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RESULTS OF TREASURY'S AUCTION QF 13-WEEK BILLS
EPT. OF THE TREAoUKT
Tenders for $10,411 million of 13-week bills to be issued
July 25, 1991 and to mature October 24, 1991 were
accepted today (CUSIPs 912794WV2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.57%
5.60%
5.60%

Investment
Rate_____Price
5.74%
98.592
5.78%
98.584
5.78%
98.584

Tenders at the high discount rate were allotted 74%.
The investment rate is the equivalent coupon—issue yield.
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
38,770
28,505,890
27,430
35,415
53,130
31,605
1,759,810
57,715
11,070
31,570
23,595
615,165
908.665
$32,099,830

AcceDted
38,770
8,679,510
27,430
35,375
53,130
31,085
366,210
17,715
11,070
31,570
23,595
186,565
908.665
$10,410,690

Type
Competitive
Noncompetitive
Subtota1, Public

$27,894,875
1.675.045
$29,569,920

$6,205,735
1.675.045
$7,880,780

2,467,460

62.450
$32,099,830

62.450
$10,410,690

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $67,350 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1378

PU BLIC DEBT NEWS
J B R A R Y ROOM
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

cgjN^djdQ

FOR IMMEDIATE RELEASE
July 22, 1991

RESULTS OF TREASURY'S AUCTION.0? y$£-yWEEKj

|of Financing
202-376-4350
LLS

Tenders for $10,442 million of 26-week bills to be issued
July 25, 1991 and to mature January 23, 1992 were
accepted today (CUSIP: 912794XW9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.70%
5.72%
5.72%

Investment
Rate_____Price
5.97%
97.118
5.99%
97.108
5.99%
97.108

Tenders at the high discount rate were allotted 70%.
The investment rate is the equivalent coupon-issue yield.
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
32,405
28,762,245
17,305
29,405
44,310
32,085
1,700,940
35,835
7,250
39,570
17,815
877,875
759.030
$32,356,070

Accented
32,405
8,790,335
17,305
29,405
42,310
31,785
332,940
19,335
7,250
39,570
17,815
322,875
759.030
$10,442,360

Type
Competitive
Noncompetitive
Subtotal, Public

$27,921,775
1.376.345
$29,298,120

$6,008,065
1.376.345
$7,384,410

2,600,000

457.950
$32,356,070

457.950
$10,442,360

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $469, 450 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1379

Department o f the Treasury • Washington,

D.c. • Telephone 566*2041

For Release Upon Delivery
Expected at 10:00 a.m.
July 23, 1991

STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Committee:
I
am pleased to present the views of the Administration on
H.R. 2777, the Tax Simplification Act of 1991, H.R. 2775,
relating to additional tax simplification, and H.R. 1555, the
Technical Corrections Act of 1991.
The Administration strongly supports simplification of our
tax laws within the fiscal constraints of last year's budget
agreement.
The benefits of tax law simplification are obvious.
When the law is simpler and easier to understand, compliance and
enforcement improve and unnecessary disputes are avoided.
Simplification reduces taxpayer compliance burdens and, by better
assuring more uniform interpretation and administration, improves
taxpayer morale.
When simplification efforts are successful, we
believe that there should be efficiency gains as well.
Against
these benefits of simplification must be weighed the greater
precision which may be achieved by more detailed provisions and
the not insubstantial benefits of statutory repose.
Our general
conclusion with respect to most of the proposals before the
Committee today is that they will simplify the law, that they are
net improvement over the more complicated provisions they
replace, and that the benefits are sufficient to justify change
at this time.
Where we believe this is not the case, my written
statement sets forth the reasons for our opposition or
reservations.
/

The bills I will review today demonstrate that revenuegaining and revenue-losing simplification proposals can be
combined to achieve meaningful simplification without overall
revenue loss.
Specifically, the Treasury's Office of Tax
NB 1380

2
Analysis estimates that H.R. 2777 is, in its current form, near
revenue neutrality (loss of $88 million in fiscal 1992 and $42
million over the 5-year budget period). Similarly, if section
101 of H.R. 2775 is excluded, that bill is also nearly revenue
neutral (loss of $37 million in fiscal 1992 and a gain of $376
million over the 5-year budget period). While the Administration
will insist that the simplification bills must ultimately satisfy
the pay-as-you-go provision, these revenue figures for the bills
demonstrate that that constraint can be satisfied.
Where we
believe particular proposals in the bill will provide significant
simplification but have significant revenue cost, we have
qualified our support as subject to an acceptable offset being
provided.
Before proceeding to the substance of the bills, I also wish
to commend the Committee and its leadership for the manner in
which this legislation has been developed.
Working from numerous
suggestions from the public and the Government, all the staffs of
the tax-writing committees, the Joint Committee on Taxation, and
the Treasury have worked together to develop these proposals.
H.R. 2777 (and its Senate counterpart, S. 1394) enjoys bi
partisan sponsorship in both Houses.
The early introduction of
legislative language by Chairman Rostenkowski and Mr. Archer will
allow all of us to benefit from thoughtful public comment on
these bills.
I believe that legislation produced in this manner
is clearly better for its development in such a process.
While H.R. 2775 contains several commendable simplification
proposals, the Administration does not support the bill in its
current form.
As noted in my written statement, we particularly
oppose — on both policy and budgetary grounds — the proposed
repeal of the young child credit and the increase in the family
size adjustment to the basic earned income tax credit.
We support the technical corrections set forth in H.R. 1555
to the tax provisions of the 1990 Omnibus Budget Reconciliation
Act (1990 OBRA). We agree that the provisions are technical and
that they do not involve any loss of revenue.
We note, however,
that additional technical corrections may ultimately be required.
The remainder of my written statement is a detailed
discussion of the provisions contained in H.R. 2777 or H.R. 2775,
other than those relating to simplification of the tax-exempt
bond rules and the reporting and audit requirements for large
partnerships.
Those provisions will be discussed in testimony
before the Subcommittee on Select Revenue Measures at separately
scheduled hearings.

3
A. ANALYSIS OF CERTAIN PROVISIONS O F H . R . 2777,
THE TAX SIMPLIFICATION ACT OF 1991
TITLE ii INDIVIDUAL TAX PROVISIONS
1.

Rollover of Gain on Sale of Principal Residence:
Rules
Relating to Multiple Sales Within Rollover Period

Current law. No gain is recognized on the sale of a
principal residence if a new residence at least equal in cost to
the sales price of the old residence is purchased and used by the
taxpayer as his principal residence within a specified period of
time.
This replacement period generally begins 2 years before
and ends 2 years after the date of sale of the old residence.
In
general, nonrecognition treatment is available only once during
any 2-year period.
In addition, if during the replacement period
the taxpayer purchases more than one residence which is used as
his principal residence within 2 years after the date of sale of
the old residence, only the last residence so used is treated as
the new replacement residence.
However, if residences are sold
in order to relocate for employment reasons, two special rules
apply: first, the number of times nonrecognition treatment is
available during a 2-year period is not limited; second, if a
residence is sold within 2 years after the sale of the old
residence, the residence sold is treated as the last residence
used by the taxpayer and thus as the only replacement residence.
Proposal. Gain would be rolled over from one residence to
another residence in the order the residences are purchased and
used, regardless of the taxpayer's reasons for the sale of the
old residence.
In addition, gain could be rolled over more than
once within a 2-year period.
Thus, the rules that formerly
applied only if a taxpayer sold his residence in order to
relocate for employment purposes would apply in all cases.
Administration position. The Administration supports this
provision. The provision simplifies the application of section
1034 by amending it to provide a single set of rules for rollover
of gain on the sale of a principal residence.
2.

Due Dates for Estimated Taxes of Individuals

4
Administration position. We do not support this proposal.
It entails a cost to the government, which would receive the
second installment of estimated tax at a later date (thereby
foregoing investment earnings on the funds or incurring interest
expense on additional borrowings) and would have to revise tax
forms and processing capabilities to accommodate the change.
The
proposal would not meaningfully simplify the law. The intervals
between due dates for installments of individual estimated taxes
would remain uneven; the 2-month interval that currently exists
between the first (April 15) and second (June 15) installments
would be replaced by a 2-month interval between the new second
(July 15) and third (September 15) installments.
3.

Payment of Tax bv Credit Card

Current law. Payment of taxes may be made by checks or
money orders, to the extent and under the conditions provided by
regulations.
Proposal. The bill would permit payment of taxes by checks,
money orders and other commercially acceptable means that the
Secretary of the Treasury deems appropriate (including payment by
credit card) to the extent and under the conditions provided by
regulations.
In addition, the Secretary would be given the
authority to contract with financial institutions for credit card
services at rates that are cost beneficial to the Government.
Administration position. The Administration supports these
grants of authority.
Allowing taxpayers to use credit cards to
make tax payments would provide them with an additional option
for payment that they have in most other debtor/creditor
relationships.
The proposal also allows flexibility to permit
other commercially acceptable forms of payment.
4.

Election to Include Child's Income on Parent's Return

Current law. The net unearned income of a child under 14
years of age is taxed at the marginal rate of the child's
parents.
If the child's gross income is solely from interest and
dividends and is more than $500 and less than $5,000, the parents
may elect to report the child's gross income in excess of $1,000
on their return.
If the election is made, in addition to the tax
on the augmented income, the parents pay the lesser of $75 or 15
percent of the excess of the child's gross income over $500.
For
purposes of the alternative minimum tax (AMT), the AMT exemption
of a child under the age of 14 is limited to the sum of the
child's earned income and the greater of $1,000 or the unused
parental minimum tax exemption.

Proposal. The dollar amounts relating to the election to
include the child's income on the return of the parents would be
indexed for inflation.
In addition, the $1,000 amount used to
determine the amount of the child's AMT exemption would be
indexed for inflation.
Administration position. The Administration supports this
provision.
Adjusting for inflation for purposes of the election
will prevent inflation from eroding the availability of the
election over time.
Because the election reduces the need to
file separate returns for young children, preserving the
availability of the election simplifies the filing process.
5.

Certain Foreign Tax Credits for Individuals

Current law. In order to compute the foreign tax credit, a
taxpayer computes foreign source taxable income, and foreign
taxes paid, in each of the applicable separate foreign tax credit
limitation categories.
In the case of an individual, this
requires the filing of Form 1116, designed to elicit sufficient
information to perform the necessary calculations.
Proposal. On an elective basis, the proposal would
eliminate the need for individual taxpayers with less than $200
in creditable foreign taxes to file a Form 1116 or to allocate
and apportion expenses to their passive foreign source income
reported on a Form 1099.
In order to permit the simplified
calculation, an electing taxpayer's credit would be limited to
the lesser of 25 percent of such passive foreign source income or
the total foreign taxes paid.
Administration position. We support this proposal.
The
bill would simplify the foreign tax credit computations for
individuals claiming small amounts of credits.
6.

Certain Personal Foreign Currency Transactions

Current law. When a U.S. taxpayer having the U.S. dollar
as his functional currency makes a payment in a foreign currency,
gain or loss (referred to as "exchange gain or loss") arises from
any change in the value of the foreign currency relative to the
U.S. dollar between the time the currency was acquired (or the
obligation to pay was incurred) and the time that the payment is
made.
Gain or loss results because foreign currency, unlike the
U.S. dollar, is treated as property for Federal income tax
purposes.
Exchange gain or loss can arise where foreign currency
has been acquired for personal use.
Proposal. The bill would exempt from taxation exchange
gains not exceeding $200 realized by individuals on the

disposition of foreign currency in personal transactions.
on such transactions are not allowed under current law.

Losses

Administration position. We support this proposal.
Taxpayers located abroad generally must conduct their affairs ^in
the local currency.
Under current law, taxpayers may be required
to recognize exchange gains on dispositions of foreign currency
in personal transactions.
We agree with the Committee that, m
de minimis cases, this imposes unreasonable administrative
demands on taxpayers, and that the insignificant amount of
revenue collected from such transactions does not justify this
administrative burden.
7.

Due Date for Furnishing Information to Partners

Current law. Partnerships are required to furnish an
information return (Schedule K-l) to each person who is a partner
for any partnership taxable year on or before the day on which
the return for such taxable year is required to be filed (April
15 for a calendar year partnership).
Proposal. A large partnership (which is a partnership with
250 or more partners or any partnership subject to the simplified
reporting rules for large partnerships proposed in H.R. 2777)
would be required to furnish information returns to its partners
by the 15th day of the third month following the end of its
taxable year (March 15, for a calendar year partnership).
Administration position. We support this proposal insofar
as it applies to simplified Schedules K-l issued by large
partnerships as described in §201 of the bill.
Information
returns that are received on or shortly before April 15 are
difficult for individuals to use in preparing their returns or
computing their payments that are due on that date.
It may thus
be appropriate to accelerate this date- in the case of large
partnerships whose tax treatment is being modified (in Title II
of this bill) in order to simplify the tax consequences of an
investment in the partnership. We question, however, whether |
this requirement should be extended to partnerships which remain
subject to detailed Schedule K —1 reporting or to Schedule K —1 s
issued to excluded partners of large partnerships.
8.

Exclusion of Combat Pav from Withhold ing Limited to Amount
Excludable From Gross Income

7
commissioned officers, these exclusions from income are limited
to $500 per month of military pay.
There is no income tax withholding with respect to military
pay for a month in which a member of the Armed Forces is entitled
to the combat pay exclusion. With respect to enlisted personnel,
this income tax withholding parallels the exclusion: there is a
total exemption from income tax withholding and total exclusion
from income. With respect to officers, however, the withholding
rule is not parallel: there is total exemption from income tax
withholding, although the exclusion from income is limited to
$500 per month.
Proposal. The proposal would make the income tax
withholding exemption rules parallel to the rules providing an
exclusion from income for combat pay.
Administration position. We support this proposal.
The
current differences between the withholding rules and the
exclusion rules with respect to combat pay can lead to
underwithholding on the pay of taxpayers (primarily officers) and
could cause hardship at the time of the filing of their tax
returns.
9.

Simplified Income Tax Returns

Current law. The Treasury Department and the Internal
Revenue Service continually study ways to simplify reporting for
individuals, both itemizers and nonitemizers.
Proposal. The bill would require the Secretary (or his
delegate) to take such actions as may be appropriate to expand
access to simplified individual income-tax returns and otherwise
simplify the individual income tax returns.
The bill would
mandate that the Secretary (or his delegate) submit a report no
later than 1 year after enactment on such actions.
Administration position. We do not oppose this proposal.
It mandates that the Treasury Department and the Internal Revenue
Service continue existing and continuous activities ^to evaluate
tax forms to make them easier to understand and to improve
compliance.
We do not believe a formal study should be required.

10.

Rural Letter Carriers

8
number of miles driven for business purposes, and is taken in
lieu of deductions for depreciation and actual operation and
maintenance expenses.
If the taxpayer is an employee, the
deduction is subject to the 2-percent floor on miscellaneous
itemized deductions.
If the taxpayer's employer reimburses the taxpayer under an
accountable plan for his actual expenses, the reimbursement is
excluded from the taxpayer's income. A plan is accountable if it
meets requirements of business connection, substantiation, and
returning amounts in excess of expenses.
Rather than requiring
an employee to substantiate the actual amount of his expense, the
employer can provide a mileage allowance.
If a mileage allowance
is paid at a rate not in excess of the standard mileage rate, the
reimbursement is excluded from the taxpayer's income.
If the
mileage allowance is paid at a rate in excess of the standard
mileage rate, the excess is included in the taxpayer's income
(and is subject to reporting and withholding).
An employee of the U.S. Postal Service may use a special
mileage rate equal to 150 percent of the standard mileage rate in
computing the deduction for business use of an automobile in
performing services involving the collection and delivery of mail
on a rural route.
Proposal. The bill would repeal the special mileage rate
for U.S. Postal Service employees.
In its place, the bill would
provide that the rate of reimbursement provided by the Postal
Service to rural letter carriers under their 1991 collective
bargaining agreement is considered to be equivalent to their
actual expenses.
This rate can be increased in the future by no
more than the rate of inflation.
The bill also would provide
that the reimbursements are exempt from the accountable plan
requirements.
Administration position. The Administration does not
oppose the proposal insofar as it treats the reimbursements for
automobile expenses provided to rural letter carriers as being
equal to their actual expenses. The Administration believes,
however, that the reimbursements should be subject to the
accountable plan requirements.
These requirements do not impose
an undue burden on the Postal Service or rural letter carriers.
11.

Exemption From Luxury Excise Tax For Certain Equipment
Installed On Passenger Vehicles For Use Bv Disabled
Individuals

Current law. The 1990 OBRA imposed a 10—percent excise tax
on the portion of the retail price of a passenger vehicle that
exceeds $30,000.
The tax also applies to the installation of

9
parts and accessories within 6 months of the date the vehicle is
purchased.
Proposal. The bill would provide that the luxury excise
tax does not apply to a part or accessory that is installed on a
passenger vehicle after its purchase in order to enable or assist
an individual with a disability to operate the vehicle or to
enter or exit the vehicle by compensating for the effect of the
disability.
The tax would continue to apply to the portion of
the retail price of the vehicle that exceeds $30,000, even if the
purchaser is disabled and/or intends to make modifications to the
vehicle that under the proposal would be exempt from the tax.
Administration position. We support the proposal.
We
would modify the proposed language slightly in order to clarify
that Congress intends the proposal also to apply to structural or
mechanical modifications to a vehicle that make the vehicle
usable by a disabled person but that may involve the removal or
rearrangement, rather than the addition, of parts.
We understand that the proposal is not intended to exclude
from the luxury tax accessories such as cruise control,
adjustable steering columns, power-adjustable seats, or power
windows, door locks, mirrors or sunroofs that are commonly
available as optional equipment from the manufacturer or dealer
and that might assist any driver in operating the vehicle.
TITLE II. TREATMENT OF LARGE PARTNERSHIPS
To be covered in testimony before the Subcommittee on
Select Revenue Measures.
TITLE III. FOREIGN PROVISIONS
1.

Deferral of Tax on Income Earned Through Foreign
Corporations and Exceptions to Deferral

tax liability for foreign-earned passive income.
Two of the
regimes were designed primarily to attack non-business-related
accumulations by domestic corporations; they impose a penalty tax
at the corporate level.
The other four regimes were targeted
specifically at accumulations by foreign corporations and apply
at the shareholder level.
These various regimes were enacted
over a period of 60 years and are not adequately coordinated.
Proposal. The bill would consolidate the anti-deferral
rules applicable to foreign corporations earning substantial
amounts of passive income.
Administration position. We support the proposal in the
bill as a substantial simplification of the current statutory
scheme.
Under the bill, taxpayers will no longer have to contend
with the overlap and inconsistencies among the multiple regimes.
Instead, shareholders will be taxed under a single integrated
regime which provides one of three methods of tax, depending on
the extent of U.S. ownership of the foreign corporation and
whether its stock is publicly traded.
The single regime applies to passive foreign corporations
(PFCs). A PFC is defined in a way that eliminates overlap and
potential inconsistencies between the current PFIC and foreign
personal holding company regimes.
All shareholders of
U.S.-controlled PFCs, and large shareholders and electing small
shareholders of foreion-controlled PFCs, will be taxed currently
under the existing Subpart F rules.
This will cover most if not
all of U.S. corporate participation in multinational enterprises.
Non-electing small shareholders of foreign-controlled PFCs will
pay tax annually on a "mark-to-market” basis if their PFC stock
is publicly traded, and will be taxed under rules similar to the
so-called "interest charge" rules of the current PFIC regime if
their PFC stock is not publicly traded.
2.

Modifications to Provisions Affecting Controlled Foreign
Corporations

Current law. A United States shareholder is taxed
currently on its pro rata share of a controlled foreign
corporation's (CFCs) Subpart F income and is allowed a
corresponding increase in its basis in the CFCs stock. When the
CFCs earnings attributable to such Subpart F inclusions are later
distributed, the dividends are excluded from the shareholder's
income to avoid double taxation of the previously taxed amounts.
A shareholder receiving the distributions is permitted to make
special adjustments to allow it to claim credits for foreign
taxes paid with respect to the distribution.
If the United
States shareholder sells its stock in the CFC, all or a portion
of the gain on the sale may be recharacterized as a dividend; to
the extent so recharacterized, the foreign tax credit rules

11
apply, in many respects, as if the shareholder had received an
actual dividend from the CFC.
Proposal. The bill contains a number of amendments to the
rules for taxing U.S. shareholders of CFCs.
In general, these
amendments are aimed at reducing the possibility of excessive
taxation of foreign earnings.
In one instance the amendments
would repeal (subject to transition rules) a provision that
imposes substantial recordkeeping requirements on foreign
corporations and their shareholders while conferring what appears
to be a relatively minor benefit.
Administration position. We support these proposals as
further implementing the existing general policy under Subpart F
that the income of a CFC, having once been taxed to its United
States shareholders, should not be taxed again. We note that the
proposals give discretion to the Secretary in certain cases to
take administrative or other concerns into account in
implementing the proposals through the issuance of regulations.
Although the proposed repeal of section 960(a)(3) may increase
the tax burden on certain income earned through a CFC, we believe
that this increased burden is likely to be minor (especially in
view of the transition rules) and is outweighed by the
substantial reduction in complexity.
3.

Translation of Foreign Taxes into U.S. Dollar Amounts

Current law. Section 986(a) requires foreign taxes, paid
in a foreign currency, to be translated into U.S. dollars for
purposes of claiming a foreign tax credit at the exchange rate on
the date of tax payment. Many U.S. multinationals have
complained that the "date of payment" rule imposes a significant
administrative burden, without promoting any substantial U.S. tax
policy interest.
The burden arises from the taxpayer's need, in
many cases, to determine the foreign exchange rate for a very
large number of separate tax payments made in different
currencies on different dates, and then maintain appropriate
records for these payments and exchange rates.
Proposal. The bill would give the Secretary the authority
to permit use of an average exchange rate for an appropriate
period, determined by regulation, rather than the exchange rate
on the specific payment date.
Administration position. We support the bill's solution to
this problem.
Use of an average rate may not always be
appropriate — for example, in hyperinflationary currencies.
The
bill will permit us to write regulations providing sensible
answers to practical problems, without reopening the policy
debate settled by the 1986 Tax Reform Act.

Foreign Tax Credit Limitation Under the Alternative Minimum
Tax

Current law. A U.S. taxpayer claiming a foreign tax credit
must compute its taxable income from foreign sources as well as
its overall, or worldwide, taxable income. Moreover, this
computation must be done for each of several foreign tax credit
"baskets" of income.
To compute its foreign source taxable
income within each of these baskets, the taxpayer must allocate
and apportion its expenses.
This procedure is complex and
time-consuming, but it is fundamental to the correct operation of
the foreign tax credit rules.
In addition to these computations,
a taxpayer may also be required to compute its foreign tax credit
for alternative minimum tax purposes.
Since taxable income for
AMT purposes is different from taxable income for regular tax
purposes, this requires a recomputation of foreign source taxable
income, and therefore a reallocation and apportionment of
expenses, in each of the foreign tax credit baskets.
Proposal. The bill would simplify the AMT foreign tax
credit computation by permitting the taxpayer to elect to use its
regular, rather than its AMT, foreign source taxable income in
each of the baskets.
Administration position. We support the proposal.
In many
cases we believe that there will not be significant differences
between a taxpayer's regular versus its AMT foreign source
taxable income in the different baskets. Where there may be
significant differences, the taxpayer need not elect the new
rule.
In this regard, it is important to note that the election
must be made once, for all future taxable years.
This is an
appropriate limitation: it will prevent taxpayers from engaging
in costly and complex computations of both AMT and regular
foreign source taxable income each year to determine whether the
election, in that year, would be cost effective.
TITLE IV. OTHER INCOME TAX PROVISIONS
A. S Corporations
1.

Determination of Whether an S Corporation Has One Class of
Stock

Current law. A corporation is not a small business
corporation, and therefore cannot elect S corporation status, if
the corporation has more than one class of stock.
Differences in
voting rights are disregarded in determining if a corporation has
more than one class of stock and debt instruments meeting the
requirements of a safe harbor are not treated as a second class
of stock.
The Code and legislative history do not provide any

13
other guidance as to what may or may not constitute a second
class of stock.
Proposal. A corporation is treated as having only one
class of stock if all outstanding shares of stock of the
corporation confer identical rights to distribution and
liquidation proceeds.
The determination of whether the
outstanding shares of a corporation confer identical rights is
made taking into account rights arising under the corporate
charter, activities of incorporation or by-laws, legal
requirements, administrative actions, and any agreements that are
legally enforceable under state law.
The provision does not
limit the Internal Revenue Service's ability to properly
characterize S corporation transactions for Federal income tax
purposes.
Administration position. The Administration supports this
provision.
The provision clarifies the intended scope of the one
class of stock requirement.
A new set of proposed regulations
consistent with this provision will soon be issued.
2.

Authority to Validate Certain Invalid Elections

Current law. S corporation status is not automatic for
qualifying corporations.
All of the shareholders of a small
business corporation must consent to the election of the
corporation to be an S corporation.
The election may be made by
a small business corporation for any tax year at any time during
the preceding tax year or at any time on or before the 15th day
of the third month of the current tax year. Any late election
made after the 15th day of the third month is treated as an
election for the following tax year. Moreover, where an election
timely made during the current tax year is invalid for that year
because one or more of the shareholders failed to consent to the
election, or because the corporation had too many shareholders,
an ineligible shareholder, or more than one class of stock, the
election will be treated as having been made for the following
tax year if the impediment is removed.
Proposal. The Internal Revenue Service would be given
authority to waive the effect of an invalid election caused by
the inadvertent failure to qualify as a small business
corporation or to obtain the required shareholder consents.
The
Internal Revenue Service would also be authorized to validate an
untimely election where the untimeliness is due to reasonable
cause.
Administration position. The Administration supports this
provision.
It would allow the Internal Revenue Service to
provide an administrative remedy for untimely or invalid
elections in appropriate circumstances.

14
3.

Treatment of Distributions bv S Corporations During Loss
Year

Current lav. The total amount of a shareholder's portion
of the losses and deductions of an S corporation may be taken
into account by the shareholder only to the extent that the total
does not exceed the basis of his stock and the basis of
indebtedness owed to the shareholder by the corporation.
Any
loss or deduction that is disallowed may be carried over
indefinitely.
Distributions by an S corporation generally are treated as
a nontaxable return of capital to the extent of a shareholder's
basis in his or her stock.
The shareholder's stock basis is
reduced, but not below zero, by the tax-free amount of the
distribution.
Any distribution in excess of the shareholder's
basis is treated as a capital gain.
The basis of each shareholder's stock in an S corporation
is increased by his or her pro rata share of certain items ^of
income and decreased by his or her pro rata share of certain
items of loss and deduction.
Current law is unclear as to
whether adjustments to basis for income, loss and deduction items
must take place before or after adjustments for distributions.
If the loss and deduction items reduce basis more than the income
items increase basis, making such adjustments to basis before
adjustments to basis are made for distributions would reduce the
amount of the distributions that would be a tax-free return of
capital.
Such a result would be inconsistent with the
partnership rules which provide that for any taxable year a
partner's basis is first increased by items of income, then
decreased by distributions, and finally decreased by losses.
A similar characterization problem arises with respect to
distributions by S corporations with accumulated earnings and
profits.
Distributions by such corporations are treated: (1) as
a nontaxable return of capital to the extent of the corporation's
"accumulated adjustments account" (essentially the aggregate
taxable income of the corporation for all years beginning after
1982 to the extent that such taxable income has not been
distributed to shareholders), (2) as a dividend to the extent of
the S corporation's accumulated earnings and profits, (3) as a
nontaxable return of capital to the extent of the remaining basis
of the shareholder's stock, and (4) as capital gain.
For
purposes of determining the effect of a distribution for any
taxable year, adjustments reflecting the corporation's items of
income, loss and expenses are made to the accumulated adjustments
account in a manner similar to the adjustments required to be
made to the shareholders' stock basis.
Proposal. The proposal would clarify that adjustments to
basis for distributions during a year are made before adjustments

15
to basis for items of loss. Accordingly, the extent to which
losses may be taken into account for a taxable year would be
determined after the tax status of distributions has been
determined.
In addition, if for any year an S corporation's items of
loss and expense exceed its items of income, the adjustments that
would otherwise be made to the accumulated adjustments account
are disregarded in determining the effect of distributions made
during the taxable year.
This rule affects only distributions
made by S corporations with accumulated earnings and profits.
Administration position. The Administration supports this
provision.
It would harmonize the basis adjustment provisions
relating to partnership interests and S corporation stock and
would provide a measure of certainty to shareholders of S
corporations regarding the tax treatment of distributions made
during loss years.
4.

Treatment of S Corporations as Shareholders in C
Corporations

Current law. An S corporation in its capacity as the
shareholder of a C corporation is treated as an individual for
purposes of subchapter C.
In a private letter ruling, the
Internal Revenue Service has interpreted this rule as preventing
the tax free liquidation under section 332 and 337 of a C
corporation subsidiary into an S corporation because a C
corporation cannot liquidate tax-free when owned by an individual
shareholder.
However, the result desired by the taxpayer can be
achieved on a tax-free basis by either having the S corporation
purchase the C corporation and having the C corporation merge
into the S corporation after the purchase or by having the S
corporation lend money to its shareholders to purchase the C
corporation who would then merge the C corporation into the S
corporation.
Proposal. The bill would repeal the rule that treats an S
corporation in its capacity as a shareholder of a C corporation
as an individual.
Administration position. The Administration supports this
provision. It would remove a trap for the unwary by treating the
liquidation of a C corporation into an S corporation in the same
manner as the merger of a C corporation into an S corporation or
a conversion from C to S status. As is currently the case when a
C corporation merges into an S corporation, the built-in gains of
the liquidating C corporation would be subject to the built-in
gains tax provisions of section 1374.

16
5.

S Corporations Permitted to Hold Subsidiaries

Current law. Under present law, an S corporation may not
be a member of an affiliated group of corporations.
This
limitation prevents an S corporation from owning stock in another
corporation that possesses 80 percent or more of both the total
voting power and value of the outstanding stock of the
corporation.
Proposal. An S corporation would be allowed to own any
amount, based on voting, value, or both, of the stock of a C
corporation.
In order to avoid the complexity of the
consolidated return regulations, the S corporation parent would
not be permitted to file a consolidated return with its
subsidiaries.
Administration position. The Administration supports this
provision if an acceptable revenue offset is provided.
The
current law restriction has caused many corporations either
knowingly or inadvertently to terminate their S status or to
adopt complex corporate structures to circumvent the restriction.
The proposal achieves the desired objective of current law by
directly preventing S corporations from filing consolidated
returns.
6.

Elimination of Pre-1983 Earnings and Profits of S
Corporations

Current law. Prior to 1983, a corporation electing
subchapter S status for a taxable year increased its accumulated
earnings and profits to the extent that its undistributed
earnings and profits for the year exceeded its taxable income.
As a result of changes made in 1982 by the Subchapter S Revision
Act, S corporations do not have earnings and profits for any year
beginning after 1982. Under current law, a shareholder is
required to include in income the pre-1983 accumulated S
corporation earnings and profits when it is distributed by the
corporation.
Proposal. If a corporation is an S corporation for its
first taxable year beginning after December 31, 1991, the
accumulated earnings and profits of the corporation (if any) as
of the beginning of that year will be reduced by the accumulated
earnings and profits that were accumulated in any taxable year
beginning before January 1, 1983, for which the corporation was
an electing small business corporation under subchapter S. Thus,
any remaining earnings and profits of such a corporation would be
solely attributable to taxable years for which an S election was
not in effect.

17
Administration position. The Administration does not
oppose this provision.
We understand that the amounts being
eliminated from earnings and profits are generally very small and
do not justify the recordkeeping burden they create.
7.

Determination of Shareholder/s Pro Rata Share Where
Disposition of Entire Interest

Current law. In general, the tax items passed through an S
corporation to its shareholders are allocated among the
shareholders on a per day, per share basis.
If a shareholder
terminates his or her interest in the corporation, the S
corporation, with the consent of all persons who were
shareholders at any time during the taxable year, may elect, for
purposes of allocating tax items, to close the books of the
corporation on the date of the termination of the shareholder's
interest in the corporation.
Proposal. The bill would mandate that an S corporation
close its books for purposes of allocating items of income on the
termination of a shareholder's interest.
Administration position. The Administration supports this
provision.
It would assure a shareholder terminating his
interest in an S corporation that his share of the corporation's
income will not be affected by events occurring after the
termination of his interest in the corporation.
8.

Treatment of Items of Income in Respect of a Decedent Held
Bv an S Corporation

Current law. Income items that would have been receivable
by the decedent had he lived, and that.are receivable by his
estate or beneficiaries, are taxed to the estate or beneficiaries
when received and retain the same character they would have had
in the hands of the decedent.
Such income is referred to as
income in respect of a decedent (IRD).
Property which may produce IRD is not entitled to a basis
step-up.
IRD generated with respect to such property is not
subject to income tax when received by the decedent's estate or
beneficiaries.
Under the partnership regulations, a partnership
interest acquired from a decedent does not receive a basis
step-up to the extent the fair market value of the interest
reflects items of IRD. Thus, the IRD rules cannot be
circumvented by contributing an IRD item to a partnership before
death and receiving a full fair market value step-up for the
partnership interest on the partner's death.
There is no
parallel provision for S corporation stock, however.

Proposal. The basis step-up at death for S corporation
stock would be denied to the extent the fair market value of the
stock represents IRD.
Administration position. The Administration supports this
provision.
It would prevent potential avoidance of the IRD rules
by dropping items of IRD fe.q.. an installment note) into an S
corporation prior to death.
The provision would be parallel to
the existing rule for determining the basis of a decedent's
partnership interest.
B. Accounting Provisions
1.

Look-Back Method For Long-Term Contracts

Current law. Income from long-term contracts generally must
be reported under the percentage of completion method of
accounting (PCM). Under PCM, expected contract profit is
recognized ratably, as costs are incurred, over the term of the
contract.
PCM includes look-back rules intended to compensate
for deferral or acceleration of contract income resulting from
use of expected (rather than actual) contract profit.
Under the
look-back rules, if actual contract profit is greater or less
than expected profit, the taxpayer must pay, or is entitled to
receive, interest.
Look-back interest is computed when a
contract is completed based on differences between expected and
actual contract profits in each taxable year of the contract.
It
must be recomputed if contract profit changes because additional
contract revenues or costs are taken into account after
completion.
Taxpayers are allowed (but not required) to discount
post—completion adjustments to contract revenues and costs back
to their value as of contract completion.
The rate used in computing look-back interest is the section
6621 overpayment rate.
This overpayment rate equals the
applicable Federal short-term rate plus 2 percentage points.
The
applicable Federal short-term rate is adjusted quarterly by the
Internal Revenue Service.
For any year of the contract,
look-back interest runs from the due date of the return for that
year without extensions (March 15 in the case of a calendar year
corporate taxpayer) until the due date of the return for the year
that the look-back is applied.
Thus, to compute look-back
interest for a particular year of the contract, a taxpayer is
required to use 5 different interest rates for each 12-month
period ending after the due date of the return for that year up
through the return due date for the year that the look-back
method is applied.
Proposal. The bill contains three proposals for simplifying
the look-back method.
The first two proposals would permit

19
taxpayers to make a combined election under which they are not
required to compute look-back interest for a contract, or to
recompute look-back interest based on adjustments to contract
price and costs, in certain de minimis cases.
The third proposal
would reduce the number of different interest rates that must be
used to compute look-back interest.
If a taxpayer makes the election, the first proposal would
provide that look-back interest is not computed for a long-term
contract if the amount of deferral or acceleration of income from
using estimates is not substantial.
Thus, look-back interest is
not computed if, for each year of the contract prior to the year
of completion, the cumulative taxable income (or loss) from the
contract as of the end of that year, determined using estimated
contract price and costs, is within 10 percent of the cumulative
taxable income (or loss) as of the end of that year using actual
contract price and costs.
In addition, if a taxpayer makes the election, the second
proposal would provide that look-back interest is not recomputed
as a result of an adjustment to contract price or costs m a year
after contract completion if the adjustment is not substantial.
Thus, look-back interest is not recomputed because of an
adjustment in a year after completion if the cumulative taxable
income (or loss) from the contract as of the end of that year is
within 10 percent of the cumulative taxable income (or loss) from
the contract as of the most recent year in which the taxpayer was
required to compute or recompute look-back interest (or would
have been required to do so if the de minimis test provided by
the first proposal had not been met).
The third proposal would generally fix the rate for
calculating look-back interest for a 12-month period beginning on
the due date of the taxpayer's return at the section 6621 rate
for the calendar quarter that includes that date.
Thus, m
computing look-back interest for a particular contract year, the
taxpayer would be required to use only one interest rate (rather
than 5 different rates) for each 12-month period ending after the
return due date for that year up through the return due date for
the year that the look-back method is applied (determined without
regard to extensions).
All three proposals apply to contracts completed in taxable
years ending after the date of enactment.
Administration position. We support these proposals if an ^
acceptable revenue offset is provided.
Each responds to specific
taxpayer concerns about the administrative burdens imposed upon
taxpayers under current law.
In testimony before the
Subcommittee on Select Revenue Measures on February 21, 1990, we
stated that we did not oppose de minimis rules similar to those
that would be provided by the first two proposals.
We believe

that all three of these proposals would reduce the administrative
burden imposed by the look-back method without undermining its
purpose.
2.

Uniform Cost Capitalization Rules

Current law. Generally, the uniform capitalization rules
require taxpayers producing real or tangible property or
acquiring property for resale to include in inventory the direct
costs of the property and the indirect costs that are allocable
to the property.
Taxpayers are permitted to use various
reasonable methods to determine the indirect costs that are
allocable to production or resale activities, including certain
simplified allocation methods provided in Treasury regulations.
Proposal. The proposal would authorize (but not require)
Treasury to issue regulations providing for a simplified method
for determining what part of the costs of administrative,
service, or support functions or departments must be capitalized
as part of the cost of property that a taxpayer produces or
sells.
The regulations, if issued, would permit allocation of
these costs to production or resale activities by multiplying the
total costs of any such function or department for the current
taxable year by an historical ratio. The ratio would be the
ratio of the total of such function or department's allocable
costs that were allocable to property produced or acquired for
sale during a "base period" to the function or department's total
costs during the base period.
The explanation prepared to
accompany the proposal states that regulations, if issued, would
provide that the base period could begin no earlier than 4
taxable years prior to the taxable year for which the simplified
method is used.
Although the proposal would be effective for
taxable years beginning after the date of enactment, taxpayers
could not use the simplified method for any taxable year
beginning before Treasury publishes regulations.
Administration position. We do not oppose the proposal
because it authorizes rather than requires such regulations.
The
Administration supports the goal of making compliance with the
uniform capitalization rules less burdensome for taxpayers.
However, we are not certain that we can devise rules which will
adequately protect the fisc from loss due to distortion of income
while meaningfully simplifying taxpayers' administrative burdens.
We would not expect to prepare regulations under this authority
unless we were convinced that the regulations could meet a
revenue neutrality constraint.

21
C. Minimum Tax Provisions
1.

Corporate Minimum Tax Depreciation Preference

Current law. In computing the AMT depreciation deduction for
personal property, taxpayers are generally required to use the
150 percent declining balance depreciation method over the ADR
life of the property set forth in section 168(g).
In computing
adjusted current earnings (ACE), corporate taxpayers are
generally required to compute the ACE depreciation deduction
using the straight-line method over the ADR life.
Proposal. Under the proposal, corporate taxpayers generally
would be required to use the 120 percent declining balance
depreciation method in computing both AMT and ACE depreciation
deductions for personal property placed in service in taxable
years beginning after December 31, 1990 (using the same ADR
recovery periods generally used for both AMT and ACE purposes
under current law). The proposal would also permit corporate
taxpayers to elect to calculate regular tax depreciation
deductions using the same 120 percent declining balance method
and recovery periods used in computing AMT and ACE depreciation
deductions.
Administration position. We support the proposal provided an
acceptable revenue offset is provided.
We believe the proposal
significantly simplifies the corporate AMT computation.
Although
the proposal loses revenue, there are some isolated instances in
which taxpayers would be disadvantaged by the proposal (e .g ,
taxpayers with both current and cumulative negative ACE
adjustments).
2.

Treatment of Built-in Losses for Purposes of the Corporate
Alternative Minimum Tax

Administration position. We support the proposal
acceptable revenue offset is provided.
Under current
section 382 limitations apply to net operating losses
unrealized built-in losses under both the regular tax

provided an
law,
and net
and AMT

22
systems.
However, the ACE asset basis restatement rule results
in needless complexity and inconsistency by departing from the
general section 382 limitations which apply for regular tax and
AMT purposes.
The proposal would significantly reduce the^
recordkeeping requirements for affected taxpayers and provide for
consistent application of the section 382 limitations to net
unrealized built-in losses under each of the separate regular
tax, AMT, and ACE systems.
D. Tax-Exempt Bond Provisions
To be covered in testimony before the Subcommittee on Select
Revenue Measures.
E. Revocable Trust Provision
Certain Grantor Trusts Treated As Estates
Current law. Many taxpayers use revocable trusts as
substitutes for wills to avoid the costs of probate, for reasons
of privacy and other nontax purposes.
When a revocable trust
becomes irrevocable on the grantor's death and thereafter
effectively functions as an estate, it is taxed as a trust and is
unable to take advantage of certain provisions of the Code that
are available to estates but not trusts.
Proposal. The bill would amend section 7701 by adding a
definition of an "estate". Under the provision, an estate is
defined to include a pourover revocable trust, or, if there is no
will, a trust that is primarily responsible for debts and
administration expenses.
Such a trust-would not be treated as an
estate for purposes of determining the trust's personal exemption
or taxable year or for gift, estate or generation—skipping tax
purposes.
Treasury would have regulatory authority to prescribe
additional exceptions.
Such a trust would be treated as an
estate for taxable years that begin within 3 years and 9 months
of the decedent's death.
Administration position. The Administration does not
oppose this provision of the bill.
The purpose of the provision
is to eliminate several of the tax disincentives to using funded
revocable trusts as substitutes for wills.
The bill would
simplify planning by reducing the tax considerations in deciding
whether to use a revocable trust.

23
P. Other Provisions Relating to Partnerships
1.

Timing Rules for Inclusion and Deduction of Partnership
Guaranteed Payments

Current law. Under section 707(a) a partner who engages in
a transaction with a partnership other than in his capacity as a
partner is treated as if he were not a member of the partnership
with respect to the transaction.
Examples of such transactions
include loans of money or property by the partnership to the
partner or by the partner to the partnership, the sale of
property by the partner from the partnership, the purchase of
property by the partner from the partnership, and the rendering
of services by the partnership to the partner or by the partner
to the partnership.
Transfers of money or property by a partner
to a partnership as contributions, or transfers of money or
property by a partnership to a partner as distributions, are not
transactions within the purview of section 7 0 7 (a).
Under section 707(c), the payments made by a partnership to
a partner for services or for the use of capital (i .e .»
"guaranteed payments") are considered as made to a person who is
not a partner to the extent the payments are determined without
regard to the income of the partnership.
Guaranteed payments are
considered as made to one who is not a member of the partnership
only for purposes of section 61(a) (relating to gross income) and
section 162(a) (relating to trade or business expenses).
Section 267 sets forth certain timing rules relating to
deductions for losses, expenses and interest arising from
transactions between related taxpayers.
As a general matter,
section 267(a)(2) provides that in transactions between related
parties, payments are deductible by a taxpayer only when they are
includible in the income of the person.to whom payment is made.
Section 267(e) extends this rule to transactions between
partnerships and their partners except with respect to a
partnership's guaranteed payments.
Instead, a partner must
include such payments as ordinary income for his taxable year
within or with which ends the partnership taxable year in which
the partnership deducted the payments.
Proposal. The bill would defer the deduction of a
guaranteed payment by a partnership until the year in which it is
includible in the partner's income.
Thus, the bill conforms the
timing rule for guaranteed payments to the timing rule for
payments made to a partner acting in a capacity other than as a
member of the partnership.
Administration position. The Administration supports this
proposal.
It is desirable to have the same timing rule for
payments made by a partnership to a partner either as payments

24
made not in the partner's capacity as a partner or as guaranteed
payments, since these types of payments can be difficult to
distinguish from each other.
2.

Closing of Partnership Taxable Year With Respect To
Deceased Partner

Current law. A partner reports his share of items of
income, gain, loss, deduction, and credit on his return for the
year in which or with which the partnership's year ends.
The
taxable year of a partnership closes with respect to a partner
who sells or exchanges his entire interest in the partnership, or
whose entire interest in the partnership is liquidated other than
by reason of death.
Thus, a partner who sells his entire
interest reports his share of partnership items for the year that
includes the date of sale on his income tax return for the year
that includes the date of sale (and not on his return for the
year in which the partnership's year would normally have ended).
Because the partnership's year does not end by reason of the
death of a partner, a decedent-partner's share of partnership
items for the partnership year that includes his death is
reported on the estate's return rather than on the decedent's
final return.
However, the partnership's year would close with
respect to the decedent-partner if his entire interest is sold
pursuant to a buy-sell agreement existing at the time of death.
In such a case, the decedent-partner's share of partnership items
for the partnership year that includes his death would be
reported on his final return rather than the estate's return.
Proposal. The bill would provide that the taxable year of
a partnership closes with respect to a partner whose entire
interest in the partnership terminates, whether by death,
liquidation, or otherwise.
Administration position. We support this proposal.
The
year closing result should not be dependent on the presence of a
buy-sell agreement.
6. Corporate Provision
Clarification of Amount of Gain Recognized bv a Securityholder in
a Reorganization
Current law. In general, a holder of corporate stock or
securities who exchanges them for other stock or securities in a
corporate reorganization or ”spin-off” does not recognize gain
even if the holder realizes gain because the value of the stock
or securities received exceeds the holder's basis in the stock or
securities given up. This general rule does not apply, however,

25
if the principal amount of securities received exceeds the
principal amount of securities given up.
In this case, any gain
realized on the exchange is recognized up to the fair market
value of the excess principal amount.
It is not clear how the
"principal amount" of a security surrendered or received in a
reorganization is measured for this purpose.
Under the original
issue discount (OID) rules of current law, however, that portion
of the stated principal amount of a bond that exceeds the issue
price of the bond is treated as unstated interest that is
included in income by the holder and deductible by the issuer
over the term of the bond.
Proposal. The proposal would coordinate the "excess
principal amount" rule with the OID rules of current law. Thus
any portion of the stated principal amount that is treated as
unstated interest under the OID rules would not be treated as 1
principal for purposes of determining how much gain is recognized
in a reorganization.
Instead, the issue price of the securities
received, and the adjusted issue price of the securities
surrendered, would be treated as their principal amount.
In
contrast to current law, under which the amount of gain
recognized is based on the fair market value of the excess
principal amount of the securities received, the proposal would
not require determination of the fair market value of this
excess.
Administration position. We support this proposal.
It
will provide similar tax treatment for exchanges that are similar
in economic substance.
TITLE V. ESTATE AND GIFT TAX PROVISIONS
1.

Waiver of Right of Recovery for Certain Marital Deduction
Property

26
Administration position. The Administration does not
oppose this proposal.
The proposal does not affect the
substantive right of the surviving spouse to waive the right of
recovery.
By establishing a clear test for what constitutes an
effective waiver under section 2207A, the provision should
prevent the inadvertent waivers that sometimes occur under
present law.
2.

Inclusion in Gross Estate of Certain Gifts Made Within
Three Years of Death

Current law. Generally, transfers made within 3 years of
death are not includible in the transferor's gross estate.
However, the transfer within 3 years of death of certain retained
rights with respect to previously transferred property causes the
entire property to be includible in the transferor's gross
estate.
This inclusion rule applies to transfers made from a
revocable trust within 3 years of the transferor's death.
This
may cause, among other things, annual exclusion gifts made from
the revocable trust during that period to be includible in the
transferor's gross estate.
Proposal. The bill would amend section 2038, which deals
with revocable transfers, to ensure that transfers made from an
individual's revocable trust within 3 years of the individual's
death are not includible in the individual's gross estate.
The
bill would also restate section 2035, which generally deals with
the inclusion in the gross estate of property transferred within
3 years of death, for greater clarity without substantive change.
Administration position. The Administration does not
oppose this provision of the bill.
Funded revocable trusts are
created by individuals for a variety of legitimate, nontax
planning purposes.
The inability to use the revocable trust as a
vehicle for making annual exclusion gifts without estate tax
exposure is a significant tax disadvantage to the use of such
trusts.
3.

Definition of Qualified Terminable Interest Property

27
qualifying income interest for life.
In Estate of Howard. 91
T.C. 329 (1988), rev'd. 910 F.2d 633 (9th Cir. 1990), the Tax
Court held that this "stub period" income must be payable to the
spouse's estate or be subject to the spouse's general power of
appointment for the spouse to have the requisite income interest.
Although the Howard decision was reversed on appeal, it is
unclear how the Tax Court would rule if the question arises in a
case appealable to another circuit.
Proposal. The bill would provide that an income interest
would not fail to be a qualifying income interest for life solely
because the stub period income is not payable to the spouse's
estate or subject to the spouse's general power of appointment.
If the marital deduction is allowed, however, such income would
be includible in the spouse's estate.
Administration position. The Administration supports this
provision of the bill.
The codification of the proposed Treasury
regulation will eliminate the need for the closing agreement
procedure now used by the Internal Revenue Service to permit
taxpayers who have relied on the proposed regulation to claim the
marital deduction while protecting the government against the
potential whipsaw of avoiding subsequent inclusion of the trust
property in the spouse's estate on the grounds that the deduction
was improperly allowed.
4.

Requirements for Qualified Domestic Trust

Current law. Generally, property passing to a noncitizen
surviving spouse does not qualify for the marital deduction
unless it passes in a qualified domestic trust (QDT).
Distributions of principal from such a trust to the surviving
spouse are subject to estate tax. When originally enacted, the
QDT provisions required that all trustees of a QDT be U.S.
citizens or domestic corporations.
This provision was
retroactively amended twice and ultimately required that the
trust must provide that no distributions can be made unless a
U.S. trustee has the right to withhold the estate tax imposed on
the distribution.
Proposal. Under the proposal, a QDT created prior to the
enactment of the 1990 OBRA whose governing instrument requires
that all trustees be U.S. citizens or domestic corporations would
be treated as satisfying the withholding requirement of current
law.
Administration position. The Administration supports this
provision of the bill.
The trustee requirements for a qualified
domestic trust have been amended twice in an attempt to give
taxpayers greater flexibility in the choice of trustees while
also protecting the government's ability to collect the tax

28
imposed on the trust. We believe that the government's interest
is adequately protected if the trust instrument requires that all
trustees must be U.S. citizens or domestic corporations.
The
bill will reduce the number of individuals who will have to
redraft wills to comply with the changes that have been made to
the trustee requirement for QDTs.
5.

Election of Special Use Valuation of Farm Property for
Estate Tax Purposes

Current law. Under certain circumstances, a decedent's
estate may elect to value real property used in a farm or a trade
or business according to its actual use rather than its highest
and best use.
The election requires, among other things, the
filing of an agreement signed by all the qualified heirs
consenting to a recapture tax if the special use terminates
within 10 years of the decedent's death. An executor who makes
the election and substantially complies with the requirements in
the regulation for making the election may provide missing
information and certain signatures missing from the agreement
within 90 days of notification by the Internal Revenue Service.
Proposal. Under the proposal, if the executor makes the
special use valuation election and files the agreement regarding
the recapture tax, the executor would be permitted to provide any
missing information and signatures within 90 days of notification
by Internal Revenue Service.
This relief would be available
without regard to whether the executor substantially complied
with the regulatory requirements for making the election.
Administration position. The Administration does not
oppose this provision.
The special use valuation election is
frequently defective because the executor fails to file certain
required information or signatures. By. expanding the scope of the
provision that permits defective elections to be cured, the bill
simplifies qualification for the special use valuation in those
estates for which it was intended to be available.
TITLE VI. EXCISE TAX PROVISIONS
A. Motor Fuel Excise Tax Provisions
1.

Use Tax on Diesel and Aviation Fuel

29
tax rate (e .a ., for use in a bus or train) is not treated as a
producer.
Thus, section 4091 does not impose a tax when a
reduced—tax purchaser diverts fuel to a nonexempt use.
Section
4041 imposes a back-up use tax on fuel diverted to nonexempt
uses, but this tax is redundant in the case of fuel diverted by a
tax-free purchaser and does not apply to fuel diverted by a
reduced-tax purchaser.
Proposal. The bill would combine the diesel and aviation
fuel tax provisions into a revised section 4091. Reduced-tax
purchasers would be treated as producers for purposes of the tax
imposed by the revised section 4091 and would be liable for the
tax when they divert fuel to a nonexempt use.
The bill would
also reorganize section 4041.
Administration position. We support the proposal.
The
proposal improves the organizational structure of the diesel and
aviation fuel excise tax statutes, making the rules easier to
locate and understand.
The imposition of tax on fuel diverted to
nonexempt uses by reduced—tax producers ensures equivalent
treatment of nonexempt uses of diesel and aviation fuel by
tax-free and reduced-tax purchasers.
2.

Refunds of Diesel and Aviation Fuel Taxes

Current law. Producers (including wholesalers) of diesel
or aviation fuel can make tax-free sales to exempt purchasers
(e.q., a State government). If, however, a retailer sells diesel
or aviation fuel on which tax has been paid to an exempt
purchaser, only the exempt purchaser can claim a refund of the
tax.
Proposal. The bill would permit the person who paid the
tax (generally the wholesaler) to claim the refund if the amount
of the tax is repaid to the retailer.
(Presumably, the
wholesaler would reimburse the retailer only if the retailer
sells the fuel to an exempt purchaser at a tax-free price.)
This
rule would apply only to fuel sold for use in one of the
following exempt uses: (1) export, (2) use as supplies for
aircraft or vessels, (3) exclusive use by a State or local
government, or (4) exclusive use by a nonprofit educational
organization.
In addition, refunds would be permitted only if
the person paying the tax meets such requirements as the Treasury
Department may impose under the regulatory authority provided in
the bill.
Administration position. We do not oppose the proposal.
The proposal significantly simplifies refund procedures for
diesel and aviation fuel sold to certain exempt users and
conforms those procedures to those applicable to special motor
fuels and gasoline.
Under the proposal, however, there is a

30
possibility of refund claims by both the wholesaler and the
exempt user, and we expect it will be necessary to prescribe
regulatory safeguards under the authority provided in the bill.
These safeguards, including appropriate certifications by the
exempt user, would be designed to prevent an exempt user from
claiming a refund if the tax is refunded to the wholesaler.
3.

Consolidation of Refund Provisions

Current law. The excise tax imposed on fuel is refunded if
the fuel is used for an exempt purpose.
Refunds of fuel taxes
are currently authorized under three separate Code sections.
Refunds may be claimed annually as a credit on the
taxpayer's income tax return.
In most cases, taxpayers also have
the option of claiming quarterly refunds for the first three
quarters of a taxable year.
This option is not available,
however, with respect to taxes imposed on gasoline and special
motor fuel used on a farm for farming purposes.
In addition,
quarterly refunds are permitted only if the amount of the refund
meets a statutory threshold.
Different thresholds are prescribed
depending on the Code provision authorizing the refund, and
claimants may not aggregate refunds authorized under different
Code sections fe.q.. gasoline refunds authorized under section
6421 and diesel fuel refunds authorized under section 6427) in
determining whether the statutory threshold is met.
An expedited refund procedure is available for gasohol
blenders.
Proposal. The bill would consolidate the Code provisions
authorizing refunds into a single section. This section would
prescribe only one refund threshold, and all gasoline and diesel
fuel refunds would be aggregated in determining whether this
threshold is met.
A refund would be permitted for any quarter
(including the fourth quarter) in which the cumulative
overpayment exceeds $750. Refunds would be permitted under this
rule with respect to taxes imposed on gasoline and special motor
fuel used on a farm for farming purposes.
The special expedited
procedure for gasohol blenders would be retained.
Administration position. We do not oppose the proposal.
The proposal significantly simplifies the refund procedures by
consolidating the rules in a single section and providing uniform
threshold and refund procedures.
A single standardized refund
claim for all fuel taxes reduces administrative burdens imposed
on taxpayers that are eligible for refunds of several different
types of excise tax.

31
4.

Refunds to Cropdusters

Current lav. The excise tax imposed on gasoline or
aviation fuel is refunded if the fuel is used for cropdusting.
The tax is generally refunded to the farmer; the cropduster is
entitled to a refund only if the farmer waives the right to a
refund.
Proposal. The bill would eliminate the waiver requirement
and provide that only the cropduster is entitled to the refund.
Administration position. We do not oppose the proposal.
The waiver requirement is cumbersome and prevents many
cropdusters from claiming refunds.
5.

Information Reporting on Certain Sales

Current law. When diesel or aviation fuel is sold free of
tax or at a reduced tax rate, both the seller and the purchaser
are required to file an information return with the Internal
Revenue Service.
Proposal. The bill would permit the Treasury Department to
issue regulations waiving the information reporting requirement.
Administration position. We support the proposal.
The
authority to waive the reporting requirement in appropriate cases
will allow the Internal Revenue Service to administer the
exemptions more efficiently and relieve taxpayers of unnecessary
paperwork burdens.
B. Alcohol Excise Tax Provisions
Imported Distilled Spirits Returned to Plant
Current law. When tax-paid distilled spirits that have
been withdrawn from bonded premises of a distilled spirits plant
are returned for destruction or redistilling, the excise taxes
are refunded or credited.
Bottled imported distilled spirits are
not eligible for this refund or credit because they are
originally withdrawn from customs custody and not bonded
premises.
Additionally, distilled spirits brought into the
United States from Puerto Rico are not eligible because they are
not withdrawn from bonded premises.
Proposal. The bill would provide that refunds or credits
of the tax would be available for all spirits that are returned
to the bonded premises of a distilled spirits plant.

32
Cancellation of Export Bonds
Current law. An exporter that withdraws distilled spirits
from bonded warehouses for export or transportation to a customs
bonded warehouse without the payment of tax must furnish a bond
to cover the withdrawal.
The required bonds are canceled "on the
submission of such evidence, records, and certification
indicating exportation as the Secretary may by regulations
prescribe."
Proposal. The bill would allow the bonds to be canceled
»»if there is such proof of exportation as the Secretary may
require." Under this rule, the Treasury Department could permit
exporters to satisfy the proof requirement by maintaining records
of exportation.
Thus, bonds could be canceled without submission
of proof of exportation.
Location of Records of Distilled Spirits— Plant
Current law. Proprietors of distilled spirits plants are
required to maintain records and reports relating to their
production, storage, dénaturation, and processing activities on
the premises where the operations covered by the records are
carried on.
Proposal. The bill would permit proprietors to maintain
records and reports at locations other than the plant premises.
As under current law, the records and reports would be required
to be available for inspection by the Treasury Department during
business hours.
Transfers from Brewery to Distilled Spirits Plant
Current law. A distilled spirits plant may receive taxfree beer on its bonded premises for use in the production of
distilled spirits.
This rule applies only if the beer is
produced on contiguous brewery premises.
Proposal. The bill would provide an exemption from excise
tax, subject to Treasury regulations, for beer removed to a
distilled spirits plant from any brewery for use in the
production of distilled spirits.
The bill would also authorize
the receipt of such beer by a distilled spirits plant.
Sian Not Required for Wholesale Dealers
Current law. Wholesale liquor dealers are required to post
a sign identifying the firm as such.
Failure to do so is subject
to a penalty.

33
Proposal.
sign be posted.

The bill would repeal the requirement that a

Refund on Returns of Merchantable Wine
Current law. Excise tax paid on domestic wine that is
returned to bond as unmerchantable is refunded or credited, and
the wine is once again treated as wine in bond on the premises of
a bonded wine cellar.
Proposal. The bill would permit a refund or credit in the
case of all domestic wine returned to bond, whether or not
unmerchantable.
Increased Sugar Limits for Certain Wine
Current law. Natural wines may be sweetened to correct
high acid content.
If the amount of sugar used exceeds the
applicable limitation, however, the wine must be labeled
"Substandard.” For most wines the limitation is exceeded if
sugar constitutes more than 35 percent (by volume) of the
combined sugar and juice used to produce the wine.
Up to 60
percent sugar may be used in wine made from loganberries,
currants, and gooseberries.
Proposal. The bill would provide that up to 60 percent
sugar could be used in any wine made from juice, such as
cranberry or plum juice, with an acid content of 20 or more parts
per thousand.
Beer Withdrawn for Embassy Use
Current law. Imported beer, wine, and distilled spirits to
be used for the family and official use of foreign governments,
organizations and individuals may be withdrawn from customs
bonded warehouses without payment of excise tax. A similar rule
applies to domestically produced wine and distilled spirits.
There is no similar exemption for domestic beer withdrawn from a
brewery or entered into a bonded customs warehouse for the same
authorized use.
Proposal. The bill would provide an exemption for domestic
beer similar to that available for domestically produced wine and
spirits.
The exemption would be subject to Treasury's regulatory
authority.

34
Beer Withdrawn for Destruction
Current law» Beer removed from a brewery for destruction
must be tax-paid rather than withdrawn without payment of excise
tax.
Proposal. The bill would provide an exemption from tax for
removals for destruction, subject to Treasury regulations.

Drawback on Exported Beer
Current law. A domestic producer that exports beer may
recover the tax (receive a "drawback”) found to have been paid on
the exported beer upon the "submission of such evidence, records
and certificates indicating exportation" required by regulations.
Proposal. The bill would allow a drawback of tax paid "if
there is such proof of exportation as the Secretary may by
regulations require." Under this rule, the Treasury Department
could permit exporters to satisfy the proof requirement by
maintaining records of exportation.
Thus, tax could be refunded
without submission of proof of exportation.
Imported Beer Transferred in Bulk to Brewery
Current law. Imported bulk and bottled beer is subject to
tax when removed from customs custody.
Proposal. The bill would provide that, subject to Treasury
regulations, beer imported in bulk containers could be withdrawn
from customs custody and transferred in bulk to a brewery without
payment of tax.
Under this provision, the proprietor of the
brewery to which the beer is transferred is liable for the tax
imposed on the withdrawal from customs custody and the importer
would be relieved of liability.
Administration Position on Alcohol Excise Tax Provisions.
support these proposals.

35
administer alcohol excise taxes more efficiently and relieve
taxpayers of unnecessary paperwork burdens.
Other proposals expand the circumstances in which the Code
permits tax-free removals of alcoholic beverages (or allows a
credit or refund of tax on a return to bonded premises). These
changes are also consistent with the current collection system
and will not jeopardize the collection of tax revenues.
In a
number of cases, the changes will eliminate inappropriate
disparities in the treatment of different types of alcoholic
beverages.
In addition, several of these proposals will provide
producers with additional options in complying with environmental
and other laws that regulate the destruction and disposition of
these products.
The remaining proposals (i .e . , the repeal of the sign
requirement and the increased sugar limits for certain wine)
repeal or revise outmoded provisions.
We do not believe the
adoption of these proposals will have adverse consequences.
C. Other Excise Tax Provisions
1.

Waiver of Registration Requirement

Current law. The Code exempts certain types of sales
fe.q.. sales for use in further manufacture, sales for export,
and sales for exclusive use by a State or local government or a
nonprofit educational organization) from excise taxes imposed on
manufacturers and retailers.
These exemptions generally apply
only if the seller, the purchaser, and any person to whom the
article is resold by the purchaser (the second purchaser) are
registered with the Internal Revenue Service.
The Internal
Revenue Service can waive the registration requirement for the
purchaser and second purchaser in some but not all cases.
Proposal. The bill would authorize the Treasury Department
to specify the cases in which the registration requirement
applies to purchasers and second purchasers.
Exempt sales to
unregistered purchasers and second purchasers would be permitted
in all other cases.
Administration position. We support the proposal.
The
authority to waive the registration requirement in appropriate
cases will allow the Internal Revenue Service to administer the
exemptions more efficiently and relieve taxpayers of unnecessary
paperwork burdens.

36
2.

Deadwood— Piggyback Trailers and Deep Seabed Minerals

Current 1a w . The Code includes a provision relating to a
temporary reduction in the tax on piggyback trailers sold before
July 18, 1985, and provisions relating to the tax on the removal
of hard minerals from the deep seabed before June 28, 1990.
Proposal.

The bill would repeal these provisions.

Administration position. We support the proposal.
Continued retention of these deadwood provisions is unnecessary.
TITLE VII. ADMINISTRATIVE PROVISIONS
A. Administrative Provisions

Employment Tax Reporting for Household Employees

Current law. Household employers who pay cash wages of $50
or more per quarter must withhold social security taxes
(including Medicare taxes) from wages paid to the employee during
the quarter.
The withheld taxes, together with the portion of
the tax paid by the employer, are paid with a quarterly FICA
return on Form 942. Household employers who pay cash wages of
$1,000 or more in any calendar quarter in the current year or the
preceding year are subject to Federal unemployment taxes and must
file an annual FUTA return on Form 940 or Form 940EZ.
Quarterly
deposits are required if certain FUTA liability thresholds are
met.
Although wages of household employees are not subject to
mandatory income tax withholding, an employer and employee may
enter into a voluntary withholding agreement.
In that case,
withheld income taxes are reported and paid on the quarterly
return filed for FICA purposes.
After, the end of each calendar
year, household employers must provide copies of Form W-2 (Wage
and Tax Statement) to each employee and must transmit all Forms
W-2 to the Social Security Administration with Form W-3
(Transmittal of Income and Tax Statements).
Household employers subject to FUTA are typically required
to file quarterly state unemployment tax returns as well.
Proposal. Household employers would report all FICA and
FUTA taxes and any withheld income taxes ("domestic service
employment taxes") on a schedule to Form 1040. No quarterly
payments or deposits would be required, but domestic service
employment taxes would be counted in determining the employer's
estimated tax penalty.
Thus, a household employer would be
required either to make payments of estimated taxes or to
increase the rate of withholding on his own wages to cover his
liability for domestic service employment taxes.

37
To make simplified annual reporting possible, the quarterly
FICA threshold would be changed to an annual threshold of $300.
In addition, the Secretary would be granted the authority
to enter into agreements with the states which would allow the
Internal Revenue Service, acting as agent for the states, to
collect state unemployment taxes in the same manner.
Administration position. The Administration supports the
proposal.
The proposal should provide substantial simplification
and increased compliance.
Current law requires employers of household employees to
file 5 Federal returns annually in addition to forms such as W-3
and W-2.
State unemployment reports must be separately filed on
a quarterly basis, often to remit quite small liabilities ($7-8
annually). Household employers are frequently unaware of and do
not comply with such requirements.
By incorporating Federal
return requirements into Form 1040, the compliance burden should
be eased and household employers will be reminded of their filing
responsibilities.
While State participation in the Form 1040
filing system would be voluntary, many states may find the system
cost effective to collect the relatively small sums involved.
We recommend that the proposal be made effective for
remuneration paid after December 31, 1992, in order to allow the
Internal Revenue Service to prepare forms and inform taxpayers
about the new filing system.
In addition, we recommend that the
return due date provision be clarified to make certain that the
schedule is not due earlier than the date of the Form 1040 if the
taxpayer utilizes an extension to file.
2.

Uniform Penalty Provisions to Apply to Certain Pension
Reporting Requirements

Current law. Any person who fails to file an information
report with the Internal Revenue Service on or before the
prescribed filing date is subject to penalties for each failure.
The general penalty structure provides that the amount of the
penalty is to vary with the length of time within which the
taxpayer corrects the failure, and allows taxpayers to correct a
de minimis number of errors and avoid penalties entirely.
A
different, flat-amount penalty applies for each failure to
provide information reports to the Internal Revenue Service or
statements to payees relating to pension payments.
Proposal. The bill would incorporate into the general
penalty structure the penalties for failure to provide
information reports relating to pension payments.

38
Administration position. We support this proposal because
conforming the information-reporting penalties that apply with
respect to pension payments to the general information-reporting
penalty structure will simplify the overall penalty structure
through uniformity and provide more appropriate information
reporting penalties with respect to pension payments.
3.

Use of Reproductions of Returns Stored in Digital Image
Format

Current law. Under section 6103(p)(2), the Internal Revenue
Service is required to provide a reproduction of a return upon
request from a person entitled to disclosure of the return, and
may provide return information to such a person through a variety
of media.
Reproductions so provided have the same legal status
as the original return and may be admitted into evidence in
judicial or administrative proceedings.
Proposal. The Code would be amended to clarify that the
Internal Revenue Service may discharge its obligations to persons
seeking disclosure of returns by furnishing them with
reproductions produced through digital image technology.
Such
technology will eventually enable the Internal Revenue Service to
store returns in digital image form and realize significant costs
savings.
The cost of storing, retrieving and copying tax returns
is today about $42 million annually.
The bill also would require
the Comptroller General to conduct a study of available digital
image technology for the purpose of determining the extent to
which reproductions of documents stored using that technology
accurately reflect the data on the original document and the
appropriate period for retaining the original document.
Administration position. We support this proposal.
In
addition to cost savings, the use of digital image technology
will speed the retrieval of return information for use by the
Internal Revenue Service in resolving taxpayer inquiries,
conducting examinations and litigating tax issues.
To ensure
that accurate and legible document images are created, the
Internal Revenue Service will institute strict quality control
standards.
As provided in section 6103 generally, taxpayer
information will continue to be protected from unauthorized
disclosure.
4.

Repeal of Tax Shelter Registration Rules

Current law. The Code requires the registration of tax
shelters with the Internal Revenue Service and imposes penalties
for failure to comply with the registration requirements.
The
provisions were adopted in 1984 to enable the Internal Revenue
Service to identify and audit more effectively tax shelter

39
investments that had proliferated during the early 1980s.
Due to
changes in the tax laws since 1984, tax shelter activities have
declined substantially.
On the other hand, partnerships with
over 500 investors have almost doubled.
The tax shelter
registration provisions are particularly cumbersome for such
widely held partnerships.
Organizers and sellers of potentially
abusive tax shelters are required to keep lists of investors and
to make them available to the Internal Revenue Service on
request.
Proposal. The tax shelter registration rules would be
repealed.
Current law rules applicable to organizers and sellers
of potentially abusive tax shelters would be retained.
Administration position. The Administration supports this
provision.
The steep decline in the number of tax shelters being
marketed has greatly reduced the amount of information being
provided under the tax shelter registration rules.
The
information is no longer sufficiently useful to justify the
paperwork burdens it creates both for taxpayers (particularly
widely held partnerships) and the Internal Revenue Service.
5.

Repeal Authority to Disclose Whether Prospective Juror Has
Been Audited

Current law. Section 6103(h)(5) provides that in connection
with any civil or criminal tax case the Secretary (or his
delegate) must disclose, upon written request from either party
to the lawsuit, whether an individual who is a prospective juror
has or has not been subject to any audit or other tax
investigation by the Internal Revenue Service.
In United States
v. Hashimoto. 878 F. 2d 1126 (9th Cir. 1989), it was held that
the defendant had an absolute right to information about
prospective jurors under section 6103(h)(5), and that trial court
rulings that had the effect of denying the defendant this right
constituted reversible error.
Following the Hashimoto decision,
the Internal Revenue Service has received from defendants an
escalating number of requests for information under section
6103(h)(5).
Proposal. The bill would repeal the authority to disclose
whether prospective jurors have been audited.
Administration position. We support the repeal of section
6103(h)(5).
Information regarding prior tax investigations can
be elicited from prospective jurors in voir dire questioning,
without resort to the cumbersome, time consuming and sometimes
harmful mechanism of section 6103(h)(5) as interpreted in
Hashimoto.

40
6.

Repeal TEFRA Audit Rules For S Corporations

Current law. An S corporation generally is not subject to
income tax on its taxable income.
Instead, it files an
information return and the shareholders report their pro rata
share of the S corporation's income and deductions on the
shareholders' tax return.
The Subchapter S Revision Act of 1982
generally made the TEFRA partnership audit and litigation rules
applicable to S corporations.
These rules require the
determination of all "Subchapter S items" at the corporate,
rather than the shareholder, level.
These rules also require a
shareholder to report all Subchapter S items consistently with
the corporation's information return or to notify the Internal
Revenue Service of any inconsistency.
Proposal. The bill would repeal the unified audit procedures
for S corporations, but retain the requirement that shareholders
report items in a manner consistent with the corporation's
return.
Administration position. We support repeal of the TEFRA
audit rules for S corporations.
The vast majority of both
existing and newly formed S corporations are expected to qualify
for the small S corporation exception from the unified audit and
litigation provisions.
Accordingly, a unified audit procedure,
with the intendant necessity for the Internal Revenue Service and
the courts to prescribe special rules and procedures, is
unnecessary and often confusing for those S corporations subject
to the provision.
It would be desirable before final enactment to clarify the
effect of the provision on pending proceedings and years before
the effective date as to which no proceeding is pending.^ The
provision also should be effective for taxable years ending after
a given date, rather than for taxable years starting after a
given date.
The precise date an S corporation's first taxable
year commences may be unclear in certain cases.
7.

Limitations on Assessment and Collection

Current law. Taxpayers who have invested or that have an
interest in passthrough entities such as partnerships, S
corporations and trusts currently are asserting that the Internal
Revenue Service cannot make adjustments to their returns with^
open statutes of limitations when the adjustments asserted arise
from distributions from passthrough entities for which the
statutes of limitations have expired.
Recent court cases have
given support to taxpayers.
See Kelley v. Commissioner, 977 F.2d
756 (9th Cir. 1989), in which the Ninth Circuit held that an
extension of time for assessing tax for the 1980 year executed by
a shareholder of an S corporation did not permit an S corporation

41
adjustment to the shareholder's return if the statute of
limitations with respect to the S corporation had expired, and
Fendell v. Commissioner. 906 F.2d 362 (8th Cir. 1990), in which
the Eighth Circuit held that the Commissioner cannot adjust
individual income tax returns for 1975 and 1977 with open
statutes of limitations, when the adjustments arise from the
distributions to a beneficiary of income from a complex trust for
which the statute of limitations has expired.
Proposal. The proposal would clarify that the running of the
statute of limitations begins with the filing of the return of
the taxpayer whose liability is in question, rather than the
filing of the return of another person (such as a partnership, S
corporation, or trust) from which the taxpayer received some item
of income, gain, loss, deduction, or credit.
The proposal would
not affect the statute of limitations applicable to an entity
subject to the TEFRA unified audit rules.
Administration position. We support this clarification,
because it would avoid years of protracted and costly litigation
over collateral matters.
B. Tax Court Provisions
1.

Overpayment Determinations of the Tax Court

Current law. The Tax Court has jurisdiction to order the
refund of an overpayment determined by the Court, plus interest,
if the Internal Revenue Service fails to refund such overpayment
and interest within 120 days after the Court's decision becomes
final. Whether such an order is appealable is uncertain.
In
addition, whether the Tax Court has jurisdiction over the
validity or merits of certain credits or offsets fe.g.. student
loans, child support, etc.) made by the Internal Revenue Service
which serve to reduce or eliminate the refund to which the
taxpayer was otherwise entitled is unclear.
Proposal. The bill would clarify that these orders are
appealable in the same manner as a decision of the Tax Court.
The bill would also clarify that the Tax Court does not have any
jurisdiction over the validity or merits of any credit or offset
made by the Internal Revenue Service which would serve to reduce
or eliminate the refund to which the taxpayer was otherwise
entitled.
Administration position.
of current law.

We support the bill's clarification

42
2.

Awarding of Administrative Costs

Current law. Any person who substantially prevails in any
action brought by or against the United States in connection with
the determination, collection, or refund of any tax, interest, or
penalty may be awarded reasonable administrative costs incurred
before the Internal Revenue Service and reasonable litigation
costs incurred in connection with any court proceeding.
No time
limit is specified for the taxpayer to apply to the Internal
Revenue Service for an award of administrative costs.
In
addition, no time limit is specified for a taxpayer to appeal to
the Tax Court an Internal Revenue Service decision denying an
award of administrative costs.
Finally, the procedural rules for
adjudicating denial of administrative costs are unclear.
Proposal. The bill would provide that a party who seeks an
award of administrative costs must apply for such costs within 90
days of the date on which the party was determined to be a
prevailing party.
The bill would also provide that a party who
seeks to appeal a denial by the Internal Revenue Service of an
administrative costs award must petition the Tax Court within 90
days after the date that the Internal Revenue Service mails the
denial notice.
The bill would clarify that dispositions of
administrative cost petitions by the Tax Court are reviewed in
the same manner as other decisions of the Tax Court.
Administration position. We support clarifying the
procedures for applying for a cost award and appealing from a
denial of such an award.
3.

Redetermination of Interest Pursuant to Motion

Current law. Section 7481(c)(4) provides that a taxpayer may
seek a redetermination of interest after certain decisions of the
Tax Court by filing a petition with the Tax Court.
Proposal. The bill would substitute a motion for a petition
for this purpose.
Administration position. We support this clarification
because it serves both to eliminate possible confusion and
conforms the terminology of section 7481(c)(4) to that of
analogous sections, such as section 6512(b)(2), which directs the
taxpayer to invoke the Tax Court's jurisdiction in other types of
supplementary proceedings by motion.

43
4.

Application of Net Worth Requirement for Awards of Litigation
Costs

Current law. In the Federal courts, including the Tax Court
and the Customs Court, a taxpayer who prevails may be awarded
reasonable litigation costs, including attorneys' fees.
The Code
provides that the prevailing party must meet the net worth
requirements of section 2412(d)(2)(B) of title 28, United States
Code.
The provision is silent as to whether the net worth
requirement relates to trusts and estates.
Proposal. The bill would clarify that the net worth
requirement applies to trusts (determined as of the last day of
the taxable year involved in the proceeding) and estates
(determined as of the date of the decedent's death). The bill
also would provide that individuals who file a joint tax return
are treated as one individual for purposes of computing the net
worth limitations.
An exception to this rule would be provided
for innocent spouses.
Administration position. We support clarifying that the net
worth requirement applies to trusts and estates and that
individuals filing a joint return are treated as one individual
for purposes of the net worth requirement.
C. Cooperative Agreements
Permit IRS to Enter Into Cooperative Agreements With State Tax
Authorities
Current law. The Internal Revenue Service is generally not
authorized to use funds appropriated for Federal tax
administration to provide services to non-Federal agencies even
if the cost is reimbursed.
Proposal. The Internal Revenue Service would be authorized
to enter into reimbursable agreements with the states to enhance
joint tax administration.
Reimbursable costs would include such
items as data processing, software development and hardware
acquisition as well as personnel costs, travel, and visual items
involved in providing a service.
Administration position. We support authorizing the Internal
Revenue Service to enter into reimbursable agreements with the
states for these purposes.
The proposal could lead to joint
Federal-state programs which would simplify and shorten return
preparation time for taxpayers and reduce processing costs at
both the Federal and state level.

44
B. ANALYSIS OF CERTAIN PROVISIONS OF H.R. 2775,
RELATING TO ADDITIONAL TAX SIMPLIFICATION
TITLE I. INDIVIDUAL TAX PROVISIONS
1.

Repeal "Wee Tots” Credit

Current law. The earned income tax credit (EITC) is a
refundable tax credit available to low-income workers with
children.
The EITC consists of (i) a basic credit, which is
adjusted for family size, (ii) a health credit, and (iii) a
supplemental credit for workers with a child under age one (the
"young child" or "wee tots" credit). The 1990 OBRA increased the
basic credit rate and added the family size adjustment, the
health credit, and the young child credit.
For 1991, the basic EITC rate is 16.7 percent of the first
$7,140 of earned income for a worker with one child and 17.3
percent of that amount for a worker with two or more children.
A
worker with one child may receive a basic EITC of up to $1,192.
For a worker with two or more children, the maximum basic credit
is $1,235.
The young child credit increases the basic EITC by 5
percentage points.
The maximum young child credit for 1991 is
$357. A taxpayer who has a child under age one and claims the
supplemental young child credit may not take that child into
account in determining the amount of the dependent care tax
credit or the exclusion for employer-provided dependent care
assistance.
For 1991, the basic EITC and the young child credit are
phased out for taxpayers with adjusted.gross income (or, if
greater, earned income) of more than $11,250.
The basic EITC and
the young child credit are not available to taxpayers with
adjusted gross income (or, if greater, earned income) of
approximately $21,245 or more.
In 1992, the basic EITC rate will increase to 17.6 percent
for a worker with one child and 18.4 percent for a worker with
two or more children.
The corresponding percentages for 1993 are
18.5 percent and 19.5 percent.
For 1994 and future years, the
percentages are 23 percent and 25 percent.
Proposal. The bill would repeal the young child credit and
would increase the family size adjustment to the basic EITC.
These changes would be effective for taxable years beginning
after December 31, 1991.
For workers with two or more children,
the basic EITC would be 21.7 percent in 1992, 22.8 percent in
1993 and 28.3 percent in 1994 and future years.

45
Administration position. The Administration opposes repeal
of the young child credit.
Repeal of the young child credit
would be contrary to the Administration's policy on child care.
Further, the repeal of the young child credit and the increase in
the family size adjustment would significantly change substantive
law.
The proposal would change the amount of the EITC received
by nearly 7 million families (or over half of all EITC
recipients). As a conseguence, this proposal cannot be viewed
merely as simplification.
Finally, the proposal as introduced is
estimated by the Office of Tax Analysis to lose almost $3 billion
over the budget period. While we understand that such a revenue
loss was not intended, this proposal simply does not belong on
the simplification agenda.
In 1989, the President proposed a number of measures designed
to increase the child care choices available to working families.
Among the proposals was a new, refundable tax credit of up to
$1,000 for each dependent child under age 4. The proposal was
targeted to the neediest families!
those with both low income
and preschool children.
A study by the Congressional Research
Service examined the child care expenditures of working mothers
of preschool children.
According to this study, child care
expenditures constituted about 6 percent of family income for
families that paid for child care.
However, for low-income
families that paid for child care, child care expenditures
constituted about 20 percent of income. Moreover, young children
generally require more extensive child care services than older
children, who may be in a school setting for much of the day. A
study for the Department of Health and Human Services by Dr.
Lorelei Brush found that the most significant predictor of child
care expenditures was the number of preschool children.
The young child credit, which was enacted as part of the 1990
OBRA, serves the same goals as the President's original proposal.
It recognizes that child care costs for infants are generally
higher than costs for older children.
The young child credit
also enhances families' options to have one parent stay at home
to care for a child during its first, critical months of life.
The proposal would decrease the EITC received by about 1
million low-income families with infants, even taking into
account the increase in the family size adjustment.
The Administration would be willing to consider a revenue
neutral simplification of the EITC which would reduce the
complications arising from current interaction requirements.
This approach would retain the basic policy decisions made last
year and would also simplify computation of the credit.

46
2.

Rollover of Gain on Sale of Principal Residence:— Rules
Relating to Use Prior to Divorce

Current law. The determination of whether a taxpayer uses
property as a residence, and of whether a taxpayer uses a
residence as his or her principal residence, is made based on all
the facts and circumstances.
No safe harbors are provided.
Proposal. The proposal would create a limited safe harbor
for taxpayers whose residence is sold pursuant to a divorce or
marital separation.
If a taxpayer in such a situation used the
residence as his or her principal residence at any time during
the 2-year period prior to the sale, the residence would be
treated as the taxpayer's principal residence at the time of the
sale for purposes of section 1034.
Administration position. The Administration does not oppose
this provision.
The provision establishes a special rule
benefitting taxpayers who move out of a principal residence
within 2 years before the residence is sold in connection with a
divorce or separation.
Although broadly drafted, this special
rule should ease the administration of section 1034 in cases of
divorce or separation, and will ordinarily have equitable
results.
The rule is particularly justified where a taxpayer is
required by a court order issued in connection with a divorce or
separation to move out of a principal residence before the
residence is sold.
3.

De Minimis Rule for Passive Losses

Current law. The passive activity rules of section 469 limit
the allowability of deductions and credits from passive
activities of individuals, estates, trusts, and certain
corporations.
In general, the rules provide that deductions from
a taxpayer's passive activities are allowed only to the extent of
the income from those activities.
The excess deductions (the
passive activity loss) may not be used to offset income from
wages, portfolio investments, and active trades or businesses.
Similarly, credits from a taxpayer's passive activities are
allowed only to the extent of the tax liability attributable to
the net income from those activities, and the excess credits (the
passive activity credit) may not be used to offset tax liability
attributable to other types of income.
The deductions and
credits that these rules disallow for a taxable year are carried
forward and treated as deductions and credits from passive
activities in the following taxable year.
Special rules apply when there has been a complete
disposition of a taxpayer's interest in a passive activity.
Under these rules, the taxpayer's current-year and suspended

47
losses are generally allowed in full in the year of the
disposition.
Special rules also apply to rental real estate activities.
Passive activities are defined to include all rental activities,
but natural persons (and certain estates) may deduct up to
$25,000 per year for losses from certain rental real estate
activities (or claim the deduction equivalent in credits from
those activities). This exemption from the passive activity
limitations applies only to losses and credits from activities in
which the taxpayer actively participates, and the exemption is
phased out for taxpayers with adjusted gross incomes between
$100,000 and $150,000.
Proposal. The bill would provide a de minimis exception from
the passive activity limitations for natural persons (and certain
estates). Under this exception, the taxpayer's losses from
passive activities would be allowed for any taxable year in which
the passive activity loss does not exceed $200.
The exception
would not apply if the $200 threshold is exceeded; in that case,
the passive activity limitations would apply in the same manner
as under current law.
The rules concerning eligibility for the exception would be
similar to the eligibility requirements for the rental real
estate exception, but would not include an adjusted gross income
limitation.
Thus, the exception would apply only to natural
persons and to estates during taxable years ending less than 2
years after the death of the decedent.
In addition, the
threshold is reduced to $100 for a married individual filing a
separate return, and the exception would not be available to
married couples who live together and file separate returns.
In general, the $200 threshold limitation would be applied by
computing the taxpayer's passive activity loss under current-law
rules.
Thus, suspended deductions from passive activities would
be taken into account.
Losses that are allowable under the
rental real estate exception would also count against the $200
threshold because that exception applies after the computation of
the passive activity loss.
A special rule would apply to items from publicly traded
partnerships.
Under this rule, a taxpayer's losses from a^
publicly traded partnership would not qualify for the de minimis
exception and would not be counted against the $200 threshold.
Administration position. We are not opposed to the objective
of providing relief from the burden of accounting for de minimis
passive losses, but we have concerns about the mechanics of this
proposal.

48
Under the proposal, a taxpayer must compute the passive
activity loss, applying all the rules of current law, to
determine whether the exception applies.
Thus, taxpayers
qualifying for the exception are relieved only from the burdens
of reporting the already—computed limitation on their returns and
retaining a record of the suspended deductions for use in future
years.
The proposal would eliminate the need for computations
allocating suspended deductions among multiple activities in
cases to which the de minimis exception applies.
There are very
few instances, however, in which (1) the passive activity loss
does not exceed $200 and (2) the suspended deductions are
attributable to multiple activities.
TITLE II. TAX-EXEMPT BOND PROVISIONS
To be covered in testimony before the Subcommittee on Select
Revenue Measures.
TITLE III. ADMINISTRATIVE PROVISIONS
1.

Payroll Tax Deposit Requirements

Current law. The Code provides that the Secretary may
establish the mode or time for collecting any tax if not
specified in the Code.
Pursuant to this authority, Treasury
regulations have generally established a system under which
employers deposit FICA taxes and income taxes withheld from em
ployees' wages.
The frequency with which deposits must be made
under this system increases as the amount of the deposit lia
bility increases.
Taxes withheld under the Railroad Retirement
Tax Act and the backup withholding provisions of the Code are
subject to similar requirements.
Employers may be required to deposit taxes under this system
up to 8 times per month if the amount of the deposit liability
equals or exceeds $3,000.
These deposits must be made within 3
banking days after the end of the eighth-monthly period to which
the taxes relate.
Monthly or quarterly deposits are required
where the amount of the deposit liability is less than $3,000.
The Code also requires employers that are subject to the
eighth-monthly system under the Treasury regulations to deposit
taxes by the close of the next banking day after any day on which
they cumulate an amount to be deposited of at least $100,000
(regardless of whether that day is the last day of an eighthmonthly period).

49
Proposal. The deposit schedule under the current payroll tax
deposit system would be altered.
The current eighth-monthly
system would be replaced with a system based on semi-weekly
periods.
Generally, taxes accumulated on Saturday, Sunday,
Monday, or Tuesday would be deposited on Friday.
Taxes
accumulated on Wednesday, Thursday, or Friday would be deposited
on Tuesday.
If banks were closed on the deposit day, the deposit
would be due on the next banking day. As under current law,
accumulations of $100,000 or more within a semi-weekly period
would be required to be deposited on the next banking day.
The
underdeposit tolerance under the current system for employers
that must make next-day or eighth-monthly deposits would be
retained, but would be reduced from 5 percent of the required
deposit to the greater of 2 percent or $150.
The current
category of employers that must make monthly deposits would be
eliminated.
Those with required deposits of $3,500 or less per
calendar quarter would generally be switched to quarterly
payments, while the rest would be subject to semi-weekly
deposits.
Administration position. The Administration does not oppose
this proposal.
It would simplify employers' tax deposit
obligations by replacing the current system with a system that is
generally clearer, more predictable and easier to understand.
2.

Estimated Tax Payment Rules for Small Corporations

Current law. A corporation is subject to an addition to tax
for any underpayment of estimated tax. A corporation does not
have an underpayment of estimated tax if it makes 4 timely
estimated tax payments each equal to at least 22.5 percent of its
tax liability for the current taxable year.
In addition, a
corporation that is not a "large corporation" may avoid the
addition to tax if it makes 4 timely estimated tax payments each
equal to at least 25 percent of its tax liability for the
preceding taxable year, so long as the preceding year was not a
short taxable year and the corporation filed a return showing a
tax liability for such year.
The only estimated tax payment that
a large corporation may base on its tax liability for the
preceding taxable year is the corporation's estimated tax payment
for the first quarter of its current taxable year.
A large
corporation is one that had taxable income of $1 million or more
for any of the 3 preceding taxable years.
Proposal. The bill would provide that a small corporation
with no tax liability in the preceding taxable year may avoid the
addition to tax if it makes 4 timely estimated tax payments each
equal to at least 25 percent of its tax liability for the second
preceding taxable year.
The second preceding year, like the
first preceding year, must not have been a short year and the
corporation must have filed a return for each of these 2 years.

50
A small corporation would owe no estimated tax for the current
taxable year, therefore, if it met these requirements and showed
no tax liability on its return for the second preceding year.
A large corporation would be permitted to use this expanded
safe harbor with respect to its estimated tax payment for the
first quarter of its current taxable year.
Administration position. We do not support this proposal.
The broadening of the safe harbor would provide targeted relief
at a significant revenue cost, and in any event is probably not
appropriate for large corporations.
3.

Large Corporate Underpayments

Current law. Section 6621(c) was added by the 1990 OBRA to
impose a rate of interest on large underpayments of tax by
corporations that is 2 percentage points higher than the rate of
interest that is generally charged on underpayments of tax.
This
higher rate of interest does not apply until 30 days after the
Internal Revenue Service sends the taxpayer a letter or notice
that indicates that the Internal Revenue Service believes there
has been an underpayment of tax, and a letter or notice is
disregarded for this purpose if the taxpayer makes a payment
within 30 days equal to the amount shown as due on the letter or
notice.
A large corporate underpayment of tax is defined as any
underpayment of more than $100,000 of tax for a taxable period.
The existence of a large corporate underpayment is determined by
comparing the amount of tax that was timely paid to the amount of
tax that is eventually determined to be the taxpayer's liability
for the period fe.q.. by agreement with the taxpayer or by a
court), without regard to the amount of the underpayment that was
asserted in the letter or notice that started interest running at
the higher rate.
Thus, under current law, if a taxpayer fails to
respond to a letter or notice asserting a small amount of tax
within 30 days, and the Internal Revenue Service later asserts a
much larger underpayment for that taxable period, then the
taxpayer owes interest at the higher rate on the entire
underpayment from the date that is 30 days after the first letter
or notice was sent.
Proposal. The bill would provide that a letter or notice
that asserts an underpayment of $100,000 or less would not start
the running of interest at the higher section 6621(c) rate.
Administration position. We do not oppose this proposal
provided an acceptable revenue offset is provided.
It eliminates
the possibility that a notice raising a relatively small issue
may commence the running of interest at the higher 6621(c) rate

51
with respect to a much larger deficiency assessed months or years
later.
We note that limiting the scope of the proposal to
letters or notices asserting a smaller underpayment (perhaps in
the $25,000 to $50,000 range) could preserve most of the benefit
of the proposal while reducing the revenue loss from the
proposal.
TITLE IV. ESTATE AND GIFT TAX PROVISION
Include Fractional Share of Property Qualifying for the Marital
Deduction in the Gross Estate
Current law. Generally, property passing to a spouse
qualifies for a gift or estate tax marital deduction.
In the
case of qualified terminable interest property or property
passing in a general power of appointment trust that qualifies
for the marital deduction, the beneficiary spouse must have the
right to receive the income from all or a specific portion of the
trust property.
In addition, in a general power of appointment
trust, the spouse must have a general power of appointment over
all or a specific portion of the trust property.
Treasury
regulations define a specific portion as a fractional or
percentage share. However, courts have held with regard to both
the income interest and the general power of appointment ^over
principal that a specific portion includes a fixed pecuniary
amount. See Northeastern Pennsylvania National Bank and Trust
Co. v. U.S.. 387 U.S. 213 (1967); Estate of Alexander v.
Commissioner. 82 T.C. 34 (1984).
Proposal. The bill would provide that a specific portion
means a fractional or percentage share.
Administration position. The Administration supports this
provision of the bill.
The marital deduction is a tax deferral
mechanism that permits a full deduction for gift and estate tax
purposes for property passing to a spouse on the assumption that
the full value of the property will be subject to transfer tax in
the surviving spouse's estate; i .e . . the property will be taxed
only once in the marital unit.
Interpreting "specific portion"
in the marital deduction provisions to include a pecuniary amount
may permit appreciation in the value of the property between the
death of the first spouse and the death of the second spouse to
escape transfer tax.
Such a result is inconsistent with the
purpose and assumptions of the marital deduction.
We believe
that the position in the regulations which is codified by the
bill is correct tax policy.

52
CONCLUSION
H.R. 2777 provides a substantial start toward simplifying our
tax laws.
Certain provisions of H.R. 2775 should be seriously
considered.
Work remains to perfect these proposals and to make
certain they meet revenue constraints.
However, the beginning
made by these bills is encouraging. Mr. Chairman, we look
forward to working with you and Mr. Archer, the members of this
Committee, and your staffs to complete the job.
I will be
pleased to answer any questions you may wish to ask.

REVENUE ESTIMATES OF H.R. 2777 AND H.R.2775
BY TITLE
(millions)
1992
1992-96
H.R. 2777
-3

-41

183

Other income tax provisions

-102

-255

Estate & gift tax provisions

-11

-31

__±3

+15

-88

-42

-37

-2,903

-3

-17

Tax-exempt bond provisions

-11

-111

Administrative provisions

-23

+464

+40

Total with §101

-71

-2,510

Total without §101

-37

376

Title I —
Title II —
Title III —
Title IV —
Title V —
Title VI —
Title VII —

Individual tax provisions
Large partnership provision
Foreign provisions

Excise tax provisions
Administrative provisions

Totals
H.R. 2775
Title I —

Individual with §101

Individual without §101
Title II —
Title III —
Title IV —

Estate & gift tax provision

Department of the Treasury
Office of Tax Analysis

July 22, 1991

¡TREASURY-NEWS

Department o f the Treasury • W ashington, p.c, • Telephone 566-2041

uLi^looiep

FOR IMMEDIATE RELEASE

EPT.OFTtS

Cheryl Crispen
202-566-2041

STATEMENT BY
THE HONORABLE JOHN ROBSON
DEPUTY SECRETARY OF THE TREASURY
ON THE SIGNING OF A
MEMORANDUM OF UNDERSTANDING WITH THE
BULGARIAN NATIONAL BANK
JULY 23, 1991
WASHINGTON, D.C.

It is a pleasure to join my friends from the Ministry of
Finance and the Bulgarian National Bank in signing this Memorandum
of Understanding to establish an Institute of Banking for their
reforming nation.
This joint initiative for the education and
training of future employees of banks and other financial
institutions will be a crucial step to improve the banking system
that is vital to Bulgaria's economic reform efforts and, indeed, to
the very functioning of the country's economy.
This agreement is consistent with considerable ongoing
international efforts to help all reforming nations.
At the
Economic Summit in London last week, the United States joined the
other major industrial nations in renewing our firm commitment to
supporting reforms in Central and Eastern Europe.
For the United
States, this means a commitment to help the region establish more
efficient and effective financial systems for sustained economic
growth.
In today's tough global marketplace, private business cannot
exist without a modern, dependable and efficient banking system.
Banks function as the allocators of credit for businesses — large
and small —
and as the fundamental facilitators of commerce
through the payment system.
Banks also create incentives for
savings among individuals,
families, entrepreneurs and large
corporations.
In turn, those savings provide capital that fuels
the
economy
and
helps
businesses
take
advantage
of
new
opportunities for growth in competitive markets.
NB - 1381

Yet, we have found that, for many countries trying to shift
from a planned economy to a free market, one of the most ignored
links in the reform chain is the banking system.
Under the old
regimes in these countries, including Bulgaria, banks had become
instruments of central planning, serving the narrow interests of
the regime in power rather than the broad interests of the
population. It is clear that these countries now need full-service
banking systems that help consumers purchase washing machines and
cars, that safeguard the savings of couples who want to buy a
house, that help businesses export to the United States or raise
capital to expand their capacity.
In response to this need, the Bush Administration is providing
expertise and technical assistance that can help new banks get on
their feet.
Already, we have agreements with Czechoslovakia and
Yugoslavia to help put banking systems in place.
Today, the United States and Bulgaria are entering into a
pledge to work together in establishing a better banking system for
Bulgaria.
Since a banking system is only as effective as the
people who operate it, our agreement focuses on developing the
human resources necessary to integrate Bulgaria*s banks and capital
markets into the broader international economy.
Specifically, the United States Treasury Department intends to
work with existing and future commercial banks, along with the
Bulgarian National Bank, to provide comprehensive training in
banking and finance.
We plan to help Bulgaria establish an
Institute of Banking with a practical curriculum geared toward both
entry-level technicians and mid—level managers.
And, we are
planning for programs to train Bulgarian instructors, enabling the
Institute to become self-sustaining as soon as possible.
But while the United States is helping the Bulgarian people in
the rebirth of the their commercial banking industry, the real work
will be done by the Institute itself. With critically needed help
from the Bulgarian commercial bankers and the Bulgarian National
Bank, I hope we can work together to have the Institute up and
running in the next few months.
I am confident the spirit of cooperation will continue to
ensure the success of this agreement.
The establishment of this
Institute of Banking will be a strong move in the continued
development of a sound banking system for Bulgaria.
It will be a
solid foundation for economic stability, sustained growth, and the
fruits of free enterprise and market economics.
Thank you.

###

TREASURYNEWS

Department o f the Treasury • Washingtoi .
FOR RELEASE AT 2:30 P.M.
July 23, 1991

UU4Ï1
-CONTACT:
EPT.OF

d .c .

g Telephone 566-204

Office of Financing
2 0 2 /3 i7 6 - 4 3 5 0

TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approxi
mately $20,800 million, to be issued
August 1, 1991.
This
offering will provide about $2,725 million of new cash for the
Treasury, as the maturing bills are outstanding in the amount
of $ 18,085 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239—1500, Monday, July 29, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$10,400 million, representing an additional amount of bills
dated
May 2, 1991
and to mature October 31, 1991
(CUSIP No. 912794 XL 3), currently outstanding in the amount
of $8,023
million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $ 10,400 million, to be
dated August 1, 1991
and to mature January 30, 1992
(CUSIP
No. 912794 XX 7).
1
The bills will be issued on a discount basis under competitive
and noncompetitive bidding, and at maturity their par amount will
be payable without interest. Both series of bills will be issued
entirely in book-entry form in a minimum amount of $10,000 and in
any higher $5,000 multiple, on the records either of the Federal
Reserve Banks and Branches, or of the Department of the Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
August 1, 1991.
In addition to the
maturing 13-week and 26-week bills, there are $ 10,691 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 aggre
gate amount of maturing bills held by them. For purposes of deter
mining such additional amounts, foreign and international monetary
authorities are considered to hold $ 1,631 million of the original
13-week and 26-week issues. Federal Reserve Banks currently hold
$1,781 million as agents for foreign and international monetary
authorities, and $ 7,297 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 5176-1 (for 13-week series) or Form
PD 5176-2 (for 26-week series).
NB-13S2

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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

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.
Com
petitive 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures.
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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.

8/89

Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239

Office of Financing
202-376-4350

FOR IMMEDIATE RELEASE
July 23, 1991

RESULTS OF TREASURY'S AUOÎlÙN* C)F 2-YEAR NOTES
Tenders for $12,549 million of 2-year notes, Series AD-1993,
to be issued July 31, 1991 and to mature July 31, 1993
were accepted today (CUSIP: 912827B68)•
The interest rate on the notes will be 6 7/8%.
The range
of accepted bids and corresponding prices are as follows:

Low
High
Average

Yield
6.93%
6.95%
6.94%

Price
99.899
99.862
99.881

Tenders at the high yield were allotted 8%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
56,890
33,466,005
38,100
41,465
128,405
51,965
1,780,665
62,855
26,315
70,255
16,780
636,365
199.465
$36,575,530

Accepted
56,890
11,121,645
38,100
41,455
53,405
42,350
729,670
51,175
25,315
70,255
16,765
102,265
199.465
$12,548,755

The $12,549 million of accepted tenders includes $972
million of noncompetitive tenders and $11,577 million of
competitive tenders from the public.
In addition, $478 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign ^and
international monetary authorities.
An additional $587 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

NB-1383

Claire E. Buchan
Appointed Deputy Assistant Secretary
For Public Affairs

Secretary of the Treasury Nicholas F. Brady today announced the
appointment of Claire E. Buchan to serve as Deputy Assistant
Secretary for Public Affairs.
Ms. Buchan will serve as the
principal advisor to the Assistant Secretary for Public Affairs
and Public Liaison on communicating Treasury policies and
programs to the public through the print and electronic media.
Prior to joining Treasury, Ms. Buchan was the Deputy Director of
Communications for the Republican National Committee.
Prior to
her serving there, she was Press Secretary and Director of Public
Affairs for the United States Trade Representative.
Ms. Buchan
has also served as Deputy Director of Public Affairs for the U.S.
Department of Commerce and Press Secretary for Congressman H.
James Saxton.
Ms. Buchan graduated from Michigan State University with a
bachelor of arts degree in Business Administration.
She resides
in Alexandria, Virginia.

NB-1384

Vnj

Department o f tho Treasury • w a*hlngton,D .C.» Telephone sss-2041

IMMEDIATE RELEASE
July 23, 1991

Contact:

Desiree Tucker-Sorini
(202) 566-8191

Statement
Office of the Assistant Secretary
for Public Affairs/Public Liaison
On
Soviet Membership in the IMF/World Bank

The Soviet Union has for some time expressed an interest in
joining the IMF and World Bank.
We understand that they
submitted a formal application for membership to the two
institutions on Monday, July 22.
At the London Economic Summit, July 15-17, it was agreed
that as a matter of urgency the Soviet Union should be granted a
Special Association with the IMF and World Bank as opposed to
commencing a lengthy negotiation for full membership.
This
decision was based on a consensus among the G-7 that Special
Association would provide the most substantive and rapid approach
to addressing the reform of the Soviet economy and its eventual
integration into the world economy.
The U.S. believes that full
membership negotiation between the Soviet Union and the IMF/World
Bank is not the most effective way for proceeding with Soviet
economic reform.
We understand that both the IMF and The World Bank are
prepared to proceed immediately in developing a Special
Association for the Soviet Union which would enable immediate
progress to be made in reforming the economy in the Soviet Union
and in providing technical assistance.

NB-1385

AS PREPARED FOR DELIVERY
FOR IMMEDIATE RELEASE

NSémtact:

Cheryl Crispen
202-566-2041

The Honorable Nicholas Brady
Secretary of the Treasury
Treasury Annual Awards Ceremony
July 24, 1991
Washington, D.C.

Thank you, David (Nummy). Thank you, also, to the awardees,
families and friends with us at this ceremony.
I know all the
families share in Treasury's pride for the top-flight employees
recognized today.
This group represents the hard work and
creativity that makes our Department a success.
The Annual Awards Ceremony is a distinguished tradition at
Treasury — pioneered by Secretary Douglas Dillon in 1964.
Secretary Dillon was an innovative manager who recognized the
important contributions of government employees.
And he created
the first Annual Awards to honor those who "distinguished
themselves by reason of their high-level performance."
That first ceremony was on Treasury's 175th Anniversary, and
the awards focused on significant Departmental suggestions and
accomplishments for the early 1960s.
One awardee suggested the
use of new "stitching machines" for BEP — to assemble food
coupon booklets — saving $16,000 for the taxpayers.
Another
suggested a new welding technique for Coast Guard buoys — that's
when the Coast Guard was still under Treasury.
Since then, each Treasury Secretary has had a different
focus — recognizing new awards and bringing new values to the
ceremony.
In 1979, the Equal Employment Opportunity Award and
the Outstanding Handicapped Employee Award were recognized.
In
1985, the Cash Management Award was added.
And there are many
others, including: small business awards, external awards, honor
awards and 50-years of service awards.
This year, we are honoring a group of men and women chosen
to represent our most recent award winners.
We also are honoring
the more than 400 Treasury employees who contributed to the
dramatic success of Operations Desert Shield and Desert Storm.
These men and women have demonstrated the ability we've seen
among all Treasury employees to rise to any challenge and to
serve our country.
NB - 1386

2
Each honoree recognized today has contributed beyond the
call of duty to the Treasury Department, and each deserves our
thanks and praise for ensuring efficiency and effectiveness that
benefits American taxpayers.
Some of today's awardees have made suggestions that save the
taxpayers money.
Some have overcome physical and societal
barriers, while excelling in the workplace.
Others are
contributing extensively to the President's war on drugs.
And
all are making critical and outstanding contributions that make
this a better department.
For example:
A group in New York sold a record number of savings
bonds, achieving 110 percent of their goal.
A suggestion was made to automate the printing of
target sheets for ATF firing ranges, leading to a cost
savings of $14,000 annually.
That's no small amount.
If every government employee saved us $14,000, our
nation would be more than $42 billion richer.
And a 65-vear veteran of the U.S. Customs Service is
being recognized today.
Ferdinand Gallozzi, now
Special Assistant to the Regional Commissioner in New
York, began as a messenger for Customs in 1926.
These accomplishments are only a few of the first-rate
efforts recognized today.
Individually, they are extraordinary.
Together, these contributions are part of a larger effort to keep
our nation strong.
The accomplishments of today's awardees remind me of a story
about another outstanding accomplishment — the great Notre Dame
Cathedral in Paris.
During the building of the Cathedral, there
were three bricklayers working at the site.
The first was asked
what he was doing? he replied:
"I'm building a wall."
The
second was asked what he was doing.
He replied:
"I, too, am
building a wall." When the third was asked, he replied: "I am
building a great cathedral."
In that spirit, today's honorees have helped more than their
offices and their department.
Each is helping to build a more
dependable and effective government for the United States.
These accomplishments are tremendous, and I am proud to
salute all of today's awardees.
You have truly made great
contributions to the government and to the American people.
Thank you very much.

###

Department of the Treasury • Washington,

D.c. • Telephone 566-2041

FOR RELEASE ON DELIVERY
Expected at 10:00 A.M.
July 24, 1991

STATEMENT OF THE TREASURY DEPARTMENT
PRESENTED TO THE
SUBCOMMITTEE ON POLICY RESEARCH AND INSURANCE
OF THE
HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

The Treasury Department welcomes this opportunity to discuss
the results of the Treasury's second study of Governmentsponsored enterprises and the Administration's legislation that
will provide for more effective financial oversight of these
important institutions.
The failure of many federally insured thrift institutions in
the 1980s, and the massive Federal funding required for their
resolution, have focused the attention of the Administration and
Congress on other areas of taxpayer exposure to financial risk.
With this concern in mind, Congress enacted legislation requiring
the Secretary of the Treasury to study and make recommendations
regarding the financial safety and soundness of GSEs.
The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA) requires the Treasury to conduct two annual
studies to assess the financial safety and soundness of the
activities of all Government—sponsored enterprises.
The first of
these studies was submitted to Congress in. May 1990.
The Omnibus Budget Reconciliation Act of 1990 (OBRA)
requires the Treasury to provide an objective assessment of the
financial soundness of GSEs, the adequacy of the existing
regulatory structure for GSEs, and the financial exposure of the
Federal Government posed by GSEs.
In addition, OBRA requires the
Treasury to submit to Congress recommended legislation to ensure
the financial soundness of GSEs.
Legislation reflecting the
approach identified in the April 30th report has been submitted.
The 1991 study is intended to meet the study requirements of
FIRREA and OBRA.
It includes an objective assessment of the
financial soundness of the GSEs, which was performed by the
Standard & Poor's Corporation (S&P) at the Treasury's request.
The study also includes the results of the Treasury's analysis of
the existing regulatory structure for GSEs and recommendations
for changes to this structure.

NB-1387

2
The immense size and concentration of GSE activities serve
to underscore the need for effective financial safety and
soundness regulation of GSEs. The outstanding obligations of the
GSEs, including direct debt and mortgage-backed securities,
totaled almost $1 trillion at the end of calendar year 1990.
Thus, financial insolvency of even one of the major GSEs would
strain the U.S. and international financial systems and could
result in a taxpayer-funded rescue operation.
The concentration of potential taxpayer exposure with GSEs
is obvious when compared to the thrift and banking industries.
The total of credit market debt plus mortgage pools of the five
GSEs included in this report is greater than the total deposits
of the more than 2,000 insured S&Ls and about one-third the size
of the deposits of the more than 12,000 insured commercial banks.
Consequently, the Federal Government’s potential risk exposure
from|GSEs, rather than being dispersed across many thousands of
institutions, is dependent on the managerial abilities of the
officers of a relatively small group of entities.
Despite the size and importance of their activities, GSEs
are insulated from the private market discipline applicable to
other privately owned firms. The public policy missions of the
GSEs, their ties to the Federal Government, the importance of
their activities to the U.S. economy, their growing size, and the
rescue of the Farm Credit System in the 1980s have led credit
market participants to view these GSEs more as governmental than
as private entities.
Because of this perception, investors
ignore the usual credit fundamentals of the GSEs and look to the
Federal Government as the ultimate guarantor of GSE obligations.
Based on the S&P analysis of the financial safety and
soundness of the GSEs, we have concluded, as we did last year,
that no GSE poses an imminent financial threat.
Because there is
no immediate problem, there may be the temptation to follow the
old adage 11if i t ’s not broke, don't fix it". We, however,
believe that this course of action would be inappropriate.
The
experience with the troubled thrift industry and the Farm Credit
System in the 1980s vividly demonstrates that taking action once
a financial disaster has already taken place is costly and
difficult.
Given the need for effective financial oversight of the
GSEs, the Treasury has developed four principles of effective
safety and soundness regulation. These principles are:
I.

Financial safety and soundness regulation of GSEs must be
given primacy over other public policy goals.

Regulation of GSEs involves multiple public policy goals.
Without a clear statutory preference, a current GSE regulator
need not give primary consideration to safety and soundness

oversight.
Therefore, unless a regulator has an explicit primary
statutory mission to ensure safety and soundness, the Government
may be exposed to excessive risk.
II.

The regulator must have sufficient stature to avoid capture
by the GSEs or special interests.

The problem of avoiding capture appears to be particularly
acute in the case of regulation of GSEs. The principal GSEs are
few in number; they have highly qualified staffs; they have
strong support for their programs from special interest groups;
and they have significant resources with which to influence
political outcomes. A weak financial regulator would find GSE
political power overwhelming and even the most powerful and
respected Government agencies would find regulating such entities
a challenge.
Clearly, it is vital that any GSE financial
regulator be given the necessary support, both political and
material, to function effectively.
The Treasury Department is under no illusions concerning the
capture problem.
No regulatory structure can ensure that it will
not happen.
Continued recognition of the importance of ensuring
prudent management of the GSEs and vigilance in this regard by
both the executive and legislative branches will be necessary.
Ill*

Private market risk mechanisms can be used to help the
regulator assess the financial safety and soundness of
GSEs.

The traditional structure and elements of financial
oversight are an important starting point for GSE regulation.
However, Governmental financial regulation over the last decade
has failed to avert financial difficulties in the banking and
thrift industries. Additionally, the financial services industry
has become increasingly sophisticated in the creation of new
financial products, and the pace of both change and product
innovation has accelerated in the last several years.
As a
result, to avoid the prospect that GSEs might operate beyond the
abilities of a financial regulator and to protect against the
inherent shortcomings in applying a traditional financial
services regulatory model to entities as unique as GSEs, it would
be appropriate for the regulator to enlist the aid of the private
sector in assessing the creditworthiness of these firms.
IV.

The basic statutory authorities for safety and soundness
regulation must be consistent across all GSEs. Oversight
can be tailored through regulations that recognize the
unique nature of each GSE.

The basic, but essential, authorities that a GSE regulator
should have include:

(1)

authority to determine capital standards;

(2) authority to require periodic disclosure of
relevant financial information;
(3) authority to prescribe, if necessary, adequate
standards for books and records and other internal controls;
(4)

authority to conduct examinations; and

(5) authority to take prompt corrective action and
administrative enforcement, including cease and desist
powers, for a financially troubled GSE.
Consistency of financial oversight over GSEs does not imply
that the regulatory burden is the same irrespective of the GSEs'
relative risk to the taxpayer. Weaker GSEs should be subjected
to much closer scrutiny than financially sound GSEs. However,
the basic powers of the regulator to assure financial safety and
soundness should be essentially the same for all GSEs.
Regulatory discretion is necessary within these broad powers
because the GSEs are unique entities and, as such, need
regulatory oversight that reflects the nature of the risks
inherent in the way each conducts its business. Additionally,
because financial products and markets change rapidly, regulatory
discretion would allow for flexibility to deal with the changing
financial environment.
The Treasury has analyzed the adequacy of the existing
regulatory structure of the GSEs against the backdrop of the four
principles of effective financial safety and soundness regula
tion. We have found deficiencies in the existing regulatory
structure for some GSEs. The Farm Credit Administration does not
have the full complement of regulatory authorities to be an
effective safety and soundness regulator for Farmer Mac.
The
Administration's bill would give the FCA these additional
authorities, which include general rulemaking authority, and
supervision of the safe and sound performance of the Corporation
utilizing authorities granted to FCA in existing law. This would
clarify the FCA's authorities to set capital standards, for
example, which we believe is fundamental for every safety and
soundness regulator.
We are aware that the General Accounting Office has
suggested the option of combining oversight of all the GSEs under
a single regulator. There are certainly sound arguments in favor
of such an approach, and creating one regulator for all of the
GSEs could, if structured correctly, result in effective
oversight of these entities. However, the advantage of the
Administration's proposal is that Congress does not have to
create yet another new bureaucracy.
The Administration's bill

5
utilizes the specialized expertise of the existing regulatory
structure and makes it more effective, which would more than
offset any savings or efficiencies from a single regulator.
In conclusion, we believe that the passage of the
Administration's proposed legislation will result in more
effective safety and soundness oversight of these important
entities, thereby sharply reducing the threat the taxpayer would
be called upon for another costly and painful financial rescue.
Moreover, effective safety and soundness oversight, by assuring
the long-term financial viability of the GSEs, will enhance the
effectiveness of these entities in achieving their public
purposes. Action on this legislation will send a strong signal
that we have learned some important lessons from the recent and
painful difficulties we have experienced in the financial
services industry.

o 0 o

PU BLIC DEBT NEWS
Department of the Treasury •

FOR IMMEDIATE RELEASE
July 24, 1991

Bureau of

'Washington, DC 20239

CONTACT^ roffice of Financing
2651
U U ¿ Q ^ U
202-376-4350
tai

RESULTS OF TREASURY'S AUCTION OF 5-YEAR NOTES
jEPT* OF TH£ TfttASuHT

Tenders for $9,331 million of 5-year notes, Series R-1996,
to be issued July 31, 1991 and to mature July 31, 1996
were accepted today (CUSIP: 912827B76).
The interest rate on the notes will be 7 7/8%.
The range
of accepted bids and corresponding prices are as follows:

Low
High
Average

Yield
7.88%
7.89%
7.89%

Price
99.980
99.939
99.939

$10,000 was accepted at lower yields.
Tenders at the high yield were allotted 45%.
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
41,072
32,597,315
23,951
42,551
267,459
47,950
1,486,209
37,592
23,715
59,989
17,469
388,583
46.289
$35,080,144

Accepted
41,047
8,554,065
23,791
42,551
115,659
38,130
226,784
36,842
23,710
59,989
17,417
104,232
46.289
$9,330,506

The $9,331 million of accepted tenders includes $922
million of noncompetitive tenders and $8,409 million of
competitive tenders from the public.
In addition, $250 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $200 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

NB-1388

AS PREPARED FOR DELIVERY
EMBARGOED UNTIL 3:00 p.m.
July 24, 1991

Contact:

Barbara Clay
202-566-5252

The Honorable John E. Robson
Deputy Secretary of the Treasury
at the
Management Training and Market Economics
Education Ceremony
July 24, 1991
Washington, D.C.

I
(

It is a great pleasure to be here today to celebrate the
kick-off of the Management Training and Market Economics
Education program for Central and East Europeans.
Management
training and economics education are important planks in our
Central and East European assistance effort.
As President Bush
stated at the February Conference at the White House which
focused on this initiative, "educated, well-trained labor forces
[are] absolutely crucial for economies in transition. [A] well
informed populace lends support for reform."
In a few minutes, Dr. Ronald Roskens of AID and Ambassador
Henry Catto of USIA will announce 20 projects, involving 32 U.S.
colleges and universities, which will receive grants totalling
$18 million.
These projects will bring America's outstanding
academic resources in management training, business education and
economics education to thousands of people in Bulgaria,
Czechoslovakia, Hungary, Poland, Romania, and Yugoslavia.
Those
involved in these projects are to be congratulated.
They will
make concrete contributions — Washington State University's
small business development center expertise will go to Romania;
the "Big 1 0 's" executive education know-how will be available in
Poland, Czechoslovakia and Hungary? and video programs such as
"Economics USA" will be shown throughout the region — to name a
few.
These projects represent a joint effort between the United
States' public and private sectors to fulfill our commitment to
assist the emergence of democracy and free market economies in
Central and Eastern Europe.
These projects will also have the
important participation of Central and East European
institutions.
In fact, I hope to be able to meet with
representatives of the two Romanian institutions who will be
project participants when I visit Romania and Albania next week.

NB 1389

In addition to the specific grants to be announced today,
other universities, corporations and non-profit organizations
throughout the United States are organizing and funding their own
programs to educate Central and East Europeans:
—

corporations are sending managers to U.S. executive
education programs and hopefully will offer more slots
in their management training programs?
non-profit organizations are teaming-up with
universities and corporations to bring students to
study in the U .S .;

—

business schools are sending MBA graduates to assist
enterprises in the region? and
the Citizens Democracy Corps is matching United States
participants and Central and East Europeans in this
educational collaboration.

Dr. John Ryan, senior counsel to Dr. Ronald Roskens at AID, is
available to work with these groups and to help sustain the
momentum in this area.
We encourage and applaud these efforts.
By knitting
together the United States Government, universities, corporations
and non-profit organizations, along with Central and East
European institutions, we can accomplish our goal of exposing as
many Central and East Europeans as possible to management
training and market economics education.
Education is a necessary springboard for reform.
But, a
thriving business climate, where one must meet a payroll or
compete with another manufacturer, will teach the principles of
management training and free market economics faster than any
course.
Therefore, we must remember that management training and
economics education is only one important tile in the mosaic of
evolution to a free market economy.
We have learned that becoming a free market is a complex,
multi-faceted process where many actions must be synchronized —
currency convertability, price liberalization, tax reform,
financial sector development, private property rights, removal of
trade barriers, privatization of state enterprises, and the
establishment of "safety nets" to help cope with unemployment.
President Bush has repeatedly stated his determination to
support Central and Eastern Europe's transformation to a free
market economy.
And, at the Economic Summit in London last week,
the United States joined the other major industrial nations in
renewing this commitment.

Since the historic decisions in Central and Eastern Europe
to follow the course of democracy, the United States has provided
almost $2 billion in grants and other assistance to the region.
This includes technical assistance in excess of $200 million for
privatization, management training, legal and financial reforms,
strengthening democratic institutions, and bank training
institutes such as the initiative announced just yesterday for
Bulgaria.
We have established Enterprise Funds in Poland, Hungary and
Czechoslovakia and capitalized them with $360 million to help
breathe life into the private sector.
We have supported the
efforts of international financial institutions such as the
International Monetary Fund, the World Bank and the newly created
European Bank for Reconstruction and Development.
And, on July
12, President Bush announced his Trade Enhancement Initiative for
Central and Eastern Europe to expand access to export markets.
These efforts reflect our belief that the success of the
economic transformation in Central and Eastern Europe cannot
depend solely on the response of governments, and must look to
the response of the private sector and the attraction of
investment.
And, in the end, although outsiders can help,
successful transitions to free markets will be accomplished
primarily through the skills and the fortitude of the people who
have chosen the path toward market economies.
Free markets work best when they enjoy the confidence and
understanding of the people who stand to benefit.
By offering
management training and market economics education to the people
of Central and Eastern Europe, we can help accelerate the pace of
reform, and we can foster the best training and education program
available — real business experience.
Thank you.

###

For Release Upon Delivery
Expected at 10:00 a.m.
July 25, 1991

STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE ’MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I
am pleased to be here today to present the views of the
Department of the Treasury on several legislative proposals which
deal with pensions. Specifically, my testimony will address the
Administration's proposal for pension simplification and expanded
coverage and portability as well as H.R. 2730, the "Pension
Access and Simplification Act of 1991” (introduced June 24 by
Chairman Rostenkowski), H.R. 2641 (introduced June 13 by Reps.
Chandler, Archer, Matsui, Johnson, Guarini and Anthony) and
H.R. 2742 (introduced June 25 by Rep. Cardin).
The Internal Revenue Code provisions relating to employee
benefits have become increasingly complex in recent years.
This
complexity reflects both the wide variety of plans and their
increasing sophistication. While the tax laws relating to
employee benefits may never be "simple,” they clearly can be
simpler than they are now, particularly for small employers who
neither need nor want more complex structures.
Eliminating
unneeded complexity will benefit both the taxpayer and the tax
administrator and will offer the prospect of improved compliance.
Pension coverage and related pension portability issues have
been a public policy concern for over two decades.
Policies to
expand pension coverage, particularly in the small business
sector, and to enhance pension portability are necessary to
strengthen the role of private pension plans in retirement income
planning.
To the extent that retirement income from private
pensions is inadequate, there will be increasing pressure on
Social Security and other government-sponsored systems.

NB-1390

2
In response to Chairman Rostenkowski's request last year for
the Treasury Department's recommendations concerning
simplification, we identified the employee benefit plan area as
one that merited further study to determine whether viable
simplification proposals could be developed.
Since then, the
Administration has worked on developing, through the joint
efforts of the Treasury Department and the Department of Labor,
proposals to simplify the tax law governing retirement plans, to
expand pension coverage, and to increase pension portability.
These proposals were announced on April 30, 1991, by Secretary of
Labor Martin.
The Administration's proposals were crafted to accomplish
these objectives within the constraint of revenue neutrality and,
in total, do not lose revenue. As the Office of Tax Analysis
estimates of the Administration proposals demonstrate (Table I) ,
that requirement was satisfied. We understand that the Joint
Committee on Taxation's estimates of the similar proposals in
H.R. 2730 differ somewhat from our estimates, but not to a degree
which has prevented formulation of a proposal satisfying the
constraints of the Budget agreement.
ADMINISTRATION PROPOSALS
The Administration's proposals include a number of
amendments to the Internal Revenue Code which would contribute
substantially to the goals of simplifying the pension tax law,
expanding pension coverage and enhancing pension portability.
These proposals are as follows:
1.

Simplify and encourage tax-free rollovers. We propose
to simplify and encourage tax-free "rollovers” of
pension distributions into IRAs or qualified plans by
allowing all plan distributions to be rolled over,
except distributions which are made in the form of a
life annuity or in installment payments over 10 years
or more.
The current law restrictions on rollovers of
after-tax employee contributions and minimum required
distributions would be retained.
Plans would be
required to offer employees an election to have
distributions eligible for rollover treatment
transferred directly to an IRA or other qualified plan
that accepts such contributions.
The favorable income
tax treatment for pension distributions which are not
rolled over — the special averaging rules and the
deferral of tax on the appreciation on employer
securities — would be repealed and the method for
determining the taxable amount of pension annuities
would be simplified.
The six rules potentially
applicable to a pension distribution would be
simplified to a single rule providing that such

3
distributions are currently taxed unless they are
rolled over.
2.

Establish a new simplified employee pension program.
Employers with 100 or fewer employees and no other
retirement plan would be eligible for the new plan.
Under the proposal, these employers would be relieved
from testing for nondiscrimination if they make a base
contribution for each eligible employee of 2 percent of
pay (up to a maximum base contribution of $2,000).
Employees could elect to contribute $4,238 (one-half
the limit on elective deferrals under 4 0 1 (k) plans).
In addition, the employer could make matching
contributions of up to 50 percent of the employees'
contributions.

Simplify the administration of 4 0 1 (k) and other plans.
The proposal would simplify the rules for testing
whether 401(k) plans provide proportionate benefits to
lower paid employees by using the prior year's
experience.
As a related matter, the proposal would
also simplify the definition of "highly compensated
employee” for purposes of the employee benefit
provisions of the Code and repeal the complex family
aggregation rules.
In addition, the proposal would
enhance the Internal Revenue Service master and
prototype program under which affordable standardized
plans can be offered.

Make 401(k^ plans generally available. Section 4 0 1 (k)
plans would be extended to employees of tax-exempt
organizations and State and local governments.

Adopt a uniform vesting standard. The vesting
requirements for multiemployer plans would be conformed
to the existing requirements for single employer plans.

We are pleased to see that most of the areas targeted by the
Administration's proposals are included in each of the bills
which is the subject of today's hearing.
ADMINISTRATION POSITION ON THE BILLS
H.R. 2730 is consistent with the Administration proposals,
and we support its enactment.
It adheres to national budget
policy and demonstrates that simplification of the employee
benefit provisions of the Internal Revenue Code can be achieved
while access to qualified plans is expanded.
The simplification
provisions of the bill do not alter fundamental retirement and
tax policies, but meaningful simplification is achieved.
The
bill simplifies and builds on existing structures and thus

4
minimizes the complications inherent in any revision. We commend
Chairman Rostenkowski for introducing the bill, and we have
appreciated the opportunity to work with the Congressional staffs
to turn proposals into proposed legislation.
In the current budgetary environment, any simplification
proposals are constrained by the realities of the Federal budget.
We understand from the Chairman's remarks on introduction of
H.R. 2730, that he intends that the bill be revenue neutral.
Our
own revenue estimates, in connection with the Administration's
pension proposals, demonstrate that this objective is attainable.
Our preliminary review indicates that both H.R. 2641 and
H.R. 2742, in their current form, would lose significant revenue.
The Administration must oppose pension legislation that loses
revenue.
In addition, as noted in more detail in our comments on
specific provisions, we have substantive policy concerns about
several provisions of H.R. 2641 and H.R. 2742.
A number of provisions in H.R. 2641 relate to recently
proposed Treasury regulations.
These regulations are primarily
the nondiscrimination regulations originally proposed in May 1990
and the separate line of business regulations proposed in
February 1991.
In accordance with the Treasury's standard
administrative practice, comments were requested with respect to
the proposed regulations and public hearings were held.
In the
process for promulgating final regulations, we review all the
written and oral comments received, consider them carefully and
modify the regulations where appropriate in light of the public
comment.
We are nearing issuance of final regulations.
Accordingly, we believe that Congressional action without
reference to final regulations would be premature.
Of necessity, points of difference tend to be highlighted in
testimony on multiple bills.
However, in viewing the overall
import of these three bills, I find more similarities than
differences on fundamentals.
We are ready to work with the
Congress to move from this general consensus to enacted
legislation.
Our substantive comments on the provisions of H.R. 2730,
H.R. 2641 and H.R. 2742 follow.

5
Taxability of Distributions from Qualified Plans (Section 101,
H.R. 2730; section 201, H.R. 2641; section 201, H.R. 2742)
Current Law
Distributions from qualified plans and other tax-preferred
retirement programs are generally subject to income tax upon
receipt.
Premature distributions, generally those made before
age 59%, may also be subject to a 10-percent additional tax. A
number of special rules may alter the general rule if applicable.
Rollovers
Current income tax and, if applicable, the additional tax on
a distribution can be avoided if the taxable portion of an
eligible distribution is "rolled over" to another qualified plan
or Individual Retirement Account (IRA). Only certain
distributions (generally distributions that are either "qualified
total distributions" or "partial distributions") are eligible for
rollover treatment.
As only the taxable portion of a
distribution is eligible for rollover treatment, after-tax
employee contributions may not be rolled over.
Lump Sum Distributions
Certain lump sum distributions are eligible to be taxed
under special rules. These rules generally result in a lower
rate of tax than would otherwise apply to a distribution.
In
general, a lump sum distribution is a distribution within one
taxable year of the balance to the credit of the participant
which becomes payable on account of death, separation from
service, or disability, or after attainment of age 59%.
A participant or beneficiary generally may be able to elect
to use the 5-year forward averaging rules with respect to a lump
sum distribution if the distribution is received after age 59%.
Five-year forward averaging is calculated under the tax rates in
effect for the year of the distribution, and the election is
available with respect to one distribution in an employee's
lifetime.
If a lump sum distribution is received before 1992,
the recipient may also be able to elect to have the portion of
the distribution attributable to pre-1974 plan participation
taxed at capital gains rates.
Participants who attained age 50 before January 1, 1986,
have three additional options which may reduce the rate of tax on
a distribution.
First, instead of using the 5-year forward
averaging rules, they may continue to use the 10-year forward
averaging rules available before the Tax Reform Act of 1986.
Second, they may use the 5-year or 10-year forward averaging
rules even if they are under the currently prescribed age
requirement (age 59%) when they receive a distribution, if all of

the other requirements for using those rules are met.
Finally,
they may elect to have the entire portion of a lump sum
distribution attributable to pre-1974 participation taxed at a 20
percent rate.
If a lump sum distribution includes securities of the
employer corporation, the net unrealized appreciation (NUA) in
the employer securities is generally not subject to tax until the
securities are sold, unless the recipient elects to have the
normal distribution rules apply. When the securities are^sold,
the NUA is treated as long-term capital gain.
If a distribution
is not a lump sum distribution, only the NUA attributable to the
employee's own contributions may be excluded from income under
these special rules.
Death Benefit Exclusion
Up to $5,000 in death benefits paid by an employer upon the
death of an employee may be excluded from gross income.
If the
death benefit is paid in the form of an annuity, the benefit is
included in the recipient's "investment in the contract".
Proposal under H.R. 2730
The bill would eliminate all restrictions on the types of
distributions eligible for rollover treatment, except for
annuity payments and installment payments over 5 years or more.
The present law restrictions on rollovers of after—tax employee
contributions and minimum required distributions would also be
retained.
The bill would also eliminate 5-year forward averaging for
lump sum distributions and the current law treatment of NUA.
The
special averaging rules available to participants who attained
age 50 before January 1, 1986 would also be repealed.
Under a
special transition rule, the current law rules would be available
with respect to one—half of any otherwise eligible distribution
made in taxable years beginning in 1992.
Finally, the $5,000 death benefit exclusion would be
repealed.
Proposal under H.R. 2641 and H.R. 2742
Under H.R. 2641, the 5-year forward averaging rules would be
repealed with respect to distributions received in taxable years
beginning after 1996. The current law treatment of NUA and the
special averaging rules available to participants who attained
age 50 before January 1, 1986, however, would be retained.
The
bill would also permit any distributions to be rolled over,
including after-tax employee contributions.
Only minimum
required distributions could not be rolled over.

7
The provisions of H.R. 2742 are generally the same as
H.R. 2641 except that the repeal of 5-year forward averaging is
effective in 1992, and after-tax contributions would not be
eligible for rollover treatment.
Administration Position
We support the provisions of H.R. 2730 relating to pension
distributions.
H.R. 2730 includes all the key elements of the
Administration's proposal relating to the taxation of
distributions.
It will provide a single simple rule for
distributions — that such distributions either can be rolled
over and deferred or are currently taxable.
While preserving and
enhancing an easily accessible deferral mechanism (i.e.. rollover
IRAs), it will eliminate the need to evaluate multiple, complex
alternatives on receipt of a distribution.
Given the 1986
changes in the basic structure of the individual tax rates and
brackets, the highly complex rules for forward averaging, NUA and
capital gains treatment are no longer needed.
The liberalized
rollover proposal should also encourage employees to preserve
their retirement savings.
We also support repeal of the $5,000
death benefit exclusion.
Our revenue estimates have been premised on lump sum
distributions of up to $750,000 being exempt from the 15 percent
excise tax on excess distributions.
We note that H.R. 2730
should be clarified to achieve this result.
H.R. 2641 and H.R. 2742 adopt certain of the provisions set
forth above, but far fewer than would be required to fund the
other changes set forth in those bills.
Further, these bills do
not significantly simplify pension distributions.
Simplified Method for Taxing Annuity Distributions under Certain
Employer Plans (Section 102, H.R. 2730)
Current Law
Distributions from a qualified retirement plan are generally
subject to income tax when paid, except to the extent that the
distribution constitutes a return of the employee's own
investment (primarily composed of after-tax contributions made by
the employee).
In addition, up to $5,000 in death benefits paid
by an employer may be excluded from gross income.
If the death
benefit is paid in the form of an annuity, the benefit is
included in the employee's investment amount.
The portion of
each annuity payment that is excludable from tax is equal to the
employee's investment amount divided by the "expected return” .
The expected return is the total annual annuity payment
multiplied by the distributee's remaining life expectancy at
retirement.
The Internal Revenue Service has issued tables of

life expectancies that are used to calculate expected returns.
In addition, the Internal Revenue Service has provided a
simplified alternative method (Notice 88-118) under which the
taxable portion of qualifying annuity payments is determined
under a simplified exclusion ratio method.
Proposal
The general rule for calculating the taxable portion of a
distribution would be replaced with a rule similar to the
alternative method currently provided in Notice 88-118 issued by
the Internal Revenue Service.
The portion of each annuity
payment that represents nontaxable return of the employee's
investment amount generally is equal to the employee's total
investment amount in the contract, divided by the number of
anticipated payments determined under a specified table by
reference to the age of the participant.
If the recipient
receives a lump sum payment in connection with the commencement
of annuity payments, that payment is taxable under the rules
relating to the taxation of annuities as if it were received
before the annuity starting date.
Administration Position
We support the proposal.
By adopting as a mandatory rule a
procedure similar to Notice 88-118, the proposal will greatly
simplify the calculation of the tax on a pension distribution
involving a return of employee contributions without significant
impact on the tax liability imposed.
Requirement that Qualified Plans Include Optional Trustee-toTrustee Transfers of Eligible Rollover Distributions
(Section 103, H.R. 2730; section 202, H.R. 2742)
Current Law
Current law places various restrictions on pre-retirement
distributions of benefits from qualified plans. When a
permissible distribution is made from a plan, it generally is
made directly to the participant or beneficiary and is subject to
income tax and, in the case of a premature distribution, a 10
percent additional tax. Under certain circumstances, the
recipient of a qualified plan distribution can avoid current
income taxation and any 10 percent additional tax by rolling the
distribution over into another qualified plan or IRA. When
making a distribution that is eligible for rollover treatment,
plan administrators are required to provide a written explanation
of the rollover rules to the recipient.
The circumstances under
which such rollovers are permitted under current law are limited,
however, and the rules applicable to them are very complex.
In
addition, rollovers must be made within 60 days of the

distribution.
The burden of this complexity falls primarily on
the individual participants.
Proposal under H.R. 2730
Qualified plans would be required to give participants the
option of having distributions that are eligible for rollover
treatment transferred directly to an eligible transferee plan
specified by the participant.
An eligible transferee plan is an
IRA, a qualified retirement plan, or a qualified annuity plan.
Before making a distribution eligible for rollover treatment, the
plan administrator would be required to provide a written notice
to the participant of the direct transfer option and of the
rollover rules.
Proposal under H.R. 2742
The bill would require qualified plans to make "applicable
distributions" in the form of direct trustee-to-trustee transfers
to an IRA or a qualified defined contribution plan that accepts
such transfers as designated by the distributee.
Applicable
distributions would generally include any distributions permitted
to be made by a plan over $500 that would have been subject to
the 10 percent additional tax on early distributions if they have
been distributed directly to the participant or beneficiary.
Thus, exceptions to the required transfer provisions would be
provided for certain distributions, including any distribution
after the employee attains age 55 and distributions of employee
contributions.
The plan would be required to provide a method
for designating the transferee plan where the distributee does
not make a designation or where the transfer to the designated
plan is not practical.
The plan trustee would be required to
provide a written notice to the participant of the transfer
requirements and of the amount of the transfer.
Similar rules
would apply in the case of annuity plans and tax-sheltered
annuities.
Administration Position
We support the proposal set forth in H.R. 2730.
We believe
that it would accomplish the objectives of the similar provision
in H.R. 2742 without imposing a mandatory transfer not always
desired by the plan participant.
The proposal would facilitate
the rollover of pension benefits and the preservation of such
benefits for retirement purposes without imposing any significant
additional burdens on employers.
We understand that under H.R. 2730 participants could direct
the transfer to the qualified plan of a subsequent employer only
if that qualified plan accepted rollover contributions.
Acceptance of rollovers by defined benefit plans could be
particularly problematic.
The Pension Benefit Guaranty

Corporation (PBGC) has advised us that the rollover requirement
is not feasible for plans for which it is trustee.
Salary Reduction Arrangement of Simplified Employee Pensions
(Section 201, H.R. 2730; section 306, H.R. 2641; section 307,
H.R. 2742)
Current Law
Under current law, an employer may establish a simplified
employee pension (SEP) that accepts elective salary reduction
contributions.
In order for a salary reduction SEP (SARSEP) to
qualify, the employer generally may have no more than 25
nonexcludable employees, at least 50 percent of all nonexcludable
employees must elect to make such contributions, and the deferral
percentage of each eligible highly compensated employee must not
exceed 125 percent of the average deferral percentage of all
eligible nonhighly compensated employees (the "ADP” test). If an
employer maintains a SEP or a SARSEP, the plan generally must be
provided to all employees who are age 21 or older, who have
performed service for the employer in at least 3 out of the last
5 years and who have received over $363 (indexed) in
compensation.
Proposal under H.R. 2730
The proposal would replace the current law SARSEP with a new
model plan.
The new plan would be available to employers with up
to 100 nonexcludable employees provided the employer does not
currently maintain any other retirement plan.
The employer would
be required to make a contribution of 3 percent of pay (up to a
maximum base contribution of $3,000) for each eligible employee.
If the employer had maintained a qualified plan at any time
during the 2 preceding years, the required contribution would be
increased to 5 percent.
Under the new model plan, employee salary reduction
contributions up to $5,000 (indexed) and employer matching
contributions of $0.50 for each $1.00 of salary reduction
contribution would be permitted.
The 50-percent participation
requirement and the ADP test of current law would no longer
apply.
Employers would be required to inform employees of the
plan and their opportunity to make salary reduction
contributions, and annual statements would be required to be
provided to them.
Proposals under H.R. 2641 and H.R. 2742
The bills would permit employers with up to 100
nonexcludable employees to set up current law SARSEPs and would
eliminate the 50-percent participation requirement.
In addition,

11
the proposal would exempt a SARSEP from the otherwise applicable
ADP test by adopting one of the design-based safe harbors
provided under the bill with respect to 4 0 1 (k) plans.
Finally,
the proposal generally would require SEPs of all types to cover
every employee with at least 1 year of service.
Administration Position
We generally support the proposal contained in H.R. 2730.
Pension coverage for employees of small business is lagging
behind other segments of American business.
One frequently cited
reason for the lack of coverage is the administrative cost
associated with the adoption and maintenance of a qualified plan.
The proposal would make a simple program with low administrative
cost available to all businesses with 100 or fewer employees.
Furthermore, the program would, at the same time, ensure broadbased coverage of rank and file employees.
The availability of
such a vehicle should encourage plan formation.
In the Administration's pension proposal, we recommended a
similar vehicle for expanding pension coverage for employees of
small business. We note that the proposal contained in H.R. 2730
is similar to the Administration's proposal except that our
proposal would have set the base contribution at 2 percent of pay
(up to a maximum base contribution of $2,000) and would have
capped the salary reduction contributions for 1991 at $4,238
(one-half the cap placed on salary reduction contributions under
qualified cash or deferred arrangements ("401(k) plans")).
We
continue to believe that these would be more appropriate limits.
We object to the increase for required base contributions because
we believe it would discourage small employers from adopting the
new plan.
We oppose the proposal contained in H.R. 2641 and H.R. 2742
to eliminate the 50-percent participation test and to create an
exemption from the ADP test applicable to SARSEPs without
requiring any base contribution.
The effect would be to
eliminate any requirement that pension coverage be actually
provided (as opposed to made available) to nonhighly compensated
employees.
Absent actual coverage of a broad base of employees,
we believe that the substantial tax expenditure provided for
pension arrangements cannot be justified.
The minimum
contribution concept embodied in H.R. 2730 and the
Administration's proposal would free small businesses from the
burdens of experience-based testing, while at the same time
ensuring broad-based coverage of nonhighly compensated employees.

12
Governments and Tax-Exempt Organizations Eligible Under
Section 401 H O (Section 202, H.R. 2730; section 311, H.R. 2742)
Current Law
The Tax Reform Act of 1986 precluded tax-exempt employers as
well as State and local governmental employers from adopting
401 (k) plans for their employees.
Certain existing plans (i .e ,
plans adopted by State and local governmental employers before
May 6, 1986 and plans adopted by tax-exempt employers before
July 2, 1986) were grandfathered.
Proposal
Under H.R. 2730, tax-exempt employers and State and local
governmental employers would be permitted to adopt 4 0 1 (k) plans
for their employees.
Under H.R. 2742, tax-exempt employers, but
not State and local governmental employers, would be permitted to
adopt 40 1 (k) plans for their employees.
Administration Position
We support the proposal. As we have previously informed the
Committee, we see no policy basis for precluding tax-exempt
employers from adopting 401(k) plans for their employees. We
believe this is also true with respect to State and local
government employers.
There are, however, revenue costs
associated with both proposals which have prevented enactment of
these proposals in the past. We believe this is an appropriate
way to encourage expanded pension coverage and to remove an
exception to the general availability of 401(k) plans.
Duties of Sponsors of Certain Prototype Plans (Section 203,
H.R. 2730)
Current Law
Pursuant to revenue procedures and other administrative
guidelines, the Internal Revenue Service currently administers a
master and prototype program under which trade and professional
associations, banks, insurance companies, brokerage houses, and
other financial institutions can obtain Internal Revenue Service
approval of model retirement plans and make the pre-approved
plans available for adoption by their customers, investors or
association members.
Under similar administrative programs, law
firms and other organizations are able to get advance approval of
model plans.

13
Proposal
Under the proposal, the Secretary of the Treasury would be
authorized to define the duties of sponsors of master and
prototype and other model plans, consistent with the objective of
protecting adopting employers from a sponsor's failure to timely
amend the plan and with the objective of insuring that adequate
administrative services are provided with respect to the plan.
Model plan sponsors that did not comply with the duties %
imposed
by Treasury regulations could be precluded from continuing to
sponsor model plans.
In addition, the proposal would authorize
regulations relaxing the "anti-cut back" rules (that generally
prohibit plan amendments having the effect of eliminating certain
subsidies or optional forms of benefit) when an employer replaces
an individually designed plan with an Internal Revenue Service
approved model plan.
Administration Position
We support the proposal.
The master and prototype plans
provide another means of reducing the administrative costs of
maintaining retirement plans.
This is particularly important for
small- and medium-sized businesses.
Modification of Definition of Leased Employee (Section 301,
H.R. 2730; section 301, H.R. 2641; section 301, H.R. 2742)
Current Law
Section 41 4 (n) of the Code provides that, for purposes of
certain retirement and welfare benefit provisions of the Code, a
leased employee is treated as an employee of the recipient of the
leased employee's services.
In order to be treated as a leased
employee, a person must not be a common—law employee of the
recipient and, in addition, must meet three requirements.
First,
the person must provide services to the recipient pursuant to an
agreement between the recipient and a third-party leasing
organization.
Second, the person must provide the services to
the recipient on a substantially full-time basis for at least 1
year.
And, third, the services must be of a type historically
performed by common—law employees in the business field of the
recipient.
Proposed regulations under section 4 1 4 (n) were issued
in August 1987.
Proposal
The bills would eliminate the third requirement that the
services be of a type historically performed by common-law
employees in the business field of the recipient.
In place of
the "historically performed" standard, H.R. 2730 would substitute
a new requirement that the services be performed under "any

14
significant direction or control” of the recipient.
The new
standard under H.R. 2641 would be "primary control over the
manner in which such services are performed” and the standard
under H.R. 2742 would be "control” . The proposals under
H.R. 2641 and H.R. 2742 generally would be retroactive to 1983.
Administration Position
We do not oppose the objective of these proposals if
effective prospectively.
We prefer the legislative language in
H.R. 2730 and note that the technical explanation which
accompanied the Chairman's floor statement upon introduction of
the bill accords with our understanding of the provision.
We
understand the intent is to limit section 414(n) to the abuses
Congress originally sought to target when it enacted the section
in 1983. As we have previously stated, we intend to withdraw
those portions of the proposed regulations relating to the
"historically performed" standard under section 41 4 (n). We have
deferred such action, however, pending Congressional revision of
the standard to be applied in new regulations.
We believe that any new standard adopted by Congress should
be clear in its application to specific cases.
In this regard,
we suggest that detailed examples in the legislative history be
provided to demonstrate the intended application of the standard.
"Control” in this context should not be determined by reference
to employment tax concepts and should reflect the realities of
the relationship, not merely its form.
Simplification of Nondiscrimination Tests Applicable Under
Sections 4 0 1 (k) and 401(m) (Section 302, H.R. 2730; section 104,
H.R. 2641; section 105, H.R. 2742)
Current Law
Elective salary deferral contributions to a 4 0 1 (k) plan are
generally required to meet a special average deferral percentage
(ADP) test.
To satisfy the ADP test, the average of the deferral
rates (expressed as a percentage of compensation) for each highly
compensated employee eligible to participate in the plan
generally may not exceed the greater of (1) 125 percent of the
average of the deferral rates of all nonhighly compensated
employees eligible to participate in the plan or (2) the lesser
of (a) 200 percent of the average of the deferral rates of all
nonhighly compensated employees eligible to participate in the
plan, or (b) such average plus 2 percentage points.
If a plan
does not satisfy the ADP test for a year, excess deferrals by
highly compensated employees must be either redistributed to them
or recharacterized as after-tax contributions in order to retain
the qualified status of the 401(k) plan.
The distributions or
recharacterizations are made on the basis of the respective

15
portions of excess contributions attributable to each highly
compensated employee.
If a plan permits after-tax employee contributions, or
provides for employer contributions that are contingent on a
participant's elective deferrals or after-tax employee
contributions ("matching contributions"), the amount of such
contributions generally must satisfy a special average
contributions percentage (ACP) test.
The ACP test is generally
the same as the ADP test described above, except that it applies
to matching and after-tax employee contributions rather than to
elective deferrals.
Rules analogous to the distribution rules
under the ADP test must also be followed if the ACP test is not
satisfied.
Multiple use of the alternative limit (i.e., the 200
percent/2 percentage points test) cannot be used in satisfying
both the ADP test and the ACP test.
Proposal under H.R. 2730
The ADP test would be modified such that each eligible
highly compensated employee individually would not be permitted
to defer more than 200 percent of the average of the deferral
rates for the eligible nonhighly compensated employees for the
preceding plan year.
In the case of an employer that has not
previously maintained a 401(k) plan, the ADP test for the first
plan year would be calculated as if the nonhighly compensated
employee deferral rate was 3 percent.
Corresponding modifications would be made to the ACP test.
The proposal would also repeal the multiple use test, and would
no longer permit recharacterization of excess deferrals as after
tax employee contributions.
Proposal under H.R. 2641 and 2742
The proposals would create certain safe harbors that would,
in effect, deem either the ADP test or the ACP test, or both, to
have been satisfied with respect to elective deferrals and
matching contributions if the plan meets certain design and
notice criteria.
Under H.R. 2641, the ADP test would be deemed
to have been satisfied if the plan provided (1) matching
contributions with respect to all nonhighly compensated employees
equal to 100 percent of elective deferrals up to 3 percent of
compensation, (2) matching contributions with respect to such
employees equal to 50 percent of elective deferrals up to 6
percent of compensation or (3) nonelective contributions equal to
at least 3 percent of compensation to all nonhighly compensated
employees eligible to participate in the plan.
Any contributions
used to satisfy the safe harbor would be required to be fully
vested and subject to the 401(k) restrictions on withdrawals.
In
addition, such contributions could not make use of the permitted
disparity rules (section 401(1)).
The safe harbor would also

16
require the employer to provide notice, within a reasonable
period before the beginning of a year, to all employees eligible
to participate of their rights and obligations under the plan.
For employers who do not choose to use one of the design based
safe harbors, the proposal would permit the ADP and ACP tests to
be based on prior year's average deferral and contribution
percentages for the nonhighly compensated employees.
The ACP test would be deemed to have been satisfied with
respect to matching contributions if the design and notice
criteria relating to the ADP test were met and, in addition, (1)
matching contributions were not made with respect to employee
contributions or elective deferrals in excess of 6 percent of an
employee's compensation, (2) the level of matching contributions
did not increase with the level of employee or matching
contributions, and (3) the rate of matching contributions at each
level of compensation was no higher for highly compensated than
nonhighly compensated employees.
The proposal under H.R. 2742 is generally the same except
that the ADP test would be deemed to have been satisfied if the
plan either (1) provided matching contributions with respect to
all nonhighly compensated employees equal to 100 percent of
elective deferrals up to 3 percent of compensation and equal to
50 percent of elective deferrals between 3 and 5 percent of
compensation or (2) provided nonelective contributions equal to
at least 3 percent of compensation to all nonhighly compensated
employees eligible to participate in the plan.
In addition,
certain alternative matching formulas would be allowed, subject
to nondiscrimination requirements, but the alternative to use the
prior plan year ADP is not included in the proposal.
Administration Position
We support the proposal contained in H.R. 2730. We believe
the approach taken in the proposal would make the results of the
ADP and ACP tests more predictable and would significantly
reduce, if not eliminate, the likelihood of excess contributions.
An employer would no longer need to monitor the average deferrals
for the nonhighly compensated employees and the highly
compensated employees during the current plan year in order to
avoid the complicated correction mechanisms.
Instead, the
maximum contribution percentage for each highly compensated
employee would be known at the beginning of the plan year.
By
minimizing the potential for excess contributions, the most
significant source of complexity in 4 0 1 (k) plans will be
eliminated.
H.R. 2641 also permits the prior year average
deferral and contribution rates to be used in the ADP and ACP
tests.
We oppose the provisions contained in H.R. 2641 and
H.R. 2742 which contain alternatives to the ADP and ACP tests by

17
allowing plans to satisfy nondiscrimination testing merely by
making matching contributions available.
These proposals
represent a significant change in policy, not a simplification.
We believe they would seriously erode current policies against
discrimination in retirement plans because they provide no
assurance that benefits will be provided to nonhighly compensated
employees.
As we have stated in the past, we believe that the
principal sources of complexity in this area are not the basic
ADP and ACP tests but rather the rules applicable to the
distribution and recharacterization of excess deferrals and
contributions.
Thus, we believe that simplification of these
rules — not abandonment of the fundamental policy underlying
these nondiscrimination rules — should be the simplification
objective in this area.
The present-law ADP and ACP tests provide a clear incentive
for employers to design a plan that is attractive to rank-andfile employees and to make every effort to communicate the plan
to those employees, since the actual level of participation by
those employees directly affects the permitted level of deferrals
by highly compensated employees.
By contrast, while the
proposals contained in H.R. 2641 and H.R. 2742 do require notice
of the plan to be given to eligible employees buttressed by
penalties for failure to do so, they provide no affirmative
incentive to provide benefits in excess of the statutory minimum.
In fact, such a test is a disincentive to do so since, once the
design—based criteria have been met, any additional participation
by the nonhighly compensated employees will generally increase
the cost of a plan.
The Administration proposals and H.R. 2730 (section 201)
will provide a design—based basic plan for small employers while
continuing to make 401(k) plans generally available.
Given the
large growth in the popularity of such plans in recent years and
the very real benefits provided to a broad base of employees, we
believe that the better approach is to simplify the current
40 1 (k) incentive structure — not abandon it.
Definition of Hiahlv Compensated Employee (Section 303,
H.R. 2730; section 101, H.R. 2641; section 101, H.R. 2742)
Current Law
The Code defines the term "highly compensated employee" to
include any employee who during the current or preceding year (1)
was a 5—percent owner, (2) earned over $90,803 (indexed) in
compensation, (3) earned over $60,535 (indexed) in compensation
and was in the top 20 percent of the employer's workforce by
compensation, or (4) was an officer earning compensation over
$54,482 (indexed) or was the highest paid officer, if no officer
earned more than the stated amount.
Current law permits certain

18
employers to treat, on an elective basis, all employees earning
over $60,535 (indexed) as highly compensated employees regardless
of whether they are in the top 20 percent of the employer's
workforce by compensation.
In addition, for purposes of
identifying highly compensated employees, certain family
aggregation rules apply in the case of 5-percent owners and other
highly compensated employees who are among the top 10 employees
by compensation.
Different family aggregation rules may apply
for purposes of the limitation on compensation that may be taken
into account under a qualified plan (section 401(a)(17)). These
latter rules limit the family members required to be aggregated
to the employee's spouse and lineal descendants under age 19.
Proposal under H.R. 2730
The bill would modify the current law definition of the term
highly compensated employee to include only 5-percent owners and
employees who earn over $65,000 (indexed).
If an employer had no
highly compensated employees under this definition, then the one
employee with the highest compensation would be treated as highly
compensated.
The family aggregation rules would be modified to
conform to those applicable for purposes of determining the
compensation limit applicable under qualified plans.
Proposal under H.R. 2641 and H.R. 2742
H.R. 2641 would redefine the term highly compensated
employee to include only 5-percent owners and employees who earn
over $60,535 (as indexed).
If an employer had no highly
compensated employees under this definition, then the one officer
with the highest compensation would be treated as highly
compensated, except for purposes of sections 4 0 1 (k) and (m)
(relating to elective deferrals, matching contributions and
employee contributions). The family aggregation rules for
purposes of the definition of highly compensated employee would
be repealed.
The proposal under H.R. 2742 is generally the same as
H.R. 2641, except that a one-employee rule would be substituted
for the one-officer rule and tax-exempt employers (including
State and local governments) would also be exempt from that rule.
The family aggregation rules would be limited to 5-percent
owners.
Administration Position
We support the proposal to simplify the definition of highly
compensated employees.
The elimination of the rules regarding
officers and the top 20 percent of employees by compensation
simplifies current law without sacrificing important policy
objectives.

19
We oppose the exception to the one-employee rule contained
in H.R. 2641 and H.R. 2742 which, under certain circumstances,
would eliminate the requirement that at least one employee be
treated as highly compensated because such a proposal effectively
eliminates the nondiscrimination rules for certain employers.
Finally, we believe that the family aggregation rules are a
source of great complexity and create inequities for two wage
earner families where both spouses work for the same employer.
Accordingly, we support the proposal in H.R. 2641 to repeal the
family aggregation rules as set forth in the Administration
proposal released in April.
Modifications of Cost-of-Living Adjustments (Section 304,
H.R. 2730; section 102, H.R. 2641; section 102, H.R. 2742)
Current Law
Cost-of-living adjustments to various dollar limitations are
currently made under adjustment procedures similar to those used
for adjusting benefits under the Social Security Act.
These
cost-of-living increases under the Code are adjusted generally by
using the last calendar quarter of a year and a base period of
the last calendar quarter of 1986. Under this procedure, costof-living adjustments to the Code limitations are announced after
the beginning of the year in which they are effective.
Proposal
The bills would require the cost-of-living adjustment to be
based on increases in the applicable index as of the close of the
calendar quarter ending September 30 of the preceding calendar
year.
The proposal would also require that dollar amounts, as
adjusted, be rounded to the nearest $1,000 (or to the nearest
$100 in the case of the limitations on elective deferrals and in
the case of the minimum compensation amounts applicable to SEPs).
Administration Position
We support the proposal.
It would permit the publication of
applicable limits before the beginning of a calendar year for
which they will be in effect and hence should assist plan
administrators and plan participants.
Similarly, the use of
rounding would ease administration and employee communications.

Elimination of Half-Year Requirements (Section 305, H.R. 2730;
section 302, H.R. 2742)
Current Law
A number of employee benefit provisions, such as those
relating to permissible and required distributions from qualified
retirement plans, are based on the attainment of age 59% or age
70%.
Proposal
Under the bills, the half-year requirements would be
eliminated so that each reference to age 59% would become one to
age 59 and each reference to age 70% would become one to age 70.
Administration Position
We do not oppose this proposal, although we question whether
requiring such a change in plans would in fact be simplifying.
Plans Covering Self-Emploved Individuals (Section 306, H.R. 2730;
section 302, H.R. 2641; section 303, H.R. 2742)
Current Law
Special employer aggregation rules apply to certain selfemployed owner-employees participating in a tax-qualified
retirement plan and controlling more than one business.
The
control group rules applicable to all employers under section
414(b) and (c) also apply to businesses controlled by selfemployed owner-employees.
Proposal
The proposal would eliminate the special employer
aggregation rules for self-employed owner-employees and would
leave the generally applicable control group rules in place.
Administration Position
We do not oppose the proposal.
The generally applicable
control group rules should be sufficient to ensure against
possible abuses with respect to plans maintained by self-employed
owner-employees.

21
Alternative Full-Funding Limitation (Section 307, H.R. 2730;
section 303, H.R. 2641; section 304, H.R. 2742)
Current Law
Under current law, an employer may generally make deductible
contributions to a qualified defined benefit plan (including a
multiemployer plan) subject to certain limitations, including the
full funding limitation.
The full funding limitation is
generally the excess, if any, of the lesser of (1) 150-percentof-current-liability or (2) the accrued liability (including
normal cost) under the plan over the lesser of (i) the fair
market value of the plan's assets or (ii) the value of the plan's
assets determined under section 412(c)(2).
Valuations of plan
assets and liabilities are required at least annually.
The Secretary of the Treasury is granted regulatory
authority to adjust the 150 percent figure to take into account
the respective ages or lengths of service of the participants.
In addition, the Secretary is granted regulatory authority to
provide alternative methods based on factors other than current
liability for the determination of the full funding limitation.
The Secretary is to exercise this regulatory authority only in a
revenue neutral manner.
Because any such change would, by
necessity, adversely affect some taxpayers and benefit other
taxpayers, the Treasury Department has concluded that it will not
exercise this authority unless directed by the Congress to do so.
Proposal under H.R. 2730
The bill permits certain employers to elect to apply the
current law full funding limitation without regard to the 150percent-of-current-liability limitation.
The Secretary would be
required under the provision to adjust the full funding
limitation in a specified manner for all plans other than those
making the election so that the provision is revenue neutral.
Proposal under H.R. 2641 and H.R. 2742
In the case of multiemployer plans, the bills would amend
current law to return to the rules in effect prior to the changes
made by the Pension Protection Act of 1987.
Thus, the 150percent-of-current-liability prong of the calculation of the
numerator of the full funding definition would be eliminated and
valuations of multiemployer plans would be required only every 3
years.
Administration Position
We do not oppose the proposal as set forth in H.R. 2730.
Earlier this year we prepared a "Report to Congress on The Effect
of the Full Funding Limit on Pension Benefit Security.” In that

22
report we noted that the full funding limit has an uneven impact
among employers, and may have the greatest effect on plans that
cover relatively young employees.
In that report, we discussed a
possible option to permit plans to make a one-time election to
use an alternative funding limitation based on 100 percent of
projected liability (as described in the report). We estimated
that the 150 percent funding limit would need to be reduced to
147 percent in order to offset the revenue shortfall resulting
from employer elections of the alternative full funding
limitation.
Unlike the proposed bill, the calculation
incorporated no restriction on which employers were eligible to
make the election, but did assume that the alternative full
funding limitation used by electing employers could be calculated
only under a specific actuarial method (the projected unit credit
method) using interest rate and salary growth assumptions which
are within designated ranges. We have not prepared an estimate,
but believe that the adjustment to the 150 percent funding limit
required by the proposal would be similar.
We are concerned that the proposal in H.R. 2730 in its
current form may impose significant administrative burdens on
employers, who would not be able to predict their plans' funding
levels, as well as on the Treasury Department and the Internal
Revenue Service.
These burdens would include monitoring
elections to use the alternative funding limitation every year,
making a determination as to whether such elections result in
more than an insubstantial net reduction in Federal revenues for
any fiscal year, and promulgating annual adjustments to the
current law full funding limitations that would remain applicable
to non-electing plan sponsors to make up any revenue shortfall.
In particular, the Committee should consider permitting
adjustments on a less frequent basis than annual and permitting
the adjustment to be based on the estimated effect of elections.
We oppose the proposal in H.R. 2641 and H.R. 2742. A
complete waiver for multiemployer plans of the 150-percent-ofcurrent-liability prong of the full funding limit involves
substantial revenue loss. We do not believe that an exception to
the generally applicable funding rules should be provided simply
because the plan is a multiemployer plan.
Distributions Under Rural Cooperative Plans (Section 308,
H.R. 2730; section 308, H.R. 2641; section 309, H.R. 2742)
Current Law
Distributions from 40 1 (k) plans may be made upon attainment
of age 59%, and distributions from profit-sharing plans may be
made in certain events, including attainment of a stated age.
Distribution from pension plans (including money purchase pension
plans) generally must not commence until retirement.

23
Proposal
The proposal would permit distributions after attainment of
age 59 from a money purchase rural cooperative plan which
includes a 401(k) plan.
Such distributions would not be limited
to the 4 0 1 (k) portion of the plan.
The proposal in H.R. 2641 and
H.R. 2742 is made retroactive, generally to 1987.
Administration Position
We oppose the proposal insofar as it creates a retroactive
special exception for a limited group of tax-qualified plans. We
do not oppose the proposal if effective prospectively as in
H.R. 2730. However, we note that there would appear to be no
impediment under current law for the rural cooperative^plans to
be converted to profit-sharing plans under which distributions
upon the attainment of a stated age would be permissible.
Special Rules for Plans Covering Pilots (Section 309, H.R. 2730)
Current Law
For purposes of determining whether a qualified plan
established pursuant to a collective bargaining agreement between
airline pilots and one or more employer satisfies the minimum
coverage rules, all employees not covered by the collective
bargaining agreement are disregarded.
Proposal
The bill extends the current law rule to nonunion airline
pilots employed by one or more common carrier engaged in
interstate or foreign commerce or employed by carriers
transporting mail for or under contract with the Federal
Government.
Administration Position
We do not oppose the proposal.
Elimination of Special Vesting Rule for Multiemplover Plans
(Section 310, H.R. 2730)
Current Law
Multiemployer plans are permitted to use a 10-year cliff
vesting schedule.
By contrast, the Tax Reform Act of 1986

24
subjected single-employer plans to shorter minimum vesting
standards, i .e . , 5-year cliff vesting or 7-year graded vesting.
Proposal
Multiemployer plans would be subject to the same minimum
vesting standards as single-employer plans.
Administration Position
We support the proposal.
It will expand pension coverage by
providing employees covered under multiemployer plans with the
same vesting rights as employees covered under single-employer
plans.

Definition of Retirement Aae (Section 311, H.R. 2730;
section 312, H.R. 2641)
Current Law
A qualifiedsplan is required to provide that benefits will
commence no later than the 60th day after the latest of the close
of the plan year in which one of several events occurs.
One of
these events is the attainment of age 65 or an earlier normal
retirement age specified in the plan.
In addition, the Code and
ERISA require that, for vesting and accrual purposes, normal
retirement age means the earlier of (1) the time a participant
attains normal retirement age under the plan, or (2) the later of
the time a participant attains age 65 or the 5th anniversary of
the time the participant commenced participation in the plan.
For purposes of the limits on contributions and benefits (section
415), however, the social security retirement age is generally
used.
Under section 415, the social security retirement age
increases to age 66 for individuals born after 1938 and to age 67
for individuals born after 1954.
Proposal
The bills would amend the definitions of normal retirement
age by replacing age 65 with the social security retirement age
(as determined under section 415) for purposes of the benefit
commencement rules and the vesting and accrual rules.
In
addition, H.R. 2641 would provide that the social security
retirement age would be treated as a uniform retirement age for
purposes of nondiscrimination testing.
Administration Position
We support the proposal.
The proposal will facilitate the
use by qualified plans of a uniform retirement age consistent
with the retirement age under Social Security. We do not oppose

25
the additional language set forth in H.R. 2641 for this
provision.
Modification of Additional Participation Requirements
(Section 103, H.R. 2641; section 104, H.R. 2742)
Current Law
Qualified plans, including both defined benefit and defined
contribution plans, are generally required to benefit the lesser
of 50 employees or 40 percent of the employer's workforce.
Proposal
The bills would exempt defined contribution plans from the
minimum participation rules.
The bills also modify the minimum
participation rule by lowering the 50-employee threshold to 25
employees and by requiring an employer with 2 or more employees
to cover at least 2 employees under the same plan.
The bills
would also permit employers to elect to have the new rules apply
as if they had been included in the Tax Reform Act of 1986.
Finally, H.R. 2641 would permit the minimum participation rules
to be tested on one representative day during the plan year.
Administration Position
We do not support the proposal. We doubt that it will be
simplifying because it would generally permit employers to
maintain a greater number of qualified plans with a smaller
number of participants in each plan and will impose additional
administrative burdens on the Internal Revenue Service.
We oppose the portion of the proposal that permits employers
to elect a retroactive effective date. We also note that the
portion of the proposal that would permit representative day
testing in certain cases is unnecessary as that simplified
testing method is already permitted by regulation.
Required Distributions (Section 202, H.R. 2641; section 202,
H.R. 2742)
Current Law
Under current law, distributions under most tax-preferred
retirement arrangements must begin by no later than April 1st of
the calendar year following the calendar year in which the
participant attains age 70^, regardless of when the participant
retires.

26
Proposal
The bills would amend current law to return to the rule in
effect prior to the changes made by the Tax Reform Act of 1986
and permit minimum required distributions to be delayed until
retirement in the case of participants working after age 70%
provided an actuarial adjustment is made if no other benefits are
accruing.
Current law would continue to apply to 5 percent
owners, and under H.R. 2641 to individuals with account balances
of $750,000. Governmental plans and church plans would be exempt
from the provisions retaining current law in specified instances
and from the provision requiring actuarial adjustment.
Administration Position
We do not oppose allowing a delay in required distributions
until actual retirement except with respect to 5 percent owners,
provided that the actuarial adjustment required in the case of
delayed distributions is fair and realistic. We favor retaining
current law in the case of individuals with account balances in
excess of $750,000.
However, we oppose exempting governmental
and church plans from the actuarial adjustment requirement.
Employees covered under those plans should be entitled to the
same protections as employees covered under other plans.
Treatment of Certain Distributions Under a Governmental Plan
(Section 204, H.R. 2742)
Current Law
If a rollover is made of amounts not eligible for rollover
treatment, the amount will generally be treated as an excess
contribution subject to an excise tax.
Proposal
Under the proposal the Internal Revenue Service would be
required to provide relief for certain distributions under a
governmental plan received in 1990, if (1) distributions were
made from such plan during 1987, 1988, 1989 and 1990 in
connection with the transition to a new retirement system, (2)
employees erroneously treated such distributions as eligible for
rollover treatment and (3) the Internal Revenue Service is
providing relief with respect to 1987, 1988 and 1989.
Administration Position
We do not support the proposal. We recognize, however, that
the effect of the proposal is limited to 1990. We also note that
if the expanded rollover provisions in the Administration's

27
proposal and H.R. 2730 are adopted, these issues should be
resolved with respect to future distributions.
Affiliation Requirements for Employers Jointly Maintaininq__a
Voluntary Employees7 Beneficiary Association (Section 304,
H.R. 2641; section 305, H.R. 2742)
Current Law
Under Treasury regulations, a voluntary employees7
beneficiary association (VEBA) is not tax-exempt under section
501(c)(9) of the Code if it benefits employees who do not share
an employment-related common bond.
An employment-related common
bond generally exists only among employees of the same employer
(or affiliated employers), employees covered by a collective
bargaining agreement, members of a labor union, or employees of
unaffiliated employers doing business in the same line of
business in the same geographic locale.
The Internal Revenue
Service has interpreted the same geographic locale requirement as
prohibiting a VEBA from covering nonunion employees of
unaffiliated employers located in more than one state or
metropolitan area. The same geographic locale requirement was
held to be invalid by the 7th Circuit in Water Quality A s s 7n
Employees7 Benefit Coro, v. United States. 795 F.2d 1303 (1986).
Proposal
The bills would exempt VEBAs maintained by unaffiliated
employers from the same geographic locale requirement if they (1)
are in the same line of business, (2) act jointly to perform
tasks which are integral to the activities of each of the
employers, and (3) act jointly to such an extent that the joint
maintenance of a voluntary employees7 beneficiary association is
not a major part of the employers7 joint activities.
Administration Position
We oppose the proposal in the bills; however, as discussed
below, we would consider a more limited change to the VEBA rules.
The same geographic locale requirement helps target the tax
benefits available under section 501(c)(9) to organizations with
the greatest need for support.
The VEBA tax exemption was
initially intended to benefit associations formed and managed by
employees of a single employer or of small local groups of
employers, to provide certain welfare benefits to their members
in situations where such benefits would not otherwise have been
available.
Congress was concerned that such associations might
not be viable without a tax exemption.
By contrast, larger
associations covering employees of unrelated employers in
different geographic areas are more likely to be viable even

28
without a tax exemption, and the benefits they provide are more
likely to be able to be provided through commercial insurance.
The fact that unaffiliated employers would be required under
the bills to conduct certain joint activities does not address
these concerns.
Moreover, we are concerned that the nature and
required level of joint activities under the bills is so unclear
that the exemption will apply to a large group of employers.
This would have serious revenue consequences and, in addition,
would undermine those provisions of the Code that prescribe the
treatment of insurance companies.
Although we oppose the proposed exemption from the
geographic locale requirement for the reasons stated above, we
understand that the one-state or metropolitan area rule may be
too restrictive in states or metropolitan areas with too few
employees in the same industry to form an economical multipleemployer VEBA.
An alternative to the proposal in the bills would
be to limit VEBAs to a three-contiguous-state area, or a larger
area if the Secretary determined that the employer group in the
three-state area was too small to make self-insurance economical.
If an acceptable offset were provided, we would not oppose such a
modification.
Treatment of Certain Governmental Plans (Section 305, H.R. 2641;
section 306, H.R. 2742)
Current Law
Benefits payable under qualified defined benefit plans
generally are limited to the lesser of $90,000 (indexed) or 100
percent of compensation (section 415). A number of circumstances
may give rise to required adjustments to these limitations,
including situations where benefits commence before age 62, in
the case of a governmental plan, or where there is less than 10
years of service or participation in the plan. Under a special
transition rule, government plans are permitted to elect to have
pre-1988 limits apply with respect to qualified participants.
The basic definition of compensation under current law used
to determine the limits on contributions and benefits is defined
to conform as closely as possible to total taxable income
received from the employer.
Thus, salary reduction amounts
excluded from an employee's gross income are not taken into
account in determining compensation for this purpose.
Excess benefit plans of governmental employers providing
benefits for certain employees in excess of the section 415
limitations on benefits and contributions under qualified plans
are subject to the provisions of section 457, which include an

29
annual cap on benefits of $7,500 (or, if less, 33-1/3 percent of
compensation).
Proposal
The bills would exempt benefits under governmental plans
from the 100 percent of compensation limitation.
The bills would
also exempt certain survivor and disability benefits under
governmental plans from the adjustment for pre-age 62
commencement, and from the participation and service adjustments
generally required to be made to the section 415 limitations on
benefits.
For purposes of determining the limits on contributions and
benefits under a governmental plan, the bills would include
certain salary reduction amounts in compensation.
The bills
would exempt governmental excess benefit plans from the
provisions of section 457.
Finally, the bills would permit a
revocation of an election to have the pre-1988 limitations apply
to qualified participants.
While the general effective date of the proposal is taxable
years beginning after the date of enactment, the bills provide
that plans are treated as satisfying the requirements of section
415 for all taxable years beginning before the date of enactment.
Administration Position
We oppose the proposal creating an exception to the 100
percent of compensation limitation.
The proposal would violate
the long-standing policy against permitting benefits payable
under qualified defined benefit plans to exceed 100 percent of
compensation and does not present an appropriate case for making
an exception to that policy.
We oppose the proposal creating a broad exception for
survivor and disability benefits under governmental plans.
We
note, however, that certain pre-retirement survivor and
disability benefits under governmental plans are not generally
subject to the limitations on contributions and benefits under
current Internal Revenue Service interpretation.
We oppose the proposal to include salary reduction amounts
in compensation for purposes of determining the limits on
contributions and benefits under governmental plans.
The
proposal is inconsistent with the general policy that amounts
excluded from gross income should not be taken into account for
this purpose.
We oppose the excess benefit plan proposal.
The scope of
the proposal is narrowly drafted to cover only excess benefit

30
plans maintained by one limited group of those employers subject
to section 457.
We oppose the provision deeming all governmental plans to
have satisfied the limits on contributions and benefits for all
prior years.
The proposal is in effect a retroactive repeal of
those limits.

Contributions on Behalf of Disabled Employees (Section 307,
H.R. 2641; section 308, H.R. 2742)
Current Law
An employer may make certain nonforfeitable contributions to
a tax-qualified defined contribution plan on behalf of any
disabled participant who is not highly compensated if an election
is made.
Proposal
The bills would permit nonforfeitable contributions to be
made on behalf of highly compensated disabled participants for a
fixed or determinable period and would waive the election
requirement, if contributions were made on behalf of all disabled
participants.
Administration Position
We would not oppose the proposal if it were modified to
insure that the provision does not operate in a manner that
discriminates in favor of highly compensated employees and if an
acceptable offset is provided.
We are concerned that, as
presently drafted, contributions during disability could be
provided for under a plan during years when the only disabled
participants are highly compensated and such provisions could
then be deleted in subsequent years when the only disabled
participants were nonhighly compensated.
Reports of Pension and Annuity Payments (Section 309, H.R. 2641;
section 310, H.R. 2742)
Current Law
Persons maintaining or administering certain tax-favored
retirement arrangements are required to file reports in the
nature of information returns regarding the arrangements with the
Internal Revenue Service and with the participants, owners, or
beneficiaries under the arrangements.
Under current law, failure
to file the reports is subject to specific penalties rather than

31
the generally applicable penalty for failure to file information
returns.
Proposal
Under the bills, failure to file reports regarding taxfavored retirement arrangements that are in the nature of
information reports would be subject to the generally applicable
penalty for failure to file information returns.
We note that
the proposal is also contained in H.R. 2777.
Administration Position
We support this proposal as stated in prior testimony
concerning H.R. 2777.
Disaggregation of Union Plans (Section 310, H.R. 2641)
Current Law
Under current law and regulations, union employees are
excluded from consideration when testing plans covering nonunion
employees for purposes of the minimum coverage rules and the
nondiscrimination rules.
Plans covering union employees are
generally deemed to satisfy the minimum coverage rules and the
nondiscrimination rules.
Proposal
The bill would permit an employer to elect to aggregate
union with nonunion employees covered under the same plan on the
same terms for purposes of the minimum coverage rules, the
nondiscrimination rules and the separate line of business rules.
Administration Position
As stated above, we believe Congress should defer action
until final regulations are published.
The primary effect of the
union disaggregation rule will relate to whether an employer can
satisfy the coverage rules on the basis of the mechanical
ratio/percentage test rather than on the basis of the average
benefit percentage test. In connection with our review of
comments received with respect to proposed regulations, we are
considering the feasibility of a special rule to facilitate
testing for coverage where an employer covers both union and
nonunion employees under the same plan on the same terms.

32
Social Security Supplements (Section 311, H.R. 2641)
Current Law
Under current law and regulations, social security
supplements are not subject to the anti-cutback rules of section
411(d)(6) (generally precluding elimination of certain
retirement-type subsidies by plan amendment).
Because of this
lack of anti-cutback protection, the proposed nondiscrimination
regulations do not permit social security supplements to be taken
into account for purposes of the nondiscrimination rules.
In the
process of finalizing those regulations, we are actively
exploring ways to permit such supplements to be taken into
account if they are afforded anti-cutback protection.
Proposal
The bill would provide that any social security supplements
(as defined) taken into account in testing most valuable accrual
rates under the nondiscrimination rules would be subject to the
anti-cutback rules as retirement-type subsidies.
In addition,
the bill would provide that social security supplements are
disregarded in determining compliance with the permitted
disparity rules.
Administration Position
While we believe that current law would permit us to
accomplish this result administratively, we would not oppose a
statutory provision subjecting certain social security
supplements to the anti-cutback rules, provided social security
supplements are appropriately defined.
Use of Basic or Regular Rate of Pav For Compensation
(Section 313, H.R. 2641; section 103, H.R. 2742)
Current Law
Current law contains a definition of compensation for
purposes, among others, of applying the nondiscrimination rules
to qualified plans (section 41 4 (s)).
In addition to the basic
statutory definition, the Secretary is authorized to provide
alternative methods for determining compensation for these
purposes.
The temporary regulations implement this authority in
two ways, most significantly by permitting employers to elect to
use any reasonable definition of compensation subject to
satisfaction of a nondiscrimination test.
Basic or regular rate
of pay is not specifically authorized under existing regulations.

33
Proposal
The bills would specify that the use of an employee's basic
or regular rate of pay be included in the alternative methods for
determining compensation prescribed by the Secretary under
regulations.
Administration Position
As stated above, we believe Congress should defer action
until the final regulations are published.
During the comment
period for the existing temporary and proposed regulations,
employers discussed the possible addition of rate of pay as an
alternative method for determining compensation.
Of course,
alternative methods for determining compensation must be
nondiscriminatory. We are carefully considering these comments^
for possible inclusion in the final regulations.
We believe this
can be accomplished under the existing regulatory authority and
that legislation in this area will not be necessary.
Transfers of Employees (Section 314, H.R. 2641)
Current Law
Benefits under a qualified plan are generally tested for
nondiscrimination solely by reference to the benefits earned in
the specific plan. An employer can elect, however, to aggregate
two plans for purposes of nondiscrimination testing and for
purposes of meeting the coverage requirements.
Proposal
Under the proposal, benefits provided under a plan would not
be considered discriminatory merely because the benefit of
employees who transfer between members of the same control group
is based on all years of service with the employer offset by the
benefit accrued under any other plan or plans of the employer.
Administration Position
As stated above, we believe Congress should defer action
until the final regulations are published.
During the comment
period for the proposed regulations, many employers indicated
that providing ’'wraparound" benefits for transferred employees
was a common business practice that should be accommodated by the
regulations.
We are carefully considering these comments and
possible ways in which the final regulations could facilitate use
of this plan design feature.

34
Special Grandfather Rule for Integrated Plans (Section 315,
H.R. 2641)
Current Law
Benefits and contributions under qualified plans are subject
to nondiscrimination testing.
Special rules permit a specified
disparity in the amount of benefits or contributions, generally
recognizing that employers also contribute to social security up
to a specified level of compensation.
The current rules relating
to permitted disparity were adopted in the Tax Reform Act of
1986, generally effective in 1989. Proposed regulations relating
to the permitted disparity rules permitted an employer to elect
one of three transition methods, each of which allowed for
continual adjustments in pre-1989 benefits due to post-1989
compensation changes, provided certain minimum standards were
met.
Proposal
The bill provides that a plan is not discriminatory merely
because an employee's accrued benefit is the sum of his or her
accrued benefit as of the close of the 1988 plan year (but based
on final average compensation as of the date of termination of
service) plus his or her benefit accrued in years after 1988.
Administration Position
We oppose this proposal.
The proposed regulations struck a
balance between the employer's desire to maintain the final
average compensation feature of pre-1989 benefits and the need to
implement the new permitted disparity rules in accordance with
the statutory modifications.
We believe that if the pre-1989
benefits were allowed to increase along with compensation without
any pre-conditions, then the effect of the 1986 Act changes would
be severely undercut.
For example, under the pre-1989
integration rules, a plan was permitted to provide no benefits
with respect to compensation below the plan's "integration"
level.
As a result such plans provided little or no benefits to
nonhighly compensated employees.
We do not believe that
increases in these benefits as a result of post-1988 compensation
increases, which benefit increases will be limited predominately
to highly compensated employees, are appropriate.
Determination of Employee Contributions Under Defined Benefit
Plans (Section 316, H.R. 2641)
Current Law
Current law provides that, in the case of a defined benefit
plan with mandatory employee contributions, the employee-derived

35
benefit must be fully vested at all times.
The employee-derived
benefit is determined by converting the accumulated employee
contributions plus interest into an annuity using PBGC interest
rates.
The accumulation of employee contributions is determined
by crediting interest at 120 percent of the Federal mid-term rate
as in effect during the first month of each plan year until the
determination date and projecting forward at the PBGC interest
rate to normal retirement age.
The employee-derived benefit may
exceed the total benefit under the plan formula.
Proposal
The bill provides for the use of the PBGC interest rate for
purposes of determining the employee-derived accrued benefit
under defined benefit plans providing for employee contributions.
The bill also provides that, in general, the employee-derived
accrued benefit will not exceed the employee's accrued benefit
under the plan.
Administration Position
We do not support this proposal as a simplification measure
at this time because the basis for determining the required
interest rate has been changed twice in the last 4 years.
We
share the concern, however, that the interest that must be used
currently may be too high.
We oppose the proposal to limit the employee-derived accrued
benefit. An employee should always be entitled to a return of
his or her own contributions plus interest.
General Nondiscrimination Test Based on Rate of Accruals
(Section 317, H.R. 2641)
Current Law
Current law provides that the contributions or benefits
under a tax-qualified plan may not discriminate in favor of
highly compensated employees.
Under the current proposed
nondiscrimination regulations, no highly compensated employee may
receive a benefit greater than a benefit provided to nonhighly
compensated employees.
However, the proposed regulations permit
the benefits and contributions under a plan to be "restructured”
into component plans for purposes of the nondiscrimination test,
provided each component plan covers a nondiscriminatory group of
employees.
Proposal
The bill provides that a plan will be deemed
nondiscriminatory if the average rate of accrual for highly

36
compensated employees is not greater than the average rate of
accrual for all other employees.
Administration Position
As stated above, we believe Congress should defer action
until the final regulations are published.
In response to
comments received with respect to the proposed regulations,
modifications to the restructuring rules are being made to
facilitate nondiscrimination testing.
Separate Line of Business Rules (Section 318, H.R. 2641)
Current Law
Under current law, all employees of employers that are
members of the same control group are treated as employed by a
single employer for purposes of various employee benefit
provisions under the Code. An exception to this general rule is
provided if the employer operates separate lines of business. As
a precondition for testing qualified plans on a separate—line—of—
business basis, however, Congress required every plan of the
employer to cover a nondiscriminatory classification of employees
on an employer-wide basis.
Current law also requires the
Secretary to provide rules for allocating headquarters personnel
among the lines of business of the employer and for the treatment
of other employees who provide services for more than one line of
business.
In accordance with the legislative history, the
proposed regulations do not generally permit headquarters to be
treated as a separate line of business.
Proposal
The proposal would repeal the employer-wide
nondiscriminatory classification test.
The bill would also
modify the rules relating to the allocation of headquarters
personnel and other shared employees by providing that no
employee is to be allocated to more than one line of business.
In addition, the bill would permit headquarters to be treated as
a separate line of business provided that at least 60 percent of
the headquarters employees are not highly compensated.
The
Secretary would be directed to prescribe rules reducing the 60
percent requirement if the number of highly compensated
headquarters employees is less than 85 percent of all the highly
compensated employees of the employer.
Administration Position
We oppose repeal of the employer—wide nondiscriminatory
classification test. We believe that the test is generally
necessary to maintain the integrity of the coverage and

37
nondiscrimination rules.
However, we note that there may be some
overlap between that requirement and other rules relating to the
determination of whether an employer is operating qualified
separate lines of business (e.q.. the 50/200 statutory safe
harbor for satisfying the administrative scrutiny requirement).
In developing final regulations, we are considering the degree to
which this overlap can be minimized.
With regard to the proposals to modify the allocation rules,
we believe Congress should defer action until the final
regulations are published.
Clarification that Section 457 Does Not A d p Iv to Nonelective
Deferred Compensation (Section 319, H.R. 2641)
Current Law
Unfunded deferred compensation plans of governmental and
tax-exempt employers are subject to the provisions of section
457, which include an annual cap on benefits of $7,500 (or, if
less, 33-1/3 percent of compensation). The provisions of section
457 apply to nonelective plans as well as plans providing for
benefits or contributions at the election of the participant.
The term "nonelective deferred compensation" would be defined by
the Secretary in regulations.
Proposal
The bill would exempt nonelective plans from the
requirements of section 457.
Administration Position
We do not support the provision.
The proposal draws a
fundamental distinction between "elective" plans and
"nonelective" plans when, in practice, it is difficult to define
the differences, particularly in the case of individually
negotiated employment contracts.
Date for Adoption of Plan Amendments (Section 320, H.R. 2641;
section 312, H.R. 2742)
Current Law
Plan amendments must generally be made by the end of the
plan year in which the amendments are effective, although later
amendments may be made if the remedial amendment period extends
that date.

38
Proposal
The bills would provide that any plan amendments required by
the legislation would not be required to be actually made before
the 1993 plan year, provided the plan is operated in accordance
with the amendment and the amendment is made retroactive.
Administration Position
We do not support this proposal. Absent appropriate
circumstances, we believe a delayed date for actual plan
amendments creates serious difficulties in the proper
administration and operation of plans.
CONCLUSION
The bills before the Committee today identify a number of
proposals which will provide meaningful simplification.
Simplification proposals must meet the revenue constraints of the
Budget agreement.
Both the Administration's pension
simplification proposals and H.R. 2730 achieve this result.
H.R. 2641 and H.R. 2742 currently do not. However, given the
number of similar provisions in these proposals, it is clear that
revenue neutral pension simplification is attainable.
We look
forward to continuing our work with Congress to enact meaningful
simplification of the employee benefit provisions of the Code.
Mr. Chairman, that concludes my formal statement.
I will be
pleased to answer any questions you or other Members may wish to
ask.

TABLE I
REVENUE ESTIMATES OF ADMINISTRATION'S PENSION PROPOSALS

(billions)
1992
1992-96
Distributions from Qualified Plans
Cash or Deferred Arrangements (401(k) Plans)
Extend 4 0 1 (k)'s to Tax-exempts

3.0

-.1

-.6

Extend 4 0 1 (k)'s to State and Local Governments

-.1

Salary Reduction Simplified Employee Pensions

-.1

Definition of Highly-Compensated Employee

-.2

1.2
-.8

Repeal of Family Aggregation Rules

Multi-Employer Vesting

-. 1

Total

-. 1

* Less than $50 million
The estimates assume an effective date of 1/1/92.
Department of the Treasury
Office of Tax Analysis

July 24, 1991

Rod

_ ___ _

M20SI 0 0 i 8O4

Department off the Treasury e W ashington, D.c. • Telephone see-2041
TEXT AS PREPARED FOR D E L IVER^p f 0 F
EMBARGOED UNTIL 9:30 A.M.

RFAi

Prepared Remarks of
Secretary of the Treasury
Nicholas F. Brady
For Press Conference to
Introduce Security-Enhanced Currency
July 25, 1991
Good morning.
Today, we are introducing two new securityenhancements for U.S. currency.
This marks another step in the
continuing effort to ensure the security of America*s paper
money.
The greenback is the most trusted and widely held currency
in the world.
It is vital to the nation and essential to a sound
global economy that we maintain that trust.
In 1862 when greenbacks were first issued to help pay for
the Civil War, only six employees worked in the basement of this
building making the money.
Annual production the first two years
was less than $2 billion.
Today, more than $268 billion is in
circulation world-wide.
This year we*11 produce more than 8
billion notes with a total face value exceeding $105 billion.
Back in the 1860s Treasury officials struggled with ways to
protect the currency.
In 1865 the Secret Service was created to
suppress an extensive and serious counterfeiting problem.
They
searched the country over to identify paper and engraving
techniques to thwart counterfeiters.
One of the products of this
effort was the embedding of red and blue fibers into the paper —
a feature that lives on in today*s currency.
These fibers, the paper, and engraving are three of the nine
security features that have protected our money for more than 100
years.
The other six include: serial numbers; lifelike
portraits; Federal Reserve and Treasury seals; and distinct
borders and denomination markings.
These features work.
In 1990 only $80 million in
counterfeit notes were seized.
This represents just one-tenth of
one percent of total genuine yearly currency production, and only
three one thousandths of one percent of world-wide circulation.
Of the counterfeit notes, more than 80% were seized before they
left the counterfeiters hands and were never passed to the
public.
NB-1391

2
Today, we introduce two new security features in Series 1990
notes.
They are subtle and nearly invisible to the naked eye.
They were developed in anticipation of the widespread
availability of advanced copying equipment — it's important to
stay ahead of technology.
And the new features were chosen after
extensive research and testing for effectiveness, durability and
subtlety.
The first feature is a polyester security thread, embedded
in the paper on the left of the portrait side of the note.
It
runs vertically between the border and the Federal Reserve seal
and has USA and the denomination, in this case 100, printed in an
alternating up—and—down pattern.
The denominated strip can only
be seen when the note is held up to a light source.
Otherwise,
it is so subtle that most people wouldn*t notice it.
The security thread can*t be copied with existing
technology, which is a significant counterfeit deterrent.
Copiers and scanners use reflected light that bounces off an
image rather than shining through it. The polyester strip is
embedded during the papermaking process rather than laid on the
surface, making it difficult to see or copy with reflected light.
The other new security enhancement — microprinting —
features the all-capitalized words, THE UNITED STATES OF AMERICA,
printed repeatedly around the portrait.
The letters, at six to
seven thousandths of an inch, appear like a thin line to the
naked eye.
At about the thickness of the paper that currency is
printed on, the microprinting is too small to read without a
magnifier or for distinct copier reproduction.
If a note is
suspect, microprinting offers another method of checking for
genuineness.
Since April, the Department of the Treasury has produced 250
million Series 1990 $100 notes worth $25 billion with the new
security enhancements.
We will be printing about 200 million
additional notes per month.
The Series 1990 $50 notes with the
enhancements are scheduled for production by year*s end. Within
three to five years, all denominations will have the security
thread and microprinting.
The only possible exception is the $1
note, which does not pose a great counterfeiting risk.
With these new safeguards, potential counterfeiters with
access to advanced color copiers, laser scanners and digital
printing equipment will be greatly deterred from quickly and
easily making bogus bills.

3
These advanced copying technologies are not yet generally
available.
In fact, counterfeiting of this kind is still very
rare.
Only $2 million in counterfeits seized last year were
produced using this sophisticated copying equipment.
We retain full confidence in American currency — with, or
without the two new enhancements.
The new security-enhanced
notes will co-circulate with existing notes, which will be
replaced by the Federal Reserve when they wear out or when enough
of the enhanced bills are available.
Although the introduction of the security thread and
microprinting places us ahead of the widespread use of advanced
copier and printer technology, we must be vigilant and continue
to provide protection against emerging techniques and potential
counterfeit threats.
Of equal importance in counterfeit
deterrence is a public knowledgeable about its money and cash
handlers skilled at recognizing counterfeits.
To ensure this, today we are launching an international
campaign to inform the public, bankers, and retailers here and^
overseas about the enhancements in U.S. currency and the security
design features that have long kept the U.S. dollar safe from
widespread counterfeiting.
Brochures, training materials for
financial institutions, and posters are being distributed in the
United States and worldwide.
These educational materials have
been translated into Japanese, Spanish, Portuguese, German,
French, and Italian.
Now, I would like to turn the microphone over to Alan
Greenspan, Chairman of the Federal Reserve Board, who will
discuss the Federal Reserve System*s plans for putting the
enhanced currency into circulation.
Chairman Greenspan.
###

artment off the Treasury • W ashington,

d .c .

• Telephone 566-204

)EPT. OF THE TREASURY

July 25, 1991

FOR IMMEDIATE RELEASE

Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of June 1991.
As indicated in this table, U.S. reserve assets amounted to
$74,940 million at the end of June 1991, down from $78,262 million in
May 1991.
U.S. Reserve Assets
(in millions of dollars)
Special
Drawing
Rights 2/3/

Reserve
Position
in IMF 2/

Total
Reserve
Assets

Gold
Stock

May

78,263

11,057

10,515

47,837

8,854

June

74,940

11,062

10,309

44,940

8,629

End
of
Month

Foreign
Currencies 4/

1991

Valued at $42.2222 per fine troy ounce.

Beginning July 1974, the IMF adopted a technique for valuing the
SDR based on a weighted average of exchange rates for the
currencies of selected member countries.
The U.S. SDR holdings
and reserve position in the IMF also are valued on this basis
beginning July 1974.

Includes allocations of SDRs by the IMF plus transactions in SDRs.

Valued at current market exchange rates.

U BLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt • Wasmngkon, DC 20239

FOR IMMEDIATE RELEASE
July 25, 1991

fice of Financing
202-376-4350

RESULTS OF TREASURY' S cifr#Ti6H TQ F a dS^WEEK BILLS
Tenders for $12,567 million of 52-week bills to be issued
August 1, 1991 and to mature July 30, 1992 were
accepted today (CUSIP: 912794YW8).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
5.86%
5.88%
5.88%

Investment
Rate_____ Price
6.24%
94.075
6.26%
94.055
6.26%
94.055

Tenders at the high discount rate were allotted 88%.
The investment rate is the equivalent coupon-issue yield.
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
33,875
33,045,085
16,720
33,445
32,250
18,280
1,701,370
18,185
6,035
32,095
13,410
544,485
299.240
$35,794,475

Accepted
33,875
11,534,725
16,720
33,445
32,250
17,280
447,370
11,945
6,035
32,095
13,410
88,485
299.240
$12,566,875

Type
Competitive
Noncompetitive
Subtotal, Public

$32,031,805
762.670
$32,794,475

$8,804,205
762.670
$9,566,875

2,850,000

150.000
$35,794,475

150.000
$12,566,875

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $55,000 thousand of bills will be
issued to foreign official institutions for new cash.

NB.^1393

Tenders for $10,401 million of 13-week bills to be issued
August 1, 1991 and to mature October 31, 1991 were
accepted today (CUSIP: 912794XL3).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
5. 56%
5. 58%
5. 58%

Investment
Rate
5.73%
5.75%
5.75%

Price
98.595
98.590
98.590

Tenders at the high discount rate were allotted 69%
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
39,690
33,254,475
21,290
48,460
49,720
27,880
2,111,965
66,880
8,105
49,655
25,445
853,825
478.535
$37,035,925

Accepted
39,690
9,038,710
21,290
48,445
44,720
27,570
384,715
26,870
8,105
49,655
25,445
207,325
478.535
$10,401,075

Type
Competitive
Noncompetitive
Subtotal, Public

$33,355,730
1.264.295
$34,620,025

$6,720,880
1.264.295
$7,985,175

2,046,500

369.400
$37,035,925

369.400
$10,401,075

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1394

For Release Upon Delivery
Expected at 9:30 a.m.
July 29, 1991

STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON SELECT REVENUE MEASURES
COMMITTEE ON WAYS AND MEANS
UNITED STATES HOUSE OF REPRESENTATIVES

Mr. Chairman and Members of the Subcommittee:
I
am pleased to present the views of the Administration on
the tax-exempt bond simplification provisions of H.R. 2777, the
Tax Simplification Act of 1991 and H.R. 2775, relating to
additional tax simplification.
This is my third appearance in less than a week on
simplification proposals.
I will not repeat earlier testimony on
the general benefits of simplification.
We believe that Federal
tax laws governing tax-exempt bonds can be simplified to the
benefit of State and local government issuers without
undercutting Federal tax policies limiting the utilization of
such bonds to appropriate purposes.
We are generally supportive
of that effort.
We are concerned, however, that sufficient
revenue offsets be provided.
The tax-exempt bond provisions of
both H.R. 2777 and H.R. 2775 lose revenue.
(See Table I.)
Our
expressions of support must be qualified by the requirement that
simplification be revenue neutral.

NB 1 3 9 5

2
ANALYSIS OF TAX-EXEMPT BOND PROVISIONS OF H.R. 2777,
THE TAX SIMPLIFICATION ACT OF 1991
TITLE IV, SUBTITLE D
Repeal of $100.000 Limitation on Unspent Proceeds Under 1-vear
Exception from Rebate
Current Law
A tax-exempt bond is not subject to the arbitrage rebate
requirement if all of the proceeds of the issue (other than
proceeds in a reasonably required reserve and replacement fund
and in a bona fide debt service fund) are spent for the
governmental purpose of the issue within 6 months of the date of
issue of the bond.
In the case of non-private activity bonds and
qualified 501(c)(3) bonds, the 6-month period is extended to 12
months if no more than the lesser of 5 percent of the proceeds of
the issue or $100,000 is unspent after the first 6 months and
such unspent amount is spent within the next 6 months.
Proposal
The condition that no more than the lesser of 5 percent or
$100,000 remain unspent after 6 months would be changed to a
requirement that no more than 5 percent of the proceeds remain
unspent after 6 months.
Administration Position
We support this proposal.
We believe that this proposal will
simplify compliance with this exception to arbitrage rebate
without compromising tax policy with respect to the arbitrage
rebate requirement.
Exception From Rebate for Earnings on Bona Fide Debt Service Fund
Under Construction Bond Rules
Current Law
Non-private activity bonds and qualified 501(c)(3) bonds
issued to finance construction projects are exempt from the
arbitrage rebate requirement if the bond proceeds are spent at
specified percentages in 6-month intervals over a 24-month period
beginning on the date of issue of the bonds.
An issuer complying
with the requirements of this exception under certain
circumstances is still required to pay arbitrage rebate on
arbitrage earnings attributable to a bona fide debt service fund.

3
Proposal
Earnings on a bona fide debt service fund, with respect to a
bond issue that meets the spend-down requirements of the 24-month
arbitrage rebate exception, would not be subject to the arbitrage
rebate requirement.
Administration Position
We support this proposal.
We believe that this proposal will
simplify compliance with the arbitrage rebate requirement and
that it is consistent with the policy behind the 24-month
arbitrage rebate exception.
Automatic Extension of Initial Temporary Period for Construction
Issues
Current Law
After the termination of the initial temporary period, bond
proceeds invested at a yield materially higher than the yield on
the bonds pursuant to such temporary period must generally be
invested at a yield not in excess of the bond yield plus .125
percent.
Proposal
With respect to bonds issued to finance non-private activity
construction projects, the initial temporary period would be
automatically extended 1 year if, as of the end of the initial
temporary period, the issuer had spent at least 85 percent of the
bond proceeds available for construction and the issuer
reasonably expected to spend the remaining bond-construction
moneys within the following 12-month period.
Administration Position
We do not oppose this proposal.
We agree that subjecting
bond proceeds to yield restriction and rebate requirements at the
same time is duplicative and that simplification in this area is
desirable.
We believe that the proposal made last year by the
Congressional staffs — to allow issuers to rebate arbitrage in
lieu of restricting yield on investments under appropriate
circumstances — continues to be the most promising approach.
We
suggest that this rebate-in-lieu-of-yield restriction proposal be
given further consideration as a means of simplifying the problem
addressed by the current proposal. We would, however, request
that the Treasury be given regulatory authority to require yield
restriction when necessary in order to discourage arbitragemotivated transactions.

4
Aggregation of Issues Rules Not to Ap p Iv to Tax or Revenue
Anticipation Bonds
Current Law
The Internal Revenue Service in certain private letter
rulings has treated multiple issues of bonds issued within 31
days of each other by the same issuer as being a single debt
obligation for purposes of applying tax rules with respect to
tax-exempt bonds.
Tax and revenue anticipation notes (TRANs) are
short-term borrowings by a governmental unit issued for the
purpose of financing near-term cash flow deficits.
Proposal
The aggregation of TRANs with other non-private activity bond
issues of an issuer would be prohibited regardless of when the
TRANs was issued.
Administration Position
We do not oppose this proposal. We believe that this
clarification will simplify compliance with relevant Federal tax
requirements without compromising Federal tax policy in this
area.
Authority to Terminate Reguired Inclusion of Tax-Exempt Interest
on Return
Current Law
Section 6012(d) of the Internal Revenue Code requires that
every person required to file a Federal income tax return for the
taxable year must include on such return the amount of tax-exempt
interest received or accrued during the year.
Proposal
The Secretary of the Treasury would be given authority to
exempt taxpayers from reporting tax-exempt interest pursuant to
section 6012(d) of the Code in any case in which the Secretary
determines that the disclosure of such interest is not useful for
tax administration.
Administration Position
We do not support this proposal.
Given the need for this
data in tax administration, we see little likelihood that this
authority could be exercised to reduce issuer compliance burdens
in any significant way.

5
Repeal of Expired Provisions
Current Law
A special exception to the arbitrage rebate requirement
applicable to certain issues of qualified student loan bonds
expired on December 31, 1988.
Proposal
Since the provision is no longer of any effect it would be
repealed as deadwood.
Administration Position
We support this proposal.

The provision is no longer needed.

ANALYSIS OF TAX-EXEMPT BOND PROVISIONS OF H.R. 2775,
RELATING TO ADDITIONAL TAX SIMPLIFICATION
TITLE II
Repeal of Disproportionate Private Business Use Test
Current Law
A bond issued by a governmental unit is treated as a private
activity bond (and therefore is generally not tax exempt) if more
than 10 percent of the proceeds of the bond are used to benefit
persons or entities other than governmental units or the general
public (nongovernmental use is generally referred to as “private
business use”) . In addition, the 10 percent threshold is reduced
to 5 percent in the event the private business use is not related
to the governmental use of the facility being financed or the
private business use is disproportionate to the different
governmental uses in multi-governmental use projects (this is
referred to as the "5 percent unrelated or disproportionate
test”) .
Proposal
The proposal would repeal the 5 percent unrelated or
disproportionate test.
Administration Position
We do not oppose this proposal.
This portion of section 141
is often misunderstood by issuers and not easily administrable by
the Internal Revenue Service.
Repeal would accomplish

significant simplification without sacrificing significant policy
objectives.
Expanded Exception from Rebate for Issuers Issuing $10.000.000 or
Less of Bonds
Current Law
Bond issuers with general taxing powers that issue, in the
aggregate, less than $5 million of tax-exempt non-private
activity bonds per calendar year are exempt from the arbitrage
rebate requirement with respect to such non-private activity
bonds issued during the year.
Proposal
The $5 million limit on qualification for small issuer status
would be increased to $10 million.
Administration Position
We do not oppose this proposal.
Increasing the number of
small issuers that are exempt from the arbitrage rebate
requirement should accomplish simplification objectives without
opening the door for abuse of arbitrage.
We would oppose any
increase in the limitation above $10 million.
Repeal of Debt Service Based Limitation on Investment in Certain
Nonpurpose Investments
Current Law
Generally, the amount of proceeds of private activity bonds
(other than qualified 501(c)(3) bonds) invested at a yield
materially higher than the bond yield may not exceed 150 percent
of debt service on the bond issue.
This limitation does not
apply to bond proceeds invested at a materially higher yield
pursuant to an initial temporary period or pursuant to a
temporary period with respect to a bona fide debt service fund.
Proposal
The 150 percent of debt service limitation on the amount of
private activity bond proceeds that could be invested at an
unrestricted yield would be repealed.

7
Administration Position
We support this proposal.
Because the arbitrage rebate
requirement continues to apply to these bond proceeds, we believe
that elimination of this requirement will result in significant
simplification without permitting abuse involving arbitrage.
Election of Rebate Requirement After Initial Temporary Period
Current Law
Issuers must generally restrict the yield earned on the
investment of bond proceeds to an amount not materially higher
than the yield on the issue.
There are exceptions to this rule,
one of which is that bond proceeds may be invested at an
unrestricted yield for an initial temporary period (usually 3
years and in some cases 5 years) pending expenditure of the bond
proceeds.
Another exception permits a reasonably required
reserve or replacement fund (a 4R Fund) and certain sinking funds
and replacement funds to be invested at an unrestricted yield.
The arbitrage rebate requirement generally requires issuers to
pay to the Federal Government virtually all arbitrage earned on
the investment of bond proceeds even when the earning of such
arbitrage is permitted by an exception to the general yield
restriction rule described above.
Proposal
Bond issuers would be allowed to elect to pay arbitrage
rebate only with respect to bond proceeds invested at an
unrestricted yield pursuant to the 3-year (or in some cases 5year) initial temporary period or invested in 4R Funds, sinking
funds and replacement funds.
If elected, an issuer would not
have to pay arbitrage rebate with respect to bond proceeds not
invested for an initial temporary period or in a 4R Fund, sinking
fund or replacement fund but would be required to restrict the
investment of such proceeds to the bond yield.
Within 60 days of
the termination of the initial temporary period issuers would pay
all rebate due on those proceeds invested for the initial
temporary period and no further rebate would be due with respect
to those proceeds.
Under certain circumstances the issuer would
also be allowed to yield restrict proceeds in a reserve or
replacement fund (instead of paying rebate on the arbitrage
earnings with respect to such proceeds). The temporary period
with respect to these funds (and any requirement to pay arbitrage
rebate) would not be affected by this election.
Administration Position
We do not support this proposal.
We do not believe this
proposal accomplishes significant simplification.
Issuers would

8
continue to be required to comply with both the arbitrage rebate
requirement and the arbitrage yield restriction requirement.
In
addition, terminating all rebate liability with respect to
proceeds that are invested at an unrestricted yield pursuant to
an initial temporary period, by allowing a rebate payment^at the
end of the temporary period, could lead to abuse.
Abuse is
possible because the actual yield to maturity on the bond issue
would not be taken into account in computing the rebate payment.
We prefer the approach described on page 3 of my testimony.
CONCLUSION
Mr. Chairman, Members of the Subcommittee, that concludes ray
formal statement.
We welcome the opportunity to work with you
to achieve meaningful and affordable simplification of the taxexempt bond provisions of the Code.
I will be pleased to answer
any questions you or other Members may wish to ask.

TABLE I
REVENUE ESTIMATES OF TAX-EXEMPT BOND PROVISIONS
OF H.R. 2777 AND H.R. 2775

(millions)
1992
1992-96

H.R. 2777
Title IV, Subtitle D

-1

“5

-11

-HI

H.R. 2775
Title II

Department of the Treasury
Office of Tax Analysis

July 22, 1991

NOT FOR RELEASE UNTIL DELIVERY
Expected at 1:30 p .m .
Monday, July 29, 1991

TESTIMONY OF
WILLIAM E. BARREDA
DEPUTY ASSISTANT SECRETARY OF THE TREASURY
FOR TRADE & INVESTMENT POLICY
BEFORE THE
SUBCOMMITTEE ON TRADE
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
JULY 29, 1991
Thank you, Mr. Chairman.
It is a pleasure to appear before
this Committee and have the opportunity to discuss the Fair Trade
in Financial Services Act of 1991.
The Treasury Department's views on this bill are well-known.
After opposing this bill in its initial form, the Treasury worked
with the sponsors to modify those parts which we found most
objectionable.
Treasury's primary objective was to obtain
greater discretion and flexibility. As a result of these
efforts, the provisions on financial services in the short-term
extension of the Defense Production Act, S.468, were changed to
respond to our concerns.
Subsequently, the Treasury withdrew its
opposition to that bill which has been introduced in the House as
H.R. 991.
The sponsors felt strongly that such legislation would give
U.S. negotiators new tools to ensure that U.S. financial firms
receive fair treatment in international financial services.
In
fact, Treasury had noted in the 1990 National Treatment Study
that: "Because of the movement towards reciprocity or reciprocal
national treatment in many other industrial countries and the
slow progress in achieving effective national treatment,
especially in some Asian and Latin American financial markets,
Members of Congress have raised the need for possible tools to
increase the effectiveness of achieving U.S. policy objectives
within the framework of national treatment and equality of
competitive opportunity."
I
would like to turn to some key background developments
which are important to this legislation and Treasury's views
regarding it.
I will also address some questions posed by the
Subcommittee.

NB-1396

NATIONAL TREATMENT IN THE UNITED STATES
First, I would like to reiterate the Treasury Department's
belief that everyone benefits from open financial markets which
are easily accessed by domestic and foreign participants.
The
benefits which accrue from competition in the financial services
sector include increased liquidity, greater access to financing,
lower cost of funds, and in general, a smoother functioning of
financial markets.
The strength, size and depth of U.S.
financial markets certainly attest to such benefits.
The prevailing policy of the United States is to provide
national treatment to foreign participants in the establishment
and operation of financial institutions within the United States.
For example, the International Banking Act of 1978 generally
provides treatment for foreign banks that is no less favorable
than that accorded U.S. banks in similar circumstances.
The
Administration's current banking modernization proposal has also
adopted national treatment as its cornerstone regarding foreign
and domestic banks.
The results of this national treatment policy are clearly
evidenced by the significant presence of foreign financial firms
in the United States.
As of December, 1990, 294 foreign banks
had 727 offices, with assets totalling $787 billion,
approximately 21 percent of total U.S. commercial bank assets.
Foreign banks provide 18 percent of total lending in the U.S. and
nearly 31 percent of total business loans.
In some areas the
role of foreign banks is much larger.
For example, foreign banks
provide 61 percent of the business loans in New York and about 51
percent in California.
Foreign banks have obviously benefitted
from our open market policy as has the entire U.S. economy.
EFFORTS TO ACHIEVE NATIONAL TREATMENT ABROAD
The United States has also persistently pressed for open
financial markets and national treatment abroad in both bilateral
and multilateral fora.
For example, the Treasury Department has
been engaged in bilateral talks with Japan since 1984 to open
Japanese financial markets and improve foreign firms' access.
These discussions have resulted in greater opportunities for U.S.
and other countries' financial firms in the government securities
markets, on the Tokyo Stock Exchange, and in various activities
such as trust banking and foreign exchange trading.
Treasury has held similar talks with Korea and Taiwan where
we have achieved some limited progress in opening those markets.
Negotiations with the Canadians four years ago resulted in a
U.S.-Canadian Free Trade Agreement which contained significant
liberalization measures for financial services.
We hope to be

3
able to extend liberalization with Mexico and Canada as part of
the negotiations on a North American Free Trade Agreement
(NAFTA). Discussions with the European Community have also been
useful in clarifying the status of U.S. firms as the EC moves
towards a single unified financial market in 1993.
In the OECD, Treasury has pressed for the principle of
national treatment in various OECD agreements and has encouraged
individual OECD member countries to adopt policies of open
markets and national treatment.
In the Uruguay Round, the Treasury has been the U.S.
Government agency responsible for negotiating a financial
services agreement which would contain legally binding
obligations calling for both market access and national treatment
for financial institutions. We hope the Uruguay Round will
improve financial services worldwide and lead to liberalization
in a wide range of countries, particularly in the newly
industrializing economies of Asia and Latin America.
While progress has been made over the years, the 1990
National Treatment Study, which the Treasury Secretary was
required by the 1988 Trade Act to submit to Congress,
demonstrated that U.S. firms continue to face difficulties in
gaining access to many foreign markets.
Significant progress
was noted in Canada and in most European countries.
However,
the findings for other foreign financial markets were less
satisfactory with regard to the ability of U.S. firms to
participate fully and effectively.
Specifically, progress in Japan was found to be dis
appointingly slow and incomplete.
In other Asian countries,
such as Korea and Taiwan, progress was considered inadequate,
with serious barriers to U.S. financial firms still existing.
Significant denials of national treatment were also noted in
Latin American countries such as Mexico, Brazil and Venezuela.
While the U.S. generally adheres to a policy of national
treatment, many countries have moved toward a reciprocal national
treatment policy whereby foreign firms are accorded national
treatment only if the home country market of the foreign firm
offers national treatment.
In 1984, only 11 OECD members had
reciprocity powers.
By January 1993, at least 18 out of the 24
OECD members will have such powers available, including such
major financial centers as Japan, the U.K. and Germany.
The EC
Second Banking Directive, which originally included a potential
mirror image reciprocity provision, has also adopted reciprocal
national treatment.

4
FAIR TRADE IN FINANCIAL SERVICES ACT
The movement towards reciprocity or reciprocal national
treatment in many other industrial countries and the slow
progress in achieving national treatment and equality of
competitive opportunity have raised the issue of whether the
United States needs additional policy tools to attain U.S.
objectives.
Some have called for a change in our fundamental
policy of national treatment, such as that contained in the
Fair Trade in Financial Services Act.
The bill provides authority for the Secretary of the
Treasury to publish in the Federal Register a determination that
a particular country denies national treatment to U.S. financial
firms. After publication of such a determination, U.S. financial
regulators may deny applications for financial activities, fol
lowing appropriate consultation with the Secretary.
The bill
also requires the Secretary of the Treasury to initiate negotia
tions with countries where there are significant denials of
national treatment for U.S. firms.
The Treasury Department initially opposed proposals to
adopt a reciprocal national treatment policy because of concern
that even limited reciprocity would involve the risk that
sanctions would be imposed and that retaliation would follow.
Such action could have a potentially serious impact on global
financial markets. As I stated earlier, however, Treasury
worked with the sponsors of the bill last year to inject greater
discretion and flexibility in the bill.
Some questions have been raised concerning the operation of
the Fair Trade in Financial Services Act.
Relationship to International Obligations
The United States has entered into, or is presently
negotiating, a number of bilateral or multilateral agreements
that contain detailed provisions aimed at improving foreign
treatment of U.S. financial institutions.
We have already
entered into the U.S.-Canada Free Trade Agreement, which was
approved by both Houses of Congress. We are currently
negotiating financial services issues in the Uruguay Round
and in the North American Free Trade Agreement and will be
sending those agreements to both Houses of Congress when they
are completed.
The Fair Trade in Financial Services Act does not
permit action to be taken which is inconsistent with our
obligations under those agreements.

5
In considering proposed actions against unfair foreign
practices, the Act also provides ample opportunity to evaluate
the compatibility of such actions with other international
obligations, such as treaties of friendship, commerce and
navigation and bilateral investment treaties, prior to reaching
a decision regarding the appropriateness of a proposed action.
Because these treaties often contain most-favored-nation
provisions, we cannot rule out the possibility that sanctions
imposed under the Act might, in some cases, be inconsistent with
international obligations under these agreements.
While we would not lightly take action inconsistent with our
international obligations to deal with unfair foreign practices
which might themselves violate international agreements, Treasury
does not believe that the Executive should be denied this
authority under domestic law.
In this context, I might point out
that Section 301 of the Trade Act of 1974 does not prohibit the
Executive from imposing sanctions in response to unfair trade
practices, even if such action would be contrary to international
obligations.
Decision-Making
The Fair Trade in Financial Services Act carefully balances
the need for expertise in the financial regulatory area
possessed by the various bank regulatory agencies and the
Securities and Exchange Commission with the overall expertise in
foreign economic relations possessed by the Secretary of the
Treasury.
The Secretary, through the conduct of negotiations
with the country denying national treatment to U.S. institutions,
will be in a position to assess the likely effectiveness of
proposed actions, and to advise the regulatory agencies
accordingly.
However, the bill does not compel the regulatory
agencies to follow the advice of the Treasury Secretary.
The Act allows the Secretary to consider all relevant
factors prior to deciding whether to publish a notice in the
Federal Register stating that the country does not accord
national treatment to U.S. financial institutions.
Even after
the Secretary has published this notice, the regulatory agencies
may weigh various factors in formulating, in consultation with
the Secretary, appropriate sanctions against the foreign country
denying national treatment.
The factors that the bill specifically requires to be
considered with respect to foreign financial institutions already
operating in the United States are:
(1) whether the foreign
country has a record of according national treatment to United
States financial institutions; and (2) whether that country would

permit United States financial institutions operating in that
country to expand their activities even if that country
determined that the United States did not accord national
treatment to that country’s financial institutions.
Furthermore,
the regulatory agencies, in consultation with the Secretary, may
further differentiate between entities already operating in the
United States and entities not already operating in the United
States, to the extent that such differentiation is consistent
with achieving the overall goal of increasing U.S. access to
foreign financial markets.
Relationship with Section 301
It has been suggested that the Fair Trade in Financial
Services Act is unnecessary because it duplicates existing
authorities under Section 301 of the Trade Act of 1974. However,
for some time there have been other laws that address trade and
investment practices which might also be actionable under Section
301.
For example, countervailing duty procedures address foreign
government subsidies, and Section 1912 of the Export-Import Bank
Act Amendments allows the Export-Import Bank to match foreign
export credits into the U.S. market that are inconsistent with
OECD guidelines.
The Mineral Lands Leasing Act of 1920 permits
aliens, as stockholders in domestic corporations, to hold
interests in mineral leases on federal lands, other than the
outer continental shelf, only if the aliens' home country grants
reciprocal rights to U.S. citizens.
While it is true that the Fair Trade in Financial Services
Act builds upon some of the concepts of Section 301, the Act
contains many features that are specifically designed to meet the
unique requirements of financial services issues.
In particular,
the Act establishes procedures that are intended to strengthen
Treasury's hand in financial market negotiations.
The role of
the Secretary should also diminish perceptions of arbitrariness
that could disrupt financial markets.
Because of the variety of unfair and injurious foreign
practices that take place in international trade in goods and
services, Section 301 is broadly drawn to make actionable a wide
spectrum of unfair foreign activities:
violations of trade
agreements or other denials of international rights, and
practices that are "unreasonable" or "discriminatory" and burden
or restrict U.S. commerce.
By contrast, the Fair Trade in
Financial Services Act is tightly drawn to target only denials of
national treatment to specified financial sectors.
Procedurally, while USTR can self-initiate Section 301
investigations, most Section 301 investigations are initiated
upon the request of a private petitioner.
By contrast, the Fair
Trade in Financial Services Act is directly linked to findings in

7
the National Treatment Studies.
Countries whose financial
practices have been criticized in a Study are put on notice that
they may be subject to sanctions should they fail to alter their
practices.
The Act gives the Secretary a flexible timetable to
conduct negotiations, or impose sanctions.
Sanctions imposed under the Fair Trade in Financial Services
Act are confined to the specific financial service sector in
which the foreign country denies U.S. financial institutions
national treatment.
Although sanctions imposed under Section 301
could be in a sector unrelated to the sector in which the unfair
foreign actions arose, such sanctions have generally been limited
to related sectors.
CONCLUSION
To conclude, as I stated earlier, the Treasury Department
has withdrawn its opposition to the Fair Trade in Financial
Services Act of 1991 as contained in H.R. 991 since suggestions
to inject greater discretion have been incorporated in that
version.
If the Congress considers it desirable that the
Administration have the flexibility to take action specifically
against denials of national treatment to U.S. financial firms
abroad, then Treasury believes that the Fair Trade in Financial
Services Act provides more appropriate leverage than Section 301.

Ji§|

flß f Î*É S I

Department of the Treasury •

Bureau of

FOR IMMEDIATE RELEASE
July 29, 1991

S^sÌiington, DC 20239

iui3

CONTACT-; ¡Office
310 U 3 1 7 u

of Financing
202-376-4350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
D E P T . O f THE TREASURY

Tenders for $10,447 million of 26-week bills to be issued
August 1, 1991 and to mature January 30, 1992 were
accepted today (CUSIP: 912794XX7).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
5. 67%
5. 69%
5. 69%

Investment
Rate
5.93%
5.96%
5.96%

Price
97.134
97.123
97.123

Tenders at the high discount rate were allotted 51%
The investment rate is the equivalent coupon-issue
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
33,245
28,344,455
16,115
38,605
63,885
38,305
2,239,940
42,945
7,785
47,555
16,850
561,565
675.795
$32,127,045

Accepted
33,245
8,910,250
16,115
38,605
61,435
35,980
491,190
25,480
7,785
47,555
16,850
87,065
675.795
$10,447,350

Type
Competitive
Noncompetitive
Subtotal, Public

$27,417,235
1.362.810
$28,780,045

$5,737,540
1.362.810
$7,100,350

2,400,000

947.000
$32,127,045

947.000
$10,447,350

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1397

•partment o f tho Treasury • W ashington, D.C. • Telephone SS6-204'
For Release Upon Delivery
Expected at 10:00
July 30, 1991

STATEMENT OF
THOMAS D. TERRY
BENEFITS TAX COUNSEL
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON EXPORTS, TAX POLICY AND SPECIAL PROBLEMS
COMMITTEE ON SMALL BUSINESS
UNITED STATES HOUSE OF REPRESENTATIVES
Mr. Chairman and Members of the Subcommittee:
I
am pleased to be here today to present the views of the
Department of the Treasury on the classification of workers as
employees or independent contractors for Federal tax purposes,
and the impact of the classification rules on small businesses.
Overview
The proper classification of workers as employees or inde
pendent contractors has significance for both Federal employment
tax and income tax purposes.
Income taxes on employees are
collected mainly by employers through the withholding system,
whereas income taxes on independent contractors are collected
mainly through self-assessment under the estimated tax system.
Similarly, fringe benefits provided to employees are eligible for
a number of tax preferences that are not available to independent
contractors.
Worker misclassification results when taxpayers misapply the
tests used to distinguish employees from independent contractors.
Under long-standing Internal Revenue Service (IRS) procedures,
the employment and income tax status of workers is generally
determined by applying 20 factors derived from the common law.
Worker misclassification may be either inadvertent or
deliberate.
Inadvertent misclassification may occur when taxpay
ers lack sufficient guidance to determine a worker's correct
classification.
Deliberate misclassification may occur when
taxpayers try to exploit differences in the treatment of employ
ees and employers, on the one hand, and independent contractors
and their clients, on the other, for Federal tax or other purpos
es. Current Federal tax law does not consistently favor status
as either an employee or an independent contractor.
Depending on
individual circumstances, however, misclassification may some
times be advantageous to the worker, his client or employer, or
both.
NB-1398

2
The IRS increased its employment tax enforcement activities
in the late 1960's, when independent contractors faced a much
lower Social Security and Medicare tax rate than the combined
rate for employers and employees.
There was a substantial
increase in the reclassification of independent contractors as
employees, sometimes resulting in large retroactive employment
tax assessments against employers.
Taxpayer complaints led
Congress to enact section 530 of the Revenue Act of 1978 (section
530), which provides statutory relief for certain employers and
prohibits the IRS from issuing regulations or revenue rulings
addressing the status of individuals as employees or independent
contractors for employment tax purposes.
In section 1706 of the
Tax Reform Act of 1986 (section 1706), Congress removed the
statutory relief of section 530, but only for taxpayers who
broker the services of technical services workers— engineers,
designers, drafters, computer programmers, systems analysts and
other similarly-skilled workers engaged in a similar line of
work.
Policy issues relating to the reclassification of technical
services workers covered by section 1706 were discussed in a
recent Treasury Department report to the Congress, Taxation of
Technical Services Personnel:
Section 1706 of the Tax Reform Act
of 1986 (March 1991) (Treasury Report). The Treasury Report was
prepared in response to section 6072 of the Technical and Miscel
laneous Revenue Act of 1988, which directed the Secretary of the
Treasury to conduct a study of the treatment provided by section
1706.
The Treasury Report addressed the five specific issues
raised about section 1706 in the Conference Report to the 1988
Act as follows:
0

Administrabilitv of section 1706. The Treasury Report found
that section 1706 presents few administrative problems and
improves administrability of classification by partially
repealing the prohibition on guidance in section 530.
It
also found that the types of occupations covered by section
1706 could be clarified.

Abuses in reporting income bv independent contractors. The
Treasury Report found that there are errors in classifica
tion which may produce revenue losses and may call for
administrative or legislative changes; that the revenue
losses may be offset to some extent by the differences in
the tax treatment of fringe benefits; and that technical
services workers generally have higher compliance rates than
other independent contractors.

Chilling effect of section 1706 on the ability of technical
services personnel to get w o r k . The Treasury Report found

3
that section 1706 may have had transitory effects but proba
bly little, if any, permanent effect.
o

Administrabilitv of the present law standards for classify
ing individuals as employees or independent contractors.
The Treasury Report found that the current rules can be
difficult to apply; that section 530 has exacerbated this
problem by prohibiting the IRS from issuing guidance; and
that section 1706 has helped by permitting the IRS to issue
guidance for certain workers.

Equity of distinguishing between independent contractors who
work through brokers and those who do n o t . The Treasury
Report found that the distinction unnecessarily limits the
beneficial effects of section 1706, possibly reducing the
efficiency of labor markets for such workers, but that data
were not available to determine whether the distinction can
be justified by differences in compliance rates.

Sources of Employee Misclassification
Inadvertent Misclassification. A wide variety of relation
ships between workers and businesses exists in the modern econo
my.
They differ with respect to the degree of control exercised
by the business, whether the services are full-time or part-time,
the method of compensation (e.g.. salaried versus hourly), the
level of material support provided by the business, and many
other factors.
Nevertheless, for Federal tax purposes, workers
must generally be grouped into one of two broad categories:
employees and independent contractors.
As indicated above, the status of a worker as an employee or
independent contractor for purposes of Federal employment, income
and other tax laws is, with few exceptions, determined under the
common law tests for determining whether an employment relation
ship exists.
These tests focus on whether the business has the
right to direct and control the worker, not only as to the result
to be accomplished by the work, but also as to the details and
means by which that result is accomplished.
The common law tests, like most facts-and-circumstances
tests, lack precision and predictability.
Despite years of
effort by many talented people, however, no clearly better
definition has ever been developed.
In the absence of a better
definition, the best alternative is improved guidance with
respect to the existing rules.
Section 530 generally prohibits the IRS from issuing regula
tions or publishing revenue rulings addressing the status of
workers as employees or independent contractors for employment
tax purposes, however.
Labor markets have undergone significant
changes since the enactment of section 530 in 1978, during which

4
time the IRS has been unable to issue any general guidance
reflecting its interpretation of the common law tests.
This has
made it difficult for taxpayers and IRS personnel alike to
analyze employment relationships consistently, and has reduced
employers' ability to predict when the common law tests require a
particular worker to be treated as an employee or independent
contractor.
For this reason, one of the legislative options for
further consideration described in the Treasury Report was to
repeal the prohibition in section 530 against IRS issuance of
guidance concerning employee status.
Deliberate Misclassification. As noted above, current law
does not consistently favor status as either an employee or an
independent contractor.
Employers and employees are treated
differently than independent contractors and their clients under
a number of Federal and State laws, however.
Thus, depending on
individual circumstances, misclassification may sometimes be
advantageous.
Prior to 1982, compensation earned by independent contrac
tors was taxed at substantially lower rates under the Social
Security and Medicare tax provisions of the Internal Revenue Code
than wage income, creating a significant incentive for misclassification.
Subsequent legislation has essentially eliminated this
important difference.
The Social Security, Medicare, and income
tax provisions of the Internal Revenue Code may still favor
classification as an independent contractor, however, where a
worker has a small or variable cash flow or significant employee
business expenses.
This is primarily because independent con
tractors face significantly fewer restrictions on their ability
to deduct trade or business expenses than employees.
Also, the
estimated tax system used to collect Social Security, Medicare,
and income taxes from independent contractors largely avoids the
problem of over-withholding that can result when an employee
incurs large business expenses, has net income that fluctuates
during a year, or is employed for only part of a year.
Independent contractors may also have more opportunity than
employees to be less than fully compliant with the tax laws.
Employees are subject to withholding, and the amount of their
wage income is reported with great precision to the IRS.
Inde
pendent contractors may be able to omit some of their income on
their tax returns.
Under-reporting of income becomes more
difficult when an independent contractor's gross income is
reported to the IRS on information returns.
Even if an indepen
dent contractor reports 100 percent of his income, however, he
may be able to reduce his reported tax liability by overstating
deductible expenses.
The unemployment insurance tax provisions of the Internal
Revenue Code and corresponding State laws, and State and Federal
labor and related laws, e. q . . workers' compensation requirements,

5
may in some cases also favor classification as an independent
contractor.
This is because employees may not value coverage
under these laws as highly as the associated tax or other costs,
and can avoid the costs by reclassifying their status as that of
an independent contractor.
The Social Security, Medicare, and income tax provisions of
the Internal Revenue Code may, on the other hand, favor classifi
cation as an employee in cases where a worker prefers to receive
some of his compensation in the form of fringe benefits rather
than cash.
This is because, under the Internal Revenue Code, an
employer may provide fringe benefits, such as pensions, accident
and health and group-term life insurance, on a tax-favored basis
to its employees but not to its independent contractors.
Such
benefits are generally excluded from employees' gross incomes
subject to income tax as well as wages subject to Social Security
and Medicare taxes.
While independent contractors can generally
establish their own fringe benefit plans, amounts used to pur
chase such benefits generally cannot be deducted or excluded from
gross income subject to income tax, or from compensation subject
to Social Security and Medicare taxes.
Certain of the most
significant benefits, including pensions and accident and health
insurance, may be available to independent contractors on a
limited basis, however.
Amounts used to purchase these benefits
can, to some extent, be deducted or excluded from gross income
subject to income tax by independent contractors, although they
cannot be deducted or excluded from compensation subject to
Social Security and Medicare taxes.
The various differences in tax treatment between employees
and independent contractors discussed above are summarized in
Tables 1 and 2, attached hereto.
Impact of IRS Reclassification Generally
The IRS is charged with enforcing most Federal tax laws.
As
a result, it is often required to determine whether a worker has
been correctly classified as an employee or an independent
contractor.
Where the worker has not been correctly classified,
the worker and his client or employer may be assessed back taxes,
interest, and penalties.
This is generally true even if the
misclassification was inadvertent.
For example, the penalties
for late deposit of withheld income and FICA taxes generally
apply regardless of fault.
Prior to 1982, when the IRS reclassified a worker as an
employee, the employer was generally held liable for the full
amount of unwithheld income taxes and the unwithheld employee
share of Social Security and Medicare taxes for all years open
under the statute of limitations.
In addition, the employer
remained liable for Federal unemployment insurance tax and the
employer share of Social Security and Medicare taxes.
Penalties

and interest could also be assessed.
Therefore,
liability for under-withholding could be abated
employer could prove that the employee had paid
Security and Medicare taxes on the compensation
reclassified worker.

the employer's
only if the
income and Social
received by the

In 1982, section 3509 was added to the Internal Revenue Code
to mitigate the problem of large retroactive employment tax
assessments in reclassification cases.
Section 3509 generally
limits an employer's liability for failure to withhold income,
Social Security or Medicare taxes on payments made to a worker
whom it misclassified as an independent contractor to 1.5 percent
of the wages paid to the individual plus 20 percent of the
employee portion of Social Security and Medicare taxes on those
wages.
If the employer did not comply with the information
reporting requirements associated with the treatment of an
individual as an independent contractor, these percentages are
doubled to 3.0 and 40 percent, respectively.
Section 3509 has no
effect on an employer's own liability for Federal unemployment
insurance taxes or the employer portion of Social Security and
Medicare taxes.
Also, in exchange for limiting the employer's
liability for failure to withhold employee taxes, section 3509
prohibits the employer from reducing its liability by recovering
any tax determined under the section from the employee, and gives
the employer no credit for any income taxes ultimately paid by
the employee.
Section 3509 does not apply in cases of intention
al disregard of the withholding requirements.
Congress has also provided general statutory relief from IRS
reclassification of employees as independent contractors for
certain taxpayers.
Section 530 of the Revenue Act of 1978,
mentioned above, prohibits the IRS from challenging an employer's
treatment of a worker as an independent contractor for employment
tax purposes if the employer (1) has a reasonable basis for such
treatment and (2) consistently treats the individual, and any
other individual holding a substantially similar position, as an
independent contractor.
Reasonable reliance on any of the
following is treated as a reasonable basis for this purpose:
o

judicial precedent, published rulings, or letter rul
ings or technical advice memoranda issued to, or with
respect to, the taxpayer;

a past IRS audit in which there was no assessment
attributable to the employment tax treatment of the
individual or of individuals holding positions substan
tially similar to that of the individual; or

a long-standing recognized practice of a significant
segment of the industry in which the individual was
engaged.

7
Relief may also be available if the taxpayer can show some other
reasonable basis for its treatment of a worker.
Section 530 does
not merely provide relief from retroactive assessments:
as long
as the two requirements are met with respect to a worker, the IRS
is prevented from correcting an erroneous classification of that
individual, even prospectively.
Section 530 applies solely for purposes of the employment
tax provisions of the Internal Revenue Code (e. g . . Social Securi
ty, Medicare, unemployment insurance taxes, and income tax
withholding). It does not affect a worker's classification as an
employee for income tax purpose.
Impact of Reclassification on Small Business
Studies suggest that smaller employers may misclassify a
larger percentage of their employees.
Thus, the impact of IRS
reclassification, particularly retroactive reclassification,
could be greater for a typical small business than for a typical
larger business.
We believe that the prohibition in section 530
against the issuance of guidance by the IRS concerning employment
status contributes significantly to the misclassification of
employees by small businesses.
Removing this prohibition, as
suggested by the Treasury Report, could make it possible for the
IRS to issue guidance which small businesses need to comply with
the tax rules.
Conclusion
To conclude, worker misclassification is a long-standing and
difficult problem of tax policy, which the Treasury is very
interested in seeing resolved.
The Treasury Report suggests
several options for further consideration and analysis.
We would
be pleased to work with the Subcommittee to develop these ideas
further.
Mr. Chairman, that concludes my formal statement.
I will be
pleased to answer any questions that you or other Members may
wish to ask.

Table 1
Tax-Favored Benefits Available to Employees and Independent Contractors

Availability

To Employee
in Emolover’s Plan

Benefits
Employee achievement awards*
Group-term life insuranceb

May be required
Generally optional

Accident and health insuranced

Generally optional

Tuition remission*
Group legal services*

To Independent
Contractor in Own Plan

May be required

Death benefits*

Meals and lodging1

To Independent
Contractor in Client’s
______Plan______

Limited deduction only

May be required
Optional
Optional

May be required

Cafeteria plans'1

May be required

Educational assistance1

May be required

Optional

Dependent care'

May be required

Optional

No-additional-cost fringes*

May be required

Optional

Qualified employee discount^

May be required

Working condition fringes“

De minimis fringes*

Optional

Generally optional

Optional

Free parking*

Optional

On-premises athletic facilities**

Optional

New-product testing*

Optional

Qualified pensions and annuities?

May be required

Optional

Tax-sheltered annuities

May be required

Qualified and incentive stock option^

Optional

Employee stock purchase plans"

May be required

Voluntary employees’ beneficiary
associations"

May be required

bepartment of the Treasury
Office of Tax Policy

In this table, "optional" means that the benefit is not required to be provided under any minimum coverage or nondiscrimination rules,
while "may be required" means that it may have to be provided.

Notes
a.

Code §§ 74(c) and 274(j)(3)(B).

Code § 79(d); Treas. Reg. § 1.79-0(b).

c. Code § 101(b)(3)(A); Treas. Reg. § 1.101-2(0(1)- Discrimination rules may apply if the benefits are provided under a qualified
pension plan, however.

Code §§ 105(g), 106, and 162(1)(1); Treas. Reg. § 1.105-l(a). Coverage and discrimination requirements may apply if the plan
is self-funded. Code § 105(h).

Code § 117(d)(2)(A).

Code § 119.

Code § 120(c)(1), (c)(2) and(d)(1).

Code § 125(b)(1) and(d)(1)(A); Prop. Treas. Reg. § 1.125-1, Q&A-4.

Code § 127(b)(2) and (c)(2); Treas. Reg. § 1.127-2(h)(l)(iii).

Code § 129(d)(2), (d)(3), (d)(8) and (e)(3).

Code § 132(b),(0 and (h)(1); Treas. Reg. § 1.132-l(b)(l) and (3).

Code § 132(c), (f) and (h)(1); Treas. Reg. § 1.132-l(b)( 1) and (3).

m. Code § 132(d);Treas. Reg. § 1.132-1(b)(2) and (4).
n.

Code § 132(e); Treas. Reg. § 1.132-1(b)(2) and (4). Certain nondiscrimination rules apply to eating facilities, however.

Code § 132(h)(4); Treas. Reg. § 1.132-(b)(2) (flush language).

Code § 132(h)(5); Treas. Reg. § 1.132-1(b)(1) and (3).

q. Treas. Reg. §§ 1.132-1(b)(2) (flush language) and 1.132-5(n).
r.

Code §§ 401(a)(4), 401(c) and 410(b); Treas. Reg. §§ 1.72-17(a) and 1.401-10(b).

Code § 403(b); Treas. Reg. § 1.403(b)-1(a)(1).

Code §§ 421-22A; Treas. Reg. § 1.42l-7(h).

Code § 423; Treas. Reg. § 1.423-2(e)(2).

Code § 501(c)(9); Treas. Reg. § 1.501(c)(9)-2(b).

Table 2
M ajor Differences in Treatment of Employees and Independent Contractors
for Federal T ax and Other Purposes
Employees

Independent Contractors
Fringe Benefits1

Value of many employer-provided fringe benefits
excluded from income and employment tax bases

Qualified retirement plan contributions excluded from
income but not self-employment tax base
25 percent of health insurance costs deducted from
income but not self-employment tax base
Few other fringe benefits excluded from income or
self-employment tax bases

Trade or Business Expenses
May be deducted from income tax base only by itemizers
and only to the extent expenses exceed two percent of
adjusted gross income

May be deducted from income tax base

May not be excluded from employment tax base

May be excluded from self-employment tax base

Certain expenses subject to additional business purpose
requirements
Administrative Costs
Withholding involves more administrative costs for
employer but less for employee

Estimated tax system involves more administrative
costs for independent contractor but less for client
Estimated tax system allows modest delay in tax
payments relative to withholding
Compliance
Somewhat more ability to be noncompliant due to lack
of withholding, larger trade or business expenses, and
somewhat more limited business purpose requirements
with respect to such expenses

Non-Tax Differences2
Less flexibility in choosing among fringe benefits; value
of employer contributions to retirement plan may be lost
if worker changes jobs frequently

May be unable to obtain fringe benefits, including
statutory fringe benefits such as unemployment
insurance and workers’ compensation

Administrative (and other) costs associated with Federal
and State laws applicable to employees, e.g., minimum
wage

May be unable to negotiate worker protections such as
minimum wage and overtime

Department of the Treasury
Office o f Tax Policy

For a detailed comparison of the tax treatment of fringe benefits and business expenses, see Appendix A. Employerprovided fringe benefits may be subject to nondiscrimination requirements and other limits.

Some o f the non-tax differences, such as minimum wage laws, may be more applicable to less advantaged workers than
to occupations covered by section 1706.

lepartment of the Treasury • Washington, D.c. • Telephone 5 6 6 -2 0 4 1
ËPT.OFTHETÏ \il Av
FOR IMMEDIATE RELEASE
Bucharest, Romania
July 30, 1991

m *
Contact: Barbara Clay
(202)566-5252

US TREASURY OFFICIAL ANNOUNCES EXPANDED ASSISTANCE TO ROMANIA

U .S. Treasury Deputy Secretary John E. Robson today announced a further expansion
o f U .S. technical assistance to Romania. Robson’s announcement followed two days o f meetings in
Bucharest with top Romanian officials, members o f opposition political parties, and representatives of
the private sector. "We know the road to democracy and a market economy is not an easy one, and
in the end, success can only be accomplished by the continued strong commitment and participation of
the Romanian people," said Deputy Secretary Robson. "President Bush and the American people
want the people o f Romania to know that we support their courageous efforts, and we will continue to
support and assist them as they implement the difficult but crucial reforms and changes ahead."
Areas o f expanded U .S. assistance which Deputy Secretary Robson discussed with
Romanian officials included: training for commercial bank personnel; tax policy and administration;
stock exchange operations; agri-business; implementation o f privatization; and health care.
Robson’s announcement followed a U .S. delegation visit which included meetings
with President Iliescu, Prime Minister Roman, Finance Minister Dijmarescu, and opposition party
leaders. The U .S. delegation also included Dr. Carol Adelman, Assistant Administrator for Eastern
Europe with the Agency for International Development (AID). The purpose o f the Robson
delegation’s visit was to further ongoing U .S. efforts to provide assistance in line with the specific
needs o f Romania. Deputy Secretary Robson serves as one of three coordinators designated by
President Bush to oversee all U .S. assistance to East and Central Europe.
While in Bucharest, Robson and Adelman also presented a joint $12 million U .S.
assistance grant to the Bucharest Polytechnic Institute and the Academy o f Economic Studies. "This
grant will help strengthen business education programs at the Romanian institutions and will help
develop a small business assistance program. These two areas o f education are fundamental to
Romania’s successful and lasting transition to a market economy," said Dr. Adelman. Two U .S.
universities will work jointly with the Romanian institutions in this management training project.
The U .S. delegation leaves Bucharest tomorrow for meetings with top government
officials in Albania.

m
NB-1399.

partmant o f the Treasury • W ashington,

FOR RELEASE AT 2:30 P.M.
July 30, 1991

CONTACT:

D.c. •

Telephone 566-2041

Office of Financing
202/376-4350

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $ 20,800 million, to be issued August 8, 1991.
This offering will provide about $ 1,625 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 19,170 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Monday, August 5, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The two
series offered are as follows:
9 1 -day bills (to maturity date) for approximately
$ 10,400 million, representing an additional amount of bills
dated May 9, 1991
and to mature
November 7, 1991
(CUSIP No. 912794 XM 1), currently outstanding in the amount
of $ 8,620
million, the additional and original bills to be
freely interchangeable.
1 8 2 -day bills for approximately $ 10,400 million, to be
dated August 8, 1991
and to mature February 6, 1992
(CUSIP
No. 912794 XY 5).
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest.
Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
August 8, 1991.
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 competi
tive 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 $ 1,670 million as agents for foreign and international
monetary authorities, and $5,033 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-14Q0

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2

1/91

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.
Com
petitive 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, m
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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures.
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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.

8/89

_____

Apartment o f th® Treasury • washlnBton, p?C. • Telephone
rpT.OV

OPENING STATEMENT OF
JOHN P. SIMPSON
DEPUTY ASSISTANT SECRETARY
DEPARTMENT OF THE TREASURY
BEFORE THE
SENATE FINANCE COMMITTEE
UNITED STATES SENATE
JULY 30, 1991

NB-1401

•2041

Mr. Chairman:

I am pleased to join my colleagues this morning to discuss with
you administration of the U.S.-Canada Free Trade Agreement.

This

hearing is particularly timely in that we are now beginning
negotiation of a North American Free Trade Agreement that will be
based on our free trade agreement with Canada.

In order to discuss how the U.S.—Canada Free Trade Agreement
works with respect to trade in goods, and specifically how rules
of origin operate, it may be useful to review briefly some
earlier U.S. trade laws.

Over the last twenty-five years,

Congress has enacted several laws that reguire goods entering the
U.S. to be treated differently according to their national
origin.

Some of these laws impose penalties or restrictions, for

example, trade and financial sanctions, quotas, or special higher
duties.

Other laws extend preferential treatment, for example,

the Generalized System of Preferences (GSP), the Caribbean Basin
Economic Recovery Act (commonly referred to as the Caribbean
Basin Initiative, or CBI), and the U.S.-Israel Free Trade
Agreement.

Congress has consistently made clear its interest in seeing these
laws administered in a manner that achieves the objectives

Congress intended.

Goods produced in countries on which

sanctions have been imposed should not avoid those sanctions.

the other hand, where Congress has extended special benefits to
products of certain countries, those benefits should be extended
only to goods produced in the countries Congress intended to
benefit, and should not slip over to products of nonbeneficiary
countries.

Administration of these laws is relatively easy when dealing with
goods that originate wholly in a country that is the target of
sanctions or the recipient of benefits.

An example of this is

agricultural products grown in that country's soil or minerals
extracted from its mines.

However, administrative problems are

greater when a target country's products are further manufactured
in another country, or when a target country further manufactures
the products of a non-target country.

We do not want a country

subject to sanctions to circumvent those sanctions by having its
products subjected to superficial processing in another country.
Nor do we wish to see countries to which we have not extended
preferential treatment effectively enjoy those benefits by having
their products superficially processed in a beneficiary country.

Consequently,

in order to achieve these objectives, we have

adopted a policy that products of a country remain products of
that country unless they undergo processing in another country

that results in a substantial change in their character, or, as
our courts have said, a substantial transformation.

Until enactment of the U.S.-Canada Free Trade Agreement in 1989,
Congress never provided specific rules for defining substantial
transformation.

Traditionally, substantial transformation has

been defined on a case-by-case basis by the U.S. Customs Service,
using principles developed in opinions issued by our courts.
Such an approach is necessarily highly subjective and the results
have been inconsistent.

Moreover, the courts have occasionally

issued opinions, particularly some involving imports of iron and
steel products, that appear to many to be in conflict with the
intent of Congress in enacting laws regarding iron and steel
trade.

It was apparently in an effort to guard against origin
determinations that fail to meet its expectations that Congress,
in enacting laws granting tariff preferences,

introduced a new

criterion for identifying products of a beneficiary country: a
value-content requirement.

The value-content requirement may set

a ceiling on the value of nonbeneficiary-country materials
contained in a product - examples of this are found in the
insular possessions preference law and in the Automotive Products
Trade Agreement with Canada - or the value-content requirement
may set a minimum value for beneficiary-country materials and

labor contained in a product, as is the case with GSP, CBI, and
the U.S.-Israel Free Trade Agreement.

In 1987, when we began negotiation of a free trade agreement with
Canada, we recognized the need to devise a better method for
defining the term "substantial transformation” for the purpose of
identifying goods qualifying for preference under the FTA.

For

many reasons that I shall not go into here, we rejected the idea
of defining substantial transformation on the basis of value
added or value content.

Instead, we borrowed and, I believe,

improved on, a European idea of defining substantial
transformation in terms of change in tariff classification.

Substantial transformation defined by tariff classification
change is the primary basis for determining the origin of goods
under the U.S.-Canada Free Trade Agreement.

However, for a

limited number of product sectors the FTA does require in
addition to a change in tariff classification that at least half
of the cost of producing goods eligible for preference be
attributable to the value of U.S. and/or Canadian materials and
labor.

We imposed this requirement only where the Harmonized

System was insufficiently detailed to support construction of a
rule of origin based on tariff classification, or where a
particular industry insisted on having a value-content
requirement.

One of the product sectors where we included the supplemental
value-content requirement is the automotive sector.

Our previous

experience with preferential trade in automotive products was the
Automotive Products Trade Agreement, or APTA.

As implemented by

the United States, APTA allowed duty-free access for automobiles
and certain automotive parts provided that not more than 50
percent of their value was attributable to foreign materials.

There was fairly widespread dissatisfaction with the APTA rule
because it was believed not to require a sufficiently high level
of U.S. or Canadian content.

One of the reasons for this was

that there was no restriction on what could be counted as U.S. or
Canadian content.

Because of this, items such as profit,

advertising and sales promotion, administrative costs, and
executive incentives could all be counted as Canadian content.
This reduced the need to utilize actual Canadian or U.S. parts
and labor.

Consequently, a primary objective in drafting the free trade
agreement with Canada was to strengthen the rule of origin for
automotive products.

We did this in several ways.

First, we

scrapped the APTA approach to valuecontent, which merely places
a limit on foreign content, and replaced it with a positive
requirement for U.S. and Canadian materials and actual labor,
which was the approach we had used in GSP, CBI, and the

U.S.-Israel FTA.

This effectively disallowed counting profit,

sales promotion, and like costs as qualifying content.

And second, we reduced the inconsistency of results that the
GSP/CBI type of value-content requirement produces by
substituting total cost of manufacturing in place of customs
value in the denominator of the equation.

This means that

regardless of changes in shipping costs or profit levels the
denominator stays the same.

Finally, we raised the qualifying threshold from the 35 percent
used in GSP/CBI to 50 percent.

The result was a value-content

requirement that was substantially more rigorous than that
provided by APTA.

As an aside, I might note that we are seeking

to have this requirement increased to 60 percent if the
value—content test is left in its current form.

It goes without saying that our experience with GSP and CBI did
not adequately prepare us for a free trade agreement involving
trade of the magnitude and complexity that we have with Canada.
This is particularly true for automotive trade.

Many of the

principles and procedures that work well in trade with Caribbean
countries are inadequate for automotive trade between the U.S.
and Canada.

We are learning some of these lessons from our

audits of companies doing business under the FTA.

We are

benefitting from this experience, and we are applying the lessons

we are learning both to seek modifications to our free trade
agreement with Canada and to devise improved rules for the NAFTA.

In the meantime, we shall need to sort out problems that we
discover, either through our audits or through other means, and
take appropriate corrective action.

And in doing that we shall

need to distinguish between problems that result from a
manufacturer's failure to comply and problems that result from
shortcomings of the FTA itself.

I know the Committee has a particular interest in Treasury's role
in Customs enforcement of the FTA.

Treasury has both a policy

making and oversight responsibility with respect to Customs
issues, including its enforcement activities.

We in Treasury are

very supportive of Customs enforcement activities, and especially
of Customs' efforts to enhance its commercial enforcement
capabilities, particularly its audit function.

We work

collaboratively with Customs on enforcement matters, especially
when such matters involve important or precedential policy
issues.

Because our experience in administering the U.S.-Canada

Free Trade Agreement will undoubtedly influence our negotiation
of a North American Free Trade Agreement, we are especially
interested in having Customs bring to our attention any audit
matters that appear to raise broad issues.
Mr. Chairman, this concludes my formal remarks.

I shall be happy

to answer any questions you or the members of the Committee may
have.

Thank you.

Press 566-2041

eaerai imancmg j
WASHINGTON, D.C. 2 0 2 2 0

lui 3 1 Si 0 0 3 3 9 4
FOR IMMEDIATE RELEASE

J ul y 3 0 , 1991

FEDERAL FINANCING BANK ACTIVITY

Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
June 1991.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $185.1 billion on
June 30, 1991, posting an increase of $2.5 billion from the
level on May 31, 1991. This net change was the result of
increases in holdings of agency debt of $2,765.5 million and in
agency-guaranteed loans of $196.1 million, while holdings of
agency assets decreased by $415.2 million.
FFB made 29
disbursements during June.
FFB began lending to the Federal Deposit Insurance
Corporation on June 3, 1991.
FFB holdings on June 30, 1991 were the highest in the
Bank's history.
Attached to this release are tables presenting FFB
June loan activity and FFB holdings as of June 30, 1991.

NB-1402

Page 2 of 4

FEDERAL FINANCING BANK
JUNE 1991 ACTIVITY

AMOUNT
OF ADVANCE

DATE

BORROWER

FINAL
MATURITY

INTEREST
RATE
(semiannual)

INTEREST
RATE
(other than
semi-annual)

9/3/96
6/2/03
12/2/91

7.275%
8.113%
6.072%

7.210% qtr.
8.278% ann.

7/1/91

5.823%

AGENCY DEBT
EXPORT-IMPORT BANK
6/3
6/3
6/3

Note #98
Note #99
Note #100

67,000,000.00
14,700,000.00
988,000,000.00

FEDERAL DEPOSIT INSURANCE CORPORATION
Note FDIC 0001
6/3

Advance #1

2,900,000,000.00

NATIONAL CREDIT UNION ADMINISTRATION
Central Liauiditv Facility
Note
Note
Note
4Note

#553
#554
#555
#556

6/14
6/21
6/24
6/28

13,000,000.00
3,000,000.00
8,000,000.00
6,000,000.00

8/13/91
8/20/91
9/23/91
8/27/91

5.878%
5.857%
5.879%
5.847%

6/10

300,000,000.00

7/1/91

5.855%

6/6
6/10
6/17
6/24
6/30

371,000,000.00
389,000,000.00
351,000,000.00
331,000,000.00
375,000,000.00

6/17/91
6/24/91
6/30/91
7/10/91
7/16/91

5.869%
5.857%
5.878%
5.857%
5.847%

RESOLUTION TRUST CORPORATION
Note RTC 0010
Advance #2
TENNESSEE VALLEY AUTHORITY
Short-term
Short-term
Short-term
Short-term
Short-term

+rollover

Bond
Bond
Bond
Bond
Bond

#101
#102
#103
#104
#105

Page 3 of 4

FEDERAL FINANCING BANK
JUNE 1991 ACTIVITY

AMOUNT
BORROWER_________________________ DATE________ OF ADVANCE

FINAL
MATURITY

INTEREST
RATE_____
(semiannual)

INTEREST
RATE________
(other than
semi-annual)

3/12/93
9/13/93

6.362%
7.109%

12/11/95
12/11/95

7.799%
8.060%

6/28/21

8.561%

11/15/91
11/15/91

6.079%
6.034%

9/1/04

8.397%

8.573% ann.

8.244%
8.371%
8.549%
8.490%
7.079%
7.159%

8.161%
8.285%8.460%
8.402%
7.017%
7.096%

GOVERNMENT - GUARANTEED LOANS
DEPARTMENT OF DEFENSE
Foreign Military Sales
Philippines 11
Philippines 11

6/21
6/26

13,261,259.49
5,049,272.00

GENERAL SERVICES ADMINISTRATION
Foley Square OfficeBuilding
Foley Square Courthouse

6/3
6/17

641.496.00
653.458.00

6/26

156,735,134.00

6/10
6/27

536,411.29
1,509,567.40

American National Bank & Trust
Advance #1
U.S. Trust Company of New York
Advance #14
Advance #15

DEPARTMENT OF HOUSING & URBAN DFVFTOFMENT
Oakland, CA

6/13

336,000.00

RURAL ELECTRIFICATION ACMINISTRATTON
Wèstern Farmer Electric #196A
*Sho-Me Pcwer #164
*Basin Electric #232
Wèstern Illinois Power #294
KAMO Electric #209A
Arizona Electric #242A

6/3
6/5
6/12
6/12
6/25
6/26

5.000. 000.00
12/31/15
650.000.
00
12/31/19
449.000.
00
1/2/24
398.000.
00
1/2/18
1.824.000.
00 6/30/93
8.622.000.
00 6/30/93

TENNESSEE VATIEY AUTHORITY
Seven States Energy Corporation
Note A-91-08
♦maturity extension

6/28

622,242,790.09

9/30/91

5.873%

Page 4 of 4
AL FINANCING BANK
(in millions)
Program

June 30. 1991

Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service

11,238.0
2,900.0
79.9
58.208.0
12.881.0
6,400.6

Mav 31. 1991
$

11,180.5
52.9
57.908.0
13.400.0
6,400.6
0

Net Change
6/1/91-6/30791
$

57.5
2,900.0
27.0
300.0
-519.0
- 0 -

FY '91 Net Change
10/1/90-6/30/91
-101.9
2,900.0
23.3
16,726.3
-1,501.0
-297.2
17,749.6
205.0
-2.7

91,707.5

88,942.0

2,765.5

Agency Assets:
Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities g .
Rural Electrification Admin.-CBO
Small Business Administration

52,254.0
66.9
82.7
4,463.9

52,669.0
66.9
82.7
4,463.9
7.0

-415.0

sub-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-Public Housing No^es +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing . .
Æ
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*

56,874.3

57,289.5

-415.2

257.4

4,702.2
4,850.0
218.6
1.903.4
646.5
29.1
24.7
32.7
1.624.4
18,894.3
296.9
706.1
2,418.7

4,699.5
4,850.0
219.1
1.903.4
491.5
29.1
24.7
32.7
1.624.4
18,878.5
296.9
712.4
2,389.2

2.7

21.8
77. n

-5,053.4
-30.0
-25.4
-47.4
279.1
-0.7
-0.5
-1,063.2
-47.9
-148.0
-85.6
-35.5
62.7
-1.5

177.0

36,546^4

36,350.4

sub-total*

$ 18Ì,128.3

22.0

$ 182,581.9

0.2

-0.5
- 0 -

154.9
- 0 -

- 0 - 0 -

15.8
-

-6.3
29.5
-

0.1
-

56.7

- 0 -

1.6

- 0 -

196.1

BliBl.

$ ~Ì7Ì46.3

$ ÏI 7 I Ô 9 .

O II CO

grand total*
♦figurés may not total due to rounding
+does not include capitalized interest

6.8

- 0 -

FOR RELEASE ON DELIVERY
Expected at 9:30 A.M.
July 31, 1991

TESTIMONY OF
THE HONORABLE NICHOLAS F. BRADY
SECRETARY OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE
OF THE
HOUSE COMMITTEE ON ENERGY AND COMMERCE
July 31, 1991

Good morning Chairman Markey, Mr. Rinaldo, and members of
the Subcommittee and full Committee.
As you may know, my background includes 33 years in the
securities industry competing with commercial banks and acting as
financial advisor and underwriter to many of the nation's
industrial companies.
I have also spent nine months in the U.S.
Senate and now nearly three years as Secretary of the Treasury.
As a consequence of this experience, I am especially pleased to
appear before you today to discuss the pressing need to
strengthen and modernize our nation's banking and financial
services laws.
The plain fact is that the laws on the books no
longer reflect the way financial companies do business.
Until we
recognize this and act, our financial system will be exposed to
further decay.
Our financial companies will become weaker;
overseas financial companies will gain at our expense? and
taxpayers will face the prospect of losses as weak financial
concerns turn to the government for help.
In short, we must instead find ways to tap voluntary private
capital from the marketplace to stand ahead of the taxpayer.
That is the strategy at the heart of comprehensive banking and
financial reform.
It is the strategy behind H.R. 1505, the
"Financial Institutions Safety and Consumer Choice Act of 1991."
And it is the strategy behind H.R. 6, which is now before this
Committee for its consideration.
NB-1403

At your request, my testimony today concentrates on issues
related both to banking and securities activities and to the
^kility of banks to tap capital from outside the banking
industry.
Let me say at the outset, however, that these are only
two aspects of the comprehensive legislation that is now before
Congress.
The legislation also decreases the exposure of the
federal safety net, provides prompt corrective action for
troubled banks, reduces the riskiness of activities funded with
insured deposits, and permits increased efficiency through
nationwide banking and branching.
Taken as a whole, the legislation addresses the fundamental
problems of the banking system — rather than just funding them.
We believe it is a carefully balanced, integrated approach, which
is essential to meaningful reform.
By contrast, a thin,
piecemeal approach is likely to push our most pressing problems
into the future and could well defeat the very purpose of the
legislation — to strengthen the banking and financial system and
better serve consumers.
For example, merely recapitalizing the
bank insurance fund would only delay the day of reckoning.
Banks will not be the only beneficiaries.
Mutual funds and
insurance companies will better serve their customers through a
broader distribution network.
And securities firms will be able
to offer their customers loans through affiliated banks.
Let me now focus on the subject of today's hearing,
beginning with an explanation of why we believe the laws
governing the permissible affiliations of banks require
fundamental change.
Meed for Reform
Today's banking and financial laws are designed for a
rigidly segmented financial system where different types of firms
specialize in different types of financial activities that are
insulated from competition.
This is the picture that many people
still have of our financial system:
banks offer checking
accounts and make business loans; thrifts offer savings accounts
and make home mortgage loans; securities firms sell only
securities products; insurance companies sell only insurance
policies; and commercial companies stay out of financial
activities altogether.
According to this view, our laws are
designed to stop these firms from competing with each other.
This may be a nice, neat picture, but it is at odds with
reality.
Both corporate and individual consumers have demanded
change, and the marketplace has responded.
Take securities
firms, for example.
Today they provide money market funds,
credit cards, and check-writing privileges that compete directly
with traditional bank products.
They even sell federally-insured
deposits directly to customers.
At the same time, traditional

3
corporate lending by banks has been supplanted by the development
of the commercial paper and securities markets, which allow
corporations to use securities firms to borrow directly from
financial markets at lower rates.
The situation with insurance companies is similar.
They,
too, sell insured deposits directly to their customers, and they
also offer securities-related products like variable annuities.
At the same time, many of their lending activities compete
directly with bank lending activities.
The nature of banking has changed, too.
Banks now have the
ability to engage directly or indirectly in a broad range of
securities activities, although with numerous restrictions.
They
can engage with few limits in underwriting and dealing in U.S.
government and agency securities, general obligation municipal
securities, agency-guaranteed mortgage-backed securities, certain
kinds of municipal revenue bonds, private placement activities,
discount and full service brokerage, and financial advisory
services.
National banks are also permitted to securitize loans
that they have originated or purchased.
Moreover, banks may
serve as advisers to mutual funds, and some of their trust
activities involving pooled investments are very similar to
mutual fund activities.
More recently, bank holding companies have been permitted to
establish subsidiaries under Section 20 of the Glass-Steagall Act
that derive a portion of their revenue from a wide range of
otherwise prohibited securities activities, including the
underwriting of corporate debt and equity.
Banks also have
gradually expanded into a limited number of insurance activities,
beginning with credit life insurance and extending to title
insurance, municipal bond insurance, fixed rate annuities,
insurance agency activities in small towns, and a much broader
range of activities within certain states.
Finally, in contrast to perhaps the most widely held
misconception, banks have been able to affiliate with securities,
insurance, and commercial companies through a variety of laws,
regulatory interpretations, and court decisions.
Likewise,
commercial and diversified financial firms have long been
permitted to acquire thrift institutions.
The result is that a
number of major diversified financial companies are in business
today, engaging in all the activities that many people still
believe are rigidly segmented into different industries.
These firms include General Electric, John Hancock, Sears,
American Express, Ford, Merrill Lynch, Household Financial, and a
number of major insurance companies.
For example, Sears owns an
FDIC-insured bank, a securities firm, and an insurance company?
engages in consumer lending and commercial lending; provides
credit cards and mortgage banking; and offers mutual funds to

4
customers. American Express offers the same broad lines of
business, including a bank with approximately $10 billion in
assets, the country*s second largest securities firm, the second
largest mortgage company, and the largest credit card issuer.
These are just two of many examples, but they graphically
illustrate the point.
Another popular myth is that smaller community bankers only
engage in traditional banking activities, and have no connection
with other kinds of financial or commercial activities.
This is
just not the case.
For example, many community banks are
expressly authorized by law to engage in a wide range of
insurance and other kinds of financial activities.
More
important, an individual today can own or control a bank and any
other kind of financial or commercial business — like the local
car dealership or insurance agency, for example — with virtually
no restrictions on transactions between the insured bank and
these other businesses or their customers.
This common ownership
of smaller banks and commercial companies is a widespread
practice throughout the country.
Finally — and this is particularly important to keep in
mind — the integration of banking and financial activities is
accelerating in virtually all of the world's major industrialized
countries, and their governments are putting in place rational
regulatory structures to allow these activities to take place
safely and profitably.
For example, the European Community has
decided in its "EC 1992" program to allow a banking organization
to engage in a full range of financial services throughout its
member countries.
Recently, Japan has shown signs of modifying
the legal segmentation of its financial businesses.
These
changes can only add to a trend that I know disturbs us all —
American financial institutions are finding it increasingly
difficult to compete internationally.
Looking at the evidence of financial integration both at
home and abroad, the question is why is this happening? I
believe the answer is clear:
consumers want this integration,
and diversified financial companies are providing it because it
is more profitable, more efficient, and safer than engaging in a
single line of business.
The know-how that a company develops in
one line of financial business can be applied successfully to
other related financial activities.
It is only natural for a
financial company to seek to capture the benefits of engaging in
such activities, and to pass the savings — in time and money —
on to the consumer.
Unfortunately, our regulatory structure is unable to keep up
with this powerful trend in the market.
Certainly, there have
been some accommodations through regulatory interpretations,
court decisions, state action, and piecemeal Congressional
action, which together have permitted the blurring of financial

5
activities described above.
But our "system” is so laced with
limitations and inequities that it creates tremendous
inefficiencies that hamstring our most innovative competitors.
Why should a big bank be allowed to underwrite corporate
equities, while a smaller bank can't distribute mutual funds to
its customers? Why should an insurance company be allowed to
sell bank deposits, while most banks can't sell insurance? Why
should some banks be allowed to sell insurance, while insurance
companies can't distribute their products through bank branches?
Why should banks be allowed to underwrite general obligation
municipal bonds, but not municipal revenue bonds? Why should
commercial companies be allowed to infuse voluntary capital into
troubled thrift institutions, saving the taxpayer billions of
dollars, while these same companies are prohibited from providing
this same capital to failing banks? These anomalies are hard to
rationalize, yet they form the antiquated mosaic of our banking
laws. And their existence imposes very real costs that we should
no longer ignore.
In previous testimony I have focused on the costs of these
restrictions to banking companies.
Of all financial firms, banks
have the most restrictions on the range of their activities,
affiliations, and ability to tap private capital.
At the same
time, innovation and competition from firms that are not subject
to these restrictions have eroded the value of the banks'
traditional franchise.
One of the steadiest and most reliable
profit opportunities for banking businesses — high grade
commercial lending — has migrated to the securities markets,
where most banks are prohibited from competing.
As a result,
weaker banks have reached for riskier activities within their
traditional lines of business, and we are all now faced with the
consequences — excessive commercial real estate lending, loans
to less developed countries, and highly leveraged transactions.
Because of the possibility of federal liability for bank losses
through deposit insurance, the causes and cures for these
problems are of particular concern. And the current credit
crunch makes clear that there is an obvious national interest in
maintaining a system of strong banks that can lend to credit
worthy customers in good times and bad.
Perhaps most troubling is the fact that our regulatory
structure is simply no longer adequate to address the inexorable
changes that have already taken place.
We need more functional
regulation.
We need to demand higher bank capital for insured
depositories that affiliate with companies engaged in a broad
range of activities. And we need a rational structure with
appropriate firewalls.
If these needs are addressed, as they are
in the legislation, the risk to the system will be greatly
reduced.

Fundamentally, I believe we have to choose between a system
that has the capacity to attract sufficient private voluntary
capital and one that does not. Trying to maintain the status quo
— by muddling through with national "policy” set haphazardly by
courts, regulators, and state legislatures — is not an
attractive option.
This approach might cause few immediate
problems, but the long-term effect would be serious.
In reality,
there will be no "status quo,” so long as consumers and the
marketplace demand movement towards financial integration.
Instead of a steady state, international competitors would
continue to gain at American firms' expense.
Outdated legal
barriers would continue to limit the flow of private capital into
the banking system, with the possibility that taxpayers' public
capital might have to take up the slack.
Sound, functional
regulation would be limited.
Turf wars would continue among
interest groups, with examples of unfair competition in every
direction.
Finally, banks and financial companies could become
weaker.
It would be far preferable to finally recognize the reality
of market forces; to adopt new laws that foster broad, fair, and
safe competition in financial services? to tap all sources of
voluntary private capital? and to rebuild a strong, vital banking
system that continues to fuel economic growth.
The House Banking
Committee has adopted this approach in legislation now before
this Committee, and with some changes, I believe this legislation
would put the American banking system well on its way to
recovery.
Let me now describe the relevant details of this approach
that you have indicated are of the most interest to your
Committee.
The Proposed Legislation
Both the Administration's proposal, H.R. 1505, and the House
Banking Committee bill, H.R. 6, would allow banks to affiliate
with financial firms through the formation of financial services
holding companies (FSHCs). Commercial companies — in practice,
firms that are most likely to be primarily financial firms —
would in turn be permitted to own these new FSHCs by forming
diversified holding companies (DHCs). (See Exhibit 1) This
proposed structure would create a level playing field that
permits banking, financial, and commercial companies to affiliate
with each other on fair terms. Moreover, both bills include
strong safeguards to prevent an expansion of deposit insurance
and the federal safety net to cover new activities, and strong
safeguards to protect consumers from abusive practices.
(Because
of the similarities between the two bills, references to the
legislation below refer to both, unless otherwise noted.)

7
This legislation would benefit not just banking
organizations, but a broad range of financial companies,
including securities and insurance companies.
It would enable
these companies to capture the benefit of providing a broad range
of financial products to retail and corporate consumers, as well
as diversifying risk.
For example, banks and securities and
insurance companies would have new customer markets to tap and
new distribution networks available to sell their products and
services.
The resulting competition is likely to create direct
benefits for consumers, including lower costs and greater
convenience.
As mentioned above, this blurring of distinctions between
banking, financial, and related products is neither a new nor a
radical idea. The legislation merely recognizes these changes
and puts in place a regulatory structure that permits more
comprehensive and more efficient "functional” regulation of
financial activities. We believe this structure will improve the
regulation of all financial activities conducted in a diversified
holding company.
In addition, the legislation allows banks to tap all aspects
of the United States financial markets for new sources of
capital.
Permitting diversified financial companies to own banks
— so long as the companies commit to strong bank capital
levels — will strengthen the banking system and reduce taxpayer
exposure.
Safeguards
Obviously, there must be strong safeguards attached to the
ability of banks to affiliate with a broader range of companies.
These safeguards must ensure that the federal safety net does not
cover new activities and expose the taxpayer to undue risk.
They
must also ensure that funding advantages of insured depositories
are not used to subsidize new financial activities to compete
unfairly with nonbank financial firms. A brief description of
the safeguards in the proposed legislation is set forth below.
Safety net confined to bank. Only the bank would have
access to deposit insurance, the Federal Reserve's discount
window, or the federal payments system? the securities or
insurance affiliate, the FSHC, or the DHC would have no such
access.
In this way the federal safety net is confined strictly
to the bank, and taxpayer exposure would be limited to the losses
of the bank, not of its affiliates.
Capital. Only banks with the highest capital level may
affiliate with securities, insurance or commercial firms.- If
capital falls below the highest level, the bank must sever
connections with any commercial firm and divest all securities
and insurance activities.

Separately Capitalized Affiliates. Securities and insurance
activities must be conducted in separately capitalized
affiliates.
Thus, failure of the affiliate will not affect the
capital or safety of the bank.
Functional Régulation. Securities and insurance activities
would be supervised by securities and insurance regulators .i This
ensures regulatory continuity and expertise and avoids multiple
bodies regulating the same activities.
It is my understanding,
however, that the Banking Committee decided to eliminate many of
the functional regulation provisions. We strongly urge the
Committee to restore these provisions.
Funding Firewalls. The proposed legislation expands the
types of transactions that are covered by existing rules limiting
transactions between banks and affiliates.
These rules limit the
total amount of such transactions, mandate adequate collateral,
and require arm's-length terms. Moreover, regulators must
receive advance notice of any large transaction with an
affiliate.
Finally, regulators have broad authority to adopt
additional funding firewalls.
'»Firebreak" Between Banking and Commercial Firms. Firewalls
between banks and commercial firms are even stronger than between
banks and other affiliates.
There would be a flat prohibition on
extensions of credit and transfers of assets, even on arm'slength terms.
Customer Protection and Disclosure. Sales of a banking
group's own securities would be prohibited on bank premises.
Existing restrictions on "tying" the bank's products have been
expanded to cover products of all affiliates, not just the bank.
And banks and their affiliates must get written acknowledgment
that their customers understand that securities and insurance
products have no guarantee from the bank or the government.
In sum, the safeguards and firewalls described are a
comprehensive, effective set of restrictions that will prevent
the potential abuse of relationships between banks and their
affiliates.
However, we have not extended firewalls to include
specific limitations on the sharing of management, employees,
officers, or directors.
Such limitations can restrict and impede
operational, managerial, or marketing synergies between a bank
and its affiliates without conferring any additional benefits for
the federal safety net.
Before concluding, let me make two observations.
First, you
have asked whether affiliations with securities and insurance
firms will solve all of the problems of banking organizations.
Of course not.
These activities will not be a panacea.
But I
strongly believe they will help restore the viability and
durability of financial institutions; that an enhanced franchise

9
will attract more private, voluntary capital into the financial
system; and that affiliation between securities firms and banks
could produce new firms better able to compete with overseas
financial firms.
Second, you have no doubt heard and will continue to hear
that this legislation amounts to the "S&Ls all over again.” This
is simply not the case.
Banks are vastly different from thrifts.
By a wide margin, banks have been better capitalized, better
managed, and better regulated than thrifts.
To be precise, banks
have over $200 billion in equity capital, plus another $50
billion in reserves.
Thrifts had less than $10 billion in equity
in 1987, the year losses mushroomed.
In addition, the approach to reform set forth in the
legislation is distinctly different from what was done with the
S&Ls.
Thrifts were permitted to use federally insured deposits
to engage in risky activities inside the insured institution.
If
effect, we let thrift owners go to the casino with Uncle Sam's
checkbook in hand.
By contrast, this legislation would allow new
financial activities to take place only outside the bank in
separately capitalized affiliates, with stringent firewalls and
strict supervision.
And the bill goes even further in limiting
new activities only to banks that exceed minimum capital
requirements by a substantial amount.
Conclusion
It is important that we not learn the wrong lesson from the
specter of the thrift problem.
It would be ironic if memories of
the thrift cleanup prevent us from making common sense changes
that will attract voluntary private capital to the system.
We believe the comprehensive approach to financial services
reform embodied in both the Administration's bill and H.R. 6 is
critical to placing our banking and financial system on a safe
financial footing over the long run. With your help, we can
adopt such an approach.
# # #

TREASURYMEWS

department off the Treasury • W ashington, D.c. s Telephone

•2041

STATEMENT
* BY
/b^
o l 2 3
HOLLIS S. MCLOUGHLIN
ASSISTANT %feGRETARY
FOR POLICY
&AS(jRy
U.S. DEPARTMENT OF TREASURY'
BEFORE THE COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
July 31, 1991

Mr. Chairman and members of the Committee, I appreciate the
opportunity to discuss the role that the Treasury Department has
played in the burden sharing initiative to defray the costs of
Operations Desert Shield and Desert Storm.
The Treasury Department has participated in an interagency
effort along with the Department of State, the Defense
Department, the National Security Council (NSC) and the Office of
Management and Budget (0MB) to generate strong financial support
from our allies.
We have received support from our allies and
coalition partners which has significantly reduced the budgetary
cost to the American people of our efforts in the Gulf.
Allied commitments to the United States for 1990 and 1991
total nearly $54 billion.
To date, we have received over $46
billion in cash and in-kind assistance from Germany, Japan, Saudi
Arabia, Kuwait, the United Arab Emirates and Korea.
This level
of sharing the responsibility for the costs of military
operations is unprecedented and demonstrates a solid
international commitment to the successful efforts of the U.S.led coalition to counter Saddam Hussein's aggression against
Kuwait.
Treasury has helped to generate this support through its
contacts with foreign officials and its on-going active
participation in interagency consultations.
As early as
September 1990, Treasury Secretary Brady and Secretary of State
Baker personally consulted a number of our allies in Europe, Asia
and the Gulf region to discuss support for U.S. military actions
in the Gulf.

Iwould like to comment specifically on Japan's commitment,
as this issue was raised in the Committee's letter of invitation.
In January, Finance Minister Hashimoto told Secretary Brady that
Japan would contribute $9 billion to help offset incremental
Desert Storm costs incurred in January-March 1991.
We had asked
that the entire $9 billion be in dollars and be disbursed to the
United States.
The Administration reported Japan's commitment to
the Congress on this basis.
NB-1404

Subsequently, Japan advised us that we had misunderstood its
precise commitment.
Japan said that it had intended all alonq to
disburse part of its 1991 commitment to other coalition partners
as it had in 1990, and believed that this would be acceptable to'
the U.S.
On July 11, President Bush met with Prime Minister Kaifu and
concluded that the difference in understanding was reasonable and
that Japan's payments were made in good faith with the agreed
commitment.
The President indicated that "any differences that
might have existed...have been resolved."
To date, Japan has contributed just under $10 billion to the
U.S. to offset our military costs in 1990 and 1991.
In addition,
Japan has committed almost $1 billion to other multinational
coalition partners, bringing its total contribution to the burden
sharing effort to nearly $11 billion.
These substantial payments
represent a n z e able portion -of this successful burden sharimr
effort:.
Mr. Chairman, I would be happy to respond to any questions
you or members of the Committee might have.

DEPARTMENT OF THE TREASURY
WASHINGTON

U .S. Treasury Department Staff Analysis of
the Economic Strategy Institute’s Report,
"Foreign Investment in the United States:
Unencumbered Access"

July 1991

Attached is an analysis of the Economic Strategy Institute’s report, "Foreign Investment in
the United States: Unencumbered Access." That report sets forth a number of concerns and
criticisms about the operation of the Committee on Foreign Investment in the United States.
The staff analysis addresses these concerns and criticisms.

CFIUS O P E R A T I O N S

C o n c e rn : Because the Committee on Foreign Investment in the United States (CFIUS) has
reviewed 540 transactions, but only investigated twelve and blocked one, "it is clear that the
intent of Congress is not being carried out."1
R e sp o n se : The success of C F I U S in implementing Exon-Florio should not be judged by
whether it has met some quota for blocking or undertaking extended investigations of a
certain percentage of transactions. As we will illustrate in several examples, C F I U S 1 impact
goes far beyond simple statistics. CFIUS enhances the national security when it identifies
specific problems which could threaten U.S. security and helps resolve those problems while
still allowing U.S. businesses to receive the capital they need. Blocking a transaction is a
crude tool and serves no purpose when more subtle remedies are available. C F I U S enhances
the national security by ensuring that U.S. and foreign businesses conform with other
national security laws before they submit notifications to CFIUS. Viewed from this
perspective, C H U S has been very successful.
As many are aware, Congress did not intend the blocking authority of Exon-Florio to
supplant existing laws to protect the national security, but to be used in those highly unusual
transactions where the President finds that:
"(1) there is credible evidence...to believe that the foreign [investor] might take action
that threatens to impair the national security, and
(2) [existing laws do not] provide adequate and appropriate authority...to protect the
national security..."2
Often CFIUS has found the authority of other laws adequate to protect national
security, and thus did not need to use Exon-Florio authority to block or to undertake a 45day investigation.
C F I U S agencies have become extremely efficient in analyzing transactions so most
transactions can be dealt with using existing laws and a thorough 30-day review. If C F I U S
can obtain the information it needs and conform the transaction to existing laws and
regulations in 30-days, subjecting transactions to an additional 45-day review only further
burdens U.S. businesses without enhancing the national security.
As noted above, C F IUS has also reviewed many transactions in which it identified
problems and possible solutions. Such problems were not, in and of themselves, reason
enough to prohibit the transactions. In such cases, the parties to the transactions withdrew

Spencer, Linda, Foreign Investment in the United States: Unencumbered Access.

Economic Strategy Institute, p. 4. (1991). (Hereinafter cited as Spencer.)
2 50 U.S.C. sec. 2170(d) (1988) (currently lapsed).

2
their notice. The transactions were later resubmitted to C F I U S after the identified problems
had been corrected. Sometimes, parties have been able to resolve problems within the 30day review period without having to withdraw their notification.
P A S H STUDIES: H O W C F IUS A F F E C T S T R A N S A C T I O N S W I T H O U T B L O C K I N G
Case #1: Ensuring Proper Security Arrangements
O n e of the first cases C F I U S considered under Exon-Florio concerned a foreign buyer
that was unaware that the small firm it sought to purchase held a highly classified contract
with a government agency. W h e n the prospective buyer became aware of the contract, it
worked with the proper government authorities to isolate the contract work from foreign
influence and control. Government agencies that engage in classified contract work require
that such procedures be followed.
Towards the end of the C F I U S review, the contracting agency informed C F I U S staff
that they had not concluded a satisfactory security arrangement with the buyer. C F I U S
inform»! both parties that it would recommend that the President prohibit the transaction
unless a proper security arrangement was in place.
As this was the only national security problem identified, and since a solution was in
sight, C F I U S consented to having the parties withdraw their notice without approving the
transaction. This permitted the foreign buyer to continue to develop a proper security
arrangement with the government agency but allowed CFIUS to keep its authority to block
the transaction if this work were not successful. After several weeks of negotiations between
the parties and the government agency, CFIUS was informed by that agency that the party
had set up an appropriate security arrangement The buyer then resubmitted its notification
to CFIUS. As no other factors in the transaction had changed, CFIUS approved the
transaction. While this case was not blocked, C F IU S h e lp e d re s o lv e a p o te n tia l n a tio n a l
s e c u rity p ro b le m w ith in th e co n te x t o f e x istin g la w a n d re g u la tio n s .
Case #2: Determining Control, Bringing in Other Agencies
A similar situation involved the purchase of a small firm that manufactured equipment
under a classified contract for the Federal government, and for foreign space entities. This
transaction also illustrates other issues which CFIUS commonly confronts in its reviews.
Although the parties notified CFIUS of the transaction, they claimed that the buyer* s
purchase of only 20 percent of the voting stock of the acquired company did not constitute
control according to the definition in the proposed regulations.3 Treasury and Defense
Department attorneys examined the proposed structure of the n ew entity and determined that

3 54 Fed. Reg. 29,751 (July 14, 1989) (section 800.213).

3
the foreign buyer would have control according to the criteria of the draft regulations.
The U.S. firm being acquired had a contractual relationship with the National
Aeronautics and Space Administration (NASA). As in all cases which involve an agency that
is not a permanent CFIUS m e m ber, CFIUS immediately contacted its liaison with N A S A and
sought its full input in the C F I U S process. C F I U S asked N A S A about the nature of work
the acquired firm was providing and whether it had any national security concerns which
could not be addressed by existing law.
The firm being acquired was also performing classified work for a branch of the
armed services. Though negotiations had been underway to reach a security arrangement
that would isolate foreign influence or control, the parties to the transaction were unable to
do so as the Exon-Florio clock approached the 30th day of the review period.
Representatives of the Defense Investigative Service (DIS) and the armed services
provided the CFIUS staff chair a classified briefing on the nature of the contract. Promptly,
CFIUS informed the parties to the transaction that it would be unable to clear the transaction
until they concluded a satisfactory security arrangement. Subsequently, the parties withdrew
their notice to the Committee. After several weeks of discussions with government security
officials, they concluded a satisfactory arrangement. Soon after, the parties resubmitted the
transaction to CFIUS, which approved the transaction. Again, while the case was not
blocked or formally investigated, C F IU S h e lp e d re s o lv e a p o te n tia l n a tio n a l s e c u rity p ro b le m
w ith in th e co n te x t o f e x is tin g la w a n d re g u la tio n s.
Case #3: Protecting Dual-Use Technology
A foreign buyer proposed buying a small instrument company. At issue was whether
foreigners might gain access to technology which might have a dual use for military purposes
with possible effects on U.S. national security. If so, C F I U S wished to determine whether
the firm’s internal control mechanisms were adequate to prevent unauthorized access to the
technology.
Because the major issue involved technology, CF IUS asked for advice from the White
House Office of Science and Technology Policy, scientists at the Departments of Defense and
Energy, and the intelligence community to assess the military importance of the technology.
CFIUS also examined the technology agreement between the seller and buyer to determine
better the technology to which the buyer would have access. In addition, C F I U S examined
internal company policies governing access to technology. C F I U S staff and interested
members of C F IUS agencies met with the buyer and seller to receive answers to detailed,
technical questions on these issues. After a thorough review, C F I U S concluded:
o
o

the technology was not readily applicable to military needs;
the buyer already possessed many aspects of the technology;

the technology could be exported under license from the Commerce Department;

4
o
o

the technology could not be obtained by reverse engineering or dismantling of the
product; and
the company maintained a strict internal control program to prevent unauthorized
access to technology.

W ith a ll issu e s s a tis fa c to rily re s o lv e d a n d c o n fid e n t th a t e x is tin g la w s w e re a d e q u a te
a n d a p p ro p ria te to p ro te c t th e n a tio n a l s e c u rity , C F IU S c le a re d th e tra n s a c tio n .
Case #4: Protecting Military Technology
A foreign customer of a U.S. software company sought to buy a division of the firm.
The firm was in financial difficulty. The notice to CFIUS indicated its products could only
be exported with a license under die Export Administration Act.
During the 30-day review, a civilian Defense Department scientist informed C F I U S
that the underlying technical data of the software program was also subject to munitions
controls under the Arms Export Control Act (AECA). Although the technical data could be
licensed to the foreign buyer, C F I U S learned from government authorities administering
munitions controls that the acquired firm had not applied for this license.
C F I U S informed the parties that it would not be able to clear the transaction until
they corrected this problem. Soon after, the authorities w h o administer munitions controls
informed C F I U S that the buyer had taken appropriate steps to conform with munitions
controls. While this process was underway, C F I U S and government experts also examined
the internal control procedures which the buyer would implement to protect against
unauthorized access to the technology.
As no other issues were identified, and confident that existing laws were adequate and
appropriate to protect the national security, CFIUS then cleared the transaction. Again,
while the case was not blocked or formally investigated C F IU S h e lp e d re s o lv e a p o te n tia l

n a tio n a l s e c u rity p ro b le m w ith in th e co n te x t o f e x is tin g la w a n d re g u la tio n s .
These cases give a few examples of the many ways C F I U S carries out its mandate to
protect national security. As the examples have illustrated, the real impact of Exon-Florio is
not captured by a simple tally of 540 notifications, 12 investigations, and 1 blocked
transaction. Die cases also illustrate ho w CFIUS carries out the intent of Exon-Florio
carefully and thoroughly within the 30-day review period. W h e n potential national security
problems have arisen, existing laws and regulations have been adequate and appropriate to
deal with those problems. In addition, there are instances when parties temporarily
withdraw transactions so they can resolve national security problems without undertaking a
formal 45-day investigation and report to the President, and without placing an undue burden
on U.S. businesses.
Finally, the cases above illustrate how C F I U S identified national security problems

5
and overcame them. Yet, there are other more subtle effects where the direct impact of
C F IUS is harder to discern. For example, the legal and mergers and acquisitions
communities are n o w aware that foreign acquisitions must pass C F IUS scrutiny. Lawyers
and businessmen commonly call C F I U S staff for guidance in the early stages of a
transaction. T h u s, C F IU S o fte n h e lp s a ssu re tra n s a c tio n s co n fo rm w ith n a tio n a l s e c u rity la w s
a n d re g u la tio n s b e fo re it re c e iv e s a n o ffic ia l n o tific a tio n . The prospect of facing a C F I U S
review has likely also deterred from taking place some transactions which C F I U S would not
have approved. Unfortunately, the C F I U S review process m a y have also deterred some
benign transactions which C F I U S would have approved. These are the costs and benefits of
maintaining an open-ended process such as that mandated by the Exon-Florio provision.

6
JOBS

C o n c e rn : "the vast bulk [of recent foreign direct investment] has gone towards acquiring
existing businesses, not creating new ones...Undoubtedly some of this investment m a y have
saved jobs that would have been lost without it. But as a result of such rationalization, some
of it also resulted in job reduction. This is in stark contrast to the mostly productive earlier
waves of direct investment."4
R e sp o n se : One cannot determine the employment effect of foreign investment by adding up
jobs associated with foreign investment and subtracting the number of jobs lost because of
the competition from foreign investment. This is a simplistic approach which has no basis in
economics.
A particular foreign investment, as any other business operation, m a y affect
employment in a specific town at a particular moment in time. A ny long-run employment
effects, however, are overwhelmed by macroeconomic policies, which are the primary
determinants of overall U.S. employment levels.
Clearly, the immediate employment effects of a foreigner establishing a ne w firm are
highly visible. Although it m a y be tempting to credit the foreign investment with "new
jobs", the more enduring employment effect and benefit to our economy derive from the
saving and investment process. These "employment effects" m a y be less visible in a merger,
acquisition, or takeover than in the case of a foreigner establishing a new firm, but the real
impact is generally the same.
W h e n foreigners invest in the U.S. economy, they invest in American workers. They
add capital, equipment, technology, and know-how. This makes American workers more
productive, makes the United States more competitive internationally, increases wages, and
raises our standard of living.
Investing in America’s workers is critical in an international economy where
developing countries can n o w produce most goods requiring only low-skill workers, while
many of our industrialized competitors have matched or surpassed U.S. technological
capabilities in some sectors. A highly-skilled work force with sophisticated equipment to
help it is no longer a luxury. But maintaining and improving such a skilled and equipped
work force requires massive and constant amounts of investment.
A high level of investment requires a high level of savings. Unfortunately, as the
attached charts illustrate, U.S. savings have been declining at the same time our major
competitors have been saving huge sums and investing in their work force. Foreign direct

4 Spencer, p. 6.

7
investment in the United States has been critical in filling this investment gap, thus allowing
the United States to maintain higher investment rates and higher levels of employment and
productivity, despite our declining saving rate.

8
PERFORMANCE REQUIREMENTS

Recommendation:

"Foreign investors should be required to meet certain performance
requirements — i.e. keeping production and research and development in the United States —
if they wish to acquire a sensitive U.S. company."5

R e sp o n se : The Administration opposes imposing mandatory performance requirements or
receiving assurances for several reasons. Performance requirements burden the sectors on
which they are imposed and inflict unfair conditions on foreign investors. Their
disadvantages are overwhelming. They impose costs on investment with no compensation to
investors; in so doing they discourage both foreign and domestic investment and harm the
economy. They require detailed government intervention in the economy. They would
discriminate against foreign investors, and would unfairly place U.S. firms acquired by
foreigners at a competitive disadvantage.
Mandatory performance requirements are an unnecessary interference by the
government on the domestic or foreign investor. Investors, both foreign and domestic, base
decisions about what to produce, h o w to produce it, and where to produce it on market
forces. They also follow their view of the market with regard to what research to undertake
and where to undertake it. For the government to mandate to a foreign or domestic investor
its preferred solutions would require the firm to shoulder all the risk of government
decisions, with no accountability by the government to the owners of the firm.
Imposing such performance requirements raises several disturbing questions:
o

H o w should a firm respond to demands from the government to make a certain
product in a U.S. facility if competing firms can earn a profit only by producing
offshore? Which government agency would cover the difference between the
firm’s cost of production and the rate of return it requires to attract capital?

H o w should a firm respond to government demands that certain technologies be
kept "alive" in the name of national security? For h o w long should the
technology by kept alive? If the government insists that a certain technology be
kept alive, h o w shall the government pay for that effort?

W h o would decide when the technology becomes obsolete, and h o w the firm
should respond when the market and technology change?

Requirements or assurances would create unnecessary red tape, expense, and serve to
deter capital from the very sectors that are critical to our national security. T o single out

5 Spencer, p. 3.

9
foreign investors for such treatment would intensify the problem. First, imposing
requirements would deter foreigners’ investments in these industries when the economy is
becoming increasingly global and firms are establishing ties across all markets to stay
competitive. This would hurt U.S. firms and U.S. workers that would benefit from the input
of foreign capital, technology, and management skills.
Further, the ability of the government to mandate performance requirements would
act as a hidden tax or disincentive to U.S. investors to invest in that industry. Both foreign
and domestic investors are likely to put their money into countries and industries in which
the government is not second guessing their decisions and looking over their shoulders, given
the many alternative investment opportunities worldwide.
Performance requirements would raise costs, lower productivity and efficiency, and
reduce the rate of return on capital by requiring firms to meet requirements that they
otherwise would not if they were following their business interests. This would harm the
competitiveness of these sectors and discourage both domestic and foreign investors from
investing in these sectors.
Other countries have experimented with performance requirements and discovered that
they are counterproductive. Moreover, they distort trade and investment flows. During Free
Trade Agreement negotiations, Canada agreed to drop major performance requirements.
And in bilateral investment treaty negotiations, the United States presses for an end to
performance requirements.
As the recent World Bank Development Report noted, across the world, nations are
moving away from the heavy hand of government interference in the market place, toward
providing the most hospitable climate possible for foreign investment. It would be ironic and
self-defeating if w e adopt discriminatory measures such as performance requirements when
the world is competing for foreign investment, and the United States is urging its major
trading partners to reduce barriers to investment. The United States could lose investment in
critical sectors and give other countries an excuse to impose their o wn requirements, hurting
U.S. investors overseas.

10
TECHNOLOGY TARGETING

C o n c e rn :

"Key U.S. industries such as semiconductor equipment, semiconductors, and
advanced materials are continuing rapidly to fall under the control of foreign companies that
are often part of their countries’ industrial targeting programs."6

R e sp o n se :

If foreign investors are targeting U.S. high-technology firms, foreign direct
investment should increase disproportionately in these sectors. However, according to
Commerce Department data, the share of foreign direct investment inflows going to hightechnology sectors did not change much during the 1980s - from 11.5% in 1980, to 9 % in
1985, to 11.1% in 1988.
Moreover, U.S. technological competitiveness is improved when foreigners invest in
high-technology industries. Foreign direct investment in the United States is not bleeding our
technological base. Quite conversely, the United States obtains more technology than it
contributes through foreign direct investment in the United States. This conclusion is based
on payments of royalties and license fees, which generally reflect the value that companies
place on their technology. Transfers to the United States through U.S. affiliates of foreign
companies have been more than five times larger than technology transfers out by them
during the 1980-89 period - $7.8 billion compared to $1.4 billion.
B y joint operations with foreign companies, U.S. high-technology companies benefit
in other important ways including access to:
o

capital saving companies that might otherwise have gone out of business - a situation
that C F I U S sees with some frequency;

foreign research and development, and increased research and development funding;

global marketing and distribution networks;

foreign manufacturing capabilities that help U.S. firms achieve economies of scale.

6 Spencer, p. 3.

11
FREE-RIDING O F F G O V E R N M E N T SUBSIDIZED R E S E A R C H

C o n c e rn : "[Cjertain acquisitions could give foreign firms the benefits of technologies
developed with U.S. taxpayers’ money for the express purpose of enhancing the economic
competitiveness of U.S. firms...Foreign investors that benefit from U.S. financed research
are not expected to compensate U.S. taxpayers for the future sale of products developed with
their funds."7
R e sp o n se :

This concern has essentially two parts:

1) Foreigners are obtaining technology developed with taxpayers’ assistance; and
2) Foreign firms are getting a free ride by not compensating U.S. taxpayers for this
technology.
OBTAINING T H E T E C H N O L O G Y
Our export control laws restrict the transfer of technologies and know-how, whether
or not they were developed with U.S. Government funds. If foreigners buy a U.S. firm that
has technology subject to these laws, these laws cover their access to such technology.
However, our export control laws only restrict the transfer of technologies which could
threaten our national security or harm our foreign policy interests. It makes little sense to
try to deter foreigners from gaining technology through investment which they can legally get
through trade or licensing agreements.
P A Y I N G A FAIR PRICE F O R G O V E R N M E N T SUBSIDIZED R E S E A R C H
The pricing of technology is no different from the pricing of other goods and
services. W h e n U.S. firms develop technology with U.S. Government assistance, they
sometimes sell goods using that technology or license the technology, and recover the costs
of developing the technology over time. U.S. taxpayers are "paid back" from taxes on the
profits of these sales or licensing agreements. Other domestic and foreign firms benefit from
"learning" or "spillover" effects.
In an acquisition, the cost of the technology, along with the other assets and
intellectual property of a firm, is paid for up front. U.S. taxpayers are "paid back" from
taxes on the profits of the sale of the firm.
In deciding ho w much to pay for an asset, businessmen use discounted cash-flow
analyses to equate the value of a future stream of payments with lump sum payments.

7 Spencer, p. 4, 15.

12
Whether a U.S. firm receives a stream of future payments or gets paid up front, the
economic benefit is the same.
Finally, restricting investment in high-tech firms which receive government assistance
could be counterproductive. It would not only reduce foreign infusions of capital but would
also discourage U.S. investors from providing funds since they would be restricted from
selling their stake to the highest bidders. The government would end up starving the exact
sectors it is trying to promote. The United States would not be better off if a U.S. firm that
had received government assistance either goes bankrupt or fails to bring a product to market
due to a lack of capital.
A s Assistant Secretary of Commerce for Technology Policy Deborah Wince-Smith
recently stated before the House Science, Space and Technology Committee,
"Rather than reducing the flexibility and freedom our firms have in forming
business and financial alliances, the real issue w e must address is creating an
economic and cultural environment in the United States that is conducive to
long-term investment in innovation and the rapid commercialization of new
technology."
The President has proposed a range of proposals to boost our technological
competitiveness. These include decreasing government dissaving by adhering to the budget
agreement, increasing R & D funding, making the research and experimentation (R&E) tax
credit permanent, cutting the capital gains tax, improving our financial system, and removing
regulatory impediments. This is what is ultimately needed to improve our technological
competitiveness, not withholding foreign capital and know-how.

13
O T H E R ISSUES
MAJORITY OWNERSHIP

C o n c e n t: NC F I U S has adopted a policy of non-review where the investment is less than 50
percent ownership."8

R e sp o n se :

This is incorrect. There is no percentage threshold which exempts transactions
from review or results in automatic approval. Case ¿F2 was an example of a case C F I U S
commonly reviews in which the foreign buyer is purchasing less than 5 0 % of the U.S. firm.

The key issue for C F I U S is whether or not the foreigner will have control over the
U.S. entity. The proposed regulations state, "the test for control focuses on the power,
whether or not exercised, to formulate, determine, direct, or decide important matters
relating to the entity."9 The Exon-Florio amendment applies only to foreign acquisitions in
which the foreigner gets control of the U.S. entity. There is no percentage threshold under
which all transactions are approved. There has been no change in policy.
C O M M E R C E & D E F E N S E R E Q U E S T S F O R INVESTIGATIONS

C o n c e rn : "Only 12 [cases] were formally investigated [by CFIUS] (all at the behest of
either the Commerce or Defense Department)."10

R e sp o n se :

This is incorrect. Requests for investigations have come from many different
C F I U S participants.

As an informal rule, C F I U S will move to a formal 45-day investigation if three or
more Presidential appointees from CFIUS agencies request one. However, the executive
order implementing Exon-Florio states,
W
one or more Committee members differ with a Committee decision not to
undertake an investigation the Chairman shall submit a report of the
Committee to the President setting forth the differing views and presenting the
issues for his decisions within 25 days after receipt by the Committee of
written notification of the proposed or pending merger, acquisition, or
takeover."11

8 Spencer, p. 13.
9 54 Fed. Reg. 29,747 (July 14, 1989) (section 800.213).
10 Spencer, p. 9.
11 Exec. Order No. 12661, 54 Fed. Reg. 781 (1989).

14
N o agency has been denied a request for investigation under this informal rule of
three. In addition, no agency has found it necessary to invoke the provision of the executive
order.
G O V E R N M E N T B A I L O U T O F IT S. F I R M S

R e co m m e n d a tio n : "When U.S. companies do reach a crisis state, the U.S. Government
should work with American business to secure a U.S. buyer."12
R e sp o n se :

W e disagree. The U.S. Government should not serve the role of an investment
banker. Providing an implicit government commitment to help firms that are in trouble
removes the incentive to manage a firm well. The "heads I win, tails the government loses"
mentality demonstrated by some in the savings and loan industry clearly illnstra»»« the danger
of providing such government guarantees. Moreover, civil servants do not have the expertise
to do better than professional investment bankers in finding a buyer.
MISSING CRITICAL T R A N S A C T I O N S

C o n c e rn : "[CFIUS’] major shortcoming is the lack of ability to gain knowledge of
investments because parties involved in a foreign acquisition are not required to notifv
CFIUS."'2
7

R e sp o n se :

While C P U S employs a voluntary system of notification, firms have a strong
incentive to notify CFIUS. Under Exon-Florio, if C F IUS does not review a transaction die
President m a y order divestment at any time in the future. This would be time consuming
and expensive. Moreover, the legal community is acutely aware that the President has the
authority to divest transactions which C F IUS has not reviewed and attorneys therefore
usually advise their clients to file a notification if there is any question that a takeover m a y
have national security implications.
J
W e are confident that C F I U S reviews the critical cases. In feet, no one has identified
a case which might have threatened our national security which C F IUS missed. A n y
requirement for mandatory filings would result in C F I U S ’ reviewing many transactions which
do not threaten our national security. This would increase the need for resources for no real

IMPROVING THE BUSINESS CTJKfATF
C o n ce m .

Washington should pay more attention to improving the business climate in

n Spencer, p. 17.
13 Spencer, p. 10.

15
which these [high-technology] firms operate - by lowering the cost of capital../14

R e sp o n se :
As stated earlier, the Administration is committed to a program which will
lower the cost of capital and thus help improve the business climate. However, the
prescriptions promoted in the Economic Strategy Institute's report will reduce the supply of
foreign capital, increase the riskiness of the investment environment, and thus increase the
cost of capital.

14 Spencer, p. 17.

TREASURY AUGUST QUARTERLY FINANCING
The Treasury will raise about $16,375 million of new cash
and refund $21,637 million of securities maturing August 15,
1991, by issuing $14,000 million of 3-year notes, $12,000 million
of 10-year notes, and $12,000 million of 30-year bonds. The
$21,637 million of maturing securities are those held by the
public, including $1,431 million held, as of today, by Federal
Reserve Banks as agents for foreign and international monetary
authorities.
The three issues totaling $38,000 million are being offered
to the public, and any amounts tendered by Federal Reserve Banks
as agents for foreign and international monetary authorities
will be added to that amount. Tenders for such accounts will be
accepted at the average prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks
hold $2,443 million of the maturing securities for their own
accounts, which may be refunded by issuing additional amounts of
the new securities at the average prices of accepted competitive
tenders.
The 10-year note and 30-year bond being offered today will
be eligible for the STRIPS program.
If. under Treasury's usual operating procedures, the
auction of 10-vear notes results in the same interest rate as on
the outstanding 8% bonds of August 15. 2001. the new notes will
be issued with either a 7-7/8% or an 8-1/8% coupon. The 8-1/8%
coupon rate will apply if the auction results in a yield in a
range of 8.07% through 8.24%.
Details about each of the new securities are given in the
attached highlights of the offering and in the official offering
circulars.
oOo
Attachment

NB-J405

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
AUGUST 1991 QUARTERLY FINANCING
July 31, 1991
Amount Offered to the Public

....

$14,000 million

Description of Security:
Term and type of security .........
Series and CUSIP designation . . . .
CUSIP Nos. for STRIPS Components

3-year notes
Series T-1994
(CUSIP No. 912827 B8 4)
. . Not applicable

Issue date ....................
Maturity date............ .
Interest rate ...................

August 15, 1991
August 15, 1994
To be determined based on
the average of accepted bids
Investment yield ...............
To be determined at auction
Premiun or discount .............. To be determined after auction
Interest payment dates ..........
February 15 and August 15
Minimum denomination available . . . $5,000
Amount required for STRIPS ....... Not applicable
Terms of Sale:
Method of sale .................
Competitive tenders ..............

Noncompetitive tenders

..........

Accrued interest
payable by investor ..............

$12,000 million

10-year notes
Series C-2001
(CUSIP No. 912827 B9 2)
Listed in Attachment A
of offering circular
August 15, 1991
August 15, 2001
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15

30-year bonds
Bonds of August 2021
(CUSIP No. 912810 EK 0)
Listed in Attachment A
of offering circular
August 15,
1991
August 15,
2021
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
February 15 and August 15

$ 1,000

To be determined after auction

Yield auction
Must be expressed as
an annual yield with two
decimals, e.g., 7.10%
Accepted in full at the average
price up to $1,000,000

None

Full payment to be
submitted with tender

Acceptable

Wednesday, August 7, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Thursday, August 8, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

Thursday, August 15, 1991
Tuesday, August 13, 1991

Payment Terms:
Payment by non-institutional
investors...................... Full payment to be
submitted with tender
Deposit guarantee by
designated institutions .......... Acceptable
ICev Dates:
Receipt of tenders . . . . . . . . . Tuesday, August 6, 1991
a) noncompetitive ...............
prior to 12:00 noon, EDST
b) competitive ..................prior to 1:00p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
available to the Treasury . . . . Thursday, August 15, 1991
b) readily-collectible check . . . . Tuesday, August 13, 1991

TALKING POINTS
FOR THE
FINANCING PRESS CONFERENCE
July 31, 1991
Today we are announcing the terms of our regular August
quarterly refunding.

I will also discuss the Treasury's

financing requirements for the balance of the current calendar
quarter and our estimated cash needs for the October-December
1991 quarter.
1.

We are offering $38.0 billion of notes and bonds to

refund $21.6 billion of privately-held notes maturing on
August 15' and to raise approximately $16.4 billion of cash.

The

three securities are:
— First, a 3-year note in the amount of $14.0 billion,
maturing on August 15, 1994.

This note is scheduled to

be auctioned on a yield basis on Tuesday, August 6.
The minimum denomination will be $5,000.

Purchases may be

made in any higher multiples of $5,000.
— Second, a 10-year note in the amount of $12.0 billion,
maturing on August 15, 2001.

This note is scheduled to

be auctioned on a yield basis on Wednesday, August 7.
The minimum denomination will be $1,000.
— Third,

a 30-year bond in the amount of $12.0 billion,

maturing August 15, 2021.

This bond is scheduled to be

auctioned on a yield basis on Thursday, August 8.
minimum denomination will be $1,000.

The

2
2.

We will accept noncompetitive tenders up to $1,000,000

for each of the note and bond auctions.
3.

If, under Treasury's usual operating procedures, the

auction of 10-year notes results in the same interest rate as on
the outstanding 8% bonds of August 15, 2001, the new notes will
be issued with either a 7-7/8% or an 8-1/8% coupon.

The 8-1/8%

coupon rate will apply if the auction results in an average yield
in a range of 8.07% to 8.24%.
4.

For the current July-September quarter, we estimate a

net market borrowing need of $107.7 billion.

The estimate

assumes a $30 billion cash balance at the end of September.

may want to have a higher balance, depending upon our assessment
of cash needs at the time.
Including this refunding we will have raised $63.1 billion
of the $107.7 billion in net market borrowing needed this JulySeptember quarter.

This net borrowing was accomplished as

follows:
—

$4.2 billion of cash from the 7-year note that settled
July 15;

—

$8.1 billion of cash from the 2-year notes which settled
July 1 and July 31;

—

$11.5 billion of cash from the 5-year notes which settled
July 1 and July 31;

—

$18.9 billion of cash from the sale of the regular weekly
bills,

including the bills announced yesterday;

-3 —

$4.0 bi llion of cash in 52-week bills?

—

$16.4 billion of cash from the refunding issues announced
today.

The $44.6 billion to be raised in the rest of the JulySeptember quarter could be accomplished through sales of regular
13-, 26-, and 52-week bills,

and 2-year and 5-year notes at the

end of August and September.

We may sell cash management bills

to cover low cash balances in the quarter^
5.

We estimate Treasury net market borrowing needs to be in

the range of $85 to $90 billion for the October-.December 1991
quarter,

assuming a $30 billion cash balance on December 31.

The 10-year notes and 30-year bonds being announced

today are eligible for conversion to STRIPS

(Separate Trading of

Registered Interest and Principal of Securities)
accordingly,
components.

and,

may be divided into separate interest and principal

Removal Notice
The item identified below has been removed in accordance with FRASER's policy on handling
sensitive information in digitization projects due to copyright protections.

Citation Information
Document Type: Transcript

Number of Pages Removed: 3

Author(s):
Title:

Treasury Department Briefing (Topic: Quarterly Financing)

Date:

1991-07-31

Journal:

Volume:
Page(s):
URL:

Federal Reserve Bank of St. Louis

https://fraser.stlouisfed.org

TREASURY FINANCING REQ UIREM ENTS
April - June 1991
—i$Bil.

Uses

107 V«

Sources

100 -

—100

80-

—80

60-

-6 0

40-

-4 0

20-

-20

0»-

Department of the Treasury
Office of Market Finance

-^0
J/ Includes budget deficit, changes in accrued interest and checks outstanding
and minor miscellaneous debt transactions.

July 30, 1991-24

TREASU RY FINANCING REQ UIREM ENTS
July-Septem ber 1991

Department of the Treasury
Office of MarKet Finance

11Includes budget deficit, changes in accured interest and checks outstanding
and minor miscellaneous debt transactions.
2/Issued or announced through July 26, 1991.
31Assumes a $30 billion cash balance September 30,1991.
July 30, 1991-18

TREASU RY OPERATING CASH B A LA N C E
Semi-Monthly

-20

-40

-60

Jul

Aug

Sep

Oct

1990

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

1991
J / Assumes refunding of maturing issues.

Department of the Treasury
Office of Market Finance

July 30,1991-15

TREASURY NET M A R K ET BORROWING^
3iL

1073/4- $Bil.
Coupons
B l Over 10 yrs.
10 yrs.

00
90

100
90

80
70

70
60

52.8

50
40

50
16.8

■10

-10

-20

1987

III

1988

III IV

1989

III

1990

III

-30

1991

Il Excludes Federal Reserve and Government Account Transactions.
artmei it of the Treasury
ce of Ilarket Finance

July 30, 1991-5

NET NEW CASH FRO M N O N CO M PETITIVE TEN D ERS
IN W EEKLY BILL AUCTIO NS^

Discount Ral :e %

M
* l «=**.

Net New Cash (Left scale)
111111126 Week
■ ■ 13 Week
Discount Rate (Right Scale)
« « « 2 6 Week
—
13 Week

7.5

7.0

6.5

6.0
5.5

-800

Oct
1990
Department of the Treasury
Office of Market Finance

Nov

Dec

Jan

Feb

Mar

Apr
1991

1/ Excludes noncompetitive tenders from foreign official accounts,
p Preliminary
July 30. 1991-25

NONCOM PETITIVE TENDERS IN TREASURY NOTES AND BONDS^/
$Bil.|------------------------------------------------------------------------------------------------------------------------------------------|$Bil.
3 .5 -

-3 .5

3 .0 -

-3 .0

2 .5 -

2.5

2.0-

1 .5 -

1.0-

■

.5-

oLJ

A S O N D J
1989

F M A M

A
1990

S O

N D J F M A M J J
1991

A / Excludes foreign add-ons from noncompetitive tenders.
Department of the Treasury
Office of Market Finance

July 30, 1991-22

NET STRIPS AS A PER C EN T O F PRIVATELY HELD
S TRIPPA BLE SECURITIES
$Bil
Held in Strippable Form
(Left Scale)

A S O N D J
1989

Department of the Treasury
Office of Market Finance

Percent
(Right Scale)

F M A M J

J A S O N D J
1990

F M A M J

1991

♦ Through July 19,1991
Note: Reconstitution began May 1,1987
July 30, 1991-19

TR EA S U R Y NET BORROW ING FRO M N O N M A R K E TA B LE ISSUES
$Bil.
E l l Savings Bonds

Dom estic Series

12.5

State & Local Series
10.6

Foreign Nonm arketables
9.1

6.5

5.7

6.0

i 29f

5.7

W
m 2.9

~
Æ
Æ
Àfelsiisl 9

-5
II III
1987

II III
1988

II III
1989

II III
1990

II IIIe
1991

e estimate
Department of the Treasury
Office of Market Finance

July 30, 1991-17

STATE & LOCAL G O V ER N M EN T SERIES
$Bil.

0
$Bil.
10

— 5

Departmei of the Treasury
Office of I jrket Finance

July 30, 1901-7

QUARTERLY CHANGES IN FOREIGN AND INTERNATIONAL
HOLDINGS OF PUBLIC DEBT SECURITIES

1987
K S lt iS r

1988

1989

1990

J/F.R.B. purchases of marketable issues as agents for foreign and international
monetary authorities which are added to the announced amount of the issue.
Preliminary.

1991
«*•«•«•

FOREIGN ADD-ONS IN TREASURY BILL AND NOTE AUCTIONS

Quarterly Totals
Department of the Treasury
Office of Market Finance

ly 4 year notes not issued after December 31, 1990.
2/ Through July 26, 1991.

July 30, 1991-4

SHORT TERM INTEREST RATES
Quarterly Averages
%
20
18

Federal Funds

16
Prime Rate

14
Through
July 24

Commercial
Paper

3 Month
Treasury Bill

••***•••»»•***

1981

1982

Department of the Treasury
Office of Market Finance

1983

1984

1985

1986

1987

1988

1989

1990

1991

July 30, 1991-9

SHORT TERM INTEREST RATES

Department of the Treasury
Office of Market Finance

July 30,1991-8

LO NG TERM M A R K ET RATES
Quarterly Averages
%
16
15

ysv

•

12
Through
July 24

New Aa Corporates

jP ——a

11
10

30-Year
M unicipal Bonds

8
7

1984

Department of the treasury
Office of Market Finance

1985

July 30.1991-11

INTERMEDIATE AN D LONG TERM TR EA S U RY RATES
Weekly Averages
%

9.00

Through
week ending
July 26

9.00

8.75

8.50

8.25

8.25
m

8.00

7.75

yv
• .. v
V *

••••
•

7.50

V
■

•••••••••

/•. *

Treasury 10-Year

•• •
•
i

*••••••. .•• \ *
•
.

.•
•

8.00
•••
7.75

Treasury 5-Year

7.50

mm.
7.25
Oct

Department of the Treasury
Office of Market Finance

Nov
1990

Dec

Jan

Feb

Mar

Apr
1991

May

Jun

Jul

7.25

July 30, 1991-10

M AR K ET YIELDS ON G O V ER N M EN TS
Bid Yields

Department of the Treasury
Office of Market Finance

July 30, 1991-26

PRIVATE HOLDINGS O F TR EA S U R Y
M A R K E TA B LE DEBT BY M ATURITY
June 30,1991 .*2020.4

CO UPON S
P S ) Over 10 years
1111 2-10 years
1-2 years
1 year & under
BILLS

0
1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

As of December 31
Department of the Treasury
Office of Market Finance

July 30, 1991-2

PRIVATE HOLDINGS O F TR EA S U R Y M A R K E T A B LE DEBT
Percent Distribution by Maturity
Coupons fU Over 10 years £21-2 years
H

2-10 years

B ills

^ 1 year & under

100%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990 J u n ’91

As of December 31
Department of the Treasury
Office of Market Finance

July 30, 1991-3

AVERAGE LENGTH OF THE MARKETABLE DEBT
Privately Held

Department of the Treasury
Office of Market Finance

July 30, 1991-1

MATURING COUPON ISSUES
August - December 1991

(In millions of dollars)
Ju ne 30, 1991
Held by

Maturing Coupons
Total

14 7/8%
7 1/2%
8 3/4%
8 1/4%
9 1/8%
8 3/8%
12 1/4%
7 5/8%
14 1/4%
8 1/2%
6 1/2%
7 3/4%
8 1/4%
7 5/8%

Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note
Note

8/15/91
8/15/91
8/15/91
8/31/91
9/30/91
9/30/91
10/15/91
10/31/91
11/15/91
11/15/91
11/15/91
11/30/91
12/31/91
12/31/91

Totals

Federal Reserve
& Government
Accounts

Private
Investors

Foreign
Investors!/

2,812
7,778
13,490
11,113
7,919
11,452
5,745
12,322
2,886
11,542
8,346
12,583
8,083
12,002

558
119
1,766
892
460
850
347
1,687
635
1,596
229
1,272
791
1,200

2,254
7,658
11,724
10,220
7,459
10,602
5,398
10,636
2,252
9,946
8,117
11,311
7,292
10,802

17
920
494
813
451
625
476
520
45
746
674
1,887
829
1,598

128,073

12,402

115,671

10,095

y F.R.B. custody accounts for foreign official institutions; included in Private Investors.
Department of the Treasury
Office of Market Finance

July 30, 1991-23

TR EA S U R Y M A R K ETA B LE MATURITIES
Privately Held, Excluding Bills
$Bil.

$Bil.
26
24

22
20

18
16
14

12.8RS13-4 ^

10
8

4
2
0
32
30
28
26
24

18
16
14
-

27.9

21.8
13.0

13.0 ^ 13.0

m
8.4

¡26.3

6.2

4
2
0
28
26
24

21.2

13.3K212.8

10
8
6

24.0

¡1
1994

28.5

24.4

-7.7

0^33.8

1993
25.5

Ìo l= 7 n 9 -2 Ì i 9 -3

i
r
i
s
iI

I
I
■I

8.3

8 8 7 7 9 .3 l9 .4

7.6

14 —
12 —
10 8.7
6

4 -

1996

18.3

17.2

18
16

9.0

8.6

9.6

I
I
9.2

10.8

9.5

19.5

mii
9.5

9.5

1997

8.1

1998
9.1

1999

7.9

9.0

9.4

10.9

I
I

9.8

10.4

I
I

8.6

9.7

18
16
14

6
4
2
0

.7.0

^7.0

I
%

1
!

15.5

16
14
12
10

6
4
2
0

15.3

14.8

F M A M J

8.7

8.4

7.0

17.5

13.6

12.5

2.3

1.6

1QN

2001

11.1

13.3

10.2

18
161—
14
12 —
—

6.9

2000

12.3

12
10

15.8

1995

16 —
14

Securities issued prior to 1989 j^ | New issues calendar year 1990
New issues calendar year 1989lH | Issued or announced through July 26, 1991
Department of the Treasury
Office of Market Finance

July 30, 1991-20

TR EA S U R Y M A R K E TA B LE MATURITIES
Privately Held, Excluding Bills
$Bit.

3.2

2.9

4.8

2005

.8.2
4.0

m
3.81
1.7
3.7,

7.0

■
18.0

j§

19.0

1.2

13.6

1.3

2009

13.2

2010

3.8

2011

14.2

2012

M 10.0
1,

2015

11.8

I
F

5.2

14.6
6.7

6.5

I I I I I 11 I I l I.

| 12'4

2014

, 3.8

a190

10.0

I
.0

9.0 ■

2018

8.5

2013

4.6 I

2006
2Q0T

2.7

2004

3.3

3.6

2003

2C16

17.9 |

I 7.1

1 I K 11 1 1 1 I

CMO (O'*CMO CO©'*’CM©00(O'*CMO ^CM© CM© CM© CM© CM© (MOOCO<0'MNOWOCOOMCMO*('IOWOflO(0*W©

,2.6

2002

1.7

.....

20 19

19.8

20 20

21.0

10.<)

2C 21
11.1î

1E:ÿ

Securities issued prior to 1989 | | | New issues calendar year 1990
New issues calendar year 1989 mH Issued or announced through July 26,1991
Department of the Treasury
Office of Market Finance

July 30, 1991-21

SCHEDULE O F ISSUES TO BE ANN O UNCED
AND AUCTIONED IN AUGUST 1991^
Tuesday

Monday

Wednesday

Thursday

Auction
3 year 2/

Auction
10 year 2/

22
Announce
2 year
5 year

28
Auction
2 year 4/

Department of the Treasury
Office of Market Finance

1/
ZJ
3/
4/

Friday

Auction
30 year 2/

16
Announce
52 week
23
Auction
52 week .2/

Auction
5 yearns
Does not include weekly bills
For settlement August 15
For settlement August 29
For settlement September 3
July 30. 1991-12

SCHEDULE O F ISSUES TO BE ANN O UNCED
AND AUCTIONED IN SEPTEM BER 1991 1
2

Friday

Thursday

W ednesday

Tuesday

Monday

Holiday
9

Auction
2 year &

18
Announce
2 year
5 year

26 Auction
!

Announce
52 week

20
Auction,,,
52 week^/
27

5 year 3/

Departmentof theTreasury

Office of Market Finance

1/ Does not include weekly bills
2/ For settlement September 26
3/ For settlement September 30

July 30,1991-13

SCHEDULE O F ISSUES TO BE ANN O UNCED
AND AUCTIONED IN O CTOBER 1991 |
Tuesday

Monday

Wednesday

Thursday

Friday

Announce
7 year
7

9
Auction
7 year-?/

15
Holiday

Announce
52 week

16
Announce
2 year
5 year

24
Auction
2 year 4/

Department of the Treasury
Office of Market Finance

18
Auction
52 week-?/
25
Auction
5 year 4/

U Does not include weekly bills
2/ For settlement October 15
3/ For settlement October 24
4/ For Settlement October 31

July 3 0 <t991-14

EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 2 0 5 0 3

MID-SESSION REVIEW
OF THE BUDGET

NOTICE:
Embargoed: There should be
no release of this document
until 4:00 p.m. (E.D.T.)
Monday, July 15, 1991

July 15, 1991

TABLE OF CONTENTS

Page
Transmittal L etter................................................................................................................

“i

I. Deficit Outlook....................................................................................................................

II. Economic Assumptions.......................................................................................................

III. Receipts...................................

IV. Spending...............................................................................................................................

V. Current Status of Pay-As-You-Go Legislation and Discretionary Spending................

VI. Appendices..............................................................................................................
A. “Improving Medicaid Estimates: Report of the HHS-OMB Task Force,” July 10,
1991........................................................................................................................
B. United States Costs In the Persian Gulf Conflict and Foreign Contribution to
Offset Such Costs; Report #5: July 15, 1991......................................................
C. Summary Tables.......................................................................................................

^
15
33
51

GENERAL NOTES
1. All years referred to are fiscal years unless otherwise
noted.
2. All totals in the text and tables include on-budget and
off-budget spending and receipts unless otherwise
noted.
3. Details in the tables and text may not add to totals
because of rounding.

EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
W A SH IN G TON , D .C . 20503

THEDIRECTOR
The following is the text of the
letter transmitting the
Mid-Session Review o f the Budget
July 15, 1991
Honorable Thomas S. Foley
Speaker of the House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
Section 1106 of Title 31, United States Code, requires that the President transm it to the Congress
a supplemental summary of the Budget that was transmitted to the Congress earlier in the year. This
supplemental summary of the Budget, commonly known as the Mid-Session Review, contains revised
estimates of the budget receipts, outlays, and budget authority for fiscal years 1991-1996 and other
summary information required by statute.
The Review tends to show the following:
(1) The Administration’s economic forecast used in developing the President’s Budget has been
highly accurate to date—and is modified only slightly herein.
(2) There has been a marked improvement in the deficit outlook for 1991—but, as is generally
recognized, it has been caused principally by changes in deposit insurance and Desert Storm funding,
which have offsetting adverse effects on the 1992 deficit.
(3) The budget reforms enacted in 1990 have been working—and the major changes in estimates
have been in areas that are exempt from the new budgetary discipline (deposit insurance, Desert
Storm, and technical reestimates).
(4) The structural deficit trend under current law remains favorable for the medium term—with
the deficit falling to 1 percent of GNP in the mid-1990s.
At the President’s direction, I have the honor to transmit the required Mid-Session Review of the
Budget.
Respectfully yours,

Richard Darman
Director
Enclosure

IDENTICAL LETTER SENT TO THE HONORABLE DAN QUAYLE
m

L DEFICIT O U T L O O K

In February, the President submitted a Budget consistent with the budget agreement reached
last year with the Congress. The Budget stated that neither the full costs of Operation Desert
Shield/Desert Storm nor the foreign contributions could be reliably estimated. It also noted, as the
previous Budget had, that there were significant deficit forecasting problems caused by major
uncertainties regarding estimated outlays for thrift and bank insurance and associated working
capital requirements.
Putting Desert Storm and deposit insurance aside, the estimates in the President’s Budget have
proven to be quite accurate on the whole. Since February, the estimates of outlays for all government
activities except Operation Desert Shield/Desert Storm and deposit insurance have changed by not
more than 2 percent for any of the forecast years. However, because of more complete information on
the incremental costs of Operation Desert Shield/Desert Storm and offsetting foreign contributions,
the size and timing of the outlays and receipts that result from deposit insurance obligations, and a
fall-off in tax collections to date, the deficit estimates have changed considerably. The estimated deficit
for 1991 has improved markedly. It has decreased by $35.9 billion from $318.1 billion to $282.2 billion.
But, as is generally recognized, this improvement in 1991 has an adverse carry-over effect upon the
1992 deficit. The timing effects of Desert Storm and deposit insurance flows have been the principal
cause of an upward adjustment of the 1992 deficit, now forecast at $348.3 billion. As shown in Table
1, the deficit estimates for each year from 1993 through 1996 have also changed. However, the pattern
of basic structural improvement in the deficit remains clear. Assuming the Administration’s
growth-oriented policies are enacted, along with necessary financial service sector reform, and
assuming the Administration’s economic forecast remains valid, then the deficit is projected to fall to
1% of GNP by the mid-1990’s.
Table 1: MID-SESSION REVIEW: CHANGE IN POLICY DEFICITS
(In billions of dollars)
1991

1992

1993

1994

1995

1996

February estim a tes...............................................................
Changes due to:
Operation Desert Shield/Desert Storm......................
Deposit insurance1 .......................................................
Receipts............................................................................
Debt service....................................................................
All other changes 3........................................................
Current estim ates..................................................................
Current estim ates excluding Desert Shield/Desert Storm
Current estimates excluding deposit insurance...............
Current estim ates excluding Deposit insurance and
Desert Storm/Desert S hield.............................................

-318.1

-280.9

-201.5

-61.8

-2.9

19.9

33.4
28.0
-22.8
0.3
-3.1
-282.2
-306.2
-198,7

-12.0
-29.9
-19.5
0.5
-6.5
-348.3
-331.5
-230.3

-2.9
-4.8
-19.4
-2.7
-14.3
-245.7
-241.9
-196.7

-1.3
-12.7
-31.0
-5.3
-20.0
-132.1
-130.4
-157.5

-0.7
2.8
-40.2
-8.5
-24.1
-73.6
-72.9
-118.8

-0.3
7.5
-43.7
-11.2
-27.6
-55.5
-55.2
-92.8

-222.7

-213.5

-192.9

-155.8

-118.1

-92.6

MEMORANDUM
As a percent of GNP:
D eficit..................................................................................
Deficit excluding Desert Shield/Desert Storm ..............
Deficit excluding deposit insurance................................
Deficit excluding deposit insurance and Desert Storm/
Desert S hield..................................................................

5.0
5.5
3.5

5.8
5.6
3.9

3.8
3.8
3.1

1.9
1.9
2.3

1.0
1.0
1.6

0.7
0.7
1.2

4.0

3.6

3.0

2.3

1.6

1.2

1 See discussion of deposit insurance change on page 6.
2 Includes debt service on all other.

II.

ECONOMIC ASSUMPTIONS

Economic developments so far this year have been consistent with those anticipated in the
February budget. The recession was predicted to be short and shallow with a cumulative real GNP
decline of 1.2 percent in the fourth quarter of 1990 and the first quarter of 1991. This was almost
identical to the actual 1.1 percent real GNP decline during that period. In fact, the budget projection
for the real GNP level in the first quarter of 1991 was within $4 billion (0.1 percent) of the actual
outcome.
The economic assumptions used in the Mid-Session Review have been revised slightly from those
of the budget to reflect new information. The projection of real GNP growth during the second half of
1991 has been raised somewhat, while that of the GNP implicit price deflator has been lowered. The
level of nominal GNP by the fourth quarter of 1991 is the same as in the budget. For the Consumer
Price Index, unemployment rate and interest rates, the recent slight differences between actual data
and those assumed in the February budget are phased out smoothly. As a result the changes in
economic assumptions since the budget have only very small effects on outlays, receipts, and the
deficit. (See tables 4 and 8.)
Table 2. ECONOMIC ASSUMPTIONS
(Calendar years; dollar amounts in billions)
Actual
1990
M ajo r econom ic in d ic a to rs:
Gross national product (percent change, fourth
quarter over fourth quarter):
Current dollars (“nominal GNP”) .........................
Constant (1982) dollars (“real GNP”) ..................
GNP deflator (percent change, fourth quarter over
fourth quarter).....................................................
Consumer Price Index (percent change, fourth
quarter over fourth q u arte r)1 ...........................
Unemployment rate (percent, fourth qu arter)2..
A n n u a l econom ic assu m p tio n s:
Gross national product:
Current dollars (“nominal GNP”):
A mount..................................................................
Percent change, year over y e a r .................. 1....
Constant (1982) dollars (“real GNP”):
Amount..................................................................
Percent change, year over y e a r .........................
Incomes:
Personal incom e......................................................
Wages and sa la rie s.................................................
Corporate profits before ta x ..................................
Price level:
GNP deflator:
Level (1982=100), annual average...................
Percent change, year over y e a r ........................
Consumer Price Index:1
Level (1982-84=100), annual average..............
Percent change, year over y e a r .........................
Total unemployment rate, annual average 2...........
Federal pay raise, January (percent).......................
Interest rates (percent):
91-day Treasury bills 3............................................
10-year Treasury notes...........................................

Estim ates
1991

1992

1993

1994

1995

1996

4.5
0.5

5.0
0.8

7.5
3.6

7.3
3.4

6.8
3.2

6.6
3.0

6.4
3.0

4.0

4.2

3.8

3.7

3.5

3.4

3.3

6.2
5.8

3.4
6.7

3.9
6.3

3.7
6.2

3.5
5.8

3.4
5.4

3.3
5.2

5,465
5.1

5,674
3.8

6,076
7.1

6,521
7.3

6,976
7.0

7,442
6.7

7,923
6.5

4,157
1.0

4,149
-0.2

4,281
3.2

4,430
3.5

4,577
3.3

4,719
3.1

4,861
3.0

4,646
2,705
305

4,853
2,801
301

5,187
3,007
343

5,533
3,236
388

5,910
3,455
434

6,291
3,688
463

6,676
3,931
490

131.5
4.1

136.7
4.0

141.9
3.8

147.2
3.7

152.4
3.5

157.7
3.5

163.0
3.4

129.0
5.3
5.4
3.6

134.7
4.4
6.6
4.1

139.9
3.8
6.4
4.2

145.1
3.8
6.3
4.7

150.3
3.6
5.9
4.3

155.4
3.4
5.5
4.1

160.6
3.3
5.2
4.0

7.5
8.5

5.7
8.0

5.9
7.8

5.8
7.0

5.6
6.6

5.4
6.4

5.3
6.3

1 CPI for urban wage earners and clerical workers. Two versions of the CPI are published. The index, shown here is that
currently used, as required by law, to calculate automatic cost-of-living increases for indexed Federal programs.
2 Percent of total labor force, including armed forces residing in the U.S. This implies an average unemployment rate of 6.4%
for the second half of calendar year 1992.
3 Average rate on new issues within period, on a bank discount basis.

Table 3: FEBRUARY BUDGET GNP FORECAST
AND ACTUAL DATA
(Dollar amounts in billions)
GNP, Annual Rate
Forecast

Actual

E rror in
Level
(%)

N om inal GNP:
Q4, 1990........................................
Q l, 1991.......................................

5,527
5,574

5,527
5,558

—
-0.3

R e al GNP (1982 dollars):
Q4, 1990.......................................
Q l, 1991........................................

4,134
4,121

4,153
4,124

0.5
0.1

3
298-090 O

2 QL :3

HI. R E C E I P T S

The current estimates of receipts for 1991 and 1992 are lower than the February estimates by
$22.8 billion and $19.5 billion, respectively. Most of these differences are the result of technical
reestimates, which account for $21.2 billion and $17.8 billion of the 1991 and 1992 differences,
respectively.
Technical reestimates for individual income tax receipts account for approximately one-half of the
total technical change for 1991 and 1992. The reestimates reflect adjustments in the light of lower
than anticipated tax collections relating to final payments of calendar year 1990 individual income
tax liability. Negative technical adjustments have also been made to employment taxes, excise taxes,
and Federal Reserve earnings.
Table 4: MID-SESSION REVIEW: CHANGE IN POLICY RECEIPTS
(In billions of dollars)

February estim ate........................
Changes due to:
Technical reestim ates...........
Economic assumptions.........
Policy.......................................
Tbtal, changes............................
Mid-Session estim ate..................

1992

1993

1994

1995

1,091.4

1,165.0

1,252.7

1,365.3

1,467.3

1,560.7

-21.2
-1.3
-0.3
-22.8
1,068.7

-17.8
-1.7

-16.5
-2.9
♦
-19.4
1,233.3

-33.7
-6.5
—
-40.2
1,427.1

-36.0
-7.7

-19.5
1,145.5

-24.7
-6.3
—
-31.0
1,334.3

Source: Department of the Treasury, Office of Tax Analysis.

1996

1991

_
-43.7
1,517.0

IV. S P E N D I N G

Outlays
The current estimate for outlays for 1991 is $1,305.9 billion, $58.7 billion lower than the February
estimate. This reduction is largely due to reestimates of the size and timing of outlays and receipts
that result from deposit insurance obligations, and different spending patterns and contributions for
Operation Desert Shield/Desert Storm than assumed in the “placeholder” estimates in February. The
current estimate for outlays in 1992 is $1,493.8 billion, $47.9 billion higher than the February
estimate.
Operation Desert Shield/Desert Storm
Estimates in the February budget included a “placeholder” for Desert Shield/Desert Storm costs
because it was too early in the operation to project costs accurately. The Budget assumed 1991 funding
of $30.0 billion, of which $15.0 billion would be offset by foreign contributions, and 1991 net outlays
of $9.4 billion. (See table 5.)
Table 5: DESERT SHIELD/DESERT STORM APPROPRIATIONS AND
CONTRIBUTIONS
(In billions of dollars)
Budget
Authority
1991

Outlays
1991

1992

1993 and
Beyond

F e b r u a r y 1991 R equest:
Appropriations:
1990 Supplemental (P.L. 101—403)..................................
1991 DOD Appropriations A ct..........................................
Placeholder Allowance.......................................................
Total Appropriations...............................................................
Offsetting Receipts.....................................................................
N et F unding................................................................................

1.0
29.0
1 30.0
-15.0
15.0

0.4
0.8
23.2
24.4
-15.0
9.4

0.1
0.2
4.6
4.8
—
4.8

0.1
—
1.2
1.2
—
1.2

M id-S ession U pdate:
Appropriations:
1990 Supplem ental............................................................
1991 Appropriations Act....................................................
Desert Storm Supplemental (P.L. 102-28)....................
Dire Emergency Supplemental (P.L. 102-27)...............
Dire Emergency Supplemental (P.L. 102-55)...............
Proposed Supplem ental.....................................................
Total Appropriations...............................................................
Offsetting Receipts................ | ..... .............................................
N et Funding................... ............................................................

1.0
42.6
2 0.7
3 0.3
2.9
147.5
-48.2
-0.7

0.4
0.8
27.8
0.4
0.1
-5.3
24.2
-48.2
-24.0

0.1
0.2
10.9
0.2
0.1
5.4
16.8
—
16.8

0.1
—
3.4
0.2
*
2.7
6.2
—
6.2

-33.4

12.0

5.0

D ifference: M id-session vs. F e b r u a r y 1991 R equest:
Net Outlays.... ........................................... .............................

1 This does not reflect the 1990 supplemental appropriation of $2.0 billion.
2 This includes $0.4 billion for DOD and $0.3 billion for the Departments of Education and Veterans Affairs.
The non-defense funding includes advance appropriations for 1992 through 1995.
3 This includes funding of $235 million for the Department of State and $16 million for the D epartment of
Defense.

The Department of Defense has estimated that the full incremental costs of Desert Shield/Desert
Storm could total $61.1 billion. The portion th at requires appropriations in 1991 and is exempt from
statutory budget ceilings is $47.5 billion. This excludes those costs covered by in-kind assistance from
allies, long-term veterans benefits, 1990 costs, and costs for expended and destroyed equipment that
the Department does not currently plan to replace.
5

Outlays currently are estimated to be about $33.4 billion less in 1991 and $12.0 billion more in
1992 than assumed in the February budget “placeholder” estimates. Current estimates assume that
in addition to cash contributions of $39.0 billion that have been received through July 12th, additional
pledged contributions of $9.2 billion will be received in 1991, for a total of $48.2 billion. Contributions
exceed U.S. disbursements in 1991 because disbursements—especially those involving contracts and
budget authority that involve low outlay spend-out rates— will occur over an extended period. Under
the Persian Gulf Conflict Supplemental Authorization Act and Personnel Benefits Act of 1991 (Public
Law 102-25), OMB is obliged on the 15th of each month to report to the Congress on the status of
Desert Shield expenditures and associated foreign contributions. The July 15th report is included as
an Appendix to this report.
Economic changes
Changes in economic conditions have reduced outlay estimates by $1.9 billion in 1991 and $4.5
billion in 1992 from the levels in the February budget. This largely reflects the more modest rise in
the consumer price index resulting in smaller cost-of-living increases for social security and other
retirement programs than previously assumed. It also reflects the pattern of interest rate changes
where short-term interest rates have been lower than projected in the budget, while long-term rates
have been somewhat higher. These interest rate changes have the effect of reducing outlay estimates
in 1991 and 1992, while increasing them in subsequent years.
Technical changes
Technical changes result from factors such as revised crop forecasts affecting farm price support
costs, changes in estimated caseloads for entitlement programs, and other non-economic, non-policy
conditions different from those previously assumed. The largest technical reestimates are for deposit
insurance, where the magnitude and timing of outlays and receipts are inherently difficult to estimate.
Only the major technical reestimates are reflected in this document.
Commodity Credit Corporation (CCC)—CCC net expenditures rise during 1991 through 1995
from $49.3 billion in the February budget to $55.2 billion. Of this $6 billion increase, about half ($2.6
billion) results from new supply and demand equations for cereals. Specifically, the Department of
Agriculture projects greater wheat consumption, which decreases budget outlays by $1.1 billion, and
lower com exports, which increases budget outlays by $3.7 billion. Most of these changes occur in the
outyears, but are simply derived by extrapolating from current market conditions, such as
disappointing Soviet purchases of com this year.
The remaining increase in CCC net expenditures is for the Export Enhancement Program (EEP).
Bonuses paid to subsidize the export of U.S. crops have been in the form of generic certificates backed
by commodity stocks held by CCC. With CCC stocks nearly depleted, the Department of Agriculture
will make bonus payments in cash for the first time in 1992. Direct cash outlays, unlike CCC com
stocks acquired as part of the price support program, are reported as an EEP expenditure. The outlays
associated with use of certificates were recorded much earlier when farmers defaulted on loans to
CCC and the Government took title to the grain pledged as collateral. As has been the case in the
past, EEP benefits, in the form of lower CCC subsidy payments, are already reflected in the estimates.
The EEP has been, and still is, scored as budget neutral.
Deposit insurance—Net outlays for three deposit insurance accounts—the Resolution Trust
Corporation (RTC), the Bank Insurance Fund (BIF), and the FSLIC Resolution Fund (FRF)—are
expected to be $28.0 billion lower in 1991 and $29.9 billion higher in 1992 than the February budget
estimates. Deposit insurance net outlays for 1993 and beyond are also estimated to differ from the
February estimates—up $4.8 billion in 1993 and $12.7 billion in 1994, but down $2.8 billion in 1995
and down $7.5 billion in 1996. The volatility of these estimates, especially for the RTC and BIF, reflect
the substantial uncertainty about key parameters affecting deposit insurance expenditures. These key
parameters include:
• availability of sufficient funding to assure timely resolution of failed institutions;
• the financial condition and structure of asset portfolios of failed depository institutions;
• the administrative ability of the Federal banking agencies to process effectively the number
and size of depository institutions projected to fail;
6

• the rate of Federal acquisition and sale of associated assets; and
• the projected general economic and specific regional real estate market conditions that affect
both the probability of an institution failing and the ability of the Federal banking agencies to
dispbse of the acquired assets from failed institutions efficiently and quickly.
There is, in addition, uncertainty as to the timing and content of financial sector reform
legislation. Table 6 indicates OMB’s current estimates of the potential range of outlays that could
occur for the deposit insurance accounts during the 1991 through 1996 period.
Table 6: POTENTIAL RANGE OF ESTIMATES OF FEDERAL DEPOSIT INSURANCE
OUTLAYS
(In billions of dollars)
1991
Resolution Trust Corporation:
Mid-Session Review Estim ate........................
Potential Range of E stim ate..........................
FSLIC Resolution Fund:
Mid-Session Review Estim ate........................
Potential Range of E stim ate..........................
Bank Insurance Fund:
Mid-Session Review Estim ate........................
Potential Range of E stim ate.........................
Total, Federal Deposit Insurance : 1
Mid-Session Review Estim ate.......................

1992

1993

1994

1995

1996

62.2
45 to 62

97.6
84 to 119

19.3
-14 to 51

-39.7
-41 to -40

-38.9
-39 to -38

-26.0
-27 to -24

9.2

7.0
4 to 12

6.0
0 to 6

*
0 to 2

♦
0 to 2

0.3
0 to 2

12.1
11 to 16

14.4
10 to 38

24.5
7 to 37

13.8
- 6 to 14

-6.0
-17 to -2

-11.7
-17 to -1

83.5

118.0

49.0

-25.4

-45.2

-37.4

—

1 Includes outlays for other deposit insurance of -$1.0, -$0.8, $0.4, -$0.3 billion in 1992-1995, respectively. Amounts for
1991 and 1996 are less than $50 million.
NOTE: Estim ates range widely due to differing assumptions about the rate of case resolution, the losses associated with
marking to market, the rates of asset acquisition and sale, and perhaps, most significantly, the associated variations in
requirements for working capital.

The reduction in 1991 deposit insurance net outlays reflects fewer case resolutions than originally
forecast. The delay in obtaining additional RTC loss funding for 1991 contributed to this lower level
of resolution activity in 1991. The 1992 net outlay increase is predicated upon the assumption that
the Congress provides the RTC loss funding and BIF recapitalization requested by the Administration
fully and promptly to avoid any delays in 1992 and 1993.
Outlays in any one year may swing widely from this projection, depending upon the timing and
size of specific closure actions dealing with failed banks. The Administration’s 1992 budget showed
the net worth of the BIF declining to negative $2.2 billion in 1992 and negative $22.2 billion by 1996.
At the time this was a more pessimistic forecast than those of the banking agencies and the
Congressional Budget Office. Now, the forecasts of some Federal agencies are beginning to show the
same negative trend. In particular, FDIC Chairman Seidman has revised his earlier estimates. He
has indicated (on June 27th) that BIF net worth would decline to at least negative $3 billion, and very
possibly as high as negative $11 billion, for the end of calendar year 1992. The complete data available
to FDIC is not yet available to OMB. OMB has, therefore, made only a preliminary revision of the
BIF estimate. Analysis of banking data from the first quarter of 1991, not yet available to OMB, as
well as reviews of the updated forecasts of the FDIC and others, may lead to a further upward revision
in the Administration’s estimates.
Working capital needs—the funding required to purchase temporarily assets intended for future
sale—is one of the most volatile components of deposit insurance outlays. This is especially true for
the current revisions for BIF outlays. As shown in Table 7, the vast majority of these BIF outlay
changes in 1992 through 1996 is the result of changes in estimates of needs for working capital.

Table 7: BANK INSURANCE FUND/RESOLUTTON TRUST CORPORATION OUTLAYS
AND WORKING CAPITAL
(In billions of dollars)
1991
B a n k I n s u ra n c e F u n d :
Outlays:
Fobrufliy
..........-........................................
Mid-Session estim ate...................................................
DiffcrBnco ...t.tt............------........................................
Working capital:
Fobrufliy estimate T»T»TrT................ ............ ....................
Mid-Session estim ate...................................................
DifTo'ronrp
.......... ..................... ...............................
Percentage change in outlays due to change in
R e so lu tio n T ru s t C o rp o ratio n :
Outlays:
February estim ate,.„f.................................... .......
Mid-Session estim ate....................................................
Difference
............... ........ ........... ........... ......
Working capital:
February pst.imfltftTrTr.....................................................
Mid-Session estim ate....................................................
..... ........ ....................... .....................
Diffomnpo
Percentage change in outlays due to change in

1992

1993

1994

1995

1996

15.9
12.1
-3.8

9.7
14.4
4.6

8.0
24.5
16.5

6.8
13.8
7.0

0.9
-6.0
-6.9

0.6
-11.7
-12.3

7.0
7.5
0.4

3.6
7.3
3.7

1.1
14.2
13.0

0.1
7.2
7.1

-3.5
-6.1
-2.6

-2.3
-9.1
-6.9

-11.4

80.0

79.2

100.9

37.7

55.7

84.6
62.2
-22.3

76.1
97.6
21.6

34.3
19.3
-14.9

-47.6
-39.7
7.9

—45.7
-38.9
6.8

-32.0
-26.0
6.0

55.4
38.4
-17.0

44.5
55.0
10.5

12.9
0.3
-12.6

-47.8
-39.9
7.9

-45.9
-39.1
6.8

-32.2
-26.2
6.0

76.3

48.6

84.1

100.0

Food stamps—Estimated outlays for food stamps are $0.7 billion and $1.8 billion above the
February estimates for 1991 and 1992, respectively, for technical reasons. Both the number of
participants in the program and the average monthly benefit per person are expected to be higher
than assumed in February. Pursuant to the Dire Emergency Supplemental Appropriations for
Consequences of Operation Desert Shield/Desert Storm, Food Stamps, Unemployment Compensation
Administration, Veterans Compensation and Pensions, and Other Urgent Needs Act of 1991 (Public
Law 102—27), the Administration is requesting the additional $1.3 billion in budget authority for food
stamps for 1991 included in that Act.
Medicaid—Technical reestimates for the Medicaid program, $2.2 billion in 1991 and $5.7 billion
in 1992, reflect an increase in state-estimated Medicaid expenditures. The increase in state-estimated
Federal Medicaid expenditures appears to be due to:
• substantial increases in inpatient hospital payments, particularly state add-ons to specific
hospitals, in part funded through provider taxes and refundable donations;
• increased numbers of beneficiaries; and
• a generally unpredicted upturn in acute health care costs.
These estimates do not reflect the level of outlays associated with regulations under development
to deal with the improper use of refundable donations and taxes.
The use of provider tax and donation schemes—and other causes of rising Medicaid
estimates—are described in more detail in “Improving Medicaid Estimates: Report of the HHS-OMB
Task Force,” July 10, 1991. (This is included at Appendix A.)
Medicare—Total outlays for 1991 to 1996 for Medicare change less than 0.2 percent as a result
of technical reestimates. Revised outlay estimates for the hospital insurance trust fund are 0.7 percent
above the February budget estimates for 1991 through 1996 due to higher beneficiary participation
rates. About half of that increase occurs in 1995 ($0.8 billion) and 1996 ($1.0 billion). Other significant
factors are higher utilization of skilled nursing facilities and home health agencies.
Revised outlay estimates for the supplem ental medical insurance trust fund are 0.9 percent
lower for 1991 through 1996. These technical decreases reflect lower independent laboratory
8

projections due to recent actual data, and reduced spending for physician services due to lower
residual payments and implementation of the conversion factor adjustment in the proposed physician
fee schedule. Outlays for 1991 and 1992 increase by 1.2 percent and 1.4 percent, respectively, due to
increased beneficiary participation in the program.
Social Security—Estimated outlays for Social Security are lower than projected in February for
1991 and 1992 but are above the February projections in the outyears. The increases are due to higher
average program awards for the Old Age and Survivors Insurance program and an increase in the
incidence of disability among workers covered under the Disability Insurance program. In the near
term, these increases are more than offset by a reduction in the number of retired workers on the
rolls relative to the February assumptions.
Unemployment insurance—Estimated outlays for unemployment compensation benefits are
higher than the February projections for all years. For 1991, benefits outlays are expected to increase
only slightly ($20 million), with a larger increase in 1992 ($1.0 billion). The increases are due to an
upward reestimate in the insured unemployment rate (IUR). This technical reestimate is based
largely on experience in the most recent calendar quarter, the only quarter of the fiscal year in which
the actual IUR has been higher than projected in February. These estimates will be monitored closely
to determine whether experience in subsequent quarters is consistent with experience in the most
recently completed quarter.
Veterans programs—Estimated outlays for veterans compensation, pensions, and readjustment
benefits are above the February estimate by $0.2 billion in both 1991 and 1992 because of a
higher-than-anticipated number of beneficiaries and higher average benefits. These increases have
been reflected in action on the 1991 supplemental appropriations bills.
Table 8: MID-SESSION REVIEW: CHANGE IN POLICY OUTLAYS
(In billions of dollars)

February estim ate........................................................
Changes due to:
Desert Shield/Desert Storm.................................
Technical reestimates:
Commodity Credit Corporation......................
Deposit insurance..............................................
Food stam p s.......................................................
M edicaid.............................................................
M edicare..............................................................
Social S ecurity...................................................
Unemployment insurance................................
Veterans programs.............................................
N et in te re st1......................................................
Subtotal, technicals...............................................
Economic assumptions:
Social Security and other retirem ent.............
O ther....................................................................
N et interest:
Interest rate effect........................................
Debt service....................................................
Subtotal, economic................................................
Policy:
Discretionary programs....................................
Pay-as-you-go legislation..................................
Debt service........................................................
Tbtal, policy.............................................................
Total, changes.................................... ........................
Mid-Session estim a te...................................................

1991

1992

1993

1994

1995

1,409.6

1,445.9

1,454.2

1,427.1

1,470.3

1,540.8

-33.4

12.0

2.9

1.3

0.7

0.3

-0.3
-28.0
0.7
2.2
0.5
-0.4
♦
0.2
♦

2.2
4.8
1.8
8.6
0.4
0.4
0.7
0.2
3.5
22.7

1.8
12.7
1.5
12.5
-0.3
1.0
0.8

1.4
-2.8
1.4
15.9
-1.0
1.5
0.5

1.1
-7.5
1.3
19.1
-2.1
2.0
0.2

____

-25.0

0.8
29.9
1.8
5.7
0.9
-0.1
1.0
0.2
0.1
40.2

7.4
37.5

12.0
29.0

16.2
30.3

*
-0.1

-2.6
-0.9

-3.8
-1.0

-3.9
0.5

-3.5
0.6

-3.2
0.7

-1.8
-1.9

-0.9
- 0.1
-4.5

3.8
-0.2
-1.1

3.8
0.1
0.5

2.9
0.6
0.6

2.4
1.0
0.9

1.6

0.1

____

0.2
0.2
30.5
1,500.7

0.2
0.2
31.7
1,572.5

—

*
1.6
-58.7
1,350.9

0.1
0.2
47.9
1,493.8

0.2
0.3
24.7
1,478.9

♦

0.1
—

0.2
♦
39.4
1,466.4

1996

1 Includes debt service impact of Operation Desert Shield/Desert Storm.

Policy cnanges
Since the budget was submitted, the Congress has completed action on three supplemental
appropriations bills and ten bills with pay-as-you-go implications. The Administration has also
submitted several budget amendments. In total, enacted Congressional and Administration policy
changes have increased outlays by $1.6 billion in 1991 and by $0.2 billion in 1992.
B udget A uthority
Total discretionary budget authority for 1991 is $18.8 billion above the February budget estimate.
Nearly all of this increase is the result of appropriations for Operation Desert Shield/Desert Storm
above the levels assumed in the Budget placeholder. Discretionary budget authority for 1992 is nearly
the same as in the February budget.
Table 9: MID-SESSION REVIEW: CHANGE IN POLICY DISCRETIONARY
BUDGET AUTHORITY
(In billions of dollars)
1991
February estimate 1...................................
Changes due to:
Desert Shield/Desert S to rm .............
Policy:
Defense.............................................
International...................................
Domestic...........................................
Total, policy.........................................
Total, changes.........................................
Mid-Session estim ate..................... ..........

1993

1996

1995

1994

523.4

522.7

515.6

517.3

523.6

535.0

17.2

0.1

—

0.3
0.9
0.4
1.5
18.8
542.2

-0.1
—
-0.1
-0.1
♦
522.8

_*
—
♦
*

—*
—
*

—*
—
—
—*
♦
523.6

—
—
_*
_*
535.0

1 Includes Desert Shield/Desert Storm placeholder.

1992

0.1
515.7

—
♦
517.3

V. S T A T U S O F P A Y - A S - Y O U - G O L E G I S L A T I O N A N D D I S C R E T I O N A R Y
SPENDING

This chapter also presents the current status of enacted and pending legislation subject to the
pay-as-you-go provisions of the Omnibus Budget Reconciliation Act of 1990 (OBRA), and the current
status of 1992 appropriations bills and the discretionary limits established in OBRA According to
OBRA, the changes in economic assumptions and technical estimates th at are discussed in this report
may not be taken into account when OMB prices legislation subject to the pay-as-you-go provisions
or the discretionary limits.
Pay-as-you-go Legislation
The Omnibus Budget Reconciliation Act of 1990 (OBRA) requires that all revenue and direct
spending legislation meet a pay-as-you-go requirement. That is, no such bill should result in an
increase in the deficit; and if it does, it m ust trigger a sequester if not fully offset.
To date, 10 bills that have pay-as-you-go implications have been enacted. In total, they decrease
the deficit by $31 million for the two years 1991 and 1992. An additional 10 bills have passed the
House or Senate but have not yet been enacted. Based on preliminary scoring, if all these bills were
enacted into law, a small across-the-board reduction could be required.
D iscretionary Spending
Status of discretionary spending limits
OBRA also specified limits on discretionary spending. Separate limits were established for
defense, international affairs, and domestic programs for each year 1991 to 1993. If either budget
authority or outlays exceed the limits in any year, there will be an automatic reduction in the category
in which the breach occurred.
Since the February budget, the Congress has enacted three appropriations bills. As required
under the law, the discretionary spending limits have been adjusted for the emergency appropriations
provided in these bills, for the incremental costs of Operation Desert Shield/Desert Storm, and for
other purposes. For defense and international discretionary programs, the enacted changes were
consistent with the requirements of OBRA For domestic discretionary programs, the enacted bills
increased budget authority above the cap for 1991 by $2.4 million. An across-the-board reduction of
.0013 percent was ordered. Table 11 shows the current status of the discretionary spending limits.

Status of 1992 appropriations bills
As this document goes to press (July 13, 1991), the House has passed 12 of the 13 appropriations
bills. The Senate has not yet passed any appropriations bills. House action on defense and
international appropriations bills is below the discretionary limits. Although the House has not
completed action on all of the domestic bills, it appears that the House action, when completed, could
exceed the domestic limits by as much as $1.5 billion in outlays, using OMB scoring. Detailed
descriptions of OMB scoring of appropriations bills have been provided to the Appropriations
Committees as the bills have been considered by the House and the Senate.
11

2 9 8 -0 9 0

0 - 9 1

3 QL : 3

TABLE 10: PAY-AS-YOU-GO LEGISLATION
(In millions of dollars)
Change in the baseline déficit

L eg islatio n e n a c te d th r o u g h J u ly 7 t h : 1
OMB estim ate................................................................
CBO estim ate................................................. ...............

-31
-44

♦
148

*
10

1991-1995

1995

1994

1993

1992

1991

*
171

-30
292

D iscu ssio n o f differen ces:
Differences in pay-as-you-go estimates of legislation enacted in this session are primarily due to the scoring of increased
Veterans’ educational benefits in Public Law 102-25. The increases are not scored as direct spending for 1991 through 1993
because the funds are only available through an appropriations act. For 1994 and 1995, OMB assumes th a t the Secretary will
return to the benefit rates paid in 1991. CBO assumes the Secretary will continue the new rates into 1994 and 1995 and index
them for inflation.
E stim a te s fo r p e n d in g le g isla tio n :
House Passed:
Money L aundering Enforcem ent Amendments
(HU . 26):
OMB estim ate.........................................................
CBO estim ate..........................................................
Transfer of Pershing H all to the Department of
Veterans Affairs (HJR. 154):
OMB estim ate.........................................................
CBO estim ate..........................................................
Reclamation Projects Authorization (H.R. 429):
OMB estim ate.........................................................
CBO estim ate..........................................................
Veterans’ Compensation Programs Improvement
Act (H.R. 1047):
OMB estim ate.........................................................
CBO estim ate..........................................................
National Flood Insurance (H.R. 1236):
OMB estim ate.........................................................
CBO estim ate............................. .-............. .............
National Defense Authorization Act (H.R. 2100):
OMB estim ate.........................................................
CBO estim ate..........................................................
Senate Passed:
Telecommunications Research and Manufacturing
Competition Act (S. 173):
OMB estim ate.........................................................
CBO estim ate..........................................................
Export Administration Authorization Act (S. 320):
OMB estim ate.........................................................
CBO estim ate..........................................................
Passed both the House and the Senate:
Futures Trading Practices Act (H.R. 707):
House: OMB e stim a te..........................................
CBO estim ate...........................................
Senate: OMB estim a te.........................................
CBO estim ate..........................................
Intelligence Authorization (H Jl. 1455):
OMB estim ate.........................................................
CBO estim ate..........................................................
Total, preliminary estimates for pending legislation as
of July 7:
OMB estim ate................................................................
CBO estim ate.................................................................
OMB estimate less CBO estimate 2............................

0
—

1
0

0
0

1
0

0 to 3
0

l t o 51
-7

2 to 12
-9

2 to 12
-8

7 to 90
-32

* to 1
♦

2 to 5
5

8 to 21
20

0
0

-3
-3

-7
-7

-1
-1

-11
-11

-20

-70

0
—

revised es tim ate und< >r developm ent
-20
-10
0

0
—

—

0
—

-6

—

-6
—

-24
—

—

0
0

-3
-3

-6
-6

-11
-10

—
-16
-14

—
-36
-33

♦
*

*
♦

♦
♦

*
♦

♦
♦

1
1

1 to 5
♦

- 6 to 47
-5
- l t o 52

-11 to 2
-13
2 to 15

-20 to -7
-20
0 to 13

-19 to -6
-18
- l t o 12

-54 to 42
-55
1 to 97

—

1 to 5

1 No legislation was enacted between June 14th, the date of the last pay-as-you-go monthly report to the Congress and July
7th.
2 Reflects Senate version of H.R. 707, and excludes H.R. 2100.
*$500,000 or less.

TABLE 111 CURRENT STATUS OF DISCRETIONARY SPENDING LIMITS
(In millions of dollars)
1992 Budget

1991 Budget
Authority
Domestic Program s:
Limits set in Omnibus Budget Reconciliation Act of 1990...............
Adjustments made in the preview rep o rt1.....................................
Preview report lim its.................. ............................................................
Adjustments for Congressional action to date:
Dire emergency appropriations.....................................................
Incremental costs of Operation Desert Shield/Desert S to rm ....
Additional outlay allowance used..................................................
Adjustments in expectation of enactment of President’s proposals:
IRS funding.......................................................................................
Special allowance..............................................................................
Revised lim its............................................................................................
International Program s:
Limits set in Omnibus Budget Reconciliation Act of 1990...............
Adjustments made in the preview re p o rt1.....................................
Preview report lim its...............................................................................
Adjustments for Congressional action to date:
Dire emergency appropriations.....................................................
Incremental costs of Operation Desert Shield/Desert S to rm ....
Additional outlay allowance used..................................................
Adjustments in expectation of enactment of President’s proposals:
IMF funding......................................................................................
Special allowance..............................................................................
Revised lim its...........................................................................................
Defense Program s:
Limits set in Omnibus Budget Reconciliation Act of 1990...............
Adjustments made in the preview rep o rt1.....................................
Preview report lim its...............................................................................
Adjustments for Congressional action to date:
Incremental costs of Operation Desert Shield/Desert S to rm ....
Adjustments in expectation of enactment of President’s proposals:
Incremental costs of Operation Desert Shield/Desert S to rm ....
Revised limits...........................................................................................

Outlays

Authority

Outlays

182,700
191
182,891

198,100
1,763
199,863

191,300
7,100
198,400

210,100
970
211,070

39
5
—

187
4
416

—
126
—

3
125
—

—
—
182,935

—
—
200,470

172
1,579
200,277

169
837
212,204

20,100
0
20,100

18,600
612
19,212

20,500
417
20,917

19,100
77
19,177

909
236
—

899
133
53

—
—
—

8
72
—

—
—
21,245

—
—
20,296

12,158
1,248
34,323

—
574
19,830

288,918
1,000
289,918

297,660
1,165
298,825

291,643
-282
291,361

295,744
46
295,790

43,000

31,977

—

6,705

2,949
335,867

-5,291
325,511

—
291,361

5,442
307,937

1 See Fiscal Year 1992 Budget, P art 5, Chapter XIV for a discussion of these adjustments.

IV. APPENDICES
APPENDIX A: IMPROVING MEDICAID ESTIMATES: REPORT OF HHS-OMB TASK
FORCE, JU LY 10, 1991
APPENDIX B: UNITED STATES COSTS IN THE PERSIAN GULF CONFLICT AND
FOREIGN CONTRIBUTIONS TO OFFSET SUCH COSTS; REPORT #5: JULY 15, 1991
APPENDIX C: SUMMARY TABLES
List of tables:
Mid-Session Review: Outlays for Mandatory and Related Programs Under Current Law
Mid-Session Review: Estimated Spending From End of 1992 Balances of Budget Authority:
Nonmandatory Programs
Mid-Session Review: Receipts by Major Source
Mid-Session Review: Outlays by Category
Mid-Session Review: Outlays by Function
Mid-Session Review: Federal Government Financing and Debt

IM PROVING M EDICAID ESTIM A TES:
REPO RT OF HHS-OMB TA SK FO R C E
O n April 30, 1991, Health and H u m a n Services ( H H S ) Secretary Louis Sullivan
and Office of Management and Budget ( O M B ) Director Richard Darman established a
special H H S - O M B Management Review Task Force. The purpose of the Review was to
address continuing and largely unanticipated increases in Medicaid spending.
A set of four fact-finding teams (jointly staffed by H H S , O M B and the Health
Care Financing Administration (HCFA)) were organized. T w o teams, supplemented by
staff from the Congressional Budget Office (CBO), visited nine States. The State visits
were coordinated with the National Governors’ Association (NGA), the National
Association of State Budget Officers (NASBO), and the National Conference of State
Legislators (NCSL).
The Teams:
•

Analyzed w h y Medicaid estimates have been so inaccurate;

•

Examined the deficiencies in the current Federal/State estimating
process that allow such discrepancies to occur without prior notice,
as well as possible corrective measures;

•

Looked at ways to work more closely with the States to understand
the unique policy dynamics of the program in each State; and

•

Used the results of the review to improve Federal Medicaid tracking
efforts and to evaluate better the fiscal impact of future Medicaid
policy changes.

The Task Force also commissioned an independent actuary to review the accuracy
of Medicaid estimates.
This report draws on the reports of these Teams. Despite the short review time,
the T e a m reports provide useful findings, analyses and insights. The T e a m reports are
available from O M B or H C F A .

BACKGROUND

The Medicaid program assists States in financing health care for 27 million low-income
and medically needy people. States are required to provide a minimum benefit package (e.g.,
hospital and physician services), but may elect to cover additional benefits (e.g., drugs and
dental care). Medicaid has changed greatly over the past decade. It now provides a widespread
health care safety net, much broader than the original purpose of financing health care to welfare
recipients.
Begun in 1965, Medicaid will spend an estimated $115 billion in Federal and State funds
in FY 1992. Medicaid now dwarfs all other Federal aid programs to State and local
governments. The program is also becoming the largest single component of State budgets:
NASBO predicts that 22 percent of State budgets in 1996 will be for Medicaid.
The Medicaid program is administered and jointly financed by the States and the Federal
government. The Federal share of total program costs could range from 50 to 83 percent,
depending on a State's per capita income.
Recently, there have been unanticipated increases in Medicaid costs. FY 1991 estimates
rose $8.28 billion or 18 percent FY 1992 estimates rose $8.4 billion or 14 percent Charts 1A
and IB show the percentage increases in FY 1991 and 1992 estimates for the nine States visited
by the teams. Chart 1C shows projected increases from FY 1990 through FY 1996.

PRINCIPAL FINDINGS
(1)

Cost Increases

Federal expenditures for Medicaid increased threefold between 1980 and 1990, from $14
billion to $41 billion; these expenditures are now expected to increase another 59 percent
to over $65 billion in 1992. (See Chart 2.)
The Task Force actuary estimated that most Medicaid spending increases (59 percent)
over the 1980-90 time period were due primarily to health care inflation. Federal
legislation and waiver programs accounted for 22 percent of the increase; other factors,
such as intensity of service and State initiatives to increase Federal match, accounted for
15 percent; increased enrollment accounted for only four percent of the spending growth.
While the actual expenditures remain to be determined, most of the unexpected increases
in Medicaid estimates for FY 1991 and 1992 appear to be due to:
•

Substantial increases in inpatient hospital care, some of which are attributable to
increases in payment rates made possible through provider tax and refundable

donation programs. (These programs arrange for providers to pay specified taxes
or make donations to a State to fund a part of the State’s share of Medicaid
funding — increasing the amount of Federal matching funds a State receives, and
allowing states to increase their spending as well.)
•

Increased numbers of beneficiaries, some of whom now receive benefits as a
result of post-1985 Congressional expansions of eligibility for Medicaid.

•

Starting in 1988, a generally unpredicted upturn in acute health care costs.

(2) Refinancing: Increasing State R eliance on Provider Taxes and
Refundable Donations
Initiatives to increase the Federal match (e.g., provider tax and refundable donation
programs) accounted for only a small portion of the Medicaid increase over the 1980-90
period. However, initiatives of this kind appear to be constituting a substantial portion of
the increases in the 1991-92 estimates of those States which currently use these devices
($3-5 billion in each year). Recent information suggests dramatically increased reliance
on these schemes to increase the effective Federal share of real State Medicaid costs.
States are working to maximize Federal payments and cover up to 100 percent of State
costs by implementing provider tax and refundable donation provisions. They can do
this by raising nominal provider payment rates while (i) effectively recapturing the
increase (through provider taxes or refunded donations) and (ii) claiming higher Federal
reimbursement on their “gross costs.” Such practices are under intensive Federal legal
scrutiny.
Since the Federal government currently reimburses the States based on gross costs,
Federal reimbursements lower the real costs borne by the States. While the nominal
Federal matching rate remains unchanged (on gross costs), the effective Federal share of
real (net) Medicaid costs increases. By 1996, the aggregate effective Federal matching
rate is estimated to rise to 62 percent under current rules — even though the nominal
Federal matching rate is projected to remain about 57 percent (see Chart 3).
Congress has blocked regulations to constrain State reliance on provider taxes and
refundable donations since 1988, currently extending the bar through 1991. The
Medicaid Baseline assumes the promulgation of regulations to constrain the use of
provider taxes and refundable donations beginning in 1992 (reducing their impact in that
year by $1-3 billion). Legislation will be required to eliminate completely the use of
these devices. Chart 4 shows the projected impact of such regulations and legislation.

(3)

Estimates

State Estimates. The Federal estimates of Medicaid spending are based on State
estimates.
—

While the average overall error in State estimates over the ten year period 198090 was only -0.3 percent, State under-estimating errors have been increasing
since 1989 (-9.2 percent in 1990; an expected -18.0 percent in 1991; and an
expected -16.0 percent in 1992).

—

There are also enormous differences in estimating accuracy among States.
Nineteen States had estimating errors greater than 10 percent with respect to FY
1990; Alabama, Kansas, Arizona and Massachusetts had estimating errors of over
20 percent. While most of the largest States had estimating errors under 5 percent
(California, New York, Texas) for FY 1990, these States accounted for an
aggregate estimating error of $2.1 billion for FY 1991 (27 percent for Texas, 17
percent for New York and 7 percent for California).

Federal Estim ates. Federal adjustments to State estimates 1980-90 (including
management and regulatory initiatives) increased the average error from -0.3 percent to 2.8 percent While Federal adjustments in this period tended to improve estimates on the
average when State estimating errors were low, they tended to increase the error when
the estim ating errors were large (particularly since 1987 when States have
underestimated actual expenditures). Until recent years, the Federal Government has
tended toward lower forecasts than the States.
Different estimating methods are now used for current and budget year projections
versus outyear projections. Use of State estimates in HCFA out-year projections can
compound mis-estimates.
Overall. The general conclusion is that inaccuracies in Medicaid estimates are primarily
associated with changes in trends. While these are always difficult to forecast, providing
a higher priority and capability for Medicaid estimating, at both the Federal and State
levels, would significantly improve the timeliness and accuracy of forecasts. This is
essential if Federal and State policy and budgeting actions are to proceed in an orderly
way.
As can be seen in Chart 5, a change in trend occurred in FY 1989. The current Federal
estimate for FY 1992 Federal expenditures on Medicaid increased from $50 billion in
January 1990 to $65 billion in July 1991 (a 30 percent increase in estimates, or $15
billion, in 18 months). If greater attention were paid to Medicaid estimating at both the
Federal and State levels, much of this new trend should have been predictable much
earlier than it was.

Task Force Team members visited nine Sates accounting for almost half of projected
Medicaid spending for FY 1991 and 1992 (Alabama, California, Florida, Maryland,
Massachusetts, New York, Ohio, Pennsylvania, and Texas). All nine of these States used
provider taxes and refundable donations to help finance State costs and increase the
Federal share.
Mis-estimates in these States appear to be due primarily to changes in Federal or State
legislation and policies (including provider taxes and refundable donations) and Court
decisions (about two-thirds of the increase). Only about one-third of the mis-estimates
were attributable to problems in the States* estimating processes. Economic trends
appear to play a lesser role. The most significant reasons for misestimates in these
States were:
—

An unpredicted increase, beginning in 1988, in health care inflation;

—

Court cases, particularly “Boren Amendment” cases, that increase
reimbursement rates for hospitals and nursing homes; and

—

Significant growth in provider tax and refundable donation mechanisms
(about one-quarter of the total increase in estimates in the States visited).

N.B.

While only 27 States used provider tax and refundable donation mechanisms in
1990, it can be anticipated that virtually all States will likely move to use these
mechanisms in the near future if they continue to be allowable.

(4)

State Capabilities

States have access to a great deal of information on Medicaid costs. But State
capabilities to tap and analyze this information vary widely.
—

Some States have well qualified personnel and employ sophisticated estimating
models; others do not

—

States that link Medicaid estimating to their State budget processes appear to
produce more accurate estimates than those that do not.

—

Many States do not take reporting to the Federal Government on HCFA Form 25
seriously, and thus do not provide accurate, complete or timely estimates.

—

Many States do not provide the Federal Government with the assumptions used in

19
298-090 0 - 9 1 - 4

QL:3

making estimates. No distinction is made between baseline estimates and new
program estimates.
—

Technical problems include differences in fiscal years and State use of accrued
versus cash budgeting.

(5)

Federal Capabilities

There is no single entity responsible for Federal Medicaid estimating. HCFA Regional
Offices, the Medicaid Bureau, the HCFA Medicaid actuary, the HCFA Office of Budget
and Administration, the HHS Assistant Secretary for Management and Budget and OMB
are all involved, but currently no single entity is accountable and no full actuarial
analysis is made at the Federal level.
Other problems include:
—

Both the Medicaid Bureau and the HCFA Actuary lack sufficient qualified
professional staff — both to stay on top of new State program
developments and to provide professional judgments on the accuracy of
State estimates.

HCFA lacks detailed information on current State rules regarding
eligibility, reimbursement and coverage.

Medicaid State Plans and other useful information are often kept at HCFA
Regional Offices and not transmitted to the HCFA Central Office.
Regional Office staff are not trained in forecasting, and are thus not able
to analyze State estimates technically.

Although HCFA surveys the States quarterly, State responses are
voluntary and HCFA lacks precise knowledge of whether estimates of the
impacts of recent Federal legislation have been accurately included in
State estimates.

The HCFA Form 25 contains little useful information on why States
expect growth in program expenditures; the explanatory section of the
Form is frequently not completed, or completed superficially. Only a
small amount of the information collected quarterly from the States on the
Form is actually used for estimating or policy analysis purposes. The
Form is incapable of capturing the volatile aspects of Medicaid that now
drive increases in Federal expenditures; nor does it capture the reasons for
the changes.

—

HCFA provides little guidance, oversight or feedback regarding State
estimating of Medicaid costs. Some States have indicated they didn’t
know that HCFA cared about the accuracy of State estimates.

PRINCIPAL RECOMMENDATIONS
Management Recommendations

While a program as large, as varied, and as dynamic as Medicaid will always have
estimating errors, structurally much can be done to improve the accuracy of both Federal and
State estimates. Better estimates, however, have as much to do with a commitment to improve
Medicaid estimating as with projection methodologies or other technical issues.
Four management recommendations and one policy recommendation follow:
(1)

Medicaid Bureau Responsibility
The HCFA Medicaid Bureau (MB) should have full Federal responsibility and
accountability for managing the Medicaid program.

(2)

—

The MB should be in direct contact with the States to ensure that HCFA
has early knowledge of proposed and actual State program and estimating
changes.

—

The MB should provide the HCFA Actuary with the policy assumptions
lying behind program change estimates, based on its assessment of which
changes are likely to go into effect The HCFA Actuary should critically
appraise State estimates, the adequacy of information obtained by the MB,
and the impacts of Federal and State program changes. The Actuary
should recommend to the MB Federal adjustments to the State estimates.

—

The MB should have sufficient qualified staff to provide for
professionally qualified desk officers for major States and groups of
smaller States.

—

The Medicaid Actuary should have sufficient qualified staff to enable it to
provide critical appraisals of State estimates and recommend adjustments
thereto.

Improved Federal and State Estimates
State Program Information. The Medicaid Bureau should begin to maintain,
make available to the public, and possibly automate:

—

State-by-State inventories of baseline Medicaid program features and
proposed program changes. By October 31,1991.

—

Detailed extracts of State Plans and amendments, describing State
eligibility, coverage and reim bursem ent policies (distinguishing
mandatory and optional features). By October 31,1991.

—

Listings of potential Medicaid policy changes that will have budget
impacts (e.g., State or Federal policy changes under consideration,
including any allow able provider tax and refundable donation
mechanisms, expected reimbursement rate changes, and law suits that
might result in changed expenditures). By December 31,1991.

—

Specific, regularly updated reports on the status of Medicaid legislation in
each State legislature. By December 31,1991.

The MB should continuously track (between the submission of quarterly State
estimates) State administrative, legislative and judicial changes with a budgetary
impact.
State Estimates. The Medicaid Bureau should by October 31, 1991, maintain
for the 10 largest States separate State-by-State estimates of (i) current service
spending and (ii) costs of anticipated Federal and State policy and program
changes. The MB should have this system in place for all states by March 31,
1992. MB should work with the States to provide:
—

State baseline estimates of expenditures (assuming no policy changes).

—

Listings of assumptions underlying these baseline estimates on eligibility,
coverage, reimbursement, and any other key factors.

—

Listings of expected changes to baseline estimates.

Consideration should be given to automating this process.
HCFA Forecasting System. HCFA should initiate immediately the development
of a Medicaid budget forecasting system that provides State-level estimates for at
least key States. An estimating model should be in place by July 1992.
—

Federal projections might be developed for larger State programs, as well
as for States with a track record of unreliable estimates.

HCFA Reporting Forms. The MB should revise substantially its State budget

estimate reporting form (HCFA-25). In addition, HCFA needs to improve its
collections of data on actual Medicaid program expenditures; the current financial
management report (HCFA-64) and statistical report (HCFA-2082) are not
sufficiently timely or detailed to provide satisfactory support for historical
program analysis or the development of accurate budget estimates. The revised
forms should be available for use by February 1992.
—

The MB should consult with the States and decide what information is
critical and determine how best to get i t

—

The goal should be to collect critical information and reduce unnecessary
collections, so as to minimize burdens on the States.

(3)

A new Partnership with the States

The Medicaid Bureau should provide systematic and ongoing feedback to States
on the accuracy of State estimates and reinforce the importance of timely,
complete and accurate estimates.
—

HCFA should reward State officials who do a good job of estimating (e.g.,
public recognition, cash awards, and publication of exemplary State
m ethodologies and charts detailing the accuracy of State budget
estimates).

—

HCFA should explore disincentives to discourage State estimates that are
consistently late or exceed a specified error threshold

—

HCFA and the States should identify and disseminate “best practices” that
States might use in producing more accurate estimates.

—

HCFA, in conjunction with the States, should consider convening annual
conferences of officials responsible for preparing Medicaid forecasts to
exchange information on Medicaid estimates.

(4)

Implementation

The MB should (a) within 30 days submit to the HCFA Administrator a detailed
plan for implementation of the recommendations in the report and (b) report to
the HCFA Administrator on September 30, 1991, and each quarter thereafter, on
the progress in implementing the recommendations in the Report. The HCFA
Administrator should forward these progress reports to the Secretary of HHS and
the Director of OMB.

HCFA should report quarterly on its progress to the States.
HCFA should issue quarterly public reports on Medicaid expenditures and
estimates.

Policy Recommendation
The Task Force recommends that the Administration and Congress proceed
promptly with regulatory and legislative measures to restrict the use of provider tax and
refundable donation programs that, if more widely used, will both stretch the Medicaid
Program beyond its original intent and contribute to making Medicaid a health care
program that is Federally financed to a much greater degree. If such actions are not
taken, combined Federal and State program costs could exceed $200 billion by 1996.
Escalating increases in Medicaid program costs will also make Medicaid larger than
Medicare by 1995. (See Chart 6.)
—

HCFA should develop by July 31 a package of regulatory and legislative
reforms which would eliminate inappropriate use of provider taxes and
refundable donations.

Chart 1A
Percent Increase in State Estimates for FY91
Federal Medicaid Expenditures

Source: Health Care Financing Administration
Note: Chart reflects percent differences between State estimates on 11 /89 versus
State estimates 5/91 for Fiscal Year 1991.
25

Chart IB
Percent Increase in State Estimates For FY92
Federal Medicaid Expenditures

Source: Health Care Financing Administration
Note: Chart reflects percent differences between State estimates in 5/90 versus State estimates in
5/91 for Fiscal Year 1992.
26

C h art 1C

Increase in Total, Federal and State Medicaid Spending
(estim ated 1991 -1996 in creases o v e r 1990 levels)

Total M edicaid
Increase

Total Federal
Increase
Total State
Increase

Source: Office of Management and Budget
Note: The FY1990 levels from which the above totals increased were S72 billion for total
Medicaid, $41 billion for total Federal Medicaid, and $31 billion for total State Medicaid
spending.

Chart 2
Federal Medicaid Outlays, 1980-1992

1980

1986
Fiscal Year

Source: HCFA Actuary
Note: FY1991-1992 estimate if no action taken to constrain provider "donations“ or taxes.

Chart 3
Provider Tax and Refundable Donation Schemes
Increase The Effective Federal Medicaid Match

Federal Medicaid Match

70%

Source: Office of Management and Budget
29

Chart 4
Federal Medicaid Expenditures for Provider
Tax and Refundable Donation Schemes

Source: HCFA Actuary
Note: FY91-96 estimated.
30

Billion Dollars

Chart 5
Estimated vs. Actual Federal Medicaid
Outlays, 1987-1992

Source: HCFA Actuary
N o te Actuals for FY1991-1992 are unavaiable. FY1991-1992 estim ate if no action taken to
constrain provider "donations" or taxes.

Chart 6
Trends Project Medicaid Soon Will Be Larger Than
Medicare

Source: OMB
Note: FY1997-2005 projections reflect average grow th FY1990-1996

EXECUTIVE OFFICE OF THE PRESIDENT

OFFICE OF MANAGEMENT AND BUDGET
W A SH IN G TO N ,

TH E DIRECTO R

D .C .

20503

The following is the text of the letter transmitting
the fifth report on United States Costs in the
Persian Gulf Conflict and Foreign Contributions
to Offset Such Costs; July 15, 1991

July 15, 1991

Honorable Thomas S. Foley
Speaker of the House of Representatives
Washington, D.C.
20515
Dear Mr. Speaker:
Enclosed is the fifth report on United States Costs in the
Persian Gulf Conflict and Foreign Contributions to Offset Such
Costs, as required by Section 401 of P.L. 102-25.
This report
was prepared in consultation with the Secretary of Defense, the
Secretary of State, the Secretary of the Treasury, and other
appropriate government officials.
Previous reports have covered
the costs and contributions for the period beginning August 1,
1990, and ending on April 30, 1991, for costs, and May 31, 1991,
for contributions.
In accord with the legal requirement, this report provides
the following information:
o

the incremental costs associated with Operation Desert
Storm that were incurred during May 1991;

the cumulative total of such costs, by fiscal year, from
August 1, 1990, to May 31, 1991;

the costs that are nonrecurring costs, offset by in-kind
contributions, or offset by the realignment,
reprogramming, or transfer of funds appropriated for
activities unrelated to the Persian Gulf conflict;

the allocation of costs among the military departments,
the Defense Agencies of the Department of Defense, and
the Office of the Secretary of Defense by category —
airlift, sealift, personnel, personnel support, operating
support, fuel, procurement, and military construction;
and

the amount of contributions made to the United States by
each foreign country during June 1991, as well as the
cumulative total of such contributions.
The report
specifies the amount of cash payments pledged and
received, provides a description and value of in-kind
contributions pledged and received, and identifies
restrictions on the use of such contributions.

The costs reported to this point should be viewed as partial
and preliminary for reasons noted in the enclosure.
As required
by Section 401 of P.L. 102-25, a sixth report will be submitted
by August 15th.
In accord with the legal requirement, it will
cover incremental costs associated with Operation Desert Storm
that were incurred in June 1991, and foreign contributions for
July 1991.
Subsequent reports will be submitted by the 15th day
of each month, as required, and will revise preliminary reports
to reflect additional cost estimates or reestimates.
Respectfully yours,

Richard Darman
Director
Enclosure

IDENTICAL LETTER SENT TO HONORABLE J. DANFORTH QUAYLE
COPIES TO:
HONORABLE ROBERT C. BYRD, HONORABLE MARK 0. HATFIELD,
HONORABLE JAMIE L. WHITTEN, HONORABLE JOSEPH M. MCDADE,
HONORABLE DANIEL K. INOUYE, HONORABLE TED STEVENS,
HONORABLE JOHN P. MURTHA, HONORABLE SAM NUNN,
HONORABLE JOHN W. WARNER, HONORABLE LES ASPIN,
HONORABLE WILLIAM L. DICKINSON, HONORABLE JIM SASSER,
HONORABLE PETE V. DOMENICI, HONORABLE LEON E. PANETTA,
AND HONORABLE WILLIS D. GRADISON, JR.

UNITED STATES COSTS IN THE PERSIAN GULF CONFLICT AND
FOREIGN CONTRIBUTIONS TO OFFSET SUCH COSTS
Report #5: July 15, 1991
Section 401 of P.L. 102-25 requires a series of reports on
incremental costs associated with Operation Desert Storm and on
foreign contributions to offset such costs.
This is the fifth of
such reports.
As required by Section 401 of P.L. 102-25, it
covers costs incurred during May 1991 and contributions made
during June 1991.
Previous reports have covered the costs and
contributions for the period beginning August 1, 1990, and ending
on April 30, 1991, for costs and May 31, 1991, for contributions.
Costs
The costs covered in this and subsequent reports are full
incremental costs of Operation Desert Storm.
These are
additional costs resulting directly from the Persian Gulf crisis
(i.e., costs that would not otherwise have been incurred).
It
should be noted that only a portion of full incremental costs are
included in Defense supplemental appropriations.
These portions
are costs that require financing in fiscal year 1991 or fiscal
year 1992 and that are exempt from statutory Defense budget
ceilings.
Not included in fiscal year 1991 or fiscal year 1992
appropriations are items of full incremental costs such as August
- September 1990 costs and costs covered by in-kind contributions
from allies.
Table 1 summarizes preliminary estimates of Department of
Defense full incremental costs associated with Operation Desert
Storm from August 1, 1990, through May 31, 1991.
The cost
information is shown by the cost and financing categories
specified in Section 401 of P.L. 102-25.
Tables 2-9 provide more
detailed information by cost category.
Costs shown in this
report were developed by the Department of Defense and are based
on the most recent data available.
Through May 1991, costs of $42.2 billion were reported by
the Department of Defense. The costs reported so far are
preliminary.
This report includes an estimate of costs
identified to date of equipment repair, rehabilitation, and
maintenance caused by the high operating rates and combat use.
The report also includes some of the costs of phasedown of
operations and the return home of the deployed forces.
There are substantial costs that have not yet been reported.
These include equipment repair, rehabilitation, and restoration
that have not so far been identified, long-term benefit and

disability costs, and the costs of continuing operations in the
region. About 68,000 military personnel were in the region at
the end of May, and approximately 72,000 reservists were still on
active duty at that time.
Significant amounts of materiel,
equipment, ammunition and vehicles had not been shipped from
Southwest Asia at the end of May. Materiel still in theater
includes the large, heavy pieces of equipment which are costly
and time consuming to prepare and transport.
Combat aircraft
continue to fly in the region and the U.S. forces will continue
to remain in the region until all parties are satisfied with long
term security arrangements.
The costs through May plus the other
costs not yet reported are expected by the Department of Defense
to result in total incremental costs of over $61 billion.
Incremental Coast Guard costs of $3 million were incurred
during this reporting period, with cumulative costs of $26
million through May to support military operations in the Persian
Gulf.
Contributions
Section 401 of P.L. 102-25 requires that this report include
the amount of each country's contribution during the period
covered by the report, as well as the cumulative total of such
contributions.
Cash and in-kind contributions pledged and
received are to be specified.
Tables 10 and 11 list foreign contributions pledged in 1990
and 1991, respectively, and amounts received in June.
Cash and
in-kind contributions are separately specified.
As of July 12, 1991, foreign countries contributed
$8.0 billion of the $9.7 billion pledged in calendar year 1990,
and $36.5 billion of the $44.2 billion pledged in calendar year
1991.
Of the total $44.5 billion received, $39.1 billion was in
cash and $5.4 billion was in-kind assistance (including food,
fuel, water, building materials, transportation, and support
equipment). Table 12 provides further detail on in-kind
contributions.
Table 13 summarizes the current status of commitments and
contributions received through July 12, 1991.

Future Reports
As required by Section 401 of P.L. 102-25, the next report
will be submitted by August 15th.
In accord with the legal
requirement, it will cover incremental costs associated with
Operation Desërt Storm that were incurred in June 1991, and
foreign contributions for "July 1991.
Subsequent reports will be
submitted by the 15th day of each month, as required, and will
revise preliminary reports to reflect additional costs as they
are estimated or re-estimated.
List of Tables
Table 1 -

Summary, Incremental Costs Associated with Operation
Desert Storm

Table 2 -

Airlift, Incremental Costs Associated with Operation
Desert Storm

Table 3 -

Sealift, Incremental Costs Associated with Operation
Desert Storm

Table 4 -

Personnel, Incremental Costs Associated with Operation
Desert Storm

Table 5 -

Personnel Support, Incremental Costs Associated with
Operation Desert Storm

Table 6 -

Operating Support, Incremental Costs Associated with
Operation Desert Storm

Table 7 -

Fuel, Incremental Costs Associated with Operation
Desert Storm

Table 8 -

Procurement, Incremental Costs Associated with
Operation Desert Storm

Table 9 -

Military Construction, Incremental Costs Associated
with Operation Desert Storm

Table 10 - Foreign Contributions Pledged in 1990 to Offset U.S.
Costs
Table 11 - Foreign Contributions Pledged in 1991 to Offset U.S.
Costs
Table 12 - Description of In-kind Assistance Received to Offset
U.S. Costs as of June 30, 1991
Table 13 - Foreign Contributions Pledged in 1990 and 1991 to
Offset U.S. Costs

Table 1
SUMMARY 1/
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
Pre iminary Estimates
F Y 1990
FY 1991
Partial and
Preliminary
This period
Total
Aug 1990Aug - Sep
Oct - Apr
May
through May May 1991
412
1,725
0 ) Airlift
378
2,103
2,515
(2) Sealift

235

2,314

662

2,976

3,212

(3) Personnel

223

3,937

632

4,569

4,792

(4) Personnel Support

352

4,822

178

5,000

5,352

(5) Operating Support

1,210

11,680

278

11,958

13,168

(6) Fuel

626

3,263

372

3,635

4,261

(7) Procurement

129

8,272

8,339

8,468

11
3,197

415
36,429

2,567

415
38,996

426
42,194 21

201

11,855

662

12,516

12,718

(8) Military Construction
Total
Nonrecurring costs
included above 3/

1/
21

3/
4/

Costs offset by:
In-kind contributions
225
4,886
188
5,073
5,298 .
Realignment 4/
913
59
59
972
Data was compiled by OMB. Source of data — Department of Defense. This report adjusts earlier
estimates to reflect more complete accounting information.
The costs reported so far are preliminary. This report includes an estimate of costs identified to date
of equipment repair, rehabilitation, and maintenance caused by the high operating rates and combat
use. Additional costs for these categories will be reported as more information becomes available.
The report also includes some of the costs of phasedown of operations and the return home of the
deployed forces. However* certain long-term benefit and disability costs have not been reflected in
the estimates. Those costs will be reported in later reports. The costs through May plus the other
costs not yet reported are expected by the Department of Defense to result in total incremental costs
of slightly more than $61 billion.
Nonrecurring costs include investment costs associated with procurement and Military Construction,
as well as other one-time costs such as the activation of the Ready Reserve Force ships.
This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

Table 2
AIRLIFT
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
______________________ Preliminary Estimates___________________ ___
FY 1991
Partial and
F Y 1990
Preliminary
Total
Aug 1990This period
through May May 1991
May
Aug - Sep Oct - Apr
Airlift
Army
Navy
Air Force
Intelligence Agencies
Special Operations Command

Total

207
85
114

1,131
754
595
1
36

1,725

378

2,103

2,515

583

270

853

96
6

278
84
10

412

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 2/

924
668
480
1
30

646
585
470
1
24

7
6

1/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

This category includes costs related to the transportation by air of personnel, equipment and
supplies.
During this period over 1,300 redeployment missions were flown, returning over 104,000 people and
39,000 short tons of cargo to the U.S. and Europe. In addition, over 1,100 other missions were flown to
carry supplies to U.S. forces still in the region.

Table 3
SEALIFT
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
______________________ Preliminary Estimates______________________
Partial and
FY 1990
FY 1991
Preliminary
This period
Total
Aug 1990 through May May 1991
May
Aug - Sep Oct - Apr
Sealift
Army
Navy
Air Force
Defense Logistics Agency
Special Operations Command

Total

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 1/

574
45
42
2

1,767
337
194
14
2

2,340
382
236
16
2

2,463
481
248
16
4

235

2,314

662

2,976

3,212

694

229

924

981

2
2

121

127

129
2

123
99
12

1/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

This category includes costs related to the transportation by sea of personnel, equipment and
supplies.
The previous October-April estimate has been reduced by $765 million, of which $442 million has
been shifted to the operating support category. The balance represents refinement of previous
estimates.
During this period a total of 64 ships (25 of them foreign flag ships) made redeployment
deliveries. These vessels shipped over 282,000 short tons of dry cargo back to the U.S. and Europe.
In addition, 170,000 short tons of petroleum products were transported to sustain U.S. forces still in
the region.

Table 4
PERSONNEL
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
______________________ Preliminary Estimates__________________ ____
Partial and
FY 1991
F Y 1990
Preliminary
Total
Aug 1990 This period
through May May 1991
May
Aug - Sep Oct - Apr
Personnel
Army
Navy
Air Force

Total

126
22
75

2,374
826
737

333
163
136

2,707
989
873

2,833
1,011
948

223

3,937

632

4,569

4,792

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 1/

1/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

This category includes pay and allowances of members of the reserve components of the Armed
Forces called or ordered to active duty and the increased pay and allowances of members of the regular
components of the Armed Forces incurred because of deployment in connection with Operation Desert
Storm.
The previous October-April estimate has been reduced by $74 million in additional savings in Reserve
component accounts.
At the end of May about 72,000 Reservists were still on active duty and about 68,000 people were still
in theater.

Table 5
PERSONNEL SUPPORT
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
______________________ Preliminary Estimates_____________ _____ _
Partial and
FY 1991
FY 1990
Preliminary
Total
Aug 1990This period
through May May 1991
May
Aug - Sep Oct - Apr
Personnel Support
Army
Navy
Air Force
Intelligence Agencies
Defense Logistics Agency
Defense Mapping Agency
Special Operations Command
Office of the Secretary of Defense

Total

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 2/

3,757
807
392
9
15
4
8
9

3,966
911
415
11
27
4
9
9

178

5,000

5,352

994

1,038

1,042

1,487

1,574

1,601
3

3,621
772
386
9
15
4
7
9

136
35
6
1
0
0
0
0

352

4,822

28
3

209
104
24
2
12
2

1/
1/
1/
1/

1/ Costs are less than $500 thousand.
2/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

This category includes subsistence, uniforms and medical costs.
The previous October-April estimate has been increased by $108 million primarily to account for
CHAMPUS costs.
In May, major costs were for subsistence and medical support.

Table 6
OPERATING SUPPORT
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
_____________ Preliminary Estimates______________________
FY 1990
FY 1991
Partial and
Preliminary
This period
Total
Aug 1990 Aug - Sep Oct - Apr
May
through May May 1991
Ooeratina Support
Army
Navy
Air Force
Intelligence Agencies
Special Operations Command
Defense Communications Agency
Defense Mapping Agency
Defense Nuclear Agency
Office of the Secretary of Defense

Total

896
223
68
15
8

1,210

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 21

167
698

6,493
3,179
1,930
1
26
1
46
2
3

72
27
177

11,680

6,565
3,205
2,107
1
26
1
47
2
3

7,461
3,428
2,175
1
41
1
55
2
3

278

11,958

13,168

852

903

1,576
12

1,598
12

1,765
710

1/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

This category includes equipment support costs, costs associated with increased operational
tempo, spare parts, stock fund purchases, communications, and equipment maintenance.

The previous October-April estimate has been increased by $226 million. This increase is the net
effect of changes in the category in which costs are reported. Repair, rehabilitation, and maintenance
costs of sealift assets are now reported under operating support while certain incremental in-country
fuel costs previously reported in this category are now reported under the fuel category.
Costs reported during this period were primarily equipment maintenance and in-country operating
costs.

Table 7
FUEL
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
______________________ Preliminary Estimates ______________ _____
Partial and
FY 1991
FY 1990
Preliminary
Aug 1990Total
This period
through May May 1991
May
Aug - Sep Oct - Apr
Fuel
Army
Navy
Air Force
Special Operations Command
Defense Logistics Agency

Total

115
1,135
2,005
8

5
95
270
1

121
1,230
2,275
9

130
1,249
2,412
9
460

626

3,263

372

3,635

4,261

21
60

1,072

1,135

1,156
60

10
19
137
460

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 1/

1/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.

This category includes the additional fuel required for higher operating tempo and for airlift and
sealift transportation of personnel and equipment as well as for the higher prices for fuel during the
period.
Costs reported during this period were about equally divided between higher operating tempo and
higher prices.

Table 8
PROCUREMENT
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
______________________ Preliminary Estimates__________________ ____
FY 1991
Partial and
F Y 1990
Preliminary
Total
Aug 1990 This period
through May May 1991
May
Aug - Sep Oct - Apr
Procurement
Army
Navy
Air Force
Intelligence Agencies
Defense Communications Agency
Special Operations Command
Defense Logistics Agency
Defense Mapping Agency
Defense Nuclear Agency
Defense Systems Project Office
Office of the Secretary of Defense

Total

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 21

49
47
32
1

2,307
2,503
3,324
13
0
99
4
1
0
1
21

129

8,272

129

8,272

119

155
47

2,318
2,503
3,381
13
0
99
4
1
0
1
21

2,367
2,550
3,413
13
0 1/
99
4
1
0 1/
1
21

8,339

8,468

8,339

8,468

155
47

155
165

10
57

1/ Costs are less than $500 thousand.
2/ This includes the realignment, reprogramming, or transfer of funds appropriated for activities
unrelated to the Persian Gulf conflict.
This category includes ammunition, weapon systems improvements and upgrades, and equipment
purchases.
The previous October-April estimates has been increased by $29 million to reflect refinement of costs
for special purpose equipment to facilitate operations in Southwest Asia and a revision of costs for Army
vehicle losses. Costs for May primarily reflect replacement of components on Air Force F-117 aircraft.

Table 9
MILITARY CONSTRUCTION
INCREMENTAL COSTS ASSOCIATED WITH OPERATION DESERT STORM
Incurred by the Department of Defense
From August 1,1990 Through May 31,1991
($ in millions)
_______ _______________Preliminary Estimates__________
.
FY 1990
FY 1991
Partial and
Preliminary
This period
Aug 1990Total
through
May
May
Aug - Sep Oct - Apr
May 1991
Militarv Construction
414
Army
7
414
421
Navy
4
2
Air Force
2
5

Total

Nonrecurring costs included above
Costs offset by:
In-kind contributions
Realignment 2/

415

426

415

426

397

397
11

1/ Costs are less than $500 thousand.
21 This includes the realignment, reprogramming, or transfer of funds appropriated for activities

unrelated to the Persian Gulf conflict.
This category includes the cost of constructing temporary billets for troops, and administrative and
supply and maintenance facilities.
There were no new costs reported in this category. There was a smart decrease in the previously
reported October-April costs due to a reestimate of certain in-kind costs by CENTCOM.

Table 10
FOREIGN CONTRIBUTIONS PLEDGED IN 1990 TO OFFSET U.S. COSTS 1/
($ in millions)

Commitments
Cash In-kind Total

Receipts through
July 12,1991
Cash In-kind
Total

Receipts in
June
Cash In-kind Total

Future
Receipts

GCC STATES
5.861
SAUDI ARABIA 2,474
KUWAIT
2,500
UAE
887

984
865
6
113

6.845
3,339
2,506
1,000

4.256
886
2,500
870

984
865
6
113

5.240
1,751
2,506
983

1.605
1,588 21

GERMANY 4/

260

812

1,072

272

782

1,054

18 5/

JAPAN 4/

961

779

1,740

961

637

1,598

142 6/

BAHRAIN

OMAN/QATAR

DENMARK

2,608

9,740

2,436

7,975

KOREA

TOTAL

7,132

5,539

17 3/

1,765

1/ Data was compiled by OMB. Sources of data: commitments — Defense, State, and Treasury;
cash received — Treasury; receipts and value of in-kind assistance — Defense.
21 This is reimbursement for enroute transportation through December for the second deployment and for

U.S. in-theater expenses for food, building materials, fuel, and support. Bills for reimbursement have
been forwarded to Saudi Arabia.
3/ This is undergoing a final accounting.
4/ 1990 cash contributions were for transportation and associated costs.
5/ An accounting of in-kind assistance accepted by U.S. forces is under way.
6/ Resolution of balance is under discussion and should be resolved shortly.

Table 11
FOREIGN CONTRIBUTIONS PLEDGED IN 1991 TO OFFSET U.S. COSTS 1/
($ in millions)
Receipts in
June
Cash In-kind Total

Commitments 21
In-kind Total
Cash

2.941 22.516
2,828 10,128
9,301
26
3,087
87

5,500

8,332

2.941 30.087
2,828 13,500
26 13,500
87 3,087

GERMANY

5,500

JAPAN 3/

8,332 4/
100

175

Future
Receipts

19.575
7,300
9,275
3,000

27.146
GCC STATES
SAUDI ARABIA 10,672
13,474
KUWAIT
3,000
UAE

KOREA

Receipts through
July 12,1991
Cash In-kind Total

275 5/

700
700

178
168
8
2

878
168
708
2

100

140

DENMARK

LUXEMBOURG

OTHER

| TOTAL

41,082

3,130 44,212

740

183

921

33,511

2,994

36,505

7.571
3,372
4,199

136 51

7,707

1/ Data was compiled by OMB. Sources of data: commitments — Defense, State, and Treasury;

2/
3/
4/

cash received — Treasury; receipts and value of in-kind assistance — Defense.
1991 commitments in most instances did not distinguish between cash and in-kind. The commitment
shown above reflects actual in-kind assistance received unless specific information is available.
1991 cash contributions are for logistics and related support.
The previously reported commitment has been reduced by $668 million, which has been paid to other
coalition partners. A difference of understanding arose with respect to the Japanese contribution for
1991. On July 11th the President met with Prime Minister Kaifu and concluded that the difference in
understanding was reasonable and Japan's payments were made in good faith with the agreed
commitment. The President thereupon stated that 'any differences that might have existed. . . have
been resolved.'
The previously reported commitment has been corrected by a reduction of $30 million, which Korea paid
to the U.K. The revision reflects an understanding between the United States and the Government of
Korea that the terms of the Korean commitment allow this $30 million contribution to other members of
the multinational forces. Future receipts are for in-kind assistance consisting of replenishment stocks for
which delivery is now being arranged and transportation assistance, which is being drawn down as
needed by U.S. forces.

Table 12
DESCRIPTION OF IN-KIND ASSISTANCE RECEIVED
TO OFFSET U.S. COSTS AS OF JUNE 30,1991
($ In millions)

Calendar Year
1990

Calendar Year
1991

865

2,828

UNITED ARAB EMIRATES............................................................
Fuel, food and water, security services, construction
equipment and civilian labor.

113

GERMANY..........................................................................
Vehicles including cargo trucks, water trailers, buses
and ambulances; generators; radios; portable showers;
protective masks, and chemical sensing vehicles

782

JAPAN .....................................................................
Construction and engineering support, vehicles, electronic
data processing, telephone services, medical equipment,
and transportation.

637

SAUDI ARABIA..........................................................................
Host nation support including food, fuel, housing, building
materials, transportation and port handling services.
KUWAIT...............................................................................
Transportation

KOREA............. ............................................................
Transportation

BAHRAIN.........................................................................
Medical supplies, food and water

•<

OMAN/QATAR....................................................................
Oil, telephones, food and water

DENMARK..............................................................................
Transportation

LUXEMBOURG................................................................
Transportation

OTHER.....................................................................
Transportation
TOTAL

2
2,436

2,994

Table 13
FOREIGN CONTRIBUTIONS PLEDGED IN 1990 AND 1991 TO OFFSET U.S. COSTS
COMMITMENTS AND RECEIPTS THROUGH JULY 12,1991 1/
($ in millions)

Commitments
1990
1991
Total

Receipts 2/
Cash
In-kind
Total

Future
Receipts

GCC STATES
SAUDI ARABIA
KUWAIT
UAE

6.845
3,339
2,506
1,000

30.087
13,500
13,500
3,087

36.932
16,839
16,006
4,087

23.831
8,186
11,775
3,870

3.925
3,693
32
200

27.756
11,879
11,807
4,070

9.176
4,960
4,199
17 3/

GERMANY

1,072

5,500

6,572

5,772

782

6,554

18 4/

JAPAN

1,740

8,332

10,072

9,293

637

9,930

142

KOREA

275

355

150

220

136

OTHER

9,740

44,212

53,952

39,050

5,431

44,481

TOTAL

9,471

1/ Data was compiled by OMB. Sources of data: commitments — Defense, State, and Treasury;
cash received — Treasury; receipts and value of in-kind assistance — Defense.
2/

Cash receipts are as of July 12,1991. In-kind assistance is as of June 30,1991.

3/ This is undergoing a final accounting.
4/ An accounting of in-kind assistance accepted by U.S. forces is under way.

Table 1: MID-SESSION REVIEW: OUTLAYS F O R M A N D A T O R Y A N D RELATED P R O G R A M S
U N D E R CURRENT LAW
(In billions of dollars)
1991

1992

1993

1994

M an d ato ry p ro g ram s:
H um an resources programs:
Education, training, employment, and social services.
H ealth.................................................................................
-Medicare.............................................................................
Income security..................................................................
Social Security..................................................................
Veterans benefits and services.......................................
Total, m andatory hum an resources program s.................

12.1
56.6
102.4
147.4
266.2
17.8
602.4

13.1
69.5
114.8
157.3
284.0
18.5
657.3

13.1
81.7
126.4
163.8
301.3
19.0
705.3

O ther m andatory programs:
International affairs.........................................................
E nergy................................................................................
A griculture.........................................................................
Commerce and housing cred it........................................
Ju stic e ................................................................................
G eneral governm ent.........................................................
O ther functions.................................................................
Total, other m andatory program s......................................

-1.4
-1.8
12.6
87.9
0.3
0.2
0.3
98.2

-1.8
-0.8
12.8
120.9
0.2
1.5
0.1
132.9

-2 .2
-0.6
13.2
53.7
0.3
1.0
-0.1

Total, m andatory program s.........................................

700.6

790.1

770.5

N et in te re st...............................................................................
U ndistributed offsetting receipts...........................................

194.9
-39.0

205.0
-39.1

220.7
-40.9

Total, outlays for m andatory and related program s under
current law ............................................................................

856.5

956.1

950.3

938.2

65.2

12.0
96.6
140.6
173.6
318.3
20.9

1995

1996

762.0

11.6
110.9
156.7
181.7
335.7
19.8
816.6

7.6
126.2
176.3
188.8
353.6
18.7
871.2

-3.0
-0.4
12.1
-21.7
0.3
0.7
-0.4
-12.5

-3.3
-1.3
10.3
-42.3
0.3
0.8
-0 .3
-35.7

-3.3
-2.2
10.3
-35.6
1.0
1.1
-0.3
-29.1

749.6

780.8

842.1

231.2
-42.6

237.9
-43.9

244.4
-45.6

974.8

1,040.9

ox
to

Table 2: MID-SESSION REVIEW: ESTIMATED
SPENDING F R O M E N D OF 1992 BALANCES
OF B U D G E T AUTHORITY: N O N M A N D A T O R Y
PROGRAMS
(In billions of dollars)
Total
Total balances, end of 1992.......................................

619.1

Spending from 1992 balances in:
1993............................................................................
1994............................................................................
1995............................................................................
1996............................................................................
E xpiring balances, 1993 through 1996....................
Unexpended balances at the end of 1996................

236.8
123.4
78.4
54.5
—

126.0

Table 3: MID-SESSION REVIEW: RECEIPTS B Y M A J O R SOURCE
(In billions of dollars)
Actual
1990

February E stim ates
1991

1992

1993

1994

C urrent E stim ates
1995

1996

1991

1992

1993

1994

1995

1996

Individual income ta x es.........
Corporation income ta x e s.....
Social insurance taxes and
contributions.........................
O n-budget.............................
Off-budget.............................
Excise ta x e s .............................
E state and gift ta x es..............
Customs duties and fees.......
M iscellaneous receipts............
Total, receipts...........................

466.9
93.5

492.6
95.9

529.5
101.9

572.0
109.0

632.9
120.6

688.9
130.0

742.1
138.3

481.9
98.5

518.2
98.7

560.5
104.9

612.3
114.6

659.1
123.7

707.0
133.4

380.0
(98.4)
(281.7)
35.3
11.5
16.7
27.3
1,031.3

402.0
(103.7)
(298.3)
44.8
12.2
17.7
26.2
1,091.4

429.4
(114.1)
(315.3)
47.8
13.3
19.3
23.9
1,165.0

463.8
(125.1)
(338.7)
50.1
14.1
20.8
22.8
1,252.7

501.0
(135.5)
(365.5)
52.0
13.7
22.0
23.2
1,365.3

534.1
(144.2)
(389.8)
53.6
14.6
22.7
23.5
1,467.3

568.5
(151.3)
(417.2)
47.8
15.7
23.9
24.5
1,560.7

395.1
(102.1)
(293.0)
42.3
11.5
17.0
22.4
1,068.7

427.2
(113.7)
(313.5)
46.6
12.5
18.7
23.6
1,145.5

461.3
(124.0)
(337.3)
49.1
13.6
20.8
23.0
1,233.3

497.4
(134.6)
(362.8)
50.8
13.5
22.4
23.3
1,334.3

530.3
(143.3)
(387.0)
52.2
14.6
23.7
23.6
1,427.1

564.9
(150.5)
(414.4)
46.4
15.8
24.9
24.6
1,517.0

ADDENDUM
On-budget.................................
Off-budget.................................

(749.7)
(281.7)

(793.2)
(298.3)

(849.8)
(315.3)

(914.0)
(338.7)

(999.8)
(365.5)

(1,077.5)
(389.8)

(1,143.5)
(417.2)

(775.7)
(293.0)

(832.0)
(313.5)

(895.9)
(337.3)

(971.5)
(362.8)

(1,040.1)
(387.0)

(1,102.6)
(414.4)

Table 4: MID-SESSION REVIEW: OUTLAYS BY CATEGORY
(In billions of dollars)
Actual
1990
D isc re tio n a ry :
Defense 1..................................
In tern atio n al...........................
D om estic..................................
Subtotal, discretionary..........
M andatory...................................
A sset sales and prepaym ents...
Foreign contributions for D esert
Shield/D esert Storm ...............
N et in te re st.................................
O ther undistributed offsetting
receipts.....................................
Total, o u tlay s..............................

C urrent E stim ates

February E stim ates
1991

1992

1993

1994

1995

1996

1991

1992

1993

1994

1995

1996

293.3
20.4
223.2
536.9
746.7
—*

287.6
21.5
228.9
538.0
713.8
—*

289.2
21.8
231.7
542.7
755.8
—*

293.8
22.0
238.5
554.2
819.7
—*

322.5
19.8
200.5
542.8
700.5
-0.5

312.1
19.7
212.4
544.2
783.5
- 0.1

296.0
20.5
223.4
539.9
760.9
—*

288.9
21.5
228.8
539.2
740.1
_*

289.9
21.8
231.7
543.4
769.3

294.2
22.0
238.4
554.5
830.5

206.3

—
212.0

—
215.5

—
213.8

—
211.0

-48.2
195.3

—
205.6

—
219.3

—
226.9

—
229.5

—
230.9

-39.1
1,409.6

-39.5
1,445.9

-41.4
1,454.2

-40.2
1,427.1

-42.0
1,470.3

-44.0
1,540.8

-39.0
1,350.9

-39.3
1,493.8

-41.2
1,478.9

-39.8
1,466.4

-41.4
1,500.7

-43.3
1,572.5

303.9
20.0
170.2

315.1
20.1
188.1

291.4
34.0
197.4

291.5
22.6
201.5

292.5
22.1
202.7

295.7
22.3
205.5

298.3
22.7
214.0

332.3
21.3
188.6

291.3
34.0
197.4

291.4
22.6
201.6

292.5
22.1
202.7

295.7
22.3
205.5

298.3
22.7
214.0

494.2

523.4

522.7

515.6

517.3

523.6

535.0

542.2

522.8

515.7

517.3

523.6

535.0

322.8
18.7
199.8
541.3
725.8
-0.5

300.4
19.6
212.0
532.1
747.1
- 0.1

184.2

-15.0
197.0

-36.6
1,251.7

300.1
18.3
182.5
500.8
603.4
- 0.1
—

—

ADDENDUM
B u d g et a u th o rity fo r d isc re tio n a ry p ro g ram s:
Defense 1..................................
In tern atio n al...........................
D om estic..................................
T otal, d isc re tio n a ry b u d g et
au th o rity ..................................

1 February estim ates include D esert Shield/Desert Storm placeholder.

Table 5: MID-SESSION REVIEW: OUTLAYS BY FUNCTION
(In billions of dollars)
Actual
1990
N ational defense......................................
Defense—M ilitary................................
O ther......................................................
International affairs................................
G eneral science, space, and technology
E nergy.......................................................
N atural resources and environm ent....
A griculture................................................
Commerce and housing cred it...............
O n-budget.............................................
Off-budget.............................................
T ransportation.........................................
Community and regional developm ent.
Education, training, employment and
social services.......................................
H ealth ........................................................
M edicare....................................................
Income security........................................
Social security..........................................
O n-budget.............................................
O ff-budget.............................................
V eterans benefits and services..............
A dm inistration of ju stic e .......................
G eneral governm ent................................
N et in te re st..............................................
O n-budget.............................................
O ff-budget.............................................

C urrent E stim ates

February E stim ates
1991

1992

1993

1994

1995

1996

1991

1992

1993

1994

1995

1996

299.3
(289.8)
(9.6)
13.8
14.4
2.4
17.1
12.0
67.1
(65.5)
(1.6)
29.5
8.5

298.9
(287.5)
(11.5)
17.0
15.8
2.6
18.8
15.9
119.5
(119.4)
(0.1)
31.5
7.7

295.2
(283.0)
(12.2)
17.8
17.5
3.7
19.5
15.3
92.8
(93.9)
(-1.1)
32.7
6.5

292.0
(279.1)
(12.8)
18.3
19.1
4.8
20.0
14.2
50.4
(49.4)
(1.0)
34.7
5.9

286.7
(273.3)
(13.4)
18.5
20.9
5.0
20.1
13.5
-32.8
(-33.5)
(0.7)
35.4
5.6

288.6
(274.6)
(14.0)
18.5
22.4
4.0
19.6
12.1
-37.7
(-38.1)
(0.5)
35.5
5.5

293.2
(278.5)
(14.7)
18.6
23.9
3.4
18.9
12.6
-26.8
(-26.1)
(-0.7)
37.1
5.4

273.6
(262.2)
(11.5)
18.0
15.8
2.6
18.9
15.7
91.5
(91.5)
(0.1)
31.5
8.0

311.5
(299.3)
(12.2)
17.9
17.4
3.7
19.6
16.0
122.7
(123.8)
32.8
6.7

295.4
(282.6)
(12.8)
18.3
19.1
4.8
20.0
16.4
55.2
(54.2)
(1.0)
34.7
6.1

288.3
(274.9)
(13.4)
18.5
20.9
5.0
20.1
15.3
-20.1
(-20.8)
(0.7)
35.4
5.6

289.3
(275.3)
(14.0)
18.5
22.4
4.0
19.6
13.5
-40.5
(-41.0)
(0.5)
35.5
5.5

293.6
(278.9)
(14.7)
18.6
23.9
3.4
18.9
13.8
-34.3
(-33.6)
(-0.7)
37.1
5.4

38.5
57.7
98.1
147.3
248.6
(3.6)
(245.0)
29.1
10.0
10.7
184.2
(200.2)
(-16.0)

42.8
71.2
104.4
173.2
269.0
(5.1)
(263.8)
31.5
12.6
11.2
197.0
(217.2)
(-20.2)

45.5
81.3
113.7
184.8
288.6
(5.8)
(282.8)
33.0
14.5
13.2
206.3
(230.1)
(-23.7)

46.0
91.3
124.6
194.1
306.5
(6.3)
(300.2)
33.9
15.2
14.1
212.0
(240.1)
(-28.0)

45.1
102.0
138.5
204.8
323.1
(6.7)
(316.4)
36.6
15.4
14.2
215.5
(248.2)
(-32.8)

45.0
112.9
154.5
215.2
339.6
(7.2)
(332.5)
36.1
15.8
13.4
213.8
(252.1)
(-38.3)

40.9
125.2
174.6
223.7
356.6
(7.7)
(348.9)
35.7
17.1
14.2
211.0
(255.6)
(-44.6)

42.6
73.4
104.9
174.0
268.5
(5.2)
(263.3)
31.8
12.6
11.3
195.3
(215.9)
(-20.7)

45.4
86.9
114.3
186.3
286.6
(5.8)
(280.8)
33.2
14.5
13.2
205.6
(229.5)
(-23.9)

46.0
99.9
124.7
194.8
303.9
(6.2)
(297.7)
34.1
15.2
14.1
219.3
(247.9)
(-28.6)

45.1
115.0
137.8
206.4
321.1
(6.7)
(314.4)
36.4
15.4
14.2
226.9
(260.4)
(-33.5)

45.0
129.6
153.0
216.3
338.4
(7.1)
(331.3)
36.0
15.8
13.4
229.5
(268.4)
(-39.0)

40.9
144.9
171.8
224.5
356.2
(7.6)
(348.6)
35.6
17.1
14.2
230.9
(276.0)
(-45.1)

A llow ances:
Proposed agency contributions for
PHS retirem en t................................
D esert Shield/D esert Storm placeh o ld er1..............................................
Total, allow ances..................................
U ndistributed offsetting receipts...........
O n-budget.............................................
Off-budget.................... .........................
Total, o u tlay s....................................

0.0
-36.6
(-31.0)
(-5.6)
1,251.7

8.2
8.2
-39.1
(-33.3)
(-5.8)
1,409.6

ADDENDUM
O n-budget..................................................
Off-budget.................................................

1,026.6
225.1

1,171.7
237.9

—

0.1

—

0.1

0.0
-39.0
(-33.2)
(-5.8)
1,350.9

0.1
-40.6
(-34.5)
(-6.1)
1,493.8

0.1
-43.5
(-36.9)
(-6.6)
1,478.9

0.1
-41.0
(-33.9)
(-7.1)
1,466.4

—
0.1
-44.2
(-36.5)
(-7.6)
1,500.7

—
0.1
-44.2
(-35.9)
(-«.3)
1,572.5

1,183.8
1,194.2
1,187.8
1,150.2
1,246.1
1,114.0
286.5
294.7
236.9
251.7
266.4
276.8
1 Current estimates allocate Desert Storm/Desert Shield spending and related foreign contributions by fonction.

1,244.1
249.7

1,215.3
263.6

1,191.9
274.5

1,215.6
285.2

1,278.0
294.5

—

4.6
4.7
-40.8
(-34.5)
(-«•2)
1,445.9

0.8
0.9
-43.7
(-36.9)
(-6.8)
1,454.2

0.4
0.5
-41.4
(-34.0)
(-7.4)
1,427.1

—

0.1
-44.8
(-36.6)
(-8.1)
1,470.3

—

0.1
-44.9
(-36.0)
(-8.9)
1,540.8

—

Table 6: MID-SESSION REVIEW: FEDERAL GOVERNMENT FINANCING AND DEBT

(In billions of dollars)

o
o
<
n
50
z
3
ra
z

E stim ates
A ctual 1990

F in an c in g :
Surplus or deficit (-)........................................................................................
(O n-budget)....................................................................................................
(Off-budget)....................................................................................................
M eans of financing other th an borrowing from th e public:
Decrease or increase (-) in Treasury operating cash balance................
Increase or decrease (-) in:
Checks outstanding, etc.1.........................................................................
Deposit fund balances..............................................................................
Seigniorage on coins.....................................................................................
C redit financing account balances:
Increase or decrease (-) in guaranteed loan financing accounts......
Increase (-) or decrease in direct financing accounts........................
Total, m eans of financing other th an borrowing from the public.............
Total, requirem ents for borrowing from the public.....................................
Reclassification of d eb t2..............................................................................
Change in debt held by the public3..............................................................

•-3

f0
50
M
z
H3
M
z
cn

o
►o
M

o
to
CO
CO

0
1

D ebt O u tsta n d in g , E n d o f Y ear:
Gross Federal debt:
Debt issued by Treasury 3............................................................................
Debt issued by other agencies....................................................................
Total, gross Federal d eb t3...............................................................................
Held by:
Government accounts...................................................................................
The public 3....................................................................................................

o
CO
o
lO

D ebt S u b ject to S ta tu to ry L im itatio n , E n d o f Y ear:
Debt issued by Treasury 3...............................................................................
Deduct (-): Treasury debt not subject to lim itation 4 ................................
Agency debt subject to lim itation..................................................................
U nam ortized discount or premium (-) on Treasury notes and bonds other
than zero-coupon bonds............................................................. .................
Total, debt subject to statutory lim itatio n 5 .....................................................

O
r
cn

-220.4
(-277.0)
(56.6)

-282.2
(-338.3)
(56.1)

-348.3
M 12.1)
(63.8)

1994

1993

1992

1991

1990

1995

-245.7
(-318.5)
(72.8)

-132.1
(-220.4)
(88.3)

-73.6
(-175.4)
(101.8)

-55.5
(-175.4)
(119.9)

—

0.8

10.2

-0.1
-0.9
0.5

1.1
-0.9
0.5

3.4
-0.8
0.5

—
-1.2
0.5

—
—
0.5

—
—
10.9
-271.3

3.7
-4.0
-1.0
-246.7
-2.1
248.8

2.3
-2 .9
-0.1
-132.2
—
132.2

0.3
-3.3
-2.5
-76.1
—
76.1

-0 .4
-3.3
-3.2
-58.7
—
58.7

—

220.1

271.3

3.4
-3.4
3.1
-345.2
—
345.2

3,173.5
32.8
3,206.3

3,557.6
19.9
3,577.5

4,024.1
23.8
4,047.9

4,408.1
28.5
4,436.6

4,702.9
25.1
4,728.0

4,962.7
22.6
4,985.3

5,215.1
22.4
5,237.5

795.9
2,410.4

895.8
2,681.7

1,020.9
3,026.9

1,160.9
3,275.7

1,320.2
3,407.9

1,501.3
3,484.0

1,694.8
3,542.7

3,173.5
-15.6
0.4

3,557.6
-15.6
0.4

4,024.1
-15.6
0.3

4,408.1
-15.6
0.3

4,702.9
-15.6
0.3

4,962.7
-15.6
0.3

5,215.1
-15.6
0.3

3.0
3,161.2

3.3
3,545.8

3.3
4,012.1

3.3
4,396.1

3.3
4,691.0

3.3
4,950.7

3.3
5,203.1

—

—
0.3
-220.1
—

—

*$50 m illion or less.
1 Besides checks outstanding, includes accrued in terest payable on Treasury debt, m iscellaneous liability accounts, allocations of special drawing rights, and, as an offset, cash
and m onetaiy assets other than the Treasury operating cash balance, miscellaneous asset accounts, and profit on sale of gold.
2 The F arm Credit System Financial A ssistance Corporation is estim ated to be reclassified from a Government-sponsored enterprise to a Federal agency as of October 1, 1992,
and its debt is accordingly reclassified as Federal agency debt.
3 Treasury securities held by the public are m easured a t accrual value (i.e., sales price plus am ortized discount or less am ortized premium).
4 Consists prim arily of Federal Financing Bank debt.
5 The statutory debt lim it is $4,145 billion.

Department of the Treasury

• Washington, D.c. • Telephone 566-2041

FOR IMMEDIATE RELEASE
AUGUST l| 1991

CONTACT:

Barbara Clay
202-566-5252

TREASURY AMENDS LIST OF LIBYAN AGENTS
The Treasury Department today added 12 companies and 21
individuals to its list of agents of the Government of Libya.
The action is part of ongoing Treasury efforts to enforce the
U.S. economic embargo against Libya.
In announcing today's action, R. Richard Newcomb, Director of
Treasury|s Office of Foreign Assets Control (OFAC), said, "The
recent Libyan economic expansion into Western Europe increases
Muammar Qadhafi's ability to promote and finance terrorist
activity.
The U.S. attitude cannot be 'business as usual'."
The 12 companies include three European affiliates of the
Houston-based U.S. oil firm, the Coastal Corporation.
Control of
these three members of Coastal's Holborn Group has been
transferred to Libya. Also listed are the three principal
°ffi-ces of Libya's state-owned Foreign Petroleum Investment
Corporation, commonly known as "Oilinvest".
The remaining six
firms are located in Malta.
The 21 individuals include key officers and managers of Oilinvest
and the Libyan-controlled entities of the Holborn Group.
As a result of today's action, those listed are now considered
"Specially Designated Nationals" (SDNs) of the Government of
Libya, bringing them under the embargo and asset freeze imposed
against Libya by President Reagan in January 1986. All assets of
Libyan SDNs within U.S. jurisdiction, including overseas branches
of U.S. banks, are blocked. All economic transactions by U.S.
persons with SDNs of Libya are prohibited.
Doing business with a Libyan SDN is equivalent to doing business
with the Government of Libya, which carries maximum criminal
penalties of $500,000 per violation for corporations and $250,000
per violation for individuals, plus prison sentences of up to 12
years for individuals and senior corporate officers.
OFAC also
may levy administrative civil penalties of up to $10,000 per
violation.
more
NB-14Q6

The list of Specially Designated Nationals of Libya may be
expanded or amended at any time, as new information becomes
available to the Treasury Department.
Persons with information
on individuals or firms owned or controlled by the Government of
Libya or acting on behalf of the Government of Libya may call
202-566-5021.
All calls will be kept confidential.
0O0

ORGANIZATIONS AND INDIVIDUALS DETERMINED TO BE
WITHIN THE TERM "GOVERNMENT OF LIBYA”
(SPECIALLY DESIGNATED NATIONALS OF LIBYA)

Companies
CORINTEIA GROUP OF COMPANIES
Head Office, 22, Europa Centre, Floriana, Malta
CORINTHIA PALACE HOTEL COMPANY LIMITED
De Paula Avenue, Attard, Malta
HOLBORN EUROPA RAFFINERIE GmbH
(a.k.a. HER)
Rothenbaumchaussee 5, 4th. Floor, D-2000 Hamburg 13
Germany
HOLBORN EUROPEAN MARKETING COMPANY LIMITED
(a.k.a. HEMCL)
Miranda Court No. 1, Ipirou Street, P.O. Box 897
Larnaca, Cyprus
Hof plein 33, 3 011 AJ Rotterdam, The Netherlands
HOLBORN INVESTMENT COMPANY LIMITED
(a.k.a. HICL)
Miranda Court No. 1/ Ipirou Street, P.O. Box 897
Laraaca, Cyprus
JERMA PALACE HOTEL
Maarsancala, Malta
LAFI TRADE MALTA
14517 Tower Road, Siema, Malta
OILINVEST
(a.k.a. FOREIGN PETROLEUM INVESTMENT CORPORATION)
(a.k.a. LIBYAN OIL INVESTMENTS INTERNATIONAL COMPANY)
(a.k.a. OIIC)
(a.k.a. OILINVEST INTERNATIONAL N. V . )
Netherlands Antilles
Tripoli, Libya
OILINVEST (NETHERLANDS) B.V.
(a.k.a. OILINVEST HOLLAND B.V.)
Museumpln li, 1071 DJ Amsterdam, The Netherlands
OS OILINVEST SERVICES A.G.
Loewenstrasse 60, Zurich, Switzerland

QUALITY SHOES COMPANY
UB 33, Industrial Estate, San Gwann, Malta
SWAN LAUNDRY & DRY CLEANING COMPANY, LTD.
55, Racecourse Street, Marsa, Malta

Individuals
ABBOTT, John G.
34 Grosvenor Street, London W1X 9FG, United Kingdom
ABDULJAWAD, Muhammed I .
(a.k.a. ABDUL JAWAD, Mohammed)
Tripoli, Libya
AGHIL, Yousef T.
Libya
BUSHWESHA, Abdullah
Libya
CHARALAMBIDES, Kypros
Cyprus
EL BADRI, Abdullah Salim
Tripoli, Libya
EL GHRABLI, Abdudayem
Libya
EL HUWEIJ, Mohamed A.
Tripoli, Libya
FERJANI, A.S.A.
Tripoli, Libya
GHADAMSI, Bashir
Italy
LAYAS, Mohammed H .
Tripoli, Libya
MANA, Salem
Libya
NAAS, Mahmoud
Libya
PARADISSIOTIS, Christoforos Pavlou
Larnaca, Cyprus
34 Grosvenor Street, London W1X 9FG, United Kingdom

RIECKE, Dr. Hans
Germany
SAUDI, Abdullah. A.
M a n a m a , Bahrain
SIALA, Mohamad Taher Hammuda
Tripoli, Libya
STAVROU,
Cyprus

Stavros

UGUETO, Luis
Venezuela
WOJTEK, Dr. Ralf
Germany
YOUSEF, Mohamed T.
Libya

Department of the Traaeury

e vraehlngton, D.C. • Telephone SBC
EFT. Oh THEThEASURY
REMARKS BY

THE HONORABLE JOHN E. ROBSON
DEPUTY SECRETARY OF THE TREASURY
TIRANA. ALBANIA
AUGUST If 1991
IT IS A GREAT HONOR TO BE HERE IN ALBANIA TO JOIN IN THE
BEGINNING OF THE REBIRTH OF YOUR COUNTRY.
ON BEHALF OF PRESIDENT
BUSH AND THE AMERICAN PEOPLE, I WANT TO THANK THE PEOPLE-OF
ALBANIA FOR OPENING YOUR ARMS AND YOUR HEARTS TO THE UNITED
STATE8 — JUST AS YOU HAVE OPENED YOUR COUNTRY TO THE IDEAS OF
DEMOCRACY AND FREEDOM.
DURING THE TIME I HAVE 8PENT IN YOUR COUNTRY, IT HA8 BECOME
CLEAR TO ME THAT ALBANIA IS A NATION OF TREMENDOUS HOSPITALITY
AND GOOD WILL TOWARD THE AMERICAN PEOPLE, AND WE ARE PROUD TO
STAND WITH YOU IN YOUR PURSUIT OF POLITICAL AND ECONOMIC REFORM.
IT IS NO COINCIDENCE THAT I AM VISITING ALBANIA AT THE SAME
TIME MY PRESIDENT IS VISITING THE SOVIET UNION.
ALTHOUGH THE
WORLD MAY SEEM TO HAVE FOCUSED A GREAT DEAL OF ITS ATTENTION ON
CHANGES IN THE SOVIET UNION, I AM HERE TO REAFFIRM THE SUPPORT OF
THE UNITED STATES FOR THE EMERGING DEMOCRACIES HERE IN ALBANIA
AND ELSEWHERE IN EAST AND CENTRAL EUROPE.
IN THE SHORT PERIOD OF TIME SINCE THE FALL OF THE BERLIN
WALL AND THE MARCH OF FREEDOM ACR0S8 EAST AND CENTRAL EUROPE, THE
OLDER INDUSTRIAL DEMOCRAT1E S , SUCH AS THE UNITED STATES, AND
NATIONS STRUGGLING TO ACHIEVE DEMOCRACY AND ECONOMIC REFORM, SUCH
AS ALBANIA, HAVE LEARNED SOME IMPORTANT LESSONS.
BUT THE FIRST
LESSON YOU SHOULD LEARN IS THAT YOU A R E .NOT FACING YOUR PROBLEMS
ALONE.
THE ALBANIAN PEOPLE ARE NO LONGER SACRIFICING IN
ISOLATION — OR WITHOUT HOPE.
AS YOUR COUNTRY WORKS TO PUT IN PLACE CHANGES THAT WILL
ACHIEVE A TRUE MARKET ECONOMY, THERE ARE STILL SACRIFICES YOU
WILL HAVE TO MAKE.
SOMETIMES IT MAY SEEM AS THOUGH PROGRESS IS
MOVING TOO SLOWLY...THAT VERY LITTLE HAS REALLY CHANGED.
BUT, IN
FACT, HISTORIC CHANGES ARE BEING MADE.
INSTEAD OF SACRIFICING
ALONE, WITH NO HOPE OF BETTER THINGS TO COME, YOU NOW HAVE THAT
SPECIAL VISION OF HOPE.
AND THAT HOPE SHOULD BRING WITH IT AN
OPTIMISM FOR A FREER AND BETTER LIFE FOR ALL ALBANIANS.
YOU NOW
HAVE SOMETHING TO WORK FOR THAT IS YOURS — AND YOURS ALONE —
FREEDOM AND PROSPERITY.
MANY OTHER FORMER SOCIALIST COUNTRIES, WHICH REJECTED
CONTROLLED ECONOMIES FOR FREE AND OPEN MARKETS, HAVE FACED
SIMILAR OBSTACLES AND UNCERTAINTIES IN THE BEGINNING THAT THE
PEOPLE OF ALBANIA NOW FACE.
I REALIZE THAT EACH COUNTRY
EMBARKING ON THE DIFFICULT PATHS OF DEMOCRATIC AND ECONOMIC
REFORM BELIEVES THAT ITS PROBLEMS ARE UNIQUE.
HAVING BEEN
CLOSELY INVOLVED WITH THE PROCESS OF REFORM THROUGHOUT EAST AND
NB-1407

CENTRAL EUROPE SINCE THE BEGINNING, I CAN ASSURE YOU, WHILE EACH
COUNTRY HAS ITS OWN UNIQUE HURDLES TO CONQUER, EVERY REFORMING
COUNTRY HAS FACED ESSENTIALLY THE SAME PROBLEMS.
M

EVERYWHERE, THE RECIPE FOR DEMOCRATIC AND ECONOMIC REFORM
M
IS PRETTY MUCH THE SAME:
O

THE GUARANTEE OF FAIR AND OPEN POLITICAL CAMPAIGNS AND
ELECTIONS, FREE OF INTIMIDATION, WHERE ALL PARTIES HAVE
EQUITABLE ACCESS TO THE MEDIA;

THE ASSURANCE OF ADEQUATE CONTROL BY CIVILIAN AUTHORITY
OF THE SECURITY SERVICES;

LIBERALIZATION OF PRICES AND WAGES;

CREATING CLEAR RIGHTS FOR PRIVATE PROPERTY OWNERSHIP,
PRIVATIZATION OF STATE ENTERPRISES TO COMPETE IN THE
FREE MARKET, AND THE FREEDOM FOR ENTREPRENEURS TO START
THEIR OWN BUSINESSES;

AND, OPENING YOUR COUNTRY TO FREE TRADE AND INVESTMENT
FROM THE REST OF THE WORLD.

THE OTHER EMERGING DEMOCRACIES — CZECHOSLOVAKIA, BULGARIA,
AND OTHERS — AS WELL AS THOSE COUNTRIES WHO SUPPORT THEIR REFORM
— SUCH AS THE UNITED STATE8 — HAVE LEARNED DURING THE REFORM
PROCESS.
WE HAVE LEARNED WHAT TYPE OF ASSISTANCE IS MOST
EFFECTIVE AS NEW DEMOCRACIES STRUGGLE TO REPLACE YEARS OF CONTROL
AND EMPTY PROMISES.
WE HAVE LEARNED HOW DIFFICULT IT IS.TO MAKE THE TRANSITION
FROM AN ECONOMIC SYSTEM WHERE ALMOST EVERYTHING IS OWNED AND
DECIDED BY GOVERNMENT, TO A SYSTEM WHERE OWNERSHIP AND ECONOMIC
DECISIONS ARE IN THE HANDS OF PRIVATE CITIZENS IN A COMPETITIVE
MARKETPLACE.
WE HAVE LEARNED THAT THE TRANSITION TO FREE MARKETS IS NOT
FOR THE FAINT-HEARTED — THAT THE ROPES OF GOVERNMENT COMMAND
MUST BE CLEANLY SEVERED.
REFORMING COUNTRIES CANNOT SUCCEED BY
CONTROLLING FROM THE CENTER.
THEY CANNOT GENTLY AND PAINLESSLY
PHASE IN THE MARKETPLACE OVER A LENGTHY PERIOD.
SUCCESS IS
LIKELY TO COME SOONEST TO COUNTRIES THAT CONVERT TO THE FREE
MARKET QUICKLY — WITH NO TURNING BACK.
AND THAT IS THE ROAD
ALBANIA MUST TAKE AS WELL.
HERE, IN ALBANIA, YOU ARE BEGINNING AN AMBITIOUS ECONOMIC
REFORM PROGRAM.
AND THE UNITED STATES IS PREPARED TO HELP.
WE ARE PROVIDING FOOD AID AND MEDICINES, AND WE WILL PROVIDE
MORE:

WE WILL ACTIVELY SUPPORT ALBANIA'S EFFORTS TO BECOME A
MEMBER OF THE INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD
BANK.
THESE ARE IMPORTANT INSTITUTIONS» WITH LARGE RESOURCES,
AND AMERICA IS THE LARGEST FINANCIAL BACKER OF ALL OF THEM.
AND WE WILL BRING OUR EXPERTS AND PROVIDE TECHNICAL
ASSISTANCE TO HELP YOU FASHION THE POLICIES AND BUILD THE
INSTITUTIONS OF THE FREE MARKET, INCLUDING FINANCING AND MONETARY
POLICY, PRIVATIZING BUSINESSES, AGRICULTURAL POLICY AND
OPERATIONS, HEALTH CARE, MANAGEMENT TRAINING, AND OTHER AREAS.
ALBANIA HAS THE HUMAN RESOURCES AND THE MOTIVATION TO
COMPETE IN THE GLOBAL MARKETPLACE.
YOUR SITUATION IS NOT SO
DISSIMILAR TO THAT FACING THE UNITED STATES WHEN OUR NATION WAS
BORN 200 YEARS AGO.
OUR NEW DEMOCRATIC GOVERNMENT WAS FRAGILE.
WE HAD LARGE DEBTS TO FOREIGN AND DOMESTIC CREDITORS.
OUR
MONETARY SYSTEM WAS IN DISARRAY.
INFLATION WAS RAMPANT.
AND
THINGS GOT WORSE BEFORE THEY GOT BETTER.
BUT STRONG FAITH AMONG
THE AMERICAN PEOPLE CARRIED US THROUGH.
FOR NEARLY HALF A CENTURY, THE PEOPLE OF ALBANIA HAVE LIVED
UNDER A SYSTEM WHERE THERE WAS GREAT HARDSHIP, BUT LITTLE HOPE.
NOW YOU ARE EMBARKED ON A PROGRAM OF DEMOCRATIC AND ECONOMIC
REFORM WHERE THERE WILL BE NECESSARY HARDSHIPS DURING THE
TRANSITION — BUT WHERE THERE IS HOPE:
©

HOPE THAT EVERY ALBANIAN WILL HAVE A VOICE AND A VOTE
IN CHOOSING THEIR LEADERSHIP AND INFLUENCING THE
POLICIES OF GOVERNMENT;

HOPE, THAT AS THE FREE MARKET DEVELOPS, ALBANIANS WILL
HAVE INDIVIDUAL OPPORTUNITIES TO IMPROVE THEIR STANDARD
OF LIVING AND RECEIVE THE ECONOMIC REWARDS OF THEIR
INDIVIDUAL EFFORTS;

AND, HOPE THAT THEY AND THEIR CHILDREN AND
GRANDCHILDREN WILL ENJOY THE PRIDE AND PROSPERITY OF
ALBANIA'S MEMBERSHIP IN THE WORLD COMMUNITY OF NATIONS
THAT ARE POLITICALLY AND ECONOMICALLY FREE.

THE ACCOMPLISHMENT OF THESE GREAT REFORMS IN DEMOCRACY AND
FREE-MARKET ECONOMICS REQUIRE THE STRONG SUPPORT OF THE ALBANIAN
PEOPLE.
BE PATIENT.
DO NOT LET UNREALISTIC EXPECTATIONS ABOUT
HOW QUICKLY YOU CAN CREATE A PROSPEROUS FREE MARKET DEFEAT YOUR
HISTORIC EFFORTS.
I URGE EACH OF YOU TO PARTICIPATE IN THE
PROCESS OF REFORM WITH YOUR HANDS, YOUR HEARTS, AND YOUR MINDS.
THE REWARDS WILL BE SUBSTANTIAL.
AND I AM OPTIMISTIC THAT
THE PEOPLE OF YOUR NATION CAN AND WILL ACCOMPLISH THE TRANSITION
WITH THE ENERGY AND SKILL THAT IS SO ABUNDANT AMONG ALBANIANS.

Department of tha

lo
Treasury • Washington, D.c. • Telephone 566-2041
:Pl Or*
tyi

^2 vRs

REMARKS BY
THE HONORABLE JOHN E. ROBSON
DEPUTY SECRETARY OF THE TREASURY
TIRANA. ALBANIA
AUGUST 1, 1991
IT IS A GREAT HONOR TO BE HERE IN ALBANIA TO JOIN IN THE
BEGINNING OF THE REBIRTH OF YOUR COUNTRY.
ON BEHALF OF PRESIDENT
S K K f f l H I AMERICAN PEOPLE, I WANT TO THANK THE PEOPLE OF
ALBANIA FOR OPENING YOUR ARMS AND YOUR HEARTS TO THE UNITED
S p l j g

a k d Tf r L d Sh

.HAVE 0PENED Y0UR C0UNTRY t o t h e i d e a s

Cl rfip^tn^Mr $1Ih h I 1 HAVE SPENT IN YOUR COUNTRY, IT HA8 BECOME
™ AT ALBANIA IS A NATION OF TREMENDOUS HOSPITALITY
AND ¿OOD WILL TOWARD THE AMERICAN PEOPLE, AND WE ARE PROUD TO
STAND WITH YOU IN YOUR PURSUIT OF
IT IS NO COINCIDENCE THAT I AM VISITING ALBANIA AT THE o a m f
TIME MY PRESIDENT IS VISITING THE SOVIET UNION.
ALTHOUGH THE
WORLD MAY SEEM TO HAVE FOCUSED A GREAT DEAL OF ITS ATTENTION ON
CHANGES IN THE SOVIET UNION, I AM HERE TO REAFFIRM T H E s J p F O R ^ O F

In d ELSEWHERr.
EL8Ew SER-A?
? AND
™ E CENTRAL
EMERQIN®EUROPE.
DEMOCRACIES HERE IN ALBANIA
AND
IN ™EAST
IN THE SHORT PERIOD OF TIME SINCE THE FALL OF THE crpt Tw
n^ntr^T^ THE MARCH 0F FREEDOM ACR0S8 EAST AND CENTRAL EUROPE THE
S ^ L I NDU8TRIAL DEMOCRATIES, SUCH AS THE UNITED STATES AND
T0 ACHIEVE DEMOCRACY a n d e c o n o m i c r e f o r m , s u c h
f'!L£LBANIA’ HAVE LEARNED SOME IMPORTANT LES80N6.
BUT THE FIRST
H K
Y?HESA ^ T ^ A^ n ' S ™ AT Y0U AKE N0T ^ C I N G YOUR PROB l I m B
I ^ L A T I O N f-AOR Wi?HOUT HOPEARE N0 f i t f l 8ACR1” ® ^ ® |
Ar„. A® I0H S „ ^ NIRY W0RKS T0 PUT IN PLACE CHANGES THAT WILL
IRLE MARKET ECONOMY, THERE ARE STILL SACRIFICES YOU
Mf-,hVv HA^E ^ MAKE.
SOMETIMES IT MAY SEEM AS THOUGH PROGRESS IS

VERY LITTLE HAS REALLY CHANGED
BUT IN
ACT, HISTORIC CHANGES ARE BEING MADE. INSTEAD OF SACK IFTrfm A
SPEC?AL^VISION W m
BETTER TH1NGE T0 COM^EA?o CFNOWCh I v EC™ a T
HSS v SSS VI8I0N OF HOPE.
AND THAT HOPE SHOULD BRING WITH IT AN
HAV e ” s ^ L ™ ? M£ t o EER AND BETTER l i f e FOR ALL ALBANIANS.
YOU NOW
BA^E SOMETHING TO WORK FOR THAT 18 YOURS — AND YOURS AI n m
FREEDOM AND PROSPERITY.
a n d YOURS ALONE ~

RETECTffn
SIMILARLnHBTArMraIES F°R FREE AND 0PEN MAKKETS, HAVE FACED
PEOPLFnrf.afhr? m ^° UNCERTAINTIES P THE BEGINNING THAT THE
°F ALBANIA n o w FACE. I REALIZE THAT EACH COUNTRY
EEFORM BEL?EVEREt S1TFi
T PATHS 0F DEMOCRATIC AND ECONOMIC
¿L^lrV
nTu ^ L 1TS PR0BLEMS ARE UNIQUE. HAVING BEEN
CLOSELY INVOLVED WITH THE PROCESS OF REFORM THROUGHOUT EAST AND
MANY OTHER FORMER SOCIALIST COUNTRIES

NB-1407

WHICH

CENTRAL EUROPE SINCE THE BEGINNING, I CAN ASSURE YOU, WHILE EACH
COUNTRY HAS ITS OWN UNIQUE HURDLES TO CONQUER, EVERY REFORMING
COUNTRY HAS FACED ESSENTIALLY THE SAME PROBLEMS.
EVERYWHERE, THE RECIPE FOR DEMOCRATIC AND ECONOMIC REFORM
IS PRETTY MUCH THE SAME:
O

THE GUARANTEE OF FAIR AND OPEN POLITICAL CAMPAIGNS AND
ELECTIONS, FREE OF INTIMIDATION, WHERE ALL PARTIES HAVE
EQUITABLE ACCESS TO THE MEDIA;

THE ASSURANCE OF ADEQUATE CONTROL BY CIVILIAN AUTHORITY
OF THE SECURITY SERVICES;

LIBERALIZATION OF PRICES AND WAGES;

CREATING CLEAR RIGHTS FOR PRIVATE PROPERTY OWNERSHIP,
PRIVATIZATION OF STATE ENTERPRISES TO COMPETE IN THE
FREE MARKET, AND THE FREEDOM FOR ENTREPRENEURS TO START
THEIR OWN BUSINESSES;

AND, OPENING YOUR COUNTRY TO FREE TRADE AND INVESTMENT
FROM THE REST OF THE WORLD.

THE OTHER EMERGING DEMOCRACIES — CZECHOSLOVAKIA, BULGARIA,
AND OTHERS — AS WELL AS THOSE COUNTRIES WHO SUPPORT THEIR REFORM
— SUCH AS THE UNITED STATES — HAVE LEARNED DURING THE REFORM
PROCESS.
WE HAVE LEARNED WHAT TYPE OF ASSISTANCE IS MOST
EFFECTIVE AS NEW DEMOCRACIES STRUGGLE TO REPLACE YEARS OF CONTROL
AND EMPTY PROMISES.
WE HAVE LEARNED HOW DIFFICULT IT IS.TO MAKE THE TRANSITION
FROM AN ECONOMIC SYSTEM WHERE ALMOST EVERYTHING IS OWNED AND
DECIDED BY GOVERNMENT, TO A SYSTEM WHERE OWNERSHIP AND ECONOMIC
DECISIONS ARE IN THE HANDS OF PRIVATE CITIZENS IN A COMPETITIVE
MARKETPLACE.
WE HAVE LEARNED THAT THE TRANSITION TO FREE MARKETS IS NOT
FOR THE FAINT-HEARTED — THAT THE ROPES OF GOVERNMENT COMMAND
MUST BE CLEANLY SEVERED.
REFORMING COUNTRIES CANNOT SUCCEED BY
CONTROLLING FROM THE CENTER.
THEY CANNOT GENTLY AND PAINLESSLY
PHASE IN THE MARKETPLACE OVER A LENGTHY PERIOD.
SUCCESS IS
LIKELY TO COME SOONEST TO COUNTRIES THAT CONVERT TO THE FREE
MARKET QUICKLY — WITH NO TURNING BACK.
AND THAT IS THE ROAD
ALBANIA MUST TAKE AS WELL.
HERE, IN ALBANIA, YOU ARE BEGINNING AN AMBITIOUS ECONOMIC
REFORM PROGRAM.
AND THE UNITED STATES IS PREPARED TO HELP.
WE ARE PROVIDING FOOD AID AND MEDICINES, AND WE WILL PROVIDE
MORE:

3
WE WILL ACTIVELY SUPPORT ALBANIA'S EFFORTS TO BECOME A
MEMBER OF THE INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD
BANK.
THESE ARE IMPORTANT INSTITUTIONS, WITH LARGE RESOURCES
AND AMERICA IS THE LARGEST FINANCIAL BACKER OF ALL OF THEM.
AND WE WILL BRING OUR EXPERTS AND PROVIDE TECHNICAL
ASSISTANCE TO HELP YOU FASHION THE POLICIES AND BUILD THE
INSTITUTIONS OF THE FREE MARKET, INCLUDING FINANCING AND MONETARY
POLICY, PRIVATISING BUSINESSES, AGRICULTURAL POLICY AND
OPERATIONS, HEALTH CARE, MANAGEMENT TRAINING, AND OTHER AREAS.
ALBANIA HAS THE HUMAN RESOURCES AND THE MOTIVATION TO
COMPETE IN THE GLOBAL MARKETPLACE.
YOUR SITUATION IS NOT SO
DISSIMILAR TO THAT FACING THE UNITED STATES WHEN OUR NATION WAS
BORN 200 YEARS AGO.
OUR NEW DEMOCRATIC GOVERNMENT WAS FRAGILE.
WE HAD LARGE DEBTS TO FOREIGN AND DOMESTIC CREDITORS
OUR
MONETARY SYSTEM WAS IN DISARRAY.
INFLATION WAS RAMPANT.
AND
THINGS GOT WORSE BEFORE THEY GOT BETTER.
BUT STRONG FAITH AMONG
THE AMERICAN PEOPLE CARRIED US THROUGH.
FOR NEARLY HALF A CENTURY, THE PEOPLE OF ALBANIA HAVE LIVED
UNDER A SYSTEM WHERE THERE WAS GREAT HARDSHIP, BUT LITTLE HOPE.
NOW YOU ARE EMBARKED ON A PROGRAM OF DEMOCRATIC AND ECONOMIC
REFORM WHERE THERE WILL BE NECESSARY HARDSHIPS DURING THE
TRANSITION — BUT WHERE THERE IS HOPE:
©

HOPE THAT EVERY ALBANIAN WILL HAVE A VOICE AND A VOTE
IN CHOOSING THEIR LEADERSHIP AND INFLUENCING THE
POLICIES OF GOVERNMENT;
HOPE, THAT AS THE FREE MARKET DEVELOPS, ALBANIANS WILL
HAVE INDIVIDUAL OPPORTUNITIES TO IMPROVE THEIR STANDARD
OF LIVING AND RECEIVE THE ECONOMIC REWARDS OF THEIR
INDIVIDUAL EFFORTS;

AND, HOPE THAT THEY AND THEIR CHILDREN AND
GRANDCHILDREN WILL ENJOY THE PRIDE AND PROSPERITY OF
ALBANIA’S MEMBERSHIP IN THE WORLD COMMUNITY OF NATIONS
THAT ARE POLITICALLY AND ECONOMICALLY FREE.

THE ACCOMPLISHMENT OF THESE GREAT REFORMS IN DEMOCRACY AND
FREE*-MARK£T ECONOMICS REQUIRE THE STRONG SUPPORT OF THE ALBANIAN
PEOPLE.
BE PATIENT.
DO NOT LET UNREALISTIC EXPECTATIONS ABOUT
HOW QUICKLY YOU CAN CREATE A PROSPEROUS FREE MARKET DEFEAT YOUR
HISTORIC EFFORTS.
I URGE EACH OF YOU TO PARTICIPATE IN THE
ROCESS OF REFORM WITH YOUR HANDS, YOUR HEARTS, AND YOUR MINDS.
THE REWARDS WILL BE SUBSTANTIAL.
AND I AM OPTIMISTIC THAT
.y S| PEOPLE OF YOUR NATION CAN AND WILL ACCOMPLISH THE TRANSITION
WITH THE ENERGY AND SKILL THAT IS SO ABUNDANT AMONG ALBANIANS.

4
GOOD LUCK TO EACH OF YOU.
THE UNITED STATES WILL WATCH
YOUR REFORMS AND WORK WITH YOU TO MAKE THEM A SUCCESS.
THE REST
OF THE FREE WORLD RECOGNIZES THE DIFFICULTIES YOU FACE, AND THE
EXPECTATIONS YOU HAVE FOR THE FUTURE.
WE ARE HERE TO HELP YOU
SHOULDER THE TASKS NECESSARY TO REACH YOUR ULTIMATE GOAL —
FREEDOM AND PROSPERITY.
THANK YOU.

pertm ont o f the Treasury | W ajÇlpgton,
For Immediate Release
August 2, 1991

o.C. •

Telephone 566-203

Contact Cheryl Crispen
(202) 566-2041
’EPT. OF THE T

Statement by
Nicholas F. Brady
Secretary of the Treasury

Vie are pleased the Senate Banking Committee today reported
out comprehensive banking reform legislation.
I applaud the
Committee's decision to endorse strong new supervisory reforms,
nationwide banking and branching, and new affiliations between
banks and securities firms, subject to strong safeguards.
Our strategy remains to work for comprehensive banking
reform legislation that will attract voluntary capital into the
banking industry.
We are disappointed that the bill does not^
adopt provisions which permit private capital to flow freely into
the banking industry ahead of the taxpayer.
And we are concerned
about the narrow view which has succeeded in restricting the
existing authority of banks to engage in profitable, low risk
financial activities.
We will continue to work with Congress to allow banks the
ability to become stronger and more viable.
We look forward to
working with Congress on comprehensive banking reform when they
return from the August recess.

oOo

NB-1408

U BLIC D EBT NEWS
Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
August 5, 1991

CONTACT: Office of Financing
202-376-4350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,431 million of 13-week bills to be issued
August 8, 1991 and to mature November 7, 1991 were
accepted today (CUSIP: 912794XM1).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5. 47%
5. 51%
5. 51%

Investment
Rate
5.64%
5.68%
5.68%

Price
98.617
98.607
98.607

Tenders at the high discount rate were allotted 65%
The investment rate is the equivalent coupon-issue
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
41,620
29,701,245
25,240
73,525
50,810
32,235
1,810,545
54,655
9,340
31,100
22,555
493,030
920.960
$33,266,860

Accepted
41,620
8,733,495
25,240
73,525
50,810
30,860
358,795
11,955
9,320
31,100
22,555
120,280
920.960
$10,430,515

Type
Competitive
Noncompetitive
Subtotal, Public

$28,986,785
1.738.460
$30,725,245

$6,150,440
1.738.460
$7,888,900

2,433,415

108.200
$33,266,860

108.200
$10,430,515

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1409

Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239

CONTACT: Office of Financing
202-376-4350

FOR IMMEDIATE RELEASE
August 5, 1991

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,425 million of 26-week bills to be issued
August 8, 1991 and to mature February 6, 1992 were
accepted today (CUSIP: 912794XY5).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.57%
5.59%
5.59%

Investment
Rate
5.83%
5.85%
5.85%

Price
97.184
97.174
97.174

Tenders at the high discount rate were allotted 87%.
The investment rate is the equivalent coupon-issue yield.
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
40,030
24,805,590
19,680
49,810
49,865
31,760
1,682,315
44,125
9,170
42,750
16,620
714,940
796.000
$28,302,655

Accepted
40,030
8,660,465
19,680
49,810
49.865
30,760
317,015
21.865
9,170
40,750
16,620
372,690
796.000
$10,424,720

Type
Competitive
Noncompetitive
Subtotal, Public

$23,056,020
1.476.835
$24,532,855

$5,178,085
1.476.835
$6,654,920

2,600,000

1.169.800
$28,302,655

1.169.800
$10,424,720

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1410

FOR IMMEDIATE RELEASE
August 6, 1991

Contact:

Cheryl Crispen
(202) 566-2041

Robert Glenn Hubbard
Appointed Deputy Assistant Secretary
for Tax Analysis
Secretary of the Treasury Nicholas F. Brady today announced the
appointment of Robert Glenn Hubbard as Deputy Assistant Secretary
of the Treasury for Tax Analysis.
Mr. Hubbard, 32, will serve as the economic deputy to Assistant
Secretary Kenneth W. Gideon, who has principal responsibility for
formulation and execution of United States domestic and
international tax policy.
Mr. Hubbard earned both a B.A. and a B.S. degree in 1979 from the
University of Central Florida, and an A.M. in 1981, and a Ph.D.
in economics from Harvard University in 1983.
Since 1988, he has
been a professor of economics and finance at Columbia University.
Prior to that, he served in residence at the National Bureau of
Economic Research.
From 1983 to 1988, he served as an Assistant
Professor of Economics at Northwestern University.
Mr. Hubbard has also worked on projects with the Federal Reserve,
the Brookings Institution, and the J.F.K. School of Government?
he has organized several research programs for the National
Bureau of Economic Research? and he has published a number of
papers for academic and public policy audiences.
Mr. Hubbard is married to Constance Pond Hubbard.
They have one
child, Robert Andrew Pond Hubbard.
They reside in Washington,
D.C.

oOo

NB-1411

TREASURY-NEWS _

Departm ent o f the Treasury • w a i l i i d ^ b r i Telephone 566-204
EPT. OF THE TREASURY
FOR RELEASE A T
August 6, 1 9 9 1

2:30 P.M.

CONTACT:

Office of Financing
202/376-4350

T R E A S U R Y ’S W E E K L Y BILL OFFERING
The Depa r t m e n t of the Treasury, by this public notice,
invites tenders for two series of T r e asury bills totaling
a p p r o x i m a t e l y $20,800
million, to be issued August 15
1991
W * 11 provide about $1,275 mill i o n of new cash for
a s .the m a turing bills are o u t s tanding in the amount
of $19,537
million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt
WashinaC * 20239-1500,
Monday, August 12, 1991
prior to
12:00 n o o n for n o n competitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The*two
series o f f ered are as follows:
«sin a nn^”^f^ bills (to m a t u r i t y date) for approximately
$10,400
million, r epresenting an additional amount of bills
dated
May 16, 1991
and to mature November 14
1991
m
m
m
912794 XN 9), currently outstanding in the amount
of $9,252
million, the additional and original bills to be
freely interchangeable.
c in J n n ”d ? T i ? illS ^to matu r i t Y date) for approximately
S 10,400 m i l l i o n
repre senting an additional amount of bills
dated February 14, 1991
and to mature
February 13
1992
XZ U ' °“ " ently o u t s t a n d i n g ^ / the amount
of S 12,550 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competi?n d n o n ® oraP etitive bidding, and at m a t u r i t y their par amount
will be payable without interest.
Both series of bills will be
issued enti r e l y in book- entry form in a mini m u m 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
T r e a s u r y bills maturing
August 15, 1991.
Tenders from Federal
Reserve Banks for their own account and as agents for foreign
and international m o n e t a ry authorities will be accepted at
the w e i g h t e d average bank discount rates of accepted c o m p e t i
tive tenders.
Additional amounts of the bills m a y be issued to
Federal Reserve Banks, as agents for foreign and international
m o n e t a r y authorities, to the extent that the aggregate amount
of tenders for such accounts exceeds the aggregate amount of
by t h e m * Federal Reserve Banks currently
h old $ 784
m i l l i o n as agents for foreign and international
m o n e t a r y authorities, and $5,340 million for their own account.
Tenders for bills to be maintained on the b o o k -entry records
^
° f the TreasurY should be submitted on Form
p d 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week

S0]Tj.6S )•
NB-1412

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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

1/91

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. Com
petitive 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
8/89

1
... .........■ ■" .... .... IflHÄP f n'l*Un'Jül"'
*' '**" ' '
Department of the Treasury • Bureau oi me Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
August 6, 1991

üj

\ Q Òjp^TÌAOT':

RESULTS OF TREASURY/^

Office of Financing
202-376-4350

K3 -YEAR NOTES

Tenders for $14,089 million of 3-year notes, Series T-1994,
to be issued August 15, 1991 and to mature August 15, 1994
were accepted today (CUSIP: 912827B84).
The interest rate on the notes will be 6 7/8%.
The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
6.90%
6.93%
6.92%

Price
99.933
99.853
99.880

Tenders at the high yield were allotted 17%
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
43,870
40,489,160
32,910
48,665
161,655
45,495
1,082,595
54,055
27,030
68,195
24,350
533,390
179,965
$42,791,335

Accepted
43,870
13,053,225
32,910
48,665
66,620
41,345
310,845
50,055
27,005
68,195
24,350
141,810
179.965
$14,088,860

The $14,089 million of accepted tenders includes $1,053
million of noncompetitive tenders and $13,036 million of
competitive tenders from the public.
In addition, $988 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $1,993 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

P U B L IC D E B T NEW S
Department of the Treasury

•

Bureau of the Public D ebt

FOR RELEASE AT 3 :0 0 PM
August 6, 1991

W&s^irigt<!>M DC 20239

Contact: Peter Hollenbach
(202) 376-4302

PU BLIC D EBT ANNOUNCES ACTIVITY FO R
SE C U R IT IE S IN TH E ST R IP S PROGRAM FO R JU L Y 1991

Treasury’s Bureau of the Public Debt announced activity figures for the month of July 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$520,322,776

Held in Unstripped Form

$390,317,061

Held in Stripped Form

$130,005,715
$2,394,560

Reconstituted in July

The accompanying table gives a breakdown of STRIPS activity by individual loan description.
The balances in this table are subject to audit and subsequent revision. These monthly figures are
included in Table VI of the Monthly Statement of the Public Debt, entitled "Holdings of Treasury
Securities in Stripped Form." These can also be obtained through a recorded message on
(202) 447-9873.
oOo

P A -6 5

TABLE VI—HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, JULY 31. 1991
(In thousands)
I
Maturity Oate

Loan Descnption

_ [
- / % Note C-1994 ............................

11 5 8

>1-1/4 % Note A-1995 ..

...........

n-1/4% Note 8-1995 .............................

....... 11/15/94......... :

Principal Amount Outstanding
Total
S6.658.554

1
i

Poriicn Held in
Unstnpped Form

Porticn Held in
Stripped Form

Reccnstituted
This Month1

S5.610.554

SI.048.000 '(

6.933.861

6.509.061

424.800 ll

-0 -

........5/15/95 ........

7.127.086 I

5.929.966 I

1.197,120 .|

4.000

7.409.501

___2/15/95 ........

546.400

$24.000

10-1/2% Note C-1995 .............................

........8/15/95 .........

7.955.901

9-1/2% Note 0-1995 ..............................

........11/15/95.........

7.318.550 I

6.146.950 I

27.200

8-7/8% Note A-1996 ...............................

........2/15/96 ........ j

8.575.199 i

8.373.599 |

201.600 ||

22.400

7-3/8% Note C-1998 ...............................

........5/15/96 ........

20,085.643 i

19.871.243 1

214.400 ij

-0-

7-1/4% Note 0-1996 ..............................

........11/15/96.........

20,258,810 I

19.968.410

290.400 ij

8-1/2% Note A-1997 .............................

. ...5/15/97 ........

9,921,237 |

9.820.037

8-5/8% Note 8-1997

........8/15/97 ........

9.362.836 i

9.330.836

32.000 li

-0-

8-7/8% Note C-1997 ...............................

........11/15/97.........

9.808,329 I

9.798.729

9.600 II
4
9.280 II
>l
37.000 l|

-0-

1.171,600 li

1 0 1 .2 0 0

46.400

800
-0-

8-1/8% Note A-1998 ...............................

........2/15/98 ........
........5/15/98 . . . .

9,159,068 j
.
1
9.165.387

9.149.788

9% Note 8-1998 ....................................
9-1/4% Note C-1998 ...............................

. . . 8/15/98 ........

11,342.646 I

11.213.848

128.800 Ij

8-7/8% Note 0-1998 ..............................

...11/15/98........

9.902.875

9.557.275

345.600 ll

-0 -

8-7/8% Note A-1999 ..............................

. . . .2/15/99 ........

9.719.623

9.695.623

24.000 ;j

-0-

. . . .5/15/99 ........

10.047.103
10,163.644

9.176.703

870.400 "

-0-

........8/15/99 ........

10.081.619

82.025 II

-0-

7-7/8% Note 0-1999 ..............................

....... 11/15/99 . .. .

10.773.960

10.765.960

-0-

8-1/2% Note A-2000 ..............................

........2/15/00 ........

10.673.033

10,496.230

10.373.030

8 3 4

- / % Note C-2000 ..............................

........5/15/00 ........
........8/15/00 .........

-0- :
123.200 I

-0-

8-7/8% Note 8-2000 ...............................

11.080.646

-0-

8-1/2% Note 0-2000 .............................

........11/15/00.........

11,519.662

11.519.682

-0 -

-0-

7-3/4% Note A-2001 ..............................

........2/15/01 ........

11.312.802

11.308.802

4.000 >

-0-

% Note 8-2001 ....................................

. . . .5/15/01 ........

12.398.083

-0-

3.844.206

4.457.600 I

9-1/8% Note 8-1999 ..............................
8

% Note C-1999

..................................

9.128.387

8 .0 0 0

■

11-5/8% Bond 2004.................................

........11/15/04

8.301.806

12% Bond 2005......................................

........5/15/05

4,280.758

1.719.108

2.541.650

........8/15/05 ........

9.269.713

8.312.113

957.600

........2/15/06 ........

4,755.916
1.452.784

- / % Bond 2005.................................

10 3 4

-0-

j
1

-04,000
-0-

-00

91.200
118.400
46.400

11-3/4% Bond 2009-14

....... 11/15/14.........

4.755.916
6.005.584

11-1/4% Bond 2015................................

........2/15/15 ........

12.667.799

2.171.639

10-5/8% Bond 2 0 1 5 .............................

........8/15/15

. .

7,149.916

1.651.996

5.497.920

9-7/8% Bond 2015..................................

........11/15/15.........

6.899.859

2.139.859

4,760.000

9-1/4% Bond 2016..................................

........2/15/16

7.266.854

6.511.654

755.200 >

77.600

- / % Bond 2016..................................

........5/15/16

18.823.551

16.913.151

1.910.400 |

2 0 .0 0 0

9-3/8% Bond 2006.

.................

7 1 4

>
4.552.800 i
10.496.160 i

. . .11/15/16........

18.864.448

14.770.288

. .5/15/17 ........

18.194,169

6.279.929

8-7/8% Bond 2017..................................

........8/15/17 ........

14.016.858

9.629.658

4.387.200

11.914.240 !

9-1/8% Bond 2018..................................

........5/15/18 ........

8.708.639

2.372,639

6.336.000

9% Bond 2018........................................

........11/15/18.........

9.032.870 .

1.457.670

7.575.200 )

87/8% Bond 2019..................................

........2/15/19

81/8% Bond 2019..................................

........8/15/19 ........

19.250.798
20.213,832

11.002.952

81/2% Bond 2020..................................

........2/15/20 ........

10,228.868

83/4% Bond 2020..................................

........5/15/20 ........

10,158.883

83/4% Bond 2020..................................

........8/15/20 ........

21.418.606

8.029.646

7-7/8% Bond 2021..................................

........2/15/21 ’

11,113.373

81/8% Bond 2021..................................

........5/15/21 ........

11.958.888

Total...................................................
1

. ..

520.322.778

14.393.600

4.857.198

50.560
99.840
59.200

8-3/4% Bond 2017..................................

7-1/2% Bond 2016.

4.094.160

-0155.200

279.680
178.400
155.200
-07.600
121.600

9.210.880 |

175.680

4.059.268

6.169.600

250.000

2.344.323

7.814.560

187.520

13.388.960

182.080

1.838.400

9.600

9.274,973 |
11.874.728 i
390.317.061

84.160
130.005.715

Effective May 1 . 1987, secuntias hakt in stnppad form war« eiigibie for racontfitution to thair unstnppad form.

No»: On tha 4th workday of aach month a recording of Table VI will be available after 3:00 pm. The telephone number la (202) 447-9873.
The balances in this table are subiect to audit and subsequent adjustments.

-0 2.394.560

department off the Treasury • Wàshington, o x . • Telephone 566-2041

ins 3SI0110940
FOR IMMEDIATE RELEASE
August 7, 1991

Contact: Barbara Clay
(202) 566-5252
EFT. OF THE TREASURY

01in L. Wethington
Assistant Secretary of the Treasury
for International Affairs
01in L. Wethington was sworn in by Secretary of the Treasury
Nicholas F. Brady as Assistant Secretary of the Treasury for
International Affairs.
He was confirmed by the Senate to this
position on July 26, 1991, and was appointed to the position by
President Bush on August 2, 1991. Mr. Wethington's
responsibilities will cover a wide range of international
economic policy issues including the international debt strategy;
economic reform in Latin America, East Europe and the Soviet
Union? trade and investment; and U.S. Government policy in the
international financial institutions.
Since 1990, Mr. Wethington has been serving as Special Assistant
to the President and Executive Secretary to the Economic Policy
Council.
From 1985 to 1990, he was a partner at the law firm of
Steptoe & Johnson in Washington D.C.
From 1983 to 1985, he
served as the Deputy Under Secretary for International Trade at
the U.S. Department of Commerce.
Mr. Wethington has also served as Director of the Planning and
Evaluation Staff for the International Trade Administration at
the Department of Commerce, and Executive Assistant to the Under
Secretary for International Trade at the Department of Commerce.
Prior to that, he was an Adjunct Professor at Georgetown
University Law Center (1980-1981), and worked at the law firm of
Steptoe & Johnson.
Mr. Wethington received his B.A. and M.A. in Oriental Studies
from the University of Pennsylvania in 1971.
He pursued graduate
studies in Political Science at Columbia University from 1971
through 1974, and went on to receive his J.D. from Harvard Law
School in 1977.
Mr. Wethington was born on November 17, 1948 in Durham, North
Carolina.
He is married to Nadine Peiffer Wethington, and has
three children, Stephanie, Bryan and Catherine.
They reside in
McLean, Virginia.
oOo
NB-1414

U BLIC DEBT NEWS
.....

Department of the Treasury •

FOR IMMEDIATE RELEASE
August 7, 1991

nn aöv DA AO

".lorm K l

i * V >i»i'i

s ^ 1 f!

<•>

..................- •

Bureau of the Public Debt • Washington, DC 20239

iUG

3310 OibäTiär:

Office of Financing
202-376-4350

RESULTS OF TREASURESFAUefTOiiS OF 10-YEAR NOTES
Tenders for $12,005 million of 10-year notes, Series C-2001,
to be issued August 15, 1991 and to mature August 15, 2001
were accepted today (CUSIP: 912827B92).
The interest rate on the notes will be 7 7/8%.
The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
7.94%
7.95%
7.94%

Price
99.557
99.489
99.557

Tenders at the high yield were allotted 13%.
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
17,528
33,703,211
14,834
31,794
233,716
23,507
1,058,042
22,158
9,456
26,962
9,802
318,802
23.640
$35,493,452

Accepted
17,508
11,704,243
14,784
19,614
29,356
19,087
74,211
18,158
9,455
26,962
9,747
38,532
23.630
$12,005,287

The $12,005 million of accepted tenders includes $582
million of noncompetitive tenders and $11,423 million of
competitive tenders from the public.
In addition, $300 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
The minimum par amount required for STRIPS is $1,600,000.
Larger amounts must be in multiples of that amount.

NB-1415

P U B L IC D E B T NEW S
Department o f the T re a su ry

•

B u reau o f the Public I^ebt , • j V^aphington, D C 20239

FOR IMMEDIATE RELEASE
August 8, 1991

Contact: Peter Hollenbach
(202) 376-4302

PU BLIC DEBT TO EXPAND AVAILABILITY O F AUCTION RESULTS

The Bureau of the Public Debt announced today that it will make the results of marketable
securities auctions available on the Commerce Department’s Economic Bulletin Board
(EBB). Beginning August 12, 1991, with the regular weekly bill auctions, the results of all
marketable securities auctions will be available on the EBB on the day of the auction.
The auction day information available on the EBB will include: the types and CUSIP
number of the security auctioned, yield and interest rate data, amounts tendered and
accepted as well as information about securities issued to F oreign and International
Monetary Authorities and the Federal Reserve’s System Open Market Accounts.
As a service to those interested in tracking Treasury marketable offerings, Public Debt is
making historic information on all auctions of Treasury Bills, Notes and Bonds from 1983
to the present available to EBB subscribers. This archival information will also become
available on August 12, 1991.
The EBB is a user friendly service that can be accessed by almost any personal computer
with telecommunications capabilities. The EBB is available 24 hours a day. There is a
nominal charge to access the bulletin board. In addition to Treasury auction information
the EBB presents a wide variety of economic information and statistics. Contact the
Commerce Department at (202) 377-1968 for EBB details and subscription information.
oOo

PA-66

RESULTS OF TREASURY'S AUCTION OF 30-YEAR BONDS
ept . of the treasury
Tenders for $12,008 million of 30-year bonds to be issued
August 15, 1991 and to mature August 15, 2021 were
accepted today (CUSIP: 912810EK0).
The interest rate on the bonds will be 8 1/8%. The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
8.15%
8.19%
8.17%

Price
99.721
99.278
99.499

$2,000 was accepted at lower yields.
Tenders at the high yield were allotted 96%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
2,142
20,067,596
2,794
4,520
17,358
5,691
726,807
8,595
1,721
5,297
2,927
256,274
2.231
$21,103,953

Accepted
2,142
11,637,596
2,774
4,470
17,358
5,544
260,675
8,595
1,711
5,297
2,907
56,239
2.221
$12,007,529

The $12,008 million of accepted tenders includes $199
million of noncompetitive tenders and $11,809 million of
competitive tenders from the public.
In addition, $150 million of tenders was also accepted
at the average price from Federal Reserve Banks for their own
account in exchange for maturing securities.
The minimum par amount required for STRIPS is $320,000.
Larger amounts must be in multiples of that amount.

NB-1416

U BLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public D e b l ^ ^ ^ h i n g t o n , DC 20239

, a
"iS3lC/
WfbctlgEACT: Office of Financing
202-376-4350
u/

FOR IMMEDIATE RELEASE
August 12, 1991

« 6
Ji
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS

ET^An

Tenders for $10,476 million of 13-weekvfrMfs to be issued
August 15, 1991 and to mature November 14, 1991 were
accepted today (CUSIP: 912794XN9).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
5.29%
5.31%
5.30%

Investment
Rate
5.45%
5.47%
5.46%

Price
98.663
98.658
98.660

Tenders at the high discount rate were allotted 4%.
The investment rate is the equivalent coupon-issue yield,
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
34,755
36,767,715
19,280
45,385
78,490
28,875
1,950,220
55,240
8,360
39,435
24,835
609,215
976.900
$40,638,705

Accepted
34,755
9,077,355
19,280
45,385
77,490
27,915
52,220
15,240
8,360
39,435
24,835
77,255
976.900
$10,476,425

Type
Competitive
Noncompetitive
Subtotal, Public

$36,242,980
1.836.820
$38,079,800

$6,080,700
1.836.820
$7,917,520

2,511,510

47.395
$40,638,705

47.395
$10,476,425

Federal Reserve
Foreign Official
Institutions
TOTALS

&n additional $18, 305 thousand of bills will bs
to-.foreign of fie ial institutions for new casi

NS-U17

U BLIC DEBT NEWS
Department of the Treasury •

f t)r\

Bureau of the Public Debt ^O ^aghington, DC 20239

¡us !

FOR IMMEDIATE RELEASE
August 12, 1991

^v^TOTACT: Office of Financing
U / Lf £ J
202-376-4350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
C

Tenders for $10,430 million of 2 6-week fbi 11s to be issued
August 15, 1991 and to mature February 13, 1992 were
accepted today (CUSIP: 912794XZ2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:

Low
High
Average

Discount
Rate
5. 37%
5. 40%
5. 39%

Investment
Rate
5.61%
5.64%
5.63%

Price
97.285
97.270
97.275

Tenders at the high discount rate were allotted 1%
The investment rate is the equivalent coupon-issue
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
33,900
25,489,400
18,085
38,915
50,570
74,515
1,417,165
42,755
12,940
47,805
19,110
593,300
753.805
$28,592,265

Accepted
33,900
9,018,400
18,085
38,915
50,570
74,515
242,665
27,805
12,940
47,805
19,110
91,300
753.805
$10,429,815

Type
Competitive
Noncompetitive
Subtotal, Public

$23,662,150
1.450.410
$25,112,560

$5,499,700
1.450.410
$6,950,110

2,850,000

629.705
$28,592,265

629.705
$10,429,815

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $282,995 thousand of bills will be
issued to foreign official institutions for new cash.

Department of the

Treasury •u#a«ihlnstpll> D.e. • Telephone

566-2041

FOR RELEASE AT 2:30 P.M.
August 13, 1991

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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

1/91

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.
Com
petitive 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
o r 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures.
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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.

8/89

lepartment off the Treasury • w ashingt on, o x . • T e l e p h o n e 5 6 6 -2 0 4 1
\J6 *3 ■*
P'T.öi

Contact:

FOR IMMEDIATE RELEASE
August 16, 1991

Anne Kelly Williams
(202) 566-2041

Meredith Bennett Oliver
Appointed Deputy Assistant Secretary
for Policy Management

Secretary of the Treasury Nicholas F. Brady today announced the
appointment of Meredith Bennett Oliver as Deputy Assistant
Secretary of the Treasury for Policy Management.
Ms. Oliver will serve as an advisor to the Assistant Secretary
for Policy Management and will continue to direct the Secretary*s
scheduling office.
Ms. Oliver joined Treasury in 1985 where she served as the
Director of the Office of Business Affairs.
From 1987 to 1989
she was Special Assistant to the Assistant Secretary of Public
Affairs and Public Liaison.
In 1989, Ms. Oliver became the
Director of Scheduling.
Prior to joining Treasury, Ms. Oliver was a senior staff
assistant to Reagan-Bush 1984 Treasurer Angela Buchanan Jackson.
In 1983, she was the assistant to the director of government
affairs for the Association of Builders and Contractors.
From
1976 until 1982, Ms. Oliver was legislative director for
Congressman David Emery.
Prior to that she was a legislative
aide to Congressman Dave Evans.
Ms. Oliver graduated from Duke University in 1974 with a bachelor
of arts degree and received her masters in public administration
from George Washington University in 1985.
She resides in
Washington, D.C. with her husband, Joseph.

oOo

NB-1420

FOR RELEASE AT 2:30 P.MPT.OF THE TREAS^Qn t a CT :
A u g u s t 16 , 1991

Office of Financing
202/ 376-4350

TREASURY’S 52-WEEK BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for approximately $12,500 million of 364-day
Treasury bills to be dated August 29, 1991
and to mature
August 27, 1992
(CUSIP No. 912794 YX 6). This issue will
provide about $ 1,875 million of new cash for the Treasury,
as the maturing 52-week bill is outstanding in the amount of
$ 10,631 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Thursday, August 22, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest.
This series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing
August 29, 1991.
In addition to the
maturing 52-week bills, there are $19,258 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 $1,871 million as
agents for foreign and international monetary authorities, and
$ 7,985 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 mone
tary 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 $ 380
million of the original 52-week issue.
Tenders for
bills to be maintained on the book-entry records of the Depart
ment of the Treasury should be submitted on Form PD 5176-3.
NB-1421

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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

1/91

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.
Com
petitive 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
8/89

August

FOR IMMEDIATE RELEASE

19/

1991

Monthly Release of U.S. Reserve Assets
The Treasury Department today released U.S. reserve assets data
for the month of July 1991.
As indicated in this table, U.S. reserve assets amounted to
$74,816 million at the end of July 1991, down from $74,940 million in
June 1991.
U.S. Reserve Assets
(in millions of dollars)
End
of
Month

Special
Drawing
Rights 2/3/

Reserve
Position
in IMF 2/

Total
Reserve
Assets

Gold
Stock 1/

June

74,940

11,062

10,309

44,940

8,629

July

74,816

11,062

10,360

44,664

8,730

Foreign
Currencies 4/

1991

Valued at $42.2222 per fine troy ounce.

Includes allocations of SDRs by the IMF plus transactions in SDRs.

Valued at current market exchange rates.

N B - 1 422

U BLIC DEBT NEWS
D epartm ent of the T reasu ry

•

B u $ ia£ hfihflpyb&cQGi&G • W ash in gton , D C 20239

FOR IMMEDIATE RELEASE
August 19, 1991

n
CONTACT: Office of Financing
EPT. OF THE TREASURY
202-376-4350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,417 million of 13-week bills to be issued
August 22, 1991 and to mature November 21, 1991 were
accepted today (CUSIP: 912794WW0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.12%
5.18%
5.17%

Investment
Rate_____ Price
5.27%
98.706
5.33%
98.691
5.33%
98.693

$3,750,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 83%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
tpcatij-on
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
27,295
25,726,345
19,440
48,220
39,040
28,310
1,644,000
14,515
7,325
27,995
17,670
626,655
897.240
$29,124,050

Accepted
27,295
8,954,875
19,440
48,220
39,040
28,310
268,500
14,515
7,325
27,995
17,670
66,655
897.240
$10,417,080

Type
Competitive
Noncompetitive
Subtota1, Pubiic

$24,974,570
1.585.595
$26,560,165

$6,267,600
1.585.595
$7,853,195

2,506,085

57.800
$29,124,050

57.800
$10,417,080

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $2,60C1 thousand of bills will be
issued to foreign official institutions for new cash.
NB-1423

U BLIG DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239
i51 0 0
FOR IMMEDIATE RELEASE
CONTACT: Office of Financing
August 19, 1991
202-376^-4350
EPT. OF FHE TREASURY
RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS

Tenders for $10,401 million of 26-week bills to be issued
August 22, 1991 and to mature February 20, 1992 were
accepted today (CUSIP: 912794YA6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.22%
5.24%
5.23%

Investment
Rate____
5.45%
5.47%
5.46%

Price
97.361
97.351
97.356

$3,235,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 16%.
The investment rate is the equivalent coupon—issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Accepted
27,895
9,366,365
17,680
30,965
34,495
30,890
45,650
16,405
5,090
31,205
11,520
60,050
722.705
$10,400,915

Type
Competitive
Noncompetitive
Subtotal, Public

$27,879,670
1.248.235
$29,127,905

$5,734,780
1.248.235
$6,983,015

2,650,000

o
o

767.900
$10,400,915

Federal Reserve
Foreign Official
Institutions
TOTALS

CTv

Received
27,895
29,732,605
17,680
30,965
34,495
30,890
1,304,700
16,405
5,090
31,205
11,520
579,650
722.705
$32,545,805

rVO
r*

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

$32,545,805

An additional $2,500 thousand of bills will be
issued to foreign official institutions for new cash.
N B - 1 424

l02

Department off the Treasury • Washington, o.e. • Telephone 566
FOR R E L E A S E A T 2:30 P.M.
August 20, 1991

CONTACT:

EPT. OF THE TritASuKY

O f f i c e of F i n ancing
202/376-4350

T R E A S U R Y ’S W E E K L Y BILL O F F E R I N G
The D e p a r t m e n t of the Treasury, b y this p u b l i c notice,
i n v i t e s t e n d e r s for two s eries of T r e a s u r y bills t o t a l i n g a p p r o x i
m a t e l y $ 2 0 , 8 0 0 million, to be i s s u e d August 29, 1991.
This
o f f e r i n g will p r o v i d e a bout $1,550
m i l l i o n of n e w c a s h for the
Treasury, as the m a t u r i n g bi l l s are o u t s t a n d i n g in the amount
of $ 1 9 , 2 5 8 million.
T e n d e r s will be r e c e i v e d at Federal Reserve
B a n k s a n d B r a n c h e s a n d at the B u r e a u of the Public Debt, W a s h i n g
ton, D. C. 20239-1500,
Monday, August 26, 1991,
p r i o r to ’
12:00 n o o n for n o n c o m p e t i t i v e t e n d e r s and pr i o r to 1:00 p.m.,
E a s t e r n Daylight Saving time, for c o m p e t i t i v e tenders.
The two
seri e s o f f e r e d are as follows:
92-day b i l l s (to m a t u r i t y date) for a p p r o x i m a t e l y
$10,400
million, r e p r e s e n t i n g an a d d i tional amount of bills
dated
May 30, 1991,
and to m a t u r e November 29, 1991
(CUSIP No. 912794 XP 4), c u r r e n t l y o u t s t a n d i n g in the amount
of $ 1 0 , 0 5 1 million, the a d d i tional and original b i l l s to be
f r e e l y i n terchangeable.
182-day b i l l s for a p p r o x i m a t e l y $10,400
million, to be
dated
August 29, 1991,
and to m a t u r e
February 27, 1992 (CUSIP
No. 9127 9 4 YB 4).
T h e b i lls will be i ssu e d o n a di s c o u n t basis u n d e r competitive
and n o n c o m p e t i t i v e bidding, and at m a t u r i t y th e i r p a r amount will
be p a y a b l e w i t h o u t interest.
B o t h series of bills will be issued
e n t i r e l y in b o o k - e n t r y form in a m i n i m u m amount of $ 1 0 ,000 and in
a n y h i g h e r $5,000 multiple, on the records eit h e r of the Federal
R e s e r v e B a nks and Branches, or of the D e p a r t m e n t of the Treasury.
The b i lls will be i s sued for c a s h and in excha n g e for
T r e a s u r y b ills m a t u r i n g August 29, 1991.
In a d d i t i o n to the
m a t u r i n g 13-week and 2 6 - week bills, there are $10,631 m i l l i o n of
m a t u r i n g 52-w e e k bills.
The d i s p o s i t i o n of this latter amount was
a n n o u n c e d last week.
T e nders from Federal Reserve Banks for their
o w n ac c o u n t and as agents for fore i g n and interna t i o n a l m o n e t a r y
a u t h o r i t i e s will be a c c e p t e d at the w e i g h t e d average b a n k discount
r a tes of a c c e p t e d c o m p e t i t i v e tenders.
A d d i tional amou n t s of the
b i l l s m a y be i s s u e d to Federal Reserve Banks, as agents for foreign
and i n t e r n a t i o n a l m o n e t a r y authorities, to the ext e n t th a t the
a g g r e g a t e amount of t e n d ers for such accounts exce e d s the a g g r e
g a t e a m o u n t of m a t u r i n g bills he l d b y them.
For p u r p o s e s of d e t e r
m i n i n g s uch a d d i t i o n a l amounts, foreign and i n t e r n a t i o n a l m o n e t a r y
a u t h o r i t i e s are c o n s i d e r e d to h o l d $1,116
m i l l i o n of the original
1 3 - w e e k and 2 6 - w e e k issues.
Federal Reserve Banks c u r r e n t l y hold
$1,496
m i l l i o n as agents for fore i g n and i n t e r n a t i o n a l m o n e t a r y
authorities, and $8,010
m i l l i o n for their o w n account.
These
a m o u n t s r e p r e s e n t the c o m b i n e d holdi n g s of such a c c o u n t s for the
three issues of m a t u r i n g bills.
Tenders for bills to be m a i n t a i n e d
o n the b o o k - e n t r y r e c o r d s of the D e p a r t m e n t of the T r e a s u r y should
be s u b m i t t e d o n Form PD 5176-1 (for 13-week series) o r Form
PD 5176-2 (for 2 6 - w e e k series).
NB-1425

1/91

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.
Com
petitive 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures.
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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.

8/89

FOR RELEASE AT 2:30 P.M.
August 21, 1991

2 3 SI

Office of Financing
202/376-4350

TREASURY TO AUCTION 2-YEAR AND 5-YEAR NOTES
TOTALING $21,750 MILLION
The Treasury will auction $12,500 million of 2-year notes
and $9,250 million of 5-year notes to refund $10,221 million of
securities maturing August 31, 1991, and to raise about $11,525
million new cash.
The $10,221 million of maturing securities are
those held by the public, including $641 million currently held
by Federal Reserve Banks as agents for foreign and international
monetary authorities.
The $21,750 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 aver
age prices of accepted competitive tenders.
In addition to the public holdings, Federal Reserve Banks,
for their own accounts, hold $892 million of the maturing securi
ties that may be refunded by issuing additional amounts of the
new securities at the average prices of accepted competitive
tenders.
Details about each of the new securities are given in the
attached highlights of the offerings and in the official offer
ing circulars.
oOo
Attachment

NB-1426

HIGHLIGHTS OF TREASURY OFFERINGS TO THE PUBLIC
OF 2-YEAR AND 5-YEAR NOTES TO BE ISSUED SEPTEMBER 3, 1991
August 21, 1991
Amount Offered to the Public ... $12,500 million

$9,250 million

Description of Security:
Term and type of s e c u r i t y .... . 2-year notes
Series and CUSIP designation ... Series AE-1993
(CUSIP No. 912827 C2 6)
Maturity date .................. August 31, 1993
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 ........ The last calendar day of
February and August through
August 31, 1993
Minimum denomination available . $5,000

5-year notes
Series S-1996
(CUSIP No. 912827 C3 4)
August 31, 1996
To be determined based on
the average of accepted bids
To be determined at auction
To be determined after auction
The last calendar day of
February and August through
August 31, 1996
$ 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 aver
age price up to $1,000,000
Accrued interest payable
by investor ................
None
Payment Terms :
Payment by non-institutional
investors ..................
Deposit guarantee by
designated institutions ....

available to the Treasury
r e a d i l y —c o l l e c t i b l e c h e c k

...
...

None

Full payment to be
submitted with tender

Acceptable

Kev Dates:
Receipt of tenders ............. Tuesday, August 27, 1991
a) noncompetitive .............. prior to 12:00 noon EDST
b) competitive ................. prior to 1:00 p.m., EDST
Settlement (final payment
due from institutions):
a) funds immediately
b)

Yield auction
Must be expressed as
an annual yield, with two
decimals, e.g., 7.10%
Accepted in full at the aver
age price up to $1,000,000

T u e s d a y , S e p t e m b e r 3, 1 9 9 1
T h u r s d a y , A u g u s t 29, 1 9 9 1

Wednesday, August 28, 1991
prior to 12:00 noon, EDST
prior to 1:00 p.m., EDST

T u e s d a y , S e p t e m b e r 3, 1 9 9 1
T h u r s d a y , A u g u s t 29, 1 9 9 1

The Treasury Department today announced that the procedures
necessary to bring into force the new income tax treaty with the
Federal Republic of Germany were completed in an exchange ceremony
held in Washington yesterday. The treaty was signed in Bonn on
August 29, 1989, and subsequently ratified by both countries.
The treaty updates a number of provisions of the 1954 U.S.Germany income tax treaty (as amended in 1965) . The treaty:
o
o
o
o
o

provides national treatment with respect to taxes of all kinds
and at all levels of government.
eliminates tax on certain preliminary or exploratory activities
in the other country;
establishes maximum rates of tax on cross-border flows of
dividends, interest and royalties;
provides certainty by setting out rules for the taxation by the
host country of each type of income derived there by the
residents of the other country; and
provides a mechanism for cooperation between the tax
authorities to resolve problems of double taxation and to
improve tax compliance.

The treaty generally applies as of Jan. 1, 1990.
different effective dates apply for several purposes.

However,

First,
phase-in rules are provided for certain direct
investment dividends, U.S. branch profits, and dividends paid by
U.S. regulated investment companies. Second, a taxpayer may elect
to have the 1954 treaty apply for 1990 instead of the new treaty.
Finally, the new treaty will apply for the territory of the former
German Democratic Republic and East Berlin from the date on which
the tax law of the Federal Republic of Germany became applicable
there (Jan. 1, 1991).
Because of the treaty's effective date, taxpayers may be
entitled to claim tax refunds. U.S. resident taxpayers who have
already obtained a partial refund, under the 1954 treaty, of tax
withheld on dividends paid by a German corporation on or after Jan.
1, 1990 will automatically receive an additional 5 percent refund,
from the German Finance Office. Others should file a refund claim
with: Federal Finance Office, Friedhofstrasse 1, 5300 Bonn 3,
Federal Republic of Germany. Detailed instructions for claiming
refunds of U.S. tax will be issued shortly.
NB-1427

PUBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Wastìifr^ton, DC 20239

FOR IMMEDIATE RELEASE
August 22, 1991

tj g Office of Financing
202-376-4350

RESULTS OF TREASURY'S

52-WEEK BILLS

Tenders for $12,584 million of 52-week bills to be issued
August 29, 1991 and to mature August 27, 1992 were
accepted today (CUSIP: 912794YX6).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.35%
5.37%
5.36%

Investment
Rate
5.67%
5.69%
5.68%

Price
94.591
94.570
94.580

Tenders at the high discount rate were allotted 33%.
The investment rate is the equivalent coupon-issue yield,
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
22,385
33,056,535
12,905
19,165
29,860
13,420
2,099,820
19,770
3,970
19,815
8,000
607,410
301.310
$36,214,365

Accented
22,375
11,596,835
12,405
19,165
29,860
13,420
382,320
12,430
3,970
19,815
8,000
161,810
301.310
$12,583,715

Type
Competitive
Noncompetitive
Subtotal, Public

$32,324,060
620.305
$32,944,365

$8,693,410
620.305
$9,313,715

3,050,000

220.000
$36,214,365

220.000
$12,583,715

Federal Reserve
Foreign Official
Institutions
TOTALS

N B - 1 428

We have entered into agreements with Bolivia to reduce
substantially Bolivia's debt to the United states.
Reduction o£
Bolivia's food assistance debt is a major*step forward in
realizing the goals of the Enterprise for the Americas Initiative
(KAI) — a program which the United states proposed on June 27,
1990, to promote increased trade, investment and growth
throughout the hemisphere* ,
Bolivia's far-reaching steps to reform its economy, including
measures to open its investment regime, qualify Bolivia for debt
reduction under the EAI.
Bolivia is receiving a very substantial
reduction of its bilateral debt owed to the United States.
Under
legislation enacted by Congress last year;^the United States is
reducing Bolivia's P.L., 4S0 debt by S6 percent, from
approximately $38 million to approximately $7,7 million.
Under separate legal authority to assist the relatively leastdeveloped countries, thé united States will eliminate Bolivia's
$341 million debt owed to the U.s. Agency for International
Development, the first time such relief"has.been provided outside
of Sub-saharan Africa.
u.; • , ' *
These understandings will' h e l p p a v e t h e . w a y f o r significant
additional funds for environmental projects in Bolivia,
in
particular, the united States welcomes thé Commitment of Bolivia
to provide $20 million in local currency <>ver 10 years to support
environmental activities.
t

„

. . ’ ‘ ’ *. . <

The Administration applauds this important step to reduce
Bolivia's debt and provide :support for ‘.the environment and looks
forward to continuing to work with. Bolivia and other countries in
the region to advance the goals of the Enterprise for the
Americas Initiative.

..I

THE WHITE H0U8E
office of the Press Secretary
(Kennebunkport, Maine)
For Immediate Release

August 22, 1991
FACT SHEET

The Reduction of Bolivia's Debt
Today, president Bush endorsed a major agreement Between the
Government of Bolivia and the United States Government to reduce
Bolivia’s official bilateral debt owed to the United States
Government on P.L. 480 food assistance loans. Deputy Secretary
of the Treasury John Robson signed for the United States and
Minister of Planning and Coordination Samuel Doria-Medina signed
for Bolivia. This agreement is the second bilateral debt
reduction under the Enterprise for the Americas initiative (SAX).
The debt reduction element of the Initiative is intended to
reduce debt owed by countries in Latin America and the Caribbean
which have undertaken broad macroeconomic and structural reforms,
liberalized their investment regimes, and reached agreement on
their commercial bank debt, where appropriate. Bolivia's sound
macroeconomic policies, stable and receptive foreign investment
regime, and substantial progress in reducing its commercial bank
debt meet the standards set under the Initiative.
Implementation of the agreement is contingent on approval of an
investment sector loan by the Inter-American Development Bank
Board of Directors, which is expected on September 11. The
agreement signed today provides for the reduction of Bolivia's
food assistance debt to the United States by 80%, from
approximately $38 million to $7.7 million.
in addition to this reduction in the stock of debt, we expect to
enter into an Environmental Framework Agreement with the
Government of Bolivia, which would allow all Interest payments on
the new reduced obligation to be paid in local currency and
channeled into an environmental fund established by Bolivia.
The United states and Bolivia also signed an agreement today to
eliminate Bolivia's official bilateral debt owed to the united
states Government on loans made by the U.s. Agency for
International Development (A.I.D.) A.i .d . Assistant
Administrator James Michel signed for the united states and
Minister Doria-Medina signed for Bolivia.
The agreement signed today provides for the full forgiveness of
Bolivia's A.I.D. debt to the united States, which is
approximately $341 million. Congress provided authority (in
section 572 of the Foreign Operations, Export Financing and
Related Programs Appropriations Act of 1989) to reduce the A.I.D.
debt of relatively least developed countries implementing strong
economic reforms. Bolivia is the first country outside of subsaharan Africa to receive such debt reduction.
in addition, Bolivia has made a voluntary commitment to provide a
bond which will produce $20 million in local currency over 10
years to support environmental activities consistent with the
EAI.
•

p T BYJXerox Telecopier 7020 I 8-23-91 5 2 s52PM i

•4

9 202 3777506;# 2

THE WHITE HOUSE
Office of the Press Secretary
(Kennebunkport, Maine)
For Immediate Release

August 23, 1991

STATEMENT BY THE PRESS SECRETARY
Today, the United States and Jamaica entered into an agreement to
reduce substantially Jamaica's food assistance debt to the United
States# Under legislation enacted by Congress last year, the
United States is reducing Jamaica's P.L. 480 debt by 80 percent,
from approximately $271 million to approximately $54#2 million.
Jamaica is implementing a wide range of reforms aimed at building
a strong market-oriented economy. These initiatives, including
measures to make the economy more attractive to investors,
qualify Jamaica for debt reduction under the EAI.
The agreement represents -a major step forward in realizing the
goals of the President's Enterprise for the Americas Initiative
(EAI) — a program designed to promote increased trade,
investment and growth throughout the hemisphere. It also paves
the way for an Environmental Framework Agreement between the
United States and Jamaica. Under this agreement, Jamaica will be
permitted to make interest payments on the new reduced debt in
local currency, paid into an environmental fund established in
Jamaica.
# # #

U r B Y ;Xerox Telecopier 7020 ! 8-23-91 i 2552PM 5

9 202 3777506!» 3

THE WHITE HOUSE
Office of the Press Secretary
(Kennebunkpor.t, Maine)
For Immediate Release

August 23, 1991
FACT SHEET

The Reduction of Jamaica's Debt
Today, the Governments of Jamaica and the United States entered
into a major agreement to reduce Jamaica's official bilateral
debt owed to the United States Government on P.L. 480 food
assistance loans. Deputy Secretary of the Treasury John Robson
signed for the United States; Minister of Foreign_Affairs and
Foreign Trade David Coore signed for Jamaica. This agreement is
the third bilateral debt reduction under the Enterprise for the
Americas Initiative (EAI).
The debt reduction element of the Initiative is intended to
reduce debt owed by countries in Latin. America and the Caribbean
which have undertaken broad macroeconomic and structural reforms,
liberalized their investment regimes, and reached agreement on
their commercial bank debt, where appropriate. Jamaica is
implementing a wide range of reforms aimed at building a strong,
market-oriented economy.
These initiatives, including measures
to make its economy more attractive to investors, gualify Jama ca
for debt reduction under the EAI.
Implementation of the agreement is contingent on approval of the
trade, finance, and investment sector loan by the Inter-American
Development Bank Board of Directors, which is expected on
September 18. The agreement signed today provides for the
reduction of Jamaica's food assistance debt to the United States
by 80%, from approximately $271 million to $54.2 million«
In addition to this reduction in the stock of debt, the United
States expects to enter into an Environmental Framework Agreement
with Jamaica, which would allow all interest payments on the new
reduced obligation to be paid in local currency and channeled
into an environmental fund established by Jamaica«
# # #

U BLIC D EBT NEWS
Department of the Treasury • Bureauroi ^ e Eublic Debt • Washington, DC 20239

r HOOH 5310

FOR IMMEDIATE RELEASE
August 26, 1991

UQL 8 Si Q

CONTACT: Office of Financing
§ g g
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS

EPT-OF THE T R E A T Y

Tenders for $10,408 million of i3-week bills to be issued
August 29, 1991 and to mature November 29, 1991 were
accepted today (CUSIP: 912794XP4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.38%
5.41%
5.40%

Investment
Rate_____Price
5.55%
98.625
5.58%
* 98.617
5.57%
98.620

$3,845,000 was accepted at lower yields.
Tenders at the high discount rate were allotted 56%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
S t . Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
29,800
28,164,880
19,185
41,535
98,480
27,475
1,854,025
56,245
8,060
32,285
21,610
520,815
878.540
$31,752,935

Accented
29,800
8,685,750
19,185
41,535
85,280
26,465
497,745
16,245
8,060
32,285
21,610
65,935
878.540
$10,408,435

Type
Competitive
Noncompetitive
Subtotal, Public

$27,664,510
1.552.425
$29,216,935

$6,320,010
1.552.425
$7,872,435

2,411,100

124.900
$31,752,935

124.900
$10,408,435

Federal Reserve
Foreign Official
Institutions
TOTALS

NB-1429

U BLIC DEBT NEWS
• Washington, DC 20239

Department of the Treasury •
FOR IMMEDIATE RELEASE
August 26, 1991

ug 2 8 31 0

ONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS

err, ur Tift TR E A S U R Y

Tenders for $10,447 million of 26-week bills to be issued
August 29, 1991 and to mature February 27, 1992 were
accepted today (CUSIP: 912794YB4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.46%
5.47%
5.47%

Investment
Rate_____Price
5.71%
97.240
5.72%
97.235
5.72%
97.235

Tenders at the high discount rate were allotted 52%.
The investment rate is the equivalent coupon-issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
31,450
28,559,755
12,560
29,110
40,950
27,625
1,532,110
40,415
9,965
41,325
15,790
683,700
681.535
$31,706,290

Accented
31,450
9,127,470
12,560
29,110
40,950
27,625
316,510
20,415
9,965
41,325
15,790
92,740
681.535
$10,447,445

Type
Competitive
Noncompetitive
Subtotal, Public

$27,005,995
1.239.995
$28,245,990

$5,747,150
1.239.995
$6,987,145

2,550,000

910.300
$31,706,290

910.300
$10,447,445

Federal Reserve
Foreign Official
Institutions
TOTALS

N B -1430

TREASURY NEWS

Department of the Treasury • Washington, D.C. • Telephone 566-204

FOR RELEASE AT 2:30 P.M.
August 27, 1991

CONTACT î

Office of Financing
202/219-3350

TREASURY OFFERS $5,000 MILLION
OF 16-DAY CASH MANAGEMENT BILLS
The Department of the Treasury, by this public notice,
invites tenders for approximately $5,000 million of 16-day
Treasury bills to be issued September 3, 1991, representing
an additional amount of bills dated March 21, 1991, maturing
September 19, 1991 (CUSIP No. 912794 XG 4).
Competitive tenders will be received at all Federal Reserve
Banks and Branches prior to 1:00 p.m., Eastern Daylight Saving
time, Thursday, August 29, 1991. 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 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 competi
tive bidding, and at maturity their par amount will be payable
without interest. The bills will be issued entirely in bookentry form in a minimum amount 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 secu
rities 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,
NB-1431

%
M

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 sixmonth 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.
Public announcement will be made by the Department of the
Treasury of the amount and yield range of accepted bids.
Those
submitting tenders will be advised of the acceptance or rejection
of their tenders.
The Secretary of the Treasury expressly reserves
the right to accept or reject any or all tenders, in whole or in
part, and the Secretary's action shall be final.
The calculation
of purchase prices for accepted bids will be carried to three
decimal places on the basis of price per hundred, e.g., 99.923.
Settlement for accepted tenders in accordance with the bids must
be made or completed at the Federal Reserve Bank or Branch in cash
or other immediately-available funds on Tuesday, September 3, 1991.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures.
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, any gain in
excess of the basis is treated as ordinary income.
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

Department off the Treasury • Washington,
FOR RELEASE AT 2:30 P.M.
August 27, 1991

CONTACT:

o.c. e Telephone sss*204i
Office of Financing
202^219-3350

TREASURY’S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $21,200 million, to be issued September 5, 1991.
This offering will provide about $2,200 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $ 19,011 million.
Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500,
Tuesday, September 3, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders.
The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$ 10,600 million, representing an additional amount of bills
dated
June 6, 1991
and to mature December 5, 1991
(CUSIP No. 912794 XQ 2), currently outstanding in the amount
of $ 10,533 million, the additional and original bills to be
freely interchangeable.

182-day bills for approximately $10,600 million, to be
dated September 5, 1991
and to mature March 5, 1992
(CUSIP
No. 912794

YC 2).

The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing September 5, 1991.
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 competi
tive 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 $1,428 million as agents for foreign and international
monetary authorities, and $4,557 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series)•
N B ^U 3*

TREASURY'S 13-, 26-, AND 52-WEEK BILL OFFERINGS, Page 2
11
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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

1/91

Depart ment of the Treasury * Bureau of the Public Debt • Washington, D C 20239

FOR IMMEDIATE RELEASE
August 27, 1991

CONTACT: Office Of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 2-YEAR NOTES
Tenders for $12,596 million of 2-year notes, Series AE-1993
to be issued September 3, 1991 and to mature August 31, 1993
were accepted today (CUSIP: 912827C26).
The interest rate on the notes will be 6 3/8%.
The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

6.45%
6.46%
6.46%

Erica
99.862
99.843
99.843

$45,000,000 wasi accepted at lower yields.
Tenders at the high yield were allotted 92%.
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
47,835
36,884,890
43,085
52,590
681,855
41,920
1,863,935
61,555
31,225
78,280
21,715
479,230
230.780
$40,518,895

Accepted
47,835
11,191,365
43,085
52,590
121,935
36,875
611,825
57,555
30,145
73,280
21,705
77,230
230.780
$12,596,205

The $12,596 million of accepted tenders includes $1,063
million of noncompetitive tenders and $11,533 million of
competitive tenders from the public.
In addition, $758 million of tenders was awarded at the
average price to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $692 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

RESULTS OF TREASURY 'S .AUCTION OF 5-YEAR NOTES
1n c 4 SI Ii? y

Tenders for $9,305 million of 5-year notes, Series S-1996,
to be issued September 3, 1991 and to mature August 31, 1996
were accepted today (CUSIP: 912827C34).
The interest rate on the notes will be 7 1/4%.
The range
of accepted bids and corresponding prices are as follows:
Low
High
Average

Yield
7.36%
7.38%
7.37%

Price
99.547
99.465
99.506

$30,000 was accepted at lower yields.
Tenders at the high yield were allotted 9%.
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
36,665
27,319,396
24,861
46,079
169,886
30,765
1,277,778
30,347
17,742
44,741
14,931
386,928
61.356
$29,461,475

Accented
36,645
8,647,197
24,858
46,079
66,715
26,205
229,238
26,347
17,715
44,731
14,931
63,197
61.356
$9,305,214

The $9,305 million of accepted tenders includes $725
million of noncompetitive tenders and $8,580 million of
competitive tenders from the public.
In a d d i t i o n $280 million of tenders was awarded at the
average price* to Federal Reserve Banks as agents for foreign and
international monetary authorities.
An additional $200 million
of tenders was also accepted at the average price from Federal
Reserve Banks for their own account in exchange for maturing
securities.

N B -1 4 3 4

Press 566-2041

Charles D. Haworth, Secretary, Federal Financing Bank
(FFB), announced the following activity for the month of
July 1991.
FFB holdings of obligations issued, sold or guaranteed
by other Federal agencies totaled $186.8 billion on
July 31, 1991, posting an increase of $1.6 billion from the
level on June 30, 1991. This net change was the result of
increases in holdings of agency debt of $2,669.1 million,
while holdings of agency assets decreased by $932.5 million
and holdings of agency-guaranteed loans decreased by
$113.3 million.
FFB made 55 disbursements during July.
FFB holdings on July 31, 1991 were the highest in the
Bank's history.
Attached to this release are tables presenting FFB
July loan activity and FFB holdings as of July 31, 1991.

NB-1435

Page 2 of 5
FEDERAL FINANCING BANK
JULY 1991 ACTIVITY

DATE

BORROWER

AM3UNT
OF ADVANCE

FINAL
MATURITY

INTEREST
RATE
(semiannual)

10/1/91
10/1/91
10/1/91

5.848%
5.848%
5.864%

8/30/91
9/27/91
10/09/91
9/20/91
10/23/91
8/28/91
9/27/91

5.834%
5.877%
5.857%
5.876%
5.879%
5.876%
5.876%

AGENCY DEBT
FEDERAL DEPOSIT INSURANCE CORPORATION
Note No. FDIC 0002
7/1 $
918,000,000.00
7/1
2,912,954,180.82
7/16
2,600,000,000.00

Advance #1
Advance #2
Advance #3

NATIONAL CREDIT UNION AEMTNISTRATICIN

Central L iq u i d it y Facility
+Note
4Note
Note
Note
Note
4Note
-Hfote

#557
#558
#559
#560
#561
#562
#563

7/1
7/2
7/12
7/22
7/25
7/29
7/29

13,000,000.00
1,500,000.00
3,000,000.00
5,000,000.00
5,000,000.00
10,000,000.00
13,000,000.00

7/1
7/15
7/29

54,082,372,965.22
500,000,000.00
2,800,000,000.00

10/1/91
10/1/91
10/1/91

5.848%
5.844%
5.876%

7/10
7/16
7/22
7/31
7/31
7/31

273,000,000.00
349,000,000.00
223,000,000.00
140,000,000.00
140,000,000.00
150,000,000.00

7/22/91
7/31/91
8/5/91
8/14/91
8/16/91
8/19/91

5.864%
5.844%
5.889%
5.864%
5.864%
5.864%

RESOLUTION TRUST CORPORATION
Note No. 0010
Advance #1
Advance #2
Advance #3
TENNESSEE VALLEY AUTHORITY
Short-term
Short-term
Short-term
Short-term
Short-term
Short-term
+rollover

Bond
Bond
Bond
Bond
Bond
Bond

#106
#107
#108
#109
#110
#111

INTEREST
RATE_______
(other than
semi-annual)

Page 3 of 5

FEDERAL FINANCING BANK
JULY 1991 ACTIVITY

-------- “
A M D U N T FINAL
BORROWER_________________________________DATE__________ OF ADVANCE
MATURITY

—

--------- -

INTEREST

RATE_______ RATS--------------

(semi—
annual)

(other than
semi-annual)

GOVERNMENT - GUARANTEED TOANS
DEPARTMENT OF DEFENSE

Foreign Mi Iitarv Sales
Philippines 11

7/26

9/13/93

7.065%

1,101,529.00
900,206.00
1,421,100.00

12/11/95
12/11/95
12/11/95

8.116%
8.017%
7.894%

471,913.00
3,303,391.25
2,230,434.75
2,117,739.25
9,110,273.76
3,988,000.00
1,452,000.00
1,544,554.47
15,015,365.21
939,935.14
589,837.85
13,924,545.40
4,380,165.35
7,545,218.16
548,000.00
2,097,000.00
1,472,470.59
929,764.81
2,897,999.97
838,000.00
220,000.00
15,569,008.25
2,155,636.37
4,977,371.88
879,428.55
924,369.76
572,727.30
1,909,090.91
1,291,025.63
2,583,999.99
1,251,000.00

9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
9/30/93
12/31/19
9/30/93
9/30/93
9/30/93
9/30/93
7/1/93
7/1/93
12/31/19
12/31/19
12/31/19
12/31/19
12/31/18
12/31/18
12/31/18
12/31/19
12/31/19
1/2/18

7.123%
7.123%
7.123%
7.123%
7.134%
7.137%
7.137%
7.135%
7.134%
7.134%
7.134%
7.127%
7.127%
7.126%
8.456%
7.125%
7.125%
7.125
7.125%
7.024%
7.024%
8.455%
8.455%
8.455%
8.455%
8.446%
8.446%
8.446%
8.384%
8.384%
8.483%

31,571.00

GENERAL SERVICES AEMTNISTRATION

Foley Square Courthouse
Foley Square Office Building
Foley Square Office Building

7/8
7/16
7/30

ETIRAT. ELECTRIFICATION AEMTNISIRATICN

♦Alleghney Electric #93A
♦Alleghney Electric #93A
♦Alleghney Electric #93A
♦Alleghney Electric #93A
♦Alleghney Electric #175A
*Alleghney Electric #255A
♦Alleghney Electric #255A
♦Associated Electric #328
*Oolarado-Ute Electric #168A
*Colarado-Ute Electric #203A
♦Colarado-Ute Electric #203A
♦Cooperative Power Assoc. #13QA
♦Cooperative Power Assoc. #13QA
♦Cooperative Power Assoc. #24QA
♦KAMD Electric #148
♦KAMD Electric #209A
♦KAMO Electric #266
♦KAMD Electric #266
♦KAMD Electric #266
♦N.W. Electric #176
♦N.W. Electric #176
♦Oglethorpe Power #320
♦Oglethorpe Power #320
♦Oglethorpe Power #320
♦Southern Mississippi Elec. #330
♦Sho-Me Power #324
♦Sho-Me Power #324
♦Sho-Me Power #324
♦United Power Assoc. #159A
♦United Power Assoc. #159A
Oombelt Power #292
♦maturity extension

7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/1
7/11

7.061% qtr.
7.061% qtr.
7.061% qtr.
7.061% qtr.
7.071% qtr.
7.074% qtr.
7.074% qtr.
7.072% qtr.
7.071% qtr.
7.071% qtr.
7.071% qtr.
7.065% qtr.
7.065% qtr.
7.064% qtr.
8.368% qtr.
7.063% qtr.
7.063% qtr.
7.063% qtr.
7.063% qtr.
6.963% qtr.
6.963% qtr.
8.367% qtr.
8.367% qtr.
8.367% qtr.
8.367% qtr.
8.359% qtr.
8.359% qtr.
8.359% qtr.
8.298% qtr.
8.298% qtr.
8.395% qtr.

Page 4 of 5

FEDERAL FINANCING BANK
JULY 1991 ACTIVITY

BORROWER

AM3UNT
DATE________ OF ADVANCE

FINAL
MATURITY

INTEREST INTEREST
RATE_____ RATE_______
(semi(other than
annual)
semi-annual)

7/28

10/31/91

5.884%

TENNESSEE VATIEY A t m O O T Y
Seven States Energy Corporation
Nöte A-91-09

$ 629,057,338.10

Page 5 of 5
AL FINANCING BANK
(in millions)
July 31. 1991

Program

11,238.0
6,431.0
96.7
57,382.4
12,828.0
6,400.6

11,238.0
2,900.0
79.9
58,208.0
12,881.0
6,400.6

-101.9
6,431.0
40.1
15,900.7
-1,554.0
-297.2

sub-total*
Government-Guaranteed Loans:
DOD-Foreign Military Sales
DEd.-Student Loan Marketing Assn.
DHUD-Community Dev. Block Grant
DHUD-Public Housing Notes +
General Services Administration +
DOI-Guam Power Authority
DOI-Virgin Islands
NASA-Space Communications Co. +
DON-Ship Lease Financing
Rural Electrification Administration
SBA-Small Business Investment Cos.
SBA-State/Local Development Cos.
TVA-Seven States Energy Corp.
DOT-Section 511
DOT-WMATA
sub-total*
grand total*
*figures may not total due to rounding
+does not include capitalized interest

94,376.6

91,707.5

2,669.1

20,418.7

51,334.0
61.3
76.1
4,463.9
6.6
55,941.9

52,254.0
66.9
82.7
4,463.9
6.8

-920.0
-5.5
-6.7
-0-0.3

-715.0
-8.2
-6.7
56.7
-1.8

56,874.3

-932.5

-675.0

4,702.2
4,850.0
218.6
1,903.4
646.5
29.1
24.7
32.7
1,624.4
18,894.3
296.9
706.1
2,418.7
21.8
177.0

-36.8
-0-1.1
-03.4
-0-0.2
-0-0-62.8
-3.5
-6.2
-6.1
-0-0-

-5,090.2
-30.0
-26.4
-47.4
282.6
-0.7
-0.7
-1,063.2
-47.9
-210.8
-89.1
-41.7
56.5
—1 •5
-0-

36,433.1

36,546.4

-113.3

-6,310.6

$ 186,751.6

$ 185,128.3

1,623.3

$ 13,433.1

A c c p ^ c •

Farmers Home Administration
DHHS-Health Maintenance Org.
DHHS-Medical Facilities
Rural Electrification Admin.-CBO
Small Business Administration

FY '91 Net Change
10/1/90-7/31/91

3,531.0
16.8
-825.7
-53.0
-0-

1
0
1

sub-total*
À C fP n n v

Nèt Change
7/1/91-7/31791
</>

Agency Debt:
Export-Import Bank
Federal Deposit Insurance Corporation
NCUA-Central Liquidity Fund
Resolution Trust Corporation
Tennessee Valley Authority
U.S. Postal Service

ne 30. 1991

PU BLIC BEBT NEWS
Department of the Treasury • B^re9U Qf|^éiI^bIjc0)^>t • Washington, DC 20239
y iv w

FOR IMMEDIATE RELEASE
August 29, 1991
EPT.OFTHE

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 16-DAY BILLS
Tenders for $5,014 million of 16-day bills to be issued
September 3, 1991 and to mature September 19, 1991 were
accepted today (CUSIP: 912794XG4).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.37%
5.39%
5.38%

Investment
Rate_____Price
5.48%
99.761
5.50%
99.760
5.48%
99.761

Tenders at the high discount rate were allotted 61%.
The investment rate is the equivalent coupon-issue yield.
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

0
28,200,000
0
0
0
0
1,615,000
0
0
0
0
625,000
0
$30,440,000

0
5,014,500
0
0
0
0
0
0
0
0
0
0
0
$5,014,500

Type
Competitive
Noncompetitive
Subtotal, Public

$30,440,000
0
$30,440,000

$5,014,500
0
$5,014,500

0
$30,440,000

0
$5,014,500

Federal Reserve
Foreign Official
Institutions
TOTALS

Received

Accepted

TJBLIC DEBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239

6 31 0 0 0 5 i j

FOR IMMEDIATE RELEASE
CONTACT: Office of Financing
September 3, 1991
202-219-3350
EFT. Of THl TREASURY
RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,633 million of 13-week bills to be issued
September 5, 1991 and to mature December 5, 1991 were
accepted today (CUSIP: 912794XQ2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.32%
5.35%
5.34%

Investment
Rate_____Price
5.48%
98.655
5.51%
98.648
5.50%
98.650

Tenders at the high discount rate were allotted 50%.
The investment rate is the equivalent coupon— issue yield.
TENDERS RECEIVED AND ACCEPTED (in thousands)
XiOcatipn
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
33,280
24,048,550
19,345
41,175
92,625
24,420
1,716,505
52,490
9,580
33,650
24,340
546,415
816.020
$27,458,395

Accepted
33,280
8,663,050
19,345
41,175
67,625
22,920
741,505
17,490
9,580
33,650
24,340
142,915
816.020
$10,632,895

Type
Competitive
Noncompetitive
Subtotal, Public

$23,736,180
1.472,910
$25,209,090

$6,910,680
1,472,910
$8,383,590

2,175,530

73.775
$27,458,395

73.775
$10,632,895

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $12,125 thousand of bills will be
issued to foreign official institutions for new cash.

N B - J4 3 7

pU
nn
s J^ ii vn
. .'ODA
ID il A p
Ti y1 n
yy
n ü

U BLIC D EBT NEWS
Department of the Treasury • Bureau of the Public Debt • Washington, DC 20239
CONTACT: Office of Financing
202-219-3350

FOR IMMEDIATE RELEASE
September 3, 1991

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,613 million of 26-week bills to be issued
September 5, 1991 and to mature March 5, 1992 were
accepted today (CUSIP: 912794YC2).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.37%
5.39%
5.39%

Investment
Rate_____ Price
5.61%
97.285
5.63%
97.275
5.63%
97.275

Tenders at the high discount rate were allotted 53%.
The investment rate is the equivalent coupon-issue yield.
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
32,460
24,199,380
12,035
30,955
40,915
32,130
1,364,795
35,620
11,655
36,395
19,980
623,560
727.450
$27,167,330

Accepted
32,460
9,072,930
12,035
30,955
40,915
29,680
358,845
18,270
11,655
36,395
19,980
221,620
727.450
$10,613,190

Type
Competitive
Noncompetitive
Subtotal, Public

$22,527,645
1.259.560
$23,787,205

$5,973,505
1.259.560
$7,233,065

2,400,000

980.125
$27,167,330

980.125
$10,613,190

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $208,075 thousand of bills will be
issued to foreign official institutions for new cash.

NB-1438

Department of the Treasury • Washington, o.c. • Telephone 566 -2 0 4 ?
tPT. OF THE TREASURY

FOR RELEASE AT 2:30 P.M.
September 3, 1991

CONTACT:* Office of Financing
202-219-3350

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling
approximately $21,200 million, to be issued September 12, 1991.
This offering will provide about $2,350 million of new cash for
the Treasury, as the maturing bills are outstanding in the amount
of $18,861 million. Tenders will be received at Federal Reserve
Banks and Branches and at the Bureau of the Public Debt, Washing
ton, D. C. 20239-1500, Monday, September 9, 1991,
prior to
12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$10,600 million, representing an additional amount of bills
dated June 13, 1991
and to mature December 12, 1991
(CUSIP No. 912794 XR 0), currently outstanding in the amount
of $10,266 million, the additional and original bills to be
freely interchangeable.
182-day bills (to maturity date) for approximately
$ 10,600 million, representing an additional amount of bills
dated
March 14, 1991
and to mature
March 12, 1992
(CUSIP No. 912794 y d 0), currently outstanding in the amount
of $ 11,233 million, the additional and original bills to be
freely interchangeable.
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing September 12, 1991. 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 competi
tive 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 $ 1,165 million as agents for foreign and international
monetary authorities, and $ 4,447 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 5176-1 (for 13-week series) or Form PD 5176-2 (for 26-week
series).
NB-1439

TREASURY'S 13-, 26-, AMD 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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

1/91

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.
Com
petitive 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
tor tne respective issues.
The calculation ot purcnase 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures.
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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.

8/89

apartment off the Treasury • Washington, D.C. • Telephone 566-204?

For Release Upon Delivery
Expected at 1:00 PM
September 4, 1991

STATEMENT OF THE HONORABLE
JEROME H. POWELL
ASSISTANT SECRETARY OF THE TREASURY
FOR DOMESTIC FINANCE
BEFORE THE
SUBCOMMITTEE ON TELECOMMUNICATIONS
AND FINANCE
COMMITTEE ON ENERGY AND COMMERCE
UNITED STATES HOUSE OF REPRESENTATIVES
SEPTEMBER 4, 1991
I
am pleased to have this opportunity to explain the
Treasury security auction process, the oversight and regulation
of the Government securities market, Salomon Brothers' recently
admitted violations of auction rules, and that firm's possible
violations of securities laws, antitrust laws, general fraud
statutes, SEC regulations, and New York Stock Exchange rules.
I
also am pleased to be able to address some specific issues you
have raised concerning government securities market regulation.
While regulation of the government securities markets can be
improved, the responsibilities of the various regulators are
reasonably well-defined.
With respect to the auctions, Treasury
determines the amounts and maturities of the securities to be
auctioned and sets the auction rules.
The Federal Reserve
conducts the auctions as Treasury's agent, and together the
Treasury and the Federal Reserve review bids for compliance.
Both the Treasury and the Federal Reserve have powerful, but
limited, sanctions available to them to punish violators of these
rules.
The Treasury, for example, has forbidden Salomon Brothers
to bid in auctions in behalf of its customers.
Securities fraud
in the form of deliberate violations of auction rules accompanied
by false statements to the Treasury and antitrust violations are
more generally the enforcement responsibility of the selfregulatory organizations, the SEC, and the Justice Department.
In addition, price manipulation and other types of secondary
market fraud are also the enforcement responsibility of the SEC
and the Justice Department.
We believe that these agencies' legal
fraud and antitrust violations in Treasury
question.
However, at a minimum, Treasury
modifications to current law to strengthen
NB-1440

authority to prosecute
auctions is beyond
would support
enforcement of

2
Treasury auction rules by providing that violations of these
rules would also constitute violations of the securities laws.
All government securities brokers and dealers, including
those that are financial institutions, are subject to regulation
pursuant to the Government Securities Act of 1986. Under that
Act, the Treasury was given the role as the rulemaker for
government securities brokers and dealers.
In its rulemaking
capacity, Treasury issued rules for government securities brokers
and dealers that adopted many of the existing SEC regulations
that already applied to registered brokers and dealers.
The
responsibility for enforcing these rules was given to the SEC and
the self-regulatory organizations for non-financial institution
brokers and dealers and to the appropriate Federal banking
agencies for financial institutions.
Salomon Brothers is, therefore, subject to comprehensive
regulation.
As a registered broker/dealer and member firm of the
New York Stock Exchange, it is subject to all SEC and NYSE rules,
as well as Treasury rules under the Government Securities Act.
Based on the recent admissions by Salomon Brothers, it is
possible that the firm violated recordkeeping and customer
confirmation requirements, as well as other requirements that the
SEC and the NYSE have full authority to enforce.
Moreover, any
allegations of market manipulation or securities fraud, if true,
would be a violation of securities laws that the SEC has the
authority to enforce.
Like all persons and entities, Salomon
Brothers and its employees are subject to the antitrust laws and
general fraud statutes. Violations of these provisions could
result in criminal prosecution by the Justice Department.
As a general matter, the current regulatory structure has
usually worked well. And yet the recent revelations of
intentional wrongdoing have raised legitimate concerns about the
integrity of the marketplace and about the adequacy of regulation
and supervision.
The ongoing investigations of misconduct are
broad ranging.
We believe that it is appropriate to conduct an
equally careful review of the adequacy of current regulation,
with the goal of maintaining the highest standards of integrity
while also preserving the liquidity, efficiency, and depth of the
government securities market.
We would expect to complete such a review and to report its
results to Congress within 90 days.
In the interim period, we
believe that all parties involved — including the regulators,
market participants, and the Congress — should exercise
restraint.
The market for U.S. government securities is the
largest, most liquid, and most important financial market in the
world.
It is the means by which we finance the national debt.
Moreover, it is the bedrock of the world financial system.
It is
essential that the integrity of this market be beyond question
and that there be adequate regulation to ensure that integrity.

3
But it is also essential that hasty action not impair the
liquidity and competitiveness of U.S. financial markets.
In my testimony today, I will first discuss Treasury
auctions, including the role of the primary dealers and
significant auction rules, then present a chronology from
Treasury's perspective of developments concerning the February
and May auctions, and conclude with a discussion of regulatory
issues.
Treasury Auctions
As the chart accompanying my testimony shows, the Treasury
Department has auctioned large amounts of marketable Treasury
securities in the past ten years.
In 1981, Treasury sold over
$600 billion of marketable Treasury securities? by 1990, this
figure had increased to over $1.5 trillion.
As long as there is
a budget deficit, the amount of securities Treasury is required
to sell will tend to increase, not only to raise funds to cover
the shortfall between receipts and expenditures, but also to
refinance maturing debt.
The massive Treasury financing requirements have been
accomplished in an extraordinarily smooth and efficient manner.
In the face of the government's large demands on financial
markets, interest rates, nevertheless, have trended down over the
last ten years.
Treasury believes that the best way to achieve
the goal of minimizing borrowing costs to the U.S. taxpayer is to
minimize surprises to the market while having in place procedures
to ensure the fairness and integrity of the market for Treasury
securities.
The Treasury Department has a regular and predictable
schedule for offering marketable securities, which is well known
to market participants.
The Treasury makes an announcement
as far in advance as is practical any time there is a £change in
the usual pattern, so that the market can digest the information
and prepare for the offerings.
The Treasury Department provides a large amount of
information to the public that helps investors estimate the
amount that the Treasury will borrow and the types of securities
that the Treasury will offer, l/z the end of the first month of
each calendar quarter, the Treasury holds a press conference to
announce the securities to be offered in the regular mid-quarter
financing operation. At the press conference, the Treasury also
announces estimates of the Treasury's borrowing needs for the
current calendar quarter and the succeeding three months.
Currently, the Treasury sells 13- and 26-week bills every
week and 52-wee< bills every four weeks.
Two-year and five-year
notes are auctioned every month for settlement at the end of the

4
month.
Seven-year notes are issued in the middle of the first
month of each calendar quarter.
The quarterly financings, which
settle on the 15th of February, May, August, and November,
typically consist of three- and ten-year notes and a thirty-year
bond.
These regularly scheduled issues amount to about 157
separate securities auctions each year.
The details concerning an offering of marketable securities
are announced about one week prior to the auction, and the
auction occurs from a few days to about one week prior to the
settlement date, depending upon holidays and other vagaries of
the calendar.
In a Treasury auction, competitive bidders submit tenders
stating the yield (discount rate for bill auctions) at which the
bidder wants to purchase the securities.
The bids are ranked
from the lowest yield to the highest yield required to sell the
amount offered to the public.
Competitive bidders whose tenders
are accepted pay the price equivalent to the yield that they bid.
In an auction of Treasury notes or bonds, the coupon rate is
determined after the deadline for receipt of competitive tenders,
based on the average yield of accepted competitive bids.
Noncompetitive bids for up to $1 million from the public are
awarded in full at the weighted average yield of accepted
The Treasury also offers cash management bills from time
to time to raise funds to cover low points in the Treasury cash
balance.
The maturity dates for cash management bills usually
coincide with the regular Thursday maturities of regular weekly
and 52-week bills.
Short-term cash management bills maturing in
a few days or a few weeks may be issued when the Treasury*s cash
balance is seasonally low.
For example, cash management bills
may be issued in early April, before the April 15 tax payment
date, and mature later in April, when cash balances are at
seasonal highs.
Short-term cash management bills may be
announced, auctioned, and settled in a period as short as one
day, if necessary, to ensure that the government does not run out
of cash.
To shorten the time for the auction and reduce the cost
of issuing short-term cash management bills, they usually are
issued only in large minimum purchase amounts — $1 million or
more — and noncompetitive tenders are not accepted.
Longer-term cash management bills are also issued from time
to time.
For example, the Treasury's borrowing requirement in
the final calendar quarter of the year is typically larger than
for the April-June quarter, when seasonally high tax payments are
due.
Cash management bills maturing after the April 15, 1991 tax
date were issued in November 1990 to manage Treasury borrowing in
light of this seasonal pattern.

5
competitive bids.
The ability to bid on a noncompetitive basis
ensures that smaller investors, who may not be able to obtain
current market information, can purchase securities at a current
market yield.
Noncompetitive bidding eliminates the risk that a
prospective investor might bid a yield that is too high and not
obtain the securities desired or too low and pay too much for the
securities.
Noncompetitive bidding also benefits the Treasury,
since the larger the amount awarded noncompetitively, the less
needs to be awarded to competitive bidders at successively higher
yields.
It also serves the goal of achieving a broad
distribution of Treasury securities.
To participate in the auction, any potential investor may
submit tender forms to any Federal Reserve Bank or branch, which
act as Treasury*s agent in the auction, or to the Treasury's
Bureau of the Public Debt.
The tenders must be received before
12:00 noon, Eastern time, for noncompetitive bids and 1:00 p.m.,
Eastern time, for competitive bids.
Currently, tenders are
received at 37 sites.
Typically, between 75 and 85 bidders
submit competitive tenders in Treasury's auctions for securities
to be held in the commercial book-entry system.
Additionally,
between 850 and 900 bidders submit noncompetitive tenders in
Treasury auctions for securities to be held in the commercial
book-entry system.
Also, on average there are about 19,000
noncompetitive tenders per Ruction for securities to be held in
the Treasury Direct system.
Depository institutions and primary dealers may submit
either competitive or noncompetitive tenders for their own
account and for the account of customers.
All other entities or
individuals may submit either competitive or noncompetitive
2 The commercial book-entry system for Treasury securities
is operated by the Federal Reserve Banks, acting as Treasury's
fiscal agents.
The Federal Reserve maintains book-entry accounts
for depository institutions and other entities such as government
and international agencies and foreign central banks.
In their
book-entry accounts at the Federal Reserve, the depository
institutions maintain their own security holdings and holdings
for customers, which include other depository institutions,
dealers, brokers, institutional investors, and individuals.
In
turn, the depository institution's customers maintain accounts
for their customers.
Broker-dealers are currently not permitted
to maintain securities accounts directly with the Federal
Reserve.
3 The Treasury Direct system is designed primarily for those
who wish to hold Treasury securities to maturity; no custodial or
transaction fees are charged.
At the end of 1990, 979,522
investors held 2.2 million security accounts in Treasury Direct
with a par value of nearly $59 billion.

tenders only for their own accounts.
Depository institutions and
primary dealers are required to submit customer lists when
submitting bids for the accounts of customers.
Customer lists
for competitive bids must be submitted either with the tender or
by the close of the auction.
Customer lists for noncompetitive
tenders must be received prior to the issue date.
The Federal Reserve Banks review the tenders for accuracy,
completeness, and compliance with Treasury*s rules and
guidelines.
The Federal Reserve Banks consult with the Treasury
Department prior to taking any action on questionable tenders
which could materially affect the results of the auction.
The
Treasury reserves the right to reject any tender.
Once it has been determined that the tenders have complied
with Treasury's rules, the Federal Reserve Banks compile the
auction summaries.
The noncompetitive summary shows the total
amount of noncompetitive bids received by each Federal Reserve
district.
The competitive bid summary shows the total amount bid
at each yield.
The summaries include information on specific
bidders only when needed to apply the 35% limitation on the
amount awarded or bid at a given yield by a single bidder or when
specific bids appear irregular.
This information is forwarded to
the Treasury's Bureau of the Public Debt.
The Bureau of the Public Debt accepts noncompetitive bids in
full and then determines the yields that are to be accepted on
competitive bids.
The amount awarded at the high yield is
prorated based on the amount bid at that yield to obtain the
offering amount.
Auction results are released to the public around 2:00 p.m.,
Eastern time, on the auction day.
Role of the Primary Dealers
In order to conduct monetary policy, the Federal Reserve
buys and sells government securities in the secondary market.
The Federal Reserve determines with which dealers it will trade,
and these designated dealers, currently 39 in number, are called
primary dealers.
Despite the name, designation as a "primary
dealer" refers to a secondary market relationship with the Open
Market Desk of the Federal Reserve System, not a relationship
with the Treasury. The Treasury does not determine which dealers
can be primary dealers, nor does it set any criteria for this
designation.
The relationship between the Federal Reserve Bank of New
York and the primary dealers is a business relationship, not a
formal regulatory one.
In order to assure itself of the
creditworthiness of the primary dealers, the Federal Reserve Bank

7
of New York requires that primary dealers submit reports to it
and that they permit FRBNY staff to inspect their operations and
books and records.
In addition to requirements that the primary dealers make
markets in all maturity sectors of Treasury securities and that
their share of the market meet certain minimums, the Federal
Reserve expects that primary dealers demonstrate their continued
commitment to the market for government securities by
participating in Treasury auctions.
Because of their importance to the government securities
market, their consistent participation in Treasury auctions, and
the monitoring of their creditworthiness by the FRBNY, primary
dealers share with depository institutions two privileges in the
auctions.
As mentioned, only primary dealers and depository
institutions can submit bids for customers as well as for
themselves.
In addition, tenders from primary dealers are
accepted without deposit, as is also the case for depository
institutions, States, political subdivisions or instrumentalities
thereof, public pension and retirement and other public funds,
international organizations in which the United States holds
membership, and foreign central banks and foreign states.
Others
must pay in full at the time the tender is submitted or, in the
case of notes and bonds, present a guarantee from a commercial
bank, or primary dealer of 5 percent of the par amount applied
for.4
That there is a group of dealers with a commitment to the
government securities market is a benefit to the Treasury, which
offers securities every week of the year. However, it needs to
be emphasized that the auction process is open; and that others
besides primary dealers can and do participate, either directly,
or if they choose, through primary dealers or depository
institutions.
The 35% Rule
For the past 29 years, the Treasury has limited the maximum
amount of securities awarded to a single bidder in a Treasury
offering.
The primary reasons for the limitation are to ensure
broad distribution of Treasury securities and to make it less
likely that ownership of Treasury securities become concentrated
in a few hands as a result of the auction.
4
Treasury also permits tenders to be received without
deposit if there is a preexisting agreement with a depository
institution on file at the Federal Reserve Bank that authorizes
the Federal Reserve Bank to debit the reserve account of the
depository institution on the issue date for the securities
purchased by the bidder.

The limitation has evolved over the years.
It was first set
at 25 percent of the total offering amount and applied only to 3month and 6-month Treasury bills.
Today, for bills, notes, and
bonds, the limitation is 35 percent of the public offering.
The
application of the 35 percent limit to any bidder includes
consideration of positions in the futures, forward, and whenissued markets.
The same limitation is also applied to the
maximum amount Treasury will recognize as having been tendered at
any particular yield.
The genesis of the maximum award limitation was the unusual
occurrence of a single bidder tendering what would have been a
successful bid for an exceptionally high proportion of the 13week bills auctioned on August 27, 1962 and issued on August 30,
1962.
On that occasion, Secretary of the Treasury Douglas Dillon
invoked his right to reject any or all tenders, in whole or in
part, because of concern about a possible market disturbance that
could have resulted from the disproportionate allotment.
On
August 28, 1962, the Treasury announced that "no single bidder
would be awarded more than one quarter of the total supply of
bills offered in either the 3- or 6-month bill maturities."
Subsequently, it became generally understood and accepted
throughout the market as applying to all Treasury offerings of
marketable securities.
The rule remained unmodified until May 14, 1979, when two
rule changes were announced.
First, the maximum award to any
single bidder in Treasury security offerings was limited to 25
percent of the total combined amounts of the competitive and
noncompetitive awards to the public. This rule excluded from the
25 percent calculation those Treasury securities allotted to the
Federal Reserve in exchange for maturing securities for its own
account and for the accounts of foreign official institutions.
It also excluded Treasury securities allotted to foreign official
institutions through the Federal Reserve for new cash.
This change was necessary because, by 1979, the size of bids
from foreign official accounts through the Federal Reserve, had
grown markedly.
As a consequence, the amount of an offering
remaining for the "public" had shrunk significantly, despite the
general increase in the size of Treasury offerings.
The second modification announced on May 14, 1979, was the
requirement, in effect today, that, beginning on June 18, 1979,
all bidders in bill auctions report on the tender form the amount
of any net long position in excess of $200 million in the bills
being offered.
This net long position is taken into account to
compute whether awards to any single bidder would exceed the
award limit.
Such positions include when-issued, futures, and
forward positions in the bill and holdings of the outstanding
bill with the same maturity date as the new offering.
Also, a
primary dealer bidding on behalf of a customer was required to

9
submit a separate tender for the customer whenever the customer's
net long position in the bill being offered exceeded $200
million.
This new rule recognized the growing importance of
when-issued trading and trading in Treasury bill futures.
A
similar rule for notes and bonds became effective on December 30,
1981.
The Treasury announced on September 8, 1981, an increase in
the limit on the maximum amount any one bidder may purely
in a
bill, note, or bond auction to 35% from 25% of the combined
amounts of competitive and noncompetitive securities available to
the public.
This was done to lessen the restrictive effect of
the modification made in 1979.
A further modification to the 35% rule was made on July 12,
1990. While continuing to permit bidders to tender for
securities at multiple yields, the Treasury announced that j^t— any
one yield the Treasury will not recognize amounts tendered in
excess of 35 percent of the public offering.
This rule change
v's made necessary because several dealers began to place very
large bids, even greater than the total size of the offering, at
what turned out to be the high or stop-out yield.
Because the
Treasury used the amount bid to prorate the securities awarded at
the highest yield among all bidders at that yield, a dealer who
guessed right about the stop—out yield and submitted a very large
bid could obtain a large proportion of the auction at the most
favorable yield.
The rule change put a stop to this practice and
resulted in a more equitable distribution for bids awarded at the
highest accepted yield.
This abuse of the proration methodology occurred in the June
27, 1990, auction of four-year notes by a primary dealer who was
directly requested not to repeat .the practice.
This same dealer,
along with another bidder, however, placed bids for extremely
large amounts at a July 10 auction of Resolution Funding
Corporation bonds.
This time tt: amounts were cut back for
purposes of proration at the stop-out yield.
Two days Inter, in
order to put an end to this practice,
Treasury announced the
rule change limiting the amount recognized as bid at any one
yield to 35% of the public offering.
Other Treasury Auction Rules
Single Bidder Guidelines.
On June 1, 1984, the Treasury
issued guidelines concerning the definition of a single bidder
for the purpose of the $1 million limitation on noncompetitive
bids.
These guidelines are also used to determine what
constitutes a single bidder for purposes of the 35 percent
limitation.
When-Issued Trading Prior to Auction.
Pre-auction trading
in Treasury notes and bonds was effectively prohibited from 1941

to 1975.
Pre-auction activity in Treasury bills has never been
prohibited, except in the case of noncompetitive bidders.
Until
1975, regular Treasury announcements of note and bond auctions
included a clause banning from the auction any participants who
engaged in purchasing, selling or making agreements on an issue
before the auction time and date.
Between February 1975 and July 1977, however, Treasury
announcements no longer carried this clause as it was thought to
be unnecessary.
This allowed a temporary when-issued market in
Treasury notes and bonds prior to auction to develop.
With the
2-year note auction of July 1977, however, Treasury once again
included the provision against pre-auction trading, citing
"undesirable speculative activity." This prohibition was
effective only for coupon securities.
Treasury decided to allow auction participants to engage in
pre-auction trading in order to "eliminate an unnecessary
regulation" beginning with the August 1981 issue of two-year
notes.
Since then, when-issued trading has come to be considered
an important and efficient mechanism for reducing the
uncertainties surrounding Treasury auctions.
The only significant rule change subsequent to 1981 was an
October 1983 Treasury announcement prohibiting when-issued
trading on the part of noncompetitive bidders.
This prohibition
applies to all Treasury securities and was intended to prevent
participants from garnering disproportionate shares of an issue
through noncompetitive auction bidding.
Bidder Certifications.
Bidders are required to certify on
the tender form that their net long position in the security
being auctioned is not in excess of $200 million, or, if it is in
excess, the amount of the long position.
Depository institutions
and primary dealers must certify that any bids submitted on
behalf of customers have been entered under the same conditions,
agreements, and certification set forth in the tender form.
The February 1991 Five-Year Mote Auction
I
would now like to discuss the unauthorized bid received in
a Treasury note auction last February.
The Treasury's Bureau of the Public Debt received a call at
approximately 1:30 p.m. February 21, 1991, from the Federal
Reserve Bank of New York concerning the application of the 35%
limitation at a single yield in connection with the five-year
note auction that day.
The FRBNY requested that a determination
be made regarding two separate bid submissions from what appeared
to be a single bidding entity — S.G. Warburg & Co., Inc. (S.G.
Warburg).

11
Salomon Brothers had submitted a tender for a customer
identified on the tender as Warburg Asset Management.
S.G.
Warburg separately submitted a tender at the same yield for its
dealer account.
Combined, the two bid!s exceeded 35% of the
public offering amount at a single yield by one bidder.
Prior to calling the Treasury, the Federal Reserve Bank of
New York had called Salomon Brothers concerning the Warburg Asset
Management bid.
Salomon Brothers stated that they had made a
mistake and that Warburg Asset Management was actually Mercury
Asset Management.
The Treasury decided to accept both tenders.
However, in an
effort to prevent future auction delays and any potential for
confusion, uncertainty, and inequity in the handling of bidders,
the Treasury, in consultation with the Federal Reserve Bank of
New York, decided to investigate the relationship of Mercury
Asset Management and S.G. Warburg to determine whether these
bidders constituted separate and distinct entities for bidding
purposes.
The Treasury discussed the issue with Tom Murphy of Salomon
Brothers and with an officer of S.G. Warburg.
It was determined
that Mercury Asset Management, a British company, is majority
owned by the same holding company that owns the British
subsidiary that owns the U.S. firm of S.G. Warburg.
After reviewing the facts of the case, the Treasury decided
that S.G. Warburg and Mercury Asset Management would be treated
as a single bidder for purposes of applying the 35% limitation
rule in future auctions.
The decision was based primarily on the
fact that the Treasury*s guidelines for determining a single
bidding entity are based on the principle that bidders that share
common investment advice and management control are viewed as a
single entity.
The Treasury*s Bureau of the Public Debt sent a letter dated
April 17, 1991 to Mercury Asset Management which provided details
concerning the two bids submitted in the February five-year note
auction and Treasury's decision to treat the two entities as a
single bidder for purposes of the 35% limitation rule.
Copies of
this letter were sent to officers of S.G. Warburg, S.G. Warburg,
PLC (the British parent company), and the Federal Reserve Bank of
New York.
In addition, a copy of the letter was sent to Mr. Paul
Mozer of Salomon Brothers.
As Salomon Brothers has now admitted, the bid from Mercury
Asset anagement was unauthorized.
The securities in question
were : fact purchased by Salomon Brothers.
It appears from
Salomon Brother's public statements that the letter from Treasury
played an important role in Mr. Mozer's decision to inform senior

12
management of the fraudulent bid.
Salomon Brothers did not
inform the government of this violation until August 9.
The Hay Two-Year Note Auction
The May two-year note auction also attracted attention at
the Treasury.
It soon became apparent after the auction of $12.25 billion
of two-year notes on May 22, 1991, that a squeeze had developed
in the issue.
The yield on the two-year notes was out of line
with market rates and the notes were "on special" in the
repurchase agreement market.
(In other words, market
participants desiring to borrow temporarily the two-year notes
had to accept a significantly lower interest rate on funds they
deposited with their counterparties in effect as collateral than
the prevailing repo rate.)
A number of market participants contacted the Treasury
Department to point out this situation.
Treasury Department
officials also had details concerning the bids received and
awarded to primary dealers and their customers.
It appeared from
this information that the squeeze had developed because Salomon
Brothers and some of its customers had bid more aggressively than
others and had been awarded the bulk of the securities.
Treasury
Department officials thought the situation serious enough to
warrant investigation by the Securities and Exchange Commission.
In late May, the Treasury told the Division of Market Regulation
and the Division of Enforcement of the SEC about the problems
stemming from the May auction and provided the SEC information
concerning auction awards.
The SEC promptly began investigating
the matter.
In addition, the Antitrust Division of the Justice
Department requested information pertinent to its own
investigation of the squeeze.
On June 4, a Treasury Department official discussed
Treasury's concerns with Mr. Paul Mozer.
On June 10, Mr. John
Gutfreund, chairman of Salomon Brothers, met with Treasury
officials to explain the firm's point of view with respect to the
May two-year notes.
He did not mention the fraudulent bid in the
February auction.
The Treasury was concerned about the squeeze in the May twoyear note for several reasons.
First, any such squeeze goes
against the goal of achieving a broad distribution of securities.
If dealers are not reasonably comfortable that they can obtain
and deliver securities that they have sold prior to the auction,
they will be less likely to participate in pre-auction
distribution of new issues.
Second, while squeezes can occur for
reasons other than market manipulation, squeezes in Treasury
securities that appear to be deliberately engineered would likely
cause some market participants to question the fairness and

13
integrity of the government securities market.
If doubt
concerning the fairness of Treasury auctions persists over the
longer term, the number of active participants in the government
securities market could be reduced.
The resulting decline in
participation in Treasury auctions and in the liquidity of the
secondary market could raise Treasury borrowing costs.
Finally,
Treasury was concerned that there may have been possible
violation of securities and other laws in the government
securities market.
Subsequent Developments
On August 9, Mr. Gutfreund, in a telephone call to Under
Secretary Glauber, informed him of the unauthorized Mercury bid
and his knowledge of this since April.
Also, on August 9, Treasury officials were provided an
advance copy of Salomon Brothers* announcement released later
that day, in which the firm admitted committing violations of the
35% rule in the December 1990 auction of four-year Treasury
notes, the February 1991 auction of five-year notes, and the May
1991 auction of two-year notes and announced the suspension of
two managing directors responsible for Treasury securities
trading and two other employees.
On August 14, Treasury staff, along with staff from other
concerned government agencies, attended meetings at the Justice
Department and at the SEC with the law firm of Wachtell, Lipton,
Rosen & Katz, which was representing Salomon Brothers in this
matter.
The Wachtell, Lipton lawyers detailed the results of
their investigation of the irregularities and rule violations in
Treasury auctions as well as related matters.
Also, on August
14, Salomon Brothers publicly announced further details of rule
violations in Treasury auctions and the fact that the senior
management had been informed in late April of an unauthorized bid
in the February 1991 auction but had not informed the appropriate
government officials of this.
After consulting with the Federal Reserve and the SEC, the
Treasury Department announced on the morning of Sunday, August
18, that, in light of Salomon Brothers* auction rule violations,
it would for an indeterminate time not allow the firm to
participate in auctions of Treasury securities.
This penalty was
modified later in the day after Salomon Brothers* board meeting
resulted in the immediate resignation of three senior officials
of Salomon Brothers, the firing of the two suspended managing
directors, and the placing of effective management control of the
firm in the hands of Mr. Warren E. Buffett. Mr. Buffett assured
Secretary Brady that appropriate controls were being put in place
to assure that there would be no future rule violations in
Treasury auctions.
Consequently, Secretary Brady decided to

14
allow Salomon Brothers to bid in auctions for its own account but
not to allow it to submit bids for its customers.
The Treasury was subsequently provided specific information
concerning the procedures and controls Salomon Brothers has put
in place to assure that there would be no violation of auction
rules.
The new procedures and controls appear to be a good faith
effort to prevent future rule violations.
The Treasury Department is assisting the SEC and the Justice
Department in their continuing investigations of Salomon
Brothers* activities in the government securities market. While
the Treasury Department has no enforcement authority in the area
of securities or antitrust law, the Treasury can help these two
agencies with its expertise concerning the market for Treasury
securities.
Government Securities Act Issues
Mr. Chairman, you asked in your letter to us to address some
specific issues concerning government securities market
regulation.
First of all, we urge that this Subcommittee act
expeditiously in reporting legislation extending Treasury*s
rulemaking authority, which will expire on October 1. We believe
that the basic regulatory structure of the Government Securities
Act of 1986 (GSA) is sound.
It recognizes that Treasury is in
the best position to set rules for all brokers and dealers,
including financial institutions, that are consistent, assure
fairness and integrity in the government securities market, but
that do not result in inordinate cost to the taxpayer by not
allowing the government to finance itself efficiently.
However,
some changes need to be made, particularly in the sales practice
area.
We support the modifications to the Government Securities
Act of S.1247.
Sales Practice Rules. Treasury believes that legislation
applying sales practice rules to the government securities market
will strengthen investor confidence and integrity in the market
and will significantly enhance customer protection.
Sales
practice rules should not result in excessive burdens or
significantly increase costs because diversified broker-dealers
now must comply with sales practice rules for their corporate and
municipal securities activities, while banks that conduct a
business in municipal securities must comply with sales practice
rules of the Municipal Securities Rulemaking Board.
We believe
that sales practice rules should apply to all government
securities brokers and dealers — both bank and non-bank brokerdealers.
The GSA was enacted to correct only those areas of
documented abuse and weakness in the government securities market
(e.g., unregistered broker-dealers and hold-in-custody repos)

15
that existed at the time, because of the concern that excessive
regulation would impair the efficient operation of the market.
Consequently, the GSA did not grant Treasury the authority to
prescribe sales practice rules pertaining to transactions in
government securities. Additionally, the GSA continued the
restriction placed on the National Association of Securities
Dealers (NASD) that prohibits it from applying its sales practice
rules to the government securities transactions conducted by its
members.
It is difficult to assess the magnitude and severity of the
problem given the lack of specific evidence of widespread sales
practice abuses.
Indeed, some of the well publicized cases
involving customer losses in government securities transactions
may not have stemmed solely from abusive sales practices.
Nevertheless, the government securities market is the only
regulated securities market in the United States that does not
have sales practice rules.
The same kinds of abuses that made
sales practice rules necessary in the corporate, municipal, and
penny stock markets may well occur in the government securities
market.
Treasury believes it is necessary to prevent
unscrupulous brokers and dealers, who may have operated in these
other markets until the advent of sales practice rules, from
moving to the government securities market.
Sales practice rules for the government securities market
would also enhance protection of smaller, less sophisticated
investors, who are attracted to the market because of their
desire for safe investments. Additionally, since the government
securities market increasingly encompasses instruments that can
pose considerably greater price risk than traditional Treasury or
agency securities, sales practice rules have become increasingly
important.
Any proposed regulatory structure for government securities
sales practice rules must retain a prominent oversight role for
Treasury, consistent with the regulatory approach set out in the
GSA.
Such a role is necessary and appropriate given Treasury's
strong interest in minimizing the cost to the taxpayer of
financing the public debt by maintaining the liquidity,
efficiency, and integrity of the government securities market.
Treasury is also in a unique position to evaluate the actual or
potential impact of sales practice rules on the liquidity and
efficiency of the market. Accordingly, Treasury supports S.1247,
which would grant authority to regulatory agencies and the NASD
to issue government securities sales practice rules, if the
Treasury has not determined that the rules would "adversely
affect the liquidity and efficiency of the market for Government
securities" or "impose any burden on competition not necessary or
appropriate" in furtherance of the purposes of the GSA.

16
Electronic Dissemination of Pricing and Trading Information.
Treasury supports expanded disclosure of and access to government
securities price and volume information.
The expanded
availability of such information would serve the public interest.
When a broad spectrum of market participants can obtain current,
accurate information on market conditions, the competitiveness,
liquidity and efficiency of the government securities market
should improve, as should the auction process.
Moreover,
expanded information access would serve to enhance customer
protection, since customers would be in a better position to
determine actual or potential transaction prices for securities,
especially for inactively traded issues, and to evaluate the
fairness of trades being proposed by a broker or dealer.
Access
to more accurate price and volume information also enhances the
ability of regulatory authorities and independent auditors to
verify that securities transactions and positions have been
properly valued.
In its 1987 report, the GAO recommended that the private
sector be given time to develop systems that would provide market
participants increased access to government securities pricing
information.
In its follow-up report issued in September 1990,
the GAO recommended that Congress legislatively mandate that
government securities price and volume information be made
available on a real-time basis to anyone willing to pay the
appropriate fees and that Treasury be assigned authority to
prescribe regulations as needed to ensure that such transaction
information is available.
Recently, private sector initiatives such as GOVPX and EJV
have become operational and have made significant steps toward
disseminating the type of government securities price and volume
information that would serve the public interest.
Consequently,
we fully support the efforts undertaken by these private sector
groups in this area. We also recognize that these initiatives
are just beginning, and it is uncertain how successful they will
ultimately be.
In addition, these private sector systems to date
do not encompass the market for government securities that are
not direct Treasury issuances.
Even with these concerns, we believe these initiatives are
an encouraging indication that adequate private sector solutions
can be found without the need for additional federal regulation.
They should be allowed additional time to develop before any
rulemaking authority is determined necessary.
Treasury supports
S. 1247, which provides for a joint Treasury/SEC/Federal Reserve
Board evaluation of private sector initiatives regarding the
dissemination of price and volume information that will permit
further development of these efforts, while providing for
continued scrutiny.

17
Conclusions
Salomon Brothers' recent admissions are a major development
that are bringing the government securities market close
scrutiny.
Treasury auctions.
Since the May auction and the squeeze in
two-year notes, Treasury has been considering changes in its
auction rules.
We stated in a letter to Chairman Markey dated
July is "Treasury is concerned that there have been several
recent auctions resulting in a concentration of ownership at
original issue...
Treasury is considering changes in its
auction rules that would make this concentration of ownership
less likely."
Treasury is currently considering auction rule changes for
both this purpose and for better monitoring of compliance with
the 35 percent limitation. Already, the Federal Reserve Bank of
New York has begun making spot checks with customers of primary
dealers to verify the legitimacy and accuracy of bids submitted
for customer accounts.
This change alone should be sufficient to
effectively eliminate any possibility that fraudulent customer
bids could successfully be used to violate the 35 percent rule.
With respect to the information advantage that it is
perceived gives primary dealers an edge in Treasury auctions, the
information that has recently been made available on interdealer
broker screen quotes through GOVPX has made for much broader
dissemination of market prices. We expect that in the future
even more price and volume information will be made generally
available.
This will make for a more level playing field for all
participants in the government securities market and in Treasury
auctions.
Finally, with respect to the Salomon Brothers matter, we
currently have no evidence that other firms have engaged in the
specific types of auction practices admitted to by Salomon
Brothers.
We do, however, believe it is salutary that major
market participants are reviewing their own procedures for
participating in the auctions.
Regulation.
Until recently, it had been our view that
existing legal authority was suffic: nt to deal with misconduct
in the government securities markets.
However, Salomon Brothers'
recent admissions of wrongdoing are deeply troubling, as are the
allegations of more widespread misconduct in the markets.
The
entire situation warrants, and is receiving, a sweeping, thorough
investigation by the appropriate regulatory authorities.
Until that investigation is reasonably complete, we would
prefer
withhold judgment as to the adequacy of existing laws
and re
rtions, as well as existing enforcement capabilities and

18
practices.
The market for U.S. government securities is the
largest and most important securities market in the world, and
any changes in its regulation should only be made after careful
collection and review of the facts.
We also recognize the urgency of this matter and the desire
of Congress to take prompt and appropriate corrective action.
The Treasury, in consultation with the Federal Reserve and the
SEC, therefore undertakes to report back to the Congress within
90 days as to any recommended legislative or regulatory changes.
We anticipate that this review will address in some depth the
adequacy of existing legal authority and enforcement practices to
detect and punish wrongdoing in the government securities
markets, while also maintaining the extraordinary liquidity and
depth of our marketplace.
Questions have also arisen as to the status of the
Treasury*s rulemaking authority under the Government Securities
Act, which will lapse unless reauthorized by October 1. In the
view of the Treasury, the Federal Reserve, and the SEC, it is
important that there be no such lapse in rulemaking authority.
We therefore urge that the reauthorization take place on schedule
or that Treasury's rulemaking authority be temporarily extended
beyond the October 1 "sunset" date.

Treasury Gross Issues and Bond Yields
trillion

1981

1982

1983

1984

1985

1986

1987

Bond yieldisannual average Treasuryconstant maturity 30-year bond yield.
Gross issues aretotalmarketablesecuritiessold.

1988

1989

1990

TREASURY NEWS _

apartment o f the Treasury • W ashington, D.c. • Telephone 5 6 6 -2 0 4 1

FOR IMMEDIATE RELEASE
SEPTEMBER 5, 1991

CONTACT:

BARBARA CLAY
202-566-5252

EXON-FLORIO MADE PERMANENT

Voluntary notices of proposed mergers, acquisitions and takeovers
of U.S. businesses by foreign companies or individuals are once
again being accepted by the Committee on Foreign Investment in
the United States (CFIUS), under the Exon-Florio provision.
CFIUS evaluates the national security impact of takeovers of U.S.
businesses by foreign companies or individuals.
The evaluation
consists of a detailed 30-day review and, if necessary, a 45-day
expanded investigation.
Following an expanded investigation, the
Committee makes a recommendation to the President, who, under the
Exon-Florio provision, may stop the takeover if he determines
that it threatens national security.
The Exon-Florio provision had lapsed on October 20, 1990, but was
made permanent on August 17, 1991, when President Bush signed the
Defense Production Act (Public Law 102-99).
The new law is
effective retroactively, from October 20, 1990.
Takeovers which were reviewed while the law had lapsed, and where
CFIUS has already advised the parties that the transaction did
not warrant further review, will not be re-examined, assuming
that the relevant notification was accurate and complete.
Parties wishing to file notices with CFIUS should continue to
follow the proposed regulations published in the Federal Register
on July 14, 1989 (54 Fed. Reg. 29744), until final regulations
are promulgated.
CFIUS is chaired by the Secretary of the Treasury.
oOo

N B - 34 4 1

P U B L IC D E B T N EW S
department of the T reasury

•

Bureau of the Public D ebt • W ashington, D C 20239

FOR RELEASE AT 3 :0 0 PM
September 6, 1991

Contact: Peter Hollenbach
(202) 219-3302

PUBLIC DEBT A N N OUNCES ACTIVITY F O R
SECURITIES IN THE STRIPS P R O G R A M F O R AUGUST 1991

Treasury’s Bureau of the Public Debt announced activity figures for the month of August 1991, of
securities within the Separate Trading of Registered Interest and Principal of Securities program,
(STRIPS).
Dollar Amounts in Thousands
Principal Outstanding
(Eligible Securities)

$544,825,453

Held in Unstripped Form

$413,418,178

Held in Stripped Form

$131,407,275

$4,488,780

Reconstituted in August

TABLE VI— HOLDINGS OF TREASURY SECURITIES IN STRIPPED FORM, AUGUST 31, 1991
(In thousands)

Principal Amount Outstanding
Loan Description

11 -5 /8 %

Maturity Date

Total

Portion Held in
Unstripped Form

Reconstituted
This Month*

Portion Held in
Stripped Form

Note C-1994 ............................

....... 11/15/94.........

$6,658,554

$5.567,354

$1,091,200

11-1/4% Note A-1995 ............................

....... 2/15/95 ........

6,933,861

6,513,381

420,480

55.68C

11-1/4% Note B-1995 ............................

....... 5/15/95 ........

7,127,086

5,831,726

1.295,360

48.32C

$25,60C

10-1/2% Note C-1995 ............................

....... 8/15/95 ........

7,955,901

7,360,301

595,600

-0 -

9-1/2% Note D-1995 ..............................

....... 11/15/95........

7,318,550

6,243,750

1,074,800

1 2 0 ,0 a

8-7/8% Note A-1996 .............................

....... 2/15/96 ........

8,575,199

8,379,999

195,200

6,4a

7-3/8% Note C-1998 ..............................

....... 5/15/96 ........

20,085,643

19,871,243

214,400

-0 -

7-1/4% Note D-1996 .............................

....... 11/15/96........

20,258,810

19,968,410

290,400

-0 -

8-1/2% Note A-1997 ..............................

....... 5/15/97 ........

9,921,237

9,820,037

101,200

-0 -

8-5/8% Note B-1997 ..............................

8/15/97

9 362 636

9 330 836

8-7/8% Note C-1997 ..............................

11/15/97

9 808 3?9

9 800 329
9 149 788

8-1/8% Note A-1998 ..............................

...

2/15/98

9 159 Q68

9% Note B-1998 ...................................

....... 5/15/98 ........

9,165,387

9,128,387

37,000

-0 -

9-1/4% Note C-1998 ..............................

....... 8/15/98 ........

11,342,646

11,213,846

128,800

-0 -

8-7/8% Note D-1998 ..............................

....... 11/15/98

9 902 875

9 674 075

8-7/8% Note A-1999 ..............................

....... 2/15/99 ........

9,719,623

9,655,623

64,000

-0 -

9-1/8% Note B-1999 ..............................

....... 5/15/99 ........

10,047,103

9,176,703

870,400

-0 -

8% Note C-1999 ...................................

....... 8/15/99 ........

10,163,644

10,081,619

82,025

-0 -

7-7/8% Note D-1999 .............................

....... 11/15/99........

10,773,960

10,765,960

8,000

-0 -

8-1/2% Note A-2000 ..............................

2/15/00

10 673 033

1 n 87*1

8-7/8% Note B-2000 ..............................

....... 5/15/00

10 496 230

10 373 030

8-3/4% Note C-2000 ..............................

8/15/00

11 ORO 646

....... 11/15/00.........

11,519,682

2/15/01

11 312 802

11 308 802

8% Note B-2001 ...................................

....... 5/15/01 ........

12,398,083

7-7/8% Note C-2001 ..............................

....... 8/15/01 ........

12,339,195

11-5/8% Bond 2004...............................

....... 11/15/04........

8,301,806

3,897,006

4,404,800

8 -1/2 %

Note D-2000 ..............................

7-3/4% Note A-2001 ......................

033

123 200

080 646
-

-0 -

12,398,083

-0 -

12,339,195

12% Bond 2005.................................

....... 5/15/05 ........

4,260,758

1,602,308

2,658,450

10-3/4% Bond 2005................................

....... 8/15/05 ........

9,269,713

8,365,713

904,000

9-3/8% Bond 2006.................................

....... 2/15/06 ........

4,755,016

4,755,916

11-3/4% Bond 2009-14 ..........................

....... 11/15/14___

6,005,584

1,379,984

4,625,600

-0 -

-0 152,00<

31 3

107,20<
-0 64,8a

11-1/4% Bond 2015................................

....... 2/15/15 ........

12,667,799

2,166,679

10,501,120

-0 -

10-5/8% Bond 2015...............................

....... 8/15/15 ........

7,149,916

1,688,156

5,461,760

55.04C

9-7/8% Bond 2015.................................

....... 11/15/15........

6,899,859

2,139,859

4,760,000

-0 -

9-1/4% Bond 2016.................................

....... 2/15/16 ........

7,266,854

6,511,654

755,200

-0 -

7-1/4% Bond 2016.................................

....... 5/15/16 ........

18,823,551

16,991,551

1,832,000

so,oa

7-1/2% Bond 2016.................................

....... 11/15/16........

18,864,448

15,504,928

3,359,520

925,84C
343,360

8-3/4% Bond 2017.................................

....... 5/15/17 ........

18.194,169

6,187,769

12,006,400

8-7/8% Bond 2017.................................

....... 8/15/17 ........

14,016,858

9,343,258

4,673,600

24,oa

9-1/8% Bond 2018.................................

....... 5/15/18 ........

8,708,639

2,335,839

6,372,800

92,8a

9% Bond 2018......................

....... 11/15/18........

9,032,870

1,408,270

7,624,600

45,0a

8-7/8% Bond 2019.................

....... 2/15/19 ........

19,250,798

5,185,198

14,065,600

438,4a

8-1/8% Bond 2019.................................

....... 8/15/19 ........

20,213,832

10,911,432

9,302,400

136,0a

8-1/2% Bond 2020.................................

....... 2/15/20 ........

10,228,868

4,036,868

6,192,000

358,8a

8-3/4% Bond 2020...................

....... 5/15/20 ........

10,158,883

2,665,443

7,493,440

512,32C

W/4% Bond 2020.................................

....... 8/15/20 ........

21,418,606

7,649.006

13,769,600

624,32C

2,110,400

99.20C

7-7/8% Bond 2021................................

....... 2/15/21 ........

11,113,373

9,002,973

9-1/8% Bond 2021...

. . . . 5/15/21

11 958 888

1n ?99 048

'-1/8% Bonds 2021 .......

....... 8/15/21 ........

12,163,482

544,825,453

413,418,178

Total . ..

Adn

131,407,275

'Effective May 1, 1987, securities held in stripped form were eligible for reconstitution to their unstripped form.
Note: On the 4th workday of each month a recording of Table VI will be available after 3:00 pm. The teleohone number is (2021 447-9873

-0 4,488,780

U BLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt, » Wàshington, DC 20239

FOR IMMEDIATE RELEASE
September 9, 1991

CONTACT: Office of Financing
202-219-3350

RESULTS OF TREASURY'S AUCTION OF 13-WEEK BILLS
Tenders for $10,662 million of 13-week bills to be issued
September 12, 1991 and to mature December 12, 1991 were
accepted today (CUSIP: 912794XR0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5. 27%
5. 30%
5. 29%

Investment
Rate
5.43%
5.46%
5.45%

Price
98.668
98.660
98.663

Tenders at the high discount rate were allotted 12%
The investment rate is the equivalent coupon-issue
TENDERS RECEIVED AND ACCEPTED (in thousands)
Location
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Treasury
TOTALS

Received
25,655
32,076,055
17,640
49,665
46,240
39,990
1,471,320
56,975
8,900
36,550
24,840
532,980
863.155
$35,249,965

Accepted
25,655
9,369,455
17,640
49,665
43,600
38,110
81,120
16,975
8,900
36,550
24,840
86,045
863.155
$10,661,710

Type
Competitive
Noncompetitive
Subtotal, Public

$31,391,375
1.580.330
$32,971,705

$6,803,120
1.580.330
$8,383,450

2,210,255

68.005
$35,249,965

68.005
$10,661,710

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $27,795 thousand of bills will be
issued to foreign official institutions for new cash.

PU BLIC DEBT NEWS
Department of the Treasury •

Bureau of the Public Debt • Washington, DC 20239

FOR IMMEDIATE RELEASE
September 9, 1991

CONTACT: Office of Financing
‘0 202-219-3350
\ x h\ V
\w

RESULTS OF TREASURY'S AUCTION OF 26-WEEK BILLS
Tenders for $10,660 million of 26-week bills to be issued
September 12, 1991 and to mature March 12, 1992 were
accepted today (CUSIP: 912794YD0).
RANGE OF ACCEPTED
COMPETITIVE BIDS:
Low
High
Average

Discount
Rate
5.30%
5.31%
5.30%

Investment
Rate
5.54%
5.55%
5.54%

Price
97.321
97.316
97.321

Tenders at the high discount rate were allotted 27%.
The investment rate is the equivalent coupon-issue yield.
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
29,855
31,395,040
18,470
33,675
46,170
44,675
1,082,495
38,780
10,665
47,285
20,060
736,935
697.755
$34,201,860

Accented
29,855
9,558,715
18,470
33,675
41,060
39,675
61,395
18,780
10,665
47,285
20,060
82,185
697.755
$10,659,575

Type
Competitive
Noncompetitive
Subtotal, Public

$29,804,315
1.309.950
$31,114,265

$6,262,030
1.309.950
$7,571,980

2,400,000

687.595
$34,201,860

687,595
$10,659,575

Federal Reserve
Foreign Official
Institutions
TOTALS

An additional $242, 005 thousand of bills will be
issued to foreign official institutions for new cash.

NB- 3443

\ f 0

y n

-■=*•

Department off the Treasury • Washington, p.C. • Telephone 566-2041

For Release Upon Delivery
Expected at 2:00 p.m.
September 10, 1991

STATEMENT OF
KENNETH W. GIDEON
ASSISTANT SECRETARY (TAX POLICY)
DEPARTMENT OF THE TREASURY
BEFORE THE
SUBCOMMITTEE ON TAXATION
COMMITTEE ON FINANCE
UNITED STATES SENATE
Mr. Chairman and Members of the Subcommittee:
I am pleased to present the views of the Administration on
the tax simplification proposals currently under your
consideration.
My testimony today will address S. 1394, the Tax
Simplification Act of 1991, and S. 1364, the Employee Benefits
Simplification and Expansion Act of 1991.
In addition, in
accordance with your invitation to testify, I urge your favorable
consideration of other proposals not included in these two bills,
specifically in the areas of payroll tax deposits, the earned
income tax credit, and pension coverage and portability.
As I stated earlier this year before the House Committee on
Ways and Means, the Administration strongly supports
simplification of our tax laws within the fiscal constraints of
last year's budget agreement.
Properly conceived and executed
simplification can reduce the costs of tax administration and
compliance, enhance both voluntary compliance and tax enforcement
efforts, and improve taxpayer morale. When simplification
efforts are successful, we believe that there should be
efficiency gains as well.
Simplification is not viable as a
revenue—losing proposition, however, and the Administration will
insist that the pay-as-you-go provision of the budget agreement
be satisfied by any combination of simplification proposals
ultimately adopted.
I particularly want to commend Chairman Bentsen and Senator
Packwood for their sponsorship and support of the bi-partisan
simplification bill, S. 1394. That bill and its House
counterpart, H.R. 2777, were produced through the cooperative
efforts of the committee staffs which deal with tax matters, the
Treasury Department and the Internal Revenue Service.
We believe
the process used to develop these bills was constructive and has
produced good draft legislation. We recognize that a number of

NR-1444

2
modifications to the introduced legislation have been suggested
by commentators. While I have not addressed these suggestions in
my written testimony today given the need to set forth our basic
position for the record and the significant volume o f K g ® ■
statement required to accomplish that objective, we will review
the record developed here and in the House and will work with the
Committees and the staff to adopt meritorious suggestions.
We
look forward to working with this Committee to perfect these
draft proposals and to enact them.
Before turning to S. 1394 and S. 1364, I will describe three
additional proposals which we believe will simplify
the tax law while meeting the constraint of revenue neutrality.

PAYROLL TAX DEPOSITS

The Treasury Department shares with members of this
Committee an interest in simplifying the current
deposit system.
We have previously indicated that the payroll
tax provisions of H.R. 2775 would achieve simplification.
Under
that proposal, semi-weekly deposits would be required instead o
eighth-monthly deposits as under the current system.
Next-day
deposits would continue to be required for liabilities of
$100,000 or more.
Employers with under $3,500 of quarter y
liability would only be required to make one payment per quarter,
and an employer would be able to determine whether it was
eligible for this small employer exception at the beginning of
each quarter.
Also, the underpayment safe harbors for each
deposit would be reduced from 5 percent under the current system
to the greater of $150 or 2 percent.
Senator Baucus has made a similar payroll tax simplification
proposal in S. 1610. This proposal would also require semiweekly deposits.
It would differ from H.R. 2775, however, in
that:
(1) small employers would be required to make monthly
rather than quarterly deposits; (2) the threshold *?r
as a small employer would be $18,000 of quarterly liability, and
(3) the minimum amount of permitted safe harbor underpayments
would be $250.
S. 1610, like H.R. 2775, would further the goal of
simplification.
However, in its current form, we preliminarily
estimate S. 1610 would result in a significant
° ~r
the 5-vear budget period.
Our current estimate is that the
revenue loss would be about $2.2 billion if small
" ■ {
allowed to underpay each monthly deposit by up to $250.
The los
would be about $0.6 billion if small employers were not allowed
to use this safe harbor to underpay their monthly deposits.
These revenue losses could, however, be offset under S. 1610
if the threshold for small employer treatment (i.e^, monthly

3
deposit) were lowered. We currently estimate that revenueneutrality could be achieved with a threshold of about $14,000/
if safe harbors were not permitted for monthly deposits or,
alternatively, with a threshold of about $8,000 if safe harbors
were allowed.
We question whether a safe harbor as larqe as $250
is needed by monthly depositors, and a significantly lower level
would allow the monthly deposit threshold to be closer to the
$14,000 level, thereby maximizing the number of eligible
employers.
The Administration believes that S. 1610, if modified to be
revenue—neutral, and the payroll tax provisions of H.R. 2775
merit serious consideration.
B.

EARNED INCOME TAX CREDIT

The earned income tax credit (EITC) is a refundable tax
credit available to low—income workers with children.
The EITC
consists of (i) a basic credit, which is adjusted for family
size, (ii) a health insurance credit, and (iii) a supplemental
credit for workers with a child under the age of one (the ”young
child" or "wee tots" credit). The Omnibus Budget Reconciliation
Act of 1990 increased the basic credit rate and added the family
size adjustment, the health credit, and the young child credit.
In 1991, the basic EITC rate is 16.7 percent of the first
$7,140 of earned income for a worker with one qualifying child
and 17.3 percent of that amount for a worker with two or more
qualifying children.
A worker with one child may receive a
basic EITC of up to $1,192.
For a worker with two or more
children, the maximum basic credit is $1,235.
The young child credit increases the basic EITC rate by 5
percentage points.
The maximum young child credit for 1991 is
$357. A credit is also available to taxpayers who purchase
health insurance that includes coverage for a qualifying child.
In 1991, the health insurance credit is equal to 6 percent of the
first $7,140 of earned income. However, the credit cannot exceed
the actual amount of health insurance expenses.
In 1991, the
maximum health insurance credit is $428.
For 1991, the basic EITC is reduced by an amount equal to
11.93 percent of the excess of adjusted gross income (or, if
greater, earned income) of more than $11,250.
The phase—out
rate for a family with two or more children is 12.36 percent.
Using the same income threshold, the young child credit and
health insurance credit increase the phase-out rates respectively
by 3.57 percentage points and 4.285 percentage points.
The basic
EITC and the supplemental credits, are not available to taxpayers
with adjusted gross incomes (or, if greater, earned income) of
approximately $21,250.
In 1992 and thereafter, the maximum

4
amount of earnings on which the credit may be taken and the
income level at which the phase-out range begins will be adjusted
for inflation.
In 1992, the basic EITC rate will increase to 17.6 percent
for a worker with one child and 18.4 percent for a worker with
two or more children.
The corresponding percentages for 1993 are
18.5 percent and 19.5 percent.
For 1994 and subsequent years,
■’"he credit rates are 23 percent and 25 percent.
The phase-out
ates for families with one child are 12.57 percent in 1992,
13.21 percent in 1993, and 16.43 percent in 1994 and thereafter.
For families with two or more children, these rates are 13.14
percent in 1992, 13.93 percent in 1993, and 17.86 percent in 1994
and thereafter.
Several "interaction rules" prevent a taxpayer from
receiving the full benefit of the health insurance credit or the
young child credit and other tax provisions.
1.

Itemized deduction for medical expenses. The health
insurance credit reduces the amount of expenses for
which a medical expense deduction is allowed.

Deduction for health insurance
emoloved. Qualifying expenses
health insurance deduction are
amount of the health insurance

Child and dependent care tax credit. A taxpayer may
not claim both the young child credit and the child and
dependent care tax credit with respect to the same
child.

Exclusion for employer-provided dependent care
assistance. Similarly, the same child cannot qualify
the taxpayer for both the young child credit and the
exclusion for employer-provided dependent care
assistance.

expenses of the selffor the self-employed
similarly reduced by the
credit.

We propose that the interaction rules described above be
repealed.
To offset the revenue losses due to this repeal, the
basic EITC percentage rates would be reduced by .05 percent, and
the phase-out rates would be reduced by .04 percent.
The
resulting rates are as follows:
Credit
percentage
For 1992:
1 qualifying child
2 or more qualifying children

17.55
18.35

Phase-out
percentage

12.53
13.10

5
For 1993:
1 qualifying child
2 or more qualifying children

18.45
19.45

13.17
13.89

For 1994 and thereafter:
1 qualifying child
2 or more qualifying children

22.95
24.95

16.39
17.82

The interaction rules create complexity in the EITC and will
hinder compliance.
Some taxpayers must complete numerous steps
in order to calculate their credit amounts and tax liabilities.
For example, a taxpayer who is eligible for both the young child
credit and the child and dependent care tax credit must calculate
both credits to determine which provides the greater benefit.
In
making this comparison, the taxpayer must also account for the
fact that the child and dependent care credit, unlike the young
child supplement, is non—refundable and thus potentially less
valuable than its face value. Workers receiving child care
assistance through their employers will have to make similar
comparisons.
Because they will have to choose between the young
child credit and the exclusion for employer-provided assistance
during the tax year, these workers will have to base the
computations on estimates of their annual income, child care
expenditures and tax liabilities.
In other cases, some taxpayers
will have to depart from normal practice and complete the credit
portion of their tax form (located at the end of the Form 1040)
before calculating itemized deductions or the self-employed
health insurance deduction.
Self-employed workers with health insurance expenses must
perform particularly complicated calculations.
The health
insurance EITC is subtracted from the amount of expenses
allowable for the self-employed health insurance deduction which
in turn is used in deriving adjusted gross income (AGI). These
computations are circular because the EITC, including the health
insurance supplement, is based partly on AGI.
The proposed
Technical Corrections Act of 1991 (H.R. 1555 and S. 750) includes
a provision that would resolve this circularity.
Nonetheless,
this provision would not eliminate the interaction between the
two provisions.
A taxpayer will still be required to calculate
the self-employed health insurance deduction and AGI twice.
As a
first step, a taxpayer must calculate AGI as if the taxpayer were
entitled to the full health insurance deduction.
Using this
"hypothetical” measure of AGI, the taxpayer would then compute
the EITC, including the health insurance component.
Next, the
taxpayer must subtract the health insurance EITC from the amount
of expenses allowable for the self-employed health insurance
deduction in order to calculate "true" AGI.
These calculations
will require a separate 19-line worksheet to supplement the
2-page EITC schedule.

6
The interaction rules also limit the Internal Revenue
Service's ability to compute the EITC for some taxpayers.
In
many cases, the Internal Revenue Service (IRS) can automatically
determine the EITC if the taxpayer provides basic information on
the first page of the EITC schedule.
However, the IRS cannot
determine the full EITC amounts for self-employed workers who
claim both the health insurance credit and the self-employed
health insurance deduction because it will not have sufficient
information to compute the "hypothetical" AGI amount described
above without reference to other data which may not be easy to
obtain.
The Office of Tax Analysis estimates that about 500,000
taxpayers are subject to these interaction rules.
Repealing
these rules will cost about $24 million a year ($25 million a
year if the self-employed health insurance deduction is extended
beyond 1991).
Although relatively few taxpayers are subject to
these rules, all EITC recipients may be adversely affected by
their complexity.
The new EITC schedule will be accompanied by 2
or 3 pages of instructions, and many taxpayers may find it
necessary to consult an IRS publication explaining the new
credit.
Although every effort is being made to keep this
guidance as simple as possible, the complexity of the interaction
rules may make it difficult for taxpayers to determine whether
the rules apply.
In the past, complex rules have contributed to
high error rates in EITC payments.
These high error rates
prompted the adoption last year of simplified eligibility rules.
Our proposal continues this effort.
To offset the revenue losses due to repeal of the
interaction rules, we are proposing a very small reduction in the
basic credit rates.
Under the proposal, no taxpayer's credit
would be reduced by more than $3.71 per taxpayer in 1992 while
other credit recipients will benefit by elimination of the
interactions•
C.

PENSION SIMPLIFICATION, COVERAGE AND PORTABILITY

We are pleased that this Committee is seriously considering
simplification of the tax laws relating to pensions.
The
Administration has concluded that improvements in pension
coverage and pension portability can be achieved as part of the
tax simplification effort. We believe that we can expand pension
coverage, particularly in the small business sector, and enhance
pension portability thereby strengthening the role of private
pension plans in retirement income planning.
Over the course of the last year, the Administration has
focused on these policy issues.
Through the joint efforts of the
Treasury Department and the Department of Labor, proposals to
simplify the tax law governing retirement plans, to expand

7
pension coverage, and to increase pension portability have been
developed.
These proposals were announced on April 30, 1991, by
Secretary of Labor Martin.
The Administration's proposals have been crafted to
accomplish these objectives within the constraint of revenue
neutrality and, in total, do not lose revenue as the Office of
Tax Analysis estimates of the Administration proposals
demonstrate (Table I ) .
The Administration's proposals include the following:
1.

Simplify and encourage tax-free rollovers. We propose
to simplify and encourage tax-free Mrollovers" of
pension distributions into IRAs or qualified plans by
allowing all plan distributions to be rolled over,
except distributions which are made in the form of a
life annuity or in installment payments over 10 years
or more.
The current law restrictions on rollovers of
after-tax employee contributions and minimum required
distributions would be retained.
Plans would be
required to offer employees an election to have
distributions eligible for rollover treatment
transferred directly to an IRA or other qualified plan
that accepts such contributions.
The favorable income
tax treatment for pension distributions which are not
rolled over — the special averaging rules and the
deferral of tax on the appreciation on employer
securities — would be repealed and the method for
determining the taxable amount of pension annuities
would be simplified.
The six rules potentially
applicable to a pension distribution would be
simplified to a single rule providing that such
distributions are currently taxed unless they are
rolled over. However, our proposals do not contemplate
that the thresholds for imposition of the excise tax on
excess pension distributions will be changed.

Simplify the administration of 4010c) and other plans.
The proposal would simplify the rules for testing
whether 4 0 1 (k) plans provide proportionate benefits to
lower paid employees by using the prior year's
experience.
As a related matter, the proposal would
also simplify the definition of "highly compensated
employee" for purposes of the employee benefit
provisions of the Code and repeal the complex family
aggregation rules.
In addition, the proposal would
enhance the IRS master and prototype program under
which affordable standardized plans can be offered.

Make 4 0 1 m
plans generally available. Section 4 0 1 (k)
plans would be extended to employees of tax-exempt
organizations and State and local governments.

Adopt a uniform vesting standard. The vesting
requirements for multiemployer plans would be conformed
to the existing requirements for single employer plans.

We are pleased to see that most of the areas targeted by the
Administration's proposals are included in S. 1364, as well as in
other pension simplification proposals pending before the
Congress.
D.

S. 1394, THE TAX SIMPLIFICATION ACT OF 1991

The Appendix to this testimony presents the views of the
Administration on the specific provisions of S. 1394. We
generally support the bill although some adjustments will be
required to achieve revenue-neutrality before enactment.
The
Office of Tax Analysis estimates that, in its current form,
S. 1394 is nearly revenue-neutral, with a loss of $89 million in
fiscal 1992 and $47 million over the 5-year budget period
(Table II). Certain of the proposals in S. 1394 will achieve
significant simplification, but with significant revenue cost.
In these instances, we have qualified our support as being
subject to an acceptable revenue offset.
E.

S. 1364, THE EMPLOYEE BENEFITS SIMPLIFICATION AND EXPANSION
ACT OF 1991

We are encouraged by the similarities among the
Administration's pension proposals, S. 1364, and the other
pension simplification proposals that have been introduced in the
Congress.
These proposals all target the same basic areas where
simplification is needed and areas where increased coverage
should be encouraged.
As the Administration's proposals
demonstrate, it should be possible to fashion a revenue-neutral
package to simplify the pension tax laws and expand coverage.
We

9
are ready to work with the Congress to move from this general
consensus to enacted legislation.
Our review indicates, however, that S. 1364 in its current
form would lose approximately $16 billion in revenue over the 5year budget period.
The Administration must oppose pension
legislation that loses revenue.
In addition, as noted in more
detail in our comments on specific provisions, we have
substantive policy concerns about certain provisions of the bill.
We believe, however, that simplification of the employee
benefit provisions of the Code can be achieved within the
parameters of the budget agreement.
Simplification of these
provisions, as well as expanded access to qualified retirement
plans, is a desirable goal.
Simplification legislation should
not be a vehicle for altering fundamental retirement and tax
policies.
We also believe that such proposals should build on
existing structures and thus minimize the complications inherent
in any change to existing laws.
Our substantive comments on the provisions of S. 1364 are
set forth in the remainder of my written statement.
TITLE I.

NONDISCRIMINATION PROVISIONS

Definition of Highly Compensated Employees (Section 101)
Current law. The Code defines the term "highly compensated
employee" to include any employee who during the current or
preceding year (1) was a 5-percent owner, (2) earned over $90,803
(indexed) in compensation, (3) earned over $60,535 (indexed) in
compensation and was in the top 20 percent of the employer's
workforce by compensation, or (4) was an officer earning
compensation over $54,482 (indexed) or was the highest paid
officer, if no officer earned more than the stated amount.
For
the current year determination, only the 100 highest paid
employees under this definition are taken into account.
Current
law permits certain employers to treat, on an elective basis, all
employees earning over $60,535 (indexed) as highly compensated
employees regardless of whether they are in the top 20 percent of
the employer's workforce by compensation.
In addition, for
purposes of identifying highly compensated employees, certain
family aggregation rules apply in the case of 5-percent owners
and other highly compensated employees who are among the top 10
employees by compensation.
Different family aggregation rules
may apply for purposes of the limitation on compensation that may
be taken into account under a qualified plan (section
401(a)(17)). These latter rules limit the family members
required to be aggregated to the employee's spouse and lineal
descendants under age 19.

Proposal. The proposal would redefine the term highly
compensated employee to include only 5-percent owners and
employees who earn over $60,535 (as indexed).
If an employer had
no highly compensated employees under this definition, then the
one officer with the highest compensation would be treated as
highly compensated, except for purposes of sections 4 0 1 (k) and
(m) (relating to elective deferrals, matching contributions and
employee contributions). In addition, tax-exempt employers and
state and local governmental employers would be exempt from the
one-officer rule.
The family aggregation rules would be limited
to 5-percent owners.
Administration position. We support the proposal to
simplify the definition of highly compensated employees.
The
elimination of the rules regarding officers and the top 20
percent of employees by compensation simplifies current law
without sacrificing important policy objectives.
We oppose the exception to the one-officer rule that, under
certain circumstances, would eliminate the requirement that at
least one employee be treated as highly compensated.
Such a
proposal effectively eliminates the nondiscrimination rules, for
certain employers without providing any other mechanism to assure
broad-based coverage.
Finally, we believe that the family aggregation rules are a
source of great complexity and create inequities for two-wageearner families where both spouses work for the same employer.
Accordingly, we support simplification of those rules.
However,
we believe the rules could be further simplified by repealing
them altogether as set forth in the Administration proposal
released in April.
Modifications of Cost-of-Living Adjustments (Section 102)
Current law. Cost-of-living adjustments to various dollar
limitations are currently made under adjustment procedures
similar to those used for adjusting benefits under the Social
Security Act.
These cost-of-living increases under the Code are
adjusted generally by using the last calendar quarter of a year
and a base period of the last calendar quarter of 1986.
Under
this procedure, cost-of-living adjustments to the limitations in
the Code are announced after the beginning of the year in which
they are effective.
Proposal. The proposal would require the cost-of-living
adjustment to be based on increases in the applicable index as of
the close of the calendar quarter ending September 30 of the
preceding calendar year.
The proposal would also require that
dollar amounts, as adjusted, be rounded to the nearest $1,000 (or
to the nearest $100 in the case of the limitations on elective

11
deferrals and in the case of the minimum compensation amounts
applicable to SEPs).
Administration position. We support the proposal.
It would
permit the publication of applicable limits before the beginning
of a calendar year for which they will be in effect and hence
should assist plan administrators and plan participants.
Similarly, the use of rounding would ease administration and
employee communications.
Election to Treat Base Pav As Compensation (Section 103)
Current law. Current law contains a definition of
compensation for purposes, among others, of applying the
nondiscrimination rules to qualified plans (section 41 4 (s)).
In
addition to the basic statutory definition, the Secretary is
authorized to provide alternative methods for determining
compensation for these purposes.
The temporary regulations
implement this authority in two ways, most significantly by
permitting employers to elect to use any reasonable definition of
compensation subject to satisfaction of a nondiscrimination test.
Basic or regular rate of pay is not specifically authorized under
existing regulations.
Proposal. The proposal would provide employers with an
election to determine an employee's compensation solely by
reference to base pay.
If the employer made the election, it
would apply with respect to all employees and for all relevant
purposes.
The election would be revocable only with the consent
of the Secretary.
Administration position. During the comment period for the
existing temporary and proposed regulations under section 4 1 4 (s),
employers discussed the possible addition of rate of pay as an
alternative method for determining compensation.
Alternative
methods for determining compensation must be nondiscriminatory.
We are carefully considering these comments for possible
inclusion in the final regulations which we intend to publish in
the very near future. We believe this can be accomplished under
the existing regulatory authority and that legislation in this
area will not be necessary. Moreover, we believe Congress should
defer action until it has evaluated the final regulations.
We
are also concerned that the proposal would not require that the
base pay definition meet any nondiscrimination standard.
Modification of Additional Participation Requirements
(Section 104)
Current law. Qualified plans, including both defined
benefit and defined contribution plans, are generally required to

12
benefit the lesser of 50 employees or 40 percent of the
employer's workforce.
Proposal. The proposal would exempt defined contribution
plans from the minimum participation rules.
The propose.^ would
also modify the minimum participation rule by lowering
•
employee threshold to 25 employees and by requiring an employer
with 2 or more employees to cover at least^ empioyees under the
same plan.
The bill would also permit employers to elect . have
the new rules apply as if they had been included m the T ..
Reform Act of 1986.

Administration position. We do not support the
We doubt that it will be simplifying because it would generally
permit employers to maintain a greater number o
with a smaller number of participants m eac^ P la£ and * li:L
impose additional administrative burdens on the IRS.
*e
particularly oppose the portion of the proposal that permits
employers to elect a retroactive effective date.
Nondiscrimination Rules For Qualified Cash or Deferred
Arrangements and Matching Contributions (Section 105)
current law. Elective salary deferral contributions to a
4 0 1 (k) plan are generally required to meet an actual deferral
percentage (ADP) test. To satisfy the ADP test, the ava^ f ® °f
the deferral rates (expressed as a percentage of compensation)
for each highly compensated employee eligible to
the plan generally may not exceed the greater of (1) 125 percent
of the average of the deferral rates of all nonhighly compensated
employees eligible to participate in the plan or (2) the lesser
of (a) 200 percent of the average of the deferral rates of a L
nonhighly compensated employees eligible to participate
plan, or (b) such average plus 2 percentage points.
If a P£an
does not satisfy the ADP test for a year, excess
*y .Jgf
highly compensated employees must be either redistributed to the
or9recharacterized as after-tax contributions in order to retain
?he qualified status of the 40 1 (k) plan.
The distributions or
recharacterizations are made on the basis of the respective
portic \{ of excess contributions attributable to each highly
compensated employee.
If a plan permits after-tax employee contributions, or
provides for employer contributions that are contingent on a
participant's elective deferrals or after-tax employee
contributions («matching contributions«), the amount of such
contributions generally must satisfy an a c ^ u a i L ^ h | ^ ^ ^ ^
percentage (ACP) test.
The ACP test is generally the same as the
ADP test described above, except that it applies to matching and
after-tax employee contributions rather than to elective
deferrals.
Rules analogous to the distribution rules under the

13
ADP test must also be followed if the ACP test is not satisfied.
Restrictions are placed on the multiple use of the alternative
limit (i.e.. the 200 percent/2 percentage points test) in
satisfying both the ADP test and the ACP test.
Proposal. The proposal would create certain safe harbors
that would, in effect, deem either the ADP test or the ACP test,
or both, to have been satisfied with respect to elective
deferrals and matching contributions if the plan meets certain
design and notice criteria.
Under the bill, the ADP test would
be deemed to have been satisfied if the plan either (1) provided
matching contributions with respect to all nonhighly compensated
employees equal to 100 percent of elective deferrals up to 3
percent of compensation and equal to 50 percent of elective
deferrals between 3 and 5 percent of compensation or (2) provided
nonelective contributions equal to at least 3 percent of
compensation to all nonhighly compensated employees eligible to
participate in the plan.
In addition, certain alternative
matching formulas would be allowed, subject to nondiscrimination
requirements.
Any contributions used to satisfy the safe harbor
would be required to be fully vested and subject to the 40 1 (k)
restrictions on withdrawals.
Furthermore, such contributions
could not make use of the permitted disparity rules (section
401(1)).
The safe harbor would also require the employer to
provide notice, within a reasonable period before the beginning
of a year, to all employees eligible to participate of their
rights and obligations under the plan.
The ACP test would be deemed to have been satisfied with
respect to matching contributions if the design and notice
criteria relating to the ADP test were met and, in addition, (1)
matching contributions were not made with respect to employee
contributions or elective deferrals in excess of 6 percent of an
employee's compensation, (2) the level of matching contributions
did not increase with the level of employee or matching
contributions, and (3) the rate of matching contributions at each
level of compensation was no higher for highly compensated than
nonhighly compensated employees.
Administration position. We oppose the provisions contained
in the proposal providing alternatives to the ADP and ACP tests
by allowing plans to satisfy nondiscrimination testing merely by
making matching contributions available.
This proposal
represents a significant change in policy, not a simplification.
We believe it would seriously erode current policies against
discrimination in retirement plans because such a test would
provide no assurance that benefits will be provided in fact to
nonhighly compensated employees.
The current law ADP and ACP tests provide a clear incentive
for employers to design a plan that is attractive to rank-andfile employees and to make every effort to communicate the plan

1
to those ennloyees, since the acv
L level of participation by
those emplc *es directly affects
e permitted level of
by highly compensated employees,
¿y contrast, while the proposal
that is under consideration at today's hearing would require
notice of the plan to be given to eligible employees buttressed
by penalties for failure to do so, it provides no affirmative
incentive to provide benefits in excess of the statutory minimum.
In fact, such a test is a disincentive to do so since, once the
design-based criteria have been met, any additional participation
by the nonhighly compensated employees will increase the cost of
the plan to the employer.
As we have stated in the past, we believe that the principal,
sources of complexity in this area are not the basic ADP and ACP
tests but rather the rules applicable to the distribution and
recharacterization of excess deferrals and contributions.
Th
,
we believe that simplification of these rules -- not abandonment
of the fundamental policy underlying these nondiscrimination
rules — should be the simplification objective m this area.
Accordingly, the Administration's pension proposal contained
modifications to the ADP and ACP tests.
Under our proposal, the
ADP test would be modified such that each eligible
compensated employee individually would not be permitted to defer
more than a specified percentage of the deferral rates for the
eligible nonhighly compensated employees for the preceding Pian
year.
Corresponding changes were proposed with respect to the
ACP test.
In addition, the multiple use test was proposed to be
repealed and recharacterization of excess deferrals as af^ T ^
employee contributions would no longer be permitted.
We believe
the approach taken in the Administration's proposal would malc®
the results of the ADP and ACP tests more predictable and would
significantly reduce, if not eliminate, the likelihood of excess
contributions.
An employer would no longer need to monitor the
average deferrals for the nonhighly compensated employees and the
highly compensated employees during the current plan year in
order to avoid the complicated correction mechanisms.
Instead,
the maximum contribution percentage for each highly compensated
employee would be known at the beginning of the plan year.
By
minimizing the potential for excess contributions, the most
significant source of complexity in 4 0 1 (k) plans will be
eliminated.
The Administration proposals will provide a design-basec
basic plan for small employers while continuing to make 4 0 1 (k)
plans generally available
Given the large growth in the
popularity of such plans in recent years and the very real
benefits provided to a broad base of employees, we believe that
the better approach is to simplify the current 4 0 1 (k) incentive
structure — not abandon it•

15
TITLE II.

DISTRIBUTIONS

Taxability of Beneficiary of Employees' Trust (Section 201)
Currant law. Distributions from qualified plans and other
tax-preferred retirement programs are generally subject to J ^ c o m
tax upon receipt.
Premature distributions, generally those made
before age 59%, may also be subject to a 10-percent additional
tax. A number of special rules may alter the general rule if
applicable.
Rollovers. Current income tax and, if applicable, the
additional tax on a distribution can be avoided
portion of an eligible distribution is rolled over to another
Qualified plan or Individual Retirement Account (IRA) • 0l?r£
certain distributions (generally distributions that are either
"qualified total distributions" or "partial <
d istributions ) a:of
eligible for rollover treatment. As only the taxable portion of
a distribution is eligible for rollover treatment, after-tax
employee contributions may not be rolled over.
Lump sum distributions. Certain lump sum distributions
are eligible to be taxed under special rules.
These rules
generally result in a lower rate of tax than would otherwise
apply to a distribution.
In general, a lump sum distribution is
a distribution within one taxable year of the balance to the
credit of the participant which becomes payable on account of
death, separation from service, or disability, or after
attainment of age 59^.
A participant or beneficiary generally may be able to elect
to use the 5-year forward averaging rules with respect to a lump
sum distribution if the distribution is received after age 59^.
Five-year forward averaging is calculated under the tax rates in
effect for the year of the distribution, and the election is
available with respect to one distribution m an employee s
lifetime.
If a lump sum distribution is received before 1992,
the recipient may also be able to elect to have the portion of
the distribution attributable to pre-1974 plan participation
taxed at capital gains rates.
Participants who attained age 50 before January 1, 1986,
have three additional options which may reduce the rate of tax on
a distribution.
First, instead of using the 5-year forward
averaging rules, they may continue to use the 10-year forward
averaging rules available before the Tax Reform Act of 1986.
Second, they may use the 5-year or 10-year forward averaging
rules even if they are under the currently prescribed age
requirement (age 59h) when they receive a distribution, if all of
the other requirements for using those rules are met.
Finally,
they may elect to have the entire portion of a lump sum

16
distribution attributable to pre-1974 participation taxed at a 20
percent rate.
If a lump sum distribution includes securities of the
employer corporation, the net unrealized appreciation (NUA) in
the employer securities is generally not subject to tax until the
securities are sold, unless the recipient elects to have the
normal distribution rules apply. When the securities are sold,
the NUA is treated as long-term capital gain.
If a distribution
is not a lump sum distribution, only the NUA attributable to the
employee's own contributions may be excluded from income under
these special rules.
Proposal. Under the proposal, the 5-year forward averaging
rules would be repealed with respect to distributions received in
taxable years beginning after 1992. The current law treatment of
NUA and the special averaging rules available to participants who
attained age 50 before January 1, 1986, however, would be
retained.
The bill would also simplify the rollover rules and permit
any distributions to be rolled over. The current law
restrictions on rollovers of after-tax employee contributions and
minimum required distributions would be retained.
Administration position. We believe that the qualified plan
distribution rules are an excellent candidate for simplification.
However, we do not believe that significant simplification in
this area will be achieved if the NUA exclusion and the
preferential treatment available to taxpayers who attained age 50
before January 1, 1986 are retained.
The Administration proposal
to simplify the distribution rules would provide a single simple
rule for distributions — that such distributions either can be
rolled over and deferred or are currently taxable.
While
preserving and enhancing an easily accessible deferral mechanism
(i.e.. rollover IRAs), such a rule would eliminate the need to
evaluate multiple, complex alternatives on receipt of a
distribution.
Given the 1986 changes in the basic structure of
the individual tax rates and brackets, the highly complex rules
for forward averaging, NUA and capital gains treatment are no
longer needed.
The liberalized rollover proposal that is also
contained in the Administration proposal should encourage
employees to preserve their retirement savings.
While the proposal in S. 1364 adopts certain of the
provisions contained in the Administration proposal, it adopts
far fewer than will be required to fund the other changes set
forth in the bill.
The bill also loses significant revenue by
permitting rollover of annuity payments.
For these reasons, we
oppose the proposal in its current form.

17
Qualified Plans Must Provide For Transfers of Certain
Distributions To Other Plans (Section 202)
Current law. Current law places various restrictions on
pre-retirement distributions from qualified plans.
When a
permissible distribution is made from a plan, it generally is
made directly to the participant or beneficiary and is subject to
income tax and, in the case of a premature distribution, a 10percent additional tax.
Under certain circumstances, the
recipient of a qualified plan distribution can avoid current
income taxation and any 10-percent additional tax by rolling the
distribution over into another qualified plan or IRA. When
making a distribution that is eligible for rollover treatment,
plan administrators are required to provide a written explanation
of the rollover rules to the recipient.
The circumstances under
which such rollovers are permitted under current law are limited,
however, and the rules applicable to them are very complex.
In
addition, rollovers must be made within 60 days of the
distribution.
The burden of this complexity falls primarily on
the individual participants.
Proposal. The bill would require qualified plans to make
"applicable distributions" in the form of direct trustee-totrustee transfers to an IRA or a qualified defined contribution
plan that accepts such transfers as designated by the
distributee.
Applicable distributions would generally include
any distributions permitted to be made by a plan over $500 that
would have been subject to the 10-percent additional tax on early
distributions if they have been distributed directly to the
participant or beneficiary.
Thus, exceptions to the required
transfer provisions would be provided for certain distributions,
including any distribution after the employee attains age 55 and
distributions of employee contributions.
The plan would be
required to provide a method for designating the transferee plan
where the distributee does not make a designation or where the
transfer to the designated plan is not practical.
The plan
trustee would be required to provide a written notice to the
participant of the transfer requirements and of the amount of the
transfer.
Similar rules would apply in the case of annuity plans
and tax-sheltered annuities.
Administration position. We support the Administration
proposal under which qualified plans would be required to give
participants the option of having distributions that are eligible
for rollover treatment transferred directly to an eligible
transferee plan specified by the participant.
We believe that it
would accomplish the objectives of the similar provision in the
bill without imposing a mandatory transfer not always desired by
the plan participant.
The Administration proposal would
facilitate the rollover of pension benefits and the preservation
of such benefits for retirement purposes without imposing any
significant additional burdens on employers.
Given the

18
availability of a better approach as described, we do not support
the proposal in the bill in its current form.
The Pension Benefit Guaranty Corporation (PBGC) has advised
us that the mandatory rollover requirement is not feasible for
plans for which it is trustee.
Required Distributions (Section 203)
Current law. Under current law, distributions under most
tax-preferred retirement arrangements must begin by no later than
April 1st of the calendar year following the calendar year in
which the participant attains age 70%, regardless of when the
participant retires.
Proposal. The proposal would amend current law to return to
the rule in effect prior to the changes made by the Tax Reform
Act of 1986 and permit minimum required distributions to be
delayed until retirement in the case of participants working
after age 70% provided an actuarial adjustment is made if no
other benefits are accruing.
Current law would continue to apply
to 5-percent owners.
Governmental plans and church plans would
be exempt from the provisions retaining current law in specified
instances and from the provision requiring actuarial adjustment.
Administration position. We would not oppose allowing a
delay in required distributions until actual retirement except
with respect to 5-percent owners, provided there is an acceptable
revenue offset and that the actuarial adjustment required in the
case of delayed distributions is fair and realistic.
However, we
oppose exempting governmental and church plans from the actuarial
adjustment requirement.
Employees covered under those plans
should be entitled to the same protections as employees covered
under other plans.
TITLE III.

MISCELLANEOUS PROVISIONS

Treatment of Leased Employees (Section 301)
Current law. Section 41 4 (n) of the Code provides that
i or
purposes of certain retirement and welfare benefit p r o v i s i o n ef
the Code, a leased employee is treated as an employee of the
recipient of the leased employee's services.
In order to be
treated as a leased employee, a person must not be a common-law
employee of the recipient and, in addition, must meet three
requirements.
First, the person must provide services to the
recipient pursuant to an agreement between the recipient and a
third-party leasing organization.
Second, the person must
provide the services to the recipient on a substantially full-

19
time basis for at least one year. And, third, the services must
be of a type historically performed by common-law employees in
the business field of the recipient.
Proposed regulations under
section 4 1 4 (n) were issued in 1987.
Proposal. The bill would eliminate the third requirement
that the services be of a type historically performed by commonlaw employees in the business field of the recipient.
In place
of the "historically performed" standard, the proposal would
substitute a requirement that the services be performed under the
"control" of the recipient.
The proposals generally would be
retroactive to 1983.
Administration position. We would not oppose the objective
of the proposal if effective prospectively and if an acceptable
revenue offset is provided.
We understand the intent is to limit
section 41 4 (n) to the abuses Congress originally sought to target
when it enacted the section in 1983. As we have previously
stated, we intend to withdraw those portions of the proposed
regulations relating to the "historically performed" standard
under section 414(n). We have deferred such action, however,
pending Congressional revision of the standard to be applied in
new regulations.
We believe that any new standard adopted by Congress should
be clear in its application to specific cases.
In this regard,
we suggest that detailed examples in the legislative history be
provided to demonstrate the intended application of the standard.
"Control" in this context should not be determined by reference
to employment tax concepts and should reflect the realities of
the relationship, not merely its form.
Elimination of Half-Year Requirements (Section 302)
Current law. A number of employee benefit provisions, such
as those relating to permissible and required distributions from
qualified retirement plans, are based on the attainment of age
59% or age 70%.
Proposal. Under the proposal, the half-year requirements
would be eliminated so that each reference to age 59% would
become one to age 59 and each reference to age 70% would become
one to age 70.
Administration position. We do not oppose this proposal,
although we question whether requiring such a change in plans
would in fact be simplifying.

Plans Covering Self-Employed Individuals (Section 303)
Current lav. Special employer aggregation rules apply to
certain self-employed owner-employees participating in a taxqualified retirement plan and controlling more than one business.
The control group rules applicable to all employers under section
414(b) and (c) also apply to businesses controlled by selfemployed owner-employees.
Proposal. The proposal would eliminate the special employer
aggregation rules for self-employed owner—employees and would
leave the generally applicable control group rules in place.
Administration position. We do not oppose the proposal
provided an acceptable revenue offset is provided.
The generally
applicable control group rules should be sufficient to ensure
against possible abuses with respect to plans maintained by selfemployed owner-employees.
Full Funding Limitation of Multiemolover Plans (Section 304)
Current law. Under current law, an employer may generally
make deductible contributions to a qualified defined benefit plan
(including a multiemployer plan) subject to certain limitations,
including the full funding limitation.
The full funding
limitation is generally the excess, if any, of the lesser of (1)
150-percent-of-current-liability or (2) the accrued liability
(including normal cost) under the plan over the lesser of (i) the
fair market value of the plan's assets or (ii) the value of the
plan's assets determined under section 412(c)(2). Valuations of
plan assets and liabilities are required at least annually.
The Secretary of the Treasury is granted regulatory
authority to adjust the 150-percent figure to take into account
the respective ages or lengths of service of the participants.
In addition, the Secretary is granted regulatory authority to
provide alternative methods based on factors other than current
liability for the determination of the full funding limitation.
The Secretary is to exercise this regulatory authority only in a
revenue neutral manner.
Because any such change would, by
necessity, adversely affect some taxpayers and benefit other
taxpayers, the Treasury Department has concluded that it will not
exercise this authority unless directed by the Congress to do so.
Proposal. In the case of multiemployer plans, the proposal
would amend current law to return to the rules in effect prior to
the changes made by the Pension Protection Act of 1987.
Thus,
the 150-percent-of-current-liability prong of the calculation of
the numerator of the full funding definition would be eliminated

21
and valuations of multiemployer plans would be required only
every 3 years.
Administration position. We oppose the proposal.
A
complete waiver for multiemployer plans of the 150-percent-ofcurrent—liability prong of the full funding limitation involves
substantial revenue loss. We do not believe that an exception to
the generally applicable funding rules should be provided simply
because the plan is a multiemployer plan.
Affiliation Requirements for Employers Jointly Maintaining a
Voluntary Employees' Beneficiary Association (Section 305)
Current law. Under Treasury regulations, a voluntary
employees' beneficiary association (VEBA) is not tax exempt under
section 501(c)(9) of the Code if it benefits employees who do not
share an employment-related common bond. An employment-related
common bond generally exists only among employees of the same
employer (or affiliated employers), employees covered by a
collective bargaining agreement, members of a labor union, or
employees of unaffiliated employers doing business in the same
line of business in the same geographic locale.
The IRS has
interpreted the same geographic locale requirement as prohibiting
a VEBA from covering nonunion employees of unaffiliated employers
located in more than one state or metropolitan area.
The same
geographic locale requirement was held to be invalid by the 7th
Circuit in Water Quality Ass'n Employees' Benefit Corp. v. United
States. 795 F.2d 1303 (1986).
Proposal. The proposal would exempt VEBAs maintained by
unaffiliated employers from the same geographic locale
requirement if they (1) are in the same line of business, (2) act
jointly to perform tasks which are integral to the activities of
each of the employers, and (3) act jointly to such an extent that
the joint maintenance of a voluntary employees' beneficiary
association is not a major part of the employers' joint
activities.
Administration position. We oppose the proposal in the
bill; however, as discussed below, we would consider a more
limited change to the VEBA rules.
The same geographic locale
requirement helps target the tax benefits available under section
501(c)(9) to organizations with the greatest need for support.
The VEBA tax exemption was initially intended to benefit
associations formed and managed by employees of a single employer
or of small local groups of employers, to provide certain welfare
benefits to their members in situations where such benefits would
not otherwise have been available.
Congress was concerned that
such associations might not be viable without a tax exemption.
By contrast, larger associations covering employees of unrelated
employers in different geographic areas are more likely to be

22
viable even without a tax exemption, and the benefits they
provide are more likely to be able to be provided through
commercial insurance.
The fact that unaffiliated employers would be required under
the proposal to conduct certain joint activities does not address
these concerns.
Moreover, we are concerned that the nature and
required level of joint activities under the proposal are so
unclear that the exemption will apply to a large group of
employers.
This would have serious revenue consequences and, in
addition, would undermine those provisions of the Code that
prescribe the treatment of insurance companies.
Although we oppose the proposed exemption from the
geographic locale requirement for the reasons stated above, we
understand that the one-state or metropolitan area rule may be
too restrictive in states or metropolitan areas with too few
employees in the same industry to form an economical multipleemployer VEBA.
An alternative to the proposal in the bill would
be to limit VEBAs to a three-contiguous-state area, or a larger
area if the Secretary determined that the employer group in the
three—state area was too small to make self-insurance economical.
If an acceptable revenue offset were provided, we would not
oppose such a modification.
Treatment of Governmental Plans (Section 306)
Current law. Benefits payable under qualified defined
benefit plans generally are limited to the lesser of $90,000
(indexed) or 100 percent of compensation (section 415). A number
of circumstances may give rise to required adjustments to these
limitations, including situations where benefits commence before
age 62, in the case of a governmental plan, or where there is
less than 10 years of service or participation in the plan.
Under a special transition rule, government plans are permitted
to elect to have pre-1988 limits apply with respect to qualified
participants.
The basic definition of compensation under current law used
to determine the limits on contributions and benefits is defined
to conform as closely as possible to total taxable income
received from the employer.
Thus, salary reduction amounts
excluded from an employee's gross income are not taken into
account in determining compensation for this purpose.
Excess benefit plans of governmental employers providing
benefits for certain employees in excess of the section 415
limitations on benefits and contributions under qualified plans
are subject to the provisions o f .section 457, which include an
annual cap on benefits of $7,500 (or, if less, 33-1/3 percent of
compensation).

23
Proposal. The proposal would exempt benefits under
governmental plans from the 100 percent of compensation
limitation.
The proposal would also exempt certain survivor and
disability benefits under governmental plans from the adjustment
for pre-age 62 commencement, and from the participation and
service adjustments generally required to be made to the section
415 limitations on benefits.
For purposes of determining the limits on contributions and
benefits under a governmental plan, the proposal would include
certain salary reduction amounts in compensation.
The proposal
would exempt governmental excess benefit plans from the
provisions of section 457.
Finally, the proposal would permit a
revocation of an election to have the pre-1988 limitations apply
to qualified participants.
While the general effective date of the proposal is taxable
years beginning after the date of enactment, the bill provides
that plans are treated as satisfying the requirements of section
415 for all taxable years beginning before the date of enactment.
Administration position. We oppose the proposal creating an
exception to the 100 percent of compensation limitation.
The
proposal would violate the long-standing policy against
permitting benefits payable under qualified defined benefit plans
to exceed 100 percent of compensation and does not present an
appropriate case for making an exception to that policy.
We oppose the proposal creating a broad exception for
survivor and disability benefits under governmental plans.
We
note, however, that certain pre-retirement survivor and
disability benefits under governmental plans are not generally
subject to the limitations on contributions and benefits under
the current IRS interpretation.
We oppose the proposal to include salary reduction amounts
in compensation for purposes of determining the limits on
contributions and benefits under governmental plans.
The
proposal is inconsistent with the general policy that amounts
excluded from gross income should not be taken into account for
this purpose.
We oppose the excess benefit plan proposal.
The scope of
the proposal is narrowly drafted to cover only excess benefit
plans maintained by one limited group of those employers subject
to section 457.
We oppose the provision deeming all governmental plans to
have satisfied the limits on contributions and benefits for all
prior years.
The proposal is in effect a retroactive repeal of
those limits.

24
Modifications of Simplified Employee Pensions (Section 307)
Current lav. Under current law, an employer may establish a
simplified employee pension (SEP) that accepts elective salary
reduction contributions.
In order for a salary reduction SEP
(SARSEP) to qualify, the employer generally may have no more than
25 nonexcludable employees, at least 50 percent of all
nonexcludable employees must elect to make such contributions,
and the deferral percentage of each eligible highly compensated
employee must not exceed 125 percent of the average deferral
percentage of all eligible nonhighly compensated employees (the
"ADP” test). If an employer maintains a SEP or a SARSEP, the
plan generally must be provided to all employees who are age 21
or older, who have performed service for the employer in at least
3 out of the last 5 years and who have received over $363
(indexed) in compensation.
Proposal. The proposal would permit employers with up to
100 nonexcludable employees to set up current law SARSEPs and
would eliminate the 50-percent participation requirement.
In
addition, the proposal would exempt a SARSEP from the otherwise
applicable ADP test if one of the design-based safe harbors
provided under the bill with respect to 4 0 1 (k) plans were
adopted.
Finally, the proposal generally would require SEPs of
all types to cover every employee with at least 1 year of
service.
Administration position. We oppose the proposal to
eliminate the 50-percent participation test and to create an
exemption from the ADP test applicable to SARSEPs without
requiring any base contribution.
The effect would be to
eliminate any requirement that pension coverage be actually
provided (as opposed to made available) to nonhighly compensated
employees.
Absent actual coverage of a broad base of employees,
we believe that the substantial tax expenditure provided for
pension arrangements cannot be justified.
In the Administration's pension proposal, we recommended a
new vehicle for employers with 100 or fewer employees and no
other retirement plan.
Under our proposal, a base contribution
would be made for each eligible employee of 2 percent of pay (up
to a maximum base contribution of $2,000).
Employees could elect
to contribute up to one-half the limit on elective deferrals
applicable to 4 0 1 (k) plans and employers could make a 50 percent
matching contribution.
The minimum contribution concept embodied
in the Administration's proposal would free small businesses from
the burdens of experience-based testing, while at the same time
ensuring broad—based coverage of nonhighly compensated employees.

25
Contributions on Behalf of Disabled Employees (Section 308)
Current lav. An employer may make certain nonforfeitable
contributions to a tax-qualified defined contribution plan on
behalf of any disabled participant who is not highly compensated
if an election is made.
Proposal. The proposal would permit nonforfeitable
contributions to be made on behalf of highly compensated disabled
participants for a fixed or determinable period and would waive
the election requirement, if contributions were made on behalf of
all disabled participants.
Administration position. We would not oppose the proposal
if it were modified to insure that the provision does not operate
in a manner that discriminates in favor of highly compensated
employees and if an acceptable revenue offset is provided.
We
are concerned that, as presently drafted, contributions during
disability could be provided for under a plan during years when
the only disabled participants are highly compensated and such
provisions could then be deleted in subsequent years when the
only disabled participants were nonhighly compensated.
Distributions Under Rural Cooperative Plans (Section 309)
Current law. Distributions from 4 0 1 (k) plans may be made
upon attainment of age 59%, and distributions from profit-sharing
plans may be made in certain events, including attainment of a
stated age.
Distribution from pension plans (including money
purchase pension plans) generally must not commence until
retirement.
Proposal. The proposal would permit distributions after
attainment of age 59 from a money purchase rural cooperative plan
which includes a 401(k) plan.
Such distributions would not be
limited to the 40 1 (k) portion of the plan.
The proposal is made
retroactive, generally to 1987.
Administration position. We oppose the proposal insofar as
it creates a retroactive special exception for a limited group of
tax-qualified plans.
We do not oppose the proposal if effective
prospectively.
However, we note that there would appear to be no
impediment under current law for the rural cooperative plans to
be converted to profit-sharing plans under which distributions
upon the attainment of a stated age would be permissible.
Reports of Pension and Annuity Payments (Section 310)
Current law. Persons maintaining or administering certain
tax-favored retirement arrangements are required to file reports

26
in the nature of information returns regarding the arrangements
with the 1RS and with the participants, owners, or beneficiaries
under the arrangements.
Under current law, failure to file the
reports is subject to specific penalties rather than the
generally applicable penalty for failure to file information
returns.
Proposal. Under the proposal, failure to file reports
regarding tax-favored retirement arrangements that are in the
nature of information reports would be subject to the generally
applicable penalty for failure to file information returns.
Administration position. We support this proposal because
conforming the information-reporting penalties that apply with
respect to pension payments to the general information-reporting
penalty structure will simplify the overall penalty structure
through uniformity and provide more appropriate information
reporting penalties with respect to pension payments.
Tax-Exempt Organizations Eligible For Section 4 0 1 (k) Plans
(Section 311)
Current law. The Tax Reform Act of 1986 precluded taxexempt employers from adopting 4 0 1 (k) plans for their employees.
Certain existing plans (i.e.. plans adopted by tax-exempt
employers before July 2, 1986) were grandfathered.
Proposal. Under the proposal, tax-exempt employers would be
permitted to adopt 4 0 1 (k) plans for their employees.
Administration position. We support the proposal subject to
an acceptable revenue offset. We see no policy basis for
precluding tax-exempt employers from adopting 4 0 1 (k) plans for
their employees.
We believe this is also true with respect to
State and local government employers as evidenced by the
Administration proposal to expand 4 0 1 (k) plans to those employers
as well.
There are, however, revenue costs associated with both
proposals which have prevented enactment of these proposals in
the past.
If the Committee does not utilize the revenue-raising
provisions proposed by the Administration, these cost constraints
may again prevent implementation of this desirable change.
We
believe this is an appropriate way to encourage expanded pension
coverage and to remove an exception to the general availability
of 4 0 1 (k) plans.
Date for Adoption of Plan Amendments (Section 312)
Current law. Plan amendments must generally be made by the
end of the plan year in which the amendments are effective,

27
although later amendments may be made if the remedial amendment
period extends that date.
Proposal. The proposal would provide that any plan
amendments required by the legislation would not be required to
be actually made before the 1993 plan year, provided the plan is
operated in accordance with the amendment and the amendment is
made retroactive.
Administration position. We do not support this proposal.
Absent appropriate circumstances, we believe a delayed date for
actual plan amendments creates serious difficulties in the proper
administration and operation of plans.
*

Mr. Chairman, that concludes my formal statement.
I will be
pleased to answer any questions that you or other Senators may
wish to ask.

TABLE I
REVENUE ESTIMATES OF ADMINISTRATION'S PENSION PROPOSALS

(billions)
1992
1992-96
Distributions from Qualified Plans
Cash or Deferred Arrangements (401(k) Plans)
Extend 401(k)'s to Tax-exempts

3.0

-. 1

-. 6
-.2

Extend 40 1 (k)'s to State and Local Governments

-.1

Salary Reduction Simplified Employee Pensions

-.1

-.8

-. 1

- *

Definition of Highly-Compensated Employee
Repeal of Family Aggregation Rules
Multi-Employer Vesting
Total

1.2

* Less than $50 million
The estimates assume an effective date of 1/1/92.
Department of the Treasury
Office of Tax Analysis

September 9, 1991

TABLE II
REVENUE ESTIMATE OF S. 1394
BY TITLE
(millions)
1992
1992-96

Title I —

Individual tax provisions

Title II - - Large partnership provision
Title III —

Foreign provisions

Title IV -- Other income tax provisions
Title V —

Estate & gift tax provisions

Title VI -- Excise tax provisions
Title VII —

Administrative provisions

Totals

Department of the Treasury
Office of Tax Analysis

-3

-41

+183

+22

+87

-103

-260

-11

-31

+15

-89

-47

September 9, 1991

APPENDIX TO STATEMENT OFCrp I j q,
KENNETH W. GIDEON
1* V I /
BEFORE THE
SUBCOMMITTEE ON TAXATION ~of
COMMITTEE ON FINANCE
OfTft£
SEPTEMBER 10, 1991

¡On y
U'

This appendix presents in detail the views of the
Administration on S. 1394, the Tax Simplification Act of 1991.
The provisions are covered in the order in which they appear in
S. 1394.

TITLE I. INDIVIDUAL TAX PROVISIONS
i•

Rollover of Gain on Sale of Principal Residence:
Rules
Relating to Multiple Sales Within Rollover Period
(Section 101)

gM,rrent law.
No gain is recognized on the sale of a
principal residence if a new residence at least equal in cost to
the sales price of the old residence is purchased and used by the
taxpayer as his principal residence within a specified period of
time.
This replacement period generally begins 2 years before
and ends 2 years after the date of sale of the old residence.
In
general, nonrecognition treatment is available only once during
any 2—year period.
In addition, if during the replacement period
the taxpayer purchases more than one residence which is used as
his principal residence within 2 years after the date of sale of
the old residence, only the last residence so used is treated as
the new replacement residence.
However, if residences are sold
in order to relocate for employment reasons, two special rules
aPP i y ! first, the number of times nonrecognition treatment is
available during a 2-year period is not limited; second, if a
residence is sold within 2 years after the sale of the old
residence, the residence sold is treated as the last residence
used by the taxpayer and thus as the only replacement residence.
Proposal.
Gain would be rolled over from one residence to
another residence in the order the residences are purchased and
used, regardless of the taxpayer's reasons for the sale of the
old residence.
In addition, gain could be rolled over more than
once within a 2-year period.
Thus, the rules that formerly
applied only if a taxpayer sold his residence in order to
relocate for employment purposes would apply in all cases.
Administration position.
The Administration supports this
provision. The provision simplifies the application of section
1034 by amending it to provide a single set of rules for rollover
of gain on the sale of a principal residence.

2
2.

Due Dates for Estimated Taxes of Individuals (Section 102)

Current law. Individual estimated taxes for a taxable year
must be paid in four installments, the due dates of which are
April 15, June 15, and September 15 of that year and January 15
of the following year.
Proposal. The due date for the second installment of
estimated tax would be changed from June 15 to July 15.
Administration position. We do not support this proposal.
It entails a cost to the government, which would receive the
second installment of estimated tax at a later date (thereby
foregoing investment earnings on the funds or incurring interest
expense on additional borrowings) and would have to revise tax
forms and processing capabilities to accommodate the change.
The
proposal would not meaningfully simplify the law.
The intervals
between due dates for installments of individual estimated taxes
would remain uneven; the 2-month interval that currently exists
between the first (April 15) and second (June 15) installments
would be replaced by a 2-month interval between the new second
(July 15) and third (September 15) installments.
3.

Payment of Tax bv Credit Card (Section 103)

Election to Include Child's Income on Parent's Return
(Section 104)

Current law. The net unearned income of a child under 14
years of age is taxed at the marginal rate of the child's
parents.
If the child's gross income is solely from interest and

3
dividends and is more than $500 and less than $5,000, the parents
may elect to report the child's gross income in excess of $1,000
on their return.
If the election is made, in addition to the tax
on the augmented income, the parents pay the lesser of $75 or 15
percent of the excess of the child's gross income over $500.
For
purposes of the alternative minimum tax (AMT), the AMT exemption
of a child under the age of 14 is limited to the sum of the
child's earned income and the greater of $1,000 or the unused
parental minimum tax exemption.
Proposal. The dollar amounts relating to the election to
include the child's income on the return of the parents would be
indexed for inflation.
In addition, the $1,000 amount used to
determine the amount of the child's AMT exemption would be
indexed for inflation.
Administration position. The Administration supports this
provision.
Adjusting for inflation for purposes of the election
will prevent inflation from eroding the availability of the
election over time.
Because the election reduces the need to
file separate returns for young children, preserving the
availability of the election simplifies the filing process.
5.

Certain Foreign Tax Credits for Individuals (Section 105)

Certain Personal Foreign Currency Transactions

(Section 106)

Current law. When a U.S. taxpayer having the U.S. dollar as
his functional currency makes a payment in a foreign currency,
gain or loss (referred to as "exchange gain or loss”) arises from

4
any change in the value of the foreign currency relative to the
U.S. dollar between the time the currency was acquired (or the
obligation to pay was incurred) and the time that the payment is
made.
Gain or loss results because foreign currency, unlike the
U.S. dollar, is treated as property for Federal income tax
purposes.
Exchange gain or loss can arise where foreign currency
has been acquired for personal use.
Proposal. The bill would exempt from taxation exchange
gains not exceeding $200 realized by individuals on the
disposition of foreign currency in personal transactions.
Losses
on such transactions are not allowed under current law.
Administration position. We support this proposal.
Taxpayers located abroad generally must conduct their affairs in
the local currency.
Under current law, taxpayers may be required
to recognize exchange gains on dispositions of foreign currency
in personal transactions.
We agree that, in de minimis cases,
this imposes unreasonable administrative demands on taxpayers,
and that the insignificant amount of revenue collected from such
transactions does not justify this administrative burden.

Due Date for Furnishing Information to Partners
(Section 107)

Current law. Partnerships are required to furnish an
information return (Schedule K-l) to each person who is a partner
for any partnership taxable year on or before the day on which
the return for such taxable year is required to be filed (April
15 for a calendar year partnership).
Proposal. A large partnership (which is a partnership with
250 or more partners or any partnership subject to the simplified
reporting rules for large partnerships proposed in H.R. 2777)
would be required to furnish information returns to its partners
by the 15th day of the third month following the end of its
taxable year (March 15, for a calendar year partnership).
Administration position. We support this proposal insofar
as it applies to simplified Schedules K-l issued by large
partnerships as described in §201 of the bill.
Information
returns that are received on or shortly before April 15 are
difficult for individuals to use in preparing their returns or
computing their payments that are due on that date.
It may thus
be appropriate to accelerate this date in the case of large
partnerships whose tax treatment is being modified (in Title II
of this bill) in order to simplify the tax consequences of an
investment in the partnership.
We question, however, whether
this requirement should be extended to partnerships which remain
subject to detailed Schedule K-l reporting or to Schedule K-l's
issued to excluded partners of large partnerships.

5
8.

Exclusion of Combat Pav from Withholding Limited to Amount
Excludable From Gross Income (Section 108)

Current law. Gross income does not include certain pay of
members of the Armed Forces.
If enlisted personnel serve in a
combat zone during any part of any month, military pay for that
month is excluded from gross income.
Special rules apply if
enlisted personnel are hospitalized as a result of injuries,
wounds, or disease incurred in a combat zone.
In the case of
commissioned officers, these exclusions from income are limited
to $500 per month of military pay.
There is no income tax withholding with respect to military
pay for a month in which a member of the Armed Forces is entitled
to the combat pay exclusion.
With respect to enlisted personnel,
this income tax withholding parallels the exclusion: there is a
total exemption from income tax withholding and total exclusion
from income.
With respect to officers, however, the withholding
rule is not parallel: there is total exemption from income tax
withholding, although the exclusion from income is limited to
$500 per month.
Proposal. The proposal would make the income tax
withholding exemption rules parallel to t h e .rules providing an •
exclusion from income for combat pay.
Administration position. We support this proposal.
The
current differences between the withholding rules and the
exclusion rules with respect to combat pay can lead to
underwithholding on the pay of taxpayers (primarily officers) and
could cause hardship at the time of the filing of their tax
returns.
9.

Simplified Income Tax Returns (Section 109)

Current law. The Treasury Department and the Internal
Revenue Service (IRS) continually study ways to simplify
reporting for individuals, both itemizers and nonitemizers.
Proposal. The bill would require the Secretary (or his
delegate) to take such actions as may be appropriate to expand
access to simplified individual income tax returns and otherwise
simplify the individual income tax returns.
The bill would
mandate that the Secretary (or his delegate) submit a report no
later than 1 year after enactment on such actions.
Administration position. We do not oppose this proposal.
It mandates that the Treasury Department and the IRS continue
existing and continuous activities to evaluate tax forms to make

them easier to understand and to improve compliance.
believe a formal study should be required.
10.

We do not

Rural Letter Carriers (Section 110)

Current law. A taxpayer may elect to use a standard mileage
rate in computing the deduction allowable for business use of an
automobile.
Under this election, the taxpayer's deduction equals
the standard mileage rate multiplied by the number of miles
driven for business purposes, and is taken in lieu of deductions
for depreciation and actual operation and maintenance expenses.
If the taxpayer is an employee, the deduction is subject to the
2-percent floor on miscellaneous itemized deductions.
If the taxpayer's employer reimburses the taxpayer under an
accountable plan for his actual expenses, the reimbursement is
excluded from the taxpayer's income.
A plan is accountable if it
meets requirements of business connection, substantiation, and
returning amounts in excess of expenses.
Rather than requiring
an employee to substantiate, the actual amount of his expense, the
employer can provide a mileage allowance.
If a mileage allowance
is paid at a rate not in excess of the standard mileage rate, the
reimbursement is excluded from the taxpayer's income.
If the
mileage allowance is paid at a rate in excess of the standard
mileage rate, the excess is included in the taxpayer's income
(and is subject to reporting and withholding).
An employee of the U.S. Postal Service may use a special
mileage rate equal to 150 percent of the standard mileage rate in
computing the deduction for business use of an automobile in
performing services involving the collection and delivery of mail
on a rural route.
Proposal. The bill would repeal the special mileage rate
for U.S. Postal Service employees.
In its place, the bill would
provide that the rate of reimbursement provided by the Postal
Service to rural letter carriers under their 1991 collective
bargaining agreement is considered to be equivalent to their
actual expenses.
This rate can be increased in the future by no
more than the rate of inflation.
The bill also would provide
that the reimbursements are exempt from the accountable plan
requirements.
Administration position. The Administration does not oppose
the proposal insofar as it treats the reimbursements for
automobile expenses provided to rural letter carriers as being
equal to their actual expenses.
The Administration believes,
however, that the reimbursements should be subject to the
accountable plan requirements.
These requirements do not impose
an undue burden on the Postal Service or rural letter carriers.

7
11.

Exemption From Luxury Excise Tax For Certain Equipment
Installed On Passenger Vehicles For Use Bv Disabled
Individuals (Section 111)

Current law. The 1990 OBRA imposed a 10-percent excise tax
on the portion of the retail price of a passenger vehicle that
exceeds $30,000.
The tax also applies to the installation of
parts and accessories within 6 months of the date the vehicle is
purchased.
Proposal. The bill would provide that the luxury excise tax
does not apply to a part or accessory that is installed on a
passenger vehicle after its purchase in order to enable or assist
an individual with a disability to operate the vehicle or to
enter or exit the vehicle by compensating for the effect of the
disability.
The tax would continue to apply to the portion of
the retail price of the vehicle that exceeds $30,000, even if the
purchaser is disabled and/or intends to make modifications to the
vehicle that under the proposal would be exempt from the tax.
Administration position. We support the proposal.
We would
modify the proposed language slightly in order to clarify that
Congress intends the proposal also to apply to structural or
mechanical modifications to a vehicle that make the vehicle
usable by a disabled person but that may involve the removal or
rearrangement, rather than the addition, of parts.
We understand that the proposal is not intended to exclude
from the luxury tax accessories such as cruise control,
adjustable steering columns, power-adjustable seats, or power
windows, door locks, mirrors or sunroofs that are commonly
available as optional equipment from the manufacturer or dealer
and that might assist any driver in operating the vehicle.
TITLE II. TREATMENT OF LARGE PARTNERSHIPS
A.

General Provisions

Partnership Reporting System (Section 201)

Current law. A partnership generally is treated as a
conduit for Federal income tax purposes.
As a conduit, a
partnership pays no tax.
Instead, each partner takes into
account a distributive share of the partnership's items of
income, gain, loss, deduction, or credit.
The character of an
item allocated to a partner is the same as if it had been
directly realized or incurred by the partner.
The taxable income
of a partnership to be allocated to the partners is computed in
the same manner as that of an individual except that no deduction
is permitted for personal exemptions, foreign taxes, charitable

contributions, net operating losses, certain itemized deductions,
or oil and gas percentage depletion.
Some elections affecting
the computation of taxable income derived from a partnership are
made by the partnership, while others are made by each partner.
The various limitations affecting the computation of taxable
income and tax liability generally apply at the partner level,
rather than at the partnership level.
Under t;he current réporting rules, each partnership must
file a Form 1065, Partnership Return of Income, for each taxable
year.
The return is accompanied by a Schedule K-l for each
partner, reporting the partner's share of allocable tax items of
the partnership, and other specified information.
A copy of the
Schedule K-l, or a suitable substitute, is furnished to each
partner for use in reporting the items on the partner's income
tax return.
A partnership must separately state on each Schedule
K-l the partner's distributive share of each of several tax items
that are specifically enumerated in the tax law.
In addition,
the K-l must separately state the partner's distributive share of
any partnership item that, if separately taken into account by
the partner, could result in an income tax liability that differs
from the liability that would result if the item were not stated
separately.
In addition, section 704(c) and the "ceiling rule”
thereunder require partnerships to take into account, in
computing income, loss, gain and deduction, the difference
between the contribution date basis and fair market value of
property contributed to the partnership.
The ceiling rule causes
complexity and may preclude fungibility of interests in a large
partnership.
Second, current law provides that a constructive
termination of a partnership for tax purposes occurs if, within a
12 month period, interests representing more than 50 percent of
partnership profits and capital are sold or exchanged.
In order
to avoid constructive terminations, which can have negative
effects, many large partnerships keep detailed records of
transfers and impose transfer restrictions on their partners.
Proposal. The bill modifies the tax treatment of a large
partnership (generally, a partnership with at least 250 partners)
and its partners.
Under the bill, as a general matter, the
taxable income of a large partnership is computed in the same
manner as that of an individual except that the number of items
that would be reported to the partners is much more limited.
As
under current law, a large partnership would not be allowed a
deduction for personal exemptions, net operating losses, or
certain itemized deductions.
All limitations and other
provisions affecting the computation of taxable income or any
credit (except for the at risk, passive loss and section 68
itemized deduction limitations, and any other provision specified
in regulations) would be applied at the partnership and not the
partner level.
Thus, for example, any investment interest of the

9
partnership would be limited at the partnership level, and any
carryover would be made at that level.
All elections affecting
the computation of taxable income or any credit would be made by
the partnership.
Except where inconsistent with the large
partnership provisions, the rules of subchapter K would apply to
large partnerships under the new system.
The bill provides that each partner takes into account
separately the partner's distributive share of the following
items:
(1) taxable income or loss from passive loss limitation
activities; (2) taxable income or loss from other activities
(e.q.. portfolio income or loss); (3) net capital gain to the
extent allocable to passive loss limitation activities and other
activities; (4) n6t alternative minimum tax adjustment separately
computed for passive loss limitation activities and other
activities; (5) general credit; (6) low-income housing credit;
(7) rehabilitation credit; (8) for certain partnerships, taxexempt interest; and (9) for certain partnerships, foreign tax
credit information.
Thus, the bill would significantly reduce the number of
potential items to be reported by large partnerships to their
partners.
We believe that in most cases the actual number of
items to be reported would be no more than six.
In order to
accomplish that simplification, the bill would require changes in
the treatment of certain items as explained in more detail below.
Capital gains. Under the bill, capital gains and
losses of large partnerships would be netted at the partnership
level.
A partner in a large partnership would take into account
separately his distributive share of the partnership's net
capital gain.
However, any excess of net short-term capital gain
over net long-term capital loss would be consolidated with the
partnership's other taxable income and would not be separately
reported to the partners.
Also, any excess of capital losses
over capital gains would not be separately reported to partners;
rather, that excess would be carried over indefinitely at the
partnership level for use against future capital gains.
A large
partnership would not be allowed to offset any portion of capital
losses against ordinary income.
The partnership's net capital gain would be allocated to
passive loss limitation activities to the extent of net capital
gain from sales and exchanges of property used in connection with
such activities.
Any excess would be allocated to other
activities.
A large partnership's section 1231 gains and losses would be
netted each year at the partnership level.
Net gain would be
treated as long-term capital gain and would be subject to the
rules described above.
Net loss would be treated as ordinary

loss and consolidated with the partnership's other taxable
income.
The netting approach provided in the bill for capital gain
and loss and section 1231 gain and loss ensures that the basic
rules for items are maintained, while simplifying reporting by
placing most of the computational and compliance burden at the
partnership level.
Absent such an approach, additional items
would have to be reported on the simplified 1099-K.
Deductions. The bill contains two special rules for
deductions.
First, unlike current law, miscellaneous itemized
deductions are not separately reported to partners.
Instead, an
amount equal to 70 percent of those deductions is disallowed at
the partnership level; the remaining 30 percent amount is allowed
at the partnership level in determining taxable income.
The
allowable deduction amount is not subject to the 2 percent floor
at the partner level.
The 70 percent disallowance is intended to
approximate the effect of the current law 2 percent floor at the
partner level with respect to partnership deductions.
Second, also unlike current law, charitable contributions
would not be separately reported to partners under the bill.
Instead, the charitable contribution deduction would be allowed
at the partnership level in determining taxable income, subject
to the limitations that apply to corporate donors.
Credits in general. Under the bill, most credits,
instead of being separately reported to the partners (as under
current law), are consolidated at the partnership level into a
general credit and then reported to partners as a single general
tax credit item.
As a general matter, the general credit
includes all credits other than the low-income housing credit and
the rehabilitation credit.
A partner's distributive share of
general credit would be taken into account as a current year
general business credit.
Thus, for example, the credits for
clinical testing expenses and the production of fuel from
nonconventional sources would be subject, at the partnership
level, to the current law limitations on the general business
credit.
The refundable credit for gasoline used for exempt
purposes would be allowed to the partnership, and thus would not
be separately reported to partners.
In recognition of their special treatment under the passive
loss rules, the low-income housing and rehabilitation credits
would be separately reported to partners as under current law.
The bill imposes credit recapture at the partnership level
and would determine the amount of recapture by assuming that the
credit fully reduced taxes.
Such recapture is applied first to
reduce the partnership's current year credit, if any; the
partnership is liable for any excess over that amount.
Under the

11
bill, the transfer of an interest in a large partnership (by a
partner other than an excluded partner) would not trigger
recapture of any credit.
Foreign tax credit. Elections, computations and
limitations regarding the foreign tax credit generally would be
made under the bill at the partnership level.
Once determined at
the partnership level to be allowable, the foreign tax credit
would be reported to the partner as a general credit.
For
purposes of applying foreign tax credit limitations, the
partnership would be treated as an individual subject to tax at a
25 percent rate.
Excess credits could be carried forward at the
partnership level but could not be carried back.
The partner's
distributive share of all items of income, gain, loss, or
deduction would be treated as derived from sources within the
United States.
Current law rules relating to the foreign tax credit would
apply if the partnership were to elect to have them apply or if
25 percent or more of the gross income of the partnership during
a taxable year were derived from sources outside the United
States.
In either case, the foreign tax credit would not be
subjected to limitations at the partnership level or folded into
the general credit.
Instead, the partnership would separately
report to its partners their respective shares of the
partnership's foreign taxes, the source of partnership income,
and the other partnership items the partners would need to
compute the foreign tax credit at their level.
As under current
law, income from the partnership generally would be treated by
the partners as passive for separate limitation purposes.
Tax-exempt interest. Under the bill, interest on a
State or local bond would be treated as taxable (and thus not
separately reported) unless at the end of each quarter of the
taxable year at least 50 percent of the value of partnership
assets consists of State or local bonds the interest on which is
exempt from taxation.
This rule reflects the judgment that apart
from large partnerships organized for the purpose of holding
State or local bonds, most large partnerships hold relatively
small or no investments in those bonds.
Unrelated business taxable income. The bill retains
current law treatment of unrelated business taxable income.
Thus, a tax-exempt partner's distributive share of partnership
items would be taken into account separately to the extent
necessary to comply with the rules governing such income.
The
bill does not alter the rule that all income from a publicly
traded partnership continues to be treated as unrelated business
taxable income.
Passive losses. Under the bill, each partner in a
large partnership would take into account separately the

12
partner's distributive share of the partnership's taxable income
or loss from passive loss limitation activities.
The term .
’’passive loss limitation activity” means any activity which
involves the conduct of a trade or business (including any
activity treated as a trade or business under section 469(c)(5)
or (6)) and any rental activity.
A partner's share of a large
partnership's taxable income or loss from passive loss limitation
activities would be treated as an item of income or loss from the
conduct of a trade or business which is a single passive
activity, as defined in the passive loss rules.
Thus, a large
partnership would not be required to separately report items from
separate activities.
Each partner in a large partnership also would take into
account separately under the bill the partner's distributive
share of the partnership's taxable income or loss from activities
other than passive loss limitation activities.
Such distributive
share is treated under the bill as an item of income or expense
with respect to property held for investment.
Thus, portfolio
income (e.g.. interest and dividends) is reported separately and
is reduced by portfolio deductions and allocable investment
interest expense.
Alternative minimum t a x . Under the bill, AMT
adjustments and preferences would be combined at the partnership
level.
A large partnership would report to partners a net AMT
adjustment separately computed for passive loss limitation
activities and other activities.
In determining a partner's AMT
income, the partner's distributive share of any net AMT
adjustment would be taken into account instead of making separate
AMT adjustments with respect to partnership items.
Except as
provided in regulations, the net AMT adjustment would be
determined by using the adjustments applicable to individuals,
and would be treated as a deferral preference for purposes of the
section 53 minimum tax credit.
REMICs. For purposes of the tax on partnerships
holding residual interests in REMICs, all interests in a large
partnership would be treated as held by disqualified
organizations.
Thus, a large partnership holding a residual
interest in a REMIC would be subject to a tax equal to the excess
inclusions multiplied by the highest corporate rate.
Deferred sale treatment for contributed property. For
all partners contributing property to a large partnership
(including partners otherwise excluded from application of the
large partnership rules, as described below), the bill replaces
section 704(c) with a ’’deferred sale” approach.
Under the bill,
a large partnership would be treated as if it had purchased the
contributed property from the contributing partner for its fair
market value on the date of the contribution.
The partnership,
therefore, would take a contribution date fair market value basis

13
in the property.
The contributing partner's gain or loss on the
contribution (the "precontribution gain or loss”) would be
deferred until the occurrence of specified recognition events.
In general, the character of the precontribution gain or loss
would be the same as if the property had been sold to the
partnership at fair market value by the partner at the time of
contribution.
The contributing partner's basis in his
partnership interest would be adjusted for precontribution
amounts recognized under the provision.
These adjustments
generally would be made immediately before the recognition event.
The provision effectively would repeal the ceiling rule for
large partnerships, i.e.. the amount of precontribution gain or
loss recognized by the contributing partner under the provision
is not limited to the overall gain or loss from the contributed
property recognized by the partnership, and the amount of
depreciation allowable to the partnership is not limited to the
contributing partner's precontribution basis in the property.
Under the bill, certain events occurring at either the
partnership or partner level cause recognition of precontribution
gain or loss.
For example, the contributing partner's
disposition of his partnership interest or the partnership's
disposition of the contributed property, as a general matter,
would cause recognition.
Loss would not be recognized, however,
by reason of a disposition to a person related (within the
meaning of section 267(b)) to the contributing partner.
Depreciation or amortization of the contributed property by the
partnership also would cause recognition.
The contributing partner would recognize precontribution
gain or loss as the partnership claims amortization,
depreciation, or depletion deductions with respect to the
property.
The amount of gain (or loss) recognized would equal
the increase (or decrease) in the deduction attributable to
changes in basis of the property occurring by reason of its
contribution.
Any gain or loss so recognized would be treated as
ordinary.
The contributing partner also would recognize
precontribution gain or loss if the partnership disposes of the
contributed property to a person other than the contributing
partner.
If such property were distributed to the contributing
partner, its basis in the hands of the contributing partner would
equal its basis immediately before the contribution, adjusted for
any gain or loss previously recognized on account of the deferred
sale.
No adjustment is made to the basis of undistributed
partnership property on account of a distribution to the
contributing partner.
A contributing partner also would recognize precontribution
gain or loss to the extent that the partner disposes of the

14
partner's partnership interest other than at death.
Such partner
also would recognize precontribution gain or loss to the extent
that the cash and fair market value of property (other than the
contributed property) distributed to him exceeds the adjusted
basis of his partnership interest immediately before the
distribution (determined without regard to any basis adjustment
under the deemed sale rules resulting from the distribution).
Section 754 election. The bill does not alter the rule
that a large partnership may elect to adjust the basis of
partnership assets with respect to transferee partners.
The
computation of a large partnership's taxable income is made
without regard to the section 743(b) adjustment.
As under
current law, the section 7 4 3 (b) adjustment is made only with
respect to the transferee partner.
In addition, a large
partnership is permitted to adjust the basis of partnership
property under section 734(b) if property is distributed to a
partner, as under current law.
Terminations. The bill provides that a large
partnership does not terminate for tax purposes solely because 50
percent of its profits and capital interests are sold or
exchanged within a 12-month period.
Partnership allocations. The provisions of the bill do
not affect the flexibility afforded to large partnerships to
allocate tax items to their partners in any manner that has
substantial economic effect or otherwise meets the requirements
of section 704 of the Code.
Definition of large partnership. Under the bill, a
"large partnership” is any partnership that has 250 or more
partners during a taxable year.
Any partnership treated as a
large partnership for a taxable year would be so treated for all
succeeding years, even if the number of partners falls below 250.
The Secretary would be given authority to adopt regulations that
would provide, however, that if the number of persons who are
partners in any taxable year falls below 100, the partnership
would cease to be treated as a large partnership.
A partnership
with at least 100 partners could elect under the bill to be
treated as a large partnership.
The election would apply to the
year for which made and all subsequent years and could not be
revoked without the Secretary's consent.
A large partnership would not include any partnership if
substantially all of its activities involve the performance of
personal services by individuals owning, directly or indirectly,
interests in the partnership, or if 50 percent or more of the
value of the partnership's assets consists of oil or gas
properties as described below.

15
Treatment of excluded partners. In general, the large
partnership rules would not apply to an excluded partner's
distributive share of partnership items.
An excluded partner is
a partner (1) owning more than a 5 percent partnership profits or
capital interest at any time during the taxable year, or (2)
materially participating in the partnership's activities during
the year and holding any interest which is not a limited
partnership interest.
Any partner treated as an excluded partner
for a taxable year is so treated for all succeeding years.
In
determining whether a partner is an excluded partner, the
treatment on the large partnership's tax return binds the
partnership and the partner, but not the Secretary.
Treatment of partnerships holding oil or eras
properties. Because of the rules relating to the percentage
depletion deduction, the current treatment of oil and gas income
of a partnership is difficult to approximate under the simplified
reporting provisions of the bill.
Therefore, the large
partnership rules do not apply to a partnership if at least 50
percent of the value of its assets consist of oil or gas
properties at any time during the taxable year. .In addition, the
rules do not apply to any item attributable to any partnership
oil or gas property.
However, an oil or gas partnership can
elect to be treated as a large partnership.
Further,
partnerships owning oil or gas properties but which otherwise
qualify as large partnerships (i .e . . because less than 50 percent
of their assets consist of oil or gas properties) can elect to
apply the large partnership rules to items attributable to their
oil or gas properties.
If an election is made: (1) depletion is
computed without regard to percentage depletion, (2) any partner
who is an integrated oil company is treated as an excluded
partner, and (3) any partner who holds a working interest in an
oil or gas property (either directly or through an entity which
does not limit the partner's liability) is treated as an excluded
partner with respect to such interest.
The election applies to
the year for which made and all subsequent years and cannot be
revoked without the Secretary's consent.
Regulatory authority. The Secretary of the Treasury is
granted authority to prescribe such regulations as may be
appropriate to carry out the purposes of the provisions.
Administration position. The Administration supports the
bill's provisions modifying and simplifying the income reporting
system for large partnerships.
If the bill's simplified
reporting regime is enacted, partners would receive a Form 1099-K
that is much simpler and less intimidating than the present
Schedule K-l.
See Exhibit 1 attached.
We anticipate that the
IRS would require large partnerships to use a standard version of
Form 1099-K.
The ultimate result should be better compliance and
lower costs to taxpayers.
In addition, the new system would
facilitate IRS matching of the information reported by a large

16
partnership to its partners' returns.
The ability to match
information would be improved because (1) in most cases the
number of items reported to each partner would be reduced, (2)
each partner would be required to report each partnership item
consistently with the partnership return, and (3) the bill would
provide authority to the 1RS to require each large partnership to
provide Form 1099-K data to the 1RS by magnetic media (see
discussion below). With improved ability to monitor compliance,
we believe the administration of large partnerships would be more
efficient and fair.
In addition, the adoption of the deferred
sale rule for contributions of property and the elimination of
the constructive termination rule will improve the tax rules
applicable to large partnerships.
2.

Large Partnership Audit System (Section 202)

Current law. Large partnerships currently are subject to
the unified audit and litigation rules of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA). The TEFRA rules are
generally applicable to partnerships with more than 10 partners.
Prior to TEFRA, regardless of the size of the partnership,
adjustments to a partnership's items of income, gain, loss,
deduction, or credit had to be made in a separate proceeding for
each partner.
When a partnership had partners located in
different audit districts, actions against the partners of the
partnership would frequently be brought in several different
jurisdictions and sometimes would result in conflicting outcomes.
The TEFRA audit rules were enacted to facilitate uniform results
in audits of partnerships.
Under the TEFRA rules, a partner must report all partnership
items consistently with the partnership return or must notify the
IRS of an inconsistency.
If a partner fails to report any
partnership item consistently with the partnership return without
notifying the IRS, the IRS may make a computational adjustment
and immediately assess any additional tax that results.
The IRS may challenge the reporting position of a
partnership by conducting a single administrative proceeding to
resolve the issue with respect to all partners.
But the IRS must
still assess any resulting deficiency against each of the
taxpayers who were partners in the year in which the
understatement of tax liability arose.
Any partner of a partnership can request an administrative
adjustment or a refund for his own separate tax liability.
Any
partner also has the right to participate in partnership-level
administrative proceedings.
As a general matter, there is no
effective partnership level settlement process because each
partner has the ability to enter into a separate settlement
agreement.

17
The TEFRA rules establish the tax matters partner (TMP) as
the primary representative of a partnership in dealing with the
IRS.
The TMP is a general partner designated by the partnership
or, in the absence of designation, the general partner with the
largest profits interest at the close of the taxable year.
If no
TMP is designated, and it is impractical to apply the largest
profits interest rule, the IRS may select any partner as the TMP.
The IRS generally is required to give notice of the
beginning of partnership-level administrative proceedings and any
resulting administrative adjustment to all partners whose names
and addresses are furnished to the IRS.
For partnerships with
more than 100 partners, however, the IRS generally is not
required to give notice to partners whose profits interests are
less than 1 percent.
After the IRS makes an administrative adjustment, the TMP
(and, in limited circumstances, certain other partners) may file
a petition for readjustment of partnership items in the Tax
Court, the district court in which the partnership's principal
place of business is located, or the Claims Court.
The IRS generally cannot adjust a partnership item for a
partnership taxable year if more than 3 years have elapsed since
the later of the filing of the partnership return or the last day
for the filing of the partnership return.
Proposal. The bill would enact a new audit system for large
partnerships.
The bill defines "large partnership” the same way
for audit as for reporting purposes (generally partnerships with
at least 250 partners) except that large oil and gas partnerships
which are excepted from the proposed reporting requirements are
nonetheless subject to the proposed audit system.
A partnership adjustment generally would flow through to
partners for the year in which the adjustment takes effect.
Thus, an adjustment that takes effect in a taxable year would
reflected in the distributive shares of partnership items of
income, gain, loss, deduction, or credit allocated to the
partners for that year.
The adjustments generally would not
affect prior year returns of any partners (except in the case
adjustments under section 704 of the Code with respect to
partners' distributive shares). An adjustment will be offset
any related adjustment in a later year.

the
be

of
by

In lieu of flowing an adjustment through to its partners,
the partnership may elect to pay an imputed underpayment.
The
imputed underpayment generally is calculated by netting the
adjustments to the income and loss items of the partnership and
multiplying the net amount by the highest individual or corporate
tax rate.
A partner may not file a claim for credit or refund of
his allocable share of payment.

Under the bill, the partnership, rather than the partners
individually, is liable for any interest and penalties that
result from a partnership adjustment.
Interest is computed for
the period beginning on the return due date for the adjusted year
and ending on the earlier of the return due date for the
partnership taxable year in which the adjustment takes effect or
the date the partnership pays the imputed underpayment.
Penalties (such as accuracy-related and fraud) are determined on
a year-by-year basis (without offsets) based on an imputed
underpayment.
All accuracy-related penalty and waiver criteria
(such as reasonable cause, substantial authority, etc.) are
determined as if the partnership were a taxable individual.
Accuracy-related and fraud penalties are assessed and accrue
interest in the same manner as if asserted against a taxable
individual.
If a partnership ceases to exist before a partnership
adjustment takes effect, the former partners are required to take
the adjustment into account, as provided by regulations.
Regulations are also authorized to the extent necessary to
prevent abuse and to enforce the audit rules in circumstances
that present special enforcement considerations.
These
situations would include partnership bankruptcy or a transfer of
a partner's interest before an expected adjustment takes effect
in order to avoid or reduce the tax liability that would result
from the adjustment.
A partner is not permitted to report any partnership items
inconsistently with the partnership return, even if the partner
notifies the IRS of the inconsistency.
The IRS could treat a
partnership item that was reported inconsistently by a partner as
a mathematical or clerical error and immediately assess any
additional tax against that partner.
As under current law, the IRS could challenge the reporting
position of a partnership by conducting a single administrative
proceeding to resolve the issue with respect to all partners.
Unlike current law, however, partners will have no right
individually to participate in settlement conferences or court
proceedings or to request a refund.
The bill requires each large
partnership to designate a partner or other person to act on its
behalf.
If a large partnership fails to designate such a person,
the IRS is permitted to designate any one of the partners as the
person authorized to act on the partnership's behalf.
Under the
bill, a large partnership would be permitted to designate a
replacement for the person so designated by the IRS.
Unlike current law, the IRS is not required to give notice
to individual partners of the commencement of an administrative
proceeding or of a final adjustment.
Instead, the IRS is
authorized to send notice of a partnership adjustment to the
partnership itself by certified or registered mail.
The IRS

19
could give proper notice by mailing the notice to the last known
address of the partnership, even if the partnership had
terminated its existence.
As under current law, an
administrative adjustment could be challenged in the Tax Court,
the district court in which the partnership's principal place of
business is located, or the Claims Court.
However, only the
partnership, and not the partners individually, can petition for
a readjustment of partnership items.
Absent an agreement to extend the statute of limitations,
the IRS generally cannot adjust a partnership item of a large
partnership more than 3 years after the later of the filing of
the partnership return or the last day for the filing of the
partnership return.
Special rules apply to false or fraudulent
returns, a substantial omission of income, or the failure to file
a return.
The IRS would assess and collect any deficiency of a
partner that arises from any adjustment to a partnership item
subject to the limitations period on assessments and collection
applicable to the year the adjustment takes effect.
Administration position. The Administration supports the
simplified audit system for large partnerships proposed by
S. 1394 because the system would provide a more efficient system
to assess and collect tax deficiencies attributable to large
partnerships and their partners.
While we believe that the TEFRA
rules continue to be appropriate for small and medium size
partnerships, the emergence of large partnerships has strained
the ability of the IRS to maintain a meaningful audit presence in
this area.
Consequently, a revised system designed for large
partnerships is appropriate.

Magnetic Media Reporting (Section 203)

Current law. Under section 6011(e), the IRS has authority
to require the filing of tax information in magnetic media or
other machine-readable format, but only if the person files at
least 250 "returns” during the year.
Schedules K-l are not
returns, and accordingly the IRS may not require the use of
magnetic media filing by large partnerships.
Proposal. Amend section 6011(e) to give the IRS authority
to require filing in magnetic media or other machine-readable
format for all partnerships with at least 250 partners.
Administration position. The Administration supports this
provision.
The IRS should have the authority to require magnetic
media filing by partnerships with many partners.
Other filers of
large numbers of information returns are already required to file
in this manner.

20
4.

Effective Date (Section 204)

Proposai. The changes proposed in section 201-203 of
5. 1394 with respect to large partnership reporting, large
partnership audit procedures, and magnetic media reporting are
proposed to be effective for partnership years ending on or after
December 31, 1992.
Administration position. Given the significant changes
proposed for large partnerships, sufficient lead time must be
provided after enactment for the 1RS and large partnerships to
implement the legislation.
We believe the effective date
proposed will be sufficient if the proposals are enacted this
year.
B.

Partnership Proceedings Under TEFRA

As discussed above, TEFRA created unified audit and
litigation procedures that are applicable to most partnerships.
The TEFRA partnership provisions represented a significant
positive change in the way that aüdits and litigation relating to
partnerships and their partners were conducted.
Thus, we are in
favor of retaining these provisions with respect to partnerships
that are not large partnerships under the bill and would
otherwise fall within the scope of the TEFRA rules.
Based upon
the experience of the 1RS in administering the TEFRA partnership
provisions, however, we recognize that certain changes should be
made to clarify and improve the procedures.
Thus, with one
exception relating to effective dates described below, the
Administration supports the technical corrections and other
simplifying amendments to the TEFRA partnership provisions that
are contained in the bill. We believe that these changes will
improve the operation and administrability of the TEFRA
partnership provisions, which will benefit the partners in the
partnerships as well as the 1RS.
This section of the Appendix provides specific comments on
the various amendments to the TEFRA partnership provisions that
are contained in the bill.
For the sake of convenience, some of
the proposals have been grouped together and will be discussed
under a common heading.
Consequently, the proposals will not
necessarily be addressed in the order that they appear in the
bill.

Treatment of Partnership Items in Deficiency Proceedings
(Section 211)

Current law. Adjustments to TEFRA partnership items must be
made in a proceeding separate from a proceeding to adjust a

21
taxpayer's nonpartnership items.
While the two types of
proceedings are separate, the result in one will affect the
result in the other.
Prior to the Tax Court's opinion in Munro
v. Commissioner. 92 T.C. 71 (1989), it was IRS practice to
compute deficiencies by assuming that all TEFRA items were
correctly reported on the taxpayer's return.
This practice
proved unsatisfactory in situations where the taxpayer is
oversheltered, i.e.. where the losses claimed from TEFRA
partnerships are so large that they offset any proposed
adjustments to nonpartnership items, because no deficiency could
arise from a non-TEFRA proceeding.
Hence, when faced with this
situation in M unro. the IRS issued a notice of deficiency to the
taxpayer that presumptively disallowed the taxpayer's TEFRA
partnership losses for computational purposes only.
The Tax
Court in Munro disapproved of the methodology used by the IRS to
compute the deficiency and held that partnership items included
on a taxpayer's return must be completely ignored in determining
whether a deficiency exists that is attributable to
nonpartnership items.
The opinion in Munro creates problems for both the IRS and
taxpayers.
In most of the cases that are either in litigation or
under audit, net losses from TEFRA partnerships are claimed and
used to partially offset income from non-TEFRA sources.
Since
under normal circumstances the TEFRA proceeding progresses more
slowly than the deficiency proceeding, computing the deficiency
under Munro will result in a greater deficiency being asserted in
the deficiency proceeding than would have been asserted under IRS
practice prior to the Munro opinion.
Furthermore, while the
methodology for computing deficiencies prescribed by Munro may
solve the problem presented by the oversheltered situation, it
creates a similar problem for the IRS in cases where a taxpayer's
income is primarily from a TEFRA partnership and the IRS seeks to
adjust nonpartnership items such as medical expense deductions,
home mortgage interest deductions or charitable contribution
deductions.
Since under Munro the income would have to be
ignored for purposes of the non-TEFRA proceeding, there would be
no deficiency.
Proposal. The bill overrules the Munro case and provides a
rule to allow the IRS to return to its prior practice of
computing deficiencies by assuming that all TEFRA items whose
treatment has not been finally determined were correctly reported
on the taxpayer's return.
With respect to Munro-type cases, the bill provides a
declaratory judgment procedure in the Tax Court for adjustments
to an oversheltered return.
An oversheltered return is a return
that shows no taxable income and a net loss from TEFRA
partnerships.
In such a case, the IRS is authorized to issue a
notice of adjustment with respect to non-TEFRA items,
notwithstanding that no deficiency would result from the

22
adjustments.
However, the IRS may only issue such a notice if a
deficiency would have arisen in the absence of the net loss from
TEFRA partnerships.
The Tax Court is granted jurisdiction to determine the
correctness of such an adjustment.
Although no tax would be due
upon such a determination, a decision of the Tax Court would be
treated as a final decision, which would afford both the taxpayer
and the IRS the right to pursue an appeal.
Administration position. We support this proposal.
The
approach required by the Tax Court in Munro causes problems for
the IRS as well as taxpayers and is unworkable as a practical
matter.
The computations required by the Munro opinion are an
administrative burden for the IRS because they are more complex
and time consuming than normal deficiency computations.
In
addition, the effect of Munro in a typical case may be to deprive
the taxpayer of a prepayment forum.
As a policy matter, this
result is an inappropriate and unintended consequence of an
opinion dealing with a relatively unusual fact pattern.
Overruling Munro and providing a declaratory judgment procedure
constitute an appropriate solution.
2.

Partnership Return to be Determinative of Audit Procedures
(Section 212)
See discussion under Boundary Issues below.

Statute of Limitations (Section 213)
Current law.

(a)
Untimely petition. Section 6229(d) provides in
pertinent part that the running of the statute of limitations
shall be suspended for the period during which an action may be
brought under section 6226 and, if an action is brought during
such period, until the decision of the court becomes final, and
for 1 year thereafter.
In a deficiency case, on the other hand,
section 6503(a) provides in pertinent part that if a proceeding
in respect of the deficiency is placed on the docket of the Tax
Court, the period of limitations on assessment and collection
shall be suspended until the decision of the Tax Court becomes
final, and for 60 days thereafter.
As a result of this
difference in language, the running of the statute of limitations
in a TEFRA case will only be tolled by the filing of a timely
petition,whereas in a deficiency case the statute of limitations
is tolled by the filing of any petition, regardless of whether
the petition is timely.
Consequently, if an untimely petition is
filed in a TEFRA case, the statute of limitations can expire
while the case is still pending before the court.

23
(b)
Bankruptcy. A partner's partnership items convert
to nonpartnership items upon the filing of a petition naming the
partner as a debtor in a bankruptcy proceeding.
Section 6229(f)
provides that the period for assessing tax with respect to items
that convert to nonpartnership items shall not expire before the
date which is 1 year after the date that the items become
nonpartnership items.
Section 6503(h) provides for the
suspension of the limitations period during thé pendency of a
bankruptcy proceeding.
However, this provision only applies to
the limitations period provided in sections 6501 and 6502.
Since
the limitations period pertaining to converted items is governed
by section 6229(f), there is some uncertainty concerning whether
the suspension of the limitations period provided by section
6503(h) applies with respect to partnership items that convert to
nonpartnership items by reason of the filing of a petition naming
the partner as a debtor in a bankruptcy proceeding.
As a result,
the limitations period may continue to run during the pendency of
the bankruptcy proceeding, even though the 1RS is prohibited from
making an assessment against the debtor because of the automatic
stay imposed by section 362(a) of the Bankruptcy Code.
Likewise, if the 1RS is unaware that the TMP has gone into
bankruptcy, the 1RS may mistakenly accept and rely on a consent
to extend the statute of limitations on behalf of all partners in
the partnership that was executed by the bankrupt TMP, which may
be determined to be invalid because the debtor's status as TMP
was automatically terminated by the filing of the bankruptcy
petition.
Hence, the 1RS may be precluded from assessing any tax
attributable to partnership item adjustments with respect to any
of the partners in the partnership because of its detrimental
reliance on a facially valid statute extension that subsequently
proved to be invalid.
Proposal. With respect to untimely petitions, the bill
amends section 6229(d) to make the language more consistent with
section 6503(a).
As a result, the TEFRA statute of limitations
will be suspended by the filing of any petition, regardless of
whether it is timely, as is the case with respect to the
deficiency procedures.
With respect to the bankruptcy of a partner, the bill adds a
provision similar to section 6503(h) to clarify that the statute
of limitations is suspended during the pendency of a bankruptcy
proceeding involving a partner in a TEFRA partnership.
Administration position. We support both of these
proposals, subject to one reservation.
As drafted, the
provisions are retroactive to 1982. As a general rule, we do not
favor retroactive legislation.
Thus, we believe that the
bankruptcy suspension provision should be effective for
bankruptcy petitions filed after the date of enactment.
However,
it should be emphasized that this provision merely clarifies

24
existing law and that no inference should be drawn from the
prospective effective date regarding the applicability of the
existing bankruptcy suspension provision to TEFRA cases.
The
untimely petition provision should similarly be prospective.
The provision regarding the suspension of the statute of
limitations upon the filing of an untimely petition is a
correction that is needed to close a gap in the statute.
Similarly, the provision regarding the suspension of the statute
of limitations upon the filing of a petition naming a partner as
a debtor in a bankruptcy proceeding provides a much needed
clarification of a very important issue.
The ambiguity under
current law makes it difficult for the IRS to adjust partnership
items that convert to nonpartnership items by reason of a partner
going into bankruptcy.
In addition, the uncertainty often
compels the IRS to seek relief from the automatic stay from the
bankruptcy court so that the IRS can make an assessment with
respect to the converted items.
This provision will obviate the
need for such action.
In addition, we believe that the bill should contain a
provision dealing with the bankrupt TMP problem described above.
This is of major concern to the IRS.
In light of the growing
number of bankruptcy filings, it is feared that this problem will
occur with increasing frequency.
To .alleviate this problem, we
recommend that the bill be amended to provide that, unless the
IRS is notified of a bankruptcy proceeding in accordance with
regulations, the IRS can rely on a statute extension signed by a
person who would be the TMP but for the fact that said person was
in bankruptcy at the time that the person signed the agreement.
Thus, this proposal would place the burden on the partnership or
the debtor to notify the IRS of any bankruptcy proceeding that
involves the TMP.
Otherwise, notwithstanding any other law or
rule of law, any statute extensions granted by the bankrupt TMP
shall be binding on all of the partners in the partnership.
4.

Boundary Issues (Sections 212 and 214)

Current law. As noted above, adjustments to TEFRA
partnership items must be made in a proceeding that is separate
from a normal deficiency proceeding.
When the IRS commences an
audit, it must determine which procedure to use.
This
determination can be very technical and difficult to make, and
the consequences of an incorrect choice can be severe.
If the
IRS applies the wrong procedure, the statute of limitations
applicable to the correct procedure may have expired by the time
that the problem is discovered.
The situations giving rise to
this problem are generally described as presenting "boundary
issues.11

25
A boundary issue arises in the context of the small
partnership exception contained in section 6231(a)(1)(B).
Pursuant to that section, the partnership audit provisions do not
apply to a partnership that has 10 or fewer partners, each of
whom is a natural person (other than a nonresident alien) or an
estate, and each partner's share of each partnership item is the
same as that partner's share of every other partnership item.
Several pitfalls exist in applying this provision.
Specifically,
if an incorrect determination is made regarding whether there
were ever more than 10 partners in the partnership at any one
time during the year, or whether a person is a nonresident alien,
or whether the same share rule is met during the year, the IRS
may inadvertently apply the wrong procedures.
Proposal. The bill contains two provisions that are
designed to alleviate boundary issue problems.
Under the first
provision, the IRS is permitted to rely on the partnership return
determine whether the TEFRA partnership procedures or the
deficiency procedures should be followed.
The second provision
modifies the small partnership exception by eliminating the same
s^are requirement and replacing the natural person requirement
with a requirement that each partner must be an individual (other
than a nonresident alien), a C corporation, or an estate of a
deceased partner.
Administration position. Permitting the IRS to rely on the
partnership's return to determine the proper procedure to apply
should make it easier for the IRS to administer the tax laws by
reducing the circumstances where the IRS must act at its peril in
making what is often a difficult determination.
A partnership
should be permitted to have a C corporation as a partner or to
specially allocate items without jeopardizing its qualification
for the small partnership exception to the TEFRA rules.
On the
other hand, we believe that it is critical to retain the
prohibition against a partnership having a flow-through entity
such as another partnership, S corporation or trust as a partner
for purposes of being excepted from the TEFRA procedures.
5.

Partial Settlements (Section 215)

Current law. Section 6231(b)(1)(C) provides that the
partnership items of a partner for a partnership taxable year
shall become nonpartnership items as of the date the IRS enters
into a settlement agreement with the partner with respect to such
items.
Under section 6229(f), the limitations period for
assessing any tax attributable to converted items shall not
expire before the date which is 1 year after the date on which
the items become nonpartnership items.
This rule creates a
problem in situations where a settlement agreement is entered
into with respect to some but not all of the issues in the case.
The reason for this is that a 1 year assessment period will apply

26
with respect to the
&e governed by
6229(a).
If issues
the proceeding, the

settled items whereas the remaining items
the normal assessment period under section
are settled at several different stages of
problem can become severe.

Proposal.
The bill provides that if a partner and the IRS
enter into a settlement agreement with respect to some but not
°f the partnership items in dispute for a partnership taxable
year, the period for assessing any tax attributable to the
settled items would be determined as if such agreement had not
been entered into.
Consequently, the limitations period that is
applicable to the last item to be resolved for the partnership
taxable year shall be controlling with respect to all disputed
partnership items for the partnership taxable year.
Administration position. We support this provision.
Under
the bill, the limitations period that is applicable to the last
item to be resolved for the partnership taxable year shall be
controlling with respect to all disputed partnership items for
the partnership taxable year.
Thus, there will only be one
statute of limitations to track and the IRS should only have to
make one computation of tax with respect to each partner's
investment in the partnership for the taxable year.

Administrative Adjustment Requests (Section 216)

Cvn^Fsnt_law.
Section 6227(a) provides that a partner may
file a request for an administrative adjustment of partnership
items within 3 years after the later of the date of the filing of
the partnership return or the last day for filing the partnership
return (determined without regard to extensions), but before the
IRS mails a notice of final partnership administrative adjustment
to the TMP.
In contrast, section 6511(c), which applies with
respect to a non-TEFRA case, provides that if an agreement is
entered into under section 6501(c)(4) to extend the period for
assessment, the period for filing a claim for credit or refund or
for making a credit or refund if no claim is filed, shall not
empire prior to 6 months after the expiration of the period
within which an assessment may be made pursuant to the agreement
under section 6501(c)(4). There is no comparable provision for
extending the time for filing refund claims with respect to
partnership items subject to the TEFRA partnership rules.
Proposal. The bill provides a rule for extending the time
for filing refund claims with respect to partnership items
subject to the TEFRA partnership provisions that is similar to
the one in section 6511(c).
Administration position. We support this provision.
The
proposal is favorable to taxpayers and makes the TEFRA rules more
consistent with the non-TEFRA rules.
This should eliminate a

27
trap for the unwary who mistakenly believed that, if the TEFRA
statute of limitations was extended, they had additional time to
file a request for administrative adjustment.
7.

Innocent Spouse (Section 217)

Current law. Under section 6013(e), an innocent spouse may
be relieved of liability for tax, penalties and interest if
certain conditions are met.
However, it is unclear whether
existing law provides the spouse of a partner in a TEFRA
partnership with a judicial forum to raise the innocent spouse
defense with respect to any tax or interest that relates to an
investment in a TEFRA partnership.
Proposal. The bill provides both a prepayment forum and a
refund forum for raising the innocent spouse defense in TEFRA
cases.
Administration position. We support this provision.
We
believe that it is appropriate to allow innocent spouse relief in
TEFRA cases if the person would otherwise qualify for such
relief.

8•

Determination of Penalties at the Partnership Level
(Section 218)

Current law. Section 6231(a)(3) limits the definition of
partnership items to those items required to be taken into
account under any provision of subtitle A.
Since penalties are
contained in subtitle F, they cannot be partnership items.
Instead, penalties are treated as affected items that require
partner-level determinations.
As a result, under section
6230(a)(2), penalties may only be asserted against a partner
through the application of the deficiency procedures following
the completion of the partnership-level proceeding.
Proposal. The bill provides that the applicability of
penalties shall be determined as part of the partnership-level
proceeding and that the deficiency procedures will not apply to
such a determination.
However, the bill allows partners to raise
any partner-level defenses in a refund forum.
Administration position. We support this provision.
Penalty-only cases have created a significant burden for the 1RS
and have the potential of significantly increasing the Tax
Court's inventory.
Moreover, the requirement of conducting a
separate proceeding with each partner greatly increases the
likelihood of disparate treatment.
Hence, the major goals of the
TEFRA partnership provisions — administrative and judicial
economy and consistent treatment of partners — are frustrated by

28
separate penalty proceedings.
The IRS believes that determining
partnership-item adjustments and the penalties that are
attributable to those adjustments in a single proceeding should
greatly simplify the audit and litigation procedures for TEFRA
partnerships.
In the vast majority of cases, this proposal will
eliminate the need to conduct affected item proceedings.

Jurisdiction of the Courts (Section 219)
Current law.

(a) Tax Court jurisdiction to enioin premature
assessments. Section 6225(a) provides a restriction on
assessment and collection of any tax attributable to any
partnership item during the 150-day period within which a
petition could be filed in response to the mailing of a notice of
final partnership administrative adjustment to the TMP by the
IRS, and if a petition is filed in the Tax Court within the 150day period, until the decision of the court becomes final.
Section 6225(b) provides that, if any assessment or collection
activity is taken in violation of the restriction described
above, such premature action may be enjoined in the proper court.
Current law is unclear regarding whether the Tax Court is a
proper court for purposes of this section.
(b) Jurisdiction of courts to consider statute of
limitations with respect to partners. Under sections 6226(c) and
(d), in order for a partner other than the TMP to be eligible to
file a petition for readjustment of partnership items or to
participate in an existing proceeding, the period for assessing
any tax attributable to the partnership items of that partner
must not have expired.
Since such a partner would only be
treated as a party to the action if the statute of limitations
with respect to that partner was still open, current law is
unclear whether the partner would have standing to assert that
the statute of limitations had expired with respect to
themselves.
(c) Jurisdiction of Tax Court to determine
overpayments attributable to affected items. Pursuant to
sections 6511(g), 6512(a)(4), and 7422(h), the normal rules with
respect to refunds in a non-TEFRA context do not apply with
respect to overpayments attributable to partnership items.
Instead, the rules set forth in sections 6227, 6228, and 6230(c)
and (d) are controlling.
Current law is ambiguous with respect
to whether the rules that are applicable to overpayments
attributable to partnership items also apply to overpayments
attributable to affected items.
Proposal. The bill provides that the Tax Court has
jurisdiction to enjoin premature assessment or collection

29
activity but only in cases where it otherwise has jurisdiction
over the partnership item adjustments giving rise to the tax
liability at issue.
The bill also clarifies that the Tax Court
does have overpayment jurisdiction in an affected item
proceeding.
In addition, the bill permits a partner to be
treated as a party to a partnership action solely for the purpose
of litigating the statute of limitations question with respect to
themselves and grants jurisdiction to the court that otherwise
has jurisdiction over the action to consider the matter.
Administration position. We support these proposals.
These
proposals are all intended to clarify points that are unclear or
ambiguous under current law and are akin to technical
corrections.
10.

Premature Petitions (Section 220)

Current law. Under section 6226(a), the TMP is given the
exclusive right to file a petition for a readjustment of
partnership items within the 90-day period after the issuance of
a notice of final partnership administrative adjustment by the
1RS.
If the TMP does not file a petition within the 90-day
period, section 6226(b) permits notice partners to file a
petition within the succeeding 60-day period.
Section 6226(b)
also provides ordering rules for determining which action goes
forward and provides for the dismissal of other actions if more
than one petition is filed during the 60-day period.
If a petition is filed by a person other than the TMP during
the 90-day period, that action is dismissed.
Thus, if the TMP
does not file a petition during the 90-day period and no timely
and valid petition is filed during the succeeding 60-day period,
judicial review of the adjustments set forth in the notice of
final partnership administrative adjustment is foreclosed and the
adjustments are deemed to be correct.
Proposal. The bill provides that in cases where the TMP
does not file a petition within the 90-day period, if a petition
is filed by a notice partner within the 90-day period and no
valid and timely petition is filed within the succeeding 60-day
period, then the premature petition shall be treated as if it
were filed on the last day of the 60-day period.
Administration position. We support this provision.
Unlike
the situation in a deficiency case, there is no opportunity to
seek judicial review under the TEFRA partnership provisions at a
later date if a premature petition is dismissed and no valid and
timely petition is filed during the 90-day or 60-day periods.
We
believe that dismissal of the premature petition under these
circumstances is too harsh a result, although the rule should not
encourage the filing of premature petitions.
We believe that a

30
proper balance is struck by reinstating a premature petition
where the action would otherwise be dismissed, and that a
premature petition should be treated as if it were filed on the
last day of the 60-day period so as to take away any incentive to
file early in an attempt to gain priority under the ordering
rules set forth in section 6226(b).
11.

Appeal Bonds (Section 221)

Current law. Section 7485(b) provides for the filing of a
bond to stay assessment and collection during the pendency of an
appeal in a TEFRA case.
The amount of the bond is to be fixed by
the Tax Court based upon its estimate of the aggregate amount of
the deficiencies attributable to the partnership items to which
the decision that is the subject of the appeal relates.
Proposal. The bill clarifies that the amount of the bond
should be based on the aggregate liability of the parties to the
action rather than of all the partners in the partnership.
In
addition, the bill makes it clear that the amount of the bond is
to be based upon an estimate rather than on a precise
calculation.
Administration position. We support this proposal.
Current
law is unclear concerning how the amount of the bond should be
fixed by the Tax Court.
By emphasizing that the amount of the
bond should be based on an estimate and clarifying whose
liabilities are to be covered by the bond, the Tax Court's job
with respect to fixing the amount of the bond should be
simplified.
In this regard, we strongly believe that the amount
of the bond should cover the aggregate liability of the parties
to the action as opposed to merely the liability of the person
posting the bond.
Allowing each partner to post a separate bond
for their respective liability would create a significant
administrative burden for the IRS.

12.

Restricted Interest (Section 222)

Current law. Section 6601(c) provides that, where a
taxpayer executes a waiver of the restrictions on assessment of a
deficiency under section 6213(d) and notice and demand for
payment of such deficiency is not made by the 1RS within 30 days
after the filing of the waiver, interest will be suspended from
the period immediately after the 30th day until the date of the
notice and demand.
The restricted interest provision is
generally not applicable to TEFRA cases.
Proposal. The bill makes the restricted interest provision
applicable to computational adjustments resulting from settlement
agreements relating to partnership items.

31
Administration position. Extending the benefits of section
6601(c) to TEFRA cases that have been settled will meke the
computation of interest in deficiency cases and TEFRA cases more
uniform.
In addition, the proposal will make it simpler for the
IRS to do interest computatiPns in such cases, which under
current law must frequently be done manually since interest is
suspended only with respect to some aspects of a TEFRA case but
not other parts of the case.
Under this proposal, the restricted
interest provision will apply with respect to the entire case.
TITLE III.
1.

FOREIGN PROVISIONS

Deferral of Tax on Income Earned Through Foreign
Corporations and Exceptions to Deferral (Sections 301-305)

Current law. Under current law, a U.S. investor in a
foreign corporation that earns passive income is potentially
subject to six separate and distinct regimes that are designed to
prevent him from improperly deferring his U.S. tax on income that
is likely to bear little or no foreign tax.
One of these
regimes — the Passive Foreign Investment Company (PFIC)
regime — itself consists of three separate sets of rules,
because of taxpayer elections available to alter the timing and
method of tax.
These regimes are not only numerous; they are
also complex and redundant.
They impose excessive burdens on
both taxpayers and the government in determining the correct U.S.
tax liability for foreign-earned passive income.
Two of the
regimes were designed primarily to attack non-business-related
accumulations by domestic corporations; they impose a penalty tax
at the corporate level.
The other four regimes were targeted
specifically at accumulations by foreign corporations and apply
at the shareholder level.
These various regimes were enacted
over a period of 60 years and are not adequately coordinated.
Proposal. The bill would consolidate the anti-deferral
rules applicable to foreign corporations earning substantial
amounts of passive income.
Administration position. We support the proposal in the
bill as a substantial simplification of the current statutory
scheme.
Under the bill, taxpayers will no longer have to contend
with the overlap and inconsistencies among the multiple regimes.
Instead, shareholders will be taxed under a single integrated
regime which provides one of three methods of tax, depending on
the extent of U.S. ownership of the foreign corporation and
whether its stock is publicly traded.
The single regime applies to passive foreign corporations
(PFCs). A PFC is defined in a way that eliminates overlap and
potential inconsistencies between the current PFIC and foreign

32
personal holding company regimes.
All shareholders of
U .S .^controlled PFCs, and large shareholders and electing small
shareholders of foreign-controlled PFCs, will be taxed currently
under the existing Subpart F rules.
This will cover most if not
all of U.S. corporate participation in multinational enterprises.
Non-electing small shareholders of foreign-controlled PFCs will
pay tax annually on a "mark-to-market” basis if their PFC stock
is publicly traded, and will be taxed under rules similar to the
so-called "interest charge" rules of the current PFIC regime if
their PFC stock is not publicly traded.
This proposal has been criticized recently by some
commentators as failing to provide adequate simplification.
I
believe that these criticisms are misguided to the extent that
they are aimed at defeating the proposal altogether.
The
statutory rules that the proposal would replace are extremely
complex.
It is not likely that they could be replaced by a
provision that is not also complex.
The literature on the
interaction of the different anti-deferral regimes under current
law is replete with complaints about the confusing interaction
between these different regimes.
The proposal addresses many of
these complaints.
This is not to say, however, that the proposal cannot be
improved.
Many of the comments address technical concerns which
we will work with the Committee to resolve.
Still other
criticize the proposals because they do not effect a fundamental
revision in underlying policies.
We question whether the
benefits of simplification should be rejected given the
uncertainties and delays inevitable in a more fundamental
reexamination.

2•

Modifications to Provisions Affecting Controlled Foreign
Corporations (Section 311-313)

Current law. A United States shareholder is taxed currently
on its pro rata share of a controlled foreign corporation's
(CFCs) Subpart F income and is allowed a corresponding increase
in its basis in the CFCs stock.
When the CFCs earnings
attributable to such Subpart F inclusions are later distributed,
the dividends are excluded from the shareholder's income to avoid
double taxation of the previously taxed amounts.
A shareholder
receiving the distributions is permitted to make special
adjustments to allow it to claim credits for foreign taxes paid
with respect to the distribution.
If the United States
shareholder sells its stock in the CFC, all or a portion of the
gain on the sale may be recharacterized as a dividend; to the
extent so recharacterized, the foreign tax credit rules apply, in
many respects, as if the shareholder had received an actual
dividend from the CFC.

33
Proposal.
The bill contains a number of amendments to the
rules for taxing U.S. shareholders of CFCs.
In general, these
amendments are aimed at reducing the possibility of excessive
taxation of foreign earnings.
In one instance the amendments
would repeal (subject to transition rules) a provision that
imposes substantial recordkeeping requirements on foreign
corporations and their shareholders while conferring what appears
to be a relatively minor benefit.
Administration position. We support these proposals as
further implementing the existing general policy under Subpart F
that the income of a CFC, having once been taxed to its United
States shareholders, should not be taxed again.
We note that the
proposals give discretion to the Secretary in certain cases to
take administrative or other concerns into account in
implementing the proposals through the issuance of regulations.
Although the proposed repeal of section 960(a)(3) may increase
the tax burden on certain income earned through a CFC, we believe
that this increased burden is likely to be minor (especially in
view of the transition rules) and is outweighed by the
substantial reduction in complexity.

3•

Translation of Foreign Taxes into U.S. Dollar Amounts
(Section 321)

Current law.
Section 986(a) requires foreign taxes, paid in
a foreign currency, to be translated into U.S. dollars for
purposes of claiming a foreign tax credit at the exchange rate on
the date of tax payment.
Many U.S. multinationals have
complained that the "date of payment" rule imposes a significant
administrative burden, without promoting any substantial U.S. tax
policy interest.
The burden arises from the taxpayer's need, in
many cases, to determine the foreign exchange rate for a very
large number of separate tax payments made in different
currencies on different dates, and then maintain appropriate
records for these payments and exchange rates.
Proposal.
The bill would give the Secretary the authority
to permit use of an average exchange rate for an appropriate
period, determined by regulation, rather than the exchange rate
on the specific payment date.
Administration position. We support the bill's solution to
this problem.
Use of an average rate may not always be
appropriate — for example, in hyperinflationary currencies.
The
bill will permit us to write regulations providing sensible
answers to practical problems, without reopening the policy
debate settled by the 1986 Tax Reform Act.

34
4.

Foreign Tax Credit Limitation Under the Alternative Minimum
Tax (Section 322)

Current law. A U.S. taxpayer claiming a foreign tax credit
must compute its taxable income from foreign sources as well as
its overall, or worldwide, taxable income.
Moreover, this
computation must be done for each of several foreign tax credit
"baskets" of income.
To compute its foreign source taxable
income within each of these baskets, the taxpayer must allocate
and apportion its expenses.
This procedure is complex and
time-consuming, but it is fundamental to the correct operation of
the foreign tax credit rules.
In addition to these computations,
a taxpayer may also be required to compute its foreign tax credit
for alternative minimum tax purposes.
Since taxable income for
AMT purposes is different from taxable income for regular tax
purposes, this requires a recomputation of foreign source taxable
income, and therefore a reallocation and apportionment of
expenses, in each of the foreign tax credit baskets.
Proposal. The bill would simplify the AMT foreign tax
credit computation by permitting the taxpayer to elect to use its
regular, rather than its AMT, foreign source taxable income in
each of the baskets.
Administration position. We support the proposal.
In many
cases we believe that there will not.be significant differences
between a taxpayer's regular versus its AMT foreign source
taxable income in the different baskets.
Where there may be
significant differences, the taxpayer need not elect the new
rule.
In this regard, it is important to note that the election
must be made once, for all future taxable years.
This is an
appropriate limitation: it will prevent taxpayers from engaging
in costly and complex computations of both AMT and regular
foreign source taxable income each year to determine whether the
election, in that year, would be cost effective.

TITLE IV. OTHER INCOME TAX PROVISIONS
A. S Corporations

Determination of Whether an S Corporation Has One Class of
Stock (Section 401)

35
other guidance as to what may or may not constitute a second
class of stock.
Proposal.
A corporation is treated as having only one class
of stock if all outstanding shares of stock of the Corporation
confer identical rights to distribution and liquidation proceeds.
The determination of whether the outstanding shares of a
corporation confer identical rights is made taking into account
rights arising under the corporate charter, activities of
incorporation or by-laws, legal requirements, administrative
actions, and any agreements that are legally enforceable under
state law.
The provision does not limit 1RS ability to properly
characterize S corporation transactions for Federal income tax
purposes.
Administration position. The Administration supports this
provision.
The provision clarifies the intended scope of the one
class of stock requirement.
New proposed regulations consistent
with this provision have recently been issued.
2.

Authority to Validate Certain Invalid Elections
(Section 402)

Current law,
s corporation status is not automatic for
qualifying corporations.
All of the shareholders of a small
business corporation must consent to the election of the
corporation to be an S corporation.
The election may be made by
a small business corporation for any tax year at any time during
the preceding tax year or at any time on or before the 15th day
of the third month of the current tax year.
Any late election
made after the 15th day of the third month is treated as an
election for the following tax year.
Moreover, where an election
timely made during the current tax year is invalid for that year
because one or more of the shareholders failed to consent to the
election, or because the corporation had too many shareholders,
an ineligible shareholder, or more than one class of stock, the
election will be treated as having been made for the following
tax year if the impediment is removed.
Proposal. The IRS would be given authority to waive the
effect of an invalid election caused by the inadvertent failure
to qualify as a small business corporation or to obtain the
required shareholder consents.
The IRS would also be authorized
to validate an untimely election where the untimeliness is due to
reasonable cause.
Administration position. The Administration supports this
provision.
It would allow the IRS to provide an administrative
remedy for untimely or invalid elections in appropriate
circumstances.

36
3•

Treatment of Distributions bv S Corporations Purina Loss
Year (Section 403)

Current law. The total amount of a shareholder's portion of
the losses and deductions of an S corporation may be taken into
account by the shareholder only to the extent that the total does
not exceed the basis of his stock and the basis of indebtedness
owed to the shareholder by the corporation.
Any loss or
deduction that is disallowed may be carried over indefinitely.
Distributions by an S corporation generally are treated as a
nontaxable return of capital to the extent of a shareholder's
basis in his or her stock.
The shareholder's stock basis is
reduced, but not below zero, by the tax-free amount of the
distribution.
Any distribution in excess of the shareholder's
basis is treated as a capital gain.
The basis of each shareholder's stock in an S corporation is
increased by his or her pro rata share of certain items of income
and decreased by his or her pro rata share of certain items of
loss and deduction.
Current law is unclear as to whether
adjustments to basis for income, loss and deduction items must
take place before or after adjustments for distributions.
If
the loss and deduction items reduce basis more than the income
items increase basis, making such adjustments to basis before
adjustments to basis are made for distributions would reduce the
amount of the distributions that would be a tax-free return of
capital.
Such a result would be inconsistent with the
partnership rules which provide that for any taxable year a
partner's basis is first increased by items of income, then
decreased by distributions, and finally decreased by losses.
A similar characterization problem arises with respect to
distributions by S corporations with accumulated earnings and
profits.
Distributions by such corporations are treated: (1) as
a nontaxable return of capital to the extent of the corporation's
**accumulated adjustments accountM (essentially the aggregate
taxable income of the corporation for all years beginning after
1982 to the extent that such taxable income has not been
distributed to shareholders), (2) as a dividend to the extent of
the S corporation's accumulated earnings and profits, (3) as a
nontaxable return of capital to the extent of the remaining basis
of the shareholder's stock, and (4) as capital gain.
For
purposes of determining the effect of a distribution for any
taxable year, adjustments reflecting the corporation's items of
income, loss and expenses are made to the accumulated adjustments
account in a manner similar to the adjustments required to be
made to the shareholders' stock basis.
Proposal.
The proposal would clarify that adjustments to
basis for distributions during a year are made before adjustments
to basis for items of loss.
Accordingly, the extent to which

37
losses may be taken into account for a taxable year would be
determined after the tax status of distributions has been
determined.
In addition, if for any year an S corporation's items of
loss and expense exceed its items of income, the adjustments that
would otherwise be made to the accumulated adjustments account
are disregarded in determining the effect of distributions made
during the taxable year.
This rule affects only distributions
made by S corporations with accumulated earnings and profits.
Administration position. The Administration supports this
provision.
It would harmonize the basis adjustment provisions
relating to partnership interests and S corporation stock and
would provide a measure of certainty to shareholders of S
corporations regarding the tax treatment of distributions made
during loss years.

Treatment of S Corporations as Shareholders in C
Corporations (Section 404(a))

Current law. An S corporation in its capacity as the
shareholder of a C corporation is treated as an individual for
purposes of subchapter C.
In a private letter ruling, the 1RS
has interpreted this rule as preventing the tax free liquidation
under section 332 and 337 of a C corporation subsidiary into an S
corporation because a C corporation cannot liquidate tax-free
when owned by an individual shareholder.
However, the result
desired by the taxpayer can be achieved on a tax-free basis by
either having the S corporation purchase the C corporation and
having the C corporation merge into the S corporation after the
purchase or by having the S corporation lend money to its
shareholders to purchase the C corporation who would then merge
the C corporation into the S corporation.
Proposal. The bill would repeal the rule that treats an S
corporation in its capacity as a shareholder of a C corporation
as an individual.
Administration position. The Administration supports this
Provision. It would remove a trap for the unwary by treating the
liquidation of a C corporation into an S corporation in the same
manner as the merger of a C corporation into an S corporation or
a conversion from C to S status.
As is currently the case when a
C corporation merges into an S corporation, the built-in gains of
the liquidating C corporation would be subject to the built-in
gains tax provisions of section 1374.

38
5«

S Corporations Permitted to Hold Subsidiaries (Section
404(b))

Current lav.
Under current law, an S corporation may not be
a member of an affiliated group of corporations.
This limitation
prevents an S corporation from owning stock in another
corporation that possesses 80 percent or more of both the total
voting power and value of the outstanding stock of the
corporation.
Proposal. An S corporation would be allowed to own any
amount, based on voting, value, or both, of the stock of a C
corporation.
In order to avoid the complexity of the
consolidated return regulations, the S corporation parent would
not be permitted to file a consolidated return with its
subsidiaries.
Administration position. The Administration supports this
provision if an acceptable revenue offset is provided.
The
current law restriction has caused many corporations either
knowingly or inadvertently to terminate their ¡5 status or to
adopt complex corporate structures to circumvent the restriction.
The proposal achieves the desired objective of current law by
directly preventing S corporations from filing consolidated
returns.

Elimination of Pre-1983 Earnings and Profits of S
Corporations (Section 404(c))

Current law. Prior to 1983, a corporation electing
subchapter S status for a taxable year increased its accumulated
earnings and profits to the extent that its undistributed
earnings and profits for the year exceeded its taxable income.
As a result of changes made in 1982 by the Subchapter S Revision
Act, S corporations do not have earnings and profits for any year
beginning after 1982.
Under current law, a shareholder is
required to include in income the pre-1983 accumulated S
corporation earnings and profits when it is distributed by the
corporation.
Proposal.
If a corporation is an S corporation for its
first taxable year beginning after December 31, 1991, the
accumulated earnings and profits of the corporation (if any) as
of the beginning of that year will be reduced by the accumulated
earnings and profits that were accumulated in any taxable year
beginning before January 1, 1983, for which the corporation was
an electing small business corporation under subchapter S. Thus,
any remaining earnings and profits of such a corporation would be
solely attributable to taxable years for which an S election was
not in effect.

39
Administration position« The Administration does not oppose
this provision.
We understand that the amounts being eliminated
from earnings and profits are generally very small and do not
justify the recordkeeping burden they create.

7•

Determination of Shareholder's Pro Rata Share Where
Disposition of Entire Interest (Section 404(d))

Treatment of Items of Income in Respect of a Decedent Held
By an S Corporation (Section 404(e))

Current law. Income items that would have been receivable
by the decedent had he lived, and that are receivable by his
estate or beneficiaries, are taxed to the estate or beneficiaries
when received and retain the same character they would have had
in the hands of the decedent.
Such income is referred to as
income in respect of a decedent (IRD).
Property which may produce IRD is not entitled to a basis
step—up.
IRD generated with respect to such property is not
subject to income tax when received by the decedent's estate or
beneficiaries.
Under the partnership regulations, a partnership
interest acquired from a decedent does not receive a basis
step-up to the extent the fair market value of the interest
reflects items of IRD.
Thus, the IRD rules cannot be
circumvented by contributing an IRD item to a partnership before
death and receiving a full fair market value step-up for the
partnership interest on the partner's death.
There is no
parallel provision for S corporation stock, however.

40
Proposal. The basis step-up at death for S corporation
stock would be denied to the extent the fair market value of the
stock represents IRD.
Administration position« The Administration supports this
provision.
It would prevent potential avoidance of the IRD rules
by dropping items of IRD (e.cr. . an installment note) into an S
corporation prior to death.
The provision would be parallel to
the existing rule for determining the basis of a decedent's
partnership interest.

B. Accounting Provisions
1•

Look-Back Method For Long-Term Contracts (Section 411)

Current law.
Income from long-term contracts generally must
be reported under the percentage of completion method of
accounting (PCM)• Under PCM, expected contract profit is
recognized ratably, as costs are incurred, over the term of the
contract.
PCM includes look—back rules intended to compensate
for deferral or acceleration of contract income resulting from
use of expected (rather than actual) contract profit.
Under the
look-back rules, if actual contract profit is greater or less
than expected profit, the taxpayer must pay, or is entitled to
receive, interest.
Look-back interest is computed when a
contract is completed based on differences between expected and
actual contract profits in each taxable year of the contract.
It
must be recomputed if contract profit changes because additional
contract revenues or costs are taken into account after
completion.
Taxpayers are allowed (but not required) to discount
post-completion adjustments to contract revenues and costs back
to their value as of contract completion.
The rate used in computing look-back interest is the section
6621 overpayment rate.
This overpayment rate equals the
applicable Federal short-term rate plus 2 percentage points.
The
applicable Federal short-term rate is adjusted quarterly by the
IRS.
For any year of the contract, look-back interest runs from
the due date of the return for that year without extensions
(March 15 in the case of a calendar year corporate taxpayer)
until the due date of the return for the year that the look-back
is applied.
Thus, to compute look—back interest for a particular
year of the contract, a taxpayer is required to use 5 different
interest rates for each 12-month period ending after the due date
of the return for that year up through the return due date for
the year that the look-back method is applied.
Proposal.
The bill contains three proposals for simplifying
look-back method.
The first two proposals would permit
taxpayers to make a combined election under which they are not

41
required to compute look-back interest for a contract, or to
recompute look-back interest based on adjustments to contract
price and costs, in certain de minimis cases.
The third proposal
would reduce the number of different interest rates that must be
used to compute look-back interest.
If a taxpayer makes the election, the first proposal would
provide that look-back interest is not computed for a long-term
contract if the amount of deferral or acceleration of income from
using estimates is not substantial.
Thus, look-back interest is
not computed if, for each year of the contract prior to the year
of completion, the cumulative taxable income (or loss) from the
contract as of the end of that year, determined using estimated
contract price and costs, is within 10 percent of the cumulative
taxable income (or loss) as of the end of that year using actual
contract price and costs.
In addition, if a taxpayer makes the election, the second
proposal would provide that look—back interest is not recomputed
as a result of an adjustment to contract price or costs in a year
after contract completion if the adjustment is not substantial.
Thus, look-back interest is not recomputed because of an
adjustment in a year after completion if the cumulative taxable
income (or loss) from the contract as of the end of that year is
within 10 percent of the cumulative taxable income (or loss) from
the contract as of the most recent year in which the taxpayer was
required to compute or recompute look-back interest (or would
have been required to do so if the de minimis test provided by
the first proposal had not been m e t ) .
The third proposal would generally fix the rate for
calculating look-back interest for a 12-month period beginning on
the due date of the taxpayer's return at the section 6621 rate
for the calendar quarter that includes that date.
Thus, in
computing look-back interest for a particular contract year, the
taxpayer would be required to use only one interest rate (rather
than 5 different rates) for each 12-month period ending after the
return due date for that year up through the return due date for
the year that the look-back method is applied (determined without
regard to extensions).
All three proposals apply to contracts completed in taxable
years ending after the date of enactment.
Administration position. We support these proposals if an
acceptable revenue offset is provided.
Each responds to specific
taxpayer concerns about the administrative burdens imposed upon
taxpayers under current law.
As we stated on other occasions we
do not oppose de minimis rules similar to those that would be
provided by the first two proposals.
We believe that all three
of these proposals would reduce the administrative burden imposed
by the look-back method without undermining its purpose.

42
2.

Uniform Cost: Capitalization Rules (Section 412)

Current law.
Generally, the uniform capitalization rules
require taxpayers producing real or tangible property or
acquiring property for resale to include in inventory the direct
costs of the property and the indirect costs that are allocable
to the property.
Taxpayers are permitted to use various
reasonable methods to determine the indirect costs that are
allocable to production or resale activities, including certain
simplified allocation methods provided in Treasury regulations.
Proposal. The proposal would authorize (but not require)
Treasury to issue regulations providing for a simplified method
for determining what part of the costs of administrative,
service, or support functions or departments must be capitalized
as part of the cost of property that a taxpayer produces or
sells.
The regulations, if issued, would permit allocation of
these costs to production or resale activities by multiplying the
total costs of any such function or department for the current
taxable year by an historical ratio.
The ratio would be the
ratio of the total of such function or department's allocable
costs that were allocable to property produced or acquired for
sale during a "base period” to the function or department's total
costs during the base period.
The explanation prepared to
accompany the proposal states that regulations, if issued, would
provide that the base period could begin no earlier than 4
taxable years prior to the taxable year for which the simplified
method is used.
Although the proposal would be effective for
taxable years beginning after the date of enactment, taxpayers
could not use the simplified method for any taxable year
beginning before Treasury publishes regulations.
Administration position. We do not oppose the proposal
because it authorizes rather than requires such regulations.
The
Administration supports the goal of making compliance with the
uniform capitalization rules less burdensome for taxpayers.
However, we are not certain that we can devise rules which will
adequately protect the fisc from loss due to distortion of income
while meaningfully simplifying taxpayers' administrative burdens.
We would not expect to propose regulations under this authority
unless we were convinced, after appropriate investigation, that
the regulations could meet a revenue neutrality constraint.

C. Minimum Tax Provisions
1-

Corporate Minimum Tax Depreciation Preference (Section 421)

Current law.
In computing the AMT depreciation deduction for
personal property, taxpayers are generally required to use the

43
150 percent declining balance depreciation method over the ADR
life of the property set forth in section 168(g).
In computing
adjusted current earnings (ACE), corporate taxpayers are
generally required to compute the ACE depreciation deduction
using the straight-line method over the ADR life.
Proposal.
Under the proposal, corporate taxpayers generally
would be required to use the 120 percent declining balance
depreciation method in computing both AMT and ACE depreciation
deductions for personal property placed in service in taxable
years beginning after December 31, 1990 (using the same ADR
recovery periods generally used for both AMT and ACE purposes
under current law). The proposal would also permit corporate
taxpayers to elect to calculate regular tax depreciation
deductions using the same 120 percent declining balance method
and recovery periods used in computing AMT and ACE depreciation
deductions.
Administration position. We support the proposal provided an
acceptable revenue offset is prbvided.
We believe the proposal
significantly simplifies the corporate AMT computation.
Although
the proposal loses revenue, there are some isolated instances in
which taxpayers would be disadvantaged by the proposal (e. q . .
taxpayers with both current and cumulative negative ACE
adjustments).

2•

Treatment of Built-in Losses for Purposes of the Corporate
Alternative Minimum Tax (Section 422)

Current law.
For ACE purposes, if a corporation with a net
unrealized built-in loss undergoes an ownership change, the
adjusted basis of each asset must be restated to its fair market
value immediately before the ownership change.
This adjustment
results in a permanent loss of asset basis for ACE purposes and
creates an added complexity for certain taxpayers in computing
AMT liabilities.
Proposal. The proposal would repeal the ACE asset basis
restatement rule.
Administration position. We support the proposal provided an
acceptable revenue offset is provided.
Under current law,
section 382 limitations apply to net operating losses and net
unrealized built-in losses under both the regular tax and AMT
systems.
However, the ACE asset basis restatement rule results
in needless complexity and inconsistency by departing from the
general section 382 limitations which apply for regular tax and
AMT purposes.
The proposal would significantly reduce the
recordkeeping requirements for affected taxpayers and provide for
consistent application of the section 382 limitations to net

44
unrealized built-in losses under each of the separate regular
tax, AMT, and ACE systems.

D. Tax-Exempt Bond Provisions
l|

Repeal of $100,000 Limitation on Unspent Proceeds Under 1—
year Exception from Rebate (Section 431)

Current law. A tax-exempt bond is not subject to the
arbitrage rebate requirement if all of the proceeds of the issue
(other than proceeds in a reasonably required reserve and
replacement fund and in a bona fide debt service fund) are spent
for the governmental purpose of the issue within 6 months of the
date of issue of the bond.
In the case of non-private activity
bonds and qualified 501(c)(3) bonds, the 6-month period is
extended to 12 months if no more than the lesser of 5 percent of
the proceeds of the issue or $100,000 is unspent after the first
6 months and such unspent amount is spent within the next 6
months.
Proposal. The condition that no more than the lesser of 5
percent or $100,000 remain unspent after 6 months would be
changed to a requirement that no more than 5 percent of the
proceeds remain unspent after 6 months.
Administration position. We support this proposal.
We
believe that this proposal will simplify compliance with this
exception to arbitrage rebate without compromising tax policy
with respect to the arbitrage rebate requirement.

2•

Exception From Rebate for Earnings on Bona Fide Debt Service
Fund Under Construction Bond Rules (Section 432)

Current law. Non-private activity bonds and qualified
501(c)(3) bonds issued to finance construction projects are
exempt from the arbitrage rebate requirement if the bond proceeds
are spent at specified percentages in 6-month intervals over a
24-month period beginning on the date of issue of the bonds.
An
issuer complying with the requirements of this exception under
certain circumstances is still required to pay arbitrage rebate
on arbitrage earnings attributable to a bona fide debt service
fund.
Proposal. Earnings on a bona fide debt service fund, with
respect to a bond issue that meets the spend-down requirements of
the 24-month arbitrage rebate exception, would not be subject to
the arbitrage rebate requirement.

45
Administration position. We support this proposal. We
believe that this proposal will simplify compliance with the
arbitrage rebate requirement and that it is consistent with the
policy behind the 24-month arbitrage rebate exception.
3•

Automatic Extension of Initial Temporary Period for
Construction Issues (Section 433)

Current law. After the termination of the initial temporary
period, bond proceeds invested at a yield materially higher than
the yield on the bonds pursuant to such temporary period must
generally be invested at a yield not in excess of the bond yield
plus .125 percent.
Proposal. With respect to bonds issued to finance nonprivate activity construction projects, the initial temporary
period would be automatically extended 1 year if, as of the end
of the initial temporary period, the issuer had spent at least 85
percent of the bond proceeds available for construction and the
issuer reasonably expected to spend the remaining bondconstruction moneys within the following 12-month period.
Administration position. We do not oppose this proposal. We
agree that subjecting bond proceeds to yield restriction and
rebate requirements at the same time is duplicative and that
simplification in this area is desirable. We believe that the
proposal made last year by the Congressional staffs — to allow
issuers to rebate arbitrage in lieu of restricting yield on
investments under appropriate circumstances — continues to be
the most promising approach. We suggest that this rebate-inlieu-of-yield restriction proposal be given further consideration
as a means of simplifying the problem addressed by the current
proposal. We would, however, request that the Treasury be given
regulatory authority to require yield restriction when necessary
in order to discourage arbitrage—motivated transactions.
4•

Aggregation of Issues Rules Not to Apply to Tax or Revenue
Anticipation Bonds (Section 434)

Current law. The IRS in certain private letter rulings has
treated multiple issues of bonds issued within 31 days of each
other by the same issuer as being a single debt obligation for
purposes of applying tax rules with respect to tax-exempt bonds.
Tax and revenue anticipation notes (TRANs) are short-term
borrowings by a governmental unit issued for the purpose of
financing near-term cash flow deficits.
Proposal. The aggregation of TRANs with other non-private
activity bond issues of an issuer would be prohibited regardless
of when the TRANs was issued.

46
Administration position. We do not oppose this proposal. We
believe that this clarification will simplify compliance with
relevant Federal tax requirements without compromising Federal
tax policy in this area.
5.

Authority to Terminate Required Inclusion of Tax-Exempt
Interest on Return (Section 435)

Current law. Section 6012(d) of the Internal Revenue Code
requires that every person required to file a Federal income tax
return for the taxable year must include on such return the
amount of tax-exempt interest received or accrued during the
year.
Proposal. The Secretary of the Treasury would be given
authority to exempt taxpayers from reporting tax-exempt interest
pursuant to section 6012(d) of the Code in any case in which the
Secretary determines that the disclosure of such interest is not
useful for tax administration.
Administration position. We do not support this proposal.
Given the need for this data in tax administration, we see little
likelihood that this authority could be exercised to reduce
issuer compliance burdens in any significant way.
6.

Repeal of Expired Provisions (Section 436)

Current law. A special exception to the arbitrage rebate
requirement applicable to certain issues of qualified student
loan bonds expired on December 31, 1988.
Proposal. Since the provision is no longer of any effect it
would be repealed as deadwoodi
Administration position. We support this proposal.
provision is no longer needed.

The

E. Revocable Trust Provision
Certain Grantor Trusts Treated As Estates (Section 441)
Current law. Many taxpayers use revocable trusts as
substitutes for wills to avoid the costs of probate, for reasons
of privacy and other nontax purposes. When a revocable trust
becomes irrevocable on the grantor's death and thereafter
effectively functions as an estate, it is taxed as a trust and is
unable to take advantage of certain provisions of the Code that
are available to estates but not trusts.

- 47
Proposal. The bill would amend section 7701 by adding a
definition of an Mestate”. Under the provision, an estate is
defined to include a pourover revocable trust, or, if there is no
will, a trust that is primarily responsible for debts and
administration expenses. Such a trust would not be treated as an
estate for purposes of determining the trust's personal exemption
or taxable year or for gift, estate or generation-skipping tax
purposes. Treasury would have regulatory authority to prescribe
additional exceptions. Such a trust would be treated as an
estate for taxable years that begin within 3 years and 9 months
of the decedent's death.
Administration position. The Administration does not
oppose this provision of the bill. The purpose of the provision
is to eliminate several of the tax disincentives to using funded
revocable trusts as substitutes for wills. The bill would
simplify planning by reducing the tax considerations in deciding
whether to use a revocable trust.
F. Other Provisions Relating to Partnerships
1»

Timing Rules for Inclusion and Deduction of Partnership
Guaranteed Payments (Section 442)

48
section 267(a)(2) provides that in transactions between related
parties, payments are deductible by a taxpayer only when they are
includible in the income of the person to whom payment is made.
Section 267(e) extends this rule to transactions between
partnerships and their partners except with respect to a
partnership's guaranteed payments. Instead, a partner must
include such payments as ordinary income for his taxable year
within or with which ends the partnership taxable year in which
the partnership deducted the payments.
Proposal. The bill would defer the deduction of a
guaranteed payment by a partnership until the year in which it is
includible in the partner's income. Thus, the bill conforms the
timing rule for guaranteed payments to the timing rule for
payments made to a partner acting in a capacity other than as a
member of the partnership.
Administration position. The Administration supports this
proposal. It is desirable to have the same timing rule for
payments made by a partnership to a partner either as payments
made not in the partner's capacity as a partner or as guaranteed
payments, since these types of payments can be difficult to
distinguish from each other.
2•

Closing of Partnership Taxable Year With Respect To
Deceased Partner (Section 443)

49 interest in the partnership terminates, whether by death,
liquidation, or otherwise.
Administration position. We support this proposal. The
year closing result should not be dependent on the presence of a
buy-sell agreement.
6. Corporate Provision
Clarification of Amount of Gain Recognized bv a Securityholder in
a Reorganization (Section 444)
Current law. In general, a holder of corporate stock or
securities who exchanges them for other stock or securities in a
corporate reorganization or "spin-off" does not recognize gain
even if the holder realizes gain because the value of the stock
or securities received exceeds the holder's basis in the stock or
securities given up. This general rule does not apply, however,
if the principal amount of securities received exceeds the
principal amount of securities given up. In this case, any gain
realized on the exchange is recognized up to the fair market
value of the excess principal amount. It is not clear how the
"principal amount” of a security surrendered or received in a
reorganization is measured for this purpose. Under the original
issue discount (OID) rules of current law, however, that portion
of the stated principal amount of a bond that exceeds the issue
price of the bond is treated as unstated interest that is
included in income by the holder and deductible by the issuer
over the term of the bond.
Proposal. The proposal would coordinate the "excess
principal amount" rule with the OID rules of current law. Thus
any portion of the stated principal amount that is treated as
unstated interest under the OID rules would not be treated as
principal for purposes of determining how much gain is recognized
in a reorganization. Instead, the issue price of the securities
received, and the adjusted issue price of the securities
surrendered, would be treated as their principal amount. In
contrast to current law, under which the amount of gain
recognized is based on the fair market value of the excess
principal amount of the securities received, the proposal would
not require determination of the fair market value of this
excess.
Administration position. We support this proposal. It
will provide similar tax treatment for exchanges that are similar
in economic substance.

50
TITLE V. ESTATE AND GIFT TAX PROVISIONS
1«

Waiver of Right of Recovery for Certain Marital Deduction
Property (Section 501)

Current law. A marital deduction is allowed for estate and
gift tax purposes for qualified terminable interest property
(QTIP) that passes to a spouse. The property is generally
includible in the estate of the spouse beneficiary. The estate
of a spouse beneficiary of a QTIP trust has a right of recovery
against the person receiving the trust property for estate taxes
attributable to the inclusion of the trust in the spouse's gross
estate. The right of recovery may be waived by the spouse
beneficiary in his or her will.
Proposal. The bill would provide that the right of
recovery may be waived by the spouse beneficiary only by a
specific reference to section 2207A.
Administration position. The Administration does not
oppose this proposal. The proposal does not affect the
substantive right of the surviving spouse to waive the right of
recovery. By establishing a clear test for what constitutes an
effective waiver under section 2207A, the provision should
prevent the inadvertent waivers that sometimes occur under
current law.
2.

Inclusion in Gross Estate of Certain Gifts Made Within
Three Years of Death (Section 502)

Current law. Generally, transfers made within 3 years of
death are not includible in the transferor's gross estate.
However, the transfer within 3 years of death of certain retained
rights with respect to previously transferred property causes the
entire property to be includible in the transferor's gross
estate. This inclusion rule applies to transfers made from a
revocable trust within 3 years of the transferor's death. This
may cause, among other things, annual exclusion gifts made from
the revocable trust during that period to be includible in the
transferor's gross estate.
Proposal. The bill would amend section 2038, which deals
with revocable transfers, to ensure that transfers made from an
individual's revocable trust within 3 years of the individual's
death are not includible in the individual's gross estate. The
bill would also restate section 2035, which generally deals with
the inclusion in the gross estate of property transferred within
3 years of death, for greater clarity without substantive change.

51
Administration position. The Administration does not
oppose this provision of the bill. Funded revocable trusts are
created by individuals for a variety of legitimate, nontax
planning purposes. The inability to use the revocable trust as a
vehicle for making annual exclusion gifts without estate tax
exposure is a significant tax disadvantage to the use of such
trusts.
3.

Definition of Qualified Terminable Interest Property
(Section 503)

Current law. A marital deduction is allowed for estate and
gift tax purposes for a QTIP passing to a spouse. For property
to qualify as QTIP, the beneficiary spouse must have a qualifying
income interest for life in the transferred property; i.e.. must
be entitled to all the income from the property, payable at least
annually. Proposed Treasury regulations provide that income
accrued or accumulated between the last income distribution date
and the date of the spouse's death does not have to be payable to
the spouse or the spouse's estate for the spouse to have a
qualifying income interest for life. In Estate of Howard. 91
T.C. 329 (1988), rev'd. 910 F.2d 633 (9th Cir. 1990), the Tax
Court held that this "stub period” income must be payable to the
spouse's estate or be subject to the spouse's general power of
appointment for the spouse to have the requisite income interest.
Although the Howard decision was reversed on appeal, it is
unclear how the Tax Court would rule if the question arises in a
case appealable to another circuit.
Proposal. The bill would provide that an income interest
would not fail to be a qualifying income interest for life solely
because the stub period income is not payable to the spouse's
estate or subject to the spouse's general power of appointment.
If the marital deduction is allowed, however, such income would
be includible in the spouse's estate.
Administration position. The Administration supports this
provision of the bill. The codification of the proposed Treasury
regulation will eliminate the need for the closing agreement
procedure now used by the IRS to permit taxpayers who have relied
on the proposed regulation to claim the marital deduction while
protecting the government against the potential whipsaw of
avoiding subsequent inclusion of the trust property in the
spouse's estate on the grounds that the deduction was improperly
allowed.
4.

Requirements for Qualified Domestic Trust (Section 504)

Current law. Generally, property passing to a noncitizen
surviving spouse does not qualify for the marital deduction

52
unless it passes in a qualified domestic trust (QDT).
Distributions of principal from such a trust to the surviving
spouse are subject to estate tax. When originally enacted, the
QDT provisions required that all trustees of a QDT be U.S.
citizens or domestic corporations. This provision was
retroactively amended twice and ultimately required that the
trust must provide that no distributions can be made unless a
U.S. trustee has the right to withhold the estate tax imposed on
the distribution.
Proposal. Under the proposal, a QDT created prior to the
enactment of the 1990 OBRA whose governing instrument requires
that all trustees be U.S. citizens or domestic corporations would
be treated as satisfying the withholding requirement of current
law.
Administration position. The Administration supports this
provision of the bill. The trustee requirements for a qualified
domestic trust have been amended twice in an attempt to give
taxpayers greater flexibility in the choice of trustees while
also protecting the government's ability to collect the tax
imposed on the trust. We believe that the government's interest
is adequately protected if the trust instrument requires that all
trustees must be U.S. citizens or domestic corporations. The
bill will reduce the number of individuals who will have to
redraft wills to comply with the changes that have been made to
the trustee requirement for QDTs.
5.

Election of Special Use Valuation of Farm Property for
Estate Tax Purposes (Section 505)

53
Administration position. The Administration does not
oppose this provision. The special use valuation election is
frequently defective because the executor fails to file certain
required information or signatures. By expanding the scope of the
provision that permits defective elections to be cured, the bill
simplifies qualification for the special use valuation in those
estates for which it was intended to be available.
TITLE VI. EXCISE TAX PROVISIONS
A. Motor Fuel Excise Tax Provisions
1«

Use Tax on Diesel and Aviation Fuel (Section 601)

Current law. Section 4091 imposes a tax on the sale of
diesel or aviation fuel by a producer. For this purpose, a
wholesaler or a tax-free purchaser fe.q.. a State government) is
treated as a producer, and a nonexempt use of fuel by a producer
is treated as a sale. A person that purchases fuel at a reduced
tax rate (e.g., for use in a bus or train) is not treated as a
producer. Thus, section 4091 does not impose a tax when a
reduced-tax purchaser diverts fuel to a nonexempt use. Section
4041 imposes a back-up use tax on fuel diverted to nonexempt
uses, but this tax is redundant in the case of fuel diverted by a
tax-free purchaser and does not apply to fuel diverted by a
reduced-tax purchaser.
Proposal. The bill would combine the diesel and aviation
fuel tax provisions into a revised section 4091. Reduced-tax
purchasers would be treated as producers for purposes of the tax
imposed by the revised section 4091 and would be liable for the
tax when they divert fuel to a nonexempt use. The bill would
also reorganize section 4041.
Administration position. We support the proposal. The
proposal improves the organizational structure of the diesel and
aviation fuel excise tax statutes, making the rules easier to
locate and understand. The imposition of tax on fuel diverted to
nonexempt uses by reduced-tax producers ensures equivalent
treatment of nonexempt uses of diesel and aviation fuel by
tax-free and reduced-tax purchasers.
2.

Refunds of Diesel and Aviation Fuel Taxes (Section 602(a))

Current law. Producers (including wholesalers) of diesel
or aviation fuel can make tax-free sales to exempt purchasers
(e»cf. * a State government) . If, however, a retailer sells diesel
or aviation fuel on which tax has been paid to an exempt

54
purchaser, only the exempt purchaser can claim a refund of the
tax.
Proposal. The bill would permit the person who paid the
tax (generally the wholesaler) to claim the refund if the amount
of the tax is repaid to the retailer.
(Presumably, the
wholesaler would reimburse the retailer only if the retailer
sells the fuel to an exempt purchaser at a tax-free price.) This
rule would apply only to fuel sold for use in one of the
following exempt uses: (1) export, (2) use as supplies for
aircraft or vessels, (3) exclusive use by a State or local
government, or (4) exclusive use by a nonprofit educational
organization. In addition, refunds would be permitted only if
the person paying the tax meets such requirements as the Treasury
Department may impose under the regulatory authority provided in
the bill.
Administration position. We do not oppose the proposal.
The proposal significantly simplifies refund procedures for
diesel and aviation fuel sold to certain exempt users and
conforms those procedures to those applicable to special motor
fuels and gasoline. Under the proposal, however, there is a
possibility of refund claims by both the wholesaler and the
exempt user, and we expect it will be necessary to prescribe
regulatory safeguards under the authority provided in the bill.
These safeguards, including appropriate certifications by the
exempt user, would be designed to prevent an exempt user from
claiming a refund if the tax is refunded to the wholesaler. They
would also assume that a wholesaler claiming a refund does not
pass the tax on in the price of the product by requiring the
wholesaler to establish that the price does not include the tax.
3.

Consolidation of Refund Provisions (Section 602(b))

55
An expedited refund procedure is available for gasohol
blenders.
Proposal. The bill would consolidate the Code provisions
authorizing refunds into a single section. This section would
prescribe only one refund threshold, and all gasoline and diesel
fuel refunds would be aggregated in determining whether this
threshold is met. A refund would be permitted for any quarter
(including the fourth quarter) in which the cumulative
overpayment exceeds $750. Refunds would be permitted under this
rule with respect to taxes imposed on gasoline and special motor
fuel used on a farm for farming purposes. The special expedited
procedure for gasohol blenders would be retained.
Administration position. We do not oppose the proposal.
The proposal significantly simplifies the refund procedures by
consolidating the rules in a single section and providing uniform
threshold and refund procedures. A single standardized refund
claim for all fuel taxes reduces administrative burdens imposed
on taxpayers that are eligible for refunds of several different
types of excise tax.
4.

Refunds to Cropdusters (Section 602(b))

Current law. The excise tax imposed on gasoline or
aviation fuel is refunded if the fuel is used for cropdusting.
The tax is generally refunded to the farmer; the cropduster is
entitled to a refund only if the farmer waives the right to a
refund.
Proposal. The bill would eliminate the waiver requirement
and provide that only the cropduster is entitled to the refund.
Administration position. We do not oppose the proposal.
The waiver requirement is cumbersome and prevents many
cropdusters from claiming refunds.
5.

Information Reporting on Certain Sales (Section 603)

Current law. When diesel or aviation fuel is sold free of
tax or at a reduced tax rate, both the seller and the purchaser
are required to file an information return with the IRS.
Proposal. The bill would permit the Treasury Department to
issue regulations waiving the information reporting requirement.
Administration position. We support the proposal. The
authority to waive the reporting requirement in appropriate cases
will allow the IRS to administer the exemptions more efficiently
and relieve taxpayers of unnecessary paperwork burdens.

56
B. Alcohol Excise Tax Provisions
Imported Distilled Spirits Returned to Plant (Section 611)
Current law. When tax-paid distilled spirits that have
been withdrawn from bonded premises of a distilled spirits plant
are returned for destruction or redistilling, the excise taxes
are refunded or credited. Bottled imported distilled spirits are
not eligible for this refund or credit because they are
originally withdrawn from customs custody and not bonded
premises. Additionally, distilled spirits brought into the
United States from Puerto Rico are not eligible because they are
not withdrawn from bonded premises.
Proposal. The bill would provide that refunds or credits
of the tax would be available for all spirits that are returned
to the bonded premises of a distilled spirits plant.
Cancellation of Export Bonds (Section 612)
Current law. An exporter that withdraws distilled spirits
from bonded warehouses for export or transportation to a customs
bonded warehouse without the payment of tax must furnish a bond
to cover the withdrawal. The required bonds are canceled "on the
submission of such evidence, records, and certification
indicating exportation as the Secretary may by regulations
prescribe."
Proposal. The bill would allow the bonds to be canceled
"if there is such proof of exportation as the Secretary may
require." Under this rule, the Treasury Department could permit
exporters to satisfy the proof requirement by maintaining records
of exportation. Thus, bonds could be canceled without submission
of proof of exportation.
Location of Records of Distilled Spirits Plant (Section 613)
Current law. Proprietors of distilled spirits plants are
required to maintain records and reports relating to their
production, storage, denaturation, and processing activities on
the premises where the operations covered by the records are
carried on.
Proposal. The bill would permit proprietors to maintain
records and reports at locations other than the plant premises.
As under current law, the records and reports would be required
to be available for inspection by the Treasury Department during
business hours.

57
Transfers from Brewery to Distilled Spirits Plant (Section 614)
Current law. A distilled spirits plant may receive tax^ ee .keer on its bonded premises for use in the production of
distilled spirits. This rule applies only if the beer is
produced on contiguous brewery premises.
Proposal. The bill would provide an exemption from excise
tax, subject to Treasury regulations, for beer removed to a
distilled spirits plant from any brewery for use in the
production of distilled spirits. The bill would also authorize
the receipt of such beer by a distilled spirits plant.
Sign Not Required for Wholesale Dealers (Section 615)
Current law. Wholesale liquor dealers are required to post
a sign identifying the firm as such. Failure to do so is subject
to a penalty.
Proposal.
sign be posted.

The bill would repeal the requirement that a

Refund on Returns of Merchantable Wine (Section 616)
Current law. Excise tax paid on domestic wine that is
returned to bond as unmerchantable is refunded or credited, and
the wine is once again treated as wine in bond on the premises of
a bonded wine cellar.
Proposal. The bill would permit a refund or credit in the
case of all domestic wine returned to bond, whether or not
unmerchantable.
Increased Sugar Limits for Certain Wine (Section 617)
Current law. Natural wines may be sweetened to correct
high acid content. If the amount of sugar used exceeds the
applicable limitation, however, the wine must be labeled
"Substandard.” For most wines the limitation is exceeded if
sugar constitutes more than 35 percent (by volume) of the
combined sugar and juice used to produce the wine. Up to 60
percent sugar may be used in wine made from loganberries,
currants, and gooseberries.
Proposal. The bill would provide that up to 60 percent
sugar could be used in any wine made from juice, such as
cranberry or plum juice, with an acid content of 20 or more parts
per thousand.

58
Beer Withdrawn for Embassy Use (Section 618)
Current law. Imported beer, wine, and distilled spirits to
be used for the family and official use of foreign governments,
organizations and individuals may be withdrawn from customs
bonded warehouses without payment of excise tax. A similar rule
applies to domestically produced wine and distilled spirits.
There is no similar exemption for domestic beer withdrawn from a
brewery or entered into a bonded customs warehouse for the same
authorized use.
Proposal. The bill would provide an exemption for domestic
beer similar to that available for domestically produced wine and
spirits. The exemption would be subject to Treasury's regulatory
authority.
Beer Withdrawn for Destruction (Section 619)
Current law. Beer removed from a brewery for destruction
must be tax-paid rather than withdrawn without payment of excise
tax.
Proposal. The bill would provide an exemption from tax for
removals for destruction, subject to Treasury regulations.
Drawback on Exported Beer (Section 620)
Current law. A domestic producer that exports beer may
recover the tax (receive a "drawback”) found to have been paid on
the exported beer upon the "submission of such evidence, records
and certificates indicating exportation" required by regulations.
Proposal. The bill would allow a drawback of tax paid "if
there is such proof of exportation as the Secretary may by
regulations require." Under this rule, the Treasury Department
could permit exporters to satisfy the proof requirement by
maintaining records of exportation. Thus, tax could be refunded
without submission of proof of exportation.
Imported Beer Transferred in Bulk to Brewery (Section 621)
Current law. Imported bulk and bottled beer is subject to
tax when removed from customs custody.
Proposal. The bill would provide that, subject to Treasury
regulations, beer imported in bulk containers could be withdrawn
from customs custody and transferred in bulk to a brewery without
payment of tax. Under this provision, the proprietor of the

59
brewery to which the beer is transferred is liable for the tax
imposed on the withdrawal from customs custody and the importer
would be relieved of liability.
Administration Position on Alcohol Excise Tax Provisions,
support these proposals.

Until 1980, the method of collecting alcohol excise taxes
required the regular presence of Treasury Department inspectors
at alcohol production facilities. In 1980, the method of
collecting tax was changed to a bonded premises system under
which examinations and collection procedures are similar to those
used in connection with other Federal taxes.
A number of proposals conform reporting and recordkeeping
requirements to the current collection system. These changes
will allow the Bureau of Alcohol, Tobacco, and Firearms to
administer alcohol excise taxes more efficiently and relieve
taxpayers of unnecessary paperwork burdens.
Other proposals expand the circumstances in which the Code
permits tax-free removals of alcoholic beverages (or allows a
credit or refund of tax on a return to bonded premises). These
changes are also consistent with the current collection system
and will not jeopardize the*collection of tax revenues. In a
number of cases, the changes will eliminate inappropriate
disparities in the treatment of different types of alcoholic
beverages. In addition, several of these proposals will provide
producers with additional options in complying with environmental
and other laws that regulate the destruction and disposition of
these products.
The remaining proposals (i.e.. the repeal of the sign
requirement and the increased sugar limits for certain wine)
repeal or revise outmoded provisions. We do not believe the
adoption of these proposals will have adverse consequences.
C. Other Excise Tax Provisions
1«

Waiver of Registration Requirement (Section 631)

Current law. The Code exempts certain types of sales
(e.q.. sales for use in further manufacture, sales for export,
and sales for exclusive use by a State or local government or a
nonprofit educational organization) from excise taxes imposed on
manufacturers and retailers. These exemptions generally apply
only if the seller, the purchaser, and any person to whom the
article is resold by the purchaser (the second purchaser) are
registered with the IRS. The IRS can waive the registration

60
requirement for the purchaser and second purchaser in some but
not all cases.
Proposal. The bill would authorize the Treasury Department
to specify the cases in which the registration requirement
applies to purchasers and second purchasers. Exempt sales to
unregistered purchasers and second purchasers would be permitted
in all other cases.
Administration position. We support the proposal. The
authority to waive the registration requirement in appropriate
cases will allow the IRS to administer the exemptions more
efficiently and relieve taxpayers of unnecessary paperwork
burdens.
2.

Deadwood— Piggyback Trailers and Deep Seabed Minerals
(Section 632)

Current law. The Code includes a provision relating to a
temporary reduction in the tax on piggyback trailers sold before
July 18, 1985, and provisions relating to the tax on the removal
of hard minerals from the deep seabed before June 28, 1990.
Proposal.

The bill would repeal these provisions.

Administration position. We support the proposal.
Continued retention of these deadwood provisions is unnecessary.
TITLE VII. ADMINISTRATIVE PROVISIONS
A. Administrative Provisions
1.

Employment Tax Reporting for Household Employees
(Section 701)

61
return filed for FICA purposes. After the end of each calendar
year, household employers must provide copies of Form W-2 (Wage
and Tax Statement) to each employee and must transmit all Forms
W-2 to the Social Security Administration with Form W-3
(Transmittal of Income and Tax Statements).
Household employers subject to FUTA are typically required
to file quarterly state unemployment tax returns as well.
Proposal. Household employers would report all FICA and
FUTA taxes and any withheld income taxes ("domestic service
employment taxes") on a schedule to Form 1040. No quarterly
payments or deposits would be required, but domestic service
employment taxes would be counted in determining the employer's
estimated tax penalty. Thus, a household employer would be
required either to make payments of estimated taxes or to
increase the rate of withholding on his own wages to cover his
liability for domestic service employment taxes.
To make simplified annual reporting possible, the quarterly
FICA threshold would be changed to an annual threshold of $300.
In addition, the Secretary would be granted the authority
to enter into agreements with the states which would allow the
IRS, acting as agent for the states, to collect state
unemployment taxes in the same manner.
Administration position. The Administration supports the
proposal. The proposal should provide substantial simplification
and increased compliance.
Current law requires employers of household employees to
file 5 Federal returns annually in addition to forms such as W-3
and W-2.‘ State unemployment reports must be separately filed on
a quarterly basis, often to remit quite small liabilities ($7-8
annually). Household employers are frequently unaware of and do
not comply with such requirements. By incorporating Federal
return requirements into Form 1040, the compliance burden should
be eased and household employers will be reminded of their filing
responsibilities. While State participation in the Form 1040
filing system would be voluntary, many states may find the system
cost effective to collect the relatively small sums involved.
We recommend that the proposal be made effective for
remuneration paid after December 31, 1992, in order to allow the
IRS to prepare forms and inform taxpayers about the new filing
system. In addition, we recommend that the return due date
provision be clarified to make certain that the schedule is not
due earlier than the date of the Form 1040 if the taxpayer
utilizes an extension to file.

62
2.

Uniform Penalty Provisions to Ap p Iv to Certain Pension
Reporting Requirements (Section 702)

Current law. Any person who fails to file an information
report with the IRS on or before the prescribed filing date is
subject to penalties for each failure. The general penalty
structure provides that the amount of the penalty is to vary with
the length of time within which the taxpayer corrects the
failure, and allows taxpayers to correct a de minimis number of
errors and avoid penalties entirely. A different, flat-amount
penalty applies for each failure to provide information reports
to the IRS or statements to payees relating to pension payments.
Proposal. The bill would incorporate into the general
penalty structure the penalties for failure to provide
information reports relating to pension payments.
Administration position. We support this proposal because
conforming the information-reporting penalties that apply with
respect to pension payments to the general information-reporting
penalty structure will simplify the overall penalty structure
through uniformity and provide more appropriate information
reporting penalties with respect to pension payments.
3.

Use of Reproductions of Returns Stored in Digital Image
Format (Section 703)

Current law. Under section 6103(p)(2), the IRS is required
to provide a reproduction of a return upon request from a person
entitled to disclosure of the return, and may provide return
information to such a person through a variety of media.
Reproductions so provided have the same legal status as the
original return and may be admitted into evidence in judicial or
administrative proceedings.
Proposal. The Code would be amended to clarify that the IRS
may discharge its obligations to persons seeking disclosure of
returns by furnishing them with reproductions produced through
digital image technology. Such technology will eventually enable
the IRS to store returns in digital image form and realize
significant costs savings. The cost of storing, retrieving and
copying tax returns is today about $42 million annually. The
bill also would require the Comptroller General to conduct a
study of available digital image technology for the purpose of
determining the extent to which reproductions of documents stored
using that technology accurately reflect the data on the original
document and the appropriate period for retaining the original
document.
Administration position. We support this proposal. In
addition to cost savings, the use of digital image technology

63
will speed the retrieval of return information for use by the 1RS
in resolving taxpayer inquiries, conducting examinations and
litigating tax issues. To ensure that accurate and legible
document images are created, the 1RS will institute strict
quality control standards. As provided in section 6103
generally, taxpayer information will continue to be protected
from unauthorized disclosure.
4.

Repeal of Tax Shelter Registration Rules (Section 704)

Current law. The Code requires the registration of tax
shelters with the IRS and imposes penalties for failure to comply
with the registration requirements. The provisions were adopted
in 1984 to enable the IRS to identify and audit more effectively
tax shelter investments that had proliferated during the early
1980s. Due to changes in the tax laws since 1984, tax shelter
activities have declined substantially. On the other hand,
partnerships with over 500 investors have almost doubled. The
tax shelter registration provisions are particularly cumbersome
for such widely held partnerships. Organizers and sellers of
potentially abusive tax shelters are required to keep lists of
investors and to make them available to the IRS on request.
Proposal. The tax shelter registration rules would be
repealed. Current law rules applicable to organizers and sellers
of potentially abusive tax shelters would be retained.
Administration position. The Administration supports this
provision. The steep decline in the number of tax shelters being
marketed has greatly reduced the amount of information being
provided under the tax shelter registration rules. The
information is no longer sufficiently useful to justify the
paperwork burdens it creates both for taxpayers (particularly
widely held partnerships) and the IRS.
5.

Repeal Authority to Disclose Whether Prospective Juror Has
Been Audited (Section 705)

64
from defendants an escalating number of requests for information
under section 6103(h)(5).
Proposal. The bill would repeal the authority to disclose
whether prospective jurors have been audited.
Administration position. We support the repeal of section
6103(h)(5). Information regarding prior tax investigations can
be elicited from prospective jurors in voir dire questioning,
without resort to the cumbersome, time consuming and sometimes
harmful mechanism of section 6103(h)(5) as interpreted in
Hashimoto.
6.

Repeal TEFRA Audit Rules For S Corporations (Section 706)

Current law. An S corporation generally is not subject to
income tax on its taxable income. Instead, it files an
information return and the shareholders report their pro rata
share of the S corporation's income and deductions on the
shareholders' tax return. The Subchapter S Revision Act of 1982
generally made the TEFRA partnership audit and litigation rules
applicable to S corporations. These rules require the
determination of all "Subchapter S items” at the corporate,
rather than the shareholder, level. These rules also require a
shareholder to report all Subchapter S items consistently with
the corporation's information return or to notify the IRS of any
inconsistency.
Proposal. The bill would repeal the unified audit procedures
for S corporations, but retain the requirement that shareholders
report items in a manner consistent with the corporation's
return.
Administration position. We support repeal of the TEFRA
audit rules for S corporations. The vast majority of both
existing and newly formed S corporations are expected to qualify
for the small S corporation exception from the unified audit and
litigation provisions. Accordingly, a unified audit procedure,
with the intendant necessity for the IRS and the courts to
prescribe special rules and procedures, is unnecessary and often
confusing for those S corporations subject to the provision.
It would be desirable before final enactment to clarify the
effect of the provision on pending proceedings and years before
the effective date as to which no proceeding is pending. The
provision also should be effective for taxable years ending after
a given date, rather than for taxable years starting after a
given date. The precise date an S corporation's first taxable
year commences may be unclear in certain cases.

65
7*

Limitations on Assessment and Collection (Section 707)

Current law. Taxpayers who have invested or that have an
interest in passthrough entities such as partnerships, S
corporations and trusts currently are asserting that the IRS
cannot make adjustments to their returns with open statutes of
limitations when the adjustments asserted arise from
distributions from passthrough entities for which the statutes of
limitations have expired. Recent court cases have given support
to taxpayers. See Kelley v. Commissioner. 977 F.2d 756 (9th Cir.
1989), in which the Ninth Circuit held that an extension of time
for assessing tax for the 1980 year executed by a shareholder of
an S corporation did not permit an S corporation adjustment to
the shareholder's return if the statute of limitations with
respect to the S corporation had expired, and Fendell v.
Commissioner. 906 F.2d 362 (8th Cir. 1990), in which the Eighth
Circuit held that the Commissioner cannot adjust individual
income tax returns for 1975 and 1977 with open statutes of
limitations, when the adjustments arise from the distributions to
a beneficiary of income from a complex trust for which the
statute of limitations has expired.
Proposal. The proposal would clarify that the running of the
statute of limitations begins with the filing of the return of
the taxpayer whose liability is in question, rather than the
filing of the return of another person (such as a partnership, S
corporation, or trust) from which the taxpayer received some item
of income, gain, loss, deduction, or credit. The proposal would
not affect the statute of limitations applicable to an entity
subject to the TEFRA unified audit rules.
Administration position. We support this clarification,
because it would avoid years of protracted and costly litigation
over collateral matters.
B. Tax Court Provisions
!•

Overpayment Determinations of the Tax Court (Section 711)

Current law. The Tax Court has jurisdiction to order the
refund of an overpayment determined by the Court, plus interest,
if the IRS fails to refund such overpayment and interest within
120 days after the Court's decision becomes final. Whether such
an order is appealable is uncertain. In addition, whether the
Tax Court has jurisdiction over the validity or merits of certain
credits or offsets (e.q.. student loans, child support, etc.)
made by the IRS which serve to reduce or eliminate the refund to
which the taxpayer was otherwise entitled is unclear.

Proposal. The bill would clarify that these orders are
appealable in the same manner as a decision of the Tax Court.
The bill would also clarify that the Tax Court does not have any
jurisdiction over the validity or merits of any credit or offset
made by the IRS which would serve to reduce or eliminate the
refund to which the taxpayer was otherwise entitled.
Administration position.
of current law.
2.

We support the bill's clarification

Awarding of Administrative Costs (Section 712)

Current law. Any person who substantially prevails in any
action brought by or against the United States in connection with
the determination, collection, or refund of any tax, interest, or
penalty may be awarded reasonable administrative costs incurred
before the IRS and reasonable litigation costs incurred in
connection with any court proceeding. No time limit is specified
for the taxpayer to apply to the IRS for an award of
administrative costs. In addition, no time limit is specified
for a taxpayer to appeal to the Tax Court an IRS decision denying
an award of administrative costs. Finally, the procedural rules
for adjudicating denial of administrative costs are unclear.
Proposal. The bill would provide that a party who seeks an
award of administrative costs must apply for such costs within 90
days of the date on which the party was determined to be a
prevailing party. The bill would also provide that a party who
seeks to appeal a denial by the IRS of an administrative costs
award must petition the Tax Court within 90 days after the date
that the IRS mails the denial notice. The bill would clarify
that dispositions of administrative cost petitions by the Tax
Court are reviewed in the same manner as other decisions of the
Tax Court.
Administration position. We support clarifying the
procedures for applying for a cost award and appealing from a
denial of such an award.
3.

Redetermination of Interest Pursuant to Motion (Section 713)

67
conforms the terminology of section 7481(c)(4) to that of
analogous sections, such as section 6512(b)(2), which directs the
taxpayer to invoke the Tax Court's jurisdiction in other types of
supplementary proceedings by motion.
4•

Application of Net Worth Requirement for Awards of Litigation
Costs (Section 714)

Current law. In the Federal courts, including the Tax Court
and the Claims Court, a taxpayer who prevails may be awarded
reasonable litigation costs, including attorneys' fees. The Code
provides that the prevailing party must meet the net worth
requirements of section 2412(d)(2)(B) of title 28, United States
Code. The provision is silent as to whether the net worth
requirement relates to trusts and estates.
Proposal. The bill would clarify that the net worth
requirement applies to trusts (determined as of the last day of
the taxable year involved in the proceeding) and estates
(determined as of the date of the decedent's death). The bill
also would provide that individuals who file a joint tax return
are treated as one individual for purposes of computing the net
worth limitations. An exception to this rule would be provided
for innocent spouses.
Administration position. We support clarifying that the net
worth requirement applies to trusts and estates and that
individuals filing a joint return are treated as one individual
for purposes of the net worth requirement.
C. Cooperative Agreements
Permit 1RS to Enter Into Cooperative Agreements With State Tax
Authorities (Section 721)
Current law. The 1RS is generally not authorized to use
funds appropriated for Federal tax administration to provide
services to non-Federal agencies even if the cost is reimbursed.
Proposal. The 1RS would be authorized to enter into
reimbursable agreements with the states to enhance joint tax
administration. Reimbursable costs would include such items as
data processing, software development and hardware acquisition as
well as personnel costs, travel, and visual items involved in
providing a service.
Administration position. We support authorizing the 1RS to
enter into reimbursable agreements with the states for these
purposes. The proposal could lead to joint Federal-state

programs which would simplify and shorten return preparation time
for taxpayers and reduce processing costs at both the Federal and
state level.

□

CORRECTED (It checked)

0M B No. 1S45-XXXX

$
2 Taxable income (toss) from
other activities

$
PARTNERSHIPS Employer 1.0. number PARTNER'S identifying number

3 Net capitai gain from
passive activities

PARTNER'S name

5 Net passive AMT adjustment

Street address (including apt no.)

: orm

1099K

\ \

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1D92

of Income (Loss)
From a Large
Partnership

4 Net capital gam from
other activities

$
8Net other AMT adjustment
$

Wo^\ \

City, state, and ZIP code

rai ilici o «oliai a

1 Taxable income (loss) from
passive activities

PARTNERSHIPS name, streat address, city, state, and ZIPcode

Copy B
For Partner
This is important tax
- information and is
being furnished to
the Internal Revenue
Service. If you are
required to file a
return, a negligence
penalty or other
sanction may be
imposed on you if this
income is taxable and
the 1RS determines
that it has not been
reported.

Department of the Treasury - Internal Revenue Service

Instructions to Individual Partners Filing Form 1040
(Fliers of Other Returns: Follow the instructions for your tax return instead of the instructions shown below.)
Box 1.——If income is reported in box 1, report the income on Schedule E, Part II, column (h). If a loss is reported in box 1, report the loss
following the Form 8582 instructions, to determine how much of the loss can be reported on Schedule E, Part II, column (g). See the
Schedule E instructions for other rules that limit losses.
Box 2.— Report the income or loss in box 2 on Schedule E, Part II, column (i) or (k). See the Schedule E instructions for special rules that
lim it losses.

Box 3.—Report thè gain in box 3 on Schedule D, line 11, column (g).
Box 4.— Report the gain in box 4 on Schedule D, line 11, column (g).
Box 5.—If you are required to file Form 6251, Alternative Minimum Tax— Individuals, indude this amount on Form 6251, line 4s.
Box 6.—If you are required to file Form 6251, indude this amount on Form 6251, line 4q.
Box 7.—Follow the instructions shown below for the code(s) shown in this box:

Code A—General credits.— Report this amount on Form 3800, line 7.
Code B— Low-Income housing credit for property placed In service after 1989.— Report
this amount on Form 8586, line 5.
Code C—Rehabilitation credit (Including low-income housing credit for property placed In
service before 1990).— Report this amount on Form 3468, line 3c.
Code D1 through 06—Foreign tax credit Information:
Code D1—T y p c o f Income.—Check the box for this category of income on Form 1116.
Code 02— Name of foreign country.—Enter on Form 1116, Part I, column A, B, or C.
Code 03— Total gross income from sources outside the U .S„—Enter this amount
on Form 1116, line 1. Enter "partnership income” on the dotted line to
the left of the entry space for line 1.

Code D4—Total applicable deductions and losses.—Enter this amount on Form 1116, line 2.
Code D5—-Total foreign taxes paid or accrued.— Enter this amount on Form 1116, line 8.
Code D6— Reduction In taxes available for the credit—Enter this amount on Form 1116, line 12.
Code E—Tax-exem pt In te re s t— Report this amount on Form 1040, line 8b.

TREASURY'S WEEKLY BILL OFFERING
The Department of the Treasury, by this public notice,
invites tenders for two series of Treasury bills totaling approxi
mately $21,200 million, to be issued September 19, 1991. This
offering will result in a paydown for the Treasury of about $2,325
million, as the maturing bills total $23,522 million (including
the 16-day cash management bills issued September 3, 1991, in the
amount of $5,015 million). Tenders will be received at Federal
Reserve Banks and Branches and at the Bureau of the Public Debt,
Washington, D. C. 20239-1500, Monday, September 16, 1991, prior
to 12:00 noon for noncompetitive tenders and prior to 1:00 p.m.,
Eastern Daylight Saving time, for competitive tenders. The two
series offered are as follows:
91-day bills (to maturity date) for approximately
$10,600 million, representing an additional amount of bills
dated December 20, 1990, and to mature December 19, 1991
(CUSIP No. 912794 WX 8), currently outstanding in the amount
of $21,840 million, the additional and original bills to be
freely interchangeable.
182-day bills for approximately $10,600 million, to be
dated September 19, 1991, and to mature March 19, 1992 (CUSIP
No. 912794 YE 8).
The bills will be issued on a discount basis under competi
tive and noncompetitive bidding, and at maturity their par amount
will be payable without interest. Both series of bills will be
issued entirely in book-entry form in a minimum amount of $10,000
and in any higher $5,000 multiple, on the records either of the
Federal Reserve Banks and Branches, or. of the Department of the
Treasury.
The bills will be issued for cash and in exchange for
Treasury bills maturing September 19, 1991. Tenders from Federal
Reserve Banks for the.ir 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 $2,406 million
as agents for foreign and international monetary authorities, and
$4,290 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 bookentry records of the Department of the Treasury should be sub
mitted on Form PD 5176-1 (for 13-week series) or Form PD 5176-2
(for 26-week series).
NB-1445

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 one-half hour prior to the closing time for receipt of
tenders 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 secu
rities and report daily to the Federal Reserve Bank of New York
their positions in and borrowings on such securities, when sub
mitting 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 other
wise dispose of any noncompetitive awards of this issue being
auctioned prior to the designated closing time for receipt of
competitive 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 bookentry records of Federal Reserve Banks and Branches.

1/91

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. Com
petitive 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.
If a bill is purchased at issue, and is held to maturity,
the amount of discount is reportable as ordinary income on the
Federal income tax return of the owner for the year in which
the bill matures. 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, any gain in
excess of the basis is treated as ordinary income.
Department of the Treasury Circulars, Public Debt Series Nos. 26-76, 27-76, and 2-86, as applicable, 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.
8/89