-264

TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

September 9, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,201 million of 13-week bills and for $7,205 million
of 26-week bills, both to be issued on September 1 2 , 1985,were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing December 12, 1985
Discount Investment
Rate
Rate 1/
Price
7.18%
7.23%
7.22%

7.41%
7.47%
7.46%

98.185
98.172
98.175

26-week bills
maturing March 13. 1986
Discount Investment
Rate
Rate 1/
Price
7.38% a/
7.40%
7.39%

7.77%
7.79%
7.78%

96.269
96.259
96.264

a/ Excepting 1 tender of $125,000.
Tenders at the high discount rate for the 13-week bills were allotted 21%
Tenders at the high discount rate for the 26-week bills were allotted 41%,
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

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

TOTALS

Accepted

46,745
5,930,810
30,870
49,130
53,455
51,605
332,515
27,800
49,745
98,680
33,465
190,170
306,100

;
85,175
20,385,590
21,520
299,050
83,560
89,855
1,209,980
99,310
46,650
61,375
30,770
1,106,100
400,400

: 45,175
6,045,515
21,520
105,550
52,085
47,705
229,055
59,310
31,900
61,375
20,770
84,235
400,400

$21,301,330

$7,201,090

$23,919,335

$7,204,595

Competitive
Noncompetitive
Subtotal, Public

$17,910,350
1,156,250
$19,066,600

$3,810,110
1,156,250
$4,966,360

$20,594,970
1,159,365
$21,754,335

$3,880,230
1,159,365
$5,039,595

Federal Reserve
Foreign Official
Institutions

1,824,730

1,800,000

410,000

365,000

TOTALS

$21,301,330

$7,201,090

$23,919,335

$7,204,595

46,745
17,953,775
30,870
49,995
62,575
57,605
1,372,105
67,800
49,745
167,430
42,415
1,094,170
306,100

Izpe

1_/ Equivalent reopen 5ssue yield
B-265

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE ON DELIVERY
EXPECTED AT 9:00 A.M.
September 10, 1985
STATEMENT OF JOHN J. NIEHENKE
ACTING ASSISTANT SECRETARY OF THE TREASURY
(DOMESTIC FINANCE)
BEFORE THE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE SENATE FINANCE COMMITTEE
Mr. Chairman and Members of the Committee:
My purpose here today is to advise you of the need for
Congressional action to increase the public debt limit and to
provide additional, authority to issue long-term marketable
Treasury bonds.
Debt Limit
Our immediate need is for legislation to increase the debt
limit.
Our current cash and debt projections indicate that the
present debt limit of $1,823.8 billion should be adequate to meet
the Treasury's needs until September 30. Without an increase
in the debt limit by that date, investment of the Civil Service
Retirement and Disability Fund in Treasury securities will have to
be delayed to avoid exceeding the debt limit. Then, on October 1,
investment of the Military Retirement Fund and, on October 3, the
Federal Supplementary Medical Insurance Trust Fund will have to be
delayed. Without action on the debt limit, the combined interest
losses to these three funds will be about $8 million a day. Also,
a delay in debt limit legislation beyond September 30 will require

B-266

- 2 the Treasury to disrupt its scheduled market borrowings, which
could add significantly to the cost of financing the debt.
Our current estimates show the debt subject to limit at
$1,840.6 billion on September 30, 1985 and $2,073.4 billion
on September 30, 1986, assuming a $20 billion cash balance on
those dates. Given these projected debt levels, and allowing a
$5 billion margin for contingencies, we request that the debt
limit be increased to $1,845.6 billion through September 30, 1985
and $2,078.4 billion through September 30, 1986.
The budget resolution adopted by Congress on August 1 contains debt limit figures of $1,847.8 billion for fiscal year 1985,
which is $2.2 billion above our request, and $2,078.7 billion for
fiscal year 1986, which is $.3 billion above our request. Thus,
the debt figures in the Congressional budget resolution are adequate
to meet our estimated needs. These figures are incorporated in
H.J. Res. 372, as passed by the House.
Timely action on the debt ceiling is essential to avoid a
repetition of past dislocations which have hampered Treasury
financing operations. In recent years, delays in action on the
debt limit have generated market uncertainty about Treasury financing
schedules and on several occasions costly emergency measures have
been undertaken, including suspension of savings bond sales, cancellation of scheduled security auctions and failure to invest trust
funds.

- 3 Finally, prompt action on the debt limit bill is absolutely
essential to permit the Government to pay its bills. If the
debt limit is not increased, the Government will be unable to
meet all of its essential obligations when they fall due — social
security checks, payroll checks, unemployment checks, defense
contracts, and principal and interest on its securities.
Long-Term Bonds
Now, I would like to advise you of our need for additional
authority to issue marketable Treasury bonds.
The maximum interest rate that the Treasury may pay on marketable bonds (securities with maturities in excess of 10 years) has
long been limited by law to 4-1/4 percent. This limit did not
become a serious obstacle to Treasury issues of new bonds until
the mid-1960's. At that time market rates of interest rose above
4-1/4 percent and the Treasury was precluded from issuing new
bonds. The average length of the privately-held marketable debt
of the Treasury declined steadily from 5-3/4 years in mid-1965 to
about 2-1/2 years in 1975, because of the heavy reliance by the
Treasury on short-term bill financing of the budget deficits
during this period.
In 1971, Congress authorized the Treasury to issue a limited
amount of bonds without regard to the 4-1/4 percent ceiling.
The dollar limit since has been increased from time to time, most
recently on May 25, 1984, when the limit was raised by $50 billion
(from $150 billion to $200 billion) to accommodate additional

- 4 long-term financing. Assuming continuation of our recent pattern
of long bond issuance, the existing $200 billion authority will be
exhausted early in calendar 1986.
Since 1975 the Treasury's debt extension policies have moved
the average length of the marketable debt from 2 years, 5 months
in January 1976 to 4 years, 10 months in July, 1985, thus broadening
the market for Treasury securities and reducing the administrative
burden and market-disrupting effects of frequent Treasury operations
to refund maturing issues. Yet while the Treasury has significantly
improved the maturity structure of the debt in recent years, more
than half of outstanding marketable debt matures within two years.
This refunding requirement must be added to Treasury's new cash
borrowing requirement to meet Treasury's total needs in the market.
Because of the short average maturity of outstanding Treasury debt,
long bond issuance must remain an integral part of Treasury's debt
management policy.
We believe the 4-1/4 percent ceiling should be repealed.
This Administration abhors interest rate ceilings as ineffective
attempts to control prices and incompatible with our commitment to
a free market pricing system. We view the interest rate ceiling on
marketable bonds as an anachronism which serves only to frustrate
the efficient management of the public debt. Removal of the
4-1/4 percent ceiling on Treasury marketable bonds will help the
Treasury meet its financing needs in an efficient, cost-effective
manner.

- 5 If the interest rate ceiling on long bonds is not abolished,
as we believe it should be, we would request an increase in long
bond authority of $50 billion, from $200 billion to $250 billion,
which would be sufficient to carry us through 1986.
While legislative action on the long bond authority will be
necessary to enable us to continue our recent pattern of long
bond issuance through 1986, in the interest of expediting action
on the debt limit, we would urge the Senate to adopt H.J. Res. 372
without amendment.
That concludes my prepared statement, Mr. Chairman. I will
be happy to respond to your questions.

OoO

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041

For Release Upon Delivery
Expected at 2:00 p.m., E.D.T.
September 9, 1985

STATEMENT OF
DENNIS E. ROSS
DEPUTY TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON SAVINGS,
PENSIONS, AND INVESTMENT POLICY
OF THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to discuss the
Treasury Department's views on the appropriate tax treatment of
employer-maintained plans to provide retired employees with
health benefits. In the context of that discussion, I wish also
to report on the present status of the study, mandated in the Tax
Reform Act of 1984 (the "1984 Act"), of the various tax and
benefit issues relating to post-retirement health benefits.
I would like to begin my testimony with a description of the
tax principles applicable to plans to provide active and retired
employees with health benefits. With that as background, I wish
to discuss the changes enacted in the 1984 Act, together with
some of the issues that remain to be addressed concerning
prefunded post-retirement health benefits.
General Tax Principles
The tax law generally requires an employee to include in
income all compensation received during the year for services
performed for the employer, including wages, commissions,
property, and other in-kind benefits. Compensation paid in the
form of certain in-kind benefits, however, may be excluded from
gross income if provided under qualifying employer-maintained
plans, including profit-sharing, pension, and health plans.

B-267

- 2 -

On the employer's side, a deduction is permitted for ordinary
and necessary business expenses paid or incurred during a taxable
vear including a reasonable allowance for employee compensation.
"Compensation" includes ordinary and necessary amounts paid with
respect to a health plan. As a general matter, the year in which
an employer is permitted to deduct compensation, whether as cash
or in-kind benefits, corresponds to the year in which the
employees include (or, but for an exclusion, would include) the
compensation in income. Moreover, if an employer prefunds future
compensation by establishing a reserve, income on the reserve is
taxable to the employer.
In certain circumstances, an employer may be eligible for
more favorable treatment for reserves for future compensation and
benefits. In such cases, the employer is allowed a current
deduction for contributions to a reserve to prefund future
compensation or benefits, and the reserve is permitted to grow on
a tax-exempt basis. With respect to cash compensation, favorable
treatment generally is available only with respect to
profit-sharing and pension plans that comply with various
qualification rules, including nondiscrimination rules and
minimum standards relating to participation, vesting, benefit
accrual, and funding.
Prior to the 1984 Act, favorable tax treatment was also
available for compensatory health benefits provided through
welfare benefit funds, including voluntary employees' beneficiary
associations ("VEBAs") and certain arrangements maintained by
insurance companies for the benefit of employers (i.e., retired
lives reserves). Although the favorable tax treatment of such
funds was the same as that available to qualified retirement
plans, welfare benefit funds were not required to satisfy the
minimum standards applicable to qualified plans. (See the
following section for a discussion of the 1984 Act as it relates
to post-retirement health benefits.)
Although the tax treatment of welfare benefit funds was
changed in the 1984 Act, employers remain able to prefund
post-retirement health benefits on a tax-favored basis through
contributions to a separate reserve account maintained in
conjunction with a qualified pension or annuity plan. (Section
401(h) of the Code.) Generally, such health benefits, when added
to any life insurance provided under the pension or annuity plan,
must be subordinate to the retirement benefits provided under the
plan. This means that the contributions made to the plan to
provide health benefits and life insurance may not exceed 25
percent of the total contributions to the plan (other than
contributions to provide past service credits). Amounts set
aside in a separate account to provide post-retirement medical
benefits may not revert to the employer or be used for any other

- 3 purpose before the satisfaction of all liabilities to provide
health benefits. Finally, the health plan must satisfy certain
nondiscrimination rules.
The Tax Reform Act of 1984
The 1984 Act adopted rules that, with limited exceptions for
post-retirement life and health benefits, subject an employer
using a welfare benefit fund, such as a VEBA, to the general tax
principles applicable to compensation and benefits outside of the
area of qualified pension and profit-sharing plans: no current
deduction for contributions to provide future benefits and no
tax-free accumulation of reserves. Congress thus sought to limit
the extent to which employers, by virtue of the favorable tax
treatment for welfare benefit funds, could shift the cost of the
benefits to the Federal government.
In the case of post-retirement health benefits, the 1984 Act
provides that an employer may deduct contributions to accumulate,
no more rapidly than over its employees' years of service, an
actuarially justified reserve to provide retired employees with
health benefits. In calculating the actuarial reserve for
post-retirement health benefits, the rules prohibit consideration
of projected increases in the current cost and level of such
benefits provided to retirees. In addition, the funds set aside
for post-retirement health benefits are not permitted to grow on
a tax-exempt basis; rather, the income of these funds is subject
to the unrelated business income tax. In effect, an employer is
permitted a deduction for contributions to a taxable, rather than
a tax-exempt, trust to prefund post-retirement health benefits.
Many have characterized the 1984 Act limits on tax-favored
prefunding as merely "anti-abuse" rules, concerned with
preventing such situations as a corporation excessively
overfunding a VEBA or using a VEBA primarily for the benefit of
its key employees. Although the 1984 Act did adopt rules
directed at the "abusive" use of VEBAs and other funds, the new
rules attempt more broadly to conform the tax treatment of
employers maintaining welfare benefit funds to the actual
economic cost of the benefits provided. In this respect, the
limits on tax-favored prefunding are consistent with the various
provisions in the 1984 Act that apply "time value of money"
concepts to the amount and timing of income and deductions.
Indeed, the welfare benefit rules are very similar to the rules
that permit limited employer deductions for contributions to
taxable reserves for future nuclear power decomissioning and mine
reclamation expenses.
An additional concern reflected in the 1984 Act is that tax
advantages not be provided for prefunded welfare benefits unless
the promised benefits are specifically defined and the employer's

- 4 Because
e not subject to
accrual
or
vesting
provisions,
it
is not possible to
v
fix~the~future benefits to which employees have accrued rights or
the future liability for which the employer should be permitted
to prefund.
Study of Post-Retirement Health Benefits
Congress' concern that tax advantages not be permitted for
prefunded post-retirement health benefits absent proper accrual,
vesting, and similar rules was additionally reflected in its
request that the Treasury Department study the funding of welfare
benefit plans and the need for minimum participation, benefit
accrual, vesting, and funding standards similar to those
applicable to qualified retirement plans. Our study, which we
have undertaken with the Department of Labor, has not been
completed. Although we are thus unprepared to offer specific
recommendations or conclusions, I would like to discuss in
general terms the tax and health policy issues on which we have
focused.
Adequacy of Funding and Benefits. A necessary threshold
issue for our study is whether the existing structure of public
and private retirement security programs is adequate, in regard
to both the aggregate benefits and the mix between cash and
in-kind benefits. Although we have not concluded our analysis,
any argument for additional public support in this area must be
examined in light of the existing constraints on the Federal
budget. In the same vein, the creation of new or expanded tax
incentives would contradict current efforts to reform the tax
system. The Administration's tax reform proposals would expand
the base of taxable income in order to make the tax system fairer
and reduce marginal tax rates. Although the proposals would
retain basic incentives for retirement savings, the purposes of
tax reform would be undermined by the extension of similar
incentives to post-retirement health benefits.
A related issue is whether existing plans for post-retirement
health benefits are adequately funded.
Very few employers were
prefunding post-retirement health benefits before the 1984 Act
and very few are currently prefunding such benefits, even though
limited tax-favored prefunding continues to be possible under a
qualified pension plan. Many employers view post-retirement
health benefits as discretionary, and believe they retain the
right to reduce or terminate post-retirement health benefits for
both retired and active employees. Employers may fear that
prefunding would restrict their ability to reduce or eliminate
currently envisioned post-retirement health benefits, not merely
for current retirees (as some courts have already held), but also
for future retirees. In any case, recent estimates of the

- 5 Department of Labor indicate that the present value of employers'
unfunded liability for currently envisioned post-retirement
health benefits is well in excess of $100 billion.
Structure of Benefit Plans. Our study has also considered
how prefunded post-retirement health benefit plans should be
structured. For example, under a defined contribution approach,
the employer would contribute amounts to individual accounts
maintained to provide post-retirement health benefits. After
retirement, the amounts accumulated in an individual's account
would be used to provide health benefits. Under a defined health
benefit approach, the employer would prefund amounts sufficient
to provide retirees with a specified type and level of health
coverage. Under a defined dollar benefit approach, the employer
would prefund amounts sufficient to provide retirees with a
specified annual dollar benefit that would be used to provide
health coverage; this approach would be substantially equivalent
to the existing defined benefit retirement plan system under
which retired employees generally receive specified annual dollar
amounts.
Each of these approaches to the prefunding of post-retirement
health benefits raises significant issues. Under both the
defined contribution and the defined dollar benefit approaches,
there may not be sufficient funds accumulated for an employee to
maintain his preretirement type and level of health benefits. At
the same time, the defined contributions and dollar benefit
approaches permit an employer to control its costs by modifying
the type and level of health coverage provided to retirees.
Furthermore, these approach could be developed as modifications
of existing defined benefit or money purchase pension plans; in
effect, some portion of a retiree's annual benefit under a
defined benefit retirement plan or contribution under a money
purchase pension plan would be dedicated to the provision of
retiree health coverage.
Under the defined health benefit approach, it would be
necessary to project the future cost of the promised health
benefits in order to calculate the appropriate levels of
prefunding. Such projection is difficult because of the need to
consider medical care inflation, increases and decreases in
medical utilization, and cost shifting from Medicare. Moreover,
absent regular accrual and vesting of benefits, actuarial
assumptions have a dramatic impact on the reliability of future
cost predictions. For example, if an employee accrues and
vests-in the full post-retirement health benefit only by
attaining age 55 and completing ten years of service, the
preretirement turnover assumption becomes an important variable.
The defined health benefit approach also makes cost control
more difficult because of the employer's commitment to a certain
type and level of health benefits. Thus, it would presumably be
necessary to restrict an employer's ability to reduce or

- 6 eliminate promised health benefits, even though changes in
medical utilization, or practice could make such reductions
appropriate cost containment measures.
Although I should again state that our analysis in this area
is incomplete, we currently are most interested in the defined
dollar benefit approach. This approach would eliminate much of
the uncertainty associated with projecting future medical costs
and would not restrict modifications in the type and level of
health benefits to adjust for changes in medical utilization and
practices. In addition, because it promises a benefit measured
in dollars, the defined dollar benefit approach would facilitate
partial vesting and the portability of benefits.
The defined dollar benefit approach also raises the question
of whether existing defined benefit pension plans can or should
be modified to permit the payment of a portion of a retiree's
annual dollar benefit in the form of health coverage. Separate
funding for post-retirement health benefits may not be
appropriate if they are regarded as simply another form of
post-retirement deferred compensation. Such use of retirement
savings to fund health benefits, however, could adversely affect
retirees who are not receiving significant annual dollar
benefits. Although health benefits cost the same dollar amount
for each retiree, pension benefits are wage-related. It thus may
be inappropriate to convert a significant portion of a retiree's
annual benefit from cash into health coverage.
It will also be important to consider whether, under the
defined dollar benefit approach, existing funds that have been
set aside to provide pension benefits should be available to
provide post-retirement health benefits. Indeed, some have
argued that permitting an employer to use excess pension funds to
provide post-retirement health benefits would both resolve some
of the policy concerns that have recently been raised about asset
reversions from defined benefit plans and, at the same time,
enable an employer to reduce its unfunded post-retirement health
liability.
Minimum Standards. We are also studying whether minimum
participation, benefit accrual, vesting, and funding standards
are necessary if favorable treatment is provided for
post-retirement health benefits. The necessary frame of
reference for this issue is, of course, the participation,
accrual, vesting, and funding standards imposed by the Employee
Retirement Income Security Act of 1974 ("ERISA") on
employer-maintained retirement plans. The basic premises of
ERISA are that an employer's pension promise must be specifically
defined and adequately funded, and employees must accrue and vest
in pension benefits in accordance with reasonable minimum
standards, if any of these elements is not satisfied, ERISA
effectively provides that an employer may not make the pension
promise.

- 7 -

Although we believe the basic logic of ERISA would properly
apply to the extent tax advantages are provided for
post-retirement health benefits, certain of the ERISA
requirements may not be readily transferable to the area of
health benefits. In particular, if the promised health benefit
is a type or level of health coverage, should employees accrue
rights to post-retirement health benefits over a specified number
of years or merely in a single year (e.g., the year of
retirement)? Should graded or cliff vesting schedules be
permitted, and in either case what is the slowest vesting
schedule that an employer may adopt? Finally, to what extent
should an employer be permitted (or required) to modify the
nature of the health coverage provided under the plan, e.g., to
control costs or take into account changes in medical utilization
or practice?
As discussed above, it appears to us that a defined dollar
benefit approach fits more readily with ERISA-type standards for
accrual and vesting, and would avoid the conflict between cost
control modifications and the employer's commitment to a specific
type and level of coverage. The design of appropriate minimum
standards thus requires that we first define the exact nature and
form of the benefit promise to which employees accrue rights.
Conclusion
In closing, I would like to reaffirm that the Treasury
Department is pleased to play a role in the study of
post-retirement health benefits. The questions raised in this
area involve fundamental issues of retirement and health policy,
and should properly be subject to examination on a regular basis.
Although significant work remains to be done, we have received
useful input from many parties, including employer and employee
representatives, representatives of insurance companies and
consulting companies, and health economists and other experts.
We welcome this aid, as well as the assistance and and
cooperation of the Department of Labor.

- 8 -

General Information Relating
to Post-Retirement Health Benefits
1. Most employers have not yet focused on the question of
post-retirement health benefits. Less than one-half of the large
employers have analyzed the long-term financial impact of their
post-retirement health plans. Most of those that have not plan
to do so in the near future. Recent growing interest in
post-retirement health benefits may be attributed to an
increasing retiree population, rising health care costs for the
elderly, increasing recognition of the employers' potential
liability, and potential changes in the accounting rules.
2. Most retirees are not covered under employer-maintained
health plans. In 1983, about 30 percent of all retirees 65 years
and older was covered in such health plans.
3. Most large employers permit retiring employees to
continue coverage under their health plans for active employees.
In some cases, however, coverage terminates at age 65, when
Medicare coverage commences. Larger companies are more likely to
provide post-retirement health benefits than are smaller
companies. Post-retirement dental coverage is much less
prevalent than post-retirement health coverage, and
post-retirement vision care is rare.
4. Employers that provide post-retirement health benefits
after age 65 generally continue the same coverage provided to
active employees until the retiree becomes eligible for Medicare,
and thereafter the employer will carve-out Medicare benefits or
provide supplemental coverage for health expenses not reimbursed
by Medicare. Under a "carve-out" approach, the employer-provided
benefit is the health benefit provided to active employees less
the amount actually reimbursed by Medicare. Under the Medicare
supplement approach, the employer's plan provides health coverage
(with their own deductibles and coinsurance) for expenses not
covered by Medicare. Some employer plans pay the Medicare Part B
premium for the retiree.

6. About one-half of the post-retirement health plans are
contributory. Between 10 and 15 percent of such plans require an
employee contribution of more than 50 percent of the cost of the
coverage.

- 9 7. Eligibility for post-retirement health benefits is
typically tied to the retirement requirements of the employer's
pension plan. Generally, these are the completion of (i) ten
years of service and the attainment of age 55 or 60, or (ii) the
attainment of age 65.
8. Virtually no employers prefund post-retirement health
benefits. Surveys generally indicate that fewer than 5 percent
of the respondents prefund post-retirement health benefits. Some
of those that do prefund such benefits do so on a "termination
funding" basis. Most employers provide post-retirement health
benefits on a pay-as-you basis. This is the case even though
prefunding was possible through VEBAs since about 1970 and
continues to be possible under a qualified pension or annuity
plan.
9. Most employers that provide post-retirement health
benefits do not believe that they are legally obliged to continue
such benefits for either current or future retirees. In several
recent cases, however, particularly those involving union
negotiated plans, courts have decided that employers do not have
the unlimited right to reduce or terminate promised health
benefits to current retirees. Indeed, in one case, the court
concluded that an employer could not terminate promised health
benefits for current retirees, even though the employer had
reserved the right to terminate such benefits, because such
benefits effectively vested upon retirement.

TREASURY NEWS
epartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
September 10, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,400 million, to be issued September 19, 1985. This offering
will result in a paydown for the Treasury of about $2,675 million,
as the maturing bills total $17,080 million (including the 16-day
cash management bills issued September 3, 1985, in the amount of
$3,004 million). Tenders will be received at Federal Reserve Banks
and Branches and at the Bureau of the Public Debt, Washington, D. C.
20239, prior to 1:00 p.m., Eastern Daylight Saving time, Monday,
September 16, 1985. The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated June 20,
1985, and to mature December 19, 1985 (CUSIP No. 912794 JK 1) , currently outstanding in the amount of $7,033 million, the additional
and original bills to be freely interchangeable.
182-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated March 21,
1985, and to mature March 20, 1986 (CUSIP No. 912794 JX 3), currently
outstanding in the amount of $8,529 million, the additional and
original bills to be freely interchangeable.
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing September 19, 1985. Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,701 million as agents for foreign and international monetary authorities, and $3,799 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-268

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041

Release Upon Delivery
Expected at 9:30 a.m., E.D.T.
September 11, 1985
STATEMENT. OF
MIKEL M. R0LLYS0N
•TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT OF THE
COMMITTEE ON FINANCE OF THE
UNITED STATES SENATE
Mr. Chairman and Members of the Committee:
It is my pleasure to be here today to present the views of
the Treasury Department on certain of the revenue initiatives
included in the Presidents' fiscal year 1986 budget proposal. I
will discuss whether the temporary increase in the cigarette
excise tax should be extended, whether the deposit schedule for
social security payroll taxes of state and local governments
should be conformed to the private sector deposit schedule, and
whether the industry pensions paid in addition to social security
benefits under railroad retirement pensions should be taxed in
the same manner as all other private industry pensions. Other
Administrative officials will discuss other revenue initiatives
proposed in the President's budget.
The Administration generally is opposed to any form of
Federal tax increase at this time. Fees imposed for the use of
Federal Government property or services, however, are an
appropriate means of compensating the Federal Government for the
expenses incurred in making such property or services available
to the public, and thus other Administration witnesses will be
testifying this morning in support of certain user fees.
B-269

-2DISCUSSION
Extension of the Cigarette Excise Tax
The current tax rate of 16 cents per pack of 20 cigarettes is
scheduled to be reduced to 8 cents per pack on October 1, 1985.
Our position is that the excise tax should be allowed to decline
to 8 cents per pack on October 1 in accordance with current law.
Excise taxes are imposed upon cigars, cigarettes, and
cigarette papers and tubes manufactured in or imported into the
United States. In general, the manufacturer or importer is
liable for these taxes when the products are removed from the
factory or released from customs custody. The rate of tax
imposed on small cigarettes (weighing no more than 3 pounds per
thousand) removed from bonded premises before January 1, 1983 and
after September 30, 1985 is $4 per thousand, which is equivalent
to a tax of 8 cents per pack of 20 cigarettes. The rate of tax
imposed on large cigarettes (weighing more than 3 pounds per
thousand) is $8.40, which is equivalent to a tax rate of 16.8
cents per pack of 20 cigarettes. The Tax Equity and Fiscal
Responsibility Tax Act of 1982 temporarily increased the rate of
tax on small cigarettes to $8 per thousand, which is equal to a
tax rate of 16 cents per pack. Similarly, the rate of tax •
imposed on large cigarettes was temporarily increased to $16.80
per thousand, which is equal to a tax rate of 33.6 cents per
pack. These -temporary increases are scheduled to expire on
September 30, 1985.
Excise taxes on tobacco products discriminate against
consumers who prefer to spend a portion of their incomes on these
products. Moreover, the excise taxes on tobacco are regressive
because low income individuals spend a larger percentage of their
income on these products than wealthier individuals. According
to the 1980-81 Consumer Expenditure Survey Diary Data, tobacco
expenditures are 2.4 percent of income for the quintile of the
population with the lowest income, but are only .4 percent of the
income for the quintile of the population with the highest
income.
In addition, state and local governments currently impose
excise taxes on cigarettes. In 1984, state and local revenue
from these taxes equaled $4.3 billion. To the extent that higher
Federal taxes on tobacco products reduce tobacco consumption,
they could restrict the ability of such governments to raise
revenue from these sources. The cigarette excise tax is a
relatively easy tax to administer, and, therefore, we regard it
as appropriate that most of the revenue from the excise taxation
of Cigarettes is collected by the states.

-3In summary, the Treasury Department favors the scheduled
termination of the temporary increase in the excise taxes on
tobacco products on September 30, 1985.
State and Local Deposit of Social Security Payroll Taxes
Under present law, states that provide social security
coverage for their employees and the employees of their political
subdivisions are required to pay social security contributions
attributable to such coverage directly to the Social Security
Trust Fund within approximately two weeks following the
semi-monthly period in which the covered wages were paid. If the
state contributions are not paid timely, interest accrues at a
rate of 6 percent per annum. The Secretary of Health and Human
Services is responsible for ensuring that contributions are
properly paid. States aggregate and deposit social security
contributions on their own behalf, and on behalf of other
governmental entities.
The Administration has submitted legislation to implement the
revenue initiative in the President's budget that would treat the
social security contributions of public employers as Federal
Insurance Contributions Act (FICA) taxes — as is the case for
social security contributions of private employers and the
Federal Government — and thereby transfer the administration and
collection of these contributions from the Department of Health
and Human Services to the Internal Revenue Service. Under the
proposed legislation, the states, their political subdivisions,
and interstate instrumentalities would individually remit their
social security contributions in the form of FICA taxes to the
Internal Revenue Service along with the Federal income taxes they
currently withhold, and states would no longer be liable for
deposits of sub-state entities. The deposit schedule would be
conformed to the private sector rules over a two-year phase-in
period. The states and their political subdivisions would be
subject to the same interest charges and penalties on late
payments and would have the same rights to administrative appeal
and judicial review under the Internal Revenue Code as private
sector employers.
The Treasury Department favors treating social security
contributions of public employers as FICA taxes. Conforming the
state and local government deposit schedule to the deposit
schedule of the private sector and placing the responsibility for
the collection of all social security contributions with the
Internal Revenue Service will lead to earlier and more efficient
collection of these contributions.

-4Taxation of Railroad Retirement Benefits
Under present law, certain Railroad Retirement system
benefits computed by using the social security benefit formula
("tier 1 benefits") are subject to Federal income tax in the same
manner as social security benefits. Tier 1 benefits, however,
may be available at an earlier age or in amounts in excess of
benefits payable under the social security system.
Under the President's budget proposal, tier 1 benefits that
•equal the social security benefits to which the individual would
have been entitled if all of the individual's employment on which
the annuity is based had been employment for social security
benefit purposes would continue to be taxed in the same manner as
social security benefits. Other tier 1 benefits would be taxed
under the rules that apply to all other payments under the
Railroad Retirement system, i.e., they would be subject to
Federal income tax to the extent payments received exceed the
amount of the individual's previously taxed contributions to the
plan. Thus, tier 1 benefits that are in excess of the social
security benefits to which an individual would be entitled, or
are payable at an age earlier than social security benefits,
would be subject to tax in the same manner as all other payments
under the Railroad Retirement system.
The Treasury Department supports this proposal.
Beneficiaries of the Railroad Retirement system should receive
the favorable tax treatment afforded social security benefits to
the extent their tier 1 benefits are equivalent to what the
individual would have received if the individual's employment
under the Railroad Retirement system had been covered employment
for social security purposes. Conversely, the portion of tier 1
benefits that is not equivalent to a social security benefit and,
therefore, is essentially the same as a private pension benefit,
should not be eligible for the special tax treatment accorded
social security benefits, but should be taxed like all other
private pensions.
* * *This concludes my prepared remarks. I would be happy to
respond to your questions.

REASURY NEWS
artment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 8:00 p.m." EDT
Remarks by Secretary of Treasury
James A. Baker, III
before the New Hampshire Association
of Commerce and Industry
September 10, 1985

I am pleased to be here tonight. I'd like to talk about trade,
from a strategic perspective, and then, tax reform. Business people
recognize the importance of the strategic vision. One can't manage a
business well by looking only to the next quarter's results. The same
is true for government.
% *
And it is particularly appropriate to discuss trade strategy in
New .Hampshire. Forty one years ago an historic meeting took place not
far north of here. Representatives from 44 nations met at Bretton
Woods to devise a postwar monetary systemThe Bretton Woods agreement was a cornerstone of a magnificent
structure -r^1 an open world economic system. Another cornerstone was
the General Agreement on Tariffs and Trade, established in 1948 to
roll back trade barriers.
Roots of the Postwar Free Trade System
The postwar system was built on the belief that the dark years of
war and deprivation had roots in the economic turmoil of the
depression. Nations had turned inward, restricting imports, clutching
their own economic resources. The loss of economic freedom helped
lead to the loss of political freedom. Trade wars were followed by
real wars.
Perhaps the greatest self-defeating measure came in 1930. The
United States passed the Smoot-Hawley tariff, the highest in our
history. Emotions reached a fever pitch. One Member of Congress was
loudly cheered by his colleagues when he suggested that the tariff
wall be built so high that foreigners would break their legs trying to
climb over it.

B-270

-2Our trading partners retaliated, one after another. The London
Morning Post called on "all men of British blood, wherever they may
sbe, to unite against this peril as they united against the Germans in
1914."
Post War Trading System And Prosperity
The postwar free trade system is designed to avoid the calamities
of the 1930's.
Although the system failed to anticipate some new problems, it
still worked fairly well. Trade and growth flourished. With the help
of U.S. capital and markets, Japan and West Germany rebounded from the
war to become leaders in the world economy. The less developed
countries, also boosted by American trade and investment, grew
rapidly.
In the quarter century after GATT began in 1948, world trade grew
7 percent annually. .At the same time, the world economy grew a
remarkable 5 percent a year.
In the past several years, a fast-growing U.S. economy boosted the
incomes of our trading partners dramatically.
Literally half the
growth of European countries in 1983 and 1984 stemmed from our
expansion's demand for their exports.
Our imports from the less developed countries helped keep their
severe eccmomic problems from spinning out of control with possible
adverse consequences for our banking system.
The remarkable world growth over the last four decades could not
have happened without the institutions of GATT and Bretton Woods.
The Bretton Woods monetary system provided for currency stability
and economic growth for many years, before giving way to the current
system of floating rates.
The GATT is the "conscience" of world trade. The Agreement itself
is an extensive set of rules on what governments can and cannot do to
affect trade. Its 90 member countries account for more than four
fifths of all trade.
Numerous multilateral GATT negotiations dramatically cut trade
barriers. Tariffs were reduced almost to insignificance.
System Now Under Stress
But now the free trade, system is under enormous stress. A
slower-growing, increasingly complex world economy is plagued by trade
distortions often so sophisticated they are not covered by GATT.
The New York Times reports that Congress is under the "postwar
era's greatest deluge of protectionism." Literally hundreds of
protectionist bills have been proposed. Even the high tariff, the

-3scourge of the Depression, is threatening a comeback.
Some who call for barriers are motivated by the belief that the
free trade system no longer works, that unfair traders are benefitting
to our disadvantage. Others demand protection, pure and simple.
Our Trade Strategy
Our task is to revitalize the institution of free trade.
The system must be repaired, extended, and modernized. Its
burdens and responsibilities should be better shared among nations.
The United States must have access to resources and opportunities
abroad just as other countries have benefitted from our open market in
the postwar era.
This trade strategy has two parts, a "macroeconomic" part and a
"trading system" part. In each, we try to take a long-term approach,
avoiding counterproductive "quick-fixes."
The first part is to achieve sustained, noninflationary growth at
home and abroad. To compete, our industries depend on sound economic
policy here. Our exporters and investors need healthy markets abroad.
The second part is to promote a free and fair trade system at home
and throughout the world, through negotiations and vigorous
enforcement of our unfair trade laws.
Macroeconomic Policy
Let's look at the macroeconomic aspect in some detail. The broad
economic factors behind our trade performance are all too often
ignored at our peril. Unresolved economic problems almost invariably
become trade problems.
Competitiveness begins at home. Government, business and labor
must emphasize long-term economic growth over quick-fix solutions like
protectionism and subsidies.
We've made great strides in reducing the burden of government on
the economy in the last several years. The tax cuts in 1981,
deregulation, and low inflation bolstered the economy and made
business more efficient.
We've encouraged exports. The Export Trading Company Act of 1982
eased outmoded antitrust laws. We must continue to push to modernize
those laws so that our companies can compete with large companies
overseas.
And we should cut the budget deficit further in order to have a
sound fiscal and monetary policy. Tax reform, which I'll say a few
words about later, will allow Americans to channel their energy into
productive enterprises rather than tax shelters.

-4Ultimately, responsibility for a competitive America rests with
the private sector. Some pessimists say America no longer can
compete, and needs protection. Just like a few years ago, when
America was supposedly doomed to perpetual inflation and stagnation.
"Then the economy sprang into the best recovery and expansion in
many years. Management streamlined itself. Labor showed a wage and
worjc-rule flexibility unheard of in many other industrialized
countries. Management and labor didn't write America off. If we put
our minds to it, we can compete. America is still the largest, most
diverse and most dynamic economic engine in the world.
Convergence of Growth
The macroeconomic part of our trade strategy also involves working
with other countries so that they may achieve durable growth.
Ironically, our trade deficit has roots in our own economic strength.
America grew much faster than most others in recent years. This
growth has drawn in imports while foreign demand for our products has
lagged. The dynamic U.S. economy has also attracted record amounts of
foreign investment. This drove up the price of the dollar, and
consequently, the trade deficit.
At the Bonn Summit this year, we joined other nations in a
cooperative effort to bring about convergent growth. The summit
partners committed themselves to reducing the burden of government and
achieving sustained, noninflationary growth.
We have*seen some progress toward this goal of more balanced world
growth. As United States growth slows to a more sustainable pace this
year, other economies are converging with ours. Prospects for the
LDC's are brighter.
As other countries become more attractive to foreign investors,
downward pressure on the dollar will intensify. In fact, the dollar
has declined considerably from its peak in February this year. About
a third of its rise since the end of 1980 against the Japanese yen,
the German mark, and the English pound has been reversed.
This decline has been moderate, and not precipitous. I do not
expect a rapid fall in the dollar, contrary to some views I've heard.
We don't have a target in mind — I don't think anyone knows what the
"correct" exchange rate for the dollar is. But I wouldn't be
surprised, nor displeased, to see further moderate declines in the
dollar as our policy of promoting the convergence of economic growth
continues.
It will take time for exports to pick up. The potential is there,
if other economies improve. For example, our exports to Mexico went
up 32 percent last year, or $3 billion, because she made dramatic
progress in servicing her foreign debt.
Strengthening Our Trading System

-5The second part of our trade strategy is to strengthen, extend and
modernize the trading system. A free and fair system allows market
forces to bring about the highest level of prosperity.
_It's not abstract, ivory tower theory. We are talking about the
living standards of all Americans. Only open markets can bring the
most trade benefits, give Americans the broadest selection of goods at
the-best prices, and provide the most jobs and income.
We must oppose policies that distort world markets — whether for
products, services, investment, or currencies. Governments cannot
achieve "protectionist prosperity" by using barriers to manage trade.
Market forces always win out — whether in the 1930's or the 1980's.
If we work with market forces, we win too.
If we go against market forces, we lose. Others will not stand by
passively if we engage in protectionist combat. Even in the short
run, we may come out on the short end. Over time, all will suffer
intensely. As President Reagan said recently, "there are no winners
in a trade war — only losers."
And the losses can be big everywhere — inflation, production
inefficiency, and retaliation. Protectionism destroyed jobs and
income with frightening swiftness in the Depression.
Our exports are extremely vulnerable to retaliation. Forty
percent of our farm produce is exported, one in every eight
manufacturing jobs depends on exports. Consumers on tight budgets
rely on low-cost imports. Manufacturers with paper-thin profit
margins depend on imports for production.
Our responsibility to the world trading system is to keep our own
markets as open as possible. Should the world's largest economy turn
protectionist, the system would be endangered. To encourage
protectionism at home is to encourage it abroad.
We've been generally successful in fulfilling this obligation to
open markets. We allowed automobile import quotas to expire earlier
this year. We strongly oppose the proposed 25 percent import
surcharge and similar protectionism.
Shoe Import Decision
The issue of trade hit close to home for New Hampshire recently,
with the decision not to impose quotas on shoe imports. We believe
those restrictions would harm the nation, while giving no lasting help
to the shoe industry.
The shoe quota would cost the American consumer almost
$3 billion — and hit low income consumers the hardest.
might soon join them as victims.

Exporters

U.S. footwear manufacturers already received protection from
foreign imports between 1977 and 1981. They came out of those years

-6even more vulnerable to international competition than before.
Indeed, without the quotas, the shoe industry has shown some good
signs of adjustment. Manufacturers have purchased state-of-the art
manufacturing equipment, updated their operations, and diversified
into profitable retail operations.
But no industry can do well in a weak economy. And that would be
the"result if we encouraged the spread of protectionism.
Instead of spending billions of consumer dollars to create
temporary jobs, President Reagan has directed the Secretary of Labor
to develop a plan to retrain unemployed workers in the shoe industry
for real and lasting employment in other areas of the economy.
While we keep our markets open, our trading partners must do the
same. We will take every step necessary to ensure that the system is
free and fair. The system needs repairs and extension. And we need
more stringent discipline for nations that violate the rules.
Our strategy requires bilateral and multilateral negotiations, as
well as the vigorous enforcement of United States unfair trade laws.
GATT Negotiations
The best way to promote free and fair trade is through
multilateral negotiations. We are encouraging GATT members to hold a
round as soon as possible. It's been six years since the last GATT
round in Tokyo.
Much needs to be done.
Such negotiations are a far better approach than individual
countries taking uncoordinated actions by themselves. The
negotiations permit us to counterbalance powerful groups that benefit
from protection with other groups that would benefit from free trade.
The negotiations should be broad in scope and coverage — since
trade restrictions are rapidly becoming more sophisticated and
entrenched. All barriers to flows of goods, services, investment and
ideas should be on the table. Both industrial and developing
countries should participate in talks on these issues.
The system must more effectively cover agriculture, services and
high technology, among other subjects. Such areas are of particular
importance to the United States, and are vulnerable to subtle
nontariff barriers.
In addition, GATT's system of dispute settlement has to be
streamlined. Disputes can last for many years, and end without a
clearcut decision. This undermines confidence in GATT.
Other Actions
We are confident that these shortcomings of GATT can be fixed. It
is a fundamentally sound institution.

-7We will not, however, wait patiently for another GATT round if
other nations dawdle.
If some countries hold back, we'll move forward with those who
want to cooperate in order to share the advantages of free trade. We
will-negotiate multilaterally. We will negotiate bilaterally. We
will seize every opportunity to tear down and hold down foreign trade
barriers.
This summer, our actions with the European Community to increase
citrus exports demonstrated our seriousness about foreign unfair trade
practices.
Our most publicized bilateral relationship, of course, is with
Japan. In the postwar years, Japan has gained tremendously from
exporting. We greatly admire her economic success, and we can learn
from some of her business skills.
Now Japan must allow her partners to export more to her. Our
trade deficit with Japan, which may reach $50 billion this year, is
not sustainable. We urge Japan not to limit her exports, but to
increase her imports. Not just from the United States, but from
others as well.
* We are currently discussing with the Japanese four major sectors
of their economy that should be more open to our exports. Progress in
these talks has been slow. Some sectors are moving — others are not.
We will not rest until all four sectors are open.
Japan also must open up its economy to American investors, as ours
is open for Japanese investors. Current Japanese law prohibits a
foreign investment if it's likely to be competitive with domestic
firms. As of now, we're the largest direct investor in the
world — with $233 billion throughout the world. But only $8 billion
of that is in Japan.
Enforcing Unfair Trade Laws
As we pursue negotiations, we must also vigorously enforce our
unfair trade laws. Our laws provide relief for those American
businesses victimized by dumped or subsidized imports. In this area,
the Administration initiated 122 investigations in fiscal year 1984,
and 97 through June of this fiscal year. These laws are consistent
with the GATT, and our rulings have been impartial.
We will intensify our attacks against unfair trade. Last week,
President Reagan took an unprecedented step; he began three
investigations of unfair trade practices under Section 301 of the
Trade Act of 1974. The burden of filing a complaint used to be on
private companies. Now they have the U.S. Government behind them. We
will use our authority to take countermeasures if nations don't play
by the rules.
The President also accelerated negotiations with Japan and the

-8European Community over certain of their unfair trade practices. He
set a deadline for solving those problems — December 1 of this year.
If not solved by then, we will take countermeasures. We are putting
other nations on notice that Section 301 will be used to its full
power against those, who refuse to treat American business fairly.
Summary Of Trade Strategy
President Reagan will speak out soon on his free trade policy. He
will reaffirm its driving principles, and set forth some forceful new
ideas about how to put these precepts into action. Some tactics may
require the passage of new legislation.
The fundamentals of our trade strategy remain the same. Our aim
is to achieve prosperity through economic freedom and fairness.
Short-term "solutions" that ignore longterm market forces could be
disastrous.
Protectionism, in particular, is a siren call that would leave our
economy on the rocks.' And surely other economies would follow. Like
Ulysses, we must resist that seductive music and sail forward. The
United States should be the navigator of efforts to repair and extend
the free trade system.
And the burdens of that leadership should be shared more equally
with other nations that thrive on free commerce. And we should not
shrink from laying down the law with nations that weaken the system by
ignoring the rules.
»• v Tax Reform
I'd like to finish with a few words on an issue that also has much
to do with our economy — tax reform.
Our historic challenge is to build a fresh tax system that is
fair, simpler, and economically efficient. We have a fair shot at
passing real reform this year, and I'll tell you why.
The American people are deeply dissatisfied with the current code.
It breeds scorn, envy and fear.
According to a recent poll, 4 out of 5 taxpayers believe the
current system helps the rich and is unfair to the ordinary working
man or woman. A majority believes the system is too complicated and
that cheating is rampant.
This discontent with the tax system is deeply rooted. It draws on
a populist spirit, a powerful American force that has cherished
fairness and opposed special privilege throughout our history.
We must restore to the American people that which is rightfully
theirs — a tax system worthy of their respect. Otherwise, as respect
for the current system erodes, respect for government in general
weakens. To the extent that we can improve the tax system, we improve

-9qovernraent and the public's perception of government. To the extent
we fail, we allow a corrosive virus of alienation and cynicism to
persist.
So we must make, fair a tax code that is marbled with inequities.
We must simplify a code that defies the comprehension of all but those
who spend their careers studying it. We must make efficient a tax
code, that capriciously distributes our national resources with little
more logic than a roulette wheel. We must lower the exorbitantly high
rates that send money fleeing into absurdly unproductive tax shelters.
inaction or hesitation are no alternatives. If postponed, true
reform may never happen. If attempted only piecemeal, comprehensive
reform will once again degenerate into a parody of its lofty intent.
If we delay, a flawed tax system will catch up with us. And the
price will be less growth, less opportunity, and less confidence in
America.
Perhaps you've heard it said that destiny is not a matter of
chance, it is a matter of choice. It is not a thing to be waited for,
it is a thing to be achieved.
The way I see it, we can take a chance and wait. Or we can make a
choice and achieve. It's clearly up to us. I think our decision
should be evident.
Thank you.

FREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041

FOR IMMEDIATE RELEASE
SEPTEMBER 11, 1985

CONTACT:

Art Siddon
(202) 566-5252

ORGANIZATION OF TREASURY DEPARTMENT
The Treasury Department today released a revised table of
organization.
The new organization table reflects the establishment of an
Under Secretary of Finance in order to strengthen the domestic
financial policy and operations roles of the Department. It
also reflects these changes:
The Assistant Secretary for Administration and Assistant
Secretary for Electronic Systems are merged into Assistant
Secretary for Management.
The Assistant Secretary for Business and Consumer Affairs and
the Assistant Secretary for Policy, Planning and Communications
are combined into Assistant Secretary for Public Affairs and
Public Liaison.
The Office of Monetary Policy Analysis is reassigned to the
Assistant Secretary for Economic Policy.
The Assistant Secretary for International Affairs now reports
directly to the Deputy Secretary and the Secretary.
oOo

B-271

THE DEPARTMENT OF THE TREASURY
SECRETARY
Deputy Secretary

Office ol
Intelligence
Support

E»ecull».
Secretary

Under Secretary
lor Finance

General
Counsel

Assistant
Secretary
(Tan Policy)

Assistant
Secretary
(International
Attain)

Assistant
Secretary
(legislative
Allans)

Assistant
Secretary
(Public Allans
IPubhcLiaitonj

Assistant
Secretary
(Management)

Comptroller
of the
Currency

Aaaialant
Secretary
(Enforcement)

Commissioner
ol Internal
KwtniM .

As of 8 26 85

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041

FOR RELEASE AT 4:00 P.M.

September 11, 19 8 5

TREASURY TO AUCTION $9,250 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,250 million
of 2-year notes to be issued September 30, 1985. This issue
will provide about $875 million new cash, as the maturing 2-year
notes held by the public amount to $8,372 million, including $671
million currently held by Federal Reserve Banks as agents for
foreign and international monetary authorities.
In addition to the maturing 2-year notes, there are $3,357
million of maturing 4-year notes held by the public. The disposition of this latter amount will be announced next week.
Federal Reserve Banks as agents for foreign and international
monetary authorities currently hold $1,29 4 million, and Government accounts and Federal Reserve Banks for their own accounts
hold $1,090 million of maturing 2-year and 4-year notes.
The $9,250 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks for their own accounts
will be added to that amount. Tenders for such accounts will be
accepted at the average price of accepted competitive tenders.
Due to the public debt limit and Treasury's need to plan
for the debt level on September 30, additional amounts of the
notes will not be issued to Federal Reserve Banks as agents for
foreign and international monetary authorities in this auction.
Details about the new security are given in the attached
highlights of the offering and in the official offering
circular.
oOo
Attachment

B-272

HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED SEPTEMBER 30, 1985
September 11, 1985
Amount Offered:
To the public

$9,250 million

Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... Z-1987
(CUSIP No. 912827 SS 2)
Maturity Date
September 30, 1987
Call date
No provision
Interest Rate
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
March 31 and September 30
Minimum denomination available .. $5,000
Terms of Sale:
Method of sale
Yield auction
Competitive tenders
Must be expressed as an
annual yield, with two
decimals, e.g., 7.10%
Noncompetitive tenders
Accepted in full at the average price up to $1,000,000
Accrued interest payable
by investor
None
Payment by noninstitutional investors
Full payment to be
submitted with tender
Payment through Treasury Tax
and Loan (TT&L) Note Accounts ... Acceptable for TT&L Note
Option Depositaries
Deposit guarantee by
designated institution
Acceptable
Key Dates:
Receipt of tenders
Wednesday, September 18, 1985,
to l:00"p.m.,
ily-collectible check .. prior
Thursday,
September EDST
26, 1985
Settlement (final payment
due from institutions)
a) cash or Federal funds
Monday, September 30, 1985

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

Remarks by Secretary of the Treasury
James A. Baker, III
at the
Inter-American Investment Corporation
Signing Ceremony
September 12, 1985
President Ortiz Mena, Members of Congress, Members of the
Diplomatic Corps, distinguished guests.
It is a pleasure to welcome you to the Treasury Department
today for the signing of the Agreement establishing the
Inter-American Investment Corporation.
At a time when we are used to reading about crises, we tend
to forget that important policy developments often occur
incrementally, without fanfare or publicity. Only a few of us
may be aware that new institutions are being created —
institutions symbolic of major changes that have far reaching
impacts.
The Inter-American Investment Corporation fits that
definition. Newspaper headlines focus on the negative dimensions
of the debt crisis in Latin America. They overlook important
changes that are occurring in Latin America and the Caribbean.
Governments in those countries are working hard to strengthen
their economies by increasing the role of the private sector and
by reducing government intervention in the market place.
The IIC will work to speed the pace of that process. It is
a multilateral organization affiliated with the Inter-American
Development Bank and aimed at strengthening the private sector in
Latin America and the Caribbean. Its capital — $200 million —
is small in comparison to the numbers that make the headlines.
It may be new and small, but its role will be catalytic, because
it will mobilize both domestic and foreign investment flows to
the region.
Its main focus will be on strengthening small- and medium-sized
enterprises in Latin America and the Carribean — exactly those
enterprises whose success will be critical to dynamic growth in
these countries.
B-273

-2We may not hear much about the IIC as it goes about its
business of making loans and taking equity positions in smalland medium-sized enterprises. Yet enterprises in which it
invests will be providing jobs, earning or saving foreign
exchange, bringing new technology and managerial skills to
promote growth, and producing goods that enable other enterprises
to operate more efficiently. But perhaps most importantly, they
will be providing outlets for the entrepreneurial spirit so
essential in a healthy privte sector.
The IIC will be an international institution grounded in
goodwill and diplomacy. It will also be a business enterprise
designed to operate efficiently with a clear sense of mission.
It is an example of how much we can accomplish if we work
together to solve common problems. Members of the Inter-American
Development Bank recognized a problem that was retarding growth
in Latin America — the unfulfilled potential and opportunities
of free enterprise. Recognizing the challenge of individual
freedom and initiative in economic development, they proceeded to
deal with the problem in a creative and cooperative way by
focusing on the unrealized potential of small- and medium-sized
enterprises. The IIC is the outcome.
And those who worked hard for its establishment deserve our
congratulations. In addition to the legislative support the
institutions received, the leadership and vision of President
Ortiz Mena and Treasury Deputy Assistant Secretary Jim Conrow did
much to shape the IIC. But the person behind U.S. participation
in the IIC, and the person who set the basic political
groundwork, is Jose Manuel Casanova, our Executive Director in
the Inter-American Development Bank. I ask Manolo to stand for
the recognition he so richly deserves.
We are here today to implement President Reagan's decision
that the United States should join the Inter-American Investment
Corporation. I am pleased to add the United States to the
present list of signatories. And I urge others to move toward
becoming IIC members. The IIC has an important role to play in
the development of Latin American and the Caribbean economies.
We look forward to continuing close cooperation with our
colleagues in Latin America to address the problems of the
present and the future.
I want to thank all of our guests for being here today.
Your presence confirms our faith in this promising enterprise.
Thank you very much. I now ask Don Antonio Ortiz Mena to
join me in signing the IIC agreement and related documents.

rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041

STATEMENT OF EDWARD T. STEVENSON
ACTING ASSISTANT SECRETARY (ENFORCEMENT AND OPERATIONS)
U.S. DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
SEPTEMBER 12, 1985
The Role of the Department of the Treasury in the
Fight Against Money Laundering
Mr. Chairman and Members of the Committee:
Thank you sincerely for the opportunity to appear before
you today to discuss the problem of money laundering. The
Treasury Department welcomes your interest in this topic, which
is of vital importance to law enforcement, to the financial
community, and to our society at large. In my testimony today,
I will discuss the scope of the money laundering problem and
some of the reasons why it is so pervasive. I will explain
why Treasury believes that an attack on money laundering is
essential to a successful fight against organized crime and
drug trafficking. I will then summarize the progress we have
made, under both the civil and the criminal enforcement powers
at our disposal. Finally, I will address very briefly the pending legislation that has the potential to further our progress.
Jim Knapp, Deputy Assistant Attorney General for the Criminal
Division, will discuss this legislation in further detail in
his testimony today.
What Money Laundering is and Why it Poses a Difficult
Challenge to Law Enforcement
At the outset, I would like to define what we mean by the
term "money laundering". I am referring to any scheme by which
criminals or their cohorts strive to conceal the illegal source
of their income and to make their proceeds appear legitimate.
Mr. Chairman, for a number of reasons, money laundering
is a major challenge for law enforcement. First, the scope of
the problem is staggering. While no one knows with certainty
how much money is laundered in the United States every year,
estimates point to anywhere between $50 and $75 billion in
laundered crime proceeds from drug trafficking alone. From
B-274

- 2 money laundering cases Treasury has investigated, we know that
a single money laundering enterprise can wash $300 million or
more in crime proceeds in less than a year's time.
Suppressing money laundering is enormously difficult for
another reason: there are seemingly infinite ways for criminals to accomplish it. Treasury investigators have uncovered
money laundering schemes that are as varied as the human imagination will allow. They can be conducted domestically or
internationally, and they can exploit various types of financial
institutions. Because virtually all organized crime depends on
skilled money launderers for its very existence, there is a
continuous incentive for criminals to develop new methods for
circumventing Federal reporting requirements and for concealing
cash and pools of assets from the eyes of law enforcement.
Money laundering has seen unprecedented growth over the
last decade for another basic reason: it is an extremely
lucrative criminal enterprise. Treasury's investigations have
uncovered members of an emerging criminal class: They are the
professional money launderers who aid and abet other criminals
through financial activities.
Some may not consider themselves
to be criminals. These individuals do not fit the stereotype of
an underworld criminal. They are accountants, attorneys, money
brokers, and members of other legitimate professions. They need
not become involved with the underlying criminal activity except
to conceal and transfer the proceeds that result from it. They
are drawn to their illicit activity for the same reason that drug
trafficking attracts new criminals to replace those who are convicted and imprisoned; and that reason is greed. Money laundering
appears to them as an easy route to almost limitless wealth.
An Attack on Money Laundering is Essential
to the Fight Against Organized Crime and
Drug Trafficking
Mr. Chairman, the difficulties I have mentioned should not
cause anyone to believe that our fight against money laundering
is a hopeless one. Quite to the contrary: in the past four
years, we have recorded substantial progress. I will give some
examples of this progress in a moment. But for now, let me
stress a principle that our financial investigations have demonstrated time and time again: that we can never hope to
control drug trafficking and other forms of organized crime in
our society unless we continue our efforts to go after the
money that is at the heart of every criminal enterprise. The
reasons behind this conclusion are fundamental ones.
Money, of course, is the motivation behind every organized
crime transaction and the thread that ties together the components
of a criminal enterprise. If we can trace the money, the trail
will often lead to high-level criminals. The leaders in any

- 3 criminal enterprise usually take great pains to distance themselves from the illegal source of their income. But they can
usually be found close to the money.
The money, if seized, is potentially devastating
evidence at a criminal trial. A jury can get lost in the
technical details of a white collar crime. But if jurors can
be shown the illicit proceeds, they can more readily understand
the full impact of the crime.
Also, through seizure and forfeiture, we can deprive
a criminal enterprise of its lifeblood. For instance, drugs
can be readily replaced by a drug trafficking organization,
but its cash reserves are essential to its functioning.
It is this cash that finances new drug importing ventures,
and is the means of corrupting justice. Large monetary
seizures can cripple the organization and possibly put it
out of business altogether.
Treasury's investigative successes under the Bank Secrecy
Act, which have been achieved by IRS and Customs Special Ayents,
demonstrate the validity of this approach. In 1980, Treasury,
with the support of the Justice Department, organized Operation
Greenback in Miami to conduct financial investigations using the
reporting information provided by the Bank Secrecy Act. The
Treasury task forces modeled after Greenback now total approximately forty in number, located in cities across the nation.
Since 1980:
° They have produced over 1300 indictments and over
460 convictions;
° They have resulted in $81.8 million in currency
seizures and $34.3 million in property seizures; and
° They have destroyed nineteen major money laundering
enterprises, which laundered a documented total
of $2.8 billion.
Greenback itself has become a component in one of the
President's Organized Crime Drug Enforcement Task Forces,
which now number thirteen. These Task Forces have initiated
over 1000 cases, even though they have been fully operational
for only a little more than two years. They have produced
indictments of more than 6300 individuals and have resulted
in more than 2500 convictions. Two out of three Task Force
cases have a financial component.

- 4 Treasury has contributed approximately 480 special agents
to work full-time on the OCDE Task Forces, 400 of which are
IRS and Customs agents who are investigating money laundering.
The other 80 agents are ATF agents who are investigating the
firearms violators who participate in and support the drug
trade and organized crime.
Treasury's Enforcement of the Bank Secrecy Act
The Bank Secrecy Act is the cornerstone of Treasury's
financial enforcement effort. The reporting and recordkeeping information it authorizes Treasury to require is
essential for the investigations conducted by the task
forces that I have described.
Specifically, beginning in 1972, Treasury has issued
and periodically revised its regulations that effectuate
the Bank Secrecy Act. These regulations require banks to
maintain certain basic records, including the following:
— cancelled checks and debits over $100;
— signature cards;
— statements of account;
-- extensions of credit in excess of $5,000; and
-- records of international transfers of more than
$10,000.
The regulations also provide for the following reports:
-- First, all financial institutions are required to
report to IRS currency transactions in excess of
$10,000. There are a few exceptions to this requirement. Transactions solely with or originated
by financial institutions need not be reported.
Also, financial institutions may exempt from reporting transactions with established customers
maintaining deposit relationships, provided that
the amounts deposited do not exceed amounts that
are reasonable and customary given the type of
business engaged in by the customer, and further
provided that the business is of a type that customarily produces large cash receipts.
Second, with the exception of certain shipments made
by banks, the international transportation of currency
and certain other monetary instruments in bearer form
and in excess of $10,000 is required to be reported
to the Customs Service. The civil sanctions for vio-

- 5 lations of this requirement are especially powerful.
Customs can seize the entire amount of unreported
currency or other monetary instruments involved in
a violation at the time a violation occurs. If a
violation is detected too late to effect a seizure,
Treasury can assess a civil penalty equal to the
amount of unreported monetary instruments that were
not seized.
— Third, Treasury requires reporting of the ownership
or control of foreign financial accounts, by all
persons subject to U.S. jurisdiction.
In addition to the responsibility for implementing the
purposes of the Act through regulations, the Secretary of the
Treasury exercises overall responsibility for ensuring compliance with the recordkeeping and reporting requirements of
the Act. In accordance with the intent of the Act, Treasury's
implementing regulations delegate this responsibility to those
agencies that supervise the various financial institutions.
Certainly, full compliance with the reporting requirements
is essential. Treasury depends on the reporting data generated
by these requirements for its own financial investigations and
the analytical support it provides other law enforcement agencies.
The Treasury Financial Law Enforcement Center, or TFLEC,
combines these data with other sources of intelligence to generate financial intelligence reports, currency flow charts, and
link analyses, which probe the financial connections inside and
among illicit enterprises. TFLEC provides vital support to ongoing investigations, including those of the OCDE'and Treasury
Task Forces, and it generates leads for the development of new
cases.
It is fair to say that were it not for the reporting information Treasury receives as a result of the Bank Secrecy Act,
the major money laundering enterprises I mentioned earlier would
all be thriving today. To ensure the availability of reports,
we must continue to improve the level of compliance by financial
institutions.
As the Committee is aware, the Department of the Treasury
is currently involved in an unprecedented number of civil
penalty cases against financial institutions. This activity is
an aftermath of the Bank of Boston case. In February, the First
National Bank of Boston pleaded guilty to failure to file currency
transactions reports in violation of the Bank Secrecy Act in
1,163 instances. The transactions involved bank-to-bank transfers
of currency between the Bank of Boston and foreign banks.

- 6 As a result of the publicity following the Bank of Boston
case, over sixty banks have come forward to disclose Bank Secrecy
Act violations, many on a voluntary basis. On June 18, 1985,
Treasury announced that civil penalties ranging from $210,000
to $360,000 had been imposed on four of these banks — Chase
Manhattan Bank, Manufacturers Hanover Trust, Irving Trust and
Chemical Bank. On August 27, Treasury imposed a civil penalty
of $2.25 million against Crocker National Bank based on over
7800 reporting violations. This is the largest Bank Secrecy
Act civil penalty imposed by Treasury to date. Crocker's
non-compliance problem was discovered in the course of a compliance audit by an alert national bank examiner from the
Office of the Comptroller of the Currency.
All of the banks, including Crocker, cooperated fully with
Treasury in developing the scope of their liability. Treasury
is not aware of any related criminal conduct on the part of any
of the banks against which civil penalties have been assessed.
The cases of the other banks that have come forward are currently under review.
In addition, my office has authorized the Internal Revenue
Service to conduct criminal Bank Secrecy Act investigations of
financial institutions in approximately 400 cases. Of these,
approximately 100 authorizations are still in effect.
We also have been working with the financial institution
regulatory agencies to strengthen their Bank Secrecy Act audit
procedures. More rigorous audits should lead to improved compliance.
We have strengthened the Treasury Bank Secrecy Act
regulations in several respects: On May 7, 1985, regulations
became effective that designated casinos as financial institutions
subject to certain Bank Secrecy Act reporting and recordkeeping
requirements. As evidenced by hearings by the President's
Commission on Organized Crime this summer, money laundering
through casinos may be even more widespread than once thought.
The Treasury regulations should foreclose the attractiveness
of the use of casinos for money laundering.
Finally, a regulatory amendment pertaining to international
transactions was published as a final rule in the Federal Register
on July 8, 1985. These regulations do not themselves impose any
reporting requirements. Under the regulations, however, Treasury
will be able in the future to select a financial institution or
a group of financial institutions for defined periods of time,
for reporting of specified international transactions, including
wire transfers. We envision that this will require reporting
of transactions with financial institutions in designated foreign
locations that would produce especially useful information concerning money laundering or tax evasion.

- 7 This effort reflects Treasury's intention to make further
progress against the problem of international money laundering.
Another aspect of our attack on money laundering offshore is
our negotiation with foreign governments that have stringent
bank secrecy laws. Treasury has worked closely with the
Departments of Justice and State to obtain the cooperation
of these governments for the release of financial information
relevant to possible violations of law. The agreement our
government has reached with Great Britain that provides for
access by U.S. prosecutors to information located in the Cayman
Islands that is relevant to narcotics violations is a direct
result of this endeavor.
The Administration's Money Laundering Bill
The Bank Secrecy Act, while an effective law enforcement
tool, is not enough, standing alone, to combat money laundering.
As long as currency transaction are properly reported, the Bank
Secrecy Act contains no sanction for money laundering. What is
clearly needed is legislation that makes money laundering itself
a criminal offense and provides severe financial consequences
for a financial institution that facilitates laundering. That
is why the Departemnt of the Treasury is pround to have worked
with the Department of Justice in developing the Administration
bill to combat money laundering, the "Money Laundering and Related Crimes Act of 1985" (H.R. 2785 and 2786). We look forward
to early, favorable Congressional action on this bill.
The bill makes it an offense to conduct a financial transaction with the intent to promote any unlawful activity or with
knowing or reckless disregard that the funds represent the proceeds of an unlawful activity. Unlawful activity is defined
broadly to include all federal and state felonies — including
tax offenses and failures to report under the Bank Secrecy Act.
The bill confers joint investigative authority on the Department
of Justice and the Department of the Treasury. We envision that
Treasury investigations would be conducted, as are the Bank
Secrecy Act investigations, by the Customs Service and the
Internal Revenue Service, as appropriate. The bill provides
both civil and criminal forfeiture authority of any funds or
monetary instruments involved in a violation including where
the underlying unlawful activity is an internal revenue offense.
The bill also contains several amendments to the Bank
Secrecy Act that are essential to more effective enforcement by
the Secretary of the Treasury. Most important, the Secretary
would be given for the first time summons authority for both
financial institution witnesses and documents in connection with
Bank Secrecy Act cases. Also the bill would increase the current
civil penalty for willful violation from $10,000 per transaction
to the amount of the transaction up to $1,000,000 or $25,000,
whichever is greater. The bill also provides for a penalty tor
mere negligent violations by financial institutions.

- 8 While the increased civil penalties would apply to financial institutions, Treasury interprets the term "financial
institution" broadly. As the Second Circuit recently held,
Congress did not intend "financial institution" to be defined
solely as legitimate, ongoing business concerns, but to also
include any enterprise or person engaging in the exchange of
currency for profit. United States v. Goldberg, 756 F.2d
949 (1985), cert, denied, 53 L.W. 3865 (6/11/85)).
Mr. Chairman, this completes my formal testimony today.
The Deputy Assistant Attorney General, Criminal Division,
James I.K. Knapp, is here today and will discuss the Administration's bill in more detail.

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
September 13, 1985

CONTACT:

Art Siddon
566-5252

(202)

ELECTION BY LIFE INSURANCE COMPANIES
UNDER SECTION 818 (f) (2)

The Treasury Department today announced the method by which
life insurance companies may elect to apportion or allocate
certain items among items of gross income for purposes of the
foreign tax credit and other purposes. The items which may be
apportioned or allocated under this election are described in
section 818(f)(1) of the Internal Revenue Code and include the
deduction for policyholder dividends, death benefits, and reserve
adjustments under section 807(a) and (b). The election, which is
permitted under section 818(f)(2) of the Code, must be made by
September 16, 1985.
The Treasury Department said that the election is made by
attaching a statement to the life insurance company's income tax
return (or amended return) for its first taxable year beginning
after December 31, 1983, or by mailing a separate statement to
the Internal Revenue Service Center with which the company's
return is filed. In either case, the statement must be mailed by
September 16, 1985. The statement should include the following:
The name, address, and taxpayer identification number of
the life insurance company;
A statement that the company is making an election under
section 818(f)(2); and
If the statement is not attached to the company's 1984
tax return, a notation to the effect that the statement
should be associated with that return.
The Treasury Department also said that, until temporary or
final regulations prescribing apportionment and allocation rules
under section 818(f)(2) are issued, life insurance companies
making the election may apportion or allocate the items to gross
income in the manner prescribed in either section 818(f)(1) or
section 1.861-8 of the Income Tax Regulations. After the
issuance of temporary or final regulations, any life insurance
company that has made the election under section 818(f)(2) will
be permitted a limited period within which to revoke the
election. Companies that do not revoke the election will be
required to amend their 1984 tax returns if an amendment is
necessary to comply with the apportionment and allocation rules
in those regulations.
oOo
B-275

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

September 16, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,220 million of 13-week bills and for $7,202 million
of 26-week bills, both to be issued on September 19, 1985, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

13-week bills
maturing December 19, 1985
Discount Investment
Rate
Rate 1/
Price
7.14%
7.18%
7.17%

7.37%
7.41%
7.40%

98.195
98.185
98.188

26-week bills
maturing March 20, 1986
Discount Investment
Price
Rate
Rate 1/
7.31%
7.33%
7.32%

7.70%
7.72%
7.71%

96.304
96.294
96.299

Tenders at the high discount rate for the 13-week bills were allotted 8%.
Tenders at the high discount rate for the 26-week bills were allotted 38%.

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

Accepted

TOTALS

$
67,295
17,271,610
45,450
54,080
91,815
50,470
2,074,775
93,940
316,865
60,070
42,110
3,093,785
286,275
$23,548,540

$
47,295
5,466,070
45 ,450
54 ,080
51 ,465
43 ,030
865 ,255
53 ,940
132,865
58 ,950
32 ,110
82 ,865
286 ,275
$7,219,650

$
68,500
16,775,980
26,090
40,305
104,445
56,555
1,158,175
86,075
44,325
46,535
39,215
2,470,360
371,115
$21,287,675

! 47,780
6,252,360
26 ,090
40,305
51 ,345
50,245
123 ,935
46 ,075
19,325
46 ,375
29 ,215
98 ,090
371 ,115
$7,202,255

Ty^e
Competitive
Noncompetitive
Subtotal, Public

$20,079,125
1,160,160
$21,239,285

$3,750,235
1,160,160
$4,910,395

$17,750,745
1,103,130
$18,853,875

$3,665,325
1,103,130
$4,768,455

Federal Reserve
Foreign Official
Institutions

1,899,055

1,900,000

410,200

533,800

TOTALS

$23,548,540

$7,219,650

$21,287,675

$7,202,255

y Equivalent coupon-issue yield

B-276

federal financing bank
WASHINGTON, D.C. 20220

FOR IMMEDIATE RELEASE

September 13, 1985

FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of July 1985.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $153.0 billion
on July 31, 1985, posting an increase of $1.0 billion
from the level on June 30, 1985. This net change was
the result of increases in holdings of agency assets of
$0.9 billion and holdings of agency-guaranteed debt of
$0.3 billion. Holdings of agency debt declined by $0.3
billion during the month. FFB made 313 disbursements
during July.
Attached to this release are tables presenting FFB
July loan activity, new FFB commitments entered during
Julv and FFB holdings as of July 31, 1985.
# 0 #

B-277

*3- 00
o\J CD
•<r
C
CD CM
(0 CO
mCO CO
to
© m
0. u.

Page 2 of 8

FEDERAL FINANCING BANK
JULY 1985 ACTIVITY
AMOUNT
DATE , iUi*& 'ADVANCE

B3R&WER

FINAL
INTEREST
MATURITY- •'• RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

ON-BUDGET AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance

7/2
7/8

#486
#487
#488
#489
#490
#491
#492
#493
#494
#495

Power Bond Series 1985 D

7/10
7/16
7/16
7/17
7/22
7/25
7/29
7/31

$ 470,000.,000.00
480,000,000.00
465,000,000.00
254,000,000.00
200,000,000.00
462,000,000.00
237,000,000.00
161,000,000.00
249,000,000,00
173,000,000.00

7/10/85
7/16/85
7/18/85
7/22/85
7/25/85
7/25/85
7/29/85
8/1/85
8/5/85
8/8/85

7.205%
7.105%
7.305%
7.385%
7.385%
7.335%
7.515%
7.605%
7.545%
7.645%

7/25

500,000,000.00

7/31/15

10.725%

7/11
7/15
7/16
7/22
7/29
7/31

65,000,000.00
2,000,000.00
41,300,000.00
1,500,000.00
550,000.00
7,225,000.00
5,000,000.00

9/30/85
10/9/85
10/15/85
10/10/85
10/21/85
10/28/85
10/28/85

7.185%
7.285%
7.455%
7.385%
7.545%
7.555%
7.625%

7/1

75,257,025.29

9/30/85

7.185%

NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Note #337
+Note #338
+Note #339
Note #340
•Htote #341
+Note #342
Note #343

7/1

OFF-BUDGET AGENCY DEBT
UNITED STATES RAILWAY ASSOCIATION
*Note #33
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
7/1
7/1
7/5
7/15
7/15
7/15
7/29
7/29
7/29
7/31
7/31
7/31

450,000,000.00
40,000,000.00
75,000,000.00
100,000,000.00
60,000,000.00
25,000,000.00
140,000,000.00
30,000,000.00
35,000,000.00
95,000,000.00
190,000,000.00
30,000,000.00

7/1/95
7/1/05
7/1/95
7/1/95
7/1/00
7/1/05
7/1/95
7/1/00
7/1/05
7/1/95
7/1/00
7/1/05

38,627,345.46
2,956,199.00
42,500.00
41,324.98
1,389.00
21,922,643.90
126,364.00

3/24/12
7/15/13
6/10/96
10/15/90
2/5/96
7/31/14
9/15/94

10.375%
10.735%
10.355%
10.355%
10.585%
10.725%
10.705%
10.955%
11.095%
10.785%
10.995%
11.115%

GOVERNMENT - GUARANTEED rDANc;
DEPARTMENT OF DEFENSE
Foreign Military <^i^
Turkey 13
Turkey 16
El Salvador 7
Niger 2
Tunisia 16
Egypt 7
Zaire 3
+rollover
*maturity extension

7/1
7/1
7/2
7/2
7/2
7/5
7/9

10.672%
10.669%
10.343%
7.675%
10.345%
10.603%
10.135%

10.644% ann
11.023% ann
10.623% ann
10.623% ann
10.865? ann,
11.013* ann,
10.991? ann,
11.255? ann,
11.403% ann.
11.076% ann.
11.297% ann.
11.424% ann.

Page 3 of 8
FEDERAL FINANCING RANK
JULY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

Foreign Military Sales (Cont'd)
Botswana 4
ugypt 7
Jordan 11
Greece 15
Peru 9
Morocco 13
Turkey 16
El Salvador 7
Egypt 7
Turkey 13
El Salvador 7
Turkey 17
Jordan 10
Thailand 11
Egypt 7
Tunisia 16
Egypt 7
Jordan 11
Spain 5
Morocco 13
Thailand 11
Jordan 10
Jordan 12
Portugal 1
Morocco 12
Morocco 13
Turkey 17
Zaire 3
Philippines 10

7/10
7/10
7/10
7/11
7/11
7/12
7/12
7/12
7/15
7/15
7/16
7/16

7A7
7/17
7/19
7/19
7/22
7/22
7/22
7/24
7/24
7/25
7/25
7/25
7/29
7/29
7/29
7/29
7/30

$ 1,108.16
1,407,709.59
1,261,513.22
123,545.80
131,807.03
19,735.00
10,335,521.27
34,500.00
21,514,276.35
466,732.15
727,367.82
27,845,212.69
1,234,839.89
378,659.56
4,234,875.00
16,243.80
1,153,843.56
181,495.55
4,429,977.55
793,981.56
8,532,605.00
31,280.87
71,090.15
4,323,137.00
12,242.24
587,461.73
4,861,788.00
23,802.00
299,475.52

7/25/92
7/31/14
11/15/92
6/15/12
9/15/95
5/31/96
7/15/93
6/10/96
7/31/14
3/24/12
6/10/96
11/30/13
3/10/92
9/10/95
7/31/14
2/5/96
7/31/14
11/15/92
6/15/91
5/31/96
9/10/95
3/10/92
2/5/95
9/10/94
9/21/95
5/31/96
11/30/13
9/15/94
7/15/92

398,900,000.00

8/1/85

7.535%
10.505%
8.853%
10.315%
9.949%
9.945%
10.609%
10.375%
10.660%
10.625%
10.395%
10.379%
8.230%
10.235%
10.775%
10.455%
10.795%
9.315%
9.915%
10.225%
10.555%
8.815%
10.495%
10.095%
10.685%
10.285%
10.849%
10.685%
10.135%

DEPARTMENT OF ENERGY
Synthetic Fuels - Non-Nuclear Act
+Great Plains
Gasification Assoc. #137

7/1

7.995%

DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
•Albany, NY
New Haven, CT
•Baldwin Park, CA
South Bend, IN
Newport News, VA
Lynn, MA
Jersey City, NJ
Waukegan, IL
Santa Ana, CA
Yonkers, NY
Pasadena, CA
Dade County, FL
Rochester, NY
Santa Ana, CA
St. Louis, MO
Omaha, NE
Ponce, PR

7/5
7/5
7/10
7/10
7/15
7/15
7/16
7/19
7/24
7/26
7/30

640,000.00
200,000.00
142,500.00
72,762.34
12,000.00
210,816.64
22,500,000.00
274,325.00
282,000.00
1,650,000.00
2,931,753.83
3,772,772.00
100,000.00
347,000.00
1,000,000.00
500,000.00
145,257.00

7/1/90
9/1/04
7/1/91
2/15/86
2/15/86
8/15/85
10/1/86
9/1/85
8/15/86
12/15/85
9/15/91
7/15/89
8/31/04
8/15/86
2/15/86
5/31/17
8/1/85

7/9

63,200,359.00

7/15/85

7/1
7/1
7/1
7/5
7/5
7/5

9.747%
10.480%
9.555%
7.615%
7.615%
7.365%
8.085%
7.365%
7.885%
7.485%
9.580%
9.073%
10.512%
8.085%
7.905%
8.995%
7.605%

DEPARTMENT OF THF NAVY
Ship Lease Financing
Williams

^maturity extension
+rollover

7.255%

9.985%
10.755%
9.783%
7.669%
7.668%

ann.
ann.
ann.
ann.
ann.

8.248% ann.
8.040% ann.
9.809%
9.279%
10.788%
8.248%
7.939%
9.197%

ann.
ann.
ann.
ann,
ann,
ann,

Page 4 of 8
FEDERAL FINANCING BANK
JULY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

7/10
7/15
7/15
7/15
7/15
7/15
7/15
7/15
7/15
7/15
7/15
7/15
7/15
7/17

$ 23,290,000.00
127,806,502.52
106,462,912.85
124,202,449.12
107,879,688.62
118,839,782.17
120,680,368.76
105,919,489.26
116,422,407.03
2,200,359.00
2,330,000.00
68,290,000.00
59,738,951.97
2,200,359.00

7/12

337,767.54

FINAL
MATURITY

INTEREST
RATE
(semiannual)

"TNTERE^T
RATE
(other than
semi-annual)

Ship Lease Financing (Cont'd)
+Buck
+Hauge
+Kocak
+Baugh
•KDbregon
+Bobo
+Anderson
+Pless
-Williams
+Bobo Container
+Pless Container
+Buck
•Williams
Williams Container

7/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
10/15/85
7/17/85
10/15/85

7.305%
7.455%
7.455%
7.455%
7.455%
7.455%
7.455%
7.455%
7.455%
7.455%
7.455%
7.455%
7.435%
7.355%

10/1/92

9.764%

9.648% qtr.

8.795%
8.895%
10.622%
8.881%
10.620%
10.618%
10.620%
8.795%
8.795%
10.622%
10.623%
10.622%
10.622%
7.355%
7.355%
9.205%
9.205%
9.205%
8.795%
8.885%
8.795%
8.895%
10.622%
10.618%
10.620%
10.620%
10.590%
10.541%
10.591%
10.309%
8.485%
10.375%
8.485%
8.985%
8.985%
8.645%
8.675%
8.675%
10.591%
8.855%
10.597%
8.905%
10.597%

8.700% qtr.
8.798% qtr.
10.485% qtr.
8.785% qtr.
10.483% qtr.
10.481% qtr.
10.483% qtr.
8.700% qtr.
8.700% qtr.
10.485% qtr.
10.486% qtr.
10.485% qtr.
10.485% qtr.
7.300% qtr.
7.300% qtr.
9.101% qtr.
9.101% qtr.
9.101% qtr.
8.700% qtr.
8.788% qtr.
3.700% qtr.
8.798? qtr.
10.485% qtr.
10.481% qtr.
10.483% qtr.
10.483% qtr.
10.453% qtr.
10.406% qtr.
10.454% qtr.
10.179% qtr.
8.39^% qtr.
10.244% qtr.
8.397% qtr.
8.886% qtr.
8.886% qtr.
8.554$ qtr.
8.583% qtr.
8.583% qtr.
10.454% qtr.
8.759% qtr.
10.460% qtr.
8.808% qtr.
10.460% qtr.

Defense Production Act
Gila River Indian Community

RURAL ELECTRIFICATION ADMINISTRATION
•Colorado Ute Electric #96
•North Carolina Electric #185
•Deseret G&T #211
•Southern Illinois Power #38
Tex-La Electric #208
Kepco #282
Saluda River Electric #186
•Wabash Valley Power #104
•Wabash Valley Power #206
•Tex-La Electric #208
•S. Mississippi Electric #171
•Kansas Electric #216
•Kansas Electric #216
Basin Electric #87
Basin Electric #232
Wolverine Power #182
Wolverine Power #183
Wolverine Power #191
Wolverine Power #234
Wolverine Power #274
Deseret G&T #211
North Carolina Electric #268
New Hampshire Electric #270
Kansas Electric #282
Tex-La Electric #208
Saluda River Electric #186
Western Farmers Electric #196
Cajun Electric #263
•S. Mississippi Electric #171
Western Farmers Electric #261
Central Electric #131
•Kansas Electric #216
•Colorado Ute Electric #96
Wolverine Power #182
Wolverine Power #183
•Wabash Valley Power #104
•Wabash Valley Power #206
Wolverine Power #234
Tri-State G&T #177
•Colorado Ute Electric #168
•New Hampshire Electric #192
Deseret G&T #211
•Oglethorpe Power #246
•maturity extension
+rollover

7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7A
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/2
7/2
7/2
7/3
7/8
7/8
7/8
7/10
7/10
7/10
7/11
7/11
7/12
7/12
7/15
7/15
7/15

484,000.00
7,517,000.00
8,274,000.00
2,000,000.00
735,939.19
814,475.89
2,562,242.79
4,823,000.00
10,571,000.00
3,213,000.00
9,948,000.00
2,067,500.00
4,572,000.00
504,000.00
1,107,000.00
3,457,000.00
4,389,000.00
700,000.00
16,002,000.00
20,785,000.00
22,443,000.00
28,191,000.00
2,281,000.00
5,800,524.11
3,519,060.81
9,773,757.21
4,005,000.00
50,000,000.00
12,649,000.00
15,985,000.00
130,000.00
560,000.00
1,084,000.00
2,427,000.00
3,146,000.00
4,651,000.00
8,665,000.00
9,763,000.00
2,500,000.00
130,295.00
1,202,000.00
8,396,000.00
18,117,000.00

7/1/87
9/30/87
1/2/18
9/30/87
12/31/19
12/31/15
12/31/19
7/1/87
7/1/87
1/2/18
12/31/15
1/3/17
12/31/17
12/3/85
12/3/85
6/30/88
6/30/88
6/29/88
7/1/87
9/30/87
7/1/87
9/30/87
12/31/17
12/31/15
12/31/19
12/31/19
12/31/19
12/31/16
12/31/17
1/2/01
7/8/87
1/2/18
7/8/87
7/11/88
7/11/88
7/10/87
7/13/87
7/13/87
12/31/19
7/12/.17
12/31/17
7/15/87
12/31/17

Page 5 of 8
FEDERAL FINANCING BANK
JULY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST1
RATE
(other than
semi-annual)

RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•East Kentucky Power #188 7/15
•Colorado Ute Electric #71
•sno-Me Hower #164
•East Kentucky Power #188
Sho-Me Power #164
•Cajun Electric #197
•New Hampshire Electric #192
•New Hampshire Electric #192
•New Hampshire Electric #192
•Colorado Ute Electric #96
Corn Belt Power #292
S. Mississippi Electric #90
Oglethorpe Electric #246
East Kentucky Power #73
East Kentucky Power #73
East Kentucky Power #140
East Kentucky Power #140
East Kentucky Power #140
East Kentucky Power #140
East Kentucky Power #140
East Kentucky Power #188
East Kentucky Power #188
East Kentucky Power #291
New Hampshire Electric #270
Kepco #282
S. Mississippi Electric #288
S. Mississippi Electric #289
•Sunflower Electric #174
•Big Rivers Electric #143
•Big Rivers Electric #179
•East Kentucky Power #73
Vermont Electric #259
Allegheny Electric #304
•S. Mississippi Electric #3
•S. Mississippi Electric #4
•Upper Missouri G&T #172
Western Farmers Electric #285
Washington Electric #269
•Basin Electric #232
•Tex-La Electric #208
North Carolina Electric #268
Plains Electric #158
Plains Electric #300
Kamo Electric #266
•Basin Electric 187
•Basin Electric #88
•Southern Illinois Power #38

$ 4,500,000.00 1/2A8
7/15
1,190,000.00
7/15
500,000.00
1/lS
7,090,000.00
7/17
500,000.00
7/17
19,000,000.00
7/17
1,125,000.00
7/17
1,253,000.00
7/17
1,765,000.00
7/18
1,230,000.00
7/18
343,000.00
7/18
884,000.00
7/18
19,922,000.00
7/18
5,726,135.26
7/18
495,169.08
7/18
640,000.00
7/18
430,000.00
7/18
600,000.00
7/18
5,900,000.00
7/18
1,130,000.00
7/18
4,069,000.00
7/18
8,126,000.00
7A8
600,000.00
7/19
439,000.00
7/22
680,000.00
7/22
10,173,500.00
7/22
1,026,500.00
7/22
752,000.00
7/22
340,000.00
7/22
1,683,000.00
7/22
1,193,000.00
7/23
1,019,000.00
7/24
265,000.00
7/24
215,000.00
7/24
445,000.00
7/24
885,000.00
7/26
9,215,000.00
7/26
136,000.00
7/29
953,000.00
7/29
820,000.00
7/30
7,521,000.00
7/31
29,000.00
7/31
1,045,000.00
7/31
551,000.00
7/31
1,099,000.00
7/31
226,000.00
7/31
1,000,000.00

7/15/87
1/2/18
12/31/15
12/31/19
7/17/88
1/2A8
1/2/18
1/2/18
7/20/87
1/2/18
9/30/87
12/31/19
12/31/15
12/31/15
12/31/14
12/31/16
12/31/16
12/31/19
12/31/19
12/31/16
12/31/16
12/31/15
1/2/18
12/31/15
9/30/87
9/30/87
1/2/18
12/31/17
12/31/17
12/31/15
12/31/19
9/30/87
12/31/10
12/31/12
7/24/87
1/3/17
9/30/87
12/3/85
1/2/18
9/30/87
12/31/19
12/31/16
12/31/15
12/3/85
12/3/85
9/30/87

10.597%
8.905%
10.597%
10.603%
10.535%
9.195%
10.538%
10.538%
10.538%
8.765%
10.508%
8.823%
10.495%
10.506%
10.516%
10.519%
10.508%
10.508%
10.494%
10.495%
10.508%
10.508%
10.512%
10.665%
10.670%
9.045%
9.065%
10.705%
10.705%
10.705%
10.712%
10.784%
9.185%
10.685%
10.694%
9.105%
10.857%
9.164%
7.695%
10.925%
9.255%
10.960%
10.882%
10.885%
7.755%
7.755%
9.251%

7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00

10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%

SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
No. Oklahoma S.B.D. Corp. 7/10
Gr. Eastern Oregon Dev. Corp. 7/10
Cleveland Area Dev. Fin. Corp. 7/10
City-Wide Sm. Bus. Dev. Corp. 7/10
Louisville Ec. Dev. Corp.
7/10
Middle Monongahela I.D.A.
7/10
Cleveland Area Dev. Fin. Corp. 7/10
Kansas City Corp. for Ind. Dev.7/10
South Dakota Dev. Corp.
7/10
South Shore Economic Dev. Corp.7/10

*maturity extension

48,000.00
53,000.00
71,000.00
76,000.00
79,000.00
105,000.00
126,000.00
158,000.00
168,000.00
189,000.00

10.460% qtr.
8.808% rrtr.
10.460% qtr.
10.466% qtr.
10.398% qtr.
9.092% qtr.
10.403% qtr.
10.403% qtr.
10.403% qtr.
8.671% qtr.
10.373% qtr.
8.728% qtr.
10.361% qtr.
10.372% qtr.
10.381% qtr.
10.384% qtr.
10.373% qtr.
10.373% qtr.
10.360% qtr.
10.361% qtr.
10.373% qtr.
10.373% qtr.
10.377% qtr.
10.526% atr.
10.531% qtr.
8.945% qtr.
8.965% qtr.
10.565% qtr.
10.565% qtr.
10.565% qtr.
10.572% qtr.
10.642% qtr.
9.082% qtr.
10.546% qtr.
10.555% qtr.
9.004% qtr.
10.714% qtr.
9.061% qtr.
7.644% qtr.
10.780% qtr.
9.150% qtr.
10.814% qtr.
10.738% qtr.
10.741% qtr.
7.704* qtr.
7.704% qtr.
9.146% qtr.

Page 6 of 8
FEDERAL FINANCING BANK
JULY 1985 ACTIVITY

BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

State & Local Development Company Debentures (Cont'd)
Greater Pocatello Dev. Corp.
7/10
Ohio Statewide Dev. Corp.
7/10
Georgia Mountains Reg. E.D.C. 7/10
Atlanta Local Dev. Co.
7/10
Evergreen Community Dev. Assoc.7/10
Gr. Metro. Chicago Dev. Corp. 7/10
St. Joseph County CDC
7/10
Chester County S.B.A. Corp.
7/10
Corp. for B.A. in New Jersey
7/10
Montgomery County B.D.C.
7A0
Gr. Metro. Chicago Dev. Corp. 7/10
St. Louis Local Dev. Co.
7A0
Gr. Southwest Kansas CDC
7/10
Mentor Econ. Assistance Corp. 7/10
St. Louis L.D.C.
7/10
St. Louis L.D.C.
7/10
St. Louis County L.D.C.
7/10
St. Louis L.D.C.
7/10
Sowega Economic Dev. Corp.
7/10
Oakland County Local Dev. Co. 7/10
Nine County Dev., Inc.
7/10
Sm. Business Services, Inc.
7/10
Provo Metropolitan CDC
7/10
Columbus Countywide Dev. Corp. 7/10
Oakland County Local Dev. Co. 7/10
Enterprise Dev.,Corp.
7/10
Cascades W. Fin. Services, Inc.7/10
Covington First Dev. Corp.
7/10
Hamilton County Dev. Co., Inc. 7/10
Chicago Industrial Fin. Corp. 7/10
Provo Metropolitan CDC
7/10
Treasure Valley CDC
7/10
Greater Southwest Kansas CDC
7/10
Birmingham City Wide Dev. Co. 7/10
Ocean State B.D.A., Inc.
7/10
San Diego County L.D.C.
7/10
St. Louis County L.D.C.
7/10
Treasure Valley C.D.C.
7/10
E.D.F. of Sacramento, Inc.
7/10
Provo Metropolitan Dev. Co.
7/10
Gr. Salt Lake Bus. Dis.
7/10
Evergreen Community Dev. Assoc.7/10
Los Angeles LDC, Inc.
7/10
San Francisco Indus. Dev. Fund 7/10
Verd-Ark-Ca Dev.. Corp.
7/10
Milwaukee Ec. Dev. Corp.
7/10
Enterprise Dev. Corp.
7/10
Long Island Dev. Corp.
7/10
Long Island Dev. Corp.
7/10
San Diego County L.D.C.
7/10
Evergreen Community Dev. Assoc.7/10
Michigan Cert. Dev. Corp.
7/10
Columbus Countywide Dev. Corp. 7/10
Metro. Growth & Dev. Corp.
7/10
Cen. Vermont Ec. Dev. Corp.
7/10
Phoenix Local Dev. Corp.
7/10
Alabama Community Dev. Corp.
7/10
Corp. of E.D. in Des Moines
7/10
Warren Redev. & Plan. Corp.
7/10
Treasure Valley C.D.C.
7/10
Wilmington Local Dev. Corp.
7/10
Gr. Muskegon Indus. Fund, Inc. 7/10
Central Ozarks Dev., Inc.
7/10
Southern Dev. Council, Inc.
7/10
Nevada State Dev. Corp.
7/10
The Southern Dev. Council, Inc.7/10
San Diego County L.D.C.
7/10

$ 194,000.00
215,000.00
218,000.00
256,000.00
315,000.00
353,000.00
404,000.00
498,000.00
500,000.00
500,000.00
500,000.00
18,000.00
20,000.00
32,000.00
42,000.00
42,000.00
44,000.00
45,000.00
48,000.00
49,000.00
63,000.00
65,000.00
76,000.00
77,000.00
86,000.00
87,000.00
88,000.00
104,000.00
105,00'0.00
112,000.00
117,000.00
121,000.00
126,000.00
166,000.00
168,000.00
181,000.00
185,000.00
187,000.00
188,000.00
198,000.00
204,000.00
205,000.00
208,000.00
231,000.00
232,000.00
252,000.00
273,000.00
300,000.00
335,000.00
340,000.00
385,000.00
409,000.00
420,000.00
481,000.00
500,000.00
500,000.00
500,000.00
43,000.00
47,000.00
67,000.00
70,000.00
71,000.00
74,000.00
80,000.00
83,000.00
97,000.00
102,000.00

7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/00
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7A / 0 5
7/1/05
7/1/05
7/1/05
7A / 0 5
7/1/05
7A / 0 5
7/1/05
7A/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7A/05
7/1/05
7A/05
7/1/05
7/1/05
7/1/05
7A / 0 5
7/1/05
7A / 0 5
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7/1/05
7A / 0 5
7/1/10
7/1A o
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10

10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.133%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.343%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%

INTEREST
RATE
(other than
semi-annual)

Page 7 of 8
FEDERAL FINANCING BANK
JULY 1985 ACTIVITY
BORROWER

DATE

AMOUNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

State & Local Development Company Debenture (Cont'd)
New Haven Com. Investment Corp.7A0
BEDCO Development Corp.
7/10
Corp. for B.A. in New Jersey
7A0
S. Cen. Tennessee B.D.C.
7/10
Community E.D.C. of Colorado
7/10
Charlotte Cert. Dev. Corp.
7/10
Texas Panhandle Reg. Dev. Corp.7A0
Allen town Ec. Dev. Corp.
7/10
Arrowhead Reg. Dev. Corp.
7/10
Union City Ec. Dev. Corp.
7/10
St. Louis Local Dev. Corp.
7/10
Chicago Indus. Finance Corp.
7/10
Corp. for B.A. in New Jersey
7/10
Gr. Spokane Bus. Dev. Assoc.
7/10
1st District Development Corp. 7 A 0
San Diego County L.D.C.
7/10
South Shore Ec. Dev. Corp.
7A0
Bay Colony Dev. Corp.
7/10
Seda-Cog Local Dev. Corp.
7A0
Massachusetts Cert. Dev. Corp. 7/10
Kisatchie-Delta RP&D Dis., Inc.7/10
Gr. Eastern Oregon Dev. Corp. 7/10
Railbelt Community Dev. Corp. 7 A 0
Bay Area Bus. Dev. Company
7/10
Evergreen Community Dev. Assoc.7A0

; 109,
000.00
112,000.00
114,000.00
126,000.00
139,000.00
147,000.00
156,000.00
181,000.00
181,000.00
186,000.00
189,000.00
192,000.00
221,000.00
236,000.00
244,000.00
253,000.00
257,000.00
265,000.00
436,000.00
474,000.00
483,000.00
498,000.00
500,000.00
500,000.00
500,000.00

7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7AA0
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1A0
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10
7/1/10

10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.4461
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%
10.446%

Small Business Investment Company Debentures
Brantman Capital Corp.
7/24
Marcon Capital Corporation
7/24
Albuquerque Small Bus. Inv. Co.7/24
Jupiter Partners
7/24
Ritter Partners
7/24
Alliance Bus. Investment Co. 7/24
Bus. Cap. Corp. of Arlington
7/24
California Cap. Investors, Ltd.7/24
Clinton Capital Corp.
7/24
Enterprise Capital Corp.
7/24
Gold Coast Capital Corp.
7/24
J & D Capital Corporation
7/24
Jupiter Partners
7/24
Kitty Hawk Capital, Ltd.
7/24
Norwest Growth Fund, Inc.
7/24
Red River Ventures, Inc.
7/24
Ritter Partners
7/24
Shared Ventures, Inc.
7/24
United Mercantile Cap. Corp.
7/24

150,000.00
450,000.00
250,000.00
500,000.00
500,000.00
710,000.00
300,000.00
600,000.00
1,500,000.00
1,550,000.00
200,000.00
300,000.00
500,000.00
1,500,000.00
1,000,000.00
500,000.00
500,000.00
300,000.00
300,000.00

7/1/88
7/1/90
7/1/92
7/1/92
7/1/92
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95
7/1/95

9.485%
9.985%
10.425%
10.425%
10.425%
10.585%
10,585%
10.585%
10.585%
10.585%
10.585%
10.585%
10.585%
10.585%
10.585?
10.585%
10.585%
10.585%
10.585%

TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
•Note A-85-10 7/31

471,945,498.61

10/31/85

7.625%

Maturity extension

FEDERAL FINANCING BANK
JULY 1985 Commitments

BORROWER
Brownsville, TX
Montgomery, PA
Alaska Electric

GUARANTOR

AMOUNT

HUD
HUD
REA

$ 1,200,000.00
4,000,000.00
18,120,000.00

COMMITMENT
EXPIRES
9/1/86
5/15/87
7/24/90

MAT'-ZRITY
9 1 '^2
5 15/93
12/31 16

Page 8 of 8
iT.n

Program

July 31, 1985

FINANCING BANK IIOIJ)INGS
(in millions)
June 30, 1985

Net Change
7/1/85-7/31/85

Net Change—FY 1985
10/1/84-7/31/85

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

$ 14,463.0
15,728.8
-. Tl^.2

;

$ 14,750.0 R
15,728.8
219.5 R

$ -287.0
-0^
/. 5.7

$"1,028.0
38.9
- -43.6 .,

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

720.0
73.U

720.0
73.8

-0-L-

63,546.0
109.0
126.1
6.1
3,536.7
33.8

62,606.0
112.2
132.0

940.0
-3.3
-5.8

6.1

-0-0-

18,087.3
5,000.0
12.4
1,536.9
292.8
33.5
2,146.2
408.6
35.6
28.2
887.6
1,003.2
5.4
60.0
21,364.1
980.5
565.3
1,611.4
153.6
177.0

17,993.4
5,000.0
12.4
1,466.5
268.1 R
33.5
2,146.2
408.6
35.6
28.3
887.6
1,060.8

-367.0
22.5t

Agency Assets
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration

3,536.7
34.5

4,035.0
-7.1
-5.8
-4.8

-0-

-0.6

-6.3

94.0

976.4

-0-0-

-06.2

70.4
24.7

246.9
84.5

Government-Guaranteed Lending
DOD-Foreign Military Sales
DEd.-Stuaent Loan Marketing Assn.
DOE-Geothermal Loan Uiarantees
DOE-Non-Nuclear Act (Great Plains)
DHUD-Community Dev. Block Grant
DHUD-New Communities
DHUD-Public Housing Notes
General Services Administration
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co.
DON-Ship Lease Financing
DON-Defense Production Act
Oregon veteran's Housing
Rural Electrification Admin.
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
TOTALS^ $ 152,958.2
•figures may not total due to rounding
treflects adjustment for capitalized interest
R = revised

5.1
60.0
21,182.5
974.6
546.0
1,611.9
153.6
177.0
$ 151,971.2 R

_o_
-0-0-0-

-0.1

-0-57.5

0.3
-0181.6

5.9
19.3
-0.5

-0-0$ 987.0

-0-32.3
-4.7
-0.4
-0.5
-67.0
1,003.2

2.3
60.0
777.1
120.2
210.7
55.9
-6.0

-0$ 8,122.1

TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone

For Release Upon Delivery
Expected at 10:00, E.D.T.
September 16, 1985
STATEMENT OF
J. ROGER MENTZ
DEPUTY ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE SUBCOMMITTEE ON TAXATION
AND DEBT MANAGEMENT
OF THE SENATE COMMITTEE ON FINANCE
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to discuss
S.376, the "Child Health Incentives Reform Plan." This bill
would amend the Internal Revenue Code to disallow an employer
a deduction for expenses relating to a group health plan
unless such plan includes preventive health care for the
children of employees. For the reasons stated below, the
Treasury Department does not support this proposal.
Current Law
The Federal tax law provides tax advantages designed to
encourage an employer to provide, and employees to accept, a
portion of compensation in the form of health insurance.
More specifically, under current law, an employer's
contributions to a group health plan for its employees and
benefits and reimbursements provided under such a plan are
excluded from an employee's income and wages for Federal
income tax and employment tax purposes. In addition, an
employer may deduct the cost of these excludable
contributions and benefits.
The tax law generally does not currently constrain
employer and employee flexibility in the design of employer
health plans. The only constraints include the following :
(i) an employer may not deduct health plan expenses if the
plan differentiates in its benefits on the basis of whether
an individual has end stage renal disease; (ii) a highly
compensated employee may not exclude from gross income a
benefit provided under a self-insured health plan unless the
B-278

2041

-2plan satisfies certain nondiscrimination requirements; and
(iii) an employee may not exclude from gross income a benefit
or reimbursement provided under a health plan (whether or not
self-insured) unless the benefit or reimbursement is for the
"medical care" of the employee, his or her spouse, and his or
her dependents.' "Medical care" is defined for this purpose
to include the diagnosis, cure, mitigation, treatment, or
prevention of disease, or for the purpose of affecting any
structure or function of the body.
Thus, under current tax law an employer may choose to
maintain or not to maintain a group health plan for its
employees. An employer that chooses to maintain a plan, with
the exception of satisfying any applicable nondiscrimination
rules, may determine which health services and expenses are
covered, the appropriate level of deductible and co-payment
requirements for each type of expense, the extent to which
covered expenses should be restricted to selected health
providers, the benefit options that should be made available
to employees, and how costs should be allocated between the
employer and employees. Of course, employees are able to
affect an employer's decisions on these and related questions
through the labor market and the collective bargaining
process. Also, an employee may be able to design his or her
own health benefit package through a cafeteria plan.
S.376: The Child Health Incentives Reform Plan
The Child Health Incentives Reform Plan would require
that an employer-maintained group health plan provide
employees with coverage for "pediatric preventive health
care" as a condition of the employer's deduction for any
expenses related to such plan. This rule would apply without
regard to whether the employer's health expenses are in the
form of payments to an insurance company or health services
provider (including a health maintenance organization),
contributions to a welfare benefit fund, or direct
reimbursements to employees.
Under the bill, "pediatric preventive health care" would
include the following types of periodic care provided to
children under the age of 21: determinations of health and
development history, comprehensive unclothed physical
examinations, developmental and behavioral assessments,
immunizations appropriate for age, health, and developmental
history, laboratory procedures appropriate for age and
population groups, and appropriate vision and hearing testing
and referral for treatment as necessary. in addition, the
bill permits the Treasury Department to require by
regulation, after consulting with the Secretary of Health and
.Human Services and appropriate child care medical
organizations, that a plan provide additional types of
pediatric preventive care.

--3-

Discussion
The Treasury Department does not support the proposed
legislation. With the exception of requiring that an
employer health plan satisfy appropriate nondiscrimination
rules, we do not believe that the Federal government should
use the tax system to regulate group health plans provided by
employers for employees. (On the nondiscrimination issue, as
part of Fundamental Tax Reform, the President has proposed
that uniform nondiscrimination rules apply to all tax-favored
welfare benefits, including tax-favored health benefits
provided under a contract with an insurance company.)
More specifically, we do not believe that substituting
the view of the Federal government, no matter how well
intentioned, for the choices of employers and employees about
the benefits to be provided under employer health plans will
result in a more optimal allocation of compensation and
health benefits. In addition, we are concerned that imposing
the Federal government's view of a proper employer health
plan may impair the flexibility that is so important to the
maintenance of an effective and cost efficient health care
system. Finally, Federal regulation through the tax system
of the benefits to be provided in employer health plans would
likely be both duplicative of and inconsistent with state
regulation of health insurance.
We recognize that pediatric preventive care may be an
important form of health coverage, and that many argue that
the broad provision of such care would result in significant
long-term health benefits. (We of course are not equipped to
evaluate many of these issues, and thus on the pure health
questions we defer to the Department of Health and Human
Services.) However, such a step by Congress in the
regulation of health care provided by employers would make it
very difficult for Congress to avoid broader imposition of
mandatory health benefit provisions in the tax law.
In our view, the Federal government should not mandate
that employer health plans provide any particular types of
benefits and thus interfere with the decisions of employers
and employees about the forms in which compensation should be
provided and about the types and levels of benefits that
should be provided under health plans. Certain employers and
employees will decide that they prefer increased cash
compensation over increased health coverage. Also, employers
and employees will conclude that, within their cost
constraints, one particular type of health coverage is more
important than another. For example, an employer and its
employees may well prefer to spend the health care dollars on
catastrophic coverage rather than on lower deductible and
co-payment requirements for other health expenses. Another
employer and its employees may prefer to purchase increased
preventive care coverage in exchange for reduced catastrophic

-4coverage or for higher deductibles. Because employers and
employees have different compensation, health, and cost needs
and constraints, decisions about the appropriate mix and
levels of particular forms of compensation, including types
of health benefits, are most appropriately made at the
employer and employee levels.
We do not believe that the provision of tax advantages
with respect to employer health plans justifies the Federal
government mandating that such plans provide particular types
of health benefits. Through the existing tax incentives,
Congress has expressed its policy view that employers should
be encouraged to provide a portion of employees' compensation
in the form of health benefits. The result has been the
successful extension of health coverage to a large portion of
this country's employees. It would be in our view a
distortion of the original policy of the current tax
advantages for the Federal government to substitute its
determination of the proper mix among health benefits for the
decisions of employers and employees.
In addition, we are concerned that increased Federal
regulation of employer health plans of the type proposed in
S.376 would interfere with the flexibility that is so crucial
to an effective health care system. Medical technology and
practice are rapidly changing, and health costs are not
easily predictable or controllable. Flexibility thus is
crucial to the maintanence of a health plan that delivers the
proper mix and levels of health benefits in a cost effective
manner. In our view, mandating types of health benefits
would limit this flexibility and inhibit both technological
and practice innovations and cost containment efforts, many
of which may well be consistent with prudent health and
economic policy, and thus would likely harm the overall
quality of the group health system.
Furthermore, in our view, for the Federal government to
embark on the path of conditioning an employer's deduction of
compensatory health-related expenses on the provision of
particular types of benefits would be an intrusion into an
area of responsibility already delegated to the states.
Several states currently regulate the insurance contracts
under which health benefits may be provided to employees by
requiring that such contracts provide certain types of
coverage, e.g., coverage for children beginning at birth,
rather than shortly after birth, and coverage for services
rendered by a particular type of health provider. Congress'
desire that the Federal government not interfere with state
regulation in this area is expressed in various laws,
including the McCarran-Ferguson Act, the Employee Retirement
Income Security Act of 1974, and the National Labor Relations
Act. Unless the states' authority to regulate health
insurance is preempted, Federal regulation would result in a
second layer of mandated benefits, which would inevitably be
duplicative of and inconsistent with state reaulation.

-5Federal preemption of course should not be undertaken without
a full examination of the benefits currently provided to
employees, the current extent of state regulation, and the
various health, economic, and tax policies that would be
affected by Federal preemption and regulation.
The proposed legislation contains several technical
uncertainties that require clarification. For instance, the
bill requires a plan to provide pediatric preventive health
care to any child who has not attained the age of 21. We
assume that this requirement would be satisfied if the plan
provided pediatric preventive care to only the children of
those employees who participate in the plan. How is this
rule intended to apply, however, if the plan does not provide
family coverage, but rather only coverage for the employees?
In addition, is the requirement satisfied if pediatric
preventive care is available under the plan, but some
employees with children elect not to purchase this benefit?
Another uncertain aspect of the bill is whether a health
plan could apply a deductible or co-payment requirement with
respect to pediatric preventive care? Would a plan satisfy
the proposed rule if only pediatric preventive care expenses
in excess of $100 were covered? What about a plan that did
not have a separate deductible for pediatric preventive care,
but rather contained a $100 or $200 deductible for all health
benefits, including pediatric preventive care? Analogous
issue arise with respect to co-payment requirements.
Finally, the bill does not in our view adequately
describe the various types of medical services that are to be
considered pediatric preventive health care. For example,
the most frequently used term in the bill is "appropriate,"
a term that provides little guidance. We recognize that it
is difficult to describe the specific types of preventive
care that a health plan should provide; the health field is a
dynamic one and concrete descriptions risk becoming outdated
in a very short time. Indeed, the dynamism of the health
field is one of the principal reasons that we do not believe
the approach of S.376 is either workable or prudent.
Nevertheless, if the approach of S.376 is to be undertaken,
additional specificity of description is necessary.
In conclusion, for the various policy reasons set forth
above, the Treasury Department does not support the enactment
of S.376.

TREASURY NEWS
iepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
September 17, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $9,000 million, to be issued September 26, 1985. This
offering will result in a paydown for the Treasury of about $5,100
million, as the maturing bills are outstanding in the amount of
$14,093 million. The size of this offering has been reduced from
recent levels in order to ensure that the current debt ceiling is
not exceeded. Tenders will be received at Federal Reserve Banks
and Branches and at the Bureau of the Public Debt, Washington, D. C.
20239, prior to 1:00 p.m., Eastern Daylight Saving time, Monday,
September 23, 1985. The two series offered are as follows:
91-day bills (to maturity date) for approximately $4,500
million, representing an additional amount of bills dated
December 27, 19 84, and to mature December 26, 1985 (CUSIP No.
912794 HQ 0 ) , currently outstanding in the amount of $15,626 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $4,500 million, to be
dated September 26, 1985, and to mature March 27, 1986 (CUSIP
No. 912794 JY 1 ) .
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing September 26, 1985. Tenders from Federal Reserve
Banks for their own account and as agents for foreign and international monetary authorities will be accepted at the weighted
average bank discount rates 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. Federal Reserve
Banks currently hold $1,593 million as agents for foreign and international monetary authorities, and $2,743 million for their own
account. Tenders for bills to be maintained on the book-entry
records of the Department of the Treasury should be submitted on Form
PD 4632-2 (for 26-week series) or Form PD 4632-3 (for 13-week series).
B-279

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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 oill being offered exceeds $200 million.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

4/85

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
September 17, 1985
TREASURY POSTPONES AUCTIONS OF 4-YEAR NOTES,
7-YEAR NOTES, AND 20-YEAR 1-MONTH BONDS
The Department of the Treasury stated today that the
auctions of 4-year notes, 7-year notes, and 20-year 1-month
bonds, which would normally be held next week, have been postponed pending Congressional action on the debt limit bill.
Interested investors are requested to look for notice of
the scheduling of these auctions in the financial press or to
contact their local Federal Reserve Bank for such information.
oOo

B-280

rREASURY NEWS
partment of the Treasury • Washington, D.C. • Telephone 566-2041

Statement by
The Honorable
David C. Mulford
Assistant Secretary of the Treasury
for International Affairs
Before the
Subcommittee on Foreign Operations
Committee on Appropriations
United States Senate
September 18, 1985
Environmental Aspects
of Multilateral Development bank Operations
Mr. Chairman and Members of the Committee, I appreciate
the opportunity to discuss with you the environmental aspects
of the multilateral development bank (MDB) lending operations.
The MDBs are important to U.S. foreign policy as the single
largest source of development assistance in the world, but
in the environmental area their pertormance has been mixed.
After describing our perception of the pattern of project
problems that have come to light, I will outline the institutional
shortcomings which the MDBs appear to share at this time and
discuss some steps that might be taken in the future.
At the outset, I should make clear that the Treasury
Department is not an agency of government charged with
maintaining a full scale professional capability to manage
the possible environmental issues. We have approached the
set of issues that I will be describing in a laymen's way,
while drawing on the competence which resides in other U.S.
agencies and in public interest organizations.
B-281

- 2 Our attention has been forcefully drawn to the environmental implications of MDB projects by a series of hearings
in the Conyress over the last two years and by the energetic
efforts of spectrum of U.S. environmental organizations.
This Committee has held hearings and expressed forceful
concern over these issues. The breadth and intensity of
public and Congressional interest appears to us consistent
with the severity of the problems we have encountered.
Our objective is to encourage the MDBs themselves to
strengthen their in-house capability to manage these issues,
so that the intense attention which has been devoted to this
subject in the last two years becomes superfluous and can be
diminished.
The Pattern of Environmental Problems
Three traditional areas of MDB lending have been the
focus of attention: hydroelectric and multi-purpose dam
projects in tropical regions, penetration road projects into
relatively uninhabited regions and agriculture and rural
development projects. Projects in these sectors have involved
significant effects on human health and on the management of
natural resources in countries which borrow from the MDbs.
While occasionally our attention has been drawn to environmental
issues in other lending sectors — for example, the management
of municipal pollution and cross-border effects on neigboring
countries in connection with water and sewage projects — these
have not been the subject of intense concern in the public
discussion of the last two years to which we are addressing
ourselves here today.
Large impoundments of rivers in tropical countries — whether
for hydroelectric, irrigation, flood control or other purposes —
are substantial investments. Project cost is rarely less than
$100 million and often involves many billions of dollars. During
fiscal year 1984, the MDBs approved ten projects related to dam
construction, which accounted for $1,262.3 million, or about six
percent of total commitments.
The environmental problems associated with water impoundments in tropical regions have been serious and several. These
include deterioration of water quality, siltation problems, and
threats to human health and well-being.
When the lush vegetation of tropical forests has been left
in an impoundment and the reservoir of water is subsequently
filled, the vegetable matter undergoes slow decay underwater
with a minimum of oxygen availability. These conditions can
lead to a severe deterioration in water quality, affecting
power generation equipment as well as the usefulness of

- 3 water for irrigation and human consumption. In extreme
conditions, a large impoundment with decaying vegetation and
relatively small amounts of water entering and leaving the
reservoir can develop into an ideal growing area for prolific
water plants, such as water hyacinth or water lettuce. These
plants can deprive fish of oxygen, curtailing any incidental
fishery benefits that might have been envisioned for a project,
and can become entangled in power generation equipment,
substantially increasing maintenance and replacement costs.
An appropriate mitigatory measure to avoid these water quality
problems is to remove the existing vegetation prior to filliny
the reservoir. In cases where the cost of completely clearing
a reservoir area would be prohibitive, removing a substantial
portion may suffice to ensure appropriate water quality.
The most dramatic examples of impoundments with water
quality problems are now several decades old, but the associated
costs remain severe. Frequent replacement of power generating
equipment and expensive, repetitive removal of floating
vegetation can significantly reduce the expected benefits
from the project. The Kariba Dam in Zambia, partially financed
by an $80 million IBRD loan in 1956, and the Volta Hydroelectric
Development project, partially supported by a 1961 $47 million
IBRD loan, are examples.
More currently, a large hydroelectric dam project on the
Sinu River in Colombia, known as Urra II and under discussion
in the IBRD and IDB over the last four years, would raise
similar water quality concerns. The Colombia project was
recently deferred for financial reasons. During the planning
process, the IDB has estimated that 20 percent vegetation
removal from the reservoir basin would be adequate, although
water quality problems would remain.
The MDBs and the international civil engineering community
are aware of the problems which can occur when veyetation is
not removed from a reservoir, but the cost of the undertaking
in remote areas sometimes encourages runniny some risks with
the expectation that the body of water will be purified as
time passes.
A second problem associate-1 with impoundment projects is
siltation. If the watershed surrounding the river system
feeding a reservoir is not protected, there is a severe risk
that the heavy rains often occuring in tropical regions
will lead to soil erosion, carryiny sediment into the
reservoir and turniny an impoundment into a larye mud puddle.
The useful life of hydroelectric generating facilities can
be drastically curtailed, unless an expensive investment in
dredging the reservoir is undertaken. An appropriate mitigatory
measure is to ensure that land use in the river basin is
limited to activities that retain vegetation which holds the
topsoil. selective forest industries, appropriate agro-forest
industries, or preservation in national parks or forests are
uses that can provide effective watershed protection.

- 4 Siltation has shortened the effective life of some
dams, but has more frequently led to costly efforts to offset
neyative effects. The classic case is the 1953 $3.5 million
IBRD loan for the Anchicaya hydroelectric dam in Colombia.
The dam was virtually unusable because of siltation only
seven years after completion and has since been abandoned.
in more recent years, projects have continued to be put
forward for funding without provisions to ensure adequate
watershed protection. Although the severity of the problem
is often acknowledged through the inclusion of a requirement
for the future formulation of a watershed protection plan,
such a plan is rarely in place prior to project approval and
is frequently delayed, risking the productivity of the project.
The 1979 IDB loan to finance construction of the Paute
hydroelectric dam in Ecuador recognized a severe siltation
problem which would render the facility unusable in about
seven years if unaddressed. The plan in 1979 was to build a
dam upstream with a larger reservoir capacity to trap the
silt. Construction of the Paute dam has not yet been completed,
but plans for the upstream dam appear to have been shelved.
A 1984 IDB project to finance several elements of hydroelectric
production in the Dominican Republic, including the Tavera
dam, required the development of a watershed protection plan
during dam construction, but land acquisition may be a problem.
The risk in a significant delay in formulation and implementation
of the watershed plan is that current siltation levels would
lead to interference in electrical production within twelve
years of dam completion.
A third set of problems associated with impoundments
has been the severe effects on human health and well-being
from some projects. The still waters associated with reservoirs
are often ideal breeding grounds for the snail that acts as
the intermediary host for the shistosomiasis bacteria. Since
the disease affects some 250 million people in the tropics
worldwide, its incidence ought to be a systematically examined
aspect of dam planning. Onchocerciasis, or river blindness,
has also been associated with d^m construction in the tropics.
Measures to control the incidence of these diseases require
planning and steady application; cures are uncertain and
expensive.
The IBRD and AFDB supported the Nangbeto dam project in
Togo which was approved in 1984 and was expected to yield an
increase in the incidence of shistosomiasis. While a study
of health needs was included in the project proposal, completion
of such studies prior to project approval would have been
preferable with the needed mitigatory measures identified
and necessary funding included.

- 5 A second major effect of dam projects on human well being
is the requirement to resettle the inhabitants of areas to
be flooded by creation of the reservoir. Such resettlement —
typically of small rural farmers and often of ethnic or cultural
minorities — can be socially and politically disruptive unless
planned and executed with care.
In March 1985, the IBRD Board approved the first of several
projects for the water development of the Narmada River Basin
in the west of India. More than 150,000 persons — many
minority group members — will require relocation. bank and
Indian Government planning for relocation has been extensive.
However, available information suggests that provisions to
deal with those who own no land — a sizable portion of the
population — may not be adequate; the provisions consist of
a requirement that the state governments find suitable employment. Press reports this summer indicate continuing severe
unrest related to the treatment of the minority groups to be
displaced. in the El Cajon dam project in Honduras, supported
by the IBRD and IDB, relocation was delayed for four years
and the approximately one thousand families were finally
moved about one year ago -- only days before the dam was to
close and the reservoir began filliny.
By contrast, in the IDB-supported Colbun-Machicura
dam in Chile, the purchase of land from and resettlement of
approximately 100 families was well underway at the time
of project approval in 1984 — an example of the kind of
approach we would prefer seeing.
Penetration roads into relatively undeveloped areas are
typically evaluated in MDB loan proposals on the basis of
economic savings to those who use existing transportation
system. Estimates of future use rarely assume significant
changes in economic activity. By contrast, experience
suggests that penetration roads will often ignite spontaneous
migration from other parts of a country which can lead to
substantial agriculture, forestry or other economic activities,
often inconsistent with sustainable resource use. When such
situations are likely, a more elaborate regional planniny
strategy, encompassing the full range of economic and social
sectors, is needed -- and may yet fall short of rational
resource use in the absence of full participation by the
public and private interests afffected by in the project.
In 1984, there were 13 projects with approximately $425
million in MDB financing which were primarily designed to
open new areas. The 1984 total may not be typical of past
years since a substantial proportion of transport sector
commitments was allocated to maintenance of existing road
systems.

- 6 The IBRD supported road through the state of Rondonia in
Northwest Brazil, with which this Committee is very familiar,
and the IDB supported road project in the neighboring state
of Acre are projects where severe problems were anticipated
and, indeed, have already arisen. In both cases, while the
potential problems were acknowledged at the time of project
approval, substantial doubts about successful implementation
remained and, in retrospect, should have been heeded. Implementation of needed agriculture, forestry, health and Indian
protection measures should have preceeded road construction
by several years to cope with the pressures from the population
influx.
Agriculture and rural development projects raise a range
of natural resource use and human health issues: top soil
management, irrigation projects associated with water-loyginy,
salinization and the spread of water-borne diseases, and
pesticide use that exceeds the farmer's training in safe
application. Agriculture represented about 40 percent of
total MDB lending in recent years. While all agriculture
projects do not involve environmental issues, the frequency
is high and the institutional capacity of borrowing
countries to manage the issues is often unadoressed.
The series of "transmigration" projects in Indonesia
over many which are designed to resettle farmers from densely
populated Java and Bali to the outer islands have been supported
most recently by a June 1985 $160 million IBRD loan and an
October 1984 $60 million ADB livestock project. The tundamental
problem with the transmigration effort is that agricultural
practices used in the rich volcanic soils of Java tend to be
transferred with the settlers to the poor soils of the outer
islands. Since the soils are poor, the farmer clears a new
plot when yields drop and leaves barren yround behind. The
resulting deforestation and soil erosion has substantially
reduced the productivity of substantial tracts in the outer
islands. The projects have also sometimes involved the
removal of ethnically distinct minorities from lands where
The IBRD
transmigration
project hunting
was primarily
for soil
traditional
agricultural
practices,
and gathering
mpermitted
appmg and
lead economic
to an information
a should
sustainable
system. base that may
provide far better policy guidance in the future. The ADB
project financed draft livestock which will likely be used
for annual crop production — an inappropriate land use in
most parts of the target island of Kalimantan.

- 7 An August 1984 $150 million IBRD loan to the Philippines
to finance needed imports included substantial amounts for
pesticides. By coincidence, in September, a researcher from
the International Rice Institute in Manila testified before
a Congressional committee regarding the correlation between
the twice yearly application of pesticides in a rural area
of the Philippines and sharp upswings in the incidence of
serious illnesses among working age males in the area. The
safety procedures used in pesticide application are thought
responsible. In any case, the loan proposal did not include
any discussion of the adequacy of pesticide training through
the Philippine agricultural extension service.
While a fair number of MDB-supported irrigation projects
have been associated an increased incidence of water-borne
diseases, such as shistosomiasis, the IBRD in 1984 reported
on an already completed 1977 project in Morocco which was
associated with a decline in the incidence of this disease
because the irrigation canals were covered and the snail
intermediary vector was cut off from feeding on vegetation
along the canal banks. The construction technique, while
expensive, had the added benefit of reducing water loss
from evaporation in the dry Moroccan climate.
Is there an institutional problem in the MDBs?
The Treasury Department has been troubled by the environmental aspects of loan proposals sufficiently frequently to
conclude that a problem exists. Almost invariably, MDB
project staff are familiar with the nature of these environmental problems and with their incidence in various parts of
the world. The MDBs generally have favorable salary structures
and recruit widely to obtain quality staff. Staff training,
while valuable to ensure broad understanding throughout the
institution, and additional staff, while in instances appropriate,
do not seem to us the principal needs.
Occasionally, we are told that borrowing governments
resist environmental measures in projects and the MDBs can
not force borrowers to do what they do not want to do. While
these conditions may hold on occasion, it seems to us that
at least some elements of borrowing governments are frequently
charged with specific responsibility for environmental protection
and that these elements, if brought into the project preparation
and implementation process, would usually be quite supportive
of appropriate environmental components in projects. The MDBs
could often ask such agencies to implement project components
in borrowing countries. Thus, this argument, while possibly
valid at certain times and certain places, would not seem to
justify accepting the performance in development projects
that we are seeing.

- 8 The problem seems to us to lie in another direction.
The Administration's 1982 assessment concluded that the
MDBs tend to overemphasize the quantity of lending rather
than the quality. We suspect that the problems encountered
in the envronmental aspects of projects may be an instance
of such an overemphasis. If environmental considerations
threaten expeditious project processing, the environment
is assigned low priority and is left to be dealt with later.
The notion that a hydroelectric dam would be presented
to an MDB Board without completed engineering plans would be
unacceptable. Yet, we frequently are asked to evaluate loan
proposals for our Executive Directors where the watershed
protection plan remains to be studied. If such a study were
to reveal that land acquisition or zoning would be difficult
to implement and the dam is already under construction,
financial resources may well be wasted because of unaddressed
siltation problems. On the other hand, if construction had
been delayed, the financial resources could have been shifted
to other, more effective uses -- or simply saved. Financial
targets of the MDBs might not be met, but development would
be sustainable.
A similar point could be made regarding the desirability
of adequate multi-sectoral regional planning -- and the
possible delay in lending — in the cases of penetration
roads and agricultural development. In the case of agriculture,
it seems essential that research and extension services be
capable of addressiny the environmental risks before the
introduction of production technologies which sharply alter
lano, water and pesticide use. Without effective services,
the risk to natural resources and human health seems high in
many projects.
During the last two years, we have endeavored to inform
MDB Managements and other Board members when we believed
that projects included seriously deficient environmental
aspects. We have reviewed projects submitted for Board
approval, consulted with MDB staffs regarding project
details, discussed particularly severe problems with senior
management and, of course, brought to attention of others
the public discussion which has been taking place in the
United states.

- 9 We have not opposed most loans, it proposals were
otherwise satisfactory, in the belief that MDB Management
and other Board members should be given an opportunity to
reflect on the problems that are coming to light in public
and in the confines of the Board room.
The Next Steps
Our country's experience with the examination of environmental issues as part of the investment planning process
suggests that initially public and private institutions
resist the methodical requirements. As the value of these
methods to anticipate and plan for potential problems has
become clear, resistance has diminished.
The MDBs already use extensive project planning techniques
in their operations. Environment considerations could be
systematically incorporated into MDB planning relatively
easily — and often are. The conspicuous absence of environmental considerations in some projects and the inadequate
treatment in other projects has been the central problem.
Our conclusion is that projects in environmentally sensitive
sectors should only be accepted if environmental aspects
have been thought through and if the mitigatory measures
necessary for sustainable development have been identified
and any necessary funding assured. Were this principle
observed, I believe we would find far less dissatisfaction
with MDB performance in this area.
We see some proyress but it is not enough. Your efforts,
Mr. Chairman, have encouraged the World Bank to give high
level attention to the difficulties in the implementation
of the Northwest Brazil projects. Your Committee and other
Committees of the Congress have brought attention to steps
that might be taken to strengthen institutional management.
Public yroups in the United States and in other countries
have expressed their views.
I believe these broadly based expressions of concern
are beginning to have an effect and that senior Management
in the MDBs is beyinning to look seriously at what steps
might be taken to address the problem. The suyyestions
that this Committee may offer, that we have put torward, and
that others may advance may be useful to MDB Manayement when
specific steps are examined to strenythen project development
Thank you, Mr. Chairman.
and implementation.
We believe they should be weiyhed caretully.

TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE

September 18, 1985

RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,255 million of
$18,084 million of tenders received from the public for the 2-year
notes, Series Z-1987, auctioned today. The notes will be issued
September 30, 1985, and mature September 30, 1987.
The interest rate on the notes will be 9%. The range of
accepted competitive bids, and the corresponding prices at the 9%
interest rate are as follows:
Yield
Price
Low
9.05%
99.910
High
9.13%
99.767
Average
9.11%
99.803
Tenders at the high yield were allotted 21%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
]Received
Location
Accepted
Boston
77,930
$
$
77,930
New York
15 ,304,850
7,631,500
Philadelphia
44,765
44,765
Cleveland
246,780
246,780
Richmond
88,855
88,855
Atlanta
89,510
89,510
Chicago
1 ,090,575
383,175
St. Louis
125,870
107,080
Minneapolis
114,325
114,325
Kansas City
149,955
148,360
Dallas
23,270
23,270
San Francisco
718,940
291,250
Treasury
8,375
8,375
Totals
$18 ,084,000
$9,255,175
The $9,255 million of accepted tenders includes $1,404 million
of noncompetitive tenders and $7,851 million of competitive tenders
from the public.
In addition to the $9,255 million of tenders accepted in the
auction process, $740 million of tenders was also accepted at the
average price from Government accounts and Federal Reserve Banks for
their own account in exchange for maturing securities. An additional
$350 million of maturing securities held by Federal Reserve Banks will
be refunded by the issuance of short-term Treasury bills. These
Treasury bills will be exchangeable by the Federal Reserve for
additional amounts of new 4-year notes, when offered.
B-282

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041

FOR RELEASE UPON DELIVERY
Expected at 9:30 a.m., E.D.T.
Friday, September 20, 1985

STATEMENT OF RONALD A. PEARLMAN
ASSISTANT SECRETARY
(TAX POLICY)
DEPARTMENT OP THE TREASURY
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON- WAYS AND MEANS
U.S. HOUSE OP REPRESENTATIVES

Mr. Chairman, Members of the Subcommittee:
Thank you for the opportunity to appear before you today to
report on the analyses that you requested of high income
taxpayers, the growth in partnerships, and partnership losses.
I would like to emphasize that the Administration shares the
view that a major focus of the tax reform debate is fairness.
As the Committee on Ways and Means prepares to develop
legislation on tax reform, it is altogether appropriate to
examine the tax burden borne by some high income taxpayers
relative to others. Similarly, it is appropriate to examine
partnership activities since they are often seen as vehicles for
tax shelters.

B-283

-2With any analysis of high income taxpayers and partnerships,
a natural reaction is to focus on the negative aspects—on the
high income individuals who pay little or no tax, and on the
growth in partnerships with losses. While these represent
important parts of the picture, it is also important to keep in
mind the positive aspects—that most high income families do pay
a fair share of taxes, and that most partnerships are profitable.
Unlike corporations, partnerships "flow through" their income and
expenses to be taxed at the partners' level, and therefore are
conducive to tax shelters. The partnership form of organization
does, however, serve some very important business purposes in
allowing individuals or other enterprises to conduct business
together or to invest together.
Partnerships are not the only
vehicle by which investors can receive preferential tax
treatment—sole proprietorships and small business corporations,
in different ways, can also be used for tax shelters.
But neither the business entity used for tax shelters nor the
high income individuals who participate in them are responsible
for the unfairness in our tax system and the prominence of tax
shelter activity. Rather, the problems arise from high marginal
tax rates and the ability of taxpayers to reduce those rates by
investing in activities that are given preferential treatment in
our existing tax code. Thus, in many instances, those tax
provisions which are intended to encourage certain kinds of
economic activity are also those that cause the perception that
the system is unfair.
My testimony is divided into three parts. First, I will
discuss high income taxpayers, drawing from and expanding on the
report we sent to this Subcommittee on July 31. Next, I will
describe the growth in partnership activity over the last two
decades. Finally, I will discuss our detailed analyses of the
most recent data available from partnership tax returns as
contained in the partnership report which we sent to you
yesterday. For the conveyance of the Subcommittee, I have
appended copies of both of these reports to this testimony.
I. High-Income Taxpayers
To analyze the tax returns of high income individuals, it is
necessary to measure income before any deductions or offsets are
taken. The measure we used in our analyses is "total positive
income, referred to as TPI. The main components of TPI are (1)
wages and salaries, (2) interest, (3) dividends, and (4) income
from profitable businesses and investments. The calculation of
H ^ i ^ ° S 1 c l v e c i n C 0 m e d o e s n o t Permit the otherwise allowable
tltltt ?!L C f° P e r c e n t o f long-term capital gains, nor does it
Ivlh L ?Sa me ^°„ b e 5 e d u c e d b Y various exclusions and deductions,
?nves?menflosses e ° 9h C 0 n t r i b u t i ™ 3 , *** — Y business and

-3For analyzing the tax returns of high income individuals, TPI
allows us to identify both "above-the-line" and "below-the-line"
reductions in taxable income. "Below-the-line" offsets reflect
itemized deductions and tax credits. "Above-the-line" offsets
include certain business and investment losses, exclusions, and
"adjustments to income." Many reported losses represent real
economic losses, but many of them also reflect the use of tax
preferences or tax incentives that generate losses for tax
purposes and create opportunities for tax shelters. "Abovethe-line" offsets represent the difference between all positive
amounts of income and adjusted gross income.
In its annual reports on high-income individual returns, the
Internal Revenue Service uses four income concepts, ranging from
adjusted gross income (AGI) to expanded income. Expanded income
differs from AGI in that it includes certain tax preference
items, such as those identified by the current minimum tax, and
excludes excess investment expenses. These measures are useful
in indicating the degree to which itemized deductions or tax
credits ("below-the-line" adjustments) reduce tax liability. Not
even expanded income, however, can shed much light on the extent
to which "above-the-line" losses enable taxpayers with
substantial economic income to reduce AGI and therefore taxable
income and tax liability.
For analyzing high income tax returns, TPI is a more useful
measure of income than is AGI or any of the related concepts.
Like all measures, TPI is not perfect, however. There are no
taxpayer data on the ideal measure of income that economists
frequently call "economic income."
In theory, economic income
counts income from all sources, whether or not it is reported on
the tax return, and accurately measures each form of income.
Such an ideal measure would separate economic losses from losses
claimed on tax returns. In practice, however, economic income is
difficult to measure and cannot be constructed using only data
from tax returns. For some taxpayers, TPI may overstate economic
income by excluding some real economic losses and by making no
inflation adjustment to reported capital gains. For other tax
returns, TPI would tend to understate economic income to the
extent that losses for tax purposes offset economic gains within
many profitable activities, and to the extent that accrued
capital gains are not reported on tax returns.
For our purposes, we chose a high cutoff level of $250,000 of
TPI for considering any return "high income."
We performed a
computer examination of all 260,275 individual returns for 1983
with TPI in excess of $250,000. These returns represented about
one-quarter of one percent of all returns filed for 1983.
Analysis. The report that I submitted to the Subcommittee on
July 31 describes most of the results of our analysis of the high
TPI returns, but I would like to mention several of the findings
and add a few points that were not reported there.

-4While much interest centers on high income taxpayers who pay
little tax, it is important to remember that most of the
taxpayers filing the returns we examined paid a substantial share
of their income in taxes in 1983. Nearly half owed tax equal to
at least 20 percent of their TPI; nearly one-quarter (23.6
percent) owed tax equal to at least 30 percent of their TPI; and
5 percent owed taxes of at least 40 percent of their TPI.
(Table 1.)
On the other hand, a significant minority owed very low taxes
in 1983 relative to their positive income. Eleven percent, or
almost 30,000 high TPI individuals, paid less than 5 percent of
TPI in tax. Of these, over 3,000 had TPI in excess of $1
million. In addition, 7,674, or 2.9 percent, of those filing
returns with TPI over $250,000 owed zero tax. Of these, 931 had
TPI of at least $1 million.
For the high TPI individuals who paid little or no tax, the
logical question is, how did they do it? As Table 2 shows,
"above-the-line" offsets to TPI were much more important than
"below-the-line" offsets such as itemized deductions.
o In the aggregate, for high income taxpayers owing less
than 5 percent of TPI in tax, itemized deductions offset
only 18 percent of TPI, whereas losses and capital gains
deductions actually exceeded TPI, offsetting 112 percent
of TPI.
Also, among the above-the-line offsets, what we called "current
business losses" were more important than the combination of the
capital gains deduction and other losses (principally losses
carried over from previous years).
o Current business losses offset 67 percent of TPI,
compared to 46 percent for the capital gains deduction
and loss carryover category.
Partnership losses dominated the category of current business
losses for these high income, low tax individuals. Partnership
losses represented 36 percent of TPI and accounted for over
one-half the current business loss offset to TPI. The other
forms of current business loss—principally losses from farming
activities, sole proprietorships, rental properties, and small
business corporations—each registered only about 7 to 8 percent
of TPI. Partnership losses were also the most common form of
current business loss among the high income, low tax returns:
23,000 returns, or 77 percent, reported some partnership loss.
High-income taxpayers as a group, including those paying
significant taxes, made substantial use of above-the-line
offsets, though less than the high income individuals with low
tax liabilities. Above-the-line losses and exclusions offset 41
percent of TPI for high income taxpayers as a whole in 1983.

-5o

Capital gains deductions and loss carryovers accounted
for the majority of these offsets — 23 of these 41
percentage points, with current business losses the
remaining 18 percentage points.
o Within the category of current business losses,
partnership losses again dominated, equalling 11 percent
of TPI, or one-quarter of all above-the-line offsets for
all high income returns.
Partnership losses are clearly a major, though not the only,
source of reduction in taxable income, and therefore in taxes
paid, for high income taxpayers.
High income taxpayers also report a disproportionately large
share of all the partnership losses that appear on individual
income, tax returns. (Table 3.)
o 166,401, or 64 percent, of all high income taxpayers
registered some partnership loss in 1983. Only 2
percent of all taxpayers reported partnership losses.
o The aggregate amount of partnership losses reported on .
the returns of high TPI individuals totaled $17.6
billion, 52 percent of the $34.2 billion in partnership
losses reported on all individual tax returns in 1983.
For comparison, these high income taxpayers generated
less than 10 percent of all TPI in 1983.
o Whereas partnership gains reported on all individual tax
returns exceeded partnership losses by $900 million in
1983, among high income returns the losses exceeded
gains by $6.5 billion.
Again, it must be emphasized, however, that the TPI measure
does not distinguish between economic losses and losses that
appear only for tax purposes. Some portion of these partnership
losses thus represent real economic losses that properly reduced
the taxable income shown on the returns examined. From our data,
the real economic losses that result from bad luck, misjudgments,
or other business errors cannot be distinguished from losses
advertised by tax shelter promoters. We know that total positive
income includes some real losses, but also that the other
frequently used measure, adjusted gross income, excludes all tax
shelter losses.
Available information can, however, help us to understand
better the sources of losses. Since our analysis has identified
partnerships as the main source of business losses for high
income taxpayers, and since there is much interest in partnerships as a common vehicle for tax shelters, the rest of my
testimony will focus on the partnership sector.

-6II.

Historical Data on Partnerships

Historically, the partnership sector has been the source of
substantial taxable income for individuals and for taxpayers as a
whole, as Table 4 shows. In the mid-1960s partnerships generated
net income of around $10 billion annually, most of which appeared
on individual's tax returns. During the 1970s, the gains and
losses generated by partnerships grew substantially, although the
net income for the sector as a whole and the net amounts reported
on individual returns did not show similar growth until the
latter part of the decade.
The pattern of fairly stable or generally rising net income
from partnerships changed abruptly in 1980. Between 1979 and
1980, net income for the sector dropped from $15.2 billion to
$8.2 billion, and losses from loss partnerships jumped from $24.8
billion to $36.8 billion. In 1981, partnerships in the aggregate
reported a net loss for the first time in the 25 years that
annual statisics on partnership returns have been available. The
net losses in the partnership sector have continued through 1983,
the most recent year for which statistics are available, with
1982 showing the greatest net loss of the three years. Losses
have assumed a greater prominence in the last three years for
which statistics are available than at any time in the nearly
three decades of statistics on partnerships. In 1981 and 1982,
but not in 1983, individual taxpayers overall also reported small
net losses from partnerships on their returns. In a few moments
I will turn to a more detailed analysis of the partnership sector
in these recent years.
Generally, over the past two decades, growth within the
partnership sector has been concentrated in certain industries
and types of partnerships, as our July 31 report to the
Subcommittee documented. (Table 5)
o Between 1965 and 1983, the number of partnerships in
both real estate and finance more than tripled, and oil
and gas partnerships more than quadrupled. Meanwhile,
the total number of partnerships in other industries
increased by only 15 percent.
o Between 1965 and 1983, the number of partnerships
reporting losses more than tripled, from 229 thousand to
757 thousand. Particularly rapid growth in the number
of partnerships with losses appeared in the oil and gas,
and real estate industries.
o Although limited partnerships represented only 1 in 12
of all partnerships in 1977, they accounted for
one-third of the increase in the number of partnerships*
between 1977 and 1983. Only one-quarter of all partners
m 1977 belonged to limited partnerships, but 88 percent

-7of the increase in partners over the next six years was
attributable to limited partnerships. General
partnerships experienced little growth during this
period.
III. Partnership Losses, 1981-1983
I would now like to take a closer look at the characteristics
of those partnerships that reported losses in the last few years
and the sources of those losses.
Measure of Income. Partnerships do not pay taxes themselves.
Rather, a partnership is an entity that passes through income and
expenses to its partners. Generally, these items are taxed as if
received or incurred by the partners, although special rules and
limitations apply to some of those items. Consequently, what a
partnership usually reports as partnership income is not what
most people would really consider income from a partnership.
Therefore, we made some adjustments to the measure of net income
that partnerships report on Form 1065. We refer to this measure
of income from which we start as 1065 net income, (Line 5,
Table 6.)
We wanted to arrive at a concept that would reflect the
contribution that partnership activities make 'to taxable income
reported by the separate partners. Some of the adjustments we
made involved items of income or expense which are subject to
special treatment at the partner level, such as investment
interest expenses and long-term capital gains. A few adjustments
required estimates of items that are not fully reported on any of
the partnership tax forms. Most of the mineral exploration costs
fell into this category. Income after these adjustments is
called "contribution to partner's taxable income." Table 6 shows
the steps required to go from 1065 net income to "contribution to
partner's taxable income after ITC. (Line 17) The report,
Analysis of Partnership Activity, which I submitted to the
Subcommittee yesterday and which accompanies my testimony,
describes the adjustments in more detail.
Our final measure of income is not perfect. There remain
other items of income and expense which receive special treatment
at the partner level and which were not available in the
Statistics of Income data. Compared to 1065 net income, however,
"contribution to partners' taxable income" provides a better
reflection of the income arising from partnership activity being
reported for tax purposes.
The overall effect of the adjustments on net income was
fairly small. In 1983, 1065 net income for all partnerships was
a loss of $2.6 billion, whereas we estimate the contribution to
partner's taxable income after ITC as a loss of $0.9 billion.
The coincidental closeness of the -$2-6 and -$0.9 hides an
increase in the gain reported by gain partnerships and a nearly
offsetting increase in the losses reported by loss partnerships.

-8Analysis. I will now turn to the discussion that you
requested ot the characteristics of partnerships with losses and
the sources of those losses.
From our examination of the IRS Statistics of Income computer
files of partnerships for the years 1981 through 1983, partnerships with losses are more likely to exhibit certain
characteristics than partnerships with gains.
(1) Limited partnerships. A higher percentage of limited
partnerships than of general partnerships register losses.
Limited partnerships are owned in part by "limited partners,"
passive investors whose liability for partnership debts is
limited to amounts they agree to contribute. Limited partners,
like partners with full liability for partnership debts, may
report their shares of partnership gains and losses on their
individual tax returns. In 1983, 65 percent of limited
partnerships reported losses, compared to 46 percent of general
partnerships. Table 6 also indicates that based on 1065 net
income in each year, from 1981 to 1983, limited partnerships in
the aggregate produced net losses, whereas general partnerships
generated gains. In 1983, 51 percent of all the losses and only
14 percent of the gains in contributions to partners' taxable
income came from limited partnerships.
(2) Recent formation. Not surprisingly, recently formed
partnerships are more apt to register losses than are older
partnerships (Table 7 ) . This is true for both limited and
general partnerships, although limited partnerships are
consistently more likely to have losses than are general
partnerships formed during the same period. In 1983, 51 percent
of all partnerships started between 1981 and 1983 generated
negative income, compared to only 32 percent of partnerships
formed before 1978. And the percentage showing losses declines
steadily as the age of the partnership increases. In part, the
explanation for this is that recently formed businesses incur
startup costs that are not immediately covered by revenues.
Furthermore, many tax provisions "front-load" deductions in the
early years.
(3) High debt-equity ratios. Loss partnerships in general
have higher debt-equity ratios than partnerships showing net
gains. Table 8 shows that the average debt-equity ratio for all
partnerships in 1983 was 5.25; for partnerships with losses the
same ratio was 13.67. A similar correlation appears within most
of the industries detailed in Table 8. Some caution should be
used in interpreting the debt-equity ratios, however, because
partnership equity is generally understated, particularly for
older partnerships, because assets are valued at book value. The
correlation still holds, though, for partnerships formed in 1983;
gain partnerships had a debt-equity ratio of 1.78, compared to
4.89 for loss partnerships.

-9(4) Industry. Losses are not evenly distributed across
industries, as Table 8 indicates. This table provides details on
all broad categories of industries and on individual industries
with over $100 million in net losses in 1983. As might be
expected, industries with losses generally had a higher than
average proportion of individual partnerships reporting losses.
In some industries, almost all partnerships report losses. In
livestock breeding 93 percent report losses, in metal mining 97
percent, in racing 88 percent, and in water transportation 80
percent report losses.
Sources of Partnership Losses. There is a general interest
in knowing the extent to which various tax code provisions
contribute to partnership losses. Most interest focuses on
provisions offering special tax treatment. Unfortunately, the
available data do not permit us to determine precisely the role
of various tax preferences in generating the tax losses that
emerge from the partnership sector. Although we know which
provisions afford economic incentives to certain activities by
understating income or overstating expenses, compared to the
economically correct amounts, we cannot identify their effect on
individual partnerships
For example, because the current law depreciation schedules
have been designed to encourage investment, we know that much of
the depreciation deductions reported for tax purposes exceed the
economic depreciation of the underlying assets. However, by
focusing on the tax return data which provide no further
information on actual economic income we cannot determine how
much of the depreciation deductions reported on the tax return
exceed an economic allowance for depreciation for the specific
partnership. We would need to know the years in which the
various assets were purchased and the method of depreciation
used, information that is not available on the computerized data
files. Similarly, interest expense deductions overstate the
economic cost of debt because, with inflation, the real value of
the debt is declining. Without knowing the interest rate being
paid, we cannot separate the inflation component from the real
component of interest payments.
The data we have available on partnerships do, however, allow
us to identify the total amount of income and deductions in
various categories reported in 1983 by all partnerships and by
partnerships in particular industries. Table 9 reports the major
categories of income and expenses for the partnership sector as a
whole, and separately for each detailed industry that reported at
least $100 million in losses in 1983.
The table shows several points.
(1) For the partnership sector as a whole, three categories
of deductions—interest, depreciation, and mineral exploration
costs—accounted for over 40 percent of all deductions—which

-10include wages and salaries, rent, repairs, and taxes—reported on
the partnerships' tax forms in 1983. In many industries this
percentage was much higher. In oil and gas, extraction costs
alone nearly equaled the category of "other deductions." In real
estate, interest deductions were the major expense; interest and
depreciation exceeded "other deductions" by $5 billion. For real
estate subdividers and developers, and for holding companies,
interest expenses alone exceed "other deductions". In equipment
rental and leasing, depreciation deductions and interest expenses
each alone exceeded "other" expenses. In water transportation,
depreciation deductions also were greater than "other"
deductions.
(2) For the sheer magnitude of losses, real estate operators
and lessors of buildings dominate all other industries. Although
their gross ordinary income is only one-third of the total for
all partnerships, they account for one-half the depreciation
deductions and 55 percent of the interest expenses. The next
largest amount of interest and depreciation deductions is
reported in the equipment rental and leasing industry. That
sector accounts for less than two percent of the total gross
ordinary income for all partnerships, but over seven percent of
all depreciation deductions. Oil and gas closely follow
equipment leasing, in size of interest and depreciation
deductions.
(3) Long-term capital gains represent an important source of
income for partnerships in several industries, notably real
estate, holding companies, and agriculture. To the extent that a
partnership is able to defer its income and receive it in the
form of long-term capital gains which give rise to a 60 percent
deduction against partners' taxable income, the partnership could
in fact be generating a profit even if it were registering losses
for tax purposes.
(4) The investment tax credit (ITC) also affects our final
measure of income for partnerships as a whole. In 1983,
partnerships reported $1.7 billion in ITC. Every dollar of
credit offsets the tax on approximately $4 of the income of
individual partners. Thus, without the credit, the contribution
of partnerships to partners' income would have been a gain of
$5.2 billion. However, there are few industries shown on Table 9
in which the ITC is large, relative to the net income figure.
Only for agriculture, all transportation, manufacturing, holding
companies, and motion picture partnerships does the ITC offset 10
percent or more of the contribution to partners' taxable income.
Conclusion
0ut
analysis of high income tax returns has shown that in
1afl,
198 3, many high income individuals paid taxes equal to a substantial portion of their total positive income, but a
significant minority paid virtually no tax. For the high income

-11individuals with low tax liabilities, partnership losses were a
major source of reduction in taxable income. Moreover, partnership losses and partnerships with losses have been increasing
fairly consistently in the past two decades.
Neither these data nor these trends should be considered an
indictment of partnerships or high-income individuals. High
marginal tax rates give high income taxpayers the incentive to
seek to lower their taxes by investing in activities that offer
preferential tax treatment. Unlike corporations, partnerships
flow through income and expenses to the owners. A partnership
is, therefore, a vehicle particularly conducive to spreading the
tax preferences of particular investments to investors, which in
some cases produces tax shelters. We therefore suggest that, as
the tax reform debate proceeds, the Subcommittee should focus on
the appropriateness of continuing the current law tax provisions
that afford preferential treatment of certain activities and on
high marginal tax rates that encourage high-income individuals to
seek these activities.

Table 1
1983 Returns with Total Positive Income* of $250,000 or More
TPI Over
$250,000
All Returns
Re1turns With
Nith Taxes Paid as Percent of TPIs
Zero
Zero to 5%
5 - 10%
10 - 20%
20 - 30%
30 - 40%
Over 40%
Returns Nith:
Partnership Losses
Partnership Losses Exceed 50% of TPI
Partnership Losses Exceed TPI
Office of the Secretary of the Treasury
Office of Tax Analysis

Percent
of Total

260,275

100%

7,674
22,126
25,452
83,173
60,393
49,021
12,436

2.9
8.5
9.8
32.0
18.8
4.8

166,401
12,655
1,916

63.9
4.9
0.7
September 18, 1985

Total Positive Income (TPI) measures gross income reported on tax returns before losses. It
primarily equals the sum of positive amounts of income on the Form 1040, with the following
exceptions: For capital gains, it equals long- and short-term gains before losses and
before exclusions. For Schedule E, TPI includes the income on rental and royalty properties
with profits, on partnerships, on estates and trusts, and on small business corporations
with gain. TPI does not subtract various exclusions or deductions which reduce AGI, such as
IRA and Keogh contributions, and the 60 percent exclusion of long-term capital gains.
Source: Extract from the 1983 IRS Individual Master File of all tax returns
with TPI of at least $250,000.

Table 2
Offsets to Total Positive Income for High Income Taxpayers, 1983
"Above-the-Llne* Offsets to TPI
•Below-the-Line" Offsets to TPI
t
:
s Other:
l Other
O
t T"~
h
e
r
t
T
o
t
a
l
i
i
t
1 A lAll
i
t Current t Losses t
t Losses t
s Excess
s Credits t Tax
s Partnership ; Business 2 Capital Gains s Capital Gains t Itemized
t ITC k
1 After
t Losses
s Losses
: Exclusions
t Exclusions
: Deductions s FTC
t Credits
(Percentage of TPI)
All High TPI
Returns

10.9

7.4

23.2

Tax Under
5* TPI

36.2

31.0

45.7

112.8

Tax Over
201 TPI

3.6

2.2

10.7

16.5

Office of the Secretary of the Treasury
Office of Tax Analysis
*

41.5 11.6

0.8

20.2

17.8

1.0

1.7

11.6

0.5

30.6

September 18, 1985

Current Business Losses include losses on partnerships; net losses from Schedule C, Subchapter S
corporations, rental and royalty properties, and farms; and net supplemental losses.

•* "All Other Losses and Capital Gains Exclusions- are primarily the excluded portion of capital gains plus
substantial loss carryovers.
Sourcet Extract from the 1983 IRS Individual Master Pile of all tax returns with Total Positive Income of at
least $250,000.
Note:

For a definition of TPI, see Table 1.

Table 3
Partnership Losses and Gains Reported on Individual Income Tax Returns, 1983
All
Taxpayers

All High
TPI Returns

96,321,000

260,275

eturns with Partnership Loss
Percent of Total

2,030,000
2.1%

166,401
63.9%

Amount of Partnership Loss (in billions)

$34.2

$17.6

eturns with Part:., ship Gc. ..s
Percent of Total

2,093,000
2.2%

131 ,270
51%

Amount of Partnership Gains (in billions)

$35.1

$11 .1

11 Returns

ffice of the Secretary of the Treasury
Office of Tax Analysis

September 18, 19 8 5

ources:

Extract from the 1983 IRS Individual Master File of all tax returns
with TPI of at least $250,000; and the Statistics of Income Individual
Income Tax File for 1983.

ote:

For a definition of TPI, see Table 1.
with TPI of at least $250,000.

"High TPI" indicates returns

Table 4
Partnership Income and Loss, 1965-1983
Partnership Income Reported
Income or Loss of Partnership
on Individual Returns
Net
Net Income :Galn
:Loss
: Net
s Net
i
Losses
or Deficit (Partnerships (Partnerships ; Income
t Gains t
:
:
:or Deficits
i
($ in Billions)
$62.9
$60.3
60.9
53.6
53.3
50.6
8.2
36.8
46.0
15.2
24.8
40.0
14.4
19.2
33.7
13.3
15.7
28.9
10.4
14.5
24.9
7.7
14.7
8.9
22.4
9.2
12.7
21.6
9.6
9.7
18.9
9.1
7.3
17.0
9.8
6.4
15.5
10.5
4.6
14.4
11.4
3.5
14.0
10.8
2.2
13.6
10.4
1.9
12.8
9.7
1.7
12.1
1.6
11.3
Office of the Secretary of the Treasury
Office of Tax Analysis
1983
1982
1981
1980
1979
1978
1977
1976
1975 .
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965

$-2.6
-7.3
-2.7

$0.9
-0.9
-0.1
9.4
12.4
15.1
13.4
11.7
10.8
11.0
11.2
11.1
10.8
10.9
11.9
13.5
11.5
10.7
9.8

$35.1
27.4
27.9
25.6
24.2
24.3
21.4
19.7
18.4
17.9
16.8
15.3
14.2
13.7
14.2
15.7
13.0
12.1
11.1

T
Limited Partnerships
t
(Percent of All t Net
i Number of
tPartnerships
t Income 2 Partners

$34.2
28.3
26.0
16.2
11.8
9.2
8.0
8.0
7.6
6.9
5.6
4.2
3.4
2.8
2.3
2.2
1.5 1/
1.4
1.3

15.2%
14.9
14.3
12.3
10.5
9.6
8.3

$-18.7
-17.5
-15.7
-9.4
-5.7
NA
-3.6

5,434,870
4,709,723
4,176,572
3,620,036
2,352,378
NA
1,542,107

September 18, 1985

Includes small business capital net gain or loss.

Source 1 IRS, Statistics of Income, Partnership Returns and Individual Income Tax Returns for relevant years.

Table 5
Partnership Activity, by Selected Industry for Selected Years, 1965-1983

1965
Total Losses Reported on
Partnership Returns (Billions)
All Industries
Oil and Gas Drilling
Real Estate
Agriculture
Finance
Services
Number of Partnerships, With and
Without Net Income
All Industries
Oil and Gas Drilling
Real Estate
Agriculture
Finance
Services
Percent of Partnerships Without
Net Income
All Industries
Oil and Gas Drilling
Real Estate
Agriculture
Finance
Services
Number of Partners
All Industries
Oil and Gas Drilling
Real Estate
Agriculture
Finance
Services

1970

79"75"

T983

$4.6

$14.7

$36.8

.1
.6
.2
.1
.2

.5
2.1
.4
.7
.4

1.7
6.5
1.1
1.8
1.9

7.3

9.5

11.4

29.5

2.1
8.0
3.2

2.8
5.8
8.1

914,215
12,467
192,833
127,782
44,537
168,850

936,133
11,820
235,443
124,165
75,720
175,800

1,073,094
12,974
320,878
123,173
106,595
198,956

1,379,654
31,405
464,389
126,224
165,969
263,400

),541,539
56,172
585,481
136,603
135,815
306,294

25.11
44.5
38.5
27.7
34.4
18.4

31.2%
37.4
42.3
32.1
46.8
24.2

38.4%
44.4
49.5
39.8
45.3
30.4

NA
674,489
322,147
317,187
448,558

28.8%

NA
41 .0
28.1
38.1
19.4

3 ,697 ,818
175 ,744
1 ,016 ,791
318 ,611
929 ,328

525 .66

35.6%
46.2
44.2
34.1
40.3
24.1

4 ,950,634
213,238
1 ,549,716
351,062
1 ,422,954
668,858

43.0%
34.5
58.0
45.4
38.2
34.2

OffTce of the Secretary of the Treasury
Office of Tax Analysis
Source:

T980

$1.6

2,721,899

Percent of Partners ln Partnership
Without Net Income
All Industries
Oil and Gas Drilling
Real Estate
Agriculture
Finance
Services

IRS, Statistics of Income, Partnership Returns, relevant years

$62.9

43.9%
54.5
54.5
42.7.
42.6
35.7

8,419,899
686,431
3,212,213
380,982
2,329,161
938,027

49.1%
58.8
58.2
46.2
44.6
38.7

10 ,589,338
1 ,987,935
4 ,327,771
466,132

1 ,572,901
1,274,934

42.7%
44.4
50.6
46.1
34.2
38.9
September

49.0%
38.6
60.3
48.6
31.5
46.6
18, 1985

Table 6. Growth ln Partnership Activity (Dollar amounts In billions)

T98T
Number of partnerships
Number of partners W
Total partnership assets
Gross receipts and gross rent
Form 1065 Income or loss
Less income from other partnerships, plus dry hole costs,
non-oil and gas depletion, and
guaranteed payments to partners
Adjusted Form 1065 Income or loss

~TWT

1460502
9095165
715.2
281.6
-2.7

1514212
9764667
845.3
312.2
-7.3

General partnerships

Limited partnerships

All partnerships

T9TT

1982

1981

1541539
10589338
887
313.5
-2.6

1983 t

1981
1252298
4918593
432.8
225.9

208204
4176572
282.4
55.7

225886
4709723
331.7
70.3

233986
5434870
381.4
70.9

-15.7

-17.5

-18.7

1983

1982

1288326 1307553
5054944 5154468
513.6
505.6
242.6
241.9
16.1
10.2

15.4

5.8

5.5

8.2

9.6

8.5

11.3

8.1

11.4

-9.9

-11.7

-13.2

21.2

19.8

24.6

Items not reported on Form 1065:
1.4
Plus foreign income
-12.7
Less mineral exploration costs
-4.9
Less investment interest expense
Less Sec. 1231 and spec, alloc, loss -.9
-5.8
Net ordinary income or loss

1.4
-10.3
-5.8
-.9

1.4
-8
-5.1
-.9

.1
-5.9
-1.9
-.3

.1
-4.6
-2.2
-.3

.1
-4.1
-2.7
-.3

1.3
-6.8
-3
-.6

1.3
-5.7
-3.6
-.6

1.3
-4
-2.4
-.6

-7.5

-1.1

-17.9

-18.7

-20.1

12.1

11.2

5.5

7.1

8.8
7.1

1.7

2.2

2.2
3.5

3.8

4.9

6.6
3.6

Capital gains
Sec. 1231 or spec, alloc, gains
Contribution to partner's taxable income before ITC 2/
Investment tax credit

1.5

Contribution to partner's taxable Income after ITC 3/
Percent of partnerships with
positive total ordinary Income

1.7

52.3

50,9

-.6

-20.6

-.9
45.1

-17.8

5.2

18.9

38.1

Office of the Secretary of the Treasury
Office of Tax Analysis

34.6

.9
19.6

48.6

54.7

53.8

September 17, 1985

1/ Includes partners that are corporations and partnerships, as well as lndivduals.
2/ Contribution to partner's taxable Income before ITC equals ordinary income plus 40% of total capital and Sec. 1231
gains.
3/ Contribution to partner's taxable income after ITC equals ordinary income plus 40% of total capital and Sec. 1231
gains leas the Investment tax credit divided by an average marginal tax rate.

Table 7
Characteristics of Partnerships ln 1983 by Year Partnership Formed

T98T

Year Partnership Started
1973-77 :
1981-62
1978-80

Before 1973

Percent of all Partnerships with
Positive Net Income:

26.9

40.2

49.0

62.9

71.6

Percent of Limited Partnerships with
Positive Net Income:

11.4

20.1

36.4

56.3

64.8

Percent of General Partnerships with
Positive Net Income:

30.3

44.4

51.6

64.1

72.3

Limited Partnerships
As Percent of Total Partnerships
As Percent of Total Partners

18
65.6

17.2
60.3

16.9
53.9

15.6
46.7

8.8
23.9

Debt/Equity Ratios:
Partnerships with Positive Income
Partnerships without Positive Income

Office of the Secretary of the Treasury
Office of Tax Analysis
Source: 1983 Statistics of Income Partnership file.
* Indicates negative equity ln these years.

1.78
4.89

1.78
9.10

2.58
40.07

4.43
*

1.64

September 18, 1985

Table 8. Summary of 1983 Partnership Characteristic? by Industry

Type of Partnership.

Number of s Percent t Percent
: Percent
Formed
8
Partnerships {Partnership:
Limited
;
i Loss
:
{Partnerships i All

All

1541538

All Agriculture
Fruit Trees
Beef,ex.feedlots
Livestock breeding
All Mining
Metal
Coal
Oil and gas
Construction
All Manufacturing
Lumber
Chemicals
M i Transportation
Water
Communications
Electric
Wholesale Trade
tetall Trade
ill finance
Real Estate
Subdividers
Holding companies
11 services
Hotels
Motels
Equipment leasing
Motion pictures
Racing
Other Amusement

136603
12091
18852
2269
59535
1793

552
56172
63592
26451
4389

308
20132

654
3530
1385
24115
168153
730067
491701
42670
108755
306294
3074
7398
36335
4382
3948
7528

: Limited

15.18

38.61

46.23
52.88
66.79
92.7
59.63
97.17
68.3
58,83
28.11
52.84
30.9
63.9
55.24
80.43
64.03
80.56
35.55
49.06
55.19
58.65
62.33
42.31
38.68
69.25
42.86
47.74
60.79
87.63
75.55

6.73
20.35
2.17
27.89
39.3
84.16
33.16
37.23

24.78 37.1 39.4 4.06 11.57 2
21.14
38.99
62.2
11.09
15.01
9.8
85.15
91.16
76.2
52.02
61.32
52.7
30.03
30.79
32.5
32.15
43.56
8.9
53.82
63.81
56.6
49.24
54.36
77.4
45.97
46
57.8
6.1
12.24
25.9
70.07
86.79
94.2
52.38
57.37
74.3
43.36
48.9
16.5
64.02
48.22
67.3
9.34
10.6
83.3
47.19
63.63
10.4
43.81
55.56
31.2
33.57
46.96
41.6
34.9
49.56
44.9
41.7
44.82
39.9
20.72
29.87
28.8
46.45
63.98
57.9
46.06
65.15
68.2
45.84
62.7
• 45.4
41.45
56.29
5.8
28.22
58.13
48.1
50.35
57.45
74.5
59.5
61.67
28.7

2.5
2.97

.52
55.73
11.91
44.53
12.72
4.46
5.49
3.67
22.38
22.27
26.44
26.45
8.34
32.34
19.33
12.92
40.91

Source: IRS Statistics of Income, Partnership Returns, * 83.

.2
9.02

Ratio of Debt to E quity All :

Loss •

Limlted :

5.25

13.67

9.5

3.64
5.44
2.01
.77
.88
2.31
.69
3.67
2.3
2.07
1.38
1.38
46.38
4.51
.37
2.78
1.59
7.68
19.22
7.87
1.98
7.11
*
26.59
4.89
18.26
.67
13.84

21.05
*
2.01
1.04
.99
2.39
.94
14.18
3.78
2.91
1.74
1.38
80.75
6.4
.31
10.24
4.59
32.56
125.29
20.63
4.25
*
*
5.38
* .7
*

5.4
1.4
2.1
1.2
.5
*
.9
*
12.7
5.2
1.8
4.2
15.9
4.4
1.3
4.9
1.6
12.8
57.9
11
1.5
103.1
*
*1 4
247.7

49.14

Office of the Secretary of the Treasury
Office of Tax Analysis

* Indicates negative equity.

In 1981-83

50.94

4TjT

September 19, 1985

Table 9. Summary of 1983 Partnership Income and Deductions by Industry (ln Millions of Dollars)

All
Ail Agric.
Fruit Trees
Beef,ex.feedlots
Livestock
All Mining
Metal
Coal
Oil
Construction
All Manufacturing
Lumber
Chemicals
All Transportation
Water
Communication
Electric
Wholesale Trade
Retail Trade
All finance
Real Estate
Subdlviders
Holding companies 4/
All services
Hotels
Motels
Equipment
leasing
Motion pictures
Racing
Other Amusement

Gross
Ordinary
Income 1/

Deductions
Other Than
Oeprec.,
Interest,
Mln.Exp.
Costs 2/

213517.7

126102.9

48215.4

32285.5

3396.8
-84.9
57.7
-21.4
12996.2
558
763.1
11404
6688.9
3332
449.5
189.6
5005.7
406.7
1114.1
346.7
3034.8
13011.7
96918.9
68994.1
4991.7

2216.6
106.5
202
61.2
10089.9
452.2
584
8889.7
3194.9
2857.6
314.9
469.7
2918.8
178.9
984.2
456.9
2019.8
9937.6
50764.5
38237.9
2754.8

474.1
42
65.5
7.7
1394.7
122.4
118.2
1114.1
553.7
403.6
99.4
94.6
855.9
169.3
234
161
325.2
550.2
38830
26777.7
2827.3

457.8
35
47.8
47.1
2563.2
228.8
147.5
2127.9
480.1
727.8
128.5
184.9
1292.6
206.6
339.1
237.5
221.2
763.4
18910.1
16780.7
486.5

7081 .6
68824.9
4233.3
3511.4

3179.7
41983.2
3336.2
2366.6

3483
4814
988.7
691.6

968.6
6848.4
763.7
572.8

4038.2
1113.5
41.5
1845.2

1287
852.4
122
1415.8

1316.1
70.8
3.9
217.2

2305.2
396
70.8
389

Interest

Depreciation

Bstlmated
Mineral
Explortlon
Costs 3/

Net
Ordinary
Income

8045 .5

-1131.6
248.3
-268.4
-257.6
-137.4
-8938.7
-335.7
-195.4
-8384.5
2460.2
-657
-93.3
-559.6
-61.6
-148.1
-443.2
-508.7
468.6
1760.5
-11668.9
-12802.2
-1076.9

7887 .1
90 .3
108,.8
7656 .8

83,.2

Investment
Tax Credit

Contribution
to Taxable
Income
(After ITC)

15942

1713.8

-947.3

746.4
51.4
171.2
18.1
274
20.9
20.8
227.6
178.4
.113.9
66
6.2
46
.2
.2
4.1
54.4
84.2
13833.7
6987.7
409.9

105.9
21 .2
13.9
7
163.2
9.9
2.5
141 .6
12.6
128.2
22.4
19.1
128.2
.9
40.1
39.6
6.4
1.9
653.8
8.9
44.3

157.5
-323.7
-154.2
-9435.4
-362.5
-196.9
-8820.2
2483.4
-1065.4
-145.4
-626.6
-474.2
-151 .8
-600.3
-653.8
465.7
1655.9
-8460
-11534.8
-1069.9

-959.6
15179.3
-855.3
-119.6

3985.9
609.9
108.5
53.8

103.7
488
67.4
20.8

265.2
13631.5
-1048.2
-173.6

-870.1
-205.7
-155.2
-176.8

18.8
23.2
.6
21.1

130.9
90.2
1
27.5

-1329.2
-527.2
-158.4
-267.6

Capital
Gain

T237.9

Office of the Secretary of the Treasury
Office of Tax Analysis

409 .9

September 17,1985

1/ Net of cost of goods sold and net income from other partnerships.
2/ Excludes guaranteed payments to partners.
3/ Includes estimated depletion, hard mineral exploration and development costs, and Intangible drilling costs
(including dry hole costs).
4/ Includes income and expenses from other partnerships.

DEPARTMENT OF THE TREASURY
WASHINGTON. D.C. 20220

TAXES PAID BY HIGH-INCOME TAXPAYERS
AND THE GROWTH OF PARTNERSHIPS
Whether a tax system is judged to be fair depends, in
part, on whether those citizens who are most able to pay
taxes are perceived to pay a fair share of their income in
taxes. Earlier analyses have focused on the extent to which
taxpayers with high adjusted gross income (AGI) pay little
or no tax. Such analyses are useful primarily in indicating
the extent to which extraordinary itemized ("below-theline") deductions reduce tax liability of high-income
taxpayers. But they do not shed much light on the extent to
which taxpayers with substantial economic income are able to
reduce AGI, and therefore taxable income and tax liability,
with various "above-the-line" losses, including losses from
tax shelters.
A computer analysis of all income tax returns for 1983
filed by high-income individuals provides further information on the tax burden borne by high-income taxpayers and on
the commonly used means of lowering that burden. The
analysis clearly identifies partnership losses as a primary
source of offset to other income and thereby of reduction in
tax liability for these high-income persons. Although the
study does not measure the amount of tax reduction attributable to the specific tax incentives that provide opportunities for tax shelters, recent trends in the partnership
sector suggest the growth and prevalence of tax shelter
activity.
I. Definition of Income
It has long been recognized that losses allowed for tax
purposes are often not real economic losses; frequently they
are merely accounting losses that result from tax shelter
activities. Because tax losses can offset normally taxable
income, it is necessary in analyzing taxes paid by highincome groups to use a measure of income which is relatively
unaffected by accounting losses that may not be real.
The measure of income chosen for this purpose is total
positive income (TPI), which essentially equals the sum of
(1) wages and salaries, (2) interest, (3) dividends, and (4)
income from profitable businesses and investments. Unlike
the more commonly used measure of adjusted gross income, TPI
does not subtract various exclusions or deductions which
reduce AGI, such as IRA and Keogh contributions and the

-260 percent of long-term capital gains that is excluded
from taxable income. TPI also excludes most business and
investment losses which are taken into account in computing
AGI.
Based on this definition of income, a return was
classified as a high-income return if total positive income
exceeded $250,000- Since TPI excludes real losses as well
as tax-shelter losses, it tends to overstate economic
income; on the other Tiand, it understates economic income
to the extent that tax shelter losses offset economic gains
within many activities. Nonetheless, most returns with
more than $250,000 of positive income can reasonably be
classified as "high income." In 1983, 260,000 tax returns
(or one-quarter of one percent of all returns) reported TPI
in excess of $250,000; nearly 28,000 tax returns reported
TPI in excess of $1 million.
II. Taxes Paid
Many taxpayers with high positive incomes paid a
substantial share of their income in taxes in 1983;
nearly half (47 percent) owed at least 20 percent of their
TPI in tax.
A significant minority, however, owed very low taxes, in
spite of the current law minimum tax. (See Table 1.)
o Almost 30,000, or 11 percent, of returns with TPI
in excess of $250,000 paid virtually no tax; that
is, taxes paid were less than 5 percent of TPI.
o Nearly twice as many owed no more than 10 percent
of positive income in taxes. Fifty-five thousand,
or 21 percent of all returns with positive incomes
in excess of $250,000, paid 10 percent or less of
positive income in taxes. Fifty-four hundred, or
19 percent, of returns with TPI over $1 million
paid no more than 10 percent of positive income in
taxes.
o Over 3,000, or 11 percent, of returns with TPI in
excess of $1 million paid virtually no tax.
These high-income returns paying less than 5 or 10
percent of TPI in taxes are shouldering lower tax burdens
than typical returns with substantially lower incomes.
° "PP^-middle-income returns with TPI of between
$30,000 and $75,000 paid on average about 13
percent of their positive income in taxes.

-3o

Nearly 17,000 of the high-income returns with TPI
exceeding $250,000 owed less than $6,272 in tax,
the amount that a typical four-person family with
$45,000 of income owed. Fifteen hundred returns
with TPI in excess of $1 million owed less than
this $6,272.
III. How Taxes Were Reduced
High-income returns with low tax liability relied most
heavily on losses reported in current business activities,
including those conducted in partnership form, to reduce
their tax bills. (See Table 2.)
o Returns with TPI over $250,000 and taxes of less
than 5 percent of TPI reported current business
losses amounting, on average-, to 67 percent of TPI.
(Thus, for example, a typical high-income return
showing TPI of $300,000 might show losses of
$200,000 and AGI of $100,000; taxable income would
be even less, after allowance for itemized
deductions and personal exemptions.)
The capital gains exclusion and losses carried over from
previous years also offset large amounts of positive income
for the low-tax returns. Itemized deductions (such
as for state and local taxes, mortgage interest expenses,
and charitable contributions) were much less important in
reducing taxes.
o For the high-income, low-tax returns—those with
taxes less than 5 percent of TPI—the combination
of the capital gains exclusion and losses other
than on current business activities offset
46 percent of TPI. (The combination of this
exclusion and these losses, together with current
business losses, offset more than 100 percent of
TPI, on average, for these returns.) Excess
itemized deductions offset only 18 percent of TPI.
The high-income returns with relatively high tax
liability—those with taxes exceeding 20 percent of positive
income—seem to have more in common with the typical
upper-middle-income return than with the high-income,
low-tax return.
o "Above-the-line" offsets to TPI —primarily losses
and the capital gains exclusion—were relatively
unimportant for the high TPI returns with high
taxes and for the upper-middle-income returns with
TPI between $30,000 and $75,000. Current business

Table 1
1983 Returns with Total Positive Income* of $250,000 or More
TPI Over
$250,000

TPI Over
$1 Million

All Returns 260,275 27,796
Returns with Taxes Paid as Percent of TPI:
Less than 5%
29,800
5 - 10%
25,452
10 - 20%
83,173
Over 20%
121,850
Returns with:

3,170
2,225
11,307
11,094

Partnership Losses 166,401 19,871
Partnership Losses Exceed
12,655
1,600
50% of TPI
Partnership Losses Exceed TPI
1,916
306
Office of the Secretary of the Treasury July 31, 1985
Office of Tax Analysis
Total Positive Income (TPI) measures gross income reported
on tax returns before losses. It primarily equals the sum of
positive amounts of income on the Form 1040, with the
following exceptions: For capital gains, it equals long- and
short-term gains before losses and before exclusions. For
Schedule E, TPI includes the income on rental and royalty
properties with profits, on partnerships, on estates and
trusts, and on small business corporations with gain. TPI
does not subtract various exclusions or deductions which
reduce AGI, such as IRA and Keogh contributions, and the 60
percent exclusion of long-term capital gains.
Source: Extract from the 1983 IRS Individual Master File of all
tax returns with TPI of at least $250,000.
*

Table 2
Ways of Reducing Income Subject to Tax
: "Below-the-Line"
"Above-the-Line" Offsets to TPI : Offsets to TPI
: All Other
: Total,
:
Current : Losses &
: Losses & : Excess
Business: Cap. Gains : Cap. Gains: Itemized
Losses* : Exclusions**: Exclusions: Deductions
(Percentage of TPI)

Tax After
Credits

20.2

18.3

23.2 41.5 13.6

67.2

45.7

112.8

17.8

1.0

5.8

10.7

16.5

11.6

30.6

Upper-Middle4.4
Income Returns***

6.1

10.5

9.9

12.7

All High TPI
Returns
Tax Under
5% TPI
Tax Over
20% TPI

Office of the Secretary of the Treasury
Office of Tax Analysis

1.7

July 31, 1985

Current Business Losses include losses on partnerships; net losses from
Schedule C, Subchapter S corporations, rental and royalty properties, and
farms; and net supplemental losses.
**

"All Other Losses and Capital Gains Exclusions" are primarily the excluded
portion of capital gains plus substantial loss carryovers.

,***

"Upper-Middle-Income Returns" have $30,000 to $75,000 of TPI.

Sources:

Extract from the 1983 IRS Individual Master File of all tax returns
with Total Positive Income of at least $250,000; and the Treasury
Individual Income Tax Model for 1983.

-4losses averaged only 6 percent of TPI for the
high-income, high-tax group and 4 percent of TPI
for the moderate TPI returns. Capital gains
exclusions and other losses offset an additional
11 percent and 6 percent of TPI for the two groups,
respectively.
o For both the high-income, high-tax returns
and for the upper-middle-income returns, itemized
deductions—"below-the-line" offsets—were almost
as important as all above-the-line offsets in
reducing tax liability. Itemized deductions
averaged 12 and 10 percent of TPI for the two
groups, respectively.
For the high-income, low-tax returns, some of the
current business losses that offset so much of positive
income undoubtedly represent real economic losses. However,
most of the losses came from partnerships. For some years,
many partnerships have been utilized as vehicles for tax
shelters (defined for purposes of this paper as activities
producing net losses available to offset net income from
other activities), and frequently they have registered
accounting losses when they have incurred no real economic
losses.
o Among the 30,000 taxpayers with TPI of $250,000 or
more who paid virtually no tax (i.e. tax of less
than 5 percent of TPI), partnership losses alone
offset an average of 36 percent of total positive
income.
o Eighty-eight hundred, or 30 percent of taxpayers
with TPI greater than $250,000 and tax liability
below 5 percent of TPI, reported partnership losses
equal to at least half of their positive incomes.
o Approximately 1,900 high-income, low-tax returns
had partnership losses which fully offset positive
income.
IV- The Growth in Partnerships
The growth in tax shelter activity in recent years,
particularly but not exclusively in limited partnerships,
has been well advertised. Some figures help document that
the growth m the partnership sector has been disproportionately concentrated in partnerships registering net tax

Table 3
Partnership Activity, 1965, 1975, and 1982
1965 1975
Partnership income reported 1/
by individuals (in billions):
Net Gain
Net Loss

1982

11.1
1.3

18.4
7.6

27.4
28.3

All industries
Oil and gas drilling
Real estate
Agriculture
Finance
Services
Number of partnerships with profits 2/

914,215
12,467
192,833
127,782
44,537
168,850

1,073,094
12,974
320,878
123,173
106,595
198,956

1,514,212
50,837
562,575
132,394
147,676
287,529

All industries
Oil and gas drilling
Real estate
Agriculture
Finance
Services
Number of partnerships with losses 2/

684,822
6,934
118,563
92,417
29,195
137,774

661,134
7,214
161,928
74,143
58,266
138,510

791,117
21,686
242,156
67,928
80,728
180,153

All industries
Oil and gas drilling
Real estate
Agriculture
Finance
Services
Total losses reported on partnership
returns (in billions) 2/

229,393
5.533
74,270
35,365
15,342
31,076

411,960
5,760
158,950
49,030
48,329
60,446

723,095
29,151
320,419
64,466
66,948
107,376

Number of partnerships with and 2/
without net income
"~

All industries
Oil and gas drilling
Real estate
Agriculture
Finance
Services
Numbers of partners 2/

1.6
.1
.6
.2
.1
.2

All industries
Oil and gas drilling
Real estate
Agriculture
Finance
Services

.721,,899
NA
674,,489
322,,147
317,,187
448,,558

brfice of the Secretary of the Treasury
Office of Tax Analysis
1/
~~
2/
""

Source:
Source:

14.7
1.7
6.5
1.1
1.8
1.9

4,,950,634
213,238
1,,549,716
351,062
1,,422,954
668,858

60.9
13.2
23.0
3.1
7.4
6.8

9,,764,667
1,,512,328
3,,720,805
448,623
1,,983,132
1,,171,642

July 31, 1995

IRS Statistics of Income, Individual Income Tax Returns,
Selected Years"
IRS Statistics of Income, Business and Partnership Tax Returns
Selected Years.

-5losses, in limited partnerships which are the form of
business most commonly used to provide tax shelters, and in
industries that are accorded favorable tax treatment such as
the real estate and oil and gas industries. (See Table 3.)
Historically, the partnership sector has been the source
of substantial net income for individuals. For many years,
though, losses reported for tax purposes have been growing
much faster than gains, and individuals have recently
reported more partnership losses than gains.
o In 1965, individuals reported almost nine times as
much income from partnerships as they did losses—
$11.1 billion in net profits vs. $1.3 billion in
net losses. By 1975, the ratio of reported income
to reported loss had declined to 2.4 to 1 —
$18.4 billion vs. $7.6 billion. By 1982, though
net partnership income had reached $27.4 billion,
net losses had risen dramatically to $28.3 billion,
actually exceeding net gains.
Growth in the partnership sector in recent years, much
in the form of limited partnerships, has been concentrated
in industries with favorable tax code treatment and therefore with opportunity for tax shelters.
o From 1965 to 1975, the total number of partnerships
in all industries increased by a modest 17 percent,
from some 914 thousand to almost 1.1 million.
Between 1975 and 1992, formation of partnerships
accelerated, with the total number of partnerships
rising by 41 percent from almost 1.1 million to
some 1.5 million.
o By comparison, from 1965 to 1975 the total number
of partnerships in the two major tax-shelter
industries, oil and gas drilling and real estate,
rose by 63 percent, from some 205,000 to almost
334,000 thousand. Partnership formation in these
tax-shelter industries accelerated between 1975 and
1982, with the number of partnerships increasing by
84 percent to a. little over 613,000.
o Between 1979 and 1982, 41 percent of the growth in
all partnerships and 74 percent of the growth in
the total number of partners occurred in limited
partnerships.

Table 4
Limited Partnerships and Publicly Offered Tax Shelters
1979 and 1982

1979

1982

Number of partnerships 1/
All partnerships
Limited partnerships

1,299,593
136,112

1,514,212
225,006

6,594,767
2,352,378

9,764,667
4,710,080

$37.6
$10.4
$ 2.3

$63.7
$26.3
$ 8.1

Number of partners 1/
All partnerships
Limited partnerships
New public offerings 2/
(in billions)
All cash offerings
Cash equity offerings
Tax shelter'limited partnerships 3/
Office of the Secretary of the Treasury
Office of Tax Analysis
1/

July 31, 1$S5

Statistics of Income, Business Income Tax Returns, Selected Years.

2/ Securities and Exchange Commission, Registered Offering Statistics
file.
3/ Public offerings of limited partnership interests in oil and gas
drilling and real estate ventures which, in the opinion of SEC
legal staff, promise significant benefits based on tax savings
to the prospective investor and therefore are classified as tax
shelters by the SEC.

-7A significant minority of the high-income returns,
however, paid virtually no tax. Nearly 30,000 (or 11
percent) of the returns with TPI above $250,000 paid no more
than 5 percent of TPI in taxes. Over 3,000 (or 11 percent)
of returns with at least $1 million in TPI paid virtually no
tax. These high-income, low-tax returns look very different
from both those of typical upper-middle-income taxpayers and
those of high-income taxpayers who pay at least 20 percent
of TPI in taxes.
The evidence discussed in this paper supports the
presumption that tax-shelter partnerships are an important
vehicle for high-income individuals to reduce their tax
liabilities. For the high-income returns examined here that
report less than 5 percent of positive income paid in taxes,
losses on current business activities—including Schedule C,
partnerships, rental and royalty properties, and farms—
form the largest offset to positive "income. Partnership
losses are by far the largest component of current business
losses.
Office o'f the Secretary of the Treasury
Office of Tax Policy
July 31, 1985

DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

Analysis of Partnership Activity

Office of the Secretary of the Treasury
Office of Tax Analysis
September 18, 1985

Analysis of Partnership Activity
I. Data Sources and Limitations.
The attached tables provide information regarding partnership
operations as compiled from the IRS Statistics of Income Partnership data files for 1981-83. Although a legal entity, a partnership is not taxed on the income it earns. Instead, the individual partners are generally taxed on their share of partnership
earnings, whether or not they receive any actual partnership
distributions.1/ The partnership files an information return,
Form 1065, with the IRS and also provides an information return,
Schedule K-l (Form 1065), to each partner. Schedule K-l
indicates the partner's share of the various items of partnership
income and expense so that the partner has the necessary
information in order to file the required tax returns. A copy of
each Schedule K-l is attached to the Form 1065 as filed with the
IRS. An additional information return, Schedule K, which
summarizes the information contained on the individual Schedule
K-ls, is also attached to the Form 1065. However, for 1983 and
later years, if the partnership has 10 or fewer partners it may
elect not to file a Schedule K. (See attachments for copies of
these forms.)
Only the information reported on the partnership Form 1065,
and certain information reported on Schedule K (if filed by the
partnership) is compiled by the IRS Statistics of Income
Division. The "bottom line" of the Form 1065 indicates the
amount of ordinary income or loss which is to be allocated to the
individual partners in accordance with their profit (or loss)
sharing ratios. However, items of income or expense which are
specially allocated to individual partners, and items of income
or expense which are subject to special treatment (such as
capital gains) or are subject to special limitations or elections
at the partner level (such as investment interest expense or
intangible drilling costs) are not included on the Form 1065.
Most of these items are instead reported on Schedules K-l and K,
but some (such as oil and gas depletion) are not reported on
either the Form 1065 or Schedules K-l or K. In short, the Form
1065 net ordinary income or loss does not necessarily reflect all
of the partnership income or expense items.
Because some items may not be reported on either the Form
1065 or Schedule K, while other items, although reported on
Schedule K, are not compiled by the IRS Statistics of Income
Division (such as short term capital gains), or may not be picked
up because no Schedule K was filed, it is not possible to calculate the total income or loss incurred by partnerships without
the use of estimating procedures. In this study, the most significant
items whichtrust,
could estate,
not be directly
determined,
T7
A corporation,
individual,
or other but
partnerinferred in
from
other available information, are
~instead
" ship had
may to
be be
a partner
a partnership.
those related to mineral extraction. In particular, oil and gas

-2depletion, hard mineral exploration and development costs, and
intangible drilling costs (including dry hole costs) all had to
be estimated. Although in principle the reported investment
interest expense for 1983 should also be adjusted for the fact
that partnerships with 10 or fewer partners were not required to
file a Schedule K, it was not possible to discern a consistent
method for doing so, and thus such adjustment was not made. The
specific methods used to infer the mineral extraction costs are
described in the Appendix to this note.
In addition to the need to estimate certain items which were
not explicitly tabulated, certain other adjustments were
necessary in order to obtain an amount which represents the
contribution to taxable income reported by the partners as a
result of partnership activities. Although guaranteed payments
to partners are reported as a partnership expense on the Form
1065, they also represent income which must be reported by the
partner (or partners) receiving such payments, and thus were
added back to the Form 1065 "bottom line" income to reflect more
clearly the total income required to be reported by the partners.
In addition, a partnership may incur gains or losses through its
ownership of interests in other partnerships. Since inclusion of
such amounts would represent a "double counting" of aggregate
partnership income, such amounts should be deducted from the Form
1065 "bottom line" income or loss. However, since the activity
of. partnerships which are characterized as "holding companies"
would be distorted if such income were eliminated, for this one
industry only such adjustment was not made.
II. Table One: Growth in Partnership Activity.
Table 1 provides summary statistics for partnerships filing
returns in SOI years 1981-83. The number of partnerships and the
number of partners, both in total and disaggregated by type of
partnership (general or limited), are shown. The total assets
and the partnership income reported, together with the
adjustments necessary to reflect the contribution to the taxable
income reported by the partners with respect to their partnership
interests, are also noted. The purpose of this table is to
indicate the overall level of partnership activity and the growth
of such activity in the last few years. Some joint ventures
engaged in investment, mineral extraction, or joint production or
use arrangements which do not involve the selling of services or
property may elect not to be considered as partnerships, and
would thus not be included in these statistics.
In each case, the number of partnerships, number of partners,
total partnership assets, and gross receipts plus gross rents are
presented in order to show the growth in partnership activity.
It may be noted from this table that whereas the number of
partners in general partnerships has remained fairly steady, the
number of partners in limited partnerships (and the number of
such partnerships) has increased rapidly from 1981 to 1983.

-3Starting from the Form 1065 "bottom line", a series of
adjustments were made to obtain an amount more reflective of the
total taxable income which the partners must report as a result
of their ownership of partnership interests. The first
adjustment consisted of subtracting the income reported as earned
from ownership of other partnership interests and adding back the
guaranteed payments to partners. For convenience, this
adjustment also involved the subtraction of the estimated dry
hold costs and non-oil and gas depletion reported on the Form
1065 so that these specific costs may be included with the
estimated "mineral exploration costs" also shown in this table.
From the resulting "adjusted Form 1065" partnership income
(or loss) , several additional adjustments were made. These
essentially involved those items of income or expense reported on
the Schedule K rather than on Form 1065. Because foreign income
and Section 1231 (or specially allocated) losses were not
compiled for 1981 and 1982, the 1983 values were assumed for
those years. Investment interest expense was not compiled in
1981, and thus the 1982 value (scaled to reflect the relative the
1981 and 1982 partnership long term debt) was used for the 1981
value.
As a result of these adjustments, a "net ordinary income or
loss" was obtained. To this income, 40% of the long term capital
gains and Section 1231 (and specially allocated) gains should be
added to obtain the "contribution to partner's taxable income
(before investment tax credit)". Unfortunately, the Section 1231
gains are not available for 1981 and 1982, and thus only the net
ordinary partnership income or loss is shown for those years.
Likewise, the "contribution to taxable income (after credits)" is
the total effective taxable income which would have been reported
by the partners if their share of the investment tax credit
earned by the partnership were expressed as an equivalent
deduction<(as described more fully in the following section).
Some caveats must be noted with reference to the information
presented in Table 1 (and the following tables). First, it has
been assumed that net IRC Section 1231 gains reported by the
parnership will ultimately be treated as long term capital gains
by the partners (and conversely that net Section 1231 losses will
be treated as an ordinary loss by the partners). Second, limitations imposed by the tax laws on the amount of partnership losses
which may be claimed by a partner, such as that due to inadequate
basis in his partnership interest (IRC Section 704(d)), the "at
risk" limitations (IRC Section 465), the investment interest
expense limitation (IRC Section 163(d)), etc., have been ignored.
Third, potential tax liabilities resulting from each partner's
share of partnership tax preference items under the alternative
minimum (or corporate minimum) tax are ignored. Fourth, any
gains or losses which must be reported by individual partners
resulting from their receipt of partnership distributions or sale
of their partnership interest are ignored. And finally, not all
partners are individuals, and thus the use of a 60% exclusion for

-4capital gains income and the use of effective individual tax
rates to translate the tax benefits associated with the
investment tax credits into a single statistic, the contribution
to partner's taxable income after ITC", may be subject to error.
It may be noted that, in aggregate, general partnerships
appear to incur positive net ordinary income, while limited
partnerships incur ordinary losses. Moreover, the net income for
the general partnerships clearly reflected the 1983 recovery from
the 1980-81 recession.2/ By contrast, the ordinary losses of the
limited partnerships continued to grow, despite the 1983 upturn.
It may also be noted that the estimated mineral exploration costs
for both the general and limited partnerships declined from 1981
through 1983. This largely reflected the cutback in oil and gas
drilling activity over this period in response to the decline in
oil prices.
III. Table Two: Breakdown by Industry.
In Table 2 the income and expenses reported by (or imputed
to) partnerships in 1983 are disaggregated by the nature of the
partnership activity. Summary statistics for all major SOI
industrial sectors, and for each industrial sub-sector for which
aggregate partnership losses exceed $100 million, are presented.
The purpose of this table is to indicate the level of partnership
activity across industries, as well as to indicate the relative
magnitude of•the interest, depreciation, mineral exploration
costs, and all other partnership deductions, and investment tax
credits incurred in each industry. Thus, only the estimated
mineral exploration costs, net ordinary income, investment tax
credit, and contribution to partner's taxable income after
credits are aggregated in the same fashion as in Table 1.
The total ordinary income shown in column two of this table
represents the sum of the gross income, gross rents, nonqualifying interest and dividend income, net farm and royalty income,
net ordinary income from the sale of partnership assets, and
other income reported on the Form 1065, plus net Section 1231
losses and foreign source income reported on the Schedule K.
Note that income from other partnerships is excluded from the
aggregate amount and from the partnership income reported for
each industry (with the exception of partnerships characterized
as "holding companies").
The deductions shown in the third column of Table 2 include
salaries and wages, rent, taxes, bad debts, repairs, rental
expenses (other than interest and depreciation) , and other deductions shown on the Form 1065. Note that guaranteed payments to
partners, interest expense, depreciation, depletion (other than
The temporal behavior of the net income reported by general
partnerships (but not limited partnerships) matches rather
closely the corresponding behavior of corporate profits.

-5oil and gas), and estimated dry hole costs (see Appendix) are
excluded. (The dry hole costs are included with the other
mineral exploration costs)•
Interest expense, depreciation, and estimated mineral
exploration costs (depletion, hard mineral exploration and development costs, and intangible drilling costs, including dry hole
costs) are presented in columns four through six. The interest
expense shown is the sum of the net interest reported on Form
1065 and the investment interest expense reported on Schedule K,
plus the reported rental interest expense. The depreciation
expense shown is the sum of depreciation reported on Form 1065
and depreciation of rental property as listed in the rental
expense schedule. The estimated mineral exploration costs are
obtained as noted in the Appendix. The net ordinary partnership
income or loss is noted in column seven. As has already been
noted, because some items of income and expense are not reported
on the Form 1065, and because of our adjustments for income from
other partnerships and guaranteed payments to partners, the
amounts shown in this column will not be the same as that shown
in the SOI Partnership Returns reports, which utilize only Form
1065 information.
The total long term capital gain shown in column eight is the
sum of the long term capital gains and net Section 1231 gains
reported on the Schedule K. By adding 40% of this amount to the
amount shown in column seven, the total contribution to the
taxable income required to be reported by the partners'is
obtained.
The investment tax credit obtained from Schedule K is shown
in column nine of this table. Using an effective individual tax
rate of 24% for loss partnerships and 29% for gain partnerships
(as obtained from an analysis of the individual SOI data files) ,
this investment credit may be converted into an equivalent
deduction. Subtracting this equivalent deduction from the
taxable income as obtained above, an effective total contribution
to taxable income after credits required to be reported by the
partners is obtained, as shown in the last column of this table.
From this table it may be seen that although partnerships may
engage in all types of business, partnerships appear to be
especially active in oil and gas extraction, construction,
wholesale and retail trade, land development, and service
activities. As expected, mineral exploration costs (depletion
and intangible drilling costs, including dry hold costs) are a
major factor in oil and gas extraction, while depreciation and
interest deductions play an important role in real estate
operations. Depreciation is also important in oil and gas
extraction and equipment leasing, while interest expense
deductions are an important factor in holding and investment
company activity.

-6IV. Table Three:

Summary of Partnership Characteristics

Summary statistics for 1983, by industry and type of
partnership, of various partnership attributes, including various
measures of debt financing, are presented in Table 3. The
activity of limited and general partnerships was seen from Table
1 to differ. The purpose of this table is to further explore the
differences between such partnerships. In particular, the
industrial composition and financing arrangements are examined.
Note that the amounts shown in columns seven and eight are the
ratios of the partnership debt to the partners' capital account
(which in some instances may be negative) .
It may be noted that in some industries, such as manufacturing, construction, electic and gas services, and beef cattle
(except feedlots), the fraction of partnerships which are
operated as limited partnerships is relatively low. By
constrast, in other industries, such as oil and gas extraction,
real estate operators and lessors of buildings, and motion
picture and video production, limited partnerships constitute a
significant fraction of total partnerships.
It may also be noted that the average number of partners in
each limited partnership is much larger than the average number
of partners in general partnerships in nearly all industries.
Moreover, fewer' limited partnerships incur positive ordinary
income than general partnerships. This,- of course, is consistent
with the fact (as noted in Table 1) that in aggregate general
partnerships exhibit ordinary gains while limited partnerships
report ordinary losses.
Greater financial leverage may be seen from this table to be
used in those industries where the underlying assets may serve as
security (such as real estate, motels and hotels, and equipment
leasing) . A greater fraction of non-recourse debt is used by
limited partnerships. Whereas a partner in a general partnership
may increase his tax basis in his partnership interest by his
share of partnership debt, this is not generally the case for a
limited partner. A limited partner may, however, increase his
basis in his limited partnership interest by his share of the
non-recourse debt incurred by the partnership. However, since
such debt does not generally benefit partners subject to the "at
risk" limitation, it is also not surprising that a particularly
large fraction of non-recourse debt is used in the real estate
industry, which under current law does not generally subject the
partners to the "at risk" limitations.

-7V.

Table 4:

Breakdown by Age of Partnership.

Table 4 shows how the various items of partnership income and
expense vary by age of the partnership. The purpose of this
table is to demonstrate the fact that the losses usually arise in
the early years of the partnership, whereas net gains are
typically not incurred until later in the partnership's life.
By examining the pattern of partnership receipts and expenses
as a function of the age of the partnership, the temporal
behavior of the taxable income that might be reported by the
"typical" partnership may be inferred. The distribution of
income and expense items by age of partnership is not, however, a
perfect proxy for the actual temporal behavior of any individual
partnership. Business cycles and secular economic growth cannot,
of course, be captured. In order to adjust for the rapid growth
in limited partnership activity, both the aggregate dollar
amounts and the amount per partner are presented.
From the table it may be seen that the newly formed
partnerships (both limited and general) incur ordinary losses,
whereas the older partnerships incur positive ordinary income (or
capital gains)• However, the per partner losses appear to be
somewhat greater for the limited partnerships than for the
general partnerships. Moreover, the gross ordinary income also
appears to increase more with partnership vintage for general
partnerships than for limited partnerships.
Appendix: Imputation of Mineral Extraction Costs
The method of reporting certain items of partnership expense
and income has varied. For a number of years oil and gas
depletion had been calculated at the partner level, and the
depletion expense was not reported on either the Form 1065 or
Schedule K. For the returns examined, a number of other items,
including hard mineral exploration and development expenses and
intangible drilling costs, were to be reported on Schedule K, but
this item was not compiled by the IRS Statistics of Income
Division. (After 1983, intangible drilling costs are not
reported on either the Form 1065 or Schedule K).3/
Although hard mineral exploration and development costs and
the intangible drilling costs were not compiled, certain tax
preference items related to these costs were picked up from
Schedule K. In particular, "excess intangible drilling costs
from oil, gas, or geotherraal wells", "net income from oil, gas,
or geothermal wells", and "other" tax preference items were
tabulated;for partnerships filing a Schedule K.
3/
"

It is possible that some partnerships may have reported
intangible drilling costs as part of the "other deductions"
shown on the Form 1065. To the extent this occurred, the
losses shown for this industry may be somewhat overstated.

-8In order to estimate intangible drilling costs attributable
to successful wells, the reported "excess intangible drilling
costs" were increased by an estimated 10%. This was done in
order to adjust for the fact that the reported "excess" amount
under current law is net of the deduction for intangible drilling
costs which would have been claimed had these costs been capitalized and either amortized over 10 years or written off on a
units of production basis.
The hard mineral depletion expense was obtained directly from
Form 1065. It was assumed that the hard mineral exploration and
development costs constitute the "other" tax preference reported
on Schedule K by partnerships in the mining industry. These
costs were found to be relatively minor in comparison with the
corresponding depletion expense obtained directly from the Form
1065.
The oil and gas depletion claimed was estimated as the lesser
of 15% of the gross receipts or 50% of the "net income from oil,
gas, and geothermal wells" for those oil and gas partnerships
that filed a Schedule K. This estimate is only approximate, for
the "net income from oil, gas, and geothermal wells" does not
take into account "excess intangible drilling costs" on productive property. It was thus implicitly assumed that such "excess
intangible drilling costs" were incurred on non-productive
properties (and thus did not affect the percentage depletion
claimed, which is calculated on a property by property basis).
It was also implicitly assumed that production from all of the
productive properties would qualify for percentage depletion.
Thus the estimate may overstate the actual percentage depletion
claimed.
Since the "excess intangible drilling costs" may be obtained
only for those oil and gas partnerships; which filed a Schedule K
the computed intangible drilling costs were scaled up by the
ratio (1.575) of the "other" deductions for oil and gas
partnerships to the "other" deductions reported on the Form 1065
for those oil and gas partnerships which did file a Schedule K.
Likewise, the percentage depletion for those oil and gas
partnerships not filing a Schedule K were imputed by scaling up
the computed depletion by the factor 1.867, which is the ratio of
the gross receipts for all oil and gas partnerships to the gross
receipts reported by those oil and gas partnerships filing a
Schedule K. These adjustments, which were required to compensate
? 2 L t h e f a C t t h a t n o t a 1 1 Partnerships filed a Schedule K in
1983, were not necessary for 1981 and 1982. As a test of the
a
S S ? r a ? L ? f t h 1 S f ad 3ustments, the relative magnitude of the
1381, 1982, and 1983 estimated intangible drilling costs were
compared with the level of drilling activity in these years.
? ! S ? \ ^ V 6 . 3 6 7 ? ! ? 1 assumptions, it was found that the pattern of
computed intangible drilling costs matched nearly exactly the
pattern of rotary rig activity and reported industry wide
drilling expenditures during those years.

-9In addition, the dry hole costs (which should have been
included in the "other" deductions on the Form 1065) were taken
to be 3/7 of the intangible drilling costs incurred on successful
wells. This is the 1982 industry-wide ratio of dry hole costs to
the drilling costs of successful wells. For convenience, these
estimated dry hole costs were subtracted from the "other"
deduction reported on the Form 1065 and added to the estimated
intangible drilling costs on successful wells. Because the ratio
of dry hole costs to successful well costs is likely to be
greater for partnership ventures than for the overall industry,
the resulting estimated intangible drilling costs (including dry
hole costs) would tend to understate the actual costs. This
should offset the possible overstatement of the percentage oil
and gas depletion claimed.

Table 1. Growth in Partnership Activity (Dollar amounts in billions)
t ' Limited partnerships

All partnerships

Tm—
Number of partnerships
Number of partners 1/
Total partnership assets
Gross receipts and gross rents

1460502
9095165
715.2
281.6

Form 1065 income or loss
Less income from other partnerships, plus dry hole costs,
non-oil and gas depletion, and
guaranteed payments to partners

-2.7

TOT

General partnerships

TTST

TOT

T9WT

1514212
9764667
845.3
312.2

1541539
10589338
887
313.5

208204
4176572
282.4
55.7

225886
4709723
331.7
70.3

233986
5434870
381.4
70.9

1252298
4918593
432.8
225.9

-7.3

-2.6

-15.7

-17.5

-18.7

15.4

11.3

8.1

11.4

Items not reported on Form 1065i
1.4
Plus foreign income
-12.7
Less mineral eiploration costs
-4.9
Less investment interest expense
Less Sec. 1231 and spec, alloc, loss -.9

1.4
-10.3
-5.8
-.9

-5.8

5.5

Adjusted Form 1065 income or loss

Net ordinary income or loss
Capital gains
Sec. 1231 or spec, alloc, gains

TOT

1288326 1307553
5054944 5154468
513.6
505.6
241.9
242.6
10.2

16.1

8.2

9.6

8.5

-9.9

-11.7

-13.2

21.2

19.8

24.6

1.4
-8
-5.1
-.9

.1
-5.9
-1.9
-.3

.1
-4.6
-2.2
-.3

.1
-4.1
-2.7
-.3

1.3
-6.8
-3
-.6

1.3
-5.7
-3.6
-.6

1.3
-4
-2.4
-.6

-7.5

-l.l

-17.9

-18.7

-20.1

12.1

11.2

7.1

8.8
7.1

1.7

2.2

2.2
3.5

3.8

4.9

6.6
3.6

Investment tax credit 1.5

1.7

Contribution to partner's taxable income after ITC V

-.9

Office of the Secretary of the Treasury
Office of Tax Analysis

TOT

5.5

5.2

45.1

TOT

5.8

Contribution to partner's taxable income before ITC 2/

Percent of partnerships with
positive total ordinary income

5.8

TUT

52.3

50.9

-17.8

-.6

-20.6
18.9

38.1
"~~

34.6

.9
19.6

48.6

54.7

53.8

September 17, 1985

1/ Includes partners that are corporations and partnerships, as well as indivduals.
2/ Contribution to partner's taxable income before ITC equals ordinary income plus 401 of total capital and Sec. 1231
gains.
3/ Contribution to partner's taxable Income after ITC equals ordinary income plus 40% of total capital and Sec. 1231
gains less the Investment tax credit divided by an average marginal tax rate.

Table 2. Summary of 1983 Partnership Income and Deductions by Industry (in Millions of Dollars)

All

All Agrlc.
Fruit Trees
Beef,ex•feedlots
Livestock
All Mining
Metal
Coal

Oil
Construction
All Manufacturing
Lumber
Chemicals
All Transportation
Hater
Communication
Blectrlc
Wholesale Trade
Retail Trade
All finance
Real Estate
Subdividers
Holding companies 4/
All services
Hotels
Motels
Equipment
leasing
Motion pictures
Racing
Other Amusement

Gross
Ordinary
Income 1/

Deductions
Other Than
Deprec,
Interest,
Hin.Exp.
Costs 2/

213517.7

126102.S

3396.8
-84.9
57.7
-21.4
12996.2

2216.6
106.5
202 '
61.2
10089.9
452.2

Interest

Depreciation

49215.4

32285.5

474.1

457.8

65.5

763.1
11404
6688.9
3332
449.5
189.6
5005.7
406.7
1114.1
346.7
3034.8
13011.7
96918.9
68994.1
4991.7

8889.7
3194.9
2857.6
314.9
469.7
2918.8
178.9
984.2
456.9
2019.8
9937.6
50764.5
38237.9
2754.8

325.2
550.2
38830
26777.7
2827.3

47.8
47.1
2563.2
228.8
147.5
2127.9
480.1
727.8
128.5
184.9
1292.6
206.6
339.1
237.5
221.2
763.4
18910.1
16780.7
486.5

7081.6
68824.9
4233.3
3511.4

3179.7
41983.2
3336.2
2366.6

3483
4814
988.7
691.6

968.6
6848.4
763.7
572.8

4038.2
1113.5
41.5
1845.2

1287
852.4

1316.1
70.8

2305.2

122

3.9

70.8

1415.8

217.2

389

5S8

584

7.7
1394.7
122.4
118.2
1114.1
553.7
403.6
99.4
94.6
855.9
169.3

234
161

Estimated
Mineral
Explortion
Costs 3/

396

8045.5

7887.1
90.3
108.8
7656.8

83.2

409.9

Net
Ordinary
Income

Capital
Gain

Investment
Tax Credit

Contribution
to Taxable
Income
1
[After ITC)
-947.3

-1131.6

15942

1713.8

248.3
-268.4
-257.6
-137.4
-8938.7
-335.7
-195.4
-8384.5
2460.2
-657
-93.3
-559.6
-61.6
-148.1
-443.2
-508.7
468.6
1760.5
-11668.9
-12802.2
-1076.9

746.4
51.4
171.2
18.1

105.9
21.2
13.9

274

163.2

20.9
20.8
227.6
178.4
113.9

9.9
2.5

54.4
84.2
13833.7
6987.7
409.9

-959.6
15179.3
-855.3
-119.6

3985.9
609.9
108.5
53.8

103.7

-870.1
-205.7
-155.2
-176.8

18.8
23.2

130.9
90.2

66
6.2
46
.2
.2
4.1

141.6
12.6
128.2
22.4
19.1
128.2

.9
40.1
39.6

6.4
1.9
653.8

8.9
44.3

488
67.4
20.8

21.1

27.5

Office of Tax Analysis
1/ Net of cost of goods sold and net income from other partnerships.
2/ Excludes guaranteed payments to partners.
3/ Includes estimated depletion, hard mineral exploration and development costs, and intangible drilling costs
~~ (Including dry hole costs).
4/ Includ.a Income and expenses from other partnerships.

157.5
-323.7
-237.9
-154.2
-9435.4
' -362.5
-196.9
-8820.2
2483.4
-1065.4
-145.4
-626.6
-474.2
-151.8
-600.3
-653.8
465.7
1655.9
-8460
-11534.8
-1069.9
265.2
13631.5
-1048.2
-173.6
-1329.2
-527.2
-158.4
-267.6

Table 3. Summary of 1983 Partnership Characteristics by Industry and Type of Partnership.
Number of
Partnerships
Limited General

All

233986

1307552

Average Number
of Partners
Limited General
23.2

J* *P

Percent Formed
In Period 1981-3
Limited General

13.1

13
15.4
20.2
67.5
31.6
67.2
72.2

9.5

3.8

33.3

15.6

34.6

53.8

39.4
62.2

23.8
10.6
11.1
88.6
64.2

2
5.4
1.4
2.1
1.2
.5

15.5

1.9
7.4

25.7
23.7
53.2

55.8
53.1
32.8

5.2
1.8
4.2

5.3
3.1
9.9
1.9
.6
1
.4
.6
3.1
1.8
1.7
1.3
I

5.3
35.5
58.6
44.9

15.9

-206

4.4
1.3
4.9
1.6

4.6
.3
2.5
1.6
5.5

76.2
52.7
32.5

8:9
13.5

a.™

22
16.1
76.4
81.9

10
6
19.5
20.2
12.2
18.6
15.6
20.6
25.8
26.1

Percent With
Positive Income
Limited General

37.5

9.8
26^3
80.5

Nonrecourse Debt
as Pet.Total Debt
Limited
General

44.6

All Agric.
9198
127405
Fruit Trees
2461
9630
408
18444
Beef,ex.feedlots•
1636
633
Livestock
23418
36117
All Mining
1509
284
Metal
183
369
Coal
20913
35259
Oil
1592
62000
Construction
25665
786
All Manufacturing
4366
23
Chemicals
172
136
2397
17735
All Transportationn
291
363
Water
3081
449
Oonrounications
1318
67
Electric
1323
22792
Wholesale Trade
6171
161982
Retail Trade
163384
566683
All finance
109491
382210
Real Estate
11280
31390
as
28762
79993
Subdivlders
25538
280756
Holding conpanh
2080
994
All services
1430
5968
Hotels
ng
4693
31642
Hotels
1793
2589
Equipment leasing
3940
8
Motion pictures
6849
679
Racing
Office
the Secretary of the Treasury
Other of
Amusement
Office of Tax Analysis

Ratio of Debt
to Equity
Limited General

56.6
77.4
57.8
25.9
94.2
74.3
16.5
67.3
83.3
10.4
31.2
41.6
44.9
39.9
28.8
57.9
45.4
48.1
68.2

lo!6

5.8

11.4
21.3

3.1

74.5
28.7

17
43.7
52.2
48.5
45.6

6
39.8
49.4
64.9
63.5

5.6
49.3
44.3
31.3

32
42.4
17.8
45.4

46
23.4
42.8
66.2
50.3
62.5

-1.2

.9
-36.9
12.7

12.8
57.9

11
1.5
103.1
-33.9
-51.7
-49.4
-5.9

1.4
247.7

11.1

6.8
2.6
4.4
7.9
9.2

28
.7
0

11.2

3.7

15.5

10.3

34.3

4.3

64.5

11.3
10.7

.7
2.8
36

44.3
14.3

7.9
26.4
48.3
61.5
14.3
28.9
30.2
17.5
20.6
19.4

6.7
40.2
54.9
28.4
20.4
33.4
49.3

3.2
5.6
25.3

49.8
17.8
65.3

3.6

14.4
42.4

18.8

2.8
3.1
1.2
3.8

41.4
19.8
15.5

18.2
24.5

34.7

33.3
50.1
33.4
13.1

13.7
12.8
28.3

8.3

60
30

-26.5

18.3

25.1

2.6
51

2
.5
5.8

34
0
1.4

2.9
4.3
4.6

32.4
25.6
20.5

46
44.3
72.4
48.1
69.1
77.1
48.3
28.6
35.2
19.4
67.3
50.6
47.7
44.6
39.2
60.4
63.9
39.2
63.7
52.4

44
12.3
24.9

September 17, 1985

Table 4. Summary Statistics tor 1983 Partnerships by Yaar Partnarshlp Has Formed.

Number partnerships
Number of partners

All Partnerships
1981-82
1978-80

1973-71 Batora 1973

363329
3186393

330043
2213783

260493
1430118

333794
1930960

48.10

39.40

23.30
14.30
9.00

Limited partnerships
1981-82
1978-80 1973-77

Before 1973

41836
1183324

62571
1922779

59246
1193633

40739
668634

29974 190020 300798
466480
620671

73.20

2.80

13.30

19.80

10.60

13.10

6.00

28.90

32.30

28.80

60.10

20.60
7.60
9.10

39.50
1,60
4.60

9.10
2.90
1.70

6.80
3.40

16.90
7.30
3.00

15.50
4.70
3.40

32.70
4.20
3.70

.50

.40

-1.50
3.90

9.60
3.30

20.90
6.40

.20
.70

7.40
1.90
1.30
2.30
-4.30

17.50
7.70
5.80

.30

10.20
7.90
9.00
1.30
•10.90

8.60
6.80
4.00

.80

9.40
2.00
1.90
2.30
•8.40

.10

-.70

6.90

23.00

13161.04

21707.88

27990.1?

37919.99

1983
231876
1803993

Aggregate Amount I In billions of dollars))
Gross profit
10.80
42.00
Deductions exc. deprec..
Int., mln. exp. costs
12.80
27.70
Interest expense
3.30
13.20
Depreciation
2.80
10.80
Est. mineral exp. cost
4.60
2.00
H»t Ordinary Income
12.90
-13.70
Capital gain
.40
1.90
Contribution to Taxable
Income (aft ITC)
-12.30
-13.30

1983

.90
.10

s
i

1983

General Partnerships
1981-62
1978-60
1973-77 Before 1973

1263616

290799 219736 306220
1022152
761464

1484480

.70

.40

.30

.40

.30

-3.20
1.00

2.50
1.80

4.90
2.10

18.90
4.90

2.30

-3.80

-4.00

2.70

3.40

20.30

28082.66

12889.26

22594.32

31600.00

37821.68

40483.36

.90

-4.00
2.10

1.20

2.00
1.90

8.90

-11.30

-3.40

I.10

2366.22

7021.09

13236.90 19892.74

.Per Partner I In dollars)!
Gross profit
9986.71
Deductions exc. deprec..
Int., mln. exp. costs
2949.90
Interest expense
7099.36
Depreciation
1940.14
Est. mineral exp. cost
1932.11
Net Ordinary Income
-7190.80
Capital gain
221.73
Contribution to Taxable
-6816.20
Income (aft ITC)

627.67
8693.21
4770.28
3389.41
-4299.53
996.29

361.03
11508.34
6433.69
4061.77
-676.96
1760.10

349.62
14404.41
9314.29
3366.14
3919.76
2307.90

296.28
20246.44
3895.92
2397.81
10712.6?
3260.44

1943.68 676.10 339.11 299.11
4963.42
9304.82
7204.89 7627.26
1690.15
3900.60
9696.89 4337.07
1267.62
2600.40
3331.11 2342.42
-7098.69 -5460.89 -3331.11 1046.88
84.91
468.0?
1799.33 1794.69

214.37 3703.67 533.97
14977.26 11922.96 13849.14
7288.63
2416.74
6093.62
1929.34
2094.51
4590.00
4287.43 -7250.22 -2332.41
3213.57
483.33
791.38

391.33 393.96 269.43
16533.74
20335.53
7337.46
6172.32
4691.64
4463.08
2445.82
6434.97
1760.99
2757.65

-4801.66

-319.92

4949.08

11789.07

-7163.16 -9876.91 -2846.49 1643.10

5339.29 -6122.41 -3165.52

2641.49 7091.60 13809.35

3.88

9.21

?.9I

14.48

2.99

3.59 9.41 22.35 -12.12

-60.77 4.43 3.06

4.90 6.02 I.||

1.08

1.19

2.26

4.99

.68

1.30 1.83 6.93 -6.33

-20.78 .72 .61

.»' I.II .2?

27.84

22.07

28.97

31.70

23.09

36.62 33.83 39.96 92.29

34.19 16.29 12.06

•7.76 16.44 15.79

Debt to equity ratio
r.>n-recourse debt
equity ratio
P.frcent non-recourse
ibt

flee of the Secretary of the Treasury
flee of Tax Analysis

22027.92
2829.27
2492.46
12731.73
3300.82

September 17, 1985

1065

Form

U.S. Partnership Return of Income

Qeoortmant of the Treasury
Intsntm* Revenue Seonce
A Pnaooal
attmty (SM
am* at
I
• Print** petted « a n a (ass
smsllefMracbMs)
C leases caaa
leaf

0 M 8 No. 1545-0099

• For F a p o i w w h Reduction Act Notice, see F o r m 1 0 6 5 Instructtom.
yssrl8C.armnlmsTti|iiit.
j m •*•*•«
UM

IRS
labeL
Other.
wise.
print

HD83

,11.

Name
Number and street

CSei

COy or town. State, and ZIP code

f uammutt

tateaaeftaiwar
Yes

Choc* method of accounting: ( 1 ) D Cash

(1) W a tbert a (fetntartna of property or a trspsfar of a partse/ssip
(2)D Acerusi (3)D Other
iottrastdstinf thttatyaar?
Chock appiicabie boxes:
( 1 ) D Fine! return
(2) M -res." is tea partaorssip aujtinf aa afejctjoa aadar aaetioa 754?
If iras," attach a statement (or tfee eteetion. (Sea Dap 4 of too
( 2 ) 0 Change m address
(3)LJ Amended return
tsstrsctMRS baton asswenaf ttiis qoastna.)
Check if the partnership meats sti the requirements shown on
At aaytiesderwf ttw tai year, dsj tat sarbior^ k m aa iataratt • or a
pago4oftholnstrurtor*ur«i«f <3>»ssrt»o*»l
•>•
apnturt or attar asttarrty owr a beat aeeoaat, •eantiaj aeeoaat. or
Numoer of partners in this partnership k > . . . . . . . . . .
odavfioaaciaiacoMrtwafofaiaseoMrtri
.
Yes
It this psrtnership s limited partnership (see page 3 of
Was tat partaerslMo tha treats? of, or traaafaror to, afaraapitrast eeca
Instructions)?
aortal oari&f tsa carraat tai year, wMaor or aat tna partnonaip or aay
b this oartnership a portner in another partnership? .
partner has toy baaaftaai stared is it? If ~tu," joa mm sawt to fat
Are any partners in this partnership also partnerships?
Forw3S20,352IKor92t(Set(at«5(Jiltirj»dM«t)
Aft tftart
of iaeaae.
a , sax. delactioa,
Is toon msiots or safes $
Ik Minos retire aaaj asswaacsi
$ aay spatially aHoeatai rtaass
Bslaooa
• p lc
cndit, ate (aat paft S of iastradioas)
2
Cost of goods sold and/or operations (Schedule A, line 7 )
3
Gross profit (subtract line 2 from line lc)
4 Ordinary income (loss) from other partnerships and fiduciaries
S
Nonqualifying interest and nonquartfyirwj dividends
6s Gross rents $_............. 6e Minus rental expenses (attach schedule) $ ..............
c
Bslanca net rental income (loss)
|>
7
Net income (loss) from royalties (attach schedule)
• Net farm profit (loss) (attach Schedule F(Form 1040))
9
Net gain (loss) (Form 4 7 9 7 . line 14)
10
10 Other income (loss)
11
11
T O T A L income (loss) (combine lines 3 through 10)
•
Baiaaca k> 12c
12s
Salafiasarteetas(otaartfaatopartasn)S
.12b MtojaascreJ* %
13
13
Guaranteed payments to partners (see page 6 of Instructions)
14
14
Rant
15s
Total deductible interest expense not datmed otaowhore on return (see page
lSe
6 of Instructions)
Minus interest expense required to b e passed through to partners o n
Schedule K-l. lines 1 3 . 2 0 * 2 ) . and 20s(3)and Schedule K, lines 13.20a(2). ISh.
and 20a(3) Of ScheduIeK is required)
15c
c
Balance
16
16
3
17
17
Bad debts (see page 7 of Instructions)
18
It
Repairs
19a
20
21*
s
22
23

Pteast
Sign
Hire

rjepreoation from Form 4 5 6 2 (attach Form 4 5 6 2 ) $
W » Minus depredation
19c
datmed on Schedule A and elsewhere on return S Balance ft>
,
20
rjoplotion(flonocefoafiarto» a^
21a
Retirement plans, etc. (see page 7 of Instructions)
21b
Employee benefit programs (see page 7 of Instructions)
22
Other deductions (attach schedule)
23
T O T A L deductions (add amounts in column for lines 12c through 2 2 )
24
Ordinary income (loss) (subtract line 2 3 from line 11)
Under penalties of perjury. I declare that I have examined tha return,todudinfaccompanying schedules and statement*, and to the bast of m y tmiaieuie i
beset it is true, correct, and complete. Oedoretion of prepww<otrsw then taxpayer) oiOasad one* intone

•

Samoturo of general partner

•
Check if

PaM
rTtejrtjr'i

UaiOifi

'•

aaxnature
Firm's name (or

l*reoerer'8 S O C U M security

+• •
E.1.NO.
ZIP code

Ptga*

Form 1065(1983)

S C H E D U L E A.—Cost of Goods Sold and/or Operations (See Page 7 of Instructions.)
Inventory at beginning of year
Purchases minus cost of items withdrawn for personal use

1
2
3
4

•

Cost of labor
Other costs (attach schedule)
Total (add lines 1 through 4)

Inventory at end of year
•
Cost of goods sold (subtract line 6 from line 5) Enter here and on page 1. line 2

6
7

•

Sa Check all methods used for valuing closing inventory:

(I) D
(il) •

Cost
Lower of cost or market as described in regulations section 1.471-4 (see page 8 of Instructions)

(111)0 Writedown of "subnormal" goods as described in regulations section 1.471-2(c) (see page 8 of Instructions)
( r v ) D Other (specify method used and attach explanation) • —
Check if the U F O irrvertory method w a s adopted this tax year for arty goods (if checked, attach Form 9 7 0 )
D
If you are engaged in manufacturing, did you value your inventory using the full absorption method (regulations section 1.471-11)? U Yes U
W a s there any substantial change in determining quartities, cost or valurtor«
. . . U Yes Q
If "Yes." attach explanation.

No
No

S C H E D U L E B.—Distributive Share Items (See Pages 8,10-11, and 15 of Instructions.)
(b) Total amount

(a) Distributive share Items
1
2
3a

Net long-term capital gain (loss)
Other net gain (loss) under section 1 2 3 l a n d specially allocarteo4 ordinary gain (toss)
. .
If the partnership had income from outside the United States, enter the n a m e of the country or U.S.
possession k>
b Total gross income from sources outside the United States

S C H E D U L E L — B a l a n c e Sheets
(See Pages 4 and 8 of Instructions and Question I on Page 1 Before Completing Schedules L and M.)
Bsajmning of tax year

End or 1

Assets
Cash
Trade notes and accounts receivable
Minus allowance for bad debts
Inventories
Federal and State government obligations . . .
Other current assets (attach schedule) . . . .
Mortgage and real estate loans
Othe' investment* (attach schedule)
Buildings and other depreciable assets
Minus accumulated depreciation

....

10
11

Depletable assets .
Minus accumulated depletion
Land (net of any amortization)
Intangible assets (amortiabie only)

12
13

Minus accumulated amortization
Other assets (attach schedule)
T O T A L assets

Liabilities a n d Capital
Accounts payable

IS
16
17

Mortgages, notes, and bonds payable m less than 1 year
Other current liabilities (attach schedule) . . .
AH nonrecourse loans

Mortgages, notes, and bonds payable in I year or more
Clher liabilities (attach schedule)
Partners'capital accounts
T O T A L liabilities and capital

19
20
21

S C H E D U L E M.—Reconciliation of Partners' Capita* Accounts (See Page 8 of In
( S h e w reconciliation of each partner's capital account o n Sehe-tinwYl. Item '•)
(a) Capital account at (a) Capital contributed (e) Ordinary income (d) Income not included (e) lasses not mcfcidod
(loss) from page 1.
tot year
» column (c). plus
dunrajyear
m column (c). plus
Una 24
nontaxable income unallowable deductions
tuj.<

(0
distributions

fj) Capital account
atendofyaar

SCHEDULE K
(Form 1065)
Department of the Treasury
Internal Revenue Service
Name of partnership

Partners' Shares of Income, Credits, Deductions, etc.

0MB No. 1545-0099

• File this form If there are more than ten Schedules K-l to be tiled with Form 1065.
Do net complete lines S, t, 21b, and 21c The amoents far these lines are shown ea Schedule 8, Fern 1065.
• Attach to Form 1065.
• See Instructions for Schedule K (Form 1065).

111)83

Employer Identification number

a. Distributive share Items

b. Total a m o u n t

Ordinary income (loss) (page 1, line 24)
Guaranteed payments
Interest from All-Savers Certificates
Dividends qualifying for exclusion . . . . „
Net short-term capital gain (loss) (Schedule D, line 4)
Net long-term capital gain (loss) (Schedule D, line 9)
Net gain (loss) from involuntary conversions due to casualty or theft (Form 4684)
Other net gain (loss) under section 1231
Other (attach schedule)
..
10 Charitabracontnbutions (attach list): 5 0 %
30%
20%
UL
11 Expense deduction for recovery property (section 179) from Part I, Section A. Form
11
4562
12a
12a Payments for partners to an IRA
12b
b Payments for partners to a Keogh Plan (Type of plan a>
)
12c
c Payments for partners to Simplified Employee Pension (SEP)
13
13 Other (attach schedule)
•
14
14 Jobs credit
,
15
15 Credit for alcohol used as fuel
16
16 Credit for income tax withheld
17
17 Other (attach schedule). . ,
18a
18a Gross farming or fishing income . . .
18b
b Net earnings (loss) from serf-employment
c Other (attach schedule)
19a
19a Accelerated depreciation on nonrecovery reai property or 15-year real property
b Accelerated depreciation on leased personal property or leased recovery property other than
19b
15-year reai property
19c
c Depletion (other than oil and gas)
19d(l)
d (1) Excess intangible drilling costs from oil. gas, or geothermal wells
19d(2)
(2) Net income from oil, gas, or geothermal wells
19e
e Net investment income (loss)
19f
f Other (attach schedule)
20a Investment interest expense:
20a(l)
(1) Indebtedness incurred before 12/17/69
20a<2)
(2) Indebtedness incurred before 9/11/75, but after 12/16/69
20a(3)
(3) Indebtedness incurred after 9/10/75
20b
b Net investment income (loss)
20c
c Excess expenses from "net lease property"
d Excess of net long-term capital gain over net short-term capital loss from investment property 20d
21a Type of income
b Foreign country or U.S. possession
c Total gross income from sources outside the U.S. (attach schedule)
d Total applicable deductions and losses (attach schedule)
e Total foreign taxes (check one): s » D Paid D Accrued
f Reduction in taxes available for credit (attach schedule) .
g Other (attach schedule)
For Paperwork deduction Act Notice, aae Form 1065 Instruction*.

Schedule K (Form 1065) 1983

TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON

September 20, 1985

TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $8,300
million of 364-day Treasury bills
to be dated October 3, 1985,
and to mature October 2, 1986
(CUSIP No. 912794 KR 4 ) . This issue will not provide new cash for
the Treasury, as the maturing 52-week bill is outstanding in the
amount of $8,311
million. Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239, prior to 1:00 p.m., Eastern Daylight
Saving time, Thursday, September 26, 1985.
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.
The bills will be issued for cash and in exchange for
Treasury bills maturing October 3, 1985.
In addition to the
maturing 52-week bills, there are $13,604 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 currently hold $ 1,610 million as agents for foreign
and international monetary authorities, and $5,369 million for their
own account. These amounts represent the combined holdings of such
accounts for the three issues of maturing bills. Tenders from Federal Reserve Banks for their own account and as agents for foreign
and international monetary authorities will be accepted at the
weighted average bank discount rate 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 $75
million
of the original 52-week issue. Tenders for bills to be maintained
on the book-entry records of the Department of the Treasury should
be submitted on Form PD 4632-1.
B-284

PAGE 2
Each tender must state the par amount of bills bid for,
which must be a minimum of $10,000. Tenders over $10,000 must
be in multiples of $5,000. Competitive tenders must also show
the yield desired, expressed on a bank discount rate basis with
two decimals, e.g., 7.15%. Fractions may not be used. A single
bidder, as defined in Treasury's single bidder guidelines, shall
not submit noncompetitive tenders totaling more than $1,000,000.
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 as of 12:30 p.m. Eastern
time on the day of 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.
A noncompetitive bidder may not have entered into an agreement,
nor make an agreement to purchase or sell or otherwise dispose of
any noncompetitive awards of this issue being auctioned prior to
the designated closing time for receipt of tenders.
Payment for the full par amount of the bills applied for must
accompany all tenders submitted for bills to be maintained on the
book-entry records of the Department of the Treasury. A cash
adjustment will be made on all accepted tenders for the difference
between the par payment submitted and the actual issue price as
determined in the auction.
No deposit need accompany tenders from incorporated banks and
trust companies and from responsible and recognized dealers in
investment securities for bills to be maintained on the book-entry
records of Federal Reserve Banks and Branches. A deposit of 2 percent of the par amount of the bills applied for must accompany
tenders for such bills from others, unless an express guaranty of
payment by an incorporated bank or trust company accompanies the
tenders.

PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
19 84, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

rREASURY NEWS
BY
partment of the Treasury REMARKS
• Washington,
D.c. • Telephone 566-2041
DIRECTOR OF THE MINT
DONNA POPE
AT THE NUMISMATIC THEATRE
AMERICAN NUMISMATIC CONVENTION
BALTIMORE, MARYLAND
August 24, 1985
Good afternoon. I hope everyone here is enjoying this
really fine convention with cooperation from the weather on
this beautiful day. I gather that since I was invited to
speak to you again this year, you either must have enjoyed my
remarks last year or were desperate for speakers this year.
I prefer to believe the former — but — for whatever reason,
this seems to be the start of a tradition of the Mint
Director reporting first hand to the coin collectors, our
valued customers, on the affairs and plans of the Mint.
For the benefit of those who missed last year's remarks
let me take a moment and review my duties as Mint Director to
provide a short introduction to the Nation's Mints.
One might think that a Mint Director, like the King in
an old nursery rhyme, might spend all of her time in the
"counting house, counting all the money". The job and the
Mint are more complex than that.
The Mint Director wears many hats including those of a
factory foreman, a policeman, an international diplomat and a
marketer. However, the principle responsibilities are those
of producing the Nation's coinage, around 18 billion last
year, and the security of the gold reserves. As I am fond of
saying, Elizabeth Taylor may have her diamond, but nothing
can compare to my 263.5 million fine troy ounces of gold
presently worth about 80 billion dollars.
Speaking as a factory foreman I should tell you that the
Mint operates out of six facilities across the country,
located in Denver, Philadelphia, West Point New York, two in
San Francisco and, of course, Fort Knox. Philadelphia and
Denver produce the bulk of our coinage. Our headquarters in
Washington coordinates all of the work done in the field plus
works directly with the Congress and other government
agencies. In this past year, the Mint headquarters moved
from a dilapidated old building on 13th Street to a new and
modern building closer to the Capitol Hill area. The
employees like the new surroundings and it is certainly a
more functional work place than the old building.
As a policeman, I protect the gold reserves of the
United States, substantial silver reserves, the coins in the
mints and some unidentified items stored in our vaults by
B-255

- 2 other government agencies in the event of a national
emergency. The Mint employs over 200 men and women as police
officers to carry out this mission.
On the international scene we are the largest Mint in
the world. We are also the only national mint administered
by a woman. This past year we have received visitors from
all around the globe who come to us seeking technical or
marketing advice. Additionally, the U. S. Mint participated
for the first time in many years in the FIDEM Congress in
Stockholm, Sweden last June. This biennial conference brings
together medalists, Mint Directors and artists to review and
discuss trends in medal making and design. I found that
Congress to be very educational on an art form few understand
or appreciate.
In the Statue of Liberty program on which the Treasury
is now embarking, the U. S. Mint is charged, among other
things with developing our export program. It is my intent
to model our efforts along the same line as the leading
foreign mints in worldwide marketing and develop some inhouse
expertise working with groups of established regional
distributors abroad. It is an exciting venture and if
successful, hopefully, will open new markets for all of the
Mint products. For the convenience of U. S firms we have
decided that the domestic market for the Statue of Liberty
Program will include all of North, Central and South America.
The Mint manages an extensive marketing effort. In the
past year, we sold 2.7 million 1985 proof sets, 1.9 million
1984 uncirculated sets plus national medals and assorted
other coins. We operate three retail sales operations and
have a contractor operate the fourth. The ANA is not the
only convention at which the Mint had an exhibit. For the
past three years we had exhibits at the major banking and
financial conventions to introduce them to Mint products and
we recently participated at the Canadian Numismatic
Convention.
Our inhouse gold medallion sales effort last December
and January resulted in the sales of 100,000 medallions worth
$26 million.
Next month the Mint will issue its first catalogue of
products in a special Christmas promotion. The catalogue
will offer the regular proof and uncirculated coin sets plus
Mint medals. Gold medallions will be available in sets of
five ounce pieces or half ounce pieces. This will be the
last time George Washington Commemorative Coins will be
offered to the public. It is our plan to discontinue sales
and melt the remaining coins at the start of next year. So,
if you have not bought your GW coins, this is your last
chance.

- 3 All of our marketing efforts are geared toward
professionalizing our delivery and enchancing our products.
Additionally, these programs are good revenue raisers for the
government, having produced a $279 million contribution to
the general fund of the Treasury last year. This does not
include the $72 million dollars raised in the Olympic Coin
Program for the U. S. Olympic effort. You see the U. S. Mint
makes money in more ways than one.
As I mentioned, the Treasury Department through a joint
effort by the Office of the Treasurer and the U. S. Mint is
now embarking on a coin program, similar to the Olympics to
raise funds for the restoration and renovation of the Statue
of Liberty and Ellis Island. The program will feature three
coins, a gold half eagle, a silver dollar and a clad fifty
cent piece. They will carry a surcharge of $35, $7 and $2
respectively in the selling prices which are earmarked for
the Foundation organizing the restoration effort. It is the
goal of this program to raise at least $40 million to "help
save the lady". The first coins will be struck during
simultaneous ceremonies at the West Point Bullion Depository
and the San Francisco Assay Office in October. The first
public offering of the coins will be made in November with
delivery slated for the first of the year. A great deal of
effort has gone into the many facets of this program and we
certainly have built on our Olympic experience to design a
tremendous coin program.
All through the Olympic Program we had major problems
with order processing, computer processing and customer
service. I spent many anguishing afternoons signing letters
to outraged customers who had not received their coins or had
not had their problem resolved to their satisfaction.
Recognizing that good customer service is a company's key to
excellence, we are making major improvements.
When I first came to the Mint I regarded Computers as
somewhat similar to witchcraft. Today, while I am by far not
an expert, there is a deep, deep appreciation for what a good
computer can do for you or what a bad set up can do to you.
The Mint's old computer has been replaced with a modern
reliable group of minicomputers which will provide more
efficient and accurate processing. Our former computer was
in such bad shape that midway through the Olympic program we
had to transfer to another computer resulting in terrible
transfer problems. We are upgrading the software that
manages the Mint mailing list to provide ease of access to a
customer's account and more flexibility. We will be able to
accept such simple information as a four line address,
telephone numbers and a more accurate history of purchases.
The system will also have an inquiry tracking system. So if
you do write us with a problem, your letter will be monitored
from receipt to resolution. Finally, instead of being listed
on our accounts , for instance, as D. Pope, I can, if I wish,

- 4 be listed as Mrs. Donna Pope.
We are moving the customer service center out of the San
Francisco Old Mint to a new modern facility in suburban
Washington. The tremendous distance between coasts made it
nearly impossible to manage this function and respond to the
changing conditions found in a special coin program. Being
closer will allow senior supervisors to manage more closely
the important customer service function. So, don't be
surprised to see a Washington return address on your letters.
The Mint is already using the private sector for the
actual order processing system. We are presently using the
services of Mellon Bank to process the bulk of all the orders
though a lock box. The Mint's order processing equipment was
almost antique and could not adjunct to the demands of
special coin programs. The lock box permits speedier
processing so that funds are deposited faster resulting in
greater interest collection for the government.
The change with which most of you are probably already
familiar is the switching from sending all parcels by
registered mail to using a combination of first class mail,
UPS delivery and registered mail for silver and gold coins.
It was just too expensive to send a proof set by registered
mail. Switching to UPS for shipment of 3, 4, and 5 proof
sets saves $380,000 over first class mail and $3,500,000
over registered mail. These savings are what allow us to
sell, one of, if not the most inexpensive proof set in the
world.
Few serious problems have been reported by the UPS
delivery. On the first trial we did send sets to home
address instead to the Post Office boxes listed on the
mailing list. This caused a concern among some collectors
who use a post office box to protect their coin collection.
One irate man telephoned rather upset because until the proof
set notice arrived at home, his wife was not aware that he
had a post office box. Not wanting to be the contributing
factor in family problems we have separated all the customers
with Post Office boxes and make sure their coins are sent to
those boxes. A key thing I'd like you to remember is that
UPS will pay for the replacement of any coin set that is
stolen or damaged so our customers are protected. And during
our cost benefit analysis we determined that even with our
first class mail replacements, there would be a great cost
savings.
I think this pretty much updates you on the numismatic
side of the Mint.
Our expansion and improvement project at the Denver Mint
is moving along quite well with construction expected to be
finished by January. We are testing some high speed coin

- 5 presses and mintwide we are working with a group of efficiency
engineers to develop work standards and guides for our
production process. I was amazed to learn, when I became
Mint Director, that engineered standards for our plants did
not exist. Any modern manufacturing plant has such standards
and in the near future so shall the Mint.
As you see the Mint has been a busy place this past year
and I have every reason to believe we will be just as busy in
the next year. It is certainly a challenge to come from the
outside to help a President carry out his program. I have
always viewed my responsibility as a member of this
Administration to find ways to carry out the Mint's mission
in an inexpensive and efficient manner.
President Reagan has said that a government agency is
the closest thing to eternal life found on the earth. The
spending habits of the government resembles that of the
feeding habits of a new born baby. An alimentary canal with
an insatiable appetite at one end and no sense of
responsibility at the other.
I am proud that at the U.S. Mint we have achieved a
measure of success in reducing that appetite and restoring
responsibility. Formerly, at the end of the budget year in
Washington it was not uncommon to see an agency rush out and
buy all sorts of unneeded supplies because the agency
discovered they were hot going to need all of their budget
for planned expenses. I am pleased to report that at the end
of last year when we discovered we were running a $7.5
million surplus at the end of the year, I returned that money
to the general fund of the Treasury. That is the kind of
responsibility in government the public demands, and the kind
we in the Reagan Administration want to deliver, and with the
help of the people at the Mint we work daily for that
deliverance
In closing, I hope all of you found time this past week
to visit the U. S. Mint exhibit. A lot of planning went into
this year's exhibit since we wanted to have a good sales
effort and make it educational. This is the first time we
have had some of the regular engraving staff out in the
public showing their work and explaining the process. I want
to thank the organizers of this theatre and the American
Numismatic Association for their hospitality. It has been a
pleasure to be here this afternoon, and if you let me "coin a
phrase" I hope the coin business continues to thrive in
"Mint" condition.
I;ll be glad to take ten minutes of friendly questions.

TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
FOR IMMEDIATE RELEASE
September 23, 1985"

CONTACT:

Art Siddon
566-5252

DAVID V. DUKES SELECTED
EXECUTIVE DIRECTOR
OF THE JOINT FINANCIAL MANAGEMENT IMPROVEMENT PROGRAM

Treasury Secretary James A. Baker, III, in his capacity as
Chairman of the Joint Financial Management Improvement Program
(JFMIP), today announced the selection of David V. Dukes to be
the Program's new Executive Director.
The JFMIP is a joint and cooperative undertaking of the
Department of the Treasury, the Office of Management and Budget,
the General Accounting Office, and the Office of Personnel
Management, working in cooperation with each other and with
operating agencies to improve financial management practices.
Leadership and guidance are provided by the four Principals of
the Program — the Secretary of the Treasury, the Director of
the Office of Management and Budget, the Comptroller General of
the United States, and the Director of the Office of Personnel
Management. Under the guidance of a Steering Committee, the
Executive Director and his staff develop, direct and undertake
projects that contribute significantly to the efficient and
effective planning and operation of government financial
programs.
Mr. Dukes formerly was Deputy Assistant Secretary, Finance,
with the Department of Health and Human Services. In that
capacity he was responsible for the Department's accounting,
fiscal, and budget execution policies; for development and
improvement of Department-wide financial systems; and for the
operation of major financial systems. He has also held financial
and auditing positions with other government agencies and the
private sector.
Mr. Dukes graduated Magna Cum Laude with a degree in
accounting from Husson College in Bangor, Maine, and earned a
Masters Degree in Public Administration from the University of
Washington at Seattle. He has received various Departmental
awards and is a member of the Association of Government
Accountants.
B-286

TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE

September 23, 1985

RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $4,514 million of 13-week bills and for $4,503 million
of 26-week bills, both to be issued on September 26, 1985, were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average
a/ Excepting
b/ Excepting
Tenders
Tenders

13-week bills
maturing December 26, 1985
Discount Investment
Rate
Rate 1/
Price

26-week bills
maturing March 27, 1986
Discount Investment
Rate
Rate 1/
Price

6.71%a/
6.92%
98.304 : 7.00%b/
7.36%
96.461
6.85%
7.07%
98.268 : 7.08%
7.44%
96.421
6.81%
7.02%
98.279 : 7.05%
7.41%
96.436
1 tender of $1,000,000.
1 tender of $1,000,000.
at the high discount rate for the 13-week bills were allotted 9%.
at the high discount rate for the 26-week bills were allotted 34%.
TENDERS RECEIVED AND ACCEPTED
"(In Thousands)
Received
Accepted
Received

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

90,625
14,773,620
23,180
52,965
136,375
44,045
1,212,245
28,950
65,545
50,010
46,905
2,432,390
268,375

$
51,525
3,375,065
23,180
52,965
136,375
44,045
230,060
28,950
65,545
50,010
46,905
141,390
268,375

85,110
14,876,455
24,585
37,640
78,510
:
44,550
966,440
29,810
40,525
51,715
34,180
2,173,200
391,815

$
48,510
3,405,955
24,585
37,640
78,510
43,050
128,140
29,810
40,525
51,715
34,180
188,200
391,815

$19,225,230

$4,514,390

: $18,834,535

$4,502,635

$16,670,365
1,024,715
$17,695,080

$1,959,525
1,024,715
$2,984,240

: $15,862,705
:
1,083,530
: $16,946,235

$1,530,805
1,083,530
$2,614,335

1,389,450

1,400,000

140,700

488,300

$19,225,230

$4,514,390

: $18,834,535

$4,502,635

Accepted

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

Equivalent coupon-issue yield.

B-287

THE SECRETARY OF THE TREASURY
WASHINGTON

FOR IMMEDIATE RELEASE

?
SEPTEMBER 22, 1985

Following is a list of participants in tha meeting with industrial
oountry Financa Ministars, Cantral Bank Govarnora, and Deputy Financa
Ministars at tha Plaza Hotal in Naw York City, Sunday, Saptambar 22,
19851
Jamas A. Bakar, III - Sacratary of tha Treasury
ynit#d Statesi
Paul A. Volckar - Chairman, Federal Reserve Board
of Governors
Richard G. Darman - Deputy Secretary of the
Treasury
David C. Mulford - Assistant Secretary for
International Affairs
Nigel Lawson - Chancellor of the Exchequer
United Kingdom:
Robin Leigh-Pemberton - Governor, Bank of England
Geoffrey Littler - Second Permanent Secretary,
Treasury
Germany:

Gerhard Stoltenberg - Minister of Finance
Karl Otto Poehl - President, Bundesbank
Hans Tietmeyer - State Secretary of Finance

Franca;

Pierre Beregovoy - Minister of the Economy and
Finance
Michael Camdessus - Governor, Bank of France
Daniel Lebegue - Director of the Treasury

Janani

Noboru Takeshita - Minister of Finance
Satoshi Sumita - Governor, Bank of Japan
Tomomitsu Oba - Vice Minister of Finance for
International Affairs

G-

,htem<L\AX

TREASURY NEWS

department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE • September 23, 198 5

Treasury Appoints Executive Director
to African Development Bank
Treasury Secretary James A. Baker III today announced the
appointment of Donald R. Sherk to serve as United States
Executive Director to the African Development Bank.
Mr. Sherk will begin his new assignment.in Abidjan, Ivory
Coast, in early October.
Since June of 1982, Mr. Sherk has served as United States
Alternate Director to the Manila-based Asian Development Bank
and for approximately nine months of 1984 served as Acting
Director to the ADB.

Prior to his appointment to the Asian

Development Bank, Mr. Sherk served as Deputy Director of the
Office of Multilateral Development Banks in the Treasury
Department.

Before that, he served as Senior Economist for

Bank Policy and Asian Development Bank Desk Officer in the
same Treasury Department office.
Prior to joining the Treasury Department in 1977, he was
a chairman of the economics department at Simmons College in
Boston and had also taught economics at the University of Iowa
and the U.S. Military Academy at West Point.
Mr. Sherk, 49, was born in Ida Grove, Iowa.

He received

B.A., M.A. and Ph.D. degrees from the University of Iowa.
Mr. Sherk is married and has two sons and a daughter.

TREASURY NEWS

Department of the Treasury • Washington, D.c. • Telephone 566FOR RELEASE AT 4:00 P.M.
September 24, 1985
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $13,600 million, to be issued October 3, 1985.
This offering will not provide new cash for the Treasury, as the maturing bills
are outstanding in the amount of $13,604 million. Tenders will be
received at Federal Reserve Banks and Branches and at the Bureau of
the Public Debt, Washington, D. C. 20239, prior to 1:00 p.m., Eastern
Daylight Saving time, Monday, September 30, 1985.
The two series
offered are as follows:
91-day bills (to maturity date) for approximately $6,800
million, representing an additional amount of bills dated
July 5, 1985,
and to mature January 2, 1986
(CUSIP No.
912794 JL 9 ) , currently outstanding in the amount of $7,070 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $6,800 million, to be dated
October 3, 1985,
and to mature April 3, 1986
(CUSIP No.
912794 JZ 8 ) .
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.
The bills will be issued for cash and in exchange for Treasury
bills maturing October 3, 1985.
In addition to the maturing
13-week and 26-week bills, there are $8,311
million of maturing
52-week bills. The disposition of this latter amount was announced
last week. Tenders from Federal Reserve Banks for their own account
and as agents for foreign and international monetary authorities will
be accepted at the weighted average bank discount rates 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 $1,463 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,538 million as
agents for foreign and international monetary authorities, and $5,370
million for their own account. These amounts represent the combined
holdings of such accounts for the three issues of maturing bills.
Tenders for bills to be maintained on the book-entry records of the
Department of the Treasury should be submitted on Form PD 4632-2
(for 26-week series) or Form PD 4632-3 (for 13-week series).
B-289

4/85

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, PAGE 3
Public announcement will be made by the Department of the
Treasury of the amount and yield 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 $1,000,000 or less without
stated yield from any one bidder will be accepted in full at the
weighted average bank discount rate (in two decimals) of accepted
competitive bids for the respective issues. The calculation of
purchase prices for accepted bids will be carried to three decimal
places on the basis of price per hundred, e.g., 99.923, and the
determinations of the Secretary of the Treasury shall be final.
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 the issue date, in cash or other immediately-available funds
or in Treasury bills maturing on that date. 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. In addition, Treasury Tax and Loan Note Option Depositaries may make payment for allotments of bills for their own accounts and for account
of customers by credit to their Treasury Tax and Loan Note Accounts
on the settlement date.
In general, if a bill is purchased at issue after July 18,
1984, and held to maturity, the amount of discount is reportable
as ordinary income in the Federal income tax return of the owner
at the time of redemption. Accrual-basis taxpayers, banks, and
other persons designated in section 1281 of the Internal Revenue
Code must include in income the portion of the discount for the
period during the taxable year such holder held the bill. If the
bill is sold or otherwise disposed of before maturity, the portion
of the gain equal to the accrued discount will be treated as ordinary income. Any excess may be treated as capital gain.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76 and 27-76, Treasury's single bidder guidelines, and this
notice prescribe the terms of these Treasury bills and govern the
conditions of their issue. Copies of the circulars, guidelines,
and tender forms may be obtained from any Federal Reserve Bank or
Branch, or from the Bureau of the Public Debt.

4/85

TREASURY NEWS
jpartment of the Treasury • Washington, D.c. • Telephone 56C'-2041
FOR IMMEDIATE RELEASE
September 26, 1985
RESULTS OF TREASURY'S 52-WEEK EILL AUCTION
Tenders for $8,305 million of 52-week bills to be issued
October 3, 198 5,
and to mature October 2, 1986,
were accepted
today. The details are as follower
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Rate
Low
High
Average -

7.32%
7.35%
7.33%

Investment Rate
(Equivalent Coupon-Issue Yield)

Price

7.86% 92.599
7.90%
7.87%

92.568
92.589

Tenders at the high discount rate were allotted 52%
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

Accepted

received

$18,,438,090

31,895
7,527,690
6,940
110,900
24,400
18,045
286,195
36,920
6,990
14,335
4,670
143,765
92,025
$8,304,770

$16,,014,150
348,940
•41*.,363,0^6

$5,880,830
348,940
$6,229,775

76,895

15, S74,690

•

6,940
110,900
36,800
22,845
1* 227,955
78,920
6,990
14,335
14,670
1,,174,125
92,025

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

2 ,000,000
75,000
$18 ,43$r090

2,000,000
75,000
$8,304,770

An additional $100,000 thousand of the bills will be issued
to foreign official institutions for new cash.

R-290

TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
Contact: Bob Levine
Sept. 27, 1985
(202) 566-2041
TREASURY SUBMITS TIED AID CREDIT LEGISLATION
In accordance with the President's trade strategy for the
eighties, Secretary Baker announced today that he has transmitted to Congress proposed legislation to establish a $300
million tied aid credit fund. This action is consistent with
the President's commitment announced in his speech of September
23, 1985.
Secretary Baker said, "The use of tied aid credits for
commercial purposes by other governments is an unfair trade
practice that has lost markets for U.S. businesses. It cannot
be allowed to continue. We will direct these funds at those
few countries that are blocking an agreement to eliminate these
predatory practices."
Tied aid and partially untied aid credits, which are aid
funds alone or in combination with official export credits, are
offered by other governments at low levels of concessional!ty
to win commercial sales. They are, in effect, subsidies that
deprive U.S. companies of fair access to world markets and
undermine the existing agreement to limit export credit subsidies. These practices also impede the growth of developing
countries by diverting funds away from development needs.
The proposed legislation would create a $300 million
temporary tied aid fund in the Treasury Department which would
provide grants combined with Export-Import Bank and/or private
credits.
These tied aid credits would be targeted at the
export markets of those countries which engage in such tied aid
and partially untied aid credits and which block progress
toward an agreement to restrict these predatory practices.
This facility could support up to $1.0 billion in tied aid
credit authorizations.
The Administration has proposed to the 22 industrial
countries of the Organization for Economic Cooperation and
Development that at least 50 percent of any such credit be in
the form of a grant.
That minimum grant element would make
these credits so expensive to use that in practice they would
be limited to foreign aid. At the last OECD Ministerial, the
United States succeeded in reaching agreement to raise the
minimum grant element from 20 to 25 percent, but further progress toward imposing greater discipline over tied aid credits
was blocked by a few key countries. Most other OECD members
agree that the minimum grant element should be increased.
B-291

TREASURY NEWS

apartment of the Treasury • Washington, D.c. • Telephone 566-2041

For Release Upon Delivery
Expected at 9:30 a.m. E.D.T.
September 30, 1985
STATEMENT OF
RONALD A. PEARLMAN
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am pleased to appear before you today to present the views
of the Treasury Department on a report, prepared by the Staff of
this Committee, entitled "The Subchapter C Revision Act of 1985."
This, report, issued in May 1985, contains a set of specific
recommendations to make a series of changes to Subchapter C of
the Internal Revenue Code. The Treasury Department is interested
in and supportive of the effort to reform the current rules
applicable to the taxation of corporations and their
shareholders, and we applaud the Staff for its excellent work in
preparing a comprehensive set of proposals, reduced to statutory
language and accompanied by rich explanatory material, to reform
and to simplify this area.
We are concerned, however, that enactment of changes of the
magnitude suggested by the Staff is for several reasons
inappropriate at this time. First, in light of the substantial
modifications to the Internal Revenue Code that will be necessary
to accomplish fundamental tax reform, we are hesitant to support
further extensive changes. Second, the Treasury Department does
not believe that the potential economic effects of the Staff's
far-reaching proposals have been adequately considered. In this
regard, we complement the Committee for soliciting the views of
various economists for today's hearing, but we must emphasize
that before undertaking major changes in an area as well settled

-2as Subchapter C, these potential effects must be clearly
understood. Therefore, with one important exception discussed
below, we recommend that the Committee defer passage of extensive
changes to Subchapter C until fundamental tax reform has been
completed, the resulting statutory changes have become understood
by taxpayers and their advisors, and the potential economic
effects of the Staff proposals have been more thoroughly
documented.
Despite our view that extensive changes to Subchapter C are
inappropriate at this time, we believe that serious attention
should be devoted this year to the limitations imposed by the
Internal Revenue Code on the extent to which a corporation can
utilize net operating loss carryovers, excess tax credits, and
other tax attributes following certain corporate transactions.
The existing limitations were amended extensively by the Tax
Reform Act of 1976 ("1976 Act"), but the effective dates of those
amendments have been delayed repeatedly in response to criticism
and are currently scheduled to become effective on January 1,
1986.
Unlike the proposed Subchapter C changes generally, the
limitations on the carry over of net operating losses and other
tax attributes have been considered extensively by Congress and
the Treasury Department during the past several years. There is
general consensus that the existing limitations are wholly
inadequate and in need of revision, and that the 1976 Act
amendments, which have been debated for almost ten years, also
are seriously flawed. Accordingly, the Treasury Department
believes that new rules to replace both the existing limitations
and the 1976 Act amendments should be developed before January 1,
1986.
In general, the Treasury Department strongly supports the
proposal regarding the limitations on net operating loss
carryovers and other tax attributes included in the Staff Report.
We be'lieve the Sta£f proposal offers an excellent foundation on
which to build a reformed system that can replace the current law
and 1976 Act limitations on the utilization of carryovers.
Consequently, although we will not at this time discuss the full
range of modifications to Subchapter C suggested by the Staff, we
will discuss in detail the proposed set of rules governing the
extent to whiclx net operating losses and other tax attributes may
be utilized following corporate acquisitions.
Background
Under current law, a corporation that incurs a net operating
loss in bne year generally is permitted to use the loss to offset
income earned in the three taxable years prior to and the 15
years after the year in which the loss is incurred. Similarly, a
corporation that incurs a capital loss may generally use that

-3loss to offset income earned in the three years prior to and the
five years after the year in which the loss is realized. The
underlying premise of allowing a corporation to offset a loss
incurred in one year against taxable income earned in another
year is to provide an averaging device to ameliorate the unduly
•harsh consequences of a strict annual accounting system. For
similar reasons, corporations that are unable to use all their
credits against tax in the year in which the credits are earned
generally may use such excess credits to offset tax liability in
the three prior and 15 succeeding taxable years. Foreign tax
credits, however, may be carried forward only five years.
The tax attributes of a corporation, including net operating
loss carryovers, net capital loss carryovers, and excess credit
carryovers, 1/ generally survive an acquisition of the
corporation, because the corporation's tax history is not
affected if its corporate status is unchanged. Thus, if a person
purchases the stock of a corporation in a taxable stock
acquisition, the corporation's tax attributes generally are
preserved, unless the acquiring corporation makes a section 338
election. Thus, the ability to use the net operating loss
carryovers of an acquired corporation to offset income earned by
that corporation in-the 15 years after the loss typically is not
affected by the stock purchase. If a section 338 election is
made, however, the taxable stock acquisition shares most of the
characteristics of a taxable asset acquisition from a liquidating
corporation, including the fact that the acquiring corporation
does not succeed to any of the target corporation's tax
attributes. In addition, if a corporation is acquired by another
corporation in a tax-free acquisition, the Internal Revenue Code
provides that the tax attributes of the target corporation carry
over Section.
to the 382
acquiring
corporation,
notwithstanding
the in
fact1954
that
was added
to the Internal
Revenue Code
to
the
acquired
corporation's
separate
corporate
existence
may
establish objective tests that would curb "trafficking" in
terminate. Finally,
tax attributes
similarly
over in was
the
corporations
with unused
net operating
losses.carry
2/ Congress
case of a tax-free liquidation of an 80-percent-owned subsidiary.
1/
~~

The credits that are available for carry over include the
various business credits, the research credit, and the
foreign tax credit.
2/ A similar set of rules is provided in section 383 to limit
~~ the use of corporate tax attributes other than net operating
losses, such as tax credit carryovers, foreign tax credit
carryovers, and capital loss carryovers. For convenience, we
will refer in our discussion primarily to net operating loss
carryovers. Most of the same principles, however, apply to
the other corporate tax attributes.

-4particularly concerned that profitable corporations were
acquiring shell corporations whose principal asset was a net
operating loss carryover that could be applied in future years
against income unrelated to any business activity of the acquired
corporation. 3/
In the Tax Reform Act of 1976, Congress sought to tighten and
to unify the provisions of section 382. The 1976 Act amendments
were enacted in part because Congress believed that section 382
as enacted in 1954 was ineffective and did not adequately serve
its purpose. The effective dates of the 1976 Act amendments,
however, have been delayed repeatedly in response to criticism,
most recently in the Tax Reform Act of 1984, and are currently
scheduled to become effective on January 1, 1986.
Section 382, both as presently in effect and as modified by
the 1976 Act amendments, incorporates two sets of rules for
limiting the utilization of net operating losses. One set of
rules applies in cases of changes of ownership by taxable stock
purchase or redemption and the other set of rules applies to
acquisitions by tax-free reorganization.
3/

In addition to the objective limitations contained in
sections 382 and 383, the carry over of net operating losses,
capital losses, and credits may be disallowed under section
269 if the principal purpose of an acquisition of a
corporation is tax avoidance by securing the benefit of the
losses or excess credits. Thus, section 269 serves as a
backstop to prevent misuse of the general carryover
limitation provisions. In addition to these statutory
limitations, the ability of an acquiring corporation to
benefit from the tax attributes of a target corporation by
joining with the target to file a consolidated income tax
return is limited to some extent by the change of ownership
and separate return limitation year rules provided in
applicable Treasury regulations. The consolidated return
regulations under certain circumstances also limit the
ability to benefit from "built-in" losses following an
acquisition. Finally, limitations also may be imposed under
certain situations by operation of a judicially-crafted
continuity of business enterprise test. In Libson Shops,
Inc. v. Koehler, 353 U.S. 382 (1957), the Court held that net
operating loss carryovers would not survive a statutory
merger unless the losses were offset against income earned
after the merger that was attributable to the same business
that* produced the loss. Libson Shops arose under the 1939
Code, but its applicability under existing law is unclear.
The legislative history of the 1976 Act amendments to section
382, however, provides expressly that the continuity of
business enterprise concept articulated in Libson Shops will
not survive the effective date of those amendments.

-5Purchase Rule
Under existing section 382, in the case of redemptions and
acquisitions by purchase, 4/ no carry over of net operating
-losses is permitted if (1) more than 50 percent of the stock of
the corporation that incurred the loss ("loss corporation")
changes ownership within two taxable years, 5/ and (2) the loss
corporation does not continue to carry on substantially the same
trade or business after the change in stock ownership. The
determination of whether 50 percent of the loss corporation stock
has changed ownership is made with reference to the ten largest
shareholders. Thus, in a transaction in which loss corporation
stock is sold or redeemed, the carry over of net operating losses
is prohibited only if there is both (1) insufficient "continuity
of interest" by the loss corporation's ten largest shareholders
and (2.) insufficient "continuity of business enterprise" after
the transaction. If either of these conditions does not occur,
however, the use of net operating loss carryovers following a
stock purchase or a redemption is not subject to any limitations.
Thus, for example, all the stock of a corporation may be sold
without invoking any limitations under section 382 if the new
owners continue the loss corporation's historic business.
Therefore, assuming the inapplicability of the Libson Shops
doctrine and section 269, the net operating loss carryovers may
be used to offset income from new businesses.
The 1976 Act amendments tightened the limitations applicable
to taxable acquisitions by removing the requirement that the
historic trade or business of the loss corporation be terminated
before limitations on carryovers would be imposed. Thus, under
the 1976 Act amendments, the limitations would be triggered
4/
For by
purposes
of to
section
382(a),
the ownership.
issuance of 6/
newMoreover,
stock
solely
reference
changes
in stock
~the
~ does
not
constitute
a
"purchase."
Thus,
the
acquisition
of a
1976 Act amendments would have broadened the definition of
control of a loss corporation through direct issuance of
stock does not involve any limitations on the corporation's
use of net operating loss carryovers.
5/ Changes of ownership among related persons are disregarded
~
urider section 382(a).
6/ The 1976 Act amendments changed the focus from voting stock
~
that was not limited and preferred as to dividends to all
"participating stock." In general, participating stock
includes any stock that represents an interest in a
corporation's earnings and assets that is not limited to a
stated amount. This change was intended to prevent the use
of "preferred" stock to circumvent the section 382
limitations.

-6purchase to include capital contributions that increase the
percentage of stock owned by a shareholder! These amendments
also raised the threshold change of stock ownership from 50
percent to 60 percent in the case of taxable stock purchases,
increased to 15 the number of relevant shareholders, and
lengthened the "lookback" period. The increase in the threshold
from 50 percent to 60 percent was enacted to coordinate the rules
applicable to purchases with those applicable to reorganizations,
described below. In addition, rather than eliminating all net
operating losses once the required change in stock ownership
occurred, net operating loss carryovers under the 1976 Act
amendments would be gradually phased out as the percentage change
in stock ownership increases from 60 percent to 100 percent.
Finally, although the 1976 Act amendments did not repeal section
269, the applicable legislative history provides that section 269
would not deny a deduction for a loss that survived section 382,
in the absence of a scheme to circumvent the purpose of the
limitations.
Reorganization Rule
Under section 382(b) as presently in effect, the carry over
of net operating losses generally is limited in the case of
certain tax-free reorganizations if the stock in the acquiring
corporation that is received .by shareholders of the loss
corporation after the acquisition represents less than 20 percent
of the stock of the surviving corporation. In such a case, the
net operating loss carryovers of the loss corporation are
gradually reduced based upon the level of the loss corporation
shareholders' ownership in the surviving corporation. In
particular, for each percentage point below 20 percent received
by loss corporation shareholders, the amount of net operating
loss carryovers that survive the reorganization is reduced by
five percent. It is irrelevant for purposes of the
reorganization rule whether the acquiring corporation continues
to conduct the trade or business of the loss corporation. Thus,
assuming that neither section 269 nor Libson Shops is applicable,
the net operating loss carryovers fully survive if the loss
corporation shareholders receive at least 20 percent of the
acquiring corporation's stock.
Under the 1976 Act amendments, the types of tax-free
reorganizations to which section 382 applies would have been
expanded significantly to prevent avoidance of the limitation. 7/
This expansion sought to cure one of the most glaring
deficiencies in the current limitations. The limitations
2/
Under existing
section
382, the otherwise
applicable
applicable
to tax-free
reorganizations
would have
been
statutory
limitations
may
be
effectively
avoided
strengthened further by increasing from 20 percent toby
40using
percent
either
triangular
or
stock-for-stock
reorganizations.
the level of stock ownership at which net operating loss

-7carryovers would be limited. Thus, the shareholders of a loss
corporation would be required to receive at least 40 percent of
the acquiring corporation's stock for the net operating losses to
be allowed in full. If, on the other hand, the loss
•corporation's shareholders acquired less than 40 percent of the
stock of the acquiring corporation in such a tax-free
reorganization, the net operating losses available to the
acquiring corporation would be phased out as the loss corporation
shareholders' percentage ownership in the surviving corporation
declined. As in the case of taxable purchases and redemptions,
the limitations applicable to tax-free reorganizations under the
1976 Act amendments would turn solely on changes in stock
ownership.
Discussion
Before discussing the Staff's proposal to change the
applicable limitations, it is useful to outline briefly the
theoretical underpinnings of limitations on the carry over of net
operating losses and other tax attributes following the
acquisition of a corporation. We also will describe generally
the criticism that has been made in response to existing law and
the 1976 Act amendments.
Basic Principles
In analyzing the issues raised by the carry over of corporate
net operating losses, commentators have suggested the following
competing, and somewhat inconsistent, tax and economic policy
considerations:
0
any rule governing the carry over of tax attributes
should be consistent with the historic legislative
purpose of the carryover provisions as averaging
devices; '
0
the tax laws should not distort investment decisions and
should not create undue bias between diversified and
non-diversified entities or between old and new
businesses;
0
a corporation's ability to carry over net operating
losses should not require the Federal Government to be a
partner in all businesses. In other words, the rules
governing the use of net operating losses should not
amount to a Federal subsidy for all such losses;
>
0

the rules applicable to the carry over of tax attributes
should prevent "trafficking" in loss corporations;
the limitations on the carry over of net operating
losses and other tax attributes should not result in tax
attributes of a corporation becoming more or less
valuable in the hands of a purchaser of the corporation
than they would have been in the hands of the seller;

-8the tax laws should not encourage corporate acquisitions>
that would not be undertaken on purely economic grounds
or discourage those that would be undertaken on such
grounds; and
the rules establishing limitations on carryovers also
should provide certainty in determining the extent to
which tax attributes will survive an acquisition to
prevent a purchaser from obtaining a windfall from the
carryover.
Refundability
As is apparent from these principles, the initial question
that must be faced is whether any limitations should be imposed
on the use of net operating Loss carryovers. One can argue that
the rules governing the use of net operating losses will not
create a bias among various types of entities and businesses and
will not distort investment decisions only if all limitations are
removed from the utilization of such losses. The furthest move
in this direction would be to provide for refundability of net
operating losses. In a refundability system, a corporation that
incurred a net operating loss would receive a refund from the
Federal government equal to the tax savings that would have
resulted if the corporation had been able to offset fully the net
operating loss in the year incurred against other income.
A provision for direct reimbursement of net operating losses
by the Federal government would, of course, eliminate the need
for limitation provisions such as section 382. Moreover, such a
system would ensure that the benefits of a net operating loss
would accrue directly to the entity that suffered the loss.
The adoption of a refundability system also would eliminate
the current bias in favor of conglomeration that exists with
respect to the deductibility of net operating losses. This bias
exists because net operating losses of one business may be offset
against profits of another business, thereby reducing the
conglomerate's current tax burden. By comparison, a corporation
engaged in a single line of business does not receive any tax
benefit from a net operating loss until and unless the
corporation realizes offsetting income. On a present value
basis, such a net operating loss is worth less than a net
operating loss that is usable currently. A reimbursement system
would eliminate this bias by providing the same after-tax
consequences for a net operating loss regardless of the existence
of a related profitable enterprise.
Similarly, the current treatment of net operating losses is
biased with respect to new investment in favor of established
enterprises. An established corporation that incurs a loss on an
investment may secure an immediate refund under current law by

-9applying that loss against past taxable profits. A new
corporation, in contrast, is unable to utilize a net operating
loss until it realizes taxable income. A system of refundability
would eliminate this bias by equalizing the tax benefits of
losses between new and existing businesses.
While a system of refundability might well make the net
operating loss provisions more neutral among various types of
enterprises, the Treasury Department does not believe it is
advisable to implement such a system. A system of refundability
would require the Federal government to become a partner in all
investments, a role we believe is inappropriate. Moreover, a
system of refundability would pose potentially insurmountable
administrative and budgetary problems. For example, verification
of the bona fide value of the net operating losses would be
imperative, yet extremely difficult and complex.
Free Trafficking
Short of providing direct government reimbursement of net
operating losses, one can argue that all limitations on the
carry over of tax attributes from one corporation to another,
including section 382, should be repealed. Under such a system,
profitable corporations would be free to purchase net operating
losses from loss corporations. While this free trafficking in
corporations with favorable tax attributes would not achieve
complete neutrality, it would ensure that most of the benefit of
the net operating losses would be realized by those who suffered
the economic losses. Consequently, purchasers of loss
corporations would not be able to realize profits at the expense
of loss corporations or their shareholders.
Unrestricted trafficking in loss corporations, however, would
constitute partial and indirect reimbursement of losses. As
stated above, we do not believe that the carryover rules were
intended to serve'the function of providing Federal subsidies,
whether direct or indirect, for corporate losses.
We also believe that unrestricted trafficking in loss
corporations would go far beyond the legislative purpose
underlying a corporation's right to offset a net operating loss
incurred in one year against taxable income earned in another
year. This right is intended merely as an averaging device to
reduce the inequity of a strict annual accounting system.
Although we recognize that both refundability and the
unrestricted trafficking in loss corporations might make
risk-taking in corporate form more attractive, it is not clear
that risk-taking is relatively discouraged under existing tax
rules. The unrestricted ability to use corporate tax attributes,
including net operating losses, also would encourage the takeover
of loss corporations by profitable corporations primarily to
obtain the tax benefits of net operating loss carryovers. Purely
tax-motivated mergers and acquisitions would have adverse effects
on the economy and should not be encouraged.

-10Alternate Bases For Limitations
Accepting, as we do, that it is appropriate to place some
limitations on the carry over of net operating loss carryovers
following corporate acquisitions, it is necessary to examine both
"the triggering events that make any limitations operative and the
mechanics of the limitation. The principal triggering events
that have been used in the past are continuity of shareholder
interest and continuity of business enterprise. The limitation
has always taken the form of complete disallowance or partial
reduction of the amount of net operating loss carryovers that
survive the triggering events.
For purposes of section 382, continuity of shareholder
interest may be defined as the continued economic interest of the
shareholders of the loss corporation in that corporation or its
successor during the taxable years subsequent to the years in
which the net operating losses were incurred. Since its
enactment in 1954, section 382 has considered continuity of
shareholder interest a significant factor in determining whether,
and the extent to which, the carry over of net operating losses
should be limited. The 1976 Act amendments to section 382, in
the furthest move in this direction, established continuity of
shareholder interest as the sole factor to be considered in
determining the limitation on net operating loss carryovers
following a change in ownership of the loss corporation.
The rationale for using continuity of share-holder interest as
the basis for limiting carryovers is that a corporation's
shareholders generally are the real parties who suffer economic
loss when the corporation they own incurs a net operating loss.
Thus, a net operating loss carryover should be deductible by the
corporation only if such a deduction will reduce the
shareholders' economic loss.
We believe that reliance on continuity of shareholder
interest as a determinative factor for determining the extent to
which carryovers survive a corporate acquisition, particularly as
the sole factor as set forth in the 1976 Act amendments, is
flawed for several reasons. First, a limitation based on
continuity of shareholder interest may be inconsistent with the
income averaging function of the net operating loss carryover
provisions. For example, net operating losses under current law
may result from a corporation's ability to deduct expenses prior
to the year in which corresponding items of income must be
reported. This mismatching of income and expenses most
frequently occurs in the case of assets that are subject to the
accelerated cost recovery system. To the extent that net
operating losses result from this mismatching of expenses and
income, rather than from economic losses, the lack of continuity
of shareholder interest should not unduly restrict the ability of
the business to use its net operating losses to offset income in
subsequent taxable years.

-11Moreover, a loss limitation rule that reduces available net
operating losses by reference to a specified percentage of
continued shareholder interest, such as the reorganization rule
in existing law and both rules under the 1976 Act amendments, may
-create undesirable economic effects. For example, if
shareholders of the loss corporation are required to own a
minimum percentage of the stock of the surviving corporation
following a tax-free reorganization, then acquisitions by
relatively large corporations are discouraged. In particular,
the larger corporations would be denied the use of otherwise
available net operating loss carryovers, and would thus be
economically motivated to offer less consideration for the loss
corporation than would a smaller potential acquirer. Certain
acquisitions might thus be discouraged, even though desirable
without regard to tax considerations. We do not believe that the
limitations on the use of net operating loss carryovers should
bias acquisitions in favor of smaller companies or penalize
larger companies.
The second criterion upon which the limitation on the carry
over of net operating losses has been based is continuity of
business enterprise. Under the continuity of business enterprise
test, limitations on the carry over of net operating losses are
triggered if the business previously conducted by the loss
corporation is not continued by the acquiring corporation. This
approach is intended to restrict use of net operating loss
carryovers to the business activities that produced the losses.
Using the continuity of business enterprise doctrine as a
test to determine the availability of net operating loss
carryovers also suffers several serious flaws. First, the
continuity of business enterprise test is difficult to apply
whenever significant new capital or other assets are added to the
old business, or where the old business is operated in a
different manner.' This uncertainty has resulted in costly and
time-consuming litigation without clarifying the ambiguous nature
of the standard. In addition, it has caused purchasers of loss
corporations to reduce the price they pay and gives them an
opportunity to realize a profit at the expense of the loss
corporation and its shareholders. Thus, the intended
beneficiaries of the carryover provisions, those who suffered the
loss, do not properly benefit from the carry over of the net
operating losses by the acquiring corporation.
Second, using continuity of business enterprise as a
triggering event for limitations on the utilization of net
operating loss carryovers encourages a loss corporation, or a
corporation that purchases a loss corporation, to continue
operating an unprofitable business. Such uneconomic behavior
should not be encouraged by the tax laws.

-12Third,- even if the continuity of business enterprise test is
met, the continuing business may be an insignificant part of the
surviving corporation or produce no income, yet the net operating
losses incurred prior to an acquisition in some cases can be used
in full to offset income from other activities. Such a result,
_which in the extreme will be tantamount to free transferability
"of net operating losses, is unsatisfactory.
Criticism of Existing Law and the 1976 Act Amendments
The existing rules of section 382, which rely on both
continuity of business enterprise and continuity of shareholder
interest, suffer the same defects as their theoretical
underpinnings. Moreover, we believe that existing law is
deficient because many corporate acquisitions can be structured
to avoid the application of the limitations in situations in
which there may be no substantial business purpose other than
utilization of the net operating loss of the acquired
corporation. For example, the limitations imposed by section 382
do not apply to stock acquisitions described in section
368(a)(1)(B). The limitations also may be avoided by acquiring
control of a corporation through the use of a subsidiary in a
triangular reorganization. While section 269 and the
consolidated return regulations may curtail such acquisitions
under certain circumstances, existing section 382 inadequately
serves its purpose when its provisions can be so easily avoided.
Finally, existing law is subject to deserved criticism
because of its inconsistent treatment of acquisitions by taxable
stock purchase and tax-free reorganization. For example, net
operating loss carryovers are ratably disallowed in the wake of a
tax-free reorganization in which there is insufficient continuity
of shareholder interest, while the carryovers would be disallowed
entirely if a purchase failed the requisite continuity of
shareholder interest (assuming the historic business is not
continued). In addition, section 382 distinquishes between
purchase and reorganization transactions by applying the
continuity of business enterprise test only to purchase
transactions. Finally, the applicable thresholds on changes in
ownership differ depending upon the type of transaction. We
believe that the limitation on the use of net operating loss
ZflirZ*15 f ? ll0 Y in <? Purchases and reorganizations, which are
often economically equivalent transactions, should be consistent.
«

r„i»Ihe„}?ILAi:t;l tH an a"6"'?' to create a more effective set of
rules, eliminated the continuity of business enterDrise

Du?cnnr2nd " O C f i n a t e d

the

treatment of acquisltionlby

re e
nrpvpn^^fd
, , u ^ 0 r 9 a n i z a t i o n - a n d tightened the rules to
a
lda
ce
HZ
nf ™
? : f"!; the rules enacted in 1976 addressed
ri
« i t i H « S % £ " " P a l ^fects of existing law, they have been
lfws shoufrt h» , 'I " m P l e x i t y . While complexity in the tax
laws should be avoided whenever possible, it is justified if the

-13rules are necessary, theoretically correct, and effective. We
believe, however, for the reasons stated above, that reliance on
continuity of shareholder interest to measure the extent to which
net operating loss carryovers may be used following an
acquisition is neither necessary nor theoretically correct.
Description of the Staff Proposals
Preliminary Staff Report
A Preliminary Report released by the Staff of this Committee
in September 1983 ("Preliminary Staff Report"), like existing law
and the 1976 Act amendments, proposed two sets of rules, one for
purchase transactions and a second for certain tax-free
reorganizations. The mechanics of the proposal, however, were
quite different from current law or the 1976 Act amendments.
The purchase rule provided in general that net operating loss
carryovers of the loss corporation would be limited, as to both
timing and amount, to the income the loss corporation would have
earned had no change of ownership occurred and had the loss
corporation begun to earn taxable income at an assumed rate of
return on the assets it owned at the time the loss was generated.
This rule would apply whenever the ownership of the outstanding
stock of a corporation changes hands in a taxable purchase after
a year in which the corporation incurred a loss.
Under- the proposal, no limitations on net operating loss
carryovers would be imposed unless more than 50 percent of the
outstanding stock changed ownership after a loss year. In
determining whether changes in the corporation's ownership were
sufficient to invoke the rule, only shareholders who owned five
percent or more of such stock in the carryover year, directly or
by attribution, would be considered.
If 100 percent of the stock of a corporation were purchased,
the purchase rule would limit the deduction of net operating loss
carryovers for each subsequent taxable year to an amount equal to
an assumed rate of return times the purchase price of the stock.
The proposal specified that the assumed rate of return would be
an after-tax rate to reflect the fact that the consideration paid
for the stock of the loss corporation would generally cover the
value of the assets as well as the net operating loss carryovers.
The proposal suggested that the assumed rate of return might be
an objective rate, such as 125 percent, of the fluctuating
interest rate determined semi-annually pursuant to section 6621.
If more than 50 percent but less than 100 percent of the loss
corporation's stock were purchased, the portion of the acquiring
corporation's income attributable to the stock that had not been
sold could absorb net operating loss carryover deductions with-

-14-

out limitation. The remaining portion of the earnings,
attributable to the stock that had been purchased, could be
offset only in an amount equal to the assumed return on the
purchase price of that stock.
Under the Preliminary Staff Report, a separate set of rules
would apply to any case in which the stock or assets of a loss
corporation were acquired in a tax-free reorganization, for stock
of the acquiring corporation, or for stock of a corporation that
controls the acquiring corporation. Under the merger rule, the
net operating loss carryovers otherwise available would be
allowed to offset only the portion of income earned by the
surviving corporation after the acquisition that is allocable to
the contribution of the loss corporation's assets to the
acquiring corporation. This merger rule was intended in
principle to permit the use of net operating loss carryovers to
the same extent that such carryovers would have been allowed if
the loss corporation and the acquiring corporation had
contributed all of their assets to a joint venture. The proposal
attempted to duplicate the fact that, under such circumstances,
only the portion of the joint venture's income allocable to the
loss corporation could be offset by that corporation's net
operating loss carryover.
After a tax-free reorganization, the merger rule would
provide that the portion of the post-acquisition taxable income
of the surviving corporation and its subsidiaries allocable to
the loss corporation's assets would be determined by reference to
'the percentage of common stock of the acquiring corporation
issued in the acquisition to the loss corporation's shareholders.
The percentage of the acquiring corporation's taxable income that
could be offset, however, would be less than the percentage of
stock of the acquiring corporation issued to the loss corporation
shareholders in the acquisition. The reduction was considered
necessary because post-reorganization taxable income
theoretically allocable to the loss corporation would not be
subject to tax to the extent of allowable net operating loss
carryovers.
As a result,
the percentage
of the
If an acquiring
corporation
issued stock
and acquiring
paid other
corporation's in
stock
that would
be issued in the acquisition
consideration
a tax-free
reorganization,
proposal
generally
would
exceed
of and
taxable
income
the
contemplates
that
both the percentage
purchase rule
merger
ruleof
would
acquiring
corporation
allocable
to the loss
assets.
apply.
Thus,
the surviving
corporation
wouldcorporation's
be able to utilize
net operating loss carryovers in an amount equal to the sum of
(i) the value of the other consideration times the applicable
rate of return plus (ii) the portion of the surviving
corporation's income that is allocable to the stock issued to the
loss corporation shareholders.

-15Final Staff Report
Overview
Unlike the Preliminary Staff Report, the bill included in the
"Final Staff Report proposes a single rule that would limit the
utilization of net operating loss carryovers and other tax
attributes following a substantial change of ownership by either
taxable purchase or tax-free reorganization. The basic principle
of this approach, like the theory underlying both the purchase
rule and merger rule suggested in the Preliminary Staff Report,
is that the entire net operating loss carryover should be
preserved following an ownership change, but a limit should be
imposed on the amount of annual income against which the net
operating losses can be deducted following the acquisition. In
this manner, the Staff proposals attempt to ensure that the use
of carryovers after an ownership change is limited to the use
that would have been available to the loss corporation had no
ownership change occurred and that the value of net operating
loss carryovers is therefore neither increased nor decreased as a
result of an acquisition. The bill provides in particular that
the deductibility of net operating loss carryovers following a
substantial ownership change would be limited in each year to an
amount equal to the Federal long-term rate times the value of the
loss corporation at the time of the ownership change. In
general, a substantial change of ownership would be defined as
any change, however accomplished, resulting in a greater than
50-percent shift in the ownership of the corporation's equity.
Losses Subject to Limitation
Following a substantial change in the ownership of a
corporation, the Staff bill would generally limit the utilization
of all net operating losses, capital losses, and credits incurred
by the corporation prior to the ownership change. For this
purpbse, any net operating loss incurred in a taxable year during
which a substantial change in ownership occurs would be allocated
to the periods before and after the change on a pro rata basis.
The bill also would generally limit the utilization of any
"built-in loss" on the same basis as net operating losses. The
treatment of built-in losses is discussed below in greater
detail.
Amount of Annual Limitation
The utilization of net operating losses and other tax
attributes in any post-change year would generally be limited by
the Staff bill to the product of the value of the loss

-16corporation 8/ immediately before the ownership change multiplied
by the applicable Federal long-term rate on the date of the
change in ownership. The long-term rate was selected by the
Staff because it represents the maximum risk-free rate of return
the loss corporation could have obtained and the Staff assumed
the maximum use of losses would be desired for the entire 15-year
carryover period. Under the Staff bill, the rate in effect on
the date of the ownership change would be the applicable rate for
all post-change years, regardless of any subsequent fluctuations
in the rate. In addition, as discussed in further detail below,
the amount of the annual limitation would be increased by any
"built-in gains" recognized during the year. If the amount of
the annual limitation exceeded the losses deducted for a year,
the excess would be carried forward to increase the limitation in
subsequent years.
In the event of successive substantial changes in ownership,
the bill would provide two rules. If the applicable limitation
for the second ownership change were less than the limitation for
the first ownership change, the second limitation would replace
the first limitation and become the relevant limit on the
utilization of all losses arising before the second change. If,
on the other hand, the second limitation were greater than the
first limitation, the two limitations would operate in tandem.
In particular, the utilization of losses arising prior to the
first ownership change would continue to be subject to the first
limitation, while any losses arising after the first change 9/
would be deductible following the second change to the extent the
second
the amount
of taxable
incomecorporation
that is
8/
The limitation
Staff bill exceeded
would define
the value
of the loss
offset
as afair
result
of the
first
limitation.
as the
market
value
of the
stock of the corporation.
According to the Staff explanation, the price paid for a
substantial portion of a corporation stock would be
indicative of the stock's fair market value. In view of the
difficulty that may arise in valuing a corporation's equity,
consideration should be given to the creation of a statutory
presumption that the value of a loss corporation would be
presumed to be equal to the purchaser's "grossed-up" basis in
the loss corporation stock plus assumed liabilities in any
case in which at least 80 percent of the loss corporation
stock is acquired during a relatively short period.
9/ Any losses recognized between the two changes that were
treated under the rules discussed below as built-in losses
with respect to the first change would continue to be subject
to the first limitation. No losses recognized after the
second change, however, would be treated as built-in losses
with respect to the first change.

-17Capital Contributions
Because the extent to which net operating loss carryovers may
be utilized following an ownership change is dependent, under the
Staff bill, upon the value of the loss corporation, the bill
.would provide a rule designed to prevent that value from being
inflated in anticipation of an ownership change. In particular,
any capital contribution made at any time as part of a plan the
principal purpose of which is to avoid the limitations would not
be taken into account in determining the value of the loss
corporation or in applying the built-in deduction rules.
Further, the bill would provide that any capital contribution
made during the two years preceding an ownership change would be
presumptively treated as part of a plan to avoid the limitations,
except as provided in Treasury regulations, and thus would not be
taken into account in determining the loss corporation's value.
Investment Companies
Under the bill, a special "anti-abuse" rule would be provided
to prevent the utilization of net operating loss carryovers
following a substantial change in the ownership of a corporation
that is essentially a nonoperating corporation with favorable tax
attributes. In particular, the bill would disallow the use of
net operating loss carryovers and other tax attributes following
a substantial change in the ownership of any corporation if
two-thirds or more of the corporation's total assets consist of
assets held for investment.
While no definition of the phrase "assets held for
investment" is provided in the bill, the explanation prepared by
the Staff states that assets that had been used in an active
trade or business would not be considered investment assets,
regardless of whether the business is actively conducted at the
time of the substantial change in ownership. The investment
company rule also-«would not apply if a corporation sold its
active business assets shortly after a substantial change in
ownership. The Staff explanation states, however, that the step
transaction doctrine generally would apply in determining whether
a corporation held assets for investment. If, therefore, a
corporation that owned active business assets agreed to dispose
of those assets prior to a change in the corporation's ownership,
but delayed the disposition until after the ownership change, the
step transaction doctrine would apply to collapse the disposition
of the assets and the change in ownership. The corporation would
thus be treated as holding its assets for investment and would
not be permitted to utilize any net operating loss carryovers
following the ownership change.
Built-in Gains and Losses
The bill would provide a comprehensive set of rules regarding
the treatment of "built-in" gains and losses. Built-in gains and
losses are simply unrealized differences between the value and
adjusted basis of assets that exist at the time of a substantial
change of ownership. In general, the bill would treat built-in
losses
in the of
same
manner asand
net would
operating
losses incurred
prior
to the change
ownership,
thus subject
the

-18deductibility of those losses to the annual limitation.
Conversely, built-in gains would be treated as if they had been
recognized prior to the change of ownership, and were thus able
to be offset by net operating losses incurred prior to the
ownership change. Accordingly, the amount of built-in gains
recognized after the ownership change would increase the
limitation for that year.
The bill would provide several simplifying assumptions and a
de minimis rule to mitigate the complexities associated with
special treatment of built-in gains and losses. First, a
corporation would be treated as having built-in gains or losses
only if the fair market value of all its assets immediately
before the change in ownership was more or less, respectively,
than the aggregate basis of its assets. Thus, a corporation
would have either a net built-in gain or a net built-in loss, and
would not have to account for both built-in gains and losses with.
respect to individual assets. In effect, therefore, the bill
would net a corporation's unrealized gains and losses against
each other for purposes of these rules. Moreover, a de minimis
rule would provide that a corporation would not have to account
for built-in gains or losses if the aggregate net built-in gain
or loss was 25 percent or less of the fair market value of the
corporation's assets. This rule would confine the complexity of
accounting for the built-in gains or losses to those corporations
for which net built-in gains or losses are significant.
If a corporation has an aggregate built-in loss that exceeds
25 percent of the fair market value of its assets, then any
losses recognized in the five years following an ownership change
(the "recognition period") would be presumed to be built-in
losses, and would thus be subject to the applicable annual
limitation in the same manner as net operating losses incurred
prior to the ownership change. A loss recognized during the
recognition period would not be treated as a built-in loss only
if the corporation was able to establish that the loss arose
after the ownership change.
If, on the other hand, a corporation has a built-in gain that
exceeds 25 percent of the fair market value of its assets, then
gains recognized during the recognition period would be treated
as built-in gains if the taxpayer was able to establish that the
gain arose before the ownership change. 10/ Any such recognized
built-in gains would be added to the applicable limitation, and
would
,thusthe
permit
corporation
to offset
gain without
10/ Under
bill,thetherefore,
while
losses the
recognized
during the
limitation
against
losses
the ownership
change.
recognition
period
are incurred
presumed prior
to be to
built-in,
any gains
recognized during that period are presumed not to be
built-in, unless the taxpayer was able to establish to the
contrary.

-19Title 11 Bankruptcy Proceedings
Under the general provisions of the Staff bill, an exchange
of stock for debt would constitute a substantial change of
-ownership if the creditors participating in the exchange received
more than 50 percent of a corporation's stock. In a typical
bankruptcy situation, therefore, the limitations would become
applicable upon the acquisition of control by the creditors.
Because the value of an insolvent corporation's stock would be
zero, the applicable limitation would be absolute.
Recognizing the facts that the creditors of a loss
corporation are often the economic equivalent of shareholders,
that a shift in status from creditor to shareholder may have
occurred gradually over an extended period, and that the Congress
has in the past provided insolvent corporations with various
incentives to rehabilitate themselves, the Staff bill would
provide a limited exception from the strict application of the
underlying theory for corporations that experience an ownership
change in the course of a Title 11 or similar proceeding. In
particular, if the shareholders and creditors of such a
corporation immediately before any exchange of stock for debt own
at least 50 percent of the stock of the corporation after the
exchange, then no limitations on the post-exchange use of net
operating loss carryovers would apply. In effect, therefpre, the
bill treats the creditors of a corporation in a Title 11
proceeding as shareholders.
Extending the treatment of these creditors to its logical
conclusion, the bill would treat the interest paid to such
creditors as dividends and any accrued interest with respect to
such debt would be eliminated from the corporation's surviving
net operating loss carryovers. Thus, the bill would provide that
the net operating loss carryovers of a corporation entitled to
this* relief would'be reduced by the amount of interest paid or
accrued by the corporation during the three years preceding the
ownership change with respect to any debt exchanged for stock in
the Title 11 proceeding.
Finally, the bill would provide an additional limitation on
corporations that qualify for the Title 11 exception. If a
formerly insolvent corporation experiences a substantial change
of ownership within two years of the Title 11 proceeding, then
the limitation following the second ownership change would be
absolute. In this manner, the bill assumes that any value of
such a corporation's stock must be the result of capital
contributed by the new owners. Because capital contributions
made two years prior to an ownership change are generally ignored
under the bill, the value of the stock at the time of the second
ownership change must be reduced by the amount of such
contributions. Accordingly, the bill would assume that the value
of the corporation's stock was zero and no net operating loss
carryovers could be utilized following the second change.

-20Substantial Change in Ownership
The limitations imposed under the bill would generally become
applicable when the shareholders of a loss corporation change by
more than 50 percentage points during any three-year "testing
period." In the case of any change in the shareholders'
respective stock 11/ ownership by purchase, redemption, new stock
issue or other means, the limitations would apply if, immediately
after the change, the value of stock owned by the five-percent
shareholders has increased or decreased by more than 50
percentage points over their stock ownership at any time during
the three-year testing period. In the case of a reorganization,
12/ the limitations would apply if, immediately after a
reorganization, the value of the stock in the surviving
corporation owned by shareholders of the loss corporation is more
than 50 percentage points less than the value of the stock of the
loss corporation owned by the shareholders at any time during the
testing period. In general, therefore, the limitations would
apply following a reorganization unless the shareholders of the
loss corporation did not maintain control of the surviving
corporation.
The bill would Specify a series of transactions that would
not be taken into account in determining whether an ownership
change has occurred. Exceptions would be included for transfers
by gift, inheritance, bequest, or by reason of divorce or
separation. The acquisition of employer securities under an
employee stock ownership plan or other qualified plan also would
be disregarded.
Other Limitations
The bill would provide that section 269 would not apply to
disallow any loss deduction or credit after an ownership change
to which the proposed limitations apply. The Staff explanation
also'states that the Libson Shops doctrine would have no
continuing applicability in determining the extent to which net
operating loss carryovers may be used following an ownership
change. Finally, the Treasury Department would be directed to
consider the extent to which the consolidated return regulations
11/ The bill would define stock as any stock other than preferred
would be modified to reflect the proposed limitations.
stock described in section 1504(a)(4).
_12/ Reflecting the new definition of acquisitions proposed by the
Staff in other areas, the bill refers to a "qualified asset
acquisition." If the proposed limitations were enacted
separate from the other Subchapter C changes, appropriate
modifications in the definition would of course be necessary.

-21Detailed Analysis of the Proposal
Overview
The Treasury Department strongly supports the method of
limiting the utilization of net operating loss carryovers and
other tax attributes following a substantial change in a loss
corporation's ownership that is proposed in the Final Staff
Report. Following publication of the Preliminary Staff Report,
we testified in general support of limiting the use of net
operating loss carryovers after an acquisition by reference to
the assumed future earnings on the loss corporation's value. We
stated, however, that the mechanism preliminarily proposed by the
Staff, which as described above contemplated one rule applicable
to reorganizations and a second rule applicable to stock
purchases, could be improved and simplified by adoption of a
single rule applicable to all acquisitions. We continue to
believe that a single rule, as now proposed by the Staff, is
preferable to the more complicated approach, and we are confident
that the proposal made in the Final Staff Report generally offers
the best means of reforming the inadequate current law
limitations on the carry over of net operating losses and other
tax attributes. Accordingly, we urge the Committee to adopt the
proposed limitations in substantially the form proposed by Staff.
We believe, however, that several minor changes, discussed
further below, should first be made.
Proper Rate Of Return
Once an approach limiting the utilization of carryovers based
upon a percentage of value is adopted, the most important
decision is to determine the rate of return that should be used
to set
the annualchoice
limitation
the use ofrate
netof
operating
losses
13/
An explicit
of the on
applicable
return would
be
and unnecessary
other tax attributes.
13/ In order
to ensure
under an alternative
approach
that that
would limit
the utilization of net operating loss carryovers and other
tax attributes after either a purchase or reorganization to
an amount equal to the purchase price of the loss
corporation. This approach is arguably the equivalent of the
Staff proposal as the purchase price can be viewed as the
discounted present value of the stream of income expected to
be earned with respect to the loss corporation's assets. By
limiting the total amount of net operating loss carryovers
and other tax attributes that would survive a purchase or
reorganization, this alternative would not impose any
restriction on when the available carryovers can be utilized.
Thus, under this alternative, the entire net operating loss
carryover could be deducted by the corporation in the year
immediately following the change of ownership, regardless of

-22utilization of the net operating loss carryovers would not be
affected by an acquisition and that the value of the carryovers
would not be increased or decreased as a result of an
acquisition, the theoretically correct limitation rate would be
the rate at which the loss corporation would have used the net
operating loss carryover if no acquisition had occurred. In our
view, however, a rule that would in each case require the
identification of the earnings attributable to the loss
corporation's assets would not be administrable. Several
approaches for approximating the theoretically correct rates have
been suggested.
First, the limitation rate could be based on a market
interest rate. This approach, which forms the basis of the bill
proposed by the Staff, was first proposed by the American Law
Institute. Such a market-rate based approach implicitly assumes
that a loss corporation could have earned this rate on its assets
and, therefore, could have absorbed its net operating loss
13/ Continued: the amount of income attributable to the loss
corporation's assets or the age of the carryovers. While it
can be argued that this approach is no more generous than the
Staff proposal when viewed on a present value basis, it does
not attempt to reflect the manner in which the loss
corporation could have used the net operating loss
carryovers. In this way, the approach violates the principle
that net operating loss carryovers should become neither more
nor less valuable in the hands of the acquiring corporation,
the theoretical basis underlying the proposed limitations.
Moreover, by allowing the entire net operating loss carryover
to offset income of the acquiring corporation this approach
may favor large acquirors at the expense of smaller
corporations. A similar approach, which has been suggested
by the American Bar Association, would generally limit the
ytilization of net operating loss carryovers, capital loss
carryovers, and excess tax credits to 24 percent of the loss
corporation's value per year for the five-year period
following the change of ownership. This alternative is based
on the view that the purchase price represents the correct
limitation, but that it should be spread over some period of
time to avoid undue potential acceleration of the carryovers.
Because this approach is premised on the view that the
purchase price reflects the correct limitation, this
alternative suffers the same flaws as the purchase price
limitation described above. Because adoption of either of
these alternatives would in varying degrees potentially
accelerate use of net operating loss carryovers and other tax
attributes following an acquisition and would thus violate
the sound theoretical base underlying the Staff proposal, the
Treasury Department does not support either approach.

-23carryovers at this speed. The loss corporation could obtain a
market rate of return, for example, by selling its assets and
investing the proceeds in Treasury bonds. The use of a market
rate of return, as suggested below, however, may violate the
principle that net operating losses should not become more or
-less valuable as a result of an acquisition in cases in which the
loss corporation could not or would not earn a market rate on its
value.
An alternative approach for setting the limitation rate would
be based on the average rate at which corporations actually
absorb net operating loss carryovers. The determination of this
average absorption rate presents several difficulties. In
particular, a decision would have to be made concerning the group
of corporations that should be used to determine the average
rate. Most loss corporations continue to experience losses and
continue to increase, rather than absorb, their net operating
loss carryovers. If this group of corporations were used to
determine the average rate at which net operating loss carryovers
are absorbed, the limitation rate would be set at or near zero.
A more generous assumption would be that all loss corporations
that are acquired have "turned around," and experience, or are
about to experience, taxable profits. Preliminary analysis
indicates that, in 1981, corporations with taxable income that
used net operating loss carryovers absorbed an average amount of
such carryovers equal to approximately 5.5 percent of their book
net worth. An even more generous assumption would be that
an acquired loss corporation is not generally different from the
average taxpaying corporation. Preliminary analysis indicates
that the average absorption rate for all corporations was
approximately 6.5 percent of book net worth in 1981. In short,
the average absorption rate approach suggests that the limitation
rate should be in the range of zero to seven percent.
Whether the limitation rate to be specified is based on an
average absorption rate or on a market interest rate, an
adjustment may be necessary to avoid double counting, if the
limitation, for administrative reasons, were based on the
purchase price of the stock or the value of the corporation's
equity. Because the proposed rule is designed to reflect the
income that could have been earned by the corporation's
productive assets and because the purchase price or value of the
corporation's stock will reflect the value of the net operating
loss carryover and other tax attributes as well as the value of
the assets, the stock value used to compute the limitation
theoretically should be adjusted downward to eliminate the value
of the net operating loss carryovers and other tax benefits.

-24Because adoption of a single rate of return r e p c e s e n t s o n l y
an approximation of a corporation's*actual return on its assets,
the limitation imposed under the Staff approach will be accurate
only on average and, therefore, no particular rate can truly be
.considered the correct rate. Recognizing the potential adverse
effect that an averaging approach may have on specific
transactions, we believe that the rate selected should not be set
at the lowest rate that is theoretically justified. Rather, the
rate selected should reflect the inherent imprecision of the
approach, and the facts that any corporation may elect to earn a
market return by selling its assets and investing the sales
proceeds in financial instruments and that any specific
corporation may earn a rate of return that is greater than the
average return. At the same time, the rate selected should not
be so high as to provide an overly generous limitation. In this
regard, while we believe that the rate selected by the Staff, the
long-term Federal rate, represents a reasonable choice, we
believe that the rate should instead be set at the Federal
mid-term rate. Such a rate, in practice, often represents a
mid-point in the range of possible rates and, in our view, would
better reflect the competing considerations that must be
balanced.
Capital Contributions
As discussed above, the theory underlying the Staff proposal
is generally to limit the utilization of net operating losses and
other tax attributes following an ownership change to the
earnings attributable to the value of the loss corporation at
that time, as that value represents the pool of capital that
suffered the losses. The Staff bill would thus properly provide
a safeguard to prevent historic shareholders from intentionally
inflating the value of the loss corporation in anticipation of a
change in ownership.
>

While we agree that a limitation on infusions of capital is
necessary, we believe that the rule proposed by the Staff may
create too much uncertainty and should thus be narrowed slightly.
In particular, we agree that any capital contribution made during
the two-year period preceding an ownership change should be
ignored in determining a loss corporation's value, for purposes
of both computing the applicable limitation and applying the
built-in gain or loss de minimis rule. Moreover, we agree that
contributions of property made during the two-year period also
should be disregarded in computing the net built-in gain or loss.
Because many capital contributions will be motivated by concerns
unrelated to the application of subsequent limitations on the use
of net operating loss carryovers, such as contributions made in
the ordinary course of business, we also believe that Treasury
regulations should be permitted to provide exceptions from the
rule for certain contributions that are not made in anticipation
of an ownership change.

-25While this approach is virtually identical to the proposal,
the Staff bill would provide further that capital contributions
made more than two years before an ownership change also would
reduce the loss corporation's value if the principal purpose of
the contribution, among other prohibited purposes, was to
-increase the ability of the loss corporation to utilize net
operating loss carryovers following an ownership change. We
believe that the limited benefits to be gained by attempting to
police capital contributions made more than two years before an
ownership change is outweighed by the uncertainty such a
provision would cause. In this regard, the relationship between
the investment company rule discussed below and this capital
contribution rule should be understood. For the reasons
discussed below, we believe that any significant abuse potential
created by limiting the capital contribution rule to a two-year
period would be cured by a slightly modified investment company
rule. Accordingly, we recommend that capital contributions made
more than two years before an ownership change should be outside
the scope of the rule governing capital contributions.
Investment Companies
An important issue that must be confronted when formulating
limitations on the utilization of net operating loss carryovers
is whether a loss corporation that has converted operating assets
into investment assets should be able to transfer its net
operating losses incurred with respect to the operating assets.
The Staff bill, in order to prevent purely tax-motivated
acquisitions of such corporations, would prohibit the carry over
of all net operating losses following a change in the ownership
of a corporation two-thirds or more of the assets of which were
investment assets at the time of acquisition.
We believe that, in theory, a corporation owning only
investment assets should be able to retain and to transfer its
net operating loss carryovers to the same extent as a corporation
that owns primarily operating assets, so long as the rules
relating to contributions to capital and new stock issues prevent
avoidance of the applicable limitations. Indeed, in the context
of an approach based on an interest-like rate of return on the
loss corporation's value, it is particularly difficult to
distinguish between a loss corporation that continues to own its
operating assets and one that has converted those assets into
passive investment assets. We afso are concerned, as reflected
by the absence of any precise definition in the Staff bill, that
it would be difficult to define the term investment assets in
many industries, including banking, insurance, and securities.
Finally* applying special rules to corporations that convert
operating assets into investment assets may have the undesirable
effect of encouraging loss corporations to retain unprofitable
businesses rather than convert them into more liquid investments.

-26The unlimited ability to sell* a corporation the assets of
which consist of only investment assets and net operating loss
carryovers, however, would be perceived as being abusive and thus
might affect the public's view of the tax system. Moreover, the
public may perceive investment assets held by an acquired
•corporation as merely a reduction in its purchase price or
acquisition value. Accordingly, we do not oppose a rule limiting
the carry over of net operating losses by companies that own
substantial investment assets.
We believe, however, that the provision proposed by the Staff
may be both too harsh in some circumstances and too lenient in
others. In particular, we believe that the "cliff effect" caused
by completely eliminating the net operating loss carryovers of a
corporation that holds two-thirds or more of its assets for
investment may be too harsh. Yet the two-thirds threshold test
may be too generous in other instances where the perceived abuse
at which the rule is directed is present, but the loss
corporation's investment assets fall below that threshold. In
some respects, such investment assets may in fact be viewed as a
partial reduction in the purchase price (or value) of the loss
corporation stock.
Consequently, the Treasury Department believes that an
appropriate investment company rule would provide that, for any
corporation that owns substantial investment assets 14/ (e.g., at
least one-third of its value), the investment assets should be
disregarded for purposes of computing the applicable limitation
on the post-change utilization of net operating losses. 15/ Such
investment assets also should be disregarded in determining
whether a corporation has a net built-in gain or loss and in
applying
the built-in
gain states
or loss
de minimis
rule.
In this
14/ The Staff
explanation
that
assets held
in an
manner,
the cliff
effect inherent
the Staff's
approach
"investment
business,"
however in
active,
would constitute
investment assets. We believe this statement should be
modified to ensure that the bill provides clearly that the
investment company rule would not operate automatically to
deny the availability of net operating losses to banks,
insurance companies, and other financial institutions.
Depending upon the scope of any such exception applicable to
financial businesses, however, consideration should be given
to applying a stricter capital contribution rule to such
corporations.
X

15/ In this regard, we believe consideration should be given to
disregarding investment assets only to the extent they exceed
loss corporation indebtedness. For those corporations that
own investment assets in excess of the threshold
consideration also could be given to disregarding investment
assets only to the extent they exceed some floor below the
threshold.

-27would be avoided and the investment company rule would apply to
some extent to all corporations that own relatively large amounts
of investment assets. Finally, in order to avoid difficult
valuation problems, consideration should be given to using basis,
rather than value, in determining the amount of non-readily
tradable investment assets held by a corporation.
Built-in Gains and Losses
As reflected in the Staff's proposal, a built-in loss is
economically equivalent to any pre-acquisition net operating
loss, and, in the Treasury Department's view, should be subject
to the same limitations as net operating loss carryovers and
other favorable tax attributes. Similarly, if a corporation with
appreciated assets and net operating loss carryovers is sold and
the limitations become applicable, pre-acquisition net operating
loss carryovers should be available to offset without limitation
any income resulting from the realization of built-in gains.
We recognize that the theoretically correct treatment of
built-in gains and losses described above may entail significant
complexity. Most importantly, special treatment of built-in
gains or losses will in many circumstances require valuation of a
corporation's assets. Consequently, as we have testified in the
past, appropriate de minimis rules and simplifying assumptions
must be carefully considered. In this regard, the Treasury
Department believes the Staff proposal generally represents a
sound method of accounting for built-in gains and losses. In
particular, we support the concept of netting built-in gains
against built-in losses and thus requiring corporations to
account for either built-in gains or built-in losses, in an
amount not exceeding the net built-in amount. Moreover, we
support a de minimis rule.of the magnitude proposed by the Staff.
We believe, however, that the Staff bill is deficient in
limiting its scope to built-in gains or losses recognized after
the ownership change and, with respect to so-called built-in
deductions, providing only that the Secretary of the Treasury
would be authorized to prescribe appropriate regulations. In the
view of the Treasury Department, the applicable statutory
provisions should state affirmatively that built-in deductions,
including deductions that accrue prior to an ownership change as
well as a portion of depreciation deductions attributable to
assets with a basis in excess of value, should be accounted for
in the same manner as recognized built-in losses and subject to
the applicable limitation. An issue this important should not be
left solely to regulations.
Although we recognize that special treatment of built-in
deductions, particularly depreciation, may require more detailed
asset valuation than the Staff bill, such deductions are usually
more significant than recognized losses and should be subject to
the applicable limitation. We would be happy to work with the
staff in devising the statutory rules that would be necessary to
account correctly for these deductions.

-28Title 11 Bankruptcy Proceedings
The general approach reflected in the Staff bill suggests
that no net operating loss carryovers should be available
-following a substantial change in the ownership of an insolvent
corporation. In particular, because the value of the loss
corporation at the time of the ownership change would presumably
be zero, the annual limitation would be absolute.
The bill,
however, provides a special exception for corporations that
experience an ownership change in the course of a Title 11 or
similar proceeding. In summary, the Staff bill treats creditors
of such a corporation as if they were shareholders. Thus, no
ownership change is considered to have occurred following an
exchange of debt for stock in a Title 11 proceeding, if the
creditors and shareholders together retain control of the
corporation.
The Treasury Department generally agrees that the creditors
of an insolvent corporation are frequently the parties that
economically bear the losses that are'reflected in the net
operating loss carryovers and are thus analogous to shareholders,
and that, moreover, their shift in status may have occurred
gradually. Consequently, we support the concept that an
exception from strict application of the rules should be provided
for insolvent corporations and that certain creditors of such
corporations may be viewed as shareholders.
We also support the provision in the Staff bill providing
that no carryovers would survive a second ownership change within
two years of an exempted change that occurred in the course of a
Title 11 proceeding. In our view, any increase in the value of a
formerly insolvent corporation that occurs within two years of an
insolvency proceeding is fairly assumed to be the result of
capital contributions made during the two-year period. Because
capital contributions made during the two years preceding an
ownership change are generally disregarded, the applicable value
of such a formerly insolvent corporation at the time of the
second change is properly assumed to be zero. While we believe
an exception from application of the general rules is
appropriate, a further exception from application of the theory
upon a successive change outside a Title 11 or other insolvency
proceeding is neither necessary nor justified.
Although we generally support the provision in the Staff bill
applicable to Title 11 proceedings, we have several concerns.
First, we believe that only historic creditors should be taken
into account in determining whether the exception applies to a
loss corporation. The Staff bill, however, provides the
exception whenever the shareholders and any creditors of a loss
corporation, new or old, retain control following a Title 11
proceeding. In our view, only the historic creditors are fairly
assumed to be parties who economically suffered the loss and who
are thus analogous to loss corporation shareholders.
Accordingly,
believe
that is
allowing
new creditors
take
might
advantage
importantly,
permit
of we
however,
certain
this
exception
abusive
extending
transactions.
not
the justified.
exception
to
Perhaps
new to
creditors
more

-29We also are concerned that resort to Title 11 proceedings may
be improperly encouraged by the Staff bill and that informal
workouts would be discouraged. We recognize, however, that an
.informal workout rule must be carefully crafted to ensure that it
cannot be used by solvent corporations to avoid application of
the general limitations and that it is not unduly complex and
difficult to apply. We would be pleased to work with the
Committee in refining the Staff proposal, if possible, in a
manner that would balance these competing concerns.
Acquisitions by Loss Corporations
In the Treasury Department's view, the primary difference in
scope between the approach described in the Preliminary Staff
Report and the bill contained in the Final Staff Report is the
fact that the Staff bill, because it encompasses only a single
rule based on a substantial change of ownership, does not affect
acquisitions of tax-paying corporations by relatively large loss
corporations. 16/ In summary, under the definition of
substantial change of ownership, a stock acquisition of an
equally-sized or smaller tax-paying corporation by a loss
corporation would not invoke any limitations because the loss
corporation shareholders would have maintained the sufficient
50-percent continuity of interest in the surviving corporation.
There are two classes of corporations that could be acquired
by relatively large loss corporations in the manner suggested
above. First, a loss corporation could acquire a corporation
that is expected to produce taxable income that could be offset
by the acquiring corporation's net operating loss carryovers.
Second, a loss corporation could acquire a corporation that has
substantially appreciated assets or other inherent tax liability,
the recognition of which could be offset by the acquiring
corporation's net operating loss carryovers.
Under the Final Staff Report, as under current law, no
meaningful limitations are imposed upon the types of acquisitions
described above. The issue which thus arises is whether the
Report is deficient is this respect and, if so, whether the Staff
bill should be modified to impose some limitations in such
circumstances.
Under the Staff bill, no restrictions are generally imposed
on the ability of a loss corporation to rehabilitate itself
through contributions to capital by the corporation's historic
shareholders. A loss corporation with capital contributed by
historic shareholders is thus permitted to purchase assets,
16/
If the an
acquiring
loss corporation
were smaller
than theloss
including
entire corporation,
and offset
net operating
acquired
corporation,
however,
the
loss
corporation
carryovers against the income from those assets. In shareholders
the Treasury
would own less than 50 percent of the surviving corporation and
the utilization of its net operating loss carryovers following
the acquisition would thus be limited.

-30Department's view, this approach is appropriate in the case of
purchases, and there is no reason in this regard to distinguish
acquisitions of corporations in exchange for loss corporation
stock from purchases for cash. Therefore, unless the loss
corporation's shareholders surrender control in a stock
acquisition, we believe no limitations should in general be
"Imposed on the loss corporation's ability to acquire a tax-paying
corporation.
We are somewhat more concerned, however, by the ability of a
loss corporation to acquire a corporation with substantially
appreciated property or other significant inherent tax liability
and to offset the resulting tax with net operating loss
carryovers. While we recognize that this is an exceedingly
difficult issue, we believe that some consideration should be
given to the manner in which this ability could be circumscribed.
If a suitable approach can be developed, however, we believe it
should be incorporated into the Staff bill.
Other Limitations
Under the Staff bill, section 269 would not be applicable to
any transactions that were subject to the proposed limitations.
While the Treasury Department believes that the uncertainty
created by section 269 is undesirable and often causes purchasers
of loss corporations to reduce the price they offer to the loss
corporation shareholders, giving the purchasers a potential
profit at the expense of such shareholders, we cannot at this
time support a substantial restriction in the scope of section
269. We are particularly concerned that"the adoption of a new
set of limitations without the potential availability of section
269 may result in unanticipated planning opportunities. After we
have gained some experience with the efficacy of the new
*
*
*
limitations, however, we should
reconsider
whether the continued
applicability of section 269 remains justified. 17/
This concludes my prepared remarks. I would be happy to
respond to questions.

17/ We are similarly of the view that, at this time, the separate
return limitation year and the consolidated return change of
ownership rules should remain applicable. After experience
with the new limitations is gained, the Treasury Department,
as suggested in the Staff explanation, would reconsider the
continued need for these regulations or whether any
modifications would be appropriate.

TREASURY NEWS

FOR IMMEDIATE
RELEASE
30, 1985
Department
of the
Treasury • Washington, D.c. •September
Telephone
566-2041
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $6,805 million of 13-week bills and for $6,834 million
of 26-week bills, both to be issued on October 3, 1985,
were accepted today
RANGE OF ACCEPTED
COMPETITIVE BIDS:

13-week bills
maturing January 2. 1986
Discount Investment
Rate
Rate 1/
Price

Low
High
Average
a/ Excepting 1
hj Excepting 1
Tenders at the
Tenders at the

26-week bills
maturing April 3, 1986
Discount Investment
Rate
Rate 1/
Price

7.06%a/
7.29%
98.215 :
7.24%b/
7.62%
96.340
7.08%
7.31%
98.210 :
7.24%
7.62%
96.340
7.07%
7.30%
98.213 :
7.24%
7.62%
96.340
tender of $15,005,000.
tender of $1,000,000.
high discount rate for the 13-week bills were allotted 62%,
high discount rate for the 26-week bills were allotted 83%,
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
:
Received

Location

Accepted

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

68,050
18,436,710
22,060
63,960
66,985
54,080
1,093,155
90,405
66,950
56,265
45,950
800,600
326,045

$
35,050
5,886,575
22,060
58,990
57,570
38,080
111,155
50,405
13,950
56,265
35,850
112,780
326,045

65,055
22,898,250
21,310
31,290
69,860
86,600
1,233,065
90,090
43,020
61,200
28,605
1,080,925
402,670

$ 35,055
5,906,320
21,310
31,290
54,110
38,600
129,065
50,090
18,020
58,800
18,605
70,425
402,670

TOTALS

$21,191,215

$6,804,775

$26,111,940

$6,834,360

Type
Competitive
Noncompetitive
Subtotal, Public

$17,861,220
1,193,585
$19,054,805

$3,474,780
1,193,585
$4,668,365

$23,104,880
1,099,560
$24,204,440

$3,827,300
1,099,560
$4,926,860

Federal Reserve
Foreign Official
Institutions

1,696,810

1,675,000

439,600

232,500

$21,191,215

$6,804,775

$26,111,940

$6,834,360

TOTALS
V

Equivalent coupon-issue yield

B-293

8924

WERT
BOOKBINDING
Grantviile. Pa
Mai — Apr 1986
, QujhlyiOO'K'

Full text of Press Releases of the United States Department of the Treasury : Volume 268

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