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U1BRARY
ROOM 5030
'JAM 8 w?
TREASURY DEPARTME
Treas.
HJ
10
.A13P4
v. 274
U.S. Dept. of the Treasury
PRESS RELEASES
C1BRARY
ROOM 5030
TREASURY DEPARTMENT
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.nr. EDT
Hay 12, 1986
STATEMENT OF
DENNIS E. ROSS
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views of
the Treasury Department on the following bills': H.R. 64, which
would extend the targeted jobs tax credit to employers who hire
displaced homemakers; H.R. 724, which would allow property seized
for the collection of taxes to be released to the property owner
in certain cases; H.R. 1622, which would exclude from income the
value of lodging located in the proximity of an educational
institution and rented by the institution to its employees at
cost; H.R. 1667, which would allow amortization of certain
freight forwarder operating authorities; H.R. 1733, which would
allow amortization of bus operating rights; H.R. 2473, which
would deny a deduction for amounts paid as restitution or other
damages for violations of law involving fraud; H.R. 4575, which
would prevent the avoidance of certain pension requirements
through the use of leased employees; H.R. 4578, which would
require that the full amount of excise taxes imposed on rum
produced in the Virgin Islands be covered over to the Virgin
Islands; H.R. 4596, which would make certain changes with
respect to the Tax Court; H.R. 4597, which would make certain
changes relating to the administration of the excise taxes on
alcohol, tobacco, and firearms; and H.R. 4603, which would treat
certain costs of a private foundation incurred in removing
B-574
hazardous substances as qualifying distributions under section
4942.
-2I will discuss each bill in turn.
H.R. 64
Tax Credit for Hiring Displaced Homemakers
Current Law
Enacted in 1978, the targeted jobs tax credit (TJTC), as most
recently amended, is available to taxable employers who hire
individuals from any of nine targeted groups. The nine targeted
groups are: vocational rehabilitation referrals; economically
disadvantaged youths (ages 18-24); economically disadvantaged
Vietnam-era veterans; Supplemental Security Income (SSI)
recipients; general assistance recipients; economically
disadvantaged youths participating in cooperative education
programs (ages 16-19); economically disadvantaged ex-convicts;
certain work incentive employees (AFDC recipients and WIN
registrants); and economically disadvantaged summer youth
employees (ages 16-17).
The nonrefundable credit generally is equal to 50 percent of
the first $6,000 of wages paid to a member of a targeted group in
the first year of an individual's employment with the employer.
In the second year, the employer is allowed a 25 percent credit,
again limited to the first $6,000 of wages. No credit is allowed
for wages paid after the second year of employment with the
employer. The -maximum credit is thus $3,000 per individual in
the first year of employment and $1,500 in the second year. 1/
As originally enacted, the TJTC was scheduled to expire in
1981, but was successively extended in 1981, 1982, and 1984.
Under present law, the credit is not available for wages paid to
an individual who begins work for the employer after December 31,
1985. H.R. 3838, as passed by the House of Representatives on
December 17, 1985, would extend the TJTC for two years, but
eliminate the credit for second year-wages and for certain
short-term employees. H.R. 3838, as approved by the Senate
Description
of H.R.
Finance Committee
on 64
May 6, 1986, would similarly extend the
TJTC.
Under H.R. 64, the TJTC would be extended to employers who
hire "displaced homemakers." The bill defines a displaced
homemaker as an individual who has not worked in the labor force
1/ For economically disadvantaged summer youths, the credit is
equal to 85 percent of up to $3,000 of wages (a maximum credit of
$2,550).
-3for a substantial number of years, but who has provided unpaid
services for family members in the home during those years. In
addition, the homemaker must either (a) have been dependent on
the income of another family member or public assistance and no
longer be receiving that income, or (b) be receiving public
assistance because of dependent children at home. Under the
bill, the TJTC with respect to displaced homemakers would not be
subject to a sunset provision.
Discussion
Although the Treasury Department recognizes the problems
faced by displaced homemakers attempting to enter the work force,
we oppose H.R. 64. In particular, we do not believe that a tax
credit for hiring displaced homemakers is a cost effective form
of assistance. In addition, we believe that H.R. 64, as
presently drafted, is unduly vague and overbroad.
The TJTC would be an effective means of assisting displaced
homemakers only if it increased employment opportunities for such
individuals. Available data with respect to the TJTC indicate
that it has not been an effective subsidy for most targeted
groups. Most importantly, the TJTC has been claimed for many
individuals who would have been hired even if the credit were not
available. In addition, at least one study has indicated that
the TJTC actually has served to discourage some firms from hiring
members of targeted groups because a stigma attaches to job
applicants who are members of those groups.
It is also important to recognize that to the extent that the
TJTC is directly responsible for the employment of members of
targeted groups, the TJTC may adversely affect employment
opportunities for ineligible individuals. The credit may thus
result in a reallocation of employment between new targeted
members who qualify for the credit and previously employed
targeted members who do not, in which case there would-be no net
increase in targeted employment. Alternatively, there may be an
increase in targeted employment, but it may come at the expense
of nontargeted, but nevertheless low paid, individuals who are
displaced by the targeted individuals.
The TJTC also entails significant revenue costs. We estimate
that expansion of the TJTC to include displaced homemakers would
lose $539 million in revenue from 1986 through 1991. Such an
expenditure is inappropriate for a program whose effectiveness
has not been demonstrated. If a subsidy is to be provided to
displaced homemakers, the Treasury Department believes that
programs that help such persons develop skills to enter and
progress in the work place would be more cost effective.
We also note that the definition of a displaced homemaker in
H.R. 64 requires clarification to limit the subsidy to
economically disadvantaged individuals. By including within the
-4definition of displaced homemaker a person who has been dependent
on the income of another family member but who is no longer
receiving that income, the bill appears to include persons who
are financially secure, such as certain widowed or divorced
individuals.
Finally, we believe that any expansion of the TJTC to include
other groups should be subject to any sunset provision generally
applicable to the TJTC. Unlike direct expenditure programs, tax
subsidies such as the TJTC are not required to be reviewed
annually as part of the appropriations process (although we
recognize that the tax-writing committees may review these
matters from time to time). Sunset provisions insure that the
usefulness and effectiveness of such programs will be reviewed
periodically.
H.R. 724
Property Seized for the Collection of Taxes
Current Law
The Internal Revenue Service generally is authorized under
section 6331 to seize the property 2/ of any person who does not
pay his taxes within 10 days after notice and demand for payment
is made. Under section 6337, personal property that has been
seized can generally be returned to the owner only if the
taxpayer pays the amount due, together with expenses of the
proceeding, prior to the sale of the property. Real property,' by
contrast, can be redeemed by the owner if the amount due is paid
within 180 days of sale.
Before seized property is sold, section 6335(e) requires the
Internal Revenue Service to determine a minimum sales price
(taking into account the expenses of the seizure and sale) for
the property. If no person offers the minimum price at the sale,
the property must be purchased at the minimum price by the United
States.
Description of H.R. 724
H.R. 724 would permit the Internal Revenue Service to return
property seized for the collection of delinquent taxes to the
owner if no person offers the minimum price established by the
Internal Revenue Service. As under current law, the Internal
Revenue Service would determine the minimum price for which the
property could be sold (including Internal Revenue Service
expenses). In addition, the Internal Revenue Service would
2/ Section 6334 identifies several classes of property, such as
certain personal effects, that are exempt from seizure.
-5determine whether it would be in the government's best interest
to purchase the property at that price. At the sale, the
property would go to the highest bidder at or above the minimum
price. If no person offered the minimum price, the government
could purchase the property at that price, but would not be
required to do so if it had previously determined that such a
purchase would not be in the government's best interest.
Instead, the property could be released to the owner. In such
cases, the expenses of the seizure and sale would be added to the
property owner's tax liability. H.R. 724 would apply to sales of
seized property after December 31, 1984.
Discussion
The seizure and sale of property of delinquent taxpayers are
governed by a number of procedural rules. The purposes of these
rules are to ensure that the rights of taxpayers are protected,
that property is preserved, and that Federal tax liabilities are
paid.
In many cases, these purposes are not served by requiring the
Internal Revenue Service to expend government funds to purchase
property that can not be sold for the minimum price. H.R. 724
would give the Internal Revenue Service the option, but not the
obligation, to return seized property to the owner if no bid
meets or exceeds the minimum price and if the government has
determined that purchase by the government would not be in its
best interests. The taxpayer would remain liable for payment of
any tax, and in addition would be liable for the costs of the
seizure and attempted sale. Thus, the existing incentive for
delinquent taxpayers to sell their property and meet their tax
obligations before seizure would not be affected. Recognizing
the need to expand the Internal Revenue Service's options when
seized property cannot be sold,
H.R. the
1622Treasury Department supports
H.R. 724.
Lodging Rented by
Educational Institutions to Employees
Current Law
Section 119 of the Internal Revenue Code excludes from the
gross income of an employee the value of lodging provided by the
employer if (1) the lodging is furnished for the convenience of
the employer, (2) the lodging is on the business premises of the
employer, and (3) the employee is required to accept the lodging
as a condition of employment. Several courts have held that
on-campus housing furnished to faculty or other employees by an
educational institution does not qualify for the section 119
-6exclusion. Thus, in such cases, the fair rental value of the
housing (less any amounts paid for the housing by the employee)
is includible in the employee's gross income and constitutes
wages for income tax withholding and employment tax purposes.
Schools and universities have argued that special statutory
rules should govern the tax treatment of housing furnished to
their employees. To allow further time for consideration of such
arguments, Congress, in the Deficit Reduction Act of 1984
(DEFRA), prohibited the Treasury Department from issuing, prior
to January 1, 1986, any income tax regulations that would treat
as income the excess of the fair market value of qualified campus
lodging, over the greater of (1) the operating costs paid in
furnishing the lodging, or (2) the rent received. This
moratorium on regulations was applicable only to qualified campus
lodging furnished after December 31, 1983, and before January 1,
1986. Qualified campus lodging was defined as lodging located on
(or in close proximity to) a campus of a school, college, or
university, and furnished to any of its employees, including
nonfacuity employees, or to the employee's spouse or dependents.
The moratorium did not apply to any amount for lodging if such
amount was treated as wages or included in income when furnished.
Description of H.R. 1622
H.R. 1622 would exclude from the taxable income of an
employee of an educational institution the value of lodging
located on, or in the proximity of the institution's campus, if
the housing is rented to the employee, or to the employee's
spouse or dependents, by or on behalf of the institution, except
to the extent that the institution's direct operating costs for
the lodging exceed amounts paid by the employee for the use of
such lodging. This provision would apply to taxable years
beginning after December 31, 1972.
Discussion
The Treasury Department believes that both educational
institutions and the Internal Revenue Service would benefit if
workable valuation rules were established to resolve the
continuing disagreements over the treatment of housing provided
to employees of educational institutions. Accordingly, the
Treasury Department supports the provisions of H.R. 3838, as
approved by the Senate Finance Committee on May 6, 1986, and
S. 1730, the Senate version of the Budget Reconciliation Act,
that establish guidelines for determining the fair rental .value
of employee housing provided by educational institutions. Under
those bills, the fair rental value of lodging provided by certain
educational institutions would be treated as no greater than five
percent of the appraised value of such lodging for the year in
question, provided that an independent appraisal by a qualified
appraiser is obtained. Based on available data concerning rent
to value ratios, we believe the five percent presumption included
-7in S. 1730 and the Senate Finance Committee version of H.R. 3838
provides a reasonable, if conservative, measure of rental value,
and would provide for a fair resolution in this area. 3/
The Treasury Department, however, does not support H.R. 1622,
because it does not properly measure (even conservatively) the
fair market value of the benefit transferred in the form of
employee housing. Many older universities have very low direct
operating costs for housing, which in many cases have no
relationship to the housing's rental value. Moreover, H.R. 1622
would create a competitive disadvantage for those, typically
newer, universities that have relatively high direct housing
costs, and would thus be required to charge higher rents in order
to avoid imputation of income to their employees.
H.R. 1667
Deduction for Loss in Value of
Freight Forwarder Operating Authorities
H.R. 1733
Deduction for Loss in Value of Bus Operating Authorities
Current Law
On July 1, 1980, the Motor Carrier Act of 1980 was enacted to
reduce regulation of the interstate motor carrier industry. The
Act made it easier for motor carriers to obtain operating
authorities from the Interstate Commerce Commission (ICC). The
legislative deregulation of the motor carrier industry only
applied to motor contract carriers and motor common carriers, and
not to freight forwarders.
The activities of freight forwarders are closely related to
those of other common carriers; a forwarder takes freight from
3/ The Treasury Department is concerned with disposition of the
unresolved disputes that were created by the uncertain tax
treatment of housing of educational institutions' employees
during the years that the moratorium on regulations was in effect
as well as prior years. In particular, it may be difficult to
determine the appraised value of housing for past years. If
legislation is enacted along the lines of the provision contained
in the Senate Finance Committee version of H.R. 3838 and S. 1730,
we would favor an approach for taxable years prior to the date of
enactment that would permit educational institutions to rely on
the value of the property as assessed by State or local tax
authorities for property tax purposes as if it were the value
determined by a qualified appraisal.
-8shippers, usually in small shipments, combines it with freight of
other shippers, and sends it via some other carrier, usually a
motor common or contract carrier. The ICC, on its own
initiative, and concurrently with the enactment of the Motor
Carrier Act, substantially reduced entry restrictions for freight
forwarders. As a result of this legislative and administrative
easing of regulation, the value of operating authorities held by
motor carriers and freight forwarders has declined.
Similarly, the Bus Regulatory Reform Act of 1982 (enacted on
November 19, 1982), by deregulating the intercity bus industry,
substantially eased entry into the intercity bus business. As a
result of deregulation, the value of.bus operating authorities
has declined.
Under section 165(a) of the Code and the regulations
thereunder, a deduction is allowed for any loss incurred in a
trade or business that is evidenced during the taxable year by a
closed and completed transaction and fixed by an identifiable
event. The amount of any deduction allowed may not exceed the
adjusted basis of the property involved. No deduction is
allowed, however, for a mere decline in value of property. These
rules have been applied by the courts to deny deductions for the
diminution in value of an operating permit or license in
circumstances closely comparable to those presented by the
reduced regulation of interstate freight forwarders and intercity
bus operators.
After the interstate motor carrier industry was legislatively
deregulated, Congress enacted section 266 of the Economic
Recovery Tax Act of 1981 (ERTA) as a special relief provision for
taxpayers who held motor carrier operating rights at that time.
Under that provision, a taxpayer who held one or more motor
carrier operating authorities on July 1, 1980 is allowed a
deduction ratably over a 60-month period for an amount equal to
the aggregate adjusted basis of all motor carrier operating
authorities held by the taxpayer on July 1, 1980 or acquired
pursuant to a binding contract in effect on July 1, 1980. The
60-month period begins with the month of July 1980 (or, if later,
the month in which the operating authority was acquired), or, at
the election of the taxpayer, the first month of the taxpayer's
first taxable year beginning after July 1, 1980. The term "motor
carrier operating authority" is defined as a "certificate or.
permit held by a motor common or contract carrier of property and
issued pursuant to subchapter II of Chapter 109 of title 49 of
the United States Code." Section 266 of ERTA provides no relief
for"taxpayers that held operating authorities as freight
forwarders. Similarly, no special provision has been enacted to
provide relief to holders of intercity bus operating authorities.
-9-
Description of H.R. 1667
H.R. 1667 would amend section 266 of ERTA to define the term
"motor carrier operating authority" to include a certificate or
permit held by a freight forwarder. The amount of the deduction
would equal the aggregate adjusted basis of all freight forwarder
operating authorities held by the taxpayer on that date or
acquired subsequently under a binding contract in effect on July
1, 1980. Thus, the bill would allow an ordinary deduction
ratably over a 60-month period for taxpayers who held freight
forwarder authorities on July 1, 1980. The bill would be
effective for taxable years ending after June 30, 1980.
Description of H.R. 1733
In a manner similar to H.R. 1667 and section 266 of ERTA,
H.R. 1733 would allow an ordinary deduction ratably over a
60-month period for taxpayers who held one or more bus operating
authorities on November 19, 1982, the date the intercity bus
industry was legislatively deregulated.' The amount of the
deduction would be the aggregate adjusted bases of all bus
operating authorities that were held by the taxpayer on November
19, 1982, or acquired after that date under a binding contract.
The bill would limit the aggregate deduction to $5 million per
taxpayer. For purposes of the $5 million limitation, a
corporation that is a member of an affiliated group would be
treated as a separate taxpayer. Special rules would be provided
to allocate basis to bus operating authorities in cases in which
a corporation acquired stock in another corporation that held bus
operating authorities. The bill would be effective for taxable
years ending after November 18, 1982.
Discussion
The Treasury Department opposes H.R. 1667's extension of the
special amortization rule provided by section 266 of ERTA to
freight forwarders, and also opposes the similar rules that would
be provided for holders of bus operating authorities under
H.R. 1733. The Treasury Department opposed the enactment of
section 266 of ERTA and similarly opposes any attempt to expand
its reach further for several reasons. First, the special
amortization rule provided by section 266 of ERTA is inconsistent
with the general principle of Federal income taxation that gains
are taxed and losses deducted only when those gains or losses are
fixed by an identifiable event. In the case of gains or losses
attributable to property, this typically occurs upon the sale,
exchange or other disposition of the property. Permitting a
current deduction for a decline in the value of assets prior to
disposition, while not taxing unrealized gains, is contrary to
our present system of taxation and sets an unfortunate precedent.
-10-
Second, we noted in 1981 that even though the deregulation of
the trucking industry caused a decline in the value of the
operating rights of motor carriers, those rights continue to have
value, since the ICC continues to require a taxpayer to secure
such rights in order to conduct a trucking business. We pointed
out that if special tax relief was to be given to affected motor
carrier operators, the proper amount of the loss deduction would
be the excess of the taxpayer's basis in the operating rxgnts
over the post-deregulation value of those rights, not the full
amount of the taxpayer's basis in the operating rights.
It should also be emphasized that the deregulation of motor
carriers (including freight forwarders) and intercity bus
operators is not materially different than any other regulatory
action that causes a diminution in value of a license or
operating right. Other industries, most notably the airline
industry, have been deregulated without the grant of special tax
relief for any reduction in value of the assets. Thus, while it
may be difficult as a matter of tax policy to draw meaningful
distinctions between the deregulation of motor carriers, freight
forwarders, and bus operators, if H.R. 1667 and H.R. 1773 are
enacted, other deregulated industries may seek similar relief.
Additionally, with respect to H.R. 1773, we are concerned
that treating members of an affiliated group of corporations as
separate taxpayers for purposes of the $5 million limit would
create an unwarranted distinction between a parent corporation
that purchased (before November 19, 1982) a controlling interest
in a single subsidiary holding multiple bus operating authorities
and a parent corporation that purchased (before November 19,
1982) multiple subsidiaries that each held a single bus operating
authority. Similarly, an unwarranted distinction would exist
between a corporation that acquired bus operating authorities
directly, and one that acquired operating authorities indirectly
by purchasing the stock of corporations already holding operating
authorities. In both cases, more favorable treatment would be
given to the affiliated group that had more members holding
operating authorities. Accordingly, we oppose the provision of
H.R. 1773 that treats members of an affiliated group as separate
taxpayers for purposes of the $5 million limit.
H.R. 2473
Denial of a Deduction for Amounts Paid as Restitution
or Other Damages for Violations of Law Involving FrauH
Current Law
Section 162(a) of the Code allows a deduction for all
ordinary and necessary expenses paid or incurred in carrying on a
-11trade or business. Prior to 1970, several court cases disallowed
deductions for payments that were believed to frustrate public
policy by encouraging unlawful conduct. In 1969, Congress
enacted section 162(f) of the Code, which provides that no
deduction shall be allowed as an ordinary and necessary business
expense for any fine or similar penalty paid to a government for
the violation of any law, and section 162(g) of the Code, which
denies a deduction for two-thirds of treble antitrust damages
paid by a taxpayer who has been convicted of a criminal violation
of the antitrust laws or has had accepted a plea of guilty or
nolo contendere to an indictment or information charging such a
violation. Legislative history to these provisions indicates
that they were "intended to be all inclusive." S. Rep. 91-552,
1st Sess., p. 274 (1969). Thus, payments for compensatory and
punitive damages made to defrauded parties have been held to be
deductible as an ordinary and necessary business expense, since
they do not fall within the language of section 162(f) or (g).
Description of H.R. 2473
H.R. 2473 would deny a deduction for any payment for
restitution or other damages to a party injured by fraud if the
taxpayer making such payment is convicted of a violation of law
involving fraud, or the taxpayer's plea of guilty or nolo
contendere with respect to such a violation is entered or
accepted in any proceeding. The bill would apply to amounts paid
after May 15, 1985, in taxable years ending after such date.
Discussion
The Treasury Department opposes H.R. 2473 for several
reasons. 4/ First, we believe disallowance of a deduction for
restitution payments misconceives the historical purposes of
restitution. The legal remedy of restitution is intended to
prevent unjust enrichment. Thus restitution is required where a
person benefits by reason of an infringement of another person's
interests, or by reason of another person's loss. Although
restitution may in some cases deter misconduct and compensate an
aggrieved party for a loss suffered, those are not its primary
concerns. A given set of circumstances may give rise to both an
obligation to make restitution and liability for other damages or
4/ The Office of Management and Budget has advised that time
penalties.
Timitations have precluded it from advising on the relationship
of H.R. 2473 to the program of the President. Consequently, the
views expressed on this bill are solely those of the Treasury
Department. The Subcommittee may wish to solicit the views of
the Justice Department regarding the bill's possible impact on
areas of concern to that department.
-12The tax treatment of restitution payments under current law
is consistent with these principles. The unjustly enriched party
includes the original receipt in gross income and is entitled to
a deduction when restitution is made. The offsetting inclusion
and deduction corresponds to the party's economic position, since
the party required to make restitution retains no economic gain.
If a deduction were denied for the restitution payment, the
requirement of restitution would, contrary to its historical
purpose, entail a significant financial penalty.
Similarly, the purpose of compensatory damages is to
compensate a party that has been injured by the wrongful act of
another. Compensatory damages are not intended to punish the
wrongdoer, although that would be their effect if a tax deduction
were denied. As a matter of tax policy, we believe it is
inappropriate to deny categorically a deduction for payments not
intended as penalties.
Where the law intends to punish a wrongdoer, it either
imposes a fine or penalty payable to a government or imposes
punitive damages payable to the injured party. In the case of
penalties payable to a government, a deduction is denied under
current law. On the other hand, current law denies a deduction
for punitive damages only in the narrowly defined case of treble
antitrust damages under section 4 of the Clayton Act. There, the
class of actions and the amount of damages subject to the
disallowance rule is clearly specified by statute. Although
there may be other situations where it would be appropriate to
deny a deduction for punitive damages, we would oppose H.R. 2473
even if it were limited to payments of punitive damages. H.R.
2473 would apply to any violation of law involving fraud, which
would leave substantial uncertainty as to the class of actions
affected. Our views might be different with respect to a
narrowly drawn bill, where the violations of law intended to be
covered and the public policies at issue could be carefully
considered.
Finally, because H.R. 2473 would
'have the effect of imposing
H.R. 4575
penalties indirectly through the tax law, the Treasury Department
opposes the retroactive effective date in H.R. 2473.
Preventing the Avoidance of Certain
Pension Requirements ThrougK"~the Use of Leasee! Employees
Current Law
Section 414(n) of the Code provides that if an employer uses
the services of a leased employee, that leased employee is
generally considered an employee of the employer for purposes of
-13certain pension plan requirements. A leased employee is
generally an individual who is not technically an employee of the
employer, but who has performed, on a substantially full-time
basis for at least a year, services historically performed by
employees in the employer's business field. An individual will
not be considered a leased employee, however, unless his or her
services are performed pursuant to an agreement between the
employer and the company leasing the individual to the employer.
In addition, an individual will generally not be considered a
leased employee if the company leasing the individual to the
employer covers the individual under a money purchase pension
plan providing immediate participation and 100 percent vesting
and at least a 7 1/2 percent nonintegrated contribution rate.
The pension plan requirements for which a leased employee is
considered an employee are generally: nondiscrimination, vesting,
the top-heavy rules and the limitations on contributions and
benefits.
Section 414(n) of the Code was intended to prevent avoidance
of the rules governing qualified pension plans through leasing of
employee services. The typical factual scenarios involved an
employer leasing individuals to perform rank and file services,
rather than hiring such individuals as employees. For example, a
doctor could lease nurses and other staff personnel. Before the
enactment of section 414(n), a qualified retirement plan could be
established that applied to the doctor but not to the leased
nurses or staff. Since the doctor technically had no other
employees, such a plan would not be discriminatory. Section
414(n) addressed this problem by generally deeming the leased
employees to be employees of the employer for purposes of certain
requirements including nondiscrimination.
Description of H.R. 4575
H.R. 4575 would modify section 414(n) of the Code in several
respects. First, H.R. 4575 would repeal the rule generally
providing that an individual is not a leased employee if the
leasing company provides the individual with a 7 1/2 percent
contribution under a money purchase pension plan. Second, H.R.
4575 would eliminate the current law rule that an individual will
not be considered a leased employee unless the services the
individual performs for the employer are pursuant to an agreement
between the employer and the leasing company. Third, H.R. 4575
would provide that an employer could not use the historically
performed test to avoid having an individual characterized as a
leased employee if a substantial amount of the same type of
service was performed for that employer by at least one
individual during each of the previous three years. Finally,
H.R. 4575 would require that regulations be issued that minimize
the recordkeeping requirements of section 414(n) of the Code in
the case of an employer using nonemployees for only a small
portion of its workload and only on a short-term basis.
-14-
Discussion
The Treasury Department supports H.R. 4575 with one important
reservation that is discussed below. First, we support repeal of
the rule providing that an individual is not a leased employee if
the leasing company provides the individual with a 7 1/2 percent
contribution under a money purchase pension plan. The. 7 I/2
percent rule of current law allows a substantial amount of the
discrimination permissible prior to the enactment of section
414(n). In other words, if a leasing company provides the
required 7 1/2 percent contribution, the lessee employer can
provide its highly compensated employees with a much greater
contribution and or benefit. For example, an employer could
provide its highly compensated employees with a contribution
equal to 25 percent of compensation, and, in some cases, a
benefit under a defined benefit plan as well. Because the 7 1/2
percent rule allows substantial discrimination of this type, we
support its repeal in H.R. 4575.
The Treasury Department also agrees with the bill's
elimination of the requirement of an agreement between the
employer and the leasing company. This requirement serves little
purpose. Almost by definition, there is an agreement of some
form in any commercial transaction.
The Treasury Department also supports modification of the
requirement that, to be a leased employee, an individual must
perform services historically performed by employees in the
employer's business field. Although we believe that the
requirement serves an important function, we recognize that due
to its vagueness, it has been abused in certain instances. For
example, some employers interpret the term "business field" so
narrowly that their business is unique and, thus, it is only
their own experiences that determine whether services have
historically been performed by employees. This narrowinterpretation enables such businesses to avoid section 414(n)
altogether if they have always leased their staff. Rather than
modify the historically performed test, H.R. 4575 provides an
alternative rule under which the historically performed test need
not be satisfied if, during the prior three years, a substantial
amount of the same type of service was performed for the employer
by at least one individual. We support this general approach,
since it accomplishes objectives similar to those intended by the
historically performed test, but in a way that is more
administrable and less susceptible to abuse.
Finally, the Treasury Department supports the general intent
of the requirement that regulations be issued minimizing the
recordkeeping requirements for certain employers. We recognize
that for certain employers that do not engage in the type of
practices which gave rise to section 414(n), the social value of
-15strict adherence to all the requirements of section 414(n) may be
outweighed by the administrative costs of such strict adherence.
It is appropriate to reduce the burdens on such employers.
We believe it appropriate also to extend relief to employers
who use a relatively small number of nonemployees on more than a
short-term basis. In general, we would support a provision to
minimize the burdens of section 414(n) for an employer if (1) it
does not have any top-heavy plans, and (2) nonemployees
performing extended service for the employer constitute only a
small percentage of the employer's total workforce. In addition,
rules should be developed that allow employers to determine with
little burden the number of employees performing extended
service. We believe such rules are consistent with the spirit of
H.R. 4575.
For example, we believe that it would be appropriate to allow
sampling of the workforce. Also, employers should generally not
be required to assemble data from geographically separate
divisions with regard to common nonemployees. Finally, we would
expect that agreements between employers and leasing companies
would require the leasing companies, which generally maintain
detailed records, to provide their customers with the data
necessary to determine if the customer qualifies for the relief.
With these developments, we believe that the number of
nonemployees performing extended service may be identified with
relatively little burden.
In summary, we believe that H.R. 4575 modifies section 414(n)
in such a way as to achieve its original purpose more
effectively. H.R. 4575 would eliminate certain inappropriate
means of avoiding leased employee status. At the same time, H.R.
4575 would better focus the burdens imposed by section 414(n) on
H.R.
the employers whose practices
were4578
the basis for Congress'
original action.
Thus,
we
support
Excise Taxes Imposed the purposes of the bill.
on Rum Produced in the Virgin Islands
Current Law
The United States has long imposed an excise tax on distilled
spirits produced domestically or imported from abroad. Section
7652 of the Code imposes a special excise tax on articles,
including distilled spirits, coming into the United States from
the Virgin Islands (and Puerto Rico). This tax is equal to, and
in lieu of, the tax that would be imposed if the articles were
produced in the United States.
-16-
Section 7652 of the Code since 1954 has required the United
States to pay over to the Treasury of the Virgin Islands the
excise tax it collects with respect to articles produced in the
Virgin Islands. This covering over of excise taxes into the
territorial treasury corresponded to a similar system that was
introduced for the benefit of Puerto Rico in 1917, when that
jurisdiction faced a loss of customs revenues because of the
disruption of trade caused by World War I.
In addition, section 7652 of the Code requires the United
States to pay over to the Treasuries of the Virgin Islands and
Puerto Rico, in accordance with a formula prescribed by the
Secretary of the Treasury, the excise taxes it collects with
respect to rum imported into the .United States frorn^foreign
countries. This additional cover-over was enacted in 1983 to
protect those jurisdictions from potential revenue losses they
might have faced as a result of the removal of the duty on rum
coming into the United States from Caribbean countries.
The excise tax on distilled spirits produced in or imported
into the United States is imposed at a rate of $12.50 per proof
gallon. The tax rate was increased to that amount from $10.50
per proof gallon on October 1, 1985 by the Deficit Reduction Act
of 1984 (DEFRA). When it increased the rate, DEFRA specifically
provided that the cover-over of the excise tax to the Virgin
Islands and Puerto Rico should be limited to the prior-law amount
Description
H.R. gallon.
4578
of
$10.50 perofproof
H.R. 4578 would require the United States to cover over to
the Treasury of the Virgin Islands the full amount of the $12.50
per proof gallon distilled spirits excise tax imposed upon Virgin
Islands rum brought into the United States.
Discussion
For the reasons discussed below, the Treasury Department
believes that it is inappropriate to increase the amount of the
rum excise taxes covered over into the Treasury of the Virgin
Islands. We therefore oppose H.R. 4578.
DEFRA's explicit limitation on the amount of the distilled
spirits excise tax that would be covered over resulted from basic
policy concerns with the excise tax cover-over program. One such
concern is that the program creates artificial incentives for the
government of the jurisdiction receiving the cover-over to
encourage either actual or apparent increases in the local
production of the particular product which generates the excise
tax.
-17-
For example, prior to DEFRA, the Government of Puerto Rico
had initiated a redistillation program whereby spirits originally
distilled in the United States were transported to Puerto Rico
and redistilled there, after which they were returned to the
United States for marketing. Because this redistillation was
considered to be Puerto Rican production, the Puerto Rican
Government received all of the excise taxes collected by the
United States with respect to these redistilled spirits. The
Puerto Rican Government was able to use part of this covered-over
amount to subsidize the costs of U.S. distillers who participated
in this program.
Whereas the Puerto Rican redistillation program sought an
artificial increase in local production in order to generate
increased excise tax cover-overs, the Virgin Islands Government
has subsidized the local production of rum with a comparable
result of higher cover-overs. In particular, the Virgin Islands
subsidizes the purchase of molasses by local distillers and
reduces their Virgin Islands tax liabilities.
The existence of such subsidies raises serious policy
questions as to the advisability of the excise tax cover-over as
an approach to providing assistance to the territories. The
absence of any comparable cover-over to State governments of
excise taxes imposed on articles produced within their States
results in disadvantages to U.S. producers who are competing in
the U.S. market with their subsidized Virgin Islands competitors.
Both the House and the Senate, in their consideration of
DEFRA, proposed various methods of addressing these policy
concerns. The House bill specifically prohibited the cover-over
of tax collected on redistilled spirits, and it proposed a more
general limitation on the cover-over of tax collected on products
that either were subsidized by the territorial governments or
were produced without a significant amount of local production.
The Senate bill also eliminated the cover-over with respect
to redistilled spirits. Instead of a more general limitation on
the cover-over with respect to subsidized products or products
that failed the local value-added test, however, the Senate
proposed the specific dollar limitation on the cover-over of
excise taxes collected with respect to distilled spirits. In
adopting this approach, the Senate Finance Committee Report
states: "At the present time, the Committee decided not to
address the overall question of whether cover over of Federal
excise tax revenues to Puerto Rico or the Virgin Islands is
appropriate in any circumstances when those revenues are not
similarly covered over to the States."
The compromise that emerged from the Conference Committee
drew upon the approaches of both bills. It retained that part of
the House bill that limited cover-overs with respect to products
-18that were locally subsidized or failed the local value-added
test, but it did not include distilled spirits in these
limitations. Instead, it retained that provision of the Senate
bill that limited the cover-over of the excise tax on distilled
spirits to the prior-law rate of $10.50.
The Treasury Department does not believe it would be
appropriate to disturb the 1984 compromise by increasing the
amount of the cover-over of excise taxes on Virgin Islands rum to
reflect the $2.00 increase in the excise tax that was enacted in
1984. It is clear from the 1984 legislative history that
Congress believed the practice of covering-over should not be
expanded, even in light of an increase in excise taxes, absent a
thorough examination of the overall issue of cover-overs. The
serious policy concerns that existed in 1984 with respect to the
practice of covering-over remain just as strong today. In
particular, we are troubled by the tendency of the territorial
governments to use these dedicated taxes to subsidize industries
which then compete in the U.S. market with domestic producers who
are unable to obtain any comparable subsidy from their State
governments. We do not believe that any increase in the Federal
excise tax rate should necessarily be an occasion for a windfall
to the territorial governments by virtue of the cover-over
program. Finally, we would note that the policy concerns
troubling us are equally applicable to the Virgin Islands and
H.R. 4596
Puerto Rico, and we see no reason
to distinguish between the two
jurisdictions Changes
for this With
purpose.
Respect to the Tax Court
Current Law
Salaries and Benefits of Judges and Special Trial Judges
Section 7443(c) of the Code provides that Tax Court judges
receive their salary at the same rate and in the same
installments as judges of the United States District Courts.
Under section 7447, a Tax Court judge who agrees to perform'
judicial duties if recalled by the chief judge of the Tax Court
may elect to receive retired pay. A Tax Court judge forfeits all
rights to retired pay, however, if he or she accepts civil office
or employment under the United States Government (other than as a
retired Tax Court judge) or performs legal or accounting services
in the field of Federal taxation or renegotiation of Federal
contracts. By contrast, District Court judges who resign and
engage in the practice of law continue to receive their full
retirement pay.
-19-
Section 7443(d) provides that Tax Court judges receive
necessary traveling expenses and expenses actually incurred for
subsistence while traveling on duty and away from their
designated stations, subject to the same limitations that apply
to the United States Court of International Trade.
The salaries of special trial judges of the Tax Court are
established by section 225 of the Federal Salary Act of 1967
(2 U.S.C. 351-361), as adjusted by section 461 of Title 28,
United States Code. On average, their salaries equal
approximately 90 percent of those of Tax Court judges, but they
are not required by law to be determined by reference to the
salaries of the Tax Court judges. The rules for reimbursement of
special trial judges for travel expenses and per diem allowances
are provided in subchapter 1 of chapter 5 of Title 5, United
States Code, under rules that are less generous than those
applicable to Tax Court judges.
United States Marshals
United States marshals are the security force for the Federal
judiciary, and are required to attend any sessions of United
States District Courts, United States Court of Appeals, and the
United States Court of International Trade, at the discretion of
the respective courts. Although United States marshals sometimes
attend Tax Court hearings when requested to do so, they are not
required by statute to attend Tax Court hearings.
Additions to Tax
Section 6214(a) grants the Tax Court jurisdiction to
"redetermine the correct amount of a deficiency." Because
additions to tax for late payment of the amount shown on any tax
return under section 6651(a)(2) are based upon the amount shown
on the return rather than upon deficiency, the Tax Court has held
that it does not have jurisdiction over such additions to tax.
In Estate of Young v. Commissioner, 81 T.C. 879 (1983), the
Internal Revenue Service determined a deficiency in estate tax,
an addition to tax for late filing of the estate tax return, and
an addition to tax for late payment of the amount shown as tax on
the return. The Tax Court concluded that it had jurisdiction to
decide the deficiency and the addition to tax for late filing,
but not the addition to tax for late payment since it was not
related to a deficiency.
Certification of Interlocutory Orders to the Courts of
Appeals
District Court judges may certify interlocutory orders to the
United States Courts of Appeals pursuant to 28 U.S.C. section
1292(b). Relying upon the applicable statutes, several courts
have held that interlocutory orders certified by the Tax Court
-20are not appealable under 28 U.S.C. section 1292(b), which by its
terms is limited to orders of District Courts. Additionally,
Rule 5 of the Federal Rules of Appellate Procedure, which sets
forth the procedures for appeals under 28 U.S.C. section 1292(b),
specifically does not apply to review of Tax Court decisions.
Description of H.R. 4596
Salaries and Benefits of Judges and Special Trial Judges
H.R. 4596 would provide that special trial judges would
receive a salary at a rate equal to 90 percent of the rate for
Tax Court judges, and in the same installments as such judges.
Accordingly, special trial judges would be compensated at a rate
equal to 90 percent of the salary of District Court judges.
H.R. 4596 also would provide that special trial judges would
receive the same expense allowance for travel and subsistence as
Tax Court judges.
In addition, H.R. 4596 would amend section 7447(b) of the
Code to provide that any Tax Court judge who meets certain age
and service requirements may make an irrevocable election to
receive 60 percent of retirement pay and would not forfeit such
pay if he or she performed certain legal or accounting services
or failed to perform judicial duties when recalled by the chief
judge of the Tax Court.
United States Marshals
H.R. 4596 would require the United States marshal for any
district in which the Tax Court is sitting, when requested by the
Chief Judge of the Tax Court, to attend any session of the Tax
Court in such district.
Additions To Tax
H.R. 4596 would amend section 6214 of the Code to give the
Tax Court jurisdiction over any addition to tax. Thus, the Tax
Court would have jurisdiction over an addition to tax for failure
to pay the amount of tax shown on the return.
Certification of Interlocutory Orders to the Courts of
Appeals"
H.R. 4596 would provide that when any Tax Court judge states
in an interlocutory order that a controlling question of law is
involved with respect to which there is a substantial ground for
difference of opinion and that an immediate appeal from that
order may materially advance the ultimate termination of the
litigation, the United States Court of Appeals may, in its
discretion, permit an appeal to be taken from such order.
Application must be made within ten days after the entry of such
-21order. Neither the application nor the granting of an appeal
shall stay the Tax Court proceedings unless a stay is ordered by
a Tax Court judge or by the United States Court of Appeals that
has jurisdiction of the appeal or by a judge of that court.
Discussion
Salaries and Benefits of Judges and Special Trial Judges
The Treasury Department supports the provisions of H.R. 4596
dealing with salaries and benefits for special trial judges.
Setting the salaries of special trial judges as a percentage of
the salaries of the Tax Court judges would accomplish two
objectives. It would allow all judicial salaries of the Tax
Court to be determined in the Internal Revenue "Code by a single
reference to the salaries of the judges of the United States
District Courts, and it would ensure a fixed percentage
differential between the salaries of the Tax Court judges and
special trial judges.
The Treasury Department also agrees that special trial judges
should be reimbursed for travel expenses at the same rate as Tax
Court judges. Special trial judges travel extensively, often to
hear regular Tax Court cases as well as the small tax case
proceedings to which they are assigned. It is unfair to
reimburse them for such travel at a lower rate than that
applicable to Tax Court judges.
With respect to retired pay, the Treasury Department believes
that Tax Court judges should be able to undertake other
employment and continue to receive their retired pay just as
United States District Court judges are permitted to do under
current law. The position of Tax Court judges in the judicial
system is similar to that of United States District Court
judges—both are trial judges whose decisions are appealable to
the United States Courts of Appeals. In our view, they should
receive similar compensation. Indeed, as described above, Tax
Court judges are paid a salary, pursuant to statute, at the same
rate as District Court judges. We see no reason to provide Tax
Court
60 percent
of number
their of
fullretired
pay upon
when,
5/ We judges
recognize
that the
Tax retirement
Court judges
under
the to
same
circumstances,
Districtconstitutes
Court judges
would receive
available
perform
judicial duties
a relatively
100
percent
of
their
retired
pay.
5/
Consequently,
while
we
high proportion of the Tax Court bench, and that the Tax Court
faces a substantial backlog. We do not believe, however, that
such circumstances, which are beyond the control of the judges,
justify a decreased level of retirement pay.
-22recognize the provision of H.R. 4596 that would provide 60
percent of retirement pay to judges who accept other employment
or refuse to accept judicial duties is an improvement over
current law, we recommend that the provision be extended to
provide retirement pay to Tax Court judges on the same basis as
District Court judges.
United States Marshals
The Treasury Department believes there is a need for United
States marshals to provide assistance to the Tax Court at its
sessions. Although the United States Marshal Service generally
agrees to provide such assistance, there have been occasional
incidents in which the United States marshal of a particular
district has questioned whether the rendering of such service was
within the scope of his duties. The safety of Tax Court judges
and the importance of smooth and orderly Tax Court hearings make
it important that the United States marshals be authorized by
statute to provide protection to the Tax Court. Although we thus
agree with the intent of H.R. 4596, we prefer the approach taken
in the Administration's comprehensive United States marshal
proposal, introduced as H.R. 4001, which would in part grant the
United States Marshal Service plenary responsibility for
providing assistance to all Federal courts, including the Tax
Court.
Additions to Tax
We believe that it is desirable for a taxpayer to be able to
have an entire tax dispute resolved in one forum. Accordingly,
the Treasury Department supports giving the Tax Court
jurisdiction over additions to tax under section 6651(a)(2).
Certification of Interlocutory Orders to the Courts of
Appeals
In most instances, Tax Court procedures correspond to
procedures in the United States District Courts. There are
situations in which permitting the appeal of Tax Court
interlocutory orders could promote the prompt and efficient
pretrial determination of the underlying litigation, thereby
conserving the resources of the litigants and the Tax Court.
Because we believe the purpose of the Interlocutory Appeals Act
of 1958, which added section 1292(b) to Title 28 of the United
States Code, was to avoid unnecessary judicial proceedings, and
thereby increase efficiency, we support extension of the
interlocutory appeals procedure to orders of the Tax Court.
-23-
H.R. 4597
Changes Relating to the Administration of the
Excise Taxes on Alcohol, Tobacco, ancTFTrearms
Current Law
Forfeiture of unregistered firearms
Weapons governed by the National Firearms Act are subject to
seizure and formal forfeiture procedures, both judicial and
administrative, if they are not registered. Such weapons include
sawed-off shotguns and rifles, machine guns, mufflers and
silencers, and destructive devices, such as bombs, grenades,
mines, rockets, and large caliber weapons such as mortars,
antitank guns, and bazookas. Property valued at more than $2,500
that has been seized for a violation of the internal revenue laws
must be forfeited in an ^n rem proceeding in a Federal district
court located in the district in which the seizure is made. A
formal complaint must be filed and a public notice of the pending
action must be published in a newspaper with general circulation.
If the property that is seized is valued at $2,500 or less,
forfeiture proceedings are pursued administratively. Under the
administrative procedures, the property must be appraised by
three disinterested persons and notice of seizure must be
published for three weeks in a newspaper. Any person interested
in property so seized may file a claim and bond for costs in the
amount of $2,500 in order' to transfer the forfeiture proceeding
to the appropriate United States District Court for judicial
proceedings. If no such claim and bond for costs are filed, the
property is forfeited administratively.
Property must be stored in the judicial district in which it
is seized. If the Bureau of Alcohol, Tobacco, and Firearms
(BATF) does not have storage facilities in that particular
judicial district, then BATF must locate other storage facilities
within the district for such items.
Place for registering firearms business and filing tax
returns
On July 1, 1972, pursuant to Treasury Department Order No.
221, the administration and enforcement of the internal revenue
laws relating to distilled spirits, wine, beer, tobacco and
certain firearms was transferred from the Internal Revenue
Service to BATF. Under section 5802 of the Code, importers,
manufacturers, and dealers in firearms must register with BATF in
each internal revenue district in which they carry on business.
Under section 6091(b) of the Code, all tax returns must be filed
in an internal revenue district or at an Internal Revenue Service
Center serving an internal revenue district. No separate rules
are provided for the excise taxes administered by BATF.
-24-
Description of H.R. 4597
Forfeiture of unregistered firearms
H.R. 4597 would eliminate formal forfeiture procedures, both
judicial and administrative, involving unregistered National
Firearms Act weapons. The owner or a person interested in the
seized property would be permitted to submit a claim for the
value of such property by establishing that the firearm was not
involved or used in violation of law, or that any unlawful
involvement or use had been without the owner's knowledge or
consent.
The bill also would permit the storage of property seized for
judicial forfeiture outside the judicial district in which it is
seized. The place of storage would be determined by the Special
Agent in charge of the particular district, taking into account
what is convenient and appropriate.
Place for registering firearms business and filing tax
returns
Finally, H.R. 4597 would require that importers,
manufacturers, and dealers in firearms register with BATF in each
State in which they carry on a business, rather than in each
internal revenue'district in which they carry on a business.
H.R. 4597 also would permit the Treasury Department to provide by
regulation for the filing of tax returns with BATF rather than
with the Internal Revenue Service.
Discussion
The Treasury Department supports the provisions in H.R. 4597.
Forfeiture of unregistered firearms
Whether forfeiture proceedings are judicial or
administrative, the process can be time consuming and costly
because of the requirements for appraisal and publication of
notice of seizure. Such an expenditure of time and money does
not serve any useful purpose in the case of unregistered
firearms, because the person from whom an unregistered firearm is
seized cannot lawfully regain possession. The Supreme Court held
in United States v. Freed, 401 U.S. 601 (1971), that unregistered
firearms cannot be returned to the person from whom the firearms
were seized because to do so would immediately place the person
in violation of the law against possession of an unregistered
firearm.
A procedure similar to that set forth in H.R. 4597 already
requires the summary forfeiture of controlled substances such as
drugs or narcotics that have no accepted medical use or have a
-25high potential for abuse. 21 U.S.C. section 881(f). As with
unregistered firearms, such controlled substances cannot be
legally possessed by anyone, and thus formal forfeiture
proceedings would be pointless. Accordingly, the Treasury
Department supports the elimination of formal forfeiture
procedures for unregistered firearms.
As to storage of property, the lack of storage facilities in
certain judicial districts is a major problem for BATF. Many
BATF field offices cover more than one judicial district. When
BATF does not have a storage facility in the district in which
the property was seized, investigative time is lost and
additional costs are incurred because BATF must locate and
utilize commercial storage facilities or other government storage
facilities. Consequently, we support the provision in H.R. 4597
that would allow a centralized storage facility to be used to
store property seized in different judicial districts within the
jurisdiction of the field office.
Place for registering firearms business and filing tax
returns
The revised filing requirements contained in H.R. 4597 merely
reflect the transfer of the administration and enforcement of the
internal revenue laws relating to distilled spirits, wine, beer,
tobacco and certain firearms from the Internal Revenue Service to
BATF. These changes would result in consolidation of
administrative, and enforcement functions within BATF and thus in
greater efficiency. Consequently, we support this change.
Distilled Spirits, Wine and Beer
In addition to the specific provisions of H.R. 4597, the
Subcommittee also requested testimony on (i) the tax treatment
and labeling of non-alcoholic and alcohol-free beer and wine, and
(ii) whether a wholesaler should be civilly or criminally liable
for selling distilled spirits, wine or beer to any retailer,
unless the retailer has furnished the wholesaler the
identification number appearing on the current special tax
covering the place where the business is conducted.
We understand that the BATF has agreed with the Subcommittee
to testify regarding the tax treatment and labeling of
non-alcoholic and alcohol-free beer and wine on May 19, 1986.
Consequently, we will not at this time discuss this issue.
We will,, however, discuss the special tax on certain
retailers. Under section 5121 of the Code, a special
occupational tax is imposed on retail dealers in distilled
spirits, wine, and beer. The amount of the tax is generally $54
per year for dealers in distilled spirits and wine, and $24 per
year for beer dealers.
-26-
The Treasury Department is aware of compliance problems
regarding payment of the special occupational tax. In response
to these problems, the Treasury Department submitted to the
Congress a legislative recommendation that would impose a
monetary penalty on wholesalers who sell distilled spirits, beer,
or wine to retailers who have not furnished proof that the
special tax has been paid. We continue to support that
recommendation.
Since this legislative recommendation was made, however, we
have met with industry representatives regarding their concerns
with our approach. At that time, the wholesalers offered several
alternative methods of improving compliance with the special
occupational tax. We are now studying the industry's concerns
and alternative solutions, and considering whether the proposed
bill can be improved. We look forward to working further with
the Subcommittee and the industry to determine the best approach
to the problem.
Proposed Technical Changes
The Treasury Department also would like to note its support
for certain additional technical changes regarding administration
of the laws applicable to alcohol, tobacco, and firearms, that
the BATF has identified and sent to the Ways and Means Committee.
Although these changes are not included in H.R. 4597 and are thus
beyond the scope of this hearing,- the Treasury Department
believes that they would clarify existing law in a number of
technical areas where either confusion or the need for more
regulatory authority has been
identified
by BATF.
H.R.
4603
Treatment of Costs of a Private Foundation in
Removing Hazardous SuBstances as Qualifying
Distributions
Current Law
Section 4942 of the Code in effect requires a private
nonoperating foundation to make qualifying distributions at a
specified minimum level by imposing an excise tax on the
difference between qualifying distributions and such minimum
level. Qualifying distributions include direct payments made to
public charities or private operating foundations to accomplish
charitable purposes. To avoid the section 4942 excise tax, a
private nonoperating foundation must make qualifying
distributions by the end of the following year, at least equal to
five percent of the fair market value of its net investment
assets for the year, less the tax imposed by section 4942. in
-27general the section 4942 tax is equal to 15 percent of the excess
of this minimum payout level (the distributable amount) over the
amount of qualifying distributions as of the first day of the
second (or any succeeding) taxable year.
Description of H.R. 4603
H.R. 4603 would reduce the minimum payout requirement of a
private foundation under section 4942 by amounts paid, incurred
or set aside by the foundation for removal or remedial action
with respect to a hazardous substance released at a facility that
was owned or operated by the foundation. This provision would
apply to taxable years beginning after December 31, 1982.
Discussion
The Treasury Department opposes H.R. 4603 because it is
inconsistent with the purpose of the minimum payout requirement.
In addition, current law adequately protects the interests of
private foundations with regard to costs incurred for the removal
of hazardous substances. Section 4942 was enacted to require
private foundations to distribute a minimum portion of their
assets for charitable purposes. Enactment of H.R. 4603 would
hinder this purpose by permitting noncharitable expenditures to
reduce the amount required to be spent for charitable purposes.
Moreover, under current law, payments made to discharge legal
obligations generally are deductible in computing the fair market
value of a foundation's net investment assets. Thus, payments
required by law for removal or remedial action with respect to a
hazardous substance currently reduce the amount that the
foundation is required to distribute for charitable purposes.
H.R. 4603 in effect would give foundations a double deduction for
amounts expended for removal or remedial action with respect to a
*
hazardous substance released* at *a facility
owned or operated by
the foundation.
This concludes my prepared remarks. I would be happy to
respond to any questions.
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
May 12, 1986
Tenders for $7,037 million of 13-week bills and for $7,012 million
of 26-week bills, both to be issued on May 15, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing August 14, 1986
Discount Investment
Rate
Rate 1/
Price
26-week bills
maturing November 13, 1986
Discount Investment
Rate
Rate 1/
Price
6.05%
6.07%
6.07%
6.09%
6.11%
6.10%
6.23%
6.25%
6.25%
98.471
98.466
98.466
6.37%
6.39%
6.38%
96.921
96.911
96.916
Tenders at the high discount rate for the 13-week bills were allotted 67%,
Tenders at the high discount rate for the 26-week bills were allotted 31%,
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
Accepted
$
45,105
23,153,835
29,690
53,660
47,260
40,985
1,709,790
72,795
34,455
57,540
46,255
1,557,915
363,200
$
42,105
5,717,060
29,690
50,690
47,260
36,860
375,290
52,795
21,155
55,735
36,255
209,175
363,200
i $
27,780
• 20,218,995
19,045
:
28,490
.
42,330
58,760
1,584,185
55,295
17,900
60,460
24,160
1,570,885
348,855
$
27,780
5,758,295
19,045
28,490
42,330
32,210
423,125
35,295
14,450
60,460
15,710
205,555
348,855
$27,212,485
$7,037,270
$24,057,140
$7,011,600
$23,922,225
1,179,435
$25,101,660
$3,747,010
1,179,435
$4,926,445
: $20,688,430
:
861,525
: $21,549,955
$3,642,890
861,525
$4,504,415
1,683,915
1,683,915
:
1,600,000
1,600,000
426,910
426,910
:
907,185
907,185
$27,212,485
$7,037,270
j $24,057,140
$7,011,600
An additional $20,090 thousand of 13-week bills and an additional $26,715
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
B-575
2041
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY EXPECTED AT
10:45 A.M., MAY 13, 1986
Statement by the Honorable James A. Baker, III
Secretary of the Treasury
before the
International Trade Subcommittee of the
Senate Finance Committee
and the
International Finance and Monetary
Policy Subcommittee of the
Senate Banking Committee
May 13, 1986
Mr. Chairman, I welcome this opportunity to discuss the
Administration's approach in dealing with large U.S. trade
deficits, particularly as they reflect problems relating to the
exchange rate system and the debt situation in the developing
countries. Before I begin, let me offer my congratulations to
the Finance Committee for successfully completing work on a major
bill of fundamental tax reform.
The Administration recognizes and shares congressional
concerns about the impact of exchange rate volatility and LDC
financial difficulties on the international competitive position
of American industry, agriculture, and labor. We have been, and
are, actively pursuing a comprehensive strategy to address this
problem. I am pleased to be here today to describe our approach
and to encourage your support for it.
Last September, the President presented a comprehensive trade
policy action plan. Our approach includes four critical
elements: strengthening the functioning of the international
monetary system through closer economic cooperation; promoting
stronger and more balanced growth among the major industrial
nations; improving growth in developing nations with a heavy debt
burden; and last, but not least, ensuring that trade is not only
free but also fair and promoting open markets world-wide. It is
our belief that this is the preferred path to reducing the U.S.
trade deficit and will have long-range positive effects on the
U.S. economy and world stability.
B-576
- 2 Today, my remarks will focus on the progress we have made in
implementing the President's trade strategy and restoring this
country's competitive position. In this context, I will offer
some perspective on the agreements reached at the Tokyo Summit
last week. I understand that Ambassador Yeutter will appear
before you tomorrow to testify on one key aspect of our trade
strategy, aggressive participation in a new round of trade
negotiations.
Progress and Opportunities
We are making significant progress in establishing the
fundamental conditions necessary to achieve and maintain a sound
and growing world economy, more balanced trade positions, and
greater exchange rate stability.
o The Plaza Agreement last September has resulted in
exchange rate relationships that better reflect underlying economic conditions. The Japanese yen and
German mark have now appreciated more than 60 percent
from their recent lows in February 1985. The dollar
has more than fully offset its earlier appreciation
against the yen; and it has reversed three-quarters of
its appreciation against the mark.
o The Plaza Agreement also contributed to movement
toward stronger, more balanced growth among the major
industrial countries, including policy commitments to
that end. Efforts to fulfill those undertakings are
ongoing. The favorable economic convergence which was
the focus of the Plaza Agreement is being realized,
with consequent narrowing of the "growth gap" between
the U.S. and its major trading partners.
o Inflation has been cut sharply and is expected to stay
low, in part reflecting the effects of the sharp
reduction in oil prices. This has facilitated a
substantial reduction in interest rates and enhances
prospects for further declines.
o We now expect the deterioration in our trade position
to halt this year, and we look forward to substantial
improvement next year. Exchange rate changes take
time to work their way through our economic system, .as
businesses and consumers gradually adjust their plans.
Next year, as the impact of these changes is more
fully felt, with assistance from the decline in oil
prices, our trade and current account deficits should
drop below $100 billion, or nearly one-third below our
projections as recently as last autumn.
o The U.S. has launched a major initiative to strengthe
the international debt strategy. Our proposals for
- 3 growth-oriented reforms in the debtor countries have
gained wide support and have begun to be implemented.
o Preparations are well advanced for launching the new
round of multilateral trade negotiations, with a
Ministerial to be held this September. Our Summit
partners agreed in Tokyo to the U.S. proposal that the
new round should include services and trade related
aspects of intellectual property rights and foreign
direct investment.
Still, problems remain. The scars of a decade of economic
turmoil are deep, and they cannot be easily or quickly erased.
The distortions to our economies from the oil shocks, rapid
inflation and the recessions of the 1970s and early 1980s have
required us increasingly to address structural problems that
demand time to correct. Unemployment remains high in many
countries, and large domestic and external imbalances persist.
Uncertainties about the future behavior of exchange rates
have also been prevalent, reflecting deficiencies in the
international monetary system that gradually intensified over the
years. We know also that the debt problems of the developing
world, accumulated over a decade or more, cannot be resolved in a
few snort months.
And we know protectionist pressures remain strong. We
recognize the need to address related problems — in our monetary
system, in our arrangements for international economic cooperation, in the developing countries — if we are to contain those
pressures and work toward more open and fair markets.
The progress that has been achieved in the general economic
environment, however, provides a golden opportunity to resolve
these remaining problems. Success inspires confidence that we
can go further. At the Tokyo Summit, President Reagan and the
heads of the other major Free World democracies manifested the
political will and leadership to confront the tasks that remain.
Strengthening International Economic Policy Coordination
The Plaza Agreement and subsequent coordinated interest rate
reductions evidenced the willingness and ability of the major
industrial countries to cooperate more closely on their economic
policies. At the same time, experience of the past year
demonstrated that exchange rate changes alone could not be relied
upon to achieve the full magnitude of adjustments required in
external positions. It had become increasingly more apparent
that closer coordination of economic policies will be required to
achieve the stronger, more balanced growth and compatible
policies necessary to reduce the large trade imbalances that
remain and foster greater exchange rate stability. For this
purpose, we went to Tokyo seeking to build upon the framework
embodied in the Plaza Agreement and to establish an improved
- 4 process for achieving closer coordination of economic policies on
an ongoing basis. I believe we succeeded.
The international monetary arrangements that have been in
place since the early 1970s contain a number of positive
elements, particularly a necessary flexibility to respond to
economic shocks. However, this flexibility went too far,
allowing problems to cumulate and countries to pursue policies
without adequately considering the international dimensions of
their decisions. The agreement reached at the Tokyo Summit seeks
to combine needed flexibility with a greater liklihood that
remedial action will be taken to deal with problems before they
reach disruptive proportions.
The arrangements that were adopted involve a significant
strengthening of international economic policy coordination aimed
at promoting non-inflationary growth, adoption of marketoriented incentives for employment and investment, opening the
trade and investment system, and fostering greater exchange rate
stability. Details of the new procedures will, of course,- have
to be worked out in subsequent discussions. However, I see the
enhanced surveillance process working as follows:
First, the measures for use in assessing country goals and
performance will be agreed upon by the countries
participating in the enhanced surveillance process. As
stated in the Tokyo communique, a broad range of indicators
would be utilized in order to achieve the- comprehensive
policy coverage necessary to insure that the underlying
problems, not just the symptoms, are addressed. These
indicators would include growth rates, inflation rates,
unemployment rates, fiscal deficits, current account and
trade balances, interest rates, monetary growth rates,
reserves, and exchange rates.
Second, each country will set forth its economic forecasts
and objectives taking into account these indicators.
Third, the group would review, with the Managing Director of
the International Monetary Fund, each country's forecasts to
assess consistency, both internally and among countries. In
this connection, exchange rates and current account and'trade
balances would be particularly important in evaluating the
mutual consistency of individual country forecasts.
Modifications would be considered as necessary to promote
consistency.
Fourth, in the event of significant deviations in economic
performance from an intended course, the group will use best
efforts to reach understandings on appropriate remedial
measures, focusing first and foremost on underlying policy
fundamentals. Intervention in exchange markets could also
occur when to do so would be helpful.
- 5 As you know, countries have been developing individual
economic forecasts for years. Moreover, the IMF consults with
individual countries on a regular basis regarding their economic
policies and performance. What is new in the arrangements
adopted in Tokyo is that the major industrial countries have
agreed that their economic forecasts and objectives will be
specified taking into account a broad range of indicators, and
their internal consistency and external compatibility will be
assessed. Moreover, if there are inconsistencies, efforts will
be made to achieve necessary adjustments so that the forecasts
and objectives of the key currency countries will mesh. Finally,
if economic performance falls short of the intended course, it is
explicitly agreed that countries will use their best efforts to
reach understandings regarding appropriate corrective action.
The procedures for coordination of economic policy were
further strengthened at the Summit. A new Group of Seven Finance
Ministers, including Canada and Italy, was formed in recognition
of the importance of their economies. At the same time, the
Group of Five has agreed to enhance its multilateral surveillance
activities.
In sum, Mr. Chairman, we have agreed on a more systematic
approach to international economic policy coordination that
incorporates a strengthened commitment to adjust economic
policies. I am hopeful that the spirit of cooperation that made
this agreement possible will carry over to its implementation.
If so, we can look forward to greater exchange rate stability,
enhanced prospects for growth, and more sustainable patterns of
international trade.
Improving Growth in Debtor Nations
Successful economic policy coordination among the industrial
nations complements our efforts to deal with LDC debt problems by
strengthening the world economy, creating the conditions for
lower interest rates, and helping to improve access to markets.
Recent improvements in the global economy are already making
a significant contribution to developing nations' growth
prospects and will substantially .ease their debt service
obligations. Stronger industrial country growth and lower
inflation, for example, will add nearly $5 billion to developing
nations' non-oil exports and reduce their import costs by
approximately $4 billion this year. The sharp decline in
interest rates since early 1985 will reduce their annual debt
service payments by about $12 billion. The decline in- oil prices
will also save oil-importing developing nations an additional $14
billion annually.
At the same time, however, developing countries, particularly
debtor nations, must position themselves to take advantage of
these improvements by putting in place policies to assure
stronger, sustained growth for their economies over the medium
- 6 and longer term. As you know, the "Program for Sustained Growth"
for the major debtor nations proposed by the U.S. in Seoul was
premised on credible, growth-oriented economic reform by the
debtor nations, supported by increased external financing.
In Tokyo, the Summit leaders welcomed the progress made in
developing the cooperative debt strategy, in particular building
on the United States' initiative. They emphasized that the role
of the international financial institutions will continue to be
central and welcomed moves for closer cooperation between the IMF
and the World Bank, in particular. The debt initiative has also
received strong support from the international financial
institutions, national banking groups in all major countries, arid
the OECD Ministers, as well as the key IMF and World Bank
Committees representing both debtor and creditor countries.
The adoption of growth-oriented macroeconomic and structural
policies by the debtor nations is at the heart of the
strengthened debt strategy and crucial to sustained growth over
the longer term. Special emphasis needs to be placed on measures
to increase savings and investment, improve economic efficiency,
and encourage a return of flight capital. A more favorable
climate for direct foreign investment can be an important element
of such an approach, helping to reverse recent declines in net
direct investment flows. Such inflows are non-debt creating,
provide greater protection against changes in the cost of
borrowing, and can help improve technology and managerial
expertise.
Similarly, a rationalization and liberalization of debtors'
trade regimes can contribute to improved efficiency and
productivity for the economy as a whole. Together with other
growth-oriented measures to assure more market-related exchange
rates and interest rates, to reduce fiscal deficits, to improve
the efficiency of capital markets, and to rationalize the public
sector, such measures can help improve growth prospects, restore
confidence in debtor economies, and encourage the return of
flight capital.
Such policy changes will take time to put in place and can't
be expected to occur overnight. The process of implementing
these reforms will also be much less public than the series of
announcements to date supporting the debt initiative.
Implementation will take place .through individual debtors'
negotiations with the IMF, the World Bank and the commercial
banks. We expect these negotiations to place greater emphasis on
dealing with current debt problems through a medium-term,
growth-oriented policy framework. This process is already
underway. The IMF, for example, has existing or pending
arrangements with 11 of the 15 major debtor nations, while the
World Bank has structural or sector loan negotiations underway
with 13 of these nations and has recently extended loans to
- 7 Ecuador, Argentina, and Colombia to support adjustment efforts in
some of their key sectors.
As the Summit communique noted, sound adjustment programs
will need to be supported by resumed commercial bank lending,
flexibility in rescheduling debt, and appropriate access to
export credits. Once debtor nations have designed economic
reform programs to improve their growth prospects that have Fund
and Bank support, it will be critical for the commercial banks to
fulfill their pledges of financial support for these programs.
The industrial nations must also cooperate regarding resumption
of export credit cover to countries implementing appropriate
adjustment policies.
We believe prompt enactment of legislation enabling U.S.
participation in the Multilateral Investment Guarantee Agency
would also make an important contribution to international
efforts to improve the LDC investment climate and to facilitate
new flows of foreign direct investment.
In addition to the strong global support for our initiative
with respect to the major debtors, we are also very pleased with
the recent action of both the IMF and the World Bank on the Trust
Fund initiative to assist low-income developing nations,
including Sub-Saharan Africa. This constitutes a major step
forward in Fund/Bank cooperation and a positive context for
current negotiations on IDA VIII. We look forward to its
implementation so that a sound basis of growth can be established
in these countries as well.
The Program for Sustained Growth is important because it
touches on a wide range of U.S. interests, but paramount among
these is its importance for U.S. trade. As you know, the debt
crisis has had a direct impact on U.S. exports. U.S. exports to
the 15 major debtor nations peaked at $40 billion in 1981.
However, this reflected an international economic environment
which was clearly not sustainable. Our exports to these
countries fell sharply to $23 billion in 1983, as the debtor
nations were unable to maintain previous import levels in the
face of financial constraints and slower export growth.
The international debt strategy adopted in the wake of the
debt crisis has helped to place the debtors' economies on a
sounder footing and to permit a resumption of import growth at a
more sustainable pace. U.S. exports to the major debtor nations
have increased by 18%, or $4 billion, during the past two years
and can be expected to improve further in response to both recent
exchange rate changes and stronger growth in the debtor
economies. The adoption of growth-oriented economic reforms,
supported by increased financing from the international
- 8 community, as envisaged by the debt initiative, will help to
enhance both growth prospects and imports.
It will also be important, however, for the United States and
other industrial nations to maintain open markets for LDC
exports to permit them to earn the foreign exchange necessary to
increase imports. The process of increasing growth and trade is
an interactive one. We cannot expect to reap the benefits of
stronger growth and increased trade abroad if we close our
markets at home.
Promoting More Fair and Free Trade
Open markets are essential to our overall international
strategy of economic adjustment and policy coordination.
At the
Tokyo Summit last week, the leaders of the Free World's major
industrialized nations recommitted themselves to maintaining an
open multilateral trading system, recognizing that:
o Open markets promote economic growth world-wide. We have
only to review the Depression years to see the effects of
closed markets.
o They provide debtor nations with markets for their exports
that are essential if they are to service their debt and,
in turn, serve as markets for U.S. goods and products; and
o Open markets facilitate our efforts to adjust large,
unsustainable external imbalances among the industrial
nations.
The Administration is committed to maintaining an open U.S.
market and ensuring a free but fair international trading system.
To implement our trade policy, we are supporting the new GATT
round of trade negotiations to reduce barriers abroad. As
mentioned, in the new round we will notably be seeking new GATT
rules covering services, intellectual property protection, and
international investment.
President Reagan and the others at the Tokyo Economic Summit
pledged to work at the September GATT Ministerial meeting in
Geneva to make decisive progress in launching the new round. We
are also starting negotiations to remove barriers to trade and
investment between the United States and Canada.
We are pursuing an aggressive program against unfair trade
practices. President Reagan is the first president to
self-initiate action under his retaliatory authority against such
practices, including cases involving Japan, Brazil, Korea and
Taiwan. The President has also announced that, unless we are
able to resolve our dispute with the EC over its new restrictions
affecting our farm exports to Spain and Portugal, we will respond
in kind.
- 9 Our aggressive policy against unfair trading practices has
already met with considerable success. We have settled disputes
involving the EC's subsidies for canned fruit, Japan's footwear
and leather import quotas, Taiwan's import monopoly for liquor
and tobacco, and Korea's restrictions on foreign motion pictures.
In sum, I strongly believe that our policy of free but fair
trade is working and is in our overall economic interest.
Legislation
At this point, Mr. Chairman, I would like to address the
question of proposed international finance and trade legislation,
such as S. 1860. I can well understand your frustration over our
trade deficit. And I can sympathize with a desire to respond to
constituent requests for action by passing legislation.
However, certain modifications in our trade law will not
eliminate the trade deficit and may actually make it worse.
The answer to our trading problems is a comprehensive
international economic policy strategy that addresses
international trade, monetary and debt issues in a coordinated
fashion and involves the cooperation of other nations. We have
developed such a strategy, as I have discussed here today, and we
are implementing it.
The exchange rate and policy coordination"sections of S, 1860
raise the right issues and point in the right direction, but they
are now out of date in light of the agreement reached at the
Tokyo Summit.
We are, of course, prepared to engage in thorough and
meaningful discussion with the Congress on all pending
legislation. And, as previously indicated, the Administration
already supports legislation to:
o provide additional protection to the intellectual property
rights of U.S. firms and individuals;
o alter our antitrust laws to help both our export and
import sensitive industries; and
o provide a war chest to improve U.S. export opportunities
by negotiating an end to tied aid credit abuses.
Legislation of this nature is not as glamorous as some of the
bills that have been introduced, but it will provide needed
support for our policies without undermining them.
We must avoid passage of protectionist trade legislation that
would alienate our trading partners, encourage them to enact
similar protectionist policies, and undermine the Administration's international economic policy. Closed markets and an
atmosphere of confrontation would doom our efforts to solve our
- 10 international economic problems in a responsible and constructive
manner. The greatest threat today to economic well-being
world-wide is the danger of protectionism and a trade war. We
need your help to avoid these dangers. I urge you to give the
Administration's policies a chance to work.
Conclusion
In conclusion, Mr. Chairman, I believe we have a viable
strategy to address the trade and financial problems that
confront us. We are working to implement it and have made
significant progress, most recently at the Tokyo Summit. But we
need your help to avoid measures that would undercut our efforts.
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
May 13, 1986
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,000 million, to be issued May 22, 1986.
This offering
will result in a paydown for the Treasury of about $300
million, as
the maturing bills are outstanding in the amount of $14,304 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, May 19, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,000
million, representing an additional amount of bills dated
February 20, 1986, and to mature August 21, 1986
(CUSIP No.
912794 LA 0 ) t currently outstanding in the amount of $6,860 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,000 million, to be dated
May 22, 1986,
and to mature November 20, 1986
(CUSIP No.
912794 LL 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 May 22, 1986.
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 $1,083 million as agents for foreign and international monetary authorities, and $3,753 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-577
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
tenders.
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
2041
apartment of the Treasury • Washington, D.c. • Telephone 566
FOR IMMEDIATE RELEASE
May 13, 1986
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,252 million of 52-week bills to be issued
May 15, 1986,
and to mature
May 14, 1987,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Low
High
Average -
Discount
Rate
6.16%
6.17%
6.17%
Investment Rate
(Equivalent Coupon-Issue Yield) Price
6.55%
93.772
6.56%
93.761
6.56%
93.761
Tenders at the high discount rate were allotted 881
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Received
Boston
$
57,995
New York
24,682,035
Philadelphia
6,275
Cleveland
15,805
Richmond
19,855
Atlanta
56,350
Chicago
1,809,125
St. Louis
52,190
Minneapolis
17,760
Kansas City
30,655
Dallas
19,285
San Francisco
2,448,210
153,655
Treasury
$29,369,195
TOTALS
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
P-578
Accepted
$
17,875
8,457,835
6,275
15,805
19,855
16,350
100,805
32,190
17,160
30,535
9,285
374,610
153,655
$9,252,235
$26,532,050
518,145
$27,050,195
2,150,000
$6,415,090
518,145
$6,933,235
2,150,000
169,000
$29,369,195
169,000
$9,252,235
TREASURY NEWS
ipartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR
IMMEDIATE
RELEASE
C o n t a c t : Bob
Levine
May 14, 1986 (202) 566-2041
U. S. TREASURY SIGNS BRIDGE" LOAN TO ECUADOR
The U. S. Department of the Treasury and the Republic of
Ecuador today signed
arrangement
continuing
a $150 m i l l i o n s h o r t - t e r m
bridge
financing
in s u p p o r t of E c u a d o r ' s economic p r o g r a m s and its
performance
in adjusting
its e c o n o m y .
The United
States praises this ongoing a d j u s t m e n t p e r f o r m a n c e , p a r t i c u l a r l y
in light of a projected
balance of payments shortfall
due to the
drop in export r e v e n u e s resulting from the recent d e c l i n e in oil
prices
The bridge loan will
It will
strengthen
position.
also permit c o n t i n u a t i o n of orderly trade and financial
transact ions.as Ecuador
facility from commercial
international
B-579
Ecuador's financial
financial
finalizes n e g o t a t i o n s for a new financing
banks and additional
institutions.
loans
from
rREASURY NEWS
tartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 14, 1986
CONTACT:
CHARLES POWERS
(202) 566-8773
UNITED STATES AND PEOPLE'S REPUBLIC OF CHINA SIGN PROTOCOL
TO INCOME TAX TREATY
The Treasury Department today announced the signing of a
Protocol to the proposed income tax treaty between the United
States and the People's Republic of China. The Protocol was
signed on May 10,1986 in Beijing by Secretary of the Treasury
James A. Baker, III and Finance Minister Wang Bingqian. It
modifies the "Agreement Between the Government of the United
States of America and the Government of the People's Republic of
China for the Avoidance of Double Taxation and the Prevention of
Tax Evasion with respect to Taxes on Income", which includes an
accompanying Protocol and Exchange of Notes, signed by President
Reagan on April 30, 1984. It becomes an integral part of the
Agreement and will be transmitted to the Senate for its advice
and consent to ratification of the Agreement, as modified by the
Protocol.
The new Protocol contains only one article. It amends
paragraph 7 of the original Protocol to provide rules to prevent
"treaty shopping", i.e. , the use of the Agreement by residents of
third countries to obtain treaty tax benefits by channelling
their investments in one of the treaty countries through the
other country. The Protocol is substantially identical to the
corresponding article in the proposed U.S.-Denmark income tax
treaty, which was considered by the Senate Foreign Relations
Committee at the same time as the proposed Agreement with China.
As an integral part of the Agreement, the new Protocol would
enter into force at the same time, that is on the thirtieth day
after notification that the legal procedures have been completed
in both countries, and its provisions would take effect for
income derived during taxable periods of the recipient beginning
on or after the following January 1.
A limited number of copies of the Protocol are available from
the Public Affairs Office, room 2315, Treasury Department,
Washington, D.C. 20220, telephone (202) 566-2041.
o 0 o
B-580
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
May 14, 1986
TREASURY TO AUCTION $9,750 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,750 million
of 2-year notes to refund $8,548 million of 2-year notes maturing
May 31, 1986, and to raise about $1,200 million new cash.
The $8,548 million of maturing 2-year notes are those held by the
public, including $900 million currently held by Federal Reserve
Banks as agents for foreign and international monetary authorities.
The $9,750 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 $644 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-581
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JUNE 2, 19 86
May 14, 1986
Amount Offered:
To the public
$9,750 million
Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... Z-1988
(CUSIP No. 912827 TR 3)
Maturity Date
May 31, 1988
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
November 30 and May 31
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 institutions
Acceptable
Key Dates;
Receipt of tenders
Wednesday, May 21, 1986,
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Monday, June 2, 1986
b) readily-collectible check .. Thursday, May 29, 1986
TREASURY NEWS
apartment
of the Treasury • Washington,
D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
CONTACT: Art Siddon
May 15, 1986
566-5252
TREASURY ANNOUNCES PUBLICATION OF REGULATIONS AND
FEATURES OF ITS NEW BOOK-ENTRY SYSTEM
The Department of the Treasury will publish final regulations tomorrow on
its new, automated TREASURY DIRECT Book-entry Securities System. Book-entry
securities are represented by accounting entries in the records of the
Treasury or a financial institution; no engraved securities are issued.
TREASURY DIRECT will permit investors in book-entry Treasury bills, notes and
bonds to have their securities maintained directly by the Treasury.
Currently, the Treasury offers book-entry accounts only for Treasury bill
investors. Treasury plans to begin offering notes and bonds through TREASURY
DIRECT this July. Treasury bills may be maintained in the new system
beginning next year.
The new system will contain features that are not presently available.
Four features that should be of particular interest to investors are: (1)
interest and principal payments by electronic direct deposit, (2) the
capability of the Federal Reserve Banks and Branches to service accounts
directly, (3) a single account under which investors can hold various issues
of bills, notes, and bonds, and (4) automatic reinvestment of Treasury bills
on an extended or one-time basis.
The TREASURY DIRECT system will provide electronic payments that are
automatically credited on the due date to investors' designated checking or
savings accounts. Electronic direct deposit eliminates the risk of theft,
forgery and mailing delays associated with check payments. Additionally, the
system will enable Federal Reserve Banks and Branches to process most
transactions. Currently, all transactions to accounts maintained by the
Treasury must be forwarded to the Treasury Department. Investors using the
new system will no longer have to keep track of multiple accounts or security
descriptions. A single account number will record all of an investor's
holdings and transactions in bills, notes and bonds. Finally, Treasury bill
investors will be able to automatically extend the reinvestment of their bill
accounts for up to two years.
B-582
Information concerning an investor's Treasury security account will be
accessible through the Federal Reserve system nationwide. All Federal Reserve
Banks and Branches can respond to investors' inquiries. Investors will
receive a statement of account following any transaction, such as an
additional investment, a transfer of securities, or a change of address.
Investors requiring additional information may contact their nearest
Federal Reserve Bank or Branch, or the Department of the Treasury, Bureau of
the Public Debt.
QUESTIONS AND ANSWERS
1.
What is book-entry?
The term "book-entry" indicates that the securities are maintained as
computerized accounting records. Currently, only Treasury bills are
maintained exclusively in book-entry form; however, with the
implementation of the new TREASURY DIRECT Book-entry Securities System,
all new issues of Treasury notes and bonds will also be maintained
exclusively in book-entry form.
2. What advantage is there in a single account number?
A single account number will simplify investors' bookkeeping records.
Instead of having an account number for each security owned, as with the
previous system, investors will only have one account number to refer
to. Additionally, a single statement of account and a statement of
interest earned will record all the pertinent information concerning the
account.
3. Will all TREASURY DIRECT payments be made by Direct Deposit?
Yes, except for:
-payments where there is not sufficient time to notify the investor's
designated institution before a payment has to be made, and
-payments to foreign addresses.
4. What information is needed to establish Direct Deposit payments?
^Jery little. All that is required is the name of a financial
institution, the name(s) on and the number of the account designated at
the financial institution to receive payments, and the institution's 9
digit American Bankers Association Routing Transit Number which can be
found at the bottom of a check or deposit slip. Investors should verify
the accuracy of this information before submitting payment instructions.
5. What benefit is there in extended reinvestment?
Extended reinvestment will make it easier for bill investors who will no
longer have to wait to receive a reinvestment (rollover) card, assure
that the card is properly completed, and mailed in time for Treasury's
receipt and processing.
6. Can Treasury bond or note investors request extended reinvestment?
No, only Treasury bill investors can request extended reinvestment
because bills are offered for the shortest terms and on a regular
schedule.
7. Will any charges or fees be imposed on investors on account of securities
held in TREASURY DIRECT?
While no provision for charging fees has been included in the
regulations, if legislation currently under consideration should be
enacted, it could lead to investor fees being charged for securities in
TREASURY DIRECT.
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE ^7 MAY 16, 1986
STATEMENT BY THE HONORABLE DAVID C. MULFORD
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
U.S. TREASURY DEPARTMENT
BEFORE THE
BANKERS' ASSOCIATION FOR FOREIGN TRADE
ANNUAL MEETING
PHOENIX, ARIZONA
MAY 16, 1986
Strengthening the Global Economy
I welcome this opportunity to discuss the international
debt situation, which continues to pose a serious challenge
for the global economy. Fortunately, our efforts to manage
and resolve the debt crisis are improving, thanks in large
part to the Program for Sustained Growth launched by Secretary
Baker last fall in Korea. We still read and hear lots of doom
and gloom in the media, in the Congress, and among some of the
debtor nations, but to those of us on the firing line, important
changes are visible.
First, it is becoming increasingly accepted by all parties
that the debt crisis can only be resolved by improving growth
prospects in the debtor nations. This means improving their
ability to accumulate foreign exchange at a faster pace than
they accumulate debt. The key point here is that sustained,
lower-inflation growth can only be accomplished through
fundamental economic reforms in the debtor countries' economies.
Unless credible reforms are put in place, these countries will
not be able to command the necessary capital for their
development. Acceptance of these facts represents an important
and basic recognition of reality from which a new beginning can
be made.
Second, and very fortunate from a timing standpoint,
improvements presently taking place in the global economic
environment will have an enormous impact on the ability of
debtor nations to service their debt and finance imports
needed
for growth.
B-583
- 2 Industrial country growth will be approximately one
percent higher than projected at the end of 1985, and
inflation will be about two percent lower. We estimate
that in 1986 this will add nearly $5 billion to developing nations' non-oil exports and reduce their non-oil
import costs by approximately $4 billion.
— The sharp decline in interest rates — nearly 3 percentage points since early 1985 — will reduce annual debt
service payments for all LDCs by about $12 billion,
freeing up these resources for productive use elsewhere
in the debtors' economies. For the major debtors alone,
the savings will be nearly $8 billion, or 20 percent of
their annual interest payments on outstanding debt. If
we compare current 6-month LIBOR rates to the average
for 1984, and focus on debt owed to the commercial banks,
the savings are even more dramatic — a decline of nearly
5 percentage points and a 45% savings in annual interest
payments to commercial banks.
These developments will provide significant relief for debtor
economies which is only now beginning to be more broadly recognized
internationally.
There are other foreign exchange savings as well. Declining
oil prices will save oil-importing developing nations some
$14 billion annually. While it is true that several major
oil-»exporting debtor nations will suffer from falling oil export
revenues, they will benefit from lower interest rates and stronger
world growth.
In fact, we are seeing the most favorable economic environment since the early 1970s, and we should bear in mind that
these broad economic changes could be more important to a
resolution of the debt problem than the provision of marginal
amounts of financing by the banks or the much-touted World
Bank general capital increase.
Admittedly, positive changes in the global economic
environment must be supplemented by economic reforms in the
debtor nations themselves to have a lasting effect. Without
such reforms, no amount of international lending or external
economic improvements can assure sustained growth for the
longer term.
' I often hear criticism that the creditor nations are not
called upon to do anything under the Baker plan. This usually
refers to the provision of more aid or a general capital increase
for the World Bank. This criticism, in my view, entirely misses
the point. The major industrial countries have a broader
responsibility, which in a sense serves as the foundation for
the debt initiative — namely, the provision of a sound world
economic environment. Viewed in this light, the contribution
since last fall has been substantial.
- 3 -
I want to dwell on this for a moment, because I have just
returned from the Tokyo Summit, and it is possible now to bring
a greater sense of perspective to the important question of
international economic policy coordination. Last September's
Plaza agreement and the Program for Sustained Growth in October
were mutually supportive initiatives to improve the prospects for
growth and stability in the global economy. It is widely agreed
that the results of the Plaza agreement have been impressive.
Major exchange rate adjustments have taken place which will
substantially improve the U.S. trade deficit, and there has been
better coordination of policy actions among the Group of Five
industrial nations, particularly with regard to interest rates.
The recent Summit agreement constitutes another important
step forward in strengthening the system of international
economic policy coordination among the key industrial nations.
A new Group of Seven Finance Ministers, including Canada and
Italy, was formed in recognition of the importance of their
economies. The Group of Five will continue its multilateral
surveillance activities, but important improvements in the
process for international economic policy coordination have
been agreed. This process will now involve the following steps:
First, countries will develop individual country economic
forecasts.
Second, these forecasts will then be reviewed for internal
consistency and external compatibility, using a range of economic
indicators. These indicators would include growth rates, inflation
rates, unemployment rates, fiscal deficits, current account and
trade balances, interest rates, monetary growth rates, reserves,
and exchange rates. Exchange rates and current account and trade
balances would be particularly useful in assessing the mutual
compatibility of country forecasts.
Third, modifications in forecasts and underlying policies
would be considered as necessary to promote consistency. Whenever there are significant deviations from an intended course,
best efforts will be made to reach an understanding on appropriate
remedial measures, focusing first and foremost on underlying
policy fundamentals. Intervention in exchange markets could also
occur when to do so would be helpful.
The IMF, through Managing Director de Larosiere, will play
an-important role in this process. We intend to implement this
agreement with the same degree of commitment and cooperation that
made reaching this agreement possible. With such implementation,
we believe the prospects are significantly enhanced for greater
exchange rate stability, more balanced growth, and more
sustainable patterns of international trade.
- 4 The Debt Initiative
The Tokyo Summit also endorsed the U.S. debt initiative
and recognized that its priorities are right. In particular,
the Summit communique emphasized the importance of effective
structural adjustment policies within the debtor nations,
coupled with measures to mobilize domestic savings, encourage
the repatriation of capital, improve the environment for
foreign investment, and promote more open trading policies.
Providing a more favorable climate for foreign direct
investment is particularly important to help reverse recent
declines in net direct investment flows. This is the exclusive
responsibility of the debtor nations themselves. If they choose
to ignore the growing competition for attracting capital, they
will face further declines in investment flows. The U.S. stock
of investment in Mexico, for example, was down 7% in 1984
compared with the average U.S. investment level for the years
1980-84.
Similarly, a rationalization and liberalization of
debtors' trade regimes can contribute to improved efficiency
and productivity for the economy as a whole. Policy improvements in the areas of both direct investment and trade should
be part of broader efforts by the debtor nations to improve the
prospects for growth. Neither, alone, can do the whole job.
These aren't impractical objectives, despite the political
sensitivity of some of these reforms. It is also important to
emphasize that we are not advocating austerity measures here but
policies with real potential to make an immediate and lasting
contribution to growth. There already has been, I believe,
some significant change in attitudes within some of the debtor
nations. Brazil and Argentina, for example, have undertaken
substantial domestic economic reform programs to reduce inflation.
A number of countries, including Chile, Mexico, and Argentina,
are moving to privatize public enterprises, while Ecuador and
Colombia have taken steps to significantly increase the marketorientation of their economies.
Taken as a whole, I am optimistic that many of the Latin
debtors — with a few exceptions — are working to improve the
efficiency of their economies at a time when growth prospects
are improving. The IMF and the World Bank are assisting in
this process. The IMF has existing or pending arrangements
with 11 of the 15 major debtor nations, while the World Bank
has structural or sector loan negotiations underway with 13
of these nations and has recently extended loans to Ecuador,
Argentina, and Colombia to support adjustment efforts in some
of their key sectors.
- 5 -
In addition, several of the major debtors have discussions
underway with the World Bank on the development of medium-term
adjustment programs, focusing on efforts to increase growth
and export capabilities, mobilize domestic savings, encourage
increased investment, and liberalize trade. These medium-term
programs will provide the framework for future World Bank sector
or structural adjustment loans and IMF programs or arrangements.
The Role of the Commercial Banks
Once debtor governments have committed to undertake
viable economic reform programs which have World Bank and IMF
support, commercial banks should be ready to implement their
earlier pledges of support in short order. I recognize that the
commercial banks are cautious about seeing the precise conditions
for IMF and World Bank lending before committing to increase their
own lending. This is understandable, and will undoubtedly mean
that pledges by the commercial banks will come later in the
process than was true in the 1982-1985 period. However, once
reforms are agreed upon, commercial banks must be ready to lend
without delay.
Yet I am concerned that not enough has been done by commercial
banks to assure that when the time comes, they will in fact be
ready to lend. Have the modalities for additional lending within
current lending syndicates been agreed? Have the differences
between the larger and smaller banks been resolved? I doubt it.
And I would caution again, as I did when I spoke to a large
group of banks in London in February, that continued efforts
by banks to obtain government guarantees or to secure for
themselves the preferred creditor status of the multilateral
development banks, will not be supported by the Administration.
The Administration is firmly on record as opposing government or
World Bank guarantees for new commercial bank lending.
Coordination among commercial banks -- domestically and
internationally — is a vital part of this exercise. Smaller
banks must be able to count on the willingness of the major
banks heading bank advisory groups to keep them informed at an
early stage of country and other developments affecting bank
lending. Similarly, the large U.S. banks need some assurance
that regional and foreign banks will continue to participate in
reschedulings and new money packages. Resolving these problems
is fundamental to continued concerted lending.
In Washington, we frequently hear that smaller banks "want
out", despite the pledges of support for the debt initiative
from U.S. banks with 98 percent of U.S. commercial bank exposure
to the major debtor nations. We have accepted these pledges of
support and the subsequent endorsement from BAFT membership as
representing the serious intentions of U.S. and foreign banks,
and we are grateful for them. Nevertheless, there seems to be
an inconsistency between previous pledges and the alleged
desire of smaller banks to cut and run.
- 6 We do not intend to twist the arms of U.S. banks. They
will lend if they perceive it to be in their interest to do
so. Taken as a whole, the banks know that without growth in
the debtor nations — and an improved ability to earn foreign
exchange — they cannot expect to be repaid, nor, to put it
bluntly, can they expect to continue favorable earnings on
assets of declining quality. The banks also know that growth
must be financed in large part from private capital resources.
The banking community, therefore, should concern itself with
helping both the debtor nations and the international financial
institutions to develop the necessary reforms and procedures
for implementing the debt strategy. Traditionally, banks have
worked with troubled clients, because they have believed it
to be in their own self-interest. The present international
debt situation is no different. Indeed, there is more at stake
for the participating banks in all the creditor nations, because
they share the same international and interdependent financial
system.
I would urge you to continue to consider innovative means
to keep banks with less exposure involved and at the same time
simplify the lending/negotiating process. That is a major
challenge.
When senior financial officials of debtor countries have •
to travel throughout the United States to sell their program to
virtually every potential lender right down to those with a
few tens of thousands of dollars of exposure, one must seriously
question the wisdom of syndicate members, both large and small.
Those officials should be home developing and implementing the
policies to improve their economies. The syndicates should
centralize their efforts more effectively and improve the
cohesion of their groups by making all members feel they have
a stake in the progress of the debtor nations. I would add
to that the need to plan ahead so that the valuable time you
have now to prepare for the major negotiations which are nearly
at hand will not have been wasted.
Debt/Equity Swaps
I would like to comment on debt/equity swaps.
Coming as I do from an investment banking background, I
am intrigued by recent developments in the area of debt/equity
swaps and the securitization of commercial bank loans. Debt
eqyity swaps, in particular, can help to reduce outstanding
debt obligations, thereby also reducing the annual debt service
burden. They can also provide an attractive means of encouraging
the return of flight capital.
Chile has recently adopted modifications in its foreign
exchange regulations which permit nationals and foreigners to
make debt/equity conversions. At least $300 million in such
- 7 -
conversions have already occurred since last August, including
foreign equity positions in financial institutions in Chile.
We understand there are hopes that considerable further sums
will be converted this year.
Part of the attraction in Chile, of course, is its open,
market-oriented investment regime, which is likely to attract
foreign direct investment in Chile, quite apart from debt/equity
swaps.
I would encourage other debtor nations to follow Chile's
example and in liberalizing their direct investment regime to
permit financial institutions to establish financial subsidiaries
that would be active in the host country's domestic markets. I
understand that some commercial banks might be interested in
moving in this direction.
In your other discussions here, you may want to review
the possibility for other innovative mechanisms to securitize
debt. I have long believed it must be possible to establish
a consortia-type development bank in certain debtor countries,
owned partly by the commercial banks, partly by the host
government concerned, and perhaps partly owned by the public,
which could use existing debt to purchase the shares of domestic
corporations, privatized parastatals, as well as existing
private company shares. I believe this to be worth exploring.
I don't want to overstate the potential benefits nor
minimize the complexities we are dealing with. I assume
that as debt is shifted to equity, or as loans are swapped
or sold off, the syndicate or exposure bases for new lending
would also shift or change. But I can't believe this is an
insoluble problem.
There are a fair number of regulatory and accounting rules,
guidelines and standards that would be involved. My understanding is that within the existing framework, there already may be
a degree of flexibility to deal with the kinds of innovations
that I would like to encourage. Situations will vary country by
country and bank by bank; the existing markets are thin; spreads
between bids and offers are wide; and some creative possibilities
for improvement are only in a nascent stage of development.
Given the long tradition of BAFT's, technical expertise perhaps
some of your own committees might have suggestions to put forward
in this regard.
Finally, in discussing these issues, let me stress the
continued need for the CEOs and boards of directors of your
institutions to take a direct interest and longer term view
of the potential benefits of the Program for Sustained Growth,
both to your banks and your domestic clients, as well as to the
borrowers. Banks and exporters are interdependent. So, as I
have emphasized earlier, is the banking community as a whole.
- 8 To the extent that the Program for Sustained Growth succeeds,
all the participants — including the banks and the regions
they serve — will be better off.
You know your markets, your clients and peers —
smaller — better than we do in Washington. Now
exercise your ingenuity, to have the information
in place and be ready to act. We must have your
ship and active cooperation if the Program is to
larger and
is the time to
and syndicates
vigorous leadersucceed.
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m. EDT
May 19, 1986
STATEMENT OF
RICHARD D'AVINO
ACTING DEPUTY TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the views of
the Treasury Department on the following bills: H.R. 3139, which
would exempt certain emergency medical transportation from the
excise tax on air transportation; H.R. 3301, which would exempt
from taxation corporations or trusts that acquire and manage real
property for certain tax-exempt organizations; H.R. 4056, which
would deny the benefits of the foreign earned income exclusion to
individuals who are in a foreign country in violation of an
Executive Order; H.R. 4077, which would provide that the
interest on an obligation issued to provide property for use by
certain electric utilities is not exempt from tax if such a
utility fails to adhere to "take or pay agreements" entered into
in connection with the proposed construction of certain nuclear
electric generating facilities; H.R. 4379, which would provide
that nonrecognition of gain on the sale of a principal residence
would be available even if one of the spouses who occupied the
residence died before occupying a new residence; and H.R. 4595,
which would provide generally that certain amounts received by a
qualified cooperative housing corporation in connection with its
refinancing of indebtedness would not be subject to Federal
income tax.
IB-584
will discuss each bill in turn.
-2-
H.R. 3139
Excise Tax Exemption for Emergency Medical Transportation
Current Law
Section 4261 of the Code imposes an excise tax equal to eight
percent of the amount paid for air transportation of any person
where the transportation begins and ends in the United States. 1/
This tax, which is generally paid by the passenger, is scheduleH
to expire on December 31, 1987. Revenues from the excise tax are
deposited into the Airport and Airway Trust Fund, which is used
to fund Federal aviation activities, such as the construction of
certain airport facilities, and the provision of air traffic
control and air navigation services.
Section 4261(e) exempts from the air passenger excise tax any
transportation by helicopter for the following purposes:
(1) transporting individuals, equipment, or supplies in the
exploration for, or the development or removal of, hard minerals,
or the exploration for oil or gas, or
(2) planting, cultivating, cutting, transporting or caring
for trees.
This excise tax exemption for certain helicopter uses applies,
however, only if the helicopter does not take off-from or land at
a facility eligible for assistance under the Airport and Airway
Development Act of 1970, and does not take advantage of services
provided pursuant to the Airport and Airway Improvement Act of
1982 during the flight. In addition, the air passenger excise
tax does not apply to transportation by any aircraft, including a
helicopter, having a maximum certified take-off weight of 6,000
pounds or less, except when such aircraft is operated on an
established line.
Section 4271 generally imposes an excise tax equal to
five percent of the amount paid for air transportation of
property within the United States, if the amounts are paid to a
person engaged in the business of transporting property for hire.
Like the air passenger excise tax, the air cargo excise tax is
scheduled to expire on December 31, 1987, and revenues from the
tax are remitted to the Airport and Airway Trust Fund.
1/ The eight percent air transportation passenger excise tax
also applies to transportation that begins and ends within
any portion of Canada or Mexico that is within 225 miles of
the continental United States, unless the Secretary of the
Treasury, as specified in section 4262(e), determines that
the tax should not apply.
-3-
Description of H.R. 3139
H.R. 3139 would provide an exemption from both the air
passenger and air cargo excise taxes for certain emergency
medical transportation. The exemption would apply to any air
transportation by helicopter if four requirements were met: the
helicopter did not take off or land at a facility eligible for
assistance under the Airport and Airway Development Act of 1970;
the helicopter did not otherwise use services provided pursuant
to the Airport and Airway Improvement Act of 1982 during the
emergency medical transportation; the helicopter was used
primarily to provide emergency medical services; and the
helicopter was owned or leased by a nonprofit health care
facility and was operated exclusively under the control of such
facility.
These exemptions would apply to transportation beginning
after January 1, 1985.
Discussion
The air passenger and air cargo excise taxes are used
exclusively to develop and maintain Federal airport and airway
facilities through the Airport and Airway Trust Fund. The
exemptions provided in present law for mining, drilling, and
logging operations reflect the policy that transportation that
derives only an insignificant, if any, benefit from Federal
facilities should not bea«r the excise tax.
In the case of excise taxes that are dedicated to trust
funds, and thus represent surrogate user fees, the Treasury
Department believes, in general, that it is appropriate to limit
incidence of the excise taxes to activities that properly are
related to the trust fund. 2/ Consistent with that policy, the
proposed exemption for emergency medical service helicopters
under H.R. 3139 is crafted narrowly to cover only those
operations that derive insignificant benefits, if any, from the
Federally assisted facilities that are funded by the air cargo
and air passenger excise taxes. Accordingly, the Treasury
Department supports H.R. 3139. 3/
2/ We note, for example, that the excise tax on gasoline, which
is used to fund the Highway Trust Fund, is refunded to the
ultimate purchasers of gasoline when such gasoline is for
off-highway qualified business uses. This exception is
granted primarily because such uses do not benefit from the
Highway Trust Fund.
3/" We estimate that enactment of H.R 3139 would result in only a
negligible revenue loss during the five-year budget period.
-4-
H.R. 3301
Tax Exemption for Corporations or Trusts that Acquire and Manage
Real Property for Certain other Exempt Organizations
Current Law
The Internal Revenue Code provides an exemption from Federal
income tax for a variety of nonprofit entities ("exempt
organizations"), including so-called "title-holding companies,"
which are exempted under section 501(c)(2). In general terms, a
title-holding company is a corporation organized for the
exclusive purpose of holding title to property, collecting the
income from such property, and turning over the entire net income
to another exempt organization. Traditionally, exempt
organizations have used title holding companies in cases where
several factors — such as limitation of liability, accounting
simplification, and clarification of title — may warrant the
segregation of an organization's property and investments in
separate entities.
Section 501(c)(2) provides that an exempt title-holding
company must turn over the income collected to "an organization."
This language raises the question whether an exempt title-holding
company may have more than one parent. 4/ Another unresolved
issue under section 501(c)(2) is whether a title-holding company
that turns over all of its income to an exempt organization
qualifies for exemption under section 501(c)(2) when it is
organized and operated by a for-profit company, such as an
investment adviser or a brokerage company.
While exempt organizations, including title-holding
companies, generally are not subject to Federal income tax,
section 511 imposes a tax on income earned by an exempt
organization from the conduct of an unrelated trade or business.
Unrelated business income ("UBI") generally is taxed in a manner
comparable to the income of commercial businesses. Section 512
generally excludes passive income, such as rental income derived
from The
real
property,
the Counsel
definition
of UBI.
4/
Office
of thefrom
Chief
of the
Internal Revenue
Service has taken the position in a General Counsel
Memorandum (G.C.M. 37351, December 20, 1977) that an
organization will not qualify for exemption under section
501(c)(2) unless it distributes all of its income to one or
more related exempt organizations. In two earlier revenue
rulings, the Internal Revenue Service recognized entities as
exempt under section 501(c)(2), even though they apparently
had multiple, unrelated exempt organization parents. See
Rev. Rul. 68-490, 1968-2 C.B. 241; Rev. Rul 68-371, 1968"?
00
C.B. 204.
'^
-5-
Although "passive" income ordinarily is not subject to the
UBI tax, this exception does not apply to debt-financed property.
The debt-financed property rules originally were enacted in
response to abusive sale-leaseback transactions between exempt
organizations and the taxable owners of active businesses, and
are designed primarily to prevent the exploitation of an exempt
organization's tax exemption by taxable persons. Where
applicable, these rules prevent the "leveraging" of an exempt
organization's tax exemption by treating as UBI a share of the
income derived from debt-financed property in proportion to the
ratio of debt on the property to its adjusted basis. An
exception to the debt-financed property rules provides that, in
certain cases, income derived from debt-financed real property
investments by educational organizations and pension,
profit-sharing, or stock bonus plans that are qualified trusts
under section 401 does not constitute UBI. This exception,
however, is subject to several restrictions and limitations in
section 514(c)(9)(B) that are designed to preclude the types of
abusive transactions that originally gave rise to the
debt-financed property rules.
Description of H.R. 3301
H.R. 3301 would add to the Code a new section 501(c)(24), 5/
which would exempt from tax a corporation or trust organized
exclusively for the purposes of acquiring and holding title to
property, collecting income from the property, and paying the
income (less expenses) to one or more qualifying exempt
organizations. Qualifying organizations would consist.of (i)
qualified pension, profit-sharing, or stock bonus plans that meet
the requirements of section 401(a); (ii) governmental pension
plans as defined in section 414(d); (iii) the United States, any
State or locality, or any Federal, State or local agency; and
(iv) charitable organizations described in section 501(c)(3).
Under the bill, exempt status under section 501(c)(24) would be
limited to organizations that have 35 or fewer shareholders or
beneficiaries and only one class of investment interest, that
permit a majority in interest of the tax-exempt investors to
replace the investment adviser, and that provide the investors
with the opportunity, subject to certain restrictions, to convert
their interests into cash.
The bill also would extend to organizations exempt under
proposed section 501(c) (24) the exception to the debt-financed
property rules that currently applies to certain real estate
5/ Although H.R. 3301 by its terms would add section 501(c)(24)
investments made by qualified pension trusts and certain
to the Code,-we note that the recently enacted Comprehensive
educational organizations. The bill would be effective for
Omnibus Budget Reconciliation Act already has added section
taxable years beginning after December 31, 1984. 6/
501(c) (24) to the Code.
6/ For convenience, organizations that would be exempt from tax
under proposed section 501(c)(24) are referred to below as
"collective real estate investment corporations."
-6-
Discussion
In general, the Treasury Department does not oppose H.R. 3301
in its present form. We would, however, suggest certain
technical modifications to the bill.
Collective Investments
In principle, the Treasury Department does not object to
allowing certain exempt organizations to make collective
investments in real estate through the use of a corporation or
trust, where those investments represent undivided interests in
the underlying assets. Functionally, such investments are not
distinguishable from ownership of the underlying real property by
the investors as tenants in common, which generally can be
accomplished without creation of a taxable entity. In the past,
our primary concerns with the use of a corporation or trust have
been that, in practice, the for-profit investment adviser, rather
than the exempt investors, could control the basic investment
decisions of the entity, and that dissatisfied investors would
have no alternative to continuation of the investment in the
entity. In such instances, the investment adviser might reap the
primary benefits of the arrangement.
H.R. 3301 has several safeguards that should prevent such
results. First, an entity would qualify as a collective real
estate investment corporation only if a majority in interest of
its shareholders or beneficiaries had the right to dismiss the
entity's.investment adviser.- The oaly limitation on this right
would be a requirement of reasonable notice to the adviser. We
would assume that a reasonable notice period for this purpose
generally would be approximately 30 days.
Second, a collective real estate investment corporation would
qualify for exemption only if each shareholder or beneficiary has
the right to dispose of its interest. This right could take
either (or both) of two forms — the right to sell or exchange
the shareholder's or beneficiary's interest to another exempt
organization, or the right to require the collective real estate
investment corporation to redeem the interest upon 90 days'
notice.
We believe that these safeguards, which would both guarantee
the majority in interest the right to control the entity and
guarantee any investor the right to liquidate its interest,
should ensure that the entity is operated exclusively for the
benefit of the exempt investors. We have some concern, however,
that the 35 shareholder limitation may be too high, and may thus
render less valuable the right to dismiss the investment adviser.
We believe that a lower ceiling might facilitate exercise of the'
investors' right to dismiss the investment adviser, and should
perhaps be considered by the Subcommittee. Furthermore, a lower
ceiling on the number of investors would be more consistent with
the traditional purposes of title-holding companies.
-7-
Finally, although the bill's heading specifically refers to
the acquisition and management of real property, proposed section
501(c)(24)(A)(iii) requires only that the entity be organized for
the exclusive purpose of "acquiring property and holding title
to, and collecting income from, such property." We recommend
that the proposed statutory language be amended to clarify that
the investments of the entity must be limited to real property.
Debt-Financed Property Rules
H.R. 3301 also would extend to collective real estate
investment corporations the provision of current law that
generally exempts certain real estate investments of qualified
pension trusts and educational organizations from the
debt-financed property rules. By extending the exception to such
corporations, the bill indirectly would extend the exception to
all organizations eligible to own beneficial interests in such
corporations.
On several prior occasions, the Treasury Department has
testified that the debt-financed property rules should not be
narrowed. On August 9, 1983, for example, the Treasury
Department testified before the Subcommittee on Taxation and Debt
Management of the Senate Finance Committee in opposition to the
expansion of the exception to include qualified educational
organizations. Similarly, on September 26, 1983, we testified
before that Subcommittee in opposition to expanding the exception
to include collective real estate investment corporations.
Several developments subsequent to our prior testimony have
caused us to alter our position regarding expansion of the
exception to the debt-financed property rules. First, the
conditions set forth in section 514(c)(9)(B), which restrict the
ability of eligible organizations to qualify for the exception,
were expanded as part of the Tax Reform Act of 1984. As a
result, the potential for abuse through an acquisition of
debt-financed property has been reduced.
Second, the Congress, in 1984, broadened the exception to the
debt-financed property rules to include educational
organizations. We opposed such an expansion of the exception.
Given the extension of the exception to educational
organizations, however, we see no principled reason the exception
should not now apply equally to the other exempt organizations
described in section 501(c)(3). Our acquiescence in this
narrowing of the debt-financed property rules is based on our
judgment that, in their present form, the rules make an untenable
distinction between educational organizations and other section
501(c)(3) organizations.
We would like to make several additional comments regarding
this aspect of the bill. First, :he bill extends the exception
in section 514(c)(9) only to collective real estate investment
-8corporations. If the exception is to be extended to such
entities, however, there is no reason that it should exclude
exempt organizations that could invest in a collective real
estate investment corporation. It would be anomalous for section
501(c)(9) to treat a section 501(c)(3) organization less
favorably than a collective real estate investment corporation
wholly owned by the same organization. Accordingly, we would
extend the exception to all organizations eligible under the bill
to invest in a collective real estate investment corporation.
Second, although H.R. 3301 would include collective real
estate investment corporations within the definition of
"qualified organization" entitled to exemption from the
debt-financed property rules, it is not entirely clear how the
restrictions contained in section 514(c)(9)(B) should apply. We
believe that collective real estate investment corporations
should be treated as pass-through entities for purposes of
section 514(c)(9)(D), and recommend that the bill or legislative
history reflect that intention.
Finally, we note that the Subcommittee on Oversight is
considering the possibility of comprehensive hearings later this
year on the UBI tax. We are hopeful that, if such hearings
occur, we will have the opportunity to consider in greater detail
the policy implications of debt-financed acquisitions of
income-producing property by exempt organizations. Our testimony
today should not be construed as indicative of what our testimony
will be in the context of a comprehensive review of the UBI
rules.
Effective Date
As noted, H.R. 3301 would be effective for taxable years
beginning after December 31, 1984. We recommend that this
effective date be made prospective.
Revenue Estimate
Assuming a continuation of the current law rules applicable
to investments in real estate, we estimate that H.R. 3301 would
would lose $64 million in revenue during the fiscal 1987-1991
budget period. Under the House-passed version of H.R. 3838,
however, the revenue cost of H.R. 3301 would be $176 million.
Finally, under H.R. 3838 as approved by the Senate Finance
Committee, the provisions described in H.R. 3301 would lose $243
million over five years. All of these revenue estimates,
consistent with our suggestion above, assume that H.R. 3301 would
be effective for taxable years beginning after December 31, 1986.
-9-
H.R. 4056
Denial of Benefits of Section 911 of the Code
to Individuals in a Foreign Country in
Violation of an Executive Order
Current Law
The United States taxes its citizens on a worldwide basis,
wherever they reside. Under section 911 of the Code, however, a
United States citizen who has his or her tax home in a foreign
country and who either is present overseas for 11 of 12
consecutive months or is a bona fide resident of a foreign
country for an entire taxable year may elect to exclude from
gross income up to $80,000 of income from personal services
performed in a foreign country. Under current law, this
exclusion is scheduled to increase to $85,000 in 1988, $90,000 in
1989, and $95,000 in 1990. In addition, qualifying individuals
may exclude certain additional housing expenses incurred in a
foreign country.
H.R. 3838, as passed by the House of Representatives, would
permanently reduce the maximum exclusion to $75,000 for taxable
years beginning after 19#85. In addition, the foreign earned
income exclusion would become subject to the minimum tax. As
ordered reported by the Senate Finance Committee, however, H.R.
3838 would reduce the maximum exclusion to $70,000 a year, but
remove it from the minimum tax base.
The objective of the exclusion under section 911 is to
encourage United States exports by reducing the cost of employing
Americans abroad. United States businesses operating abroad
frequently prefer to employ Americans, who may be more familiar
with the business than local labor. These businesses argue that
Americans also may be more familiar than foreigners with American
products, and may therefore be more likely to purchase them on
behalf of their employers, thus aiding United States exports.
Absent the exclusion, these businesses argue, it would be
more difficult to employ Americans abroad. Foreign employees
working in the same country are often subject only to the host
country tax. In countries with lower tax burdens than the United
States, Americans would incur a higher tax cost in the absence of
special relief. The foreign earned income exclusion provides a
substantial exemption of foreign earnings from United States tax,
making United States labor more competitive with foreign labor in
low tax countries.
In Executive Orders 12543 and 12544 of January 7 and 8, 1986,
the President, under the authority of the International Emergency
Economic Powers Act and other statutes, ordered specified
sanctions against Libya to be implemented in accordance with
-10regulations issued by the Treasury Department. In particular,
the President ordered that United States persons generally are
prohibited from performing any contract in support of an
industrial, commercial, or governmental project in Libya. Among
several other provisions, the President prohibited any
transaction by a United States person relating to activities by
any such person within Libya, other than certain specified
transactions, including travel for journalistic activities by
persons regularly employed in such capacity by a newsgathering
organization.
Description of H.R. 4056
H.R. 4056 would deny the foreign earned income exclusion to
Americans present in a foreign country in violation of an
Executive Order, effective for periods beginning after January
31, 1986. Although neither Executive Orders 12543 and 12544 nor
the underlying Treasury regulations prohibit presence in Libya
per se, H.R. 4056 would have the effect of denying the foreign
earned income exclusion to Americans working in Libya after the
effective date. Limited exceptions would apply with respect to
journalists and to spouses and dependents of Libyan nationals
who, in certain cases, are not in Libya in violation of the law.
Discussion
The Treasury Department generally opposes using the income
tax as an instrument of foreign policy. We do not believe that
the denial of tax benefits is an appropriate form of opposition
to a foreign government's non-tax policies. H.R. 4056, however,
addresses a very exceptional case. The activity giving rise to
the tax benefits — employment in a particular country — is
prohibited by statute, as implemented by Executive Order of the
President and underlying regulations, and criminal sanctions
apply if violations of the Executive Order occur. The criminal
penalties for violation of the prohibition can be a fine of
$50,000 and imprisonment for 10 years.
The Treasury Department believes that, in the exceptional
situation addressed in this case, the Congress could rationally
choose to deny the tax benefit of the foreign earned income
exclusion to persons earning income in Libya in violation of the
Executive Order. We would not regard such action as precedent
for denying tax benefits, such as the foreign tax'credit, in
other circumstances where direct statutory penalties would be
appropriate.
We also note that the State Department does not oppose this
bill.
-11H.R. 4077
Denial of Tax-Exemption for Bonds to Provide
Property Used by Certain Electric Utilities
Current Law
Section 103, with certain exceptions, excludes from gross
income interest on obligations of a State or its political
subdivisions. Interest on bonds issued to finance publicly owned
electric generating facilities qualify for this exclusion, unless
the bonds, are classified as industrial development bonds or
consumer loan bonds.
A bond issued by a State or local government to finance a
publicly owned electric generating facility is an industrial
development bond ("IDB") if one nonexempt person (or two or more
nonexempt persons, each of which pays annually a guaranteed
minimum payment exceeding three percent of the average annual
debt service) agrees (i) to take, or to take or pay for, more
than 25 percent of the total output of the facility, and (ii) to
pay more than 25 percent of the total debt service on the bonds.
A bond issued by a State or local government is a consumer
loan bond if more than five percent of the bond proceeds are
reasonably expected to be used directly or indirectly to make or
finance ioans to nonexempt persons. A contract to sell the
output of a bond-financed electric generating facility to an
nonexempt person may constitute a loan for this purpose if the
contract significantly shifts the burdens and benefits of
ownership of the bond-financed facility to the nonexempt person.
If a bond is an IDB or a consumer loan bond, the bond may
nevertheless qualify for tax exemption if the bond proceeds are
used to provide an exempt facility. Under present law,
facilities for the local furnishing of electric energy qualify as
exempt facilities. (H.R. 3838, as passed by the House of
Representatives, would repeal this exception.)
Description of H.R. 4077
H.R. 4077 would amend section 103 to deny the tax exemption
for interest on a bond, under certain circumstances, if any
portion of the bond proceeds is to be used directly or indirectly
to provide property for use by any one of 88 electric utilities
that entered into an agreement in 1974 with a certain corporation
to "take or pay" for specified amounts of electricity to be
generated by either of two nuclear electric generating facilities
that were not constructed. In particular, interest on such bonds
would not be excludable from gross income during any period that
payments under the take or pay agreements are in arrears. For
purposes of determining the amount of payments that are in
arrears, the bill treats the agreements as binding and construes
them as if electricity were generated (and available for
purchase) from the facilities involved. The bill would apply to
obligations issued after the date of enactment.
-12-
While the bill is framed in terms of general applicability,
it is our understanding that the only utilities that would be
affected by the provision are those that contracted with the
Washington Public Power Supply System ("WPSS") for the purchase
of power from the planned (but uncompleted) nuclear generating
units four and five of that system.
Discussion
The Treasury Department strongly opposes H.R. 4077.
The 88 electric utilities referred to by the bill contracted
with WPSS to purchase electric power from two nuclear electric
generating facilities to be constructed. Under the terms of the
contracts, the utilities agreed to pay their share of the
construction costs (including debt service on bonds issued by
WPSS), even if the facilities were never completed. After WPSS
issued bonds to finance construction and pledged the contracts to
the bondholders as security, cost overruns and reduced electric
demand adversely affected the anticipated economic viability of
the facilities, and construction of the facilities was suspended.
Subsequently, actions were brought by ratepayers and some of the
88 utilities to declare the contracts null and void on the ground
that the utilities, most of which were State public utilities,
did not have authority to enter into them. The State of
Washington Supreme Court decided that the contracts were invalid,
and barred the State's public and municipal utilities from making
any payments under the contracts. After the State court's
action, the bonds issued by WPSS went into default.
The purpose of the bill seems to be either to force the 88
utilities to make payments under the contracts, which would
apparently contravene the decision of the Washington Supreme
Court and might subject the directors of the utility to personal
liability under shareholder or ratepayer suits, or to penalize
them for not doing so by restricting their ability to borrow on a
tax-exempt
basis.
believe
that involved
it is entirely
Under the
bill,Wethe
utilities
in thi inappropriate
under these circumstances to attempt to accomplish either of
these purposes through the Internal Revenue Code.
significant amount of power to any of the 88 utilities, becau se
such facilities apparently would be considered used by'one of the
88 utilities for purposes of the bill.
-13-
H.R. 4379
Nonrecognition of Gain on Sale of Old Residence
Where One Spouse Dies Before Occupying New Residence
Current Law
In general", section 1034 of the Code allows a taxpayer to
defer the recognition of gain on the sale of his or her principal
residence if the taxpayer invests the proceeds from such sale in
a new principal residence within two years. Section 1034(g)
addresses the particular situation where a taxpayer and the
taxpayer's spouse each contribute different proportions of the
cost of the new residence as compared to the old residence. For
example, if the taxpayer paid the entire $50,000 cost of the old
residence, but only one-half of the $75,000 cost of the new
residence, section 1034(g) of the Code allows the taxpayer and
the taxpayer's spouse to elect to treat the taxpayer as providing
the entire cost of purchasing the new residence so that no gain
must be recognized. The taxpayer and the taxpayer's spouse must
both consent to the application of this provision and agree to
calculate their basis in the new residence to preserve the gain
that was inherent in the sale of the old residence.
Description of H.R. 4379 *"
H.R. 4379 would amend section 1034(g) to allow nonrecognition
of gain on the sale by a married couple of an old principal
residence where one spouse' who occupied the old res'idence dies
after the date of the sale of the old residence, but before the
deceased spouse occupies the new residence. This result would be
achieved by removing the requirements that the deceased spouse
both consent to the application of 1034(g) and occupy the new
residence as the principal residence. The bill would apply to
the sale of old residences after December 31, 1984.
Discussion
Treasury Department supports H.R. 4379, with suggestions for
minor technical changes.
Section 1034, as currently in effect, does not by its terms
contemplate the possibility that one spouse may die in the period
between the sale of the old residence and the occupation of the
new residence. It would be consistent with the policy of section
1034 to allow the application of section 1034(g) in such a
situation, because the gain from' the sale of the old residence
would be preserved in the surviving spouse's basis in the new
residence.
While the Treasury Department supports H.R. 4379, we believe
that certain minor changes should be made to clarify its meaning.
Specifically, we would: (1) replace the term "the taxpayer" with
the term "the taxpayer or his spouse," and (2) clarify that the
surviving spouse must occupy the new residence as the principal
residence within the prescribed period and must agree to
calculate his or her basis in the new residence so as to preserve
the gain before this provision would be applicable.
-14-
H.R. 4595
Treatment of Certain Amounts Received by
Qualified Cooperative Housing Corporations
in Connection with the Refinancing of
Certain Indebtedness
Current Law
Under section 216 of the Code, a. tenant-stockholder of a
cooperative housing corporation ("cooperative") may deduct
amounts paid or accrued to the cooperative to the extent such
amounts represent the tenant-stockholder's proportionate share of
(1) real estate taxes allowable as a deduction to the cooperative
that are paid or incurred by the cooperative with respect to the
cooperative's land or buildings, and (2) the interest allowable
as a deduction to the cooperative that is paid or incurred by the
corporation on its indebtedness contracted in the acquisition, _
construction, or improvement of the cooperative's buildings or in
the acquisition of the cooperative's land.
A corporation generally may qualify as a cooperative housing
corporation only if (1) it has only one class of stock, (2) each
of its stockholders is entitled, solely by reason of ownership of
stock, to occupy a dwelling unit owned or leased by the,
corporation, (3) none of its stockholders is entitled to receive
any distribution not out of. earnings and profits of the
corporation, except on a complete or partial liquidation, and (4)
80 percent of more of its gross income for the taxable year is
derived from tenant-stockholders.
Under section 118(a), gross income of a corporation does not
include any contribution to the capital of the corporation.
The Congress, in enacting this provision in 1954, intended it to
apply in cases in which, "because the contributor expects to
derive indirect benefits, the contribution cannot be called a
gift; yet the anticipated future benefits may also be so
intangible as to not warrant treating the contribution as a
payment for future services." S. Rep. No. 1622, 83d Cong., 2d
Sess., pp. 18-19 (1954); H. Rep. No. 1337, 83d Cong., 2d Sess.,
pp. 17-18 (1954).
The issue whether a payment to a corporation by a
nonshareholder constitutes a contribution to capital under
section 118(a) or gross income under section 61 is an inherently
factual determination. In The May Department Stores Company, 33
T.C.M. 1128 (1974), aff'd per curiam, 519 F.2d 1154, 75-2
U.S.T.C. par. 9628 (8th Cir. 1975), for example, the Tax Court
held that the taxpayer received a nontaxable contribution to
capital where developers of a shopping center transferred to the
taxpayer a parcel of land to induce the taxpayer to construct a
-15department store on the land. The developers were motivated by
their expectation that construction of the department store would
increase the value of their real estate interests if the store
attracted customers to the shopping center. Under those
circumstances, the court reasoned that the benefits sought by the
developer were "indirect" and "intangible" and constituted a
nontaxable contribution to capital. On the other hand, in
Teleservice Company of Wyoming Valley v. Commissioner, 254 F.2d
105, 58-1 U.S.T.C. par. 9383, (3d Cir. 1958), aff'g 27 T.C. 722
(1957), the court held that customer contributions to a community
television antenna system for the construction of facilities
represented taxable income to the taxpayer because those
contributions in substance constituted "part of the payment for
services rendered or to be rendered."
Under section 277, deductions attributable to providing
services or goods to members of a social club or other membership
organization are allowed only to the extent of income derived
during the taxable year from members. To the extent deductions
attributable to membership activities exceed such income for a
taxable year, the excess is carried forward to the succeeding
taxable year and is again subject to the same limitation.
Section 277 applies to cooperative housing corporations. !_/
Under section 163(a), a deduction generally is allowed for
all interest paid or accrued within the taxable year on
indebtedness of the taxpayer. Section 446(b) provides, however,
that if the method of accounting used by the taxpayer does not
clearly reflect income, the computation of taxable income shall
be made under such method as, rn the opinion of the Secretary,
clearly reflects income.
Background
The Treasury Department is aware of several taxpayer
controversies involving cooperative housing corporations,
currently pending before the Internal Revenue Service, that would
be affected by the terms of H.R. 4595. In particular, certain
cooperative housing corporations, prior to January 1, 1984,
refinanced their existing mortgage loans in transactions that
resulted in an agency of the Federal Government providing a
guarantee of a new first mortgage loan held by a city housing
corporation, and the creation of an unguaranteed second mortgage
loan See
heldS.by
the No.
city938,
housing
7/
Rep.
94th corporation.
Cong., 2d Sess., pp. 397-398
(19 7 6 ) ; Shore Drive Apartments, Inc. v. U.S., 76-2 U.S.T.C.
par. 9808 (M.D. Fla. 1976) .
-16-
In the course of each of these refinancing transactions, the
Federal government agency required the city housing corporation
to pay certain costs as a condition of guaranteeing the loan.
These payments included the costs of closing the refinancing and
establishing a capital reserve fund for the benefit of the
cooperative. The reserve fund was to be used for the benefit of
the cooperative for purposes approved by the Federal Government
agency, such as capital expenditures to repair the building or to
replace appliances. The fund was invested in income-producing
instruments, and the interest income could be used for operating
expenses of the cooperative. Any remaining balance of the fund
will be paid to the cooperative upon final payment of the first
and second mortgages.
Finally, the terms of the second mortgage loan provided for a
below-market interest rate, a moratorium on principal and
interest payments for two years, and a limited obligation to make
subsequent payments of principal and interest (with no accrual of
interest on deferred payments) until complete repayment of the
40-year first mortgage loan.
In certain of the cases described generally above, Technical
Advice Memoranda stating the position of the Internal Revenue
Service have been issued, and conferences have been held between
the Service and the taxpayers regarding these positions. Because
of our acute sensitivity to maintaining confidential taxpayer
information,- we have summarized above only those facts that are
both properly available to the public under section 6103 and
important to understanding the implications of H.R. 4595.
Description of H.R. 4595
Section 1(a) of the bill provides that, in the case of a
qualified refinancing of a mortgage loan of a qualified
cooperative housing corporation, the payment or reimbursement by
a city housing development corporation of amounts for (1) closing
costs incurred with respect to the refinancing, and (2) the
creation of a reserve for the cooperative, shall not be included
in the gross income of the cooperative. Section 1(b) of the bill
provides that income attributable to a reserve described in
section 1(a) of the bill shall be treated as derived from members
for purposes of sections 216 and 277. Section 1(c) of the bill
provides that any amount claimed by a qualified cooperative
housing corporation as a deduction for interest on a second
mortgage loan made by a city housing development corporation in
connection with a qualified refinancing shall be treated as if
such amount were paid during such taxable year. The provisions
of section 1 of the bill are effective only for taxable years
beginning before January 1, 1986.
For purposes of section 1 of the bill, a "qualified
cooperative housing corporation" means any corporation that (1)
is subject to a limited-profit housing companies law that limits
-17the resale price for a tenant-stockholder's stock in a
cooperative housing corporation to his or her stock basis and
share of amortization of any mortgage on the cooperative's
building, and (2) would be treated as a cooperative housing
corporation under section 216 after application of sections 1(a)
and 1(b) of the bill. Under section 1(e) of the bill, a
"qualified refinancing" generally means a refinancing that
occurred before January 1, 1984, and in which a first mortgage
loan held by a city housing development corporation was
refinanced with a first mortgage loan insured by an agency of the
Federal Government and a second mortgage loan held by the city
housing development corporation.
Section 2 of the bill provides that, for taxable years
beginning after December 31, 1985, payments from a qualified
refinancing-related reserve described in section 1 of the bill
out of amounts excluded from gross income shall not give rise to
deductions from income and, in the case of payments made to
acquire property, shall not be included in the basis of such
property.
Discussion
As described above, H.R. 4595 specifically affects several
ongoing controversies between the Internal Revenue Service and
taxpayers. This is illustrated by the fact that section 1 of the
bill applies only to taxable years beginning before 1986, with
respect to refinancings that occurred before 1984. By their
terms, therefore, the principal provisions of H.R. 4595 apply
only retroactively. 8/
The Treasury Department generally opposes retroactive
legislation that will affect live controversies between the
Internal Revenue Service and taxpayers. We believe that the
Congress generally should not interfere in such cases.
Accordingly, because H.R. 4595 involves existing taxpayer
disputes with the Internal Revenue Service, the Treasury
Department must oppose the bill.
Although we oppose the bill on its face, several substantive
tax law concerns also are raised by H.R. 4595. In particular,
the provisions of the bill raise three discrete sets of
underlying substantive issues. The first question is whether
payments by the city housing development corporation, a
nonshareholder, to or on behalf of the cooperative constitute
gross income to the cooperative or should be treated as a
contribution to capital excluded from the cooperative's gross
income under section 118(a). Second, for purposes of the rules
regarding "membership income" of cooperative housing
corporations,
it must
be determined
whetherrules
income
derived to
from
8/ Section 2 of
the bill,
which provides
applicable
investmentmade
of out
reserve
funds
should would
be treated
membership
~the
~
payments
of the
reserve,
affect asfuture
taxable
years, but only with respect to reserves created before 1984.
-18-
or nonmembership income. Third, it
circumstances it is appropriate for
his discretion under section 446(b)
method of accounting as not clearly
Treatment of Payments as Contributions
must be determined under what
the Commissioner, to exercise
to disregard a taxpayer's
reflecting income.
to Capital
As described above, a contribution to the capital of a
corporation is not included in the corporation's gross income
under section 118(a). Under the case law, the treatment of a
payment to or on behalf of a corporation as a contribution to
capital is appropriate only where the facts and circumstances
indicate that the payment was not made by the payor for the
purpose of obtaining benefits other than benefits that are
"indirect" and "intangible." In the case of the refinancing
transactions described in H.R. 4595, the facts indicate that the
person making payments to or on behalf of the cooperatives
received direct and tangible benefits, namely the proceeds of new
first mortgage loans guaranteed by an agency of the Federal
Government. Thus, under section 118(a), the Internal Revenue
Service has taken the position that the payments made to the
cooperative in connection with these refinancing transactions did
not constitute contributions to capital excludable from gross
income. Accordingly, the payments would be taxable to the
corporation.
On the other hand, because the benefits derived by the payor
as a result of these transactions were not provided by the
cooperative receiving the benefits o.f the payments ( i,. e. , the
payments did not constitute consideration for a service) , the
cooperative has argued that it may exclude such payments under
the traditional application of section 118(a).
The issue whether the payments made to the cooperatives were
income or contributions to capital is factual, requiring
application of the general principles of section 118(a) to the
circumstances of a specific case. We believe it is particularly
appropriate for such mattters to be resolved by the Internal
Revenue Service and the taxpayer, through the courts if
necessary. The Congress should not interfere in such a
determination. If the Congress undertakes to resolve this
factual dispute between taxpayers and the Internal Revenue
Service, it may be drawn into many other such controversies.
Treatment of Reserve-Fund Income as Derived from
Tenant-Stockholders
The special rules for tenant-stockholders of cooperative
housing corporations are intended to place tenant-stockholders in
essentially the same tax position as if they had directly
purchased interests in their dwelling units. In the case of a
• cooperative that does not receive any income from sources other
than rent payments from tenant-stockholders, this goal would be
realized without complication.
-19-
Cooperatives, however, often receive income from other
sources, including business transactions with persons other than
tenant-stockholders as well as from investment activities. The
proper taxation of cooperative corporations requires that these
transactions be adequately considered. In particular, it is
necessary to ensure that income derived from investment
activities and from the operation by a cooperative of a trade or
business with outsiders is taxed in a fashion comparable to
income earned by a corporation that does not also furnish housing
to its stockholders. If these classes of income were not subject
to the normal corporate tax rules, tenant-stockholders of
cooperative housing corporations would not merely obtain the same
tax benefits obtained by direct homeowners, but would be treated
more favorably than homeowners similarly earning income through
corporate business or investment activities.
As stated above, section 277 provides that deductions
attributable to providing services to tenant-stockholders, such
as depreciation and operating expenses, are allowed only to the
extent of income derived from members, such as rental payments,
and are not allowed to reduce income from non-member sources. If
investment income earned by a cooperative from investing in a
capital reserve fund were treated as derived from
tenant-stockholders for purposes of section 277, a cooperative
earning such income would be able to pay, with before-tax
dollars, expenses that a direct homeowner must, pay with after-tax
dollars, such as insurance, maintenance, and principal payments
on a mortgage loan. Thus, allowing a cooperative's investment
income to-be trea.ted as membership income would be roughly
equivalent to exempting a cooperative homeowner's investment
income from tax when the income is used to pay housing expenses.
The purpose of section 277 is to prevent membership organizations
such as housing cooperatives from obtaining such an unintended
benefit.
Accordingly, investment income from qualified
refinancing-related reserve funds should not be treated as
derived from tenant-stockholders for purposes of section 277.
Section 1(b)(2) of H.R. 4595, however, would provide the opposite
result. 9/
A slightly different issue is raised by section 1(b)(1) of
the bill, which would treat the investment income from the
reserve fund as derived from tenant-stockholders for purposes of
section 216. The effect of this provision would be to permit
tenant-stockholders of an affected cooperative to deduct their
contributions to the cooperative's mortgage interest and real
estate
taxesthat
even
if cooperatives,
the cooperativeincluding
derived more
than 20 percent
9/
We note
many
housing
of
its
income
from
non-member
sources
(taking
into
accountincome,
the
~ cooperatives, urge a broader definition of membership
reserve-fund
income).
and would thus
argue that the investment income from the
reserve fund should be considered membership income.
-20-
In general, corporate investment income should not be treated
as derived from tenant-stockholders for purposes of the
20-percent rule of section 216. If corporate investment income
were not subject to the 20-percent limit, any amount of such
investment income would potentially be used by cooperatives to
provide economic benefits to the tenant-stockholders (generally
in the form of reduced rent), even though the tenant-stockholders
normally do not report taxable dividends in such circumstances.
Under normal corporate tax rules, which apply to direct
homeowners who are stockholders in corporations earning
investment income, corporate after-tax income cannot be used to
provide benefits to stockholders without creating taxable
dividend income. It would be inappropriate to expand the ability
of cooperative housing corporations to earn investment income
without clearly subjecting the tenant-stockholders to dividend
taxation.
Treatment of Accrued but Unpaid Interest as not Clearly
Reflecting Income
As stated above, in the refinancing transactions described in
H.R. 4595, second mortgage loans were created with terms that (1)
provided below-market interest rates, (2) provided a moratorium
on all principal and interest payments for two years, and (3)
provided that the obligation to make any principal and interest
payments would be substantially limited until after the first
mortgage loans were fully paid, 40 years after the first interest
accruals. Section l-( c)" of the bill would provide that any amount
claimed by a qualified cooperative housing corporation a-s a
deduction for interest for any taxable year beginning before
January 1, 1986, with respect to such second mortgage loans would
be treated as paid in the year claimed.
In light of the substantial period of time during which the
cooperatives in question will not be unconditionally obligated to
pay interest that accrued during the years in question, the small
present value of the deferred amounts, and the possibility that
the amounts may in fact never be paid, the Internal Revenue
Service has concluded, under the authority of section 446(b),
that allowing the deduction of such interest in the year accrued
would not clearly reflect income. The taxpayer, in contrast, has
claimed that such deductions are properly allowable under section
163. The question whether the Commissioner has properly
exercised his discretion under section 446(b), like the other
issues presented by these transactions, should be resolved
between the parties. Again, we urge the Congress not to make
concludes my prepared remarks. I would be pleased to
such This
determinations.
to any questions.
*respond
* *
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 19, 1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,001 million of 13-week bills and for $7,025 million
of 26-week bills, both to be issued on May 22, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13--week bills
:
maturing August 21, 1986
Discount Investment
Price
Rate 1/
Rate
6.17%
6.23%
6.22%
6.36%
6.42%
6.41%
26--week bills
maturing November 20 , 1986
Discount Investment
Price
Rate
Rate 1/
98.440
98.425 :
98.428 :
6.26%
6.28%
6.28%
6.55%
6.58%
6.58%
96.835
96.825
96.825
Tenders at the high discount rate for the 13-week bills were allotted 60%.
Tenders at the high discount rate for the 26-week bills were allotted 80%.
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 Thousand8)
Received
Accepted
Received
30,055
19,890,595
19,000
23,490
29,460
49,145
1,178,575
60,555
17,285
37,565
22,730
1,263,585
300,450
$
26,855
6,119,395
19,000
23,490
27,460
44,145
221,695
40,555
16,285
37,565
16,730
131,385
300,450
$7,000,500
: $22,922,490
$7,025,010
$18,786,160
1,129,555
$19,915,715
$3,639,760
1,129,555
$4,769,315
: $19,584,825
:
734,440
: $20,319,265
$3,687,345
734,440
$4,421,785
1,904,010
1,904,010
:
1,875,000
1,875,000
327,175
327,175
:
$22,146,900
$7,000,500
728,225
$22,922,490
728,225
$7,025,010
$ " 40,380
17,837,875
24,800
56,390
52,455
32,600
1,382,225
65,610
19,380
66,595
46,735
2,172,975
348,880
$
40,380
5,628,875
24,800
56,390
52,055
32,600
397,225
45,610
19,380
66,595
41,735
245,975
348,880
$22,146,900
$
Accepted
'
s
:
:
:
:
:
:
An additional $37,025 thousand of 13-week bills and an additional $63,975
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
B-585
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY EXPECTED AT
9:30 A.M., MAY 20, 1986
Statement by the Honorable James A. Baker, III
Secretary of the Treasury
before the
Committee on Foreign Relations
United States Senate
May 20, 1986
Mr. Chairman, members of the Committee:
I am pleased to have the opportunity to brief
morning on the principal economic developments
Summit and to bring you up to date on'progress
our international debt strategy. I would also
support for the important piece of legislation
Congress authorizing U.S. participation in the
Investment Guarantee Agency.
The Setting: Progress and Opportunities
you this
at the Tokyo
in implementing
like to urge your
before the
Multilateral
Allow me, before turning to these specific subjects, to
describe the significant progress being made in establishing the
fundamental conditions necessary to achieve and maintain a sound
and growing world economy, more balanced trade positions, and
greater exchange rate stability.
o The Plaza Agreement last September has resulted in
exchange rate relationships that better reflect underlying economic conditions. The Japanese yen and
German mark have now appreciated more than 55 percent
from their recent lows in February 1985. The dollar
has more than fully offset its earlier appreciation
against the yen; and it has reversed nearly
three-quarters of its appreciation against the mark.
o The Plaza Agreement also contributed to movement
toward stronger, more balanced growth among the major
industrial countries, including policy commitments to
that end. Efforts to fulfill those undertakings are
ongoing. The favorable economic convergence which was
the focus of the Plaza Agreement is being realized,
B-586
- 2 with consequent narrowing of the "growth gap" between
the U.S. and its major trading partners.
o Inflation has been cut sharply and is expected to stay
low, in part reflecting the effects of the sharp
reduction in oil prices. This has facilitated a
substantial reduction in interest rates and enhances
prospects for further declines.
o We now expect the deterioration in our trade position
to halt this year, and we look forward to substantial
improvement next year. Exchange rate changes take
time to work their way through our economic system, as
businesses and consumers gradually adjust their plans.
Next year, as the impact of these changes is more
fully felt, with assistance from the decline in oil
prices, our trade and current account deficits should
drop below $100 billion, or nearly one-third below our
projections as recently as last autumn.
o Preparations are well advanced for launching the new
round of multilateral trade negotiations, with a
Ministerial to be held this September. Our Summit
partners agreed in Tokyo to the U.S. proposal that the
new round should include services and trade related
aspects of intellectual property rights and foreign
direct investment.
o And, as I will detail later, our proposals for
improving growth in the debtor countries have gained
wide support and are now being implemented.
Still, there is no doubt that problems remain and that we
have to do more to address them.
The scars of a decade of economic turmoil are deep, and they
cannot be easily or quickly erased. The distortions to our
economies from the oil shocks, rapid inflation and the recessions
of the 1970s and early 1980s have required us increasingly to
address structural problems that demand time to correct.
Unemployment remains high in many countries, and large domestic
and external imbalances persist.
Uncertainties about the future behavior of exchange rates
have also been prevalent, reflecting deficiencies in the
international monetary system that gradually intensified over the
years. We know also that the debt problems of the developing
world, accumulated over a decade or more, cannot be resolved in a
few short months. And we know protectionist pressures remain
strong. We recognize the need to address related problems — in
our monetary system, in our arrangements for international
economic cooperation, in the developing countries — if we are to
contain those pressures and work toward more open and fair
markets.
- 3 The progress that has been achieved in the general economic
environment, however, provides a golden opportunity to resolve
these remaining problems. Success inspires confidence that we
can go further. At the Tokyo Summit, President Reagan and the
heads of the other major Free World democracies manifested the
political will and leadership to confront the tasks that remain.
Strengthening International Economic Coordination
at The Tokyo Economic Summit
The Plaza Agreement and subsequent coordinated interest rate
reductions evidenced the willingness and ability of the major
industrial countries to cooperate more closely on their economic
policies. At the same time, experience of the past year
demonstrated that exchange rate changes alone could not be relied
upon to achieve the full magnitude of adjustments required in
external positions. It had become increasingly apparent that
closer coordination of economic policies will be required to
achieve the stronger, more balanced growth and compatible
policies necessary to reduce the large trade imbalances that
remain and foster greater exchange rate stability.
For this purpose, we went to Tokyo seeking to build upon the
framework embodied in the Plaza Agreement and to establish an
improved process for achieving closer coordination of economic
policies on an ongoing basis. I believe we succeeded.
The international monetary arrangements that have been in
place since the early 1970s contain a number of positive
elements, particularly a necessary flexibility to respond to
economic shocks. However, this flexibility went too far,
allowing problems to cumulate and countries to pursue policies
without adequately considering the international dimensions of
their decisions. The agreement reached at the Tokyo Summit seeks
to combine needed flexibility with a greater likelihood that
remedial action will be taken to deal with problems before they
reach disruptive proportions.
The arrangements that were adopted involve a significant
strengthening of international economic policy coordination aimed
at promoting non-inflationary growth, adoption of marketoriented incentives for employment and investment, opening the
trade and investment system, and fostering greater exchange rate
stability. Details of the new procedures will, of course, have
to be worked out in subsequent discussions. However, I see the
enhanced surveillance process working as follows:
First, the measures for use in assessing country goals and
performance will be agreed upon by the countries
participating in the enhanced surveillance process. As
stated in the Tokyo communique, a broad range of indicators
would be utilized in order to achieve the comprehensive
policy coverage necessary to insure that the underlying
problems, not just the symptoms, are addressed. These
- 4 indicators would include growth rates, inflation rates,
unemployment rates, fiscal deficits, current account and
trade balances, interest rates, monetary growth rates,
reserves, and exchange rates.
Second, each country will set forth its economic forecasts
and objectives taking into account these indicators.
Third, the group would review, with the Managing Director of
the International Monetary Fund, each country's forecasts to
assess consistency, both internally and among countries. In
this connection, exchange rates and current account and trade
balances would be particularly important in evaluating the
mutual consistency of individual country forecasts.
Modifications would be considered as necessary to promote
consistency.
Fourth, in the event of significant deviations in economic
performance from an intended course, the group will use best
efforts to reach understandings on appropriate remedial
measures, focusing first and foremost on underlying policy
fundamentals. Intervention in exchange markets could also
occur when to do so would be helpful.
As you know, countries have been developing individual
economic forecasts for years. Moreover, the IMF consults with
individual countries on a regular basis, regarding their economic
policies and performance. What is new in the arrangements
adopted in Tokyo is that the major industrial countries have
agreed that their economic forecasts and objectives will be
specified taking into account a broad range of indicators, and
their internal consistency and external compatibility will be
assessed. Moreover, if there are inconsistencies, efforts will
be made to achieve necessary adjustments so that the forecasts
and objectives of the key currency countries will mesh. Finally,
if economic performance falls short of an intended course, it is
explicitly agreed that countries will use their best efforts to
reach understandings regarding appropriate corrective action.
The procedures for coordination of economic policy were
further strengthened at the Summit. A new Group of Seven Finance
Ministers, including Canada and Italy, was formed in recognition
of the importance of their economies. At the same time, the
Group of Five has agreed to enhance its multilateral surveillance
activities.
In sum, Mr. Chairman, we have agreed on a more systematic
approach to international economic policy coordination that
incorporates a strengthened commitment to adjust economic
policies. I am hopeful that the spirit of cooperation that made
this agreement possible will carry over to its"implementation.
If so, we can look forward to greater exchange rate stability,
enhanced prospects for growth, and more sustainable patterns of
international trade.
- 5 International Trade at the Tokyo Economic Summit
Action toward closer international coordination of economic
policies and greater exchange rate stability complements our
efforts to promote a fair and open international trading system.
President Reagan and the others at the Tokyo Economic Summit
reaffirmed their commitment to fighting protectionism and
strengthening the international trading system. They further
pledged to work at the September GATT Ministerial meeting to make
decisive progress in launching the new round of multilateral
trade negotiations. We expect this meeting will initiate these
important negotiations.
As mentioned earlier, in the new round we will notably be
seeking new GATT rules covering services, intellectual property
protection, and international investment, as well as improved
market access abroad. Agricultural issues are a priority for the
U.S., and agriculture will also be included in the new round of
trade negotiations.
The Tokyo Summit also featured a precedent-setting discussion
of agricultural issues by the Heads of State and Government. The
Summit gave special emphasis to concerns about the global
structural surplus in some agricultural commodities that results
in part from the subsidies and protection provided in all the
Summit countries. Moreover, the Summit leaders agreed that
policies should be redirected and the structure of agricultural
production adjusted in the light of world demand. They also
expressed their determination to support the work of the OECD in
this area.
Open markets are essential to our overall international
strategy of economic adjustment and policy coordination. In
recommitting themselves to maintaining an open multilateral
trading system, the leaders of the Free World's major
industrialized nations recognized in Tokyo that:
o Open markets promote economic growth world-wide. We have
only to review the Depression years to see the effects of
closed markets.
o Open markets provide debtor nations with markets for their
exports that are essential if they are to service their
debt and, in turn, serve as markets for U.S. goods and
products; and
o Open markets facilitate our efforts to adjust large,
unsustainable external imbalances among the industrial
nations.
The Administration is committed to maintaining an open U.S.
market and ensuring a free but fair international trading system.
We must avoid passage of protectionist trade legislation that
- 6 would alienate our trading partners, encourage them to enact
similar protectionist policies, and undermine the Administration's international economic policy. Closed markets and an
atmosphere of confrontation would doom our efforts to solve our
international economic problems in a responsible and constructive
manner. The greatest threat today to economic well-being
world-wide is the danger of protectionism and a trade war. We
need your help to avoid these dangers. I urge you to give the
Administration's policies a chance to work.
International Debt Strategy
The resolution of international debt problems is important to
the U.S. economy as a whole, as well as to our international
trade and financial system. We also have strong political and
humanitarian interests in improving economic growth and political
stability in the debtor nations.
When I briefed this Committee last October on our proposals
for strengthening the international debt strategy, I warned that
there are no easy solutions to the debt problem, and that the
road ahead would be difficult and challenging. Seven months
later, that statement remains valid. But I can also assure you
that the directions in which we turned last fall are still
correct and that we are making progress in implementing our
initiative.
Recent improvements in the global economy are already making
a significant contribution to developing nations' growth
prospects and will substantially ease their debt service
obligations. Stronger industrial country growth and lower
inflation, for example, will add nearly $5 billion to developing
nations' non-oil exports and reduce their import costs by
approximately $4 billion this year. The sharp decline in
interest rates since early 1985 will reduce their annual debt
service payments by about $12 billion. The decline in oil prices
will also save oil-importing developing nations an additional $14
billion annually.
At the same time, however, developing countries, particularly
debtor nations, must position themselves to take advantage of
these improvements by putting in place policies to assure
stronger, sustained growth for their economies over the medium
and longer term. As you know, the "Program for Sustained Growth"
for the major debtor nations proposed by the U.S. in Seoul was
premised on credible, growth-oriented economic reform by the
debtor nations, supported by increased external financing.
In Tokyo, the Summit leaders welcomed the progress made in
developing the cooperative debt strategy, in particular building
on the United States' initiative. They emphasized that the role
of the international financial institutions will continue to be
central and welcomed moves for closer cooperation between the IMF
and the World Bank, in particular. The debt initiative has also
- 7 received strong support from the international financial
institutions, national banking groups in all major countries, and
the OECD Ministers, as well as the key IMF and World Bank
Committees representing both debtor and creditor countries.
The adoption of growth-oriented macroeconoraic and structural
policies by the debtor nations is at the heart of the
strengthened debt strategy and crucial to sustained growth over
the longer term. Special emphasis needs to be placed on measures
to increase savings and investment, improve economic efficiency,
and encourage a return of flight capital. A more favorable
climate for direct foreign investment can be an important element
of such an approach, helping to reverse recent declines in net
direct investment flows. Such inflows are non-debt creating,
provide greater protection against changes in the cost of
borrowing, and can help improve technology and managerial
expertise.
Similarly, a rationalization and liberalization of debtors'
trade regimes can contribute to improved efficiency and
productivity for the economy as a whole. Together with other
growth-oriented measures to assure more market-related exchange
rates and interest rates, to reduce fiscal deficits, to improve
the efficiency of capital markets, and to rationalize the public
sector, such measures can help improve growth prospects, restore
confidence in debtor economies, and encourage the return of
flight capital.
Such policy changes will take time to put in place and can't
be expected to occur overnight. The process of implementing
these reforms will also be much less public than the series of
announcements to date supporting the debt initiative.
Implementation will take place through individual debtors'
negotiations with the IMF, the World Bank and the commercial
banks. We expect these negotiations to place greater emphasis on
dealing with current debt problems through a medium-term,
growth-oriented policy framework. This process is already
underway. The IMF, for example, has existing or pending
arrangements with 11 of the 15 major debtor nations.
The World Bank is also moving ahead to strengthen procedures
and policies to implement its expanded role in the debt strategy.
It is currently assisting major debtors in the development of
medium-term adjustment programs. It also plans to implement
procedures which will streamline operations and provide for a
more comprehensive review of lending priorities for individual
countries. Finally, Bank staff are working with private
creditors in considering ways to better mobilize additional
support for debtors' adjustment programs.
The World Bank currently has structural or sector loan
negotiations underway with 13 of the heavily indebted, middle
income debtors. New structural or sectoral adjustment loans have
already been signed with some of these countries, including
- 8 Ecuador and Argentina, both of which are also discussing
follow-on standby programs with the IMF. Other countries are at
different stages in implementing comprehensive growth-oriented
economic programs.
As the Summit communique noted, sound adjustment programs
will need to be supported by resumed commercial bank lending,
flexibility in rescheduling debt, and appropriate access to
export credits. Once debtor nations have designed economic
reform programs to improve their growth prospects that have Fund
and Bank support, it will be critical for the commercial banks to
fulfill their pledges of financial support for these programs.
The industrial nations must also cooperate regarding resumption
of export credit cover to countries implementing appropriate
adjustment policies.
In addition to the strong global support for our initiative
with respect to the major debtors, we are also very pleased with
the recent actions of the IMF and the World Bank on the Trust
Fund initiative to assist low-income developing nations,
primarily those in Sub-Saharan Africa. Creation of these new
arrangements constitutes a major step forward in helping these
countries address their fundamental economic problems. The new
arrangements will also stimulate closer Fund/Bank cooperation and
provide a positive context for current negotiations on IDA VIII.
We look forward to their implementation so that a sound basis of
growth can be established in these countries as well.
The Program for Sustained Growth is important because it
touches on a wide range of U.S. interests, but paramount among
these is its importance for U.S. trade. As you know, the debt
crisis has had a direct impact on U.S. exports. U.S. exports to
the 15 major debtor nations peaked at $40 billion in 1981.
However, this reflected an international economic environment
that was clearly not sustainable. Our exports to these countries
fell sharply to $23 billion in 1983, as the debtor nations were
unable to maintain previous import levels in the face of
financial constraints and slower export growth.
The international debt strategy adopted in the wake of the
debt crisis has helped to place the debtors' economies on a
sounder footing and to permit a resumption of import growth at a
more sustainable pace. U.S. exports to the major debtor nations
have increased by 18%, or $4 billion, during the past two years
and can be expected to improve further. The adoption of
growth-oriented economic reforms, supported by increased
financing from the international community, as envisaged by the
debt initiative, will help to enhance both growth prospects and
imports.
It will also be important, however, for the United States and
other industrial nations to maintain open markets for LDC exoorts
to permit them to earn the foreign exchange necessary to increase
imports. The process of increasing growth and trade is an
- 9 interactive one. We cannot expect to reap the benefits of
stronger growth and increased trade abroad if we close our
markets at home.
Multilateral Investment Guarantee Agency (MIGA)
We believe prompt enactment of legislation enabling U.S.
participation in the Multilateral Investment Guarantee Agency
would make an important contribution to the implementation of our
international debt strategy.
The MIGA is designed to encourage the flow of investment to
and among developing countries by issuing guarantees against
political risk, encouraging sound investment policies in member
countries, and carrying out a wide range of promotional
activities. The United States has long been an advocate of a
greater role for foreign direct investment in the development
process. Foreign direct investment both enhances the private
sector's role in development and, as I earlier suggested,
encourages the flow of non-debt capital to LDCs.
The MIGA will stimulate these flows and in addition, because
of its multilateral nature, will be well positioned to promote
investment policy reforms in developing countries. The United
States has a direct stake in the investment policy reform
process; since this country is the largest direct investor in
other countries, it is in our best interests to see that
appropriate investment protection standards are more widely
accepted.
The Administration thus strongly supports U.S. membership in
the Multilateral Investment Guarantee Agency and has requested
Congress to authorize and provide full funding for membership in
fiscal year 1987. The $222 million U.S. subscription to the MIGA
involves only a $22 million budget outlay to be paid in cash.
While another $22 million of budget authority has also been
requested, it is not expected to result in any outlays and will
be in the form of non-negotiable, non-interest-bearing promissory
notes. The remaining $178 million is for callable capital under
program limitations. The potential return on this small
investment is, however, substantial. As the MIGA stimulates
private investment flows to LDCs, this additional capital can,
over time, substitute for scarce official flows from both
governments and the multilateral development institutions.
The MIGA supports our development policies, reinforces our
international debt strategy and will result in additional flows
of direct investment to LDCs. In addition to the strong support
of the Administration, MIGA has also attracted broad endorsement
from the private sector. Both the Chamber of Commerce and the
American Bar Association have issued statements in support of
U.S. membership.
- 10 We should not allow delay in acting on the MIGA legislation
to weaken the impetus behind MIGA. Many countries are moving
expeditiously to take the necessary steps to join the agency.
The United States, which has been a strong advocate of the MIGA
and has taken an active role in ensuring that the agency created
will be a sound and credible one, should now also take the steps
necessary to join this important institution.
I strongly encourage prompt enactment of the legislation
(S.2169) now before the Congress.
This legislation also contains authorization to merge the
Ordinary Capital and Inter-Regional Capital accounts of the
Inter-American Development Bank (IDB), which will allow more
efficient use of Bank capital. In other words, the IDB will be
able to lend on the basis of a smaller increment of capital
subscriptions from members than if the two accounts were to
remain separate. U.S. agreement to the proposal requires
legislative action, and I urge your early and favorable
consideration.
Multilateral Development Bank Replenishments
Mr. Chairman, currently we are negotiating replenishments
with all of Multilateral Development Bank (MDB) groups. We have
been consulting with members of Congress regularly to ensure
that your views are taken into account. In conducting these
negotiations we have — per the President's budget request -assumed that up to $1.4 billion in budget authority would be
available in the out-years to fund these replenishments. The
$1.4 billion amount maintains the budget authority level for the
MDBs of previous years and reflects considerable inter-agency
discussion, taking into account the impact of Gramm-RudmanHollings. The actual amount of each replenishment will be a
function of how far an MDB goes in accepting the policy reforms
we are seeking, e.g., improved loan quality, emphasis on
privatization, and enhanced compatibility between MDB country
strategies and individual loans.
We were very successful in achieving our objectives in the
Asian Development Fund and agreed to a $3.6 billion replenishment
over four years. The U.S. share remains at 16.23 percent, which
means a contribution of $146 million per year. We are achieving
a significant consensus among IDA Donors on U.S. policy objectives. Provided there is agreement to U.S. suggestions on policy
reforms, the Administration is willing to support an IDA
replenishment in the $10.5-$12 billion range.
Regarding the Inter-American Development Bank, we are in the
midst of protracted and intense negotiations, including a meeting
this week in Buenos Aires. It is still uncertain whether we will
secure the reforms we seek, and as a result the role the IDB will
play in the debt initiative has not been resolved. Discussions
are just beginning in the African Development Bank, which we hope
- 11 to complete by the time of their Annual Meeting next year. We do
not see the need for a World Bank General Capital Increase at
this time. The World Bank has ample capacity to increase lending
commitments by some $2-2.5 billion above the FY 1985 amount, and
to concentrate that lending more heavily on the large debtors
with credible reform programs.
I want to emphasize the Administration's commitment and full
support for the MDBs. They play an important role in U.S.
foreign and international economic policy. Now, we are asking
them to take a more active part in supporting growth-oriented
policy reform in the developing countries — to play a central
role in implementing the "Program for Sustained Growth."
I recognize fully that even in the best of circumstances
supporting foreign assistance is never popular. Now, at a time
of severe budget constraint, it will be even more difficult.
However, of all the existing institutions, the MD3s are the most
cost-effective from a U.S. budgetary perspective. One dollar of
budget authority for the World Bank, for example, translates into
$60 of lending authority.
Mr. Chairman, we can't duplicate that kind of leveraging on
a bilateral basis. For instance, through 1984 the MDB hard loan
windows have made total loan commitments of $133.1 billion at a
cost to the United States of only $2.4 billion. The soft,
concessional loan windows have made $50.6 billion in loan
commitments at a cost to U.S. taxpayers of $14.8 billion.
The MDBs are also very effective at providing financial
resources to countries of importance to us. For example, in FY
1984 total lending from the MDBs was $22.9 billion. Of this
amount, $15.6 billion went to countries receiving U.S. foreign
assistance and another $4.6 billion went to countries which are
of strategic importance to us — such as Mexico, Argentina,
Brazil and Korea — but which did not receive any bilateral
assistance. In other words, nearly 88 percent of MDB lending
went to countries of significant importance to the United States.
We need the MDBs as part of our international economic
strategy. I strongly believe that if we do not support the MDBs
now, we may have to resort to more costly measures later.
Conclusion
Mr. Chairman, the problems still with us in the international
economic arena are substantial and difficult. But we now have
the most favorable general economic environment in many years for
making further large strides towards resolving them. The United
States is leading the way in devising solutions in the best
interest of both our own country and the community of nations.
We believe the comprehensive, growth-oriented approach we have
- 12 urged is the preferred path, and we are making real progress in
implementing our strategy. I hope for your support in our
efforts.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
May 20, 1986
0. DONALDSON CHAPOTON
Deputy Assistant Secretary (Tax Policy)
Secretary of the Treasury James A. Baker, III today announced
the appointment of 0. Donaldson Chapoton as Deputy Assistant
Secretary (Tax Policy).
As Deputy Assistant Secretary (Tax Policy), Mr. Chapoton will
serve as the chief deputy to the Assistant Secretary for Tax
Policy, J. Roger Mentz, and oversee the activities of the Office
of Tax Legislative Counsel and the Office of the International
Tax Counsel.
Prior to joining the Treasury Department, Mr. Chapoton was a
Senior Partner with the law firm of Baker & Botts in Houston
specializing in the areas of corporate reorganizations,
acquisitions and liquidations, oil and gas and partnership tax
law, and tax aspects of foreign investment in the United States.
From 1961-63, Mr. Chapoton served in the Judge Advocate General's
Corps, U.S. Army. He also served as a law clerk to John R.
Brown, Fifth Circuit Court of Appeals, Houston, Texas, after
receiving his LL.B. from the University of Texas School of Law in
1960.
Mr. Chapoton is a member of the Texas Bar Association and the
American Bar Association as well as the tax sections of both of
those associations. He has lectured extensively on a wide
variety of tax matters.
Mr. Chapoton, a native of Houston, Texas, is married to the
former Mary Jo Kelley. They have two children, a daughter
Kelley, age 10 and a son Hunt, age 7.
# # #
B-587
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-204'
STATEMENT OF THE HONORABLE FRANCIS A. KEATING II
ASSISTANT SECRETARY OF THE TREASURY
(ENFORCEMENT)
HEARING ON H.R. 4700
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY
HOUSE FOREIGN AFFAIRS COMMITTEE
May 20, 1986
Economic Sanctions Against the Government of Libya
Mr. Chairman and Members of the Committee:
I am pleased to be with you today to discuss the status of
the economic sanctions imposed against the Government of Libya,
with particular reference to the Treasury licenses issued to the
U.S. oil companies.
My statement today will outline the role of the Department of
the Treasury in administering the sanctions. • By implementing the
President's decision to impose sanctions on Libya, the Treasury
is carrying out a long-standing role under statutes delegating to
the President broad authority to impose trade and financial
sanctions during a national emergency declared in response to an
international situation that constitutes a threat to the national
security, foreign policy or economy of the United States.
Since January 7, the Treasury Department has been administering the Libyan sanctions pursuant to President Reagan's
authority under the International Emergency Economic Powers Act
(IEEPA). Treasury's role has been to constantly monitor and
where necessary modify and fine-tune the embargo through regulations and licenses. Treasury's role can be placed in
historical perspective by describing briefly our implementation
of economic sanctions not only under IEEPA but under the Trading
With the Enemy Act as well. I will attempt to do this in my
statement today. Before I do so, however, I would like to
describe the role of my immediate office in the process.
Treasury Agencies and Offices
As Assistant Secretary of the Treasury for Enforcement, I
bear responsibility for Treasury resources, programs, policies
and activities in law enforcement. This includes the Bureau of
Alcohol, Tobacco and Firearms, the Federal Law Enforcement
Training Center, the Office of Foreign Assets Control (commonly
known as "FAC"), the United States Customs Service, and the
United States Secret Service. Of these entities, it is the
B-588
-2Office of Foreign Assets Control, under my supervision, that has
responsibility for administration of the Libyan Sanctions Regulations. With regard to enforcement of the regulations, that
office is supported by the U.S. Customs Service, which has broad
overall enforcement responsibilities regarding imports and
exports from the United States.
The Office of Foreign Assets Control
The Office of Foreign Assets Control (FAC) is a subordinate
element of my immediate office. It is headed by a Director, Mr.
Dennis O'Connell, who is an attorney and who served as Chief
Counsel and Director of the office during the Iran crisis. The
office dates from 1950 when President Truman imposed an assets
freeze and trade embargo against the People's Republic of China
and North Korea during the Korean War. It is a successor to the
Treasury office that administered the broad trading with the
enemy and alien property program during World War II. The
countries currently under full embargo controls, including an
assets freeze, under FAC administration are Cuba, North Korea,
Vietnam and Kampuchea, in addition to Libya. FAC also
administers a trade embargo against Nicaragua imposed by the
President on May 1 last year. Finally, the Office also
administers prohibitions imposed last fall on lending to South
African Government agencies and on imports of the South African
gold coin, the krugerrand.
The U.S. Customs Service
The Customs Service's primary role in this embargo is to
identify and prevent exportation or importation of goods which
are prohibited by the Libyan sanctions. Thus, for example,
Customs will detect, interdict and detain, for possible seizure
and forfeiture and imposition of penalties, any products of
Libyan origin which someone may attempt to import into the United
States. Similarly, Customs will be alert to interdict United
States exports, such as spare parts, which may be intended to
reach Libya either directly or through third country routing.
The Libyan Sanctions
The economic sanctions against Libya, including controls on
transactions involving Libya and a freeze on Libyan government
assets, were imposed by two successive Executive Orders, issued
on January 7 and 8.
The first, Executive Order No. 12543 of January 7, 1986,"
prohibited trade transactions, service contracts and travel
transactions. Specifically, it prohibited the following:
(a) the importation into the United States of any goods or
services of Libyan origin, other than publications and materials
imported for news publication or news broadcast journalism;
-3(b) the exportation to Libya of any goods, technology, or
services from the United States except publications and donations
of articles intended to relieve human suffering, such as food,
clothing, medicine and medical supplies intended strictly for
medical purposes;
(c) any transactions by a United States person relating to
transportation to or from Libya; the provision of transportation
to or from the United States by any Libyan person on any vessel
or aircraft of Libyan registration; or the sale in the United
States by any person holding authority under the Federal Aviation
Act of any transportation by air which includes any stops in
Libya;
(d) the purchase by any United States person of goods for
export from Libya to any country;
(e) the performance by any United States person of any
contract in support of an industrial or other commercial or
governmental project in Libya;
(f) the grant or extension of credits or loans by any United
States person to' the Government of Libya, its instrumentalities,
and controlled entities;
(g) any transaction by a United States person relating to
travel by any United States citizen or permanent resident alien
to Libya, or to activities by any such person within Libya, other
than transactions necessary to effect such person's departure
from Libya, or travel for journalism by persons regularly
employed in such capacity by newsgathering organizations; and
(h) any transactions by any United States person which
evades or avoids, or has the purpose of evading or avoiding, any
of the prohibitions described above.
On January 8, 1986, Executive Order No. 12544 was issued
prohibiting any transfer of property and interests in property of
the Government of Libya, its agencies, instrumentalities and
controlled entities (including the Central Bank of Libya) that
are in the United States, that come within the United States
after the date of the Executive Order, or that are or come within
the possession or control of U.S. persons, including overseas
branches of U.S. persons. This order had the effect of freezing
Libyan government assets in the United States.
On January 10, 1986, the Treasury Department's Office of
Foreign Assets Cotrol issued the Libyan Sanctions Regulations,
implementing the terms of Executive Order 12543 which imposed
trade and financial sanctions on Libya. The regulations were
amended on January 16, 1986, adding new provisions implementing
Executive Order No. 12544, which froze Libyan government assets.
The freeze on Libyan assets took effect immediately on
-4January 8, 1986. Also, certain provisions of the January 7
sanctions took effect immediately on January 7, namely, the
.prohibition on the extension of loans or credits to Libya and the
restrictions on transactions relating to travel. However, other
provisions of the January 7 sanctions, including the prohibition
on engaging in any contract in support of an industrial project
in Libya had a deferred effective date, namely, February 1.
Between January 7 and February 1 a number of U.S. companies,
including five oil companies, contacted the Treasury Department
and requested authorization to conduct an orderly winddown of
their Libyan operations extending after February 1.
After a number of meetings with the companies, careful review
of information submitted by them, and careful interagency review
within the Government, it was determined that affording the
companies a limited time after February 1 in which to close out
their Libyan involvement was most consistent with our objectives
of maximizing economic pressure on Libya without causing
excessive and unnecessary harm to U.S. business. On February 7,
the State and Treasury Departments announced that the following
principles would govern in implementation of the provision of the
Executive Orders for the divestiture of assets of U.S. companies
in Libya:
(A) As a general rule, all activities pursuant to contracts
an other arrangements between U.S. nationals and Libya were to be
terminated immediately.
(B) U.S. nationals owning assets in Libya would be free to
remove such property, where possible, or to sell it to Libya, to
Libyan nationals or, if the property is not for use in Libya, to
anyone else.
(C) in exceptional cases, where abandonment of contracts or
concessions would result in a substantial economic windfall to
Libya, limited extensions would be granted to companies to
prevent windfalls, on strict conditions.
To carry out these principles, the Treasury Department on
February 7, 1986, issued licenses to five American oil companies
to conduct an orderly termination of their Libyan operations.
The companies are Conoco, Amerada Hess, Occidental, Marathon, and
W.R. Grace. This process of the oil companies phasing out of
their Libyan business has been going forward and must be
completed by the end of June. The administration policy of
permitting the companies to remain in Libya up to this point has
avoided the catastrophic losses to the American companies and the
windfall to Qadhafi that a precipitous cutoff of U.S. operations
would have entailed.
Since the February licenses were issued, the U.S. companies
have not been permitted to operate the oil fields but only to
sell their share of the oil "at the flange" in Libyan ports.
Without their involvement, Libya could still have marketed the
-5oil and retained the oil companies' share of the profits.
Hasty U.S. action might have delivered the oil companies' assets
into the hands of Qadhafi as "abandoned" properties without his
having to take the politically and legally risky step of
"expropriation.
The licenses contain the following provisions. They:
a) authorize the sales of Libyan oil "at the flange" at
Libyan ports, provided the oil companies do not directly or
indirectly ship or distribute the crude oil;
b) direct the companies to terminate their involvement in
the operations of their oil-related business in Libya, and
dissolve any companies owned or controlled by them that operate
their concessions. The companies are also directed to ensure
that any successor operating companies will be Libya;
c) direct the companies to remove from Libya or sell any
property or assets that are located in Libya as soon as
practical. The Treasury Department must be notified in writing
both prior to any such sales and at the completion of any sales;
d) require that the net proceeds of the licensed operations
be placed in an escrow-type account and may be released only
pursuant to a Treasury license;
e) require that the companies undertake no new contracts or
agreements which would entail additional expenditures or otherwise expand their Libyan activities;
f) prohibit the exportation of U.S.-origin equipment,
technical data, or services to Libya by the companies; and
g) require every 30 days a report to the Treasury Department
detailing all transactions the companies engaged in pursuant to
the licenses.
The licenses have no specific termination dates as issued;
however, it was understood that they would probably be effective
for several months. Following the Tokyo Economic Summit, the
President announced that the oil companies would be required to
terminate their operations in Libya by June 30, 1986. We have
met with the companies to inform them of this decision and to
discuss the necessary revisions of the licenses.
No amendments
to the licenses have yet been issued.
Proposed amendments
requiring cessation of operations by June 30 are in the
interagency clearance process. Essentially the amendments will
require that the companies:
(1) suspend all operations in Libya by June 30, including
the distribution of equity oil;
(2) cease all involvement in their oil-related business in
-6Libya including any involvement in any companies owned or
controlled by them that operate their concessions;
(3) make no payments to Libya after June 30.
The exact wording of the licenses is still under discussion.
However, we expect to issue amendments to the oil company
licenses within the next week.
That concludes my prepared testimony. I would be happy to
answer your questions.
TREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
May 20, 1986
TREASURY TO AUCTION $7,750 MILLION
OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury will auction $7,750 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.
oOo
Attachment
B-589
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 5-YEAR 2-MONTH NOTES
TO BE ISSUED JUNE 3, 1986
May 20, 1986
Amount Offered:
To the public
$7,750 million
Description of Security:
Term and type of security
5-year 2-month notes
Series and CUSIP designation .... K-1991
(CUSIP No. 912827 TS 1)
Maturity Date
August 15, 1991
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 .,
February 15 and August 15 (first
payment on February 15, 1987)
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 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 institutions
f.. Acceptable
Key Dates:
Receipt of tenders
Wednesday, May 28, 1986,
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Tuesday, June 3, 1986
b) readily-collectible check .. Friday, May 30, 1986
TREASURY NEWS
apartment
of the Treasury • Washington, D.c. • Telephone
566-2041
FOR RELEASE AT 4:00 P.M.
May 20, 1986
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 May 29, 1986.
This offering
will provide about $125
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,271 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, May 27, 1986.
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
February 27, 1986, and to mature August 28, 1986
(CUSIP No.
912794 LB 8 ) , currently outstanding in the amount of $6,829 million,
the additional and original bills to be freely interchangeable.
183-day bills (to maturity date) for approximately $7,200
million, representing an additional amount of bills dated
November 29, 1985, and to mature November 28, 1986
(CUSIP No.
912794 KT 0) , currently outstanding in the amount of $9,064 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 May 29, 1986.
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 $2,078 million as agents for foreign and international monetary authorities, and $3,364 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-590
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
tenders.
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
fedoro.i n
-~
ncing bank
X
wD
O
co J1
WASHINGTON, D.C. 20220
fcOR IMMEDIATE RELEASE
FEDERAL FINANCING BANK
AC'L'IVLJL'Y
Francis X. Cavanaugh, Secretary, leaeral Financing
bank (FFB), announcea the following activity Cor the
month of March 1986.
FFB holdings o£ obligations issued, sold or guaranteed by other Federal agencies totaled $153.5 billion
on March 31, 1986, posting an increase of less than
$0.1 billion from the level on February 28, 1986. This
net change was the result of increases in holdings of
agency-guaranteed debt of $0.3 billion and in holdings
of agency assets of $0.1 billion while holdings of
agency debt issues declined by $0.4 billion. FFB made
385 disbursements during March.
Attached to this release are tables presenting FFB
March loan activity, commitments entered during March
and FFB holdings as of March 31, 1986.
# 0 #
B-591
JM
C£
CO
m
a.
LL
Page 2 of 10
FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
3/10/86
3/13/86
3/18/86
3/21/86
3/24/86
3/25/86
3/27/86
3/31/86
4/1/86
4/3/86
4/7/86
7.315%
7.195%
6.935%
6.955%
6.885%
6.765%
6.765%
6.725%
6.735%
6.735%
6.655%
3,000,000.00
3/1/96
8.255%
3/10
3/17
5,000,000.00
9,550,000.00
19,715,000.00
4/2/86
6/10/86
6/17/86
7.365%
6.945%
6.875%
3/31
81,142,814.85
6/30/86
6.655%
DATE
BORROWER
INTEREST
RATE
(otner than
semi-annual)
AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#582
#583
#584
#585
#586
#587
#588
#589
#590
#591
#592
3/4
3/6
3/10
3/13
3/18
3/21
3/21
3/24
3/27
3/27
3/31
$ 242,000,000.00
284,000,000.00
259,000,000.00
285,000,000.00
223,000,000.00
20,000,000.00
248,000,000.00
189,000,000.00
79,000,000.00
173,000,000.00
347,000,000.00
EXPORT-IMPORT BANK
Note #68
3/3
8.172% qtr.
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Note #388
+Note #389
+Note #390
3/3
UNITED STATES RAILWAY ASSOCIATION
*Note #33
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
1
Certificates of Beneficial Ownership
3/1
3/16
3/25
100,000,000.00
35,000,000.00
55,000,000.00
3/1/01
3/16/01
3/25/96
8.375%
8.055%
7.825%
100,500,000.00
346,900,000.00
4/1/86
3/31/16
6.655%
7.755%
292,577.83
211,950.00
9,495.49
189,234.90
1,250,536.00
1,418,299.01
17,200.00
4,220,812.00
7/25/92
6/15/12
3/31/94
9/15/95
3/20/96
4/15/14
5/15/91
3/20/96
7.905%
8.365%
8.205%
8.215%
8.199%
8.225%
7.655%
8.005%
RURAL ELECTRIFICATION ADMINISTRATION
Certificates of Beneficial Ownership
3/31
3/31
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Botswana 4
Greece 15
Morocco 9
Peru 9
Thailand 12
Egypt 6
Philippines 9
Thailand 12
+rollover
•maturity extension
3/3
3/3
3/3
3/3
3/3
3/5
3/5
3/5
8.550% ann.
8.217% ann.
7.978% ann.
Page 3 of 10
FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual
INTEREST
RATE
(other than
semi-annual)
Foreign Military Sales (Cont'd)
Tunisia 7
Greece 15
Cameroon 7
Turkey 18
Egypt 7
Turkey 17
Egypt 7
Morocco 13
Greece 14
Greece 15
Egypt 7
Morocco 11
Niger 2
Turkey 18
Greece 15
Peru 10
Turkey 17
Indonesia 10
Egypt 7
Jordan 11
Thailand 12
Egypt 7
Colombia 7
Egypt 6
Turkey 13
Cameroon 7
Greece 15
Israel 12
Egypt 7
Morocco 11
Morocco 12
Philippines 10
3/5
3/6
3/6
3/6
3/7
3/7
$ 72,086.00
1,214,258.91
589,333.84
455,775.00
7,366,801.38
137,109.53
939,348.45
69,063.23
3,421,600.00
1,422,815.38
363,385.87
69,407.25
89,306.54
1,652,218.54
34,921.80
35,034.58
295,385.77
3,577,837.82
1,339,330.42
7,799,660.04
2,835,112.00
1,946,592.17
1,770,711.30
203,726.12
2,288.46
253,974.48
386,749.21
100,000,000.00
2,248,595.04
67,017.45
20,625.00
20,589.47
9/15/96
6/15/12
3/26/91
3/12/14
7/31/14
11/30/13
7/31/14
5/31/96
4/30/11
6/15/12
7/31/14
9/8/95
10/15/10
3/12/14
6/15/12
4/10/96
11/30/13
3/20/93
7/31/14
11/15/92
3/20/96
7/31/14
9/5/91
4/15/14
3/24/12
3/26/91
6/15/12
8/5/11
7/31/14
9/8/95
9/21/95
7/15/92
7.930%
8.385%
7.340%
8.315%
8.355%
8.405%
8.295%
7.615%
8.215%
8.075%
8.145%
7.315%
7.325%
7.925%
7.995%
7.805%
8.125%
7.853%
8.145%
7.678%
7.892%
8.095%
7.286%
8.035%
8.065%
7.055%
7.995%
7.776%
7.965%
7.215%
7.545%
7.445%
3/10
3/14
3/18
3/18
3/18
3/18
3/18
3/19
3/24
3/31
3/31
3/31
3/31
11,857,000.00
2,514,938.40
620,000.00
3,073.18
178,246.17
1,157,159.80
282,300.00
1,600,721.00
727,542.00
188,000.00
1,979,921.36
162,876.20
170,000.00
386,460.00
210,355.00
171,000.00
800,000.00
3/1/87
3/1/91
8/1/86
8/1/86
7/15/86
8/1/86
5/1/87
8/1/86
2/17/87
3/1/88
8/15/86
8/1/87
1/2/04
5/1/87
6/2/86
11/3/86
8/1/86
7.555%
8.035%
7.215%
7.255%
6.995%
7.025%
7.185%
6.985%
7.145%
7.335%
7.015%
7.255%
8.020%
6.945%
6.655%
6.775%
6.685%
3/6
3/6
116,787,637.44
2,200,413.00
4/15/86
4/15/86
7.195%
7.195%
3/10
3/11
3/11
3/11
3/11
3/12
3/12
3/12
3/13
3/17
3/17
3/19
3/20
3/20
3/20
3/21
3/25
3/25
3/25
3/26
3/26
3/27
3/27
3/28
3/28
3/31
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
+Indianapolis, IN
Boston, MA
Springfield, MA
Mayaguez, PR
Pasadena, CA
Garden Grove, CA
Biloxi, MI
Garden Grove, CA
Sacramento, CA
Sacramento, CA
Santa Ana, CA
Mayaguez, PR
Baltimore, MD
Biloxi, MI
Council Bluffs, IA
Lincoln, NE
Long Beach, CA
3/3
3/3
3/5
3/6
DEPARTMENT OF THE NAVY
Ship Lease Financing
Lummus 1
Lummus Container
+rollover
7.697% ann.
8.196% ann.
7.314% ann.
7.261% ann.
7.470% ann.
7.387% ann.
8.181% ann.
7.066% ann.
6.808% ann.
Page 4 of 10
FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
AMOUNT FINAL INTEREST INTEREST
BORROWER
DATE
OF ADVANCE
MATURITY
RATE
(semiannual)
RATE
(other than
semi-annual)
Defense Production Act
Gila River Indian Community 3/26 $ 163,748.79 10/1/92 7.486% 7.417% qtr.
RURAL ELECTRIFICATION ADMINISTRATION
Saluda River Electric #271
3/3
•South Mississippi Electric #90 3/3
•United Power #139
3/3
•Saluda River Electric #186
3/3
•Saluda River Electric #186
3/3
Kamo Electric #209
3/3
*Soyland Power #105
3/5
•Sunflower Electric #174
3/5
Sitka Telephone #213
3/5
Allegheny Electric #255
3/5
•Tri-State G&T #79
3/6
*Tri-State G&T #79
3/6
•Tri-State G&T #79
3/6
•Tri-State G&T #79
3/6
*Tri-State G&T #79
3/6
•Oglethorpe Power #74
3/6
•Oglethorpe Power #150
3/6
•Oglethorpe Power #150
3/6
Seminole Electric #141
3/6
Western Illinois Power #160
3/10
•Colorado Ute Electric #71
3/10
•Deseret G&T #170
3/10
•Deseret G&T #170
3/10
•Deseret G&T #170
3/10
•Deseret G&T #170
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Deseret G&T #211
3/10
•Tex-La Electric #202
3/12
•Dairyland Power #54
3/12
Tex-La Electric #208
3/12
•Wabash Valley Power #104
3/12
•Wabash Valley Power #206
3/12
•Cajun Electric #197
3/12
•Wolverine Power #100
3/12
•Wolverine Power #101
3/12
•Wolverine Power #101
3/12
•Wabash Valley Power #104
3/12
•Wolverine Power #182
3/12
•Wolverine Power #183
3/12
•Brazos Electric #144
3/12
•Gulf Telephone #50
3/12
•Gulf Telephone #50
3/12
•South Mississippi Electric #90 3/13
•Cont. Tele, of Kentucky #115
3/13
•Western Illinois Power #99
3/14
Central Electric #248
3/17
•Tri-State G&T #177
3/17
•New Hampshire Electric #192
3/17
•maturity extension
1,279,000.00
709,000.00
3,650,000.00
2,565,000.00
4,907,000.00
4,200,000.00
9,554,000.00
42,300,000.00
670,000.00
933,000.00
1,109,000.00
3,599,000.00
888,000.00
997,000.00
336,000.00
12,990,000.00
259,148,000.00
16,204,000.00
14,426,000.00
514,000.00
2,920,000.00
1,378,000.00
1,417,000.00
695,000.00
294,000.00
21,565,000.00
4,915,000.00
1,232,000.00
31,781,000.00
5,089,000.00
4,671,000.00
13,752,000.00
7,210,000.00
32,490,000.00
4,449,000.00
22,243,000.00
21,332,000.00
780,000.00
2,100,000.00
842,000.00
7,021,000.00
524,000.00
40,000,000.00
839,000.00
1,073,000.00
40,000.00
5,530,000.00
3,420,000.00
4,362,000.00
4,165,000.00
544,000.00
230,000.00
1,297,000.00
3,000,000.00
2,245,000.00
1,513,000.00
279,000.00
1,380,000.00
1/2/18
12/31/12
1/3/17
1/3/17
1/3/17
1/3/17
12/31/14
1/3/17
12/31/20
12/12/20
12/31/13
12/31/13
12/31/13
12/31/13
12/31/13
12/31/14
12/31/14
12/31/14
3/31/88
12/31/20
3/10/88
12/31/15
12/31/15
12/31/14
12/31/19
12/31/19
12/31/19
12/31/19
1/3/17
1/3/17
1/3/17
1/3/17
V3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
12/31/14
12/31/20
3/12/88
3/12/88
3/13/89
12/31/12
12/31/12
12/31/12
12/31/14
1/3/17
1/3/17
1/3/17
12/31/14
12/31/14
12/31/12
12/31/14
V3/17
12/31/20
1/3/17
1/3/17
8.402%
8.349%
8.404%
8.404%
8.405%
8.404%
8.219%
8.222%
8.229%
8.229%
8.425%
8.425%
8.425%
8.425%
8.425%
8.424%
8.424%
8.424%
7.675%
8.309%
7.415%
8.317%
8.317%
8.321%
8.310%
8.310%
8.310%
8.310%
8.313%
8.313%
8.316%
8.316%
8.313%
8.316%
8.313%
8.313%
8.316%
8.087%
8.087%
8.087%
7.275%
7.275%
7.345%
8.039%
8.039%
8.039%
8.087%
8.087%
8.087%
8.087%
8.088%
8.088%
7.977%
8.055%
8.111%
8.097%
8.098%
8.098%
8.316% qtr.
8.264% qtr.
8.318% qtr.
8.318% qtr.
8.319% qtr.
8.318% qtr.
8.136% qtr.
8.139% qtr.
8.146% qtr.
8.146% qtr.
8.338% qtr.
8.338% qtr.
8.338% qtr.
8.338% qtr.
8.338% qtr.
8.337% qtr.
8.337% qtr.
8.337% qtr.
7.603% qtr.
8.224% qtr.
7.348% qtr.
8.232% qtr.
8.232% qtr.
8.236% qtr.
8.225% qtr.
8.225% qtr.
8.225% qtr.
8.225% qtr.
8.228% qtr.
8.228% qtr.
8.231% qtr.
8.231% qtr.
8.228% qtr.
8.231% qtr.
8.228% qtr.
8.228% qtr.
8.231% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
7.210% qtr.
7.210% qtr.
7.279% qtr.
7.960% qtr.
7.960% qtr.
7.960% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.008% qtr.
8.008% qtr.
7.899% qtr.
7.975% qtr.
8.030% qtr.
8.017% qtr.
8.018% qtr.
8.018% qtr.
Page 5 of 1C
FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
West Virginia Telephone #17 3/17 $ 32,000.00 3/17/88 7.315% 7.249% qtr.
•Colorado Ute Electric #203
3/17
1,030,000.00
3/17/88
7.315%
•N.E. Missouri Electric #217
3/17
2,009,000.00
V3/17
8.098%
•East Kentucky Power #188
3/17
9,307,000.00
1/3/17
8.098%
•Cajun Electric #76
3/18
50,000,000.00
12/31/14
8.143%
•East Kentucky Power #140
3/18
1,897,000.00
12/31/20
8.130%
•East Kentucky Power #291
3/18
751,000.00
12/31/15
8.139%
•Dairyland Power #54
3/19
2,011,000.00
3/20/89
7.415%
•Wabash Valley Power #206
3/19
837,000.00
3/19/88
7.365%
Oglethorpe Power #246
3/20
70,087,000.00
12/31/20
8.146%
•Plains Electric #158
3/20
402,000.00
V3/17
8.149%
•Plains Electric #158
3/20
10,000,000.00
1/3/17
8.147%
•Plains Electric #158
3/20
106,000.00
12/31/19
8.147%
•Plains Electric #158
3/20
23,000.00
1/3/17
8.087%
•Plains Electric #300
3/20
63,072,062.99
V3/17
8.087%
•Plains Electric #300
3/20
5,615,149.62
1/3/17
8.087%
•Plains Electric #300
3/20
6,887,370.07
V3/17
8.087%
•Plains Electric #300
3/20
505,763.78
1/3/17
8.087%
•Plains Electric #300
3/20
3,981,669.28
V3/17
8.087%
•Plains Electric #300
3/20
620,000.00
1/3/17
8.087%
•Plains Electric #300
3/20
727,136.00
V3/17
8.087%
•Dairyland Power #161
3/21
849,000.00
3/21/88
7.295%
•Cajun Electric #316
3/21
50,000,000.00
12/31/20
8.083%
•North Carolina Electric #185
3/24
13,916,000.00
12/3V15
8.141%
•North Carolina Electric #185
3/24
4,679,000.00
12/31/15
8.141%
•North Carolina Electric #185
3/24
6,160,000.00
12/3 V 1 5
8.141%
•North Carolina Electric #185
3/24
10,824,000.00
12/31/15
8.141%
•North Carolina Electric #185
3/24
19,610,000.00
12/3V15
8.141%
•North Carolina Electric #185
3/24
7,051,000.00
1/3/17
8.140%
•North Carolina Electric #185
3/24
13,097,000.00
1/3/17
8.140%
•North Carolina Electric #185
3/24
26,305,000.00
1/3/17
8.140%
•North Carolina Electric #185
3/24
7,000,000.00
1/3/17
8.140%
•North Carolina Electric #185
3/24
4,755,000.00
1/3/17
8.140%
•North Carolina Electric #185
3/24
7,517,000.00
1/2/18
8.138%
•North Carolina Electric #185
3/24
10,371,000.00
V2/18
8.138%
•North Carolina Electric #185
3/24
17,248,000.00
1/2/18
8.138%
•North Carolina Electric #185
3/24
34,471,000.00
1/2/18
8.138%
•North Carolina Electric #189
3/24
8,725,000.00
12/31/14
8.136%
•North Carolina Electric #268
3/24
7,207,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
10,520,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
33,677,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
7,462,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
9,188,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
34,996,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
5,461,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
12,308,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
26,001,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
11,932,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
10,753,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
8,079,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
28,191,000.00
V2/18
8.134%
•North Carolina Electric #268
3/24
7,521,000.00
1/2/18
8.134%
•North Carolina Electric #268
3/24
4,590,000.00
V2/18
8.134%
•Colorado Ute Electric #168
3/24
290,794.00
3/24/88
7.315%
•Western Farmers Electric #64
3/24
480,000.00
1/3/17
8.138%
•Western Farmers Electric #133 3/24
120,000.00
1/3/17
8.138%
•Western Farmers Electric #220 3/24
12,000,000.00
V3/17
8.138%
•East Kentucky Power #140
3/24
530,000.00
1/3/17
8.138%
•Old Dominion Electric #267
3/24
2,289,000.00
12/31/13
8.109%
•North Carolina Electric #268
3/24
17,210,000.00
1/2/18
8.134%
•Suqar Land Telephone #210
3/24
5,857,000.00
12/3V20
8.134%
•North Carolina Electric #185
3/25
7,630,000.00
12/3V15
8.041%
•maturity extension
7.249% qtr.
8.018% qtr.
8.018% qtr.
8.062% qtr.
8.049% qtr.
8.058% qtr.
7.348% qtr.
7.298% qtr.
8.065% qtr.
8.068% qtr.
8.066% qtr.
8.066% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
8.007% qtr.
7.230% qtr.
8.003% qtr.
8.060% qtr.
8.060% qtr.
8.060% qtr.
8.060% qtr.
8.060% qtr.
8.059% qtr.
8.059% qtr.
8.059% qtr.
8.059% qtr.
8.059% qtr.
8.057% qtr.
8.057% qtr.
8.057% qtr.
8.057% qtr.
8.055% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
8.053% qtr.
7.249% qtr.
8.057% qtr.
8.057% qtr.
8.057% qtr.
8.057% qtr.
8.028% qtr.
8.053% qtr.
8.053% qtr.
7.962% qtr.
Page 6 o: FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
12/31/15
12/31/15
12/31/15
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/2/18
3/31/88
3/26/88
3/26/88
1/2/18
12/31/20
12/31/20
12/31/15
12/31/20
1/2/18
1/2/18
1/2/18
1/2/18
12/31/10
12/31/10
12/31/10
12/31/10
12/3V10
12/31/15
12/31/15
12/31/15
3/31/88
3/31/68
3/31/88
3/31/88
3/31/88
3/31/88
3/31/88
3/31/88
12/31/13
12/31/14
12/31/14
12/31/14
1/3/17
12/31/14
12/31/14
12/31/14
12/31/14
1/3/17
1/3/17
1/3/17
12/31/14
12/31/14
12/31/14
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
1/3/17
8.041%
8.041%
8.041%
6.040%
8.040%
8.040%
8.040%
8.039%
8.039%
8.039%
8,036%
7.251%
7.245%
7.245%
7.960%
7.767%
7.767%
7.764%
7.767%
7.763%
7.763%
7.767%
7.767%
7.701%
7.701%
7.701%
7.701%
7.701%
7.764%
7.764%
7.764%
7.159%
7.160%
7.159%
7.159%
7.162%
7.162%
7.162%
7.161%
7.715%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.765%
7.766%
7.765%
7.765%
7.765%
7.766%
7.766%
INTEREST
RATE
(otner tnan
semi-annual,
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•Nortn Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #286
•Colorado Ute Electric #78
•Colorado Ute Electric #96
•Colorado Ute Electric #203
•North Carolina Electric #268
Deseret G&T #170
Deseret G&T #211
Kamo Electric #266
South Texas Electric #200
Western Illinois Power #294
Soyland Power #293
New Hampshire Electric #270
Central Electric #248
•S. Mississippi Electric #3
•S. Mississippi Electric #3
•S. Mississippi Electric #3
•S. Mississippi Electric #3
•S. Mississippi Electric #3
•East Kentucky Power #73
•East Kentucky Power #73
•East Kentucky Power #73
•Colorado Ute Electric #78
•Colorado Ute Electric #78
•Colorado Ute Electric #78
•Colorado Ute Electric #78
•Tri-State G&T #89
•Tri-State G&T #89
•Tri-State G&T #89
•Southern Illinois Power #38
•Allegheny Electric #93
•Big Rivers Electric #58
•Big Rivers Electric #58
•Big Rivers Electric #58
•Big Rivers Electric #58
•Big Rivers Electric #65
•Big Rivers Electric #91
•Big Rivers Electric #91
•Big Rivers Electric #91
•Big Rivers Electric #91
•Big Rivers Electric #91
•Big Rivers Electric #91
•Big Rivers Electric #136
•Big Rivers Electric #136
•Big Rivers Electric #136
•Big Rivers Electric #136
•Big Rivers Electric #136
•Big Rivers Electric #136
•Big Rivers Electric #136
•Big Rivers Electric #143
•Big Rivers Electric #143
•Big Rivers Electric #143
•Big Rivers Electric #143
•Big Rivers Electric #179
•maturity extension
3/25
3/25
3/25
3/25
3/25
3/25
3/25
3/25
3/25
3/25
3/25
3/26
3/26
3/26
3/27
3/28
3/28
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
$ 4,561,000.00
2,850,000.00
2,788,000.00
20,247,000.00
5,380,000.00
8,729,000.00
25,153,000.00
7,049,000.00
9,312,000.00
1,516,000.00
29,714,000.00
2,989,000.00
474,000.00
2,714,000.00
2,877,000.00
571,000.00
2,556,000.00
4,162,000.00
302,000.00
16,186,000.00
26,216,000.00
3,530,000.00
667,000.00
2,701,416.64
2,475,000.00
3,419,166.63
1,851,666.70
114,583.31
8,534,743.95
292,753.60
487,922.70
4,157,875.03
2,570,575.03
614,000.03
717,799.97
8,666,625.00
7,698,255.00
9,041,940.00
300,000.00
3,141,000.00
521,000.00
20,000.00
738,000.00
764,000.00
138,000.00
2,846,000.00
4,683,000.00
2,415,000.00
46,000.00
1,191,000.00
1,483,000.00
67,000.00
560,000.00
193,000.00
20,000.00
457,000.00
16,000.00
509,000.00
91,000.00
129,000.00
367,000.00
167,000.00
24,500,000.00
7.962% qtr.
7.962% atr.
7.962% qtr.
7.961% qtr.
7.961% qtr.
7.961% qtr.
7.961% atr.
7.960% qtr.
7.960% qtr.
7.960% qtr.
7.957% qtr.
7.186% qtr.
7.161% atr.
7.161% qtr.
7.882% qtr.
7.693% qtr.
7.693% qtr.
7.690% ctr.
7.693% atr.
7.689% ctr.
7.689? qtr.
7.693% atr.
7.693% qtr.
7.628% qtr.
7.628% qtr.
7.628% qtr.
7.628% qtr.
7.628% qtr.
7.690% qtr.
7.690% qtr.
6.690% qtr.
7.096% atr.
7.097? qtr.
7.096% qtr.
7.096% qtr.
7.099% qtr.
7.099% qtr.
7.099% qtr.
7.098% qtr.
7.642% atr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% atr.
7.691% qtr.
7.691% atr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.691% qtr.
7.692% qtr.
7.691* qtr.
7.691% qtr.
7.691* qtr.
7.692% ctr.
7.692? qtr.
Page 7 of 1FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
INTEREST
RATE
RATE
(other than
(semisemi-annual)
annual)
'ION ((:ont'd)
•Big Rivers Electric #179
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•North Carolina Electric #185
•Cajun Electric #263
•Brazos Electric #108
•Brazos Electric #230
•Vermont Electric #193
•Glacier Highway Electric #262
•Tel. Ut. of E. Oregon #256
•Old Dominion Electric #267
•Old Dominion Electric #267
•Old Dominion Electric #267
•Sunflower Electric #63
•Kansas Electric #216
•Kansas Electric #216
•Corn Belt Power #138
•Saluda River Electric #271
•Tex-La Electric #208
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
3/31
5,555,000.00
396,460,000.00
7,566,000.00
2,925,000.00
7,084,000.00
14,285,000.00
8,865,000.00
26,472,000.00
55,000,000.00
249,000.00
8,154,000.00
4,880,000.00
494,000.00
1,686,000.00
1,247,474.72
828,131.28
5,262,424.24
432,000.00
4,573,000.00
1,502,000.00
200,000.00
11,507,000.00
5,056,000.00
V3/17
12/31/15
12/31/15
1/3/17
V3/17
1/3/17
V3/17
1/3/17
V3/17
V3/17
V3/17
1/3/17
V3/17
1/3/17
12/31/13
12/31/13
12/31/13
12/31/13
1/3/17
1/3/17
V3/17
1/2/18
12/31/20
7.766%
7.765%
7.765%
7.765%
7.765%
7.766%
7.766%
7.766%
7.748%
7.766%
7.766%
7.766%
7.766%
7.766%
7.737%
7.737%
7.737%
7.764%
7.766%
7.766%
7.766%
7.764%
7.767%
3/1/01
3/1/01
3/1/01
3/V01
3/1/01
3/1/01
3/1/01
3/V01
3/1/01
3/1/01
3/1/01
3/V01
3/1/01
3/V01
3/1/01
3/V01
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/V06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/V06
3/1/06
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.112%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
Lorain 503 Development Corp.
3/5
Wilmington Indus. Dev. Corp.
3/5
B.D.C. of Nebraska, Inc.
3/5
Hamilton County Dev. Co., Inc. 3/5
St. Louis County L.D. Co.
3/5
Iowa Business Growth Co.
3/5
Empire State C D . Corp.
3/5
S.C. Kansas Dev. Dis., Inc.
3/5
Capital Efc. Dev. Corp.
3/5
St. Louis County L.D. Co.
3/5
Indiana Statewide C D . Corp.
3/5
San Diego County L.D. Corp.
3/5
Hamilton County Dev. Co., Inc. 3/5
Indiana Statewide C D . Corp.
3/5
Washington Community Dev. Corp.3/5
Long Island Dev. Corp.
3/5
Nine County Dev., Inc.
3/5
Dev. Corp. of Middle Georgia
3/5
N. Virginia L.D. Co., Inc.
3/5
Rural Enterprises, Inc.
3/5
Nevada State Dev. Corp.
3/5
Wilmington Indus. Dev., Inc.
3/5
Hamilton County Dev. Co., Inc. 3/5
Topeka/Shawnee County Dev. Corp3/5
Nevada State Dev. Corp.
3/5
St. Louis Local Dev. Co.
3/5
Catawba Regional Dev. Corp.
3/5
Hamilton County Dev. Co., Inc. 3/5
Corp. for Bus. Asst. in NJ
3/5
Indiana Statewide C D . Corp.
3/5
Nevada State Dev. Corp.
3/5
Ark-Tex Reg. Dev. Co., Inc.
3/5
Verd-Ark-Ca Dev. Corp.
3/5
Birmingham City Wide L.D. Co. 3/5
Evergreen Community Dev. Assoc.3/5
Metropolitan Growth & Dev. Co. 3/5
•maturity extension
45,000.00
51,000.00
54,000.00
76,000.00
83,000.00
101,000.00
147,000.00
173,000.00
184,000.00
208,000.00
210,000.00
211,000.00
291,000.00
415,000.00
500,000.00
500,000.00
25,000.00
43,000.00
44,000.00
45,000.00
48,000.00
52,000.00
71,000.00
74,000.00
86,000.00
88,000.00
89,000.00
100,000.00
101,000.00
105,000.00
107,000.00
108,000.00
113,000.00
114,000.00
116,000.00
120,000.00
7.692%
7.691%
7.691%
7.691%
7.691%
7.692%
7.692%
7.692%
7.674%
7.692%
7.692%
7.692%
7.692%
7.692%
7.664%
7.664%
7.664%
7.690%
7.692%
7.692%
7.692%
7.690%
7.693%
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
qtr
Pa - = o;
FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
3/1/06
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.216%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
8.271%
State & Local Development Company Debentures (Cont'd)
130,000.00
Dallas Sm. Bus. Corp., Inc.
3/5
130,000.00
E.C.I.A. Bus. Growth, Inc.
3/5
132,000.00
South Shore Ec. Dev. Corp.
3/5
139,000.00
Region E. Development Corp.
3/5
157,000.00
Dallas Sm. Business Corp., Inc.3/5
158,000.00
Empire State C D . Corp.
3/5
160,000.00
The Mid-Atlantic C D . Co.
3/5
166,000.00
Massachusetts C D . Corp.
3/5
172,000.00
S.W. Pennsylvania E.D. Dist.
3/5
180,000.00
Caprock L.D. Co.,
3/5
185,000.00
Commonwealth S.B.D. Corp.
3/5
200,000.00
S.W. Pennsylvania E.D. Dist.
3/5
226,000.00
Birmingham City Wide L.D. Co. 3/5
227,000.00
N. Texas C D . Corp.
3/5
229,000.00
S.W. Pennsylvania E.D. Dist.
3/5
239,000.00
Granite State Ec. Dev. Corp.
3/5
249,000.00
N. Virginia L.D. Co., Inc.
3/5
252,000.00
Long Island Dev. Corp.
3/5
267,000.00
W. C. Arkansas P&D Dist., Inc. 3/5
270,000.00
Monroe County Indus. Dev. Corp.3/5
273,000.00
Pocono N.E. Enterprise Dev Corp3/5
282,000.00
Lake County Ec. Dev. Corp.
3/5
365,000.00
Long Island Dev. Corp.
3/5
367,000.00
Empire State C D . Corp.
3/5
388,000.00
Urban Business Dev. Corp.
3/5
461,000.00
Colunbus Countywide Dev. Corp. 3/5
500,000.00
Wisconsin Bus. Dev. Fin. Corp. 3/5
500,000.00
Indiana Statewide C D . Corp.
3/5
500,000.00
Arizona Enterprise Dev. Corp. 3/5
43,000.00
River East Progress, Inc.
3/5
58,000.00
MSP 503 Dev. Corp.
3/'5
74,000.00
Capital Region Bus. Corp.
3/5
92,000.00
Panhandle Area Council, Inc.
3/5
109,000.00
Central California C D . Corp. 3/5
113,000.00
Warren Redev. & Planning Corp. 3/5
114,000.00
Montgomery County B.D. Corp.
3/5
130,000.00
La Habra L.D. Co., Inc.
3/5
D8,000.00
San Diego County L.D. Corp.
3/5
147,000.00
Worcester Bus. Dev. Corp.
3/5
153,000.00
Alabama Community Dev. Corp.
3/5
159,000.00
Wilmington Indus. Dev. Corp.
3/5
160,000.00
St. Louis Local Dev. Co.
3/5
170,000.00
St. Louis Local Dev. Co.
3/5
257,000.00
Granite State Ec. Dev. Corp.
3/5
264,000.00
Phoenix Local Dev. Corp.
3/5
315,000.00
St. Louis Local Dev. Co.
3/5
340,000.00
Southern Nevada C D . Co.
3/5
367,000.00
South Shore Ec. Dev. Corp.
3/5
368,000.00
St. Louis County L.D. Co.
3/5
479,000.00
Wilmington Indus. Dev., Inc.
3/5
493,000.00
Androscoggin Valley C. of Gs. 3/5
500,000.00
N. Virginia L.D. Co., Inc.
3/5
Small Business Investment Company Debentures
Marcon Capital Corporation 3/19 150,000.00
Bancorp Hawaii SBIC, Inc.
3/19
500,000.00
Bancorp Venture Capital, Inc. 3/19
2,250,000.00
Domestic Capital Corporation
3/19
1,000,000.00
Intemountain Ventures, Ltd.
3/19
1,250,000.00
Jupiter Partners
3/19
1,000,000.00
RIHT Capital Corporation
3/19
1,000,000.00
3/VH
3/1/11
3/VH
3/1/11
3/VH
3/1/11
3/V11
3/1/11
3/1/H
3/1/11
3/1/11
3/1/11
3/1/11
3/1/11
3/VH
3/1/11
3/VH
3/1/11
3/VH
3/1/11
3/VH
3/1/11
3/1/93
3/VH
3/1/96
3/1/96
3/1/96
3/1/96
3/1/96
3/1/96
7.795%
7.895%
7.895%
7.895%
7.895%
7.895%
7.895%
INTEREST
RATE
(other than
semi-annual;
i-age -) or
FEDERAL FINANCING BANK
MARCH 1986 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
DATE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
Small Business Investment Company Debentures (Cont'd)
Retzloff Capital Corporation
Ritter Partners
Unicorn Ventures, Ltd.
3/19
3/19
3/19
$ 2,000,000.00
1,000,000.00
500,000.00
7.895%
7.895%
7.895%
3/1/96
3/1/96
3/1/96
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
634,012,613.97
+Note A-86-06 3/31
6/30/86
6.655%
+rollover
FEDERAL FINANCING BANK
MARCH 1986 Commitments
BORROWER
Baltimore, MD
Fulton, GA
Greeley, CO
Ind ianapoli s, IN
Lincoln, NE
Long Beach, CA
Mayaguez, PR
Newport News, VA
Philadelphia, PA
Ponce, PR
Provo, UT
Tacama, WA
Winston-Salem, NC
GUARANTOR
AMOUNT
COMMITMENT
EXPIRES
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
HUD
$ 805,000.00
600,000.00
700,000.00
14,424,571.00
1,000,000.00
5,000,000.00
2,785,000.00
3,848,115.00
707,110.00
6,820,000.00
942,583.00
173,990.00
2,198,000.00
1/2/88
1/5/87
11/1/86
3/1/87
10/1/87
8/1/87
8/1/87
2/15/87
10/1/87
10/1/87
8/1/86
10/15/87
8/1/87
MATURITY
1/2/04
1/5/87
11/1/86
3/1/87
10/1/87
8/1/87
8/1/87
2/15/87
10/1/03
10/1/87
8/1/86
10/15/03
8/1/87
Ifege 10 of 10
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
Net Change
3/1/86-3/31/86
Net Change—FY 1986
10/1/85-3/31/86 _
March 31, 198b
February 28, 1986
$ 15.250.1
223.0
14,649.0
1,690.0
73.8
$ 15,670.3
225.8
14,673.0
1,690.0
73.8
$ -420.2
-2.9
-24.0
-0-0-
-159.0
0.8
268.0
-0-0-
63,464.0
105.9
122.1
63,774.0
105.9
122.1
-310.0
-0-0-0447.4
-0.6
-705.0
-3.3
-0.7
-2.7
447.4
-3.5
Agency Debt
Export-Import Bank
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
U.S. Railway Association
Agency Assets
Fanners Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
3.4
3.4
4,171.7
29.4
3,724.3
30.0
18,584.3
5,000.0
297.)
32.2
2,ill.4
405,3
34.7
27.8
887.6
1,588.6
18,542.4
5,000.0
288.7
32.2
. 2,111.4
405.3
35.1
27.8
887.6
1,469.6
Government-Guaranteed Lending
DOD-Foreign Military Sales
UEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
CIIUD-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-Sfliall Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Soct ion 51!
IX M'-V*V\'I7\
T(/TAI;
•figures may not total due to rounding
20,958.8
1,051.0
703.6
1,742.3
63.7
177.0
60.0
20,739.0
1,059.8
688.5
1,728.5
65.6
177.0
41.9
-08.4
-0-0-0-0.5
-0-0119.0
0.2
-60.0
219.8
-8.8
15.2
13.9
-1.9
-0-
495.7
-07.7
-1.3
-34.7
-3.1
-0.5
-0.4
-0275.5
1.6
-60.0
-716.8
27.1
108.0
90.9
-89.9
-0-
$ 15 3,455.3
$ 153,418.4
$ 36.8
$ -58.0
7.5
-0-
7.3
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 2-YEAR NOTES
May 21, 1986
The Department of the Treasury has accepted $9,811 million
of $35,599 million of tenders received from the public for the
2-year notes, Series Z-1988, auctioned today. The notes will be
issued June 2, 1986, and mature May 31, 1988.
The interest rate on the notes will be 7-1/8%. The range of
accepted competitive bids, and the corresponding prices at the 7-1/8%
interest rate are as follows:
Yield Price
Low
7.20%
9h
7.20%
Average
7.20%
Tenders at the high yield were allotted 81%.
Hi
99.863
99.863
99.863
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
$
110,335
32,024,415
27,785
80,520
94,795
54,205
1,477,565
105,310
51,510
129,655
17,855
1,418,970
6,160
$35,599,080
Accepted
$
27,335
9,156,505
27,785
45,520
48,795
35,205
152,565
99,310
41,510
122,655
17,855
29,970
6,160
$9,811,170
The $9,811 million of accepted tenders includes $773
million of noncompetitive tenders and $9,038 million of competitive tenders from the public.
In addition to the $9,811 million of tenders accepted in
the auction process, $378 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $644 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-592
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
For: Immediate Release
May 22, 1986
Contact:
Charlie Powers
566-8773
TREASURY DEPARTMENT ASSESSES PENALTY AGAINST
WELLS FARGO BANK UNDER BANK SECRECY ACT
The Department of the Treasury announced today that
Wells Fargo Bank, San Francisco, has agreed to a settlement that
requices the bank to pay a civil penalty of $75,000 for failure
to report in excess of 300 currency transactions as required by
the Bank Secrecy Act.
Francis A. Keating, II, Assistant Secretary (Enforcement),
who announced the penalty, said the penalty represented a
complete settlement of Wells Fargo's civil liability for these
violations. Keating said that Wells Fargo came forward
voluntarily, cooperated fully with Treasury in developing the
scope of its liability, and has instituted measures to ensure
full compliance with the Bank Secrecy Act in the future.
The Department of the Treasury has no evidence that Wells
Fargo engaged in any criminal activities in connection with these
reporting violations. The violations were not systemic, but
limited to certain types of transactions by certain units of the
bank.
#H
B-593
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-204
FOR IMMEDIATE RELEASE
May 22, 1986
CONTACT: CHARLEY POWERS
Phone: (202) 566-8773
TREASURY ANNOUNCES PENALTY AGAINST
SECURITY PACIFIC NATIONAL BANK
The Department of the Treasury today announced that Security
Pacific National Bank, Los Angeles, has agreed to pay a civil
penalty of $605,000 for violations of the Bank Secrecy Act. The
violations consist of failures to file Currency Transaction
Reports for cash transactions exceeding $10,000, as required
under the Act. This represents a complete settlement of Security
Pacific National Bank's civil liability under the Act.
The penalty was based on over 2,400 violations by Security
Pacific. Based on the compliance review done by Security
Pacific, examinations by the Comptroller of the Currency and a
review of the bank's compliance history, Treasury is confident
that the penalty amount is appropriate. Security Pacific has
agreed to review further cash transactions and to late-file
additional Currency Transaction Reports as required by Treasury.
Treasury has no information that the bank engaged in
criminal activity in connection with these violations. Security
Pacific cooperated in developing the scope of its liability and
has taken measures to assure good future compliance.
The penalty was announced by Francis A. Keating, II,
Assistant Secretary for Enforcement. Mr. Keating said, "We
continue to encourage financial institutions to come forward to
Treasury with information regarding past non-compliance with the
Bank Secrecy Act. Treasury has not yet closed the door to
volunteers. Mere late-filing of Currency Transaction Reports
with the Internal Revenue Service without further communication
with Treasury is not adequate notice to Treasury of past
non-compliance."
"Treasury is now turning its attention to identifying banks
with past violations which have not come forward to Treasury
voluntarily. Such banks will be dealt with subtantially more
severely."
Tn the last year, over sixty banks have come forward to
Treasury to discuss past Bank Secrecy Act non-compliance. Since
June 1985, seventeen other banks have been penalized in amounts
ranging from $75,000 to $4.75 million. The cases of other banks
are under review.
B-594
FREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
Text as Prepared
Embargoed for 8:00 p.m. EDT Delivery
Remarks by Secretary of Treasury
James A. Baker, III
To the John F. Kennedy School of Government
Public Affairs Forum
Harvard University
Boston, Massachusetts
Thursday, May 22, 1986
Thank you Dean Allison, ladies and gentlemen, faculty and
students of Harvard University. I am very pleased to be here
tonight and deeply gratified to accept the Honorary Medal for
Distinguished Public Service. If there is anything that Harvard
represents, it is achievement in the public sector.
In my own years in public service I have been privileged to
serve two U.S. Presidents. And so I have had the opportunity to
observe the modern American Presidency at close range — and to
develop some opinions about that office that I would like to
share with you tonight. In doing so I will touch on what I think
are some of the elements necessary for the making of a strong
Presidency, and why the strength of this political institution is
important to the nation.
One of the keenest observers of the Presidency (whom I was
fortunate enough to know through three campaigns) was Teddy White
— a son of Massachusetts and Harvard who I know we all will
miss. In The Making of the President 1960, the first of five
books on America's electoral process, White's concluding chapter
reflects on an interview with the new young President about the
unique requirements of that office. "The essence of leadership,"
wrote White, is whether the President "is moved by other people
and outer forces or [whether, he] moves them." He added: "A
President governing the United-States can move events only if he
can first persuade."
B-595
-2The inauguration of John F. Kennedy seemed to initiate a new
era for the American Presidency — and the nation. We were at
peace and relatively prosperous, yet he emerged on the national
scene determined to provide vigorous national leadership to
confront our problems.
At the same time another force that would have a profound
effect on the institution of the Presidency also came on the
political stage. In fact it would come more and more to shape
the script and actors of governance, and that was television.
When Kennedy campaigned in the early primaries, the pencil
press that followed him was sometimes joined by a cumbersome
network quartet of producer, reporter, soundman, and cameraman,
the curiously new participants on the campaign trail.
That same year television also played a key role in the
advent of 20th century mass democracy — the televised political
debates. With their phenomenally high ratings these contests (it
can be fairly said) gave the more skillful communicator, Kennedy,
a boost that carried him to victory a few weeks later. What
struck White most about the first encounter was not Kennedy's
response to any specific question, but the effectiveness with
which he communicated his vision for the future.
Once in office he mastered the new medium by being the first
President to allow his press conferences to be televised live,
satisfying the thirst of the new medium for drama on the national
scene. His performances seemed to cement Americans' impression
of him as the President who would lead and offer movement to a
nation with seemingly unbridled prospects for growth and
prosperity. Regrettably, events overtook our optimism.
By 1968 White commented in his third book on the presidential
election process that President Johnson had "left behind a
tradition of distrust in leadership, a repudiation of the
presidential capacity unmatched, emotionally, since the
repudiation of Herbert Hoover."
At the risk of oversimplifying, a credibility gap had taken
hold of the Johnson Presidency engulfing his domestic and foreign
initiatives. His vision for a harmonious "Great Society" was
cracked by discordant riots in our cities and a new dissent on
our campuses. His pronouncements that the Vietnam War was going
well were repudiated by the reality of an escalating conflict.
And reflecting all of this was television, which had become,
White wrote, the primary vehicle "for the new court of high
criticism" of the Presidency. Many tests faced the next
President, turmoil in the cities, social unrest, the war, but
White thought Richard Nixon's real challenge would be to restore
"the confidence of millions of Americans who no longer trust any
government of the United States." This would only happen, White
predicted, if the new president could convey his vision of
conciliation to the nation.
-3But none of Nixon's accomplishments at home or abroad could
offset the verdict of two summers' congressional hearings
televised daily and nightly into America's homes. The office of
the President had reached its lowest ebb. From a time when we
once revered the image of Camelot at the White House, "imperial"
had become a pejorative when used to describe our highest
elective office. President Ford restored confidence and trust in
the chief executive's post, but in the aftermath of Watergate,
instead of turning to a strong Presidency in the next election,
we looked to a different kind of Presidency.
The early Carter Presidency was a time of national catharsis.
He scorned the customary limousine and walked with his family to
the White House after his inauguration. When he greeted his
first official audience at the White House, the ceremonial
ruffles and flourishes was not played. Initially, the press
applauded President Carter for "denoblizing" the presidency,
stripping it of its pomp. The Carter Administration made the
White House and the Presidency more ordinary and less mystifying,
and removed any sense of awe and majesty from the Oval Office.
All of this, it seems, reflected the distaste for leadership
that Americans had developed in the aftermath of Watergate and
Vietnam. Accompanying (and perhaps feeding) this syndrome, was
an increasingly popular tendency to denigrate the Presidency. It
would reach its zenith in the Carter years.
Professor Henry Graff of Columbia University has noted how
Lyndon Johnson, "the ablest congressional politician of this
century, was somehow changed perceptually into a riverboat
gambler unworthy of his high place," how Gerald Ford, "the best
athlete ever to sit in the Oval Office, became a caricaturist's
delight as an oafish stumblebum," and how Jimmy Carter, having
been elected as "the outsider brought in to straighten out the
mess, became a failure because he was not an insider."
During this period (from President Johnson to President
Carter) at the other end of Pennsylvania Avenue, significant
changes had taken place since the last Democratic administration
that altered the environment for presidential persuasion, the
critical tool of presidential power.
On Capitol Hill the overwhelming majority of congressional
reforms were intended to provide more opportunities for more
members to express themselves in the legislative process and not
to enhance the integration of policy. Autocratic committee
chairmen were overthrown in the caucus and subcommittee
chairmanships had grown by more than 50 percent in the Senate and
the House since Lyndon Johnson had left the White House.
-4Even with partisan control of the Congress a master
technician like Johnson often found his will thwarted. He wrote
in his presidential memoir, Vantage Point, about the limits to
his power to force congressional compliance drawing on his
experience in the Texas State Legislature.
It seems that a state senator named Alvin Wirtz arranged a
meeting between Johnson and some private utility company owners
to try and persuade them to make electrical power available to
small farmers. During the course of their discussions Johnson
was angered by one of the company presidents and told the man to
"go to hell." The meeting broke up but later Senator Wirtz
called Johnson aside and said: "Listen Lyndon, I've been in this
business for a long time.... If I have learned anything at all
in these years, it is this — you can tell a man to go to hell,
but you can't make him go." That bit of advice was offered to
Johnson in 1937. He never forgot it.
In Vantage Point Johnson described how he thought about
Senator Wirtz's advice many times during his Presidency when he
was locked in a struggle with the House or Senate. "no matter
how many times I told Congress to do something," wrote Johnson,
"I could never force it to act."
The Presidency is an office held to high expectations. Yet
the framers of the Constitution were determined that the
President should not command Congress. Our chief of state has
fairly modest and much-checked formal powers but, as your
distinguished presidential scholar Dick Neustadt has observed,
great resources for leadership by "persuasion." He must use
those resources skillfully in order to secure the broad approval
of the public and support from the political community —
especially Congress — or he will be ineffective.
Now admitting my own bias and prejudice, I think that the
perceived failure of the Carter Presidency, and conversely the
success of Ronald Reagan's, center on their different attitudes
towards governance.
President Carter's first hundred days certainly rivaled FDR's
in number of initiatives. He sent a massive and far-reaching
collection of complex legislation to Capitol Hill, including a
tax cut bill, a major budget revision, executive reorganization
authority, establishment of the new Energy Department, and
packages for welfare, labor and social security reform, among
others. Yet with the possible exception of the energy plan,
there was no focal point for his Presidency to rally around, no
vision of what his priorities were.
-5A kind of legislative "gridlock" resulted on Capitol Hill.
Few of President Carter's proposals were even moved to the floor
for consideration. And the President himself sent confusing
signals to lawmakers. He abruptly withdrew the $50 personal
rebate as part of his tax cut package without forewarning
congressional leaders and some in his own administration.
Congress was overloaded, the public was confused and
disinterested.
The failure to establish an agenda was a strategic mistake on
President Carter's part, but there were tactical ones as well.
Much has been written about his perceived inability to negotiate
effectively with Congress. Some said he handled the Congress
with the same detached coolness that he accorded the Georgia
State Legislature. And that he was less than a forceful
communicator. One observer noted: "Carter blew the trumpet,
yelled 'Charge' and [then]... nothing."
But perhaps the most fundamental flaw in the Carter
Presidency was the philosophical premise that the task of
governing can be achieved with a technocratic approach to problem
solving. This is the idea that every public policy issue can be
resolved with a specific plan or program, and that the activist
President is the technocratic manager of a complex set of
interrelated policies. Whatever appeal this may have to social
scientists, it is of little help in the practical aspects of
governing.
As opposed to being seen as a leader with a vision and
effective capacity, President Carter was diminished by his
approach to governance. He himself correctly lamented the
problem towards the end of his term in the famous "malaise"
speech: What you see in Washington he said: "is a system of
governance incapable of action.... Often you see paralysis and
drift. . . ."
The elements of this crisis can be seen in the contradiction
between the objectives of President Carter's government by
technocratic management and the forces that accompanied his rise
to power. The powers of the Presidency had been so degraded by
the time he took office, that Carter did not command the respect
and deference normally accorded a President.
And the reform impulse in Congress, the diffusion of power
with the proliferation of subcommittees and the weakening of the
congressional leadership expanded the opportunities for interest
groups with inimical goals to influence the lawmakers.
As Teddy White observed*: ."President Carter... insisted on
keeping, all his promises at once, which left him exposed to all
those with leverage in the offices of congressmen elected to
represent their interests."
-6In response to this situation, a consensus among our elites
began to develop that the structural design of government was
inadequate to meet the tasks of governing. It was said that the
President's personal and political resources were insufficient to
overcome the fragmentation and disarray inherent in the American
separation of powers.
President Carter's White House Counsel argued while his chief
was still in office that the formal institutional resources for
executive leadership were so insufficient that the Carter
Presidency could not succeed. "In parliamentary terms, one might
say that under the U.S. Constitution it is not now feasible to
"form a government," he wrote in Foreign Affairs magazine.
Unfortunately, he said, no recent President had been able
to get his programs through Congress in anything approaching
coherent form. The United States, he suggested, needed to go to
a parliamentary type of government to end this
executive-legislative deadlock.
This was not the first time that structural reform was
advised for the Presidency. Limiting the President to a single
six-year term was discussed at the Constitutional Convention and
proposed to Congress as a constitutional amendment as early as
1826! Proponents have reintroduced this measure into Congress
more than 100 times since then, arguing that the President should
be released from the constraints of seeking re-election.
More recently we've heard that our problems are too big for
partisan control of the executive branch and that some form of
coalition government should be considered.
I think we should question such proposals. When political
institutions, like the Presidency, maintain relatively popular
support for nearly 200 years, we should assume that they are
doing something right! The American public has shown little
dissatisfaction with the existing constitutional limits on the
Presidency.
By successfully completing two successive terms, Ronald
Reagan will have not only redefined the role of the President but
reinvigorated the institution of the Presidency as well. This
will be, I think, one of his most important legacies to the
nation. He has reversed the commentary that Presidents were
incapable of leading the nation.
The Presidency is still what Theodore Roosevelt once called
a "bully pulpit." Much has-been said and written of Ronald
Reagan's ability to gain su'pport for his programs by his skill as
an educator, as a mobilizer of public opinion. His televised
speeches are firm but not abrasive, persuasive without seeming
hostile, a powerful combination in our political culture. The
President has been able to use his skills as a communicator to
take maximum advantage of the powers of persuasion that Dick
Neustadt, has written about.
-7When President Reagan came into office the conventional
wisdom was that it was very difficult for a President to maintain
his power through television, and — over time — it would help
destroy him. But now that view is subject to some revision I
think. In his first term, by carefully marshaling his
appearances before key congressional votes the President was able
to maximize his leverage over the congressional agenda. And with
each'victory, the President enhanced his reputation as a strong
and successful leader.
But having observed President Reagan interact with members of
the House and Senate, I would place equal emphasis for his
success upon what Neustadt called "the residual impressions of
tenacity and skill" that the President conveys to the Congress
and the rest of the Washington community. A President's high
approval in public opinion polls is no guarantee that he will be
able to lead effectively if the elite opinion of his abilities is
low.
The political skills needed to persuade the Washington
community are not always the ones a President uses to move public
opinion. Strength, steady resolution, the ability to fight hard
for one's policies without personalizing disagreements, and
knowing when and how to compromise to achieve the most elements
of one's objectives have all been critical to President Reagan's
success.
By revitalizing the Presidency, Ronald Reagan has increased
the likelihood of cooperation between Capitol Hill and the White
House on public policy. The contest between the two branches of
government is not a zero-sum game. The President's gain is not
Congress's loss. In fact, polling data suggest that the
President's popularity and success are positively influencing
public attitudes toward other branches and levels of government,
including Congress.
I have seen this cooperation work first hand. The Social
Security compromise in 1983 was sensible legislation and defused
perhaps the most sensitive political issue between Democrats and
Republicans. And although it may be just a footnote now to the
protracted turmoil in Lebanon, I think historians will favorably
record the successful negotiations between the Congress and the
President over the first use of the War Powers Act to deploy U.S.
military forces. (Fundamental tax reform may become another
product of this cooperation.)
As we approach the 200th year of our Constitution we should
remember that America's government at its best is based on the
strength of her institutions. Calling forth our best is not only
for presidents and lawmakers, but for scholars and students and
Americans of all walks of life. Twenty-five years ago that was
the message of the president for whom this school is named.
-8The history of this university and its community kindles the
honorable flame of duty and service in all of us. Just north of
this building, a brief walk from here is the Memorial Church.
Sons of Harvard who have fallen in battle for their country are
memorialized there.
And a short distance from that point, due west, is the
Cambridge Common, where George Washington took command of the
Continental Army and members of this community volunteered to
join his ranks.
In this city, at this university, we are constantly reminded
that the founding fathers were men who dared to build a nation
upon confidence and cooperation, not fear and disunity.
At the conclusion of his memoirs (Iji Search of History) White
wondered whether "the old ideas that have made America a nation
could stretch far enough to keep it one." I am confident that he
believed they would. I agree. And as we continue with the
challenges we face in the years ahead, I am sure that our leaders
and institutions will prove equal to the tasks.
Thank you very much.
rREASURY N E W
tartment of the Treasury • Washington, D.C. • Telephone ss
FOR IMMEDIATE RELEASE
May 27, 1986
Contact: Dorene Erhard
566-3021
WOMEN IK LAW ENFORCEMENT
The Interagency Committee on Women in Federal Law Enforcement
will present a training program on May 28-29, 1986, at the
Twin Bridges Marriott, Arlington, Virginia, entitled "Forward
to the Future." More than 150 %*omen and men from Federal,
State, and local law enforcement agencies will attend the
2-day conference.
Keynote speakers are Francis A. Keating, II, Assistant
Secretary for Enforcement, Department of the Treasury, and
Victoria Toensing, Deputy Assistant Attorney General,
Criminal Division, Department of Justice. Lois Haight
Harrington, Assistant Attorney General, Office of Justice
Programs, is addressing the conference participants at a
luncheon to be held on May 28. Seminars and workshops offer
topics ranging from career and personal development to
enforcement-related subjects such as specialized weapons,
computers as an investigative tool, and psychological
profiling of criminals.
The Interagency Committee on Women in Federal Law Enforcement
was established in 1977 as a special task force under the
Office of Personnel Management to identify problems facing
women in law enforcement and recommend solutions. It has
evolved into an active organization sponsored by the
Department of the Treasury and the Department of Justice
and made up of representatives from over 30 Federal agencies
with law enforcement reponsibilities.
The Interagency Committee hos received nationwide recognition
for its efforts in publicizing recruitment opportunities and
the challenges of a career in law enforcement for women. It
was cited in the 1984 report by the White House Task Force on
Legal Equity for Women as an example of the type of initiative
supported by the President to enhance opportunities for
equality of women.
B-597
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
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 June 5, 1986.
This offering
will result in a paydown for the Treasury of about $100
million, as
the maturing bills are outstanding in the amount of $14,500 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, June 2, 1986.
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
September 5, 1985, and to mature September 4, 1986
(CUSIP No.
912794 KQ 6 ), currently outstanding in the amount of $15,642 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
June 5, 1986,
and to mature December 4, 1986
(CUSIP No.
912794 LM 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 June 5, 1986.
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 $1,129 million as agents for foreign and international monetary authorities, and $3,667 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-598
TREASURY'S 13-, 26-, AND 52-V7EEK 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
tenders.
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
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 27, 1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,200 million of 13-week bills and for $7,220 million
of 26-week bills, both to be issued on May 29, 1986,
were accepted today,
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing August 28, 1986
Discount Investment
Rate
Rate 1/
Price
6.12%
6.16%
6.15%
6.30%
6.34%
6.34%
26-week bills
maturing November 28, 1986
Discount Investment
Price
Rate
Rate 1/
98.453
98.443
98.445
6.19%
6.22%
6.21%
6.48%
6.51%
6.50%
96.853
96.838
96.843
Tenders at the high discount rate for the 13-week bills were allotted 74%.
Tenders at the high discount rate for the 26-week bills were allotted 100%
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
$
41,835
17,605,885
29,010
44,095
48,650
45,280
1,530,110
84,455
24,115
51,355
43,090
1,400,985
302,820
$
41,835
5,380,185
29,010
44,095
48,650
42,680
465,050
58,455
24.115
51,355
38,090
673,685
302,820
$21,251,685
:
$
24,645
Accepted
24,645
$
19 ,308,900
6 ,213,900
13,760
25,585
50,295
35,205
1,532,715
76,225
8,800
35,320
24,515
997,640
244,270
13,760
25,585
50,295
35,205
262,715
48,225
8,800
35,320
14,515
242,640
244,270
$7,200,025
: $22,377.875
$7 ,219,875
$18,258,365
1,018,235
$19,276,600
$4,206,705
1,018,235
$5,224,940
: $19,148,085
687,090
: $19,835,175
$3 ,990,085
1,766.185
1,766,185
1 ,700,000
1,700,000
208,900
208,900
842,700
842,700
$21,251,685
$7,200,025
: $22,377,875
$7 ,219,875
:
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
1/ Equivalent coupon-issue yield.
B-599
:
687,090
$4 .677,175
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 28, 1986
RESULTS OF AUCTION OF 5-YEAR 2-MONTH NOTES
The Department of the Treasury has accepted $7,756 million
of $18,080 million of tenders received from the public for the
5-year 2-month notes, Series K-1991, auctioned today. The notes
will be issued June 3, 1986, and mature August 15, 1991.
The interest rate on the notes will be 7-1/2%. The range of
accepted competitive bids, and the corresponding prices at the 7-1/2%
interest rate are as follows:
Price
Yield
99.946
7.50%
Low
99.734
7.55%
High
99.819
7.53%
Average
Tenders at the high yield were allotted 65%.
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
$
7,738
$
7,738
Boston
New York
16,211,962
7,107,962
Philadelphia
4,328
4,328
Cleveland
19,425
16,425
Richmond
32,667
31,617
Atlanta
34,277
30,177
Chicago
975,466
321,016
St. Louis
82,600
66,250
Minneapolis
11,983
11,683
Kansas City
25,624
25,624
Dallas
8,012
5,312
San Francisco
665,069
127,119
Treasury
816
816
Totals
$18,079,967
$7,756,067
The $7,756 million of accepted tenders includes $337
million of noncompetitive tenders and $7,419 million of competitive tenders from the public.
In addition to the $7,756 million of tenders accepted in
the auction process, $15 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
B-600
TREASURY NEWS
apartment of the Treasury • Washington, D.C. • Tejephone 566-2041
FOR IMMEDIATE RELEASE
Nay 28, 1986
Contact: Charles H. Powers
566-8773
TREASURY STATEMENT
In public testimony before a Senate Foreign Affairs Subcommittee
on Tuesday, May 13, 1986, Customs Commissioner William von Raab,
in answer to a question, stated that he had information that the
Governor of Sonora is alleged to own four ranches located near
Alamosa in Sonora State on which marijuana and opium poppies are
grown.
However, no information exists that the Governor, of Sonora,
Rodolfo Felix Valdez, has any knowledge of the growth of these
plants on these ranches or even of the fact that it is alleged
that such growth occurs.
The Customs Service does, however, have information that
narcotics are grown on ranches and farms in the State of Sonora.
The initiative between the Attorneys General of Mexico and the
United States is the proper vehicle for the resolution of these
concerns.
The United States Government is supportive of the continuation of
these mutually important efforts to eradicate the scourge of
narcotics and narcotics trafficking.
Because this matter involves sensitive investigative information,
any further comment on such information will be confined to
channels that can assure its appropriate protection.
B-601
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
May 29, 1986
CONTACT: CHARLES POWERS
Phone: (202) 566-8773
TREASURY ANNOUNCES JUNE 30 TERMINATION OF
U.S. OIL COMPANY OPERATIONS IN LIBYA
The Department of the Treasury announced today that it has
amended the licenses authorizing the wind-down of U.S. oil
company operations in Libya to require the termination of all
Libyan operations by June 30, 1986.
Limited individual licenses were issued by the Office of
Foreign Assets Control on February 7, 1986 to Amerada Hess
Corporation, Conoco Inc., Marathon Oil Company, Occidental
Petroleum Corportion, and W. R. Grace & Company. These
licenses directed the companies to terminate their involvement
in the operation of Libyan oil concessions and to end their
Libyan connections by the removal or sale of their Libyan
assets. The purpose of the licenses was to avoid giving an
economic windfall to the Libyan Government by requiring hasty
abandonment of U.S. companies' assets in Libya, while also
affording the companies an opportunity to negotiate with Libya
for the disposition of those assets.
In a May 7 press conference following the Tokyo Economic
Summit, and in concert with other measures adopted by the
Summit partners, President Reagan confirmed that the oil
companies were to wind up operations in Libya by June 30.
The Treasury Department amendments to the five oil companies'
licenses require termination by June 30 of their sales of
Libyan crude oil, payments to the Government of Libya, and
participation in the operation and management of their oil
concessions.
While the oil companies, as well as other companies, will
be required to terminate completely their operations in Libya
by June 30, they will be permitted to continue negotiations
with the Government of Libya for the sale of their Libyan
assets beyond that date. Any such sale would be concluded only
if authorized in advance by the U.S. Government.
oOo
B-602
TREASURY NEWS
•partment of the Treasury • Washington, D.c. • Telephone 566-204
TAX REFORM IN THE SEASON OF THE GOLDEN BEAR
REMARKS BY
RICHARD G. DARMAN
DEPUTY SECRETARY OF THE TREASURY
BEFORE THE
NATIONAL ASSOCIATION OF MANUFACTURERS
WASHINGTON, D.C.
MAY 30, 1986
This is an unconventional time of day to have to listen to a
speech. Indeed, it's a time when many are still wearing
earplugs. And it's no wonder — for it's a particularly
unconventional time to have to listen to a speech about tax
reform. With this in mind, I thought I'd best offer somewhat
unconventional remarks.
Hope Springs Eternal: "This May Be the Red Sox Year"
This is the time when, before rushing off to the world of
work, many would ordinarily be at the breakfast table completing
a last-minute review of important statistics. The statistics, of
course, are those found in the daily newspaper's sports section
— an essential buffer between the world of darkness and the
world of light. Knowing that I might otherwise be depriving some
of you of this source of stimulation and comfort, it occurred to
me that I should combine tax reform and a sports report.
So that is what I'll try to do. And if at any point there
seems to be too much of either tax reform or sports, I'd just ask
you to think of the one as a metaphor for the other.
As a sometime son of Massachusetts, let me start with what
is most important. I don't mean the Boston Celtics, who of
course are again in the NBA finals. The Celts do have a proud
tradition to uphold, and there is important human drama in their
continuing quest for excellence. I refer, rather, to a more
fundamental and poignant human drama: the eternal rite of
spring, the hope that "This may be the Red Sox year."
It's a bit like Charlie Brown lining up one more time with
Lucy holding the ball — or like the seemingly endless, perennial
drama of tax reform. With the start of each new season, each
successive generation of fans and would-be heroes thinks and
hopes: This may be the year.
R-603
- 2 -
The Red Sox, I'm pleased to report — at this rather late
date for them — are still in first place. Their record is now
31 wins and 14 losses — a winning percentage of .689. They lead
the league in both hitting and pitching. Roger Clemens is 8-0.
Clemens and Hurst rank 1-2 in strikeouts. Wade Boggs looks like
he may be on his way to another batting crown. And old Bean Town
is once again high with pennant fever.
It's almost like the euphoric effect of getting a tax bill
with a top rate of 27% through the Senate Finance Committee on a
20-0 vote.
The fever of hope has even reached my 9-year-old and
5-year-old sons — not in the form of hope for tax reform, but
hope for the Red Sox. They've temporarily swapped their orange,
black, and white Orioles hats for the distinctive Boston blue
with the red "B". They think they know a winner when they see
one.
But, of course, we all know that the Red Sox have a tragic
flaw: a chronic habit of entrapping their fans with a strong
start, only to leave them with a broken heart. Often the fall
comes at the end of spring training. Sometimes it comes right
after the July 4th break. Occasionally it doesn't come until the
seventh game of the World Series. But every year since 1918,
sooner or later, the fall has come; and hopes have been dashed.
The most remarkable thing, of course, is that the fans keep
hoping — year after year, game after game, inning after inning.
Boston even has a ballpark especially designed to keep hope
alive: Fenway, with its stolid "green monster," that threatens
to convert a seemingly simple pop fly into anything from a
game-winning homer to a ricochet single that might tempt a runner
to stretch for a double, only to be thrown out at second. It's
the one park in which the home team can be down by 9 runs in the
bottom of the ninth, and the fans will still stay; for there's a
reasonable chance that the game might be tied and go into extra
innings. It's the field more than any other that validates the
simple oracular wisdom of the Red Sox long-time,nemesis, Yogi
Berra: "It ain't over til it's over."
Quite obviously, Fenway Park is an ideal training ground for
tax reform. A few seasons at Fenway are probably worth more —
at least spiritually — than a few decades of practicing tax law.
How better could one be prepared to deal with the ups and downs
of a quest that has included the following selected highlights:
o Over the decades, there has been season after season
with false starts, disappointed fans, and frustrated
would-be heroes. The late Stanley Surrey first argued
vigorously for a level playing field; but he went to
his grave as seemingly misguided political
grounds-keepers built mounds all over the field and
then cut criss-crossing basepaths all around them.
- 3 -
Al Ullman sought to build support for a reformist
approach that got him promptly ejected from the game.
William Simon left office with his game plan still in
the locker. Messrs. Bradley and Gephardt went to North
Oaks, Minnesota in the campaign of '84 to try to sell
their standard-bearer on reform — only to have him
continue to follow a strategy that seemed curiously
designed to maximize his opponent's score. Even the
team that produced Treasury I — as they took the field
after a year of closed practices — was greeted by
those holding the equivalent of season tickets and
special concessions with a chorus of Bronx cheers.
o Indeed, given the history, it's a wonder that anyone
would wish to take the bat, and that fans would still
be ready to cheer. Yet that is exactly what happened
when the President and the Chairman of the Ways and
Means Committee joined for one more try — and millions
of fans responded to the call, "Write Rosty."
o But then again, hopes were dashed. The game stalled in
the House with seemingly endless bickering over narrow
interests. And just when that problem was solved, a
fight suddenly broke out among players who were once
thought to be on the same team, and who were calmed
down only by a resonant last-minute plea to get one
more for the Gipper.
o The game then moved to the home of the Senators. But
it had an inauspicious beginning. A pre-game retreat
to build team spirit was abruptly called on account of
snow — literally.
o When spring came and play resumed, it seemed for a
while as if the players were interested in an entirely
different game — more like jai alai. But then a new
coach and a new spirit came to life in the equivalent
of a long locker-room session — following which a
united team emerged for a stunning 20-0 inning.
o And that's where the game now stands as we move to the
Senate floor — where a mere 100 players can take the
field at once, restrained only by the fact that for the
first time their game will be televised.
There have, of course, been many points along the way at
which people have thought, or even hoped, that the game was over
— but not the true fans of tax reform, the people fortunate
enough to possess a touch of the Fenway spirit.
As an experienced Fenway fan, however, I should quicklv add
that "it ain't over til it's over" applies just as much when
you're ahead as when you're behind. So 'though tax reform is
ahead at the moment, it seems best to act with an appreciation
- 4 -
that the game is by no means over. There are plenty of pitches
yet to be thrown, and plenty of balls that will threaten to be
off the wall.
Senators are being pressured to offer amendments that would
seem to have some natural appeal. Indeed, there is a case for
some of these on the merits — except for the fact they threaten
the larger enterprise.
o There's a proposed amendment to preserve the full
current law treatment of IRAs. This is notwithstanding
the fact that the Senate Finance Committee bill would
fully preserve tax-deductible IRAs for all those who
are npt covered by a qualified pension plan; and would
allow everyone else to benefit from tax-deferred growth
of non-deductible IRA contributions — so that many
could take advantage of lower rates and come out better
than they would under current law.
o There's a possible amendment to preserve the current
exclusion for capital gains. This is notwithstanding
the fact that the Committee bill dramatically reduces
the top personal rate and contributes substantially to
productive investment through, for example, lower
corporate rates, the retention of the R&D credit, and
the dramatic curtailment of incentives for unproductive
tax sheltering.
o There are likely amendments to preserve the
deductibility of state and local sales taxes. This is
notwithstanding the fact that their deductibility
complicates both personal recordkeeping and public law
enforcement, while benefitting primarily the minority
who itemize.
o And there are likely amendments to weaken the proposed
limitations on the use of passive losses to offset
unrelated income in order to avoid paying taxes. This
is notwithstanding the fact that the current and
growing use of passive losses is leading us from a
society of productive workers and creative
entrepreneurs toward a society of limited partners and
passive shelterers, for whom the measure of creativity
is "zeroing out" and the monument to productivity is an
overstuffed steer or a "see-through" office building.
Fortunately for tax reform, preliminary reports from the
field suggest that there has not been anything like the
outpouring of support for these amendments that some had expected
to materialize during the Memorial Day recess. The widespread
appeal of a simple, low-rate tax system in which all must pay
their fair share seems far greater than the attraction of
amendments that would threaten to prevent that achievement.
- 5 -
The threat they pose is nonetheless real. It derives from
the fact that most of the amendments are expensive. They would
either have to be paid for by raising tax rates — thus eroding a
fundamental basis for tax reform's popular and economic appeal.
Or they would have to be paid for with a host of other
revenue-raising measures — affecting, for example, banks, the
insurance industry, the natural resources sector, or those who
pay excise taxes — and this, in turn, would probably destroy the
basis of a workable political consensus on the Senate floor.
In this context, there are several basic legislative
strategies available — depending on one's general posture toward
the Finance Committee bill. The best strategy for those who are
at least roughly satisfied with the bill is to oppose all
amendments on the Senate floor — and save refinements for the
House-Senate Conference. For those who are less satisfied, but
who don't think their amendments would show well on the Senate
floor, the best strategy would seem to be to avoid the risk of
visible loss on the floor and try to gain satisfaction in
Conference — it being the case, presumably, that those who both
threaten tax reform and show weakness on the floor would not,
thereby, advantage themselves in what may be the most lobbied
Conference in the history of the American legislative process.
And for those who are extremely dissatisfied with the Senate
Finance bill, the best strategy would seem to be to try to join
with others and form a killer coalition — seeking to pass a
combination of popular revenue-losing amendments without the
unpopular measures to pay for them.
There are, however, two significant problems for those who
would adopt the bill-killing strategy. One is procedural: In
the Gramm-Rudman world, a super-majority of 60 votes might be
required for a revenue-losing package to be deemed to be in order
on the Senate floor. That would depend on the status of the
budget resolution and a ruling by the Parliamentarian. In any
case, a revenue-losing approach will clearly be contrary to the
spirit and intent of the Budget Act as amended by Gramm-Rudman.
The second problem is more broadly political: Kill-the-bill
strategists will have to justify their approach on national
television. They would, in effect, have to be prepared to defend
the preservation of the current tax system — in the face of its
overwhelming unpopularity with the American people. That, I
think, is a formidable obstacle.
The Season of the Golden Bear
This is not to suggest that would-be bill-killers will be
without resources. They have certainly demonstrated before that
they can threaten the life of meaningful tax reform. Indeed,
they have been so effective at times that one major news
organization after another has been led to write tax reform's
obituary.
- 6 -
Happily, however, each of these obituaries has been but the
precursor of one more astonishing tale of tax reform's remarkable
resurrection.
Almost a year ago, when the New York Times was analyzing the
"death of tax reform," I thought that tax reform might follow
the melodramatic path that it has pursued. At that time, the .Red
Sox had already begun their decline and were in fifth place. So
I thought I'd better use a different metaphor. I used one that
got a certain amount of attention. Back then I noted:
"We're at that stage in the process of
'revolution' when, upon hearing shots fired, many
presume there must be fatalities — when, in some
quarters, the crowd begins to run; and when, among
instant historians, debate begins to rage as to how key
battles were lost.
"But to my ears at least, the sounds of early
Summer have hardly risen to the level of the guns of
August — or in this case, the likely guns of the Fall.
Indeed, the sounds I've heard seem to be more like the
pops of a shooting arcade. And tax reform is like the
target bear. It gets 'hit'. It rises, pauses, turns a
bit — and then it keeps on going."
I went on to ask the rhetorical question, "What if tax
reform is delayed beyond this year [1985]? Does the game really
stop?" I answered:
"I think not. It might just become more difficult
for a while. The substantive and conceptual character
of the reformist interest might be expected to shift;
and coalitions would probably have to be
restructured....
"Yet a response is bound to come. The
dissatisfaction with the present system is
unsustainably high and will demand a remedy from our
democracy....
"So the bear will keep on coming in its relentless
pursuit of progress."
I believe that even more now — in light of the Senate
Finance Committee's bold action, and in view of the great good
fortune that the tax reform debate will be the first major Senate
debate to be televised. These developments have only
strengthened the bear.
Yet, as you know, with tax reform and the Red Sox now riding
high, I seem to have been tempted to abandon the metaphor of the
bear and, like my kids, to try suddenly to fit tax reform into a
Red Sox uniform. Tempted, yes. But I'm afraid I've had more
experience with the Red Sox than my kids. While I'd love the Sox
to make it all the way, I can't quite risk counting on them.
- 7 -
Still, just thinking about the all-American image of
baseball at Fenway, I've been led to recognize the inadequacy of
the bear-in-the-arcade metaphor. But I've concluded the problem
is not the bear. It's the arcade. An arcade is just not
wholesome and open and bright enough for a subject like good,
clean — even heroic — tax reform.
So I've decided that though I can't risk putting the bear in
a Red Sox cap, it's time to get the bear out of the arcade. I've
decided to modify the image just a bit by recalling the recent
Masters golf tournament and Jack Nicklaus' sensational finish —
and suggesting that tax reform is now like the Golden Bear.
Nicklaus, you'll recall, had not won a major tournament in
six years, had'missed the cut in both the U.S. and British Opens,
and was greeted with newspaper headlines saying "Jack Should
Quit" — just as, I may say, they had said "Tax Reform Is Dead."
But on the last day of the Masters, the Golden Bear charged from
ninth place with a record back nine score of 30 to win the
Masters for the sixth time. The Post's Thomas Boswell captured
the scene:
"As Jack Nicklaus walked up the 18th fairway . . .
the sun was going down on Augusta National Golf Club,
just as it is surely going down on Nicklaus' career.
. . . Nicklaus slowly raised his left hand, then
his right, his left and his right again, to acknowledge
the waves of joyous ovation rolling from the crowd. In
tens of thousands of minds, a camera shutter was
clicking. This, among all the photos in the Nicklaus
family album of our minds, would be the frontispiece.
First, he was Ohio Fats, then the Golden Bear and
now, finally, most unexpectedly, most sweetly of all,
he is the Olden Bear, glorious once again, walking off
the final green into legend with his son's arm around
him."
It was a scene of pure American triumph; a picture of
recovery, revitalization, renewal.
That's the way I suggest we should see tax reform. Just as
a majority of distinguished pundits had written it off, tax
reform came back for a dramatic recovery — and what could be a
glorious finish.
And what is more: this is not just revitalization for a
process called tax reform. It promises to be a more fundamental
revitalization for the American system.
Here we are in the second-term of a Presidency. Many
supposed wisemen, seeming to have lost faith in our institutional
arrangements, assume a second-term President must be a lame duck,
and lament the seemingly endless stalemate between the Executive
and Legislative branches. The public is beginning another of its
periodic drifts toward cynicism about the culture of Washington.
- 8 -
The conventional wisdom has been growing a bit jaded. And all of
a sudden there's now the surprising possibility of bold
bipartisan action that would dramatically rebut the tiresome
conventional wisdom.
Here we are, too, in what some might think of as the middle
age of our economic development. Though there's still great
strength in the economy, there have been troubling signs of
lagging productivity and a slowness to adjust to new roles and
new frontiers. And all of a sudden there's now the promise of a
new stimulus to growth and creativity, a renewal of the basic
American spirit of fairness and opportunity — a revitalization
of America's special claim to excellence and perennial youth.
That fundamentally is what bold tax reform both offers and
represents.
Now, as tax reform starts its charge up the back nine, waves
of people are beginning to sense that they may witness,
encourage, and even participate in an historic American
victory — in this the season of the Golden Bear.
Yes, there are traps ahead that must be avoided. And it's
far too early to begin measuring the fabled green jacket. But
the Golden Bear — even after all it's been through — is
starting to look like a pretty good bet.
As for the Red Sox, it's best just to hope.
Thank you very much.
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone
FOR RELEASE AT 12:00 NOON
TREASURY'S 52-WEEK BILL OFFERING
May 30, 1986
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,250
million of 364-day Treasury bills
to be dated
June 12, 1986,
and to mature June 11, 1987
(CUSIP No. 912794 MP 6). This issue will provide about $725
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,533
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, June 5, 1986.
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 June 12, 1986.
In addition to the
maturing 52-week bills, there are $14,464 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 $1,820 million as agents for foreign
and international monetary authorities, and $5,521 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 $85
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-604
TREASURY'S 13-, 26-, AND 52-V7EEK 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
tenders.
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., 99.9 23, 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
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON
May 30, 1986
TREASURY OFFERS $5,000 MILLION OF 15-DAY
CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice, invites
tenders for approximately $5,000 million of 15-day Treasury bills
to be issued June 4, 1986, representing an additional amount of
bills dated December 19, 1985, maturing June 19, 1986 (CUSIP No.
912794 KL 7 ) .
Competitive tenders will be received at all Federal Reserve
Banks and Branches prior to 1:00 p.m., Eastern Daylight Saving time,
Tuesday, June 3, 1986. 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 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, futures,
B-605
- 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 Wednesday, June 4, 1986. 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.
TREASURY NEWS
tepartment of the Treasury • Washington, D.C. • Telephone 566-204
For Immediate Release
May 29, 1986
Contact: Charles Powers
Phone: (202) 566-8773
TREASURY RELEASES REPORT ON JOBS TAX CREDITS
The Treasury Department today released THE USE OF TAX
SUBSIDIES FOR EMPLOYMENT, a Report to Congress by the Departments
of Labor and Treasury. The study examines the economic effects
of the Targeted Jobs Tax Credit (TJTC) which was enacted to
provide employers with incentives to hire certain persons—
primarily youth from low-income families. The TJTC was enacted
in 1978 and has been extended several times since its originally
scheduled expiration date of December 31, 1981. The report
primarily evaluates the initial experience with the credit in
1979-81. The study also evaluates the New Jobs Tax Credit
(NJTC), which was available to certain employers for increasing
their payrolls in 1977 and 1978.
Among the principal findings of the report are:
(1) While several studies indicate that the NJTC increased
employment in certain firms and industries, these
employment gains may have been offset by employment
losses in other firms and industries without an increase
in aggregate employment.
(2) Because most workers eligible for the TJTC found
employment without the credit, the TJTC could have had
only a minimal effect on total targeted employment.
(3) The NJTC had a total estimated cost of $9.7 billion in
1977-78 and the TJTC cost $730 million during fiscal
years 1979-81.
B-606
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE June 2. 1986
RESULTS OF TREASURY*S WEEKLY BILL AUCTIONS
Tenders for $7,212 Billion of 13-veek bills and for $7,214 million
of 26-veek bills* both to bo issued on June 5, 1986,
were accepted today.
RANGE OF ACCEPTED 13-veek bills s 26-week bills
COMPETITIVE BIDS: maturing September A, 1986
Discount Investment
Rate
Rate 1/ Price
i maturing December 4. 1986
: Discount Investment
s
Rate
Rate 1/
Price
Low 6.291 6.48% 98.410 * 6.41% 6.72% 96.759
High
6.33%
6.522
98.400 : 6.42%
Average
6.33%
6.52%
98.400 * 6.41%
6.73%
6.72%
96.754
96.759
Tenders at the high discount rate for the 13-week bills were allotted 91%.
Tenders at the high discount rate for the 26-week bills were allotted 52%,
s
Location
Boaton
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)
Accepted
1
Received
Received
$
39.775
20,403,000
23,070
47,290
50,095
45,585
1,271,310
77,340
36,765
64,075
33,675
1,044,510
338.580
$
39,775
5,876,520
23,070
44,215
43,895
43,585
309,810
52,840
23,865
63,075
33,675
317,470
338,580
8
$
30,575
s 21,908,575
«
18,775
*
24,505
1
37,725
:
73,665
s
1,384,340
:
70,350
1
20,355
s
50,945
:
10,815
1
1,320,545
:
285,085
$
30,575
6,416,605
18,775
24,505
33,245
61,665
166,840
46,350
15,355
45,570
10,815
58,345
285,085
$23,475,070
$7,212,375
s $25,236,255
$7,213,730
$20,360,990
1,126.980
$21,487,970
$4,098,295
1,126,980
$5,225,275
i $21,943,370
s
777,185
1 $22,720,555
$3,920,845
777,185
$4,698,030
1,860,100
1,860,100
:
1,850,000
1,850,000
127,000
127,000
:
665,700
665,700
$23,475,070
$7,212,375
: $25,236,255
$7,213,730
1/ Equivalent coupon-issue yield.
B-607
Accepted
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
Remarks by Secretary of Treasury
James A. Baker
To the 1986 International Monetary Conference
Boston, Massachusetts
Tuesday, June 3, 1986
I welcome this opportunity to address the International
Monetary Conference and, in so doing, to reaffirm a tradition
established by my predecessors. I've looked forward to sharing
my perspective on some important global economic issues with such
a distinguished group of leaders in the international financial
community.
More and more, governments today realize that to a great
extent their own domestic prosperity hinges on the condition of
the international economy. That awareness has recently been
focused on two issues — the coordination of economic policies
among the major industrial nations and the debt problems of the
developing countries. Today, I would like to expand on our ideas
for strengthening the framework of international cooperation in
these two critical areas.
The impetus behind the program initiated at the Tokyo Summit
to enhance economic policy coordination among the major
industrial nations was the fact that such coordination is
essential in an increasingly interdependent world.
The broad thrust of post World War II international economic
policy has been to reduce barriers to the flow of goods and
capital across borders. And although some barriers remain, and
we are facing intense pressure to erect new ones, the current
flow of trade and capital is probably greater than the architects
of the postwar international economic system could reasonably
have anticipated.
The great interdependence of nations that resulted from the
expansion of an open system of trade and payments has, almost by
definition, increased each country's vulnerability to
developments in other nations.
B-608
-2Unfortunately, the evolution of our arrangements for
cooperation among nations has not kept pace with the requirements
of growing interdependence. Perhaps most importantly, political
institutions have not fully adapted to that reality.
The international monetary system that emerged from Bretton
Woods relied heavily on the discipline of fixed exchange rates to
foster changes in domestic policies to adjust international
imbalances. But, in practice, this discipline and the burden of
adjusting payments positions fell primarily on deficit countries.
The system also proved too rigid — too successful in
constraining the use of exchange rate changes for international
adjustment. This rigidity, and the asymmetry in adjustment
responsibilities, was instrumental in the system's breakdown.
The system of floating rates which succeeded Bretton Woods
provided the international economy with much needed flexibility.
This system, or non-system as some have characterized it, gave
countries greater latitude to pursue domestic policies of their
own choosing — so long as they accepted the exchange rate
consequences. However, this freedom was not always used wisely
and the commitment to coordinate economic policies was
inadequate. Despite the recent progress on inflation and growth
under the current regime, domestic and external imbalances have
grown and exchange rate volatility has increased, creating
undesirable economic and political difficulties.
Thus, we turned at the Tokyo Summit toward a more effectively
coordinated international economic system, with management
responsibilities extending across a broad range of economic
policies and performance. The system is designed to promote
consistent domestic policies and compatible policies among
countries, all the time focusing on achieving favorable
fundamentals.
The Summit partners established a process for coordination
and committed themselves to make that process work. The
participating countries will review economic objectives and
forecasts with their peers at regular intervals, taking into
account a broad range of indicators such as those spelled out in
the Tokyo Summit communique. The internal and external
consistency of these projections will then be assessed with a
view to necessary adjustments. If significant deviations from an
intended course emerge, the participants have pledged to exert
best efforts to adopt remedial action.
-3"Best efforts" and peer pressure may not seem like a
prescription for fundamentally altering the economic course of
nations. But with such efforts there is a better chance for a
higher degree of external discipline than under normal practices.
If nothing else, one could reasonably expect that the political
process would lead countries to formulate and adapt economic
policies with more awareness, at least, of external
considerations.
The coordination of economic policies will not be easy. To
specify, and then reconcile, national objectives and forecasts
taking into account a broad range of indicators will raise a host
of problems, some technical, some political. There will be
deviations from intended courses, and there will be difficulties
in determining'which are significant and should have priority.
Nevertheless, we believe that the end result will be a
greater likelihood that remedial actions will be taken when
necessary. In addition to the high level commitment, other
factors give us greater hope as we work out the details of the
Tokyo arrangements.
Experience with the Plaza Accord last September is a good
omen. The public agreement of the G-5 to implement important
policy intentions and modify exchange rates was not easily or
lightly reached. In addition, subsequent coordination of
interest rate decisions was not easily achieved. But in the end,
actions were taken in a coordinated fashion. These achievements
encouraged us to seek approval of a better mechanism for policy
coordination at the Tokyo Summit.
The process of economic policy coordination can also be made
more manageable by a focus on exchange rates and current account
positions to assess incompatibilities among nations. Countries
may not always be able or willing to agree on the specific level
for their currencies. But they can tell when currency values
need to change and the appropriate direction of change. The
Plaza Accord demonstrates that the major industrial countries
could go this far. The Tokyo arrangements institutionalize the
practice of discussing exchange rates on a regular basis. One
result should be greater stability of exchange rate expectations.
Exchange rates have moved considerably since the Plaza
Accord. This should play an important role in reducing external
imbalances. At the same time, experience has shown that exchange
rate change alone should not be relied upon to achieve the full
magnitude of the adjustments required in external positions.
-4This is part of the reason we place such importance on
strong, sustained and better balanced growth among the industrial
countries. Not only is such a pattern of growth the foundation
for dealing with the debt problems of the developing world, but
without greater growth abroad, increased reliance will need to be
placed on exchange rates in the adjustment of payments
imbalances.
The achievement of improved, more balanced global growth will
require a focus on the broad range of policies affecting a
nation's economic performance. Therefore, the Tokyo arrangements
specify that both domestic and external indicators will be used
to assess the consistency and compatibility of national forecasts
and objectives. This will help assure that attention is directed
to underlying economic fundamentals.
The Tokyo arrangements do not involve any ceding of
sovereignty, nor should they. But if the system is to work,
participants will of their own volition — to be sure, under the
watchful eye of their peers — have to take external
considerations more heavily into account in formulating their
domestic economic policies. For the United States this only
reflects the reality that the time is long past when the U.S.
could, in setting domestic policies, relegate external
considerations to a second order of importance.
The major implications for U.S. policy at present are fairly
clear. We must follow through on our program to reduce our
budget deficit. The Congress has to complete action on tax
reform. Monetary policy must continue to be directed toward
sustained non-inflationary growth. And, we must avoid the folly
of protectionism.
The system will only be viable, however, if other nations are
prepared to accept similar responsibilities. If U.S. economic
policies are to be adjusted to take into account international
concerns, others too must be willing to adjust policies.
Countries such as Germany and Japan with large trade surpluses
must recognize the global need for stronger domestic demand to
facilitate the adjustment of external imbalances.
The global community also has a strong stake in economic
stability and growth in the debtor nations, and the successful
management of their debt problems. Debt service difficulties
affect all of us, in terms of reduced exports, lower growth, and
a less stable international financial system. Cooperative
efforts to deal with the debt problem therefore have a high
priority on our policy agenda.
-5Recent progress in this area is heartening, and provides a
solid basis for future improvements:
First, there is broad agreement among both creditors and
debtors that improved growth in the debtor nations is essential
to the resolution of their debt problems, and that growthoriented reforms are needed to achieve this objective.
Second, centered on that growth theme, we have an agreed
basis on which to proceed. The debt initiative which we outlined
last fall in Seoul has received the strong support of the
international community. It is now being actively implemented
through individual debtor's discussions with the IMF and the
World Bank.
Third, recent improvements in the international economy are
providing significant and timely relief for the debtor nations.
For example, stronger growth in the industrial nations this year
will add approximately $2 billion to the major debtors' exports,
while the sharp decline in interest rates since 1984 will save
them $12 billion annually in debt service payments. Lower oil
prices will also save the oil-importing members of this group
some $2 billion annually.
I recognize that the debt situation for the net oil exporting
debtors will be exacerbated by lower oil export earnings. This
may require additional adjustment measures to meet the new
external realities. But lower interest rates and stronger world
growth will alleviate these added demands upon their economies.
Indeed, on an aggregate basis, these growth and interest rate
changes if sustained, could be more important to a resolution of
the debt problem than the amount of financing by the banks or the
much-touted World Bank general capital increase.
Continued cooperative efforts among'the key industrial
nations will be important to sustain this positive global
environment. But the adoption of growth-oriented policies by the
debtor nations will remain crucial to provide the domestic
stimulus to stronger growth. A number of them are already moving
in this direction. We should not harbor any illusions that such
policy changes will be easy to implement, or that they can be
accomplished overnight. They will take time.
There has been some concern about how the three elements of
the debt initiative will come together, and when in particular
commercial bank financing should key in. Let me review briefly
how we see this process working.
-6The World Bank, in close consultation with the IMF, is
helping a number of the major debtor nations develop proposals
for medium-term adjustment programs. They will focus in
particular on efforts to increase growth and export capabilities,
mobilize domestic savings, encourage increased investment, and
liberalize trade. The privatization of public enterprises and
domestic tax reforms may be important elements of this approach.
As these medium-term approaches are being developed, the IMF
and World Bank are also working closely with the debtor nations
on immediate policy steps to be supported by new IMF arrangements
and World Bank sector or structural adjustment loans. The IMF
continues to play a critical role. It has existing or pending
arrangements with 11 of the 15 major debtor nations. In
addition, the World Bank has structural or sector loan
negotiations underway with 13 of these nations and has recently
extended loans to Ecuador, Argentina, and Colombia to support
adjustment efforts in some of their key sectors.
For the multilateral development banks to fulfill their role,
however, they must have the necessary resources. While current
concerns about the need for budget restraint make the task of
securing Congressional support for the MDBs even more difficult
than usual, I would underscore the importance of the MDBs as part
of our international economic strategy and their cost
effectiveness from a U.S. budgetary perspective.
I strongly believe that if we do not support the MDBs now, we
may have to resort to more costly measures later. Building
conditions for prosperity is our strongest bulwark for political
stability in the developing world.
Commercial bank support for the debtors* reform efforts,
however, is crucial. Once reforms have been agreed upon,
commercial banks must be ready to lend without delay. For those
debtors that have successfully implemented IMF programs and have
adopted additional structural adjustment measures in concert with
World Bank loans, the commercial banks should be responsive to
requests for new lending.
Coordination among larger and smaller, U.S. and foreign
banks, will be a vital part of this process. I would hope that
the banks are using effectively the time they now have — in
advance of agreement on specific reforms — to put mechanisms in
place which will assure that financing packages can be assembled
quickly when called upon.
-7I recognize that some regional and smaller banks are
concerned about continued lending at a time when they may be
swapping, selling off, or writing down existing loans to some
debtor nations. The larger banks, on the other hand, need some
assurance that net new lending arrangements will be concerted
efforts and not fall disproportionately on a few banks.
Resolving these diverse interests is an important task which
cannot be placed indefinitely on the back burner.
Recent developments in the area of debt/equity swaps and the
securitization of commercial bank loans are gaining increasing
attention as an attractive means of both reducing outstanding
debt obligations in the debtor countries and encouraging the
return of flight capital.
We shouldn't overestimate the benefits or minimize the
complexities involved in such transactions. The market for swaps
is clearly limited, and swaps don't offer a panacea for resolving
the debt problem. The banking community will also have to
consider how shifts in exposure bases arising from these
transactions will affect new lending — which must, in any case,
be assured.
I don't believe these pose insurmountable problems to the
development of these and other innovative mechanisms which can
improve both the investment and the debt climate in the debtor
nations. Certainly they are worth exploring further.
The banking community as a whole has a major stake in the
development of stronger debtor economies, in terms of the quality
of their individual bank's outstanding loans, as well as the
importance of debtor nations to trade flows, global economic
growth, and international financial stability. We do not intend
to twist the arms of U.S. banks or support special government or
World Bank guarantees in order to secure new lending.
I am confident that the banks will lend if they perceive it
to be in their interest to do so. Nevertheless, it is important
for all of us to be able to plan ahead, and to count on the
timely support of the commercial banks, as pledged, as one of the
key elements of the debt initiative, and vital to its success.
In this context, I call on you, as the acknowledged leaders
of the international banking community, to take a direct interest
in the implementation of the debt initiative, and to set the
positive, cooperative tone that will be necessary if it is to
succeed.
We have made progress in resolving our major economic
problems. That progress provides a golden opportunity to adopt
cooperative arrangements to resolve remaining problems and
enhance global prosperity.
-8Inflation is down sharply and is expected to remain low.
Growth in the industrial countries is improving although
important imbalances remain. Exchange rates among the key
currencies are in much better alignment today than a year ago.
Interest rates are down and the improved economic environment
provides scope for further declines.
It is now up to all of us to use this opportunity wisely.
For the major industrialized countries, we must implement our
plans for enhanced coordination of economic policies and bring
about greater exchange rate stability, reductions in external
imbalances, and stronger, more balanced, and sustained growth.
For the developing countries, the order of the day is to push
ahead with the needed macroeconomic and structural adjustments.
For the private financial institutions, now is the time to
position yourselves to respond promptly and effectively to the
improving prospects in those developing countries implementing
needed economic reforms.
All would be for naught, however, should we lapse into
protectionist solutions. Indeed, the essential choice we have is
to extend our cooperative efforts to a level that allows us to
maintain and expand our interdependence, or to reduce that
interdependence.
The experience of the interwar period convinced one
generation that the only acceptable answer lay in greater
cooperation. I am confident that the present generation need not
relive history to absorb its lessons. To extend the framework of
international economic cooperation will not be easy, but it is
the only responsible course.
Thank you very much.
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S AUCTION
OF 15-DAY CASH MANAGEMENT BILLS
June 3 r 1986
Tenders for $5,000 million of 15-day Treasury bills to
be issued on June 4, 1986, and to mature June 19, 1986, 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)
Price
Low 6.69% 6.81% 99.721
High
6.73%
Average
6.71%
99.720
99.720
6.83%
6.83%
Tenders at the high discount rate were allotted 28%.
TOTAL TENDERS RECEIVED AND ACCEPTED
BY FEDERAL RESERVE DISTRICTS:
(In Thousands)
Location
Received
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
SanTOTALS
Francisco
$
B-609
23,218,000
1,975,000
Accepted
$
4,869,200
2,800
1,000
1,170,000
128,000
$26,364,000
$5,000,000
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2
FOR RELEASE AT 4:00 P.M. June 3, 1986
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 June 12, 1986.
This offering
will result in a paydown for the Treasury of about $75
million, as
the maturing bills are outstanding in the amount of $14,464 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, June 9, 1986.
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
March 13, 1986,
and to mature September 11, 1986 (CUSIP No.
912794 LC 6), currently outstanding in the amount of $6,868 million,
the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,200 million, to be dated
June 12, 1986,
and to mature December 11, 1986
(CUSIP No.
912794 LN 2).
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 June 12, 1986.
In addition to the maturing
13-week and 26-week bills, there are $8,533
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 $1,828 million of the original 13-week and 26-week
issues. Federal Reserve Banks currently hold $1,913 million as
agents for foreign and international monetary authorities, and $5,59 3
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).
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
tenders.
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
department of the Treasury • Washington, D.c. • Telephone 566-2041
REMARKS OF THE HONORABLE
DAVID C. MULFORD
ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS
BEFORE THE ATLANTIC INSTITUTE
JUNE 5, 1986
It is a pleasure to be here today.
You have asked me to speak on a very timely topic, especially
in view of the Atlantic Institutes' 25 year record of support for
cooperative approaches to international challenges. Today I want
in particular to speak about the last of those 25 years, because I
believe that in the past twelve months there has been remarkable
progress achieved in international economic policy coordination.
This progress is the result of efforts initiated by Secretary
of Treasury, James Baker, almost exactly one year ago to prepare
the G-5 exercise which has since become known as the Plaza
Agreement. I use the word "initiative" advisedly because the
September meeting at the Plaza Hotel in New York marked the
beginning of a "process" in which other important steps have
followed.
In the Plaza Agreement, the major countries of the industrial
world explicitly recognized the interrelationships among exchange
rates, external imbalances, and domestic economic policies and
performance. The immediate impact of the Agreement on exchange
rates was dramatic. The Japanese yen and German mark have now
appreciated 50 percent from their lows against the dollar of
February 1985. By the same token, the dollar has more than fully
offset its appreciation against the yen in the early 1980s; and it
has reversed two-thirds of its appreciation against the mark.
Less noticed, but perhaps of more lasting importance, was the
Agreement itself which set out medium-term policy intentions that
governments would follow to achieve more flexible economies and
stronger non-inflationary growth.
B-611
- 2 -
The Plaza meeting was not a spontaneous occurrence. It was
the end result of a great deal of planning and a series of
informal, private discussions — initially bilateral, subsequently
multilateral -- during which the shape and specific content of the
text of the Agreement were developed. This effort, led by the
United States, reflected our growing concern and that of other
major countries that an unsustainable international situation was
developing, which needed to be addressed in a substantial and
visible way. It was made effective by several important features:
— First, the high degree of cooperation in expressing
important long-term policy intentions;
Second, the preservation of secrecy so as to maximize the
impact on markets;
— Third, the fact that the Agreement underscored actual
policy developments and changes in economic fundamentals,
as well as the improving convergence of economic
performances which at that time were not fully reflected
in world currency markets;
Fourth, the acknowledgement that exchange rates are
related to other aspects of the international economy,
notably to large and persistent external imbalances, LDC
debt problems, and to underlying causes of instability in
the international economic system; and
Finally, the expressed willingness to engage in extensive
coordination, consultation, and action for mutual
benefit.
Thus on one level, the Plaza Agreement contributed to
exchange rate relationships among the major currencies that better
reflect underlying economic conditions.
But, on another level, it saw the beginning of a process to
improve economic policy coordination. In the intervening months
— if you excuse the pun — this process has- been built upon by
successful rounds of interest rate cuts, the deliberations of the
spring Interim Committee, and the OECD Ministerial in April which
focused on the need for sustained, balanced growth, the reduction
of external imbalances, and the LDC debt situation. In the OECD
Communique, Ministers emphasized that:
— Macroeconomic policies to support growth and employment
should also be directed toward reducing external
imbalances, and be implemented in ways that promote
greater exchange rate stability at rates reflecting
economic fundamentals. In particular, surplus countries
need to increase domestic demand to achieve full
potential growth and employment, and reduce external
surpluses.
- 3 -
—
Structural policies are also important to strengthening
growth prospects, by enlarging opportunities for
productive incentives. The OECD Communique explicitly
included within its scope capital markets, as well as
labor and product markets.
Last month, another major step forward was taken at the Tokyo
Summit, where Heads of State agreed to put in place a stronger
program to improve economic policy coordination. As Secretary
Baker put it speaking a few days ago in Boston: "We turned at the
Tokyo Summit toward a more effectively coordinated international
economic system, with management responsibilities extending across
a broad range of economic policies and performance. The system is
designed to promote consistent domestic policies and compatible
policies among countries, all the time focusing on achieving
favorable fundamentals."
We have yet to implement these new elements in the process,
but there is a clear commitment by the participating countries to
review economic objectives and forecasts with their peers at
regular intervals, and in doing so to take into account a broad
range of indicators of the type spelled out in the Summit
Communique. The compatibility of their projections will be
assessed with a view to making necessary adjustments, and if
significant deviations from an intended course emerge, the
countries have made a commitment -- declared as a general
principle, at a Summit meeting — to exert their best efforts
to adopt remedial action.
I believe that if we can complete the delicate task of
implementing these undertakings, the process of international
economic policy coordination will be greatly strengthened. A
significant improvement will have been made in the international
monetary system. Significantly, this will not be because nations
have agreed to infringe their sovereignty, but because a better
recognition of the international implications of domestic policy
decisions will develop, backed by peer pressure and a "best
efforts" commitment to adjust policies.
Meanwhile, we will be working to implement our arrangements
in a better world economic environment than we have seen for many
years.
— Inflation has been cut sharply and is expected to stay
low, in part — but only in part — reflecting the
effects of the sharp reduction in oil prices. This has
facilitated the substantial reduction in interest rates
we have experienced over the past year.
Growth in the industrial countries will rise this year to
an average level in the 3-1/2 percent range.
- 4 -
—
This industrial country growth will be approximately one
percent higher than projected at the end of 1985, and
inflation will be about two percent lower. We estimate
that in 1986 this will add nearly $5 billion to
developing nations' non-oil exports and reduce their
non-oil import costs by approximately $4 billion.
Stronger industrial country growth means stronger demand
for LDC exports, and lower inflation means less costly
imports for LDCs.
The sharp decline in interest rates -- 3 percentage
points since early 1985 — will reduce annual debt
service payments for all LDCs by about $12 billion,
freeing up scarce foreign exchange resources for
productive use elsewhere in the debtors' economies.
For the 15 major LDC debtors alone, the savings will
be nearly $8 billion.
The negative factor in the economic scene for developed
and developing countries is the continued rise in
protectionism and large external imbalances.
This makes it urgent that we not lose our momentum and that
we move forward promptly in the next few months to implement the
agreed improvement.
No doubt, in the discussion period following my remarks, you
will certainly ask two central questions: How will the system
actually work? What are the chances for successful
implementation?
Most of you are well aware of the complications of building
consensus among sovereign nations. Therefore, you will understand
me when I say it is impossible to be specific at this time about
procedures. To do so would be doctrinaire, and unhelpful for our
efforts to build a consensus. In any case, we are talking about a
process, and by definition a process is dynamic.
However, there are certain important elements we believe need
to be included in the program:
— Credible economic forecasts for individual countries must
be developed.
— These forecasts, taken together, must be reviewed for
consistency in each country's case and external
compatibility for all the countries together. A range
of economic indicators should be used for this process.
These indicators would include such variables as growth
rates, inflation rates, unemployment rates, fiscal
deficits, current account and trade balances, interest
rates, monetary growth rates, reserves, and exchange
- 5 rates. Exchange rates and current account and trade
balances would be particularly useful in assessing the
mutual compatibility of country forecasts.
— The IMF, through Managing Director de Larosiere, will
play an important role in this process.
— Where there are significant deviations from an intended
course, best efforts will be made to reach an understanding on appropriate remedial measures, focusing first
and foremost on underlying policy fundamentals.
Intervention in exchange markets could also occur when to
do so would be helpful.
This seems simple enough and there is already broad agreement
on most of these principle elements. The focus on exchange rates
and current account positions does, of course, pose extremely
delicate problems. However, here we are less concerned with
precise figures than with establishing recognition among countries
of the need for change. Countries may not be able to agree on
specific currency levels, but they can tell when currencies need
to change and the appropriate direction of change. The Plaza
Agreement has demonstrated this important point, and I feel
confident that we can put this valuable experience to use in the
improved arrangements called for in Tokyo.
Finally, can we succeed? Yes. And, bear in mind that we
have already made important progress during the past year.
Moreover, Heads of State have agreed on the need to improve the
system. There is no reason to believe that the degree of
commitment and cooperation that made reaching agreement at the
Summit possible will not be just as apparent in the implementation. There is a shared interest among all participants to
improve international economic policy coordination. All of us
want the better growth and exchange rate stability needed to
remove the world's present threatening imbalances. There is also
the pressing need to resolve the international debt situation, a
goal shared by all nations. Ultimately, there is the shared
perception of the cost of failure — namely rising protectionism
and global recession and stagnation.
Thus, the discussions which lie ahead will be about methods,
timing, and other resolvable problems. It will take time to
continue to build trust and understanding as we test the way
forward. And, as in the case in all difficult enterprises,
patience and imagination — and then more patience — will be the
essence of the business. But in the end — I would cite to you
the Chinese proverb, "Patience, and the mulberry leaf become a
silk gown."
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 5, 1986
RESULTS OF TREASURY'S 52-WEEK BILL AUCTION
Tenders for $9,251 million of 52-week bills to be issued
June 12, 1986,
and to mature
June 11, 1987,
were accepted
today. The details are as follows:
RANGE OF ACCEPTED COMPETITIVE BIDS:
Discount
Rate
Investment Rate
(Equivalent Coupon-Issue Yield)
Price
6.55%
6.62%
6.59%
6.99%
7.07%
7.03%
93.377
93.306
93.337
Low
High
Average -
Tenders at the high discount rate were allotted 2%.
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS
Received
Accepted
$
11,170
19,668,005
6,160
13,305
20,625
12,665
1,312,660
52,130
12,780
31,300
9,650
1,179,655
106,145
$22,436,250
$ 11,170
8,388,505
6,160
13,305
20,625
12,665
282,160
32,130
12,780
31,300
9,650
324,655
106,145
$9,251,250
$19,769,565
381,685
$20,151,250
2,200,000
$6,584,565
381,685
$6,966,250
2,200,000
85,000
$22,436,250
85,000
Type
Competitive
Noncompetitive
Subtotal, Public
Federal Reserve
Foreign Official
Institutions
TOTALS
$9,251,250
An additional $-152,400 thousand of the bills will be issued
to foreign official institutions for new cash.
B-612
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
June 6, 1986
Michael F. Hill
Appointed Deputy Assistant Secretary
The Treasury Department today announced the appointment of
Michael F. Hill as Deputy Assistant Secretary for Departmental
Management, responsible for Department-wide management programs
and administrative policy. Mr. Hill has been with the Department
of the Treasury since 1981 as Director of the Office of Revenue
Sharing.
Before joining the Administration, Mr. Hill was an account
executive with the E. Bruce Harrison Company. He also served as
the project director for the firm's Clean Air Act program. From
1977-1979, Mr. Hill was Director of Government Affairs for the
National Solid Wastes Management Association.
Mr. Hill had previous experience with the Revenue Sharing program
between 1976 and 1977 as Special Assistant to the Director.
Mr. Hill acquired local government experience in Knoxville,
Tennessee while serving as the Director of Planning and
Management and Assistant to the Mayor between 1973 and 1976.
During this period, he was actively involved with local
governmental commissions and councils. For the previous two
years, Mr. Hill was Director of Medical Services for Knox County,
Tennessee.
From 1965 to 1971, Mr Hill taught English at the University of
Tennessee in Knoxville, while he pursued work on his Ph.D. in
English. He received his M.A. degree in English from McNeese
State University in Lake Charles, Louisiana in 1966 and his B.A.
degree from the University of Hawaii in 1963.
Mr. Hill was born in 1940 in Abbeville, Louisiana.
B-613
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m., EDT
June 9, 1986
STATEMENT OF
J. ROGER MENTZ
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to have this opportunity to discuss the
Treasury Department's views regarding the Federal income tax
treatment of "pass-through" entities. Pass-through entities
include a wide range of entities, all or part of whose income is
taxed to the entity's owners rather than to the entity.
This hearing comes at a time when the Congress is
acting on a fundamental tax reform bill that can be expected to
produce major changes in the operation and utilization of
pass-through entities. In particular, it appears that the final
bill will in some manner limit the ability of taxpayers to
use "passive" losses (from pass-through entities or otherwise) to
offset unrelated income. H.R. 3838, as passed by the House of
Representatives, would disallow deductions for certain "excess
passive activity" losses for purposes of the individual
alternative minimum tax. The version of H.R. 3838 approved by
the Senate Finance Committee would go further, by limiting such
deductions for purposes of the regular income tax for individuals
and certain corporations. The Finance Committee bill would, in
general, prevent losses and credits from limited partnerships and
other business activities in which the taxpayer does not
materially participate from being used to offset personal
service,- active business, and portfolio investment income.
B-614
-2Although tax reform promises great changes in the tax law,
the significance of the issues being discussed today will not be
diminished. Indeed, a number of these issues take on added
importance because of the provisions affecting pass-through
entities that may be included in the tax reform bill.
The proper income tax treatment of pass-through entities is
part of a broader question concerning the income taxation of
business enterprises generally. A completely satisfactory
resolution of this issue may not be possible, as it involves
competing considerations of economic theory, administrative
practicality, fiscal responsibility, and public perceptions of
fairness. In my testimony today, however, I will attempt to
identify the more important of these considerations, and suggest
how they bear on the issue of pass-through entity taxation.
My testimony is divided into three parts. The first will
provide an overview of the treatment of pass-through entities and
will discuss the current tax rules applicable to certain of these
entities. The second part will propose a limited change in the
rules determining the classification of entities for Federal
income tax purposes. The third part will discuss other issues
that deserve additional study.
I. Background/Current Law
A. Introduction
Individuals engage in business enterprises through many
different forms of business entities, which are governed by
different sets of legal rules, both tax and non-tax. Most of the
differences in legal rules involve differences in the extent to
which, for any given purpose, the particular entity is, on the
one hand, treated as a mere aggregation of the owners of the
entity or, on the other hand, treated as a separate and distinct
person.
As I will describe more fully below, the current Federal
income tax treatment of different business entities ranges along
a continuum. At one end of the continuum are entities, such as
sole proprietorships and grantor trusts, whose separate existence
is for most purposes ignored. At the other end are entities,
such as Subchapter C corporations, that generally are treated as
separate persons whose tax liabilities are in addition to and
independent of those of their shareholders. Between these two
extremes are entities such as partnerships, trusts,
S corporations, regulated investment companies, real estate
investment trusts, and cooperatives, the taxation of which
reflect both aggregate and separate entity principles.
-3Along the continuum, significant differences in tax
treatment include (a) whether the income earned by the entity is
taxed to the entity in full, only to the extent not distributed
to the owners, or not at all, (b) whether the entity's owners are
taxed on distributed or undistributed income of the entity, (c)
whether losses incurred by the entity can be deducted currently
by its owners, or only upon a disposition of their interests in
the entity, (d) whether the timing or character of any income of
the entity that is passed through to the owners is altered when
passed through, and (e) whether the owners of the entity are
treated as engaging directly in the activities of the entity.
In our view, two fundamental questions must be addressed in
deciding where along the continuum different entities should be
classified for tax purposes. The first question is under what
circumstances should a business entity be treated as a taxpayer
separate from the owners of the entity. The stakes of this issue
may be stated simply. Under current law, if an entity is
classified as a corporation, and thus taxable separately from its
owners, income earned by the entity and distributed to its owners
is taxed at a combined maximum marginal rate of 73 percent. By
contrast, if the entity is not classified as a separate taxpayer
(e.g., a partnership), the income is taxed at a maximum marginal
rate of 50 percent. The second question is, in the case of an
entity that is not taxed in full at both the entity and
individual levels, what method should be used to pass through the
income of the entity to its owners.
Before I turn to these fundamental questions, it will be
useful to examine the manner in which current law classifies
entities along the continuum and the current law treatment under
Classification
Factors
currentB.law
of many of the
more significant tax regimes.
The classification of an entity for Federal income tax
purposes is based on the characterization of the entity for state
law purposes, the presence in the entity of certain "corporate"
characteristics, or the satisfaction by the entity of
qualification requirements for special tax rules. If an entity
is incorporated under the laws of a state, and operates lawfully
under local law, the entity is classified as a corporation for
Federal income tax purposes. Corporations with certain
characteristics, however, such as S corporations, regulated
investment companies, and real estate investment trusts, may
qualify for relief from double taxation under special rules.
-4If an entity is unincorporated, or incorporated under the
laws of a foreign jurisdiction, its classification as a
corporation, partnership, trust, or other noncorporate entity
depends on the existence of certain characteristics specified in
regulations under section 7701 of the Code. Under these
regulations, if an entity has the two characteristics of (1)
associates and (2) an objective to carry on business and divide
the gains therefrom, the entity is classified as either a
partnership or an association taxable as a corporation, rather
than as a trust or other noncorporate entity. Classification as
a partnership or an association depends, in turn, on whether the
entity possesses the following "corporate" characteristics: (1)
continuity of life; (2) centralization of management; (3) limited
liability; and (4) free transferability of interests. If the
entity has no more than two of these characteristics, it is
classified as a partnership; otherwise, it is classified as an
association.
Although the classification of different business entities
for tax purposes may produce profoundly different tax
consequences, the classification is based on factors that may
reflect only subtle differences in the actual operation of the
entities or the interests of the owners therein. For example, in
many situations the existence of the corporate characteristic of
limited liability under state law may have little significance.
Although not responsible under state law for corporate
liabilities, the shareholders of closely held corporations
frequently are required by creditors to guarantee corporate debt.
Conversely, the unlimited liability of owners of a partnership
may be rendered illusory by the use of limited partnerships,
liability insurance, thinly capitalized general partners, and
nonrecourse debt.
The application
the classification
factors of current
C. Direct of
Taxation
of Individuals
law to various business entities, and the consequences of such
If
an entity lacks
and an objective to carry on
classification,
are associates
described below.
business and divide the gains therefrom, and is not organized as
a trust or corporation, activities carried on by the entity are
taxed as if they were carried on by the individual or individuals
owning the entity. The simplest example of this is a sole
proprietorship. In this case, for local law purposes the entity
may consist of nothing more than the filing with the appropriate
government office of a company name under which the proprietor is
conducting the business. Direct taxation may also apply where
-5more than one individual has an interest in income-producing
assets. For example, two or more individuals may hold property
as tenants in common. In such case, each individual owner
includes in his taxable.-income a proportionate share of each item
of income, gain, loss, deduction, and credit generated by the
property.
Direct taxation of the individual owners also applies in
the case of certain trusts that lack associates and an objective
to carry on business and divide the gains therefrom and are
treated as "grantor trusts." Whether a trust is treated as a
grantor trust ordinarily depends on whether the grantor has
retained an interest in the trust's assets or income or is able
to exercise certain administrative powers. In general, a grantor
trust is not treated as a separate entity for Federal income tax
purposes. Instead, under the grantor trust rules, the grantor of
the trust or, in certain cases, a person other than the grantor,
is generally treated as the owner of the trust assets.
Finally, certain entities that would otherwise be
classified as partnerships may be taxed as if their activities
were carried on directly by the owners of the entity, if all of
the owners so elect. This election is available in the case of
entities that are availed of (1) for investment purposes only,
(2) for the joint production, extraction, or use of property, or
(3) by securities dealers for the purposes of underwriting,
selling, or distributing a particular issue of securities,
provided the income of the owners may be adequately determined at
the individual level.
In general, only the simplest co-ownership arrangements can
be handled in a satisfactory way through direct taxation. For
example, differing forms or classes of ownership interests may
make it difficult to determine the appropriate share of each
owner in each item of income, gain, loss, deduction, and credit
of the entity.1/ In addition, it is cumbersome to audit and
assess tax deficiencies at the individual owner level. The
issuance or redemption of interests in the entity in exchange for
cash may be a taxable event to all of the owners. Significant
complexity also may result from the need to make various
1/ This difficulty
was one of(e.g.,
the reasons
the recent
elections
and determinations
holding for
period,
method of
~
issuance
of
regulations
that,
in
general,
classify
investment
accounting, and dealer status) at the individual-owner level.
trusts with multiple classes of ownership as associations
taxable as corporations or as partnerships. See Treas. Reg.
sec. 301.7701-4(c).
-6D.
Partnerships
Most unincorporated joint business enterprises are carried
on as partnerships under state law, and are classified as
partnerships for Federal income tax purposes. The partnership
tax rules, which are found in Subchapter K of the Code, reflect a
mix of aggregate and entity concepts. In general, items of
partnership income, gain, loss, deduction, and credit are
calculated at the partnership level, but passed through to the
partners, so that no tax is imposed on the partnership as an
entity. These items retain their character in the hands of the
partners.2/ As in the case of direct taxation, partnership
income is taxed to the partners regardless of whether the
partnership distributes the income to the partners.
Contributions and distributions to and from the partnership are
generally nontaxable events, except to the extent cash
distributions exceed the partner's tax basis in his partnership
interest.
The rules of Subchapter K differ from direct proportional
taxation of the partners in several important respects. First,
Subchapter K was designed to provide flexibility, and thus
permits so-called special allocations of partnership items,
guaranteed payments to certain partners, and other arrangements
that deviate from a simple pro rata sharing of all income and
expenses of the business. Moreover, a partnership is explicitly
treated as an entity for certain tax purposes. For example, a
partnership calculates its income at the entity level using its
own method of accounting and its own taxable year. Partners
include in income the income and other items of the partnership
2/
all year
partnership
income items ending
are treated
for Because
any taxable
of the partnership
within as
or if
with the
incurred directly by the partners, the activities of a
partnership are, in effect, imputed to the partners. For
example, if the partnership engages in an active trade or
business, the distributive share of the income of a
tax-exempt partner generally is treated as unrelated business
taxable income. Similarly, if the partnership conducts a
trade or business in the United States, the distributive
share of income of a nonresident alien partner is treated as
income effectively connected with a trade or business
conducted in the United States.
-7taxable year of the partner. The use by a partnership of a
taxable year different from that of its partners may produce a
deferral of tax.3/ Also, the partnership is generally treated as
an entity for purposes of determining the tax consequences of a
purchase or sale of a partnership interest.
E.
Trusts
As with the rules of partnership taxation, the rules of
Subchapter J, which govern the income taxation of trusts and
estates, are designed to produce one level of Federal income tax.
Unlike the partnership rules, however, Subchapter J — with the
exception of the grantor trust rules described above — does not
employ a pure conduit system of taxation. Rather, trust income
ordinarily is taxed directly to the beneficiaries only to the
extent that it is distributed or required to be distributed
currently. Trust income that is not distributed currently is
taxable to the trust under the rate schedule applicable to
married individuals filing separate returns (albeit with no zero
bracket amount). Upon subsequent distribution of such
accumulated trust income, double taxation is generally avoided by
allowing the beneficiaries a credit for the taxes previously paid
by the trust. In general, trust losses are not passed through to
beneficiaries.
The modified conduit system applicable to trusts creates
several troubling opportunities for tax avoidance. First, the
treatment of trusts as separate taxpayers with a separate
graduated rate schedule can cause income to be taxed at a rate
lower than if the grantor had retained direct ownership of the
trust assets or given the assets outright to the beneficiaries.
The problems created by allowing trusts a separate rate schedule
on their undistributed income have given rise to the "throwback
rules," under which income accumulated by a trust in one year and
distributed in a later year may become subject to additional tax.
In addition, the ability to use multiple trusts to take advantage
of separate graduated rate schedules is limited by the "multiple
3/
Rules
under
current
law that
the
ability
a
trust
rule,"
which
requires
that limit
certain
trusts
be of
treated
as a
partnership
to
use
a
taxable
year
different
from
that
of its
single trust. Although intended to limit tax avoidance, these
partners
would be complex,
tightenedand
indifficult
the SenatetoFinance
Committee's
rules
are imperfect,
administer.
version of H.R. 3838.
-8Second, the Subchapter J rules provide opportunities to
allocate income among beneficiaries and the trust in a way that
minimizes the aggregate tax burden. If income is not required to
be distributed currently to a specified beneficiary, then the
allocation of income between trust and beneficiary, or among
various trust beneficiaries, is determined by the distributions
made by the fiduciary.4/
In addition, because distributions of trust income are
includible in the beneficiary's income in his or her taxable year
in which or with which the trust's taxable year ends, the use by
the trust of a taxable year that differs from that of the trust
beneficiaries will result in a deferral of tax. Subchapter J
currently contains no requirement that the taxable year of a
trust correspond to the taxable year of any of its
beneficiaries.^/
F. Corporations and Associations Taxable as Corporations
Corporations and associations taxable as corporations are
taxed under Subchapter C of the Code unless another special
provision applies. In general, Subchapter C imposes two levels
of tax on the profits of a corporation. The corporation is taxed
as a separate entity when the profits are earned, and the
shareholders are taxed at their individual rates when the profits
are distributed in the form of dividends.
4/
H.R. 3838, as passed by the House, would comprehensively
reform Subchapter J in order to eliminate these opportunities
for tax avoidance and to simplify the applicable rules. The
Senate Finance Committee version of H.R. 3838 would not make
major changes to Subchapter J, but would substantially reduce
the benefit of the separate graduated rate schedule by taxing
income above $5,000 at the maximum individual rate.
5/ Both the House-passed version of H.R. 3838 and the Senate
Finance Committee version of H.R. 3838 include changes
designed to minimize the tax benefits derived from fiscal
year trusts.
-9Corporations taxed under Subchapter C typically operate in a
manner that postpones or avoids double taxation of their income.
Thus, double taxation encourages corporations to retain rather
than distribute income, so as to defer the second level of tax
and give shareholders the opportunity to realize such income
through a sale of stock, gain on which is generally taxed at
favorable rates. In addition, double taxation encourages
corporations to raise new capital through the issuance of debt,
interest payments on which are deductible, rather than through
the issuance of stock, dividend payments on which are not
deductible. Similarly, closely held corporations are encouraged
to distribute income to their owners in the form of deductible
salary or rental payments.
Although current law attempts to
restrict avoidance or postponement of the double tax on corporate
income (for example, through the collapsible corporation
provisions, the personal holding company tax, the accumulated
earnings tax, rules characterizing debt as equity, and rules
limiting the deduction of unreasonable compensation), the double
tax is, in practice, to some extent mitigated.
Special provisions in the Code permit corporations or
associations that otherwise would be taxed under Subchapter C to
avoid, or pay a reduced amount of, corporate-level tax if they
meet G.
certain
qualification requirements. These special
S Corporations
provisions are discussed below.
In the case of an electing small business corporation,
Subchapter S of the Code generally eliminates entity level
taxation and instead taxes the shareholders of the corporation
directly in a manner similar (though not identical) to the
taxation of the partners of a partnership. Under Subchapter S,
the S corporation's income or losses are passed through to
shareholders in proportion to their stock ownership. Generally,
in order to be an S corporation, the corporation may have only
one class of stock, may not have more than 35 shareholders, and
may have as shareholders only individuals who are subject to tax
in the United States. Thus, the direct pass-through rules of
Subchapter S are limited to entities that allocate income and
expenses on a pro rata basis and have a small number of
shareholders. TRere is, however, no limit on the size (other
than the number of shareholders) of an S corporation.
-10H. Special Dividend Relief Provisions
Regulated Investment Companies. Relief from double taxation
of the income of regulated investment companies ("RICs"),
commonly known as mutual funds, is provided in order to give
investors access to an expertly managed, diversified portfolio of
investments without the imposition of a second (or, in the case
of investments in corporate stock, third) level of tax. RICs are
allowed a dividends paid deduction, and thereby avoid
corporate-level tax on income distributed to shareholders. RIC
losses, however, may not be passed through to shareholders.
To qualify as a RIC, an entity must derive at least 90
percent of its gross income from dividends, interest, payments
with respect to securities loans, and gains from the sale or
disposition of stocks or securities. In addition, limitations
are placed on a RICs ability to engage in short-term trading
activities or to concentrate its investments in the securities of
a relatively small number of issuers. Moreover, a RIC must
distribute to its shareholders at least 90 percent of its net
income (both taxable and tax-exempt) in each taxable year. We
will discuss the treatment of RICs in greater detail in our
testimony tomorrow.
Real estate investment trusts. As under the RIC provisions,
relief from double taxation of the income of real estate
investment trusts ("REITs") is provided in order to give
investors access to an expertly managed portfolio of real estate
investments without the imposition of a second level of tax. The
method
I. of
Cooperatives
relief (allowance of a dividends paid deduction) and
the qualification requirements are similar to those that apply to
Subchapter T of the Code contains rules providing limited
RICs. Our testimony tomorrow also will contain a detailed
relief from the corporate-level tax to farmers' cooperatives and,
discussion of the treatment of REITS.
with certain exceptions, to other corporations operating on a
cooperative basis.6/ The issue of what constitutes operating on
a cooperative basis has been the subject of controversy for many
years.
6/
Cooperative housing corporations are taxed under different
provisions and are not discussed in this testimony.
-11In its purest form, a cooperative is a corporation owned and
patronized by the same persons, and the function of the
cooperative is to serve each patron at cost. Any profit derived
by the cooperative from dealing with a patron is returned to the
patron in the form of a patronage dividend. Amounts returned to
patrons as patronage dividends are not included in the
cooperative's taxable income. To the extent the patronage
dividend is attributable to a business transaction of the patron,
it increases the patron's income. Profits derived by a
cooperative from transactions with nonmembers generally are
subject to entity-level tax under the rules applicable to
corporations. Subchapter T contains a set of complicated rules
designed to translate the simple goal of relieving double
taxation of patronage earnings into a framework that corresponds
to the real and more complex world of cooperative businesses.
The special tax treatment of cooperatives gives rise to a
number of basic concerns. The principal concern relates to the
deferral of tax. A cooperative is permitted to deduct currently
the amount of a patronage dividend as long as the distribution to
the patron is made within eight and one-half months after the end
of the year. A second concern arises where a cooperative
deriving earnings from business transactions with patrons returns
those earnings to the patrons in the form of bargain sales of
personal items. In such cases, it may be difficult to enforce
imposition of the appropriate level of tax on either the
cooperative
or of
the
patrons.
There is no legislative proposal
II. Taxation
Entity
and Owners
currently pending that would address either of these concerns.
A. In General
As discussed above, the first question that must be addressed
in considering the proper taxation of business enterprises is
under what circumstances should an enterprise be treated as a
taxable entity separate from its owners. Most economists agree
that income from business activities carried on through separate
-12legal entities should not be taxed more onerously than income
from activities not conducted in entity form.2/ This view is
grounded in the proposition that a market economy operates most
efficiently if all business activities are subject to the same
rate of tax.
Under current law, significant differences in effective tax
rates result from subjecting certain business activities to an
extra level of tax. With maximum corporate and individual income
tax rates of 46 percent and 50 percent, respectively, the current
maximum effective tax rate on corporate earnings distributed to
shareholders is, as noted above, 73 percent, nearly one and
one-half times the maximum effective tax rate on income taxed
only to individuals. Inefficiencies resulting from the higher
effective tax rate on corporate income include the shift of
production away from goods produced more readily in the corporate
sector, the favoring of debt capital over equity capital, and the
favoring of retention rather than distribution of corporate
earnings.
Many who criticize the uneven effects of the current tax
system argue that the corporate and individual income taxes
should be integrated. In general, two significantly different
methods for achieving integration are available. The first,
commonly referred to as dividend relief, is to impose a lower
effective tax rate on corporate income that is distributed to
shareholders. This is done either by allowing shareholders a
credit against their own tax for the tax paid by the corporation
on income distributed to the shareholder or by allowing the
corporation a deduction for dividends paid to shareholders (or
taxing at a lower rate income that is distributed to
shareholders). Dividend relief does not permit losses of the
corporation to be passed through to shareholders. The second
method,
known
pure or
partnership-model
is to
7/ Charles
E.as
McLure,
Jr.,
Must Corporate integration,
Income Be Taxed
attribute
all
corporate
income
(whether
or
not
distributed)
and
Twice?, Brookings Institution, 1979. George F. Break and
all Joseph
corporate
to Federal
the shareholders.
A. losses
Pechman,
Tax Reform: The Impossible
Dream?, Brookings Institution, 1975, pp. 90-104. Proponents
of a consumption tax argue that even a single level of tax on
income from business activities is inappropriate if the
income is reinvested rather than consumed by the individual
owners. See, e.g., David F. Bradford, "The Case for a
Personal Consumption Tax, in Joseph A. Pechman, ed., What
Should be Taxed: Income or Expenditure?, Brookings
Institution, 1980, pp. 75-111.
-13The tax systems of most of our major trading partners provide
some degree of integration of the corporate and individual income
tax systems. In all cases, this integration is achieved through
dividend relief rather than partnership-model integration. For
example, Japan relieves 38 percent, and West Germany 100 percent,
of the double tax on income distributed by corporations by
applying a reduced corporate tax rate to distributed income and
allowing shareholders a tax credit for part or all of the tax
paid by the corporation on the distributed income. Canada
relieves 40 percent, France 50 percent, and the United Kingdom 80
percent, of the double tax on distributed income by allowing
shareholders a tax credit for a portion of the tax paid by the
corporation
on income
distributed
to shareholders.
B. Current
Prospects
for Integration
As a matter of ideal tax policy, income from different
business activities should be taxed at equivalent rates,
irrespective of the form of business entity. We recognize that a
failure to integrate the corporate and individual income tax
systems will perpetuate differences in effective tax rates. Such
differences will exist not only among different types of entities
engaging in the same activity, but among different sectors of the
economy, with the production of those goods and services that are
more readily produced by corporations discouraged relative to the
production of other goods and services.
Nonetheless, it does not appear that a significant level of
integration will be achieved in the foreseeable future. In our
November 1984 report to the President on tax reform, the Treasury
Department proposed that partial integration be achieved by
allowing corporations a 50 percent dividends paid deduction,
phased in over a ten-year period. In the President's tax reform
proposals to the Congress, a ten percent dividends paid deduction
was proposed. The President's proposal, which was intended to
represent a meaningful first step toward elimination of the
double tax, was limited solely because of revenue concerns. In
H.R. 3838, as passed by the House of Representatives, a ten
percent dividends paid deduction would be provided, phased in
over a ten-year period. The tax reform bill recently approved by
the Senate Finance Committee does not provide for any dividend
relief. This sequence of events suggests that the prospects for
significant integration in the near future are not bright.
-14The apparent reasons for a lack of strong support for
integration are significant. One reason is the substantial
revenue cost of any integration proposal. The dividends paid
deduction proposed in the Treasury Department's report to the
President was estimated to cost over $30 billion in 1990, when
the amount of the deduction would have been 40 percent of
dividends paid. Restoration of these revenues would require
either substantial changes in the tax base or significant
increases in tax rates.
The prospects for significant integration are also weakened
by the public and political support for a corporate income tax.
Corporations, and large corporations in particular, are widely
viewed as separate entities that should contribute, through tax
payments, to the cost of government. It is noteworthy as well
that prior integration proposals have not received strong support
from the corporate sector. Many corporate managers may prefer
either reduced income tax rates on all corporate earnings or
increased tax preferences for investment over dividend relief or
other methods of integration. Some may also be concerned that
integration in the form of dividend relief would force larger
distributions of corporate income and thus reduce the capital
C. Proposal to Revise Classification Standards
available to corporations for reinvestment.
As long as the Federal income tax system does not provide for
full integration of the corporate and individual income tax
systems, purely equivalent tax treatment of income generated
through different business entities can be achieved only by
subjecting all business entities (including sole proprietorships)
to separate entity and individual levels of tax. We would
obviously not support achieving equivalent tax treatment of
different entities in this manner. Such a rule, by taxing all
income from equity investment at a higher effective rate than
other income, would seriously discourage investment. Moreover,
we believe that such a dramatic expansion of the entity level tax
would be an inappropriate extension of the double tax to entities
that bear no significant resemblance to corporations.
If we accept the premise that corporations and sole
proprietorships — the entities at the opposite ends of the
continuum of business entities — will continue to be taxed in
fundamentally different ways and at significantly different
-15effective rates, we must also accept that it is impossible to
achieve a completely level playing field for different types of
business enterprises engaging in similar income generating
activities. Moreover, given the many different types of business
entities and the wide differences in practical operation between
particular entities of the same type, we must recognize that any
lines that are drawn to classify entities for tax purposes will
be, to some degree, arbitrary and unsatisfactory.
Kintner Regulations. The difficulty in drawing acceptable
classification lines is illustrated by recent experience with the
rules distinguishing partnerships from associations taxable as
corporations. As described earlier, the current association
regulations under section 7701 (commonly referred to as the
"Kintner" regulations) 8/ treat an unincorporated association as
a corporation only if tHe association has more than two of the
four relevant corporate characteristics (continuity of life,
centralization of management, limited liability, and free
transferability of interests). Under these regulations, only in
rare situations will a partnership formed under a uniform
partnership or limited partnership act be classified as an
association taxable as a corporation.
The Kintner regulations were issued at a time when
corporations were allowed to take advantage of certain qualified
pension plan and other beneficial rules not available to
partnerships. The regulations reflected the desire to limit the
ability of unincorporated entities to gain access to these rules.
Since the issuance of the regulations, the advantages of
corporate classification have generally been eliminated 9/ while
the advantages of partnership classification have grown Tlargely
due to the reduction in individual tax rates and the expansion of
tax preferences). Because of the "bias" in the Kintner
regulations in favor of partnership classification, the
regulations have permitted the formation of limited partnerships
that, in operation, bear little resemblance to traditional
partnerships.
Sincewere
all developed
entities incorporated
under state
law
8/ The regulations
largely in response
to the
are classification
taxed as corporations,
taxpayers
in
effect
are
allowed
to
of a professional service organization as a
electcorporation
to be taxedin as
a corporation
a partnership.
Kintner
v. Unitedor States,
216 F.2d 418 (9th
Cir. 1954).
9/ The advantages of corporate classification were reduced
significantly by changes in rules relating to qualified
pension plans and personal service corporations contained in
the Tax Equity and Fiscal Responsibility Act of 1982.
-16Proposals for Change. Although the Kintner regulations
have been criticized because they make corporate status
virtually elective, various proposals to revise the
classification rules have met with no greater acceptance.
The Treasury Department's report to the President on tax
reform proposed to treat as a corporation any limited
partnership having more than 35 limited partners. Although
this proposal was made in the context of a tax reform plan
that would nave reduced significantly the differences in
taxation of corporations and partnerships, it was heavily
criticized and was not included among the President's tax
reform proposals to the Congress. Among the criticisms of
the proposal were that no logical basis existed for
distinguishing limited partnerships with more than 35
limited partners from those with 35 or fewer limited
partners and that the proposal favored wealthy individuals
who would be able to invest in partnerships raising large
amounts of capital from a small number of partners.
Earlier attempts to substitute a more subjective and
restrictive resemblance test for the Kintner regulations
also were unsuccessful. In 1977, the Treasury Department
proposed new regulations that would have revised the
standards for determining whether each of the four corporate
characteristics exists in a particular case, and eliminated
the rule that a majority of the corporate characteristics
must exist for an unincorporated association to be
classified as a corporation. In the face of heavy
criticism, these regulations were withdrawn two days after
their publication. 10/
The experiences described above make us cautious in
suggesting any change in the classification standards. We
do, however, believe that one limited change is appropriate.
In suggesting a change in current classification
standards, we do not wish to move from a set of objective
rules as provided under current law. Although objective
classification rules may be criticized as arbitrary and
unfair, there is a compelling need on the part of both
taxpayers and the government for certainty. Moreover, we
question whether subjective classification rules would be
significantly more fair than objective rules, since even
subjective
rules would
provide
widely dissimilar
10/
Prop. Treas.
Reg. sec.
301.7701-1-3,
42 Fed. tax
Reg. 1038
treatment
for 1977),
similar
entities 42
falling
on either
(Jan. 5,
withdrawn,
Fed. Reg.
1489 side
(Jan.of
7, the
subjective
line.
1977).
-17Consistent with the above, we believe that the
characterization of an entity under state law should
ordinarily be respected. Thus, an entity organized and
operated as a corporation under state law should be
classified as a corporation for Federal income tax purposes,
notwithstanding that the enterprise may more closely
resemble a sole proprietorship than a corporation.
Likewise, an entity that is organized as a partnership under
state law generally should be treated as such for tax
purposes.
Notwithstanding our general acceptance of state law
characterization, we believe that, unless pure
"partnership-model" integration is achieved for corporations
generally, access to such pass-through treatment by
noncorporate entities should be limited in certain
instances. In our view, this limit should apply to require
corporate classification in the case of an entity that (1)
has a large number of owners, substantially all of whom are
not involved in the management or operation of the entity,
(2) has ownership interests that change hands frequently,
(3) has access to capital markets in a manner comparable to
large corporate entities, and (4) is carrying on significant
business activity and dividing the gains therefrom.
The application of pass-through taxation principles to a
partnership or similar entity possessing each of these
characteristics produces tax results that are inordinately
complex. Moreover, it is likely that non-tax considerations
make the partnership form relatively unwieldy for such
entities, so that the advantage of pass-through taxation is
sought at the expense of economic efficiency. Finally, an
entity possessing the characteristics described above
operates and is commonly and appropriately viewed as an
entity that is separate and independent from its owners.
For these reasons, we believe that such a partnership or
similar entity exceeds the practical and appropriate limit
for pass-through taxation and should be treated as a
corporation for Federal income tax purposes. We have no
illusions that we can identify the precise point at which
11/
do not
this testimony
propose however,
a standard
forit is
thisWelimit
is in
reached.
We do suggest,
that
determining
when
the
interests
in
a
limited
partnership
exceeded in the case of business activities organized as
wouldpartnerships,
be treated as
publicly
traded.
We note,
however,
limited
the
interests
in which
are publicly
that the Code already contains the related concept of
traded.11/
whether securities are "readily tradable" or "regularly
traded" on an "established securities market." See,
e.g., sections 170(e) (5) (B) ( i ), 453(f)(5), 897(cTH),
TI7J(b)(3), and 1445(b)(6). Whether a partnership is
publicly traded could also be determined by reference to
the Federal securities laws. As we indicated earlier,
it is essential that any standard that is chosen be
clear and based on objective factors.
-18Administrative Complexity. For tax purposes, the
partnership model is best suited to entities that have a
small number of owners who are involved in, or at least
closely aware of, the activities of the partnership.
Utilization of this model for complex entities, the
interests in which are widely held and frequently
transferred, creates difficulties both for the Internal
Revenue Service and for the partnerships and partners
themselves.
Because adjustments to the items of income, gain,
loss, deduction, and credit of the partnership produce
adjustments to the taxable income of all of the individual
partners, the tasks of auditing the returns of a large
partnership, and collecting any deficiency from, or
returning any refund to, the individual partners are not
easy ones. Some of the problems of auditing large
partnerships have been reduced as a result of the
partnership-level audit provisions adopted in the Tax Equity
and Fiscal Responsibility Act of 1982. Nonetheless, audit
and collection procedures are significantly simpler in the
case of corporations, including corporations, such as RICs
and REITs, that qualify for dividend relief.
In addition, it is difficult for both the Internal
Revenue Service and the partnership and partners themselves
to apply the pass-through rules where the proportionate
interests of the owners are changing frequently. Among the
most difficult of the rules to apply are section 708(b)
(under which a partnership is treated as terminated if
within a 12-month period there is a sale or exchange of 50
percent or more of the interests in the partnership), 12/
sections 734 and 743 (which provide for optional adjustments
to the basis of partnership property as a result of certain
distributions of partnership property or transfers of
partnership interests), section 751 (under which amounts
received upon the sale of partnership interests that are
attributable to certain ordinary income property of the
partnership are characterized as ordinary income rather than
an amount from the sale of a capital asset), and section
704(c) (under which tax items relating to property
12/ Termination of the partnership under section 708
contributed to a partnership are shared so as to take
produces a deemed distribution of the assets of the
account of the variation between the tax basis of the
partnership and a deemed formation of a new partnership.
property and its fair market value).
-19Publicly traded partnerships typically do not know who
many of their partners are, because interests are often held
in "street name." Therefore, they have no way of knowing
whether transfers of partnership interests have resulted in
a termination of the partnership under section 708(b), and
such partnerships are incapable of properly applying the
relevant rules. The making of section 734 and 743
adjustments by publicly traded partnerships requires the use
of sophisticated computer programs, and even then is
feasible only if simplifying assumptions are made. The
proper application of section 751 to publicly traded
partnerships also is virtually impossible, because the
individual partners have insufficient knowledge regarding
the partnership's assets to determine the applicable tax
consequences. In addition, interests in a partnership must
be fungible in order to be traded readily. Yet, the tax
treatment under section 704(c) of partners in a partnership
to which property having a value different from its tax
basis has been contributed may cause interests in the
partnership not to be fungible.
At the partner level, one need only examine the
difference between a Form K-l, the information return
provided by a partnership to its partners, and a Form 1099,
the information return provided by a corporation to its
shareholders, to appreciate the difference in level of
complexity. Additional complexity is present in the case of
partners that are tax-exempt organizations or foreign
persons. Because the activities engaged in by the
partnership are, in effect, passed through to the partners,
income from the partnership may be treated as unrelated
business taxable income to a tax-exempt partner or income
effectively connected with a U.S. trade or business to a
foreign partner. The depreciation deductions of a
partnership may in certain cases be affected by the
existence of a tax-exempt partner. A level of complexity
that may be appropriate where a small number of persons hold
large interests in an entity becomes unacceptable where a
large number of persons hold small interests in an entity.
The administrative difficulties of applying the tax
rules on a pure pass-through basis to widely held business
entities is a major reason that the partnership model
generally has been rejected as an acceptable way to achieve
integration of the corporate and individual taxes. The
foreign countries that have adopted full or partial
integration have uniformly done so through dividend relief
rather than the partnership-model. Similarly, the
integration provided in our tax system for RICs and REITs
and the partial integration that has been considered in
-20connection with tax reform have taken the form of dividend
relief through the allowance of a dividends paid
deduction.13/
Non-Tax Considerations. Independent of the
administrative difficulties of applying the partnership tax
rules to a publicly traded limited partnership, many non-tax
factors make the partnership an unwieldy vehicle for a
publicly traded business enterprise. Limited partnerships
lack the relatively well developed body of law that exists
with respect to the business activities of corporations and
the respective rights and obligations of the owners and
managers of the entity. State limited partnership laws are
in large part based on the assumption that the partners will
have a continuing interest in the partnership and will be
familiar with the operations of the partnership. Because
partners are generally free to govern their own affairs
through the partnership agreement, partners have a greater
burden in understanding the terms of their investment.
State law restrictions on the transferability of partnership
interests may prevent the purchaser of an interest from
acquiring all of the rights of a partner. In addition,
partners may become liable for state and local income taxes
in many of the jurisdictions in which the partnership
operates.
The uncertainties, complexities, and risks associated
with operating an entity in partnership form make the
limited partnership a less efficient vehicle for operation
of a publicly traded business enterprise than a corporation.
Tax considerations aside, it is unlikely that any publicly
traded business entity would be organized and operated as a
partnership. The inefficiencies borne by an entity and its
owners are not irrelevant to the choice of appropriate tax
rules. The strongest argument against taxing publicly
traded limited partnerships as corporations is that the
uneveness and consequent inefficiency of the double tax
system should not be expanded by extending double tax
treatment to entities now taxed as partnerships. We
13/ We note that the Treasury Department in 1977, while
question the extent of the efficiency benefits that actually
acknowledging potential administrative problems,
result from permitting pass-through tax treatment for those
proposed a partnership-model integration scheme. See
publicly traded business entities that utilize the unwieldy
Blueprints for Basic Tax Reform (January 17, 1977)1
partnership vehicle.
During our most recent study of this issue, the Treasury
Department concluded that administrative and other
problems make such a scheme infeasible at this time,
and, as described above, we proposed a system of
dividend relief.
-21Resemblance to Corporations. The tax and non-tax factors
that make the limited partnership an unwieldy vehicle for a
publicly traded business enterprise all derive from the fact that
the partnership rules are, on the whole, designed to treat the
partnership as an aggregation of its individual partners. An
entity that is engaged in an active business and has a large, and
frequently changing, group of partners, few of whom are engaged
in the management or operation of the partnership, does not fit
easily within the partnership rules for the simple reason that
such an entity cannot reasonably be viewed as an aggregation of
its owners. Rather, the entity is, like a corporation,
appropriately and, indeed, necessarily viewed as separate and
distinct from its owners. The current ability of certain
entities to escape corporate taxation while behaving like
corporations in all important respects raises questions both of
fairness and, in the long-run, of the integrity of the corporate
income tax base. Given the evident public and political support
for a corporate income tax, it is inappropriate as a matter of
tax policy
to permit for
that
tax to be
avoided by
entities
Prior Proposals
Change.
Classifying
publicly
traded
functionally
indistinguishable
from corporations.
limited
partnerships
as corporations
for Federal income tax
purposes is not a new idea. In 1982, the American Law Institute,
in its Federal Income Tax Project on Subchapter K, proposed to
classify any limited partnership whose interests are traded in an
established securities market as an association taxable as a
corporation. In 1983, the staff of the Senate Finance Committee
released a preliminary report on Subchapter C reform ("The Reform
and Simplification of the Income Taxation of Corporations")
containing the same proposal. (In the final version of the
Finance Committee staff report, released in 1985, the issue of
how to classify publicly traded limited partnerships was
determined to be beyond the scope of the report and was not
addressed.)
In 1983, when we testified before the Senate Finance
Committee concerning the preliminary staff proposals on
Subchapter C reform, we opposed the publicly traded limited
partnership classification proposal. Our principal objection was
that the proposal was beyond the scope of the Subchapter C reform
project and required additional study. We also expressed doubt
that the degree of marketability of an entity's equity interests
should determine the manner in which the entity is taxed and were
concerned about the impact of the proposal on certain activities
that have traditionally raised capital through limited
partnerships.
As we did in 1983, we recognize now that some publicly
traded limited partnerships will differ in only minor respects
from other widely held, but not publicly traded, limited
partnerships. The proposal we make today is not based on the
view that publicly traded limited partnerships are different in
-22kind from all other partnerships, but on the view that public
trading in the interests of a limited partnership is indicative
of the existence of the other, more relevant, classification
factors (discussed above) that may, to a lesser extent, be
present in many other partnerships. If it is determined that
certain activities (such as natural resource exploration or
development, research and experimentation, and housing
development) should be permitted to continue in the form of
publicly traded entities not subject to a double level of tax, we
suggest that alternatives to the partnership model be considered.
In particular, the double tax could be avoided through additional
dividend relief provisions comparable to those applying to RICs
and REITs.
Conclusion. For the reasons discussed above, we recommend
that current law be amended to provide for the classification of
publicly traded limited partnerships as associations taxable as
corporations. We believe such a provision would represent a
reasonable balancing of considerations of economic efficiency,
administrative feasibility, fiscal responsibility, and equitable
treatment of different entities that operate in a similar manner.
If such a proposal is to be enacted, additional study is needed
regarding such issues as the proper standard for determining
whether interests in a limited partnership are publicly traded,
the proper treatment of existing publicly traded limited
partnerships, and possible alternative methods of relief from
double taxation for certain activities. We will be pleased to
III. with
Issues
Subchapter
work
theUnder
Subcommittee
to Kresolve these and other issues.
A. In General
To the extent partnerships will continue to operate free of
an entity-level tax, as we believe is appropriate for the vast
majority of businesses currently organized in partnership form,
the question remains as to how partnership income should be
passed through to the partners. Currently, the answer to this
question is provided by Subchapter K of the Code.
Subchapter K, which is a complex melding of entity and
aggregate notions of taxation, allows greater flexibility to
taxpayers than any other scheme of taxation in the Code. This
flexibility reflects the freedom partners are afforded under
state law to structure their economic affairs, and thus is
appropriately intended to conform partnership tax consequences to
a partnership's economic results.
In providing flexibility, however, Subchapter K requires a
complex set of rules to allocate partnership income among the
partners. These rules were not overly difficult to apply to the
relatively small and simple business arrangements that
typically were conducted in partnership form at the time
Subchapter K was developed. In recent years, however, as
-23partnership arrangements have grown more complex, Subchapter K
has become vastly more difficult to apply, increasing
administrative burdens on taxpayers and the Internal Revenue
Service, and raising significant tax policy concerns as to the
appropriateness of the tax results achieved in some transactions.
The growth in complexity of partnership arrangements in part
simply reflects the increased sophistication of commercial
arrangements, and the fact that businesses traditionally
conducted in partnership form also have become more complex. A
more troubling source of complexity, however, is the use of the
partnership form either to transfer Code-based tax incentives
among partners or to obtain tax results that are inconsistent
with the economic results that the partners expect to achieve
from the partnership's activities. The number of these
arrangements appears to have grown dramatically as tax incentives
have increased and marginal tax rates have remained at relatively
high levels.
In recent years, Congress has adopted a number of statutory
changes designed to limit the use of the partnership form to
achieve inappropriate tax consequences. 14/ For the most part,
these changes have been targeted responses to specific
transactions or arrangements, amending particular provisions of
Subchapter K while leaving its structural flexibility in place.
Moreover, prior to the beginning of the tax reform process,
little had been done to reduce the high marginal tax rates and
broad tax incentives that prompt tax-motivated partnership
arrangements.
As noted above, Congress is now acting on fundamental tax
reform legislation that would dramatically alter this country's
tax system. The versions of H.R. 3838 passed by the House and
approved by the Senate Finance Committee would substantially
reduce marginal tax rates and would reduce or eliminate many
incentives now in the Code. In addition, both bills would extend
to real estate a limited version of the at risk rules, expand the
minimum tax, and limit the deductibility of interest expense.
Finally, as noted earlier, the Senate Finance Committee version
also would directly limit the ability of passive partners to use
partnership losses to shelter their other incomes.
These changes, if enacted, would significantly limit current
incentives for tax-motivated partnership arrangements. We should
not assume, however, that tax reform will eliminate all problems
in this area, and, indeed, it is only prudent to expect that
dramatic changes in the tax system may prompt new tax-motivated
uses
of example,
the partnership
form. to It
thus less
remains
importantchanges
to
14/ For
in addition
other
significant
examine
the
use
of
partnerships
under
current
law
and
to
consider
affecting partnerships, the Tax Reform Act of 1984 amended
what sections
changes to
Subchapter
K might
appropriate
if
704(c),
706, 707,
734,be
and
752, and added
new
tax-motivated
partnership
arrangements
persist.
sections 386 and 761(e).
-24B.
Perceived Problems
In exploring possible changes to Subchapter K, it is
appropriate to focus on its system of partnership allocations,
which is the principal source of the flexibility afforded to
partnerships. As mentioned earlier, under current law each
partner takes into account separately his distributive share of
the partnership's items of income, gain, loss, deduction, and
credit. The partners are free to allocate these items in any way
they choose, so long as the allocations made by the partnership
agreement have "substantial economic effect."
The notion of substantial economic effect is
straight-forward in the abstract — the manner in which the
partners share the economic consequences of partnership
activities should dictate the tax consequences to the partners of
those activities. In other words, if a partner enjoys economic
income or bears an economic loss as a result of partnership
activities, he should realize a corresponding amount of taxable
income or loss.
For example, if a partner in a law firm receives a
disproportionately large share of the firm's income in a
particular year because of his unusual contribution to the firm
in that year, the lawyer, and not his partners, would be taxed on
that income. Thus, if the economic results of the partnership
are shared among the partners other than on the basis of a fixed
percentage ownership interest in the partnership, Subchapter K
provides the flexibility for the partners to be taxed
consistently with that business arrangement. Even though the
partnership may be quite large and there may exist a complex
formula for measuring each lawyer's contribution to the firm, the
resulting complexity in determining the tax consequences under
Subchapter K may be acceptable because no other system would as
accurately reflect how the partners share the economic results of
the partnership's activities.
As applied to other partnerships,, however, in which
allocations are intended less to reflect economic reality than to
minimize taxes, the concept of substantial economic effect has
proven much less satisfying. Take, for example, a partnership to
which Partner A (a high-bracket investor) contributes $150,000
15/
partnership
agreement
provides
that (1)$50,000.
capital 15/
accounts
and The
Partner
B (a service
provider)
contributes
The
will
be
maintained
properly,
(2)
upon
liquidation
of
the
partnership borrows $800,000 on a recourse basis and constructs a
partnership
or any partner's
interest, leases
liquidating
building
for $1,000,000.
The partnership
the building to
distributions will in all cases be made in accordance with
capital accounts, and (3) partners are required to restore
deficit capital account balances, all as described in Treas.
Reg. sec. 1.704-l(b)(2)(ii)(b).
-25a financially secure corporation for 20 years under a "net lease"
with a rental inflation adjustment provision. In its first
taxable year, the partnership expects to receive rental income of
$90,000, incur interest expense of $80,000, and be entitled to a
cost recovery deduction of $47,000. The partnership agreement
provides that net losses of the partnership will be allocated 99
percent to Partner A and 1 percent to Partner B, and that net
profits of the partnership will be allocated 99 percent to
Partner A and 1 percent to Partner B until all prior losses have
been "charged back." Thereafter, all profits of the partnership
will be allocated equally between the partners. 16/
Traditionally, the allocation of the partnership's $37,000 first
year loss $36,630 to Partner A and $370 to Partner B has been
considered to have substantial economic effect because, if the
partnership were to sell the building subject to the lease for
$953,000 (the adjusted basis of the building) at the end of the
first taxable year, Partner A would have suffered an economic
detriment of $36,630, and Partner B would have suffered an
economic detriment of $370.
Nevertheless, the appropriateness of the results achieved
under this traditional approach may be questioned in the context
of an incentive depreciation system, such as ACRS, where tax
depreciation deductions are likely to be far in excess of
economic depreciation. For instance, if the partners expect to
sell the building at the end of the year and reasonably believe
(on the basis of several appraisals and offers they have received
from potential purchasers) that they will receive no less than
$1,000,000, it is questionable whether 99 percent of the tax
loss, which appears not to be matched by a corresponding economic
loss, should be allocable to Partner A. Put another way, should
99 percent of the subsidy provided by faster than economic
depreciation deductions (intentionally provided by the Code to
stimulate investment in real estate) be available to Partner A
16/ In because
fact, the
partners
probably
considerthethemselves
merely
Partner
A agrees
to accept
real, but equal
partners
except
that
Partner
A
is
to
receive
"tax
relatively small, risk that the tax deduction willthereflect
benefits."
economic
reality? 17/
17/ If, at the end of the year, the property is subject to a
contract for sale at a price of $1,000,000 or if the debt is
nonrecourse, the risk of Partner A bearing an economic loss
corresponding to the tax loss is even smaller. Moreover, if
the tax incentive being allocated is a tax credit, rather
then a deduction, there is absolutely no economic risk
corresponding to the tax allocation.
-26Similarly, consider a partnership to which Partner C (who has
an expiring net operating loss carryover) contributes $100,000,
and Partner D (who is a high-bracket taxpayer) contributes
$900,000. 18/ The partnership uses the contributed capital to
purchase a retail store for $1,000,000. The partnership
agreement provides that the partnership's net profit, if any, in
its first taxable year will be allocated to Partner C, who will
be able to offset the income with his NOL. Thereafter, all
profits and losses of the partnership will be allocated 10
percent to Partner C and 90 percent to Partner D. Nonliquidating
cash distributions will be made 10 percent to Partner C and 90
percent to Partner D, except that, in each of years 10 through
30, Partner C will receive additional annual cash distributions
in an amount necessary to amortize the amount of net profit
allocated to Partner C from the partnership's first taxable year
plus an agreed-upon rate of interest that is less than a market
rate. The partnership agreement further provides that Partner C
may not cause the partnership or his interest in the partnership
to be liquidated without Partner D's consent.
If the partnership realizes net income of $100,000 in its
first taxable year, Partner C will be allocated that $100,000 of
income.
Nevertheless, C's right to receive the actual cash
attributable to that $100,000 profit has a present value that is
far less than $100,000 because that amount will be distributed to
Partner C over time and will earn a below-market rate of
interest. Should Partner D be able to avoid paying tax on the
entire $100,000 of taxable income earned in the partnership's
first year even though Partner C is prevented from enjoying the
full economic benefit corresponding to that income? Final
regulations published in December of 1985 contain rules intended
to prevent this result. 19/ The rules have been criticized by
some, however, as being ineffective and by others as beyond the
scope of the substantial economic effect requirement. 20/
18/ The
partnership
agreement
contains
the requirements
These
relatively
simple
examples
illustrate
the conflictdescribed
in
footnote
15
above.
between the intentional flexibility of Subchapter K and the
general
policy
the transfer
taxReg.
attributes
independent
19/
Treas.
Reg.against
sec. 1.704-l(b),
50 of
Fed.
53420 (December
31,
1985).
20/ The version of H.R. 3838 approved by the Senate Finance
Committee includes in the amendments to section 382 a
provision explicitly giving the Treasury Department authority
to deal with this and other such arrangements involving a
corporate partner with an NOL carryfoward.
-27of any economic incidents to which they relate. 21/ Although the
current law substantial economic effect requirement is intended
to prevent the separation of tax from economic consequences, its
effectiveness for this purpose is unclear in the situations
described. As mentioned above, final regulations defining
substantial economic effect have only recently been published.
Although there are early indications that these regulations may
not have stopped certain transactions that may be viewed as
abusive, the basic approach taken in the regulations, perhaps
with modifications, may ultimately prove workable and effective.
Moreover, as noted above, pending tax reform legislation would,
by limiting tax incentives and reducing tax rates, ease existing
pressures on the rules of Subchapter K.
C. Further Study
Although it may be premature to make significant changes in
the structure of Subchapter K, we believe this is an area that
will require close and continuing scrutiny. If exploitation of
Subchapter K through tax-motivated partnership arrangements
persists, it may be appropriate to consider revisions of
Subchapter K that would substantially restrict its flexibility.
One approach deserving study would be a partnership
allocation system similar to that employed in Subchapter S.
Under this more rigid system, each unit of ownership interest in
the partnership would be required to share equally in each item
of partnership income, gain, loss, deduction, and credit and in
each distribution made by the partnership. If the partnership
did not meet this requirement, it would be taxed as a corporation
under Subchapter C, just as an S corporation that is found to
have two classes of stock. Under such a regime, any shift in a
partner's percentage interest in partnership items would, as with
a transfer of shares in an S corporation, be characterized and
taxed appropriately (as, for example, a purchase of an additional
interest for capital, a receipt of an additional interest for
services,
or a gift).
In developing
such
an approach,
could
21/
Limitations
on the transfer
of NOL
carryforwards
init
the
be desirable
tocorporate
analyze the
possibility
of a
single
of the
context of
acquisitions
have
long
beensystem
part of
pass-through
taxation
for
all
non-publicly
traded
business
Code. Similarly, the right to depreciation deductions has
entities,
which could
replace
Subchapters
K and S of
current law.
historically
followed
"ownership"
of property,
thus
preventing separation of depreciation benefits from the
property's economic incidents. Although the "safe harbor
leasing" rules contained in the Economic Recovery Tax Act of
1981 permitted taxpayers the right to transfer depreciation
and credits independent of economic ownership, these rules
were largely repealed in the Tax Equity and Fiscal
Responsibility Act of 1982. Moreover, despite continuing
debate over the merits of free transferability of tax
benefits, Congress has shown no willingness to move in this
direction.
-28Obviously, this possible approach to revising Subchapter K,
as well as any other possible revision of this magnitude, would
require extensive consideration before enactment. We recognize,
moreover, that significant restrictions on the flexibility of
Subchapter K could adversely affect economic arrangements that
appear to be taxed appropriately under current law. in this
regard, it could well be appropriate to retain more flexible
treatment for certain identified activities or industries. For
example, service organizations might be permitted to shift
allocations of bottom line income or loss without regard to units
of ownership where such shifts respond to the shift from year to
year in the relative values of services provided by the various
partners.
We recognize that any recommendation even to study the basic
structure of Subchapter K may be met with alarm in some quarters.
We should not be dissuaded, however, from efforts to strike the
appropriate balance between flexibility for taxpayers and the
integrity of the tax system. The Treasury Department will
continue to study how that balance should be struck with respect
to the taxation of pass-through entities. If the Subcommittee
wishes to pursue this general subject, we will of course be
pleased to participate fully inOQO
such efforts.
This concludes my prepared statement. I will be happy to
respond to questions.
TREASURY NEWS
epartment
of the
Treasury • Washington, D.c. • Telephone
June 9, 1986
FOR IMMEDIATE
RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,201 million of 13-week bills and for $7,208 million
of 26-week bills, both to be issued on
June 12, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing September 11 1986
Discount Investment
Rate
Rate 1/
Price
26-week bills
maturing December 11, 1986
Discount Investment
Rate
Rate 1/
Price
6.26%
6.32%
6.31%
6.34%
6.41%
6.39%
6.45%
6.51%
6.50%
98.418
98.402
98.405
6.64%
6.72%
6.69%
96.795
96.759
96.770
Tenders at the high discount rate for the 13-week bills were allotted 79%,
Tenders at the high discount rate for the 26-week bills were allotted 27%.
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
$
48,100
19 ,022,500
33,260
49,240
87,010
53,340
1,575,715
86,820
16,510
66,910
46,170
945,645
334,590
48,100
$
5 ,794,000
33,260
49,225
37,010
43,340'
400,715
53,980
15,460
65,860
40,120
284,935
334,590
$
Accepted
29,545
17,580,315
13,695
31,910
35,685
46,420
1,127,935
83,130
18,630
42,290
32,005
645,385
:
280,300
$
29,545
6,291,865
13,695
31,910
35,685
46,420
214,935
48,210
18,630
42,290
27,005
127,135
280,300
$22 ,365,810
$7 ,200,595
: $19,967,245
$7,207,625
Type
$19 ,120,905
Competitive
1 ,137,875
Noncompetitive
Subtotal, Public $20 ,258,780
$3 ,955,690
1,137,875
$5 ,093,565
: $16,866,975
:
778,970
: $17,645,945
$4,107,355
778,970
$4,886,325
1 ,691,130
1,691,130
:
1,750,000
1,750,000
415,900
415,900
:
571,300
571,300
$22,365,810
$7,200,595
$19,967,245
$7,207,625
TOTALS
Federal Reserve
Foreign Official
Institutions
TOTALS
1/ Equivalent coupon-issue yield
B-615
2041
TREASURY NEWS
apartment of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m., EDT
June 10, 1986
STATEMENT OF
DENNIS E. ROSS
TAX LEGISLATIVE COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I am pleased to have this opportunity to discuss the Treasury
Department's views regarding the following four bills that would
affect the tax treatment of certain pass-through entities: (1)
H.R. 1658, relating to the treatment of business development
companies; (2) H.R. 3397, relating to the treatment of regulated
investment companies; (3) H.R. 4916 and H.R. 2571, relating to
the treatment of real estate investment trusts; and (4) H.R.
4448, relating to the treatment of multiple class mortgage pools.
In addition to discussing the specific provisions of each bill, I
will discuss certain other issues relating to the treatment of
several of these entities under current law.
Broader issues concerning the proper method of taxing
different types of business entities and their owners were
discussed at yesterday's hearing. The Treasury Department's
testimony at that hearing focused, in part, on whether limits
should be placed on the ability of certain noncorporate entities
to avoid being treated for Federal income tax purposes as
corporations, thus eliminating one of the two levels of tax
generally imposed on corporate earnings that are distributed as
dividends. All of the entities that are the subject of today's
hearing are either corporations or noncorporate entities that are
nevertheless treated as corporations. The entities being
considered today, however, are (or would be under proposed
legislation) governed by special tax regimes that limit (or
eliminate) the double taxation of corporate income that is
distributed to shareholders. The common issues explored in my
testimony today will be first, what limits should exist on the
activities
of organizations benefiting from these special
B-616
regimes, and
second,
what
rulesincome
shouldearned
apply by
to the
ensure
proper
taxation
to the
owners
of the
entity.
-2H.R. 1658
Business Development Companies
Current Lav
The Internal Revenue Code ("Code") permits certain
corporations that qualify as "regulated investment companies"
("RICs"), commonly called mutual funds, to deduct dividends paid
to their shareholders, and thereby avoid the double taxation that
would otherwise be imposed on distributed corporate earnings. In
order to qualify as a RIC for Federal income tax purposes, a
domestic corporation must meet several requirements. 1/ In
particular, a corporation may qualify as a RIC only U it is
registered with the Securities and Exchange Commission at all
times during the taxable year as a management company or as a
unit investment trust under the Investment Company Act of 1940
(the "1940 Act"), or, if it is a common trust fund or similar
fund, that it be excluded from the definition of common trust
fund under the Code and from the definition of investment company
under the 1940 Act.
The Small Business Investment Incentive Act of 1980 (the "1980
Act") amended the 1940 Act to permit a closed-end company that
provides capital and significant managerial assistance to small
businesses to elect, subject to certain requirements, to register
as a business development company. A company is eligible to
register as a business development company under the 1980 Act
only if it would otherwise be required to register as a
management company under the 1940 Act. An eligible company that
registers as a business development company is not required to
register under the 1940 Act.
The alternative form of regulation available under the 1980
Act was specifically designed in lieu of registration under the
1940 Act, and imposes less burdensome regulatory requirements
than the requirements otherwise applicable to corporations
required to register as management companies. For example, a
business development company registered under the 1980 Act is
subject to less stringent restrictions regarding its capital
structure and its ability to engage in transactions with
affiliated persons than a similar company registered under the
1940 Act. Thus, a corporation eligible to register as a business
development company under the 1980 Act would generally find such
registration to be preferable to registration as a management
company
under
the 1940 Act.
Because the
definition
a RIC
has
1/
The RIC
qualification
requirements
are
described of
more
fully
not
been
changed
to
reflect
this
new
type
of
registration,
a
Tn the following section of the testimony.
corporation can obtain the benefits of registration as a business
development company only if it foregoes the pass-through
treatment available to RICs under the Code.
-3Description of the Bill
H.R. 1658 would amend present law to provide that any domestic
corporation that registers as a business development company
under the 1940 Act, as amended by the 1980 Act, would be eligible
for the tax treatment applicable to RICs, subject to the
requirements generally applicable in determining whether an
investment company qualifies as a RIC. Thus, business
development companies could both elect to register with the
Securities and Exchange Commission under the streamlined
procedures provided by the 1980 Act and be treated as a RIC for
Federal income tax purposes. H.R. 1658 would apply to taxable
years beginning on or after October 21, 1980 (the effective date
of the 1980 Act).
Discussion
The Treasury Department has previously testified in favor of
this legislation (introduced in the prior Congress as H.R. 2686)
before this Subcommittee. As we expressed at that time, we have
some concern as to whether the degree of activity engaged in by a
business development company is consistent with the traditional
purposes underlying the RIC provisions. Nevertheless, we
continue to support H.R. 1658, because it would remove Federal
income tax treatment as a factor in the determination by an
otherwise eligible company of whether it will elect to be
regulated under the securities laws as a business development
company or as a management company.
A company can qualify as a business development company for
securities law purposes only if it would otherwise fall within
the definition of a management company under the 1940 Act.
Hence, H.R. 1658 would not expand the class of corporations that
can elect to be treated as RICs. Rather, the bill's effect would
be that a closed-end management company, which is already
eligible to be treated as a RIC for Federal income tax purposes,
would not lose that eligibility by electing to be regulated under
the securities laws as a business development company.
A business development company is permitted under the 1980 Act
to provide "significant managerial assistance" to the companies
in which it has invested. Such a company may thus arguably
engage in a higher level of activity than the passive investment
companies for which Subchapter M was designed. As noted above,
however, a corporation registered as a management company under
the 1940 Act may engage in many of the same activities as a
business development company without ceasing to qualify as a RIC.
In this regard, we note that section 851(e) grants an exception
from the diversification rules generally applicable to RICs in
cases in which, under regulations of the Securities and Exchange
Commission, such companies are principally engaged in providing
-4capital to other corporations engaged in developing or exploiting
new inventions, technology, products, or processes. Thus, the
existing rules already contemplate RIC status for companies
registered under the 1940 Act that are engaged in such
activities. As long as such companies continue to be eligible
for RIC status, we see no reason to deny such treatment to
business development companies registered under the 1980 Act. At
the same time, we believe that consideration should be given to
whether any company engaging in a significant degree of activity,
regardless of whether registered under the 1940 Act or the 1980
Act, should be eligible for taxation under Subchapter M.
Although we support H.R. 1658, we believe that several
technical changes should be made to the bill. First, because
registration as a business development company is in lieu of
registration as a management company, we believe that the
provisions of Parts I and III of Subchapter M should apply to a
corporation meeting the definition of a business development
company as if it were registered as a management company. Such a
change would clarify that a business development company can
qualify as a RIC only if it is registered throughout its taxable
year as a business development company or as a management
company. This change also would make it clear that section
851(e) would apply to a business development company. Finally,
such a change would help clarify that a business development
company electing tax treatment under Subchapter M would be
treated as a RIC for all purposes of the Internal Revenue Code,
and not just for purposes of Subchapter M.
Second, the exception contained in H.R. 1658 for business
development companies that are personal holding companies or that
would be personal holding companies but for the application of
section 542(c)(8) should be deleted. By making such companies
ineligible to become RICs, H.R. 1658 is consistent with the RIC
provisions as they existed prior to 1984. The Tax Reform Act of
1984, however, deleted the prohibition against election of RIC
status by a personal holding company (although a RIC that is a
personal holding company is subject to tax at the maximum
corporate rate on its undistributed income). Because a personal
holding company that is registered under the 1940 Act as a
management company may now elect to be treated as a RIC if it
meets all the other applicable requirements, we see no reason
that a personal holding company that elects to be regulated as a
business development company should be forced to forego the
opportunity for taxation as a RIC, as long as its undistributed
income is subject to tax at the highest corporate rate.
Finally, our endorsement of H.R. 1658 is predicated on its
being prospective in application. Because the legislation is
designed to remove a tax disincentive to registration as a
business development company, it should not be extended to
companies that have previously decided to forego RIC status by
registering as business development companies. Accordingly, we
years
strongly
ending
urge after
that H.R.
the date
1658,
of if
enactment.
enacted, apply only to taxable
-5H.R. 3397
Regulated Investment Companies
Current Law
In order to qualify to be taxed as a RIC, an entity must
satisfy certain organizational, income source, income
distribution, and asset diversification requirements, and must
elect (or have previously elected) to be so taxed. First, as
discussed in the previous section of this testimony, the entity
must be a domestic corporation (or an association taxable as a
corporation) that is registered under the 1940 Act as a
management company or unit investment trust (or is exempt from
registration as a common trust fund or similar fund). Second,
the entity must satisfy two income source requirements: (i) at
least 90 percent of the entity's annual gross income must be
derived from dividends, interest, payments with respect to
certain securities loans, and gains from the sale or other
disposition of stock or securities; and (ii) less than 30 percent
of the entity's gross income must be derived from the sale or
other disposition of stock or securities held for less than three
months. Third, the entity must distribute to shareholders each
year at least 90 percent of the sum of its taxable income
(without regard to capital gains) and its net tax-exempt income.
Fourth, the entity must satisfy asset diversification
requirements, which limit the extent to which the assets of the
RIC may include securities (other than Government securities and
securities of other RICs) either of any one issuer or any issuers
a substantial portion of whose voting securities are owned by the
RIC.
Corporations that qualify as RICs are generally taxed under
the rules applicable to regular Subchapter C corporations.
Unlike regular corporations, however, RICs are allowed a
deduction for dividends paid to shareholders, and thereby avoid
the corporate-level tax on any income distributed to
shareholders. In addition, any undistributed taxable income of a
RIC (other than capital gains) is taxed at the highest corporate
tax rate.
Shareholders treat most distributions from a RIC as they would
distributions from any other corporation. Thus, dividends
received by individual shareholders generally are taxed as
ordinary income to the extent of the RICs earnings and profits.
Special rules, however, provide that dividends paid out of net
capital gains or, in the case of certain RICs, tax-exempt
interest are treated by the shareholders as long-term capital
gains
or
tax-exempt
interest,
respectively.
Many
that
singleis
RICs
legal
made
are
up
entity
organized
of several
(either
as
investment
a"series"
corporation
funds,
funds.
or each
a Abusiness
series
of which
trust)
fund
issues
is a
-6a separate class of stock of the entity. The owners of each
separate class of stock have an interest only in the assets and
income of the separate fund. In Union Trusteed Funds v.
Commissioner, 8 T.C. 1133 (1947),"acq., 1947-2 C.B. 4, the Tax
Court held that a series fund organized as a corporation was a
single corporation for Federal income tax purposes. In Revenue
Ruling 56-246, 1956-1 C.B. 316, the Internal Revenue Service
reached the same conclusion. Although the Internal Revenue
Service has consistently followed this case and ruling with
respect to series funds organized as corporations, it has issued
a number of private rulings holding that each series of a series
fund organized as a business trust would be taxed as a separate
corporation. Recently, however, the Internal Revenue Service has
been studying this area and has stopped issuing such rulings.
Description of the Bill
H.R. 3397 would make a series of amendments to the provisions
of the Code relating to RICs. In particular, the bill would
remove the limitation on the short-term trading activities of
RICs, expand and clarify the types of income that may be earned
by RICs, revise and clarify the treatment of RICs organized in
series form, and make several other minor changes.
First, H.R. 3397 would repeal the existing requirement that a
RIC derive less than 30 percent of its annual gross income from
the sale of stock or securities held by the RIC for less than
three months. Accordingly, while RICs would remain subject to
the other limitations on their activities, a corporation could
qualify as a RIC regardless of the extent to which it engaged in
short-term trading activities.
Second, the bill would liberalize the types of income to be
considered in determining whether a RIC has satisfied the
requirement that it derive 90 percent of its income from
permitted sources. In particular, the bill would treat the
following as permitted income: (i) gains from options and
futures contracts that are related to a R I C s portfolio assets;
(ii) gains from foreign currency transactions; and (iii) certain
other amounts, such as State tax refunds and recoveries of
excessive management fees, derived with respect to the ric's
investment activities. The bill also would provide that the term
"securities" as used for purposes of determining whether a
corporation satisfies the income source rules would have the same
meaning as under the 1940 Act.
Third, H.R. 3397 would revise the treatment of rics organized
in series form. The bill would treat each separate fund of such
-7a RIC as a separate corporation, regardless of whether the RIC is
organized as a corporation or a business trust. A separate fund
would be defined as a segregated portfolio of assets beneficially
owned by the holders of a class or a series of stock that is
preferred over all other classes or series in respect of the
segregated portfolio. By treating each fund as a separate
corporation, the income source, income distribution, and asset
diversification requirements would be applied separately to each
fund. A particular fund could thus qualify as a RIC regardless
of whether other funds within the same corporation satisfied the
requirements.
Finally, the bill would make two other minor changes. First,
it would extend the time period within which a RIC is required to
provide certain notices to shareholders from 45 days to 60 days.
Second, the bill would treat RICs in the same manner as other
financial institutions for purposes of the rules applicable to
third-party summonses.
Discussion
In general, the Treasury Department supports the provisions of
H.R. 3397. As explained below, however, we believe that certain
revisions are necessary to narrow slightly the proposed expansion
of the income source rules and to provide additional rules for
series funds that are treated under current law as a single
corporation. In addition, we note that we have not at this time
completed an analysis of the bill's revenue consequences. Our
support for the bill assumes that it would move forward only in
the context of legislation that would not produce any significant
revenue loss.
Short-Term Trading Activities of RICs
H.R. 3397 would liberalize the income source requirements
applicable to RICs by repealing the requirement that a RIC derive
less than 30 percent of its gross income from the sale of stock
or securities held for less than three months. The underlying
purpose of this requirement of current law is to restrict the
favorable RIC tax provisions to "passive" investment entities
that are not engaged in the active business of dealing in
securities.
As discussed at yesterday's hearing, the single tax imposed on
RICs and their shareholders is, as a matter of ideal tax policy,
preferable to the classical system of taxation that applies
generally to corporations and their shareholders. Thus, some
have questioned the need for any restriction on the activities of
RICs. Moreover, because double taxation of the distributed
income of RICs is avoided through the allowance of a dividends
paid deduction, rather than through partnership-model
integration, many of the administrative concerns we expressed
yesterday concerning publicly traded limited partnerships do not
apply to RICs. Nonetheless, in a system in which the double
-8taxation of corporate earnings is standard, we believe that the
types of activities that can be carried on by a RIC without being
subject to double taxation must be limited. Specifically, we
believe that RIC treatment should be available only to entities
that are not engaged in an active business. In our view,
however, a restriction on short-term trading activities is not
essential to this policy and is not justified on other grounds.
Our support for the repeal of the restriction on short-term
trading activities is, in large part, based on the fact that the
trading of portfolio securities is generally treated for Federal
income tax purposes as less "active" than other comparable
business activities. This difference in treatment is evident in
a number of areas.
First, the standard for determining whether property is held
for investment (and will thus produce capital gain or loss upon
sale) or is held for sale to customers in the ordinary course of
business (and will thus produce ordinary income or loss upon
sale) differs depending upon whether the property is stock or
securities or other property. Among the most important factors
that determine whether other property, such as real estate, is
held for sale to customers in the ordinary course of business are
the number, frequency, and continuity of sales of the property by
the taxpayer. By contrast, these factors are not relevant in
determining whether securities are held for sale to customers in
the ordinary course of business. Thus, an extremely active
securities trader, without more, is not considered by the tax law
to be in the active trade or business of dealing in securities.
Instead, securities generally are treated as held for investment
unless the seller performs a merchandising function comparable to
buying the securities in the wholesale market and selling them in
the retail market. 2/
Second, among the requirements that must be satisfied in order
for a distribution of securities of a controlled corporation to
be tax-free under section 355 of the Code is that both the
distributing and the controlled corporation must be engaged in
the active conduct of a trade or business. The trading by a
corporation of stocks and securities held for its own account,
regardless of the size of the portfolio or the amount of activity
involved in the. management of the portfolio, is not treated as
the active conduct of a trade or business for purposes of section
355. 3/
Third, certain "S corporations" (i.e., corporations taxed
under Subchapter S of the Code) may be penalized, or lose their
status as S corporations, if they have excessive amounts of
"passive investment income." For this purpose, passive
investment
income
defined to include
all Reg.
gainsSec.
from1.471-5.
sales or
2/
Treas. Reg.
Sec.is1.1236-l(c)(2);
Treas.
exchanges of stock or securities, regardless of the number of
shares
or the
holding
period
of C.B.
the securities
sold.
3/
See Rev.
Rul.
66-204,
1966-2
113.
-9Finally, tax-exempt organizations generally are subject to tax
on any "unrelated business taxable income." Gains or losses from
the sale or exchange of property (other than property held for
sale to customers in the ordinary course of business) are
excluded from the definition of unrelated business taxable
income. One of the reasons for this exclusion was the view of
Congress that such gains and losses are "passive" in character.
H.R. Rep. No. 2319, 81st Cong. 2d Sess. 38 (1950). As described
above, sales or exchanges of securities do not generally produce
ordinary income, and are thus not generally subject to the
unrelated business income tax.
Thus, in these other areas of the tax law, a distinction is
drawn between sales of securities and sales of other property.
The distinction is not drawn between sales of securities held for
a short period and sales of securities held for a longer period.
While we believe strongly that RICs should be precluded from
engaging in an active business, we do not believe that a
distinction based upon the holding period of securities sold
should be drawn for purposes of determining whether a RIC is
engaged in an active business.
We also note that an independent limitation on the permissible
activities of a RIC is generally imposed by the requirement that
a RIC register as an "investment company" (or qualify as a common
trust fund or similar fund exempt from registration) as defined
in the 1940 Act. 4/ This requirement did not exist when the
limitation on the short-term trading activities of RICs was first
enacted. Registration with, and regulation by, the Securities
and Exchange Commission under the 1940 Act both limits the
ability of active business corporations to qualify as RICs and
makes applicable numerous rules designed to protect the
shareholders of investment companies.
Some have argued that a restriction on short-term trading
protects shareholders of RICs by limiting speculative trading or
portfolio "churning." We question whether such a restriction, in
fact, provides any meaningful protection to RIC shareholders.
More importantly, however, we believe that regulation of the
relationship between corporations and their shareholders should
4/
In this regard,
note
that certain
be achieved
through wethe
securities
laws,management
rather thancompanies
the tax
Tdiscussed
in
the
prior
section
of
this
testimony)
that are
system.
registered under the 1940 Act arguably engage in activities that
are inconsistent with the traditional activities of a RIC. As we
discussed earlier, we support the bill permitting business
development companies registered under the 1980 Act to qualify as
RICs because corporations engaging in similar activities can
qualify as RICs if registered under the 1940 Act. We question,
however, whether such a level of activity is appropriate for
corporations eligible to be taxed under a regime that was
designed to apply to passive investment vehicles.
-10The restriction on short-term trading activities, in addition
to being unnecessary as a matter of tax policy, imposes
substantial costs on RICs and their shareholders, both by
limiting the RICs ability to make investment decisions on
economic grounds and by forcing RICs to monitor their compliance
with the rule. In order to comply with the three-month
restriction, RICs are in some cases forced to forego the
realization of gains on securities held for less than three
months or to reduce such gains as a percentage of gross income by
selling securities held for a longer period. We do not believe
that the tax system should require RICs to make such uneconomic
choices.
The costs of monitoring compliance with this restriction also
have grown in recent years as the volatility of investment
markets has increased, and the rules for determining the holding
period of securities have become more complex. For example, it
may be prudent for a RIC to hedge a portfolio of securities
against price fluctuations. Hedging activities, however, may
produce less-than-three-month gains with respect to securities
that have been held for more than three months. This would occur
if gain is realized on the hedging side of the transaction, or if
the holding period of the underlying securities is affected by
rules (such as the short sale and straddle transaction rules)
that suspend the running of, or create new, holding periods for
securities. Additional uncertainty concerning the application of
the three-month restriction has resulted from the rule requiring
that unrealized gains and losses on regulated futures contracts
be recognized at the end of each taxable year.
In summary, because we believe that the restriction on
short-term trading activities serves no legitimate tax policy
concerns, forces RICs to make uneconomic decisions, and
needlessly imposes substantial compliance costs on RICs, we
support the proposal in H.R. 3397 to repeal the limitation on the
extent to which a RICs income may consist of gains on sales of
securities held for less than three months.
Sources of RIC Income
As discussed above, a RIC is required to derive at least 90
percent of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale
or other disposition of stock or securities. This listing of
permitted income, which was last amended in 1978, fails to
include certain types of investment-related income now commonly
received by RICs.
Despite the apparent inflexibility of the Code, the Internal
Revenue Service has often gone beyond the literal terms of the
statute
to give
a reasonable
interpretation
to thehas
income
rules. For
example,
the Internal
Revenue Service
ruledsource
-11privately that certain investment products, such as options and
futures contracts on securities, which are not specifically
listed in the Code, will be treated as securities, gains from the
sale or disposition of which constitute permitted income. 5/ In
addition, the Internal Revenue Service has ruled that the receipt
of certain other kinds of income, although not permitted income,
will not result in loss of RIC status even though the amount of
such income exceeds ten percent of the R I C s annual income. 6/
Despite the flexibility that has been shown by the Internal
Revenue Service, however, RICs often can be certain of the
treatment of various income items only by obtaining a private
ruling.
H.R. 3397 would expand the list of permitted income to include
gains from the disposition of "foreign currency, and other income
(including but not limited to gains from options or futures
contracts) derived with respect to its business of investing in
such stock, securities, or currencies." The Treasury Department
generally supports liberalization of the types of income RICs may
receive to include the passive investment income sources
specified in the bill.
We must again emphasize, however, that RICs should not be
permitted to engage in an active business. In this regard, we
note that the proposed repeal of the restriction on short-term
trading activities, while independently justified, places
additional importance on the income source rules as a limit on
the activities in which RICs may engage. We believe, therefore,
that it is essential that two limits on the activities of RICs be
retained. First, permitted income should be limited to income
from property held for investment, as opposed to property held
for sale to customers in the ordinary course of business.
Second, such income should be limited to income from stocks and
securities, as opposed to other property. (The reimbursement or
recovery of expenses and similar items should be treated as
falling within these limits because they generally represent
amounts that were offset against such income in past years.)
H.R. 3397 would treat all foreign currency gains as permitted
income. Although foreign currency is a commodity and not a
security, the purchase and sale of stocks or securities
denominated in a foreign currency cannot be accomplished without
the See
purchase
sale(August
of foreign
currency.
Hence,
foreign
5/
G.C.M.and
37233
25, 1977)
(options
on securities);
currency
gains
and
losses
are
an
inherent
part
of
any
G.C.M. 38994 (January 21, 1983) (futures contracts on investment
in foreign-currency
denominated
securities.
securities);
and G.C.M.
39316 (July
31, 1984) (stock index
futures, options on stock indexes, and options on stock index
futures).
6/ See Rev. Rul. 64-247, 1964-2 C.B. 179 (recovery of excess
management fees); Rev. Rul. 74-248, 1974-1 C.B. 167 (recovery of
damages from investment advisor for breach of fiduciary duty);
Ltr. Rul. 8530016 (April 24, 1985) (recovery of state taxes).
-12We believe that investments in foreign-currency denominated
securities are a type of passive investment that should be
permissible for RICs. Moreover, foreign currency investments
that are made to hedge investments in foreign-currency
denominated securities are, in our view, an appropriate part of
the passive investment activity of RICs. Accordingly, we believe
that gains from investments in foreign-currency denominated
securities and from establishing offsetting foreign currency
positions with respect to such securities should be treated as
permitted income.
While we generally support expanding the definition of
permitted income to include additional securities, we oppose any
expansion of these rules to include gains from sales of other
types of assets, such as commodities. Because foreign currency
is a commodity, not a security, we believe that any foreign
currency gains that are not related to investments in
foreign-currency denominated securities should not be treated as
permitted income. We recognize, however, that attempting to
distinguish between qualifying and nonqualifying foreign currency
gains would be difficult, and we are not prepared at this time to
propose statutory rules that would draw the appropriate
distinction. Consequently, we do not oppose including foreign
currency gains on the statutory list of permitted income, as
contemplated by H.R. 3397. We believe, however, that the
Treasury Department should be provided with regulatory authority
to exclude from permitted income any foreign currency gains that
are not derived with respect to investment in a foreign-currency
denominated security or from establishing offsetting positions
with respect to such a security. 7/
Series Funds
As discussed above, some RICs are made up of several
investment funds, each of which is beneficially owned by a
separate class of shareholders. Under current law, if a RIC is
organized as a corporation, it is treated as a single
corporation, even if it consists of several funds. By contrast,
there is uncertainty whether a series RIC organized as a business
trust is treated as a single corporation or multiple
corporations.
H.R. 3397 would end the current distinction between RICs
organized as corporations and those organized as business trusts,
and would treat each separate series of a series fund, regardless
of whether organized as a corporation or as a business trust, as
a separate
corporation.
Thus,
qualification
tests similar
would be
7/
We note that
S. 2155, a
bill the
containing
provisions
to
applied
on would
a fund-by-fund
basis.
H.R.
3397,
provide such
regulatory authority.
-13In our view, treating each series as a separate corporation
reflects the economic substance of RICs organized in series form.
Moreover, the contrary rule, which now applies to RICs organized
as corporations, may permit avoidance of many of the requirements
that are imposed on RICs. For example, it may be possible within
a series RIC to have a fund that does not meet the diversification requirement, a fund that does not meet the income source
requirement, and a fund that does not meet the income
distribution requirement, provided that, in the aggregate, all of
the funds meet these requirements. In addition, treatment of a
series fund as a single corporation creates several technical
problems. For example, the capital losses of one series offset
the capital gains of another series, thereby providing an
unintended shift of tax benefits among the shareholders of the
different series. Similarly, the straddle transaction and wash
sale rules may prevent the deduction of losses by one series
because of investments made by another series. Consequently, we
support the provision in H.R. 3397 that would treat each fund
within a series RIC as a separate corporation.
If H.R. 3397 is enacted, rules should be provided to clarify
the tax consequences of the "deemed reorganization" resulting
from the bill's treatment of existing series funds that are now
treated as a single corporation as more than one corporation.
Although such rules are highly technical and are beyond the
appropriate scope of this testimony, we note that a set of such
rules would be provided by S. 2155.
Shareholder Notice Requirements
Current tax rules require a RIC to send various notices to its
shareholders within 45 days following the end of the RICs
taxable year. These notices are customarily included as part of
the RICs annual report. The Securities and Exchange Commission
has recently extended the time for mailing annual reports to
shareholders from 45 days to 60 days after the end of the RICs
taxable year.
H.R. 3397 would make a conforming change in the Internal
Revenue Code notice requirements to permit information contained
in a timely annual report to satisfy these notice requirements.
In our view, each of the notices that RICs are required to send
their shareholders would provide timely information if received
within 60 days after the RICs taxable year. Moreover, we
believe that it would be wasteful to require RICs to send
repetitive mailings to their shareholders. Consequently, we
support the proposal to extend the notice deadline.
Third-Party Recordkeeper Summons
Section 7609 of the Code provides certain procedural rules
This
applicable
institutions
term is
todefined
such
summons
as banks,
to
served
include
savings
on various
"third-party
institutions,
typesrecordkeepers."
of financial
and brokers.
-14H.R. 3397 would expand the definition of "third-party
recordkeepers" to include RICs. For this purpose, we believe
RICs should be treated in the same manner as these other
financial institutions. Consequently, we do not object to this
proposal.
Sliding Scale Dividends
Representatives McGrath, Flippo, and Kennelly have requested
the view of the Treasury Department concerning a possible
modification to H.R. 3397. In particular, the modification would
permit RICs to pay higher dividends per share to large
shareholders to reflect the lower per share fees or costs
incurred with respect to those shareholders.
Under current law, RICs are allowed a dividends paid deduction
only for dividends that are strictly pro rata. 8/ No preference
may be provided to any share of stock as compared with other
shares of the same class. If a dividend distribution is
preferential, the dividends paid deduction is disallowed. The
deduction disallowance is not limited to the preferential portion
of the distribution, or to the distribution to the shareholders
who are given the preference, but applies to the entire amount of
the dividends paid by the RIC. The legislative history of the
restriction on preferential dividends explains that the dividends
paid deduction was withheld in the case of such dividends to
prevent injustice to certain shareholders and to eliminate the
potential for tax avoidance. 9/
The problem that the proposed modification seeks to address is
illustrated by a recent private ruling issued by the Internal
Revenue Service. 10/ This ruling involved a proposed arrangement
under which the fee received by the manager of a RIC for certain
administrative services would have been assessed directly against
the account of each shareholder at a rate that, on a per share
basis, would vary with the value of shares owned by the
shareholder.
Larger
shareholders
would
haveof
been
lower
8/
This rule is
contained
in section
562(c)
theassessed
Code.
per share 561
fees.
Internal rules
Revenue
determined
that the
Sections
and The
562 provide
for Service
determining
the
administrative
fees werepaid
expenses
of the
RIC rather
than
amount
of the dividends
deduction
allowed
to RICs
andof the
individual
shareholders.
The
consequences
of
this
determination
real estate investment trusts for purposes of the regular
tax and to other corporations for purposes of the
accumulated earnings tax, personal holding company tax and
foreign personal holding company tax.
9/ H.R. Rep. No. 1860, 75th Cong. 3rd Sess. 23 (1938).
10/ Ltr. Rul. 8552063 (September 30, 1985).
-15were, first, that the expenses could be deducted only by the RIC,
and second, that the arrangement caused the dividends paid on
some shares of the stock to exceed the dividends paid on other
shares of the same class of stock. Viewing the arrangement as a
sliding scale dividend arrangement, the Internal Revenue Service
ruled that all dividends paid by the RIC would be treated as
preferential dividends for which no dividends paid deduction
would be allowed.
The proposed amendment would except from the preferential
dividend rules differences in dividends paid by a RIC "which
reflect management fees or cost savings attributable to
particular shareholders or groups of shareholders." Differences
in dividend levels attributable to other factors would continue
to be subject to the preferential dividend rule. Moreover, the
rule would continue to apply without exception to dividends paid
by a RIC for purposes of the accumulated earnings tax and the
personal holding company tax.
In the case of a sliding scale dividend arrangement that
reflects management fees or cost savings, we do not believe that
the concerns that motivate the disallowance of a deduction for
preferential dividends — the potential for shareholder injustice
or tax avoidance — are present. Although it may appear to be
unfair for large shareholders to receive higher per share
dividends than small shareholders, the costs per share of
administering a shareholder's account may indeed be greater in
the case of small shareholders than in the case of large
shareholders. Accordingly, a sliding scale dividend arrangement
may serve the valid business purpose of allocating administrative
costs to the shareholders who generate those costs. We do not
regard this as unjust. More importantly, while we realize that
one of the historical policies underlying the preferential
dividend provision is shareholder fairness, we believe that the
relationship between RICs and their shareholders is more
appropriately regulated by the Securities and Exchange Commission
through the securities laws than by the Internal Revenue Service
through the Internal Revenue Code.
We believe strongly, however, that the preferential dividend
rule appropriately applies to dividend arrangements that have a
tax avoidance purpose. In our view, a sliding scale dividend
arrangement that truly reflects management fees or cost savings
is unlikely to serve as a tax avoidance device. Nevertheless, it
is possible for such a preferential dividend arrangement to
reduce the overall taxes paid by the shareholders of a RIC. This
would result, for example, if the larger shareholders of the RIC
tend to be pension plans and other tax-exempt organizations and
the smaller shareholders tend to be taxable individuals. We
believe, however, that sliding scale dividend arrangements that
reflect management fees or cost savings are primarily motivated
by business reasons rather than tax avoidance. Accordingly, we
would
not oppose
a provision
permit the deduction of dividends
paid under
such sliding
scale to
arrangements.
-16Although the concerns that motivate the preferential dividend
rule are not present in the case of a sliding scale dividend
arrangement that reflects varying management or administrative
costs, two significant tax policy issues are raised by such an
arrangement. The first issue is whether any deduction should be
allowed to a RIC for administrative, investment, and other
expenses. As discussed earlier, RICs are treated as pass-through
entities only to a limited extent. In the case of partnerships
and other pure pass-through entities, items of income and expense
are generally passed through to the owners of the entity and
included in income or deducted by the owners. By contrast, while
RICs may pass through to shareholders the character of certain
income, such income is net of expenses deducted at the RIC level.
If expenses were passed through to RIC shareholders, the
expenses would generally be deductible by the shareholders as an
itemized deduction to the extent permitted under section 212 of
the Code, which permits deductions for expenses incurred for the
production of income or for the management of property held for
the production of income. Accordingly, no deduction would be
allowed to shareholders who do not itemize deductions. Under
current law, this distinction between itemizing shareholders and
nonitemizing shareholders would be the principal effect of
denying RICs an entity-level deduction for investment expenses,
and passing such amounts through to shareholders.
It is significant, however, that limits would be placed on
certain itemized deductions under both fundamental tax reform
bills now being considered by Congress. Under H.R. 3838, as
passed by the House, investment expenses would be deductible only
to the extent that such expenses, together with certain other
miscellaneous and employee business expenses, exceed one percent
of the taxpayer's adjusted gross income. Under the version of
H.R. 3838 approved by the Senate Finance Committee, no deduction
would generally be allowed for investment expenses. If either of
these approaches is ultimately adopted by the Congress, the
importance of allowing a RIC an entity-level deduction for
investment expenses would be greatly magnified.
The second tax policy issue is whether RICs should be allowed
to make special allocations of items of income and expense. As
discussed in the Treasury Department's testimony at yesterday's
hearing, we have some concerns regarding special allocations by
partnerships of items of income and expense. Although special
allocations may serve the useful purpose of accurately reflecting
the economic arrangement among partners, such allocations
increase the complexity of the partnership rules and create the
potential for tax avoidance. Traditionally, RICs have not been
permitted to make special allocations of items of income or
expense. A sliding scale dividend arrangement, however, is a
limited form of special allocation. While we do not oppose
allowing a deduction for such preferential dividends, we must be
cautiouspass-through
simple
in adopting regime
any change
that has
that worked
would well
move away
for RICs.
from the
-17Taxable Years and Spill-over Dividends
As discussed earlier, RICs are generally allowed a dividends
paid deduction, thereby avoiding corporate-level tax on income
distributed to shareholders. For purposes of determining the
amount of the deduction for dividends paid to shareholders,
certain dividends paid following the close of the taxable year
may be treated by a RIC as paid during the taxable year. Such
"spill-over" dividends are taxed to the shareholders of the RIC
in the year they are actually received (often the succeeding
year). The payment of such spill-over dividends, which
frequently allows a deduction to the RIC in the year before the
corresponding amounts are included in income by the shareholders,
may produce a significant deferral of tax. Significant deferral
of tax also may result from the use by RICs of a taxable year
other than the calendar year.
The version of H.R. 3838 approved by the Senate Finance
Committee would eliminate both of the tax deferral consequences
described above by requiring that all RICs adopt the calendar
year as their taxable year and by imposing a five percent excise
tax on spill-over dividends. We support this provision, and
encourage the Subcommittee to consider adoption of a similar
provision.
While we support attempts to foreclose the deferral
opportunities available to RICs, we recognize that significant
burdens may be imposed on mutual funds and on regulatory agencies
if all RICs are required to adopt the calendar year. In
addition, we recognize that RICs may not readily be able to avoid
paying some spill-over dividends and that, in this situation, the
five percent excise tax may be a higher interest charge for the
deferral of tax than is appropriate. We are certainly willing to
work with the Subcommittee to accomplish the purposes of the
Finance Committee provision — the elimination of the deferral of
tax — in a manner that imposes the least burden on the industry.
In this regard, we suggest that exceptions from the Finance
Committee provision might be provided for RICs that distribute
substantially all of their income not less often than monthly and
for RICs substantially all of whose dividends qualify as
exempt-interest dividends.
-18H.R. 4916 and H.R. 2571
Real Estate Investment Trusts
Current Law
As in the case of a RIC, in order to qualify to be taxed as a
real estate investment trust ("REIT"), an entity must satisfy
organizational, income source, income distribution, and asset
requirements, and must elect (or have previously elected) to be
so taxed.
First, the entity must be a domestic corporation (or an
association classified as a corporation for tax purposes), which
has at least 100 shareholders and does not meet the stock
ownership test of the personal holding company definition. This
stock ownership test is met if five or fewer individuals own,
directly or indirectly, more than 50 percent of the value of the
stock at any time during the last half of the taxable year. In
applying this test, the ownership of stock by an individual may
be treated as including stock owned by certain related persons,
including any persons who are members of the same partnership as
the individual.
Second, the entity must satisfy three income source
requirements: (i) at least 75 percent of the entity's gross
income must be derived from certain passive real estate sources,
such as rents and mortgage interest; (ii) at least 95 percent of
its gross income must be derived from these passive real estate
sources and certain other passive sources, such as dividends and
nonmortgage interest; and (iii) less than 30 percent of its gross
income must be derived from certain sales of property. For
purposes of the 75 percent and 95 percent income source
requirements, rental income includes charges for services
customarily furnished or rendered in connection with the rental
of real property. Rental income is not treated as qualifying
income, however, if the REIT (either directly or indirectly
through persons in which the REIT has a financial interest)
furnishes services to the tenants or manages or operates the
property. Instead, all such tenant services must be performed by
independent contractors.
Real estate lenders commonly make loans (and real estate
lessors commonly enter into leases) that provide for a
participation by the lender (or lessor) in some portion of the
income or earnings of the borrower (or lessee). Under one form
of such equity participation, a portion of the lender's interest
(or lessor's rent) may be based on the gross, or more commonly,
net income of the borrower (or lessee). The ability of REITs to
take
advantage
of
formnet
ofinterest
equity
participation
is
limited.
which
treated
In particular,
isas
determined
qualifying
any this
portion
by rent
the
or
of
rent
income
or of
interest
income
another
to
the
person
the
amount
REIT.
isof
not
-19Another form of equity participation is the shared
appreciation mortgage, under which the lender receives a
contingent return based upon appreciation in the mortgaged
property. Substantial uncertainty exists under current law
concerning the proper treatment of shared appreciation mortgages.
The Internal Revenue Service has issued a revenue ruling
characterizing payments under a shared appreciation mortgage on
residential property as additional interest. 11/ The ruling was
expressly limited to noncommercial loans to individuals and the
Internal Revenue Service has not issued further guidance in this
area. It is thus currently disadvantageous for REITs to enter
into shared appreciation mortgages because of the risk that
income from the mortgage might not be treated as qualifying
income.
Third, the entity must satisfy income distribution rules
requiring that at least 95 percent of the sum of the entity's
"real estate investment trust taxable income" ("REITTI") and its
after-tax income from "foreclosure property" must be distributed
to shareholders.
Fourth, at least 75 percent of the entity's assets must be
invested in certain real estate assets, government securities, or
cash items, and any other assets must meet a diversification
test. One effect of these asset diversification requirements is
that no more than 25 percent of the assets of a REIT may consist
of the stock of another corporation (other than a REIT).
Except as otherwise provided, REITs are taxed under the rules
applicable to regular corporations. The principal difference
between REITs and other corporations is that REITs, like RICs,
are allowed a deduction for dividends paid to shareholders, and
thereby avoid the corporate-level tax on any income distributed
to shareholders. A REIT, however, may not use shareholder
distributions to avoid corporate-level tax on two classes of
income. First, a REIT is taxed at the highest corporate rate on
net income from certain property that the REIT has acquired by
foreclosure or similar action and elected to treat as
"foreclosure property." Second, a REIT is taxed at a 100 percent
rate on net income (and is unable to deduct net losses) derived
from "prohibited transactions."
A prohibited transaction is any sale of property that is held
by a REIT primarily for sale to customers in the ordinary course
of business. Sales of "foreclosure property" and sales that
qualify under a safe harbor are not considered prohibited
transactions. The safe harbor applies to sales of real property
if (1)
REIT
has83-51,
held 1983-2
the property
(generally, for the
11/
See the
Rev.
Rul.
C.B. 48.
production of rental income) for at least four years, (2) the
aggregate expenditures made by the REIT to improve the property
-20in the four years prior to sale do not exceed 20 percent of the
net selling price of the property; and (3) the REIT does not make
more than five sales of property (other than foreclosure
property) during the taxable year.
Shareholders of a REIT treat most distributions from a REIT as
they would distributions from any other corporation. Thus,
dividends generally are taxed as ordinary income to the extent of
the REIT's earnings and profits. A special rule, however,
provides that dividends paid out of the net capital gains of the
REIT in the taxable year of the distribution are treated by the
shareholders as long-term capital gains.
In general, an organization may not elect to be a REIT unless
it adopts a calendar taxable year. Entities that elected to be
taxed as REITs for taxable years beginning before October 5,
1976, are excepted from the calendar year rule. In addition,
REITs, like RICs, are permitted to pay spill-over dividends.
Some limits, however, are imposed on the payment of spill-over
dividends by REITs. Unless a REIT distributes at least 75
percent of its REITTI (determined without regard to the dividends
paid deduction and any net capital gains) before the end of the
taxable year, a three percent excise tax is imposed on a portion
of the spill-over dividends paid during the succeeding year.
If the taxable income of a REIT for a prior taxable year is
increased by a judicial or administrative determination, the REIT
may retroactively increase its dividends paid deduction for the
prior year (thereby satisfying the distribution requirement and
reducing its taxable income) by distributing to shareholders a
"deficiency dividend." For purposes of determining the amount of
interest and additions to tax charged by the Internal Revenue
Service on underpayments of tax, the amount of the deficiency
dividend is treated as an underpayment of the REIT's tax
liability for
Description
ofthe
theprior
Bills taxable year. In addition, a
nondeductible penalty tax equal to the amount of the interest
H.R.
4916
2571 would
make
numerous
changesofinone-half
the
charged
on and
the H.R.
deficiency
dividend
(but
not in excess
taxation
of REITs
and deficiency
their shareholders.
The changes are
of the amount
of the
dividend) 12/
is imposed.
designed primarily to enable REITs to compete more effectively in
the real estate market.
12/ We note that the provisions of H.R. 4916 are identical to the
provisions of the Senate Finance Committee's version of H.R. 3838
relating to real estate investment trusts.
-21First, H.R. 4916 would revise the prohibited transaction rules
in several respects. In particular, the prohibited transaction
safe harbor would be expanded as follows: (a) the maximum number
of sales during a year would be increased from five to seven; (b)
an unlimited number of sales would be permitted to qualify for
the safe harbor provided that the gross income from such sales
does not exceed 15 percent of the REIT's REITTI (determined
without regard to the dividends paid deduction); and (c) the
amount that a REIT is permitted to spend to improve a property in
the four years before a sale would be increased from 20 percent
of the net selling price of the property to 30 percent. In
addition, REITs would be permitted to deduct losses from
prohibited transactions in computing REITTI, but would not be
permitted to net gains and losses from such transactions.
Second, H.R. 4916 would revise the definition of qualifying
rental and interest income. The rule treating rental income as
nonqualifying if the REIT directly furnishes services with
respect to the property would be liberalized by permitting REITs
to perform any services in connection with the rental of property
that a tax-exempt organization could perform without being
treated as receiving unrelated business taxable income. In
general, under the unrelated business income standard, services
in connection with the general maintenance of the building, such
as the furnishing of heat or light and the cleaning of public
areas, would be permissible, while services provided primarily
for the convenience of a tenant, such as janitorial services for
tenant areas, would be prohibited. In addition, rental (or
interest) income of a REIT that is based on the net rental income
of another person would be treated as qualifying income, provided
that (1) the income of the other person is derived from the
subleasing (or leasing) of real estate and (2) such income would
be treated as qualifying rental income if received directly by
the REIT.
Third, for purposes of determining whether the REIT meets the
stock ownership test of the personal holding company definition,
H.R. 4916 would narrow the rules used to attribute ownership of
stock among related persons. Specifically, attribution of stock
ownership among partners would be eliminated. In addition,
consistent with an amendment to the RIC rules enacted in the Tax
Reform Act of 1984, a corporation would be permitted to qualify
as a REIT only if it distributes to shareholders any earnings and
profits accumulated in taxable years in which it was not taxed as
a REIT. H.R. 4916 also would suspend the shareholder
concentration rule, and the rule requiring that a REIT have 100
or more shareholders, for the first taxable year in which an
entity elects to be a REIT.
-22Fourth, H.R. 4916 would permit REITs to form wholly owned
subsidiaries to hold real estate assets, thereby allowing REITs
to limit their loss exposure from separately incorporated real
estate projects. The REIT and any subsidiary that has, at all
times, been wholly owned by the REIT would be treated as a single
corporation for Federal income tax purposes. The ceasing of a
subsidiary to be wholly owned by the REIT would be treated as the
organization of a new corporation.
Fifth, H.R. 4916 would repeal the penalty tax on deficiency
dividends.
Sixth, H.R. 4916 would provide several exceptions from the
requirement that the REIT distribute 95 percent of its REITTI,
determined without regard to the dividends paid deduction. A
REIT would not be required to distribute non-cash income that is
imputed to the REIT under rules adopted in the Tax Reform Act of
1984 (i.e., imputed interest under section 1274(c) and rents
accrued under section 467) and income from putative tax-free
exchanges under section 1031 that are subsequently determined to
be taxable exchanges. The exemption would apply only to the
extent that such income exceeds five percent of the REIT's
REITTI. As under current law, a REIT would be taxed at corporate
rates on any undistributed income.
Finally, H.R. 4916 contains other amendments that would (1)
permit entities that have not engaged in any trade or business to
change to the calendar year (which all new REITs are required to
adopt) without IRS approval, (2) treat certain income and assets
attributable to sales of stock by a REIT as qualifying income and
assets for a period of one year, (3) permit a REIT to pay capital
gain dividends to shareholders notwithstanding the existence of
operating losses, (4) permit certain shareholder notices to be
mailed with the REIT's annual statement, and (5) provide that a
REIT's current earnings and profits cannot be less than the
REIT's REITTI, determined without regard to the dividends paid
deduction.
Discussion
During the consideration of H.R. 3838 by the Ways and Means
Committee, the Treasury Department objected to the addition of
the provisions in H.R. 2571. Our objections at that time
concerned certain proposed changes that we viewed as inconsistent
with the policies that Congress has traditionally applied to
REITs. The proposed changes to which we objected were modified
or not included in H.R. 4916. Accordingly, we do not oppose the
provisions contained in H.R. 4916. 13/ We note, however, that
the provisions in H.R. 4916 have a revenue cost of between $50
and $100 million, and that our position assumes inclusion of the
bill
in legislation
that would
result in any
significant
13/ Because
we understand
that not
the provisions
of H.R.
2571 that
revenue
loss.
oTffer from those in H.R. 4916 are no longer being pursued, our
testimony will address only the provisions contained H.R. 4916.
-23Permissible Activities of REITS
The harsh treatment of a REIT's income and losses from
prohibited transactions — 100 percent taxation of net gains and
nondeductibility of net losses — is designed to enforce the
basic rule that REITs are not permitted to engage in the conduct
of active business operations. The legislative history of the
original REIT provisions states that:
your committee has also undertaken to draw a sharp line
between passive investments and the active operation of
business, and has extended the regulated investment company
type of tax treatment only to income from the passive
investments of real estate investment trusts. Your committee
believes that any real estate trust engaging in active
business operations should continue to be subject to the
corporate tax in the same manner as is true in the case of
similar operations carried on by other comparable
enterprises. 14/
Some have questioned the need for any restriction on the
activities of REITs, and as a matter of ideal tax policy, the
single tax imposed on REITs and their shareholders may be
preferable to the system of double taxation that applies
generally to corporations and their shareholders. Nonetheless,
in a system in which the double taxation of corporate earnings is
standard, we believe strongly that it is important to restrict
the types of activities that can be carried on by a REIT without
being subject to double taxation.
Under the original REIT provisions, the holding of any
property for sale to customers in the ordinary course of business
would prevent an entity from qualifying as a REIT. This rule was
unsatisfactory because of the absence of an objective test for
determining whether property is held for sale to customers in the
ordinary course of business. In 1976, the rules imposing a 100
percent tax on gains and making losses nondeductible were adopted
to prevent the inadvertent disqualification of REITs that were
determined to have held property for sale to customers in the
ordinary course of business, while at the same time assuring
"that a REIT would not intentionally undertake the conduct of an
active business." 15/ The safe harbor exception was adopted in
1978H.R.
to permit
a REIT
to86th
makeCong.
a limited
number
of asset sales
14/
Rep. No.
2020,
2d Sess.
4 (1960).
without risking forfeiture of all profits from the sales. The
15/
S. Rep. No.
94-938,
94th Cong.
Sess. to
470"prevent
(1976). REITs
restrictions
in the
safe harbor
were 2d
designed
from S.
using
safe
harbor 95th
to permit
engage
an active
16/
Rep.the
No.
95-1263,
Cong.them
2d to
Sess.
179 in
(1978).
trade or business such as the development or subdivision of
land." 16/
-24The prohibited transaction rules of current law may be
somewhat arbitrary and harsh in application. The principal
source of arbitrariness is the limitation of the prohibited
transaction safe harbor to five sales of property. The fixed
maximum number of sales provides a needed objective rule that can
be relied upon to avoid the subjective determination of when
property is held for sale to customers in the ordinary course of
business. Moreover, the number of sales of real estate made by a
taxpayer is one of the significant factors used to determine
whether the taxpayer is holding property for sale to customers in
the ordinary course of business. Nonetheless, the five sale
limit fails to take into account the size of the REIT or of the
properties sold. We do not regard the sale by a large REIT of
more than five, relatively small, properties as necessarily
indicative that the REIT is engaging in impermissible business
activities.
Thus, we do not believe that the essential passivity of REITs
would be lost by allowing them to make a larger number of sales
of property, provided that the gains from such sales constitute
an insubstantial portion of the REIT's taxable income, determined
without regard to the dividends paid deduction. Accordingly, we
do not oppose the provision in H.R. 4916 that would increase the
number of permissible safe-harbor sales from five to seven. In
addition, we regard the additional 15 percent of income safe
harbor proposed in H.R. 4916 as an appropriate standard of
insubstantiality. We also note that the expanded safe harbor
under H.R. 4916 appropriately will continue to be limited to
properties that have been held by the REIT for not less than four
years and that the expenditures by the REIT during the prior four
years in improving the property may not exceed 30 percent
(increased from 20 percent) of the net selling price of the
property. Finally, if the 15 percent of income safe harbor is
used, substantially all of the marketing and development
expenditures with respect to the property would have to be made
through an independent contractor.
The repeal of the nondeductibility of net losses from
prohibited transactions, as proposed in the bill, would eliminate
a harsh result under current law, while the corresponding
elimination of netting of gains and losses from prohibited
transactions would serve as an even greater disincentive to
intentionally engaging in prohibited transactions. Thus, we do
not oppose these provisions of the bill.
The rule restricting REITs from performing services for
tenants is designed to prevent REITs from engaging in active
business operations. The unrelated business income rules that
apply to tax-exempt organizations are intended to serve the same
purpose. We believe that it is appropriate for the same standard
to define the permissible activities in connection with the
rental of real property for both REITs and tax-exempt
organizations.
Hence,
we or
support
the proposal
H.R. 4916 to
whether
apply the
a unrelated
REIT has
performed
trade
permissible
business
rules
services.
in in
determining
-25Incoae Determined by Profits of Another Person
The restriction that the qualifying income of a REIT does not
include any amount of rent or interest that depends on the income
of another person was adopted to give "assurance that no
profit-sharing arrangement will in effect make the trust an
active participant in the operation of the property." 17/
Although intended to prevent REITs from indirectly participating
in the active operation of property, current law does so by
disqualifying the income from any net profit-sharing arrangement,
whether or not the arrangement results in the REIT participating
indirectly in the active operation of the property. In general,
H.R. 4916 would permit a REIT to share in the net profits of a
lessee or borrower from the REIT, provided that the income of the
lessee or borrower would be qualifying rent to the REIT. Because
the bill would not permit a REIT to engage indirectly in
activities in which it could not engage directly, we do not
oppose this provision.
We understand that many REITs are concerned that this
provision of the bill will be of little practical significance
given the restrictions that apply to the qualifying rents of
REITs. Of particular concern is the requirement, discussed
above, that all services with respect to the property be
performed through independent contractors. Although H.R. 4916
would liberalize this requirement, many lessees or borrowers from
a REIT may be unwilling to restrict their own activities in order
to preserve the qualifying character of the REIT's income. We
would be willing to consider modified approaches that would
increase the utility of this provision without permitting REITs
indirectly to engage in substantial active operations. Possible
approaches include requiring a separate accounting of income from
activities in which the REIT could not engage directly or
relaxing the independent contractor requirements as applied to a
person, if the REIT shares less than a given percentage of that
person's income.
A similar issue is raised in connection with shared
appreciation mortgages. Although we do not believe it is
appropriate to resolve the broader issue of the characterization
of commercial shared appreciation mortgages in the narrow context
of REIT legislation, we think it would be possible to identify
circumstances in which income received by a REIT from a shared
appreciation mortgage is qualifying income. Again, the issue is
whether
rules
are adopted
have the
effect
of
17/ H.R. any
Rept.
No.that
98-432,
Part 2, would
98th Cong.
2d Sess.
1746.
allowing a REIT to participate indirectly in the active operation
of property. For example, such a result could occur in the case
of
aprohibited
shared
mortgage
onaproperty
with
respect
to
which
the
income
issue
development
requires
from appreciation
such
some
transaction
mortgages
activities
additional
would
rules
are
study,
be
being
on
we
useful
look-through
undertaken.
suggest
starting
that
basis
While
point.
applying
to
this
-26Shareholder Concentration
The qualification standards for RICs were amended in 1984 to
eliminate the requirement that a RIC not meet the shareholder
test of the personal holding company definition and to require
that corporations initially electing RIC status distribute all of
their earnings and profits accumulated in years in which they
were taxed as regular corporations. The reasons for these
changes were that, because closely held investment companies
could qualify for pass-though treatment under Subchapter S, it
would be anomalous to deny pass-through treatment under the RIC
rules, and that it was appropriate to require distribution of
previously accumulated earnings when the corporation first
qualifies for pass-through tax treatment. 18/ Because the
reasons underlying the RIC rule are applicable to REITs as well
as RICs, we do not oppose the provision extending the earnings
and profits distribution rule to REITs.
In addition, the bill would narrow the attribution rules for
purposes of applying the stock ownership test of the personal
holding company definition. The requirement that the stock
ownership not be met, however, would be retained. We believe it
would be simpler, and consistent with the RIC rules, to repeal
this limitation entirely. Nonetheless, we do not oppose this
amendment.
REIT Subsidiaries
H.R. 4916 would treat a REIT and certain wholly owned
subsidiaries as a single corporation for Federal income tax
purposes. We recognize that such a rule is inconsistent with
conventional tax principles. We do not believe, however, that
REITs should be prevented from limiting exposure to loss by
separately incorporating different properties. Moreover, we
believe that more conventional means of achieving this result,
such as by treating a REIT and its wholly owned subsidiaries as a
consolidated group of corporations and applying the REIT rules on
a consolidated group basis, probably would be more complicated
The deficiency dividend rules were enacted in 1976 to prevent
and serve no more effectively to minimize tax avoidance
an inadvertent error in calculating the taxable income of a REIT
opportunities.
from causing a failure to meet the distribution requirement (and
Deficiency Dividend Rules
hence disqualification of the REIT). The interest charge and
penalty tax imposed on deficiency dividends were intended to be
burdensome in order to assure that "the net cost to the REIT of
18/ H.R. Rept. No. 98-432, Part 2, 98th Cong. 2d Sess. 1746.
-27borrowing money from its shareholders (that is, the net cost of
underdistributions) is high enough to discourage such action and
to encourage the distribution of earnings to shareholders
currently." 19/
A deficiency dividend is, in effect, borrowed in part from
the REIT shareholders and in part from the government. The
portion of the deficiency dividend that is borrowed from the
government is the tax that would have been paid by the REIT
shareholders had the distribution been paid currently. The
remainder of the deficiency dividend is borrowed from the REIT
shareholders. Because the REIT must pay interest to the
government on the full amount of the deficiency dividend, the
government receives interest both on the portion of the
deficiency dividend borrowed from it and on the portion borrowed
from shareholders. We believe that this rule will, by itself,
act as a sufficient disincentive to the intentional utilization
of the deficiency dividend procedure. Accordingly, we do not
object to the repeal of the penalty tax on REIT deficiency
dividends.
Distribution Requirement
As discussed above, a REIT generally is required to
distribute currently to shareholders an amount that equals or
exceeds the sum of 95 percent of the REITTI (determined without
regard to the dividends paid deduction and by disregarding net
capital gains) and 95 percent of its after-tax income from
foreclosure property. H.R. 4916 would except from this
requirement certain non-cash income and income from failed
section 1031 exchanges.
We question whether the non-cash income that would be
excepted under the bill should be distinguished from economically
equivalent income that is received by a REIT and reinvested.
Nonetheless, we recognize that, in certain situations, the
receipt of large amounts of non-cash income may force a REIT that
lacks liquid assets to borrow funds in order to satisfy the
distribution requirement. The proposed amendment is limited to
situations of this type. We note, moreover, that the consequence
of a failure to distribute income currently is an entity-level
tax on the undistributed income. For these reasons, we do not
oppose the amendment.
Taxable Year and Spill-over Dividends
As discussed earlier, the version of H.R. 3838 approved by
the Senate Finance Committee would eliminate the deferral of tax
resulting from the utilization by RICs of a taxable year other
19/
Rep.
No. 94-938,
94th
Cong.
2d Sess.
466 (1976).
thanS.
the
calendar
year and
the
payment
of spill-over
dividends.
We believe the Subcommittee should consider extending the
calendar year provision to those REITs that remain entitled to
use a fiscal year.
-28In addition, we believe the Committee should consider
extending to REITs the spill-over dividend provisions that the
Senate Finance Committee's version of H.R. 3838 would apply to
RICs. The spill-over dividend excise tax contained in that bill
would permit significantly less deferral of tax than the rules
that apply to spill-over dividends of REITs under current law.
H.R. 4448
Mortgage-Backed Securities
Overview
Treasury supports legislation which would provide rules for
the tax treatment of multiple class mortgage pools and the
investors in such pools. Uncertainty under current law may
result in inconsistent reporting of income by holders and issuers
of interests in multiple class mortgage pools, as well as the
conversion for holders of ordinary interest income into capital
gain. Since we expect the market for multiple class mortgage
pools to grow, we are seriously concerned about the potential
revenue loss from continued uncertainty in this area. We thus
support legislation clarifying the proper reporting of income and
deductions with respect to mortgage-backed securities. We also
support, subject to appropriate safeguards, legislation that
would impose a single level of tax with respect to the underlying
mortgages.
Although we support legislation in this area, we remain
concerned about the growth of Federal credit, including that of
the Federal agencies active in the secondary mortgage market. As
we have testified previously, we believe it important to
encourage private issuers of mortgage securities to enter that
market. To this end, Treasury supports limiting legislation in
this area to prevent participation in multiple class mortgage
pools by the Federal agencies.
Background
Recent years have seen not only substantial growth in the
secondary mortgage market, but also the development of new forms
of mortgage-backed securities. Traditionally, mortgage-backed
securities have been issued as certificates of undivided
beneficial interest in "fixed investment trusts," which are
viewed for tax purposes as grantor trusts. In this format, the
certificate holders are treated as the beneficial owners of the
mortgages and bear all income taxes with respect to the
mortgages. The grantor trust format, however, prevents issuers
from taking advantage of the fact that long-term yields exceed
those for short-term obligations or from offering investors any
degree of protection against uncertainty as to the maturity of
their investments arising from the possibility of prepayments of
the underlying mortgages.
-29Because individual mortgages typically are composed of a
series of equal monthly payments, the cash flow from a pool of
mortgages has the same temporal pattern as a series of short- and
long-term obligations. A mortgage pool may thus be used to
collateralize an issue of debt obligations with differing terms
by allocating the anticipated mortgage payments among the
different classes of securities. Such arrangements, known as
"fast-pay/slow-pay" or "multiple class" pools, permit the issuer
to price interests in the mortgage pool so as to take advantage
of the different maturities and to offer the various classes some
degree of predictability as to the term of their investment. In
this fashion, multiple class mortgage pools permit an issuer to
secure a better return from a secondary marketing.
The Multiple Class Trust Regulations
In an attempt to incorporate the advantages of the multiple
class structure, in the grantor trust format, Dean Witter
Reynolds, Inc. and the Sears Financial Network in 1984 structured
two grantor trusts offering investors differing temporal
interests in the payment rights on $500 million pools of
residential mortgages. Dean Witter and Sears successfully
marketed the first pool, but in April 1984, before interests in
the second pool were sold, the Internal Revenue Service proposed
regulations denying trust status to arrangements having multiple
classes of ownership interests.
Historically, whether an investment trust is classified as a
trust or as an association taxable as a corporation has focused
on whether the investors' interests were fixed or could instead
be varied under the terms of the trust agreement. A power to
vary the investors' interests, even though only in contingent
form, is sufficient to deny the arrangement trust status. Thus,
the investment trust regulations limit trust classification to
"fixed investment trusts" where there is no power under the trust
agreement to vary the investors' interests.
At the time these regulations were first promulgated in 1945,
fixed investment trusts had only one class of investment
certificates. The certificates represented undivided interests
in the trust property and were, in form, receipts for the
securities held by the trust. This use of a trust to hold
investment assets and facilitate direct investment in a pool of
assets by investors is consistent with the custodial purposes
that have traditionally limited trust classification.
A multiple class investment trust, such as that formed by
Dean Witter and Sears, departs from the traditional form of a
fixed investment trust in that the beneficiaries' interests are
not undivided, but diverse. The existence of varied beneficial
interests indicates that the trust is not employed simply to hold
investment assets, but serves the additional purpose of providing
-30investors with economic and legal interests that could not be
acquired through direct investment in the trust assets. Such use
of an investment trust introduces the potential for complex
allocations of trust income among investors with the possibility
that the timing and character of the investors' aggregate income
will differ from that of the trust.
The difficult questions that arise concerning the allocation
of income to investors with diverse interests are properly
foreign to the trust area. The complexity necessary to
accommodate varied forms of commercial investment, including an
economic substance requirement to limit artificial allocations of
income for tax purposes, would certainly result in a set of rules
that would be virtually incomprehensible to all but the most
sophisticated fiduciaries. Thus, Treasury recently issued final
regulations which affirm the general rule of the proposed
regulations and provide that trust status generally is denied to
investment trusts with multiple classes of ownership.
Collateralized Mortgage Obligations
Because the traditional grantor trust format is inconsistent
with the multiple class structure for mortgage pools, issuers
have increasingly employed thinly-capitalized, single purpose
financing entities (typically corporations) that hold pools of
mortgages and issue classes of debt securities collateralized by
the underlying mortgages. This type of debt obligation is known
as a collateralized mortgage obligation ("CMO"), and nearly $33
billion have been issued since 1983.
The CMO structure is a relatively inefficient vehicle for
marketing a pool of mortgages. The issuer ideally would prefer
to have no residual economic or tax consequences from its holding
of the underlying mortgages. Although this economic result might
be accomplished in many cases by leaving the issuer without
significant capital and issuing obligations that, in the
aggregate, exactly mirrored the characteristics of the underlying
mortgages, this would threaten the issuer's status for tax
purposes as the owner of the mortgages and the issuer.of debt.
The CMOs could be deemed to constitute equity interests in the
issuer or to represent instead direct interests in the underlying
mortgages. Either characterization could leave the issuer with a
tax liability on the mortgage income that would more than offset
the economic advantages of the multiple class structure.
To ensure that the issuer will be respected as owner of the
mortgages and that the CMOs will be characterized as debt for tax
purposes, careful issuers have attempted to satisfy minimum
capitalization requirements and to retain some residual interest
in the underlying mortgages. This approach introduces a degree
of economic inefficiency to the transaction, however, since it
ties up capital
in the issuer
and prevents
the issuer
from this
borrowing
fully against
the underlying
mortgages.
To avoid
-31inefficiency, less cautious issuers have taken aggressive
positions, providing little if any capitalization and retaining
no significant residual interest in the underlying mortgages.
Since the Internal Revenue Service has not yet publicly
challenged the formal structure of a CMO transaction, the net
effect at present is a secondary market in which conservative
issuers operate at a disadvantage.
Taxation of CMOs
Current Uncertainty
The taxation of issuers and holders of CMOs under current law
is uncertain. In particular, if a CMO is issued at a discount,
it is unclear whether the likelihood of prepayments on the
underlying mortgages must be taken into account in determining
the allocation of original issue discount ("OID") to the various
accrual periods under the obligation. Since prepayments
generally have the effect of accelerating the accrual of OID, it
is probable that most holders are ignoring the possibility of
prepayments (at least until they actually occur) while at least
some issuers are anticipating prepayments as a way to accelerate
their OID deductions. Such inconsistent positions are obviously
a source of revenue loss to the Treasury.
The potential revenue loss is even greater to the extent CMO
holders that have reported less OID than has accrued economically
are able to sell these obligations for their true value,
converting ordinary income into capital gain. On the other hand,
issuers who do not properly estimate the effect of prepayments
suffer an acceleration in the timing of the income that they are
required to include as holders of the residual economic interest
in the underlying mortgages. Because the expectation of
prepayments is a critical factor in the formation and pricing of
multiple class mortgage pools, any legislation addressing the
taxation of such pools must also address the effect of
prepayments on the proper accrual of original issue discount.
Phantom Income
Under current law, an issuer of CMOs includes in taxable
income the interest it receives on the underlying mortgages, and
receives a deduction for interest passed through to the holders
of the CMOs. Although this result is consistent with the
taxation of other corporations earning income and paying interest
to creditors, in the case of the CMO issuer it produces a timing
discrepancy between its taxable and economic income. The
explanation for this result is the phenomenon of so-called
"phantom income," which is, in turn, a function of the differing
yields on investments of different maturities.
-32Two points should be emphasized regarding phantom income.
First, phantom income is always offset by an equal phantom loss
in later periods, so that the total income from the mortgage
obligations, although accelerated, is not overstated. Second,
phantom income arises not from the creation of multiple class
mortgage pools but from an inaccuracy in the taxation of the
underlying mortgages. Because interest rates on short-term loans
are typically lower than those on long-term loans, and because a
mortgage calls for principal payments during every period of the
loan term, the true economic interest rate on a fixed-rate
mortgage will be slightly below the stated rate in the early
years of the loan and slightly above the stated rate in the later
years. For reasons of simplicity and administrability,
mortgagors and mortgagees are required to account for interest on
mortgage loans using a single yield to maturity, which has the
effect of front-loading the interest accruals relative to the
pattern of economic accrual. This occurs on every mortgage loan,
whenever long-term interest rates exceed short-term rates.
As long as a mortgage is held by a single taxpayer, the
accelerated interest deductions to the borrower are offset by
accelerated interest income inclusions for the lender. If,
however, the economic interests in the mortgages are split into
two or more pieces with differing maturities, and if each piece
is taxed correctly on its economic income, the accelerated
interest deductions are no longer offset and a net revenue loss
is virtually certain. If, on the other hand, the holders of all
the interests in the mortgage pool are taxed in the aggregate on
all the income of the underlying mortgages, one or more of these
holders will necessarily be taxed on more income than has
economically accrued, with an offsetting deduction in a later
taxable year.
A simplified example, involving no contingencies and hence no
residual economic interest, may serve to illustrate this
phenomenon. Suppose A borrows $1 million from B in exchange for
A's debt instrument calling for two equal annual payments of
$576,190. In effect, A and B have entered into a two-payment
mortgage with an effective interest rate of 10 percent. Now
suppose that, on the same day, B borrows $528,615 from C,
agreeing to pay C $576,190 at the end of one year (reflecting an
interest rate of 9 percent) and borrows $471,385 from D, agreeing
to repay $576,190 at the end of two years (reflecting an interest
rate of 10.56 percent).
-33B now has no possibility of economic gain or loss from the
transactions (assuming no default by A) since he has recouped his
$1 million in loan proceeds and the two payments from A will
exactly cover his obligations to C and D respectively.
Nevertheless, B's interest income will not be offset by interest
deductions on a year-by-year basis, as is shown by the following
table:
Deduction
Interest
Deduction
Total
on Loan
Income on
on Loan
Interest
Year
from C
Loan to A
from D
Deductions
$100,000
52,381
$47,575
$49,775
55,031
$97,350
55,031
Thus, B has "phantom income" of $2,650 in Year 1 and a "phantom
deduction" of $2,650 in Year 2.
Description of the Bills
H.R 4448
In general, H.R. 4448 allows the issuance of interests in a
pool of mortgages to be treated as a sale of the mortgages to the
investors, if certain conditions are met. Treated in this
manner, no entity level tax is imposed on the mortgage pool.
Investor interests in an "issue" (i.e., the mortgage pool) must
constitute either "regular" or "residual" interests. A regular
interest is a registered transferable interest which entitles the
holder to a fixed stated principal amount and periodic interest
payments or accruals on the outstanding principal balance. A
regular interest is analogous to a typical CMO. A residual
interest is also a registered transferable interest, but the
holder's rights to payments are wholly contingent on the extent
of prepayments on the underlying mortgages, income from temporary
investments, and contingent payments (e.g., equity kickers) on
the underlying mortgages. Both residual and regular interests
are taxed as debt obligations and are treated as qualifying
assets for purposes of the thrift bad debt deduction and REIT
rules. In addition, H.R. 4448 prescribes new information
reporting
rules 4448,
for regular
andmuresidual
interests.
st consist
of only aThese
fixed rules
pool
Under H.R.
the issue
would
extend
existing
reporting
requirements
to
virtually
all
of residential mortgages and cert ain short-term "permitted
holders
of these
investments."
Theinterests.
issuer may not engage in any trading
activities or in other prohibited transactions, including the
receipt of compensation for servi ces. In addition, a holder of
mortgages generally would recogni ze gain (but not loss) upon
transfer of the mortgages to the issuer in exchange for regular
interests. Loss that is deferred when the originator transfers
mortgages to an issuer and retain s one or more of the interests
in the issue would be allowed ove r the term of the interest as
market premium.
-34To provide rules for the taxation of regular interests, H.R.
4448 would amend the original issue discount provisions of the
Internal Revenue Code to provide specific rules for the accrual
of original issue discount on a mortgage-backed security,
including a regular interest. Under H.R. 4448, the accrual of
OID on an obligation collateralized by mortgages is based
initially on the stated maturity of the underlying mortgages,
i.e., the yield to maturity is calculated on the assumption that
no prepayments will be made. Each time a prepayment on an
underlying mortgage is received, shortening the maturity of the
obligation, investors accrue additional OID equal to the increase
in the present value of the stream of payments resulting from the
prepayment (discounting at the yield based on the stated
maturity).
Because the payments on a residual interest are contingent,
H.R. 4448 adopts a different set of rules for taxing such
investors. The bill essentially taxes residual holders on the
excess of amounts "paid or credited" to them over the basis
recovery amount for such period. The basis recovery amount is
determined by allocating the price paid for the interest ratably
over the estimated duration of the interest.
Under H.R. 4448, an issuer of mortgage-backed securities is
relieved of any tax liability for income not taxed directly to
regular or residual holders. The aggregate income of the
underlying mortgages, however, generally will exceed the
aggregate income of the regular and residual holders. This
excess arises both from inaccuracies in the taxation of the
regular and residual interests and from the phantom income
problem discussed above. To limit the revenue loss that would
arise from forgiveness of excess income, the bill allocates such
income to the holders of the regular interests in proportion to
the OID on these interests (subject to certain limitations) or,
to the extent not so allocated, to the residual holders. The
theory behind this allocation presumably is that the largest
component of this excess income results from errors in reflecting
prepayments accurately in the accrual of OID on the regular
interests rather than from differing yields on debt instruments
of different maturities.
Senate Finance Committee Bill
H.R. 3838, as reported by the Senate Finance Committee,
contains provisions which relate to the tax treatment of entities
issuing multiple interests in a pool of real estate mortgages, as
well as the taxation of investors in such pools. The Finance
Committee bill would authorize a new elective entity, known as a
"Real Estate Mortgage Investment Company" or "REMIC." Although
many
theS.
technical
aspects
of the Finance
Committee
bill are
drawn of
from
1959 (which
is identical
to H.R.
4448), the
-35approach of the Finance Committee bill differs from S. 1959 and
H.R. 4448 in that it would impose a corporate level tax on the
issuer of multiple interests in a mortgage pool. This tax would
be imposed on the difference between the mortgage income received
by the issuer and the income of the regular and residual holders.
Thus, the REMIC would pay tax on phantom income and also to the
extent the income of holders of regular and residual interests is
understated.
A REMIC may be organized as a corporation, association, trust
or partnership. To qualify as a REMIC, the entity must meet many
of the requirements applicable to an issuer under H.R. 4448,
including the nature of its assets and the type of interests
which it may issue. In addition, the REMIC must distribute 100
percent of its net cash flow within 15 days after the end of each
taxable year.
The taxation of regular interests under the Finance Committee
bill is similar to that under H.R. 4448, except that the holder
is required to account for all interest on the accrual method,
whether or not subject to the original issue discount rules. The
bill also provides that an intention to call such obligations
prior to maturity will be presumed; thus, gain on sale or
retirement of a regular interest will be ordinary to the extent
of unaccrued original issue discount. In addition, the bill
grants the Treasury Department the authority to issue regulations
prescribing rules for the recognition of market discount on an
obligation, such as a regular interest, where principal is paid
in installments.
Under the Finance Committee bill, the taxation of residual
interests differs substantially from the treatment of such
interests under H.R. 4448. In general, holders of residual
interests are taxed only to the extent of actual payments.
Payments to a residual holder are characterized as income to the
extent accrued, computed by applying a deemed yield equal to the
applicable Federal rate on the adjusted issue price of the
interest. Distributions in excess of the amount of income deemed
to accrue are first applied against the adjusted basis of the
interest and, once basis has been fully recovered, are treated as
gain from the sale or exchange of the residual interest. Taxable
income received by a foreign holder of a residual interest is
subject to the withholding tax on dividends. Assuming the proper
yield to maturity is chosen, this method should result in a
slower recovery of basis than under H.R. 4448 and, if the imputed
yield approximates the actual expected yield, in a more accurate
measure of the economic income of the holders of residual
interests.
If an entity meets the qualification requirements and elects
to be treated as a REMIC, the entity is subject to tax at the
highest corporate rate. The taxable income of a REMIC is
-36computed in the same manner as a regular corporation, except that
a REMIC may claim a deduction for distributions to residual
holders to the extent income is deemed to have accrued on the
interest. Capital gain distributions, on the other hand, are not
deductible by the REMIC. Thus, to the extent the economic yield
to the residual holder exceeds the applicable Federal rate,
payments from the REMIC to the residual holder are subject to a
double tax. In addition, a REMIC is permitted an unlimited
carryback of net operating losses. The purpose of this provision
is to allow phantom losses to be carried back to offset phantom
income in earlier years. Finally, a REMIC is required to accrue
market discount currently.
The Finance Committee bill also provides that any entity
which is formed to hold real estate mortgages and issue multiple
interests in the pool is treated as a taxable corporation,
without regard to its form for state law purposes. Thus, any
multiple class arrangement which under current law might be
treated as a conduit for tax purposes, would be treated as a
corporation.
In addition, the bill treats regular interests in a REMIC as
a qualified asset for REIT purposes and as a qualifying real
property loan for purposes of the bad debt deduction for thrift
institutions. Finally, the Finance Committee bill adopts
compliance provisions similar to those contained in H.R. 4448.
Discussion
As stated previously, the Treasury Department supports
legislation that would clarify the taxation of multiple class
mortgage pools and investors in such pools. Without such
legislation, we would be forced to address these difficult issues
by regulation or ruling. While development of current law
through the administrative process might ultimately lead to a
satisfactory set of rules, this would follow many months or even
years of uncertainty. Continued uncertainty in this area will
encourage taxpayers to take inconsistent and aggressive
positions, with a consequent revenue cost to the Treasury.
Taxation of Regular Interests
With respect to the taxation of holders of regular interests,
we generally support the method of OID accrual contained in H.R.
4448 and the Finance Committee bill and believe it will result in
a much closer approximation of the manner in which OID accrues
economically. We would be willing to work with this Subcommittee
and with interested taxpayers, however, to develop an even better
approximation of the economic accrual of OID, bearing in mind
that any approach that attempts to anticipate prepayments will
necessarily entail greater complexity. Given this additional
complexity, it may be appropriate to make any rules that
anticipate prepayments elective by the issuer.
-37Taxation of Residual Interests and the Issuing Entity
As to the taxation of income not credited to holders of
regular interests, the issues are far more complex. In concept,
investors in a multiple class mortgage pool should be taxed on
their economic income, and the entity established to issue
interests in the pool should be exempt from tax if wholly
passive. There are two problems, however, with this approach.
First, while it is feasible to create a system that produces a
reasonable approximation of economic income for regular
interests, it is far less clear that a system for approximating
the economic income of a residual interest holder can be devised,
given the purely contingent nature of these interests and their
extreme sensitivity to differences in the prepayment pattern on
the underlying mortgages. Second, exempting interest holders and
the entity from tax liability on phantom income would result in
inconsistent taxation of the interest income and deductions in
respect of the underlying mortgages. Although holders of regular
or residual interests would be taxed only on their economic
income, interest deductions would continue to accrue to
individual mortgagors on an accelerated basis. Such asymmetry
would produce a substantial revenue loss. Since it is not
practical to alter the method under which mortgage interest
deductions accrue, revenue considerations dictate that the
matching that occurs under current law be retained by reflecting
phantom income in some manner in the income of the entity or the
holders of regular or residual interests.
As noted above, H.R. 4448 attempts to deal with these
problems generally by taxing residual interests only on amounts
paid or credited (with a straight-line basis recovery) and by
taxing all additional amounts (including phantom income) to
holders of discount regular interests. While this approach
preserves the taxable income base, we are concerned that some
significant loss of revenue would nevertheless result because the
principal holders of discount regular interests (typically the
slower-paying interests) will be pension funds and other
tax-exempt or low-tax entities.
In general, the Treasury Department supports the provisions
of the Finance Committee version of H.R. 3838 in this area.
Because of concern that legislation not facilitate the allocation
of phantom income to persons not subject to tax, the Finance
Committee effectively traps phantom income at the entity level.
This is, of course, the most direct way to assure that phantom
income does not escape taxation.
We are concerned, on the other hand, that the specific
provisions
contained
ininterests
the Finance
bill may
farther
the
than return
is necessary
on
residual
to protect
against
to Committee
the
revenue
applicable
loss.
Federal
By go
limiting
rate
-38and by taxing all phantom income at the highest corporate rate,
significantly more income may be subject to tax at the highest
corporate rate than under current law and some income may be
subject to a double tax. In addition, representatives of'the
mortgage industry have voiced concern that a substantial
entity-level tax may pose difficulties to the issuer that, in
many cases, outweigh the economic benefits of creating
multiple-class mortgage pools.
The Treasury Department believes that it is in the mutual
interests of the Congress, the Treasury Department, and the
mortgage industry to continue to work together to devise a
workable solution to these problems that does not entail
significant revenue cost. In particular, Treasury would be
willing to work on approaches that would minimize or even
eliminate the impact of the entity-level tax without significant
loss in revenue.
Treasury is also of the view that whatever rules are finally
enacted to deal, with the problem of multiple class mortgage pools
should be the exclusive rules in this area. Thus, we support the
elimination of other conduit vehicles for multiple class mortgage
pools. We suggest, however, that an appropriate transition
period be provided which would allow issuers to continue to offer
existing types of multiple class pools available under current
law. This interim period would permit issuers to adjust to the
new rules and would help avoid disruptions in the secondary
mortgage market.
Other Assets
Although neither H.R. 4448 or the Finance Committee bill
pose the issue directly, it is appropriate to consider whether
legislation allowing multiple class debt pools should be limited
to pools of real estate mortgages. If legislation in this area
is adopted, we believe it is appropriate that multiple class
arrangements for which pass-through treatment is granted be
limited at this time to debt obligations in the nature of real
estate mortgages or mortgage-backed securities. Although
multiple class pools of auto loans, lease receivables, corporate
bonds, and various other obligations would appear closely similar
in concept to multiple class mortgage pools, we believe it
appropriate to proceed with some caution in this area. Thus,
Treasury believes it appropriate that we gain experience with
multiple class mortgage pools before extending these concepts to
multiple class pools of other debt obligations. Moreover,
because of real estate mortgages' typically long term and
significant incidence of prepayment, they present the most
pressing case for the allowance of multiple class arrangements.
-39To summarize the Treasury Department's views with regard to
the pending legislation, we hope the efforts to clarify the tax
rules in this area will move forward and that an approach that
satisfies the concerns of the industry without a loss in revenue
can be found. To that end, we offer our support for these .
efforts and pledge to work with this Subcommittee and industry
representatives to achieve a practical solution to these
difficult tax issues.
0 o 0
This concludes my prepared statement.
respond to questions.
I would be pleased to
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone 566-2041
STATEMENT OF THE HONORABLE DAVID C. MULFORD
ASSISTANT SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON WESTERN HEMISPHERE AFFAIRS
OF THE
COMMITTEE ON FOREIGN RELATIONS, U.S. SENATE
Washington D.C.
June 10, 1986
Mr. Chairman, I welcome the opportunity to appear before this
subcommittee to discuss Mexico's economic situation. My remarks
today will focus on the present state of the economy and address
the major problems facing Mexican policymakers. I will review
the developments leading to the 1982 financial crisis and the
measures taken by the Mexican government to cope with it. This
provides the necessary context for an understanding of how Mexico
is managing its present problems.
Introduction
Mexico and the United States share a close economic and financial
relationship. Mexico is our third largest trading partner. U.S.
direct investment in Mexico is estimated at $5 billion with the
presence of some 2,90 0 U.S. firms. Although Mexico has attracted
substantial equity capital from other nations, the United States
remains the largest single source of private foreign direct
investment.
Mexico has also become a major player in the world economy. It
is the twelfth largest economy and the second largest LDC debtor,
with an estimated $97.4 billion in outstanding obligations. Of
this, nearly $74 billion is owed the commercial banks, including
$24.4 billion to U.S. banks — about one-third. This has made
Mexico one of the focal points in our debt strategy.
We enjoy a close working relationship with Mexican financial
officials who have repeatedly demonstrated Mexico's commitment
to being a responsible member of the international financial
community. Unlike a number of other nations, Mexico has not
permitted significant accumulation of payments arrears and the
adjustment of its external accounts after 1982 was impressive.
Through determination and perseverance, Mexico became a model
adjuster in the post-1982 period as it eliminated, its current
account deficit even in the face of sharply reduced economic
output.
The sacrifices of the Mexican people after 1982 have made the
impact of the sudden oil price collapse in 1986 all the more
onerous. This year will be the third out of the last five that
Mexicans will have to endure economic contraction. Against this
background, the rapid adjustment required by the sudden loss of
oil revenues becomes all the more difficult.
B-617
-2Mexican officials are well aware of the dimensions of their
current problems and the need for early resolution.' The
government has already taken numerous steps to deal with these
problems, including actions to cut spending, sell off state
enterprises, and shift debt into equity. These difficult steps
have not received the recognition they deserve and Mexico has
not been given credit due. When it comes to Mexico, there is a
tendency to be quick with criticism and cautious with praise.
Events Leading to the 1982 Crisis
Mexico's present situation can only be understood and assessed
against the background of the 1982 crisis and events since then.
The oil windfall of the late 1970's was used to spur economic growth,
with only modest efforts to diversify the economy's export base.
In this regard, Mexico behaved no differently than most other
oil exporters. The rapid pace of economic growth, which
averaged 8.5% from 1978 to 1981, created serious structural
bottlenecks. As a result, inflation began accelerating, reaching
99% in 1982, compared with 29% in 1981. Instead of dealing with
the root causes of these problems, Mexico resorted to additional
foreign borrowing. In 1981 alone, Mexico's foreign debt increased
by $18 billion.
In part, this was because the commercial banks continued to lend
and at low spreads. Real interest rates in the late 1970's
were negative. Thus, as was the case with other large debtors,
Mexico's continued borrowing from abroad was not surprising.
However, most of Mexico's external debt carried floating interest
rates. As interest rates peaked in 1981, the real interest rate
on the foreign debt became sharply positive and Mexico's debt
service increased substantially. With the world recession,
softening oil prices and Mexico's own economic performance,
banks became concerned about Mexico's creditworthiness. They
began to reduce their lending to that country and before long
the probability of a financial crisis became very high.
Mexico's announcement over the weekend of August 13, 19 82 that
it was suspending payments on its external obligations caused a
near panic in the financial markets. There were widespread
fears that other major debtors would follow suit and cause
irreparable damage to the financial system.
However, with the close cooperation of official and private
creditors and the IMF, Mexico quickly implemented a major
stabilization program, and serious disruption to the financial
system was avoided.
- 3 Stabilization After the Crisis
The economic stabilization program that the de la Madrid
administration undertook in the wake of the 1982 crisis brought
Mexico's external accounts under control in a relatively short
time. However, as was the case with a number of debtor nations
in the first round of the adjustment to the new financial and
economic conditions of 1983-1984, the degree of internal
adjustment accomplished by Mexico was limited. This was in part
due to the high political and economic costs associated with it
Following the 1982 crisis, the Mexican government took some very
tough measures on the fiscal, monetary and foreign exchange
fronts. As a result, economic activity dropped by 0.5% in 1982
and another 5.3% in 1983; imports were reduced by 40% in 1982
and a further 45% in 1983. The current account swung from a
deficit of $6 billion in 1982 to a surplus of over $5 billion in
19 83. During this period because of its good progress on the
external side, Mexico was seen by many as a model adjuster.
In 19 84, the economy grew by 3.5% and the current account
registered a surplus of $4 billion, despite a 31% growth in
imports. But the external adjustment began to slow late in the
year since further improvement on the balance of payments could
only come from further growth and improved export performance.
While Mexico's imports dropped by two-thirds between 1981 and
19 83, a development that contributed to our own growing trade
deficit, its exports grew by less than 11% during this period.
This disparate performance reflects the fact that Mexico was
plagued by economic and structural problems rooted in its past.
Having followed a policy of import substitution since the 1940's,
Mexico had not by the early 1980's sufficiently diversified its
export base and thus its capacity to expand non-oil exports
quickly during this period was limited.
In 1985, Mexico suffered an 11% decline in oil receipts that was
exacerbated by declines in non-oil exports due in part to an
overvalued exchange rate for much of the year. In an effort to
sustain economic growth, the government adopted expansionary
fiscal and monetary policies despite the lower oil revenues. While
growth was maintained at about the 1984 pace, inflation accelerated
as the government monetized a substantial portion of the government
deficit.
The Mexican Economy Today
Mexico's attempt to maintain economic growth in the face of
declining oil revenues made it particularly vulnerable to the
50% drop in world oil prices that took place in the short space of
six-weeks in early 1986. Since approximately half of Mexico's
government revenues are based on oil exports, the drop in prices
translated into a 25% real decline in government revenues.
-4Coming as it did after four years of economic adjustment, this
traumatic contraction was not only economically painful, but
politically demoralizing.
The problem now facing Mexico is how to undertake additional
substantial adjustment within a very short time frame. This is
necessary to stabilize the balance of payments, reduce the fiscal
deficit and contain inflation so as to preserve confidence in
the peso. To its credit, the de la Madrid administration has
taken several steps to contain the fiscal deficit. These include:
— the continued divestiture of state enterprises, including the
closing of a large but inefficient steel mill involving the
loss of 5,000 jobs;
— reduction in direct subsidies to parastatals, a problem that
has plagued Mexico's economy for many years.
— reduction in government subsidies for basic goods and services;
— encouraging increased foreign investment and a reduction of
the debt burden through the use of debt/equity swaps; and
— implementing a tight credit policy, which in the first four
months of 19 86 reversed capital flows into Mexico.
The Mexican authorities estimate that in 1986 they will lose
about $6 billion in oil export earnings. They also estimate
that total external financial requirements are on the order of
$5-6 billion. This is not much greater than the amount estimated
before the drop in oil prices. The reason for this is that the
Mexicans themselves expect to absorb the bulk of the loss in oil
revenues. In fact, economic activity in 1986 is anticipated to
decline by 3-5%.
As I have noted, large public sector deficits are a major source
of inflation in Mexico. Like most other developing countries,
Mexico has limited domestic private savings and underdeveloped
capital markets. As a result, Mexico is often forced to monetize
as much as half of its fiscal deficit. Foreign borrowing can be
used to help finance the deficit, but it may not always be
available in sufficient quantity. Thus, Mexico has not been
able to avoid some of the most undesirable aspects of deficit
financing, as indicated by the rise of inflation. At present,
inflation is running at about 85% on an annual basis, compared
to 64% in 1985 and 28% in 1981.
The Investment and Trade Climate
Foreign investment capital could play a more significant role in
Mexico's development at a time when additional bank lending is
both difficult and unattractive. However, the foreign investment
law adopted in 1973 and subsequent government decrees affecting
autos, pharmaceuticals, and other sectors have adversely affected
Mexico's investment climate.
-5The de la Madrid administration announced this past March that
it would administer the foreign investment law more flexibly.
The increase in the number of applications approved since then
seems to indicate a change in attitude. The decision last year
to allow a major U.S. multinational to set up a 100% wholly owned
subsidiary in Mexico was another indication of a more open
attitude toward foreign direct investment by the de la Madrid
administration.
The de la Madrid administration is also trying innovative
approaches to attract foreign direct investment. Recently, it
has been promoting debt/equity swaps which have the benefit of
reducing the foreign debt while potentially increasing equity
capital inflows. Mexico agreed to a provision in its 1985 debt
rescheduling agreement with commercial banks to allow for the use
of debt/equity swaps. We believe, and the Mexicans agree, that
debt/equity swaps can play an expanding role not only in direct
investment by foreigners, but also in the possible reflow of
capital held abroad by Mexican nationals.
Mexico is also making considerable progress in rationalizing its
trading system through replacement of most import licenses with
tariffs. This eliminates unnecessary red tape and represents a
first step in opening up the Mexican economy to foreign competition.
To help this process along, Mexico is negotiating a large Trade
Liberalization Loan with the World Bank.
Mexico and the Program for Sustained Growth
Mexico is one of the major debtor countries expected to benefit
from the Program for Sustained Growth. It is presently involved
in intensive negotiations with the World Bank on a number of
fast-disbursing policy-based loans, including the Trade
Liberalization Loan already mentioned. These loans are expected
to increase World Bank lending to Mexico in 1986 to about
$1 billion net, which is significantly higher than previous levels.
In addition, the Mexican authorities are engaged in continuing
negotiations with the IMF on a new stand-by arrangement. Not
surprisingly, we understand that the size of the fiscal deficit
and the accompanying inflation rate are the major issues under
discussion. We hope that the two sides can soon come to an
agreement so that Mexico can begin negotiations with the commercial
banks on a new money package. If Mexico can successfully implement
a new IMF program and important economic reforms in connection
with this program and with its World Bank loans, there is every
reason to believe that private credit markets will respond.
CONCLUSION
Mr. Chairman, I have briefly reviewed Mexico's economic situation.
I have attempted to be candid in my comments in the hope that,
by airing these issues fully, we can better appreciate Mexico's
economic problems.
-6Mexico is an important trade and investment partner. We have
been working closely with Mexican authorities and they have kept
us fully informed of their situation. In our experience, Mexico's
economic team has demonstrated competence and a strong commitment to
improve their country's economic performance.
The development of the Mexican economy is in the interest of both
Mexico and its creditors. Patience, objectivity and sound judgment
are of the utmost importance at this juncture.
The task ahead is not easy. But with our support, Mexico's own
efforts to grapple with its difficult economic problems, and with
the assistance of the international financial institutions and
private banks, we are confident that Mexico can stabilize its
situation and return to sustainable economic growth.
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
June 10, 1986
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approximately $14,800 million, to be issued June 19, 1986. This offering
will result in a paydown for the Treasury of about $4,650 million,
as the maturing bills total $19,458 million (including the 15-day
cash management bills issued June 4, 1986, in the amount of $5,000
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,
June 16, 1986. The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,400
million, representing an additional amount of bills dated March 20,
1986, and to mature September 18, 1986 (CUSIP No. 912794 LD 4 ) ,
currently outstanding in the amount of $6,840 million, the additional and original bills to be freely interchangeable.
182-day bills for approximately $7,400 million, to be
dated June 19, 1986, and to mature December 18, 1986 (CUSIP No.
912794 LP 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 June 19, 1986. 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 $1,587 million as agents for foreign and international
monetary authorities, and $3,777 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-618
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
tenders.
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
Department of the Treasury • Washington, D.c. • Telephone 566-2041
Text As Prepared
For Release Upon Delivery
Expected at 7:00 PM EDT
Remarks for the Secretary of Treasury
James A. Baker, III
At the National Foreign Trade Council Dinner
in New York City
Wednesday, June 11, 1986
I am pleased to be with you. I appreciate having the
opportunity to come before this distinguished group and discuss
Administration policy. For 72 years, the National Foreign Trade
Council has been a powerful voice for free trade and a
competitive America.
There is undoubtedly a great deal of accumulated wisdom in a
Council that has observed the ebb and flow of trade for so long.
You have much to teach those of us involved in trade policy in
Washington.
You could recount, for example, how in the 1920s a few
ripples of protectionism coalesced into a swell in the form of
the Fordney-McCumber tariff. This swell gathered momentum and
ultimately became a tidal wave called Smoot-Hawley that smashed
the world trading system in the 1930s. After the wave broke, the
waters became still under the calming influence of the General
Agreement on Tariffs and Trade. The ships of free trade sailed
swiftly over these smooth waters, carrying prosperity to all
parts of the world.
But now, in recent years, the waters have grown choppy and
rough again. Subtle and tricky currents, never before seen, pose
unexpected dangers. Trade barriers loom like icebergs, and below
the surface lurk more subtle barriers. A wave of protectionism
may be gathering once more. Those who remember the lessons of
history, and cherish the blessings of free trade, must unite to
resist this wave.
B-619
-2But in so doing, we must not panic and run for quick-fix
solutions. We must look to comprehensive solutions that address
fundamental causes. Rough waters often reflect broad climatic
changes or massive seismographic shifts in the earth below the
sea. Trade problems often result from movements in the general
economy. The Fordney-McCumber tariff in 1922 aimed to protect
certain infant industries. The Smoot-Hawley bill came as the
depression spread.
Today, our trade deficit reflects such obvious factors as
foreign trade barriers, but also less publicized but very
powerful factors as differing growth rates among the U.S. and its
trading partners, currency values, less developed country debt,
and difficulties ,in certain sectors of our economy.
These factors are more influential and complex than fifty
years ago. Each country is now more vulnerable to developments
in other nations. In the United States, one of every eight jobs
is related to exports, as is two out of every five acres devoted
to agricultural production. In some countries, trade is equal to
as much as 50 percent of their Gross National Product.
The existence of these factors means that the trade deficit
can't be papered over with protectionist legislation. The
underlying movements will inevitably shred the paper cover —
dashing false hopes and exposing the policy as inadequate.
President Reagan, therefore, has designed an international
economic strategy that takes these factors into account. As he
laid out this strategy last September, it has four parts:
strengthening the functioning of the international monetary
system through closer economic cooperation; promoting stronger
and more balanced growth among the major industrial nations;
improving growth in developing nations with a heavy debt burden;
and last, but not least, promoting free and fair trade.
We believe these elements are the best way to reduce the U.S.
trade deficit and the dangerous protectionist pressures
associated with it. The policy has already brought significant
progress toward establishing the fundamental conditions necessary
to achieve and maintain a sound and growing world economy, more
balanced trade positions, and greater exchange rate flexibility.
A key contributor to this progress was the Plaza Accord
reached here in New York City last September among the "G-5"
nations — Japan, Great Britain, France, Germany and the United
States. Since the Accord, exchange rates have moved
considerably, and this should play an important role in reducing
external imbalances.
-3At the same time, experience has shown that exchange rate
changes alone should not be relied upon to achieve the full
magnitude of the adjustments required in external positions.
This is one reason why we place such importance on strong,
sustained and better balanced growth among the industrial
countries. Without greater growth abroad, increased reliance
will need to be placed on exchange rates in the adjustment of
payments imbalances.
At the recent Tokyo Summit, therefore, we built on the
success of the Plaza Accord. We established a process for closer
policy coordination.
Under the system, the participating countries will regularly
review economic objectives and forecasts with their peers and the
managing director of the International Monetary Fund. They will
take into account a broad range of indicators such as those
spelled out in the Tokyo Summit communique. The internal and
external consistency of these projections will then be assessed
with a view to necessary adjustments. If significant deviations
from an intended course emerge, the participants have pledged to
exert best efforts to adopt remedial action.
The Tokyo arrangements do not involve any ceding of
sovereignty, nor should they. But if the system is to work, the
participants will of their own volition — to be sure — under
the watchful eye of their peers -- have to take external
considerations into account in formulating their domestic
economic policies. For the United States this only reflects the
reality that the time is long past when the U.S. could, in
setting domestic policies, relegate external considerations to an
insignificant order of importance.
The major implications for U.S. policy at the present are
fairly clear. We must follow through on our program to reduce
our budget deficit. The Congress has to complete action on tax
reform. Monetary policy must continue to be directed toward
sustained, noninflationary growth. And we must avoid the
pitfalls of protectionism (more on that in a minute).
The system will only be viable, however, if other nations are
prepared to accept similar responsibilities. If U.S. economic
policies are to be adjusted to take into account international
concerns, others too must be willing to adjust policies.
Countries such as Germany and Japan with large trade surpluses
must recognize the global need for stronger domestic demand to
facilitate the adjustment of external imbalances.
I've described two parts of the President's international
economic strategy — improving the monetary system and
encouraging industrial country growth. Let me turn to a third.
-4The global community has a strong stake in economic stability
and growth in the debtor nations, and the successful management
of their -debt problems. Debt service problems affect all of us,
in terms of reduced exports, lower growth, and a less stable
international financial system.
Recent progress in this area is heartening, and provides a
sound basis for future progress. There is now broad agreement
(when not too long ago there wasn't) among both creditors and
debtors that improved growth in the debtor nations is essential
to the resolution of their debt problems, and that
growth-oriented reforms are needed to achieve this goal.
And, centered on that growth theme, we have an agreed basis
on which to proceed. The debt initiative outlined by the United
States in Seoul last fall has received the strong support of the
international community. It is now being carried out through
individual debtor's discussions with the IMF and the World Bank.
Moreover, recent improvements in the international economy
are providing significant and timely relief for the debtor
nations. Stronger growth in the industrial nations this year
will add about $2 billion to the major debtors' exports. The
sharp decline in interest rates since 1984 will save them $12
billion a year, and lower oil prices will save the oil-importing
members some $2 billion annually.
These growth and interest rate changes if sustained, could be
more important to a resolution of the debt problem than the
amount of new financing by the commercial banks or the
much-touted World Bank general capital increase. But to attain
stronger growth, debtor nations must adopt growth-oriented
policies.
Such changes will not be easy. Commercial bank support for
these reform efforts is crucial. Once reforms have been agreed
upon, commercial banks must be ready to lend without delay.
Coordination among banks — large and small, U.S. and foreign —
will be a vital part of this process.
And I would hope that the banks are using effectively the
time they have now — in advance of agreement on specific reforms
— to put mechanisms in place which will assure that financing
packages can be assembled quickly when called upon.
Recently, much attention has been given to Mexico's efforts
to cope with its debt problems. We are actively working on this
issue, and are confident that Mexico can stabilize its situation.
-5I've described so far some of the more basic factors that
underlie the choppy surface of the ocean of trade — less
developed country debt, the growth rates among nations, and
exchange rates. If these issues are resolved in a coordinated
fashion, then trade will flow more smoothly, without so much
"pitching to and fro" and turbulence and seasickness and ill
tempers.
At the same time, we must address directly these problems on
the surface — the fourth part of the President's strategy —
promoting free and fair trade. Open markets promote growth
worldwide and aid our efforts to adjust trade imbalances among
industrial nations.
In keeping with the ideal of international cooperation, our
efforts to open markets begin at the multilateral level. We are
pleased that preparations are well advanced for launching the new
round of trade negotiations under the auspices of the General
Agreement on Tariffs and Trade. The GATT has served the world
well for nearly forty years, but has not completely kept up with
the rapid proliferation of trade and trade barriers. The GATT
needs to be modernized, streamlined and expanded.
Our Summit partners agreed in Tokyo to the U.S. proposal that
the new round of negotiations should include services and trade
related aspects of intellectual property rights and foreign
direct investment. Agricultural issues are a priority for the
United States, and they will also be included in the new round.
While we get ready for multilateral negotiations, we are also
carrying on bilateral discussions to open up markets. Last year,
for example, we successfully conducted the so-called MOSS talks
involving four sectors of Japan's economy. This year talks will
focus on additional sectors, including auto parts.
Moreover, we have been pursuing an aggressive program against
unfair trade practices. Over the past ten months, the
Administration has taken nearly two dozen actions to allow
American goods and services to compete on equal footing with
foreign competitors.
President Reagan is the first President to self-initiate
Section 301 cases against unfair trade practices. Section 301 is
a powerful weapon for opening markets, but previously, industry
had to go to all the time and expense to start a case.
There already has been considerable success. We have settled
disputes involving the European Community's subsidies for canned
fruit, Japan's footwear and leather import quotas, Taiwan's
import monopoly for liquor and tobacco, and Korea's restrictions
on foreign motion pictures.
-6The answer to our trading problems is a strategy that
addresses international issues in cooperation with other nations.
The answer most certainly is not a resort to unilateral,
self-defeating trade barriers. We want to open foreign markets,
not close ours. As President Reagan emphasized last week, he
will veto "kamikaze" legislation that could trigger a trade war
and send our economy into a nose dive.
It is appropriate to recall here that fifty-six years ago,
this very week, the House and the Senate passed the Smoot-Hawley
tariff. The bill raised the average levy on imports to 60
percent — the highest in the twentieth century. It was designed
to cure all sorts of economic problems in the United States.
Like today's protectionist legislation, Smoot-Hawley was
propelled by extravagant rhetoric. "If this bill is passed,"
predicted a leading member of the Senate on behalf of
Smoot-Hawley, "this nation will be on the upgrade, financially,
economically, and commercially within thirty days, and within a
year from this date we shall have regained the peak of
prosperity."
Not unlike what's going on today, Members of Congress vied
with each other to demonstrate how "tough" Smoot-Hawley would be
on our trading partners. One Member was loudly applauded 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.
Within 30 days, instead of instant prosperity for the United
States, an economic and political disaster began to spread.
Nations retaliated almost instantly. Spain, Italy, Switzerland,
France, Britain, Canada and numerous other nations raised
tariffs, boycotted American goods, and installed exchange
controls. The London Morning Post called on "all men of British
blood, wherever they may be, to unite against this peril as they
united against the Germans in 1914."
U.S. merchandise exports sank 60 percent from 1929 to 1932.
Scholars agree that the loss of trade significantly deepened the
Great Depression. The only winners of the bitter tariff battle
were dictators who profited from the economic misery it created.
Today, a trade war would create nothing but misery also —
perhaps more so. The House of Representatives has just passed an
omnibus bill that could touch off an enormous trade conflict.
The bill would force other countries to cut their trade with us,
no ifs, ands, or buts. We would be sucked into all sorts of
disputes. The flexibility a President needs to administer trade
would be sharply restricted. Finding a middle ground in
sensitive trade negotiations would be impossible.
-7Once the button was pressed, the protectionist missiles could
not be recalled. American exporters, consumers, and
manufacturers would be held hostage. The consequences of such
actions would be incalculable in terms of inflation,
inefficiency, and unemployment.
And the repercussions would not be merely economic. A trade
war would involve primarily our friends and allies. Vital
foreign policy and national security goals would be jeopardized
if we alienate our trading partners. Our ideals of cooperation
and international harmony would be crushed by any retreat to
protectionism.
A trade conflict is vastly different than a struggle against
terrorism or communism. In the latter, we defend freedom.
A trade war, on the other hand, destroys freedom — such as the
freedom of American consumers and manufacturers to buy products
they can afford, the freedom of our farmers to sell their
products abroad, and the freedom gained from prosperity in
general.
In the struggle against tyranny, we stand with our friends.
In a trade war, we stand alone.
Protectionism poses a particular challenge to the business
community and all organizations that support free trade. It is
sometimes supposed that a dramatic shift in public opinion is
behind the protectionist movement in Washington in recent years.
But polling data, as compiled by public opinion analyst William
Schneider, seem to indicate that the level of protectionist
sentiment in the general public has not changed very much over
the last ten or so years.
The shift in opinion, Schneider observes, has come among
business executives. Increasing percentages of these elites
believe that trade barriers are necessary, and this sentiment
encourages protectionist proposals.
A special responsibility therefore rests with those of you in
the business community to work for free trade. Your opinions are
respected. Your influence on the course of events can be
considerable. The cry for protectionism today is clear and
forceful. The voice of free trade must also be fully heard.
This is the responsibility of the United States to the world
as well. Since our noble experiment began in the wilderness
centuries ago, we have set ideals that sophisticated skeptics of
the old world said never could be reached. We may not have
attained all of these ideals yet, but in pursuing them, we have
achieved a measure of greatness. And we have inspired the world
to follow in our footsteps.
-8But should the United States abandon its free trade
principles and launch large-scale protectionism, what kind of
example would we set for the world? And what sort of model would
we be for our idealistic youth, whom we have raised to believe in
a dynamic United States and its heritage of freedom? The bottom
line is if the U.S. goes protectionist — we will lose the
world's free trading system.
The results of a trade war would be manifold, but perhaps the
most enduring would be disillusionment. The hopes for a better
world would be dimmed. As D.H. Lawrence wrote of World War I,
"all the great words were canceled out for that generation."
After a trade war, the words we use today, like "freedom, growth,
opportunity" -would lose their meaning as well. And without words
to live by, achievement is not possible.
But I am confident that, if we commit ourselves to the task,
and follow our strategy, we can build on the progress we have
made in recent months. We can create a brighter future, and set
a good example for all, in our service to the country that
Lincoln called the "last, best hope of earth."
Thank you.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE UPON DELIVERY
June 10, 1986
Statement by
Robert A. Cornell
Deputy Assistant Secretary
for Trade and Investment Policy
Department of the Treasury
Before
Subcommittee on Financial Institutions Supervision,
Regulation, and Insurance
Committee on Banking
House of Representatives
June 10, 1986
Chairman and Members of the Subcommittee:
I appreciate the opportunity to present the Treasury
Department's views on H.R. 4868 and to comment on the sanctions
contained therein. The Administration, like the Congress, seeks
the end of apartheid and establishment of a system of government
in South Africa in which all South Africans can participate.
We think that measures such as those proposed in H.R. 4868,
aimed at the entire South African economy, will not realize their
goal, even though they may be sincerely intended to do so. We
hold this view for several reasons:
We remain strongly opposed to punitive economic sanctions.
B-620
- 2 -
Reducing the U.S. economic presence in South Africa and
attempting to damage severely the South African economy will
not provide the incentives for genuine change that we seek.
U.S. firms in South Africa are challenging the apartheid
system.
The proposed measures would harm the majority, non-white
population of South Africa more than they would help it.
Some recent polls in South Africa indicate that seven out of
ten black South Africans oppose sanctions.
The measures would harm United States banks, investors, and
business firms.
Imposition of sanctions will strengthen the extremes and
weaken the middle of the political spectrum in all
communities.
I shall focus my remarks initially on certain effects of the
President's September 1985 economic measures and subsequently on
H.R. 4868's proposals to prohibit U.S. citizens from making
deposits in banks in South Africa and in U.S. branches of South
African banks, to ban new U.S. investment in South Africa and new
South African investment in the United States banking sector, to
force divestiture of established investments, to prohibit certain
imports and further restrict exports and technology transfers.
President's Executive Order on Bank Loans
Last September, the President imposed a ban on most types of
U.S. bank loans to the South African Government, including public
sector entities such as power companies and the agricultural
marketing boards. Among other things, the ban prohibits U.S.
export financing where the importing entities are in the
governmental sector. Treasury's Office of Foreign Assets Control
has promulgated regulations to carry out this ban, and has
received no indication that this measure has been evaded.
Total U.S. bank claims on South Africa as of December 1985
were $3.2 billion compared to $4.7 billion at the end of 1984.
But only a small portion of these claims, about five percent or
$180 million, represented direct lending to South African public
sector entities. The amount is small because over a period of
several years U.S. banks of their own accord had greatly reduced
their claims on the public sector of South Africa.
- 3 -
Prior to September 1985, U.S. banks already had
independently froze and then reduced their credit lines to South
Africa, mostly affecting the private sector. The U.S. banks'
actions were taken in late July and August of last year partially
as a result of President Botha's declaration of a state of
emergency. The banks' decisions to freeze and reduce their
credit lines and the further erosion of international confidence
in South Africa and its currency led to a declaration by the
South African Government in early September of a moratorium on
repayments of principal on much of the country's foreign debt
owed to banks. U.S. bank claims on South Africa's private sector
have in effect been frozen as a result of this action, and will
decline if debt is repaid without the benefit of new loans.
Therefore, the overall effect of the U.S. ban coupled with
independent actions of U.S. banks and the South African
Government itself are likely to result in a continued decrease in
U.S. bank claims on South Africa.
H.R. 4868 Proposals on Banking
Let me now turn to the sanctions approach found in
H.R. 4868. The bill bans all new investments in South Africa,
other than the reinvestment in an existing business enterprise of
earnings derived from that enterprise. It also bans deposits in
banks in South Africa. If certain very fundamental political
changes are not made in South Africa within twelve months after
the passage of the bill, then all computer-related investment in
South Africa must be divested. Also, if such changes are not
made by mid-1988, the President must recommend to the Congress
whether there should be divestment of all U.S. investment in
South Africa.
The bill also prohibits certain types of investment activity
outside South Africa. No deposits may be made in banks organized
under South African law or owned or controlled by South African
nationals. Banks organized under South African law or owned or
controlled by South African nationals may not establish or
operate branches or agencies in the United States. Air carriers
owned by the Government of South Africa or by South African
nationals will be prhobited from having landing rights in the
United States.
Disinvestment and Ban on New Investment
As you know, Mr. Chairman, this Administration has a
long-standing policy not to restrict market oriented investment
flows. In the case of South Africa, this goal and our mutual
- 4 -
concerns for the economic and social well-being of the majority
of South African citizens are best served by not requiring
disinvestment and not banning new investment. I should note,
however, that owing to market forces and exchange rate changes,
there was a $500 million net decline in the outstanding amount of
U.S. direct investment in South Africa at the end of 1984, the
latest year for which we have data.
The Impact on the Majority Community. A ban on new
investments in South Africa and/or a requirement that U.S. firms
disinvest would have some impact on the employment of non-whites
in South Africa and on the exemplary labor policies practiced by
U.S. firms with operations in South Africa. U.S. firms operating
in South Africa are important employers of blacks and a major
source of pressure for change in South Africa's policies.
Limiting the ability of these firms to bring in new capital, to
grow or to adjust to market conditions, or requiring that they
leave South Africa, could reduce job opportunities for blacks.
The level of unemployment among blacks is already extremely
high—about 25 percent overall and up to 60 percent in the
Port Elizabeth area, according to some observers. Any reduction
in foreign investment would retard the South African economy's
growth rate and its ability to absorb new non-white entrants into
the job market.
Replacement by Other Investors. Foreign investment is a
small percentage of total domestic and foreign investment in
South Africa, about 14 percent for all foreign investors.
Although the United States is the third largest source of foreign
direct investment in South Africa, an ending of new U.S.
investment flows or the sale of existing capital assets is not
likely by itself to create a long-term danger for the South
African economy. Other countries (Japan, the United Kingdom,
West Germany) have major commercial interests in South Africa,
and their firms, which also compete with us in world markets, or
South African firms, would fill gaps left by departing U.S.
firms. South Africa also has demonstrated its ability to develop
efficient indigenous production in the face of international
sanctions, such as in its arms industry.
Adverse Impact on U.S. Investors. U.S. firms would also be
placed in a precarious position by a ban on new investment or a
requirement to disinvest. A large portion of U.S. investment in
South Africa is in those sectors where there are numerous
competitors—automotive vehicles, pharmaceuticals, petrochemicals
- 5 -
and computers. A ban on new investments and on technology
transfers to South African subsidiaries of U.S. energy companies
would limit established U.S. firms' capacity to adjust to the
dynamics of the market and, without the ability to make new
investments, ultimately could force many firms to withdraw. This
could be extremely costly to the firm. Firms would likely be
forced to sell their assets at a price well below market value.
The likely buyers—white South Africans and non-U.S.
foreigners—would reap windfall gains from the forced sale of
U.S. firms. In addition, the buyers would likely have less
interest in maintaining and encouraging non-discriminatory
practices in the workplaces than U.S. firms do. It is hard to
see the point of a policy that would: a) confer windfall capital
gains on white South African investors and perhaps our worldwide
competitors at American expense, and b) weaken our companies'
stance against discriminatory practices in the workplace and
their courageous action in promoting civil disobedience to
challenge apartheid.
Blocked Transfers. If faced with disinvestment, the South
African Government could effectively block the transfer of the
proceeds of the divested assets from South African rands into
dollars. In this situation, U.S. investors would hold
inconvertible South African rands, which for all intents and
purposes would be worthless. Even if transfers were not blocked,
the U.S. investor would be paid in "financial" rands, which,
under South Africa's present system, can only be converted into
foreign exchange by selling to another foreign investor. With
U.S. investors in effect ultimately forced to divest in the
banking, computer and energy sectors and possibly more generally,
under the proposed legislation, the resulting downward pressure
on the financial rand would reduce even further the dollar value
of the realized assets.
Trade Ban
Finally, the Treasury Department firmly opposes the measure
proposed in H.R. 4868 to prohibit certain imports into the United
States from South Africa. A ban against importation of these
goods from South Africa would require switching of sourcing which
would result in higher costs for our industry.
We also oppose the ban on U.S. energy technology exports and
the possible exports of computer related items. You are aware,
Mr. Chairman, that the United States Government currently has in
- 6 -
place comprehensive controls on exports to South Africa covering
military and dual-use items, computers, and nuclear technology.
All these controls focus pressure on the South African
Government, its defense agencies, and those agencies which
enforce the policies of apartheid.
A ban on certain exports to the South African private sector
would adversely affect our export sector; in fact U.S. exports to
South Africa declined by $1 billion last year. It would also
have an adverse impact on the South African people and its
economy, denying them goods and services necessary for a healthy
economy. We believe it would be wrong to target the South
African people. The President's Executive Order was aimed at the
South African Government and its enforcement of apartheid.
Conclusion
In summary, Mr. Chairman, we recognize the pressures to
respond strongly to South Africa's policies, and the Congress's
genuine attempts to develop a sound approach. In fact, the
financial markets have already recognized the increased risks of
doing business with South Africa. Nevertheless, Treasury's
examination of the types of measures proposed in legislation such
as those contained in H.R. 4868, in terms of their potential for
promoting change and their effects on U.S. interests and the
interests of non-whites in South Africa, leads to the conclusion
that the proposed measures would be very damaging. We believe
the proposed sanctions in H.R. 4868 would not produce the changes
we all seek, but would damage interests we would like to promote
and defend. Such sanctions would further disadvantage the black
population in South Africa, and would have adverse, perhaps
significant and long-standing, effects on U.S. Government and
private economic interests and on our ability to influence events
in a positive fashion.
#####
F3.24
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
June 11, 1986
TREASURY TO AUCTION $9,750 MILLION OF 2-YEAR NOTES
The Department of the Treasury will auction $9,750 million
of 2-year notes to be issued June 30, 1986. This issue will provide
about $725 million new cash, as the maturing 2-year notes held by
the public amount to $9,033 million, including $801 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 $4,346
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 $1,426 million, and Government accounts and Federal Reserve Banks for their own accounts
hold $1,313 million of maturing 2-year and 4-year notes.
The $9,750 million is being offered to the public, and any
amounts tendered by Federal Reserve Banks for their own accounts,
or 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.
Details about the new security are given in the attached
highlights of the offering and in the official offering circular.
oOo
Attachment
B-621
HIGHLIGHTS OF TREASURY
OFFERING TO THE PUBLIC
OF 2-YEAR NOTES
TO BE ISSUED JUNE 30, 1986
June 11, 1986
Amount Offered:
To the public
$9,750 million
Description of Security:
Term and type of security
2-year notes
Series and CUSIP designation .... AB-1988
(CUSIP No. 912827 TT 9)
Maturity Date
June 30, 1988
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
December 31 and June 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 institutions
Acceptable
Key Dates:
Receipt of tenders
Wednesday, June 18, 1986,
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions)
a) cash or Federal funds
Monday, June 30, 1986
b) readily-collectible check .. Thursday, June 26, 1986
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
STATEMENT OF THE HONORABLE
FRANCIS A. KEATING, II
ASSISTANT SECRETARY OF THE TREASURY (ENFORCEMENT)
BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS,
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
UNITED STATES SENATE
June 12, 1986
I appreciate the opportunity to testify before the Committee
today on the subject of Bank Secrecy Act enforcement. We welcome
the continued interest of this Committee in this complex subject
and the analysis of the General Accounting Office of our
programs.
At the outset, let me express to this Committee my commitment and
determination to continue to improve the utilization of the Bank
Secrecy Act as a major weapon against drug trafficking and all
other forms of organized crime. I want to highlight to the
Committee the initiatives that Treasury has taken over the last
year to improve Bank Secrecy Act enforcement. I believe that
much progress has been made towards our shared goal of efficient
and effective Bank Secrecy Act enforcement. We are proud of our
efforts, but we also recognize that improvements can be made.
Of course, I am not in a position today to respond to the
specific criticisms in the GAO report. However, I want to
assure the Committee that we will thoroughly evaluate all the
recommendations in the GAO report and take appropriate remedial
steps where necessary. I would be happy to appear again before
the Committee or to respond in writing after we have had time to
evaluate the report. In the future, I also would be pleased to
discuss the steps we have taken to implement the recommendations
of the report.
The enforcement initiatives that I will discuss today fall into
four general categories:
1. Improved coordination with and supervision of the
agencies to which Treasury has delegated Bank Secrecy
Act enforcement authority. This includes issuance of
standardized Bank Secrecy Act examination procedures and
establishment of the Treasury Bank Secrecy Act Enforcement
Advisory Board and Working Group.
2. Revision of the Bank Secrecy Act regulations and
promotion of legislative improvements to the Act.
B-622
-23. Additions to and reorganization of Treasury resources
dedicated to Bank Secrecy Act compliance. Treasury has
established the .Office of Financial Enforcement to develop
enforcement policy and supervise the enforcement of the Bank
Secrecy Act. The Internal Revenue Service has established a
separate, greatly enlarged unit at the Detroit Data Center
to conduct Bank Secrecy Act operations, including the
processing of Currency Transaction Reports (CTRs) . IRS
has succeeded recently in eliminating the backlog in CTR
processing.
4. Assessment of civil penalties against financial
institutions for past Bank Secrecy Act non-compliance.
1. Improved Supervision and Coordination with the Bank Secrecy
Act Enforcement Agencies
First, I would like to mention the measures Treasury has taken
to improve its supervision of and coordination with the agencies
to which it has delegated Bank Secrecy Act responsibilities. A
primary initiative in this area was standardization of the
examination procedures used by the various agencies, including
the Internal Revenue Service, the Securities Exchange Commission
and the bank supervisory agencies, for compliance examinations.
As many of the civil penalty cases which we have dealt with and
the Bank of Boston case have demonstrated, the procedures used
by the examiners in the past were not sufficient to ensure that
violations of the Act would be detected. These procedures needed
to be improved, and a number of other issues also had to be
considered in order to make compliance examinations more
effective. These issues include the maintenance of detailed
workpapers, the sharing of information among bank supervisory
agencies, and the uniform application of the examination
procedures. To address these matters, we held a series of
meetings with the Federal bank supervisory agencies and others
who have an interest in improving the procedures used by
examiners for checking the compliance of financial institutions
with the Bank Secrecy Act. As a result of these consultations,
we issued final instructions on examination procedures to the
supervisory agencies in April of this year. It is axiomatic
that improved and aggressive examination will foster improved
compliance.
Our experience in the improvement and standardization of
examination procedures made clear to me the need for an ongoing
interchange of ideas between Treasury and the agencies to which
Treasury has delegated enforcement responsibility. Therefore,
I convened a permanent Treasury Bank Secrecy Act Enforcement
Advisory Group, consisting of supervisory level representatives
of Treasury, Customs, IRS, the SEC, and the bank supervisory
-3agencies. This group is chaired by the Deputy Assistant
Secretary (Law Enforcement). The group had its first meeting in
May and will meet monthly as needed. We will use this forum to
address mutual enforcement problems and to discuss Treasury
policy initiatives. The Advisory Group has established a Bank
Secrecy Act Working Group under its auspices to work on specific
tasks assigned by the Advisory Group.
One of the first tasks assigned to this Working Group is
to revise the standard procedures for referral of penalty
cases to Treasury. A second task is to work with the Office
of Financial Enforcement to develop a pamphlet for distribution
to all bank financial institutions on procedures for exempting
customers from the reporting requirements of the Bank Secrecy
Act. The first draft of this pamphlet is due June 18th.
As you are aware, under Treasury regulations, banks may exempt
certain customers from the reporting requirements and may request
special exemptions from Treasury on others. Treasury does not
require banks to exempt any customers. In an abundance of
caution in the last year, many banks have greatly reduced the
number of exemptions. This has resulted in a large volume of
Currency Transaction Reports being filed on customers eligible
for exemptions. Filing on exemptible transactions is expensive
to the banks and Treasury, and produces information of little or
no utility. We hope that the information in this pamphlet will
enhance banks' understanding of the exemption process and
encourage the judicious granting of exemptions to our mutual
advantage.
In the future, among the tasks of the Working Group will be to
develop guidelines for more comprehensive, standard periodic
reports to Treasury on the agencies' Bank Secrecy Act enforcement. In this way, Treasury will be better advised of the
strengths and weaknesses of the agencies' programs and will be
able to direct remedial measures. The group also will develop
a formal published ruling system for dissemination of interpretations of the Bank Secrecy Act and the Bank Secrecy Act
regulations .
2. Regulatory and Legislative Initiatives
Since last year, we have strengthened the Treasury Bank Secrecy
Act regulations in several respects and currently have under
discussion internally a major regulatory revision package. On
May 7, 1985, regulations became effective that designated'casinos
as financial institutions subject to Bank Secrecy Act reporting
and recordkeeping requirements. As evidenced in hearings by the
President's Commission on Organized Crime last summer, money
-4laundering through casinos may have been even more widespread
than once thought. We believe that the new regulations have
reduced the attractiveness of the use of casinos for money
laundering.
A regulatory amendment pertaining to international transactions
was published as a final rule last summer. Under the regulations, Treasury is able to require a financial institution or
a selected group of financial institutions to report specified
international transactions, including wire transfers, for a
defined period of time. We envision that this will require
reporting of transactions with financial institutions in
designated foreign locations that would produce information
especially useful in identifying individuals and companies
involved in money laundering and tax evasion. The Internal
Revenue Service's Criminal Investigation Division has sent to
my office for approval a pilot program for the initial use of
this regulatory authority. This plan is currently under review.
In February, Treasury circulated a major regulatory revision
package to the bureaus within Treasury with Bank Secrecy Act
responsibility - Customs, IRS, the Office of the Comptroller of
the Currency - and to the Justice Department. This package is
complex and comprehensive and has undergone much revision and
scrutiny. Treasury has tried to strike the proper balance
between law enforcement needs and the need to avoid excessive
burdens to financial institutions. We anticipate that these
regulations will be published as a proposed rule within the
next month or so.
Among the highlights of the proposed regulatory revisions are the
following:
° Treasury proposes to expand the types of businesses that banks
can unilaterally exempt from currency reporting without a special
exemption request to Treasury. The new types of businesses are
public utility companies, regularly scheduled transportation
companies and organizations that have been granted § 501(c)(3)
status by the IRS.
° For the first time, the regulations will specifically include
the instruction on the Currency Transaction Report that a
financial institution must, for reporting purposes, aggregate
all currency transactions of which it is aware that occur in a
single day.
0
There will be a proposed new reporting requirement to address
the well-known problem of smurfing, whereby individuals take cash
from illegal sources in amounts less than the $10,000 reporting
threshold to various banks and purchase a number of cashier's
-5checks. The checks are then deposited to an account and often
wired abroad. We will propose a requirement that banks maintain
records of each cash purchase of a monetary instrument, e.g.
a travelers check, bank or cashier's check, in excess of a
specified amount.
0
We propose to require customers to certify on a Treasury form
the accuracy of the information on which a bank is basing an
exemption of the customer's transactions from currency reporting.
The information includes the nature of the customer's business
and the type, frequency and dollar amount of regular cash transactions .
With respect to legislative initiatives, Treasury worked with the
Department of Justice to develop S. 1335, the "Money Laundering
and Related Crimes Act". Besides a substantive criminal offense
for money laundering, the bill contains a number of critical
revisions to the Bank Secrecy Act.
Under S. 1335 the Secretary for the first time would be given
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 money laundering to the President's
Commission on Organized Crime.
Under the proposal, the Secretary would be able to summon a
financial institution officer, or an 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.
This authority is especially needed with respect to miscellaneous
non-bank financial institutions, such as casinos and certain
companies which transfer funds domestically and internationally.
These institutions number in excess of 3,000. The responsibility
for compliance review of these institutions has been delegated
to the Internal Revenue Service. Currently, however, the IRS
summons authority is restricted to Title 26 purposes. Therefore,
in examining these institutions, IRS must rely on voluntary
cooperation. The cooperating financial institutions frequently
request a summons as a means of protecting themselves from suits
by their customers.
In addition to the Administration's money laundering bill, there
is another legislative initiative on which we have urged early
-6and favorable action. This bill is S. 2306 (H.R. 4753), introduced by Senator D'Amato and in the House by Congressmen Pickle
and Schulze.
This bill would prohibit structuring of currency transactions
to avoid the $10,000 currency transaction reporting requirement.
Recent decisions in three Federal Circuits have made it clear
that the current law is inadequate to sustain consistent
prosecutions for structuring. The proposal would subject to the
criminal and civil sanctions of the Bank Secrecy Act any person
who structures transactions to avoid the currency reporting
requirements, or who causes a financial institution not to file
a required report.
The bill also provides seizure and forfeiture authority for
currency related to a domestic (CTR) reporting violation or
interest in property traceable to the currency. Currently,
there is forfeiture authority only for cash and monetary
instruments involved in violations of the reporting requirements for internationally transported monetary instruments.
Mr. Chairman, the Bank Secrecy Act has proven beyond all doubt
its effectiveness as a law enforcement tool against drug trafficking, organized crime, and the illicit financial activity that
supports it. The investigations that the Departments of Justice
and Treasury have conducted, particularly those under the
President's Organized Crime Drug Enforcement Task Force program,
have relied upon the Bank Secrecy Act data and the analyses of
these data that Treasury has prepared. In approximately three
years of full operation, these Task Forces have initiated 1,350
cases and resulted in the indictments of 8,649 individual, 3,678
of which have been convicted.
While our progress has been substantial, we are under no
illusions concerning the extent of the drug and organized crime
problem that continues to plague our society. In my view, the
amendments to the Bank Secrecy Act which I have described are
critically needed, so that we can strike a more effective blow
against these forms of criminal activity.
3. Commitment and Reorganization of Treasury Resources
In July, 1985, the Treasury Department established the Office of
Financial Enforcement as the unit primarily responsible within my
office for administering the Bank Secrecy Act. The establishment
of this office provided a focal point for Bank Secrecy Act
related activity within the Treasury Department and acknowledged
the increasing importance of the Act in Treasury's law enforce-
-7ment efforts. The office has broad responsibilities for the
compliance activities of all agencies that have been delegated
responsibilities under the Act, and there has been an increased
commitment of staff resources to the office.
In April, Robert J. Stankey, Jr., who had been acting as Director
of the Office of Financial Enforcement, retired. Mr. Stankey
was a familiar figure to this Committee and more than any other
person was responsible for the development of the Bank Secrecy
Act into an effective law enforcement tool.
We have been interviewing many well-qualified replacements for
Mr . Stankey and hope to have a new permanent Director of the
Office of Financial Enforcement in the near future. One of
the first tasks I will assign to that person is to take all
appropriate measures to follow up on the GAO report.
Another significant development has been a very large commitment
of resources by IRS, particularly with respect to the processing
of Currency Transaction Reports. As you know, following the
publicity surrounding the Bank of Boston case there was a
dramatic upsurge in the filing of Currency Transaction Reports.
As you can see from the attached charts, at the present rate,
there will be an estimated 3 million CTR's filed this year. This
compares with approximately 1.8 million filed in 1985 and 700,000
in 1984. Unfortunately, the unexpected upsurge created a
processing backlog for a number of months.
The backlog is now eliminated. All CTRs received through
April 1986 have been processed. Data from over 2.4 million CTRs
has been sent to the TECS database this fiscal year. The Detroit
Data Center has utilized a combination of both permanent and
temporary employees and contract transcription support to process
these forms. CTRs received in May 1986 are currently being
processed on schedule. The backlog of unprocessed CTRs has been
eliminated.
The function of granting special exemptions to bank customers
from the reporting requirement was also delegated to IRS by my
office late last year . All exemptions were previously granted
by the Office of Financial Enforcement and its predecessor
office. This function is also being carried out by the Detroit
Data Center. Presently seven persons have been assigned responsibility for review of exemptions.
4. Civil Penalty Assessment
I also would like to discuss Treasury's imposition of civil
penalties against financial institutions for past non-compliance.
In the wake of the publicity surrounding the Bank of Boston case,
-8and in good measure as a response to Congressional hearings,
including those held by this Committee, over sixty banks and
bank holding companies have come forward to Treasury with past
violations of the Bank Secrecy Act. Some have come forward as a
result of bank regulatory examinations, particularly those of the
Comptroller of the Currency. To date, eighteen civil penalties
have been assessed under 31 U.S.C. § 5321, ranging from $75,000
to $4.75 million in the case of Bank of America.
Other cases are under review, and we anticipate that additional
penalties will be assessed shortly. In many instances, the
cases are taking several months to conclude because of the time
required for banks to conduct an examination of past compliance
and to reconstruct past unreported transactions for late-filing
of Currency Transaction Reports.
We continue to encourage financial institutions to come forward
to disclose past violations. Non-volunteer banks will be dealt
with more severely. Banks that become aware of past noncompliance and make no effort to contact Treasury are running
a serious risk. We are now working to uncover these nonvolunteers. This effort will ultimately depend heavily on
the support of the bank supervisory agencies.
We believe that Treasury's rigorous enforcement of the Bank
Secrecy Act, including the imposition of publicly announced,
substantial civil penalties, where appropriate, has contributed
to enhanced awareness of the requirements of the Bank Secrecy
Act. As a consequence, and as confirmed in our dealings with
many banks and the increased volume of Currency Transaction
Reports, we believe that overall compliance has improved and that
compliance has become a high priority with many major financial
institutions.
In closing, I want to emphasize that this is a time of activity
and innovation in Treasury's Bank Secrecy Act program. I am
pleased to have GAO's input into this ongoing process. I am
firmly committed to an aggressive enforcement policy that ensures
that all information required under the Bank Secrecy Act is
retained or reported. At the same time, I am also committed
to the efficient and effective use of that information.
Mr. Chairman, I would like to acknowledge the substantial
contribution that this Committee has made to our progress in
improving the administration and enforcement of the Bank Secrecy
Act. I look forward to continuing to work with you and the other
members of this Committee as we seek to further our progress.
This concludes my prepared remarks. I would be happy to address
any questions the Committee may have.
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TREASURY NEWS
Department of the Treasury • Washington, ox. • Telephone 566-2041
Text As Prepared
For Release Upon Delivery
Expected at 2:30 p.m. EDT
Remarks by Secretary of Treasury
James A. Baker, III
To the National Convention of
The League of Women Voters
Washington, D.C.
Monday, June 16, 1986
It is a privilege for me to address an organization that is
such a highly regarded feature on our country's electoral
landscape. The League of Women Voters is well known, not just for
its sponsorship of Presidential debates (on which I've had the
pleasure of working closely with the League), but also for its
valuable service in voter education and registration. And you can
all take great pride in your involvement in America's political
process. Your participation helps strengthen our democratic
fabr ic .
Today, you, like I, are focusing on the future of tax reform,
and I am looking forward to responding to your questions on this
subject during the Q&A session to follow these remarks. But in
recognition of your contribution to our political process I want to
take this opportunity to discuss another, more enduring element of
governance — the institution of the American Presidency.
I have been privileged to serve two Presidents and to be
involved in the last three campaigns for that office. So I have
been able to observe the modern American Presidency at close range
— and to develop some opinions about that office — the factors
that shape a strong Presidency, and why its strength is important
to the nation.
One of the keenest observers of the Presidency was Teddy White
who died recently and whom I know we will all miss. In The Making
of the President 1960, the first of five books on America's
pFesidential electoral process, White's concluding chapter reflects
on an interview with the new young President about the unique
requirements of that office. "The essence of leadership," wrote
White, is whether the President "is moved by other people and other
forces or [whether he] moves them." He added: "A President
governing the United States can move events only if he can first
persuade
."
r>
.ca^rr
-2The inauguration of John F. Kennedy seemed to initiate a new
era for the American Presidency — and the nation. He emerged on
the national scene determined to provide vigorous national
leadership to confront our problems. At the same time another
force that would have a profound effect on the institution of the
Presidency also came on the political stage. In fact it would come
more and more to shape the script and actors of governance, and
that was television.
Television played a key role in the advent of 20th century mass
democracy by broadcasting the presidential debates. With their
phenomenally high ratings these contests (it can be fairly said)
gave the more skillful communicator, Kennedy, a boost that carried
him to victory a few weeks later.
Once in office he mastered the new medium by being the first
President to allow his press conferences to be televised live,
satisfying the thirst of the new medium for drama on the national
scene. His performances seemed to cement Americans' impression of
him as the President who would lead and offer movement to a nation
with seemingly unbridled prospects for growth and prosperity.
Regrettably, events overtook our optimism.
By 1968 White commented in his third book on the presidential
election process that President Johnson had "left behind a
tradition of distrust in leadership, a repudiation of the
presidential capacity unmatched, emotionally, since the repudiation
of Herbert Hoover."
At the risk of oversimplifying, a credibility gap had taken
hold of the Johnson Presidency engulfing his domestic and foreign
initiatives. His vision for a harmonious "Great Society" was
cracked by discordant riots in our cities and a new dissent on our
campuses. His pronouncements that the Vietnam War was going well
were repudiated by the reality of an escalating conflict.
And reflecting all of this was television, which had become,
White wrote, the primary vehicle "for the new court of high
criticism" of the Presidency. Many tests faced the next President,
social unrest and the war, but White thought Richard Nixon's real
challenge would be to restore "the confidence of millions of
Americans who no longer trust any government of the United States."
This would only happen, White predicted, if the new president could
convey his vision of conciliation to the nation.
But none of Nixon's accomplishments at home or abroad could
offset the verdict of two summers' congressional hearings televised
daily and nightly into America's homes. The office of the
President had reached its lowest ebb. From a time when we once
revered the image of Camelot at the White House, "imperial" had
become a pejorative when used to describe our highest elective
office. President Ford restored confidence and trust in the chief
executive's post, but in the aftermath of Watergate, instead of
turning to a strong Presidency in the next election, we looked to a
different kind of Presidency.
-3In the wake of the previous decade the early Carter Presidency
was a time of national catharsis. Instead of choosing the
customary limousine, he walked with his family to the White House
after his inauguration. When he greeted his first official
audience at the White House, the ceremonial ruffles and flourishes
was not played. Initially, the press applauded President Carter
for "denobilizing" the presidency, stripping it of its pomp. The
Carter Administration made the White House and the Presidency more
ordinary and less mystifying, and removed any sense of awe and
majesty from the Oval Office.
All of this, it seems, reflected the distaste for leadership
that Americans had developed in the aftermath of Watergate and
Vietnam. Accompanying (and perhaps feeding) this syndrome, was an
increasingly popular tendency to denigrate the Presidency. It
would reach its zenith in the Carter years.
Professor Henry Graff of Columbia University has noted how
Lyndon Johnson, "the ablest congressional politician of this
century, was somehow changed perceptually into a riverboat gambler
unworthy of his high place," how Gerald Ford, "the best athlete
ever to sit in the Oval Office, became a caricaturist's delight as
an oafish stumblebum," and how Jimmy Carter, having been elected as
"the outsider brought in to straighten out the mess, became a
failure because he was not an insider."
The Presidency is an office held to high expectations. Yet the
framers of the Constitution were determined that the President
should not command Congress. Our chief of state has fairly modest
and much-checked formal powers but, as presidential scholar Richard
Neustadt has observed, great resources for leadership by
"persuasion." He must use those resources skillfully in order to
secure the broad approval of the public and support from the
political community — especially Congress — or he will be
ineffective.
Now admitting my own bias and prejudice, I think that the
perceived failure of the Carter Presidency, and conversely the
success of Ronald Reagan's, center on their different attitudes
towards governance.
President Carter's well-intentioned first hundred days
certainly rivaled FDR's in number of initiatives. He sent a
massive and far-reaching collection of complex legislation to
Capitol Hill, including a tax cut bill, a major budget revision,
executive reorganization authority, establishment of the new Energy
Department, and packages for welfare, labor and social security
reform, among others. Yet with the possible exception of the
energy plan, there was no focal point for his Presidency to rally
around, no vision of what his priorities were.
-4The failure to establish an agenda was a strategic mistake on
President Carter's part, but there were tactical ones as well.
Much has been written about his perceived inability to negotiate
effectively with Congress. Some said he handled the Congress with
the same detached coolness that he accorded the Georgia State
Legislature. Other observers have noted that he was less than a
forceful communicator.
But perhaps the most fundamental flaw in the Carter Presidency
was the philosophical premise that the task of governing can be
achieved with a technocratic approach to problem solving. This is
the idea that every public policy issue can be resolved with a
specific plan or program, and that the activist President is the
technocratic manager of a complex set of interrelated policies.
Whatever appeal this may have to social scientists, it is of little
help in the practical aspects of governing.
As opposed to being seen as a leader with a vision and
effective capacity, President Carter was diminished by his approach
to governance. He himself correctly lamented the problem towards
the end of his term in the famous "malaise" speech: What you see
in Washington he said: "is a system of governance incapable of
action.... Often you see paralysis and drift...."
The elements of this crisis can be seen in the contradiction
between the objectives of President Carter's government by
technocratic management and the forces that accompanied his rise to
power. The powers of the Presidency had been so degraded by the
time he took office, that Carter did not command the respect and
deference normally accorded a President.
And the reform impulse in Congress, the diffusion of power with
the proliferation of subcommittees and the weakening of the
congressional leadership expanded the opportunities for interest
groups with inimical goals to influence the lawmakers.
As Teddy White observed: "President Carter... insisted on
keeping all his promises at once, which left him exposed to all
those with leverage in the offices of congressmen elected to
represent their interests."
In response to this situation, a consensus among our elites
began to develop that the structural design of government was
inadequate to meet the tasks of governing. It was said that the
President's personal and political resources were insufficient to
overcome the fragmentation and disarray inherent in the American
separation of powers.
President Carter's White House Counsel argued while his chief
was still in office that the formal institutional resources for
executive leadership were so insufficient that the Carter
Presidency could not succeed. "In parliamentary terms, one might
say that under the U.S. Constitution it is not now feasible to
"form a government," he wrote in Foreign Affairs magazine.
-5Unfortunately, he said, no recent President had been able to
get his programs through Congress in anything approaching coherent
form. The United States, he suggested, needed to go to a
parliamentary type of government to end this executive-legislative
deadlock.
This was not the first time that structural reform was advised
for the Presidency. Limiting the President to a single six-year
term was discussed at the Constitutional Convention and proposed to
Congress as a constitutional amendment as early as 1826!
Proponents have reintroduced this measure into Congress more than
100 times since then, arguing that the President should be released
from the constraints of seeking re-election.
More recently we've heard that our problems are too big for
partisan control of the executive branch and that some form of
coalition government should be considered.
I think we should question such proposals. When political
institutions, like the Presidency, maintain relatively popular
support for nearly 200 years, we should assume that they are doing
something rightl The existing constitutional definition of the
Presidency retains the support of the American public.
Notwithstanding my own bias, I think that by successfully
completing two successive terms, Ronald Reagan will have not only
redefined the role of the President but reinvigorated the
institution of the Presidency as well. This will be, I think, one
of his most important legacies to the nation. He has reversed the
commentary that Presidents were incapable of leading the nation.
The Presidency is still what Theodore Roosevelt once called a
"bully pulpit." Much has been said and written of Ronald Reagan's
ability to gain support for his programs by his skill as an
educator, as a mobilizer of public opinion. The President has been
able to use his skills as a communicator to take maximum advantage
of the powers of persuasion Neustadt has written about.
When President Reagan came into office the conventional wisdom
was that it was very difficult for a President to maintain his
power through television, and — over time — it would help destroy
him. But now that view is subject to some revision I think. In
his first term, by carefully marshaling his appearances before key
congressional votes the President was able to maximize his leverage
over the congressional agenda. And with each victory, the
President enhanced his reputation as a strong and successful
leader.
Perhaps most importantly, the President has been able to convey
a vision for the future of the country. This is critical to
effective Presidential leadership. Many people do not agree with
particular aspects of his vision, but by focusing the national
agenda, President Reagan has given much-needed direction to our
public policy debates.
-6But having observed President Reagan interact with members of
the House and Senate, I would place equal emphasis for his success
upon what Neustadt called "the residual impressions of tenacity and
skill" that the President conveys to the Congress and the rest of
the Washington community. A President's high approval in public
opinion polls is no guarantee that he will be able to lead
effectively if the elite opinion of his abilities is low.
The political skills needed to persuade the Washington
community are not always the ones a President uses to move public
opinion. Strength, steady resolution, the ability to fight hard
for one's policies without personalizing disagreements, and knowing
when and how to compromise to achieve the most of one's objectives
have all been critical to President Reagan's success.
By revitalizing the Presidency, Ronald Reagan has increased the
likelihood of cooperation between Capitol Hill and the White House
on public policy. The contest between the two branches of
government is not a zero-sum game. The President's gain is not
Congress's loss. In fact, polling data suggest that the
President's popularity and success are positively influencing
public attitudes toward other branches and levels of government,
including Congress.
I have seen this cooperation work first hand. The Social
Security compromise in 1983 was sensible legislation and defused
perhaps the most sensitive political issue between Democrats and
Republicans. And although it may be just a footnote now to the
protracted turmoil in Lebanon, I think historians will favorably
record the successful negotiations between the Congress and the
President over the first use of the War Powers Act to deploy U.S.
military forces. Fundamental tax reform — which many
sophisticates said couldn't be accomplished — now appears likely
to become another product of this cooperation.
As we approach the 200th year of our Constitution we should
remember that America's government at its best is based on the
strength of her institutions. Calling forth our best is not only
for Presidents and lawmakers, but for Americans of all walks of
life. Twenty-five years ago that was the message of a dynamic
young President.
In this city we are constantly reminded that the founding
fathers were men who dared to build a nation upon confidence and
cooperation, not fear and disunity. And the memorials to America's
sons and daughters who have fallen in battle for their country
kindles the honorable flame of duty and service in all of us.
At the conclusion of his memoirs (I_n Search of History) White
wondered whether "the old ideas that have made America a nation
could stretch far enough to keep it one." I am confident that he
believed they would. I agree. And as we continue with the
challenges we face in the years ahead, I am- sure that our leaders
and institutions will prove equal to the tasks.
Thank you very much.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
June 16, 1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for $7,400 million of 13-week bills and for $7,406 million
of 26-week bills, both to be issued on June 19, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13--week bills
maturing September 18 , 1986
Discount Investment
Price
Rate
Rate 1/
26--week bills
maturing December 18, 1986
Discount Investment
Price
Rate
Rate 1/
6.07%
6.12%
6.11%
6.17%a/
6.20%
6.18%
6.25%
6.30%
6.29%
98.466 :
98.453 '
98.456 :
6.46%
6.49%
6.47%
96.881
96.866
96.876
a/ Excepting 2 tenders tota]Ling $100,200 ,000.
Tenders at the high discount rate for the 13-week bills were allotted 27%.
Tenders at the high discount rate for the 26-week bills were allotted 04%.
Location
TENDERS RECEIVED AND ACCEPTED
(In Thousands)
Received
Accepted
Received
Accepted
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
$ 40,585
21,529,265
24,925
48,865
46,480
41,360
1,732,800
69,570
29,355
49,690
43,200
1,120,840
307,670
$ 40,585
6,407,475
24,925
48,865
46,480
41,360
193,150
49,570
15,705
49,690
43,200
131,610
307,670
$ 27,630
20,600,970
16,660
23,355
41,370
26,265
1,939,830
63,635
29,170
43,260
15,020
916,725
221,360
$ 27,630
6,208,170
16,660
23,355
31,770
26,265
437,230
43,635
19,570
43,260
15,020
291,765
221,360
TOTALS
$25,084,605
$7,400,285
$23,965,250
$7,405,690
Tv^e
Competitive
Noncompetitive
Subtotal, Public
$21,602,175
1,075,275
$22,677,450
$3,917,855
1,075,275
$4,993,130
$20,476,805
673,245
$21,150,050
$3,917,245
673,245
$4,590,490
1,954,355
1,954,355
1,900,000
1,900,000
452,800
452,800
915,200
915,200
$25,084,605
$7,400,285
$23,965,250
$7,405,690
Federal Reserve
Foreign Official
Institutions
TOTALS
1/ Equivalent coupon-issue yield
B-624
2041
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
For Release Upon Delivery
Expected at 10:00 a.m. EDT
June 17, 1986
STATEMENT OF
DON FULLERTON
DEPUTY ASSISTANT SECRETARY (TAX ANALYSIS)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON COAST GUARD AND NAVIGATION
COMMITTEE ON MERCHANT MARINE AND FISHERIES
Mr. Chairman and Members of the Subcommittee:
I am pleased to have the opportunity to present the findings
of the Treasury Department's study of the excise taxes
attributable to fuel used in recreational motorboats. The study
was mandated by the Recreational Boating Safety and Facilities
Improvement Act of 1980. The principal findings of the report,
which was released on June 16, 1986, are the following:
(1) For 1985, approximately $98 million of gasoline excise
tax revenues were attributable to fuel used in
recreational motorboats. This amount equals 1.08 percent
of total gasoline excise tax revenues.
(2) Although gasoline excise tax revenues have been allocated
to the trust fund using the fixed allocation percentage
(0.75), the methodology developed in the report provides
estimates of motorboat fuel consumption that can be
updated annually when new Coast Guard data become
available. Use of the report's methodology would ensure
that gasoline excise tax revenues attributable to
motorboats capture the relative growth in motorboat use.
The methodology also could incorporate new state studies
on the use of fuel by size of motorboat.
B-625
-2My testimony is divided into three sections. The first
section describes the background for the current percentage used
to attribute revenues to excise taxes on motor fuels. The second
section describes the methodology developed in the Treasury
Department's study for estimating excise tax revenues attributable to fuel used by recreational motorboats. The third
section discusses the report's findings and conclusions.
Background
The revenues from excise taxes on motor fuels are paid into
the Highway Trust Fund. The fund finances the Federal-aid
highway program using revenues from excise taxes imposed on those
who benefit from the resulting expenditures, i.e., users of
public highways. When these excise taxes were enacted under the
Highway Revenue Act of 1956, certain exemptions were provided for
nonhighway use of motor fuels so that taxes collected on motor
fuels not used on the highways would not be used to fund the
Federal-aid highway program, and they are not.
In the Land and Water Conservation Fund Act of 1965, Congress
directed that revenue from the excise tax on fuels used in
recreational motorboats be transferred to the Land and Water
Conservation Fund for the acquisition and development of public
land and water areas for recreational purposes. The tax on
motorboat use of motor fuels was intended to benefit boaters.
This legislation provided that the Secretary of the Treasury
estimate the amounts of the excise tax revenue that derives from
fuels used in motorboats, in consultation with the Secretary of
Commerce. These amounts would then be transferred from the
Highway Trust Fund to the Land and Water Conservation Fund.
Although the Highway Revenue Act had provided that the
Internal Revenue Service (IRS) refund fuel excise taxes for fuel
used in recreational motorboats, there were relatively few
requests for such refunds. As a consequence, IRS data were not
available to estimate fuel use by recreational motorboats.
Estimates were available from only two states in the late
1960's. A study done by the state of California in 1964
estimated that 0.58 percent of the total motor fuel sold in the
state was consumed by boaters. A study by the state of
Washington in 1966 estimated that sales of gasoline for use in
boats was 0.83 percent of total taxable gasoline sales in the
state.
In fiscal year 1969, the Secretary of the Treasury concurred
with a recommendation by the Secretary of Commerce to set the
amount of total fuel excise tax revenue attributable to
motorboats at 0.75 percent, and the rate has not changed since
then. The recommendation by the Department of Commerce was based
on the estimates from the states of California and Washington,
which were thought to be representative of boating activities
nationally.
-3The Recreational Boating Safety and Facilities Improvement
Act of 1980 established the National Recreational Boating Safety
and Facilities Improvement Fund (Boating Safety Fund) to finance
recreational boat safety and facilities improvement projects.
Under the Act, excise taxes on motor fuel used in motorboats were
transferred to the Boating Safety Fund. The 1980 Act mandated
the Treasury study because of concern over the prevailing rate
used to estimate the revenue allocation. Some of this concern
was generated after additional studies by individual states were
completed.
Although the Deficit Reduction Act of 1984 repealed the
provisions of the 1980 Act which established the Boating Safety
Fund, it established instead the Aquatic Resources Trust Fund.
The 0.75 percent allocation percentage currently is used to
determine amounts of excise tax revenue on motor fuels to be
transferred to the Land and Water Conservation Fund and the
Aquatic Resources Trust Fund.
Fourteen states have conducted surveys during the past
twenty years to estimate fuel use by recreational motorboats,
with disparate results. Estimates of annual fuel consumption per
boat ranged from 41 gallons to 386 gallons. Motorboat fuel
consumption as a percent of total state fuel consumption ranged
from 0.21 percent to 1.74 percent. Most state surveys have been
based on respondent recall of the amount of fuel used. This type
of study methodology is problematic for several reasons,
including difficulty of recall, gamesmanship by respondents, and
different survey designs.
The United States Coast Guard conducted two studies in 1973
and in 1976 that included estimates of fuel consumption by
recreational motorboats. For 1973, the average number of gallons
of fuel used per boat was estimated to be 330 gallons. For 1976,
the comparable estimate was 351 gallons. Use of the 1976 Coast
Guard estimate would have resulted in a finding that 2.45 percent
of total gasoline excise tax revenue was attributable to use in
recreational motorboats. This estimate exceeded estimates from
all the state studies.
Unlike most state surveys, the Coast Guard Survey did not ask
respondents directly about the amount of fuel used. A possible
source of upward bias of the Coast Guard estimates may have been
confusion about two of the survey questions. The first question
asked about the "number of different months" in which the boat
was used. A second question asked how may times per month, on
the average, the boat was used during "the boating season."
Respondents may have considered the "boating season," a period of
relatively intensive boat use, to be a period shorter than the
"number of different months" the boat was used. The consumption
estimate, however, multiplied the answers to these two questions,
and then multiplied by the answer to a third question on the
average gallons of fuel used on a typical outing.
-4Methodology for Estimating Excise Tax Revenues
Attributable to Fuel Used by Recreational Motorboats
The Treasury Department's study developed a methodology which
used available data for estimating the excise tax revenue
attributable to fuel used in motorboats. Unlike the use of a
single fixed proportion of total fuel excise tax revenues, the
Treasury Department's methodology could be used to update the
estimates annually to reflect changes in the number and size of
motorboats. Further, the estimates could reflect new data, as it
became available, on the average fuel consumption of motorboats.
The methodology is quite simple. The average annual fuel
consumption per motorboat in each of three boat-size classes was
calculated from state studies and then was multiplied by the
number of motorboats in those classes (available from the U.S.
Coast Guard). The fuel consumption in each size class was then
added together to obtain an estimate of total fuel consumption
attributable to all motorboats in the United States. Finally,
total motorboat fuel consumption was then multiplied by the
prevailing Federal excise tax rate per gallon of gasoline to
obtain an estimate of total gasoline excise tax revenues
attributable to motorboat fuel consumption in the United States.
This estimate was based on data which the Coast Guard
publishes annually on the number of motorboats under 16 feet in
length, 16 to 26 feet, and over 26 feet. The size distribution
of motorboats has changed since 1964, with fewer small motorboats
and proportionally more medium-size boats. This methodology
would capture that change in future years.
As noted earlier, the average annual fuel consumption per
motorboat has not been collected reliably on a national basis.
A number of states, however, have asked boaters to estimate the
amount of fuel used during the year. After contacting all fifty
states plus the District of Columbia, seven state studies were
identified that estimated fuel consumption by size of boat. The
state studies used to estimate the U.S. average for fuel
consumption by size of boat are from Arizona, California, Hawaii,
Nevada, New York, Pennsylvania, and Wisconsin. These states
accounted for 1.6 million registered motorboats and 18 percent of
all motorboats in the United States in 1985.
The methodology involves two important assumptions. First,
the average fuel consumption estimates by size of motorboat from
the seven state studies were assumed to be representative of
recreational boating and boat use nationally. A statistical test
was performed that compared three factors affecting recreational
boating use in these seven states and all states: heating degree
days, inland water density, and coastline density. The results
of the statistical test supported the assumption that these
factors in the seven states are similar to those in all states.
-5Second, the average fuel consumption in each size class was
assumed to be unchanged from the time that the state studies were
completed. Part of any change in the relative intensity of
motorboat use would be reflected in changes in the size
distribution of motorboats, which could be updated annually with
Coast Guard data. Although the average horsepower of motors used
in a particular size class could change, so could the efficiency
of motors and the amount of time the motors were used. The
methodology could incorporate new estimates of average fuel
consumption by boat size as it became available.
Findings and Conclusions
The Treasury Department's study estimates that approximately
$97.9 million of motor fuel excise tax revenues were attributable
to fuel used in recreational motorboats in 1985. This represents
1.08 percent of the $9,062.4 million of total gasoline tax
revenues in 1985. Total revenues attributable to fuel used in
recreational motorboats were calculated by multiplying the 9
cents per gallon excise tax rate on gasoline by an estimate of
1.08 billion gallons of fuel consumed in the United States by
recreational motorboats in 1985.
The data used in estimating gasoline excise tax revenues
attributable to fuel used in motorboats for 1985 are shown in
Table 1. The first row shows the number of motorboats in each
size class as reported by the United States Coast Guard. The
second row shows the average annual fuel consumption per boat, by
size of boat. These consumption estimates are based on the seven
state surveys, weighted by 1985 boat registration data. Total
fuel consumed per size class (line 3)is obtained by multiplying
the first two rows. Total motorboat fuel consumption for the
United States of $1,087.7 million gallons (line 4) is the sum of
the amounts shown on line 3. The amount of gasoline excise tax
revenue attributable to recreational motorboats, $97.9 million,
is calculated by multiplying the current gasoline excise tax rate
of 9 cents per gallon by the total gallons consumed (line 4 ) .
Because the methodology estimates the actual gallons of fuel
consumed by all motorboats, the amount of annual excise tax
revenue is derived directly by simply applying the prevailing tax
rate. This methodology enables the estimate to be updated
annually, thereby ensuring that the allocation reflects changes
in the number and size distribution of boats. The estimate of
motor fuel tax revenue attributable to motorboats would then
depend upon the relative growth of boating use. The methodology
also could incorporate new state studies on the use of fuel by
size of motorboat.
Table 1
Estimation of Gasoline Excise Tax Revenues
Attributable to Use by Recreational Motorboats
and Supporting Data: 1985
Motorboat Size
: Less t h a n :
16 to
: 16 feet
: 26 feet
:
:
Greater than
26 feet
1. Number of Boats in
the U.S. (millions)
5.19
3.34
0.35
2. Average Annual Fuel
Consumption Per
Boat, gallons
55.01
192.86
451.55
644.2
158.0
3. Total Gallons of
Motorboat Fuel
Consumed (millions)
285.5
4. Total Motorboat Fuel Consumed: 1,087.7 million gallons.
5. Current Gasoline Excise Tax Rate: $0.09 per gallon.
6. Gasoline Excise Tax Attributable to Recreational Motorboats:
(1,087.7 million gallons) x ($0.09) = $97.9 million.
Department of the Treasury June 1986
Office of Tax Analysis
rREASURY NEWS
partment of the Treasury • Washington, D.c. • Telephone 566-2041
For Immediate Release
June 16, 1986
Contact
Phone:
Charles Powers
(202) 566-8773
TREASURY RELEASES REPORT ON
GASOLINE EXCISE TAX REVENUES
ATTRIBUTABLE TO FUEL USED
IN RECREATIONAL MOTORBOATS
The Treasury Department today released its Report on the
Gasoline Excise Tax Attributable to Fuel Used in Recreational
Motorboats. The report was mandated by the Recreational Boating
Safety and Facilities Improvement Act of 1980 (P.L. 96-451) which
requires the Secretary of the Treasury to conduct a study to
determine the portion of taxes imposed on motor fuels that are
attributable to fuel used in recreational motorboats. The Act
established a separate fund, entitled the Recreational Boating
Safety and Facilities Improvement Fund, and directed the
Secretary of the Treasury to pay into the fund excise tax
revenues attributable to fuel used in recreational motorboats.
The principal conclusions of the report are:
(1) For 1985, approximately $98 million of gasoline excise
tax revenues were attributable to fuel used in
recreational motorboats. This amount equals 1.08
percent of total gasoline excise tax revenues.
Currently, 0.75 percent of gasoline excise tax revenues
are attributed to fuel used in recreational motorboats
and are transferred from the Highway Trust Fund to the
Land and Water Conservation Fund and the Aquatic
Resources Trust Fund.
(2) Although gasoline excise tax revenues have been
allocated to the trust fund using the fixed allocation
percentage (0.75), the methodology developed in the
report provides estimates of motorboat fuel consumption
that can be updated annually when new Coast Guard data
become available. Use of the report's methodology would
ensure that gasoline excise tax revenues attributable to
motorboats reflect the relative growth in motorboat use.
The methodology also could incorporate new state studies
on the use of fuel by size of motorboat.
B-626
TREASURY NEWS
epartment of the Treasury • Washington, D.c. • Telephone 566-2041
TEXT AS PREPARED
Embargoed for Release Upon Delivery
Expected at 8:00 p.m. EDT
Remarks by Secretary of Treasury
James A. Baker, III
To the New York Financial Writers' Association
Sheraton Centre Hotel
New York City
Tuesday, June 17, 1986
It's a great pleasure to be here tonight. I always look forward
to discussing current economic issues with members of the press.
Really, we have much in common. Like myself, you must constantly be
alert to twists and trends in the markets, always scanning the
latest indicators for what they may portend for the economy's
future.
Being in the international financial capital of the world I
thought it would be appropriate to take this opportunity to be a
little reflective and focus my remarks on a topic that I'm sure many
of you are familiar with, and that is international economic policy
cooperation and coordination.
Looking back over the 20th ^entury we see that international
cooperation on economic problems is not a new impulse. The goal of
economic coordination inspired the formation of such modern-day
institutions as the International Monetary Fund and the
International Bank for Reconstruction and Development which were
outgrowths of the Bretton Woods Conference held during World War II.
At that time the allies recognized that the post-war world would
need to be reassured that the economic ravages of the 1930s, which
gave rise to totalitarianism, would not be repeated.
The mistakes that plagued the world's interwar financial
relationships are worth remembering. In response to the Great
Depression our own country resorted to protectionism with the
Smoot-Hawley Tariff. We thought that this would restore domestic
prosperity. Instead, our trading partners retaliated in kind, U.S.
exports sank dramatically, and economic misery spread.
The depression unraveled the economic ties among nations.
Governments sought to shelter domestic economies from the global
collapse through competitive currency devaluations. Facing rising
domestic unemployment, countries unilaterally depreciated their
currencies to stimulate exports and discourage imports.
B-627
-2But the result of these uncoordinated actions was a global
exchange rate crisis which further disrupted international monetary
relations. This beggar-thy-neighbor cycle of devaluations did
nothing to restore business or political confidence and, in fact,
did little to improve the devaluing nation's competitive position.
The only winners in this vicious cycle were dictators who profited
from the economic disruption it created.
The Bretton Woods arrangements sought to prevent a recurrence of
these problems. These arrangements aimed at avoiding uncoordinated
national actions, especially trade controls and competitive
depreciations. And indeed, under the new rules of Bretton Woods, a
great liberalization of the international economy occurred and world
trade and output flourished.
The economic pressures today are not those the industrial world
faced in the '30s. Quite the contrary, the primary nemesis of the
international economy in the 1970s, inflation, has been cut sharply
and is expected to stay low. The recent substantial reductions in
interest rates have been facilitated by the easing of inflationary
pressures. And this year, growth in the industrial countries has
been predicted to average three-and-a-half percent.
But serious problems remain. Postwar efforts at coordination
have not been totally successful. Large external imbalances persist
which can lead governments to adapt protectionist policies. And
when their constituents demand it, governments often are tempted to
follow economic policies aimed at strictly domestic goals. We must
avoid risking a return to the economic nationalism that destroyed
the world economy in the 1930s.
In recent years efforts have been made at various economic
summits to improve coordination. And we took an important step
forward with the Plaza Agreement- here in New York city last
September. The impact of the Plaza Agreement on exchange rates was
dramatic. They have moved considerably since then and this should
improve prospects for reducing our trade deficit.
At the same time, experience has shown that exchange rate
changes alone should not be relied upon to achieve the full
magnitude of the adjustments required in external positions. This
is one reason why we place such importance on strong, sustained and
better balanced growth among the industrial countries. Without
greater growth abroad, increased reliance will need to be placed on
exchange rates in the adjustment of payments imbalances.
At the recent Tokyo Summit we built on the success of the Plaza
Agreement. We established a system for closer policy coordination.
Under this system management responsibilities extend across a broad
range of economic policies and performance. The system is designed
to promote consistent domestic policies and compatible policies
among countries, all the time focusing on achieving favorable
fundamentals.
-3The Summit partners established a process for coordination and
committed themselves to make that process work. The participating
countries will review economic objectives and forecasts with their
peers and the managing director of the IMF. They will take into
account a broad range of indicators such as those spelled out in the
Tokyo Summit communique. The internal and external consistency of
these projections will then be assessed with a view to necessary
adjustments. If significant deviations from an intended course
emerge, the participants have pledged to exert best efforts to adopt
remedial action.
"Best efforts" and peer pressure may not seem like a
prescription for fundamentally altering the economic course of
nations. But with such efforts there is a better chance for more
external discipline than under normal practices. If nothing else,
one could reasonably expect that the political process would lead
countries to formulate and adapt economic policies with more
awareness, at least, of international considerations.
The coordination of economic policies will not be easy. To
specify, and then reconcile, national objectives and forecasts,
taking into account a broad range of indicators, will raise a host
of technical and political problems. There will be deviations from
intended courses, and there will be difficulties in determining
which are significant and should have priority.
Nevertheless, we believe that the end result will be a greater
likelihood that remedial actions will be taken when necessary. In
addition to the high level commitment, other factors give us greater
hope as we work out the details of the Tokyo arrangements.
For example, the success of the Plaza Agreement last September
is a good omen. The public agreement of the G-5 to implement
important policy intentions and modify exchange rates was not easily
nor lightly reached. In addition, subsequent coordination of
interest rate decisions was not easily achieved. But in the end,
actions were taken in a coordinated fashion. These achievements
encouraged us to seek approval at the Tokyo Summit of the better
mechanism for policy coordination.
The process of economic policy coordination can also be improved
by a focus on exchange rates and current account positions to assess
incompatibilities among nations. Countries may not always be able
or willing to agree on the specific level for their currencies. But
they can tell when currency values need to change and the
appropriate direction of change. The Plaza Agreement demonstrates
that the major industrial countries could go this far. The Tokyo
arrangements institutionalize the practice of discussing exchange
rates on a regular basis. One result should be greater stability of
exchange rate expectations.
-4The Tokyo arrangements do not involve any ceding of sovereignty,
nor should they. But if the system is to work, participants will of
their own volition — to be sure, under the watchful eye of their
peers — have to take external considerations more heavily into
account in formulating their domestic economic policies. For the
United States this only reflects the reality that the time is long
past when the U.S. could, in setting domestic policies, relegate
external considerations to an insignificant order of importance.
The major implications for U.S. policy at present are fairly
clear. We must follow through on our program to reduce our budget
deficit. The Congress has to complete action on tax reform.
Monetary policy must continue to be directed toward sustained
non-inflationary growth. And, we must avoid the folly of
protectionism.
The system will only be viable, however, if other nations are
prepared to accept similar responsibilities. If U.S. economic
policies are to be adjusted to take into account international
concerns, others too must be willing to adjust policies. Countries
such as Germany and Japan with large trade surpluses must recognize
the global need for stronger domestic demand to facilitate the
adjustment of external imbalances.
The global community also has a strong stake in economic
stability and growth in the debtor nations, and the successful
management of their debt problems. Debt service difficulties affect
all of us, in terms of reduced exports, lower growth, and a less
stable international financial system. Cooperative efforts to deal
with the debt problem therefore have a high priority on our policy
agenda.
Recent progress in this area;«is somewhat heartening, and
provides a basis for future improvements:
First, there is broad agreement among both creditors and debtors
that improved growth in the debtor nations is essential to the
resolution of their debt problems, and that growth oriented policy
reforms in the debtor nations are central to achieving this
objective.
Second, centered on that growth theme, we have an agreed basis
on which to proceed. The debt initiative which we outlined last
fall "in Seoul has received the strong support of the international
community — including the key international financial institutions
and the commercial banking groups in all major creditor nations.
This strengthened debt strategy is now being actively implemented
through individual debtor's discussions with the IMF and the World
Bank.
-5Third, recent improvements in the global economy are providing
significant and timely relief for the debtor nations. For example,
stronger growth in the industrial nations this year will add
approximately $2 billion to the major debtors' exports. The sharp
decline in interest rates — more than four percentage points since
early 1984 — will save them $12 billion annually in debt service
payments. Lower oil prices will also save the oil-importing members
of this group some $2 billion annually.
I recognize that the debt situation for the net oil exporting
debtors will be exacerbated by the loss in oil export earnings, and
that this may necessitate additional adjustment measures to meet the
new external realities. But lower interest rates and stronger world
growth will help to temper these added demands upon their economies.
Indeed, on an aggregate basis, these growth and interest rate
changes if sustained, could be more important to a resolution of the
debt problem than the provision of marginal amounts of financing by
the banks or any World Bank general capital increase. Calls for
interest rate relief or debt forgiveness seemingly ignore this
dramatic change in the global economic environment.
Such "solutions" to the debt problem may appear to offer
short-term panaceas to ease the debt service burden, but in reality
pose a very serious risk of shutting off future access to financial
markets which is crucial to developing nations' trade and future
growth.
Continued cooperative efforts among the key industrial nations
will be important to sustain this positive global environment. But
the adoption of growth-oriented policies by the debtor nations will
remain crucial to providing the domestic stimulus to stronger
growth. Measures which will increase savings and investment,
improve economic efficiency, and encourage a return of flight
capital, together with sound fiscal and monetary policies, will
enhance the debtors' ability to take advantage of favorable external
circumstances, while providing a sound basis for long term growth.
A number of debtor nations are already moving in this direction,
adopting more market-oriented policies, reducing inflation, and
privatizing public enterprises. We should not harbor any illusions
that such policy changes will be easy to implement, or that they can
be accomplished overnight.
m
They will take time. And while the IMF and the World Bank can
assist in this process — and are doing so — the reforms which are
adopted must be developed at the initiative and with the support of
the debtor governments themselves. Ultimately, they are responsible
for the international financial markets' perception of their
creditworthiness.
-6I recognize that there has been some concern about how the three
elements of this process will come together. Let me review briefly
how we see this process working.
The World Bank, in close consultation with the IMF, is helping a
number of the major debtor nations to develop proposals for
medium-term adjustment programs. They will focus in particular on
efforts to increase growth and export capabilities, mobilize
domestic savings, encourage increased investment, and liberalize
trade. The privatization of public enterprises and domestic tax
reforms may be important elements of this approach.
As these medium term approaches are being developed, the IMF
and World Bank are also working closely with the debtor nations on
immediate policy steps to be supported by new IMF arrangements and
World Bank sector or structural adjustment loans. The IMF, for
example, has existing or pending arrangements with 11 of the 15
major debtor nations, while the World Bank has structural or sector
loan negotiations underway with 13 of these nations and has recently
extended loans to Ecuador, Argentina, Colombia and the Ivory Coast
to support adjustment efforts in some of their key sectors.
Commercial bank support for these policy changes, however, is
crucial. Once reforms have been agreed upon, commercial banks must
be ready to lend without delay. For those debtors which have
successfully implemented IMF programs and have adopted additional
structural adjustment measures in concert with World Bank loans, the
commercial banks should be responsive to requests for new lending.
We do not intend to twist the arms of U.S. banks or to support
special government or World Bank guarantees in order to secure new
lending. I am confident that the banks will lend if they perceive
it to be in their interest to do so. Nevertheless, it is important
for all of us to be able to plan ahead, and to count on the timely
support of the commercial banks, as pledged, as one of the key
elements of the debt initiative, and one which is vital to its
success.
We are all, in fact, engaged in a process of exploring new
horizons in seeking to resolve the international debt problem. All
of us have a stake in this process: the industrial nations, to
provide a sound world economic environment within which individual
debtor's problems can be effectively managed; the debtors, to
undertake the policy reforms needed to enhance their growth
prospects; the international financial institutions and the
commercial banks to support this process with enhanced financing to
assure a srcooth transition to stronger growth in the debtor nations.
Working together, I am confident that we can accomplish that task.
-7I began my remarks tonight with a reference to the Bretton Woods
Conference. One of my predecessors at Treasury, Henry Morgenthau,
opened that Conference 43 years ago by telling the delegates that
the problems in the international economy were "beyond the capacity
of any one country, or of any two or three countries."
They were,
he said, multilateral problems which required multilateral
cooperation.
Morgenthau urged the assembled nations to work together in a
cooperative spirit so that exchange disruptions of the interwar
period could be avoided and the balanced growth of international
trade restored. If negotiations were conducted with good will and
statesmanship, he predicted that the delegates could construct "a
dynamic world economy in which the people of every nation will be
able to realize their potential in peace."
Our challenges are surely no greater than those posed to the
post-war generation. They too can be dealt with if we perceive the
wisdom of strengthening international cooperation and coordination.
Now the task of statesmanship is to implement these goals so the
potential of our countries today remains undiminished in the future.
Thank you very much.
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,800 million, to be issued June 26, 1986.
This offering
will provide about $350
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,451 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, June 23, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,400
million, representing an additional amount of bills dated
March 27, 1986,
and to mature September 25, 1986 (CUSIP No.
912794 LE 2 ) , currently outstanding in the amount of $6,842 million,
the additional and original bills to be freely interchangeable.
183-day bills (to maturity date) for approximately $7,400
million, representing an additional amount of bills dated
December 26, 1985, and to mature December 26, 1986
(CUSIP No.
912794 KU 7 ) , currently outstanding in the amount of $9,281 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 June 26, 1986.
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 $1,588 million as agents for foreign and international monetary authorities, and $3,014 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-628
TREASURY'S 13-, 26-, AND 52-V7EEK 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
tenders.
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
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 4:00 P.M.
June 17, 1986
TREASURY TO AUCTION 4-YEAR AND 7-YEAR NOTES
TOTALING $14,000 MILLION
The Treasury will raise about $9,650 million of new cash
by issuing $7,250 million of 4-year notes and $6,750 million
of 7-year notes. This offering will also refund $4,346 million
of 4-year notes maturing June 30, 1986. The $4,346 million of
maturing 4-year notes are those held by the public, including
$625 million currently held by Federal Reserve Banks as agents
for foreign and international monetary authorities.
In addition to the maturing 4-year notes, there are $9,033
million of maturing 2-year notes held by the public. The disposition of this latter amount was announced last week. Federal
Reserve Banks, as agents for foreign and international monetary
authorities, currently hold $1,426 million, and Government
accounts and Federal Reserve Banks for their own accounts hold
$1,313 million of maturing 2-year and 4-year notes. The maturing
securities held by Federal Reserve Banks for their own account
may be refunded by issuing additional amounts of the new 2-year
and 4-year notes at the average prices of accepted competitive
tenders.
The $14,000 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 prices of accepted competitive tenders.
Details about each of the new securities are given in
the attached highlights of the offerings and in the official
offering circulars.
oOo
Attachment
B-629
HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 4-YEAR AND 7-YEAR NOTES
June 17, 1986
Amount Offered to the Public... $7,250 million
Description of Security:
Term and type of security
4-year notes
Series and CUSIP designation.... Series P-1990
(CUSIP No. 912827 TU 6)
Issue date
June 30, 1986
Maturity date
June 30, 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 auctioi
Interest payment dates
December 31 and June 30
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 through Treasury Tax
and Loan (TT&L) Note Accounts... Acceptable for TT&L Note
Option Depositaries
Payment by non-institutional
investors
Full payment to be
submitted with tender
Deposit guarantee by
designated institutions
Acceptable
Key Dates:
Receipt of tenders
Tuesday, June 24, 1986,
prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions):
a)
b) cash
readily-collectible
or Federal fundscheck
Monday,
Thursday,
June
June
30,
26,
1986
1986
$6,750 million
7-year notes
Series G-1993
(CUSIP No. 912827 TV 4)
July 7, 1986
July 15, 199 3
No provision
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
January 15 and July 15 (first
payment on January 15, 1987)
$1,000
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
Acceptable for TT&L Note
Option Depositaries
Full payment to be
submitted with tender
Acceptable
Wednesday, June 25, 1986,
prior to 1:00 p.m., EDST
Monday, July 7, 1986
Wednesday, July 2, 1986
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
EXPECTED AT 9:30 A.M.
WEDNESDAY, JUNE 18, 1986
Statement of
Robert A. Cornell
Deputy Assistant Secretary of the Treasury
for International Trade and Investment Policy
Before the
Economic Stabilization Subcommittee
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
Mr. Chairman and Members of the Subcommittee:
I am pleased to be able to testify today on the Treasury's
role in the offset report required by Section 309 of the
Defense Production Act, and on our view of the final product.
Since Treasury representatives testified on offsets before
this committee in 1981 and again in 1984, you are aware that we
have long been concerned about the effects of offsets on the
U.S. economy. However, there had been no consensus within the
Executive Branch on whether the net economic effects of offsets
are positive or negative, still less on whether the United
States should discourage them as a matter of policy.
In the spring of 1984, the Treasury suggested to the
Interagency Group on International Economic Policy (IG/IEP)
that the Administration conduct a study of the economic effects
of offsets. We hoped to assemble a body of facts and analysis
which might form the basis for a policy consensus. At about
the same time, Congress renewed the Defense Production Act and
included Section 309, which was intended to accomplish the same
objective and preempted our initiative in the IG.
My; testimony will deal first with the procedures followed
by the interagency coordinating committee which produced the
report, and then with the substance of the report itself.
Data Collection
The first major issue addressed by the coordinating committee was whether a survey of industry was necessary.
Agencies believed that it was, since there was no comprehensive
B-630
- 2 economic information available on offsets and without a survey
we would not be able to develop a comprehensive data base.
We then learned that the International Trade Commission
was preparing a survey of its own on nonrailitary countertrade,
and wondered whether it might be combined with the offset
report to minimize the reporting burden on industry. In the
summer of 1984, working-level staff members of the ITC and of
the Departments of Commerce, Treasury, Labor and Defense met in
the Treasury to discuss whether there was an overlap in subject
matter and methodology between the two such that it would make
sense to combine them in the interest of efficiency. The group
concluded that there was very little overlap, and that combining them would make both surveys more difficult to conduct
with little or no reduction in the respondents' paperwork
burden to show for it.
The two projects proceeded on separate tracks until, at a
meeting in November 1984, the committee was informed by OMB
that the two survey questionnaires would be combined into one
at the direction of OIRA. We were informed that the ITC was to
have responsibility for collecting the data and passing it in
its entirety to the 309 committee. Treasury agreed to handling
the data in this way. When the offsets questionnaire was
mailed out in January, 1985, the instruction sheet included the
following statement: "The information supplied in connection
with this survey will be made available in aggregated form to
appropriate Executive agencies as designated by the Office of
Management and Budget ..." (emphasis added).
Given my experience with the USITC, I recognized this as
its standard practice, which we do not criticize. We thought
that the USITC was prepared to make an exception in this case,
but there apparently was a misunderstanding or a communication
failure. In any event, the result was a probably unintended
compromise of the survey process that in Treasury's view caused
fundamental problems which it was too late to cure.
Let me outline the problems as Treasury saw them. The
Treasury has maintained from the outset of this project that
the drafting agencies must have access to individual survey
responses to do an adequate job of economic analysis. Survey
responses, especially on a subject as complex and uncharted as
this one, inevitably contain ambiguities and omissions. These
must be clarified if the margin of error in the final report is
to be kept within reasonable bounds. The normal, and only
possible, means of clarification is by follow-up telephone
calls to the respondents, and without access to the individual
responses no follow-up is possible (although we understand the
ITC did some limited follow-up).
- 3 -
The underlying assumption of a survey such as this is that
a body of aggregated data will be built up from the individual
responses, and conclusions at the aggregate level will be based
on close screening of the data at a microeconoraic level. The
researcher will not only know the degree of confidence he can
place in his data, he also will be able' to make comparisons and
cross-tabulations among the responses to spot trends or trace
the consequences of particular events (such as a given sale).
When access to the individual responses was denied us, these
normal elements of economic analysis were foreclosed.
The result was that the report included errors and ambiguities which would have been reduced if normal survey research
procedure had been followed. The GAO Report of April 1986
confirms on pages 7, 8, and 9 that there were ambiguities in
the responses as well as errors in transcribing the data; it
was precisely to deal with such problems that we sought access
to the responses. It made no sense for those charged with
preparing the report to have no access to their prime sources,
while the raw data were available only to an agency which had
no role at all in the analysis.
The drafting agencies did have access to a matrix which
included "all" the data "except" the names of firms, programs,
and competitors.
But we believed these omissions, far from
being minor, imposed significant limits on our ability to produce a credible analysis.
As one example, it makes a
substantial difference to our discussion of trade effects
whether a competitor for a contract is American or foreign.
The Questionnaire and Analytical Strategy
Once a work plan was established, with Defense, Commerce,
Labor and Treasury in charge of drafting the four main sections
of the report, the next step was to design a questionnaire. An
office in the Commerce Department made the first attempt at
this very difficult task. The resulting draft was comprehensive, but, understandably, so long and complicated that it was
thought likely to discourage response. Assuming that we would
get better results by cooperating with industry rather than
confronting it, a working group including Commerce, Defense,
Labor, Treasury and OMB undertook to simplify the questionnaire
with input from interested industrial groups.
Section 309 requires a report on the effects of offsets
"on the defense preparedness, industrial competitiveness,
employment, and trade of the United States." The working group
observed that the one variable underlying all four of these
topics is U.S. production.
- 4 -
As a consequence, the analytical strategy adopted by the
Commerce, Treasury and Labor Departments for their portions of
the report was to focus on production effects, especially in
Commerce's discussion of competitiveness. The competitiveness
section, in turn, would be the heart of the report. These
agencies' input to the questionnaire was designed to elicit
information as concisely as possible on sales and offsets in
order to determine the effects on U.S. production.
Since, in the view of Treasury and others, changes in
employment and trade are a result of changes in competitiveness, the employment and trade sections of the report would
flow from the Commerce Department's analysis. The Treasury did
not think it useful to ask questions specifically on trade,
since any one firm could provide answers only on its own trade
but not on total U.S. trade. Even if we had included direct
questions on trade and aggregated the answers, the conclusions
would not have taken into account the effect on the foreign
trade of other U.S. firms not involved in the survey.
While it was never intended that the defense preparedness
section be based on the competitiveness analysis in the same
way as the trade and employment sections, it obviously was
likely that some of Commerce's conclusions would be relevant to
the question of defense preparedness.
After considerable delay, the aggregated data (without
company, program, or competitor names) were released to the
committee by the ITC in late July 1985. But an essential
element of the analytical approach had been changed.
The
Coordinating Committee did not have access to individual survey
responses. Without that access, a strategy of analyzing the
effects of offset transactions on U.S. production was ruled
out. Commerce was obliged to rely more heavily than intended
on anecdotal evidence, rather than doing a quantitative
analysis as planned.
Without being able to build on the Commerce portion of the
report, we in the Treasury concluded that we could not do a
credible analysis of trade effects. We would have been confined to limited analysis based on the available data, which
would not have told us much more than we learned from our 1983
reporr. on offsets. Early in the fall of 1985, therefore, we
notified OMB we could not write the trade section.
The Mailing List
I should address here the issue raised by the GAO about
the selection of firms asked to participate in the survey.
- 5 -
The working group preparing the mailing list began with
the Defense Department's list of one hundred largest defense
contractors. After deleting firms supplying food and petroleum
to U.S. military bases, this gave us a ready-made roster of
large manufacturers of defense articles — the firms most often
asked to provide offsets.
Identifying a representative group of subcontractors was
much harder. We began with DOD's list of its five hundred
largest R&D contractors, focusing on smaller firms toward the
bottom of that list as a proxy for the universe of subcontractors.
We deleted the "beltway bandits" who concentrate
solely on research, in an attempt to isolate manufacturers.
When in doubt, we telephoned many of these companies to confirm
that they produce hardware or engineering services which might
be subjected to offset requirements.
To these we added firms named in Aviation Week's annual
inventory of U.S. aerospace firms which were known to be significant producers but were not already on our list. We also
canvassed knowledgeable personnel in our agencies for ideas.
We well knew this procedure was not ideal, but considered it to
be the most practical way of proceeding, since the alternative
would have been to canvass hundreds or even thousands of firms.
The problem of isolating the effect of offsets on subcontractors was one of the most difficult we addressed in the
entire survey. Obviously, despite the best efforts of all
concerned, we have not solved it yet.
The Report
I have tried in this presentation to stress to the
Subcommittee the unfortunate consequences of what turned out,
in our view, to be a breakdown in the survey process. In the
following discussion of the Report itself, I provide a catalog
of the consequences of that procedural problem. It should be
interpreted in that light rather than as simply a critique of
the Report or of any of the Agencies which prepared it.
The drafting agencies were instructed in early summer,
1984, to start preparing their contributions to the report even
before the survey was conducted. We were to identify gaps in
our information to be addressed in the survey.
But without
data, the Treasury believed this approach would lead only to
repetition of established agency positions without moving us
any closer to understanding the costs and benefits of offsets.
As a result, several sections of the report, particularly
- 6 in the Executive Summary and Introduction, could be interpreted
as supporting current offset practices without focussing on the
effects of those practices. We need more analysis of a costbenefit type to permit definitive conclusions on this point.
Several of the "findings" on pages ix through xi of the
Executive Summary do not flow from the data.
The first and
fourth ones on page ix, for example, are a priori judgments on
which we see a need for more analysis. The fourth one asserts
that a sale with offsets is better than no sale at all, without
considering whether the costs of the offsets exceed the benefits of the sale. Another example appears on page 22, where it
is asserted that without offsets, importing countries would be
willing to spend less on foreign-designed defense goods. Such
may not be the case.
At the bottom of page ix, it is stated that production
costs "may be lowered by an increased number of producers both
here and abroad," apparently on the assumption that more
producers will lead to fiercer competition and lower prices.
In fact, it is at least as likely that an increase in the
number of producers will lead to higher costs for each of them,
absent an increase in the size of the market.
The trade section treats offsets as the economic equivalent of normal imports, ignoring the role of governments in
requiring offsets. Foreign government monopsony power of this
sort requires much deeper study, we think. This section also
asserts that any imbalances in military trade will be
counterbalanced by capital flows; in other words, because of
the truism that the balance of payments is always in balance,
it is of no consequence to the national interest whether U.S.
firms lose business due to the actions of other governments.
The report, except for the Employment section, makes
little use of the data that are available. While a large
number of tables is appended, there is little connection
between most of them and the text.
This probably is due in
part to the lack of access to the survey responses, which
precluded deeper analysis.
Conclusion
Treasury believes that additional analysis of the offset
phenomenon would be warranted. We continue to believe that the
Administration and the Congress should have better information
and, we would hope, a better understanding of the economic
consequences of offsets. We are convinced that the only way to
achieve
this
understanding
is by detailed
analysis of
individual offset" transactions.
- 7 -
We believe there are various ways by which this might be
done while taking account of the legal constraints on the ITC,
such as by temporarily assigning researchers from an Executive
Branch agency to the ITC to perform the analysis.
Alternatively, we could ask the firms to submit copies of their
previous responses to this agency. In any case, the Treasury
continues to believe that the Executive Branch must have
detailed data in order to have an adequate understanding of
this issue. Economic and cost-benefit analysis of offsets are
possible.
Thank you.
TREASURY NEWS
lepartment of the Treasury • Washington, D.c. • Telephone 566-2041
June 18, 1986
J. MICHAEL HUDSON
ASSISTANT SECRETARY FOR LEGISLATIVE AFFAIRS
J. Michael Hudson was confirmed as Assistant Secretary of the
Treasury for Legislative Affairs on May 8, 1986. He succeeds
Bruce E. Thompson, Jr.
Since 1984 Mr. Hudson has been serving at the White House as
Special Assistant to the President for Legislative Affairs.
Previously, he was Assistant to the Director for Legislative
Affairs, Office of Management and Budget, in 1982-84, and was
Deputy Assistant to the Director for Legislative Affairs, Office
of Management and Budget in 1981-82.
From 1979 to 1981, Mr. Hudson held the positions of
Legislative Assistant and Press Secretary to U.S. Representative
Tom Loeffler (R-Texas). He was Speechwriter and Legislative Aide
to U.S. Senator John Tower (R-Texas) in 1977-1979.
Mr. Hudson graduated from the University of Texas (B.A.,1971)
and American University (M.A.,1975). He was born February 27,
1948 in Hollis, Oklahoma and now resides in Washington, D.C.
# # #
B-631
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
RESULTS OF AUCTION OF 2-YEAR NOTES
June 18, 1986
The Department of the Treasury has accepted $9,751 million
of $26,720 million of tenders received from the public for the
2-year notes, Series AB-1988, auctioned today. The notes will be
issued June 30, 19 86, and mature June 30, 1988.
The interest rate on the notes will be 7%. The range of
accepted competitive bids, and the corresponding prices at the 7%
interest rate are as follows:
Yield
7.00%
Hl h
9
7.05%
Average
7.04%
Tenders at the high yield were allotted 52%.
Low
Price
100.000
99.908
99.927
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
$
79,470
23,266,130
28,960
111,150
62,025
34,315
1,401,405
110,065
32,965
109,755
18,020
1,458,990
6,880
$26,720,130
Accepted
$
48,470
8,296,890
28,960
106,350
53,585
32,835
438,285
94,065
32,815
109,755
18,020
483,910
6,880
$9,750,820
The $9,751 million of accepted tenders includes $735
million of noncompetitive tenders and $9,016 million of competitive tenders from the public.
in addition to the $9,751 million of tenders accepted in
the auction process, $565 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,000 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->**
TREASURY NEWS
Department of the Treasury • Washington, D.C. • Telephone
FOR IMMEDIATE RELEASE
June 18, 1986
RESULTS OF AUCTION OF 2-YEAR NOTES
The Department of the Treasury has accepted $9,751 million
of $26,720 million of tenders received from the public for the
2-year notes, Series AB-1988, auctioned today. The notes will be
issued June 3 0 , 1986, and mature June 30, 1988.
The interest rate on the notes will be 7%. The range of
accepted competitive bids, and the corresponding prices at the 7%
interest rate are as follows:
Price
Yield
7.00%
7.05%
7.04%
Low
High
Average
100.000
99.908
99.927
Tenders at the high yield 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
Received
79,470
23,266,130
28,960
111,150
62,025
34,315
1,401,405
110,065
32,965
109,755
18,020
1,458,990
6,880
$26,720,130
$
Accepted
48,470
8,296,890
28,960
106,350
53,585
32,835
438,285
94,065
32,815
109,755
18,020
483,910
6,880
$9,750,820
$
The $9,751 million of accepted tenders includes $735
million of noncompetitive tenders and $9,016 million of competitive tenders from the public.
in addition to the $9,751 million of tenders accepted in
the auction process, $565 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $1,000 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-632.
-2041
IN ADVANCE OF
PRINTED COPY
AGENCY:
Treasury
ACTION:
SUMMARY:
DEPARTMENT OF THE TREASURY
Office of Foreign Assets Control
•
31 C.F.R. Part 550
Libyan Sanctions Regulations
Office of Foreign Assets Control, Department of the
Final Rule
The Treasury Department is amending S 550.409 of the
Libyan Sanctions Regulations ("the Regulations") to alter the interpretation of the scope of the prohibition on exports from the
United States to Libya in S 550.202 of the Regulations.
Exports
of goods to third countries are prohibited where the exporter
knows, or has reason to know, that exported goods are intended
specifically for substantial transformation or incorporation
abroad into manufactured products to be used in the Libyan petroleum or petrochemical industry.
Similarly, exports of technology
to third countries are prohibited where the exporter knows, or
has reason to know, that exported technology is intended specifically for use abroad to manufacture, or for incorporation into,
products to be used in the Libyan petroleum or petrochemical
industry.
Other aspects of the interpretation in S 550.409 are
generally unchanged.
The Treasury Department is also amending
the Regulations to reflect approval by the Office of Management
and Budget of the information collection provisions contained in
ff 550.601 and 550.602 of the Regulations.
»
'
1
-2-
EFFECTIVE DATE:
[14 days from date of publication in the Federal
Register for S 550.409; publication date for S 550.901.*)
FOR FURTHER INFORMATION: Contact Marilyn L. Muench, Chief
Counsel, Office of Foreign Assets Control, Department of the
Treasury, Washington, D.C.
20220, Tel. (202) 376-0408.
SUPPLEMENTARY INFORMATION: The Libyan Sanctions Regulations, 31
C.F.R. Part 550 (51 FR 1354, January 10, 1986; 51 FR 2462,
January 16, 1986; and 51 FR 19751, June 2, 1986) were issued by
the Treasury Department in implementation of Executive Order
12543 of January 7, 1986 (51 FR 865, January 9, 1986) and
Executive Order 12544 of January 8, 1986 (51 FR 1235, January 10,
1986).
As originally published, S 550.409 of the Regulations
exempted from the prohibition on exports to Libya exports of
goods to third countries if, among other things, the goods were
to be incorporated abroad into manufactured products or substantially transformed abroad prior to shipment to Libya. The amendment adopted in this notice makes the exemption in § 550.409
unavailable for such exports to third countries where the
exporter knows, or has reason to know, that the third-country
product produced using the U.S. exports is intended specifically
for use in the Libyan petroleum or petrochemical industry. The
amendment also extends the interpretation of S 550.409 expressly
to cover exports of technology as well as goods.
-3-
Since the Regulations involve a foreign affairs function, the
9
provisions of the Administrative Procedure Act, 5 U.S.C. 553,
requiring notice of proposed rulemaking, opportunity for public
participation, and delay in effective date, are inapplicable.
Because no notice of proposed rulemaking is required for this
rule, the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. , does
not apply. Because the Regulations are issued with respect to a
foreign affairs function of the United States, they are not
subject to Executive Order 12291 of February 17, 1981, dealing
with Federal regulations.
List of Subjects in 31 C.F.R. Part 550: Libya, Exports,
Reporting and recordkeeping requirements.
PART 550—LIBYAN SANCTIONS REGULATIONS
31 CFR Chapter V, Part 550, is amended as set forth below:
1. The "Authority" citation for Part 550 continues to read
as follows:
Authority: 50 U.S.C. 1701 et seg.; E.O. 12543, 51 FR 875,
January 9, 1986; E.O. 12544, 51 FR 1235, January 10, 1986.
"2. The table of contents of Part 550 is amended by adding
an entry for S 550.901 to previously reserved Subpart I as
follows:
* * * * *
-4Subpart I-Miscellaneous
*
*
*
*
*
w
Sec.
550.901
Paperwork Reduction Act Notice.
Subpart D~Interpretations
3. Section 550.409 is revised to read as follows:
S 550.409
Exports to third countries; transshipment.
(a) Exports of goods or technology (including technical
data and other information) from the United States to third
countries are prohibited if the exporter knows, or has reason to
know, that:
(1) the goods or technology are intended for transshipment to Libya (including passage through, or storage in, intermediate destinations) without coming to rest in a third country
>
and without being substantially transformed or incorporated into
manufactured products in a third country, or
(2) the exported goods are intended specifically for
substantial transformation or incorporation in a third country
into products to be used in Libya in the petroleum or petrochemical industry, or
(3) the exported technology is intended specifically
for use in a third country in the manufacture of, or for incorporation into, products to be used in Libya in the petroleum or
-5petrochemical industry.
.
(b)
For the purposes of paragraph (a) of this section:
(1)
the scope of activities encompassed by the petro-
leum and petrochemical industries shall include, but not be
limited to, the following activities: oil, natural gas, natural
gas liquids, or other hydrocarbon exploration (including geophysical and geological assessment activity), extraction, production, refining, distillation, cracking, coking, blending, manufacturing, and transportation; petrochemical production, processing, manufacturing, and transportation;
(2) exports subject to the prohibition in paragraph (a) include not only goods and technology for use in thirdcountry products uniquely suited for use in the petroleum or
petrochemical industry, such as oilfield services equipment, but
also goods and technology for use in products, such as computers,
office equipment, construction equipment, or building materials,
which are suitable for use in other industries, but which are
intended specifically for use in the petroleum or petrochemical
industry;
and
(3)
goods and technology are intended specifically for
a third-country product to be used in Libya if the particular
product is being specifically manufactured to fill a Libyan order
or if the manufacturer's sales of the particular product are
predominantly to Libya.
-6(c)
Specific licenses may be issued to authorize exports to
third countries otherwise prohibited by paragraph (a)(2) of this
section in appropriate cases, such as those involving extreme
hardship or where the resulting third-country products will have
insubstantial U.S. content.
(d) Exports of goods or technology from the United States
to third countries are not prohibited where the exporter has
reasonable cause to believe that:
(1) except as otherwise provided in paragraph (a) of
this section, the goods will be substantially transformed or
incorporated into manufactured products before export to Libya,
or
(2) the goods will come to rest in a third country for
purposes other than reexport to Libya, e.£., for purposes of
restocking the inventory of a distributor whose sales of the
particular goods are not predominantly to Libya, or
(3) the technology will come to rest in a third country
for purposes other than reexport to Libya.
(e) Note: Exports or reexports of goods and technical
data, or of the direct products of technical data (regardless of
U.S. content), not prohibited by this part may require authorisation from the U.S. Department of Commerce pursuant to the
Export Administration Act of 1979, as amended, 50 U.S.C. App.
S 2401 et seq., and the Export Administration Regulations imple-
-7menting that Act, 15 C.F.R. Parts 368-399.
Subpart I-Miscellaneous
4. New S 550.901 is added to read as follows:
S 550.901 Paperwork Reduction Act Notice.
The information collection requirements in SS 550.601 and
550.602 have been approved by the Office of Management and Budget
and assigned control number 1505-0092.
Dated: June /L , 1986
Dennis M. O'Connell
Director
Office of Foreign Assets Control
Approved: June fC , 1986
rancis A. Keating, II
Assistant Secretary
(Enforcement)
Filed:
June 19, 1986
Publication Date: June 23, 1986
•t
o
CNJ
CD
CD
in
"ederal financing bank
0)
GO
CO
WASHINGTON, D.C. 20220
• * •
CM
CO
CD
m
CD
0. u.
FOR IMMEDIATE RELEASE
June 23, 1986
FEDERAL FINANCING BANK ACTIVITY
Francis X. Cavanaugh, Secretary, Federal Financing
Bank (FFB), announced the following activity for the
month of April 1986.
FFB holdings of obligations issued, sold or guaranteed by other Federal agencies totaled $153.5 billion on
April 30, 1986, posting an increase of less than
$0.1 billion from the level on March 31, 1986. This net
change was the result of a decrease in holdings of agency
debt of $0.5 billion and increases of under $0.3 billion
each in agency assets and in holdings of agency-guaranteed
debt. FFB made 341 disbursements during April.
Attached to this release are tables presenting FFB
April loan activity, commitments entered during April, and
FFB holdings as of April 30, 1986.
# 0 #
B-633
00
CD
Page 2 of 9
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
4/10
4/10
4/14
4/17
4/17
4/21
$ 179,000,000.00
250,000,000.00
119,000,000.00
28,000,000.00
146,000,000.00
262,000,000.00
250,000,000.00
13,000,000.00
5,000,000.00
4/10/86
4/14/86
4/17/86
4/15/86
4/17/86
4/21/86
4/21/86
4/23/86
4/25/86
6.655%
6.535%
6.535%
6.315%
6.315%
6.255%
6.065%
6.065%
6.165%
4/21
600,000,000.00
4/30/16
7.285%
11,225,000.00
5,000,000.00
3,000,000.00
37,925,000.00
5,000,000.00
7/3/86
7/3/86
7/8/86
7/15/86
7/29/86
6.655%
6.645%
6.545%
6.265%
6.415%
25,000,000.00
100,000,000.00
200,000,000.00
40,000,000.00
4/1/01
4/1/06
4A4/96
4/30/96
7.565%
7.585%
7.415%
7.505%
4,000,000.00
231,789.00
4,996,145.81
482,788.14
174,897.60
7,740,078.50
838,590.75
592,551.12
1,952,715.00
125,700.46
2,515,051.00
151,214.00
23,054.58
398,067.07
45,126.64
953,922.80
22,385.48
47,100,000.00
99,855.59
19,816.66
3/26/91
12/15/88
6/30/91
7/31/14
4/30/11
9/10/95
11/30/13
7/31/14
9/5/91
11/15/92
2/5/95
7/15/92
11/30/13
7/13/14
9/15/95
11/30/13
7/15/92
3/25/96
9/14/95
7/15/92
7.180%
7.125%
7.176%
7.565%
7.575%
7.427%
7.565%
7.595%
7.185%
7.365%
7.421%
7.355%
7.615%
7.665%
7.495%
7.695%
7.405%
7.215%
7.245%
7.155%
DATE
INTEREST
RATE
(other than
semi-annual)
AGENCY DEBT
TENNESSEE VALLEY AUTHORITY
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
Advance
#593
#594
#595
#596
#597
#598
#599
#600
#601
Power Bond Series 1986 B
4/3
4/7
4/7
NATIONAL CREDIT UNION ADMINISTRATION
Central Liquidity Facility
+Note
+Note
+Note
•Note
+Note
#391
#392
#393
#394
#395
4/1
4/2
4/7
4/14
4/29
AGENCY ASSETS
FARMERS HOME ADMINISTRATION
Certificates of Beneficial Ownership
4/1
4/1
4/14
4/30
GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Cameroon 7
Colombia 5
Colombia 6
Egypt 7
Greece 14
Portugal 2
Turkey 17
Egypt 7
Colombia 7
Jordan 11
Jordan 12
Philippines 10
Turkey 17
Egypt 7
Peru 9
Turkey 17
Philippines 10
Spain 8
Zaire 4
Philippines 10
+rollover
4/1
4/1
4/1
4/1
4/1
4/1
4/1
4/2
4/3
4/3
4/3
4/3
4/4
4/7
4/7
4/7
4/7
4/8
4/8
4/10
7.708%
7.729%
7.552%
7.646%
ann.
ann.
ann.
ann.
Page 3 of i
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual
INTEkEb'i
RATE
(other than
semi-annual)
Foreign Military Sales (Cont'd)
Greece 15
Jordan 12
Greece 14
Egypt 7
Indonesia 11
Morocco 13
Turkey 17
Jordan 12
Jordan 11
Greece 15
Philippines 10
Ecuador 8
Tunisia 17
Greece 14
Greece 15
Kenya 10
Portugal 2
4/10
4/10
4/10
6/15/12
2/5/95
4/30/11
7/31/14
8/12/93
5/31/96
11/30/13
2/5/95
11/15/92
6/15/12
7/15/92
7/31/96
9/15/96
4/30/11
6/15/12
5/5/94
9/10/95
7.502%
7.335%
7.525%
7.455%
6.375%
6.845%
7.298%
7.145%
6.975%
7.318%
6.925%
7.012%
7.271%
7.797%
7.787%
7.392%
7.475%
4/10
4/11
4/14
4/14
4/21
4/22
4/22
4/28
4/28
942,583.00
254,000.00
400,000.00
608,932.00
220,099.94
102,000.00
160,536.00
15,000.00
103,000.00
187,598.01
250,000.00
281,397.68
175,000.00
69,000.00
8/1/86
2/17/87
2/17/87
8/1/86
8/15/86
2/2/87
5/V87
8/3/87
2/17/87
12/1/86
7/1/03
8/3/87
9/15/86
2/17/87
6.665%
6.815%
6.795%
6.695%
6.585%
6.435%
6.455%
6.555%
6.445%
6.245%
7.209%
6.425%
6.565%
6.725%
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/15
4/22
118,839,782.17
2,200,359.00
116,422,407.03
2,200,359.00
113,852,682.12
2,200,359.00
116,787,637.44
2,200,359.00
47,642,729.54
44,561,684.08
43,316,650.34
43,583,218.74
104,788,142.81
107,879,688.62
105,919,489.26
2,330,000.00
126,322,576.50
122,312,472.03
120,680,366.76
117,268,592.12
1,584,418.71
124,086,023.84
1,584,382.08
46,101,422.15
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
7/15/86
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.215%
6.165%
4A1
4/11
4/17
4/17
4/21
4/22
4/22
4/22
4/23
4/23
4/25
4/25
4/30
4/30
$ 1,536,275.05
181,190.00
1,448,020.08
286,104.51
329,828.00
16,725.47
9,175,360.75
98,126.70
40,713.00
669,221.23
529,872.33
521,580.00
649,564.00
15,452,684.11
15,196,411.89
1,244,429.71
422,030.00
DEPARTMENT OF HOUSING & URBAN DEVELOPMENT
Community Development
Provo, UT
Newport News, VA
St. Louis, MO
Springfield, MA
Santa Ana, CA
Louisville, KY
Biloxi, MI
Mayaguez, PR
Newport News, VA
Hialeah, FL
Albany, NY
Mayaguez, PR
Massillon, OH
Newport News, VA
4/1
4/1
4/3
4/3
4/7
DEPARTMENT OF THE NAVY
Ship Lease Financing
+Bobo
+Bobo Container
•Williams
-Williams Container
+Lopez
+Lopez Container
+Lummus
+Lummus Container
•Buck
+Darnell
+Cobb
•Matthiesen
+Kocak
+Obregon
-t-Pless
+Pless Container
-t-hauge
+Baugh
+Anderson
+Fisher
+Fisher Container
+Bonnyman
+Bonnyman Container
Gianella
-t-rollover
6.915% ann.
6.894% ann.
6.515%
6.559%
6.662%
6.529%
6.281%
7.339%
6.528%
ann.
ann.
ann.
ann.
ann.
ann.
ann.
6.810% ann.
page 4 of 9
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
Defense Production Act
Gila River Indian Community 4/21
$ 179,598.69
10/1/92
6.829%
6.772% qtr.
L/2/18
4/4/88
4/4/88
12/31/12
12/31/12
12/31/12
V3/17
V3/17
V3/17
12/31/13
12/31/15
12/31/15
12/31/13
V3/17
V3/17
V3/17
12/31/18
12/31/18
12/31/18
12/31/18
12/31/18
12/31/18
12/31/20
12/31/16
6/30/88
6/30/88
12/31/16
12/31/12
12/3V12
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
V3/17
1/3/17
V3/17
V3/17
V3/17
12/31/18
12/3V13
12/31/15
12/3V15
12/31/15
12/31/20
12/31/18
12/31/18
1/2/18
12/31/20
12/31/20
1/3/17
V3/17
V3/17
V3/17
V3/17
V3/17
12/31/19
7.586%
7.015%
7.015%
7.542%
7.562%
7.5*2%
7.587%
7.587%
7.587%
7.545%
7.550%
7.550%
7.545%
7.587%
7.587%
7.587%
7.591%
7.591%
7.591%
7.591%
7.591%
7.591%
7.566%
7.563%
7.072%
7.072%
7.535%
7.717%
7.717%
7.717%
7.717%
7.717%
7.717%
7.717%
7.717%
7.702%
7.702%
7.702%
7.702%
7.702%
7.697%
7.713%
7.703%
7.703%
7.703%
7.691%
7.696%
7.696%
7.675%
7.704%
7.704%
7.547%
7.547%
7.547%
7.547%
7.547%
7.547%
7.543%
7.515% qtr.
6.955% qtr.
6.955% qtr.
7.472% qtr.
7.492% qtr.
7.492% qtr.
7.516% qtr.
7.516% qtr.
7.516% qtr.
7.475% qtr.
7.480% qtr.
7.480% qtr.
7.475% qtr.
7.516% qtr.
7.516% qtr.
7.516% qtr.
7.520% qtr.
7.520% qtr.
7.520% qtr.
7.520% qtr.
7.520% qtr.
7.520% qtr.
7.496% qtr.
7.493% qtr.
7.011% qtr.
7.011% qtr.
7.465% qtr.
7.644% qtr.
7.644% qtr.
7.644% qtr.
7.644% qtr.
7.644% qtr.
7.644% qtr.
7.644% qtr.
7.644% qtr.
7.629% qtr.
7.629% qtr.
7.629% qtr.
7.629% qtr.
7.629% qtr.
7.624% qtr.
7.640% qtr.
7.630% qtr.
7.630% qtr.
7.630% qtr.
7.618% qtr.
7.623% qtr.
7.623% qtr.
7.603% qtr.
7.631% qtr.
7.631% qtr.
7.477% qtr.
7.477% qtr.
7.477% qtr.
7.477% qtr.
7.477% qtr.
7.477% qtr.
7.473% qtr.
RURAL ELECTRIFICATION ADMINISTRATION
Corn Belt Power #292 4/2
•Wabash Valley Power #206
4/2
*Wabash Valley Power #206
4/2
*South Mississippi Electric #90 4/2
•Wolverine Power #100
4/2
•Wolverine Power #101
4/2
•Wolverine Power #182
4/2
•Wolverine Power #191
4/2
•Sunflower Electric #174
4/2
•Allegheny Electric #93
4/2
•Allegheny Electric #175
4/2
•Allegheny Electric #175
4/2
•United Power #86
4/2
•Saluda River Electric #186
4/2
•United Power #122
4/2
•United Power #212
4/2
•Western Illinois Power #225
4/2
•New Hampshire Electric #192
4/2
•Kansas Electric #216
4/2
•Kansas Electric #216
4/2
•Kansas Electric #216
4/2
•Kansas Electric #216
4/2
•Deseret G&T #211
4/3
•Deseret G&T #315
4/3
•Colorado Ute Electric #276
4/3
•Colorado Ute Electric #297
4/3
•Plains Electric G&T #300
4/3
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #87
4/7
•Basin Electric #137
4/7
•Basin Electric #137
4/7
•Basin Electric #137
4/7
•Basin Electric #137
4/7
•Basin Electric #137
4/7
•Basin Electric #137
4/7
•Basin Electric #137
4/7
•Basin Electric #272
4/7
•Basin Electric #272
4/7
•Basin Electric #272
4/7
Sho-Me Power #164
4/7
•Tex-La Electric #208
4/7
•Basin Electric #232
4/7
•United Power #129
4/8
•United Power #159
4/8
•United Power #212
4/8
•New Hampshire Electric #192
4/9
•New Hampshire Electric #192
4/9
•New Hampshire Electric #192
4/9
•New Hampshire Electric #192
4/9
•Brazos Electric #108
4/9
•Brazos Electric #144
4/9
•Associated Electric #132
4/9
•maturity extension
637,000.00
12,107,000.00
365,000.00
495,000.00
1,409,000.00
1,822,000.00
4,870,000.00
5,878,000.00
17,100,000.00
2,670,000.00
4,933,000.00
9,024,000.00
2,456,000.00
7,042,000.00
678,000.00
1,160,000.00
5,367,000.00
1,575,000.00
2,960,000.00
1,134,000.00
1,104,000.00
1,234,000.00
4,772,000.00
33,357,000.00
2,155,000.00
2,803,000.00
1,023,000.00
1,515,000.00
10,000.00
20,000,000.00
205,951.46
374,000.00
295,000.00
254,000.00
25,000,000.00
9,853,000.00
25,000,000.00
30,000,000.00
20,000,000.00
20,000,000.00
15,000,000.00
30,000,000.00
600,900.82
163,256.20
6,884.30
1,600,000.00
3,222,000.00
121,000.00
1,946,000.00
619,000.00
61,000.00
1,098,000.00
1,340,000.00
1,091,000.00
1,065,000.00
1,101,000.00
1,541,000.00
10,945,000.00
Page 5 c: 9
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual;
RURAL ELECTRIFICATION ADMINISTRATION (Cont'd)
Oglethorpe Power #246 4/10 $ 30,268,000.00 12/31/20
Oglethorpe Power #299
4/10
4,898,000.00
•Wabash Valley Power #104
4/10
3,606,000.00
•Wabash Valley Power #206
4/10
223,000.00
•Mid-Georgia Telephone #229
4/10
2,312,000.00
•Wolverine Power #100
4/10
2,158,000.00
•Wolverine Power #101
4/10
2,757,000.00
•Allegheny Electric #93
4/10
2,643,000.00
•Sunflower Electric #151
4/11
542,000.00
•Mid-Georgia Telephone #229
4/11
2,312,000.00
•Oglethorpe Power #74
4/14
15,289,000.00
•Oglethorpe Power #74
4/14
18,470,411.17
•Oglethorpe Power #74
4/14
25,429,000.00
•Oglethorpe Power #150
4/14
760,000.00
•Oglethorpe Power #150
4/14
9,394,000.00
•Oglethorpe Power #150
4/14
7,041,000.00
•Oglethorpe Power #150
4/14
26,772,000.00
•New Hampshire Electric #192
4/14
1,100,000.00
•Wabash Valley Power #104
4/14
6,237,000.00
•Wabash Valley Power #206
4/14
1,973,000.00
•Wolverine Power #101
4/14
1,057,000.00
•Wolverine Power #182
4/14
2,917,000.00
•Wolverine Power #183
4/14
1,594,000.00
•Wolverine Power #191
4/14
941,000.00
•Alabama Electric #244
4/14
3,354,000.00
•East Kentucky Power #140
4/16
188,000.00
•East Kentucky Power #291
4/16
706,000.00
•Western Illinois Power #99
4/16
3,603,000.00
•Corn Belt Power #94
4/16
361,000.00
•Soyland Power #226
4/16
31,142,000.00
•Colorado Ute Electric #203
4/16
1,376,000.00
•South Texas Electric #200
4/16
704,000.00
•Cajun Electric #180
4/16
46,500,000.00
•Central Electric #131
4/16
425,000.00
•Seminole Electric #141
4/17
2,037,000.00
•Seminole Electric #141
4/17
36,562,000.00
•Seminole Electric #141
4/17
21,106,000.00
•Seminole Electric #141
4/17
8,765,000.00
•Old Dominion Electric #267
4/18
47,979,798.00
•Sugar Land Telephone #69
4/18
1,200,000.00
•Sugar Land Telephone #69
4/18
1,411,000.00
•Sugar Land Telephone #69
4/18
1,000,000.00
•Sugar Land Telephone #69
4/18
1,771,000.00
•Sugar Land Telephone #210
4/18
688,000.00
Brazos Electric #230
4/21
986,000.00
•South Mississippi Electric #90 4/21
1,170,000.00
•Corn Belt Power #94
4/21
600,000.00
•United Power #145
4/21
1,650,000.00
•Southern Illinois Power #98
4/21
800,000.00
•Western Farmers Electric #133 4/21
1,705,000.00
•Western Farmers Electric #200 4/21
2,600,000.00
•Colorado Ute Electric #78
4/23
414,000.00
•Cajun Electric #147
4/23
35,500,000.00
•Cont. Tel. of Kentucky #254
4/23
3,500,000.00
•Central Electric #278
4/24
714,000.00
•Colorado Ute Electric #168
4/28
1,027,695.00
•French Broad Electric #245
4/28
650,000.00
•Cajun Electric #249
4/28
10,000,000.00
•S. Mississippi Electric #3
4/29
138,028.85
•S. Mississippi Electric #3
4/29
107,650.48
•S. Mississippi Electric #3
4/29
557,575.44
•S. Mississippi Electric #4
4/29
1,101,127.27
•maturity
extension Electric #4
•S. Mississippi
4/29
1,100,154.54
12/31/21
12/31/14
4/11/88
12/31/20
12/31/12
12/31/12
12/31/13
12/31/14
12/31/20
1/3/17
1/3/17
12/31/15
1/3/17
1/3/17
12/31/14
12/31/15
12/31/18
4/14/88
4/14/88
12/31/12
1/3/17
1/3/17
1/3/17
12/31/20
12/31/20
12/31/15
12/31/14
12/31/18
12/31/18
4/18/88
1/3/17
1/3/17
1/3/17
12/31/14
1/2/18
1/2/18
12/31/15
12/31/13
12/31/14
1/3/17
12/31/14
1/3/17
12/31/13
12/31/20
12/31/12
1/3/17
1/3/17
12/31/18
12/31/18
12/31/18
6/30/88
12/31/14
12/31/20
12/31/16
4/28/88
12/31/18
12/31/18
1/3/11
1/3/11
1/3/11
12/31/12
12/31/12
7.480%
7.471%
7.488%
6.705%
7.466%
7.475%
7.475%
7.448%
7.475%
7.466%
7.521%
7.521%
7.523%
7.521%
7.521%
7.523%
7.523%
7.520%
6.775%
6.775%
7.475%
7.521%
7.521%
7.521%
7.519%
7.486%
7.482%
7.484%
7.484%
7.484%
6.655%
7.484%
7.484%
7.484%
7.286%
7.287%
7.287%
7.287%
7.287%
7.311%
7.310%
7.312%
7.311%
7.310%
7.346%
7.304%
7.351%
7.351%
7.348%
7.348%
7.348%
6.738%
7.488%
7.459%
7.630%
7.035%
7.792%
7.792%
7.669%
7.669%
7.669%
7.674%
7.674%
7.411% qtr.
7.403% qtr.
7.419% qtr.
6.650% qtr.
7.398% qtr.
7.406% qtr.
7.406% qtr.
7.380% qtr.
7.406% qtr.
7.398% qtr.
7.452% qtr.
7.452% qtr.
7.454% qtr.
7.452% qtr.
7.452% qtr.
7.454% qtr.
7.454% qtr.
7.451% qtr.
6.719% qtr.
6.719% qtr.
7.406% qtr.
7.452% qtr.
7.452% qtr.
7.452% qtr.
7.450% qtr.
7.417% qtr.
7.413% qtr.
7.415% qtr.
7.415% qtr.
7.415% qtr.
6.601% qtr.
7.415% qtr.
7.415% qtr.
7.415% qtr.
7.221% qtr.
7.222% qtr.
7.222% qtr.
7.222% qtr.
7.222% qtr.
7.245% qtr.
7.244% qtr.
7.246% qtr.
7.245« qtr.
7.244% qtr.
7.280% qtr.
7.239% qtr.
7.285% qtr.
7.285% qtr.
7.282% qtr.
7.282% qtr.
7.282% qtr.
6.682% qtr.
7.419% qtr.
7.391% qtr.
7.559% qtr.
6.974% qtr.
7.718% qtr.
7.718% qtr.
7.597« qtr.
7.597% qtr.
7.597% qtr.
7.602% qtr.
7.602% qtr.
Page 6 of 9
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
INTEREST
RATE
(semiannual)
INTEREST
RATE
(other than
semi-annual)
12/31/12
12/31/12
12/31/12
12/31/12
12/31/12
1/31/17
1/2/18
1/2/18
1/2/18
12/31/15
12/31/15
12/31/15
12/31/18
1/2/18
12/31/15
12/31/17
12/31/15
12/31/18
12/31/18
12/31/16
12/31/18
12/31/18
5/2/88
7.716%
7.715%
7.674%
7.674%
7.674%
7.674%
7.704%
7.700%
7.701%
7.701%
7.707%
7.707%
7.708%
7.699%
7.698%
7.579%
7.610%
7.580%
7.587%
7.608%
7.612%
7.608%
7.608%
6.975%
7.643%
7.642%
7.602%
7.602%
7.602%
7.602%
7.631%
7.627%
7.628%
7.628%
7.634%
7.634%
7.635%
7.626%
7.625%
7.509%
7.539%
7.510%
7.516%
7.537%
7.541%
7.537%
7.537%
6.915%
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/01
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.548%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
FINAL
MATURITY
RURAL PT-**7rRIFICATI0N ADMINISTRATION (Cont'd)
•S. Mississippi Electric #90 4/29 $ 382,000.00 12/31/12
•S. Mississippi Electric #90
4/29
599,016.39
•S. Mississippi Electric #90
4/29
485,917.44
•S. Mississippi Electric #90
4/29
264,185.82
•S. Mississippi Electric #90
4/29
867,779.82
•S. Mississippi Electric #90
4/29
3,837,409.08
•S. Mississippi Electric #171
4/29
4,688,000.00
•S. Mississippi Electric #171
4/29
2,250,000.00
•S. Mississippi Electric #171
4/29
2,375,000.00
•S. Mississippi Electric #171
4/29
1,800,000.00
•S. Mississippi Electric #171
4/29
2,891,000.00
•S. Mississippi Electric #171
4/29
1,639,000.00
•S. Mississippi Electric #171
4/29
2,500,000.00
•S. Mississippi Electric #289
4/29
1,026,500.00
•North Carolina Electric #268
4/29
1,157,000.00
•Karoo Electric #266
4/30
4,239,000.00
•New Hampshire Electric #270
4/30
978,000.00
•Allegheny Electric #175
4/30
4,421,000.00
Allegheny Electric #304
4/30
306,000.00
•Tex-La Electric #208
4/30
788,000.00
•Basin Electric #137
4/30
9,545,000.00
•Basin Electric #232
4/30
69,000.00
•Corn Belt Power #138
4/30
162,000.00
•Northwest Electric #176
4/30
915,000.00
SMALL BUSINESS ADMINISTRATION
State & Local Development Company Debentures
4/9
Deep East Texas Reg. CDl Co.
4/9
North Georgia CDC
4/9
Virginia Economic Dev. Corp.
4/9
North Texas Reg. Dev. Corp.
4/9
Empire State CDC
4/9
San Diego County LDC
4/9
Cumberland-Allegheny C.I.F.
4/9
Arrowhead Reg. Dev. Corp.
4/9
Iowa Business Growth Co.
4/9
Southeast LDC
Brenham Indus. Foundation, Inc.4/9
4/9
Michigan CDC
4/9
Iowa Bus. Growth Co.
4/9
Wilmington Indus. Dev., Inc.
4/9
Birmingham City Wide LDC
4/9
Area wide Dev. Corp.
4/9
Texas CDC, Inc.
4/9
South Georgia Area Dev. Corp. 4/9
Coon Rapids Dev. Co.
4/9
St. Louis LDC
4/9
Jacksonville LDC, Inc.
4/9
Opportunities Minnesota Inc.
4/9
Columbus Countywide Dev. Corp. 4/9
Columbus Countywide Dev. Corp. 4/9
Michigan CDC
4/9
Historic 25th Street Dev. Co. 4/9
St. Louis County LDC
4/9
Arizona Enterprise Dev. Corp. 4/9
Oakland County LDC
4/9
Opportunities Minnesota, Inc. .4/9
Texas Panhandle Reg. Dev. Corp.4/9
Indiana Statewide CDC
4/9
St. Louis County LDC
4/9
Milwaukee Economic Dev. Corp. =4/9
Toledo Econ. Plan. Council, Ino
•maturity extension
88,000.00
102,000.00
105,000.00
151,000.00
174,000.00
176,000.00
202,000.00
214,000.00
244,000.00
385,000.00
420,000.00
420,000.00
500,000.00
44,000.00
56,000.00
60,000.00
64,000.00
75,000.00
76,000.00
79,000.00
81,000.00
82,000.00
83,000.00
88,000.00
89,000.00
90,000.00
97,000.00
102,000.00
105,000.00
105,000.00
109,000.00
121,000.00
122,000.00
125,000.00
126,000.00
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 7 of 9
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
DATE
AMOUNT
OF ADVANCE
FINAL
MATURITY
INTEREST
RATE
(semiannual)
State & Local Development Company Debentures (Cont'd)
Evergreen Community Dev. Assoc. /9
Detroit Economic Growth Corp.
/9
Bristol County Chamber LDC
/9
Oakland County LDC
/9
St. Petersburg CDC, Inc.
/9
Mahoning Valley Ec. Dev. Corp. /9
Oakland County LDC
1/9
d a y County Dev. Corp.
/9
Coon Rapids Dev. Co.
/9
East Texas Reg. Dev. Co.
/9
Opportunities Minnesota Inc.
/9
Tulare County Ec. Dev. Corp.
/9
East Gen. Michigan Dev. Corp. /9
Granite State Ec. Dev. Corp.
/9
Empire State CDC
/9
Metro. Growth & Dev. Corp.
/9
Nevada State Dev. Corp.
/9
Houston-Galveston Area LDC
/9
Greater Southwest Kansas CDC
/9
East Cen. Michigan Dev. Corp.
/9
Hamilton County Dev. Co., Inc. /9
Wilmington Indus. Dev., Inc.
/9
Georgia Mountains Reg. EDC
/9
C.D.C. of Warren County, Inc. /9
Los Medanos Fund, Inc.
/9
Wisconsin Bus. Dev. Fin. Corp. /9
San Diego County LDC
/9
Big Country Dev. Corp.
/9
San Diego County LDC
/9
Wisconsin Bus. Dev. Fin. Corp. /9
Centralina Dev. Corp., Inc.
/9
Wisconsin Bus. Dev. Fin. Corp. /9
MSP 503 Dev. Corp.
/9
Warren Redev. & Planning Corp. •9
Dev. Corp. of Middle Georgia
/9
Johnstown Area Reg. Indus. CDC /9
Montgomery County B.D.C.
/9
River East Progress, Inc.
/9
Region Eight Dev. Corp.
i/9
E.D.F. of Sacramento, Inc.
/9
Gold Country CDC
/9
Lake County Sm. Bus. 503 Corp. /9
Wilmington Indus. Dev., Inc.
/9
Opportunities Minnesota, Inc.
/9
Gold Country CDC
/9
Bay Colony Dev. Corp.
/9
Columbus Countywide Dev. Corp. /9
New Haven Com. Invest. Corp.
/9
Housatonic Indus. Dev. Corp.
/9
E.D.F. of Sacramento, Inc.
/9
Business Dev. Corp. of Nebraska' /9
Wisconsin Bus. Dev. Fin. Corp. /9
Kisatchie-Delta RP&D Dis., Inc. /9
St. Louis County LDC
/9
Massachusetts CDC
/9
N. Virginia LDC, Inc.
/9
Bay Area Employment Dev. Co.
/9
W. Mass. Sm. Bus. Assist., Inc. /9
Railbelt Community Dev. Corp. /9
Scioto Ec. Dev. Corp.
/9
Bay Area Bus. Dev. Co.
/9
HEDCO LDC
/9
Evergreen Community Dev. Assoc. /9
Bay Area Bus. Dev. Co.
/9
Delaware Dev. Corp.
/9
131,000.00
134,000.00
137,000.00
142,000.00
145,000.00
149,000.00
150,000.00
169,000.00
174,000.00
182,000.00
189,000.00
206,000.00
208,000.00
208,000.00
218,000.00
234,000.00
246,000.00
272,000.00
291,000.00
347,000.00
348,000.00
351,000.00
375,000.00
379,000.00
420,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00
500,000.00
53,000.00
78,000.00
83,000.00
83,000.00
87,000.00
97,000.00
99,000.00
106,000.00
119,000.00
138,000.00
147,000.00
156,000.00
158,000.00
158,000.00
181,000.00
202,000.00
231,000.00
241,000.00
265,000.00
268,000.00
273?000.00
282,000.00
283,000.00
301,000.00
342,000.00
343,000.00
363,000.00
387,000.00
390,000.00
441,000.00
498,000.00
500,000.00
500,000.00
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/1/06
4/VH
4/VH
4/VH
4/VH
4/VH
4/VH
4/V11
4/VH
4/VH
4/VH
4/1/11
4/VH
4/VH
4/VH
4/1/11
4/VH
4/1/11
4/VH
4/VH
4/VH
4/1/11
4/VH
4/VH
4/VH
4/1/11
4/VH
4/VH
4/VH
4/1/11
4/VH
4/1/11
4/VH
4/V11
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.670%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
7.724%
INTEREST
RATE
(other than
semi-annual)
Page 8 of 9
FEDERAL FINANCING BANK
APRIL 1986 ACTIVITY
BORROWER
AMOUNT
OF ADVANCE
FINAL
MATURITY
501,360,919.15
7/31/86
DATE
INTEREST
RATE
" (semiannual)
INTEREST
RATE
(other than
semi-annual)
TENNESSEE VALLEY AUTHORITY
Seven States Energy Corporation
•Note A-86-07
4/30
6.415%
•••rollover
FEDERAL FINANCING BANK
APRIL 1986 Commitments
BORROWER
Alhambra, CA
Bellflower, CA
Harrisburg, PA
Harrisburg, PA
Hialeah, FL
Kansas City, MO
Pascagoula, MS
GUARANTOR
AMOUNT
COMMITMENT
EXPIRES
MATURITY
HUD
HUD
HUD
HUD
HUD
HUD
HUD
$ 1,370,285.00
1,725,000.00
150,000.00
650,000.00
276,140.68
1,500,000.00
1,173,000.00
8/15/87
6/1/87
12/1/86
12/1/86
12/1/86
6/15/87
6/1/87
8/15/93
6/V93
12/1/92
• 12/1/92
12/1/90
6/15/92
6/V93
Page 9 of 9
FEDERAL FINANCING BANK HOLDINGS
(in millions)
Program
Agency Debt
April 30, 1986
Export-Import Bank $ 15,250.1
NCUA-Central Liquidity Facility
Tennessee Valley Authority
U.S. Postal Service
U.S. Railway Association
Agency Assets
Fanners Home Administration 63,829.0
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Overseas Private Investment Corp.
Rural Electrification Admin.-CBO
Small Business Administration
Government-Guaranteed Lending
March 31, 1986
Net Change
4/1/86-4/30/86
Net Change—FY 1986
10/1/85-4/30/86
146.5
14,250.0
1,690.0
73.8
$ 15,250.1
223.0
14,649.0
1,690.0
73.8
$ -0-76.5
-399.0
-0-0-
$ -159.0
-75.7
-131.0
-0-0-
105.9
122.1
3.4
4,071.2
28.9
63,464.0
105.9
122.1
3.4
4,171.7
29.4
365.0
-0-0-0-100.5
-0.5
-340.0
-3.3
-0.7
-2.7
346.9
-4.0
18,584.3
5,000.0
297.1
32.2
2,111.4
405.3
34.7
27.8
887.6
1,588.6
7.5
-020,958.8
1,051.0
703.6
1,742.3
63.7
177.0
102.5
-0-9.7
-0-0-0-0-0-046.1
0.2
-0101.7
-9.6
20.3
12.4
-0-0-
$ 153,455.3
$ 52.4
598.3
-0-2.0
-1.3
-34.7
-3.1
-0.5
-0.4
-0321.6
1.8
-60.0
-615.0
17.5
128.2
103.3
-89.9
-0$ -5.6
DOD-Foreign Military Sales 18,686.8
DEd.-Student Loan Marketing Assn.
5,000.0
DHUD-Community Dev. Block Grant
287.4
DHUD-New Communities
32.2
DHUD-Public Housing Notes
2,111!4
General Services Administration
405.3
DOI-Guam Power Authority
34.7
DOI-Virgin Islands
27.8
NASA-Space Communications Co.
887.6
DON-Ship Lease Financing
1,634.7
DON-Defense Production Act
7.6
Oregon Veteran's Housing
-0Rural Electrification Admin.
21,060.5
SBA-Small Business Investment Cos.
1,041.4
SBA-State/Local Development Cos.
723.9
TVA-Seven States Energy Corp.
1,754.7
DOT-Section 511
53)7
DOT-WMATA
177.0
TOTALS^
$ 153,507.6
1
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
June 23, 1986
Tenders for $7,408 million of 13-week bills and for $7,409 million
of 26-week bills, both to be issued on June 26, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing September 25, 1986
Discount Investment
Rate
Rate 1/
Price
26-week bills
maturing December 26, 1986
Discount Investment
Rate
Rate 1/
Price
6.07%
6.10%
6.09%
6.11%
6.14%
6.13%
6.25%
6.28%
6.27%
98.466
98.458
98.461
6.39%
6.43%
6.41%
96.894
96.879
96.884
Tenders at the high discount rate for the 13-week bills were allotted 18%.
Tenders at the high discount rate for the 26-week bills were allotted 42%.
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
$
19,305
$
34,175
$
34,175
21,664,510
6,337,560
22,319,160
10,355
21,245
21,245
45,115
107,065
127,565
55,320
39,795
40,260
22,640
36,150
37,900
1,731,510
223,950
1,679,270
74,165
48,120
84,640
23,395
12,320
26,420
39,175
44,905
44,905
18,490
32,635
36,735
1,303,080
193,410
2,122,150
184,285
276,460
276,460
Accepted
$
19,305
6,417,310
10,355
30,615
47,420
21,640
452,610
39,845
23,395
39,175
15,590
107,500
184,285
$26,850,885
$7,407,790
• $25,191,345
$7,409,045
$24,142,550
954,760
$25,097,310
$4,699,455
954,760
$5,654,215
$21,807,130
585,740
$22,392,870
$4,024,830
585,740
$4,610,570
1,524,430
1,524,430
1,500,000
1,500,000
229,145
229,145
1,298,475
1,298,475
$26,850,885
$7,407,790
$25,191,345
$7,409,045
An additional $25,255 thousand of 13-week bills and an additional $120,725
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield
B-634
2041
TREASURY NEWS
Department of the Treasury • Washington, D.c. • Telephone
June 25, 1986
JAMES A. BAKER, III
SECRETARY OF THE TREASURY
James A. Baker, III became the 67th Secretary of the Treasury on
February 3, 1985.
Prior to this Secretary Baker had been appointed by President
Reagan as Chief of Staff to the President of the United States, a
position which he occupied from January 1981 through January 1985.
While at the White House he was a member of the National Security
Council and remains a member as Secretary of the Treasury. He is als
Chairman of the President's Economic Policy Council.
In 1980, Secretary Baker served as Senior Adviser to the
Reagan/Bush general election campaign. From January 1979 to May 1980
he was the Chairman of Vice President Bush's campaign for the 1980
Republican Presidential nomination.
Secretary Baker was the Republican Party's nominee for Attorney
General of the state of Texas in 1978. He is a native Houstonian and
practiced law there with the firm of Andrews & Kurth from 1957 to
1975.
In August 1975, Secretary Baker was appointed'by President Ford t
be'the Under Secretary of Commerce. Secretary Baker joined President
Ford's presidential campaign in May 1976 as Deputy Chairman for
Delegate Operations and in August became National Chairman of the
President Ford Committee.
Secretary Baker graduated from Princeton University in 1952.
After two years of active duty as a Lieutenant in the United States
Marine Corps he entered the University of Texas School of Law at
Austin. He received his J.D. with honors in 1957.
A member of the American, Texas and Houston Bar Associations, the
American Judicature Society, and the Phi Delta Phi honorary legal
fraternity, Secretary Baker also serves on the Board of Trustees of
the Woodrow Wilson International Center for Scholars at the
Smithsonian Institution. He has served on the governing bodies of th
Texas Children's Hospital and the M.D. Anderson Hospital and Tumor
Institute.
Secretary Baker has been the recipient of the Jefferson Award for
distinguished public service from the American Institute for Public
Service, an award for Distinguished Public Service from the John F.
Kennedy School of Government at Harvard and the Woodrow Wilson A w a M
for distinguished achievement in the nation's service from Princeton
University. Secretary Baker was selected in 1986 as a Distinguished
Alumnus of the University of Texas. He has received numerous honcar
degrees.
Secretary Baker was born April 28, 1930. He and his wife, the
former Susan Garrett, reside in Washington, D.C. They have eight
children.
B-635
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2C41
FOR RELEASE AT 4:00 P.M.
June 24, 1986
TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for two series of Treasury bills totaling approximately
$14,800 million, to be issued July 3, 1986.
This offering
will provide about $125
million of new cash for the Treasury, as
the maturing bills are outstanding in the amount of $14,673 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, June 30, 1986.
The two series offered are as follows:
91-day bills (to maturity date) for approximately $7,400
million, representing an additional amount of bills dated
October 3, 1985,
and to mature October 2, 1986
(CUSIP No.
912794 KR 4), currently outstanding in the amount of $15,447 million,
the additional and original bills to be freely interchangeable.
183-day bills for approximately $7,400 million, to be dated
July 3, 1986,
and to mature January 2, 1987
(CUSIP No.
912794 LQ 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 July 3, 1986.
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 $946
million as agents for foreign and international monetary authorities, and $3,732 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-636
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
tenders.
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
lepartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
June 24, 1986
RESULTS OF AUCTION OF 4-YEAR NOTES
The Department of the Treasury has accepted $7,389 million
of $31,930 million of tenders received from the public for the
4-year notes, Series P-199 0, auctioned today. The notes will be
issued June 30, 1986, and mature June 30, 1990.
The interest rate on the notes will be 7-1/4%. The range
of accepted competitive bids, and the corresponding prices at the
7-1/4% interest rate are as follows:
Yield
7.26%
7.26%
7.26%
Tenders at the high yield were allotted 40%.
Low
High
Average
Price
99.966
99.966
99.966
TENDERS RECEIVED AND ACCEPTED (In Thousands)
Location
Received
Accepted
Boston
$
27,316
$
7,316
New York
29,530,850
7,057,390
Philadelphia
11,519
11,519
Cleveland
15,989
15,989
Richmond
32,835
16,835
Atlanta
36,112
13,112
Chicago
1,382,762
118,762
St. Louis
85,331
56,731
Minneapolis
8,098
8,098
Kansas City
45,400
43,400
Dallas
11,006
5,006
San Francisco
741,872
33,672
Treasury
926
926
Totals
$31,930,016
$7,388,756
The $7,389 million of accepted tenders includes $384
million of noncompetitive tenders and $7,005 million of competitive tenders from the public.
In addition to the $7,389 million of tenders accepted in
the auction process, $325 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities. An additional $313 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-637
2041
TREASURY NEWS
Ipepartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
June 25, 1986
RESULTS OF AUCTION OF 7-YEAR NOTES
The Department of the Treasury has accepted $6,758 million
of $16,656 million of tenders received from the public for the
7-year notes, Series G-199 3, auctioned today. The notes will be
issued July 7, 1986, and mature July 15, 1993.
The interest rate on the notes will be 7-1/4%. The range
of accepted competitive bids, and the corresponding prices at the
7-1/4% interest rate are as follows:
Yield
Price
Low
7..26%
99..940
High
7..36%
99..399
Average
7.. J J "5
99..561
Tenders at the high yield were allotted 30%.
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
$
1,650
14,543,090
1,232
10,531
6,290
17,162
1,127,102
59,008
3,973
19,075
15,707
851,076
437
$16,656,333
Accepted
$
1,650
5,950,590
1,232
8,531
6,290
17,162
285,102
43,008
3,973
19,075
15,707
405,076
437
$6,757,833
The $6,758 million of accepted tenders includes $309
million of noncompetitive tenders and $6,449 million of competitive tenders from the public.
B-638
2041
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR IMMEDIATE RELEASE
June 26, 1986
CONTACT: Susanne Howard
566-2843
TREASURY SECRETARY BAKER
ANNOUNCES SELECTION OF DESIGNS
FOR UNITED STATES GOLD AND SILVER BULLION COINS
Secretary of the Treasury, James A. Baker III,
announced today the designs for the new U. S. gold and
silver bullion coins which will be issued this fall marking
this country's first entry into the bullion coin market.
All four denominations of gold coins - a Fifty Dollar
coin containing one fine ounce of gold, a Twenty-five Dollar
coin containing a half ounce, a Ten Dollar coin containing a
quarter ounce, and a Five Dollar coin containing one-tenth
ounce have the Augustus Saint-Gaudens obverse design of
Liberty used on U. S. Twenty Dollar gold pieces from 1907
until 1933. The reverse on each of the four new gold coins
features a "family of eagles" - a male eagle carrying an
olive branch flying above a nest containing a female eagle
and hatchlings - symbolizing the unity and family tradition
of America.
The Silver Liberty One Dollar coin has Adolph A.
Weinman's Walking Liberty design used on U. S. Half Dollar
coins from 1916 until 1947. The reverse design is a
rendition of a heraldic eagle with shield holding arrows in
one talon and an olive branch in the other.
Public Law 99-185 of December 17, 1985, the Gold
Bullion Coin Act of 1985, provides for the Treasury
Department to mint and issue gold bullion coins in
quantities sufficient to meet public demand. The Act
specifies that the obverse design of the Fifty Dollar gold
coin shall have a design symbolic of Liberty and a reverse
design representing a family of eagles. The Liberty Coin
Act of July 9, 1985, provided for the striking and issuance
of silver One Dollar coins to meet the demand of the public,
and calls for a symbol of Liberty on the obverse side and an
eagle on the reverse.
There have been some minor refinements to the
Saint-Gaudens double eagle Liberty design which will appear
on the gold coins, the most noticeable being the increase in
B-639
- 2 the number of stars around the border to fifty (50). The
coin had a border of forty-six (46) stars on the obverse
from 1907 to 1911 and forty-eight (48) stars from 1912 to
1933. Roman numerals will be used to designate the year of
issue. Augustus Saint-Gaudens1 initials appear on the
design. Matthew Peloso, a Mint Sculptor and Engraver,
executed the model.
Mrs. Miley Busiek, an artist from Dallas, Texas,
prepared and furnished to the Department a "family of
eagles" design which appears on all four denominations of
gold coins. She worked with U. S. Mint Sculptors/Engravers
in simplifying and refining her design to be adaptable for
use on the bullion coins. Sherl J. Winter, a Mint Sculptor
and Engraver, executed the model and his initials will
appear on the reverse as well as those of Mrs. Busiek.
On the original Walking Liberty Half Dollars, Adolph A.
Weinman's monogram appeared on the reverse of the coin. On
the Silver Liberty One Dollar bullion coin-his monogram has
been added to the obverse design. Edgar Steever, a Mint
Sculptor and Engraver, executed the model.
Unlike earlier U. S. Silver Dollars which are 1-1/2
inches in diameter and contain a little over three quarters
of an ounce of fine silver, the new U. S. Silver Liberty One
Dollar bullion coin is slightly larger in diameter and
contains one fine ounce of silver. John Mercanti, a Mint
Sculptor and Engraver, prepared the heraldic eagle design
and executed the model. His initials will appear on the
reverse.
In accordance with the Gold Bullion Coin Act and the
Liberty Coin Act, the Department will issue both the gold
and silver bullion coins on October 1, 1986.
TREASURY NEWS
department of the Treasury • Washington, D.C. • Telephone 566-2041
For Release Upon Delivery
June 19, 1986 2:00 P.M. EDT
llemarks of
David D. Queen
Deputy Assistant Secretary of Enforcement
Department of the Treasury
before the
House Select Committee on
•arcotlcs Abuse and Control
and
House Foreign Affairs Committee
Task Force on International
Narcotics Control
Mr. Chairman, the Treasury Department is pleased to have
this opportunity to appear before you to address the issue of
international drug trafficking, narcotics related money
laundering and other activities associated with the illicit
narcotics trade.
In the past decade illegal drug trafficking has increased
dramatically, with a corresponding increase in crimes associated
with it. President Reagan has identified the interdiction of
illegal drugs as one of the major priorities of this
administration. In support of this commitment the United States
has allocated substantial law enforcement and prosecutorial
resources to impede the flow of drugs and moneys associated with
this illegal activity across our borders. As you may be aware,
the Treasury Department and its law enforcement agencies has
taken an equally firm stand to put narcotics interdiction
squarely at the top of our international law enforcement agenda.
We have repeatedly stated in every available forum that drug
trafficking is a problem that cannot be solved by any one person,
agency or Government. It must be attacked on all fronts and with
every tool at our command, including the cooperation and
assistance of our allies.
B-640
- 2Treasury has primary responsibility for enforcing the "Bank
Records and Foreign Transactions Act", commonly referred to as
the "Bank Secrecy Act." The Act authorizes the Secretary of the
Treasury to require certain reports and records where they are
unlikely to have a high degree of usefulness in criminal, tax or
regulatory investigations or proceedings. Under the Act,
Treasury is responsible for monitoring the flow of currency in
and out of the United States through the use of the reporting
requirements. In addition, this law permits us to monitor and
require the reporting of large cash transactions at domestic
financial institutions.
Our experience in this area indicates that illegal drug
trafficking, and the money laundering associated with it,
requires the use of sophisticated financial arrangements
involving the movement of large sums of cash. In many instances
the financial institutions and systems that are used for these
activities have no knowledge that they are being used to launder
money.
Early in 1983, the Treasury Department became aware of an
unusual flow of U.S. currency from the Banco Nacional de Panama
(National Bank of Panama) to the Federal Reserve Bank offices in
New York and Miami. Based on the data we were able to compile,
it revealed that from 1980 through 1984 approximately $3.5
billion (primarily small bills) was shipped from Panama to the
United States. In contrast the Federal Reserve Banks shipped to
Panama $500 million in replacement currency during the same
period, showing an immense cash surplus. Although U.S.
Government agencies had received information for a number of
years indicating that major drug traffickers or money launderers
were using Panamanian banks or shell corporations to conceal
their financial transactions, we were previously unaware of the
magnitude and growth of the transactions being channeled through
Panama.
Although our most recent data indicates the currency flow
from the Banco Nacional de Panama appears to have decreased, it
is still running at a very high level. It is our belief, based
on data from the Forms 4789 (Currency Transaction Report - IRS)
and 4790 (Currency & Monetary Instruments Report - Customs) filed
with us, that much of this money is from illegal activities,
mainly drug trafficking.
Panama is particularly vulnerable to money launderers for
two reasons: geography and its banking system. Geographically
Panama is the crossroad between the two continents, North and
South America. With the exception of Mexican marijuana and
heroin, which are produced adjacent to its market, Central
America and the many islands in the Caribbean provide the bridge
traveled by Latin American drugs en route to markets in the
United States and Europe.
In the opposite direction a stream of money flows back to
reimburse participants at the various stages of the production
and trafficking process and to pay for the equipment and
protection needed to move the various products to their
destinations.
- 3-
The flow pattern of drug money is motivated by many of the
same considerations that govern the disposition of other liquid
assets. Like legitimate money, narco-dollars tend to seek the
Highest rate of return and the lowest rate of taxation consistent
with other considerations, such as secrecy and the ease to which
narco-dollars may be disguised as legitimate dollars. While
Panama is smaller geographically and in population than the State
of New Jersey, it has over a 123 banks operating within its
borders, and can justifiably proclaim itself the major financial
center for Latin America. Approximately 70 of these financial
institutions are associated with 26 foreign countries, including:
U.S. - 14, Japan - 9, France - 6, Switzerland - 5, Canada - 3,
Columbia - 2 etc. The facilities through which narco-dollars may
be laundered or disguised as legitimate dollars are abundant.
A common hazard shared by drug traffickers is fluctuation in
the relative value of currencies. Since the most likely exchange
rate movement is devaluation of nonconvertible currency,
traffickers try to hold their funds in hard currency (preferably
U.S. dollars) as long as possible. The balboa, the Panamanian
unit of currency, is at par with and equivalent to the U.S.
dollar. Panama issues no paper currency. The U.S. dollar serves
as the circulating medium of paper currency, making it almost
impossible to segregate narco-dollars from legitimate dollars.
Drug money movements are susceptible to special problems.
Like illicit drugs, narco-dollars are a form of contraband, which
places an exceptionally high premium on secrecy of movement. It
is no secret that Panama has perhaps the most stringent bank
secrecy laws of any country in the region. Indeed, much of its
success as a banking center is directly attributable to the
strict confidentiality inherent in its bank secrecy laws and
numbered accounts which are major ingredients in the system.
While the picture I have painted may appear somewhat dismal,
I am pleased to report that we are engaged in discussions aimed
at addressing these problems. During my tenure as Deputy
Assistant Secretary I have had the opportunity to discuss this
problem with my law enforcement colleagues at Justice and State,
and our counterparts within the Government of Panama. The
Panamanians have built a record of informal cooperation and
assistance to the United States in law enforcement matters (e.g.
extradition, search and seizure of Panamanian flag-ships, etc.).
It is clear that illegal drug trafficking has important
implications for the national interests of our respective
countries. I believe this concern is shared by civilian
officials at the highest level of the Panamanian Government with
whom we have dealt. Building on the tradition of informal law
enforcement cooperation that Panama has established, I am hopeful
This
my formal
remarks,
I would
be pleased
to
that as
ourconcludes
discussions
continue
the United
States
and Panama
address
any question
the aCommittee
have. this problem may be
will
be able
to develop
framework may
through
addressed.
TREASURY NEWS
department of the Treasury • Washington, D.c. • Telephone 566-2041
FOR RELEASE AT 12:00 NOON
TREASURY'S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice, invites
tenders for approximately $9,500
million of 364-day Treasury bills
to be dated July 10, 1986,
and to mature July 9, 1987
(CUSIP No. 912794 MT 8 ) . This issue will provide about $975
million of new cash for the Treasury, as the maturing 52-week bill
is outstanding in the amount of $8,514
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, July 8, 1986.
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 July 10, 1986.
In addition to the
maturing 52-week bills, there are $14,500 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 $1,816 million as agents for foreign
and international monetary authorities, and $5,388 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 $100
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-641
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 12s30 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.
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
apartment of the Treasury • Washington, D.c. • Telephone
FOR IMMEDIATE RELEASE
June 30, 1986
RESULTS OF TREASURY'S WEEKLY BILL AUCTIONS
Tenders for^$7,401 million of 13-week bills and for $7,411 million
of 26-week bills', both to be issued on July 3, 1986,
were accepted today.
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average
13-week bills
maturing October 2, 1986
Discount Investment
Rate
Rate 1/
Price
5.96%
6.00%
5.99%
6.14%
6.18%
6.17%
98.493
98.483
98.486
26- week bills
maturing January 2, 1987
Discount Investment
Rate 1/
Price
Rate
5.94% a/
5.97%
5.96%
:
6.21%
6.24%
6.23%
96.981
96.965
96.970
a/ Excepting 1 tender of $325,000
Tenders at the high discount rate for the 13-week bills were allotted 23'
Tenders at the high discount rate for the 26-week bills were allotted 46^
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
Federal Reserve
Foreign Official
Institutions
TOTALS
$
38,275
19,842,855
30,035
41,375
38,155
38,985
1,375,715
37,215
17,250
52,570
37,405
1,457,915
305,360
$
36,255
20,564,465
20,385
28,000
43,720
36,475
1,456,940
35,190
17,650
62,655
27,375
485,795
296,845
36,255
$
6 ,285,385
$
38,275
5,461,755
30,035
41,375
38,155
38,985
149,165
21,215
13,400
52,570
33,555
1,176,715
305,360
Accepted
20,385
28,000
43,720
35,475
299,535
19,190
14,950
59,575
24,675
247,015
296,845
$23,313,110
$7,400,560
: $23,111,750
$7 ,411,005
$20,248,685
1,043,030
$21,291,715
$4,336,135
1,043,030
$5,379,165
. $19,596,310
:
858,375
$20,454,685
$3 ,895,565
1,890,010
1,890,010
:
1,850,000
1,850,000
131,385
131,385
:
807,065
807,065
$23,313,110
$7,400,560
: $23,111,750
$7 ,411,005
858,375
$4 ,753,940
An additional $59,515 thousand of 13-week bills and an additional $401,835
thousand of 26-week bills will be issued to foreign official institutions for
new cash.
1/ Equivalent coupon-issue yield.
B-642
2167
WERT
BOOKBINDING
@FedFRASER